Operations Management – An overview, Definition of production and operations management, Production
Cycle, Classification of operations, New Product Development, Product Design, Plant Location, Layout
Operations Management – An overview
Most organizations, including not for profit organizations can be described as production systems.
These organizations transform or convert a set of inputs, such as materials, labor and equipment into one
or more outputs, such as automobiles, computer, legal services, health care services or electricity.
The outputs of a production system are normally called products; these products may be tangible goods,
intangible services or a combination.
Examples of Production Systems:-
Hungry Customers Prepare Food
High School Grads Transferring
Understanding Goods and Services
and Assembly Automobiles
A good is a physical that you can see, touch, or possibly consume. Examples of goods include oranges,
flowers, televisions, soap, airplanes, fish , furniture, coal, lumber, personal, computer, paper and industrial
A durable good is a product that typically lasts at least 3 years. Vehicles, dishwashers and furniture are
some examples of durable goods.
A non durable good is perishable and generally lasts for less than 3 years.
A service is any primary or complementary activity that does not directly produce a physical product.
Similarities between Goods and Services
1. Goods and services provide value and satisfaction to customers who purchase and use them.
2. They both can be standardized or customized to individual wants and needs.
3. A process creates and delivers each good or service, and therefore, Operations Management is a critical
Differences between Goods and Services
Goods are tangible while services are intangible.
Customers participate in many service processes, activities and transactions.
The demand for services is more difficult to predict than the demand for goods.
Services cannot be stored as physical inventory.
Service management skills are paramount to a successful service encounter.
Service facilities typically need to be in close proximity to the customer.
Patents do not protect services.
Production of Goods and Services
Goods are tangible items that can be touched or held.
Production systems that produce goods are often referred to as manufacturing systems and the production
of goods is called manufacturing.
Some common examples of manufactured goods are chemicals, automobiles, steel, computers, airplanes,
beverages, packaged food and furniture.
Services are intangible products that satisfy some need of a consumer, including the enhancement of a
Production systems that produce services are referred to as service systems.
Health care services, legal assistance, financial services, accounting services, educational instruction and
personal transportation are examples of service products.
They enhance the consumer’s life in some way and serve a useful function, but they cannot be touched or
Some services enhance goods, such as cargo transportation, which makes a good available at a more
desirable location; warehousing services, which makes a good available at a more desirable time.
Products can also be a combination of goods and services. Restaurants produce the tangible product of a
meal, along with the intangible services of delivery, cleaning of dishes and a pleasant environment.
Some Important differences between the production of goods and the production of services:-
1. Systems that produce tangible goods usually rely more heavily on raw material inputs than do service
2. Goods usually can be stored for later use and transported over space before use, whereas services usually
3. Consumers of goods have little, if any, direct involvement with the production of the goods. In contrast,
most services require close involvement of the consumer with the production process, and in many cases
actual physical contact is essential (For example, most health care services require the patient to
participate personally with doctors, nurses and technicians; a doctor cannot give a physical examination
or remove a tumor without the patient’s participation. Similarly, air transportation requires the customer to
be on the airplane to obtain the services.
4. The production of goods can be separated from the consumer in space and time more easily than can the
production of services.
Functional Units of the Organization
The 3 primary functions are the marketing, financial and operations functions.
The marketing function serves to identify and/or create demand for the organization’s products.
The financial function, which includes accounting activities, provides the financial resources necessary
to produce, market and distribute the organization’s products.
The Operations function is responsible for producing the products and distributing them to customers.
What is Operations Management?
Production and operations management (POM) is defined as the design, operation and improvement of the
transformation process, which converts the various inputs into the desired outputs of products and services.
The term ‘production and operations management’ is being increasingly replaced by simply operations
management, as the production function relating to the manufacturing organizations has become a part of
operations. Operations management is a broad term which includes manufacturing as well as service
Operation management is the science and art of ensuring that goods and services are created and delivered
successfully to customers. The principles of Operations Management help one to view a business enterprise as a
total system, in which all activities are coordinated, not only vertically throughout the organization, but also
horizontally across multiple functions.
Operations management is a discipline and profession that studies the process of planning, designing and
operating production systems and subsystems to achieve the goals of the organization.
4 aspects of the definition:1. Operations management deals with the process. A person need not hold the job title ‘operations manager’
or ‘production manager’.
Production schedulers, quality assurance supervisors, materials managers, department supervisors and
store managers are primary operations managers.
2. The term management should be interpreted broadly to include designing the system and performing all
activities necessary to operate the system, including directing personnel and acquiring materials and
3. Subsystems- Organizations have many subsystems that provide products to other parts of the production
For eg. The cost accounting department for an auto manufacturer provides products (reports and various
accounting information) to other units of the company, even though its products do not go into the final product
(reports and various accounting information) to other units of the company, even though its products do not go
into the final product, automobiles. However, the cost accounting department is a production subsystem and the
manager of the department is an operations manager, even though the manager is part of the accounting function
and has the title ‘cost accounting manager’
4. Goals of organization can be-efficiency, productivity and cost reduction
The primary goals of most businesses are to earn a steady (and growing) stream of profits and to
maintain long term demand for their products so as to stay in existence.
The decisions made by operations managers influence the revenue component of the profit
equation as well as the cost, and they affect the long term demand for the organization’s products.
Not for profit organizations commonly have as their goal to deliver cost effective levels and types
Reaching the Goals
Operations decisions should be made and implemented
So as to achieve the broader goals of the organization, such as profitability and growth, or, for not for
profit organizations, better public service.
Every organization should have a strategy that reflects its mission and defines its organizational goals,
policies and performance measures precisely.
Each functional unit- marketing, finance, operations and so on should have its own strategy, which is
designed to support the organization’s strategy and to enhance the ability of the organization to achieve its
Equipment and facilities
Locational Services (Transportation)
Storage Services (Warehousing)
Government Services (State, Local)
Outputs of a Production System
IMPORTANCE OF POM
* Effective control of the conversion process of inputs into outputs (e.g., fewer defect output, less
wastage of material inputs, effective allocation of staff, will lead to more output per unit time).
