The Economic Order Quantity model solves the “how much” and “when” aspects of ordering inventory. When inventory reaches the zero point, you order just enough to replenish your stock back to its original level. You repeat this cycle throughout the year, never having to decide when to order or how much to order. The decisions are based on preset levels. While this model offers some positive guidelines, you must watch for pitfalls as well.

Economic order quantity or EOQ model is the equation that helps compute order quantity of inventory accompanied by the minimum total holding and ordering costs.


The economic order quantity is derived from the total cost equation,EOQ=2DCo÷CL

a unit price, D is annual demand quantity, Co is ordering cost per unit, CL is holding cost per unit, and Q is order quantity.

To find order quantity with the minimum total cost, we should calculate the derivative of the total cost function with respect to variable “Q” and set it equal to zero assuming that other variables are constant.

Assumptions of EOQ model

If the economic order quantity model is applied, the following assumptions should be met:

  1. The rate of demand is constant, and total demand is known in advance.
  2. The ordering cost is constant.
  3. The unit price of inventory is constant, i.e., no discount is applied depending on order quantity.
  4. Delivery time is constant.
  5. Replacement of defective units is instantaneous.
  6. There is no safety stock level, i.e., the minimum stock level is zero.
  7. Restocking is made by the whole batch.

Holding cost vs. ordering cost

The holding or carrying cost is the total cost for keeping and maintaining inventories in storage. Common examples are a rent fee for the storage space, depreciation, labor cost to operate storage, materials, equipment and its maintenance cost, shrinkage of stock, security expense, insurance, cost of capital, and other direct costs.

Ordering cost refers to the cost related to shipping and handling a new order, e.g., communication and transportation cost, and insurance. Please note that ordering cost doesn’t include cost of goods!

Holding cost and ordering cost move in opposite directions. To reduce ordering cost per unit, we should increase order quantity, but such a scenario leads to an increase in holding cost; in turn, reducing holding costs requires a smaller order quantity, which leads to an increase in ordering cost. This relationship is shown in the graph below.



The EOQ model assumes that demand remains steady throughout the year and that inventory gets used at a fixed rate. If those assumptions hold true, you can order at the same time each month or quarter. However, if demand fluctuates, you may run out of inventory sooner than you anticipate. You also may have to order more than you usually do to meet higher demand, or lower the order to adjust to declining demand. That means you would temporarily have to temporarily abandon the EOQ model when demand fluctuates.

Lead Time

When you run out of stock, you can expect a waiting period until your new stock arrives, even if you order immediately. As a result, the EOQ model can take lead time into consideration and move the reorder date to just before stock runs out. This works well in most cases. However, the model assumes the lead time remains the same for each order. In reality, your supplier could experience delays. Since you carry the minimum amount of inventory if you use EOQ, you could run out during a supplier delay. The solution is to establish reorder dates that take into account your suppliers’ reliability.

One-Year Holding Cost

When you apply EOQ principles, you assume that each unit has a cost for warehousing and holding it until you order again. This allows you to predict your inventory expenses. In practice, you will sell some of the inventory much sooner than the reorder date, so you do not actually incur the projected holding cost. You could be showing less profit for your company because you assume the maximum holding expense for each unit of inventory. One way to rectify this is to discount your holding cost to allow for the fact that not all units are being held for the same amount of time.

Quantity Discounts

Because the EOQ method has you order the same amount each time, you do not get to take advantage of quantity discounts and specials your suppliers may offer. If you want the discount, you will have to temporarily suspend your EOQ method and watch inventory levels until it is time to order again. Presumably, since you ordered more to get the discount, it will take you longer to use up your inventory. This means you will have to monitor inventory to decide when to re-order



Factors to Be Considered when planning for materials to be used during Production

Production managers are responsible for planning out a project before starting it. The production planning is a demanding task, as the manager must consider many aspects and assess any risks associated with the project. The manager must consider factors that contribute to the project, such as employees, funding and overall time frame allotted by the company.

Employee Availability  One of the factors the production manager must consider during the planning process is the role and availability of employees for the project. Depending on the size of the project, employees may play a significant role in completing the job in question. The company doing the production may have employees available for some tasks, but the production manager is responsible for identifying jobs that need to be outsourced. For instance, the company may not have the expertise to finish smaller tasks in the various production stages.

Budgeting Limitations   Another factor that must be considered in the production planning stages is the overall budget given for the production. This can be an ongoing budget for product or service production or be a single large budget for a production project. When planning the production, the manager must consider the employees, renting the equipment, the price of raw materials and additional supplies and save some funds for emergency situations, such as broken machinery.

Additional Resources  The company completing the production project may have a set of resources available to the production manager. He must take these resources into consideration when planning the project, as the resources could save the company money and speed up the production process. These additional resources can include software systems, machines or equipment, additional employees or internal office supplies like paper, printer and ink.

Deadline and Scheduling     Another factor that must be addressed in the planning process is the overall deadline set by the company executives. At times, the deadline given is a desired deadline, where the manager needs to try to finish the production within the given time frame. However, given unforeseen circumstances like the bad weather or broken machinery, company executives may be flexible with the deadline. Part of the production planning includes creating a schedule with weekly or daily goals to stay on track for the given deadline.

Production Planning Techniques

Production planning is a three-step process. It involves scheduling, estimating and forecasting. To perform this task, the customers’ orders, production capacities and foreseeing of future inventories and trends are essential.

There are five main techniques of production planning. Each technique has its relative merits and demerits. The underlying assumptions and principles are different with each different technique. Also the application of these techniques depends on the type of the ware being produced and the method in which it is being produced. The five main techniques are discussed below.

Job Method   This technique is used if either one single worker or a group of workers are needed to produce the ware, or product. That is, if the work cannot be broken down into parts, this method is used. The scale of operations for these types of jobs could be simple or complex.

The method is often used when customer specifications are important in the production. Examples of professionals who use the Job Method of production planning are hairdressers, cooks and tailors.

On the simpler end of this technique are jobs that are small-scale in nature, on which the production is fairly easy and simple and for which the worker possesses the required skill set. Equipment required for these jobs is also easy to procure and maintain. Therefore the customer’s specific requirements can be incorporated or adjusted at any time during the progress of the job.

The more complex jobs are those that require the use of sophisticated technology and proper control and management. The construction business offers complex jobs that use the Job Method.

Batch Method   Large-scale operations make it imperative for businesses to use the Batch Method. In this method, the work is broken down into parts. To produce on a large scale, one batch of workers works one part while another group works on another. A hitch in this method is that for any part of work to proceed, it is essential that the work in the previous batch is totally completed. This method requires specialization of labor for every division of the business. An example of businesses that use the Batch Method would be manufacturers of electronic parts.

Flow Method    This method is an improvisation on the batch method. The intent here is to improve on the quality of work and on the flow of material being worked, reduction in labor costs and faster delivery of the end product. Work is once again distributed but the process on all parts progresses simultaneously as a flow. Once all the parts are manufactured, they are all assembled together in the end. The ware is produced by numerous interconnected steps in which the raw material moves from one stage to another without interruptions and time delays. Television manufacturing utilizes the Flow Method.

Process Method    The production uses a uniform sequence. Hence the production is always continuous. The raw materials are few and received from few sources. The end unvaried product is made on the latest and most sophisticated machinery.

Mass Production Method    The organization uses some standardized techniques for the production, focusing on quantity once sufficient quality has been achieved, with quality checks routinely scheduled. There is usually a product-specific layout and balanced production.

Interface between material need, plant and equipment maintenance

Simple implementation of communication interfaces (External) 

The Plant iT connect module is used for the implementation of communication interfaces for exchanging information between the process control system and various external systems. The range includes:

  • Client/Server or host-based systems (e.g. ERP systems such as SAP R/3, LIMS systems, maintenance systems)
  • PC and PLC-based systems (e.g. automation systems and SCADA systems)
  • Intelligent measuring and inspection systems (e.g. inspectors, inline analysis instruments).

The optionally available module Plant iT connect consists of: The engineering interface, The communication channels interface,   The system service interface

The engineering interface

The user interface of Plant iT connect is only required for parameterising and monitoring communication interfaces. It is seamlessly integrated into the Configuration Manager, the central engineering environment of Plant iT. With regard to the various available communication channels, the parameterisation dialogues have a uniform structure. They are automatically adapted to the special characteristics of the respective channel in terms of their content.

The communication channels interface

The type of communication is specified for each interface to be parameterised by selecting a communication channel. Tasks of the communication channel include the interface-compliant preparation of the data to be transferred and the use of standardised functions for sending and receiving data packages.
The following communication channels are available:

The system service interface

The Plant iT connect service acts at operating system level. Its primary task is to coordinate and log the communication transactions. Incoming data is prepared and forwarded to the correct communication channel. As the central instance, the service assumes key parts of data preparation. It therefore relieves the communication channels and enables a flexible extension of the system with additional types of communication.

Internal Interfaces and Role of Material Management

Market forecasting

One of the key role-played by materials management is to forecast the future demands. For example, if a university like IGNOU is printing study material for its students, it needs to manage the raw materials and well as the finished product that is the printed blocks. The first point here would be to ascertain what would be the demand of study material for the various Programs; this forecast can be made on the basis of material usage patterns and increase in demand for the last few years, in addition expected enrolments for programs that
are new, this information can be predicted on the basis of response to new programs of similar type/ area during last few years. Thus, materials management has a great role to play for an organization. But remember here, a forecast is always estimation.



One of the key roles of material management system would be to see that the process of production goes unhindered. For example, once again the case of the university as above, printing would require availability of printing paper and art card paper – required for covers. If any of the two papers is out-of- stocks the printing process cannot continue. In addition, please note that the demands have been predicted thus the material requirements can be calculated with this data. In production organizations making predictions is even more difficult as the sales are to be predicted without much of a basis.



The material management is strategically very much linked to cost reduction. The cost may include the inventory cost and thus, have a major impact   on the material budget. For example, one must procure the paper for the university, so that the paper requirement of printing in fulfilled in time, however, this should not cause any unnecessary hold up of the finance. The hold up time should be minimum.

For example, if study materials are to be sent to student in the month of May-June then procurement of paper may be done in January- February so that study material can be printed in March-April.


Inventory Control

One of the key strategic roles of material management would be to minimize the inventory of an organization. This also results in cost minimization. In general a production schedule is made in an organization. This should be synchronized with the material procurement and supply so that the production process is not hampered. For example, as stated above the material should be procured in January-February such that the printing process can proceed smoothly.


Inspection or quality control

This is a very interesting interface as the quality of material for different types of an organization is impacted during materials management cycles, though materials management is not directly responsible for quality, yet it can cause indirect effects on the quality of products. The products, whose quality deteriorates with time, are very likely candidates in this category. For example, if we buy paper 3-4 months in advance then proper storage conditions may need to be kept in store to avoid any deterioration of quality of the paper. This is also the problem of inventory control.


Material handling, traffic and physical distribution logistics

The role here is to see that the material is handled and distributed easily. For example, the paper stores of the university may be located outside the campus and may be near the place where most of the printing presses are located. Also since the university sends the study materials through post, a unit of distribution may be located near some head post office.



Materials Flow Systems

The material flow process is given in Figure 2.1. Please note that in Figure 2.1 how the material is flowing but more important than that is the information flow.


Materials management system activities have impact on:

  • Purchasing and procurement activities sometimes it determines the details of past performance of vendors, quality, etc details which may help in proper selection of vendors. If so needed the orders can even be distributed over time.
  • Receiving and inspection data is very important quality control activity during this process, where information about the quality is registered.
  • Production planning information/ sales information does impact the process of material management.


Thus, Materials Management is a social technology, which demands professional expertise of its own and have a direct impact on the cost effectiveness of an organization. It can also be defined in terms of the functions that are needed for the coordination of planning, sourcing, moving, storing and controlling materials in an optimum manner so as to provide a pre-decided service to the customer at a minimum cost. But which department should be made responsible for coordinating the functions of Materials Management?


In the recent past the Materials Management is not tied up to any group within an organization rather it is largely system-oriented, which takes into account functional dependence with a wide range of partial activities, where utility of materials is enhanced as these pass through each of the stages of the production process till the finished product. Thus, material management may be found a very suitable component that needs to be controlled by a centralized database or enterprise resource planning (ERP) packages




Plant location or the facilities location problem is an important strategic level decision making for an organization. One of the key features of a conversion process (manufacturing system) is the efficiency with which the products (services) are transferred to the customers.

