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UNIT – I
INTRODUCTION TO MANAGEMENT
CONCEPT OF MANAGEMENT
Management is what managers do. It refers to the people at top level in the
organization. It is often viewed as maneuvering, i.e. doing something cleverly to change a
situation and make things happen the way you want them to. It has drawn the concepts and
principles from a number of disciplines such as economics, sociology, psychology,
anthropology, and statistics and so on. There are a variety of views about the term
management. Traditionally, the term "management" refers to the activities (and often the
group of people) involved in the four general functions (planning, organizing, leading,
controlling).
Another common view is that "management" is getting things done through others. To
most employees, the term "management" probably means the group of people (executives and
other managers) who are primarily responsible for making decisions in the organization. In
non-profit organizations, the term management might refer to all or any of the activities of the
board, executive director and/or program directors.
Human Physical
Resources resources
Effective and
Managerial efficient Goals
activities utilization
Financial
Resources Information
resources
In general, management is a set of activities directed at the efficient and effective
utilization of resources in the pursuit of one or more goals. Different scholars from different
disciplines have expressed their views on management. For example, economists have treated
management as a factor of production; sociologists have treated it as a class or group of
persons; practitioners have treated it as a process comprising different activities.
Definition:
1. According to Harold Koontz, “Management is an art of getting things done through
and with the people in formally organized groups. It is an art of creating an
environment in which people can perform and individuals and can co-operate towards
attainment of group goals”.
2. According to F.W. Taylor, “Management is an art of knowing what to do, when to do
and see that it is done in the best and cheapest way”.
3. According to Henry Fayol, “To manage is to forecast and to plan, to organize to
command, to coordinate and to control”.
Therefore, a good management includes both being effective and efficient. Being
efficient means doing the task correctly atleast possible cost with minimum wastage of
resources. Management is a process involving planning, organizing, staffing, directing and
controlling human efforts to achieve stated objectives in an organization.
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Unit-1: Introduction to Management 1.2
IMPORTANCE OF MANAGEMENT
Management has been important to the daily lives of people and to the organizations.
The importance of management may be traced in the following contexts:
1. Achievement of group goals: A human group consists of several persons, each
specializing in doing a part of the total task. Each person may be working efficiently,
but the group as a whole cannot realize it objectives unless there is mutual
cooperation and coordination among them. Management creates team work and
coordination in the group.
2. Optimum utilization of resources: Managers forecast the need for materials,
machinery, money and manpower. They ensure that the organization has adequate
resources and at the same time does not have idle resources.
3. Minimization of Cost: In the modern era of cut-throat competition no business can
succeed until it is able to supply the required goods and services at the lowest possible
cost per unit. Management directs the day-to-day operations in such a way that all
wastages are avoided.
4. Survival and Growth: An enterprise has to adapt itself to the changing demands of
the market and society. It takes steps in advance to meet the challenges of changing
environment. Managers enable the enterprise to minimize the risks and maximize the
benefits of opportunities.
5. Generation of Employment: By setting up and expanding business enterprises,
managers create jobs for the people. Managers also create such an environment that
people working in enterprise can get job satisfaction and happiness.
6. Continuity in the organization: Continuity is very important in the organization. It
is only management that keeps the organization continuing. Where there are no proper
guidelines for decision making continuity cannot be guaranteed.
7. Development of the Nation: Efficient management is equally important at National
level. The development of a country largely depends on the quality of the
management of its resources. By producing wealth, management increases the
national income and living standards of people.
NATURE OF MANAGEMENT
The study and application of management techniques in managing the affairs of the
organization have changed its nature over a period of time. The following points will describe
the nature of management:
1. Management is a Social process: Management is done by people, through people
and for people. Social process refers to a series of activities that are performed in the
society. These activities are carried out by administrators, politicians, economists,
doctors, lawyers, parents, etc.
2. Management is goal oriented: Management involves achieving certain goals; it has
no justification to exist without goals. The basic goal of management is to ensure
efficiency and economy in utilization of human, physical and financial resources.
3. Management is Universal: Management is an essential element of every organized
activity irrespective of the size or type of activity. All types of organizations require
management. Managers at all levels perform the same basic functions.
4. Management is a continuous process: Management is dynamic and an on-going
process. The cycle of management continuous to operate so long as there is organized
action for the achievement of group goals.
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Unit-1: Introduction to Management 1.3
FUNCTIONS OF MANAGEMENT
Management is a process of the quality of both physical as well as human resources to
seek objectives. The elements or activities which are performed in this process are known as
functions of management. Various authors have classified these functions differently:
Writers Management Functions
Henry Fayol Planning, Organizing, Commanding, Coordinating, Controlling
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Unit-1: Introduction to Management 1.4
PLANNING
The first function of the manager is planning. It is also the foremost and the essential
function. Planning defines the goals and objectives to be reached in the plan period. It also
consists of policies, procedures, methods, budgets, strategy and programmes that are needed
to achieve the goals set. Decision-making is the most important and integral part of planning.
Planning is the most basic and pervasive process involved in managing. It means
deciding in advance what actions to take and when and how to take them. Planning is needed,
firstly for committing and allocating the organization’s limited resources towards achieving
its objectives in the best possible manner and, secondly for anticipating the future
opportunities and problems.
Planning is putting down in black and white the actions which a manager intends to
take. Each manager is involved in planning though the scope and character may vary with the
level of the manager. Planning involves determination of objectives; forecasting; formulation
of policies and programmes; and preparation of schedules.
ORGANIZING
Organizing is to give a proper shape to the structure that should execute the plan
smoothly to achieve its success. It is the function of putting together different parts forming
an enterprise and makes it an organic whole to enable it to carry out defined operations.
Various activities to fulfill the goals have to be grouped and these are to be assigned to
people in-groups or departments. The authority, responsibility, accountability needed at each
level to execute the plan is to be defined and delegated.
Organizing simply can be defined as a process that results in organizational structure
through departmentalization, linking departments together, defining authority and
responsibility and prescribing authority relationship sub activities. The organizing function
deals with all those activities that result in the formal assignment of tasks and authority and a
coordination of effort. The supervisor staffs the work unit, trains employees, secures
resources, and empowers the work group into a productive team.
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Unit-1: Introduction to Management 1.5
STAFFING
It is the function of manning the organization structure and keeping it manned.
Staffing has assumed greater importance in the recent years due to advancement of
technology, increase in size of business, complexity of human behavior etc. The main
purpose of staffing is to put right man on right job i.e. square pegs in square holes and round
pegs in round holes.
The staffing function involves identifying/selecting the right person for executing
each task planned. By carrying the functions of organizing and staffing the "plan" is
transformed from a document level to the operational stage. Having found the right
candidate, it is equally important that you are able to retain him. Among other things,
motivation and leadership provided by the top management of organization also plays an
important role.
The staffing function includes all the jobs connected with:
Manpower Planning;
Recruitment; Selection & placement;
Training & development;
Remuneration, Performance Appraisal;
Promotions & Transfer.
DIRECTING
It is that part of managerial function which actuates the organizational methods to
work efficiently for achievement of organizational purposes. It is considered life- spark of the
enterprise which sets it in motion the action of people because planning, organizing and
staffing are the mere preparations for doing the work. Direction is that inert-personnel aspect
of management which deals directly with influencing, guiding, supervising, motivating sub-
ordinate for the achievement of organizational goals.
The function of directing embraces the following activities:
a. Issuing orders and instructions.
b. Supervising (overseeing) people at work.
c. Motivation, i.e. creating the willingness to work for certain objectives.
d. Communication, i.e. establishing understanding with employees regarding plans and
their implementation, and
e. Leadership or influencing the behavior of employees.
Direction has following elements:
1. Supervision: implies overseeing the work of subordinates by their superiors. It is the
act of watching & directing work & workers.
2. Motivation: means inspiring, stimulating or encouraging the sub-ordinates with zeal
to work. Positive, negative, monetary, non-monetary incentives may be used for this
purpose.
3. Leadership: may be defined as a process by which manager guides and
influences the work of subordinates in desired direction.
4. Communications: is the process of passing information, experience, opinion etc
from one person to another. It is a bridge of understanding.
CONTROLLING
Control is the tool for course regulation as the organization marches ahead and
correcting it when it diverts off-course. The results of the activity must confirm to the laid
down standards and all variations should be analyzed and root cause identified. Controlling
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Unit-1: Introduction to Management 1.6
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Unit-1: Introduction to Management 1.7
SCIENTIFIC MANAGEMENT
The classical scientific branch arose because of the need to increase productivity and
efficiency. The emphasis was on trying to find the best way to get the most work done by
examining how the work process was actually accomplished and by scrutinizing the skills of
the workforce.
The concept of scientific management was introduced by Frederick Winslow Taylor
in USA in the beginning of 20th century (1856-1915).Since Taylor has put the emphasis on
solving managerial problems in a scientific way, often, he is called as Father of Scientific
Management and his contributions as the principles of scientific management. He also
developed a theory of organizations, which has been largely accepted by subsequent
Management Philosophers.
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Unit-1: Introduction to Management 1.8
Definition:
“Scientific management is concerned with knowing exactly what you want to do and
then see in that they do it in the best and cheapest way.”
Taylor was concerned with the problems of increasing labour productivity without
putting under strain or workers. Scientific management implies the application of scientific
methods of study and analysis to the problems of management. On the basis of experiments,
he published many papers and books and all his contributions were compiled in his book
“Scientific Management”.
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Unit-1: Introduction to Management 1.9
Worker
CRITICISM:
Scientific management ignored human side of organization. Taylor and his disciples
were called "Efficiency Experts" because they concentrated attention on improving
efficiency of workers and machines. Scientific management is therefore restricted in scope as
a theory of Industrial Engineering or Industrial Management, rather than a general theory of
management.
Although it is accepted that the scientific management enables the management to put
resources to its best possible use and manner, yet it has not been spared of severe criticism.
Employer’s Viewpoint:
1. More Expensive: Scientific management is a costly system and a huge investment is
required in establishment of planning dept., standardization, work study, training of
workers. It may be beyond reach of small firms.
2. Time Consuming: Scientific management requires mental revision and complete
reorganizing of organization. A lot of time is required for work, study standardization
& specialization.
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Unit-1: Introduction to Management 1.10
Workers Viewpoint:
1. Unemployment: Workers feel that management reduces employment opportunities
through replacement of men by machines and by increasing human productivity
fewer workers are needed to do work leading to chucking out from their jobs.
2. Exploitation: Workers feel they are exploited as they are not given due share in
increasing profits which is due to their increased productivity. Wages do not rise in
proportion as rise in production. Wage payment creates uncertainty & insecurity.
3. Monotony: Due to excessive specialization the workers are not able to take initiative
on their own. Their status is reduced to being mere cogs in wheel. Jobs become dull.
Workers lose interest in jobs and derive little pleasure from work.
4. Weakening of Trade Union: Everything is fixed & predetermined by management.
So it leaves no room for trade unions to bargain as everything is standardized,
standard output, standard working conditions, standard time etc.
5. Over speeding: The scientific management lays standard output, time so they have to
rush up and finish the work in time. The workers speed up to that standard output, so
scientific management drives the workers to rush towards output and finish work in
standard time.
ADMINISTRATIVE/MODERN OPERATIONALMANAGEMENT
Administrative theory focuses on the total organization and attempts to develop
principles that will direct managers to more efficient activities. Administrative theorists
looked at productivity improvements from the "top down", as distinguished from the
Scientific Approach of Taylor, who reorganized from "bottom up". Administrative theorists
developed general guidelines of how to formalize organizational structures and relationships.
Henri Fayol(1841-1925) was a French mining engineer who spent many of his later
years as an executive for a French coal and iron combine. In 1916, as director of the
company, Fayol penned the book General and Industrial Management. In this book, Fayol
classified the study of management into several functional areas which are still commonly
used in executive training and corporate development programs. The functional areas
identified by Fayol are planning, organizing, commanding, coordinating, and controlling. His
contributions are divided in the following categories:
According to Fayol the following are the list of qualities required in a manager:
Physical – includes Health, Vigor and address.
Mental – includes ability to understand and learn, judgment, and capability.
Moral – includes energy, firmness, initiative, loyalty, etc.
Educational – includes qualifications.
Technical - peculiar to the function being performed.
Experience – knowledge in related field.
Organizational Activities:
He emphasized the role of administrative management and concluded that all
activities that occur in business organizations could be divided into six main groups.
1. Technical - related to production or manufacturing.
2. Commercial – includes buying, selling and exchange.
3. Financial – includes search for capital and its optimum use.
4. Security – related to protection of property and person.
5. Accounting – includes record keeping, costing and statistics.
6. Managerial – includes planning, organizing, commanding, coordinating and
controlling).
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Unit-1: Introduction to Management 1.11
He concluded that the six groups of activities are interdependent and that it is the role
of management to ensure all six activities work smoothly to achieve the goals of an
enterprise.
10. Order: This is a principle relating to the arrangement of things and people. In social
order, there should be the right man in the right place.
11. Equity: Equity is the combination of justice and kindness. Equity in treatment and
behavior is liked by everyone and it brings loyalty in the organization.
12. Stability of tenure: No employee should be removed or transferred within short time.
There should be reasonable security of jobs. Stability of tenure is essential to get an
employee accustomed to new work and succeeding in doing it well.
13. Initiative: Within the limits of authority and discipline, managers should encourage
their employees for taking initiative. Initiative is concerned with thinking out and
execution of a plan. Initiative increases zeal and energy on the part of human beings.
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Unit-1: Introduction to Management 1.12
14. Esprit de corps: It is the principle of ‘union is strength’ and extension of unity of
command for establishing team work. The manager should encourage esprit de corps
among his employees.
Until today, his principles remain important as they continue to have a significant
impact on current managerial thinking. Fayol's main contribution was the idea that
management was not a talent related to genetic hereditary, but a skill that could be taught. He
created a system of ideas that could be applied to many areas of management and laid down
basic rules for managing large organizations.
THEORIES OF MOTIVATION
The word ‘motivation’ has been derived from the latin word ‘motive’ which means
any idea, need or emotion that prompts a man into action. Human motives are internalised
goals within individuals. Motivation may be defined as those forces that cause people to
behave in certain ways. Motivation encompasses all those pressures and influences that
trigger, channel, and sustain human behaviour. Most successful managers have learned to
understand the concept of human motivation and are able to use that understanding to achieve
higher standards of subordinate work performance.
Motivation is the process of channelling a person's inner drives so that he wants to
accomplish the goals of the organization. It seeks to know the incentives for work and tries to
find out the ways and means whereby their realization can be helped and encouraged.
Managers, by definition, are required to work with and through people, so they must gain at
least some understanding of the forces that will motivate the people they are to manage.
Definition:
1. Koontz and O'Donnell, "Motivation is a general term applying to the entire class of
drives, needs, wishes and similar forces".
2. Lewis Allen, "Motivation is the work a manager performs to inspire, encourage and
impel people to take required action".
Theories of Motivation:
Many methods of employee motivation have been developed. There are many
approaches to classify the theories of motivation. Two primary approaches to motivation are
content and process.
1. The content approach emphasizes what motivates employees, focuses on the
assumption that individuals are motivated by the desire to fulfill inner needs. Content
theories focus on the needs that motivate people.
2. The process approach emphasizes how and why people choose certain behaviors in
order to meet their personal goals. Process theories focus on external influences or
behaviors that people choose to meet their needs.
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Unit-1: Introduction to Management 1.13
Experiment Results:
After analyzing the results from the Hawthorne experiments Mayo concluded that
workers were motivated by more than self-interest and the following had an impact too:
1. Psychological Contract:There is an unwritten understanding between the worker
and employer regarding what is expected from them; Mayo called this the
psychological contract.
