Operations management (OM) is the administration of business practices to

create the highest level of efficiency possible within an organization. It is

concerned with converting materials and labor into goods and services as
efficiently as possible to maximize the profit of an organization.
Operations management is important in a business organization because it helps
effectively manage, control and supervise goods, services and people.

Corporate strategy
A company’s corporate strategy refers to its overall company strategy that guides
its mission and vision and binds each branch of the organization together. When
planning a corporate strategy, see the organization as a system and its various
departments as interconnected hubs and nodes working together to achieve
common objectives. A corporate strategy can create company-wide policies and
guidelines that allocate resources of each department to help your organization
achieve its aims.

Customer-driven operational strategy

A company uses customer-driven operational strategies to meet the needs of its
customers. Customer-driven strategies can identify trends in customer behavior,
such as a change in buying preferences based on demographics. This data can
help your company adapt quickly to changes in the market, identify threats and
take steps to mitigate them and leverage strengths that will improve its
competencies and market advantage.

Core competencies strategy

A company may use a core competencies strategy to develop and enhance its key
strengths, resources and capabilities. A company’s core competencies can
include its proprietary technology, employees, financial position, market share
and distribution system.

Identifying and enhancing major strengths can help your organization maintain
its market, expand its customer base, increase customer satisfaction and loyalty
and cut product development time. It can also reduce the cost of production,
improve the ability to generate revenue, promote cordial relationships with
investors and other stakeholders and potentially make the organization an
attractive place to work for talented people.
Competitive priorities strategies
Companies use competitive priorities strategies to distinguish their brand,
products, services and people from competitors. It requires incorporating your
marketing strategy, production processes and organizational culture into the
overall corporate strategy. The aim of competitive priorities strategies is to create
products and services that can always meet the needs and preferences of
customers at an acceptable price point.

To develop effective competitive priorities, companies need to assess their

operational expenses and product development times. They also need to
evaluate the features, quality and benefits of their offers and introduce variety
and distinct features that can help their products and services stand out from
others in the market.

Product or service development strategy

A product or service development strategy can help a company improve
innovation and add value to the design of its products or services. One strategy
businesses can adopt in this area is to create products or services designed to
meet the needs of a niche market. It can also mean leveraging staff and
technology to offer customers a wide range of products or services with features
not found in alternatives. For example, a company can prioritize the speedy
delivery of products, free installation or multi-platform usability of a service.

Cost-driven strategies
Cost-driven strategies can help an organization implement an operational
strategy to compete based on price. It is common in markets where the customer
bases their decision to buy on the price of a commodity relative to alternatives.
For example, most people buy staples like flour, sugar and salt based on price
because many brands offer similar products. To successfully implement this
strategy, a company may make its production process more cost effective to offer
its products at a more competitive price than rivals.

Outsourcing strategy
Many industries rely on the expertise and supply chain resources of others to
produce their products and services and deliver them to the end-user. For
companies that outsource or offshore some of their operations, there is a need
to have a comprehensive outsourcing strategy that will take care of vendors,
quality control issues and logistics.

For example, several companies outsource their manufacturing and packaging to

foreign companies to take advantage of lower labor costs. They also hire supply
chain management firms to oversee the distribution of the finished product from
the ports to the customer’s door.

Having an efficient outsourcing strategy can ensure products meet the

company’s standards, solve customers’ needs at the right price point and help
the organization achieve its cost-cutting and revenue targets. The same can apply
to companies that sell services, such as web-based software. They can outsource
the software development to companies in other countries, host the finished
product in a cloud-based system and only interact with customers via online
interfaces such as a website or mobile application.

Flexibility strategy
Some companies use an operational strategy that allows them to compete based
on the flexibility of their product or service or volume. For example, a company
can emphasize its ability to change its products quickly based on customers’
preferences. Flexibility can also mean allowing customers to personalize their
orders or the ability to hold a small or large amount of inventory based on
expected demand.
Competitive advantage is the leverage a business has over its competitors. This
can be gained by offering clients better and greater value. Advertising products
or services with lower prices or higher quality piques the interest of consumers.
This is the reason behind brand loyalty, or why customers prefer one particular
product or service over another.[2]

Each organization needs to have a deep understanding of their customers and

what drives their customers to make purchases. We refer to these as key
purchasing criteria. They are the factors which customers evaluate and consider
when making a product choice.

It is important to keep in mind that the customer is not always a consumer

purchasing a good at a store. The customer in many instances may be another
business. The city of Toronto may be purchasing heavy duty trucks to use in the
landscaping of city parks or Toyota may be searching for a new supplier for
automobile glass.

Key Purchasing Criteria include:

Price – Firms need to understand how much the customer will pay for an item. If
products are seen to be very similar to one another, the customer will choose
based on price.

Quality – Many customers are willing to spend more in order to obtain a product
with specific characteristics or brand reputation. Not only are we considering a
product with a great design, but also, one that is long lasting and defect free.

Variety – There is a part of the market that value the opportunity to choose from
a wide variety of products. They look for options to change the style, colour,
dimensions or technical characteristics.

