Intermediate Operations Management & Strategic Management Paper 9 PDF

Intermediate Operations Management and Strategic Management Paper 9 The Institute of Cost Accountants of India Statutory Body under an Act of Parliament...

Intermediate Operations Management and Strategic Management Paper 9 The Institute of Cost Accountants of India Statutory Body under an Act of Parliament www.icmai.in  About the Institute T he Institute of Cost Accountants of India is a Statutory Body set up under an Act of Parliament in the year 1959. The Institute as a part of its obligation, regulates the profession of Cost and Management Accountancy, enrols students for its courses, provides coaching facilities to the students, organizes professional development programmes for the members and undertakes research programmes in the ield of Cost and Management Accountancy. The Institute pursues the vision of cost competitiveness, cost management, ef icient use of resources and structured approach to cost accounting as the key drivers of the profession. With the current emphasis on management of resources, the specialized knowledge of evaluating operating ef iciency and strategic management the professionals are known as ''Cost and Management Accountants (CMAs)''. The Institute is the 2ⁿ largest Cost & Management Accounting body in the world and the largest in Asia, having more than 5,00,000 students and 90,000 members all over the globe. The Institute operates through four regional councils at Kolkata, Delhi, Mumbai and Chennai and 113 Chapters situated at important cities in the country as well as 11 Overseas Centres, headquartered at Kolkata. It is under the administrative control of the Ministry of Corporate Affairs, Government of India. Vision Statement T he Institute of Cost Accountants of India would be the preferred source of resources and professionals for the inancial leadership of enterprises globally.” Mission Statement T he Cost and Management Accountant professionals would ethically drive enterprises globally by creating value to stakeholders in the socio-economic context through competencies drawn from the integration of strategy, management and accounting.” Motto From ignorance, lead me to truth From darkness, lead me to light From death, lead me to immortality Peace, Peace, Peace Cover Image Source: https://www.shutterstock.com/search/operations Behind Every Successful Business Decision, there is always a CMA  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 Price: ` 600.00 Published by : Directorate of Studies The Institute of Cost Accountants of India CMABhawan, 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 © 2022 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 - 386 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 13-86 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 87-100 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 101-252 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 253-280 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 281-344 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 345-366 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 367-386 SECTION B: STRATEGIC MANAGEMENT 387-521 Module 8. Introduction 389-424 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 425-456 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 457-496 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 497-521 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 O perations Management (OM) encompasses all organizational activities that acquire the raw form of materials (input), process or convert into a consumable products and services as required to meet the needs of the end customers. OM deals with both tangible product and intangible services. Example 1 (Product Centric) Suppose, you require a smartphone. OM deals with procuring all raw materials such as chip, motherboard, battery, lens, speakers etc.; assemble and mount all components; test the performance of finished good; quality check; maintenance; storage and distribution for making the smartphone available to you. Example 2 (Service Centric) Suppose, you take a subscription of Netflix to watch a movie. OM covers all activities that includes dealing with movie-makers to get transmission right, make the movie available in the database, arranging for live streaming or recorded version transmission over spectrum and so on. To better understand OM, let us have a simple diagram Conversion Finished Product/ Input (Raw Form) through process Service Examples of input include, raw materials, machines, electricity, manpower, facilities, storage space etc. In some cases, product and service are required both. For example, if you visit a retail shop. You not only require the availability of the products you want but also you expect courtesy of the salesperson, ambience, convenience of buying etc which are services. In fact, goods (tangible) and services (intangible) follow a trade off relationship over a continuum ranging from pure product (for example, study material) to pure service (for example, teaching). 