2. Interest in Workers:A worker’s motivation can be increased by showing an interest
in them. Mayo classified studying the workers (through the experiments) as showing
an interest in the workers.
3. Work is a Group Activity:Work is a group activity, team work can increase a
worker’s motivation as it allows people to form strong working relationships and
increases trust between the workers. Work groups are created formally by the
employer but also occur informally.
4. Social Aspect of Work:Workers are motivated by the social aspect of work, as
demonstrated by the female workers socializing during and outside work and the
subsequent increase in motivation.
5. Recognize Workers:Workers are motivated by recognition, security and a sense of
belonging.
6. Communication:The communication between workers and management influences
workers’ morale and productivity. Workers are motivated through a good working
relationship with management.
Conclusion:
The traditional view of how to motivate employees is that you offer monetary rewards
(pay increases, bonuses, etc.,) for work completion. However the Hawthorne experiments
may suggest that motivation is more complicated than that. Advocates of the "Hawthorne
Effect" will state that the Hawthorne experiment results show that motivation can be
improved through improving working relationships and social interaction.
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Unit-1: Introduction to Management 1.14
1. Physiological needs: The Physiological needs are at the top of hierarchy because they
tend to have the highest strength until they are reasonably satisfied. It includes the
need for food, sleep, shelter, etc. these are the basic needs and if these are not
satisfied, one does not think of needs at higher level.
2. Safety or Security Needs: Once physiological needs are satisfied to a reasonable
level, the next level in the hierarchy is safety. Safety means being free of physical
danger or self-preservation. It covers protection, job security, safety of property, food
or shelter, etc.
3. Affiliation or Acceptance or Social needs: After the first two needs are satisfied,
social needs become important in the need hierarchy. Man wants to live in the society
as a member of society. He wants to love and be loved by others. It includes desire to
seek or show affection and recognition, need for companionship, identification with a
group, etc.
4. Esteem needs: These needs are concerned with self respect, self confidence, a feeling
of personal worth, feeling of being unique and recognition. Satisfaction of these needs
produces feelings of self confidence, prestige, power and control.
5. Self actualization needs: These needs indicate the strong desire to achieve
something, particularly in view of potential one has. This includes competence which
implies control over environmental factors both physical and social and achievement.
Conclusion:
Maslow suggest that the various levels are interdependent and overlapping, each
higher level need emerging before the lower level need has been completely satisfied.
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Unit-1: Introduction to Management 1.15
Theory - X: This is the traditional theory of human behaviour, which makes the following
assumptions about human nature:
1. Management is responsible for organizing the elements of productive enterprises -
money, material, equipment, and people - in the interest of economic ends.
2. With reference to people it is a process of directing their efforts, motivating them,
controlling their actions, modifying their behaviour in order to be in conformity with
the needs of the organization.
3. Without this active intervention by management, people would be passive – even
resistant to organizational needs. Hence they must be persuaded, rewarded, punished
and properly directed.
4. The average human being has an inherent dislike of work and will avoid it if he can.
5. He lacks ambition, dislikes responsibility and prefers to be led.
6. He is inherently self-centred, indifferent to organizational needs.
7. He is by nature resistant to change.
8. He is gullible, not very bright.
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Unit-1: Introduction to Management 1.16
According to Theory X, people lack self- While in Theory Y people are self-
motivation and require be externally directedand creative and prefer Self-
controllingand closely supervising in control.
order to get maximumoutput.
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Unit-1: Introduction to Management 1.17
2. Motivational Factors: These factors are capable of having a positive effect on job
satisfaction often resulting in an increase in ones total output. Most of the factors are
related with job contents. An increase in these factors will satisfy the employees.
However, any decrease in these factors will not affect their level of
satisfaction.Satisfaction comes from motivators that are intrinsic or job content, such
as:
1. achievement,
2. recognition,
3. advancement;
4. work itself,
5. possibility of growth and
6. responsibility
DECISION MAKING
Decision-making is an essential aspect of modern management. It is a primary
function of management. Decision-making is the key part of manager's activities. Decisions
are important as they determine both managerial and organizational actions. A decision may
be defined as "a course of action which is consciously chosen from among a set of
alternatives to achieve a desired result." It represents a well-balanced judgment and a
commitment to action.
Decision is a choice from among a set of alternatives. The word 'decision' is derived
from the Latin words de ciso which means 'a cutting away or a cutting off or in a practical
sense' to come to a conclusion. Decision-making is a process by which a decision (course of
action) is taken. Decision-making lies embedded in the process of management.
According to Trewatha& Newport, "Decision-making involves the selection of a
course of action from among two or more possible alternatives in order to arrive at a solution
for a given problem".
Implementation of Decision
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Unit-1: Introduction to Management 1.19
Definition:
According to Koontz and O'Donnel"It is grouping of activities necessary to attain
enterprise objectives and the assignment of each grouping to a manager with authority
necessary to supervise it".
Steps in Organizing:
Organizing involves the following interrelated steps:
1. Determination of Objectives: Organization is always related to certain objectives.
Therefore, it is essential for the management to identify the objectives before starting
any activity. It will help the management in the choice of men and materials with the
help of which it can achieve its objectives.
2. Identification and Grouping of Activities: If the members of the group are to pool
their efforts effectively, there must be proper division of the major activities. Each job
should be properly classified and grouped. This will enable the people to know what
is expected of them as members of the group.
3. Assignment of Duties: After classifying and grouping the activities, each individual
should be given a specific job to do according to his ability and made responsible for
that. He should also be given the adequate authority to do the job, assigned to him.
4. Developing Authority,Responsibility and Relationships: Since so many individuals
work in the same organization, it is the responsibility of management to lay down
structure of relationships in the organization. This will help in the smooth working of
the enterprise by facilitating delegation of responsibility and authority.
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Unit-1: Introduction to Management 1.20
PRINCIPLES OF ORGANISATION
Effective and efficient working of any organization depends on how the managerial
function of organization is being performed. The function of organization can be carried
effectively with the help of under mentioned principles:
1. Division of work: While structuring organization, division of work, at the very
outset, should be considered as the basis of efficiency. It is an established fact that
group of individuals can secure better results by having division of work. This is also
called the principle of specialization.
2. Attention to objectives: An organization is a mechanism to accomplish certain goals
or objectives. The objectives of an organization play an important role in determining
the type of structure which should be developed.
3. Span of Management: Span of management also refers to span of control signifying
the number of subordinates reporting directly to any executive. It is an established fact
that larger the number of subordinates reporting directly to the executive, the more
difficult it tends to be for him to supervise and coordinate them effectively.
4. Unity of Command: Organization structure should also be designed in such a way
that there exists unity of command in the sense that a single leader is the ultimate
source of authority.
5. Flexibility: While designing the organization it should be kept in mind that
organizational structure should not be regarded as static. Every organization is a
living entity in a living environment which is fast changing.
6. Proper balance: It is important to keep various segment or departments of an
organization in balance. The problem of balance basically arises when an activity or a
department is further divided and subdivided into smaller segments
7. Efficiency: The organization should be able to attain the predetermined objectives at
the minimum cost. From the point of view of an individual, a good organization
should provide the maximum work satisfaction.
8. Decentralization: This principle is of great significance to big organizations.
Decentralization implies selective dispersal of authority to help departments and units
to run effectively and efficiently without frequent interruptions from the top of the
enterprise.
9. Scalar principle: Scalar chain refers to the vertical placement of superiors starting
from the chief executive at the top through the middle level to the supervisory level at
the bottom. Proper scalar chain or line of command is prerequisite for effective
organization.
10. Continuity: The form of organization structure should be such which is able to serve
the enterprise to attain its objectives for a long period of time.
11. Coordination: The principal of coordination underlines that there should be proper
liaison and cooperation between different departments and units of work. Unity of
efforts for the accomplishment of desired objectives is the main aim of organization.
12. Authority and Responsibility: Authority should commensurate with responsibility.
While assigning the responsibility, authority should also be assigned. If authority is
not granted, the subordinates cannot discharge their responsibility properly.
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LINE ORGANIZATION
It is also known as scalar or military or vertical organization and perhaps is the oldest
form. In this form of organization managers have direct responsibility for the results; line
organization can be designed in two ways:
a) Pure Line Organization: Under this form, similar activities are performed at a
particular level. Each group of activities is self – contained unit and is able to perform
the assigned activities without the assistance of others.
Production Manager
b) Departmental Line Organization: Under this form, entire activities are divided into
different departments on the basis of similarity of activities. The basic objective of
this form is to have uniform control, authority and responsibility.
Production Manager
Suitability:
This type of organisational structure is suitable to small scale organizations where the
number of subordinates is quite small.
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Advantages:
1. Simplicity: Line organization is very simple to establish and can be easily understand
by the employees.
2. Discipline: Since each position is subject to control by its immediate superior position,
often the maintenance of discipline is easy unity of command and unity of direction
foster discipline among the people in the organization.
3. Co-ordination: The hierarchy in management helps in achieving effective coordination.
4. Effective communication: There will be a direct link between superior and his
subordinate; both can communicate properly among him or herself.
5. Economical: Line organization is easy to operate and it is less expensive.
6. Unity of command: In this every person is under the command of one boss only.
7. Prompt decision: Only one person is in charge of one division or department. This
enables manager to take quick decisions.
8. Over all development of the managers: The departmental head has to look after all the
activities of his department; therefore, it encourages the development of all round
managers at the higher level of authority.
Disadvantages:
1. Ability of Manager: The success of the enterprise depends upon the caliber and
ability of few departmental heads, loss of one or two capable men may put the
organization in difficulties.
2. Personnel limitations: In this type of organization an individual executive is suppose
to discharge different types of duties. He cannot do justice to all different activities
because he cannot be specialized in all the trades.
3. Overload of work: Departmental heads are overloaded with various routine jobs
hence they cannot spare time for managerial functions like planning, budgeting, etc.
4. Dictatorial way: In line organization, too much authorities centre on line executive.
Hence it encourages dictatorial way of working.
5. Duplication of work: Conflicting policies of different departments result in
duplication of work.
6. Unsuitable for large concerns: It is limited to small concerns.
7. Scope of favourism: As the departmental heads has the supreme authority, there is
chance of favourism.
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Unit-1: Introduction to Management 1.24
Suitability:
It can be followed in large organizations where specialization of activities is required,
because it offers ample opportunities for specialization.
Advantages:
1. Planned specialization: The line and staff structure is based upon the principle of
specialization. The line managers are responsible for operations contributing directly to
the achievement of organizational objectives where as staff people are there to provide
expert advice on the matters of their concerns.
2. Quality decisions: Decisions come after careful consideration and thought each expert
gives his advice in the area of his specialization which is reflected in the decisions.
3. Prospect for personal growth: Prospect for efficient personal to grow in the
organization not only that, it also offers opportunity for concentrating in a particular
area, thereby increasing personal efficiency
4. Less wastage: There will be less wastage of material.
5. Training ground for personnel: It provides training ground to the personnel in two
ways. First, since everybody is expected to concentrate on one field, one’s training
needs can easily be identified. Second, the staff with expert knowledge provides
opportunities to line managers for adopting rational multidimensional approach towards
a problem.
Disadvantages:
1. Chances of Mis-interpretation: Although the expert advice is available, yet it reaches
the workers through line supervisors. The line officers may fail to understand the
meaning of advice and there is always a risk of misunderstanding and
misinterpretation.
2. Chances of friction: There are bound to be occasions when the line and staff may
differ in opinion may resent in conflict of interests and prevents harmonious relations
between the two.
3. Ineffective Staff in the absence of authority: The staff has no authority to execute
their own advice. Their advice is not a binding on the line officers. Therefore the
advice given by specialist may be ignored by line heads.
Management Science
Unit-1: Introduction to Management 1.25
4. Expensive: The overhead cost of the product increases because of high salaried
specialized staff.
5. Loss of initiative by line executives: If they start depending too much on staff may
lose their initiative drive and ingenuity.
FUNCTIONAL ORGANIZATION
It is the most widely used organization structure in the medium and large scale
organizations having limited number of products. This structure emerges from the idea that
the organization must perform certain functions in order to carry on its operations.
Functional structure is created by grouping the activities on the basis of functions
required for the achievement of organizational objectives. For this purpose, all the functions
required are classified into basic, secondary and supporting functions according to their
nature & importance.
Features:
1) The whole activities of an organization are divided into various functions.
2) Each functional area is put under the charge of one executive.
3) For any decision, one has to consult the functional specialist.
Suitability:
Functional organisational structure is suitable for large scale organizations.
General Manager
Line of authority
Functional authority
Advantages:
1. Separation of work: In functional organization, work has been separated from routine
work. The specialist has been given the authority and responsibility for supervision
and administration pertaining to their field of specialization unnecessary over loading
of responsibilities is thus avoided.
2. Specialization: Specialization and skilled supervisory attention is given to workers
the result is increase in rate of production and improved quality of work.
3. Ease in selection and training: Functional organization is based upon expert
knowledge. The availability of guidance through experts makes it possible to train the
workers properly in comparatively short span of time.
Management Science
Unit-1: Introduction to Management 1.26
4. Reduction in prime cost: Since for every operation expert guidance is there, wastage
of material is reduced and thus helps to reduce prime cost.
5. Scope of growth and development of business: This type of organization presents
ample scope for the growth and development of business.
Disadvantages:
1. Indiscipline: Since the workers receive instructions from number of specialist it leads
to confusion to which they should follow. Therefore, it is difficult to maintain
discipline
2. Shifting of responsibility: It is difficult for the top management to locate
responsibility for the unsatisfactory work everybody tries to shift responsibility on
others for the faults and failure.
3. Kills the initiative of workers: As the specialized guidance is available to the workers
the workers will not be using their talents and skills therefore their initiative cannot be
utilized.
4. Overlapping of authority: The sphere of authority tends to overlap and gives rise to
friction between the persons of equal rank.
5. Lack of co-ordination between functions: except the function in which he is
specialized he is absolutely indifferent to other functions. Therefore, there is a lack of
coordination of function and efforts.
MATRIX ORGANISATION
It is also called project organization. It is a combination of all relationships in the
organization, vertical, horizontal and diagonal. It is a mostly used in complex projects. The
main objective of Matrix organization is to secure a higher degree of co-ordination than what
is possible from the conventional, organizational structures such as line and staff.
In matrix organization structure, a project manager is appointed to co-ordinate the
activities of the project. Under this system a subordinate will get instructions from two or
more bosses, Viz., administrative head and his project manager.
General Manager
Project A
W W W W
Manager
Project B W
W W W
Manager
Project C
W W W W
Manager
Management Science
Unit-1: Introduction to Management 1.27
Suitability:
It can be applicable where there is a pressure for dual focus, pressure for high
information processing, and pressure for shred resources.
Ex: Aerospace, chemicals, Banking, Brokerage, Advertising etc.
Advantages:
1. It offers operational freedom & flexibility
2. It focuses on end results.
3. It maintenance professional Identity.
4. It holds an employee responsible for management of resources.
Disadvantages:
1. It calls for greater degree of coordination,
2. It violates unity of command.
3. Difficult to define authority & responsibility.
4. Employee may be de motivated.
COMMITTEE ORGANISATION
A committee does not represent a separate type of organization like line and staff, or
functional. It is rather a device which is used as supplementary to or in addition to any of the
above types of organizations. A committee may be defined as a group of people performing
some aspects of Managerial functions. Thus, a committee is a body of persons appointed or
elected for the Consideration of specific matters brought before it.
Suitability:
It is suitable for educational organizations and universities.
Merits:
1. Pooling up of opinions.
2. It facilitates coordination.
3. It enhances communication.
4. It gives better motivation.
Demerits:
1. It is highly expensive.
2. It makes compromised decisions.
3. Lack of secrecy.
4. Domination by few members.
Management Science
Unit-1: Introduction to Management 1.28
VIRTUAL ORGANIZATION
The concept of virtual organisation or corporation along with virtual team and office
has entered management field very recently. The meaning of virtual is having the efficacy
without the material part; unreal but capable of being considered as real for the purpose. It
works in a network of external alliances, using the Internet. This means while the core of the
organization can be small but still the company can operate globally is a market leader in its
niche.