This fact will include the determination of where to place the plant or facility.

The selection of location is a key-decision as large investment is made in building plant and machinery. It is not advisable or not possible to change the location very often. So an improper location of plant may lead to waste of all the investments made in building and machinery, equipment.

Before a location for a plant is selected, long range forecasts should be made anticipating future needs of the company. The plant location should be based on the company’s expansion plan and policy, diversification plan for the products, changing market conditions, the changing sources of raw materials and many other factors that influence the choice of the location decision. The purpose of the location study is to find an optimum location one that will result in the greatest advantage to the organization.


The need for selecting a suitable location arises because of three situations

  1. When starting a new organisation, i.e., location choice for the first



Objectives of Plant Maintenance and repair

  1. To increase functional reliability of production facilities.
  2. To enable product or service quality to be achieved through correctly adjusted, serviced and operated equipment.
  3. To maximize the useful life of the equipment.
  4. To minimize the total production or operating costs directly attributed to equipment service and repair.
  5. To minimize the frequency of interruptions to production by reducing breakdowns.
  6. To maximize the production capacity from the given equipment resources.
  7. To enhance the safety of manpower.

Role/Importance of purchasing in Plant and equipment Maintenance:

(i) The importance of plant maintenance varies with the type of plant and its production.

(ii) Equipment breakdown leads to an inevitable loss of production.

The Role

  1. Facilitates continuous production:- If a piece of equipment goes out of order in a flow production factory, the whole line will soon come to a halt. Other production lines may also stop unless the initial fault is cleared.
  2. To avoid losses: This results in an immediate loss in productivity and a reduction of several thousand money per hour of output.

(iii) An un-properly maintained or neglected plant will sooner or later require expensive and frequent repairs, because with the passage of time all machines or other facilities (such as transportation facilities), buildings, etc., wear out and need to be maintained to function properly.

(iv) Plant maintenance plays a prominent role in production management because plant breakdown creates problems such as:

Plant breakdown results to:

  1. Loss in production time. b. Rescheduling of production. c. Spoilt materials (because sudden stoppage of process damages in-process materials).    d. Failure to recover overheads (because of loss in production hours).   e. Need for over-time.   f. Need for subcontracting work.

Causes of Equipment Breakdown:

(i) Failure to replace worn out parts.,   (ii) Lack of lubrication.,  (iii) Neglected cooling system.  (iv) Indifference towards minor faults.,  (v) External factors (such as too low or too high line voltage, wrong fuel, etc.),  (vi) Indifference towards -equipment vibrations, unusual sounds coming out of the rotating machinery, equipment getting too much heated up, etc.

Disadvantages of Breakdown Maintenance:

(i) Breakdowns generally occur at importunate times. This leads to poor, hurried maintenance and excessive delays in production.,   (ii) Reduction of output. ,  (iii) Faster plant deterioration.   (iv) Increased chances of accidents and less safety to both workers and machines.   (v) More spoilt material.   (vi) Direct loss of profit.   (vii) Breakdown maintenance practice cannot be employed for those plant items which are regulated by statutory provisions, for example cranes, lifts, hoists and pressure vessel,   g. Temporary work shortages-workers require alternative work.

Type/ways of Plant and Equipment Maintenance and repair

Traditionally, 5 types/ways of maintenance have been distinguished, which are differentiated by the nature of the tasks that they include:

(a) Corrective or breakdown maintenance,

(b) Scheduled maintenance,

(c) Preventive maintenance, and

(d) Predictive maintenance

(e) Maintenance(overhaul)

  • Corrective maintenance: The set of tasks is destined to correct the defects to be found in the different equipment and that are communicated to the maintenance department by users of the same equipment.
  • Preventive Maintenance: Its mission is to maintain a level of certain service on equipment, programming the interventions of their vulnerabilities in the most opportune time. It is used to be a systematic character, that is, the equipment is inspected even if it has not given any symptoms of having a problem.
  • Predictive Maintenance: It pursues constantly know and report the status and operational capacity of the installations by knowing the values of certain variables, which represent such state and operational ability. To apply this maintenance, it is necessary to identify physical variables (temperature, vibration, power consumption, etc.). Which variation is indicative of problems that may be appearing on the equipment. This maintenance it is the most technical, since it requires advanced technical resources, and at times of strong mathematical, physical and / or technical knowledge.
  • Scheduled/Periodic maintenance (Time Based Maintenance TBM): the basic maintenance of equipment made by the users of it. It consists of a series of elementary tasks (data collections, visual inspections, cleaning, lubrication, retightening screws,…) for which no extensive training is necessary, but perhaps only a brief training. This type of maintenance is the based on TPM (Total Productive Maintenance Zero Hours
  • Maintenance (Overhaul): The set of tasks whose goal is to review the equipment at scheduled intervals before appearing any failure, either when the reliability of the equipment has decreased considerably so it is risky to make forecasts of production capacity . This review is based on leaving the equipment to zero hours of operation, that is, as if the equipment were new. These reviews will replace or repair all items subject to wear. The aim is to ensure, with high probability, a good working time fixed in advance.

Maintenance Costs:

Breakdown of equipment makes the workers and the machines idle resulting in loss of production, delay in schedules and expensive emergency repairs. These downtime costs usually exceed the preventive maintenance costs of inspection, service and scheduled repairs up to the point M shown in fig. 1.12.


Beyond this optimal point an increasingly higher level of preventive maintenance is not economically justified and it is economical to adopt breakdown maintenance policy. The optimal level of maintenance activity M, is easily identified on a theoretical basis, to do this the details of the costs associated with breakdown and preventive maintenance must be known.

Costs associated with maintenance are:

  1. Down time (Idle time cost) cost due to equipment breakdown.
  2. Cost of spares or other material used for repairs.
  3. Cost of maintenance labour and overheads of maintenance departments.
  4. Losses due to inefficient operations of machines.
  5. Capital requirements required for replacement of machines.

Maintenance Policies:

  1. Breakdown (repair) maintenance
  2. Preventive maintenance

Breakdown maintenance is emergency based policy in which the plant or equipment is operated until it fails and then it is brought back into running condition by repair. The maintenance staffs locate any mechanical, electrical and any other fault to correct it immediately. Preventive maintenance policy prevents the probable breakdown and it ensures smooth and uninterrupted production by anticipating the breakdowns (failures) and taking corrective actions:

The preventive maintenance policy has four forms:

(a) Time based: Which means doing maintenance at regular intervals? It is time dependent rather than usage dependent.

(b) Work based: Maintenance after a set of operating hours of volume of work produced.

(c) Opportunity based: Where repair and replacement takes place when the equipment or system is available.

(d) Condition based: Which often relies on planned inspection to reveal when maintenance is required?

Preventive maintenance is used to delays or prevents the breakdown of equipment and also to reduce the seventy of any breakdowns that occur.

Two aspects of preventive maintenance are:

  1. Inspection: Inspection of critical parts will indicate the need for replacement or repair well in advance of probable breakdown. Regular inspection conducted by either by equipment or operator or by maintenance department is the most important direct means of increasing equipment reliability.
  2. Servicing: Routine cleaning, lubrication and adjustment may significantly reduce wear and hence prevent breakdowns. Frequently such duties are carried out by equipment operator or may be carried out by maintenance department.

Preventive versus Breakdown Maintenance:

Preventive maintenance is the routine inspection and service activities designed to detect potential failure conditions and make minor adjustments or repairs that will help prevent major operating problems.

Breakdown maintenance is the emergency repair and it involves higher cost of facilities and equipment that have been used until they fail to operate.

Effective preventive maintenance programmes for equipment requires properly trained personnel, regular inspection and service and has to maintain regular records.

Preventive maintenance is planned in such a way that it will not disturb the normal operations hence no down time cost of equipment. Breakdown maintenance stops the normal activities and the machines and the operators are rendered idle till the equipment is brought back to normal condition of working.

LOCATION AND PLANT LAYOUT   (Four Main Types of Plant Layout)

Plant layout means the disposition of the various facilities (equipment, material, manpower, etc.) and services of the plant within the area of the site selected previously. Plant layout begins with the design of the factory building and goes up to the location and movement of a work table. All the facilities like equipment, raw materials, machinery, tools, futures, workers, etc. are given a proper place. In deciding the place for equipment, the supervisors and workers who have to operate them should be consulted.   Keeping in view the type of industry and volume of production, the type of layout to be selected is to be decided from the following:

  1. Product or Line Layout
  2. Process or Functional Layout.
  3. Fixed Position Layout.
  4. Combination type of Layout.
  5. Product or Line Layout:

If all the processing equipment and machines are arranged according to the sequence of operations of the product, the layout is called product type of layout. In this type of layout, only one product of one type of products is produced in an operating area. This product must be standardized and produced in large quantities in order to justify the product layout.

The raw material is supplied at one end of the line and goes from one operation to the next quite rapidly with a minimum work in process, storage and material handling. Fig. 8.3 shows product layout for two types of products A and B.


Advantages offered by Product Layout:

(i) Lowers total material handling cost.  (ii) There is less work in processes.

(iii) Better utilization of men and machines, (iv) Less floor area is occupied by material in transit and for temporary storages.

(v) Greater simplicity of production control.  (vi) Total production time is also minimized.

Limitations of Product Layout:

(i) No flexibility which is generally required is obtained in this layout.

(ii) The manufacturing cost increases with a fall in volume of production.

(iii) If one or two lines are running light, there is a considerable machine idleness.

(iv) A single machine break down may shut down the whole production line.

(v) Specialized and strict supervision is essential.

  1. Process or Functional Layout:

The process layout is particularly useful where low volume of production is needed. If the products are not standardized, the process layout is more low desirable, because it has creator process flexibility than other. In this type of layout, the machines and not arranged according to the sequence of operations but are arranged according to the nature or type of the operations. This layout is commonly suitable for non repetitive jobs.

Same type of operation facilities are grouped together such as lathes will be placed at one place, all the drill machines are at another place and so on. See Fig. 8.4 for process layout. Therefore, the process carried out in that area is according to the machine available in that area.


Advantages of Process Layout:

(i) There will be less duplication of machines. Thus, total investment in equipment purchase will be reduced.

(ii) It offers better and more efficient supervision through specialization at various levels.

(iii) There is a greater flexibility in equipment and man power thus load distribution is easily controlled.

(iv) Better utilization of equipment available is possible.

(v) Break down of equipment can be easily handled by transferring work to another machine/work station.

(vi) There will be better control of complicated or precision processes, especially where much inspection is required.

Limitations of Process Layout:

(i) There are long material flow lines and hence the expensive handling is required.

(ii) Total production cycle time is more owing to long distances and waiting at various points.

(iii) Since more work is in queue and waiting for further operation hence bottle necks occur.

(iv) Generally, more floor area is required.

(v) Since work does not flow through definite lines, counting and scheduling is more tedious.

(vi) Specialization creates monotony and there will be difficult for the laid workers to find job in other industries.

  1. Fixed Position Layout:

This type of layout is the least important for today’s manufacturing industries. In this type of layout the major component remain in a fixed location, other materials, parts, tools, machinery, man power and other supporting equipment’s are brought to this location.

The major component or body of the product remain in a fixed position because it is too heavy or too big and as such it is economical and convenient to bring the necessary tools and equipment’s to work place along with the man power. This type of layout is used in the manufacture of boilers, hydraulic and steam turbines and ships etc


Advantages Offered by Fixed Position Layout:

(i) Material movement is reduced,   (ii) Capital investment is minimized.

(iii) The task is usually done by gang of operators, hence continuity of operations is ensured

(iv) Production centers are independent of each other. Hence, effective planning and loading can be made. Thus total production cost will be reduced.

(v) It offers greater flexibility and allows change in product design, product mix and production volume.

Limitations of Fixed Position Layout:

(i) Highly skilled man power is required.

(ii) Movement of machines equipment’s to production centre may be time consuming.

(iii) Complicated fixtures may be required for positioning of jobs and tools. This may increase the cost of production.

  1. Combination Type of Layout:

Now a days in pure state any one form of layouts discussed above is rarely found. Therefore, generally the layouts used in industries are the compromise of the above mentioned layouts. Every layout has got certain advantages and limitations. Therefore, industries would to like use any type of layout as such.