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. The Institute of Cost Accountants of India 5 Operations Management and Strategic Management 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 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. 6 The Institute of Cost Accountants of India  Introduction 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. 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. The Institute of Cost Accountants of India 7 Operations Management and Strategic 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 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) 8 The Institute of Cost Accountants of India  Introduction 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 likesoap. 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 pecific 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. In this segment we shall restrictour discussions mainlyon forecasting of demand of products. Why do we need to forecast the demand? From a holistic perspective any organisation is described in terms of its supply chain, also sometimes called value chain which gets into existence from the moment demand is created and/or gets generated. In other word, it is the demand that decides the existence of any business. With the available demand forecasting the organisations perform production/ service planning, take inventory decisions, decide on facility selection and process design, and select appropriate technology, plan for fund requirement and manpower planning. Hence, a reasonably accurate forecasting of demand can make a company while absence of the same lead to breaking of organisations.The competition is either on products pace and/or on service space where effectiveness and efficiency of forecasting is a critical success factor. 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. However, all these above sources provide mostly structured data and information thereof. With the development in Information and communication technology, today forecasting is significantly controlled by unstructured and The Institute of Cost Accountants of India 15 Operations Management and Strategic Management semi structured high volume of data in terms of quantified data,video,audio, image, multimedia message, social media post to name a few. Range of period Forecasting is done on short, medium and long term basis. The underlying objectives are explained below. The period of forecasting, that is the time range selected for forecasting depends on the purpose for which the forecast is made. 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’ and ‘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 (example, highly innovative products with shorter life cycle like smartphones; usually spanning over 6-8 months) In case of short-term forecast, which extends from few weeks to three or six months Example smart phones usually Spanning are 6-8 months the following purposes are generally served: (i) To estimate the inventory requirement, (ii) To provide transport facilities for despatch of finished goods, (iii) To decide work loads for men and machines, (iv) To find the working capital needed, (v) To set-up of production run for the products, (vi) To fix sales quota, (vii) To find the required overtime to meet the delivery promises. Medium run forecasting (example, consumer durable products, medicines) In case of medium range forecasting the period may extend over to one or two years. Example—Consumer Durable products, Medicines The purpose of this type of forecasting is: (i) To determine budgetary control over expenses, (ii) To determine dividend policy, (iii) To find and control maintenance expenses, (iv) To determine schedule of operations, (v) To plan for capacity adjustments. Long run forecasting (example, daily used routine household product like Aata) In long range forecast, the normal period used is generally 5 years. Example—Daily used routine household product like Aata. In some cases it may extends to 10 to 15 years also. The purpose of long range forecast is: (i) To work out expected capital expenditure for future developments or to acquire new facilities, (ii) To determine expected cash flow