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Instructor: Ms. Tanzeela Siddiqui

Product is defined as a "thing produced by labor or effort" or the "result of an act or a process"
For a consumer: Combination of Utilities
For a product manager: Combination of Processes
For a Financial Manager: Mix of various cost elements,
For an HR Manager: Mix of various skills
In general we can define the product as a bundle of tangible and intangible attributes which along with the
service is meant to satisfy the customer wants.
Production is Step-by-step conversion of one form of material into another form through chemical or
mechanical process to create or enhance the utility of the product to the user. Its a value addition process.
Example: manufacturing custom-made products like a boiler with a specific capacity, and standardized
products like, bikes, radio, television etc.

Production Management is the process of planning, organizing, directing and controlling the activities of
a production function. It combines and transforms various resources into value-added product in a
controlled manner as per policies of the organization.

Objectives of Production Management:

An objective of production management is to produce products and services of right quality and quantity
at right time and right manufacturing cost.
RIGHT QUALITY: is not necessarily best quality. It is determined by the cost of the product.
RIGHT QUANTITY: products should be produced in right number. If they are produced in excess of
demand, capital will block-up in the form of inventory. And if the quantity is produced in short of
demand, leads to shortage of products.
RIGHT TIME: timeliness of delivery is an important parameter to judge the effectiveness of department.
So, the production department should make the optimal utilization of its resources to achieve its
RIGHT COST: manufacturing cost is established before the product is actually manufactured. So product
should be produced at pre-established costs to minimize the variation b/w actual costs and pre-established
Production system can be classified as job-shop, batch, mass, and continuous production.

Classification of production system

Job shop production are characterized by manufacturing of one or few quantity of products designed and
produced as per the specification of customers within prefixed time and cost. 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

High variety of products and low volume

Use of general purpose machines and facilities
Highly skilled operators
Large inventory of materials

Detailed planning is essential

Higher cost due to frequent set up changes
Larger space requirements

Example: tailor, a construction company who build houses as per specifications, orange county chopper (a
custom-bike manufacturing company)
Batch production is defined as a form of manufacturing in which the job passes through the functional
departments in lots or batches and each lot may have a different routing. It is characterized by the
manufacture of limited number of products produced at regular intervals and stocked awaiting sales.

shorter production runs

When plant and machinery are flexible.
When 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
lead time and cost are lower as compared to job order production

Example: a bakery, a boutique, a pharmaceutical co.

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.
Dedicated special purpose machines having higher production capacities and output rates.
Large volume of products.
Shorter cycle time of production.
Lower in process inventory.
Flow of materials, components and parts is continuous and without any back tracking.
Production planning and control is easy.
Material handling can be completely automatic
Example: plastic company, assembly shops of automobiles, domestic appliance, Colgate etc.
Production facilities are arranged as per the sequence of production operations from the first operations to
the finished product. The items are made to flow through the sequence of operations through Material
handling devices such as conveyors, transfer devices, etc.
Material handling is fully automated.
Process follows a predetermined sequence of operations.
Component materials cannot be readily identified with final product.
Planning and scheduling is a routine action.
Unit cost is lower due to high volume of production
Example: nails, screws, brick etc

Everett E. Adam & Ronald J. Ebert define operating system as, An operating system (function) of an
organization is the part of an organization that produces the organizations physical goods and services.
In some of the organization the product is a physical good (hotels) while in others it is a service
(hospitals). Bus and taxi services, tailors, hospital and builders are the examples of an operating system.
Production Management is a sub-system operations management.
An operation is defined in terms of
the mission it serves for the organization
technology it employs
and the human and managerial processes it involves
Operations in an organization can be categorized into
1. Manufacturing operations: conversion process that includes manufacturing yields a tangible
output: a product
2. Service operations: conversion process that includes service yields an intangible output: a deed, a
performance, an effort. Some services are equipment based namely rail-road services, telephone
services and some are people based namely tax consultant services, hair styling
Manufacturing Operations
tangible outputs (products)
outputs that customers consume overtime
jobs that use less labor and more
little customer contact
no customer participation in the conversion

Service Operations
intangible outputs
jobs that use more labour and less
direct consumer contact
frequent customer participation in the
conversion process

Operation management is concerned with planning, organizing, and controlling the activities in
production process which affect human behavior through models.
Operations Management is 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 there-off to the
customer while meeting the other organizational objectives of effectiveness, efficiency and adaptability.
Planning: Defines the objectives for the operations subsystem of the organization, and the policies, and
procedures for achieving the objectives.
Organizing: Activities are determined, required to achieve the goals and assign authority and
responsibility for carrying them out.
Controlling: Measuring actual outputs and comparing them to planned operations management.
Controlling costs, quality, and schedules are the important functions here

Behavior: how the behavior of subordinates can affect managements planning, organizing, and
controlling actions. Their interest lies in decision-making behavior.
1. Customer Service
The first objective of operating systems is the customer service to the satisfaction of customer wants.
Therefore, customer service is a key objective of operations management. The operating system must
provide something to a specification which can satisfy the customer in terms of cost and timing. Thus,
primary objective can be satisfied by providing the right thing at a right price at the right time.
2. Resource Utilization
Another major objective of operating systems is to utilize resources for the satisfaction of customer wants
effectively, i.e., customer service must be provided with the achievement of effective operations through
efficient use of resources. Inefficient use of resources or inadequate customer service leads to commercial
failure of an operating system. Operations management is concerned essentially with the utilization of
resources, i.e., obtaining maximum effect from resources or minimizing their loss, under utilization or
Every entrepreneur is faced with the problem of deciding the best site for location of his plant or factory.
Plant location refers to the choice of region and the selection of a particular site for setting up a business
or factory. But the choice is made only after considering cost and benefits of different alternative sites. It
is a strategic decision that cannot be changed once taken.
An ideal location is one where the cost of the product is kept to minimum, with a large market share, the
least risk and the maximum social gain.
Location Analysis
Location analysis is a dynamic process where entrepreneur analyses and compares the appropriateness or
otherwise of alternative sites with the aim of selecting the best site for a given enterprise. It consists the