Employees in a virtual organization will become emasculate and ineffective in the
absence of information and knowledge. Therefore, virtual organizations use a seamless web
of electronic communication media. The main components of this web are as follows:
1. Technology: The traditional ways of working has been transformed through new
technology.
2. E-mail integration: The whole organization can take advantage of SMS products
such as ‘Express Way’ by integrating SMS into the existing e-mail infrastructure.
3. Office systems integration: SMS technology can greatly enhance the existing or new
office systems. For example, phone messages can be sent via SMS rather than
returning it in a message book.
4. Voice Mail Alert: Addition of SMS technology to the existing voice mail system
builds an effective method of receiving voice mail alerts.
5. Mobile Data: This enables a laptop to retrieve information anywhere through the
mobile phone network. In the past corporate information has been inaccessible from
many places where it is needed. One can keep connected to his/her virtual
organization from anywhere by linking laptop to mobile phone.
Advantages:
1. Saves time and travel expenses.
2. Provides excess to outside experts, without down time and travel or logging expenses.
3. Ability to organize in teams even if members are not in reasonable proximity to each
other.
4. Firms can expand their potential labour markets. They can hire and retain the best
people irrespective of their physical locations.
Management Science
Unit-1: Introduction to Management 1.29
Disadvantages:
1. Lack of physical interactions.
2. Lack of synergies arising from face-to-face interaction.
3. Non-availability of verbal and non-verbal cues such as voice, eye movement, facial
expression and body language which make communication more effective.
Advantages:
1. It allows free flow of ideas of information or resources throughout the organisation
and others.
2. Boundary less organization is able to achieve greater integration and coordination.
3. They are able to adapt to environmental changes.
4. It is highly flexible and responsive.
5. It reduces ineffectiveness.
6. Creativity, quality, timeliness.
7. Increase in speed and flexibility.
Disadvantages:
1. Lack of flexibility to changing mission needs/rapidly changing world.
2. Slow/poor in responding customer requirement.
3. Failure to get things to done.
4. Customer/vendor has a hard time dealing with the organization.
Management Science
Unit-1: Introduction to Management 1.30
TEAM STRUCTURE
One of the newest organizational structures developed in the 20th century is team. In
small businesses, the team structure can define the entire organization. Teams can be both
horizontal and vertical. While an organization is constituted as a set of people who synergies
individual competencies to achieve newer dimensions, the quality of organizational structure
revolves around the competencies of teams in totality.
For example, every one of the Whole Foods Market stores, the largest natural-foods grocer in
the US developing a focused strategy, is an autonomous profit centre composed of an average
of 10 self-managed teams, while team leaders in each store and each region are also a team.
Larger bureaucratic organizations can benefit from the flexibility of teams as well.
Suitable:
Xerox, Motorola, and DaimlerChrysler are all among the companies that actively use
teams to perform tasks.
Advantages:
1. Team-based organizations filter decision making down to all levels of management.
2. Team-based organizations require that all employees participate in the decision-
making process.
3. Employees feel they are part of the total organization, rather than members of an
individual department.
4. Team-based organizations run more efficiently and effectively, giving them a
competitive edge in today's global market.
Disadvantages:
1. Recognition for individual achievement within a hierarchical organization is a
motivator and a factor in determining compensation.
2. Team-based organizations value team performance over individual performance.
3. Lack of focus on the individual in team-based organizations.
4. Motivating individuals in a team-based organization can be more challenging.
5. Team-based organizations are decentralized rather than hierarchical.
Management Science
Unit-1: Introduction to Management 1.31
Suitable:
This organisation structure is suitable for sales associates, journalism, etc.
Advantages:
1. In this structure the customers are given the first preference.
2. It becomes simple to know their preferences and plan the strategies of the
organisation accordingly.
3. Front line employees are given more responsibility and authority in the organisation
than the top management because they are closest to the customers.
4. Decentralization of authority and responsibility place a very important role in prompt
and timely decisions.
5. The inverted pyramid structure motivates the employees as they are placed in a better
position than the top management.
Disadvantages:
1. This structure may be dangerous because the role of top management is shifted to
supporting one from that of commanding one which ultimately leads to the direction
less-organisation.
2. In this structure there is absence of clear authority and responsibility levels as a result
of which people become confused and business veers out of control.
3. Frontline supervisor cannot make strategies regarding organisations even though they
have proper understanding of the customers because they are not equipped to do so.
Flat Organizations are those, which have few or even one level of management. For
example, a service organization with equal partners and 30 employees. Flat organizations are
known by their wider span of management of control. Each manager controls more number
of employees at a given point of time.
Managing Director
Management Science
Unit-1: Introduction to Management 1.32
General Manager
Advantages:
1. It is simple to understand.
2. Easy supervision & control.
3. Quick decisions are possible.
4. It sets clearly the direct lines of authority and responsibility of a line manager.
Disadvantages:
1. Lack of specialization
2. Low – Morale
3. Autocratic approach
4. Overburden to manager
IMPORTANT QUESTIONS
1. Explain the nature and functions of management?
2. Explain how scientific management paved way for changes in the traditional mindset.
3. “Management is regarded as an art by some, science by others”. In the light of this
statement, Explain the exact nature of management
4. What is the contribution of Henry Fayol to management thought? Explain 14
principles of management thought.
5. Write short notes on:
a. Maslow theory of Hierarchy of Human Needs
b. Frederick Herzberg two factor theory of motivation.
c. Theory X and Theory Y (Douglas Mc. Gregor)
d. Mayo’s Hawthorne Experiments
6. What are the challenges you have to face as a manger? Discuss.
7. State the history of evolution of management thought with emphasis on modern
management techniques.
8. Explain the meaning of organization and state its principles.
9. Write brief notes and merits and demerits of the following.
a. Line & staff organization
b. Line organization
c. Functional organization
10. What are the different organizational structure designs in modern trends?
Management Science
Unit-2: Operations & Project Management 2.1
UNIT – II
OPERATIONS MANAGEMENT
PLANT LAYOUT
Plant layout deals with the arrangement of work areas and equipment. It is related to
allocation of adequate spaces at the appropriate places for work equipment, working men,
materials, other supporting activities and also customers. The basic theme behind the
arrangement of work area is to produce the product economically, to provide the service
effectively and to provide a safe and good physical environment for the users that is, the
workers and / or the consumers.
Definition:
According to Moore, “Plant layout is a plan of an optimum arrangement of facilities
including personnel, operating equipment, storage space, material handling equipment and all
other supporting services along with the design of best structure to contain all these
facilities”.
Management Science
Unit-2: Operations & Project Management 2.2
5. Principle of maximum flexibility: The good layout is one that can be altered without
much cost and time, i.e., future requirements should be taken into account while
designing the present layout.
6. Principle of safety, security and satisfaction: A good layout is one that gives due
consideration to workers safety and satisfaction and safeguards the plant and
machinery against fire, theft, etc.
7. Principle of minimum handling: A good layout is one that reduces the material
handling to the minimum.
Advantages:
1. Removal of obstacles in production: Product layout ensures unrestricted and
continuous production thereby minimizing bottlenecks in the process of production,
this is because work stoppages are minimum under this method.
2. Economies in material handling: Under this method there are direct channels for the
flow of materials requiring lesser time which considerably eliminate back-tracking of
materials. On account of this, cost of material handling is considerably reduced. This
is greatly helpful in achieving desired quality of the end product.
3. Lesser manufacturing time: Under this method (as already pointed), backward and
forward handling of materials is not involved; it leads to considerable saving in
manufacturing time.
4. Lesser work in progress: On account of continuous uninterrupted mass production,
there is lesser accumulation of work in progress or semi-finished goods.
Management Science
Unit-2: Operations & Project Management 2.3
5. Proper use of floor space: This method facilitates proper and optimum use of
available floor space. This is due to non- accumulation of work in progress and
overstocking of raw materials.
6. Economy in inspection: Inspection can be easily and conveniently undertaken under
this method and any defect in production operations can be easily located in
production operations. The need for inspection under this method is much less and
can be confined at some crucial points only.
7. Lesser manufacturing cost: On account of lesser material handling, inspection costs
and fullest utilization of available space, production costs are considerably reduced
under this method.
8. Lesser labour costs: Due to specialization and simplification of operations and use of
automatic simple machines, employment of unskilled and semi-skilled workers can
carry on the work. The workers are required to carry routine tasks under this method.
This leads to lesser labour costs.
9. Introduction of effective production control: Effective production control on
account of simple operation of this method can be employed successfully. Production
control refers to the adoption of measures to achieve production planning.
Dis-Advantages:
1. Lesser flexibility: As work is carried in sequence and process arranged in a line, it is
very difficult to make adjustments in production of operations. Sometimes, certain
changes under this method become very costly and impractical.
2. Large investment: Under this method, machines are not arranged in accordance with
functions as such similar type of machines and equipment is fixed at various lines of
production. This leads to unavoidable machinery duplication resulting in idle capacity
and large capital investment on the part of the entrepreneur.
3. Higher overhead charges: Higher capital investment leads to higher overheads
(fixed overheads) under this method. This leads to excessive financial burden.
4. Interruption due to breakdown: If one machine in the sequence stops on account of
breakdown, other machines cannot operate and work will be stopped. The work
stoppage may also take place on account of irregular supply of material, poor
production scheduling and employee absenteeism etc.
5. Difficulties in expanding production: Production cannot be expanded beyond
certain limits under this method.
6. Lack of specialization in supervision: Supervision of different production jobs
becomes difficult under this method as there is absence of specialized supervision as
the work is carried on in one line having different processes and not on the basis of
different departments for different specialized jobs.
7. Under-utilization of machines: As has already been pointed out, separate set of one
type of machines is fixed at different lines of production. Usually, these machines are
not properly and fully utilized and there remains idle capacity in the form of under-
utilized equipment.
Management Science
Unit-2: Operations & Project Management 2.4
Advantages:
1. Maximum utilisation of machines: This method ensures fuller and effective
utilisation of machines and consequently investment in equipment and machines
becomes economical.
2. Greater flexibility: Changes in the sequence of machines and operations can be made
without much difficulty. This is because the machines are arranged in different
departments in accordance with the nature of functions performed by them.
3. Scope for expansion: Production can be increased by installing additional machines
without much difficulty.
4. Specialisation: As has already been pointed out that under this method, specialised
machines are used for performing different production operations. This leads to
specialisation.
5. Effective utilisation of workers: Specialised workers are appointed to carry different
type of work in different departments. This leads to effective and efficient use of their
talent and capabilities.
6. More effective supervision: As the machines are arranged on the basis of functions,
performed by them, the specialised and effective supervision is ensured by the
specialised knowledge of supervisors. Each supervisor can perform his task of
supervision effectively as he has to supervise limited number machines operating in
his department.
7. Lesser work stoppages: Unlike the product method, if a machine fails, it does not
lead to complete work stoppage and production schedules are not seriously affected.
Due to breakdown in one machine, the work can be easily transferred to the other
machines.
Management Science
Unit-2: Operations & Project Management 2.5
Disadvantages:
1. Coverage of more floor area: Under this method, more floor space is needed for the
same quantum of work as compared to product layout.
2. Higher cost of material handling: Material moves from one department to another
under this method, leading to the higher cost of material handling. The mechanical
devices of material handling cannot be conveniently employed under this method on
account of functional division of work.
3. Higher labour costs: As there is functional division of work, specialised workers are
to be appointed in different departments for carrying specialised operations. The
appointment of skilled worker leads to higher labour costs.
4. Longer production time: Production takes longer time for completion under this
method and this leads to higher inventories of work-in-progress.
5. Difficulties in production, planning and control: Due to large variety of products
and increased size of the plant, there are practical difficulties in bringing about proper
coordination among various areas (departments) and processes of production. The
process of production, planning and control becomes more complex and costly.
6. Increased inspection costs: Under this type of layout more supervisors are needed
and work is to be checked after every operation which makes the process of
supervision costlier.
Advantages:
1. Economies in transformation: As the work is carried at one place and material is not
taken from one place to another, this leads to savings in transformation costs.
2. Different jobs with same layout: Different projects can be undertaken with the help
of same layout.
3. Production in accordance with specifications: The jobs can be performed in
accordance with the specifications given by the customers.
4. Scope for flexibility: It provides maximum flexibility for various changes in
production processes and designs of the products.
Disadvantages:
1. Immobility of material: As material is fixed at one place, this leads to certain
difficulties in arranging specialised workers, machines and equipment for the job.
2. Large investment: This method is time consuming and costlier as compared to first
two methods.
Management Science
Unit-2: Operations & Project Management 2.6
3. Unsuitable for small products: This method is not suitable for producing and
assembling small products in large quantities. In actual practice, it has been observed
that a judicious combination of three types’ viz., product, process and stationary
material layout is undertaken by different organisations.
4. COMBINATION LAYOUT:
A combination of process and product layouts combines the advantages of both
types of layouts. A combination layout is possible where an item is being made in
different types and sizes. Here machinery is arranged in a process layout but the process
grouping is then arranged in a sequence to manufacture various types and sizes of
products. It is to be noted that the sequence of operations remains same with the variety
of products and sizes. The below figure shows a combination type of layout:
Management Science
Unit-2: Operations & Project Management 2.7
Advantages:
1. The group technology reduces production planning time for jobs.
2. It reduces the set-up time.
3. It can increase component standardization and rationalization.
4. Effective machine operation and productivity.
5. It can decrease the Paper work and overall production time.
6. Work-in-progress and work movement.
7. It can reduce the Overall cost.
Disadvantages:
1. This type of layout may not be feasible for all situations.
2. If the product mix is completely dissimilar, then we may not have meaningful cell
formation.
WORK STUDY
Work study is a generic term for those techniques, method study and work
measurement which are used in the examination of human work in all its contexts. According
to British standard (BS 3138), work study refers to the method study and work measurement,
which are used to examine human work in all its contexts by systematically investigating into
all factors affecting its efficiency and economy to bring forth the desired improvement. The
principal aim of work study is to bring efficiency and economy by making improvements in
the method of doing the job. It is used in agricultural, manufacturing, services, transport, etc.
It has 2 parts:
METHOD STUDY
Method study enables the industrial engineer to subject each operation to systematic
analysis. The main purpose of method study is to eliminate the unnecessary operations and to
achieve the best method of performing the operation. Method study is also called methods
engineering or work design. Method engineering is used to describe collection of analysis
techniques which focus on improving the effectiveness of men and machines.
According to British Standards Institution (BS 3138), “Method study is the systematic
recording and critical examination or existing and proposed ways or doing work as a means
or developing and applying easier and more effective methods and reducing cost.”
Management Science
Unit-2: Operations & Project Management 2.8
Method Study
PROCEDURE
SELECT the task to be studied.
RECORD all related facts about current or proposed methods.
EXAMINE the facts critically considering the purpose,
sequence, place and resources.
DEVELOP the best possible method.
DEFINE the best possible method.
EVALUATE different alternatives to develop new method.
INSTALL the new improved method.
MAINTAIN verify the installed method.
RESULT
Increased Efficiency, Cost Effectiveness and
productivity through
a) Improved workplace layout
b) Improved equipment design
c) Reduction in worker fatigue
d) Improved product/process design
1. Select: The task or work to which the method study principles are to be applied is to be
identified and the objectives such as saving costs, increasing productivity, eliminating
unnecessary emotions by works, etc are to be specified.