Flexibility is a very important factory, so layout should be such which can be molded according to the requirements of industry, without much investment. If the good features of all types of layouts are connected, a compromise solution can be obtained which will be more economical and flexible.

The principles of plant layout

(a) Integration:  It means the integration of production centres facilities like workers, machinery, raw material etc., in a logical and balanced manner.

(b) Minimum Movements and Material Handling:  The number of movements of workers and materials should be minimized. It is better to transport materials in optimum bulk rather than in small amounts.

(c) Smooth and Continuous Flow:   Bottlenecks, congestion points and back tracking should be removed by proper line balancing techniques.

(d) Cubic Space Utilization:    Besides using the floor space of a room, if the ceiling height is also utilized, more materials can be accommodated in the same room. Boxes or bags containing raw material or goods can be stacked one above the other to store more items in the same room. Overhead material handling equipment save a lot of valuable floor space.

(e) Safe and Improved Environments:   Working places-safe, well ventilated and free from dust, noise, fumes, odours, and other hazardous conditions decidedly increase the operating efficiency of the workers and improve their morale. All this leads to satisfaction amongst the workers and thus better employer- employee relations.

(f) Flexibility:  In automotive and other industries where models of products change after some time, it is better to permit all possible flexibility in the layout. The machinery is arranged in such a way that the changes of the production process can be achieved at the least cost or disturbance.







Information and communication technologies (ICT) are one of the most important enablers of effective operations management. As electronic business gain importance, new opportunities exist, and the wide spread use of internet is increasing the interest for the information technologies. ICT tools are a source of competitive power for many companies. operations management, time and opportunities to get information on time is very important. Accurate and timely information will enable the organization to increase service level and as a result decrease the costs and lead times Along with this, many companies are offering information technologies based services to their customers in order to gain competitive edge and sustain long term relationships with them. Firms utilize ICT in the following ways in operations management:

Uses of IT in operations management

Machining centers: they not only provide automatic control of a machine but carry out au-tomatic tooling changes as well. For example, a single machine may be equipped with a shuttle system of two worktables that can be rolled into and out of the machine. While work is being done at one table, the next part is mounted on the second table. When machining on the first table is complete, it is moved out of the way and the second part is moved into position.

Numerically controlled (NC) machines: these are under the control of a digital computer.

Feedback control loops determine the position of the machine tooling during the work, constantly compare the actual location with the programmed location, and correct as needed. This eliminates time lost during setups, and applies to both high-volume, standardized types of products as well as low-volume, customized products.

Industrial robots: these are substitutes for human manipulation and other highly repetitive functions. A robot is a reprogrammable machine with multiple functions that can move devices through specialized motions to perform any number of tasks. It is essentially a mechanized arm that can be fitted with a variety of handlike fingers or grippers, vacuum cups, or a tool such as a wrench. Robots are capable of performing many factory operations ranging from machining processes to simple assembly

Computer-aided design and manufacturing (CAD/CAM): uses a computer to integrate component design and processing instructions. In current CAD/CAM systems, when the design is finalized, the link to CAM is made by producing the manufacturing instructions. Because of the efficiency of CAD/CAM systems, design and manufacture of small lots can be both fast and low in cost. Even though CAD/CAM systems are usually limited to larger companies because of the high initial cost, they do increase productivity and quality dramatically. More alternative designs can be produced, and the specifications can be more exact. Updates can be more readily made, and cost estimates more easily drawn. In addition, computer-aided process planning (CAPP) can shorten and, in some cases, even eliminate traditional process planning.

Flexible manufacturing system (FMS): Actually refers to a number of systems that differ in the degree of mechanization, automated transfer, and computer control and are sufficiently flexible to produce a wide variety of products. A flexible manufacturing module is a numerically controlled (NC) machine supported with a parts inventory, a tool changer, and a pallet changer. A flexible manufacturing cell consists of several flexible manufacturing modules organized according to the particular product’s requirements. A flexible manufacturing group is a combination of flexible manufacturing modules and cells located in the same manufacturing area and joined by a materials handling system, such as an automated guided vehicle (AGV). A flexible production system consists of flexible manufacturing groups that connect different manufacturing areas, such as fabrication, machining, and assembly. A flexible manufacturing line is a series of dedicated machines connected by AGVs, robots, conveyors, or some other type of automated transfer device.

Computer-integrated manufacturing (CIM): this approach integrates all aspects of production into one automated system. Design, testing, fabrication, assembly, inspection, and materials handling may all have automated functions within the area. However, in most companies, communication between departments still flows by means of paperwork. In CIM, these islands of automation are integrated, thus eliminating the need for the paperwork. A computer links all sectors together, resulting in more efficiency, less paperwork, and less personnel expense.

Islands of automation: Refer to the transition from conventional manufacturing to the automated factory. Typical islands of automation include numerically controlled machine tools, robots, automated storage/retrieval systems, and machining centers.

Bar-coding: abar-code is a readable representation of information by a computer. Originally, information on barcodes was stored in the widths and spacing of written parallel lines, but nowadays, they come in different patterns of dots, concentric circles, and text codes. Barcodes can be read by optical scanners called barcode readers or scanner. Barcodes are widely used to implement automatic data capture systems that improve the speed and accuracy of computer data entry. Bar-coding accelerates the flow of products and information throughout the business. Barcoding may be used in counting raw materials and finished goods inventories, automatic sorting of cartons and bins on conveyor belts and palletizers, production reporting, automatic warehouse applications, including receiving, put away picking and shipping, package tracking, access control and lot tracking.

Radio Frequency Identification (RFID): An RFID tag contains a silicon chip that carries an identification number and an antenna able to transmit the number to a reading device. This means improved inventory management and replenishment and replenishment practices, which in turn, result in a reduction of interrupted production or lost sales due to being out of stock. RFID enables bulk read where many tags can be read in a short space of time a typical read rate is hundreds of tags per second, the tags can be read over a very long range many hundreds of metres in the case of specialized tags. RFID tags are durable because they can be ripped, 79


soiled and performance is not impaired. They can do bulk reading in a short space of time. All these importance enhance performance.

Enterprise Resource Planning (ERP): ERP is a business management system that, supported by multi-module application software that incorporates all departments or functions of the organization. While MRP allows manufacturers to track supplies, work-in-progress and the output of finished goods to meet sales order, ERP is applicable to all organizations and allow managers from all functions or departments to have an understanding of what is or is not taking place throughout the organization. Most of ERP systems are designed around a number of modules, each of which can be standalone or combined with others. The modules in the ERP system are finance, marketing, procurement, manufacturing, supplier management and human resource among other modules. ERP system plays a vital role in improving performance. There is faster inventory turnover because the manufacturers and distributors may increase inventory turns reduce inventory costs. There is improved customer service, in many cases, and ERP system can increase the production to a higher rate by providing the required products at the required place within the required time thus achieving customer expectation and satisfaction. ERP facilitates better inventory accuracy with fewer audits thus, reducing the need for physical audits. It also reduces the set-up time by ensuring coordination of people, tools and machinery together with efficient use of equipment and minimizing downtime by virtue of efficient maintenance. ERP software leads to high quality work with strong manufacturing components, proactively pinpoints quality issues, providing the information required to increase production levels reduce wastes or rework

Material Resource planning (MRP): This is a technique that assists in the detailed planning of production and its characteristics are that; it is geared specifically to assembly operations, it is a dependent demand technique and it is a computer based information system. The aim of MRP is to make available either purchased or company manufacturing assemblies just before they are required by the next stage of production or for delivery. It enables orders to be tracked throughout the entire manufacturing process and assist purchasing and control departments to move the right supplies at the right time to manufacturing or distribution points

Distribution Requirements Planning (DRP): Distribution requirements planning (DRP) is scheduling technique the controls inventory control and applies MRP principles to distribution inventories It can also be considered as a method of handling replenishment of the stock in an organization. DRP is useful for both manufacturing organizations, such as car manufactures that sell their car via several distribution points, such as regional and local distributors, and purely merchandising organizations, such as supermarkets

Review questions

(i) outline the importance of IT in operations management

(ii) describe the main uses of IT in operations management






Benchmarking is the process of comparing one’s business processes and performance metrics to industry bests or best practices from other industries. Benchmarking is about comparing and measuring your performance against others in key project activities, and then using lessons learned from the best to make targeted improvements. It involves answering two questions – who is better, and why is they better? – With the aim of using this information to make changes that will lead to real improvements. The best performance achieved in practice is the benchmark. A benchmark is the best in class level of performance achieved for a specific production process or activity. It is used as a reference point for comparison in the benchmarking process.

Dimensions typically measured are quality, time and cost. In the process of best practice benchmarking, management identifies the best firms in their industry, or in another industry where similar processes exist, and compares the results and processes of those studied (the “targets”) to one’s own results and processes. In this way, they learn how well the targets perform and, more importantly, the business processes that explain why these firms are successful.

Key performance indicators

A Key Performance Indicator (KPI) is the measure of performance associated with an activity or process critical to the success of a project or process. The information provided by a KPI can be used to determine how a process compares with the benchmark, and is therefore a key component in an organisation’s move towards best practice and value for money.

Key performance indicators can take a variety of forms, which reflect the stakeholder interest. KPI‟s form part of many approaches to good business management and practice but it is important to note that KPI‟s should not just be viewed, an ad-hoc, or short term measure. The nature of KPI‟s means that, they should continually be reviewed and the information gained from them used effectively to increase productivity and economic efficiency. Therefore, the use of KPI‟s is a dynamic approach and thus, a framework should exist where these KPI‟s are regularly reviewed and adjusted if necessary

Types of benchmarking

(i) Internal benchmarking– a comparison of internal operations such as one site (or project

team) against another within the same company.


(ii) Competitive benchmarking – a comparison against a specific competitor for the product, service or function of interest.


(iii) Generic benchmarking – a comparison of business functions or processes that are the same, regardless of industry or country.

(iv) Functional benchmarking: Comparisons to similar functions within the same industry

(v) External Benchmarking: Involves analysing outside organisations that are known to be best in class. External benchmarking provides opportunities of learning from those who are at the “leading edge”.


Process of benchmarking

  1. Identify problem areas: Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, financial ratio analysis, or simply reviewing cycle times or other performance indicators. Before embarking on comparison with other organizations it is essential to know the organization’s function and processes; base lining performance provides a point against which improvement effort can be measured.
  2. Identify other industries that have similar processes: For instance, if one were interested in improving hand-offs in addiction treatment one would identify other fields that also have hand-off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.

iii. Identify organizations that are leaders in these areas: Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.

  1. Survey companies for measures and practices: Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.
  2. Visit the “best practice” companies to identify leading edge practices: Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.
  3. Implement new and improved business practices: Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.

Advantages of benchmarking

  1. Assists in Setting Strategic Targets
  2. Promotes Improvements in Performance

iii. Establishes a Competitive Edge

  1. Enhances Customer Satisfaction
  2. Reduces Costs
  3. Improves Employee Morale

vii. Survival i.e. promotes business sustainability


Disadvantages of benchmarking

  1. Difficulties getting agreement on what indicators are to be used.
  2. Difficulties in defining the data.

iii. Provides only limited information about how to correct performance shortfalls.

  1. The projects could be completed quickly but the results might take much longer time.
  2. Highly ambitious goals might lead to unsuccessful benchmarking process.
  3. Several organizations prevent the procedure lest their weaknesses be exposed to their competitors.

vii. Cultural differences might, lead to some difficulties in applying best practices as happening Multi National Corporations.

World class operations

Being world-class in operations capabilities is crucial to survival, because world-class has become an order-qualifier rather than an order-winner. World class operations encompass the following aspects:

(i) Lean production: an organization must adopt Lean practices in order to be a world class organisation.

(ii) Quality: Quality in world class firms is about never giving up on quality, getting better in the areas where the firm already excels, and actively seeking out areas of improvement that do not appear to be important on the surface.

(iii) Innovation is also a major requirement for firms, although being first to market does not necessarily bring sustained success.

(iv) Alliances and partnerships: World class firms must also chose partners in a range of areas, and manage relationships with them. Enemies must become friends or allies as part of world-class operations.

(v) business ethics and corporate responsibility are part of world-class operations. This responsibility is likely to increase, as awareness in major ethical and environmental issues become greater.


Guidelines for effective benchmarking and achieving world class operations

  1. Commitment. A strong determination to stay the course.
  2. Communication. Paying exceptional attention to employee comments and suggestions.

iii. Culture Consciousness. Fitting systems and programs into the culture.

