Intermediate Operations Management and Strategic Management Study Notes Syllabus 2022 PDF

INTERMEDIATE Paper 9 OPERATIONS MANAGEMENT AND STRATEGIC MANAGEMENT Study Notes SYLLABUS 2022 The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in First E...

INTERMEDIATE Paper 9 OPERATIONS MANAGEMENT AND STRATEGIC MANAGEMENT Study Notes SYLLABUS 2022 The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 www.icmai.in First Edition : August 2022 Reprint : November 2022 Reprint : January 2023 Reprint : March 2023 Reprint : June 2023 Reprint : August 2023 Reprint : January 2024 Reprint : March 2024 Reprint : May 2024 Revised Edition: July 2024 Price: ` 600.00 Published by : Directorate of Studies The Institute of Cost Accountants of India CMA Bhawan, 12, Sudder Street, Kolkata - 700 016 [email protected] Printed at: M/S. INFINITY ADVERTISING SERVICES PVT. LTD Plot No. 171 & 172, Sector-58, Faridabad, Haryana - 121004 Copyright of these Study Notes is reserved by the Institute of Cost Accountants of India and prior permission from the Institute is necessary for reproduction of the whole or any part thereof. Copyright © 2024 by The Institute of Cost Accountants of India  PAPER 9 : OPERATIONS MANAGEMENT AND STRATEGIC MANAGEMENT Syllabus Structure: The syllabus in this module comprises the following topics and study weightage: Module No. Module Description Weight Section A: Operations Management 60% 1 Operation Management – Introduction 5% 2 Operations Planning 5% 3 Designing of Operational System and Control 5% 4 Production Planning and Control 20% 5 Productivity Management and Quality Management 5% 6 Project Management 15% 7 Economics of Maintenance and Spares Management 5% Section B: Strategic Management 40% 8 Introduction 10% 9 Strategic Analysis and Strategic Planning 10% 10 Formulation and Implementation of Strategy 10% 11 Digital Strategy 10% B 40% A 60%  Learning Environment – Paper 9 Subject TitleOPERATIONS MANAGEMENT AND STRATEGIC MANAGEMENT Subject Code OMSM Paper No. 9 Course The subject comprises two sections – Operations Management and Strategic Management. DescriptionThe former aims to provide students with a critical understanding of the scope and strategic importance of operations management, various tools and techniques for operations planning and designing as well as production planning. It also offers detail coverage of important techniques for measurement and management of productivity, project management and inventory management which lie at the core of a successful organisation. The section, Strategic Management, tries to address different aspects of strategy formulation and implementation in an organisation. It tries to take into account the problems that strategic managers face while developing and implementing strategies within a dynamic business environment. The subject also deals with the contemporary issues such as digital and social marketing strategies that have immense impact on organisation’s competitive advantage. CMA Course 1. Interpret and appreciate emerging national and global concerns affecting organizations and Learning be in a state of readiness for business management. Objectives a. Identify emerging national and global forces responsible for enhanced/varied business (CMLOs) challenges. b. Assess how far these forces pose threats to the status-quo and creating new opportunities. c. Find out ways and means to convert challenges into opportunities 2. Acquire skill sets for critical thinking, analyses and evaluations, comprehension, syntheses, and applications for optimization of sustainable goals. a. Be equipped with the appropriate tools for analyses of business risks and hurdles. b. Learn to apply tools and systems for evaluation of decision alternatives with a 360-degree approach. c. Develop solutions through critical thinking to optimize sustainable goals. 3. Develop an understanding of strategic, financial, cost and risk-enabled performance management in a dynamic business environment. a. Study the impacts of dynamic business environment on existing business strategies. b. Learn to adopt, adapt and innovate financial, cost and operating strategies to cope up with the dynamic business environment. c. Come up with strategies and tactics that create sustainable competitive advantages. 4. Learn to design the optimal approach for management of legal, institutional, regulatory and ESG frameworks, stakeholders’ dynamics; monitoring, control, and reporting with application-oriented knowledge. a. Develop an understanding of the legal, institutional and regulatory and ESG frameworks within which a firm operates. b. Learn to articulate optimal responses to the changes in the above frameworks. c. Appreciate stakeholders’ dynamics and expectations, and develop appropriate reporting mechanisms to address their concerns.  5. Prepare to adopt an integrated cross functional approach for decision management and execution with cost leadership, optimized value creations and deliveries. a. Acquire knowledge of cross functional tools for decision management. b. Take an industry specific approach towards cost optimization, and control to achieve sustainable cost leadership. c. Attain exclusive knowledge of data science and engineering to analyze and create value. Subject A. Operations Management Learning 1. To appreciate the recent trends and challenges in production and operations management and Objectives understand the relationships between operations and other business functions. (CMLO 1a, b, [SLOB(s)] c) 2. To attain knowledge on techniques and tools to be applied for product and process designing, capacity planning and production line balancing; and job designing; in operations management. (CMLO 3c, 5a, b, c) 3. To develop detailed understanding about frameworks and tools for measuring and managing productivity of resources as well as quality control of outputs. (CMLO 2q 3c, 5c) 4. To gain knowledge on project planning, managing and control to ensure optimum utilization of time and resources. (CMLO 2b, 3c, 5b) 5. To appreciate the importance and gather knowledge about processes for spares management in mitigating related risks and optimising costs. (CMLO 2a, 3c, 5b) B. Strategic Management 1. To analyse the dynamics of national and global business environment in order to assess the potential impacts of changes on existing strategies and risks and challenges. (CMLO 1a, 3a) 2. To assess organisational strengths, weaknesses, opportunities, threats, and challenges with introspective analysis of internal realities with applications of various managerial tools and frameworks. (CMLO 1b) 3. To develop the ability to identify, understand, assimilate, and use innovative strategies to create and sustain with competitive advantages. (CMLO 3 b, c) 4. To gain a comprehensive views and abilities towards achieving the overall organisational vision, mission, always remaining in search of excellence for value creation and high ESG score. (CMLO 2, c, 4a 5 c) Subject A. Operations Management Learning SLOC(s) Outcome [SLOC(s)] 1. Students will be able to attain abilities to identify the elements of operations management and and various transformation processes to enhance productivity and competitiveness. Application 2. They will achieve application-oriented skills for analysing and evaluating various facility Skill [APS] alternatives and their capacity decisions, develop a balanced line of production, scheduling and sequencing techniques in different operating environments. 3. They will acquire knowledge and application skills for project planning and control with the objective to ensure optimised utilisation of time and resources. 4. They will be equipped with knowledge and skills to apply materials handling principles and operating practices, measures in quality control, Quality Circles and TQM.  5. Students will accomplish application skills for mathematical tools that are needed to solve optimisation problems. 6. They will attain application-oriented knowledge for using mathematical models and software to solve various problems of operations management for improved performance and optimisation of results. APS 1. Students will be able to independently apply attained skills to identify relevant frameworks, models and tools for solving optimisation problems and analyse how different factors in various areas of operations can affect success of business. 2. They will be able to apply attained skills for planning and time management in scheduling deadlines, monitoring important production milestones and ensuring teams finish projects within specific deadlines. 