2. Record: The current process of doing job has to be recorded. While doing so, every
detail, however small it may be, has to be identified. Where the process is too long,
involving many stages of production, inspection, the present process of doing the job is
recorded sufficiently, together with all the relevant information, by using the process
chart symbols.
Management Science
Unit-2: Operations & Project Management 2.9
Symbol Meaning
Operation (doing something):
It involves change in the condition of a product
Ex: Assembly of spare parts
Transport (Moving something from one location to
another): Ex: Assembled PC is moved to inspection
section.
Storage (Permanent):
It occurs when object is kept and protected against
unauthorized removal.
Ex: When PC is put into store after inspection.
Delay (Temporary storage):
It occurs to an object when conditions do not permit the
D performance of next job.
Ex: Machinery breakdown, waiting for next stage, etc.
Inspection:
To check whether the Quality and quantity of the product
is good or not.
Operation cum Inspection:
Inspection is taking place during the production process.
3. Examine: This is the most important phase of method study. After an activity has been
suitably recorded by means of any method, the recorded events are to be critically
examined. The analysis may be based on primary questions like purpose, place,
sequence, person etc.
4. Develop: Based on the recorded data, the alternative methods of doing the same job
more effectively are to be identified and evaluated. From these alternatives, the best one
is selected and developed to suit the requirements.
5. Evaluate: The different alternatives to developing a new improved method comparing
the cost-effectiveness of the selected new method with the current method with the
current method of performance.
6. Install: The new method so developed is to be installed in a phased manner. As part of
installation, adequate planning of schedules and deployment of resources should be
taken care of. Once the method is adopted, the workers have to be retrained, the
equipment has to be provided, and the method has to be tested in order to seek
improvement.
7. Maintain: It should be ensured that the method is used in the manner intended.
Complaints and improvements in productivity should be registered. Once the new
method starts yielding the desired result, it is necessary to maintain the new method
without any change for some time.
Management Science
Unit-2: Operations & Project Management 2.10
WORK MEASUREMENT
Work measurement is also called by the name ‘Time Study’. Work measurement is
absolutely essential for both the planning and control of operations. Without measurement
data, we cannot determine the capacity of facilities or it is not possible to quote delivery dates
or costs. We are not in a position to determine the rate of production and also labour
utilization and efficiency. It may not be possible to introduce incentive schemes and standard
costs for budget control.
According to British Standard Institute time study 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”.
Work Measurement
PROCEDURE
DESCRIBE the given work for measurement.
BREAK the job into elements.
MEASURE the performance of operator.
DETERMINE the basic time.
PROVIDE time allowance for fatigue etc.
DETERMINE standard time.
RESULT
Increased Efficiency and
Higher productivity through
a) Scientific basis to develop incentive systems
b) Maintain reasonable levels of employment
c) Reliable means of planning and control
The essential pre-requisite to carry out work measurement is to describe the method
underlying the job. Stop watch time is the basic technique for determining accurate time
standards. They are economical for repetitive type of work. Steps in taking the time study are:
Management Science
Unit-2: Operations & Project Management 2.11
Definition:
According to Juran “Quality control is the regulatory process through which we
measure actual quality performance, compare it with standards, and act on the difference”.
Management Science
Unit-2: Operations & Project Management 2.12
Confidence limit:
It indicates the range of confidence level. A confidence level refers to the probability
that the value of measurement or parameter, such as length of screw, is correct.
Ex: If a component is required with measurement of 50 mm. across, then the buyer
accepts all components measuring between 48 mm and 52 mm across, considering a five
percent confidence level.
Control limit:
Control limits are found in the control charts. There are two control limits 1) Upper
control limit (UCL) and 2) Lower control limit (LCL). These are determined based on the
principles of normal distribution.
Ex: In a pilot investigation of the length of the nails produced in the shop floor, it is
found that the mean length X is cm, the S.D 3σ, the measure of variability of the nails
produced 0.2 cm. How do you construct the control chart for this data.
Management Science
Unit-2: Operations & Project Management 2.13
CONTROL CHARTS:
It is a technique of ensuring the quality of the products during the manufacturing
process itself. It aims to control and maintain the quality of products in manufacturing
process. It is carried out through control charts. A control chart compares graphically the
process performance data to compute statistical control limits. It is of two types:
1. Variable charts:
A variable is one whose quality measurement changes from unit to unit. The
quality of these variables is measured in terms of hardness, thickness, length, etc.
These are drawn using principles of normal distribution. It is meant for variable type
of data i.e. X-Bar chart and R charts.
X – Charts:
In control charts for variables, to construct a chart, only the mean or the
average value of dimensions in the samples in plotted on it. Procedure for
construction X-Chart:
a) Compute average of averages X.
b) Calculate average of Range (R).
c) Multiply the average range by the conversion factor (A2). This gives A2R.
d) Calculate the upper control and lower control limits
Upper control limit (UCL) = X+A2R
Lower control limit (LCL) = X+A2R
Where, A2 are conversion factors from table of constants.
R – Charts:
In control charts for variables, to construct a chart, only the mean or the
average value of dimensions in the samples in plotted on it. Procedure for
construction R-Chart:
a) Compute average of averages X and R for each of the samples obtained.
b) Calculate average of Range (R).
c) Multiply the average range by the conversion factor (D4 or D3).
d) Calculate the upper control and lower control limits
Upper control limit (UCL) = D4R
Lower control limit (LCL) = D4R
Where, D4 or D3 are conversion factors from table of constants.
R is average of sample ranges
Management Science
Unit-2: Operations & Project Management 2.14
2. Attribute charts:
The quality of attributes can be determined on basis of yes or no. It is one in
which it is not possible to measures the quality characteristics of a product, i.e., it is
based on visual inspection only like good or bad, success or failure, accepted or
rejected. It is meant for attribute type of data i.e. C-chart and P-chart.
C – Chart:
It is used where there are a number of defects per unit. Here the sample size
should be a constant. It is used when there are several independent defects that occur
in ever unit produced. It is calculated as:
Upper control limit (UCL) = c + 3√c
Lower control limit (LCL) = c + 3√c
Where,
Total No. of defects in all samples
c = -------------------------------------------
Total No. of samples inspected
P – Chart:
It is used where there is data about the number of defectives per sample. It is
also known as fraction defective or percentage defective chart. It is classified on ‘go
or nogo’ basis i.e. good or bad defective. It is calculated as:
Upper control limit (UCL) = p + 3[√ p (1 – p)] / n
Lower control limit (LCL) = p + 3[√ p (1 – p)] / n
where,
Total No. of defectives found
average defective (p) = --------------------------------------
Total No. of pieces inspected
n = No. of pieces inspected.
Management Science
Unit-2: Operations & Project Management 2.15
ILLUSTRATIONS
1. Construct x and R charts from the following information and state whether the process
is in control for each of the following x has been computed from a sample of 5 units
drawn at an interval of half an hour from an ongoing manufacturing process.
Solution:
The mean of means =
Range is calculated as =
X Chart: X chart UCL and LCL compute at sample size 5 in A2 table value is 0.58
R Chart: R chart UCL and LCL compute at sample size 5 in D4 table value is 2.11
and D3 table value is 0
Management Science
Unit-2: Operations & Project Management 2.16
Solution:
3. For each of the 14 days a number of magnets used in electric relays are inspected and
the number of defectives is recorded. The total number of magnets tested is 14,000. The
following are the particular of the number of defectives found every day.
Management Science
Unit-2: Operations & Project Management 2.17
Solution:
Management Science
Unit-2: Operations & Project Management 2.18
MATERIALS MANAGEMENT
Materials management is a function, which aims for integrated approach towards the
management of materials in an industrial undertaking. Its main objective is cost reduction and
efficient handling of materials at all stages and in all sections of the undertaking. Its function
includes several important aspects connected with material, such as, purchasing, storage,
inventory control, material handling, standardization etc.
Materials management plays a significant role in controlling the costs and reducing
the wastage in a manufacturing industry. Most oftenly, 70% of the price of goods are towards
cost of materials and rest on wages, salaries, overheads and profits. It means material cost
form a significant portion of total cost. For running any industry or business, we need a
number of resources. These resources are popularly known as 5 M's of any Industrial activity
i.e. Men, Machines, Materials, Money and Management.
Materials refer to inputs into the production process, most of which are embodied in
the finished goods being manufactured. It may be raw materials, work in progress, finished
goods, spare parts, etc.
INVENTORY MANAGEMENT
An inventory is a list of items or goods. Inventory and stock control are used
interchangeably in business circle. There are various types of inventory depending upon the
context or situations. For example, inventory in a library means the list of books, journals,
periodicals, furniture, fans, etc.
A typical firm carries different kinds of inventories such as: raw materials and
purchased parts; partially completed goods called work-in-process (WIP); finished-goods or
merchandise in retail stores; replacement parts, tools, and supplies; and goods-in-transit to
warehouses or customers (called pipeline inventory).
Generally a firm has about 30 percent of its current assets and as much as 90 percent
of its working capital invested in inventory. Because inventories may represent a significant
portion of total assets, a reduction of inventories can result in a significant increase in return
on investment (ROI) - a ratio of profit after taxes to total assets.
Management Science
Unit-2: Operations & Project Management 2.19
INVENTORY CONTROL
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).
These questions are answered by the use of inventory models. The scientific inventory
control system strikes the balance between the loss due to non-availability of an item and cost
of carrying the stock of an item. Scientific inventory control aims at maintaining optimum
level of stock of goods required by the company at minimum cost to the company.
Management Science
Unit-2: Operations & Project Management 2.20
1. Inventory Ordering Costs: The cost refer to the cost incurred to procure the materials
particularly in large organizations, these cost are significant. This is also called as
procurement cost.
Definition: It is the cost of placing an order from a vendor. This includes all costs
incurred from calling for quotation to the point at which the item is taken into stock.
Ex: Receiving quotations, processing purchase requisition, Receiving materials and
then inspecting it, Follow up and expediting purchase order, processing sellers
invoice.
2. Inventory carrying cost: Carrying cost which are also known as holding costs are the
costs incurred in maintaining the stores in the firm. They are based on average inventory.
Ex: Storage cost includes: Rent for storage facilities, Salary of person and related storage
expenses, Cost of insurance, Cost of capital.
Determining EOQ:
(a) Graphical Method:
Total cost = ordering costs + carrying costs
EOQ = quantity at which total cost is minimum
Management Science
Unit-2: Operations & Project Management 2.21
Algebraic Method:
Step-1:
Total ordering cost per year = No. of order placed per year x ordering costs per order
=A/SxO
Step-2:
Total carrying cost per year = Average inventory level x carrying cost per year
=S/2xC
Where, A = Annual Demand
S = Size of each order (units per order)
O = ordering cost per order
C = carrying cost per unit
Step-3:
EOQ = TOC = TCC
=A/SxO
=S/2xc
2AO = S2C
S2 = 2AO / C
S = 2AO / C
√
EOQ =
Where,
EOQ is the size of economic order quantity
A is the annual demand in units
O is the ordering costs per order
C is the carrying cost per unit
ILLUSTRATIONS
1. A biscuit manufacturing company buys lot bags of 10,000 bags wheat per annum. The
cost per bag is Rs.500 and ordering cost is Rs.400. The inventory carrying cost is
estimated at 10% of the price of the wheat. Determine EOQ and number of orders
required per year.
Solution:
Annual demand (A) = 10,000 bags
Ordering cost per order (O) = Rs.400
Carrying cost per unit (C) = 10% of Cost price
= 0.10 x 500 = Rs.50/-
In the above case, the company has to place 25 orders to optimize its ordering and
carrying costs.
Management Science
Unit-2: Operations & Project Management 2.22
2. 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, A = 1800 per year
Procurement cost, O = Rs. 16 per order
Inventory carrying cost, C = Rs. 42 × Re. 0.20 = Rs. 8.40 per year
Then, optimal quantity (EOQ),
√
EOQ =
√ x 1800 x 16
= .
If the company follows the policy of ordering every month, then the annual ordering cost is
= Rs 12 × 15
= Rs. 180
Management Science
Unit-2: Operations & Project Management 2.23
Hence, the company should purchase 300 parts at time interval of 1/30 year instead of
ordering 750 parts each month. The net saving of the company will be
= Rs. 1305 – Rs. 900
= Rs. 405 per year.
4. 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.
Solution:
The table and the graph 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.
Management Science
Unit-2: Operations & Project Management 2.24
ABC ANALYSIS
It is a technique of controlling inventories based on their value and quantities. It is
remembered as “Always Better Control”. 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. The
analysis is carried out by drawing a graph based on the cumulative number of items and
cumulative usage of consumption cost.
Classification is done as follows:
Category Value (%) Volume (%) Degree of Control
A 70 10 Strict
B 20 20 Moderate
C 10 70 Low
100
90 C
Volume of Inventory (Rs.)
70
0 10 30 100
Volume of inventory (units)
A – Category:
It comprises of inventory which are costly and valuable. Normally 70% of funds are
tied up in costly stocks, which would be 10% of total volume of stock and these require strict
monitoring on a day to day basis.
B – Category:
It comprises of inventory which is less costly. 20% of funds are tied up in such stocks
which are 20% of total of stocks. These require monitoring on a weekly or fortnightly basis.
C – Category:
It consists of least cost inventory. 10% of funds are tied up in such stocks which are
70% of total volume. It can be monitored on a monthly or bi-monthly basis.
For effective inventory control, combination of the techniques of ABC with VED or
ABC with HML or VED with HML analysis is practically used.
Management Science
Unit-2: Operations & Project Management 2.25
ILLUSTRATION
Note that C type items are not necessarily unimportant; incurring a stock-out of C
items such as the nuts and bolts used to assemble manufactured goods can result in a costly
shutdown of an assembly line. However, due to the low annual dollar volume of C items,
there may not be much additional cost incurred by ordering larger quantities of some items,
or ordering them a bit earlier.
Management Science
Unit-2: Operations & Project Management 2.26
PROJECT MANAGEMENT
NETWORK ANALYSIS
It refers to a number of techniques for planning and control of complex projects. The
basis of network planning is the representation of sequential relationships between activities
by means of network of lines and circles. The idea is to link various activities in such a way
that the overall time spent on the project is kept to a minimum.
The advantages of developing a network are:
1. They provide logical picture of the layout and sequence of a project.
2. They help to identify the activities and events of the project.
3. They provide basis for working out times, costs involved in project.
4. They act as a focus point for action and coordination.
5. They make an enormous contribution to planning of projects.
2. Critical Path Method (CPM): It is a commonly used for those projects which are
repetitive in nature & where one has prior experience of handling similar projects. It
is a deterministic model & places emphasis on time & cost for activities of a project.
Management Science
Unit-2: Operations & Project Management 2.27
a circle or node ( ). The event from which an arrow comes out is called preceedor
event. The event into which the arrow gets in is called the successor event.
Preceedor Successor
Event Event
3. Dummy Event: This is an activity drawn to show clear and logical dependencies
between activities so as not to violate the rules of drawing networks. It does not
consume resources. Dummy activity is a hypothetical activity which takes no
resource or time to complete. It is represented by broken arrowed line & is used for
either distinguishing activities having common starting & finishing events or to
identify & maintain proper precedence relationship between activities that are not
connected by events.
It is represented by dotted arrow ( ).
NETWORK:
This is the combination of activities, dummy activities and events in a logical
sequence, according to the rules of drawing a network. Each activity of the project is
represented by arrow pointing in direction of progress of project. The events of the network
establish the precedence relationship among different activities.
The rules of drawing a network:
1. A complete network should have only one point of start and only point of end event.
2. Each activity must have one preceding or tail event and one succeeding or head event.
3. An event is not complete until all activities are complete.
4. All activities must be tied into the network. Events left untied to network are called
danglers.
5. Arrows cannot go backward and loop network should be avoided.
6. An arrow should always be straight, not curved, head from left to right and do not
cross each other.