  1. Customer-focused. Being proactively attentive to customer needs, both present and anticipated.
  2. Interdependence. Recognizing the influence of one function’s work on others.
  3. Never Satisfied. Being deeply committed to the continuous improvement ethic.

vii. Relationship. Building alliances to gain support and complete the work.

viii. Risk Taking. You need to take risks. Don’t get sandbagged by your mistakes, he cautioned. Learn from them.

  1. Strategy and Planning. Doing what management books prescribe.
  2. Effective Change management. A “world class” organization, must learn how to master change.








Lean operations

Lean operations aims to meet demand instantly, deliver perfect quality and eliminate waste in all its forms. five key elements of Lean Operations are:

(i) eliminate waste,

(ii) involve everyone and

(iii) continuous improvement.


(i) Eliminate Waste


Waste is considered as any activity which does not add value to the operation. There are 7 classified types of wastes, the priority should be to avoid these wastes.

Types of waste

– Overproduction – making too much too early

– Waiting – Need to keep a low of material/customers

– Unnecessary Motions – ergonomics and layout

– Transporting – unnecessary movements/handling

– Processing – Too much capacity in one machine instead of a number of smaller ones

– Inventory – Raw material, work in progress and inished goods

– Defects – costs of defects tend to escalate the longer they remain undetected


The 7 service customer wastes can be the basis for an improvement programme:

– Delay on the part of customers waiting for service, for delivery, in queues, for response, not arriving as promised.

– Duplication. Having to re-enter data, repeat details on forms and answering queries from several sources within the same organisation.

– Unnecessary movements. Queuing several times, poor ergonomics in the service encounter.

– Unclear communication and the wastes of seeking clarification.

– Incorrect inventory. Out-of-stock, unable to get exactly what is required, substitute products or services.

– Opportunity lost to retain or win customers, failure to establish rapport, ignoring customers, unfriendliness, and rudeness.

– Errors in the service transaction, product defects in the product-service bundle, lost or damaged goods.


(ii) Involvement of Everyone :  Some organisations view the lean approach as consisting almost exclusively of waste elimination. However effective waste elimination is best achieved through changes in staff behaviour. Lean aims to create a new culture in which all employees are encouraged to contribute to improvement efforts through generating ideas. In order to undertake this level of involvement the organisation will provide training to staff in a wide range of areas, including techniques such as statistical process control (SPC) and more general problem solving techniques.

(iii) Continuous Improvement (CI):   Continuous Improvement or Kaizen, the Japanese term, is a philosophy which believes that it is possible to get to the ideals of Lean by a continuous stream of improvements over time. Continuous Improvement is needed because customer’s views are continually changing and standards are rising. Kaizen is about moving tacit knowledge to explicit knowledge.

Tacit – „Know-How‟ based on years of experience but may not be written down. Explicit – Written down in principles and procedures. CI enables ideas held tacitly to be explicitly incorporated by the organisation. Principles for implementing a continuous improvement effort include:

Implementing Lean operations

As stated earlier the „lean‟ approach aims to meet demand instantly, deliver perfect quality and eliminate waste in all its forms. One of the ways it does this is through replacing the traditional push production system with a pull production system sometimes called “lean synchronisation”. Other techniques include setup reduction and total preventative maintenance.

By the end of the chapter the student should be able to: (i) Highlight the main objective of lean management (ii) Discuss the key elements of lean operations (iii) Describe the concept of just in time (iv) Explain the key elements of just in time
Lean operations Lean operations aims to meet demand instantly, deliver perfect quality and eliminate waste in all its forms. five key elementsof LeanOperationsare: (i) eliminate waste, (ii) involve everyone and (iii) continuous improvement.
(i) Eliminate Waste Waste is considered as any activity which does not add value to the operation. There are 7 classified types of wastes, the priority should be to avoid these wastes.
Types of waste
– Overproduction – making too much too early
– Waiting – Need to keep a low of material/customers
– Unnecessary Motions – ergonomics and layout
– Transporting – unnecessary movements/handling
– Processing – Too much capacity in one machine instead of a number of smaller ones
– Inventory – Raw material, work in progress and finished goods
– Defects – costs of defects tend to escalate the longer they remain undetected The 7 service customer wastes can be the basis for an improvement programme:
– Delay on the part of customers waiting for service, for delivery, in queues, for response, not arriving as promised.
– Duplication. Having to re-enter data, repeat details on forms and answering queries from several sources within the same organisation.
– Unnecessary movements. Queuing several times, poor ergonomics in the service encounter.
– Unclear communication and the wastes of seeking clarification.

– Incorrect inventory. Out-of-stock, unable to get exactly what is required, substitute products or services.
– Opportunity lost to retain or win customers, failure to establish rapport, ignoring customers, unfriendliness, and rudeness.
– Errors in the service transaction, product defects in the product-service bundle, lost or damaged goods.
(ii) Involvement of Everyone Some organisations view the lean approach as consisting almost exclusively of waste elimination. However effective waste elimination is best achieved through changes in staff behaviour. Lean aims to create a new culture in which all employees are encouraged to contribute to improvement efforts through generating ideas. In order to undertake this level of involvement the organisation will provide training to staff in a wide range of areas, including techniques such as statistical process control (SPC) and more general problem solving techniques.
(iii) Continuous Improvement (CI) Continuous Improvement or Kaizen, the Japanese term, is a philosophy which believes that it is possible to get to the ideals of Lean by a continuous stream of improvements over time. Continuous Improvement is needed because customer’s views are continually changing and standards are rising. Kaizen is about moving tacit knowledge to explicit knowledge. Tacit – „Know-How‟ based on years of experience but may not be written down. Explicit – Written down in principles and procedures. CI enables ideas held tacitly to be explicitly incorporated by the organisation. Principles for implementing a continuous improvement effort include:
Implementing Lean operations As stated earlier the „lean‟ approach aims to meet demand instantly, deliver perfect quality and eliminate waste in all its forms. One of the ways it does this is through replacing the traditional push production system with a pull production system sometimes called „lean synchronisation‟ . Other techniques include setup reduction and total preventative maintenance.
Push Production Systems In a push production system a schedule pushes work on to machines which is then passed through to the next work centre. At each production stage a buffer stock is kept to ensure that if any production stage fails then the subsequent production stage will not be starved of material. The higher the buffer stocks kept at each stage of the line, the more disruption can occur without the production line being halted by lack of material. Advantages
• Buffers insulate stages against disruption in other stages. Disadvantages
• Because buffers insulate system from problems the problems are not visible so no one takes responsibility for f i xing them.
• Buffer stock leads to high inventory and slower lead times
• Production is not connected to demand
Pull production system In a pull system the process starts by an order for the finished product (e.g. car) at the end of the production line. This then triggers an order for components of that item which in turn triggers an order for further sub-components. The process repeats until the initial stage of production and the material lows through the system as in the push approach. Advantages
One system for implementing a pull system is called a kanban (Japanese for „card‟ or „sign‟) production system. Each kanban provides information on the part identiication, quantity per container that the part is transported in and the preceding and next work station. Kanbans in themselves do not provide the schedule for production but without them production cannot take place as they authorise the production and movement of material through the pull system. Kanbans need not be a card, but something that can be used as a signal for production such as a marker, or coloured square area
Setup Reduction In order to operate with the small batch sizes required by lean it is necessary to reduce setup time (the time taken to adjust equipment to work on a different component) drastically because of the increased number of setups needed with small batches. Originally some operations such as stamping car door panels with a press die were done in very large batch sizes, and the output stored in inventory, because the setup time for the press could be measured in hours or even days. Shigeo Shingo developed a system for setup reduction which became known as the Single Minute Exchange of Dies (SMED)
Total Preventative Maintenance (TPM) This anticipates equipment failures through a programme of routine maintenance which will not only help to reduce breakdowns, but also to reduce downtime and lengthen the life of the equipment. TPM includes the following activities:
– Regular Maintenance activities such as lubricating, painting, cleaning and inspection. These activities are normally carried out by the operator in order to prevent equipment deterioration.
– Periodic Inspection to assess the condition of equipment in order to avoid break downs. These inspections are normally carried out at regular time intervals by either operator or maintenance personnel.
– Preventative Repairs, due to deterioration, but before a breakdown has occurred. Normally carried out by maintenance personnel but ideally by the operators.

Just-In-Time (JIT) Production

Just-in-time (JIT) is defined as “a philosophy of manufacturing based on planned elimination of
all waste and on continuous improvement of productivity”. It also has been described as an
49 approach with the objective of producing the right part in the right place at the right time (in
other words, “just in time”). Waste results from any activity that adds cost without adding value, such as the unnecessary moving of materials, the accumulation of excess inventory, or the use of faulty production methods that create products requiring subsequent rework. JIT (also known as lean production or stockless production) should improve profits and return on investment by reducing inventory levels (increasing the inventory turnover rate), reducing variability, improving product quality, reducing production and delivery lead times, and reducing other costs (such as those associated with machine setup and equipment breakdown). In a JIT system, underutilized (excess) capacity is used instead of buffer inventories to hedge against problems that may arise. JIT applies primarily to repetitive manufacturing processes in which the same products and components are produced over and over again. The general idea is to establish flow processes (even when the facility uses a jobbing or batch process layout) by linking work centers so that there is an even, balanced flow of materials throughout the entire production process, similar to that found in an assembly line. To accomplish this, an attempt is made to reach the goals of driving all inventory buffers toward zero and achieving the ideal lot size of one unit. The basic elements of JIT were developed by Toyota in the 1950’s, and became known as the Toyota Production System (TPS). JIT was well-established in many Japanese factories by the early 1970’s. JIT began to be adopted in the U.S. in the 1980’s (General Electric was an early adopter), and the JIT/lean concepts are now widely accepted and used.

Key Elements of JIT

  1. Stabilize and level the MPS with uniform plant loading (heijunka in Japanese): create a uniform load on all work centers through constant daily production (establish freeze windows to prevent changes in the production plan for some period of time) and mixed model assembly (produce roughly the same mix of products each day, using a repeating sequence if several products are produced on the same line). Meet demand fluctuations through end-item inventory rather than through fluctuations in production level. Use of a stable production schedule also permits the use of backflushing to manage inventory: an end item’s bill of materials is periodically exploded to calculate the usage quantities of the various components that were used to make the item, eliminating the need to collect detailed usage information on the shop floor.
    2. Reduce or eliminate setup times: aim for single digit setup times (less than 10 minutes) or “one-touch” setup — this can be done through better planning, process redesign, and product redesign. A good example of the potential for improved setup times can be found in auto racing, where a NASCAR pit crew can change all four tires and put gas in the tank in under 20 seconds. (How long would it take you to change just one tire on your car?) The pit crew’s efficiency is the result of a team effort using specialized equipment and a coordinated, well rehearsed process.
    3. Reduce lot sizes (manufacturing and purchase): reducing setup times allows economical production of smaller lots; close cooperation with suppliers is necessary to achieve reductions in order lot sizes for purchased items, since this will require more frequent deliveries.
    4. Reduce lead times (production and delivery): production lead times can be reduced by moving work stations closer together, applying group technology and cellular manufacturing concepts, reducing queue length (reducing the number of jobs waiting to be processed at a given machine), and improving the coordination and cooperation between successive processes; delivery lead times can be reduced through close cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.
    5. Preventive maintenance: use machine and worker idle time to maintain equipment and prevent breakdowns.
    6. Flexible work force: workers should be trained to operate several machines, to perform maintenance tasks, and to perform quality inspections. In general, JIT requires teams of competent, empowered employees who have more responsibility for their own work. The
    Toyota Production System concept of “respect for people” contributes to a good relationship between workers and management.
    7. Require supplier quality assurance and implement a zero defects quality program: errors leading to defective items must be eliminated, since there are no buffers of excess parts. A quality at the source (jidoka) program must be implemented to give workers the personal responsibility for the quality of the work they do, and the authority to stop production when something goes wrong. Techniques such as “JIT lights” (to indicate line slowdowns or stoppages) and “tally boards” (to record and analyze causes of production stoppages and slowdowns to facilitate correcting them later) may be used.
    8. Small-lot (single unit) conveyance: use a control system such as a kanban (card) system (or other signaling system) to convey parts between work stations in small quantities (ideally, one unit at a time). In its largest sense, JIT is not the same thing as a kanban system, and a kanban system is not required to implement JIT (some companies have instituted a JIT program along with a MRP system), although JIT is required to implement a kanban system and the two concepts are frequently equated with one another.
    Review questions 1. Distinguish between lean operation and just in time 2. Describe the main elements of lean operations 3. Explain the process of implementing lean operations 4. Highlight the benefits of JIT 5. Enumerate the key elements of JIT approach to management


Ergonomics can be defined simply as the study of work. More specifically, ergonomics is the science of designing the job to fit the worker, rather than physically forcing the worker’s body to fit the job.

