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Production and Operations
Management
Fifth Edition
 About the Author
S.N. Chary has formerly been a Professor with Indian Institute of Management Bangalore where
he taught for over a quarter of a century. A prolific management analyst and thinker, he has writ-
ten several books, papers and articles. He has been the Director, Kirloskar Institute of Advanced
Management Studies, Karnataka and is a well known management and educational consultant. He
is working on social change through people empowerment.
Production and Operations
Management
Fifth Edition

S N Chary
Former Professor
Indian Institute of Management
Bangalore

Tata McGraw Hill Education Private Limited

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Production and Operations Management, 5/e

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 This book
is
dedicated to

Gurudev
 Preface
This latest edition incorporates the changes desired by the readers over the past editions, in view
of the changing global management culture. This book is primarily addressed to the students
studying production and operations management for the first time like those pursuing an MBA,
PGDM, MMS or PGDBA programme. The book would, however, be equally useful for a practic-
ing executive.
Production and operations management is a part of the course curricula of a large number of
professional engineering and other technical courses. The students of these courses would find
this book very useful as a text.
The treatment of the topics and the language in this book has been kept simple to make students
easily grasp the concepts. This book is valuable as a primer for undergraduate students such as the
BBA or BBM students. This edition has additional solved problems at the end of several relevant
chapters to enhance the understanding of the chapter and the various shades of the topic. Each
solved problem highlights a significant aspect of the basic concept described in the chapter.
A chapter on ‘Lean Operations’ has been added since the philosophy underlying ‘lean’ is going
to be the essence of operations and other disciplines of management. ‘Lean’ is not just about cutting
out the flab in the organisation but about the tenet of ‘service’ to the customer and to the society.
That is the direction of the future.
This book has a universal appeal. It contains globally important topics and has numerous ex-
amples drawn from India and abroad. Hence, it can certainly be handy for readers across all the
continents.
While writing this book I have referred to several papers, articles and books. I take this oppor-
tunity to thank the authors and publishers of all the publications I have referred to and some of
whom I have quoted in this edition. Likewise, I have provided the examples and case studies from
many organisations. I thank all these organisations.
My family Geetha, Sathya, Kartik and Manjula have always been a great source of encourage-
ment. Several thanks to them.
Above all, I thank my Gurudev and the Creator of all to whom this book is dedicated.

S.N. Chary
 Preface to the First Edition
In the course of my teaching in the postgraduate programme, I have acutely felt the need for a
textbook on production and operations management which does justice to the stipulated curricu-
lum for the basic course in this field. The curricula of the MBA programme offered by the Indian
universities are similar in many ways and a similar need would be felt there too. There are very
few books on production operations management by Indian authors. The dependence has been,
to a large extent, on books by foreign authors written primarily for their curricular requirements
and student audience, and based on their work environment.
There are five major reasons why a book tailored to meet the Indian situation is required. First,
the basic courses in this discipline in India are more detailed and involve more analysis than those
in most American universities. Available foreign books are generally of two kinds: (a) elementary,
and (b) very detailed on a special topic. Neither of them are suitable for our teaching purposes.
Second, there are certain topics which are relatively more important in the Indian environment.
For instance, project management, incentive schemes, job evaluation, logistics management, regu-
latory framework, etc. One may find these topics either underplayed or glossed over in the various
available foreign books as these pertain to a different economic environment.
Third, there are special Indian topics such as Tandon Committee recommendations or location
of facilities. These obviously have to be covered in a book meant for an Indian target audience.
Fourth, there are Indian concerns, such as management of sectors and services, problem of infla-
tion, concern about closing the gap in technology and matching it with the available resources, etc.
These have to be reflected upon in the discussions of various topics which may appear universal.
Finally, the book should also appeal to those practising executives who wish to undertake a
refresher course in this discipline. The treatment of each topic should, therefore, be practical and
simple, yet comprehensive. The book should have sufficient material to offer on individual topics,
such as materials management or quality management.
I have made an attempt to fulfil these needs through this book. Readers from other develop-
ing countries may also find it useful for the possible reason that we share common concerns and
similar objectives. However, the book may have a universal appeal; it may also find interested
readership in the developed countries. Perhaps, its comprehensiveness and novel interpretation
of the topics could be the attractive features for foreign readers.
This book is my maiden venture. In the course of writing it, I have received much encourage-
ment from my colleagues Prof. Prasanna Chandra, B K Chandrasekhar, Ronald W Haughton,
T S Nagabhushana, S Subba Rao, V K Tewari, G K Valecha and Vinod Vyasulu. I express my sincere
gratitude to them. My other colleagues, V Vilasini, Anna Robinson and S Murali have helped me
by way of secretarial assistance. My thanks are also due to them. In the course of writing this book
I have referred to many publications. Wherever possible, I have taken permission and given credits
for the sources and I thank them all very much. If some of the sources have been left out inadvert-
ently, I seek their pardon. Any mistakes/errors in the book are, however, fully my responsibility.
I have drawn inspiration from the encouragement of the former Chairman of IIM Bangalore,
Mr V Krishnamurthy, now Chairman of Steel Authority of India. My heartfelt thanks to him for
writing the Foreword to this book.
Above all, I thank my Gurudev and Creator of all to whom this book is dedicated.
S N Chary
 Contents
Preface vii
Preface to the First Edition ix