7. Use dummies only when it is required.
Management Science
Unit-2: Operations & Project Management 2.28
Management Science
Unit-2: Operations & Project Management 2.29
a) Project Initiation Stage (Starting of the project): In this stage, the specifications of
the project are defined along with the clear cut project objectives. Project teams are
formed and their major responsibilities are assigned. More specifically, this stage
defines the goals, specifications, tasks and responsibilities.
It includes information such as:
Project’s purpose, vision, and mission
Measurable objectives and success criteria
Elaborated project description, conditions, and risks
Name and authority of the project sponsor
Concerned stakeholders
b) Project Planning Stage (Organizing and Preparing): In this stage, the effort level
increases and plans are developed to determine what the project will entail, when it
will be scheduled, whom it will benefit, what quality level should be maintained and
what the budget will be. More specifically, this stage will include planning schedules,
budgets, resources, risks and staffing.
c) Project Execution Stage (Carrying out the project): In this stage, a major portion of
the project work takes place. The physical product is produced (For eg., house, bridge,
software program, report, etc). Time, cost and specification measures are used for
control. More specifically, this stage will take care of status reports, changes, quality
and forecasts.
d) Project Closure stage (Termination of the project): This is the final stage which
includes two activities, viz., delivering the outcome of the project to the customer and
redeploying the project resources. Delivery of the project might include customer
training and transferring documents. Redeployment usually involves releasing project
equipment/materials to other projects and finding new assignments for team members.
More specially, this stage will undertake activities relating to training the customer,
transfer of documents, releasing resources, releasing staff and learning lessons.
2. Pessimistic Time Estimate (tp): This is the maximum possible time it could take to
complete the job barring the major disturbances like labour strike, etc.
3. Most-Likely time Estimate (tm or ti): It is the time estimate which likes between the
optimistic and pessimistic time estimates.
Management Science
Unit-2: Operations & Project Management 2.30
4. Average Time Estimate (te): according to beta distribution, the average of the 3
estimates is equal to the aggregate of one-sixth of optimistic, two-thirds of most likely
and one-sixth of pessimistic time estimates. This equation is very significant in PERT
analysis:
te = 1/6 to + 2/3 tm + 1/6 tp
or
te = to +4tm + tp / 6
5. Range, Standard Deviation and Variance: In beta distribution, the range is equal to
the difference between pessimistic time estimate (tp) and optimistic time estimate (to).
Range = tp - to
Standard Deviation (σ) is equal to one-sixth of range.
σ = (tp- to) / 6
Variance (σ2) = [(tp- to) / 6]2
3. It is a technique for evaluating the Here time estimates are based on past
probability of completing the project. data.
Management Science
Unit-2: Operations & Project Management 2.31
1. Earliest Expected Time (TE): (Forward pass time): It refers to the time when an
event can be expected to be completed at the earliest. It is computed by adding t e’s of
the activity path leading to that event. It is started with the start event and worked out
for all events. Where there is more than one path leading to a particular event,
consider the maximum value of the TE’s.
TE (Successor Event) = maximum value of [TE (preceedor event) + te (activity)]
2. Latest Allowance Occurrence Time (TL): (Backward pass time): It is the latest
time by which an event must occur to keep the project on schedule. If not the project
is delayed. Where TE for the end event becomes TL for the end event. We start with
the end event and work out latest allowable occurrence time to all other events. Where
there is more than one path, consider the minimum value of TL.
TL (Preceedor Event) = minimum value of [TL (successor event) + te (activity)]
3. Critical Path: Critical path is that path which consumes the maximum amount of
time or resources. It is that path which has zero slack value.
(TL – TE)
4. Slack: Slack means the time taken to delay a particular event without affecting the
project completion time. If a path has zero slack that means it is the critical path.
Slack = LFT – EFT
5. Earliest Start Time (EST): It is the earliest possible time at which an activity can
start, and is calculated by moving from first to last event in the network diagram.
6. Earliest Finish Time (EFT): It is the earliest possible time at which an activity can
be finished.
EFT = EST + Duration of activity
7. Latest Start Time (LST): It is the latest possible time by which an activity can start
without delaying the date of completion of the project.
LST = LFT – Duration of the activity
8. Latest Finish Time (LFT): It is the latest time by which the activity must be
completed. So that the scheduled date for the completion of the project may not be
delayed. It is calculated by moving backwards.
Management Science
Unit-2: Operations & Project Management 2.32
FLOAT
Floats in the network analysis represent the difference between the maximum
time available to finish the activity and the time required to complete it. The basic difference
between slack and float times is a slack is used with reference to event, float is use with
reference to activity.
Floats are three types:
1. Total float: It is the additional time which a non critical activity can consume
without increasing the project duration. However total float may affect the floats in
previous and subsequent activities.
Total float = LST – EST or LFT – EFT
2. Free float: Free float refers to the time by which an activity can expand
without affecting succeeding activities.
Free float = EST of Head Event – EST of Trail Event – Activity duration
3. Independent float: This the time by which activity may be delayed or extended
without affecting the preceding or succeeding activities in any away.
Independent float = EST of Head event – LFT of Trail event – Activity duration
PROBABILITY
To compute the probability of completing the project within a given time, we use the
concepts of range, standard deviation and variance. The following steps are involved in
determining probability:
1. Find out the range of pessimistic and optimistic time estimates of those activities
covered by critical path (tp – to).
2. Determine standard deviation (σ) for each activity.
3. Determine the variance (σ2).
4. Find the sum of variances of projects Σ σ2 = σ21, σ22 + … + σnn
5. Determine square root of sum of variances
σ = √ σ 21, σ22 + … + σnn
6. Divide the slack (i.e. difference between the scheduled completion time and the latest
allowable occurrence time) by SD of entire network.
Normal deviate = Z = [TL – TE / σ]
This should be within a range of +-3 σ limits.
7. To arrive at % of probability of completing the project within a given time, the value
of the normal deviate has to be converted into the value of probability by use normal
distribution function table. The probability of not completing the project with time is
(100 + % of probability of completing the project).
PROJECT CRASHING
In project crashing, the starting point is the critical path. Once the critical path in a
network is identified, it is necessary to identify the crash activities by calculating cost slope.
The network diagram should be reconstructed at every stage of crashing incorporating the
effect of crashing in the selected sequence.
For reducing the duration, extra expenditure is required to be incurred, but to save
resources; organizations keep this extra expenditure at a minimum. As such, the decision to
crash or expedite should be taken for only those activities which would involve minimum
extra cost.
Management Science
Unit-2: Operations & Project Management 2.33
Total Cost (A + B)
0
0 CT OT NT X
Project Time Duration
Where, CT = Crash time
OT = Optimum time
NT = Normal time
From the above graph, it can be observed that direct cost (A) decrease with an
increase in time. As the project duration increases, the indirect cost (B) increases. The total
cost (A+B) curve is flat U-shaped, which implies that only up to a particular point (0) the
crashing is economical. The time duration which involves the least total cost is the optimum
duration at optimum cost. Crashing the duration of a project may not be possible and may not
be possible beyond a particular point.
The total project cost is the sum of the direct & the indirect costs.
Optimum duration is the project duration at which total project cost is lowest.
Management Science
Unit-2: Operations & Project Management 2.34
ILLUSTRATIONS
1. Draw a network to represent the project and find the minimum time of completion of
the project when time, in days, of each task is as follows. Also identify the critical path.
Activity: 1-2 1-3 2-3 2-5 3-4 3-6 4-5 4-6 5-6 6-
Duration 15 15 3 5 8 12 1 14 3 14
7
:
(Weeks)
Solution:
Network Diagram:
Critical Path = 1 – 2 – 3 – 4 – 9 – 7
Project Duration = 54 weeks
Activity A B C D E F
Preceding - A B A D C,E
Activity
Duration 4 6 5 4 3 3
Solution:
Network Diagram:
Management Science
Unit-2: Operations & Project Management 2.35
3. A small engineering project consists of six activities. The three time estimates in number
days for each activity are given below.
Activity to tm tp
1–2 2 5 8
2–3 1 1 1
3–5 0 6 18
5–6 7 7 7
1–4 3 3 3
4–5 2 8 14
Find out:
a) Calculate the values of expected time (te), SD, variance of each activity
b) Draw the network diagram and calculate total slack for each activity
c) Identify the critical path and mark on the net work diagram
d) Probability of completing project in 25 days
Solution:
Management Science
Unit-2: Operations & Project Management 2.36
Here, ts = 25 days
te = 20 days
= √1 + 0 + 9 + 0 = √10
25 − 20
=
√1 + 0 + 9 + 0
5
=
√10
= 1.50
From the table value (z = 1.50) = 93.32%
Management Science
Unit-2: Operations & Project Management 2.37
4. Given the following data, work out the minimum duration of the project and
corresponding cost.
Solution:
Management Science
Unit-2: Operations & Project Management 2.38
Management Science
Unit-2: Operations & Project Management 2.39
5. The following table gives the information relating to a project. By using the given data
calculate the optimum duration of the project. Where indirect cost is estimated Rs.2,000
per day.
Solution:
Management Science
Unit-2: Operations & Project Management 2.40
Management Science
Unit-2: Operations & Project Management 2.41
All activities comes under the critical activities, the priority are changed according to
the cost slope 4-5 activity having minimum cost slope. So, that it is possible to crash out 4-5
activity by one day only and 2-5 by one day simultaneously.
This network diagram not possible to crashing further, So that the project duration is 6
days and optimum cost is Rs.22,000/-
Optimum cost = Rs.22,000/-
Optimum Duration = 6 days
IMPORTANT QUESTIONS
1. What are the objectives of plant layout? Explain the factors influencing plant layout.
2. What do you understand by product layout? Analyse the advantage & disadvantage of
product layout.
3. What is SQC? Explain the various techniques of SQC and throw light on their
limitations?
4. What are the objectives of work measurement? Briefly point out the methods of work
measurement?
5. What do you mean by work study/ Explain the basic procedure involved in method
study and work measurement.
6. Graphically represent “economic order quantity” and explain the type of costs that go
into them.
7. Discuss the procedure of classifying inventory into A,B,C categories.
Management Science
Unit-2: Operations & Project Management 2.42
8. The demand for a product is 30000 units per annum. Cost per unit is Rs 4,
procurement cost is Rs.60 per order and carrying cost is 20% of inventory value.
Determine EOQ.
9. What is meant by inventory? What is the need for inventory control at different stages
of production? What are the different costs involved in maintaining inventory?
10. Explain and illustrate what you understand by network analysis.
11. What do you mean by crashing a network? State step by step procedure of crashing.
12. What is CPM? What are the essential steps in CPM for project planning?
13. Explain PERT. What are the requirements for application of PERT technique?
SIMPLE PROBLEMS
1. Draw the network diagram for the following project:
Activity Immediate predecessors
A -
B -
C A
D B
E C,D
F D
G E
H F
2. The following details are available regarding a project. Determine the critical path, the
critical activities and the project completion time.
Activity Predecessor Activity Duration
A - 3
B A 5
C A 7
D B 10
E C 8
F D,E 4
3. Draw the network diagram and determine the critical path for the following project:
Activity Time Estimates (Weeks)
1-2 5
1-3 6
1-4 3
2-5 5
3-6 7
3-7 10
4-7 4
5-8 2
6-8 5
7-9 6
8-9 4
Management Science
Unit-2: Operations & Project Management 2.43
4. A project consists of seven activities for which relevant data are given below:
(i) Draw the network, (ii) Name and highlight the critical path.
Activity Preceding activity Activity duration (days)
A - 4
B - 7
C - 6
D A, B 5
E A, B 7
F C, D, E 5
G C, D, E 4
5. A small maintenance project small maintenance project consists of the following 12 jobs
with duration in days. Find out the critical path, total project duration, float.
Job Duration
1-2 2
3-4 3
5-8 5
7-9 4
2-3 7
3-5 5
6-7 8
8-9 1
2-4 3
4-6 3
6-10 4
7-10 7
6. A project consists of the following activities and different time estimates (in days). Draw
a network and find the critical path. What is the probability that the project will be
completed by 27 days?
Activity Optimistic time Most likely time Pessimistic time
1-2 3 6 15
1-3 2 5 14
1-4 6 12 30
2-5 2 5 8
2-6 5 11 17
3-6 3 6 15
4-7 3 9 27
5-7 1 4 7
6-7 2 5 8
Management Science
Unit-2: Operations & Project Management 2.44
(i) Draw the project network and identify all paths for its completion
(ii) Find the expected duration and variance of the project
(iii) Calculate the early and late occurrence time for each mode. Calculate
expected project length
(iv) Calculate the slack of each activity
8. A project consists of seven activities and the time estimates of the activities are
furnished as under:
Activity Optimistic Most likely Pessimistic
Days Days Days
1-2 4 10 16
1-3 3 6 9
1-4 4 7 16
2-5 5 5 5
3-5 8 11 32
4-6 4 10 16
5-6 2 5 8
Draw the network diagram.
Identify the critical path and its duration.
What is the probability that project will be completed in 5 days earlier than the
critical path duration?
What project duration will provide 95% confidence level of completion (Z0.95
=1.65)?
Z 1.00 1.09 1.18 1.25 1.33
Probability 0.1587 0.1379 0.1190 0.1056 0.0918
9. An Engineering Project has the following activities, whose time estimates are listed:
Activity Estimated Duration (in months)
(i-j) Optimistic Most Likely Pessimistic
1-2 2 2 14
1-3 2 8 14
1-4 4 4 16
2-5 2 2 2
3-5 4 10 28
4-6 4 10 16
5-6 6 12 30
Draw the project network and find the critical path.
Find the expected duration and variance for each activity. What is the
expected project length?
Management Science
Unit-2: Operations & Project Management 2.45
10. From the following data crash the network and identity the optimum time of the project
where the indirect cost is estimated Rs.2000 per day.
11. Given the following details of a project, determine the optimum duration and cost of the
project. Indirect cost is 1300 per week
Activity Time (weeks) Cost (rs.)