Timeliness – Some customers care greatly about how long it will take to obtain
the product or service. For companies’ in the transportation business, this will be
a key necessity in order to gain new customers. This can also be related to the
capability of the company to deliver at the time that they had promised.

Operations strategy categories can be broken down into many types of areas that
must be addressed. The decisions made in these areas will determine whether
the business strategy is executed. Below is a list of 10 critical decisions in
operations management[8]:

1. Design of Goods and Services – The actual design of the product or service
will have the largest impact on the cost to produce and the quality to
achieve.
2. Quality – The way in which the organization will ensure that the product
specifications are met. This may include the use of statistical process
control, total quality management or Six Sigma.
3. Process and Capacity Design – The type of product along with its volume
and variety will have the major impact on which type of process to be
chosen.
4. Location – Important decisions such as how many locations and where to
locate them are critical to organization success. This will be a major factor
in terms of how quickly the transformation process can take place, and
how quickly goods can be shipped to customers.
5. Layout Design and Strategy – Consider the placement of work centres,
movement of goods, people and information How materials are delivered
and used.
6. Human Resources and Job Design – Decisions regarding training for
employees, how to motivate employees to achieve operational success.
7. Supply Chain Decisions – Decisions in terms of where suppliers are located
and the level of supplier collaboration are major considerations that
impact cost and delivery speed.
8. Inventory – How will inventories be used and controlled in the business
and the supply chain
9. Scheduling – includes both how to schedule production, resources and
employees in order to be effective, efficient and meet commitments to
customers.
10. Maintenance– This involves maintaining equipment and machinery as well
as keeping quality high and processes stable.

• Operations has a major influence on competitiveness through product and

service design, cost, location, quality, response time, flexibility, inventory
 and supply chain management, and service. Many of these are
interrelated.
• We define competitiveness as the ability and performance of a firm to sell
and supply goods and services in a given market, in relation to the ability
and performance of other firms. In other words, how will one firm win over
customers in order to become the product or service of choice.
• Operations management involves planning, organizing, coordinating, and
controlling all the resources needed to produce a company’s goods and
services. Understanding your target market and customer segments, and
how to make them happy, drives operating decisions for effectiveness and
efficiency.
• Strategic and tactical operations decisions determine how well the
organization can accomplish its goals. They also provide opportunities for
the organization to achieve unique competitive advantages that attract
and keep customers.
• In the company level, the increase of productivity reflects in the
improvement of competitiveness, therefore productivity directly impacts
competitiveness 18. There are more radical visions that emphasize that if
competitiveness has any meaning, it is just another way of expressing
productivity 19.

• Production Analysis provides a visual representation of production output

and allows you to quantify production losses and the cost associated with
them. With regular use of Production Analysis, your company can
determine where you are losing the most money and then take corrective
actions that will help yield higher production and earn greater profits.

Production Analysis allows you to evaluate the reliability of manufacturing

processes. GE Digital APM Production Analysis analyzes production output
data to help you see patterns in the output and determine the reliability of
those processes.

Often, a great amount of profit is lost due to production problems, rather

than just Asset problems. Therefore, analyzing losses due to operational
problems is necessary for conducting a comprehensive analysis of
production losses. To quantify losses due to operational problems, in
 addition to analyzing individual Asset, you must also analyze the process in
which they are involved. To do this, you can use a Production Analysis.

Within a Production Analysis, you can plot production output data and
then:

Define the observed production output with a Demonstrated Line.

Determine the reliability of the production process by defining a Process
Reliability Line.
Define the ideal production output with a Nameplate Line.
Draw one or more Custom Lines to exhibit losses and gains compared to
other observed production output or based on theoretical scenarios.
Compare the observed output to the ideal output to calculate the
efficiency and utilization costs.

Objectives of production management :

Production management applies planning, directing, organising and
controlling for managing production operations. This process is concerned
with the conversion of raw materials into business finished products
efficiently without any wastage of resources.
The strategic level decisions are:
1. New Product Identification and Design:
The success of an organisation depends upon the product mix that it offers to the
customer. There exists a demands for the products if the product has good
market acceptability. The products should be designed in such way as to meet
the expectations of customers. The tools like value analysis should be applied at
the design stage to avoid unnecessary cost building up in to the product.
2. Process Design and Planning:
This involves the appropriate technology for conversion of raw materials in to
products. The choice of technology depends upon several factors such as
demand, investment capability, labour availably and degree of automation
required. This is followed by selection of the process of conversion and
determining the workstations and the flow of work. At this stage, macro level
process planning is done.
3. Facilities Location and Layout Planning:
The facilities location is a strategic decision and facilities once located will not be
altered in near feature. So due considerations should be given to all the factors
that affect the location.
4. Design of Material Handling System:
As per the principle of Material handling, the handling should be kept at minimum
though it is not possible to avoid handling. The selection of particular flow pattern
and material handling equipment is dependent on the distance between the
workstations, intensity of flow or traffic and size, shape and nature of materials
to be handled.
5. Capacity Planning:
This decision is concerned with the procurement of fixed assets like plant and
machineries. The decision regarding the size of the plant, output etc. Are decided
at this stage. The capacity planning activity is again a function of volume of
demand. The operational level decisions are short-term decisions. These are
mainly concerned with planning and control of production activities.
The operational level decisions are:
1. Production planning:
It is concerned with determining the future course of action regarding production
to achieve the organisation objectives.