** Higher productivity leads to higher profits – How?
Improves our ability to meet customer needs:
* Ensure provision of high quality products and services at reasonable prices (not just cheap
* Enables us to provide service to our target customers better than our competitors.
* Meeting customer needs is crucial to long term survival of the firm.
Central to the building of a brand name/reputation of the company/firm, as a competitive weapon:
* High-quality product/service provider
* Low cost/good value producer/service provider (e.g., Sony & Panasonic)
* Fast delivery or response/lead time (e.g., Dominos Pizza for just 30 minutes)
Decision Making in POM
1. Strategic Decisions
These decisions are of strategic importance and have long-term significance for the organization.
Examples include deciding:
the design for a new product’s production process
where to locate a new factory
whether to launch a new-product development plan
These decisions are necessary if the ongoing production of goods and services is to satisfy market
demands and provide profits.
Examples include deciding:
how much finished-goods inventory to carry
the amount of overtime to use next week
the details for purchasing raw material next month
3. Control Decisions
These decisions concern the day-to-day activities of workers, quality of products and services, production
and overhead costs, and machine maintenance.
Examples include deciding:
labor cost standards for a new product
frequency of preventive maintenance
new quality control acceptance criteria
Responsibilities and Challenges facing Operations managers
Design and Planning
Process design and choice of technologies
Facility design and layout
Job design and work organization
Product Quality Assurance
Operation and Control
Aggregate/ Intermediate term planning
Materials management and inventory control
Scheduling personnel, equipment, jobs
Distribution and logistics
1. Product Design
The design characteristics of the product will affect the way the production system should be designed
Eg. The variety of items offered by a restaurant and its willingness to customize orders will affect the
food preparation process, the equipment, materials and personnel required and the cost of preparation.
2. Capacity Planning and Process Design
Two fundamental design issues are how to produce the firm’s products and how much production
capacity to have.
The design of the production process is crucial to supporting the marketing strategy of the organization.
For eg. A company that intends to compete primarily through low price can often utilize an inflexible but
efficient production process, whereas a company that plans to offer customized products needs production
The design of the production process requires decisions to be made regarding the arrangement of
individual production activities, the division of work, and specialization of labor, and the choice of
equipment and technology.
Some of the capacity decisions facing operations managers are of great strategic importance, such as
deciding how many television sets a new factory should be able to produce per year, how many airplanes
to have in a commercial fleet, or how much floor space a grocery store should have.
Other capacity decisions are tactical, such as how many photocopiers to have in a building or how many
customer service representatives to have answering customer calls.
3. Facility Location and Layout
The decisions on where to locate a factory, restaurant, policy station, or school have long term strategic
significance because they determine how much it will cost to make products and how well customers can
Decisions about the internal design of facilities range from determining the layout of a complete
manufacturing process to choosing where to display certain products in a retail store, how to arrange
different items in a warehouse, where to locate a computer lab on university campus, or where to locate a
photocopier in a building.
4. Job Design and Work Organization
The choice of a production process directly affects the number and skill level of personnel required.
Some major issues facing managers are the design of jobs, the development and use of work standards,
the organization of work, and the role of personnel in producing high quality products.
For eg, a constant issue in job design is how many tasks and responsibilities a job should include.
There are both advantages and disadvantages to having jobs with a small number of well defined tasks
versus jobs having many tasks.
5. Product Quality
Some companies compete primarily with respect to price. They often establish a minimum acceptable product
quality and then try to minimize the production cost while achieving it. Other companies compete primarily in
terms of product quality. They focus on achieving the highest quality product in the market while keeping cost
within some limit.
6. Coordinating Production Resources and Demand
Managers can execute short term operations more efficiently when intermediate term plans have been
made several months in advance to match production resources with anticipated product demand.
These intermediate term plans coordinate personnel decisions, such as hiring, training, layoffs and
overtime, with production scheduling, inventory decisions and subcontracting.
7. Managing Materials and Inventories
Important questions to consider are what to buy, from whom to buy, when to buy and how much to buy
For eg. Should a company buy one month’s supply of paper every month or one year’s supply once a
Should a company increase the amount it purchases from a supplier to take advantage of a quantity
8. Scheduling Personnel, equipment and work
Scheduling of personnel, machines, production jobs and projects is a never ending task.
A bank has customer demands that vary considerably from day to day and over the course of a day. How
many full time and part-time workers should the bank employ, what days should each one work, when
they should start work, how many hours should they work, and when should their meal breaks be
A company’s sales department is moving to a larger building. The existing office must be vacated no later
than Dec 10. What tasks, such as ordering new phone lines and moving computers, have to be done, who
should do them, and when must each task be started so that the move is accomplished by the deadline
without interrupting ongoing sales activities?
The prime objectives of most production managers are to ensure customer satisfaction by meeting due dates and
reducing the costs of production. For example, fertilizer industry production managers are generally found to be
interested in minimizing wastage. Ensuring better working conditions for production employees was given low
Skills and Knowledge needed to be a successful operations manager
Operations management is concerned with the process of how to design, plan and operate production
To be an effective operations manager, it is important to be sensitive to the physical and psychological
characteristics of employees and to interact well with people on a personal bias.
3 other skills needed:1. General knowledge of production processes
2. Knowledge and understanding of operations management principles
3. Working knowledge of decision making tools and techniques to help solve problems that occur in
The Japanese Production System is based on 3 principles:
Quality comes fast
Improve product and process quality continuously
Eliminate all forms of waste
Operations as a Competitive weapon
The Operations strategy needs to be proactive instead of reactive; the characteristics and competitive advantages
of the operations function should influence which new products to make, which markets to serve and especially
along which dimensions the company can compete most effectively.
