PERIYAR INSTITUTE OF DISTANCE EDUCATION

(PRIDE)

PERIYAR UNIVERSITY
SALEM - 636 011.

M.B.A. MARKETING MANAGEMENT

SECOND YEAR
PAPER – IX : PRODUCTION MANAGEMENT

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Prepared by :
Dr. J. SENTHIL VELMURUGAN,
MBA, M.Com., PGDCA, Ph.D.
Assistant Professor
Periyar Institute of Management Studies
(PRIMS)
Periyar University
Salem – 636 011.

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 UNIT - I

OBJECTIVES
After studying this lesson, you should be able to:
 Definition of production management.
 The concept of production system.
 The types of production system.
 Differentiate between services and production.
 Steps in product design.

PRODUCTION MANAGEMENT
Strategic growth and competitiveness of organisations are depending
upon the effective utilization of the critical productive resources of the
organisation. Production function is concerned with design and control systems
responsible for the productive use of raw materials, human resources,
equipment and facilities in the development of a product or service. The words
productions are used synonmously.
Production is a creation of utility. The production function creates
utility by providing form, time and place utilities for the produced goods.
Manufacturing provides form utility while physical distribution (a service
function) provides the time and place utilities. An operation is often defined as
a transformation process. In operations management, we try to ensure that the
transformation process is transformed efficiently and that the output is of
greater value than sum of the inputs. Thus, the role of operations is to create
value. The transformation process itself can be viewed as a series of activities
along the value chain extending from supplier to customer. Any activities that
do not add value are wastes (superfluous) and should be eliminated. The input
transformation (process) - output process is a characteristic of a wide variety of
operation systems. In an automobile factory, steel sheet is formed into different
shapes, painted and finished and then assembled with thousands of component
parts to produce a working automobile. In an Aluminium factory, various
grades of bauxite are mixed, heated and cast into ingots of different sizes. In a
hospital, patients are helped to become heathier individuals through special
care, meals, medication, laboratory tests and surgical procedures.
Obviously, operations can take many different forms. The transformation
process can be
 Physical: as in manufacturing operations.

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  Locational: as in transportation or warehouse operations.
 Exchange: as in retail operations.
 Physiological: as in health care.
 Psychological: as in entertainment.
 Informational: as in communication.
Definition
Production management is the process which combines and transforms
various resources used in the Production subsystem of the organization into
value added products/services in a controlled manner as per the policies of the
organization.
Production function, therefore, is that part of an organization which is
concerned with the transformation of a range of inputs into the required outputs
(products/services) having the requisite quality level.
The set of interrelated management activities which are involved in
manufacturing certain products is called as production management. So, in
general, the concept of manufacturing products/providing services is called as
production management.
SYSTEMS CONCEPT OF PRODUCTION
System is a collection of interrelated entities. As stated earlier,
operations management is the management of transformation systems which
convert inputs into goods and/or services. The inputs to the system are
materials, labour, equipments and capital. These inputs are combined and
converted into goods and/or services by a suitable process technology. The
types of inputs used vary from one industry to another. In product
manufacturing, the major inputs are capital, machines, equipments and tools,
and labour is required to operate and maintain the equipments. The materials
input is the basis for the conversion process.
Explains the systems aspect of production/operations function of an
organization. The organization receives several inputs as indicated on the left
hand side and converts them into useful products and/or services using its
facilities (manufacturing facilities). In the process of

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 Fig. 1.1 Systems aspect of production/operations function.
conversion, definitely, there will be some deviations in the product's attributes
like quality, size, shape and number of units produced. Just to cope up with the
predetermined plans and policies, it is highly essential to communicate these
deviations to the input stage in the form of feedback for making necessary
corrections.
 A sample list of corrections is presented below:
 Tight quality check on the incoming raw materials
 Adjustment of machine settings
 Change of tools
 Proper allocation of operators to machines with matching skills
 Change in the production plans, like increase or decrease in volume of
production
 Rigid in-process quality programme to avoid rework
Based on this feedback, the system once again tries to produce the
product/service with modified parameters, in order to meet the specifications.
The feedback mechanism is a continuous exercise to monitor the status of the
system.
The system operates in an environment. So, the system has to take
feedback from its environment and adjust its parameters accordingly. The
environment can be classified into internal environment and external
environment. The top management may be treated as the internal environment

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and its instructions and expectations will form internal feedback. The system
must respond to these modifications for achieving better results.
Managing the transformation system involves continual monitoring of
the system and its environment. The environment outside the firm may change
in terms of legal, political, social or economic conditions, thereby necessitating
the corresponding change in the environment of production/ operations. So, the
production/operations system must consider these changes as feedback from
external environment and adjust its parameters accordingly.
A detailed schematic diagram of the production/operations subsystems
is shown in Fig. 1.2, wherein the different components of the production/
operations system are indicated. This system receives different inputs as
indicated in the figure and converts them into useful products/services by

Fig. 1.2 Schematic representation of production/operations subsystem.

utilizing the equipments at the transformation stage. This is usually achieved
with the help of required manpower and by applying suitable techniques and
procedures. The techniques and procedures used in the production/operations
system are as follows:
1. Forecasting
2. Location and layout techniques
3. Product design and analysis, work study
4. Production control techniques

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 (a) Aggregate planning
(b)Master production schedule
(c) Materials requirements planning
(d) Capacity planning
(e) Scheduling and control
• Line balancing
• Line of balance
• Single machine scheduling
• Flow shop scheduling
• Job shop scheduling
5. Maintenance management
6. Feedback and control techniques
(a) Quality control
(b) Inventory control
The finished products/services produced by the system are to be
checked for conformance with quality specifications and other design
specifications. These are done at the output stage and corresponding feedbacks
are given to the input stage for necessary corrections. This feedback mechanism
is a continuous process, but the degree of corrections required depends on the
materials' quality, equipment condition, employees' skills and their
commitments.
TYPES OF PRODUCTION SYSTEM
The production system of a company mainly uses facilities, equipments,
and operating methods (called the production system) to produce goods that
satisfy customers' demand. The above requirements of a production system
depend on the type of product that the company offers and the strategy that it
employs to serve its customers. The classification of production system is
summarized in Table 1.1 and is explained in the following sections.
Table 1.1 Classification of Production System

Basis Classification Examples

Type of output Products Consumer goods like furniture, TV, radio, etc.
Producer goods like, lathe, milling machine,
etc.
Services Transportation, health, entertainment, services,
education system, etc.