2. Production control:
It is a management technique, which aims to see that the activities are carried
out as per the plan. Production control activity is concerned with comparing
actual output with standard output and to take corrective action if there exists a
deviation between actual and standard.
3. The other activities include:
Inventory control, maintenance and replacement, cost reduction and cost control
and work system design.

Selection of the location of an enterprise:

(i) Availability of Raw Materials
 (ii) Proximity to Market
(iii) Infrastructural Facilities
(iv) Government Policy
(v) Availability of Manpower
(vi) Local Laws, Regulations and Taxation
(vii) Ecological and Environmental Factors

Objectives/Advantages of Plant Layout:

Following are the objectives/advantages of plant layout:
(i) Streamline flow of materials through the plant.
(ii) Minimise material handling.
(iii) Facilitate manufacturing progress by maintaining balance in the
processes.
(iv) Maintain flexibility of arrangements and of operation.
(v) Maintaining high turnover of in-process inventory.
(vi) Effective utilisation of men, equipment and space
(vii) Increase employee morale.
(viii) Minimise interference (i.e. interruption) from machines.
(ix) Reduce hazards affecting employees

Principles of Plant Layout:

While designing the plant layout, the following principles must be kept in view:
(i) Principle of Minimum Movement:
Materials and labour should be moved over minimum distances; saving cost and
time of transportation and material handling.
(ii) Principle of Space Utilization:
All available cubic space should be effectively utilized – both horizontally and
vertically.
(iii) Principle of Flexibility:
Layout should be flexible enough to be adaptable to changes required by
expansion or technological development.
 (iv) Principle of Interdependence:
Interdependent operations and processes should be located in close proximity to
each other; to minimize product travel.
(v) Principle of Overall Integration:
All the plant facilities and services should be fully integrated into a single
operating unit; to minimize cost of production.
(vi) Principle of Safety:
There should be in-built provision in the design of layout, to provide for comfort
and safety of workers.
(vii) Principle of Smooth Flow:
The layout should be so designed as to reduce work bottlenecks and facilitate
uninterrupted flow of work throughout the plant.
(viii) Principle of Economy:
The layout should aim at effecting economy in terms of investment in fixed
assets.
(ix) Principle of Supervision:
A good layout should facilitate effective supervision over workers.
(x) Principle of Satisfaction:
A good layout should boost up employee morale, by providing them with
maximum work satisfaction.

Types of Plant Layout:

Two basic plans of the arrangement of manufacturing facilities are – product
layout and process layout. The only other alternative is a combination of product
and process layouts, in the same plant.

Following is an account of the various types of plant layout:

(a) Product Layout (or Line Layout):
In this type of layout, all the machines are arranged in the sequence, as required
to produce a specific product. It is called line layout because machines are
arrange in a straight line. The raw materials are fed at one end and taken out as
finished product to the other end.
Special purpose machines are used which perform the required jobs (i.e.
functions) quickly and reliably.

Product layout is depicted below:

Advantages:
1. Reduced material handling cost due to mechanized handling systems and
straight flow

2. Perfect line balancing which eliminates bottlenecks and idle capacity.

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3. Short manufacturing cycle due to uninterrupted flow of materials

4. Simplified production planning and control; and simple and effective

inspection of work.

5. Small amount of work-in-progress inventory

6. Lesser wage cost, as unskilled workers can learn and manage production.

Disadvantages:
1. Lack of flexibility of operations, as layout cannot be adapted to the
manufacture of any other type of product.

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2. Large capital investment, because of special purpose machines.

3. Dependence of whole activity on each part; any breakdown of one machine in

the sequence may result in stoppage of production.

4. Same machines duplicated for manufacture of different products; leading to

high overall operational costs.

5. Delicate special purpose machines require costly maintenance / repairs.

Suitability of product layout:

Product layout is suitable in the following cases:
1. Where one or few standardized products are manufactured.

2. Where a large volume of production of each item has to travel the production
process, over a considerable period of time.

3. Where time and motion studies can be done to determine the rate of work.

4. Where a possibility of a good balance of labour and equipment exists.

5. Where minimum of inspection is required, during sequence of operations.

6. Where materials and products permit bulk or continuous handling by

mechanical parts.

7. Where minimum of set-ups are required.

(B) Process Layout (or Functional Layout):