Normal Crash Normal Crash
1-2 6 4 5000 6200
1-3 4 2 3000 3900
2-3 7 6 6500 6800
2-4 3 2 4000 4500
3-4 5 3 8500 10000
Management Science
Unit-2: Operations & Project Management 2.46
z 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09
0.0 0.0000 0.0040 0.0080 0.0120 0.0160 0.0199 0.0239 0.0279 0.0319 0.0359
0.1 0.0398 0.0438 0.0478 0.0517 0.0557 0.0596 0.0636 0.0675 0.0714 0.0753
0.2 0.0793 0.0832 0.0871 0.0910 0.0948 0.0987 0.1026 0.1064 0.1103 0.1141
0.3 0.1179 0.1217 0.1255 0.1293 0.1331 0.1368 0.1406 0.1443 0.1480 0.1517
0.4 0.1554 0.1591 0.1628 0.1664 0.1700 0.1736 0.1772 0.1808 0.1844 0.1879
0.5 0.1915 0.1950 0.1985 0.2019 0.2054 0.2088 0.2123 0.2157 0.2190 0.2224
0.6 0.2257 0.2291 0.2324 0.2357 0.2389 0.2422 0.2454 0.2486 0.2517 0.2549
0.7 0.2580 0.2611 0.2642 0.2673 0.2704 0.2734 0.2764 0.2794 0.2823 0.2852
0.8 0.2881 0.2910 0.2939 0.2967 0.2995 0.3023 0.3051 0.3078 0.3106 0.3133
0.9 0.3159 0.3186 0.3212 0.3238 0.3264 0.3289 0.3315 0.3304 0.3365 0.3389
1.0 0.3413 0.3438 0.3461 0.3485 0.3508 0.3531 0.3554 0.3577 0.3599 0.3621
1.1 0.3643 0.3665 0.3686 0.3708 0.3729 0.3749 0.3770 0.3790 0.3810 0.3830
1.2 0.3849 0.3869 0.3888 0.3907 0.3925 0.3944 0.3962 0.3980 0.3997 0.4015
1.3 0.4032 0.4049 0.4066 0.4082 0.4099 0.4115 0.4131 0.4147 0.4162 0.4177
1.4 0.4192 0.4207 0.4222 0.4236 0.4251 0.4265 0.4279 0.4292 0.4306 0.4319
1.5 0.4332 0.4345 0.4357 0.4370 0.4382 0.4394 0.4406 0.4418 0.4429 0.4441
1.6 0.4452 0.4463 0.4474 0.4484 0.4495 0.4505 0.4515 0.4525 0.4535 0.4545
1.7 0.4554 0.4564 0.4573 0.4582 0.4591 0.4599 0.4608 0.4616 0.4625 0.4633
1.8 0.4641 0.4649 0.4656 0.4664 0.4671 0.4678 0.4686 0.4693 0.4699 0.4706
1.9 0.4713 0.4719 0.4726 0.4732 0.4738 0.4744 0.4750 0.4756 0.4761 0.4767
2.0 0.4772 0.4778 0.4783 0.4788 0.4793 0.4798 0.4803 0.4808 0.4812 0.4817
2.1 0.4821 0.4826 0.4830 0.4834 0.4838 0.4842 0.4846 0.4850 0.4854 0.4857
2.2 0.4861 0.4864 0.4868 0.4871 0.4875 0.4878 0.4881 0.4884 0.4887 0.4890
2.3 0.4893 0.4896 0.4898 0.4901 0.4904 0.4906 0.4909 0.4911 0.4913 0.4916
2.4 0.4918 0.4920 0.4922 0.4925 0.4927 0.4929 0.4931 0.4932 0.4934 0.4936
2.5 0.4938 0.4940 0.4941 0.4943 0.4945 0.4946 0.4948 0.4949 0.4951 0.4952
2.6 0.4953 0.4955 0.4956 0.4957 0.4959 0.4960 0.4961 0.4962 0.4963 0.4964
2.7 0.4965 0.4966 0.4967 0.4968 0.4969 0.4970 0.4971 0.4972 0.4973 0.4974
2.8 0.4974 0.4975 0.4976 0.4977 0.4977 0.4978 0.4979 0.4979 0.4980 0.4981
2.9 0.4981 0.4982 0.4982 0.4983 0.4984 0.4984 0.4985 0.4985 0.4986 0.4986
3.0 0.4987 0.4987 0.4987 0.4988 0.4988 0.4989 0.4989 0.4989 0.4990 0.4990
3.1 0.4990 0.4991 0.4991 0.4991 0.4992 0.4992 0.4992 0.4992 0.4993 0.4993
3.2 0.4993 0.4993 0.4994 0.4994 0.4994 0.4994 0.4994 0.4995 0.4995 0.4995
3.3 0.4995 0.4995 0.4995 0.4996 0.4996 0.4996 0.4996 0.4996 0.4996 0.4997
3.4 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4997 0.4998
3.5 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998 0.4998
3.6 0.4998 0.4998 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999
3.7 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999 0.4999
Management Science
Unit-3: Human Resource Management 3.1
UNIT –III
HUMAN RESOURCE MANAGEMENT
CONCEPT OF HRM
Human Resource Management (HRM) is a relatively new approach to managing
people in any organisation. People are considered the key resource in this approach. Human
Resource Management is a process, which consists of four main activities, namely,
acquisition, development, motivation, as well as maintenance of human resources. Human
Resource Management is responsible for maintaining good human relations in the
organisation. It is also concerned with development of individuals and achieving integration
of goals of the organisation and those of the individuals.
Definition:
1. Scott, Clothier and Spriegel, “Human Resource Management as that branch of
management which is responsible on a staff basis for concentrating on those aspects
of operations which are primarily concerned with the relationship of management to
employees’ and employees to employees and with the development of the individual
and the group.”
2. Edwin B. Flippo, “Human resource management is planning, organizing, directing
and controlling of the procurement, development, and resources to the end that
individual and societal objectives are accomplished.”
Management Science
Unit-3: Human Resource Management 3.2
FUNCTIONS OF HR MANAGER
The various functions of a HR Manager are as follows:
1. Manpower Planning: Manpower planning is also known as human resource planning
(HRP). It may be defined as a rational method of accessing the requirements of
human resources at different level in an organization. It ends with proposals of
recruitment, retention or dismissal. Through planning a management strives to have
the right number and the right kinds of people at the right places, at the right time, to
do things which result in both the organisation and the individual receiving the
maximum long-range benefit.
Importance of Manpower planning:
1. It directly contributes to achieve the corporate objectives.
2. It enables to secure the right kind of quantity of human resources at different
levels.
3. It helps decision makers in search for optimum strategy.
4. It helps the line managers to highlight the existing problems in managing the
HR under their control.
5. It provides an adequate basis to take meaningful decisions.
2. Recruitment: Recruitment means search of the prospective employee to suit the job
requirements as represented by job specification–a technique of job analysis. When the
manpower plan reveals the need for additional people in organization, the manager
has to initiate the search for employees and see that they apply for jobs in the
organization. Recruitment is often called Positive function. At this stage the
applications are invited for further scrutiny and short-listing.
The sources of recruitment includes internet, executive search agencies,
employment exchanges, university and college campus, Ads in TV and Radio,
recommendation of existing employees, etc.
3. Selection: The process of identifying the most suitable persons for the organization is
called selection. It is also called Negative function because here applications are
screened and shortlisted on the basis of selection criteria. The main purpose is to
choose right person for right job. The selection procedure, depending upon the cadre,
involves different stages. The organizations are free to formulate their own selection
procedures, as there is no standard practice.
Management Science
Unit-3: Human Resource Management 3.3
5. Placement: After training the employee is placed in his position under the charge of a
manager. The new recruit is allowed to exercise full authority and is held responsible
for the results. Placement involves assigning a specific job to each one of the selected
candidates. However, placement is not simple as it looks. It involves striking a fit
between the requirements of a job and the qualifications of a candidate. The
importance of placement is that it reduces employee’s turnover, absenteeism,
accidents and dissatisfactions.
Management Science
Unit-3: Human Resource Management 3.4
8. Transfer: It is a lateral shift that moves an individual employee from one position to
another i.e. it may be in same department or to a different department or location. To
optimize the human resources at different locations or departments, employees are
transferred from one location to another. It is also viewed as a tool for punishing the
employee in case of misconduct or misbehavior. It does not involve any change in
salary, duties and responsibilities.
MANPOWER PLANNING
Manpower planning is also known as Human Resource Planning (HRP). Human
Resource Planning is concerned with the planning the future manpower requirements are the
organisation. Human Resource planning is the process by which a management determines
how an organisation should move from its current manpower position to its desired
manpower position. Through planning a management strives to have the right number and the
right kinds of people at the right places, at the right time, to do things which result in both the
organisation and the individual receiving the maximum long-range benefit.
Definition:
1. Coleman – “Human Resource Planning as the process of determining manpower
requirements and the means for meeting those requirements in order to carry out the
integrated plan of the organisation.
2. Leap and Crino – “HRP includes the estimation of how many qualified people are
necessary to carry out the assigned activities, how many people will be available, and
what, if anything, must be done to ensure that personnel supply equals personnel
demand at the appropriate point in the future”.
Objectives of HR Planning:
The objectives of human resource planning may be summarized as below:
1. Forecasting Human Resources Requirements: HRP is essential to determine the
future needs of HR in an organization. In the absence of this plan it is very difficult to
provide the right kind of people at the right time.
2. Effective Management of Change: Proper planning is required to cope with changes
in the different aspects which affect the organization. These change needs
continuation of allocation/reallocation and effective utilization of HR in organization.
3. Realizing the Organizational Goals: In order to meet the expansion and other
organizational activities the organizational HR planning is essential.
4. Promoting Employees: HRP gives the feedback in the form of employee data which
can be used in decision-making in promotional opportunities to be made available for
the organization.
5. Effective Utilization of HR: The data base will provide the useful information in
identifying surplus and deficiency in human resources.
Management Science
Unit-3: Human Resource Management 3.5
Management Approval
---------------------------------------------------------------------------------------------------------------
Action Plans
Management Science
Unit-3: Human Resource Management 3.6
Definition:
According to Edwin B. Flippo, “Training is the act of increasing the knowledge and
skills of an employee for doing a particular job”.
Management Science
Unit-3: Human Resource Management 3.7
METHODS OF TRAINING:
The following methods are generally used to provide training i.e. On-the-Job Training
and Off-the-Job Training:
2. Job Rotation: The major objective of job rotation training is the broadening of the
background of trainee in the organisation. If trainee is rotated periodically from one job
to another job, he acquires a general background.
3. Special Projects: This is a very flexible training device. The trainee may be asked to
perform special assignment, thereby he learns the work procedure. Sometime a task-
force is created consisting of a number of trainees representing different functions in the
organisation.
4. Apprenticeship: Under this method, the trainee is placed under a qualified supervisor
or instructor for a long period of time depending upon the job and skill required. Wages
paid to the trainee are much less than those paid to qualified workers. This type of
training is suitable in profession, trades, crafts and technical areas like fitter, turner,
electrician, welders, carpenters etc.
5. Vestibule Training: Under this method, actual work conditions are created in a class
room or a workshop. The machines, materials and tools under this method is same as
those used in actual performance in the factory. This method gives more importance to
learning process rather than production.
Management Science
Unit-3: Human Resource Management 3.8
b) Second approach to special courses and lectures is for organizations to work with
universities or institutes in establishing a course or series of course to be taught by
instructors by these institutes.
c) Third approach is for the organizations to send personnel to programmes established
by the universities, institutes and other bodies.
2. Conferences: This is also an old method, but still a favorite training method. In this
method, the participants pools, their ideas and experience in attempting to arrive at
improved methods of dealing with the problems, which are common subject of
discussion; Conferences may include buzz sessions that divide conferences into small
groups of four or five intensive discussion. These small groups then report back to the
whole conference with their conclusions or questions.
3. Case Studies: This technique, which has been developed, popularized by the Harvard
Business School, U.S.A is one of the most common form of training. A case is a written
account of a trained reporter of analyst seeking to describe an actual situation. Some
causes are merely illustrative; others are detailed and comprehensive demanding
extensive and intensive analytical ability. Cases are widely used in variety of
programmes. This method increases the trainee‘s power of observation, helping him to
ask better questions and to look for broader range of problems.
Management Science
Unit-3: Human Resource Management 3.9
JOB EVALUATION
It is a technique of assessing systematically the relative worth of each job. The
fundamental pre-requisite to the establishment of a compensation policy is the determination
of the comparative values of jobs throughout the hierarchy. These values form the basis to
build the pay and the benefits package.
Objectives:
1. To establish correct wage correct wage differentials for all jobs within the factory.
2. To bring new jobs into their proper relatively with jobs previously established.
3. To help clarify lines of authority, responsibility and promotion.
4. To accomplish the foregoing by means of the facts and principles, this can be readily
explained to and accepted by all concerned.
5. To establish a general wage level for a given factory which will have parity with those
of neighboring factories.
Advantages:
1. It is simple, inexpensive and expeditions.
2. It is easily understood and easily administered.
3. It helps setting better rates based purely a judgment and experience.
4. Same unions prefer it, because it leases more room for bargaining.
Disadvantages:
1. Job may be ranked on the basis of incomplete inform action and without the benefits
of well defined standards.
2. The rank position of different jobs is likely to be influenced by prevailing wage ranks.
3. No one committee number is likely to be familiar with all the jobs.
2. Classification Method: This is also called job-grading method. Here, the number of
grades and the salary particulars for each grade are worked out first. The grades are
clearly described in terms of knowledge, skill and so on. Major steps for job
evaluation:
Deciding the number of grades
Writing grade descriptions
Identifying/listing of the jobs to be evaluated
Preparing job descriptions
Management Science
Unit-3: Human Resource Management 3.10
Quantitative Method:
Where point values are assigned to the various demands of a job and relative value is
obtained by summing all such point values.
1. Factor comparison method: Every job requires certain capabilities on the part of the
person who does the job. These capabilities are considered as critical factors, which
can be grouped as follows:
Mean effort
Skill
Physical
Responsibility
Working conditions
Step involved in the factor comparison method:
i) Identify the key jobs
ii) Rank the key job, factor by factor
iii) Apportion the salary among each factor and rank the key jobs
iv) Compare factor ranking of each job with its monetary ranking
v) Develop a monetary comparison scale
vi) Evaluate non-key jobs based on the monetary comparison scale
2. Point-rating method: There are four widely accepted factors used in the point rating
method, skill, effort, responsibility and job conditions each of these factors is divided
into sub-factors.
Skills: It includes the rating factors such as Education and training,
Experience, Judgment and initiative.
Efforts: This factor includes Physical and Mental abilities of an individual.
Responsibility: It includes the factors like Materials or product, Equipment or
process, Safety of others, and Work of others.
Job conditions: It includes the working environment of the organisation.
PERFORMANCE APPRAISAL
Definition:
According to Edwin Flippo, “Performance appraisal is the systematic, periodic and an
impartial rating of an employee‘s excellence in matters pertaining to his present job and his
potential for a better job.”
Management Science
Unit-3: Human Resource Management 3.11
1. Defining Objectives: The first step in the systematic appraisal system is to define the
objectives of the appraisal itself. Appraisal is used for different purposes from motivating
appraise to controlling their behaviour. In each case, the emphasis on different aspects of
appraisal differs. For example, reward providing appraisal, such as salary revision or
promotion differs from appraisal for training and development.
2. Defining Appraisal Norms: Appraisal is done in the context of certain norms or
standards. These may be in the form of various traits of apprises or their expected work
performance results. Since one of the basic long-term objectives is to improve
performance, appraisal is more performance oriented. Hence, performance norms are to
be specified in the beginnings of the period for which appraisal is concerned.
3. Designing Appraisal Programme: In the design for appraisal programme, types of
personnel to act as appraisers, appraisal methodology and types of appraisal are all to be
decided. Ideally speaking all personnel of the organization should be covered by the
appraisal system. But generally various organizations keep lower level employees out of
the purview of formal appraisal. Generally, the superior concerned appraises his
subordinates. However, the present trend in appraisal suggests the concept of 360 degree
appraisal, which involves appraisal by the apprises himself known as self appraisal. The
next issue is the methodology to be used in appraisal system. Should it be through
structured forms and questionnaire or personal interview of appraises or a combination of
both is to be decided. Along with this the time period and tuning of the appraisal should
be decided.
Management Science
Unit-3: Human Resource Management 3.12
Management Science
Unit-3: Human Resource Management 3.13
COMPETENCY MANAGEMENT
Management Science
Unit-3: Human Resource Management 3.14
The word ‘competency’ has its roots in a Latin word ‘competentia’ that implies
“having the right to speak” or “being authorized to judge”. Thus, they are abilities, traits,
skills or knowledge that is considered favorable for good job performance. The concept of
Competency management in HRM in not new and traces its history to 1970s.
Competency Management focuses on integration of human resource planning in an
organization with its strategic vision by qualitative and quantitative analysis of competencies
of current manpower of the organization and its comparison with the level of competencies
required to meet the goals and mission of the organization. After this analysis, targeted and
efficient HR policies and strategies are devised to bridge gaps.
Today, competency management is being used in every facet of human resource
management. It is utilized in recruitment and selection, succession planning, compensation
and benefits, training and career development as well. The approach undertaken is to identify
an appropriate competency model, which is a framework that lists down the required
competencies for being effective in the assigned job. Here, the competencies are categorized
into two- soft competency that relates to communication and interpersonal skills like
leadership and hard competency, which relates to technical qualifications needed for the job,
like financial analysis and operational analysis. Many ‘core’ competencies are first identified,
which is then followed by choosing additional competencies for each sub-group.