1. Demographic Analysis:
It involves study of population in the area in terms of total population (in no.), age composition, per capita
income, educational level, occupational structure etc.
2. Competitive Analysis:
It helps to judge the nature, location, size and quality of competition in a given trade area.
3. Traffic analysis:
To have a rough idea about the number of potential customers passing by the proposed site during the
working hours of the shop, the traffic analysis aims at judging the alternative sites in terms of pedestrian
and vehicular traffic passing a site.
4. Site economics:
Alternative sites are evaluated in terms of establishment costs and operational costs under this. Costs of
establishment is basically cost incurred for permanent physical facilities but operational costs are incurred
for running business on day to day basis, they are also called as running costs.
Two sites A and B are evaluated in terms of above mentioned two costs as follows:

The above cost statement indicates that site B is preferable to site A keeping in mind economic
considerations only although in some respects site A has lower costs. By applying the definition of ideal
location which is the place of maximum net advantage or which gives lowest unit cost of production and
distribution, site
B would be preferred.
Selection Criteria
Natural or climatic conditions
Availability and nearness to the sources of raw material.
Access to market: small businesses in retail or wholesale or services should be located within the
vicinity of densely populated areas.
Availability of Infrastructural facilities
Availability of skilled and non-skilled labour and technically qualified and trained managers.
Banking and financial institutions are located nearby
Strategic considerations of safety and security should be given due importance
Residence of small business entrepreneurs want to set up nearby their

Plant layout refers to the arrangement of physical facilities such as machinery, equipment, furniture etc.
within the factory building in such a manner so as to have quickest flow of material at the lowest cost and
with the least amount of handling in processing the product from the receipt of material to the shipment of
the finished product.
It may be defined as a technique of locating machines, processes and plant services within the factory so
as to achieve the right quantity and quality of output at the lowest possible cost of manufacturing.
An efficient plant layout is one that can be instrumental in achieving the following objectives:
Proper and efficient utilization of available floor space
To ensure that work proceeds from one point to another point without any
Reduce material handling costs
Reduce hazards to personnel
Utilize labour efficiently
Increase employee morale
Reduce accidents
Allow ease of maintenance
Types of Layout
In case of manufacturing unit, plant layout may be of four types:
Product or line layout: Under this, machines and equipments are arranged in one line depending upon
the sequence of operations required for the product. The materials move from one workstation to another
sequentially without any backtracking or deviation. Under this, machines are grouped in one sequence.
A line layout for two products is given below.

Manufacturing units involving continuous manufacturing process, producing few standardized products
continuously on the firms own specifications and in anticipation of sales would prefer product layout e.g.
chemicals, sugar, paper, rubber, refineries, cement, automobiles, food processing and electronics etc.
Process or functional layout:
In this type of layout machines of a similar type are arranged together at one place. E.g. Machines
performing drilling operations are arranged in the drilling department, machines performing casting
operations be grouped in the casting department. The work has to be allocated to each department in such
a way that no machines are chosen to do as many different job as possible i.e. the emphasis is on general
purpose machine.
Process layout is shown in the following diagram.

Thus, process layout or functional layout is suitable for job order production involving non-repetitive
processes and customer specifications and non-standardized products, e.g. tailoring, light and heavy
engineering products, made to order furniture industries, jewelry.
Fixed position or location layout:
In this type of layout, the major product being produced is fixed at one location. Equipment labour and
components are moved to that location. All facilities are brought and arranged around one work center.
This type of layout is not relevant for small scale entrepreneur. The following figure shows a fixed
position layout regarding shipbuilding.

In case of Trade unit, plant layout may be

1. Self service layout: The self-service layouts allow customers to select merchandise for themselves.
Customers should be led through the store in a way that will expose them to as much display area as
possible, e.g. Grocery Stores or department stores.
2. Full service layout: Certain specialty enterprises sell to fewer numbers of customers or higher priced
product, e.g. Apparel, office machines, sporting goods, fashion items, hardware, good quality shoes,
jewelry, luggage and accessories, furniture and appliances are all examples of products that require
time and personal attention to be sold. These full service layouts provide area and equipment
necessary in such cases.
3. Special layouts: Some layouts depend strictly on the type of special store to be set up, e.g. TV repair
shop, soft ice cream store, and drive-in soft drink stores are all examples of business requiring special
design. Thus, good retail layout should be the one, which saves rent, time and labour.
In case of Services centers and establishment plant layout may be:
Services establishments such as motels, hotels, restaurants, must give due attention to client convenience,
quality of service, efficiency in delivering services and pleasing office ambience. In todays environment,
the clients look for ease in approaching different departments of a service organization and hence the
layout should be designed in a fashion, which allows clients quick and convenient access to the facilities
offered by a service establishment.