In this type of layout, all machines performing similar type of operations are
grouped at one location i.e. all lathes, milling machines etc. are grouped in the
shop and they will be clustered in like groups.
Advantages:
1. Greater flexibility with regard to work distribution to machinery and
personnel. Adapted to frequent changes in sequence of operations.
2. Lower investment due to general purpose machines; which usually are less
costly than special purpose machines.
3. Higher utilisation of production facilities; which can be adapted to a variety
of products.
4. Variety of jobs makes the work challenging and interesting.
5. Breakdown of one machine does not result in complete stoppage of work.
Disadvantages:
1. Backtracking and long movements occur in handling of materials. As such,
material handling costs are higher.
2. Mechanisation of material handling is not possible.
Production planning and control is ddifficult
3. More space requirement; as work-in-progress inventory is high-requiring
greater storage space.
4. As the work has to pass through different departments; it is quite difficult
to trace the responsibility for the finished product.
Suitability of process layout:
Process layout is suitable in the following cases, where:
1. Non-standardised products are manufactured; as the emphasis is on
special orders.
2. It is difficult to achieve good labour and equipment balance.
3. Production is not carried on a large scale.
4. It is difficult to undertake adequate time and motion studies.
5. It is frequently necessary to use the same machine or work station for two
or more difficult operations.
6. During the sequence of operations, many inspections are required.
7. Process may have to be brought to work, instead of “vice-versa”; because
materials or products are too large or heavy to permit bulk or continuous
handling by mechanical means.
 (C) Combination Layout:
In practice, plants are rarely laid out either in product or process layout form.
Generally a combination of the two basic layouts is employed; to derive the
advantages of both systems of layout. For example, refrigerator
manufacturing uses a combination layout.
Process layout is used to produce various operations like stamping, welding,
heat treatment being carried out in different work centres as per
requirement. The final assembly of the product is done in a product type
layout.
(D)Fixed Position Layout:
It is also called stationary layout. In this type of layout men, materials and
machines are brought to a product that remains in one place owing to its size.
Ship-building, air-craft manufacturing, wagon building, heavy construction of
dams, bridges, buildings etc. Are typical examples of such layout.

Quality management is the act of overseeing all activities and tasks that must
be accomplished to maintain a desired level of excellence. This includes the
determination of a quality policy, creating and implementing quality planning
and assurance, and quality control and quality improvement. It is also referred
to as total quality management (TQM).
In general, quality management focuses on long-term goals through the
implementation of short-term initiatives.
The most famous example of TQM is Toyota’s implementation of the Kanban
system. A kanban is a physical signal that creates a chain reaction, resulting in
a specific action. Toyota used this idea to implement its just-in-time (JIT)
inventory process. To make its assembly line more efficient, the company
decided to keep just enough inventory on hand to fill customer orders as they
were generated.
Therefore, all parts of Toyota’s assembly line are assigned a physical card that
has an associated inventory number. Right before a part is installed in a car,
the card is removed and moved up the supply chain, effectively requesting
another of the same part. This allows the company to keep its inventory lean
and not overstock unnecessary assets.
 Cost of quality is a method for calculating the costs companies incur ensuring
that products meet quality standards, as well as the costs of producing goods
that fail to meet quality standards.
The goal of calculating the cost of quality is to create an understanding of how
quality impacts the bottom line.
Four Types of Cost of Quality
Appraisal Costs:
Measurement and inspection activities during operations to determine
conformance to quality requirements.
Examples include inspection, testing, process or service audits, calibration of
measuring and test equipment.
Prevention Costs:
Activities planned and designed before operations to guarantee good quality
and prevent bad quality products or services.
Examples include new product review, quality planning, supplier surveys,
process reviews, quality improvement teams, education and training.
Internal Failure Costs:
Expenses incurred to remedy defects discovered before the delivery of a
product or service.
Examples include scrap, rework, re-inspection, re-testing, material review,
material downgrades.
External Failure Costs:
Expenses incurred to remedy defects discovered by customers after the
customer receives the product or service.
Examples include processing customer complaints, customer returns,
warranty claims, product recalls.

Work measurement is concerned with the determination of the amount of time

required to perform a unit of work. Work measurement is very important for
promoting productivity of an organization. It enables management to compare
alternate methods and also to do initial staffing. Work measurement provides
basis for proper planning.
Since it is concerned with the measurement of time it is also called ‘Time Study’.
The exact examination of time is very essential for correct pricing. To find the
correct manufacturing time for a product, time study is performed. To give
competitive quotations, estimation of accurate labour cost is very essential. It
becomes a basis for wage and salary administration and devising incentive
schemes.

Work measurement has been defined as, “The application of techniques

designed to establish the time for a qualified worker to carry out a specified job
at a defined level of performance”. This time is called standard or allowed time.
Time study may also be defined as “the art of observing and recording the time
required to do each detailed element of an industrial operation”.

Objectives of Work Measurement:

1. To compare the times of performance by alternative methods.

2. To enable realistic schedule of work to be prepared.

3. To arrive at a realistic and fair incentive scheme.

4. To analyse the activities for doing a job with the view to reduce or eliminate
unnecessary jobs.
5. To minimise the human effort.
6. To assist in the organisation of labour by daily comparing the actual time
with that of target time.
Uses of Work Measurement:
1. Wok measurement is used in planning work and in drawing out schedules.