3. They will be able to apply the attained skills to examine the associated information for figuring out relevant factors responsible for a problem, and apply frameworks, methods, and tools to analyse the issues and solve problems for optimisation of results from operating actions. B. Strategic Management SLOC(s) 1. Students will be able to analyse an organisation’s competitive position within a dynamic business environment and devise appropriate strategies to create and sustain with competitive advantage both nationally and globally. 2. Students will be capable of identifying the core competencies of an organisation and the critical success factors which would enable them to continuously nurture and build on those to achieve a state of readiness for future. 3. Students will develop a fair understanding of the requirements to provide strategic leadership in an organisation. They will know the common gaps, biases and heuristics in decision making and how to overcome those. APS 1. Students will be able to apply various management tools and frameworks for continuous evaluation of both present realities and emerging dimensions of external and internal business environment and impacts thereof prepare a SWOTC analyses report. 2. Students will be able to apply the acquired skill sets to frame an organisation’s strategies and tactical plans for execution thereof with a 3600 view and considering the dynamics of ever emerging business ecosystem. Module wise Mapping of SLOB(s) Module Additional Resources (Research articles, Topics SLOB Mapped No. books, case studies, blogs) A. Operations Management 1 Operation Sustainable operations management: recent To appreciate the recent trends Management – trends and future directions – Walker et al. and challenges in production Introduction https://www.emerald.com/insight/content/ and operations management and doi/10.1108/IJOPM-12-2013-0557/full/html understand the relationships be- tween operations and other  2 Operations Orlicky’sMaterial Requirements Planning – Planning Ptak et al. McGraw Hill Education 3 Designing of Principles of Process Planning – A Logical To attain knowledge on tech- Operational Approach niques and tools to be applied for System and Halevi & Weill product and process designing, Control capacity planning andproduction Springer Publication 4 Production Lean operations management: Identifying and line balancing; and job designing; Planning and bridging the gap between theory and practice– in operations management. Control Tracy & Knight https://scholar.google.com/scholar?hl=en&as_ sdt=0%2C5&q=lean+operations&btnG= 5 Productivity ISO 9000 Family Quality Management To develop detailed understand- Management https://www.iso.org/iso-9001-quality- ing about frameworks and tools and Quality management.html for measuring and managing pro- Management ductivity of resources as well as quality control of outputs. 6 Project Fundamentals of Project Management To gain knowledge on project Management (Fifth Edition)- Joseph Heagney Amacom planning, managing and control Publication to ensure optimum utilization of time and resources. 7 Economics of Maintenance and Spare Parts Management– To appreciate the importance Maintenance Gopalakrishnan & Banerji and gather knowledge about pro- and Spares PHI Learning cessesfor spares management in Management mitigatingrelated risks and opti- mising costs. B. Strategic Management 8 Introduction Conceptual Foundations of the Balanced 1. To analyse the dynamics of Scorecard – Kaplan national and global business https://www.sciencedirect.com/science/ environment in order to as- article/abs/pii/S1751324307030039 sess the potential impacts of changes on existing strategies and risks and challenges. 2. To gain a comprehensive views and abilities towards achiev- ing the overall organisational vision, mission, always re- maining in search of excel- lence for value creation and high ESG score. 9 Strategic Not dead yet: the rise, fall and persistence of To assess organisational Analysis and the BCG Matrix – Madsen strengths, weaknesses, opportuni- Strategic https://papers.ssrn.com/sol3/papers. ties, threats, and challenges with Planning cfm?abstract_id=2954610 introspective analysis of internal  realities with applications of var- ious managerial tools and frame- works. 10 Formulation Measuring the Success of Technology-Based and Imple- Strategic Business Units – Dvir&Shenhar mentation of https://www.tandfonline.com/doi/abs/10.1080 Strategy /10429247.1992.11414701 To develop the ability to identify, understand, assimilate, and use 11 Digital Digital Transformation - Interplay of Strategies innovative strategies to create Strategy and Technologies for Customers’ and sustain with competitive ad- Delight in Banking Industry – CMA. vantages. ParitoshBasu http://52.172.159.94/public/journals/255/ images/Volume-27-November-2021.pdf  Contents as per Syllabus SECTION A: OPERATIONS MANAGEMENT 01 - 424 Module 1. Introduction 3-12 1.1 Scope 1.2 Characteristics of Modern Operations Functions 1.3 Recent Trends in Production and Operations Management Module 2. Operations Planning 13-96 2.1 Demand Forecasting 2.2 Capacity Planning 2.3 Facility Location and Layout 2.4 Resource Aggregate Planning 2.5 Material Requirements Planning 2.6 Manufacturing Resource Planning 2.7 Economic Batch Quantity Module 3. Designing of Operational Systems and Control 97-110 3.1 Product Design 3.2 Process Design and Selection 3.3 Product Life Cycle 3.4 Process Planning and Selection 3.5 Design Thinking Module 4. Application of Operation Research - Production Planning and Control 111-282 4.1 Introduction 4.2 Production Planning and Control 4.3 Control Measures – Time & Motion Study, Method Study, Work Study 4.4 Optimum Allocation of Resources - LPP 4.5 Transportation 4.6 Job Evaluation, Job Allocation - Assignment 4.7 Scheduling and Queuing Models 4.8 Simulation and Line Balancing 4.9 Lean Operations 4.10 JIT Contents as per Syllabus Module 5. Productivity Management and Quality Management 283-310 5.1 Measurement Techniques of Productivity Index 5.2 Five Key Aspects of Productitity 5.3 TQM Basic Tools and Certification 5.4 ISO Standard Basics Module 6. Project Management, Monitoring and Control 311-374 6.1 Project Planning 6.2 Project Life Cycle 6.3 Gantt Charts 6.4 PERT and CPM 6.5 Basics of MS Project Module 7. Economics of Maintenance and Spares Management 375-424 7.1 Breakdown Maintenance 7.2 Preventive Maintenance 7.3 Routine Maintenance 7.4 Replacement of Machine 7.5 Spare Parts Management Objective Type Questions and Answers 405-424 SECTION B: STRATEGIC MANAGEMENT 425-564 Module 8. Introduction 427-462 8.1 Introduction to Strategy and Strategic Management 8.2 Alignment of Strategy with Vision, Mission and Culture 8.3 Objectives of Strategic Management 8.4 Organisational Genomics 8.5 Alignment with Individual Level Objective and Organisational Objective 8.6 Balanced Score Card 8.7 EVA – Driven Responsibility Accounting  Contents as per Syllabus Module 9. Strategic Analysis and Strategic Planning 463-496 9.1 Analysis of Business Environment 9.2 PESTEL, Value Chain and Porter’s 5 Framework 9.3 SWOTC Analysis (Industry Sector and Company) 9.4 Portfolio Analysis and BCG Matrix 9.5 Stages in Strategic Planning 9.6 Alternatives in Strategic Planning Module 10. Formulation and Implementation of Strategy 497-538 10.1 Strategy Formulation - Production Strategy, Supply Chain Strategy, Marketing Strategy, Human Resource Strategy 10.2 Structuring of Organisation for Implementation of Strategy 10.3 Strategic Business Unit 10.4 Business Process Re-engineering 10.5 Management Control, Operational Control and Task Control 10.6 Goal Congruence Module 11. Digital Strategy 539-564 11.1 Introduction 11.2 Digital Transformation for Competitive Advantages 11.3 Innovations and Disruptive Business Models 11.4 Emerging Trends in Digital and Social Marketing Strategies  SECTION-A Operations Management  Introduction Introduction 1 This Module Includes 1.1 Scope 1.2 Characteristics of Modern Operation Functions 1.3 Recent Trends in Production and Operations Management The Institute of Cost Accountants of India 3 Operations Management and Strategic Management Introduction SLOB Mapped against the Module To appreciate the recent trends and challenges in production and operations management and understand the relationships between operations and other Module Learning Objectives: After studying this module, the students will be able to: ~ Understand the concept of operation management ~ Identify the resource utilisation objectives ~ Describe objectives of operation management. 