The following examples show how operational strengths can be used effectively as competitive weapons.
1. Product/ Process Expertise- A Company can have special expertise in making certain products. Eg. Detroit
Hyatt Regency Hotel has Japanese speaking employees to assist Japanese customers, a service few other U.S.
2. Quick Delivery- A Company can have a production process and capacity that allows it to produce a product and
satisfy a customer’s request quickly. Eg. Same day dry cleaning
3. Short Product Cycle- Research has shown that the first company to enter a market gains a significant market
share advantage over subsequent competitors.
- A McKinsey and Company study showed that a delay of 6 months in bringing a product to market can cost a
company one third of the product’s lifetime profit potential.
- The speed of product introduction is greatly dependent on the production system; those companies that can put
new products into production quickly obtain this advantage.
- Hewlett Packard-has dominated the laser printer industry because it was the first in the market, and it has
continued to bring out new products quickly before its competitors can catch up.
4. Production Flexibility- Some companies specialize in having highly flexible and rapidly responsive operations.
Eg. Dell Computers-deliver customized personal computer within 5 days of ordering.
5. Low-Cost Process- A company with an especially efficient production system or access to a low cost resource
may be able to make standard products at lower cost than its competitors.
Eg. Southwest Airlines has become an industry leader by developing the lowest cost passenger airline system in
6. Convenience and Location- Facility location can provide substantial competitive advantage, especially when it
is interwoven with the marketing strategy.
Eg. American Express Corporation competes primarily based on location convenience.
It has more offices located throughout the world to replace lost or stolen travellers checks and to provide other
travel services than its competitors.
This convenience allows American Express to charge higher fees for many of its services.
Every organization is concerned with building and sustaining a competitive advantage in its markets.
A strong competitive advantage is driven by customer needs and aligns the organization’s resources with
its business opportunities
A strong competitive advantage is difficult to copy, often because of a firm’s culture and habits
Competitive Priority- Cost
Almost every industry has a low price market segment.
Low cost strategy firms: Honda Motor Company, Wal Mart, Southwest Airlines
Southwest Airlines is one of the few airlines that have been profitable during the 2001-2005 period. A low
cost strategy can reshape industry structure such as in the airline industry.
Competitive Priority- Quality
1. Businesses offering premium quality goods usually have large market shares and were early entrants into
2. Quality is positively and significantly related to a higher return on investment for almost all kinds of
3. A strategy of quality improvement usually leads to increased market share, but at a cost in terms of
reduced short-run profitability.
4. High goods quality producers can usually charge premium prices.
Improved Quality of design
Higher perceived value
Increased market share
Higher Perceived value -> Higher Prices
Increased market share -> Increased revenues -> Higher Profitability
Competitive Priority- Time
1. Time is perhaps the most important sources of competitive advantage
2. Customers demand quick response, short waiting times, and consistency in performance.
3. Many firms use time as a competitive weapon to create and deliver superior goods and services such as
Dell, CNN, FedEx, Wal Mart
Reduction in flow time serve 2 purposes:-
First, they speed up work processes so that customer response is improved. Deliveries can be made faster
and more often on time.
Second, restrictions in flow time can be accomplished only by streamlining and simplifying processes and
value chains to eliminate non value added steps such as rework and waiting time.
Flow time reductions often drive simultaneous improvements in quality, cost, and productivity (Hyundai
Motor Co. )
Competitive Priority- Flexibility
Mass Customization is being able to make whatever goods and services the customer wants, at any
volume, at any time for anybody and for a global organization, from any place in the world.
Mass customization requires companies to align their activities around differentiated customer segments
and to design goods, services and operations around flexibility.
High-levels of flexibility might require special strategies such as modular designs, interchangeable
components and postponement strategies.
Flexible operations require sharing manufacturing lines and specialized training for employees.
Flexible operations may also require attention to outsourcing decisions, agreements with key suppliers
and innovative partnering arrangements, because delayed shipments and a complex supply chain can
Levi’s jeans that are cut to exact measurements
Personal web pages
Harley Davidson bikes
Personal weight training programs
Cell phone/laptops customized
Competitive Priority- Innovation
Innovation is the discovery and practical application or commercialization of a device, method or idea
that differs from existing norms.
Innovations in all forms encapsulate human knowledge.
Innovations take many forms, such as:
Physical goods such as telephones, automobiles, refrigerators, computers, optical fiber, satellites
and cell phones
Services such as self-service, all suite hotels, health maintenance organizations, and internet
Manufacturing such as computer aided design, robotic automation and smart tags
Manufacturing practices such as customer satisfaction surveys, quantitative decision models and
It is the set of activities develop to transform a set of input element (men, material, money,
machinery) into a specified set of output element like finished product and services in proper
quality and quantity to satisfy customer need and satisfaction.
The transformation of input element through production may be of integrated (convert raw material to
finished product), disintegration (no. of component join to form new product) and it may provide services.
Production cycle (procedure) starts with the customer and ends up with satisfying the need of the
customer by delivering their required product.
It’s a frame work which describe how and from where the production started and when the various
operations are interrelated to each other and how one is depend on other and from where its
returns to its first step where it is initiated.
STEPS OF PRODUCTION CYCLE
THE PRODUCTION CYCLE/PROCEDURE INVOLES THE FOLLOWING STEPS
PREPARATION OF BUDGET AND ENGG: DEPT: PREPARE DETAILS
STOCK AND DELIVERY OF CUSTOMER
1. SALES FORCASTING/ MARKET RESEARCH
It is the very first or initial method i-e the sales enquiry is received by sales department.
This enquiry may come from company's sales men, from agents, company's advertisement in order
to get the customer need and necessities.
This information give the limiting dimension in design and consumer relation to modification.
The sales-forecast report is prepare and submitted to the top management.