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Types of flow Projects Construction of bridge, darn, road, etc.
Job shop Hospital, auto repair, machine shop,
Company, etc.
Flow shop High volume TV factory, auto factory
Continuous Postal services, Telephone Company, process
power corporation, oil refinery, chemical plant
Type of specification Customized Medical care, legal services
Insurance, under service type Standardized
wholesale stores
Flow Shop
This is a conversion process in which successive units of output
undergo the same sequence of operations, using specialized equipment’s
usually positioned along a production line; for example auto assembly,
assembly of television sets, assembly of electric motors, assembly of; computer
keyboards, etc.
Extreme form of flow shop is sometimes treated as a continuous process
in which there is a constant flow of materials, as in oil refining, chemical
processing and others in which there is no way too identify successive units of
output.
Ordinary flow shop can be classified into continuous flow shop and
intermittent flow shop. Continuous flow shop will produce the same type of
output like cigarettes, fertilizer, cement, etc. In intermittent flow shop, the
process is interrupted to set it up to handle different specifications of the same
basic design. In each run, however, all units will follow the same sequence.
Examples are bottling factories, mass production of clothing, television sets,
etc.
Job Shop
This is a conversion process in which units of different types of
products follow different sequences through different shops. This type of
system has more flexibility. But this system results into more set-up time, more
in-process inventory, complex scheduling, varying quality, and so forth.
Batch Manufacturing
A batch manufacturing facility produces some intermediate varieties of
products with intermediate volumes. The volume of any single product may not
be sufficient to justify the use of a dedicated set of equipment for its
production. Under this condition, a few or several products will have to share
the production resources to balance their utilization. Production equipment in

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batch manufacturing must be capable of performing a variety of tasks, but the
range of possible operations is much narrower than in a job shop.
The Project
A project refers to the process of creating a complex one-of-a-kind
product or service with a set of well-defined tasks in terms of resources
required and time phasing. Some examples of projects are: dam constructions,
starting new industries, fabricating boilers, and so on.
DIFFERENCES BETWEEN SERVICE OPERATIONS AND
PRODUCTION
(i) Productivity can be more easily measured in manufacturing operations
than in service operations because manufacturing operations produce
tangible products whereas outputs of service operations are generally
intangible.
(ii) Quality standards are more difficult to establish and product quality is
more difficult to evaluate in service operations. They are relatively
simple and easy ill manufacturing operations.
(iii) Customers have more contact with persons who provide services than
with those who perform manufacturing operations.
(iv) In continuous production of standard products, manufacturing
operations can accumulate or decrease inventory of finished product,
whereas non-manufacturing operations cannot produce outputs that can
be stored.
(v) The proportion of expenses required for material handling is more in
manufacturing operations than for non-manufacturing operations.
(vi) Investments in assets such as facilities, equipment and inventory are
higher in manufacturing organizations than in service organizations.
(vii) Manufacturing operations depend more heavily on maintenance and
repair work than non-manufacturing operations.
HISTORICAL DEVELOPMENT OF PRODUCTION MANAGEMENT
Production systems have existed since the earliest days of civilization as
evidenced by the pyramids of Egypt, the Great Wall of China etc. The wide
spread production of consumer goods and thus production management did not
begin until the Industrial Revolution in the 1700s. Prior to that time, the skilled
craftsmen and their apprentices fashioned goods for individual customers. The
typical production facility has a handful of apprentice workers under
supervision of master craftsman cum owner. Its technology was embedded in
minds and hands rather than equipment. Product design and production process
were united in the person of the owner, materials and quality control, personnel

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scheduling were done from experience using simple rules. Markets were small
and distribution was uncomplicated.
Crafts production, the process of handcrafting product/services for
individual customers. Every piece was unique, hand fitted and made entirely by
one person.
The availability of coal, iron ore and steam power set into motion a
series of industrial inventions that revolutionized the way work was performed.
Mechanically powered machines replaced the labour as primary factor of
production and brought workers to a central location to perform tasks under the
direction of a supervisor in a place called 'Factory'. During the same time,
Adam Smith's Wealth of Nations (1776) proposed the division of labour in
which the production process was broken down into a series of small tasks,
each performed by different workers. The specialization of worker and limited,
respective tasks made him an expert on the tasks and further encouraged the
development of specialised machinery.
The introduction of interchangeable parts by Eli Whitney (1790s)
allowed the manufacturing of firearms; watches, sewing machines and other
goods to shift from customized one at a time production to volume production
of standardized parts. Thus, the system of measurements and inspection, a
standard method of production and supervisors to check the quality of the
worker's production had started. Advances in technology continued through the
1800s. Cost accounting and other control systems were developed but the
management theory and practice virtually non-existent.
In the beginning of 1900s, Frederick W. Taylor, approached
management of work as a science, based on observation, measurement and
analysis, he identified the best method of doing each job i.e.
The methods are standardized for all workers and economic incentives
are established to encourage workers to follow the standards. Taylor's
philosophy became famous as "Scientific Management". This idea was
extended by efficiency experts Frank and Lillian Gilbreth and Henry Grant,
among others.
Mass Production
American manufactures became adept at mass production over the next
five decades and almost dominated manufacturing worldwide. The mass
production refers to high volume production of a standard product for a mass
market.
The human relations movement of 1930s, led by Mayo Elton and
Hawthorne studies, introduced the idea that worker motivation as well as