4 The Institute of Cost Accountants of India  Introduction Scope 1.1 Operations is that part of a business organisation that is responsible for producing goods and/or services. The three basic functions of a business organisation are ORGANISATION FINANCE OPERATIONS MARKETING The ideal situation for a business organisation is to achieve an economic match of supply and demand. Having excess supply or excess capacity is wasteful and costly; having too little means lost opportunity and possible customer dissatisfaction. The key function on the supply side are Operations & Supply chains; The key function on the demand side are Sales & Marketing; The driving fuel to all these is Finance; If the business organisation is a Car, Operations would be its engine. And just as the engine is the core of what a car does, in a business organisation operations is the core of what the organisation does. Operations Management is responsible for managing that core. Operations management is the management of systems or processes that create goods and/or provide services. Operations Management (OM) encompasses all organizational activities that acquire the raw form of inputs, process or convert into a consumable products and services as required to meet the needs of the end customers. OM deals with both tangible products and intangible services. Sometimes from inputs goods and services often occur jointly. Like painting of a house is a service but paint which is used is a good. The whole gamut of Operations management is represented in the following figure: The Institute of Cost Accountants of India 5 Operations Management and Strategic Management Inputs: Outputs: Land Labour Transformation / Goods / Conversion Process Services Capital Information Measurement & Feedback Measurement & Feedback Measurement & Feedback Control Operations Management Objectives of Operations Management Objectives of operations management can be categorised into (i) Customer service and (ii) Resource utilisation. (i) Customer service The first objective is the customer service which means the service for the satisfaction of customer wants. Customer service is therefore a key objective of operations management. The Operations Management must provide something to a specification which can satisfy the customer in terms of cost and timing. Thus, primary objective can be satisfied by providing the ‘right thing at the right price at the right time’. These three aspects of customer service - specification, cost and timing - are described in a little more detail for the four functions in Table 1. They are the principal sources of customer satisfaction and must, therefore, be the principal dimension of the customer service objective for operation managers. Table 1: Aspects of Customer Service Principal customer wants Principal function Primary consideration Other consideration Manufacture Goods of a given, requested Cost i.e. purchase price or cost of obtaining or acceptable specification goods Timing, i.e. delivery delay from order or request to receipt of goods Transport Movement of a given, requested Cost, i.e. cost of movement, Timing ,i.e. or acceptable specification (i) duration or time to move (ii) wait, or delay from requesting to its commencement 6 The Institute of Cost Accountants of India  Introduction Supply Goods of a given, requested Cost, that is purchase price or cost obtaining or acceptable specification goods Timing, i.e. delivery delay from order or request to supply, to receipt of goods Service Treatment of a given, requested Cost, i.e. cost of treatment or acceptable specification Timing, i.e. (i) Duration or timing required for treatment (ii) wait, or delay from requesting to its commencement Generally an organization will aim reliably and consistently to achieve certain standards, or levels, on these dimensions, and operations managers will be influential in attempting to achieve these standards. Hence, this objective will influence the operations manager’s decisions to achieve the required customer service. (ii) Resource Utilization Another major objective is to utilize resources for the satisfaction of customer wants effectively, i.e., customer service must be provided with the achievement of effective operations through efficient use of resources. Inefficient use of resources or inadequate customer service leads to commercial failure of an operating system. Operations management is concerned essentially with the utilization of resources, i.e., obtaining maximum effect from resources or minimizing their loss, under utilization or waste. The extent of the utilization of the resources’ potential might be expressed in terms of the proportion of available time used or occupied, space utilization, levels of activity, etc. Each measure indicates the extent to which the potential or capacity of such resources is utilized. This is referred as the objective of resource utilization. Operations management is also concerned with the achievement of both satisfactory customer service and resource utilization. An improvement in one will often give rise to deterioration in the other. Often both cannot be maximized, and hence a satisfactory performance must be achieved on both objectives. All the activities of operations management must be tackled with these two objectives in mind, and many of the problems will be faced by operations managers because of this conflict. Hence, operations managers must attempt to balance these basic objectives. Below Table 2 summarizes the twin objectives of operations management. The type of balance established both between and within these basic objectives will be influenced by market considerations, competitions, the strengths and weaknesses of the organization, etc. Hence, the operations managers should make a contribution when these objectives are set. Table 2 : The twin objectives of operations management The customer service objective. The resource utilization objective. To provide agreed/adequate levels of customer To achieve adequate levels of resource utilization service (and hence customer satisfaction) by (or productivity) e.g., to achieve agreed levels of providing goods or services with the right utilization of materials, machines and labour. specification, at the right cost and at the right time. The Institute of Cost Accountants of India 7 Operations Management and Strategic Management Scope of Operation Management Operations Management concerns with the conversion of inputs into outputs, using physical resources, so as to provide the desired utilities to the customer while meeting the other organizational objectives of effectiveness, efficiency and adoptability. It distinguishes itself from other functions such as personnel, marketing, finance, etc. by its primary concern for ‘conversion by using physical resources’. Following are the activities, which are listed under Production and Operations Management functions: 1. Location of facilities. 2. Plant layouts and Material Handling. 3. Product Design. 4. Process Design. 5. Production Planning and Control. 6. Quality Control. 7. Materials Management. 8. Maintenance Management. Location of Facilities Plant Layout Maintenance & Management Material Handling Production Materials and Product management Operations Design Management Quality Process Control Design Production Planning and Control Figure 1.1 : Scope of Production and Operations Management Let us take an example of a product manufacturing company xyz Ltd. The xyz Ltd requires to take few important decisions. The first question comes into picture is: “What to produce?” This question is linked with the basic existence of the company It talks about the product that xyz Ltd. is manufacturing. Here, the organization needs to understand that what is the need of the customers in terms of product attributes/Features & quality. In other words, it talks about the competitive positioning of the company, its products acceptability at the market place this decision is based on the input received from market intelligence team and often is a part of the product design process later on we will study an important concept related to product 8 The Institute of Cost Accountants of India  Introduction design, such as QFD. In this regard, one important point to be noted that, many a times the organizations need to forecast about product life cycle & related requirement of the technology. Forecasting we will discuss separately. One the company is aware that what it needs to produce, the second question comes: “How much to produce?” This question is an ongoing questions, as the organization is engaged in estimating the quantity (“How much”) on a daily, weekly, monthly, quarterly & yearly basis. Again this information is obtained from marketing team. Based on the information received, the planning team (as a part of supply chain’s planning section) provides a forecast of demand. Hence, here deal with an important aspect of operational planning known as Demand Forecasting. The next question is: “Where to produce?”