Section I
Role of Production and Operations Management in a Changing Business World
1. Production and Operations Management Function 1.5–1.17
2. Operations Strategy 2.1–2.18
3. Services 3.1–3.20

Section II
Useful Basic Tools
4. Relevant Cost Concepts 4.3–4.10
5. Linear Programming 5.1–5.9
6. Capital Budgeting 6.1–6.16
7. Queueing Theory 7.1–7.19
8. Forecasting 8.1–8.32

Section III
Imperatives of Quality and Productivity
9. Quality Management–I 9.5–9.34

10. Quality Management–II 10.1–10.33

11. New Quality Concepts and Initiatives, Total Quality Management
and Six Sigma 11.1–11.44
xx Content

12. Product Design 12.1–12.19

13. Maintenance Management — I 13.1–13.29

14. Maintenance Management – II 14.1–14.11

15. Work Study 15.1–15.31

16. Job Evaluation 16.1–16.11

17. Incentive Schemes 17.1–17.23

18. Job Redesign 18.1–18.4

19. Productivity 19.1–19.17

Section IV
Supply Chain Management
20. Purchasing 20.3–20.23
21. Inventory Models and Safety Stocks 21.1–21.46

22. ABC and Other Classification of Materials 22.1–22.10

23. Materials Requirement Planning 23.1–23.19

24. Other Aspects of Materials Management 24.1–24.12

25. Physical Distribution Management 25.1–25.29

26. Materials Management—An Integrated View 26.1–26.4

27. Supply Chain Management 27.1–27.21

28. Outsourcing 28.1–28.24

Section V
Spatial Decisions in Production and Operations Management
29. Plant Layout 29.3–29.30

30. Cellular Manufacturing 30.1–30.14

 Content xv

31. Location of Facilities 31.1–31.26

Section VI
Timing Decisions
32. Production Planning and Control 32.5–32.11
33. Aggregate Planning 33.1–33.26

34. Scheduling 34.1–34.37

35. Project Management—I 35.1–35.18

36. Project Management—II 36.1–36.30

37. Just-In-Time Production 37.1–37.11

38. Lean Operations 38.1–38.23

Section VII
Present Concerns and Future Directions
39. Environmental Considerations in Production and
Operations Management 39.3–39.20

40 Where is Production and Operations Management Headed? 40.1–40.11

Bibliography B.1–B.37
Index I.1–I.15
 Role of Production and
Operations Management
in a Changing Business World