Materials handling can be defined as the function dealing with the preparation, placing and positioning
of materials to facilitate their movement or storage. Material handling is the art and science involving
the movement, handling and storage of materials during different stages of manufacturing. Thus the
function includes every consideration of the product except the actual processing operation.
Material handling does not add any value to the product but adds to the cost of the product and hence it
will cost the customer more. So the handling should be kept at minimum. Material handling in Indian
industries accounts for nearly 40% of the cost of production. Out of the total time spent for manufacturing
a product, 20% of the time is utilized for actual processing on them while the remaining 80% of the time
is spent in moving from one place to another, waiting for the processing. Poor material handling may
result in delays leading to idling of equipment.
Following are the objectives of material handling:
1. Minimize cost of material handling.
2. Minimize delays and interruptions by making available the materials at the point of use at right
quantity and at right time.
3. Increase the productive capacity of the production facilities by effective utilization of capacity and
enhancing productivity.
4. Safety in material handling through improvement in working condition.
5. Maximum utilization of material handling equipment.
6. Prevention of damages to materials.
7. Lower investment in process inventory.
Selection of Material Handling equipment is an important decision as it affects both cost and efficiency of
handling system. The following factors are to be taken into account while selecting material handling
1. Properties Of The Material
Whether it is solid, liquid or gas, and in what size, shape and weight it is to be moved, are important
considerations and can already lead to a preliminary elimination from the range of available equipment
under review. Similarly, if a material is fragile, corrosive or toxic this will imply that certain handling
methods and containers will be preferable to others.
2. Layout And Characteristics Of The Building
Another restricting factor is the availability of space for handling. Low-level ceiling may preclude the use
of hoists or cranes, and the presence of supporting columns in awkward places can limit the size of the
material-handling equipment. If the building is multi-storeyed, chutes or ramps for industrial trucks may
be used. Layout itself will indicate the type of production operation (continuous, intermittent, fixed
position or group) and can indicate some items of equipment that will be more suitable than others. Floor
capacity also helps in selecting the best material handling equipment.
3. Production Flow
If the flow is fairly constant between two fixed positions that are not likely to change, fixed equipment
such as conveyors or chutes can be successfully used. If, on the other hand, the flow is not constant and
the direction changes occasionally from one point to another because several products are being produced
simultaneously, moving equipment such as trucks would be preferable.
4. Cost Considerations
This is one of the most important considerations. The above factors can help to narrow the range of
suitable equipment, while costing can help in taking a final decision. Several cost elements need to be
taken into consideration when comparisons are made between various items of equipment that are all
capable of handling the same load. Initial investment and operating and maintenance costs are the major

cost to be considered. By calculating and comparing the total cost for each of the items of equipment
under consideration, a more rational decision can be reached on the most appropriate choice.
5. Nature Of Operations
Selection of equipment also depends on nature of operations like whether handling is temporary or
permanent, whether the flow is continuous or intermittent and material flow pattern-vertical or horizontal.
6. Equipment Reliability
Reliability of the equipment and supplier reputation and the after sale service also plays an important role
in selecting material handling equipments.
The effectiveness of the material handling system can be measured in terms of the ratio of the time spent
in the handling to the total time spent in production. This will cover the time element. The cost
effectiveness can be measured by the expenses incurred per unit weight handled. It can be safely said that
very few organizations try to collate the expenses and time in this manner so as to objectively view the
performance and to take remedial measures. Some of the other indices which can be used for evaluating
the performance of handling systems are listed below:
Equipment Utilization Ratio
In order to know the total effort needed for moving materials, it may be necessary to compute Materials
Handling Labor (MHL) ratio. This ratio is calculated as under:

Personnel assigned

MHL= Material Handling

Total OperatingWork Force
In order to ascertain whether is the handling system delivers materials work centres with maximum
efficiency, it is desirable to compute direct labour handling loss ratio. The ratio is:


Materials handlingtime lost of labour

Total direct labour time


Conveyors are useful for moving material between two fixed workstations, either continuously or
intermittently. They are mainly used for continuous or mass production operationsindeed, they are
suitable for most operations where the flow is more or less steady. Conveyors may be of various types,
with rollers, wheels or belts to help move the material along: these may be power-driven or may roll
freely. The decision to provide conveyors must be taken with care, since they are usually costly to install;
moreover, they are less flexible and, where two or more converge, it is necessary to coordinate the speeds
at which the two conveyors move.

Industrial Trucks
Industrial trucks are more flexible in use than conveyors since they can move between various points and
are not permanently fixed in one place. They are, therefore, most suitable for intermittent production and
for handling various sizes and shapes of material. There are many types of truckpetrol- driven, electric,
hand-powered, and so on. Their greatest advantage lies in the wide range of attachments available; these
increase the trucks ability to handle various types and shapes of material.

Cranes And Hoists

The major advantage of cranes and hoists is that they can move heavy materials through overhead space.
However, they can usually serve only a limited area. Here again, there are several types of crane and
hoist, and within each type there are various loading capacities. Cranes and hoists may be used both for
intermittent and for continuous production.

These are either dead container (e.g. Cartons, barrels, skids, pallets) which holds the material to be
transported but do not move themselves, or live containers (e.g. wagons, wheelbarrows or computer
self-driven containers). Handling equipments of this kind can both contain and move the material, and is
usually operated manually.

Many types of robot exist. They vary in size, and in function. While many robots are used for handling
and transporting material, others are used to perform operations such as welding or spray painting. An
advantage of robots is that they can perform in a hostile environment such as unhealthy conditions or
carry on arduous tasks such as the repetitive movement of heavy materials.