2. Wok measurement is used to determine standard costs.

4. Wok measurement is used as an aid in preparing budgets.
5. It is used in balancing production lines for new products.
6. Wok measurement is used in determining machine effectiveness.
7. To determine time standards to be used as a basis for labour cost control.
8. To establish supervisory objectives and to provide a basis for measuring
supervisory efficiency.
9. To determine time standards to be used for providing a basis for wage
incentive plans.
 Techniques of Work Measurement:
Work measurement is investigating and eliminating ineffective time. It not
only reveals the existence of ineffective time. But it can be used to set
standard times for carrying out the work so that ineffective time does not
evolve later. It will be immediately found out by the increased standard time.
For the purpose of work measurement, work may be regarded as repetitive
work and non-repetitive work.
1. Time Study
2. Work Sampling
3. Pre-determined Motion Time System
4. Analytical Estimating
Direct Time Study: Direct time study refers to the ascertainment of the time
needed to carry out a unit of work. In this method, observation and recording of
time is necessary for undertaking each unit of an operation are done, with a view
to ascertaining, the actual time, in which the work can be accomplished.
Work Sampling or Ratio Delay Method: A work measurement method, in which
the work of several employees is sampled randomly, at periodic intervals, to
ascertain the proportion of total operations, of a specific activity.
Synthesis Method: A work measurement method, in which the job or activity is
divided into various parts, after which the time consumed in performing each
element of the job is recorded and then combined.
Analytical Estimating: This method of time measurement is used to ascertain the
time values for the tasks, that are long and not repetitive in nature.
Predetermined Motion Time System (PMTS): In PMTS method, basic times are
set up for basic human motions. Such time values are used to compute the time
required by the job for its completion, with fixed standard. It is a new and
improved version of motion study.
Work measurement techniques helps in preparing realistic work
schedules, by proper evaluation of human work. It helps in comparing the
actual time taken by the worker, with the time allowed, to keep a check on
the workers and avoid idle time.
Steps Involved in Work Measurement
• Divide jobs into elements
 • Observe and record each element, any of the work measurement
techniques.
• Set up unit time values, by extending observed time into normal time
for each unit. This can be done by applying rating factor.
• Evaluate relaxation allowance and add the same to the normal time, for
each element to get the work content.
• Ascertain the frequency of occurrence of each element in the job, then
multiply the work content to it. After that total the times to reach the
work content of the job.
• Add contingency allowance, wherever required, to get the standard
time for performing the job.
Work measurement is helpful in evaluating the labour cost. Further, gives
information with respect to the estimation of tenders, assessment of
delivery schedule and fixation of the selling price.

Material requirements planning (MRP) is a system for calculating the materials

and components needed to manufacture a product. It consists of three
primary steps: taking inventory of the materials and components on hand,
identifying which additional ones are needed and then scheduling their
production or purchase
MRP, which is done primarily through specialized software, helps ensure that
the right inventory is available for the production process exactly when it is
needed and at the lowest possible cost. As such, MRP improves the efficiency,
flexibility and profitability of manufacturing operations. It can make factory
workers more productive, improve product quality and minimize material and
labor costs. MRP also helps manufacturers respond more quickly to increased
demand for their products and avoid production delays and inventory
stockouts that can result in lost customers, which in turn contributes to
revenue growth and stability.
.MRP uses information from the bill of materials (BOM), inventory data and
the master production schedule to calculate the required materials and when
they will be needed during the manufacturing process.
The BOM is a hierarchical list of all the materials, subassemblies and other
components needed to make a product, along with their quantities, each
usually shown in a parent-child relationship. The finished good is the parent
at the top of the hierarchy.
The inventory items in the BOM are classified as either independent demand
or dependent demand. An independent demand item is the finished good at
the top of the hierarchy. Manufacturers determine its amount by considering
confirmed orders and examining market conditions, past sales and other
indicators to create a forecast, then decide how many to make to meet the
expected demand.

Dependent demand items, in contrast, are the raw materials and components
needed to make the finished product. For each of these items, demand
depends on how many are needed to make the next-highest component in
the BOM hierarchy.

MRP is the system most companies use to track and manage all of these
dependencies and to calculate the number of items needed by the dates
specified in the master production schedule. To put it another way, MRP is an
inventory management and control system for ordering and tracking the
items needed to make a product.
MRP is useful in both discrete manufacturing, in which the final products are
distinct items that can be counted -- such as bolts, subassemblies or
automobiles -- and process manufacturing, which results in bulk products,
including chemicals, soft drinks and detergent, that can't be separately
counted or broken down into their constituent parts.
Benefits of MRP
The primary objective of MRP is to make sure that materials and components
are available when needed in the production process and that manufacturing
takes place on schedule. Additional benefits of MRP are:

Reduced customer lead times to improve customer satisfaction;

Reduced inventory costs;
Effective inventory management and optimization – by acquiring or
manufacturing the optimal amount and type of inventory, companies can
 minimize the risk of stock-outs, and their negative impact on customer
satisfaction, sales and revenue, without spending more than necessary on
inventory;
Improved manufacturing efficiency by using accurate production planning and
scheduling to optimize the use of labor and equipment;
Improved labor productivity; and
More competitive product pricing.
Disadvantages of MRP
MRP has drawbacks, including:
Increased inventory costs: While MRP is designed to ensure adequate
inventory levels at the required times, companies can be tempted to hold
more inventory than is necessary, thereby driving up inventory costs. An MRP
system anticipates shortages sooner, which can lead to overestimating
inventory lot sizes and lead times, especially in the early days of deployment
before users gain the experience to know the actual amounts needed.
Lack of flexibility: MRP is also somewhat rigid and simplistic in how it accounts
for lead times or details that affect the master production schedule, such as
the efficiency of factory workers or issues that can delay delivery of materials.
Data integrity requirements: MRP is highly dependent on having accurate
information about key inputs, especially demand, inventory and production.
If one or two inputs are inaccurate, errors can be magnified at later stages.
Data integrity and data management are thus essential to effective use of
MRP systems.