2. PREPARATION OF BUDGET & ENGG: DEPT: PREPARE DETAIL
The finance department prepares production budget in construction with the production
The proposed budget by finance department and sales forecasts, are closely interrelated and
management takes decision through these two regarding the annual or semi annual quantity to be
The engg: department is instructed to prepare drawing, part list and specification or check or
modify existing one.
The manufacturing budget is then adjusted according
3. PRODUCTION PLANNING ACTIVITY
As the technical information is received from engg: department (including drawing, part list,
specifications, standards etc) the production, planning and control activity.
The basic function of this activity is to well informed about availability of material and expected
delivery of material which is already order.
The production planning activity is concerned with the make of detailed schedule of activity.
It is also concerned to check the inventory levels in order to determine the procurement of material
and standard parts that have to be issued.
The production planning section supplies complete data on methods, machine loading, and
utilization, as well as production schedules, to the control section for dispatching
It is the process of setting production activities in motion through release of orders and instructions.
Its authorizes the start of production activities by releasing material, components, tools, fixture and
instruction sheet to the operator.
At this stage the material process and assembling is inspected by quality control department.
It gives details of specification and if specification are not made accordingly than the product is
rejected and if the specification is OK than the product is ready or accepted.
Final inspection of the parts carried out before product leaves the shop and moves to the finished
parts or products store.
When the detail production orders specifying how when, where the operation should be perform by
the production control section the control function are carried out through out the manufacturing
period, and progress is constantly compared with the planned schedule so that the suitable
modification can be considered and incorporate when required.
Its gives a permanent contact b/w the control section and the manufacturing departments, to
facilitate the a constant flow of information and instructions.
Evaluation of the production operation is the main pillar of the control function and has to carried out
both during and after these operations.
Inspection reports are one facility of Evaluation, they form a basis for corrective actions in the processes
or methods, and sometimes even for modifications in the specifications of raw materials.
8. STOCK AND DELIVERY TO CUSTOMER
When the product is completely made then finish product is transferred after inspection to stock for
selling purpose in the local as well as international markets or regular customers.
The last stage of production cycle at which the product is deliver to the customer.
And the customer his self after comparing the product characteristic with of its competitors and
with his exceptions is ready to contribute his views and reactions to market research means again
production start that’s why it is called production cycle
PRODUCTION CYCLES WITH THE INTERACTION OF CUSTOMER AND SUPPLIER’S
GRAPHICAL REPRESENTATION OF PRODUCTION CYCLE
Classification of operations (Scope)
Product Selection& Design
Process Selection & Planning
Layout & Material Handling
Operations Planning & Control
Inventory & Quality Control
Maintenance & Replacement
CLASSIFICATION OF PRODUCTION SYSTEM
Production systems can be classified as Job-shop, Batch, Mass and Continuous production systems
1. Job-shop production
Job-shop production are characterised by manufacturing one or few quantity of products designed and produced
as per the specification of customers within prefixed time and cost. The distinguishing feature of this is low
volume and high variety of products.
A job-shop comprises of general-purpose machines arranged into different departments. Each job demands unique
technological requirements, demands processing on machines in a certain sequence.
This process can handle a larger variety of products than the batch process. The products may be so different from
each other that their processing requirements may be varied processes, on different machines, in different
sequences, and with different processing times. The batches of items produced in job shop may vary in size from
large, comprising many units, to very small, comprising a single unit. For example, in a restaurant every customer
gives a different order of dishes, which are prepared by different cooks using different utensils, ovens etc and
different recipes. Job shop results in low volume of output at a given time and thus costlier products compared to
Job-shop Production is characterised by
1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product, capacities for
each work centre and order priorities.
Following are the advantages of Job-shop Production:
1. Because of general purpose machines and facilities variety of products can be produced.
2. Operators will become more skilled and competent, as each job gives them learning
3. Full potential of operators can be utilised.
4. Opportunity exists for Creative methods and innovative ideas.
Following are the limitations of Job-shop Production:
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
4. Larger space requirements
This process is adopted when batches or lots of items are to be produced using the same set of machines in the
same sequence. For example, in a bakery, a batch of salted biscuits may be made in the oven, followed by a batch
of chocolate, followed by a batch of bread and so on. The equipment used is the same in all the cases with the
same processing steps, but cleaning and adjustments of the equipment may be required after each production run.
Batch Production is characterised by
1. Shorter production runs.
2. Plant and machinery are flexible.
3. Plant and machinery set up is used for the production of item in a batch and change of set up is required for
processing the next batch.
4. Manufacturing lead-time and cost are lower as compared to job order production.
Following are the advantages of Batch Production:
1. Better utilisation of plant and machinery.
2. Promotes functional specialisation.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.
Following are the limitations of Batch Production:
1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
3. Work in process inventory is higher compared to continuous production.
4. Higher set up costs due to frequent changes in set up.
Manufacture of discrete parts or assemblies using a continuous process are called Mass Production. This
production system is justified by very large volume of production. The machines are arranged in a line or product
layout. Product and process standardisation exists and all outputs follow the same path.
Mass Production is characterised by
1. Standardisation of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back tracking.
8. Production planning and control is easy.
9. Material handling can be completely automatic.
Following are the advantages of Mass Production:
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilisation due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.
Following are the limitations of Mass Production:
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.
The continuous process as the name suggests is continuous in nature. The set-up time for starting such processes
is usually very long, and once started, they continue for a long duration. The products produced by such a process
are highly standardized with almost no variety, and are measured on a continuous basis (tonnes per day, meter
lengths per day etc) rather than in terms of discreet units. For example, urea, chemicals, steel, plastic, sugar,
textiles, detergents, etc. industries are based on the continuous process and are known as process industries.
Continuous Production is characterised by
1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.
Following are the advantages of Continuous Production:
1. Standardisation of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilisation due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.
Following are the limitations of Continuous Production:
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.