from sales, (iii) To plan for future manpower requirements, 16 The Institute of Cost Accountants of India  Operations Planning (iv) To plan for material requirement, (v) To plan for Research and Development. Here much importance is given to long range growth factor. Steps in Forecasting Whatever may be the method used for forecasting, the following steps are followed in forecasting. (a) Determine the objective of forecast: What for you are making forecast? Is it for predicting the demand? Is it to know the consumer’s preferences? Is it to study the trend? You have to spell out clearly the use of forecast. (b) Select the period over which the forecast will be made? Is it long-term forecast or medium-term forecast or short-term forecast? What are your information needs over that period? (c) Select the method you want to use for making the forecast. This method depends on the period selected for the forecast and the information or data available on hand. It also depends on what you expect from the information you get from the forecast. Select appropriate method for making forecast. (d) Gather information to be used in the forecast. The data you use for making forecasting to produce the result, which is of great use to you. The data may be collected by: (i) Primary source: This data we will get from the records of the firm itself. (ii) Secondary source: This is available from outside means, such as published data, magazines, educational institutions etc. (e) Make the forecast: Using the data collected in the selected method of forecasting, the forecast is made. Forecasting Methods (How to forecast demand?) There are two types of approaches such as ~~ Qualitative ~~ Quantitative A. Qualitative Methods 1. Survey of buyer’s intentions or the user’s expectation method 2. Collective opinion or sales force composite method 3. Group executive judgement or executive judgement method 4. Experts’ opinions 5. Market test method 1. Survey of buyer’s intentions or the user’s expectation method: Under this system of sales forecasting actual users of the product of the concern are contacted directly and they are asked about their intention to buy the company’s products in an expected given future usually a year. Total sales forecasts of the product then estimated on the basis of advice and willingness of various customers. This is most direct method of sales forecasting. The chief advantages of this method are: (i) Sales forecast under this method is based on information received or collected from the actual users whose buying actions will really decide the future demand. So, the estimates are correct. (ii) It provides a subjective feel of the market and of the thinking behind the buying intention of the actual uses. It may help the development of a new product in the market. (iii) This method is more appropriate where users of the product are numbered and a new product is to be introduced for which no previous records can be made available. (iv) It is most suitable for short-run forecasting. The Institute of Cost Accountants of India 17 Operations Management and Strategic Management 2. Collective opinion or sales force composite method: Under this method, views of salesmen, branch manager, area manager and sales manager are secured for the different segments of the market. Salesmen, being close to actual users are required to estimate expected sales in their respective territories and sections. The estimates of individual salesmen are then consolidated to find out the total estimated sales for the coming session. These estimates are then further examined by the successive executive levels in the light of various factors like proposed changes in product design, advertising and selling prices, competition etc. before they are finally emerged for forecasting. 3. Group executive judgement or executive judgement method: This is a process of combining, averaging or evaluating, in some other way, the opinions and views of top executives. Opinions are sought from the executives of different fields i.e., marketing; finance; production etc. and forecasts are made. 4. Experts’ opinions: Under this method, the organisation collects opinions from specialists in the field outside the organisation. Opinions of experts given in the newspapers and journals for the trade, wholesalers and distributors for company’s products, agencies or professional experts are taken. By analysing these opinions and views of experts, deductions are made for the company’s sales, and sales forecasts are done. 5. Market test method: Under this method seller sells his product in a part of the market for sometimes