Inventory management is an approach for keeping track of the flow of inventory.

It starts right from the procurement of goods and its warehousing and continues
to the outflow of the raw material or stock to reach the manufacturing units or
to the market, respectively.
Inventory management is a useful method for simplifying all the warehousing
activities of the organization. With this technique, the company can now access
and determine its stock and inventory with efficiency to smoothen all the
business operations.
It has also proved to be a valuable tool for maintaining the working capital
requirement.

When the goods arrive at the premises, inventory management ensures

receiving, counting, sorting, arrangement, storage and maintenance of these
items, i.e. stock, raw material, components, tools, etc., efficiently.
To see how this whole system functions, we should first understand the flow of
inventory in an organization. The same has been represented in the following
diagram:

Here, the goods which are stored in the warehouse can be utilized in the
following two ways:

1. Direct distribution in the market i.e., to the wholesalers, dealers, retailers

or customer; or
2. Sent to the production units for manufacturing of finished goods.

There are many inventory management techniques available for organizations to

choose from. Some of the most common ones are EOQ (economic order
quantity), ABC analysis, just-in-time management, EQR model, VED analysis, LIFO
(last in last out) and FIFO (first in first out).
An efficient system of inventory management will determine (a) what to
purchase (b) how much to purchase (c) from where to purchase (d) where to
store, etc.

The followings are the objectives of inventory management:

1. To ensure continuous supply of materials spares and finished goods

so that production should not suffer at any time and the customer’s
demand should also be met.

2. To avoid both overstocking and under-stocking of inventory.

3. To maintain investment in inventories at the optimum level as

required by the operational and sales activities.

4. To keep materials cost under control so that they contribute in

reducing cost of production and overall cost.

5. To eliminate duplication in ordering or replenishing stocks. This is

possible with the help of centralising purchases.

6. To minimise losses through deterioration, pilferage, wastages and

damages.

7. To design proper organisation for inventory management. Clear cut

accountability should be fixed at various levels of the organisation.

8. To ensure perpetual inventory control so that materials shown in

stock ledgers should be actually lying in the stores.

9. .To ensure right quality goods at reasonable prices. Suitable quality

standards will ensure proper quality stocks. The price analysis, the
cost analysis and value analysis will ensure payment of proper
prices.

10. To facilitate furnishing of data for short term and long term planning
and control of inventory.
 The scope of inventory control is as follows:

1. Determination of economic order quantity.

2. Formulation of policy.

3. Determination of lead time.

4. Effectiveness towards running of store.

5. Organisation structure

6. Determination of safety stock

7. Minimum material handling and storage cost.

1. Determination of economic order quantity:

Economic order quantity or economic lot size refers to that number ordered in a
single purchase or number of units should be manufactured in a single run, so
that the total costs — ordering or set up costs and inventory carrying costs are at
the minimum. So, the determination of E.O.Q. is also within the scope of
inventory control.

2. Formulation of policy:

The policies of investment procurement, storage, handling, accounting, storages

and stock outs, deterioration, obsolescence etc. Are to be formulated under the
scientific system of inventory control. What, when and how much of purchasing
and fixation of minimum and maximum levels is also to be determined for a given
period of time.

3. Determination of lead time:

By lead time is meant the time that lapses between the raising of an indent by
the stores and the receipt of materials by them. Lead time is of fundamental
importance in determining inventory levels.

4. Effectiveness towards running of store:

The deter-mination of policies of the location, layout and materials and storage
handling equipments certainly help in the effective working of stores
organisation.

5. Organisation structure:

After determining of inventory policy, the next step is to decide the location,
layout and types of storehouse. It facilitates the movement of materials and thus
minimise the storage and handling cost of stores.

6. Determination of safety stock:

Safety stock is defined as the difference between the amount stocked to sati.sfy
demand during a certain time interval and the mean expected demand for that
period. It is for the purpose of providing protection against depletion. If demand
remained constant and lead tin-; is invariable, there would be no fear of
shortages and no need for safely stocks.

The exact quantity of safety stock of an item depends upon its lead time, usage
value, and variability of lead time demand, carrying charges and the importance
of its stock out cost. Again, determination of buffer stock reserve stock is included
in the management of inventory.

7. Minimum material handling and storage cost:

Stores organisation activities are arranged in such a manner that the east of
bringing in the store house and issuing from the store house if the various stores,
will minimise the storage and materials handling cost of stores.

Inventory Management Objectives

Inventory management is performed to simplify the operational activities. Some

of the primary objectives for which it is carried out are as follows:
Preventing Dead Stock or Perishability: With an optimal inventory level, the
chances of wastage in the form of goods spoilage or dead stock.

Optimizing Storage Cost: It reduces the chances of maintaining excessive stock,

even the requirements are pre-determined, which ultimately cuts done the
unnecessary warehousing costs.