. This question leads to facility location selection problem after this, a series of questions need to be answered that lead to a member of decision areas such as “ Q: “How to produce?” (Process selection & Layout) Q: “When to produce?” (Aggregate Planning inventory Master Production decision schedule) Q: “Do we have materials to produce?” (MRP, Inventory Management) It also deals with Sourcing Q: “Are we producing right things?” (Quality Management) Q: “Are our machines able to provide desired results?” (Maintenance Management) Q: “How to reach the products to the customers?”(Distribution or Delivery planning) It includes transportation decision, warehousing, materials handling ets. Logistics issues In case the organization is practicing sustainability then another important decision area is reverse Logistics i.e., taking returns Therefore, in summary the major decision areas are: 1. Product selection 2. Facility Location Selection 3. Demand Forecasting 4. Process selection & Layout decision 5. Capacity planning 6. Aggregate Planning, Master production schedule 7. Materials Requirement Planning (MRP)/Manufacturing Resource Planning (MRP I)/ Distribution Resource Planning (DRP) / Enterpnse Resource Planning (ERP) 8. Inventory Management 9. Supplier Selection/Sourcing 10. Process Management 11. Quality Management 12. Maintenance 13. Warehousing /Transportation 14. Reverse Logistics In Addition, an operations manager is also responsible for working capital management, skill-management etc. The Institute of Cost Accountants of India 9 Operations Management and Strategic Management Characteristics of Modern Operations Functions 1.2 The production management of today presents certain characteristics which make it look totally different from what it was during the past. Specifically, today’s production system is characterised by at least four features. 1. Manufacturing as Competitive Advantage In the past production was considered to be like any other function in the organisation. When demand was high and production capacities were inadequate, the concern was to somehow muster all inputs and use them to produce goods which would be grabbed by market. But today’s scenario is contrasting. Plants have excess capacities, competition is mounting and firms look and gain competitive advantage to survive and succeed. Interestingly, production system offers vast scope to gain competitive edge and firms intend to exploit the potential. Total Quality Management (TQM), Time-Based Competition, Business Process Re-engineering (BPRE), Just-in-Time (JIT), Focused Factory, Flexible Manufacturing Systems (FMS), Computer Integrated Manufacturing (CIM), and The Virtual Corporation are but only some techniques which the companies are employing to gain competitive advantage. 2. Services Orientation As was stated earlier, service sector is gaining greater relevance these days. The production system, therefore, needs to be organised keeping in mind the peculiar requirements of the service component. The entire manufacturing needs to be geared to serve (i) intangible and perishable nature of the services, (ii) constant interaction with clients or customers, (iii) small volumes of production to serve local markets, and (iv) need to locate facilities to serve local markets. There is increased presence of professionals on the production, instead of technicians and engineers. 3. Disappearance of Smokestacks Protective labour legislation, environmental movement and gradual emergence of knowledge based organisations have brought total transformation in the production system. Today’s factories are aesthetically designed and built, environment friendly - in fact, they are homes away from homes. Going to factory everyday is no more excruciating experience, it is like holidaying at a scenic spot. A visit to ABB, L & T or Smith Kline and Beecham should convince the reader about the transformation that has taken place in the wealth creation system. 4. Small has Become Beautiful It was E.F. Schumacher who, in his famous book Small is Beautiful, opposed giant organisations and increased specialisation. He advocated, instead, intermediate technology based on smaller working units, community ownership, and regional workplaces utilising local labour and resources. For him, small was beautiful. Businessmen, all over the world, did not believe in Schumacher’s philosophy. Inspired by economies of scale, industrialists went In for huge organisations and mass production systems. 10 The Institute of Cost Accountants of India  Introduction Recent Trends in Production and Operations Management 1.3 Modern Operations Management is characterized by the following : (a) Technological development (b) Shorter product life cycle (c) Changing needs and preferences of the customers (d) Disruptions (market and product) and pressure for innovation (e) Globalization (f) Requirement for supreme service at an affordable price (g) Pressure for optimization of operational cost Production Management vs Operations Management There are two points of distinction between production management and operations management. First, the term production management is more used for a system where tangible goods are produced. Whereas, operations management is more frequently used where various inputs are transformed into intangible services. Viewed from this perspective, operations management will cover such service organisations as banks, airlines, utilities, pollution control agencies, super bazaars, educational institutions, libraries, consultancy firms and police departments, in addition, of course, to manufacturing enterprises. The second distinction relates to the evolution of the subject. Operations management is the term that is used nowadays. Production management precedes operations management in the historical growth of the subject. Recent trends in production and operations management relate to global competition and the impact it has on manufacturing firms. Some of the recent trends are : 1. Global Market Place : Globalisation of business has compelled many manufacturing firms to have operations in many countries where they have certain economic advantage. This has resulted in a steep increase in the level of competition among manufacturing firms throughout the world. 2. Production/Operations Strategy : More and more firms are recognising the importance of production/ operations strategy for the overall success of their business and the necessity for relating it to their overall business strategy. 3. Total Quality Management (TQM) : TQM approach has been adopted by many firms to achieve customer satisfaction by a never-ending quest for improving the quality of goods and services. 4. Flexibility : The ability to adapt quickly to changes in volume of demand, in the product mix demanded, and in product design or in delivery schedules, has become a major competitive strategy and a competitive advantage to the firms. This is sometimes called as agile manufacturing. The Institute of Cost Accountants of India 11 Operations Management and Strategic Management 5. Time Reduction : Reduction of manufacturing cycle time and speed to market for a new product provide competitive edge to a firm over other firms. When companies can provide products at the same price and quality, quicker delivery (short lead times) provide one firm competitive edge over the other. 6. Technology : Advances in technology have led to a vast array of new products, new processes and new materials and components. Automation, computerisation, information and communication technologies have revolutionised the way companies operate. Technological changes in products and processes can have great impact on competitiveness and quality, if the advanced technology is carefully integrated into the existing system. 7. Worker Involvement : The recent trend is to assign responsibility for decision making and problem solving to the lower levels in the organisation. This is known as employee involvement and empowerment. Examples of worker involvement are quality circles and use of work teams or quality improvement teams. 8. Re-engineering : This involves drastic measures or break-through improvements to improve the performance of a firm. It involves the concept of clean-slate approach or starting from scratch in redesigning the business processes. 