Chapter 1 Production and Operations Management Function

Chapter 2 Operations Strategy
Chapter 3 Services

The last century, particularly the latter half of it, has seen an upsurge in industrial
activity. Industries are producing a variety of products. Consumerism has been
on a steep rise. People, all over the world, have been demanding more and better
products and devices. The developments in technology, particularly in the areas of
telecommunications, Internet, mass media and transport have made it possible for
products and ideas to travel across the globe with minimal effort. A Chinese girl
sitting in Shanghai can see on the television what girls of her age wear in distant
USA or Europe. A housewife from Delhi, while visiting her son in San Jose in the
Silicon Valley, is able to check out on the interiors and furniture available in that part
of the world. A middle class newly married couple from Bangalore thinks of Malaysia
or Mauritius as a honeymoon destination. The world has shrunk. Despite the political
boundaries, nations are getting closer in trade and commerce. Products are aplenty. A
variety of devices are available Communications are quicker. Consumers are the kings.
It is obvious that a lot is being demanded of the production and operations
management function. The responsibility of that function is to see that the required
products and devices are of a good quality, with an acceptable price and delivered at
a time and place the customer desires. Quality, productivity (and hence price) and
delivery have become the basic minimums that a firm must offer in order to stay
in competition. There is competition amongst firms even at the level of these basic offerings. In
order to have differentiation and a unique selling proposition (USP), a firm and its production or
operations function have to make continuous efforts. The USP that exists today may be copied by
another firm tomorrow, thus nullifying the competitive advantage. New products or variants of
products and devices have to be continuously designed, produced and delivered—all profitably.
Production/operations function has to very actively support the marketing function. Engineering
has to listen to customer needs. Materials and Logistics people have to react swiftly to the needs of
the manufacturing system. The human resources (HR) function has to ensure that people within
the firm not only have the needed skills but also the essential attitudes. The production operations
function has to interact with the HR function on this count. Each function needs to be attuned
to the other function within the firm. The modern business world has necessitated a high level of
integration within organisations. It is not that integration was not needed earlier and it is needed
now. It is not that quality of products was not a concern earlier and it is so only now. The basic roles
and requirements remain, but the intensity of application has increased. The role of production and
operations—which is central to the industrial organisation—has become much more intense.
In the competition to seek differentiation, manufacturing firms are finding ways of attaching
‘service’ components to the physical product. Services are no longer ‘frills’ that some firms
offered earlier. Services have become intertwined with the output of the production process.
It is the combination that the customer buys today. No manufacturing company is purely into
manufacturing. It is also, in part, a service-providing company. Therefore, the special characteristics
of services are getting incorporated into the design of the production system. For one, there is a
lot more interaction and interfacing of the production function with the customers today than it
was earlier. Customer, so to say, has come closer to, and sometimes within, the company. This has
ramifications for the production function. It is no longer an aloof outfit.
The service sector is increasing at a tremendous rate. For instance, there are more banks in one
town now than they were in an entire district earlier. More and more banks from the developed
world are doing business in the developing countries. Money is more easily available to the
consumers. Hence, more leisure activities are being pursued. The number of hotels is, therefore,
increasing rapidly. In the places where there were only government-run hospitals, now there are
corporate hospitals and lifestyle clinics providing health care combined with comfort. There are
thus primary, secondary and tertiary hospitals. A bank also has several back-office operations.
A corporate hospital offering comprehensive ‘executive health check-ups’ needs to streamline its
operations right from the minute a ‘customer’ arrives at the reception counter to her undergoing
a series of medical tests and check-ups to her receiving a complete report and personal advice
from the physician. Besides, this series of ‘check-up’ operations has to be a great ‘experience’ for
the customer. Operations management is being called upon to deliver these varied outputs. Since
the services sector is as large as (in some economies it is larger than) the manufacturing sector,
managing operations in non-manufacturing businesses has assumed as much significance as
managing production in a manufacturing set-up.
The fundamentals of this new production-cum-service economy are the same as the earlier
manufacturing dominated economy. However, the orientation has changed. For instance, in a bank
the customer is right at the place where the operations are taking place. In a hotel, she gets the
various ‘utilities’. In a way, she is the input that is being transformed. Same is true of a hospital and
an educational institution. Thus, ‘customer focus’ is built into the system. This attitude is rubbing
into the manufacturing firms too. The criteria for performance of an operations system today
strongly emphasise customer satisfaction. Production and operations management is becoming
less about machines and materials and more about service to the customer. The focus has shifted.
All that is done with regard to the machines and materials, spatial and timing or scheduling
decisions is with the customer in view.
This has made a huge difference. It has brought relationships to the fore. Since a customer is now
an individual or individual entity, the requirements on the production and operations system tend
to be multitudinous (number), multifarious (variety) and multi-temporal (time). The tolerance for
mistakes is low for a system that is subjected to several variations in demand. This requires real
leadership on the part of the firms so as to align the firm’s interests with that of its people inside
the firm and with that of its suppliers and others outside who provide inputs into the production
and operations system. The joint family concept may have gone from the society today, but it has
found a new place in the corporate world. A ‘supply chain’ is one such manifestation. Outsourcing
is increasingly being used to gain maximum advantage from the ‘core competence’ of other firms
in the ‘family’. Such relationships could spread over several continents; distance or political bound-
ary is not necessarily a constraint. Production and operations have become globalised. A bank in
UK or USA can send its several accounting and other operations to be performed in Mumbai by
an India-based firm—just as an auto-part producing firm in Chennai provides supplies to an auto
manufacturer in Detroit. Long distance business relationships are possible because of the progress
in the fields of telecommunication, computers and the Internet. These technologies have made the
integration (which means extensive and intensive interconnections) of various business organisa-
tions feasible. One may call the present times as the world of inter-relationships.
Due to the inter-relationships, certain things have become easier. For instance, a firm could
truly depend on its business associates. Thus the market undulations, i.e., the changing needs of
the customers can be met more easily. However, it would behove on the firm to be equally reliable
or be better. A relationship comes with its accompanying responsibilities. The modern day produc-
tion and operations management is expected to provide that kind of leadership.
If ‘efficiency’ was the all important factor yesterday, and if today ‘service’ and ‘relationships’
are the buzz words of production and operations management, what will be in store for tomor-
row? The concept of a ‘product’ has changed over the past few decades to include ‘service’ in it
Environmental and larger social concerns are getting to increasingly occupy the decision space
of the management. The production and operations function will remain in the future, even in a
‘post-industrial’ society. Utilities—of form, state, possession and place—have to be provided and
operations cannot be wished away. What may perhaps change would be the nature of the product
and the service.
 1 Production and Operations
Management Function