Maintaining Sufficient Stock: Now, the production department need not worry
about the shortage of raw material or goods because of its constant supply.
Enhancing Cash Flow: Inventory has a significant impact on the cash flow of the
company. With effective inventory management, the organization can ensure
sufficient liquid cash to enhance its operational efficiency.

Reducing the Inventories’ Cost Value: When there is a constant purchase of goods
or stock, the organization can ask for discounts and other benefits to decrease
the purchase price.

Types of Inventory Management

While installing an inventory management system, the organization has to

consider the various aspects like cost, budget, utility and accessibility. However,
it can be classified into the following types:

Bar-code Inventory Management

The barcode system is its automated and simplified version. The management
can find out the stock remaining with just one click on a computer device. The
scanned barcodes enable the software to maintain a track of all the purchases
and the flow of inventory.

Continuous Inventory Management

It links the barcode and radio frequency identification with the accounting
inventory system, inventory received, and point of sales systems along with the
production system, to trace the path of inventory movement. It is mostly
beneficial for accounting purpose. This is also termed as perpetual inventory
management.
Periodic Inventory Management

It is a manual process, which is used for determining the closing inventory value,
for putting it up in the ledger at the end of a financial year. Depending on the
organizational need, it can also be analyzed quarterly. However, it is a time-
consuming way, since the inventory has to be physically counted.

Inventory Management Process

Since it is a process of identifying and resolving inventory-related obstacles. Given

below is the step by step method of improving the organization’s inventory
management system:

Step 1: Determining the Loopholes

The foremost step is to evaluate the inventory requirement and the actual stock
of the goods. Also, the reasons for this gap between the demand and inventory
should be ascertained.

Step 2: Analyzing Consumer Demand and Spending Patterns

The market demand forecasting holds equal importance. This is because it helps
the organization to estimate the production quantity, which ultimately leads to
the maintenance of adequate inventory.

Step 3: Evaluating the Cost Involved

Its implementation involves different types of expenses such as warehousing,

maintenance, transport, bulk discounts and supply chain costs. Each of these
should be well analyzed.

Step 4: Identifying the Extent of Process Automation

It is not possible for every organization to completely automate the inventory

management process. However, the management can recognize those particular
areas where there are possibilities of automation.

Step 5: Inspecting Supplier’s Practices and Performance

The next step is to find out the suppliers’ inventory management practices since
this strategy cannot be implemented solely. If the supplier is resistant to change
and tends to proceed with the traditional means, the organization needs to look
for alternative vendors.
Step 6: Classifying Inventories into Different Categories

The goods have to be segregated into various categories depending upon the
product type, customer class, maintenance cost or profit margin.

Step 7: Setting Objectives for Each Inventory Category

To efficiently manage and track the performance of the applied technique for
each category, it is essential to set individual goals. It not only provides a base
for benchmarking but also identifies the problems and issues faced in each of
these categories.

Step 8: Prioritizing the Areas of Improvement

Now, that we are aware of the problems, the next step is about finding out the
density of each issue and its impact. The concerns which can be resolved
immediately needs to be addressed first. And then, the ones which are complex
and requires restoration should be considered.

Step 9: Taking Advice or Opinion from Experts

Designing an appropriate inventory management system is the task of the

personnel who specialize in the field. Thus, at this stage, the organization needs
to hire consultants or experts for advice and opinion on current technology and
problem fixation within the desired budget.

Step 10: Framing Suitable Inventory Management Policy

The last step is to implement a satisfactory inventory management strategy for

the desired change. This improvement should be incorporated as an inventory
management policy to deal with the changes in demand and add value to
customer experience.
The evolving technology and changing consumer preference have
Importance of Inventory Management

The evolving technology and changing consumer preference have significantly

brought forward the need for a robust inventory management system. Given
below are some of the most prominent reason for which it is considered
beneficial for every business entity.

Enables Enterprise Resource Planning (ERP)

The ERP software accommodates and links the different business operations.
These are inventory procurement, warehousing, production, human resource,
finance, marketing and sales to one another. In this process, inventory
management contributes its part of providing the necessary data.

Proper Warehouse Management

The barcode system, LIFO and FIFO techniques provide a clear picture of the past
and present inventory available with the company to optimize the warehousing
functions.
Efficient Inventory Valuation

It provides for proper evaluation of the different types of inventory, i.e., stock in
hand, opening and closing stocks, raw material, finished goods, etc. This data is
also used to prepare the cost sheet.

Being a segment of supply chain management, it is responsible for streamlining

all the warehousing operations and flow of raw material or stock.

Manages Sales Operations

Sales, as we know, is a continuous process which depends upon the production

of goods or services. If there is inefficient inventory management in the
organization, the chances of unavailability of raw material for manufacturing may
arise.

Challenges Faced in Inventory Management

Inventory management has become an inevitable part of significant business

entities. Also, many small organizations have adopted the concept to keep track
of their stock and raw material.

But while practically implementing it, the companies have to deal with the
following limitations:
Lack of Knowledge: The personnel at the receiving and warehousing departments
may lack the required expertise and adequate knowledge of segregating the
regular and seasonal goods out of the whole stock.