9. Environmental Issues : Today’s production managers are concerned more and more with pollution control and waste disposal which are key issues in protection of environment and social responsibility. There is increasing emphasis on reducing waste, recycling waste, using less-toxic chemicals and using biodegradable materials for packaging. 10. Corporate Downsizing (or Right Sizing) : Downsizing or right sizing has been forced on firms to shed their obesity. This has become necessary due to competition, lowering productivity, need for improved profit and for higher dividend payment to shareholders. 11. Supply-Chain Management : Management of supply-chain, from suppliers to final customers reduces the cost of transportation, warehousing and distribution throughout the supply chain. 12. Lean Production : Production systems have become lean production systems which use minimal amounts of resources to produce a high volume of high quality goods with some variety. These systems use flexible manufacturing systems and multi-skilled workforce to have advantages of both mass production and job production (or craft production). 12 The Institute of Cost Accountants of India  Operations Planning Operations Planning 2 This Module Includes 2.1 Demand Forecasting 2.2 Capacity Planning 2.3 Facility Location and Layout 2.4 Resource Aggregate Planning 2.5 Material Requirements Planning 2.6 Manufacturing Resource Planning 2.7 Economic Batch Quantity The Institute of Cost Accountants of India 13 Operations Management and Strategic Management Operations Planning SLOB Mapped against the Module To attain knowledge on techniques and tools to be applied for product and process designing, capacity planning and production line balancing; and job designing; in operations management. Module Learning Objectives: After studying this module, the students will be able to: ~ Comprehend the challenges faced by the operations manager. ~ Understand the characteristics of capacity Planning and requirement ~ Understand the different forecasting techniques used in planning. ~ Understanding the inventory management. 14 The Institute of Cost Accountants of India  Operations Planning Demand Forecasting 2.1 “Demand” is in a simpler way defined as the requirement and desire of consumers to purchase products and services and willingness and abilities to pay for availing the same. Example of product: Household durable products like television, daily use products like soap. Example of service: Pathological tests by medical service providing laboratories like Drs. Ray & Trivedi Lab. The products/services demanded are of two categories such as industrial purpose products like machines and consumers, specific products like confectionaries “Forecasting” is the process of making prediction about future happenings and/or requirements based on available information and/evidences. Example, forecasting of product requirements, forecasting of weather, forecasting of fashion trends, forecasting of tourist inflow, forecasting of patient admission, forecasting of technology etc. A forecast is an estimate about the future value of a variable such as demand. Forecasts of demand are a basic input in the decision processes of operations management. The primary goal of operations management is to match supply to demand. Therefore, demand forecasting is essential for determining how much capacity or supply will be needed to meet demand. ANTICIPATED FORECASTS FUTURE DEMAND Future Operations Plan Production/Service Planning Facility Selection Process Design Inventory Decisions Selection of Production Technology In this segment we shall restrict our discussions mainly on forecasting of demand of products. The Institute of Cost Accountants of India 15 Operations Management and Strategic Management Source of Information (used for forecasting) There are a number of sources from where past information and/or evidences are gathered to facilitate forecasting of demand such as Market Report Sales force opinion Experts’ views Industry report Point of Sales data Structured customer survey Field report etc. Range of period Forecasting is done on short, medium and long term basis. The underlying objectives are explained below. Forecasting can have both near and distant horizons. This period of forecasting, that is the time range selected for forecasting depends on the purpose for which the forecast is made. For example demand for a product can have both near and distant horizons but replacement of plant, other than due to obsolescence, is bound to have a distant horizon. The period may vary from one week to some years. Depending upon the period, the forecast can be termed as Short range forecasting Medium range forecasting Long range forecasting Short range forecasting period may be one week, two weeks or a couple of months. Medium range forecasting period may vary from 3 to 6 months. Long range forecasting period may vary from one year to any period. The objective of above said forecast is naturally different. In general, short term forecasting will be more useful in production planning. The manager who does short range forecast must see that they are very nearer to the accuracy. Short run forecasting (usually for highly innovative products with shorter life cycle like smartphones; usually spanning over 6-8 months) In case of short-term forecast, following purposes are generally served: To estimate the inventory requirement To provide transport facilities for dispatch of finished goods To decide workloads for men and machines To find the working capital needed To set-up of production run for the products To fix sales quota To find the required overtime to meet the delivery promises. 16 The Institute of Cost Accountants of India  Operations Planning Medium run forecasting (usually for consumer durable products, medicines, period may extend over to one or two years) The purpose of this type of forecasting is: To determine budgetary control over expenses To determine dividend policy To find and control maintenance expenses To determine schedule of operations To plan for capacity adjustments Long run forecasting (usually for daily used routine household product like Aata, the normal period used is generally 5 years, in some cases it may extends to 10 to 15 years also. ) The purpose of long range forecast is: To work out expected capital expenditure for future developments or to acquire new facilities, To determine expected cash flow from sales To plan for future manpower requirements To plan for material requirement To plan for Research and Development. Here much importance is given to long range growth factor. Forecasting Methods (How to forecast demand?) There are two types of approaches such as Qualitative ► Delphi method An iterative group process which employs group of experts, staff, respondents to obtain forecasts ► Sales force composite Group comprising members from sales force of company are asked to estimate the likely demand in respective sales zones ► Consumer panel Survey Group of consumers are asked about their purchase plans to ascertain future demand forecast Quantitative ► Causal/Regression analysis Forecast of a dependent variable is made with the help of its variability nature with an independent variable Follows Simple regression equation Y = a + bX a = y axis intercept of the regrssion line b = slope of the regrssion line X = the independent variable Y = the forecast value of dependent variable The Institute of Cost Accountants of India 17 Operations Management and Strategic Management ΣXY - n * X * Y b= ΣX2 - nX2 a = Y - bX Y, X are mean of respective variables n = no of data items in X and Y series Example: A manufacturer has held road side exhibition which exhibited on the introduction of a new product of its smart phone product. The number of sales personnel employed at each of a sample of 10 exhibitions and the no of smart phones booked at each one are given below: No of sales person 15 18 16 18 19 13 15 14 16 16 No of smart phone booked 30 60 50 60 70 52 50 80 72 80 If the manufacturer employs 20 salesmen in an exhibition then forecast no of Smartphones that could be booked in that exhibition. Answer: Here number of smartphones booked needs to be predicted on the basis of no. of salesmen involved So No of sales person is independent variable: X and No of smartphones booked is dependent variable: Y Therefore we will apply simple regression analysis under following steps: Find out the value of a,b Form the regression equation i.e. Y= a+bX Hence find the value of Y,putting X = 20 in the above regression line Detail computation are as follows: Sr. No. X Y XY X2 1 15 30 450 225 2 18 60 1080 324 3 16 50 800 256 4 18 60 1080 324 5 19 70 1330 361 6 13 52 676 169 7 15 50 750 225 8 14 80 1120 196 9 16 72 1152 256 10 16 80 1280 256 Total 160 604 9718 2592 ∑X 160 ∑Y 604 X= = = 16, Y = = = 60.4 n 10 n 10 ΣXY - n * X * Y 9718 - 10 * 16 * 60.4 Hence b = = = 1.6875 ΣX2 - nX2 2592 - 10 * 16 * 16 18 The Institute of Cost Accountants of India  Operations Planning Hence a = Y - bX = 60.4 - 1.6875 * 16 33.4 Hence Y = a + bX i.e.Y = 33.4 + 1.6875X Hence required forecast Y = 33.4 + 1.6875 * 20 = 67.15 = 67 (Approx) Quantitative  Time Series analysis  Under this method to make forecast of future, time series data of actual demand for historical previous periods are taken  A time ordered sequence of observations taking at regular intervals (e.g. hourly, daily, weekly, monthly etc.)  