and makes the assessment of sales for the full market on the bases of results of test sales. This method is quite appropriate when the product is quite new in the market or good estimators are not available or where buyers do not prepare their purchase plan. B. Quantitativeor Statistical Method This approach takes into account historical data and uses statistical models to forecast the demand. There are broadly two types of approach Causal/Regression analysis Time Series Analysis Causal Model The causal model is expressed at Dt = f(F1, F2...Fn) Where, Dt = Demand for period t F1, F2, F3...Fn are the factors responsible. For, example, suppose we want to forecast the demand (sales) for period t F1 = Sales budget F2 = Price F3 = Promotional Budget F4 = Technology etc. Now, these Fi may also be a f(t) Therefore, we need to take into account the ‘time’.However, the causal/regression analysis model sometimes is treated as a useful method as it considers various perspectives or influencers into the analysis. In this context, it may be noted with regard to the forecasting period. We sometimes fail to capture sudden change in given conditions over the study period. For example, After spread of covid-19, an organisation (lets take an example of a FMCG company) that made forecasting of demand in 2020 and beyond, had undergone an abrupt initial variations in the demand. 18 The Institute of Cost Accountants of India  Operations Planning Therefore, Forecasting is never absolutely accurate. There is an error in the forecasting process. This concept shall be more clearly explained in the next section on time series analysis. Time Series Analysis let, Yt = Demand at time t yt = Realized demand at time t yt à Y t (sample) (population) Therefore, yt = f(t) and yt = f(t) For any time series data, there are four components ~~ Trend(T) ~~ Seasonality(S) ~~ Cyclical ~~ Irregular(I) or Random Time series models are of two kinds of forms ~~ Additive yt = T+S+C+I ~~ Multiplicative yt = TSCI Like yt, T,S,C all are f(t). Next, Let us define these components ~~ Trend: An indicator of long term movements i.e., it is the tendency of the data to move upward or downward over a considerably longer period of time. Sometimes, the data remains unchanged in time that implies trend = 0 (Stable data) For example, Population trend, no of students admitted, no of infected cases of covid-19 ~~ Seasonality: Rhythmic, regular & periodic variations over a span of less than 1 year. This type of variations may be recorded daily, weekly, monthly, quarterly or yearly. Example: Consumer Durable products may have seasonal variations during festive times & special occasions every year. ~~ Cyclic variation: A kind of oscillatory movement generally spanning over more than 1 year. Example: Business Cycle (Prosperity,recession,depression,recovery) ~~ Irregular variation: Random, unpredictable, uncontrollable, irratic. They are referred to as noise. In the following we shall discuss time series model based analysis for both additive and multiplicative model. However, in our discussion we restrict ourselves not to considering cyclical component for the time being. Additive Model yt = T+S+I We consider linear trend for our discussion. To find trend we use following models – 1. yt = a + bt a, b are coefficients (Linear) The Institute of Cost Accountants of India 19 Operations Management and Strategic Management 2. yt = a + bt + ct2 (linear in coefficients) This is also called intrinsially linear (Parabolic Form) Suppose, t = T then the equation become 2 yt = a + bt + cT 3. yt = abt (exponential form) This can also made in the form of (1) Log10(yt) = Log10(a) + t lot10(b) fi y¢t = A + Bt A = log10(a) B = log10(b) Using these models we forecast the demand Let ŷt is the predicted demand. The model’s effectiveness depends on how less is the MSE (Mean Square Error) Observed → yt = ŷt + Œ ← Error ↑ Predicted fi Œ= yt – ŷt fi Ess = SŒ2 = S(yt – ŷt)2 ESS MSE = No. of time periods After getting the trend (T) the equation becomes (yt – T) = S + I In fact, yt – T – S = C + I Therefore, now the question is how to find S (seasonal variation) For this purpose we use I. Moving average II. Weighted moving average III. Simple exponential smoothing IV. Double exponential smoothing V. Hot-winter model Moving Average (MA) Captures impulsive changes Dynamic in nature, ability to handle outliers more than arithmetic means which is static in nature Continuous movement of average values. 