1. As material handling adds no value but increases the production cycle time, eliminate handling
wherever possible. Ideally there should not be any handling at all!
2. Sequence the operations in logical manner so that handling is unidirectional and smooth.
3. Use gravity wherever possible as it results in conservation of power and fuel.
4. Weight of unit load should be maximum, so that each handling trip is productive.
5. Work study aspects, such a elimination of unnecessary movements and combination of processes
should be considered while installing a material handling system
6. Location of stores should be as close as possible to the plant which uses the materials

Materials management is defined as the function responsible for the coordination of planning, sourcing,
purchasing, moving, storing and controlling materials in an optimum manner so as to provide a predecided service to the customer at a minimum cost.
From the definition it is clear that the scope of materials management is vast. Its main objective is cost
reduction and efficient handling of materials at all stages and in all sections of the undertaking.
The functions of materials management can be categorized in the following ways:

Materials planning and control:

Material planning is a scientific technique of determining in advance the requirements of raw materials,
ancillary parts and components, spares etc. as directed by the production programme. It is a sub-system in
the overall planning activity. There are many factors, which influence the activity of material planning.
These factors can be classified as macro and micro systems.
Some of the macro factors which affect material planning are:
price trends,
business cycles
Govt. import policy etc.
Some of the micro factors that affect material planning are:
plant capacity utilization,
rejection rates,
lead times,
inventory levels,
working capital,
delegation of powers and communication.
Purchasing is an important function of materials management. In any industry purchase means buying of
equipments, materials, tools, parts etc. required for industry. The importance of the purchase function
varies with nature and size of industry. In small industry, this function is performed by works manager
and in large manufacturing concern; this function is done by a separate department.
Objectives of Purchasing
The basic objective of the purchasing function is to ensure continuity of supply of raw materials, subcontracted items and spare parts and to reduce the ultimate cost of the finished goods. In other words, the
objective is not only to procure the raw materials at the lowest price but to reduce the cost of the final
product. The objectives of the purchasing department can be outlined as under:
To avail the materials, suppliers and equipments at the minimum possible costs
To ensure the continuous flow of production
To develop an alternative source of supply

To establish and maintain the good relations with the suppliers

To achieve maximum integration with other department of the company
To train and develop the personnel
Efficient record keeping and management reporting

Right Price
It is the primary concern of any manufacturing organization to get an item at the right price. But right
price need not be the lowest price. It is very difficult to determine the right price; general guidance can be
had from the cost structure of the product. The tender system of buying is normally used in public sector
organizations but the objective should be to identify the lowest responsible bidder and not the lowest
Right Quality
Right quality implies that quality should be available, measurable and understandable as far as
practicable. The right quality is determined by the cost of materials and the technical characteristics as
suited to the specific requirements.
Right Time
For determining the right time, the purchase manager should have lead time information for all products
and analyse its components for reducing the same. Lead time is the total time elapsed between the
recognition of the need of an item till the item arrives and is provided for use. While determining the
purchases, the buyer has to consider emergency situations like floods, strikes, etc. He should have
contingency plans when force major clauses become operative, for instance, the material is not available
due to strike, lock-out, floods, and earthquakes
Right Source
The source from which the material is procured should be dependable and capable of supplying items of
uniform quality. The buyer has to decide which item should be directly obtained from the manufacturer.
Source selection, source development and vendor rating play an important role in buyer-seller
relationships. In emergencies, open market purchases and bazaar purchases are restored to.
Right Quantity
The right quantity is the most important parameter in buying. Concepts, such as, economic order quantity,
economic purchase quantity, fixed period and fixed quantity systems, will serve as broad guidelines. But
the buyer has to use his knowledge, experience and common sense to determine the quantity after
considering factors such as price structure, discounts, availability of the item, favorable reciprocal
relations, and make or buy consideration.
Right Attitude
The purchase manager should be innovative and his long-term objective should be to minimize the cost of
the ultimate product. He will be able to achieve this if he aims himself with techniques, such as, value
analysis, materials intelligence, purchases research, SWOT analysis, purchase budget lead time analysis,
Right Transportation
Right modes of transportation have to be identified as this forms a critical segment in the cost profile of
an item. It is an established fact that the cost of the shipping of ore, gravel, sand, etc., is normally more
than the cost of the item itself.

1. Recognition Of The Need

The initiation of procedure starts with the recognition of the need by the needy section. The demand is
lodged with the purchase department in the prescribed Purchase Requisition Form forwarded by the
authorised person either directly or through the Stores Department. The purchase requisition clearly
specifies the details, such as, specification of materials, quality and quantity, suggested supplier, etc.
2. The Selection Of The Supplier
The process of selection of supplier involves two basic aspects: searching for all possible sources and
short listing out of the identified sources. The complete information about the supplier is available from
various sources, such as, trade directories, advertisement in trade journals, direct mailing by the suppliers,
interview with suppliers, salesmen, suggestions from business associates, visit to trade fair, participation
in industries convention, etc. Identification of more and more sources helps in selecting better and
economical supplier. It should be noted that the low bidder is not always the best bidder. When everything
except price is equal, the low bidder will be selected. The important considerations in the selection are the
price, ability to supply the required quantity, maintenance of quality standards, financial standing etc. It
should be noted that it is not necessary to go for this process for all types of purchases. For the repetitive
orders and for the purchases of low-value, small lot items, generally the previous suppliers with good
records are preferred.
3. Placing The Order
Once the supplier is selected the next step is to place the purchase order. Purchase order is a letter sent to
the supplier asking to supply the said material. At least six copies of purchase order are prepared by the
purchase section and each copy is separately signed by the purchase officer.
Out these copies, one copy each is sent to store-keeper, supplier, accounts section, inspection department
and to the department placing the requisition and one copy is retained by the purchase department for
4. Follow-Up Of The Order
Follow-up procedure should be employed wherever the costs and risks resulting from the delayed
deliveries of materials are greater than the cost of follow-up procedure, the follow-up procedure tries to
see that the purchase order is confirmed by the supplier and the delivery is promised. It is also necessary
to review the outstanding orders at regular intervals and to communicate with the supplier in case of need.