Expanding Product Portfolios: The customers’ demand and requirements for a

wide range of products have tremendously increased the inventory size, making
it difficult to manage, manually.

Supply Chain Complexity: The organization, at times, fail to track the stock or
goods during the supply chain process. Moreover, it is not necessary that the
business partners also maintain an inventory management system, creating
hurdles.

Manufacturing has changed. Products used to be more standardized, demand

more consistent and predictable, and supply chains fairly stable. Efficiency and
quality were enough to compete for market leadership.
Today’s global economy is more interconnected and consumer tastes shift from
minute to minute. Demand is more volatile, driving more diverse products,
shorter product cycles, and the need to get products to market more quickly.

At the same time, there are some major technology advancements that are
helping manufacturers stay ahead of the game. Here are four things you need to
be aware of that will have a major impact on your business:

Cloud Computing

The question of whether or not to go with a cloud-based platform is outdated.

Just like the question of getting a smart phone or a flip phone is outdated. Cloud
is an essential component of modern manufacturing. Legacy, on-premise
platforms need constant maintenance, upgrading, and re-investment to try to
keep up with the ever-increasing complexity and demands of modern
manufacturing. These platforms were created with a now outdated technology
mindset for now outdated business models, not today’s manufacturing reality.

Cloud unifies your business and data across geographically dispersed locations
and delivers unparalleled security, agility, accessibility, and scalability—so you
can focus on growing and streamlining your business. Cloud gets you out of the
IT business so you can focus on your core purpose: manufacturing. It’s elastic and
scales as your business changes, and eliminates those large up-front capital
expenses and annual maintenance costs (not to mention upgrade pains) since the
latest functionality is available to you without disruption or downtime.

Mobility

The ability to access data and functionality via mobile devices delivers an
untethered work environment where information is available at a user’s
fingertips, from anywhere, any time. Moreover, advancements in industrial
wearable devices like smart glasses provides an inexpensive, hands-free
experience to workers in the factory. But mobile ERP goes beyond the user
mobile device. The production environment is increasingly being armed with
sensors, RFID, beacons, Bluetooth, and other communication technologies that
increase data sharing wirelessly and providing greater visibility into operations
like production status, inventory movement, and machine efficiency. In other
words, these technologies help manufacturers do their jobs more effectively, and
they are becoming increasingly common in production environments.
Analytics

You may be like many manufacturers today in that you’re not using much of the
data you generate. If only you had a way to harness it, that data could be used to
drive insights, autonomous decisions, and predictive behavior to drive higher
levels of efficiency. Analytics sift through and pick out meaningful data points,
connect them, and then present information in an actionable manner. Analytics
are becoming more powerful every day and are critical in managing a world of
Big Data. Analytics and manufacturing intelligence are facilitating machine
learning that can generate prescriptive actions and should be an integral part of
modern manufacturers’ business strategy.

Statistical Quality Control (SQC)

Employing a number of statistical methods, SQC validates the quality of premium

goods and services. In 1924, Walter A. Shewhart produced the basic ideas for
statistical quality control, since after the area of SQC has been scattered its
foundation with extensive work of researchers, quality controlled philosophers
and statisticians.

Making use of statistical tools and techniques in order to monitor and manage
product quality across various industries including food, pharmaceutical and
manufacturing units, the process is named as Statistical Quality Control. The
method can be conducted as,

A part of production process,

A part of last-minute quality control check

A part of eventual check by quality control department.

“Statistical quality control can be simply defined as an economic & effective

system of maintaining & improving the quality of outputs throughout the whole
operating process of specification, production & inspection based on continuous
testing with random samples.”

Statistical quality control techniques are extremely important for operating the
estimable variations embedded in almost all manufacturing processes. Such
variations arise due to raw material, consistency of product elements, processing
machines, techniques deployed and packaging applications. Moreover, any of
these factors or combination of two can impact the eventual quality of finished
product.

The method incorporates legislation allowing manufacturing units to make sure

that the finished product must contain the net quantity mentioned in packaging.
Any overfilled quantity can lead to financial loss for the manufacturer and
therefore must be avoided. Fill control, validating weight and weight variation are
hugely deployed statistical quality control techniques that make use of weights
of individual products in the statistical data analysis.

In case of pharmaceutical goods, such as tablets, pills, capsules, syrups etc, the
standard weight must not be exceeded the upper limit that saves consumers
from taking high doses of active ingredients that might result in severe
consequences. At the same time, the weight shouldn’t be too less, if not the drug
might not be effective. In this case, the weight variation based statistical quality
control test is used to ensure the consistency of the dosage unit, and also to
support product identity, reliability and quality.

Another example would be, in the production of food and beverages, it is

required to inspect the weight of packages rendering quick confirmation such
that filled quantities fulfil the legal necessities. Any deviation from standard value
signifies errors in the production process, imprecise ingredient-quantities leading
to impactful consequences.

In addition to this, while confirming consumer satisfaction, safety and compliance

with regulations, SQC with weight determination is highly important. Though, it
is recommended to employ actual balances or measuring scales and software
suitable for particular applications.