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technical aspects of work, affected productivity. Theories of motivation were
developed by Herzberg, Maslow, McGregor and others, Quantitative models
and techniques by the operations research groups of World War II continued to
develop and were applied successfully to manufacturing and services.
Computers and automation led another breakthrough in technological
advancements applied to operations.
Japanese Production System
During 1970s, Japanese companies became significant players in the
world economy, especially in products such as automobiles and consumer
electronics. During the 1980s, they started dominating many industries. The
robustness of the Japanese economy and their business success has caused
operations managers throughout the world to study how Japanese companies
were able to develop their production system dominance. Japanese production
philosophy is embedded in three major principles or goals.
• Quality comes first
• Improve product and process quality continuously
• Eliminate all forms of waste.
Production/Operations Management - Today
Mass production can produce large volumes of goods quickly, but it
cannot adapt very well to changes in demand. Today's consumer market is
characterised by Product Proliferation, shortened Product life cycles, Shortened
product development times, Changes in technology, Customised products and
Segmented markets. Mass production doesn't fit the environment of mass
Customization. Using a concept known as just in time, Japanese manufacturers
changed the rules of production from mass production to lean production
characterised by flexibility and quality. Total quality management has since
spread across the globe and is an underlying force for successful operations
today. Technology with changing political and economic conditions prompted
an era of industrial globalisation in which companies competed worldwide for
both market access and production resources.
Service Economy and Environmental Awareness
Since 1960, Service industries have grown rapidly compared to
manufacturing service operations face almost all the problems confronted in
manufacturing. So, operations management has become all the important in
service sector.
A new challenge facing operation managers is to make production
system environmentally compatible, yet efficient. The opportunities for doing
this include - reducing the production of harmful by-products, recycling waste

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materials and energy, recycling of water, green packaging and environmental
friendly products.
Operations Management in E-Business Environment
The emergence of the Internet has energised the trend of globalisation.
Trade that occurs over the internet (or any computer network) is called
Electronics Commerce or e-Commerce. E - Commerce can take the form of
trade between business, between consumers, between business and consumers.
• Business-to-Business (B2B) trade typically involves companies and
their suppliers.
• Business to Consumer (B2C) trade can take the form of online retailing.
• Consumer to Business (C2B) transactions reverses the normal flow of
trade by having customers post what they want and having business
accept or reject their offers.
Operations management skills in order fulfilment, warehousing,
logistics and distribution enable B2C e-commerce. B2B e-commerce plays an
important role in streamlining the operations/function in the areas such as,
product design, procurement and supply chain management.
PRODUCT DESIGN AND ANALYSIS
WHAT IS PRODUCT DESIGN AND ANALYSIS
In any business venture, product design is the first step immediately
after accepting the concept of a product. Product design has direct bearing on
plant layout and in-process materials flow. In the process of product design,
one has to critically analyse different design features with relevance to places
of use, substitute materials, and carefully plan equipment alternatives for
manufacturing the product. Therefore the purpose of product design and
analysis is to determine and specify products that will be profitable to
manufacturers and distributors and will give human satisfaction.
The various aspects in product design are: Design for Function, Design
for Making and Design for Selling.
Design for function:
A product must perform the function which its customer expects it to
do. If a product is designed by taking its functional features into account, then it
will create satisfied customers, and will further lead to having more repeat
customers. The factors which are to be considered for functional design are
strength and wear ability of the product and its components.
Design for making:

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 A product design that solves the functional problem smoothly, but is
impossible to manufacture, is of no use. Attention must be given to materials,
fastening devices etc., while designing a product. The hardness of the material
specified at the design stage must be within the permitted range while
machining. In some intricate design, to join components, we may require small
size fasteners. If these are not available in the market, then the design may
become infeasible at the manufacturing stage. Making use of standard parts is
an important aspect of product design. Also, operational convenience of the
machineries must be taken into account at the design stage.
Design for selling:
A product that functions well and is easy to make, but is wanted by no
one is of no avail. It makes no difference whether the product is a pen or a CNC
machine; it has to sell itself to the customers. The features like, appearance and
convenience, depending on the customers, needs, are to be considered. Product
convenience can be improved using pre-determined motion-time systems.
So, engineers, designers and psychologists should work together to
design a better product for selling.
Modules of product design and analysis:
Product design may be classified into design for new products (new
product development) and design for modifications of existing products.
Product design is a repetitive task. A careful analysis of the product attributes
would reduce obsolescence and extend product's life. The following are the
various aspects of product design and analysis:
 Process planning and design
 Value analysis/Value engineering
 Standardization and simplification
 Make or buy decision
 Ergonomic considerations in product design
 Concurrent engineering
Since a new product development requires special emphasis, its
concepts and steps are presented before discussing the aforementioned aspects
of product design and analysis.
NEW PRODUCT DEVELOPMENT - ITS CONCEPTS
Innovation is a process of converting an invention(s) into some useful
product which can satisfy human wants either directly, or indirectly. A product
which has been innovated in the past by an organization will definitely reach its
maturity stage at some point of time. The rate at which it reaches the maturity

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stage depends on technology, level of competition, rate of obsolescence,
culture, taste of customers, etc. So, the organization must continuously monitor
the market and its environment for possible Upgradation of its product, at least
to retain its market share at the present level. The product may be upgraded
either by changing some parts to improve its operational performance or by
completely changing the technology employed in the manufacturing process.
Sometimes, a change in the product must be introduced to reduce its price so
that the price becomes competitive in the market. Companies require flexibility
to enable themselves to introduce new products rapidly and to change their
product mixes often.
The design of the goods and services that a company offers in the
market is strategic in nature. Apart from directly affecting the company's
success in the market place, the effects of design are interrelated and they may
affect many functions of the company. Design is guided by objectives and
policies that are best addressed when a company considers the type of goods
and services it intends to offer and the level of quality it intends to provide.
Furthermore, a product's design and reputation affect perceptions of the
company as viewed by its employees, customers and the public.
Some of the factors which are to be taken into account while designing
a product are as listed below:
 External appearance of a manufactured product which influences
potential buyers to make purchase decision.
 Internal components of a product which will have effect on its
performance, reliability and durability, and hence, the customer's long-
term satisfaction.
 The number, type and complexity of a product's components which
affect the type of suppliers with which a company must deal and the
amount of work and operating costs involved. The types of components
used in a product can also affect the production processes required to
make it, and hence the capital investment and personnel skills, which
are important to the company.
One can see that design affects many aspects of operations in addition
to pricing, sales, revenues and products or services must have market appeal
and be reasonably easy to produce with quality and economy. It has been
estimated that 70 percent or more of a manufactured product's cost is
determined by its design. This is because the design establishes the number of
parts that must be made or purchased, the type of material and equipment that
will be used, and the amount of labour that will be needed. So, designers must
be careful about the consequences of the different design parameters while