Period wise actual demand data (Y) fluctuates  These fluctuations in any time series demand data are caused by four components—Trend(T), Seasonality (S), Cyclical (C) and Irregular (I) or Random(R)  These components are related either Additively or Multiplicatively  Under Additive model Y=T+S+C+I  Under Multiplicative model Y=T*S*C*I  Forecast is made by forming trend equation or by average method Methods of forecasting by forming Trend equation Trend (T)  Refers to a long term upward or downward movement in the data mainly due to seasonal variations in the time duration  The trend component may be linear or may be non-linear.  Linear trend is fairly common and measured by forming the equation F_t=a+bt  Ft = Forecast for period t, a = value of Ft at t = 0 i.e. y axis intercept, b = slope of the linear trend equation shown above,t = specified no of time periods from t = 0 ΣtY - n * t * Y nΣtY - Σt * ΣY  b= = Σt2 - nt2 nΣt2 - (Σt)2  a= Y-bt  t , Y are mean of respective variables  n = no of data items in t and Y series  Very similar to causal method discussed earlier Methods of forecasting by averaging Can be found by  Simple moving average method  Weighted moving average method The Institute of Cost Accountants of India 19 Operations Management and Strategic Management Forecast by Simple moving average method is done by n Σt=1 At-i  Ft = MAn = n Where Ft = Forecast for period t, MAn = n period moving average, At - i = Actual demand in period t - i & n = no of period (data points)in the time series  Forecast by weighted moving average method is done by n F = WMA = Σi=1Wt-i *A t n t-i Where Ft = Forecast for period t, WMAn = n period weighted moving average, At-i = Actual demand in period t - i, wt = weight assigned to period t - i & n = no of period (data points)in the time series Seasonality (S)  Refers to short term fairly regular variations in the data Cycles (C)  Refer to wave like variations in the data of more than one year’s duration due to cyclical variations in the economy during the time period Irregular (I)  Random unexplained variations in the time series data Example: Monthly sales of ABC Company for a seven month period are as follows: Month Feb Mar April May June July August Sales (000 units) 24 23 20 25 23 27 25 a) Plot the data; b) Forecast September sales volume using each of the following: i) A five month moving average; ii) A weighted average using 0.60 for August, 0.30 for July and 0.10 for June iii) A linear trend equation Answer: (a) 20 The Institute of Cost Accountants of India  Operations Planning (b) A 5 month moving average : Our formula will be n Σi=1 At-i Ft = MAn = n A... + At-2 + At-1 Or = t-n n Where Ft = Forecast for time period t. Here time period t = 8 from February month n = Number of periods (data points) in the moving average = 5 here MAn = n period moving average At-i = Actual value in period t-i Since here we are calculating with t = 8, so we require 8 - 1 = 7th, 8 - 2 = 6th, 8 - 3 = 5th, 8 - 4 = 4th & 8 - 5 = 3rd month data respectively from February. Therefore the concerned months and actual data will be as follows: At-5 = April 20 At-4 = May 25 At-3 = June 23 At-2 = July 27 At-1 = August 25 Sum 120 So forecast sales for the month of September MA5 = 120/5 = 24 (in 000) (c) In case of weighted average the heaviest weights are assigned to the most recent values. And for September our forcast will be Ft = 0.6 * Sales of August + 0.3 * Sales of July + 0.1 * Sales of June Or, = 0.6 * 25 + 0.3 * 27 + 0.1 * 23 = 25.4 (in 000) (d) For computation of trend we have to use the following two parameters: nΣtY - Σt * ΣY ΣY - bΣt b= &a= nΣt - (Σt) 2 2 n Where Y represents sales value and t represents time period & n number of items. Trend equation is Ft = a + bt, where Ft = forecast for period t, a = value of Ft at t = 0 & b = slope of the line Computations are: t = Month Y = Sales t*Y t2 1 24 24 1 2 23 46 4 3 20 60 9 4 25 100 16 5 23 115 25 6 27 162 36 7 25 175 49 Sum 28 167 682 140 The Institute of Cost Accountants of India 21 Operations Management and Strategic Management So b = 0.5 & a = 21.86 For September t = 8 So forecast for September = 21.86 + 0.5 * 8 = 25.857 (in 000) In time series analysis Seasonality(S) refers to regular annual variation. Well known examples of seasonality is rush hour rate of UBER cab booking, holiday influenced demand like puja shopping etc. We have learnt that fluctuation in time series due to Seasonality is smoothen out by averaging. Therefore Seasonality in time series is expressed in terms of the amount that actual demand values deviate from the average value of the series. If trend is present, seasonality is expressed in terms of the trend value. In additive model, seasonality is expressed as a quantity which is added to or subtracted from the series average in order to incorporate seasonality In multiplicative model, seasonality is expressed as a percentage of the average (or trend) which is then used to multiply the value of a series to incorporate seasonality In practice, businesses use multiplicative model much more than additive model Seasonality expressed as a percentage of the average (or trend) is termed Seasonal relative (Seasonal Index) If seasonality relative to Christmas month is 1.60 and a trader has monthly average of 300 units of sales then in December the trader could expect a sales demand around 480 (i.e.300*1.6) Seasonal Relatives are used for forecasting in two ways  To deseasonalise the forecast by dividing the forecast data by respective seasonal relative e.g. Christmas month’s total demand forecast / Seasonal relative of Christmas month = Actual forecast resulted by following trend pattern of the underlying product/service  To seasonalise a forecast by multiplying the forecast data by respective seasonal relative e.g. Christmas month’s demand forecast as per trend pattern of the underlying product * Seasonal relative of Christmas month = Christmas month’s total demand resulted from trend and seasonality  Seasonal Relatives can be found by i) Simple average; ii) Centered moving average; Example: Yearly sales of a company for last 8 years are as follows: Year Q1 Q2 Q3 Q4 Total 2016 28 37 33 24 122 2017 27 40 30 23 120 2018 31 36 33 30 130 2019 31 39 36 26 132 2020 29 38 32 24 123 2021 32 40 36 26 134 2022 34 42 34 29 139 2023 31 39 39 23 132 22 The Institute of Cost Accountants of India  Operations Planning Year t Y ty t2 2016 1 122 122 1 2017 2 120 240 4 2018 3 130 390 9 2019 4 132 528 16 2020 5 123 615 25 2021 6 134 804 36 2022 7 139 973 49 2023 8 132 1056 64 Total 36 1032 4728 204 Form a trend line and find yearly forecast for 2024 and 2025. Hence compute average quarterly forecast for these two years. Hence seasonalise the quarterly forecast of 2024 and 2025. Apply simple average method Answer: For computation of trend we have to use the following two parameters: nΣtY - Σt * ΣY ΣY - bΣt b= &a= nΣt2 - (Σt)2 n Detail computations are as follows from where we get b = 2 & a = 120 and the trend equation is Y = 120 + 2t So for year 2024, t = 9 and hence yearly forecast = 120 + 2 * 9 = 138 So for year 2025, t =10 and hence yearly forecast = 120 + 2 * 10 = 140 Hence Average quarterly forecast for 2024 = 138/4 = 34.5 Hence Average quarterly forecast for 2025 = 140/4 = 35 To seasonalise these quarterly forecast we have to find Seasonal Relative w.r.t each quarter as follow through simple average Year Q1 Q2 Q3 Q4 Total 2016 28 37 33 24 122 2017 27 40 30 23 120 2018 31 36 33 30 130 2019 31 39 36 26 132 2020 29 38 32 24 123 2021 32 40 36 26 134 2022 34 42 34 29 139 2023 31 39 39 23 132 Total 243 311 273 205 Average 30.375 38.875 34.125 25.625 Seasonal Relative (30.375/32.25) (38.875/32.25) (34.125/32.25) (25.625/32.25) *100 = 94.19 *100 = 120.54 *100 = 105.81 *100 = 79.46 *(30.375+38.875+34.125+25.625)/4 = 32.25 The Institute of Cost Accountants of India 23 Operations Management and Strategic Management Hence seasonalised quarterly forecast for 2024 & 2025 are 2024 2025 Quarter Seasonalised Seasonalised Quarterly Seasonal Quarterly Seasonal Quarterly Quarterly Average Relative (%) Average Relative forecast forecast Q1 34.5 94.19 32.5 35 94.19 32.97 Q2 34.5 120.54 41.59 35 120.54 42.19 Q3 34.5 105.81 36.50 35 105.81 37.03 Q4 34.5 79.46 27.41 35 79.46 27.81 Seasonalised Quarterly forecast = Quarterly average (available from trend) * Seasonal Relative Seasonal relative can also be found by Centered Moving average. It gives more accurate result compared to simple average method. Simple average method however could be used for finding Seasonal relative when ratio of intercept to the slope is large. Example: Quarterly demand data for a manufacturer are as follows. Compute Seasonal relative for each quarter by centered moving average (Apply even numbered moving average say 4) Year Q1 Q2 Q3 Q4 1 34 38 55 66 2 48 56 80 91 3 65 74 104 108 4 78 Answer: First we have to calculate MA4. Since the computed centered values are not corresponding to actual data point, we have to find MA2 and the computed centered values correspond to actual data point. With MA2 we could find Demand/MA2. Detail computation are as follows: Year Quarter Demand MA4 MA2 Demand/MA2 1 1 34 2 38 3 55 48.25 4 66 51.75 50 1.10 2 1 48 56.25 54 1.22 2 56 62.5 59.38 0.81 3 80 68.75 65.63 0.85 4 91 73 70.88 1.13 3 1 65 77.5 75.25 1.21 2 74 83.5 80.50 0.81 3 104 87.75 85.63 0.86 4 108 91 89.38 1.16 4 1 78 24 The Institute of Cost Accountants of India  Operations Planning Demand/MA2 Total Q1 Q2 Q3 Q4 1.10 1.22 0.81 0.85 1.13 1.21 0.81 0.86 1.18 Total 1.62 1.71 3.41 2.43 Average 0.81 0.855 1.137 1.215 4.017 Relative 0.81*4/4.017= 0.807 0.855*4/4.017= 0.851 1.137*4/4.017= 1.215*4/4.017= 1.132 1.210 For repopulating understanding on time series paper 3 under foundation curriculum could be well referred Illustration 1 From the following time series data of sale project the sales for the next three years. Year 2017 2018 2019 2020 2021 2022 2023 Sales (`000 units) 80 90 92 83 94 99 92 Solution: Computation of Trend Values Years Time Deviation Sales in Squares of Product of time from 2020 (` 000 units) time dev. deviations and sales X Y X² XY 2017 –3 80 9 –240 2018 –2 90 4 –180 2019 –1 92 1 –92 2020 0 83 0 0 2021 +1 94 1 +94 2022 +2 99 4 +198 2023 +3 92 9 +276 n=7 ∑X = 0 ∑Y = 630 ∑X² = 28 ∑XY = + 56 Regression equation of Y on X Y = a + bX To find the values of a and b ∑Y 630 a= = = 90 n 7 ∑XY 56 b= = =2 ∑X2 28 The Institute of Cost Accountants of India 25 Operations Management and Strategic Management Hence regression equation comes to Y = 90 + 2X. With the help of this equation we can project the trend values for the next three years, i.e., 2024, 2025 and 2026. Y2024 = 90 + 2(4) = 90 + 8 = 98 (000) units. Y2025 = 90 + 2(5) = 90 + 10 = 100 (000) units. Y2026 = 90 + 2(6) = 90 + 12 = 102 (000) units. Illustration 2 With the help of following data project the trend of sales for the next five years: Years 2018 2019 2020 2021 2022 2023 Sales (in lakhs) 100 110 115 120 135 140 Solution: Computation of trend values of sales Year Time deviations from the Sales (in lakh `) Squares of time Product of time middle of 2020 and 2021 deviation deviation and sales assuming 6 months = 1 unit X Y X2 XY 2018 -5 100 25 -500 2019 -3 110 9 -330 2020 -1 115 1 -115 2021 +1 120 1 +120 2022 +3 135 9 +405 2023 +5 140 25 +700 n=6 ΣX = 0 ΣY = 720 ΣX² = 70 ΣXY = 280 Regression equation of Y on X: Y = a + bX To find the values of a and b ∑Y 720 a= = = 120 n 6 ∑XY 280 b= = =4 ∑X2 70 Hence regression equation comes to Y = 120 + 4X Sales forecast for the next years, i.e., 2024-28 Y2024 = 120 + 4 (+7) = 120 + 28 = ` 148 lakhs Y2025 = 120 + 4 (+9) = 120 + 36 = ` 156 lakhs 26 The Institute of Cost Accountants of India  Operations Planning Y2026 = 120 + 4 (+11) = 120 + 44 = ` 164 lakhs. Y2027 = 120 + 4 (+13) = 120 + 52 = ` 172 lakhs. Y2028 = 120 + 4 (+15) = 120 + 60 = ` 180 lakhs. Illustration 3 An investigation into the demand for colour TV sets in 5 towns has resulted in the following data: Population of the town (in lakhs) X: 5 7 8 11 14 No of TV sets demanded (in thousands) Y: 9 13 11 15 19 Fit a linear regression of Y on X and estimate the demand for CTV sets for two towns with a population of 10 lakhs and 20 lakhs. Solution: Computation of trend values Population (in Sales of CTV (in thou- Squares of the popu- Product of population and lakhs) sands) lation sales of colour TV X Y X² XY 5 9 25 45 7 13 49 91 8 11 64 88 11 15 121 165 14 19 196 266 ΣX = 45 Σy = 67 ΣX² = 455 ΣXY = 655 Regression equation of Y on X Y = a + bX To find the values of a and b, the following two equations are to be solved ΣY = na + bΣX... (i) ΣXY = aΣX + bΣX2... (ii) By putting the values we get 67 = 5a + 45b... (iii) 655 = 45a + 455b... (iv) Multiplying equation (iii) by 9 and putting it as no. (v) we get, 603 = 45a + 405b... (v) By deducting equation (v) from equation (iv); we get 52 = 50b 52 b= = 1.04 60 The Institute of Cost Accountants of India 27 Operations Management and Strategic Management By putting the value of b in equation (iii), we get 67 = 5a + 45 × 1.04 or, 67 = 5a + 46.80 or, 67-46.80 = 5a or, 5a = 20.20 20.20 or, a = 5 or a = 4.04 Now by putting the values of a and b the required regression equation of Y on X, is Y = a + bX or, Y = 4.04 + 1.04X When X = 10 lakhs than Y = 4.04 + 1.04 (10) or, Y = 4.04 + 10.40 or 14.44 thousand CTV sets. Similarly for town having population of 20 lakhs, by putting the value of X = 20 lakhs in regression equation Y = 4.04 + 1.04 (20) = 4.04 + 20.80 = 24.84 thousands CTV sets. Hence expected demand for CTV for two towns will be 14.44 thousand and 24.84 thousand CTV sets. Illustration 4 An investigation into the use of scooters in 5 towns has resulted in the following data: Population in town Population in town (in lakhs) (X) 4 6 7 10 13 No. of scooters (Y) 4,400 6,600 5,700 8,000 10,300 Fit a linear regression of Y on X and estimate the number of scooters to be found in a town with a population of 16 lakhs. Solution: Computation of trend value Population No. of scooters Squares of Product of population and (in lakhs) demanded population No. of scooters demanded X Y X² XY 4 4,400 16 17,600 6 6,600 36 39,600 7 5,700 49 39,900 10 8,000 100 80,000 13 10,300 169 1,33,900 ΣX = 40 ΣY = 35,000 ΣX² = 370 ΣXY = 3,11,000 28 The Institute of Cost Accountants of India  Operations Planning Regression equation of Y on X Y = a + bX To find the values of a and b we will have to solve the following two equations ΣY = na + bΣX... (i) ΣXY = aΣX + bΣX 2....(ii) By putting the values, we get 35,000 = 5a + 40b... (iii) 3,11,000 = 40a + 370b... (iv) By multiplying equation no. (iii) by 8 putting as equation (v) we get, 2,80,000 = 40a + 320b... (v) By subtracting equation (v) from equation (iv), we get 31,000 = 50b or, 50b = 31,000 310 or, b = = 620 50 By substituting the value of b in equation no. (iii), we get 35,000 = 5a + 40b or 35,000 = 5a + 40 × 620 or 35,000 = 5a + 24,800 or 10,200 = 5a 10200 or a = = 2040 5 Now putting the values of a and b the required regression equation of Y on X, is Y = a + bX or, Y = 2040 + 620 X When X = 16 lakhs then Y = 2040 + 620 (16) or Y = 2040 + 9920 or Y = 11,960 Hence, the expected demand of scooters for a town with a population of 16 lakhs will be 11,960 scooters. The Institute of Cost Accountants of India 29 Operations Management and Strategic Management Capacity Planning 2.2 Capacity is the maximum amount of output a productive unit could produce within a stated time. So capacity is the rate of productive capability of a facility and it is usually expressed as volume of output per period of time. Capacity refers to the maximum load an operating unit can handle. The operating unit might be a plant, a department, a machine, a store or a worker. Capacity of a plant is the maximum rate of output (goods or services) the plant can produce. The production capacity of a facility or a firm is the maximum rate of production the facility or the firm is capable of producing. It is usually expressed in terms of units produced per period of time (i.e., hour, shift, day, week, month etc.). But when firms are producing different types of products, it is difficult to use volume of output of each product to express the capacity of the firm. In such cases, capacity of the firm is expressed in terms of monetary value (production value) of the various products produced put together While producing output if the production process consists of many sub processes, then