Generally, a routine urge is made to the supplier by sending a printed post card or a circular letter asking
him to confirm that the delivery is on the way or will be made as per agreement. In absence of any reply
or unsatisfactory reply, the supplier may be contact through personal letter, phone, telegram and/or even
personal visit.
5. Receiving And Inspection Of The Materials
The receiving department receives the materials supplied by the vendor. The quantity are verified and
tallied with the purchase order. The receipt of the materials is recorded on the specially designed
receiving slips or forms which also specify the name of the vendor and the purchase order number. It also
records any discrepancy, damaged condition of the consignment or inferiority of the materials. The
purchase department is informed immediately about the receipt of the materials. Usually a copy of the
receiving slip is sent to the purchase department.
6. Payment Of The Invoice
When the goods are received in satisfactory condition, the invoice is checked before it is approved for the
payment. The invoice is checked to see that the goods were duly authorized to purchase, they were
properly ordered, they are priced as per the agreed terms, the quantity and quality confirm to the order, the
calculations are arithmetically correct etc.
7. Maintenance Of The Records
Maintenance of the records is an important part and parcel of the efficient purchase function. In the
industrial firms, most of the purchases are repeat orders and hence the past records serve as a good guide
for the future action. They are very useful for deciding the timings of the purchases and in selecting the
best source of the supply.
8. Maintenance Of Vendor Relations
The quantum and frequency of the transactions with the same key suppliers provide a platform for the
purchase department to establish and maintain good relations with them. Good relations develop mutual
trust and confidence in the course of the time which is beneficial to both the parties. The efficiency of the
purchase department can be measured by the amount of the goodwill it has with its suppliers.
Stores play a vital role in the operations of company. It is in direct touch with the user departments in its
day-to-day activities. The most important purpose served by the stores is to provide uninterrupted service
to the manufacturing divisions.
Functions of Stores
The functions of stores can be classified as follows:
1. To receive raw materials, components, tools, equipments and other items and account for them.
2. To provide adequate and proper storage and preservation to the various items.
3. To meet the demands of the consuming departments by proper issues and account for the
4. To assist in verification and provide supporting information for effective purchase action
5. Codification
It is one of the functions of stores management. Codification is a process of representing each item by a
number, the digit of which indicates the group, the sub-group, the type and the dimension of the item.
each code should uniquely represent one item
It should be simple and capable of being understood by all
Codification should be compact, concise, consistent and flexible enough to accommodate new
Inventory generally refers to the materials in stock. It is also called the idle resource of an enterprise.
Inventories represent those items which are either stocked for sale or they are in the process of
manufacturing or they are in the form of materials, which are yet to be utilised.
Reasons for Keeping Inventories

1. To stabilise production: The demand for an item fluctuates because of the number of factors, e.g.,
seasonality, production schedule etc. The inventories (raw materials and components) should be made
available to the production as per the demand failing which results in stock out and the production
stoppage takes place for want of materials.
2. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying and to
gain this price advantage the materials are bought in bulk even though it is not required immediately.
3. To keep pace with changing market conditions: The organizations have to anticipate the changing
market sentiments and they have to stock materials in anticipation of non-availability of materials or
sudden increase in prices.
Inventory control is a planned approach of determining what to order, when to order and how much to
order and how much to stock so that costs associated with buying and storing are optimal without
interrupting production and sales
Inventory control basically deals with two problems: (i) When should an order be placed? (Order level),
and (ii) How much should be ordered? (Order quantity).
Benefits of Inventory Control
Improvement in customers relationship because of the timely delivery of goods and service.
Smooth and uninterrupted production and, hence, no stock out.
Eliminates the possibility of duplicate ordering.
Techniques of Inventory Control
ABC analysis: In this analysis, the classification of existing inventory is based on annual consumption
and the annual value of the items. Hence we obtain the quantity of inventory item consumed during the
year and multiply it by unit cost to obtain annual usage cost. The items are then arranged in the
descending order of such annual usage cost.
Once ABC classification has been achieved, the policy control can be formulated as follows:
A-Item: Very tight control, the items being of high value. The control need be exercised at higher level of
B-Item: Moderate control, the items being of moderate value. The control need be exercised at middle
level of authority.
C-Item: The items being of low value, the control can be exercised at gross root level of authority, i.e., by
respective user department managers.
HML analysis: In this analysis, the classification of existing inventory is based on unit price of the items.
They are classified as high price, medium price and low cost items.
FSN analysis: In this analysis, the classification of existing inventory is based consumption of the items.
They are classified as fast moving, slow moving and non-moving items.
GOLF analysis: In this analysis, the classification of existing inventory is based sources of the items.
They are classified as Government supply, ordinarily available, local availability and foreign source of
supply items.
SOS analysis: In this analysis, the classification of existing inventory is based nature of supply of items.
They are classified as seasonal and off-seasonal items.
For effective inventory control, combination of the techniques of ABC with VED or ABC with HML or
VED with HML analysis is practically used.
Economic Order Quantity (EOQ)
Inventory models are concerned with two decisions: how much to order (purchase or produce) and when
to order so as to minimize the total cost. For the first decisionhow much to order, there are two basic
costs are considered namely, inventory carrying costs and the ordering or acquisition costs. As the
quantity ordered is increased, the inventory carrying cost increases while the ordering cost decreases.