Adapting tasks, work stations, tools, and equipment to fit the worker can help reduce physical stress on a worker’s body and eliminate many potentially serious, disabling work- related musculoskeletal disorders (MSDs). Ergonomics draws on a number of scientific disciplines, including physiology, biomechanics, psychology, anthropometry, industrial hygiene, and kinesiology.

The Impact Of Ergonomics On Workplace Design

The goal of Ergonomics is to provide maximum productivity with minimal cost; in this context cost is expressed as the physiological or health cost to the worker. In a workplace setting there are seldom a large number of tasks that exceed the capabilities of most of the work force. There may be jobs that will include a specific task that requires extended reaches or overhead work that cannot be sustained for long periods, by using Ergonomic principles to design these tasks; more people should be able to perform the job without the risk of injury.

Matching the requirements of a job with the capabilities of the worker is the approach to be adopted in order to reduce the risks of musculoskeletal injuries resulting from handling materials manually.

Proactive Ergonomics emphasizes the prevention of work related musculoskeletal disorders through recognising, anticipating and reducing risk factors in the planning stages of new systems of work or workplaces. In effect, to design operations that ensures proper selection and use of tools, job methods, workstation layouts and materials that impose no undue stress and strain on the worker. Additional costs are incurred in redesigning or modifying work processes therefore it is more cost effective to reduce risk factors at the design stage. A proactive approach to Ergonomics will ensure that:

  • Designers will receive training in ergonomics and have appropriate information and guidelines regarding risk reduction
  • Decision-makers planning new work processes should have knowledge of Ergonomics principles that contribute to the reduction or elimination of risk.
  • Design strategies emphasize fitting job demands to the capabilities and limitations of workers. For example, for tasks requiring heavy materials handling, use of mechanical assist devices to reduce the need for manual handling would be designed into the process
  • Other aspects of design should be considered including load design, layout of the workplace to allow for ease of access when using mechanical aids and eliminating unnecessary lifting activities.

Responsibilities of managers in ergonomics

  1. Implementing and maintaining ergonomic principles
  2. Ensuring that employees are properly trained in ergonomic principles

iii. Ensuring that employees follow safe ergonomic practices

  1. Actively practicing and developing positive attitudes towards ergonomic issues
  2. Ensuring that employees use the ergonomic equipment provided
  3. Considering workplace layout, ergonomics and individual needs when allocating tasks to people in your area


Responsibilities of employees in ergonomics

  1. Complying with ergonomic safety instructions of their organisation
  2. Not putting themselves or other at risk by their actions or omissions

iii. Making proper use of ergonomic equipment provided

  1. Using training received in applying ergonomic principles to their tasks
  2. Reporting potential ergonomic hazards and problem to their Area OHS Supervisors


General principles of ergonomics


  1. Correct, neutral posture: Maintain Postures where the body is aligned and balanced, while sitting or standing. The head is kept upright and is not turned to either side more than about 30 degrees or tilted forward or backward more than about 15 degrees. When the worker is standing, the torso is not bent more than 10 to 20 degrees from the vertical position and the natural curves of the spine are maintained. The pelvis and shoulders should face straight ahead to avoid twisting the torso. The shoulders are relaxed and knees slightly bent. The arms hang normally at the side, with elbows close to the body. The elbows are not bent more than about 90 degrees and the palms face in toward each other and the center line of the body. The wrists are in line with the forearms and are not bent sideways, forward (towards the palm), or backward (towards the back of the hand.) When the worker is seated, the buttocks and feet are firmly supported.
  2. Cleanliness and orderliness: Establishing a strong housekeeping program will keep the work place tidy and reduce the risk of tripping over cords and debris. It also extends the life of tools and equipment, and results in increased productivity.

iii. Lifting: Lifting properly is important. While there are some general lifting guidelines, a different approach may be needed for each load to be lifted. Sometimes it is appropriate to lift with the legs, and other times the back should be used to lift. These techniques depend on the size and shape of the load, and the frequency of lifting that is required.

  1. Planning: Planning should be done with ergonomics in mind. Items to be planned include determining routes between staging areas and work spaces, scheduling for members of other trades, and knowing what services and utilities will be provided.
  2. Power zone: lifting should be done with the power zone. The power zone for lifting is close to the body, between mid-thigh and mid-chest height. This zone is where arms and back can lift the most with the least amount of effort.
  3. Proper handholds: Proper handholds make lifting easier and reduce the risk of injury. Handholds should be made large enough to accommodate larger hands and should not dig into fingers and palms.

vii. Pulling vs. Pushing: Pushing is generally preferable to pulling. Pushing allows the employee to use large muscle groups and apply more force to the load. Pulling carries a greater risk of strain and injury.

viii. Staging: Staging is an important step in any electrical project. Proper staging includes placing materials as close as possible to work spaces, and storing materials at ideal heights so employees can utilize the power zone to take materials from storage.

  1. Task Rotation: Many stressors cannot be engineered out of a task, short of complete automation. Rotation of assignments can be an effective means of limiting the amount of time employees are exposed to these stressors. This will often reduce the chance of injury, because the risk of injury is proportional to the amount of time one is exposed to a stressor.






Business process re-engineering (BPR) is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed.

Components of business process re-engineering definition

– Fundamental rethinking – reengineering usually refers to the changing of significant business processes

– Radical redesign – involves a complete rethink about the way the business operates

– Dramatic improvements – tens or hundreds of percent improvement

– Critical contemporary measures of performance – process measures based on competitive factors of cost, quality, service and speed.


BPR stresses the use of information technology as a catalyst for these major changes. Examples given include decision support systems, teleconferencing and shared databases. BPR organises work around customer processes rather than functional hierarchies

Advantages of functional structures:

– Creates a pool of expertise which can service a number of areas

– Helps develop careers in a particular field


Disadvantages of functional structures:

– Focus of work can be on functional boss rather than end customer

– No one takes overall responsibility for overall process

– Tasks may be undertaken for internal functional reasons rather than overall business strategy Implementing


Business Process Redesign


The task of designing processes should be undertaken in a structured manner and the steps involved can be described as:

  1. Identifying and documenting the process activities
  2. Identifying processes for improvement
  3. Evaluating process design alternatives


  1. Identifying and documenting the process activities


The identification of activities in a current process design is a data collection exercise using methods such as examination of current documentation, interviews, and observation. In order to provide a framework for the design and improvement of service processes the techniques of process mapping and service blueprinting can be utilised.

  1. Identifying processes for improvement


The identification of the relevant business processes for improvement can be undertaken using a scoring system in which prioritisation is governed by importance to customers and performance against competitors. Other measurement systems can be used such as a process marking guide covering the amount of impact and extent of innovation required of a process to meet performance across a number of critical success factors.

  1. Evaluating Process Design Alternatives


There are many ways in which a process can be designed to meet particular objectives and so it is necessary to generate a range of innovative solutions for evaluation. Three approaches which can be used to generate new ideas are:

– Generating new designs through brainstorming

This approach offers the greatest scope for radical improvements to the process design but represents a risk in the implementation of a totally new approach.

– Modifying Existing Designs


This approach is less risky than a blue skies approach but may mean the opportunity for a radical improvement in process design is missed

– Using an established „benchmark‟ design


This approach applies the idea of identifying the best-in-class performer for the particular process in question and adopting that design.




2.1 Introduction
A standard is defined as a model or general agreement or a rule established by authority, consensus, or custom, created and used by various level of interest.
Standardization is the orderly and systematic formulation, adoption, application and review of industrial standard which lead to simplification or variety reduction.
This implies reducing unnecessary varieties and standardizing to the most economical sizes, grades, shapes, colour or types of parts. The word “standard” is multivalued as it may means physical standard prototype of mass or a technical document. Industrial standard s is the generally accepted statement of the requirement.
Standardization eliminates the rule thumb method as the width of the thumb varies widely from one individual to another.
Simplification is the process of reducing the variety of items. It reduces the number of types and sizes of item s to a minimum; consistent with the needs of an organization.
Simplification in company operators is an essential process of standardization.
Standardization is the process of formulating and applying rules for a beneficial and orderly approach to specific activity. It is based on consolidated efforts of science, technology and experience, reflecting in: (a) units of measurement
(b) Terminology
(c) Products
(d) Process
(e) Safety of persons.
The term “standard” or “technical standard” includes:
· Common and repeated use of rules, conditions, guidelines or characteristics for products or related processes and production methods, and related management systems practices.
· The definition of terms; classification of components; delineation of procedures; specification of dimensions, materials, performance, designs, or operations; measurement of quality and quantity in describing materials, processes, products, systems, services, or practices; test methods and sampling procedures; or descriptions of fit and measurements of size or strength.

Standards may be classified in numerous ways. Standards can be differentiated based on purpose.
· A basic standard has a broad ranging effect in a particular field, such as a standard for metal which affects a range of products from cars down to screws.
· Terminology standards (or standardized nomenclature) define words permitting representatives of an industry or parties to a transaction to use a common, clearly understood language.
· Test and measurement standards define the methods to be used to assess the performance or other characteristics of a product or process.
· Product standards establish qualities or requirements for a product (or related group of products) to assure that it will serve its purpose effectively.
· Process standards specify requirements to be met by a process, such as an assembly line operation, in order to function effectively.
· Service standards, such as for repairing a car, establish requirements to be met in order to achieve the designated purpose effectively.
· Interface standards, such as the point of connection between a telephone and a computer terminal, are concerned with the compatibility of products.
· Standards on data to be provided contain lists of characteristics for which values or other data are to be stated for specifying the product, process or service.
· International Standards have been developed through a process that is open to participation by representatives of all interested countries, transparent, consensus-based, and subject to due process. The existence of non-harmonized standards for similar products, processes, and services in different countries or regions can create barriers to
trade. Therefore, export-minded countries and industries have recognized the need for internationally accepted standards to help rationalize the international trading process.
Standards may also be classified by the intended user group. Some examples include:
· Company standards are meant for use by a single industrial organization and usually are developed internally.
· International standards are developed and promulgated by international governmental and non-governmental organizations, such as the North Atlantic Treaty Organization (NATO) or the International Organization for Standardization (ISO).
· Harmonized standards can be either an attempt by a country to make its standard compatible with an international, regional or other standard or it can be an agreement by two or more nations on the content and application of a standard, the latter of which tends to be mandatory.
· Industry standards are developed and promulgated by an industry for materials and products related to that industry.
· Government standards are developed and promulgated by Federal, State, and local agencies to address needs or applications peculiar to their missions and functions.
Another distinction among standards is the manner in which they specify requirements.
· Performance standards describe how a product is supposed to function. A performance standard for water pipe might set requirements for the pressure per square inch that a pipe must withstand, along with a test method to determine if a specimen meets the requirement.
· Design standards define characteristics or how the product is to be built. The specification that a pipe be made of a given gage of copper would characterize a design standard.
Government agencies are encouraged to write technical regulations and standards in terms of performance, rather than design characteristics.
Still another classification scheme distinguishes between voluntary standards, which by themselves impose no obligations regarding use, and mandatory standards. A mandatory standard is generally published as part of a code, rule or regulation by a regulatory government body and imposes an obligation on specified parties to conform to it. However, the distinction between these two categories may be lost when voluntary consensus standards are referenced in government regulations, effectively making them mandatory” standards.
It is clear, then, that standards cover a broad range of types and serve a wide variety of purposes.
Where appropriate purchasing should work with design, engineering, and operation to seek opportunities to standardize materials, components and supplies to increase the usage of standardize items. For example, a car manufacture could design different models of automobiles to use the same starter mechanism, thus increasing its usage and reducing the need for multiple items storage space. While allowing for large quantity price documents. This will also reduce the number of small value purchases for less frequently used items.