DEFINITION
Production and operations management concerns itself with the conversion of inputs into outputs,
using physical resources, so as to provide the desired utility/utilities—of form, place, possession or
state or a combination thereof—to the customer while meeting the other organisational objectives
of effectiveness, efficiency and adaptability. It distinguishes itself from the other functions such
as personnel, marketing, etc. by its primary concern for ‘conversion by using physical resources’.
Of course, there may be and would be a number of situations in either marketing or personnel or
other functions which can be classified or sub-classified under production and operations manage-
ment. For example, (i) the physical distribution of items to the customers, (ii) the arrangement
of collection of marketing information, (iii) the actual selection and recruitment process, (iv)
the paper flow and conversion of the accounting information in an accounts office, (v) the paper
flow and conversion of data into information usable by the judge in a court of law, etc. can all be
put under the banner of production and operations management. The ‘conversion’ here is subtle,
unlike manufacturing which is obvious. While in case (i) and (ii) it is the conversion of ‘place’
and ‘possession’ characteristics of the product, in (iv) and (v) it is the conversion of the ‘state’
characteristics. And this ‘conversion’ is effected by using physical resources. This is not to deny
the use of other resources such as ‘information’ in production and operations management. The
input and/or output could also be non-physical such as ‘information’, but the conversion process
uses physical resources in addition to other non-physical resources. The management of the use
of physical resources for the conversion process is what distinguishes production and operations
management from other functional disciplines. Table 1.1 illustrates the many facets of the produc-
tion and operations management function.
Often, production and operations management systems are described as providing physical
goods or services. Perhaps, a sharper distinction such as the four customer utilities and physical/
non-physical nature of inputs and/or outputs would be more appropriate. When we say that the
Central Government Health Service provides ‘service’ and the Indian Railways provide ‘service’,
these are two entirely different classes of utilities, therefore criteria for reference will have to be
entirely different for these two cases. To take another example the postal service and the telephones
1.6 Production and Operations Management

Table 1.1 Production and Operations Management—Some Cases

Case Input Physical Output Type of Input/ Type of Utility

Resource/s Used Output Provided to the
Customers
1. Inorganic Ores Chemical plant Inorganic Physical input Form
chemicals and equipment, chemical and physical
production other chemicals, output
use of labour, etc.
2. Outpatient Unhealthy Doctors, nurses, Healthier Physical input State
ward of a patients other staff, patients and physical
general equipment, other output
hospital facilities
3. Educational ‘Raw’ minds Teachers, books, ‘Enlightened’ Physical (?) State
institution teaching aids, etc. minds input and
physical (?)
output
4. Sales office Data from Personnel, office Processed Non-physical State
market equipment and ‘information’ input and non-
facilities, etc. physical output
5. Petrol pump Petrol (in Operators, Petrol (in Physical input Possession
possession err- and boys, possession of and physical
of the petrol equipment, etc the car owner) output
pump owner)
6. Taxi service Customer (at Driver, taxi itself Customer (at Physical input Place
railway station) petrol his residence) and physical
output
7. Astrologer/ Customer Astrologer, Customer Physical input State
palmist (mind full of Panchanga, other (mind with and physical
questions) books, etc. less questions) output
(hopefully)
8. Maintenance Equipment Mechanics, ‘Good’ Physical input State and form
workshop gone ‘bad’ Engineers, repairs Equipment and physical
equipment, etc. output
9. Income tax ‘Information’ Officers and Raid Non-physical State
office other staff, office input and (possession?)
facility physical output

service are different because the major inputs and major outputs are totally different with different
criteria for their efficiency and effectiveness.
Also, a clear demarcation is not always possible between operations systems that provide
‘physical goods’ and those that provide ‘service’, as an activity deemed to be providing ‘physical
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