New Product Development
Why the emphasis on new goods and services: Organizations today are under more
pressure than ever before to develop new goods and services and the processes necessary
to produce and deliver them. Two of the major causes for this increased emphasis on
developing new products are (a) increased competition and (b) advances in the
a) Increased competition: The reasons for this increase in foreign competition are many,
Advances in IT
A trend to lower trade barriers and the creation of trade organization.
The faster speed at which goods can be transported.
Advances in technology: Rapid advances in technology are causing many products
to become obsolete more quickly. Computers are good example of products that have
been significantly impacted by advances in technology.
The benefits of introducing new product faster:
1. Greater Market Share: That firm with the ability to bring new products to market
quickly has several advantages over their slower competitors.
2. Price premiums: When a firm is the first to bring a new product to market, it has
little or no competition, and can therefore charge premium prices.
3. Quick reaction to competition: To bring new products to market quickly is also in
a much better position to respond quickly to a competitor’s surprise announcement
of the introduction of a new product.
4. Set industry standards: For revolutionary products, the first firm into the market
often has the luxury of setting the standards for that industry.
Stages in New product development
Concept development and testing
Market strategy development
1. Idea Generation
The development of a product will start with the concept. The rest of the process will ensure that ideas are
tested for their viability.
Ideas can, and will come, from many different directions. The best place to start is with a SWOT analysis,
(Strengths, Weaknesses, Opportunities and Threats), which incorporates current market trends. This can be
used to analyse your company’s position and find a direction that is in line with your business strategy.
In addition to this business-centred activity, are methods that focus on the customer’s needs and wants. This
Under-taking market research
Listening to suggestions from your target audience – including feedback on your current products’
strengths and weaknesses.
Encouraging suggestions from employees and partners
Looking at your competitor’s successes and failures
2. Idea Screening
The object is to eliminate unsound concepts prior to devoting resources to them.
The screeners must ask these questions:
Will the customer in the target market benefit from the product?
What is the size and growth forecasts of the market segment/target market?
What is the current or expected competitive pressure for the product idea?
What are the industry sales and market trends the product idea is based on?
Is it technically feasible to manufacture the product?
Will the product be profitable when manufactured and delivered to the
customer at the target price?
3. Concept Testing
The organisation may have come across what they believe to be a
feasible idea, however, the idea needs to be taken to the target audience.
What do they think about the idea? Will it offer the benefit that the
organisation hopes it will? or have they overlooked certain issues? Will
there be a demand for the product? Note the idea taken to the target
audience is not a working prototype at this stage, it is just a concept.
4. Market Strategy Development
Includes development of three part strategy plan
Describe the market’s size, structure, and behavior, the planned product positioning, and the sales, market
share, and profit goals for first few years.
Outlines the planned price, distribution strategy, and marketing budget for the first year.
Describes the long-run sales and profit goals and marketing-mix strategy over time.
5. Business Analysis
Estimate likely selling price based upon competition and customer feedback
Estimate sales volume based upon size of market
Estimate profitability and breakeven point
6. Product Development
At this stage the prototype is produced. The prototype will undergo a
serious tests, and will be presented to a selection of people made up of
the the target market segment to see if changes need to be made.
7. Test Marketing
Test marketing involves placing a product for sale in one or more selected areas and observing its actual
performance under the proposed marketing plan
Test marketing means testing the product within a specific
geographic area. The product will be launched within a particular
region so the marketing mix strategy can be monitored and if
needed modified before national launch.
If test marketing is successful the product is ready for national launch. The following
decisions regarding the national launch need to be made
timing of the launch
how the product will be launched
where the product will be launched
will there be a national roll out or will it be region by region?
Product design deals with conversion of ideas into reality. Every business organisation
have to design, develop and introduce new products as a survival and growth strategy.
Developing the new products and launching them in the market is the biggest challenge
faced by the organizations.
Concepts in Product Design
1. Research and Development
The design of new products is done by the Research and Development (R&D) department
of organizations with the help of many other departments.
2. Reverse Engineering
Reverse engineering is the process of carefully dismantling an existing product (of a
competitor) step by step in order to understand the unique underlying concepts. It helps in
designing new products which are better than those of the competitors. In the field of
consumer electronics, Sony Corp. is on the forefront in designing new innovative items
such as the walkman, handycam, digital cameras etc. Many other companies have to
follow the reverse engineering approach in order to break Sony’s monopoly of new
products in the shortest possible time.
Manufacturability implies designing a product in such a way that its
manufacturing/assembling can be done easily. While designing a new product, the
manufacturing capabilities (such as existing machines, equipment, skills of workers etc) of
the organization have to be kept in mind.
Standardization refers to less variety in the design of products i.e. new products are
designed such that there is no major variation from the existing products. For example, all
computers and typewriters have the same arrangement of keys in the keyboard because it
has become a standard consumers are used to. Although many other more efficient
designs of keyboard keys are available, no company is willing to take the risk of deviating
from this standard.
5. Robust Design
Robust design means designing a product that is operational in varying environmental
conditions. For example, if you compare a car with a jeep (a four wheel drive), the jeep is
more robust in design as it can even be used efficiently on hilly areas with poor road
6. Concurrent Engineering
Concurrent engineering is the product design approach in which the design team includes
personnel from the marketing department (to specify the customer requirements),
engineering department (to look at the feasibility of the design), production department
(to suggest if production capability exists for the design), materials department (to give
inputs about material availability according to design specifications), and finance
department ( to suggest financial feasibility of the design) in addition to the design
department. This approach is opposite to the classical sequential product design approach
in which the design process takes place in stages, moving from one department to the
other. Concurrent engineering saves a lot of time and effort unlike the sequential approach
in which feedback between departments, at times leading to rejections of the suggested
designs at later stages, results in the wastage of a lot of time and effort.
7. Computer-aided Design
CAD is a software which helps the designer to make the three dimensional design of a
product on the computer and visualize the design from various angles. In the earlier times,
when CAD softwares were not available, design engineers had to make designs from
various angles ( say, front, back, side, top, bottom views of the product/components) on
paper charts by using rulers and other equipment, which was tedious and time consuming.