The task force, responsible for standardization must follow procedure to get the items standardized. They should get all relevant facts from the concerned executive. They should develop standards which are easy to understand and to implement. There should be a constant reviewing, updating and monitoring committee so that best benefits accrue
to the company. The process of standardization can be conceived on a three dimensional plane. To include factors such as levels, aspect, subject and there interrelation .the level includes individual, departments, company, industry, nation, international, and universe.
While the aspects may include forms, ethics, code of conducts procedures, contracts, inspection, testing sampling, agreements or reporting, notes etc. The third dimension, namely the subjects, encompasses industry, education, agriculture, communication, transport, mining, trade, commerce, energy, family planning, construction and
The standardization process may take the form of a document containing a set of conditions to be fulfilled, a fundamental unit or physical constant or an object for physical comparison. The apex body of standards in Kenya is the Kenya bureau of standards (KeBS).
At international level, international standard organization is based in Geneva.

Items to be standardized
The warehouse and inventory manager should involve executives from design, maintenance, inspections, operations and costing department in order to ensure that the recommended standards are implemented. This team should update its knowledge on the latest available technological development to effectively implement the process of
standardization. If the standard is approved as a company standard, the standard department should make necessary reproduction and distribute copies as mandatory to all concerned.
We have the kilogram as standard of weight, meters as the standard of length. Keeping to the right as the standard of the road, motors are made only in certain ratings, bulbs only in specific voltages, etc. Procedures, formats, reporting system, sampling inspections plans, letter heads, operating manual, standard costing method, etc. are the examples one comes across in the field of standardization. It is advantageous to tackle non critical high value, easily available item for standardization, as otherwise there will be opposition from design department. MRO-maintenance, repair and operation items like fasteners, hardware items, maintenance, etc. are a good starting point to impose standardization.

When ever published standards are available from outside sources the same can be applied. The frequency distribution of demand for each type and size of an item in terms of quantity of materials purchased/used /or products sold, would be an excellent starting point for standardization and variety reduction in an organization. For instance, consider the example where the diameters in millimeters of pipes are 5.0, 5.1, 5.2, 5.3, 5.4 and the past pattern shows that only two sizes 5.1 and 5.4 are often used. Then the orders for the remaining three dimensions can be gradually discontinued if these items are not critical from performance and safety angles.
The preferred number series-a series of standard sizes is suitable steps used in the bulbs and currency-developed by Renaud and known as R-5, R-10, R-29, R-40 etc is another way of stating the standardization process.

2.4 Simplification
Simplifications refers to reduction of the number of the company, supplier, or standard materials used in the product or process during product design. For example, an engine starter manufacture could design all of its starter model to use a single type of housing or solenoid. Thus, simplification can further reduce the number of small value purchases
while reducing storage space requirements, as well as allowing for quantity purchase discounts. Simplification can achieved as follows;

i) Accumulating Small Order to Create a Large Order
Number small orders can be accumulated and mixed into a large order, especially if the material request is not urgent. Otherwise, purchasing can simply increase the order quantity if the ordering cost exceed the inventory holding cost. Larger orders also reduce the purchase price and unit transportation cost.

ii) Using a fixed order interval for specific categories of materials/supplies
Another effective way to control small orders is to group materials and supplies into categories and then set fixed order intervals for each category. Order intervals can be set as biweekly or monthly depending on usage. Instead of requesting individual materials or supplies, users request the appropriate quantity of each item in the category on a
single requisition to be purchased from a supplier. This increases the dollar value and decreases the number of small orders.

2.5 Benefit of standardization
The warehousing and inventory manager must have an unambiguous nomenclature for
identifying the terms, in order to serve the customer promptly.
a) In this process, standardization which reduces the variety plays a vital role by reducing the number of varieties of the same item held in the warehouse.
b) More than any other executive, the stores in charge comes into direct contact with a variety of materials. He can gain knowledge on the uses of materials in the store and can contribute significantly to achieve standardization.
c) Standardization enables one to concentrate on large quantity of fewer items.
d) It is possible to place economic order quantity or orders of staggered deliveries with bulk discount.
e) Economic lot size at manufacturing will not be a problem as items can as items can be manufactured with the same set up timings for standard items.
f) Since the inventory is likely to be less, the working capital commitment of the organization will also be less.
g) The items can be easily identified by all persons in stores as the bin location can also be standardized.
h) Standardization reduce the time involve in negotiation process with the suppliers as communication is better with prompt delivery schedule.
i) The procurement lead time gets reduce as everyone knows the item clearly.
j) The buyer-seller relations can be improved as all dimensions including price analysis.
Specifications lead time etc, are standardized without scope for disputes.
K) Standardization promotes healthy competition amongst vendor as standard items can be bought by several companies.
l) Standardization minimizes obsolescence.
m) It is possible to have rate running contracts for standardized items.
n) Standardization reduces design time by concentrating on fewer parts.
O) It minimizes draft time through respective of standard drawings.
p) It expands the engineers list of known and power items.
q) It reduces specification writing by repetitive use of standard specifications.
r) Interchangeability of parts is assured through standardization.
s) Lower cost of production through continuous manufacturing run with less material
handling problems and increased capacity utilization is achieved by standardization.
t) The workers at all levels and departments become more efficient by repeated handling
of items and it is possible to utilize less skilled workers for standard operations.
u) Standardization enables reduced inspections and quality control burden.
V) Since methods are standardized, it ensures safety to all.
w) Standardization directly reduces the variety and improves the information system of the warehouse manager.
x) Standardization enables reduced number of maintenance tools and improves
maintenance practices.
y) Standardization aims at maximum variety of finished product with minimum categories of assemblies, sub assemblies and components.
z) In general, standardization result in simple operations, minimum paper work, improve inter departmental coordination, ease of computer application and pinpoints areas involving inefficiency. In short, standardization is a means to faster and better understood communication, with fewer mistakes and hence smoother life.
2.6 Roadblock to standardization
Standardizations should not lead to monotony and prohibit innovations. For instance, it is not possible to introduce standardizations of end products in job shops, but assemblies/parts constituting a final product may be standardized. Similarly, it is possible to standardize items like shoes in terms of seven, or eight sizes. Standardizations must not lead to rigidity in design or restrict technical development. Standardizations is also based on previous practices.

In summery, the following points should be borne in mind;
i) Identify the relevance of standardizations in warehousing and inventory management
ii) Discuss the benefit of standardization to different departments in the organizations
iii) Explain how you will identify the items of standardizations
iv) Describe the procedures for standardizations
v) Enumerate the pitfalls of standardization
vi) Elucidate the applications of the concept of frequency distributions to standardizations
vii)Clarify the concepts of preferred number series in relations to standardization
viii) Specify the interrelationship between standardizations ,simplifications and specifications
ix) Explain the role of Kenya bureau of standards in development of standards
x) Examine the scope of standardizations in job shop, office and administrations.

Suggested Further Readings
i) Arjan Van Weele (2004), Purchasing and Supply Chain Management, PVT publishers, New Delhi
ii) Benton W C (2007), Purchasing and Supply Management, Routledge, London
iii) Gopalakrishnan P(1994) Handbook of Material Management, Prentice Hall, India
Review Questions
i) Define the following terms:
a) standards
b) simplifications
ii) discuss various types of standard classifications
iii) discuss the importance of standardizations and simplifications
iv) explain how simplifications are achieved


Learning Objectives
By the end of this chapter the learner should be able to:
i) Explain the basic issues in make or buy decisions
ii) Discuss why firms outsource
iii) Differentiate between turnkey and partial outsourcing
iv) Explain the motives of outsourcing under:
· Focus on core competence.
· Focus on cost efficiency/effectiveness and
· Focus on service
v) Explain factors found by McQuiston to be core to a successful outsourcing
vi) Describe the outsourcing process
vii) Describe the four phase strategic outsourcing model
viii) Describe the factors considered in deciding where to buy
3.1 Introduction
Many chief executives consider the make-or-buy decision to be among the most critical and most difficult confronting their organizations. Not only are billions of dollars needlessly wasted if the wrong decision is made, but scarce management resources frequently are stretched past the breaking point.
Outsourcing is a term being used in relation to services such as accounting, maintenance, security, promotion, stocking, and the like. The basic issues are the same concerning the question of doing it yourself or contracting with an independent outside the buying firm.
The strategic issue requires the firm to identify its core competencies-the things that differentiate it and make it viable. If an item or service at or near the heart of the firm’s core competencies is to be outsourced, it should only be supplied by a carefully selected supplier under a tightly woven strategic alliance.
Top management has the ultimate responsibility for make-or-buy decisions. In most cases, this responsibility can be satisfied through operating procedures that develop and pool all relevant information surrounding a make-or-buy issue. Purchasing is a source of much of this information.
Also, Purchasing frequently should identify candidates for a make-or-buy analysis.

Five major problems are common in the make-or-buy area namely:
1. Make-or-buy decisions are made at too low a level in the organization.
2. Not all factors are considered when conducting a make-or-buy analysis.
3. Decisions are not reviewed on a periodic basis. Circumstances change!
4. The estimates underlying the cost of making are less objective and accurate than the purchase facts.
5. Members of the buying company assume they know more than the supplier about the material or service.

3.2 Make or buy issues
a) The Strategic issues
“What kind of an organization do we want to be?” This issue is the first, and perhaps most critical, to be addressed. Pride or purely emotional reasoning plays a major part in many decisions. Pride in Self-sufficiency can become a dominant factor that can lead to many problems. While self-sufficiency in some areas is desirable or even necessary, it is
impossible for even a large firm to become entirely self-sufficient.
These decisions influence the firms manufacturing operation shape and capacity by determining;
– What product to make
– What investments to make in plant and equipment
– The framework for short term tactical and component decisions.
– Development of new products.

II) Tactical make or buy decisions
This deal with the issue of temporary imbalance in manufacturing capacity e.g. changes in demand may make it possible to make everything in house.
III) Component make or buy decisions
Made at the design stage, these decisions have to do with whether a particular component should be made in – house or is bought.
b) Costs
Two keys prerequisites are essential to a thorough and sound analysis of the cost considerations of a make-or-buy decision.
· Cost must be segregated between fixed costs and variable or incremental ones.
Such cost figures must include all relevant costs, both direct and indirect, near term and anticipated changes. Realistic estimates of in-house production costs must include expected rejection rates and spoilage. These estimates also should consider the likely effects of learning resulting from long production runs.
· Accurate and realistic data must be available on the investment required to make or to buy an item. Frequently, the working capital required in the manufacture of an item can equal and even exceed the investment required for facilities and equipment. It is essential to consider both the facilities and the working capital components of an investment.
Cost factor in make or buy decisions often require the application of marginal costing and break – even analysis
i) Marginal costing
this is a principle whereby valuable costs are charged to cost units and the fixed costs attributable to the relevant period written off in full against the contributions for that period contribution = purchase price – vc per them

ii) opportunity cost
This is the potential benefit that is foregone because one course of action has been chosen over another. I.e. if the production facilities used in making the item had been applied to some alternative purpose.
Using the D.T Dobic example, if instead of producing the shocks the facilities could be used to make suspension springs with a contribution of ksh 175 each.
Should D.T Dobic make the shocks or buy.

In favour of making
I) Cost considerations
The major elements of the cost considerations are:
– Materials and labour costs
– Follow on costs stemming from quality related problem
– Incremental inventory carry on costs
– Incremental factory overhead costs
– Incremental management costs
– Incremental purchase costs
– Incremental costs of capital
ii) Desire to integrate plant operations
iii) Reproductive use of excess plant capacity to help absorb fixed costs
iv) Need to exert direct control over production and /or quality.
v) Design secrecy required
vi) Unreliable suppliers
i) Desire to maintain a stable work force (in periods of low sales )
ii) Potential lead time reduction
iii) Exchange rate risk
iv) Greater purchasing power with bulk purchase of materials.