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designing a product. A general guideline often followed by designers of
manufactured items is to reduce the number of parts a company should make.
This is possible through standardization and simplification. Standardization
aims to have fewer choices of the components and products that will be
produced, so there is more focus on the production operations. The use of
common components in multiple models of a product is an example of
standardization. Simplification aims to have no more parts than are necessary to
perform the product's intended function and tries to reduce the complexity of
those parts.
STEPS OF PRODUCT DESIGN
As stated earlier, a good product is one that will have the following features:
 Serving unmet need
 Inheriting easy to use feature
 Attractive to the consumers, which create a desire in t1hem to possess
the Product
 Efficient in its performance
 Highly convenient to use
The development of a product involves challenging tasks, which
requires structured approach, whose steps are as follows:
 Problem assessment
 Design specification
 Idea generation
 Screening and evaluation of ideas
 Business analysis
 Concept design
 Detailed design
 Prototyping and testing
 Manufacturing
 Commercialization/Product launch
Problem assessment:
After having identified the problem in terms of a new product/enhanced
product, it is better to write-down the problem in clear terms. Let it be the
design of a torch light which is used during nights by millions of peoples either
at home or during their walk on roads. Such exercise will make the team to
narrow down the thinking process and come out with the precise problem
statement which in turn will narrate the function of the product.

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Design specification:
This is the first step after stating the problem clearly. In this step, the
requirements of the product are to be listed out. Some requirements of "Torch
light" are listed below.
 Retail price of the product
 Size of the product
 Special features, like the need for water proof, light weight, aesthetic, etc.
 Mode of power, viz. through batteries or through fixed power point Such
requirements will fix the boundaries to design the product.
Idea generation:
After having stated the problem and listed down design specifications,
the next step is to do brain storming session to propose suitable design to meet
the purpose of the product. At this stage, a group of experts will generate ideas
about the design of the product.
Some example ideas are listed below:
• Torch light with square head and short length
• Torch light with square head and long length
• Torch light with circular head and short length
• Torch light with circular head and long length
• Foldable torch light, which can be kept in shirt packet
• Torch light with newer technology
Some of the ideas may be funny. But, the team leader should not curb
the ideas.
Screening and evaluation of ideas:
Rank the ideas generated in the previous step, in the descending order
of their importance and utility and then select one or more ideas from the sorted
list from top for design purpose. The purpose of selecting more than one idea
may be because the company may be keen in bringing out more than one model
in the market.
Business analysis:
It is an in-depth study of the estimated economic feasibility of the
product. The expected costs and revenues may be estimated in macro terms.
Then the economic feasibility is done to check the viability of the product.

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Concept design :
After having selected the idea for the new product, a rough design of the
product is to be worked out in terms of the components of the product, shape
and size of each of those components. Then, the three-dimensional view of the
product may be constructed on the screen of a computer to have a comparison
of the product with that of the idea of the product what is wanted. If the
comparison is through, then the next step can be performed; otherwise, the
steps, from idea generation to the current step are to be repeated till this current
step qualifies to move forward to the next step.
Detailed design:
After having generated the three-dimensional diagram of the product of
interest, the next step is to go for detailed design. In the detailed design, the full
details, like measurements for each part of the product are to be determined by
taking the functional requirements of that product in conjunction with the
function(s) of the product as a whole. Then create part drawings and assembly
drawings of the product. Also, develop the design of a three-dimensional proto-
type of the product.
Production of prototype and testing:
Based on the prototype design, manufacture few units of the product and
get feedback from potential users for its designed features. Sometime, the
prototype is to be sent to laboratory to test the performance of the product.
In the case of the torch light, the users will give feedback about the
convenience of handling the product, aesthetic appearance of the product, etc.
The aspects like, life of the charge, power consumption, time between failures
of the torch light, etc. may be tested in a laboratory.
Manufacturing:
The final step of the design process is to manufacture the product. So,
the design engineer in consultation with the process planning engineer will
design the manufacturing system with machineries and equipment’s to
manufacture the product, if it is made in house; -otherwise, the company needs
to identify supplier who can produce the product to specifications and deliver
the units as per the production plan of the company.
In some cases, the company may license the product to some product
agency, who will produce and sell the product. In such case, a clear licensing
agreement is to be made between the company and the product agency.
Through this mode, the company is entitled to receive royalty from the product
agents.

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Commercialization/Product launch:
This is the final step which aims to launch the product into the market.
If it is a multinational company, it may plan for product launching
simultaneously in at least one city of select countries; otherwise, the company
may identify the most promising city by taking the future sales into account for
launching the product within that country.
Some of the guidelines for smoother product design are listed below:
• Identify a good team leader to head the product development team.
• Allow more time for the early stages of the product design cycle.
• The specifications must be in clear terms.
• A compressed development schedule can be beneficial by spurring,
quicker and more accurate thinking.
• The building and testing of the models should be relentless.
• Incremental innovation may be advocated for a greater success of the
company.
DESIGNING FOR THE CUSTOMER
Designing for aesthetics and for the user is generally termed industrial
design which is probably the most neglected area by manufactures. In many
products we use, parts are inaccessible, operation is too complicated or there is
no logic to setting and controlling the function of the product. Sometimes worst
conditions exist, metal edges are sharp and consumers cut their hands trying to
reach for adjustment or repairs. Many products have too many features-far
more than necessary and for instance many electronic products have too many
features which the customers cannot fully make use of (operate). Once
approach to getting the voice of the customer into the design specification of a
product is quality function deployment (QFD). This approach uses
interfunctional teams from marketing, design engineering and manufacturing to
incorporate the features sought by the customers in the product at the stage of
product design. The Customer’s requirements (with its importance weightage)
and the technical characteristics of the product are related to each other in a
matrix called house of quality. The customers are asked to compare the
company’s products. The technical characteristics are then evaluated to support
or refute the customer perception of the product. This data is then used to
evaluate the strengths and weaknesses of the product in terms of technical
characteristics.