20 The Institute of Cost Accountants of India  Operations Planning odd term (2n + 1) Generalization Ex : 3 period MA; 2n + 1 = 3 fi 2.1 + 1 = 3 there fore, we forgo one period both at the beginning & end MA Even term (2n) Generalization The advantage of odd term MA is its simplicity in computation. However, it has to forgo n periods at the beginning & end. Hence, it loses some fluctuations and also it is applicable for long period. For a longer period, possibility of error increases. Another limitation is that, odd term MA is a one time average calculation method. Further, if we increase n value it misses more number of periods. This is one of the reason that we calculate seasonality index. Solution with time series analysis Let us take the example of an Insurance company. The data we record is the policy sale (quarterwise for last 4 years). Therefore, we have 16 data points such as d1, d2……d16. Refer to the following table :- Year Quarter Sales 1 Q1 d1 Q2 d2 Q3 d3 Q4 d4 2 Q1 d5 Q2 d6 Q3 d7 Q4 d8 3 Q1 d9 Q2 d10 Q3 d11 Q4 d12 4 Q1 d13 Q2 d14 Q3 d15 Q4 d16 Now we want to find out I. Trend The Institute of Cost Accountants of India 21 Operations Management and Strategic Management II. Seasonality III. Seasonal index Note that we do not consider cyclic variations for the time being. Seasonal Index allows to calculate error value for each quarter each year. Steps Plot the data graphically. Apply least square approximation method to get the normal equations (2 nos) solving which we find out coefficient values (a and b). Our equation is yt = a + bt...(1) Coefficient for a = 1 Coefficient for b = t Multiply the equation (1) by coefficient of ‘a’ and summing up both side we get Syt = na + bSt...(2) Again multiplying the equation (1) by the coefficient of ‘b’ i.e. t and summing up both side we get Styt = aSt + bSt2...(3) In the time series, there is one extra constraint for solving its parameters easily, i.e., St = St3 = 0 Therefore, from equation (2) we get v a=  y t = y... (4) t n Again from (3) Styt = aSt + bSt2 fi b=  ty t... (5)  t2 Now let ŷt is the predicted value Therefore ŷt = â + b t...(6) Where, â & b are known values In this context, the question is how to get Σt = 0 for odd period and even period. Let us try to explain with a simple example. T - Midyear T YT t= yt tyt t2 Width Width = 1 2016 Y1 –2   4 22 The Institute of Cost Accountants of India  Operations Planning 2017 Y2 –1   2 Mid year 2018 Y3 0   0 2019 Y4 +1   1 2020 Y5 +2   4 St = 0 St2 = 0 Therefore, our next step is to find out MSE yt ŷt (yt – ŷt) (yt – ŷt)2 y1 ŷ1 y2 ŷ2 y3 ŷ3...... 2 S(yt – ŷt)2 Ê Ÿ ˆ  ÁË y t - y t ˜¯ MSE = n Let us now use model 2 (parabolic) for the same odd term MA. y = a + bt + ct2...(7) Following the same procedure as we did in case of y = a+bt. We get three normal equation as follows Syt = na + bSt + cSt2...(8) Styt = aSt + bSt2 + cSt3...(9) St2yt = aSt2 + bSt3 + cSt4...(10) Now we know St = St3 =... = 0 Therefore from equation (9) we get b=  ty t  t2 From equation (8) we get Syt = na + cSt2...(11) From equation (10) we get St2yt = aSt2 + cSt4...(12) The Institute of Cost Accountants of India 23 Operations Management and Strategic Management Solving (11) & (12) we get the values of a and c. Next we follow the usual process for getting ŷ& MSE subsequently. We now show the procedures for yt = abt The equation can be formed as Log10(yt) = log10(a) + tlog10(b) fi yt = A + Bt...(13) Now the equation resembles the same form of equation (1) A = log10(a) fi a = 10A B = log10(b) fi b = 10B Therefore we in a similar way proceed to find ŷt (predicted value) & MSE. So far we have talked about trend & MSE. Now we shall follow to capture seasonality & proceed to discuss about Moving Average (MA). MA(odd term)Generalization is (2n + 1) We Know yt = T + S + I After doing MA we get ỹt = T + I¢ I¢ < I yt – ỹt = S + (I – I¢) = S + I¢¢ I¢¢ < I¢ < I Year Quarter Sales (yt) 3 term Moving 3 term MA (yt) (yt – yt) total 1 Q1 d1 Q2 d2 D1 D1/3 d2 - D1/3 Q3 d3 D2 D2/3 d3 - D2/3 Q4 d4 D3 D3/3 2 Q1 d5 D4 D4/3 Q2 d6 D5 D5/3 Q3 d7 D6 D6/3 Q4 d8 D7 D7/3 24 The Institute of Cost Accountants of India  Operations Planning Year Quarter Sales (yt) 3 term Moving 3 term MA (yt) (yt – yt) total 3 Q1 d9 D8 D8/3 Q2 d10 D9 D9/3 Q3 d11 D10 D10/3 Q4 d12 D11 D11/3 4 Q1 d13 D12 D12/3 Q2 d14 D13 D13/3 Q3 d15 D14 D14/3 d15 - D14/3 Q4 d16 Example : D1 = d1 + d2 + d3 : D8 = d8 + d9 + d10 Usually seasonality index is expressed in base value of 100. Any calculated figure >100 :seasonality↑ We now will show how to derive adjusted seasonality index in the following table. Quarters Year Q1 Q2 Q3 Q4 Y1 – S12 S13 S14 S12, S11 er are Y2 S21 S22 S23 S24 seasonality values Y3 S31 S32 S33 S34 Y4 S41 S42 S43 – Avg AV1 AV2 AV3 AV4 S21 + S31 + S41 AV1 = 3 S12 + S22 + S32 + S42 AV2 = 4 S + S23 + S33 + S43 AV3 = 13 4 S14 + S24 + S34 AV4 = 3 Now we know that seasonality has a base value 100. Here, AV1 + AV2 + AV3 + AV4 = t (let us take) Therefore adjusted seasonality index for Q1 to Q4 is calculated as The Institute of Cost Accountants of India 25 Operations Management and Strategic Management AV1 S1adj = ¥ 400 t AV2 S2adj = ¥ 400 t AV3 S3adj = ¥ 400 t AV4 S4adj = ¥ 400 t 4  Siadj = 400 if Siadj > 100 fi More seasonality i =1 4 If  S jadj > 400 say 400.20 i=1 Then we proceed for further adjustment Ê 0.20 ˆ as S*i adj = Si adj - Á Ë 4 ˜¯ 4 So that  S*i adj = 100 i =1 Therefore we get yt ŷt SI I This is called decomposition yt – yt¢ = S + I Now let us discuss about MA for even term. This is very important & mostly used as it provides less error. The following table depicts the calculation for 4 term MA Year Quarter Sales (yt) 4 term 4 term MA 2 term MA (yt – yt) Moving (yt) total 1 Q1 d1 Q2 d2 D1 D1/4 Q3 d3 D1¢¢ d3 - D1¢¢ D2 D2/4 Q4 d4 D2¢¢ d4 - D2¢¢ 26 The Institute of Cost Accountants of India  Operations Planning Year Quarter Sales (yt) 4 term 4 term MA 2 term MA (yt – yt) Moving (yt) total 2 Q1 d5 Q2 d6 Q3 d7 Q4 d8 3 Q1 d9 Q2 d10 Q3 d11 Q4 d12 4 Q1 d13 Q2 d14 Q3 d15 Q4 d16 D1 = d1 + d2 + d3 + d4 D2 = d2 + d3 + d4 + d5 ÊD D ˆ D1 '' = Á 1 + 2 ˜ / 2 Ë 4 4 ¯ So for 4 term MA we actually find the result by dividing with 8. After preparing this table follow the same process as odd term MA. Therefore we complete the discussion on Additive models. Multiplicative Models General form y1 = T × S × I (discarding cyclic component for time being) yt ' = T ¥ I ' yt Ê Iˆ = S ¥ Á ˜ = S ¥ I '' yt ' Ë I '¯ I I '' = < I' < I I' Now we follow the same process as we underwent in the case of additive models to find a trend, adjusted seasonality index and decomposition. It may be noted that for the short-term we normally use additive models whereas for long term we go for multiplicative model. The Institute of Cost Accountants of India 27 Operations Management and Strategic Management Illustration 1 From the following time series data of sale project the sales for the next three years. Year 2015 2016 2017 2018 2019 2020 2021 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 2004 (` 000 units) time dev. deviations and sales X Y X² XY 2015 –3 80 9 –240 2016 –2 90 4 –180 2017 –1 92 1 –92 2018 0 83 0 0 2019 +1 94 1 +94 2020 +2 99 4 +198 2021 +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 a=  Y = 630 = 90 n 7 b=  XY = 56 = 2  X 2 28 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. 2022, 2023 and 2024. Y2008 = 90 + 2(4) = 90 + 8 = 98 (000) units. Y2009 = 90 + 2(5) = 90 + 10 = 100 (000) units. Y2010 = 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: 28 The Institute of Cost Accountants of India  Operations Planning Years 2016 2017 2018 2019 2020 2021 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 2004 and 2005 deviation deviation and sales assuming 6 months = 1 unit X Y X2 XY 2016 -5 100 25 -500 2017 -3 110 9 -330 2018 -1 115 1 -115 2019 +1 120 1 +120 2020 +3 135 9 +405 2021 +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 a=  Y = 720 = 120 n 6 b=  XY = 280 = 4  X 2 70 Hence regression equation comes to Y = 120 + 4X Sales forecast for the next years, i.e., 2022-26 Y2022 = 120 + 4 (+7) = 120 + 28 = ` 148 lakhs Y2023 = 120 + 4 (+9) = 120 + 36 = ` 156 lakhs Y2024 = 120 + 4 (+11) = 120 + 44 = ` 164 lakhs. Y2025 = 120 + 4 (+13) = 120 + 52 = ` 172 lakhs. Y2026 = 120 + 4 (+15) = 120 + 60 = ` 180 lakhs. The Institute of Cost Accountants of India 29 Operations Management and Strategic Management 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 By putting the value of b in equation (iii), we get 67 = 5a + 45 × 1.04 or, 67 = 5a + 46.80 30 The Institute of Cost Accountants of India  Operations Planning 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 Regression equation of Y on X Y = a + bX The Institute of Cost Accountants of India 31 Operations Management and Strategic Management To find the values of a and b we will have to solve the following two equations ΣY = na + bΣX... (i) ΣXY = aΣX + bΣX2....(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. 