C) Quality
When there is a significant difference in quality between items produced internally and items purchased or when a specified quality cannot be purchased, then management must consider these quality considerations in the make-or-buy decision. One argument for making over buying is the so-called impossibility of finding a supplier capable or
willing to manufacture the item to the desired specifications. But further investigation should be conducted before this argument can be accepted.
Why are these specifications so much more rigid than those of the rest of the industry?
The Manufacturer should reexamine the specifications and make every effort to secure the cooperation of potential suppliers to ensure that the quality specifications are realistic and that no satisfactory product is available. Frequently, suppliers can suggest alternatives that are just as dependable if they know the intended purpose of the item.
On the other hand, the firm may desire a level of quality below that commercially available. Suppliers may be selling only a quality far above that which would fully satisfy the need in question and may, at the same time, have so satisfactory a volume at the higher level as to have no interest in a lower quality product. If this is the case, the user
may be justified in manufacturing the item.
Frequently, it is claimed that in-house production may better satisfy manufacturing’s quality requirements. The user of an item usually better understands the operational intricacies involved in the item’s use. With a make decision, a better degree of coordination will probably exist between those responsible for producing the item and those responsible for assembling it. Communications between the two groups are facilitated compared with the situation in which the item is furnished by an outside supplier. If the firm has a weak purchasing department, such assumptions may be true.
But with a professional purchasing operation, the flow of information and coordination between purchaser and supplier should result in no more problems than between two production activities of the same firm.
Since quality must be controlled in either the purchased or manufactured items, a competent quality assurance staff and a TQM (total quality management) program must be employed. The purchase order may state that the purchaser’s quality assurance inspectors have access to the supplier’s manufacturing, inspection, and shipping
departments. Thus, the purchaser can maintain significant control and still not incur the additional cost resulting from manufacturing the item.

One of the most frequent reasons for making over buying is that a requirement may be too small to interest suppliers. Small volume requirements of unique, nonstandard items may be difficult to purchase. The firm may feel that it is forced to make such items;
however, it may be economically imprudent to do so. The costs of planning, tooling, setup, and purchase of required raw materials may be exorbitant. It may be far more cost effective to purchase the required item in larger quantities or to identify a suitable substitute.
If a large quantity of an item is required on a repetitive basis, then the analysis described in the Cost section should be made. The company should have a high degree of confidence that its requirements for the item will continue to the point that it receives a satisfactory ROI before deciding to make such an item.
Frequently a firm will follow a conscious policy of making an item at a level of production sufficient to meet its minimum requirements and purchase additional items as required. This policy builds a degree of stability into the firm’s production activities and provides accurate comparative cost data. Such a policy should be adopted only after
investigating the willingness and ability of suppliers to fill such fluctuating demand.
d) Service
Service often is defined simply as reliable delivery. In a broader sense, it includes a wide variety of intangible factors that lead to greater satisfaction on the part of the purchasing firm. This consideration must be judged fairly and the purchasing firm must not be given undue credit with respect to service simply for emotional reasons. Merely because the item is produced in-house is not proof that service will be superior to that of a supplier.
Assurance of supply is a primary service consideration. When the lack of an item causes serious problems, such as total production stoppage, and totally reliable suppliers are not available, the decision to make rather than buy may be justified.
When a purchaser is faced with a monopolistic environment, the service accompanying the product is generally somewhat poorer than in a highly competitive market. Such a situation may induce the would-be purchaser to make the product. If an item is used as a subcomponent on a product the purchaser is selling and is causing the entire product to be unreliable, the resulting loss of goodwill and sales may be significant enough to justify
a make decision, even though the cost analysis does not support such a decision.

e)Specialized Knowledge
Frequently, a supplier possesses specialized knowledge, abilities, and production knowhow that would be very expensive to duplicate. Suppliers may have a large R&D budget leading to improved and/or less expensive products.
The protection of innovation achieved by the supplier is a critical aspect of trust, that is, the buyer must not under any condition give this innovation to a supplier’s competitor or use the technology were it to make the item.

f) Design or Production Process Secrecy
Occasionally, a firm decides to manufacture a certain part because additional industrial security can be provided, especially when the item is a key part for which a patent would not provide adequate protection. This justification must be used with caution, however, as the firm can provide very little protection against design infringement after sale. In short, if a patent will not protect a certain part, then in-house manufacturing may not either. Frequently, a firm may have developed a unique or proprietary production process. Such circumstances may support a decision to make over buying.

g) Urgent Requirements
The firm usually can purchase a small quantity much more readily than were it to produce the item. If the requirement is urgent, such as to preclude stopping an assembly line, the payment of a higher price to buy the item is justified.
h) Labor Problems
The production of any new item may require labor skills that the company does not possess. The hiring, cross-training, and upgrading of personnel may be a troublesome and complex process, especially if a union is involved. The company may be entering a field in which it has no experience and no adequately trained personnel. Labor problems are easily shifted to someone else, namely, the supplier, through a decision to buy.
The presence of unions within the company also may be a significant factor. Unions often have clauses in their contract prohibiting the purchasing of items that can be manufactured within the plant. The history of labor problems in the supplier’s company also may influence the make-or-buy decision.

i) Plant Capacity
Obviously the more significant the item in question is relative to the company’s size, the greater the probability that the item will be purchased rather than produced in house.
When the item would require a significant investment, the smaller company has no rational decision other than to buy.
Generally the more mature company will try to integrate items currently purchased into its production more often than will a new company. The new company understandably concentrates on increasing output and has very little excess capital or plant capacity to divert to production of components. Quite the opposite is true for the more mature
company. Such a firm tends to have extra facilities, capital, and personnel and, therefore, is in a better position to increase profit by producing what was formerly purchased.
Excess plant capacity and the likely duration of the excess capacity should always be considered in the make or buy decision as should additional expenses such as tooling, setup, and training.

j) Capital Equipment
Manufacturers sometimes find it necessary to make a needed item, simply because a suitable supplier does not exist. This is most frequently the case with highly specialized manufacturing equipment.

k) Use of Idle Resources
A make decision can prove profitable to a firm even when suitable supplies are available.
In periods of1 recession or business slumps, a firm is faced with the problem of idle plant equipment, labor, and management. By making a product that it may have been buying, a firm can put its idle machinery to work, retain skilled employees, and spread its overhead costs over a larger volume of production.
Perhaps the biggest benefits obtained from a make decision during a slump are in the area of labor relations. Employee morale can be maintained and layoff penalty costs can be avoided by timely use of the make decision. Even in times of recession, most firms find it desirable to retain highly skilled production personnel. These personnel can be kept at work and a stable workforce maintained by a decision to make. The long-run benefits from good labor relations are obvious.
Great caution must be taken when basing a make decision primarily on temporary idle resources.
Make decisions tend to be permanent. A decision to make temporarily an item under such circumstances should be reviewed when demand increases.

3.3 Make and Buy
Some firms make and buy critical nonstandard items to ensure that a reliable second source is available in case of difficulty with the supplier. Such a policy also provides data that are useful in reviewing internal production and management efficiency.

Making the Decision
Make-or-buy decisions can have a critical effect on the economic health of a firm, even on its survival.
Frequently, these decisions are made at too low a level in the organization. On many occasions, no conscious decision appears to have been made. Things just happen! The decision to make is often weaker than the decision to buy because buy costs are known whereas make costs are estimates. Obviously, the amount of time and effort and the level of managerial attention appropriate are functions of the amount of money involved and the criticality of the item to the firm’s well-being. Normally several departments should be interested and involved in make-or-buy decisions: Production, Purchasing,
Engineering, Finance, and Marketing.
Any of the following situations should precipitate a make-or-buy analysis:
* New product development and modification. Every major component should be reviewed.
* Unsatisfactory supplier performance. If purchasing is unable to develop reliable sources for an item, the item should be reviewed and analyzed to ensure that the specified quantity level is essential and to ensure that suitable substitutes are not available. If the item, as specified, passes these reviews, it becomes a candidate for in-house sourcing.
* Changes in sales. Sales demand that exceeds capacity calls for a make-or buy review of those items produced in house that contribute the lowest ROI. Declines in sales and production should prompt a review of candidates for in-house production.
* Periodic review of previous decisions. Changing costs and other considerations can convert a good make-or-buy decision into a bad one very quickly. Major make-or-buy decisions should be reviewed as a component of the firm’s annual planning process.

Decision process for make or buy
Is the component
core business
Have we design
Have we
Are we
This is the strategic use of resources to perform activities traditionally handled by international staff and their resources. An alternative definition is the buying in of components, sub –assemblers finished products and service from outside suppliers rather than supplying them internally. It is strategy by which an org outstand.
The term “outsourcing” probably refers to buying materials or components from suppliers instead of making then in-house. It also refers to buying materials or components that were previously made in-house. In recent years, the trend has been moving toward outsourcing combined with the creation of supply chain relationships, although traditionally firms preferred the make option by using backward and forward vertical integration. Backward vertical integration refers to acquiring upstream suppliers, whereas forward vertical integration refers to acquiring downstream customers. For example, an end-product manufacturer acquiring a supplier’s operations
that supplied component parts is an example of backward integration. Acquiring a distributor or other outbound logistic providers would be an example of forward integration.
Whether to make or buy materials or components is a strategic decision that can impact an organization’s competitive position. It is obvious that most organizations buy their MRO and office suppliers rather than make the items themselves. Similarly, seafood restaurants usually buy their fresh seafood from fish market. However, the decision on whether to make or buy technically advanced engineering parts tat impact the firm’s competitive position is a complicated one.
Traditionally, cost has been the major driver when making sourcing decisions. However, organizations today focus more on the strategic impact of the sourcing decision on the firm’s competitive advantage.
Generally, organizations outsourcing noncore activities while focusing on core competencies. Finally, the make-or-buy decision is not an exclusive either-or option.
Firms can always choose to make some components or services in-house and buy the rest from suppliers.
3.5 Reasons for buying or Outsourcing
Organizations buy or outsource materials, components, and/or services from suppliers for many reasons.
1. Cost advantage: For many firms, cost is an important reason for buying or outsourcing, especially for supplies and components that are nonvital to the organization’s operations and competitive advantage. This is usually true for
standardized or generic supplies and materials for which suppliers may have the advantage of economies of scale because they supply the same items to multiple users. In most outsourcing cases, the quantity needed is to small that it does not justify the investment in capital equipment to make the item. Some foreign suppliers may also offer cost advantage because of lower labour and/or materials costs.
2. Insufficient capacity: A firm may be running at or near capacity, making it unable to produce the components in-house. This can happen when demand grows faster than anticipated or when expansion strategies fail to meet demand. The firm buys parts or components to free up capacity in the short term to focus on vital operations. Firms
may even subcontract vital components and/or operations under very strict terms and conditions in order to meet demand. When managed properly, subcontracting, instead of buying, is a more effective means to expand short –term capacity because the buying firm can exert better control over the manufacturing process and other
requirements of the component parts or end products.
3. Lack of expertise: The firm may not have the necessary technology and expertise to manufacture the item. Maintaining long term technological and economical viability for noncore activities may be affecting the firm’s ability to focus on core competencies.
Suppliers may hold the patent to the process or product in question, thus precluding the make option, or the firm may not be able to meet environmental and safety standards to manufacture the item.
4. Quality: Purchased components may be superior in quality because suppliers have better technology, process, skilled labor and the advantage of economies of scale.
Suppliers may be investing more in research and development. Suppliers’ superior quality may help firms stay on top of product and process technology, especially in high-technology industries with rapid innovation and short product life cycles.
An organization also makes its own materials, components, service and/or equipment inhouse for many reasons. Let us briefly review these reasons;
1. Protect proprietary technology: A major reason for the make option is to protect proprietary technology. A firm may have developed an equipment, product, or process that needs to be protected for the sake of competitive advantage. Firms may choose not to reveal the technology by asking suppliers to make it, even if it is patent.
An advantage of not revealing the technology is to be able to surprise competitors and bring new products to market ahead of competition, allowing the firm to charge a price premium.
2. No competent supplier: If the component does not exist, or suppliers do not have the technology or capability to produce it, the firm may have no choice but to make an item in-house, at least for the short term. The firm may use suppliers development strategies to work with a new or existing supplier to produce the component in the
future as a long-term strategy.
3. Better quality control: If the firm is capable, the make option allows for the most direct control over the design, manufacturing process, labour and other inputs to ensure that high quality components are built. The firm may be so experienced and efficient in manufacturing the component that suppliers are unable to meet its exact
specifications and requirements. On the other hand, suppliers may have better technology and processes to produce better quality components. Thus, the sourcing option ensuring a higher quality level is a debatable question and must be investigated thoroughly.
4. Use existing idle capacity: A short term solution for a firm with excess idle capacity is to use the excess capacity to make some of its components. This strategy is valuable for firms that produces seasonal products. It avoids laying off skilled workers and, when business picks up, the capacity is readily available to meet the demand.
5. Control of lead-time, transpiration, and warehousing cost: The make option provides easier control of lead time and logistical costs since management controls all phases of the design, manufacturing and delivery process. Although raw materials may have to be transported, finished goods can be produced near the point of use, for instance, to minimize holding cost.
Outsourcing can be described as the transfer of activities, that were previously conducted in-house, to a third party. Ellram and Billington (2001) see outsourcing primarily as the transfer of the production of goods or service that had been performed internally to an external party.
Outsourcing means that the company divests itself of the resources to fill a particular activity to another company to focus more effectively on its own competence.
The difference with subcontracting is the divestment of assets, infrastructure, people and competencies.
3.6 Types of outsourcing
There are two different types of outsourcing namely :
· turnkey integral and
· Partial outsourcing.
Turnkey outsourcing applies when the responsibility for the execution of the entire function (or activities) lies with the external supplier. This includes not only the execution of the activities but also the coordination of these activities. Partial outsourcing refers to the case in which only a part of an integrated function is outsourced.