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 UNIT – II

FACILITY LOCATION

OBJECTIVES
After studying this lesson, you should be able to:
 Understand the importance of locating facilities
 Identify the factors that affect location decisions
 Explain the factor rating analysis method
 Describe the types of Processes
 Explain the concept of Process selection

Facility location
The location of a plant or a service facility has strategic implications.
Revised trade agreements and the advent of technology have reduced the world
to a global facility. Facilities should be so located that the firm gets competitive
advantage. This can be in terms of cost leadership, flexibility, time advantage
or advantage of quality. Ellora Times Private Limited, the maker of Ajanta
watches and Orpat calculators, telephone instruments and so on, shifted their
facilities to China as they were unable to compete with the influx of cheaper
Chinese goods into India. Business process outsourcing, by way of call centres
has developed into a major service in India. Why have foreign concerns like
IBM and foreign banks shifted their call centres to India? The location gives
them a significant cost advantage.
The location of a facility acts as the basis of determining production
technology and cost structure. For example, a manufacturing unit in a less
developed country willuselabour-intensive technology as labour is cheap. Its
cost structure too will be different as compared to a similar unit located in a
highly developed country. In a highly developed country where the cost of
labour is high, the processes used will be capital-intensive.
Location decisions involve large capital outlays that are not easily
reversible. Adequate consideration must be given before a decision on location
of a facility is taken. The location is vital for providing timely and convenient
service to the customers.
Location decisions are based on a number of factors. The factors depend
on the nature of the product or service. Services generally require a high degree
of customer contact and the proximity to markets or customers becomes a

20
major deciding factor. In other cases, some other factors become overriding.
For instance, safety would be a major consideration when locating a nuclear
power plant. When considering the location of a facility globally, a higher
weightage will be given to political stability, state of economy and so on.
Location of facilities has a major impact on costs, as the cost of land,
labour, raw materials and transportation and distribution vary from place to
place. The impact on cost will also have a cascading effect on income.
The Why of Location Decision Problems
Location decisions occur due to many reasons. Whenever a new
enterprise is started, the location of the facility has to be decided upon. In an
expanding market, additional capacity is necessary for an already established
enterprise. The additional capacity can be located at the already existing facility
or a new facility created in keeping with the market requirements. The
introduction of new products or services also requires the establishment of new
facilities.
Changes in technology may necessitate the closure of the existing
facility and the establishment of a new one which may not be located at the
earlier site. Often facilities have to shift because of exhaustion of raw materials
in a particular location. Companies involved in extraction are typical examples.
Changes in demand, availability of resources, political factors,
economic environment, and trade regimes and so on can also give rise to a shift
in existing facilities or the need to set up new facilities. A decision on the
location of new facilities will have to be taken in all such cases.
Factor Influencing Plant Location
Every production unit attempts to locate at a place which will yield the
lowest possible production cost. It makes use of certain inputs like land, labor,
capital, raw materials and energy. It converts these inputs into finished products
and sells them in the market. Therefore, some production units achieve lowest
cost by locating near the inputs whereas others are located near the customers
or markets. Plant location is the function of deciding where the plant should be
located so as to maximize operating efficiency and to minimize costs. The need
for location decision may arise both at the time of setting up a new plant and at
the time of expansion. While deciding the location for a production unit, four
main facto' should be considered:
1. Input costs
2. Location of the output market
3. Transportation costs
4. Agglomeration economies and other factors.

21
Input costs
Inputs are the economic resources used in a process of production, e.g.,
land; labour, capital, raw materials, power, etc. Land exercises little influence
in location except in terms of land costs, access roads, sewers, etc. One land
cost may set off the other. For example, cheap rates of land in a semi urban area
may more than offset the lack of access roads.
Capital. Location is seldom determined by capital because capital is a
highly mobile input and its cost of transfer is negligible. Cost of capital may
differ due to differences in risks and interest rates.
1. Power and Water. The development of gas; oil pipelines and electric
grid system has reduced dependence on coal. Therefore, industrial location is
not fully attached to coal mines. However, in some places there is acute
shortage of electric power in India. Normally, water exercises negligible
influence on location of production units. But in some industries abundant and
regular supply of water is essential. For example, paper and jute industries tend
to be located near perennial rivers.
2. Raw Materials. The locational pull of raw material sources depends
directly upon the nature and type of materials and its processing. All materials
are not available in equal amounts at every place. Some materials are very
bulky or fragile and perishable while others are lightweight and durable. If the
raw materials are perishable, the industry tends to be located near the source of
materials. This is true of fruit canning industries. Industries like cement and
brick using bulky and heavy materials are located near the source of limestone,
etc. Sugar and paper and other industries using weight losing materials are also
located near point of supply. But industries using light and heavyweight costly
materials are located near markets. Industries which depend for their raw
materials on other industries tend to be located near such industries. For
example, the petrochemical industry is located near the refineries. In recent
years, the significance of raw materials as a locational cost has been
diminishing due to several reasons. First, the cost of carrying raw materials has
declined as a result of more efficient methods of transportation. Secondly, in
many sophisticated industries like electronics, the 'material content' is low and
technology content is high in the finished product. Thirdly, modern industries
depend upon several sources of materials and they are not tied up to one source
of raw material. Today, it is not essential to locate a plant near coal depots. In
many cases the transportation cost of the finished product (due to bulk and
value) is greater than that of the material. For example, it is costlier to carry a
one-ton motor car than one ton of steel and other materials used in its
manufacture. As a result, the relative pull of the raw material has declined.

22
 In general, bulky, voluminous, fragile, perishable, non-durable use
(materials, fuel, labor, etc. which are bought frequently) inputs exercise a
greater influence on industrial location as compared to lightweight and durable
use (machines, equipment and tools etc.) inputs.
3. Labor: Labor costs depend largely on the prevailing wage rates in the
area. But differences in labor productivity may more than offset any apparent
gain in lower wage rates. Generally, labor productivity is low in regions with
low wage rates. As compared to capital or power, is less mobile due to social
considerations. Industries tend to be localized in areas which have abundant
supply of cheap/skilled labor.
4. Entrepreneurship. Entrepreneurial ability is a highly mobile factor of
production. But professionally and technically qualified personnel are relatively
unmobile. For example, engineers, technicians, scientists and professional
executives are more readily attracted towards the metropolitan cities like Mum-
bai, Delhi, Calcutta, Madras than to other parts of the country.
Location near inputs. Where the inputs are perishable or fragile
industries (e.g., sugar, dairy, fruit canning, etc.) tend to be located near the
source of inputs. Industries requiring large supply of cheap labor tend to be
located in areas with low wage rates. Production units processing weight-losing
and bulky materials also tend to locate near inputs. For example, a steel mill
can save costs by locating near coal and iron mines. Suppose, one ton of iron
ore and 4 tons of coal are required to produce one ton of steel. If the firm
producing 100 tons of steel locates near mines it has to transport only 100 tons
of steel to the market. But if it is located near the market it will have to
transport 100 tons of iron ore and 400 tons of coal. This is an example of 'input
oriented' location.
FACTORS AFFECTING PLANT LOCATION
I. Input Considerations
(a) Materials - Quantity, quality, cost and regular supply
(b) Land- Site availability and costs, costs of construction, constructional
regulations
(c) Equipment - Availability and costs
(d) Plant utilities - gas, electricity, coal, water, etc. - Availability and rates
(e) labor - Availability, total supply, skills, wage rates, unionization
(f) Capital - Equity and debt potential, is banking facilities.
II. Processing Considerations
(a) Production analysis - Educational and research facilities