Determination of EOQ by Tabulation Method

This method involves the following steps:
1. Select the number of possible lot sizes to purchase.
2. Determine average inventory carrying cost for the lot purchased.
3. Determine the total ordering cost for the orders placed.
4. Determine the total cost for each lot size chosen which is the summation of inventory carrying cost and
ordering cost.
5. Select the ordering quantity, which minimizes the total cost.
ILLUSTRATION: The XYZ Ltd. carries a wide assortment of items for its customers. One of its popular
items has annual demand of 8000 units. Ordering cost per order is found to be Rs. 12.5. The carrying
cost of average inventory is 20% per year and the cost per unit is Re. 1.00. Determine the optimal
economic quantity and make your recommendations.

The table indicates that an order size of 1000 units will gives the lowest total cost among the different
alternatives. It also shows that minimum total cost occurs when carrying cost is equal to ordering cost.
Determination of EOQ by Analytical Method
The most economic point in terms of total inventory cost exists where,
Inventory carrying cost = Annual ordering cost-------- (1)
Total annual ordering costs = Number of orders per year Ordering cost per order

total demand per year
lot size in each production run
ordering cost per order
Total inventory carrying cost = Average inventory Inventory carrying cost per unit

cost per unit
inventory carrying cost %age
So, according to eq(1)
D/Q C1 = Q/2 C I
From the above equation, we can derive the formulae



ILLUSTRATION : An oil engine manufacturer purchases lubricants at the rate of Rs. 42 per piece from
a vendor. The requirements of these lubricants are 1800 per year. What should be the ordering quantity
per order, if the cost per placement of an order is Rs. 16 and inventory carrying charges per rupee per year
is 20 paise.
SOLUTION: Given data are:
Number of lubricants to be purchased,
Ordering cost,
Inventory carrying cost,

D = 1800 per year

C1 = Rs. 16 per order
CI = Rs. 42 Re. 0.20 = Rs. 8.40 per year

2 x1800x16
Optimal quantity (EOQ),

Qo =
Qo = = 82.8 or 83 lubricants (approx).


Standardization: Standardization means producing maximum variety of products from the minimum
variety of materials, parts, tools and processes.
Simplification: The concept of simplification is closely related to standardization. Simplification is the
process of reducing the variety of products manufactured. Simplification is concerned with the reduction
of product range, assemblies, parts, materials and design.
Value analysis is defined as an organized creative approach which has its objective, the efficient
identification of unnecessary cost-cost which provides neither quality nor use nor life nor appearance nor
customer features.

Quality Control
Different meaning could be attached to the word quality under different circumstances. The word quality
does not mean the quality of manufactured product only. It may refer to the quality of the process (i.e.,
men, material, and machines) and even that of management. Where the quality manufactured product
referred as or defined as quality of product as the degree in which it fulfills the requirement of the
customer. It is not absolute but it judged or realized by comparing it with some standards.
Quality begins with the design of a product in accordance with the customer specifications. Crosby
defined as quality is conformance to requirement or specifications.
Factors affecting quality
Market: because of technology advancement, we could see many new products to satisfy customer
wants. At the same time, the customer wants are also changing dynamically. So, it is the role of
companies to identify needs and then meet it with existing technologies or by developing new
Money: the increased global competition necessitates huge outlays for new equipments and process. This
should be rewarded by improved productivity. This is possible by minimizing quality costs associated
with the maintenance and improvements of quality level.

Men: the rapid growth in technical knowledge leads to development of human resource with different
Machines and mechanization: in order to have quality products which will lead to higher productivity of
any organization, we need to use advanced machines and mechanize various operations.
Modern information methods: the modern information methods help in storing and retrieving needed
data for manufacturing, marketing and servicing.
Motivation: if we fix the responsibility of achieving quality with each individual in the organization with
proper motivation techniques, there will not be any problem in producing the designed quality products.
Materials: selection of proper materials to meet the desired tolerance limit is also an important
consideration. Quality attributes like, surface finish, strength, diameter etc., can be obtained by proper
selection of material
Quality control
The process through which the standards are established and met with standards is called control.
This process consists of observing our activity performance, comparing the performance with some
standard and then taking action if the observed performance is significantly too different from the
Steps in Quality Control
Following are the steps in quality control process:
1. Formulate quality policy.
2. Set the standards or specifications on the basis of customers preference, cost and profit.
3. Select inspection plan and set up procedure for checking.
4. Detect deviations from set standards of specifications.
5. Take corrective actions or necessary changes to achieve standards.
6. Decide on salvage method i.e., to decide how the defective parts are disposed of, entire scrap or
7. Coordination of quality problems.
8. Developing quality consciousness both within and outside the organization.
Inspection is an important tool to achieve quality concept. It is necessary to assure confidence to
manufacturer and aims satisfaction to customer. Inspection is an indispensable tool of modern
manufacturing process. It helps to control quality, reduces manufacturing costs, eliminate scrap losses and
assignable causes of defective work.
The inspection and test unit is responsible for appraising the quality of incoming raw materials and
components as well as the quality of the manufactured product or service. It checks the components at
various stages with reference to certain predetermined factors and detecting and sorting out the faulty or
defective items.
Purpose of inspection
1. To distinguish good lots from bad lots.
2. To distinguish good pieces from bad pieces.
3. To determine if the process is changing.
4. To determine if the process is approaching the specification limits.
5. To rate quality of product.
6. To rate accuracy of inspectors.
7. To measure the precision of the measuring instrument.
8. To secure products-design information.
9. To measure process capability
Types of inspection
1. Floor inspection

In this system, the inspection is performed at the place of production. It suggests the checking of materials
in process at the machine or in the production time by patrolling inspectors. These inspectors move from
machine to machine and from one to the other work centres. Inspectors have to be highly skilled. This
method of inspection minimize the material handling, does not disrupt the line layout of machinery and
quickly locate the defect and readily offers field and correction.
1. Heavy products are produced.
2. Different work centers are integrated in continuous line layout

2. Centralized inspection
Inspection is carried in a central place with all testing equipment; sensitive equipment is housed in airconditioned area. Samples are brought to the inspection floor for checking. Centralized inspection may
locate in one or more places in the manufacturing industry.