the capacity of the productive unit is governed by the capacity of the weakest link. Sub Process 1 Sub Process 2 Sub Process 3 Productive Unit If sub process 2 is the weakest link then capacity of the productive unit is governed by the capacity of weakest link. But no single capacity measure is best for all situations. A retailer measures capacity as annual sales rupees generated per square ft; An airline measures capacity as available seat miles per month; A theater measures capacity as number of seats; A car manufacturer measures capacity as number of cars produced per day; In general capacity can be expressed in one of two ways: Output measures of capacity – Are best utilized when applied to individual processes within the firm or when the firm provides a relatively small number of standardized services and products; High volume processes such as car manufacturers are a good example; Capacity is expressed as number of cars produced per day; 30 The Institute of Cost Accountants of India  Operations Planning This method is less applicable when the amount of customization and variety in the product mix increases; Input measures of capacity – Are generally used for low volume, flexible processes such as furniture maker; Capacity is usually expressed as number of workstations or number of workers; Capacity can be: Installed Capacity--It represents capacity in terms of machines actually installed. Productive machines procured for installation have some defined capacity, as provided in their printed literatures. Summation of such capacity gives a total installed capacity. Rated Capacity--This denotes the highest output established by the actual trial runs of the productive machines installed. (However, deciding the capacity rate based on the single one-time highest achievement may not be always correct. It is necessary to assume the average of performance rate of machines over a time period for more effective rating decision) Licensed Capacity--This denotes the actual capacity licensed by the concerned government authorities. Design capacity -The maximum output rate or service capacity an operation, process or facility is designed for achieving under ideal condition Effective capacity -Design capacity minus allowances such as personal time, maintenance etc. Effective Capacity can be determined by giving due consideration to the following factors Facilities - design, location, layout and environment Product - Product design and product-mix. Process - Quantity and quality capabilities of the process or to be followed. Human factors - Job content, Job design, motivation, compensation, training and experience of labour, learning rates and absenteeism and labour turn over. Operational factors - Scheduling, materials management, quality assurance, maintenance policies, and equipment break-downs. External factors - Product standards, safety regulations, union attitudes, pollution control standards. Effective capacity is always less than design capacity owing to changing product mix, the need for periodic maintenance of facilities, tiffin breaks, lunch breaks etc. Actual output can never exceed effective capacity and is usually less because of machine breakdown, absenteeism, shortages of materials etc. These different measures are useful in defining two measures of effectiveness of a system: Capacity Utilisation Efficiency Capacity Utilisation – Is the degree to which a resource such as equipment, space or the workforce is currently being used and is measured as the ratio of average output rate to maximum capacity (expressed as a percent). The average output rate and the maximum capacity needs to be measured in the same terms – that is time, customers, The Institute of Cost Accountants of India 31 Operations Management and Strategic Management units or rupees. Actual output Utilisation = × 100% Design Capacity The utilization rate indicates the need for adding extra capacity or eliminating unneeded capacity. Utilisation can be increased by increasing actual output and hence effective capacity since actual output is born out of effective capacity Actual output Efficiency = × 100% Effective Capacity Capacity planning is concerned with finding answers to the basic questions regarding capacity such as: What kind of capacity is needed? How much capacity is needed? When this capacity is needed? Capacity planning is a Long term strategic decision that establishes a firm’s overall level of resources. The goal of capacity planning of an organisation is to achieve a match between its long term supply capabilities and the predicted level of long term demand. Capacity decisions often involve long term irrevocable commitment of resources Capacity decisions affect— Product lead times ( Duration between receipt of order for the product and readiness of the product); Customer Responsiveness; Operating Costs; Firm’s ability to compete; Capacity decisions are strategic because this decisions can affect competitiveness. The objective of capacity planning and control of capacity, is to match the level of operations to level of demand. Out of Balance Capacity occurs when there is a gap between current and desired capacity. This depletes the competitiveness. Capacity decisions are made in light of several long term issues such as the firm’s economies and diseconomies of scale, capacity cushions, timing, trade offs between customer service and capacity utilisation etc. Because of the aforesaid long term factors there are risks involved and Capacity strategies should consider all these. Therefore while taking capacity decisions concerns are on factors Flexibililty: Flexibility is introduced into the system  Provisions for future requirments must be there in the system If future expansion of an education institute is most likely, then during initial construction of the the institute’s building water lines, power lines etc must be provided with adequate capacity commesurate with future need  Besides provisions for future requirements, flexibility also incorporated While designing Location & Layout of equipments 32 The Institute of Cost Accountants of India  Operations Planning While making Productin planning, Scheduling & Inventory policies Life Cycle: Capacity requirements are often closely linked to the stage of the Life Cycle that a product or service is in. The product life cycle is the process a product goes through from when it is first introduced into the market until it declines or is removed from the market. The life cycle has four stages - introduction, growth, maturity and decline. At introduction phase of a product---size of the overall market and organisation’s share of the market is uncertain----large and inflexible capacity planning needs to be avoided At growth phase of a product---size of the overall market grows—  Rate of growth of individual organisation’s market share influences its capacity planning  Influences individual organisation’s level of production, level of investment  Opens opportunities to all organisations to bring competitive advantage through introduction of distinguished features into product (product differentiation) by investing in technology and process improvements  Brings risks of overcapacity in the market and result in higher unit costs of the output At maturity phase of a product---size of the market levels off  Organisations tend to have stable market share  Organisations could increase profitability through cost reduction and full capacity utilisation  Organisations with lower capacity in earlier phases of life cycle could go for capacity addition if maturity stage is thought to be prolonged At decline phase of a product---overall market demand declines  Organisations face underutilisation of capacity  Excess capacity could be sold off  Excess capacity could be used for producing other products or services Interrelation: Parts of any system are always interrelated Capacity of one part has impacts on other parts and so capacity planning must consider these interrelations  Increasing the number of routes from an airport must have influence on security check-in capacity of the station. Capacity decisions related to a process has a role on the supply chain of the organisation as a whole  Increasing production capapcity may require more raw material supllies and suplliers require time to adjust this change requirement So capapcity planning decsions must be made with collaboration among all the interelated players including suplliers, distributos, transporters etc Bottleneck: Capacity planning decision must not encouarge Bottleneck Operation The Institute of Cost Accountants of India 33 Operation