Competency Management is being increasingly used in organizations as it targets
enhancing the potential of the organization’s workforce which will ultimately aid in the
organization reaping more revenues and having an edge over other competing firms. It
encompasses competency profiling, competency based job descriptions, competency based
selection, and competency based training. For example, an organization that designs its
training program directed towards achieving set objectives and ‘performing’, rather than
focusing on ‘knowing’ is using competency based training.
Management Science
Unit-3: Human Resource Management 3.15
Management Science
Unit-3: Human Resource Management 3.16
IMPORTANT QUESTIONS
1. Discuss in detail the objectives & functions of HRM.
2. What do you understand by job evaluation? Explain in detail different methods of job
evaluation.
3. “HRM in an organization is the most challenging function”. Do you agree? Justify
your answer.
4. What is the purpose of training? Explain how training can be imparted.
5. What is the difference between job evaluation & performance appraisal?
6. “Training is an ever continuing process….” Explain briefly and state the objectives of
training.
7. What is Human Resource Planning? Explain the process of manpower planning?
8. What is Competency Management? Explain its challenges and benefits.
Management Science
Unit-4: Marketing Management 4.1
UNIT – IV
MARKETING MANAGEMENT
MARKETING MANAGEMENT
The term “market” originates from the Latin word “Marcatus” which means “a place
where business is conducted.” A layman regards market as a place where buyers and sellers
personally interact and finalize deals. Marketing is an essential function of a modern
organization whether it deals in products or services. Marketing is a process of identifying the
customer’s requirements and satisfying them efficiently and effectively. It constitutes the
eyes and ears of the business.
Marketing is the basic reason for the existence of a business organization. In the age
of fast changes, marketing is springboard of all business activities. It works as the guide for
all business/non-business organization. It is a powerful mechanism which alone can satisfy
the needs and wants of consumers at the place and price they desire. Marketing is said to be
the eyes and ears of a business organization because it keeps the business in close contact
with its economic, political, social and technological environment, and informs it of events
that can influence its activities as per requirements of the market.
Definition:
1. Philip Kotler defines, “Marketing is a societal process by which individuals and
groups obtain what they need and want through creating, offering and freely exchange
products and services of value with others.”
2. E.F.L. Brech defines, “Marketing is the process of determining consumer demand for
a product or service, motivating its sales and distributing it into ultimate consumption
at a profit.”
For a managerial definition, marketing has often been described as “the art of selling
products.” Marketing management takes place when at least one party to a potential exchange
thinks about the means of achieving desired responses from other parties. Marketing
management as the art and science of choosing target markets and getting, keeping, and
growing customers through creating, delivering, and communicating superior customer value.
Management Science
Unit-4: Marketing Management 4.2
The marketing functions can be broadly categorized into three categories. Buying and
selling, the first two functions represent exchange functions. Transporting and storing are
physical distribution functions. The final four marketing functions – standardizing and
grading, financing, risk taking and securing market information – are often called facilitating
functions because they assist the marketer in performing the exchange and physical
distribution functions.
A. Exchange functions:
1. Buying: Ensuring that product offerings are available in sufficient quantities to
meet customer demands.
2. Selling: Using advertising, personal selling and sales promotion to match goods
and services to customer needs.
B. Physical distribution functions:
1. Transporting: Moving products from their points of production to locations
convenient for purchasers.
2. Storing: Warehousing products until needed for sale.
C. Facilitating functions:
1. Standardizing and grading: Ensuring that product offerings meet established
quality and quantity control standards of size, weight and so on.
2. Financing: Providing credit for channel members or consumers.
3. Risk taking: Dealing with uncertainty about consumer purchases resulting from
creation and marketing of goods and services that consumers may purchase in the
future.
4. Securing marketing information: Collecting information about consumers,
competitors and channel members for use in marketing decision making.
MARKETING MIX
The term ‘marketing mix’ was introduced by Prof. N.H. Borden of the Harward
Business School. It describes combination of the four inputs which constitute a company’s
marketing system the product, the distribution system, the price structure and the promotional
activities. Marketing mix strategy is an overall marketing approach that is used to achieve
objectives of strategy marketing plans. A marketer involves several factors while dealing
with the marketing-mix strategy product lines, brands and packaging, price setting and
strategies, channel, design, selection and management and communication strategies.
Definition:
1. According to Philip Kotler, “Marketing Mix is the set of controllable variables that
the firm can use to influence the buyer’s response”.
2. According to Mr. Jerome McCarthy an American expert, “Marketing mix is the pack
of four sets of variables, namely product variables, price variables, promotion
variables and place variables.
3. According to Stanton, marketing-mix is a combination of four elements – product,
pricing structure, distribution system and promotional activities used to satisfy the
needs of an organizations target market and at the time achieve its marketing
objectives. Marketing mix represents a blending of decision in four areas, product,
pricing, promotion and physical distribution. These elements are interrelated because
decision in one area usually affects actions in the others.
Management Science
Unit-4: Marketing Management 4.3
Marketing mix is the set of controllable variables and their levels that the firm uses to
influence its target market. McCarthy popularized the four Ps nearly product, price, place and
promotion. Each firm strives to build up such a composition of 4‘P’s, which can create
highest level of consumer satisfaction and at the same time meet its organisational objectives.
Thus, this mix is assembled keeping in mind the needs of target customers, and it
varies from one organisation to another depending upon its available resources and marketing
objectives. Marketing – mix is a combination of several mixes as shown in above fig.
Marketing – mix encompasses product-mix (brand, quality, weight, etc.), price-mix (unit
price, discount credit etc.), promotion mix (advertising, salesmanship and sales promotion),
and place-mix (distribution channels, transport, storage, etc.).
Various elements of marketing-mix are inter related and inter dependent as shown in
the fig. below. For instance, feature of a product inefficient its price, but the price customer
can pay also determines the product features. The choice of channels is determined by the
nature of product and its price. Similarly, promotional activities add to the cost of the
product, the nature of product and its price also influence the kind of promotion to be done.
Management Science
Unit-4: Marketing Management 4.4
2. Price: It is one of the most difficult tasks of the marketing manager to fix the right
price. The marketing manager has to do a lot of exercise to determine the price. Price
is the value of the product or service expressed in monetary turns. From buyer’s point
of view, it is the cost which he is paying to marketer in order to obtain product or
service. Price has its important role in marketing. The price of the product is related
with affordable paying capacity of the consumer, the purpose and motive behind the
purchase etc.
The marketer should explore and design suitable price strategies to capture
maximum market share. Major price policies and strategies are geographical pricing,
uniform pricing, unit pricing, resale price maintenance, leader pricing, follow the
leader pricing, skim pricing, psychological pricing, price competition, non-price
competition and discount and allowances Pricing decisions and policies have direct
influence on the sales volume and profits of the firm. Price therefore is an important
element of the marketing-mix. Right price can be determined through pricing research
and by adopting test marketing techniques.
Management Science
Unit-4: Marketing Management 4.5
4. Place or Physical Distribution: Production has no meaning until and unless the
product is delivered to the consumers. In this regard, the marketer should select the
right distribution policy. The marketer should take into account the factors affecting
the choice of channel of distribution. Place-mix entails activities that are necessary to
transfer – ownership of goods to customers and to make available goods at the right
time and place. Thus it includes decision about the channel of distribution and the
place at which the products should be displayed and made available to the customers.
The basic purpose of establishment of channel is to provide convenience in
buying to the customers so that they can purchase firms products or services without
any harassment. The important channels used for physical distribution of goods are
wholesalers and retailers. In some cases the manufacturers even own the retail outlets.
e.g., oil companies in India have their own stations distributing their petroleum
products.
5. The Fifth P: Packaging: Apart from the 4Ps which are basic to the value delivery
process of any company, packaging has assumed its importance as the 5th ‘P’ of
marketing mix strategy. Packaging is the art, science and technology of preparing
goods for transport, sale and exchange. In recent times, packaging has become an
effective marketing tool. It has become a useful marketing tool because of the
growing importance of self-service, innovation in packaging industry.
The significance of packaging has increased these days because of severe
competition in the market and rise in the standard of living of the people. Packaging
facilitates the sale of a product. It acts as a silent salesman of the manufacturer,
particularly at a place where there is methods of retail selling, automatic vending and
other self-selection methods of retail selling.
Management Science
Unit-4: Marketing Management 4.6
3. Process: It refers to the process by which a customer is served with the desired
product. The process of delivery becomes important in a service organization. It
includes the procedures, mechanism and routines which remain within the
organization. The decisions in service process cover technology, specific equipments,
location, layout etc.
Thus, we see that marketing of services requires an expanded marketing mix
comprising the product, price, place, promotion and the people, physical evidence and
process. The marketer has to be more careful in selecting the right marketing-mix strategy in
case of marketing of services to satisfy the customer requirements.
Sales
Time
Management Science
Unit-4: Marketing Management 4.7
Introduction phase:
During the introduction phase, pricing can be a quandary, especially if you enjoy a
temporary monopoly. In that situation, there may be no direct competitor and thus no
benchmark for what buyers will tolerate or for their sensitivity to price differences. There
may be indirect competitors (substitutes), however, and they can be used as starting points for
the pricing decision. The total economic value equation becomes relevant, wherein the price
of the best alternative is known but the value of the performance differential of the new
product is unknown. Customers themselves may have difficulty in sizing up the value of
something that is new and different. They too lack benchmarks of value. In such instances,
any of the following strategies may be adopted:
Skimming: Some people will be happy to pay a high price for anything that is new
and unique. This strategy, of course, is short term and contains dangers like attracting
competition.
Penetration pricing: A low price may have the threefold benefits of (1) getting
established as the market share champion, (2) discouraging market entry by
competitors, and (3) creating broad-based demand for the product.
Cost-plus: In a monopoly, the producer can administer its own price and cost-plus is
one way of determining that price. However, product monopolies are short-lived.
Pricing decisions in this introductory phase are not only difficult but also deadly
important. Putting too high a price on a newly introduced product may kill it in its infancy,
undoing the work of many employees over a long period of development.
Growth phase:
The growth phase is characterized by increasing unit sales and accelerating customer
interest. If competitors have not yet surfaced (which is an unlikely event), skimming may be
appropriate. All the deep-pocketed buyers who simply had to be the first in their
neighborhoods to own the product have already been skimmed in the introduction phase. So
now, the price must be reduced gradually, skimming other market segments that are
progressively more price sensitive. A producer that enjoys prime position on the experience
curve will also want to progressively reduce prices during this phase. Doing so will maintain
its margins even as the strategy expands unit sales and punishes late-into-the-game rivals in
the marketplace. Some of these rivals will either take a loss on every sale or simply wind up.
Mature phase:
By the time a product enters this phase, growth in unit sales is leveling off and the
remaining competitors are trying to find ways to differentiate their products. During this
phase, one may see sellers offer different versions of the product, each version trying to
colonize a targeted segment. Price is one of the factors used in this strategy (i.e. by
developing and pricing good, better and best versions to expand the product line).
Decline phase:
Competition gets ugly in this phase. Total demand for the product category is now
visibly slipping, perhaps because of the appearance of superior substitutes or because of
market saturation. Whatever the case, unit sales will continue to decline. Some companies
will get out of the business entirely; those that remain will aggressively try to take business
away from the rivals. Every player in the market is trying to harvest as much as possible from
a contracting market. Price tactics include the following:
Beat a retreat on price, but work overtime to reduce production costs. Success in the
latter will maintain a decent profit margin;
Management Science
Unit-4: Marketing Management 4.8
Increase the price on the few remaining units in inventory. This is because there may
be a small number of customers who still rely on that particular product. This is
particularly true of replacement parts. Here, the seller hopes that the higher price will
compensate for fewer sales. When the inventory is exhausted, the product line is
terminated.
CHANNELS OF DISTRIBUTION
Channels of distribution refer to the ways and means of reaching the customer
through the intermediaries such as wholesalers, retailers and other agencies, if any. The
channel intermediaries involve the transfer of goods from seller at a given place to the buyer
in a different place. Thus, they provide place utility to the marketing process. They bring the
goods to the consumer in a convenient shape, unit, size, style and package when he wants
them. The wholesaler buys the goods from the manufacturer, stores them, if necessary, and
sells to the retailers for onward sale to the ultimate customer. Thus, they add time utility also.
Definition:
According to Stanton, “A distribution channel consists of the set of people and firms
involved in the transfer of title to a product as the product moves from producer to ultimate
consumer or business user”.
Management Science
Unit-4: Marketing Management 4.9
customers with no middlemen in between them. This is true more for industrial goods where
the customers are highly knowledgeable and their individual purchases are large. The various
channels used for distribution of consumer goods can be described as follows:
1. Zero stage channel of distribution
2. One stage channel of distribution
3. Two stage channel of distribution
4. Three stage channel of distribution
Management Science
Unit-4: Marketing Management 4.10
IMPORTANT QUESTIONS
1. Define Marketing? Explain the functions of Marketing?
2. Explain the concept of Marketing Mix in detail?
3. What do you mean by Channels of distribution? Explain its importance and functions
in marketing.
4. What are the factors that determine the choice of Channel of distribution? Why
manufacturer do favours intermediaries.
5. “Marketing should aim at meeting a given consumers need rather than selling a given
product”. Comment.
6. Describe different stages of product life cycle and marketing strategies required at
each stage.
Management Science
Unit-5: Financial Management 5.1
UNIT – V
FINANCIAL MANAGEMENT
FINANCIAL MANAGEMENT
Financial management means money management. Financial management is
concerned with the planning and controlling of the financial resources of the business firm.
The term financial management has emerged from the generic discipline of management. As
an academic discipline, the subject of financial management has undergone radical changes
in relation to its scope, functions and objectives. In the past, the financial management was
confined to rising of the funds and its procedural aspects. In the broader sense, it is now
concerned with the optimum use of financial resources in addition to its procurement.
Therefore, financial management is that part of management which is concerned mainly with:
Fund Raising: raising the right type of funds in the most economic and suitable
manner.
Use of Funds: using the funds in the most profitable and safest possible manner.
Meaning:
Financial management refers to that part of the management activity, which is
concerned with the planning, & controlling of firm’s financial resources. It deals with finding
out various sources for raising funds for the firm. Financial management is practiced by many
corporate firms and can be called Corporation finance or Business Finance.
Financial management is the art of planning; organizing, directing and controlling of
the procurement and utilization of the funds and safe disposal of profits to the end that
individual, organizational and social objective are accomplished.
Definition:
The simple definition of Financial Management is `the ways and means of managing
money’. This statement can be further expanded to define Financial Management: the
determination, acquisition, allocation and utilization of the financial resources with the aim of
achieving the goals and objectives of the enterprise.
According to Archer and Ambrosia, “Financial management is the application of the
planning and control functions to the finance function”.
Joseph and Massie, “Financial management is the operational activity of a business
that is responsible for obtaining and effectively utilizing the funds necessary for
efficient operation”.
Management Science
Unit-5: Financial Management 5.2
Management Science
Unit-5: Financial Management 5.3
PROFIT MAXIMIZATION
The main aim of any kind of economic activity is earning profit. A business concern
is also functioning mainly for the purpose of earning profit. Profit is the measuring
techniques to understand the business efficiency of the concern. Profit maximization is also
the traditional and narrow approach, which aims at, maximizes the profit of the concern.
Management Science
Unit-5: Financial Management 5.4
WEALTH MAXIMIZATION
Wealth maximization is one of the modern approaches, which involves latest
innovations and improvements in the field of the business concern. The term wealth means
shareholder wealth or the wealth of the persons those who are involved in the business
concern. Wealth maximization is also known as value maximization or net present worth
maximization. This objective is a universally accepted concept in the field of business.