3. Functional inspection
This system only check for the main function, the product is expected to perform. Thus an electrical
motor can be checked for the specified speed and load characteristics. It does not reveal the variation of
individual parts but can assure combined satisfactory performance of all parts put together. Both
manufacturers and purchasers can do this, if large number of articles are needed at regular intervals. This
is also called assembly inspection.
4. First piece or first-off inspections
First piece of the shift or lot is inspected. This is particularly used where automatic machines are
employed. Any discrepancy from the operator as machine tool can be checked to see that the product is
within in control limits. Excepting for need for precautions for tool we are check and disturbance in
machine set up, this yields good result if the operator is careful.
5. Pilot piece inspection
This is done immediately after new design or product is developed. Manufacturer of product is done
either on regular shop floor if production is not disturbed. If production is affected to a large extent, the
product is manufactured in a pilot plant. This is suitable for mass production and products involving large
number of components such as automobiles airplanes etc., and modification are design or manufacturing
process is done until satisfactory performance is assured or established.
6. Final inspection
This is also similar to functional or assembly inspection. This inspection is done only after completion of
work. This is widely employed in process industries. This is done in conjunction with incoming material
Methods of Inspection
1. 100% Inspection
This type will involve careful inspection in detail of quality at each strategic point or stage of manufacture
where the test is involved is non-destructive and every piece is separately inspected.
It requires more number of inspectors and hence it is a costly method. There is no sampling error. It is
suitable only when a small number of pieces are there or a very high degree of quality is required.
Example: Jet engines, aircraft, medical and scientific equipment.
2. Sampling Inspection
In this method randomly selected samples are inspected. Samples taken from different patches of products
are representatives. If the sample proves defective, the entire concerned is to be rejected or recovered.
Sampling inspection is cheaper and quicker. It requires less number of Inspectors.
This type of inspection governs wide currency due to the introduction of automatic machines or
equipments which are less susceptible to chance variable and hence require less inspection, suitable for

inspection of products which have less precision importance and are less costly. Example: Electrical
bulbs, radio bulbs, washing machine etc.
Waste Management
The industrial waste and scrap consists of spoiled raw-materials, rejected components, defective parts,
waste from production departments etc. involves some commercial values. They should be disposed of
periodically and proper credit of the amount should be taken in the books of accounts.
Hence, waste management places an important role in managing operations. Wastes can be categorized
into obsolete, surplus and scrap items.
1. Obsolete items:
These are those materials and equipments which are not damaged and which have economic worth but
which are no longer useful for the Companys operation owing to many reason such as, changes in
product line, process, materials, and so on.
2. Surplus items:
These are those materials and equipments which have no immediate use but have accumulated due to
faulty planning, forecasting and purchasing. However, they have a usage value in future.
It is defined as process wastage, such as, turnings, borings, sprues and flashes. They may have an end-use
within the plant having commercial values. Hence, should be disposed of periodically.
Disposal of Scrap
Disposal action follows when the scrap cannot be utilized within the organization. In practice, it has been
found that it is profitable to dispose the scrap directly to end-users rather than to middlemen who
normally form a cartel of their own which leads to lower returns. Before disposal action it is essential that
the scrap is segregated according to metal, size, etc. when the scrap is mixed, the return is even lower than
the lowest element in the mixture.
Auction and Tender methods are frequently used for disposal of scrap. Parties in both the cases are
normally required to inspect the scrap in the scrap yard and deposit earnest money. It is necessary that
optimum usage of materials is made and funds tied up in obsolete surplus and scrap items minimized.
This is only possible when top management shows commitment and support. The employees of the
organizations are naturally the best people to suggest improvements in materials, processes and new end
users for scrap. It is they who can minimize the accumulation of scrap through coordination.
Therefore, top management should work out formal reward systems to promote employee participation in
this matter.



Example 1
The ABC Co. is planning to stock a new product. The Co. Has developed the following information:
Annual usage = 5400 units
Cost of the product = 365 Rs./unit
Ordering cost = 55 Rs./order

Carrying cost = 28% /year of inventory value held.

a Determine the optimal number of units per order
b. Find the optimal number of orders/year
c. Find the annual total inventory cost i.e O.C+C.C

Example 2
Holding costs are 35 Rs./unit/year. The ordering cost is 120 Rs./order and sales are relatively constant at
400 month.
a. What is the optimal order quantity?
b. What is the annual total inventory cost?(C.C+ O.C)
Example 3
Azim furniture company handles several lines of furniture, one of which is the popular Layback
Model TT chair. The manager, Mr. Farmerson, has decided to determine by use of the EOQ model the
best quantity to obtain in each order. Mr. Farmerson has determined from past invoices that he has sold
about 200 chair during each of the past five years at a fairly uniform rate and he expects to continue at
that rate. He has estimated that preparation of an order and other variable costs associated with each order
are about 10 Rs., and it costs him about 1.5 % per month (or 18% per year) to hold items in stock. His
cost for the chair is 87 Rs..
a. How many layback chairs should be ordered each time?
b. How many orders would there be?
c. Determine the approximate lenght of a supply order in days? (Q/D*365)
d. Calculate the minimum total inventory cost
e. Show and verify that the annual holding cost is equal to the annual ordering cost (due to
rounding, show these costs are approximately equal)

Example 4
A. Leyla Tas has determined that the annual demand for #6 screws is 100000 screws. Leyla,
estimates that it costs 10 RS. every time when an order is placed. This cost includes wages, the cost of the
forms used in placing the order and so on. Furthermore, she estimates that the cost of carrying are screw
in inventory for a year is one-half of 0.01 RS.. Assume that the demand is constant throughout the year.
a. How many #6 screws should Leyla order at a time to minimize total inventory cost?
b. How many orders per year would be placed? What would the annual ordering cost be?
c. What would the average inventory be? What would the annual holding cost be?