The designs made on CAD can be seen at different workstations through intranets
simultaneously . Also, these can be transmitted to distant locations using the Internet.
Plant location or the facilities location problem is an important strategic level decision making for an
organisation. 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 fundamental object of location analysis is to maximize the profits by minimizing the
total cost of production associated with the production process.
• Total costs = Fixed costs + Operational costs
• Fixed costs include expenditure on land, building, machines and other equipments etc.
Operational costs are the expenditure incurred on inputs, transformation process and the
distribution of output etc.
• The contribution of various factors to the total cost will vary form place to place
The location of the plant can have a crucial effect on the profitability of a Project, and the
scope for future expansion. It is difficult to set down rules whereby the problem of facilities
location can be programmed but there are a number of factors which should be considered
when selecting a suitable site. The principal factors which influence the choice of location
1. Proximity to customers (market): Organization may choose to locate facilities close to
their market, not merely to minimize transportation costs, but to provide a better service.
When the customers/markets are located near the plant, products can be easily supplied
to the. This reduces the cost of the product as the transportation cost is not added to it.
The product, thus, competes well with the competitors’ product. Most of the small ancillary
units are located near the big automotive factories
Pune has many such ancillary units because of the presence of big auto factories such as
Bajaj Auto Limited, Kinetic Engineering Ltd etc.
Also proximity to markets allows companies to meet any sudden increase in demand, thus
providing an advantage over competitors located at far off places. The response time to
such demand is of prime importance for service sector organizations such as hospitals,
clinics, nursing homes, post offices, banks, insurance companies etc. These organizations
locate their facilities/offices in high population zones so that they are able to serve a large
number of customers.
2. Integration with other parts of the organisation: If the new plant or facility is one of a
number owned or operated by a single organization or group, it should be so situated that
its work can be integrated with that of the associated units.
3. Availability of cheap, skilful and efficient labour- India and other developing nations appear to have cheap
labour. However, the reality is that labour turns out to be expensive here because it is not efficient when compared
to the labour in developed countries. Multinational companies prefer China over India to set up their global
sourcing bases because the labour in China has become more skilful and efficient as a result of increased
industrial activity in the past few decades.
4. Basic amenities: The area for location of the plant should have water supply lines
managed by the local municipal corporation. Roads up to the factory premises are always
desirable. These basic amenities are very useful even during the construction period of the
plant. Other amenities desired are sanitation facilities such as sewer lines, drainage
5. Availability of transport: It is important that good transport facilities are readily
available. Regions near metro cities have the advantage of good transportation facilities,
as they have good rail, water, and road transportation networks. Cities such as Mumbai
and Chennai have been industrial and business hubs for a long time because of being
located on the seashore.
6. Proximity to raw material- Most textile units are located in Gujarat and Maharashtra
because these are the largest cotton growing areas in the country. Iron and steel plants
are located in Bihar and Orissa because of the large presence of iron ore mines in these
regions. Easy access to coal, the raw material required for power generation in the
process, is an added advantage. Raw material is thus cheaper because of negligible
7. Availability of services
• Disposal of waste
Uninterrupted power supply is a basic requirement of most industries. Some factories have
to set up their own captive power plants if located in areas with power problems. For
example the factories of HINDALCO (ADITYA Birla Group) as well as Kanoria Chemical
Industries Ltd at Renukoot (UP) have their own captive power plants.
8. Environmental and community considerations-
The geology of the area needs to be considered, together with the climate conditions.
Many state governments have strict environmental policies in place, which have to be
followed by the industries operating there.
The Sardar Sarovar Dam project is an example where opposition from the local people had
led to complete disruption in the construction of the dam over the Narmada River. After
the Union Carbide factory disaster in Bhopal, every new factory there faces close scrutiny
on the environmental front.
9 Regional regulations: It is important to check at an early stage that the proposed
location does not violate any local regulations.
10. Room for expansions
11. Safety requirements: Some production units may present, or may be believed to
present, potential dangers to the surrounding neighbourhood. Location of such plants in
remote areas may be desirable.
12. Site cost: As a first charge, the site cost is important, although it is necessary to
prevent immediate benefit from jeopardizing long term plans.
13. Government Policies: The governments of states such as Maharashtra, Gujarat and
Karnataka have been very successful in inducing big business houses to set up their plants
in these states. Pondicherry and Daman and DIU are examples of ‘no sales tax regions’
and therefore, we find that most of the companies have their offices/warehouses located
there.Many state governments promote industrial activities in their regions by creating Industry
Development Zones. Various facilities are provided by the government; e.g., the
governments of Karnataka, Andhra Pradesh and UP have created Software Development
Parks, where facilities such as high-speed internet, servers etc are provided to software
companies at subsidized rates.
Agriculture is one area that gets maximum subsidies from the central as well as State
governments. Various processing plants of agricultural and horticultural products have
these advantages. before locating such plants in a region, the government policies there
must be considered.
14. Special grants, regional taxes and import/export barriers: Certain government and
local authorities often offer special grants, low-interest loans, low rental or taxes and other
inducements in the hope of attracting certain industries to particular locations.
15. Proximity to subcontractors: The presence of small ancillary units manufacturing small components/subassemblies is important for any new factory. If a new auto plant is set up in Gurgoan, where the Maruti Suzuki
plant is already located, it will get the advantage of the subcontractors existing there. These subcontractors can
immideately start supplying the components required by the new plant for starting its production process.
16. Easy availability of cheap land- Land is the basic necessity for the construction of a new plant. Regions such
as UP, Bihar and Orissa may be lucrative for big companies because of this. Still, because of many other factors,
companies prefer costly land near Mumbai, Pune, Ahmedabad etc.