32 The Institute of Cost Accountants of India  Operations Planning Capacity Planning 2.2 Capacity Planning: The effective management of capacity is the most important responsibility of production and operations management. The objective of capacity management i.e., planning and control of capacity, is to match the level of operations to the level of demand. Capacity planning is concerned with finding answers to the basic questions regarding capacity such as: (i) What kind of capacity is needed? (ii) How much capacity is needed? (iii) When this capacity is needed? Capacity planning is to be carried out keeping in mind future growth and expansion plans, market trends, sales forecasting, etc. Capacity is the rate of productive capability of a facility. Capacity is usually expressed as volume of output per period of time. Capacity planning is required for the following: ~~ Sufficient capacity is required to meet the customers demand in time, ~~ Capacity affects the cost efficiency of operations, ~~ Capacity affects the scheduling system, ~~ Capacity creation requires an investment, ~~ Capacity planning is the first step when an organisation decides to produce more or new products. Capacity planning is mainly of two types: (i) Long-term capacity plans which are concerned with investments in new facilities and equipments. These plans cover a time horizon of more than two years. (ii) Short-term capacity plans which takes into account work-force size, overtime budgets, inventories etc. 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 as volume of output per period of time (i.e., hour, day, week, month, quarter etc.). Capacity indicates the ability of a firm to meet market demand - both current and future. Effective Capacity can be determined by giving due consideration to the following factors: Facilities - design, location, layout and environment. The Institute of Cost Accountants of India 33 Operations Management and Strategic Management 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. Measurement of capacity Capacity of a plant is usually expressed as the rate of output, i.e., 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. Capacity Planning Decisions Capacity planning involves activities such as: (i) Assessing the capacity of existing facilities. (ii) Forecasting the long-range future capacity needs. (iii) Identifying and analysing sources of capacity for future needs. (iv) Evaluating the alternative sources of capacity based on financial, technological and economical considerations. (v) Selecting a capacity alternative most suited to achieve strategic mission of the firm. Capacity planning is necessary when an organisation decides to increase its production or introduce new products into the market or to increase the volume of production to gain the advantages of economies of scale. Once the existing capacity is evaluated and a need for new or expanded facilities is determined, decisions regarding the facility location and process technology selection are undertaken. When the long-range capacity needs are estimated through long-range forecasts for products, a firm may find itself in one of the two following situations: (i) A capacity shortage situation where present capacity is not enough to meet the forecast demand for the product. (ii) An excess or surplus capacity situation where the present capacity exceeds the expected future demand. Factors affecting determination of plant capacity (i) Capital investment required, (ii) Changes in product design, process design, market conditions and product life cycles, (iii) Flexibility for capacity additions, (iv) Level of automation desired, (v) Market demand for the product, (vi) Product obsolescence and technology obsolescence and (vii) Type of technology selected. 34 The Institute of Cost Accountants of India  Operations Planning Forms of capacity planning: Based on time-horizon (i) Long-term capacity planning and (ii) Short-term capacity planning Based on amount of resources employed (i) Finite capacity planning and (ii) Infinite capacity planning Factors Affecting Capacity Planning: Two kinds of factors affecting capacity planning are: (i) Controllable Factors: amount of labour employed, facilities installed, machines, tooling, shifts of work per day, days worked per week, overtime work, subcontracting, preventive maintenance and number of production set ups. (ii) Less Controllable Factors: absenteeism, labour performance, machine break-downs, material shortages, scrap and rework, strike, lock-out, fire accidents, natural calamities (flood, earthquake etc.) etc. Capacity Requirement Planning : Capacity requirement planning (CRP) is a technique which determines what equipment and labour/personnel capacities are required to meet the production objectives (i.e., volume of products) as per the master production schedule and material requirement planning (MRP-I). Capacity Requirement Planning Strategies: Two types of capacity planning strategies used are: (i) “Level capacity” plan and (ii) “Matching capacity with demand” plan. “Level capacity” plan is based in “produce-to-stock and sell”