23
 (b) Process analysis - Engineering and consultancy
(c) Forecasting and scheduling - Data sources and capabilities
(d) Production control - Inventory storage and future expansion
(e) Maintenance - Service and repair facilities
(f) Cost-control - Accounting and credit facilities
(g) Presence of related industries.
III. Output Considerations
(a) Distribution – distribution and storage facilities.
(b) Transportation – Facilities and costs.
(c) Present and future market potential
(d) Local rates and taxes
IV. Other Considerations
(a) Community attitudes towards industry and company
(b) Public or community services - educational, recreational, housing,
medical, cultural, etc.
(c) Stockholder interests
(d) Organizational decentralization policies
(e) Environmental standards - air, water, zoning and building codes
(f) Political situation.
5. Output Market
In many cases, plants tend to be located near the market for their
products. In recent years the output market has been exerting an increasing
"pull" on industrial location. The reasons for this trend are: (a) the relatively
higher costs of transporting bulky and heavy finished goods than the cost of
moving raw materials; (b) the affluence of cities as a market; (c) the advantage
of being close to customers for service purposes particularly in high technology
and service industries.
Units producing perishable and fragile products (bread, butter, ice-
cream, glasses, etc.) tend to be located near the market. Industries producing
bulky or heavy goods also tend to locate near the market so as to minimize
transport costs. For example, aero plane and ship building and furniture making
units are located near the users. Similarly, soft drinks tend to be produced near
the consumers. It costs less to transport a few cans of syrups than to carry a
large number of bottles and cans to consumers. Soft drinks increase in weight
when water is added to the syrup and this can easily be done at the customer's
location as water is available everywhere. In some cases (e.g., garment

24
industry) personal contact with customers is desirable. These are examples of
'market-oriented' location.
While deciding the market to which the firm would like to cater
population and income characteristics in the area should be considered. Size of
population, age and sex composition, number and size of households,
occupational pattern, geographical distribution of population and degree of
mobility are important population characteristics. The consumption pattern
differs between age and sex groups, e.g., teenage market, baby market, female
market, etc. The number and size of households are; important determinants of
demand in case of many consumer durable products, e.g., TV, refrigerator,
washing machine, etc. Geographical distribution and mobility determine the
spread and shift of sale over time.
Level and distribution of income is an important determinant of demand
or buying potential of a region. One way of evaluatin4the buying potential of a
region is to develop an index on the basis of population and income charac-
teristics. One such index is called "Buying Power Index" (BPI) which is
aweighted measure of population, retail sales and effective buying income. It
measures the ability of a market area to buy the product as a percentage of the
national buying potential.
6. Transportation Costs
Transportation costs play a significant role in locational decisions.
According to-Brenham, "the location of manufacturing industries may be
influenced by many factors, but often the dominant influence is that of
transport costs. An industry which uses considerably more than a ton of
materials to make a ton of output will tend to be located near the ply of supply
of materials, provided that its products are fairly easy to transport.
Alfred Weber has very well explained the role of transportation costs in
industrial location. Weber's theory is based on an analysis of transportation
costs, labor costs and the economies and diseconomies arising from the con-
centration of industries. Transportation costs depend mainly on the weight to be
carried and the distance to be covered. Weight depends upon the nature of
materials and bulk of the product. In some industries the weight of the raw
material is much higher than that of the finished product. For example, in a
weight-losing industry like sugar manufacturing four to five, tons of sugarcane
has to be carried per ton of sugar. Similarly, in iron and steel industry two tons
of iron is required to produce one ton of pig iron. Therefore, transport costs can
be saved by locating near the source of materials.
In case of weight-gaining industries, on the other hand, location near the
market may result in savings in transportation costs. For example, in soft

25
drinks, ice-cream, furniture, etc. industries, the weight of the finished product is
greater than the cost of raw materials. Therefore, furniture making units are
located near furniture market rather than timber markets (the source of wood).
Industries using bulky and voluminous raw materials can save transport
costs by locating near the source of materials.
In some industries the pull of raw materials and the push of the market
may be balanced. In such cases an intermediate location may be the point of
minimum transport costs. The role of transpiration costs on location has
declined over time due to the development of more efficient means of
transportation. In location decisions, the entire mix of variables influencing
transport costs rather than just physical weights should be considered. For this
purpose, location theorists often use the concept of ideal weight. The ideal
weight of an item, say coal, is its physical weight multiplied by the freight per
unit of physical weight.
Within the framework of profit maximization, a mathematical model can
be build up for location decision of production facilities. Let a product unit use
it, inputs (I1, I2,…… In) and sell in m markets (X1, X2,…..Xn). The unit has
cost (C1) and revenue (R1) with respect to each location. Let per unit cost of
input i at location I be CiL and price per unit of output j at location l be pjl. The
maximum profit location (π1) for the production unit can be chosen with the
help of the following model:
Cost of location l : Cl = ∑CilIil
Revenue of location l : Ri = EPjXil
Production function : x = f(I1,I2 .....In)
Production mix : X =EXj
Objective function mix : π1 = R1 - Ci
It is possible that local taxes and duties may differ from one location
(State) to another. In such a case, C would include both transport costs and
local taxes.
Sometimes, non-economic considerations may influence location of a
production unit. Good surroundings, public facilities like education and
medical may result in the location of a plant away from inputs and market. But
such non-economic considerations are ignored if they clash with economic
criteria.
Agglomerative Economies. These are the savings in costs arising from
the concentration of industries in a particular region. These savings could
accrue from developed infrastructure (roads, railways, etc.), skilled labor,
banking services, common research and testing facilities, ancillary firms, etc.