Management Science
Unit-5: Financial Management 5.5
Definitions:
Mead, Baker and Malott, “Working Capital means Current Assets”.
J.S.Mill, “The sum of the current asset is the working capital of a business”.
Weston and Brigham, “Working Capital refers to a firm’s investment in short-term
assets, cash, short-term securities, accounts receivables and inventories”.
2. Net Working Capital: Net Working Capital is the specific concept, which considers
both current assets and current liability of the concern. Net Working Capital is the
excess of current assets over the current liability of the concern during a particular
period. If the current assets exceed the current liabilities it is said to be positive
working capital; it is reverse, it is said to be Negative working capital.
NWC = C A – CL
Current Assets and Liabilities: Current assets refer to those assets which can be easily
converted in to cash normally within a period of one year. While current liabilities are
those liabilities which have to be paid in the ordinary course of time i.e. normally
liabilities have to be settled within a period of one accounting year.
Management Science
Unit-5: Financial Management 5.6
Non-current Assets and Liabilities: All Assets and liabilities other than current assets
liabilities come within the category of non-current assets and liabilities.
Funds Flow Statement is a widely used tool in the hands of financial executives for
analyzing the financial performance of a business concern. Funds keep on moving in a
business which itself is based on a going concern concept.
Funds Flow Statement is prepared to study the changes in the financial position of a
business over a period of time generally one year. Funds Flow Statement reveals both inflow
and outflow of funds. The inflow of funds is known as sources of the funds and the outflow
of funds means uses or application of the funds. Funds flow statement is also known as
Statement of sources and Applications of funds or where got-where gone statement. Funds
Flow Statement highlights and changes in the financial structure of an undertaking. It
determines the financial consequences of business operations. Thus, Funds, Flow Statement,
in general is able to present that information which either is not available or not readily
apparent from an analysis of other financial statements.
Management Science
Unit-5: Financial Management 5.7
Sources of Funds
1. Issue of share capital: If there is any increase in share capital it denotes issue of
additional shares during the period. Issue of shares is a source of funds as it
constitutes inflow of funds. Even calls received on partly paid shares constitute an
inflow of funds. If shares are issued at premium, the premium will also become a
source of fund. If shares are issued and allotted for other than cash, consideration do
not generate fund.
2. Issue of debentures of long term loans: Issue of debentures, accepting public
deposits, and raising long term loans results in the flow of funds. If debentures like
shares have been allotted to somebody other than cash, consideration do not generate
fund.
3. Sale of fixed assets or long term investments: When any fixed asset like Land,
Building, Machinery, Furniture on long term investments etc. are sold, it generate
funds and becomes a source of funds.
4. Non-trading income: Any non-trading receipts like dividends, rent, interest etc.
5. Decrease in working capital: If working capital is decreased during the accounting
period, when compared with previous period, it denotes release of funds from
working capital and it constitutes a source of funds.
Management Science
Unit-5: Financial Management 5.8
Management Science
Unit-5: Financial Management 5.9
Bank Overdraft
Outstanding expenses
Accounts payable
Provision for tax
Dividend
(B) Total Current Liabilities
Increase/Decrease in Working
capital
Illustration 1
From the following details, prepare a schedule of changes in working capital
Management Science
Unit-5: Financial Management 5.10
Management Science
Unit-5: Financial Management 5.11
It may be seen from the proforma that in the funds flow statement preparation, current
assets and current liabilities are ignored. Attention is given only to change in fixed assets and
fixed liabilities. In this connection an important point about provision for taxation and
proposed dividend is worth mentioning. These two may either be treated as current liability
or long-term liability. When treated as current liabilities they will be taken to `schedule of
changes in working capital’ and thereafter no adjustment is required anywhere. If they are
treated as long-term liabilities there is no place for them in the schedule of changes in
working capital. The amount of tax provided and dividend proposed during the current year
will be added to net profits to find the funds from operations. The amount of actual tax and
dividend paid will be shown as application of funds in the funds flow statement. In this
lesson, we have taken them as current liabilities.
Management Science
Unit-5: Financial Management 5.12
Illustration 1: The balance sheet of Mahathi limited for two years are as follows:
Additional Information:
Depreciation written off during the year on Plant and machinery Rs.6,400 and
Furniture Rs. 200
Prepare a schedule of changes in working capital and a statement of sources and
application of funds.
Management Science
Unit-5: Financial Management 5.13
Management Science
Unit-5: Financial Management 5.14
Illustration-2: From the following balance sheets of X Ltd. On 31st December, 2011 and
2012, you are required to prepare a schedule of changes in working capital and Funds flow
Statement.
Solution
Schedule of Changes in Working Capital
Management Science
Unit-5: Financial Management 5.15
Management Science
Unit-5: Financial Management 5.16
CAPITAL BUDGETING
Definition:
According to Charles T. Horngreen, "Capital budgeting is long-term planning for
making and financing proposed capital outlays."
According to G.C.Philippatos, "Capital budgeting is concerned with the allocation of
the firm's scarce financial resources among the available market opportunities. The
consideration of investment opportunities involves the comparison of the expected
future streams of earnings from a project with the immediate and subsequent streams
of expenditure for it".
Thus, capital budgeting decision may be defined as "The firms decision to invest its
current funds most efficiently in long-term projects, in anticipation of an expected flow of
future funds over a series of years". It therefore involves the process of generation of
investment proposals, estimation of cash flows for the proposals, evaluation of cash flows,
selection of projects based upon an acceptance criterion and finally continuous revaluation of
investment projects after their acceptance.
Management Science
Unit-5: Financial Management 5.17
1. Project generation: The capital budgeting process starts with the identification of
investment proposals to be undertaken depending upon its future plans of activity. The
proposal about potential investment opportunities may originate from the top
management or may come from any officer of the organization. The various proposals are
according to the following categories:
Replacement of equipment: In this case the existing outdated equipment and
machinery may be replaced by purchasing new and modern equipment.
Expansion: The Company can go for increasing additional capacity in the
existing product line by purchasing additional equipment.
Diversification: The Company can diversify its product by producing various
products and entering into different markets. For this purpose, it has to acquire the
fixed assets to enable producing new products.
Research and Development: Where the company can go for installation of
research and development suing by incurring heavy expenditure with a view to
innovate new methods of production new products etc.
2. Project evaluation: The next step in the capital budgeting process is to evaluate the
profitability of various proposals. The process of project evaluation comprises two steps.
Estimation of benefits and costs: These must be measured in terms of cash
flows. Benefits to be received are measured in terms of cash inflows and costs to
be incurred are measured in terms of cash outflows.
Selection of an appropriate criterion: The selection of an appropriate method to
judge desirability of the project is also a step in project evaluation. However, it
should be noted that the various proposals to be evaluated may be classified as:
a. Independent proposals: Independent proposals are those which do not
compete with one another and the same may be either accepted or rejected
on the basis of a minimum return on investment required.
b. Contingent proposals: The proposals whose acceptance depends upon the
acceptance of one or more proposals are the contingent proposals.
c. Mutually exclusive proposals: Mutually exclusive proposals are those
which compete with each other and one of those may have to be selected at
the cost of the other.
3. Project selection: After evaluating various proposals, the unprofitable or uneconomic
proposals may be rejected straight away. But there is no standard administrative
procedure for approving the investment decisions. Hence, it is very essential to rank the
various proposals and to establish priorities after considering urgency, risk and
profitability involved there in. However, the proposals are scrutinized at multiple levels
and the final approval of the project generally rests with the top management of the
company.
Management Science
Unit-5: Financial Management 5.18
4. Project Execution: It is not possible to implement the project just by preparing a capital
expenditure budget and incorporating a particular proposal in the budget. A request for
authority to spend the amount should further be made to the Capital Expenditure
Committee which may like to review the profitability of the project in the changed
circumstances.
5. Performance Review: This is the last stage in the process of capital budgeting and
involves the evaluation of the performance of the project. The evaluation is made by
comparing the actual expenditure on the project with the budgeted one and also by
comparing the actual return from the investment with the anticipated return.
Management Science
Unit-5: Financial Management 5.19
Formula:
a. When cash flows are even:
Cash Outlay (or) Original cost of project
Pay Back period =
Annual Cash inflow
Demerits:
1. This method fails to take into account the cash flows received by the company after
the payback period.
2. It doesn’t take into account the interest factor involved in investment outlay.
3. It is not consistent with the objective of maximizing the market value of the
company’s share.
Management Science
Unit-5: Financial Management 5.20
Merits:
1. It is very simple to understand and calculate.
2. It can be readily computed with the help of the available accounting data.
3. It uses the entire stream of earning to calculate the ARR.
Demerits:
1. It is not based on cash flows generated by a project.
2. It ignores the length of the projects useful life.
3. It does not take into account the fact that the profits can be re-invested.
Management Science
Unit-5: Financial Management 5.21
Merits:
1. It recognizes the time value of money.
2. It is based on the entire cash flows generated during the life of the asset.
3. It is consistent with the objective of maximization of wealth of the owners.
4. The ranking of projects is independent of the discount rate used for determining the
present value.
Demerits:
1. It is different to understand and use.
2. The concept of cost of capital is difficult to understood and determine.
3. It does not give solutions when the comparable projects are involved in different
amounts of investment.
Formula:
IRR = Present value of cash inflows = Investment
Management Science
Unit-5: Financial Management 5.22
If the present value of the project lies between two discount rates:
PL – I
IRR = L + X H - L (or)
PL – PH
NPVL
IRR = L + XD
PL - PH
where, L = Lower discount rate
H = Higher discount rate
PL = Present value of cash inflows at lower rate
PH - Present value of cash inflows at higher rate
I = Investment or cash outflows
Merits:
1. It considers the time value of money.
2. It takes into account the cash flows over the entire useful life of the asset.
3. It gives uniform ranking of project.
4. It is the actual rate of return generated by the project.
5. It enables to evaluate true profitability.
Demerits:
1. It is very difficult to understand and use.
2. It involves a very complicated computational work.
3. It may not give unique answer in all situations.
Formula:
Present value of cash inflows Present value of cash inflows
PI = (or)
Present value of cash outflows Investment
where,
IO = Investment
CF1, CF2, …CFn = cash inflows in different years
K= Cost of the Capital (or) Discounting rate
t = No. of Years
Management Science
Unit-5: Financial Management 5.23
Merits:
1. It requires less computational work then IRR method
2. It helps to accept / reject a proposal on the basis of value of the index.
3. It takes into consideration the entire stream of cash flows generated during the useful
life of the asset.
Demerits:
1. It is somewhat difficult to understand.
2. Some people may feel no limitation for index number due to several limitation
involved in their competitions.
3. It is very difficult to understand the analytical part of the decision on the basis of
probability index.
ILLUSTRATIONS
1. Consider the case of the company with the following two investment alternatives each
costing Rs. 9, 00,000/-. The details of the cash flows are as follows.
Cash flows (in Rs.)
Year
Project-I Project-II
1 3,00,000 6,00,000
2 5,00,000 4,00,000
3 6,00,000 3,00,000
The cost of capital is 12 percent per year. Which one will you choose under NPV method ?
Solution:
DCF Method
Project - I Project - II
Year PV@10%
Cash Flows PVCF Cash Flows PVCF
1 0.909 3,00,000 2,72,700 6,00,000 5,45,400
2 0.826 5,00,000 4,13,000 4,00,000 3,30,400
3 0.751 6,00,000 4,50,600 3,00,000 2,25,300
Total PVCF 11,36,300 11,01,100
NPV Method
NPV = PVCF – Investment
Project – I = 11,36,300 – 9,00,000 = 2,36,300
Project – II= 11,01,100 – 9,00,000 = 2,01,100
Project – I is chosen as its NPV is higher than Project – II
2. ABC Co. ltd. is proposing to mechanize their operations. Two proposals A and B in the
form of quotations have been received from two different vendors. The proposal in each
case cost Rs. 5, 00,000/-. A discount factor of 14% is used to compare the proposals.
Cash flows after taxes are likely to be as under.
Management Science
Unit-5: Financial Management 5.24
3. A business firm is thinking of choosing the right machines for their purpose after
financial evaluation of the proposals. The initial cost and the net cash flow over five years
to the business firm have been calculated for each machine is as follows and assuming the
cost of capital to be 12%.
Machine X Machine Y
Initial cost (Rs.) 20,000 28,000
Net cash flows (Rs.)
1st year 8,000 10,000
nd
2 year 12,000 12,000
3rd year 9,000 12,000
th
4 year 7,000 9,000
5th year 6,000 9,000
Choose the machine based on (a) payback period and (b) NPVI method
Solution:
(a) Pay Back period:
Machine - X Machine - Y
Year Cumulative Cumulative Cash
Cash Flows Cash Flows
Cash Flows Flows
1 8,000 8,000 10,000 10,000
2 12,000 20,000 12,000 22,000
3 9,000 29,000 12,000 34,000
4 7,000 36,000 9,000 43,000
5 6,000 42,000 9,000 52,000
Machine – X = 2 years
Machine – Y = 2 years + (6000 / 12000) = 2.5 years
Management Science
Unit-5: Financial Management 5.25
3.16. EXERCISES
2. Determine the Pay Back Period for the information given below
a) The project cost is Rs. 20,000
b) The life of the project is 5 years
Management Science
Unit-5: Financial Management 5.26
c) The cash flows for the 5 years are Rs.10,000, Rs.12,000; Rs.13,000;
Rs.11,000; and Rs. 10,000 respectively and
d) Tax rate is 20%
3. Calculate the Net present value (NPV) of the two projects X and Y. Suggest which of
the two projects should be accepted assuming a discount rate of 10%
Item Project-A Project-B
Initial Investment Rs. 80,000 Rs. 1,20,000
Life Period 5 Years 5 Years
Scrap Value Rs.4,000 Rs.8,000
(Annual Cash Inflows) (CFAT) (CFAT)
Year: 1 Rs.24,000 Rs.70,000
,, 2 Rs.36,000 Rs.50,000
,, 3 Rs.14,000 Rs.24,000
,, 4 Rs.10,000 Rs.8,000
,, 5 Rs.8,000 Rs.8,000
4. A Company has at hand two proposals for consideration. The cost of the proposals in both
the cases is Rs. 5, 00,000 each. A discount factor of 12% may be used to evaluate the
proposals. Cash inflows after taxes are as under.
Year Proposals X(Rs.) Proposals Y(Rs.)
1 1,50,000 50,000
2 2,00,000 1,50,000
3 2,50,000 2,00,000
4 1,50,000 3,00,000
5 1,00,000 2,00,000
Which one will you recommend under NPV method?
5. Consider the case of the company with the following two investment alternatives each
costing Rs.9 lakhs. The details of the cash inflows:
Rs. in Lakhs
Year Project-1 Project-2
1 3 6
2 5 4
3 6 3
The cost of capital is 10% per year. Which project will you choose under NPV method?
6. The following are the details pertaining to a company which is considering to acquire a
fixed asset:
Project A: Cost of the proposal: Rs.42, 000, Life 5 years, Average after Tax
Cash inflow Rs.14000. (constant)
Project B: Cost of the proposal Rs.45000, Life 5 years
Annual cash inflows 1st year Rs. 28,000, 2nd year Rs.12, 000, 3rd year
Rs.10, 000, 4th Rs.10, 000 and 5th year Rs. 10,000. Determine IRR. Which project do
you recommend?
7. Mahesh Enterprises is considering of purchasing a CNC Machine. The following are the
earnings after tax from the two alternative proposals under consideration each costing Rs.
8, 00,000. Select the better one, if the company wishes to operate at 10% rate of return.
Management Science
Unit-5: Financial Management 5.27
9. Rank the following investment proposals in order of their profitability according to Pay-
Back Period and Discounted Cash flow methods assuming the cost of capital to be 12%.
Management Science