17. Less construction costs- Construction costs of a plant may be low at a particular place due to cheap labour
available there. The construction material may also be cheaper at another place. Such places are obviously
preferred for locating a plant.
18. Residential complexes, schools, hospitals, clubs etc
Usually new factories are given land in remote villages by the state governments. Proper facilities such as
residential complexes, schools, hospitals, clubs etc are not available for the managers of these plants and their
families at such places. Under such situations companies have to create these facilities on their own. The TISCO
factory at Jamshedpur is the first example of this kind in India, where the company has created all such facilities
for its employees. In UP, Indian Telephone Industries (Mankapur), HINDALCO (Renukoot), Indo-Gulf Fertilizers
(Jagdishpur), and Kanoria Chemical Industries are similar examples.
Locating Foreign Operations Facilities
Globalization has made consumers expect the best products at the lowest prices irrespective of where they are
The following factors should be considered while evaluating international location options for a facility.
1. Trade barriers
The government in some countries imposes trade barriers on the import of the products of foreign companies. The
imported products thus become expensive due to import duties imposed and at times unavailable due to
restrictions imposed in the form of quotas. In such situations, foreign companies can overcome these trade
barriers by producing the goods in that country locally.
2. International customers
If a foreign company has a large customer base in a country, it may be beneficial for the company to start
operations locally in that country. This way the company can serve the customers better and thus gain their
3. International competition
If a company’s competitors are starting or already have operations facilities in a country, it is natural for the
company to start operations in that country.
Harsh regulatory measures imposed by the government of a country can be avoided by starting operations
facilities in another country.
5. Additional resources
International locations provide organizations with access to a host of additional resources such as natural
resources, skilled human resources, technologies etc.
6. Lower costs
The overall cost of operations may be lower at certain foreign locations due to low cost of labour, material,
transportation, financing etc.
In order to promote FDI, the central and state governments in certain countries provide industrial infrastructure,
insurance, tax exemptions/reductions, interest free/subsidized loans etc to foreign companies willing to establish
operations facilities in their region.
8. Exploitation of firm-specific advantage
Internationally famous brands and technologies of an organization can easily get established in a new country
when it starts a new base of operations.
9. Economies of scale
More facilities in different countries imply more demand for the products, resulting in the economies of scale due
to the large combined scale of production in all the facilities taken together.
Past learning experiences and benefits from setting up facilities in some countries can be useful in setting up new
facilities in other countries.
11. Power and prestige
The market value of the firm may soar as international operations are deemed prestigious by investors.
12. Offensive in competitor’s home
Initiating operations at the competitor’s home country may at times force the competitor to concentrate more on
the home turf and wind up or downsize its international operations.
Examples of plant location (India)
• Most of the textile mills are found in or near Mumbai and Ahmedabad because of the
humidity conditions that prevail there.
• Sites for nuclear power plants to be located in different parts of the country largely depend
upon environmental, safety, socio-economic and also the engineering factors affecting the
construction and operation of such plants.
• Steel plants are generally located near the Jharkhand, Bengal, Chhattisgarh and Orissa
regions. This choice of site is mainly because of more economical transport of the finished
goods as compared to basic raw materials.
• Similar case is observed in the plants which manufacture cement; such plants are located
near the lime and the coal deposits.
• Namroop and Thal Vaishet, both act as very important sites for the gas-based fertilizer
plants. Coal based fertilizer plants at Ramagundum are located near the source of raw
• Naptha / oil based fertilizer plants at Mangalore, Madras, Cochin have been located near
ports, which act as a great source for the import of the raw materials.
• ‘Proximity to market’ forms a major factor which affects plant location decisions in case of
machine tool industries. In case of such industries, sites are scattered over different parts of
the country such as Ludhiana, Pune, Bangalore, Calcutta, Mumbai etc.
• Information Technology/BPO/Software Industries depend largely on availability of skilled
personnel, infrastructure etc… Because of these reasons most of such organizations operate
in urban areas such as Delhi, Chennai, Hyderabad, Bangalore, Pune etc.
Various models are available which help to identify the ideal location. Some of the popular models
1. Factor rating method
2. Weighted factor rating method
3. Load-distance method
4. Centre of gravity method
5. Break-even analysis.
4.5.1 Factor Rating Method
The process of selecting a new facility location involves a series of following steps:
1. Identify the important location factors.
2. Rate each factor according to its relative importance, i.e., higher the ratings is indicative
of prominent factor.
3. Assign each location according to the merits of the location for each factor.
4. Calculate the rating for each location by multiplying factor assigned to each location with
basic factors considered.
5. Find the sum of product calculated for each factor and select best location having highest
ILLUSTRATION 1: Let us assume that a new medical facility, Health-care, is to be
located in Delhi. The location factors, factor rating and scores for two potential sites are
shown in the following table. Which is the best location based on factor rating method?
The total score for location 2 is higher than that of location 1. Hence location 2, is the best
Weighted Factor Rating Method
In this method to merge quantitative and qualitative factors, factors are assigned weights based
on relative importance and weightage score for each site using a preference matrix is calculated.
The site with the highest weighted score is selected as the best choice.
ILLUSTRATION 2: Let us assume that a new medical facility, Health-care, is to be located in Delhi. The
location factors, weights, and scores (1 = poor, 5 = excellent) fortwo potential sites are shown in the following
table. What is the weighted score for these sites? Which is the best location?
Total patient km per month
Average time per
Land and construction
SOLUTION: The weighted score for this particular site is calculated by multiplying each factor’s weight by its
score and adding the results:
Weighted score location 1 = 25 × 3 + 25 × 4 + 25 × 3 + 15 × 1 + 10 × 5
= 75 + 100 + 75 + 15 + 50 = 315
Weighted score location 2 = 25 × 5 + 25 × 3 + 25 × 3 + 15 × 2 + 10 × 3
= 125 + 75 + 75 + 30 + 30 = 335
Location 2 is the best site based on total weighted scores.