26
 There are three main types of cost savings open to a firm as a result of
agglomeration or clustering of industries. (i) Internal econornics. With increase,
in the market size, the- long-run average cost curve of a firm declines.
(ii) Localization economies which are external to the firm but internal to the
industry. If several closely related firms are located together common facilities
become available to each. Common research facilities, ancillary units,
consultancy services are examples of such facilities. (iii) External economies
which are gains to all firms in all industries which result from locating together.
They include the presence of a highly developed infrastructure of roads,
railways, posts and telegraph facilities, banking and capital market, marketing
research facilities, etc.
Miscellaneous factors like climate, Government policy, _political inter-
ference, historical causes; etc., also influence industrial location.
PLANT LOCATION
Introduction
The Facilities location problem is an important strategic level decision
making for an organization. One of the key features of a conversion system
(manufacturing system) is the efficiency with which the product (services) is
transferred to the customers. This fact will include the determination of where
to place the plant or facility.
Holmes defines plant location problem as one of determining That
location which, in consideration of all factors affecting product/service,
delivered-to-customers, cost of product(s) to be manufactured, will offer the
enterprise the greatest advantages obtained by virtue location.
The selection of location is a key-decision as large investment is made
in building plant and machinery. It is not advisable or not possible to change
the location very often. So an improper location of plant may lead to waste of
all the investments made in building and machinery equipment.
Before a location for a plant is selected, long range forecasts should be
made anticipating future needs of the company.
The plant location should be based on the company's expansion plan
and policy, diversification plan for the products, changing market conditions,
the changing sources of raw materials and many other factors that influence the
choice of the location decision. The purpose of the location study is to find an
optimum location one that will result in the greatest advantage to the
organization.

27
Importance of Plant Location
Plant location is of paramount importance, both for a new enterprise as
well as for the existing ones. The fundamental objective of an organisation is to
maximise its profits. Profits can be increased either by increased sales or by
decreasing cost of production. The reduction in cost of production is possible
when the firm is of optimum size and when the industry is located at an
appropriate site where all kinds of production economies are available.
Selection of a suitable location is very important due to the following reasons:
Location of plant partially determines the operating and capacity costs. It
determines the nature of investment costs to be incurred and also the level of
many operating costs
(i) Each prospective location implies a new allocation of capacity to
respective market area.
(ii) Location fixes some of the physical factors of the overall plant design
etc., heating and ventilation requirements, storage capacity for raw
materials, taking into consideration their local availability, transportation
needs for raw materials and finished goods, power needs, cost of labour,
taxes, land construction, fuel etc.
(iii) Location helps to deliver the product at a cheaper price and thus helps to
combat competition.
The existing firms seek new locations in order to expand their capacity
or to replace the existing facilities. The increase in demand for the company's
products can give rise to the following decisions:
 Whether to expand the existing capacity and facilities.
 Whether to look for new locations for additional facilities.
 Whether to close down the existing facilities to take advantages of
new locations.
Reasons for Relocation: The probable reasons for replacement of existing
facilities to new locations are given below:
(i) Changes in location of demand;
(ii) Changes in availability of materials/raw materials;
(iii) Changes in availability of transport;
(iv) Changes in cost and/or supply of labour;
(v) Changes in regulations and law;
(vi) Changes in policy of industries to relocate on which the firm is
dependent.

28
Types of Locational Decisions
A manufacturing enterprise has to take locational decisions with respect
to the following:
1. Location of production units or plants for the conversion of inputs into
finished products.
2. Location of service units which provide assistance to production units.
3. Location of distribution and retail units for dispersion of the production to
the materials.
4. Location of procurement centres to assemble necessary inputs in the
selected site.
5. Location of warehouse facilities.
Responsibility for the Plant Location Decision: The responsibility for
making this decision ultimately rests upon the chief executive, subject to
approval by the board of directors. In India, plant location decisions are taken
by promoters and entrepreneurs. However, there should be a plant location
committee headed by the plant engineer, which can prepare cost analysis with
proper supporting data for all proposed locations. A management consultant
may also be retained. The management team will consider the committee's
recommendations, the cost analysis and the supporting data for the proposed
locations before voting a decision to locate one or another of the prospective
locations. In turn, the president and board of directors must approve the team's
decision.
Objectives in Plant Location
(i) Reduced
capital investment and operating cost : An ideal location should
have the objective of reducing capital investment For instance, if location is at a
place where raw materials are readily and conveniently available in the quantity
so desired, the plant can operate with minitnun't inventories on hand, requiring
lesser investment in storage buildings -anci,lesser amount of investment in
inventories.
Ensuring effective Plant Layout: Plant layout and plant location are
(ii)
interdependent and influence each other. The facilities available in the nearby
areas, the topography of the land , the climate and geographical conditions and
several other factors influence the plant location. An ideal location should
reduce the inconvenience and cost. For instance, if sub-contracting and repair
facilities are readily and cheaply available in the area, the managers may decide
to get some of the parts manufactured by these sub-contractors and may not
establish any elaborate repair shop, resulting in lesser investment in buildings
and equipment and causing lesser problems in plant layout. If the climate is

29
very cold, the factory may require more covered areas and have to install
heaters. If the climate is very hot, open space and installation of coolers may be
required.
(iii)Coordination with government policies: While selecting a location,
managers should first consider whether the government will issue licence to
start a factory at proposed location. Moreover, what will be the policy of the
government regarding establishment of factories in a particular region should
also he considered.
Employee welfare and public needs: The non-economic objective of
enhancing employee welfare and catering to public needs should also be served
by plant location. If a place is selected, where educational, recreational,
medical, religious and such other needs of employees are met properly, the
employeeswill be contended and will have high morale. If they are deprived of
these basic needs, they will he unhappy. If an area is selected for plant location,
it will throw open employment opportunities to the local public who will
welcome such a decision. Selection of a site, in a highly congested area will be
resented by the public.
(v) Security : It is one of the important objectives. The plant should be free
from foreign attack, anti-social elements and should not be prone to floods,
earthquakes, etc. A location with any one of the above factors will be regarded
as extremely poor, eventhough other social and economic factors may be very
favourable in establishing a factory there.
Aspects of Plant Location: Plant location may be defined as "deciding a
suitable location or place etc., where the factory or plant will start functioning.
There are three different aspects to a location problem."
(i) Selection of a region (regional factors)
(ii) Selection of a locality (community factors)
(iii) Selection of a site (site factors)
Regional Factors: Selection of a region should be determined by
(a) availability of raw materials, (b) nearness to the source of motive power,
(c) proximity to the market, (d) availability of transport facilities, and
(e) suitability of climate.
Community Factors: The factors generally considered in selection of a
community (locality) are: (i) Supply of labour, (ii) Prevailing wage rates,
(iii) Existence of supplementary or complementary industries, (iv) Banking,
insurance and communication facilities, (v) Attitude of the people in the
locality, (vi) Local taxes and the bye laws, (vii) Living conditions for the
workers and (viii) Water supply and fire fighting services.