B. The manager believes that Leyla places too many orders for screws /year. He believes that an order
should be placed only twice/year. If Leyla follows her manager`s policy, how much more would this cost
every year over the ordering policy that she developed, if only two orders were placed each year?

Example 5
Ahmet Uslu experiences an annual demand of 220 000 units for pro quality tennis balls at the zmir
Tennis Supply Company. It cost Ahmet 30 RS. to place an order and his carrying cost is 18%. How many
orders per year should Ahmet place for the balls?

Example 6
Aye alkan,owner of Computer Village, needs to determine an optimal ordering policy for Porto-Pro
computers,annual demand for the computers is 28 000 units and carrying cost is 23 percent. Aye has
estimated order costs to be 48 RS. per order. What are the optimal quantity per order?

Example 7
ERS. uses 96 000 annually of a particular reagent in the chemistry department of the ERS. estimates the
ordering cost at 45 RS. and thinks that the university can hold this type of inventory at an annual storage
cost of 22% of the purchase price. How many months supply should the purchasing department order at
on time to minimize total annual cost of inventory?

Example 8
A local artisan uses supplies purchased from an overseas supplier. The owner believes the
assumptions of the EOQ model are met reasonably well. Minimization of inventory cost is her objective.
Relevant data, from the files of the credit firm, are annual demand is 240 units, ordering cost is 42
RS./order, and holding cost = 4 RS./unit/year.
a) How many should she order at one time?
b) How many times per year will she replenish its inventory of this material?
c) What will be the total inventory costs associated with this material?
d) If she discovered that the carrying cost has been overstated, and was in reality only 1 RS./unityear, what is the corrected value of EOQ?

Example 9
ABC, a company that sells pump housings to other manufacturers, would like to reduce its inventory cost
by determining the optimal number of pump housings to obtain per order. The annual demand is 1 000
units, the ordering cost is 10 RS./order, and the average carrying cost per unit per year is 0.50 RS..
Calculate EOQ .(i.e.the optimal number of units per order).

Example 10
Lemar Supermarket sells about 200 000 kilos of milk annually. The milk is purchased for 4 RS./kg.
Holding costs are 1.40 RS./kg/yr. Each order costs 35 RS.. If the shelf life of the milk is only 5 days, how
many kilos should be ordered at a time.

Example 11
A building materials stockist obtains its cement from a single supplier. Demand for cement is reasonably
constant throughout the year. Last year the company sold 2 000 tonnes of cement. It estimates the costs
of placing an order at around 25 RS. each time an order is placed and charges inventory holding at 20% of
purchase cost. The company purchases cement at 60 RS. per tonne.
a) How Much cement should the company order at a time?
b) Instead of ordering EOQ, why not a order convenient 100 tonnes?

Example 12
# 2 pencils at the ERS. bookstore are sold at a fairly steady rate of 60 per week. The pencil cost the
bookstore 0.02 RS. each and sell for 0.15 RS. each. It costs the bookstore
12 RS. to initiate an order
and holding costs are based on an annual interet rate of 25%. Determine the optimal number of pencils for
the bookstore to purchase and the time between placement of orders. What are the holding and setup costs
for this item?

Example 13
A wholesaler has a steady demand for 50 items of a given product each month. The purchase cost of each
item is 6 RS. and the holding cost for this item is estimated to be 20% of the stock value per annum.
Every order placed by the wholesaler cost 10 RS. in administration charges regardless of the number

Example 14
Demand/week = 400 unit.

Purchase price = 3 RS./unit

Holding cost = 2 RS./100 items/week
Order cost =12 RS./order

Example 15
TT Beverage Co. is a distributor of beer, wine and soft drinks product. From a main warehouse located in
Magusa, TRNC, TT supplies nearly 1000 retail stores with beverage products. The beer inventory, which
constitutes about 40% of the companys total inventory, averages approximately 50 000 cases. With an
average cost per case of approximately 8RS., TT estimates the value of its beer inventory to be 400 000
The warehouse manager has decided to do a detailed study of inventory costs associated with Sergio Beer,
the # 1 selling TT beer. The purpose of the study is to establish the how-Much to order, and when to
order decisions for Segio Beer that will result in the lowest possible cost.
The manager found that the demand is constant and 2 000 cases/week.The cost of holding for the TT beer
inventory is 25% of the value of the inventory.
(Note that definding the holding cost as a % of the value of the product is convenient, because it is easily
transferable to other products)
TT is paying 32 RS./order regardless of the quantity requested in the order. Suppose TT is open 5 days
each week, and the manufacturer of Sergio Beer guarantees 2-day delivery on any order placed.
a) Find Economic Order Quantity.
b) Find reorder point.
c) How frequently theorder will be placed?
d) Find the cycle time?
e) Calculate minimum total inventory cost.