The advantages and disadvantages of Turnkey and partial outsourcing
Advantages Disadvantages
Turnkey outsourcing
Buyer has minimal responsibility for outsource processes.
The buyer has limited influence on the determination of the price and little insight into cost structure of provider.
Buyer doesn’t need to have experience with similar projects.
The buyer has limited influence on the staff, technology and materials used an their quality.
The project generally goes smoothly for the buyer.
Large dependence of buyer on provider resulting in high commercial, technical and performance risks.
Partial outsourcing
The buyer has more influence on prices, rates and costs.
The buyer is required to have knowledge of the separate parts of the outsourced
The buyer has more influence on the staff, technology and materials used and their quality.
The buyer is required to have the organizational capacities to coordinate and integrate the outsourced functions/activities.
Specific advantages can result in cost reductions.
Communication and coordination problems between parties involved can be a cause of delay and disappointment.
Optimal usage of knowledge, equipment and experience of third party
Continuous follow-up and monitoring of the supplier relationship is necessary
Increased flexibility: fluctuations in the workload can more easily be absorbed.
Risks of communication and organizational problems during the transfer of activities to a third party.
Outsourcing leads to easier and more focused primary processes in the organization.
Risk of leakage of confidential information
Input through an independent party’s point of view which reduces the risks of introvert
short-sightedness in the organization
Depending on balance of power between parties; inability to execute contractual performance incentives and penalties.
Risk of losing essential strategic knowledge.

3.6 Strategic phase
During the strategic phase three essential questions have to be answered:
· The question relates to the objective of the firm with regard to its intent to outsource a certain activity.
· what activities are considered for outsourcing.
· what qualifications a supplier should be able to meet in order to qualify as a potential future partner for providing the activity concerned must be answered.
The decision to outsource should support and enable the company’s overall strategy. The motives that are cited most are:
1. Focus on core competence.
2. Focus on cost efficiency/effectiveness and
3. Focus on service
This motives and that strategy of the outsourcing company should be aligned. These three motives and the outsourced activities should contribute to this strategy.
The second question relates to what should be outsourced. Two important approaches are used to answer this question;
· The transaction cost approach and
· The core competence approach.
The transaction cost approach is based on the idea of finding a governance structure aimed at arriving at the lowest cost possible for each transaction that is made.
Transaction cost is defined as the costs that are associated with an exchange between two parties. The assumptions of the transaction costs approach is that an exchange with an external party is based upon a contract. The (potential) costs associated with establishing,
Monitoring and enforcing the contract, as well as the costs associated with managing the relationship with the external party, are all considered to be part of the transaction costs as well as the costs associated with the transaction itself. Therefore all of these costs should be taken into account when deciding between make or buy options.
The level of the transaction costs depends upon three important factors. These factors are:
· frequency of the transaction,
· the level of the transaction specific investments and
· the external and internal uncertainty.
The frequency of the transaction is an important factor because the more frequently exchanges occur between partners, the higher the total costs that are involved. The level of the transaction-specific investments also determines the level of transaction costs, because transaction-specific investments are investments that are more or less unique to a specific buyer-supplier relationship.
Examples are investments in specific supplier tooling (such as molds and dies) by a large automotive manufacturer and the change costs involved when choosing a new accountant (internal staff need to get accustomed to the new accountant, the new accountant needs to be thoroughly briefed to get acquainted with the company etc.).
These examples show that investments are made in assets as well as in human capital.
Obviously the higher these investments are, the higher the transaction cost will be. The last factor that determines the transaction costs is the external and internal uncertainty.
Uncertainty is a normal parameter in the decision-making process. It can be defined as the inability to predict contingencies that may occur. The higher these uncertainties, the more slack a supplier wants to have in presenting his proposal and rates, and the more difficult it will be to make a fixed price or lump sum contract that deals with all
uncertainties beforehand.

The outsourcing process
Strategic phase Transition phase Operational phase
Therefore, the higher the level of uncertainty, the higher the transaction costs will be.
The other approach on which an outsourcing decision can be based is the core competence approach. This theory is based, among others, on the work of Quinn and Hilmer (1994). The core competence approach is based on the assumption that, in order to create a sustainable competitive advantage, a company should concentrate its resources
on a set of core competencies where it can achieve definable pre-eminence and provide a unique value for customers … (hence it should) strategically outsource all other activities’ (Quinn and Hilmer, 1994 p43). The important question to be answered here is what are the firm’s core competence. Characteristics of core competence are;
§ Skills or knowledge sets, not products or functions
§ Flexible, long term platforms that are capable of adaptation
§ Limited in number; generally two or three
§ Unique sources of leverage in the value chain
§ Areas where the company can dominate
§ Elements important to the customer in the long run
§ Embedded in the organization’s system
The competencies that satisfy these requirements are the core competencies and provide the firm with its long-term competitive advantage. These competencies must be closely protected and are not to be outsourced. All other activities should be procured from the markets if these markets are totally reliable and efficient.
Long and Vickers-Koch (1992) distinguish five categories of a firm’s activities, instead of two categories, core or non-core, (Quinn and Hilmer 1994). These five categories are;
§ Cutting edge activities. The activities that determine the competitiveness of the organization from a long term perspective.
Assessment and approval
Competence analysis
Contract negotiation
Project execution and transfer
Managing relationship
Contract termination

The Outsourcing Process
§ Core activities. The activities that create the foundation and main process for the organization and its possible competitive advantages.
§ Support activities. Those activities that are directly connected to the core competences.
§ Separate activities. The activities that are part of the main process, but easily separated from that process and not related to the core competences.
§ Peripheral activities. The activities that do not concern the main process.
Anorld (2000) also makes a further distinction in a firms activities. He distinguishes between:
§ Company core activities. Activities that are directly to the core activities.
§ Close-core activities. The activities that are directly related to the core activities.
§ Core distinct activities. The supporting activities.
§ Disposable activities. Activities with general availability.
Both studies imply that the outsourcing decision framework based upon the work of Quinn and Hilmer (1994) needs adjustment. Anold (2000) has developed a general model for whom the function should be outsourced. After the decision to outsource has it is essential that the right supplier is chosen. A suppler has to be selected who has the
necessary technical and managerial capabilities to deliver the expected and required level of performance. Also the supplier should be able to understand and be committed to these requirements.
The supplier selection process is key to the success of the buyer-supplier relationship.
Companies that make extensive use of supplier selection and monitoring practices in supplier partnership seem to be more successful than the companies. An adequate supplier selection model is crucial for the success of the outsourcing decision.
Momme and Hvolby (2002) present a four-phase model (figure below). This model gives guidance on how to identify, evaluate and select outsourcing candidates and therefore is an appropriate tool to use in the strategic phase . it also gives a brief guidance for the transition (phase 2 and 3) and the operational phase (phase 4), but needs to be elaborated for that purpose.

Many companies attempt to track down new technologies and product through systematic market research. The results of this research are usually translated by the marketing department into several new products idea which are then discussed with research and development and the engineering department. These discussions are often the starting point for projects aimed at improving current products or the developments of new ones.

4.2 The process of new product development
Depending on the nature of the product and the type of company the development process, starting with conceptualization and ending with introduction to the market will pass through several stages
· Products development. In this phase the idea supplied by the marketing department are translated into a few concrete, but still relatively abstract.
Functional design. Such designs describe the functions that the product to be developed will have to fulfill for the user. From these functional designs, the most promising design is selected to be elaborated further.
· Product design. In this phase the functional design is worked out in detail – proposals are made about the materials to be used. The physical properties that the product must satisfy. E t c. Often several products designs are produced which meet the functional design and these can be presented to potential clients at an early stage. In order to get the first reaction and impressions concept testing. This information enables the engineers to focus on the most promising design.
Subsequently the product design is elaborated in the form of prototype can also be presented to potential buyers and users.
· Production planning. The manufacturability of the product has already been considered during the product design stage the production requirements are taken into account. After the prototype has been approved. Preparation for production can be started. If it concerns a technically complex products this phase may take a lot of time and it may be necessary to purchase new production equipment. The capacity requirements of this new equipment will have to be determined based on.
Among other things, Market exploration and sale forecasts. Production planning frequently ends with a number of production series
· Start of the production. Products from the pre production series are subjected to through examination: based on the result of this examination the product design or the setting of the machines might be adopted so as to limit future production and quality problems to a minimum. One of the problems that might occur in this phase is changing the specifications. Every change is documented in a change – order send by the engineering department to the purchasing department in order to discuss this with the supplier. This phase means a lot of work for the purchaser
involved in the project.
Every change in the specification has to be approved by the supplier, the consequences for the total costs have to be analyzed, the change product needs to be tested again, etc.
This is one of the reason why it takes so long for a new product to become available for customers. Only when the problem have been taken care of, can actual production commence.
It goes without saying it is possible to refine this sequence of steps, depending on the nature of the product and the type of company. As the development process advances, the specifications become more rigid and it becomes more difficult to introduce changes.
The consequence for purchasing is that its latitude decreases and the cost of technical changes introduces at a later stage in the process become higher.
Once a suitable material or construction has been found, tested and approved, the willingness to consider any alternatives (in the form of a different material, component or a substitute product from another supplier) will be limited at a later stage. Any alternative will have to be tested and approved again, which implies not only a lot of
work but also risks. This desire to reduce technical risk may result in specific components being channeled in the direction of one particular supplier because of positive experiences with this supplier in the past.
The buyer is put in a difficult situation since it is awkward to negotiate with such suppliers. Based on his job perceptions, a buyer will always attempt to have more than one supplier to fall back on. For the buyer to go out into the market, the product preferably must be described in terms of functional specifications rather than in terms of
supplier or brand specifications. There exists therefore, a kind of natural conflicts in the way the engineers and buyers operate which can only be solved by cross functional development teams.

4.3 communications between buyers and first tier suppliers
Large manufacturers communicate with their first tier suppliers in product development as follows:
¨ Purchasing engineering. This is a specialist function to provide the liaison between the engineering department and the purchasing department. Purchasing engineers are members of the design teams, where they will evaluate designs against purchasing-specific criteria. It is their task to bring in specific supply market knowledge and new supplier at an early stage of design.
¨ Early supplier involvement (ESI) suppliers who have proved in the past to be ‘best-in-class’ are invited to participate in the company’s development projects at an early stage. In this way they are able to criticize future designs, suggest alternative materials, come up with ideas for more efficient manufacturing, etc as a
stage where engineering changes can be made without severe cost consequences.
¨ Residential engineering. A next step is to co-locate engineers from the suppler on a more or less permanent basis within the organization in order to work on design or.

4.4 benefits of early supplier involvement
In accessing the benefits of early supplier involvement, companies need to differentiate between short-term and long-term benefits (Van Echtelt, 2004).
Short-term benefits may result from improved product quality, reduction of product cost, reduction of development time and reduction of development cost. These benefits result from the supplier’s in-depth knowledge of components and technologies, which enables them to match component designs better with their manufacturing capabilities.
Long-term benefits may consist of more efficient and effective collaboration in future new product development projects, the alignment of future technology strategies, a better access to the technology resources of the supplier and the contribution of suppliers to product differentiation.
Involving buyers in development processes at an early stage can result in contribution of new knowledge and better understanding of:
· Construction
· Suitable materials
· Suppliers
· Supplier knowledge
Involving the supplier in new product development can also result in considerable savings.
The following shows the degree of design complexities with each of product design stage.

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