The load-distance method is a mathematical model used to evaluate locations based on proximity
factors. The objective is to select a location that minimizes the total weighted loads moving into
and out of the facility. The distance between two points is expressed by assigning the points to
grid coordinates on a map. An alternative approach is to use time rather than distance.
Suppose that a new warehouse is to be located to serve Delhi. It will receive inbound shipments
from several suppliers, including one in Ghaziabad. If the new warehouse were located at
Gurgaon, what would be the distance between the two facilities? If shipments travel by truck,
the distance depends on the highway system and the specific route taken. Computer software
is available for calculating the actual mileage between any two locations in the same county.
However, for load-distance method, a rough calculation that is either Euclidean or rectilinear
distance measure may be used. Euclidean distance is the straight-line distance, or shortest
possible path, between two points.
The point A on the grid represents the supplier’s location in Ghaziabad, and the point B
represents the possible warehouse location at Gurgaon. The distance between points A and B
is the length of the hypotenuse of a right triangle, or
dAB = Sqrt ((XA – XB)2 + (YA – YB)2)
where dAB = distance between points A and B
XA = x-coordinate of point A
YA = y-coordinate of point A
XB = x-coordinate of point B
YB = y-coordinate of point B
Rectilinear distance measures distance between two points with a series of 90° turns as city
blocks. Essentially, this distance is the sum of the two dashed lines representing the base and side
of the triangle in figure. The distance travelled in the x-direction is the absolute value of the
difference in x-coordinates. Adding this result to the absolute value of the difference in the
DAB = |XA – XB| + |YA – YB|
CALCULATING A LOAD-DISTANCE SCORE
Suppose that a firm planning a new location wants to select a site that minimizes the distances that loads,
particularly the larger ones, must travel to and from the site. Depending on the industry, a load may be shipments
from suppliers, between plants, or to customers, or it may be customers or employees travelling to or from the
facility. The firm seeks to minimize its load distance, generally by choosing a location so that large loads go short
distances. To calculate a load-distance for any potential location, we use either of the distance measures and
simply multiply the loads flowing to and from the facility by the distances travelled. These loads may be
expressed as tones or number of trips per week. This calls for a practical example to appreciate the relevance of
the concept. Let us visit a new Health-care facility, once again.
ILLUSTRATION 3: The new Health-care facility is targeted to serve seven census tracts
in Delhi. The table given below shows the coordinates for the centre of each census tract,
along with the projected populations, measured in thousands. Customers will travel from
the seven census tract centres to the new facility when they need health-care. Two locations
being considered for the new facility are at (5.5, 4.5) and (7, 2), which are the centres
of census tracts C and F. Details of seven census tract centres, co-ordinate distances along
with the population for each centre are given below. If we use the population as the loads
and use rectilinear distance, which location is better in terms of its total load-distance
SOLUTION: Calculate the load-distance score for each location. Using the coordinates from
the above table. Calculate the load-distance score for each tract.
Using the formula DAB = |XA – XB| + |YA – YB|
Summing the scores for all tracts gives a total load-distance score of 239 when the facility is located at (5.5, 4.5)
versus a load-distance score of 168 at location (7, 2). Therefore, the location in census tract F is a better location.
Center of gravity
Center of gravity is based primarily on cost considerations. This method
can be used to assist managers in balancing cost and service objectives. The
center of gravity method takes into account the locations of plants and
markets, the volume of goods moved, and transportation costs in arriving at
the best location for a single intermediate warehouse.
The center of gravity is defined to be the location that minimizes the
weighted distance between the warehouse and its supply and distribution
points, where the distance is weighted by the number of tones supplied or
consumed. The first step in this procedure is to place the locations on a
coordinate system. The origin of the coordinate system and scale used are
arbitrary, just as long as the relative distances are correctly represented. This
can be easily done by placing a grid over an ordinary map. The center of
gravity is determined by formulae
Cx = x-coordinate of the center of gravity
Cy = y-coordinate of the center of gravity
Dix = x-coordinate of location i
Diy = y-coordinate of location I
Activity: Finding the center of gravity
Remember the example we discussed in the previous class. Can you find
the target area’s center of gravity for the Health-Care medical facility.
Try using your understanding of the concept. Once you are through, tally
your solution with that given below.
To calculate the center of gravity, we start with the following information,
where population is given in thousands
Next we find Cx and Cy.
Cx = 453.5 / 68 = 6.67
Cy = 205.5 / 68 = 3.02
The center of gravity is (6.67, 3.02), which is not necessarily optimal. It is
in the general vicinity of location (7, 2), which was found best from the
load-distance score. Using the center of gravity as starting point, managers
can now search in its vicinity for the optimal location.
Break even analysis implies that at some point in the operations, total revenue equals total cost.
Break even analysis is concerned with finding the point at which revenues and costs agree
exactly. It is called ‘Break-even Point’. The Fig. portrays the Break Even Chart:
Break even point is the volume of output at which neither a profit is made nor a loss is incurred.
Plotting the break even chart for each location can make economic comparisons of locations.
This will be helpful in identifying the range of production volume over which location can be
ILLUSTRATION 5: Potential locations X, Y and Z have the cost structures shown below.
The ABC company has a demand of 1,30,000 units of a new product. Three potential
locations X, Y and Z having following cost structures shown are available. Select which
location is to be selected and also identify the volume ranges where each location is suited?
SOLUTION: Solve for the crossover between X and Y:
10X + 150,000 = 8X + 350,000
2X = 200,000
X = 100,000 units
Solve for the crossover between Y and Z:
8X + 350,000 = 6X + 950,000
2X = 600,000
X = 300,000 units
Therefore, at a volume of 1,30,000 units, Y is the appropriate strategy.
From the graph (Fig. 4.4) we can interpret that location X is suitable up to 100,000 units,
location Y is suitable up to between 100,000 to 300,000 units and location Z is suitable if the
demand is more than 300,000 units.