30
 Site Factors: They are determined by two factors: (i) Price of land (ii)
Disposal of waste.
(i) Price of land: The prevailing price of land is an important consideration
in locating a site which should be affordable to the organisation.
Disposal of waste: Disposal of solid waste such as ash, etc., is an
important aspect that has to be sorted out before production is commenced.
Sufficient land should be available for dumping ash, etc ,otiv:rwise it will cause
problems such as air pollution, ete., to the employees and other residents of the
locality.
Plant Location Problem
The locations of the facilities is carried out in three stages
First stage - Selection of a general territory (or region )Second stage -
Selection of a Community
Third stage - Selection of specific site
1. Selection of a region. This refers to the selection of a particular
geographical zone or state taking in to consideration such factors as
nearness to market and sources of raw materials, basic infrastructure
facilities available, climatic conditions and taxation and laws.
2. Selection of a Community. This refers to the selection of the specific
locality within the selected region. The factors that influence the selection
of community are availability of labor, community attitude, social structure
and service facilities.
Generally the following alternatives are available
(1 ) Urban area
(2 ) Rural area
(3 ) Semi-urban area near the urban area
3. Selection of a particular site : This refers to the selection of specific site
within the community. The factors that influence the site selection are the
cost of the land, availability and suitability of the land. The type of
manufacturing process may dictate the site selection. The conditions that
govern the particular types of community are as follows -
A. Condition that demand city (Urban) location
(i) Highly skilled labor requirement
(ii) Manufacturing dependent on urban utilities
(iii) Excellent communication and transportation facility
(iv) concentrated suppliers

31
B. Conditions that demand sub-urban location
(i) Semiskilled or female work force required
(ii) Large space availability for future expansion
(iii) Community close to large population centre
C. Conditions demanding rural location
(i) Large site required for future expansion
(ii) Requirement of unskilled labor
(iii) Manufacturing process is dangerous and objectionable
(iv) Low wage structure
(v) Lower property tax rates
(vi) Lower cost of land.
Advantages of Urban, Suburban, Rural Locations
A.URBAN AREA
Advantages
(1) Excellent communication network
(2) Good transportation facilities for material and people
(3) Availability of skilled and trained manpower.
(4) Factory in the vicinity of the market hence high local demand
(5) Excellent sourcing (sub-contracting ) facilities
(6) Good educational, recreational and medical facilities
(7) Availability of service of consultants, training institutes and trainers.
Disadvantages
(1) High cost of land compared to rural area
(2) Sufficient land is not available for expansion
(3) Labor cost is high due to high cost of living
(4) Industrial unrest due to trade union activities
(5) Management labor relations are much influenced by union activities
(6) Municipal and other authority restrictions on buildings etc.
(7) High labor turnover
B.RURAL AREA
Advantages
(1) Cheaper and ample availability of site
(2) Cheaper labor rates
(3) Less turnover of labors because of limited mobility

32
 (4) No municipal restrictions
(5) Good industrial relations
(6) Scope for expansion and diversification
(7) No slums and environmental pollution Disadvantages
(1) Poor transportation network
(2) No good communication facilities
(3) Sourcing of components & materials should be from outside
(4) Far away from market
(5) High absenteeism during harvest season
(6) No educational, medical and recreational Facilities C.SUBURBAN
AREA
Advantages
(1) Land available at cheaper rate compared to urban location
(2) Infrastructure facilities are developed by promotional agencies
(3) Because of nearness to city availability of skilled manpower
(4) Educational. medical facilities are available because of nearness to city
Limitations
(1) Due to concentration the suburban area will become crowd and will
become urban in turn within short period
TYPES OF PROCESS
(a) Single-stage Process
If the forging machine were viewed as a simple black box, it would be
categorized as a single-stage process. In this case, all activities that are involved
in forging the component would be analyzed using the different factors
described in the earlier section to determine the overall economics and to
represent the process parameters.
(b) Multiple-stage Process
It has multiple groups of activities that are linked through flows. The
connecting rod, seen as a component for the engine, would have two stages for
its manufacture; the ‘forging’ stage and the ‘machining’ stage. The term stage
indicates multiple activities that are pulled together for analysis purposes. For
example, ECIL manufactures the CYBER series of mainframes of Control Data
Corporation, USA, a supercomputer, under the name of MEDHA. Most of the
processes used in ECIL for the manufacture of this equipment are complex
multi-stage processes.
Multistage Process with Buffer

33
Alternate Paths
Different Product Activities
Simultaneous Activities
SELECTION OF PROCESS
Process selection decisions determine the type of productive process to
be used and the appropriate span of that process. For example, the managers of
a fast-food restaurant may be required to decide whether to produce food
strictly to customer order or to inventory. The managers must also decide
whether to organize the process flow as a high-volume line flow or a low-
volume batch-production process. Furthermore, they must decide whether to
integrate forward towards the market and/or backward towards their suppliers.
All these decisions help in defining the type of process which will be used to
make the product.
Process selection is sometimes viewed as a layout problem or as a series
of relatively low-level decisions. But, on the contrary, process selection is
strategic in nature and is of utmost importance. Process decisions affect costs,
quality, delivery and flexibility of operations.
Process Selection Decisions
Processes can be classified and selected according to product flow and
the type of customer order. The customer order is generally of two types—
make-to-stock and make-to-order.
Make-to-stock aims to produce products in advance and helps to have
ready stock when demands occur. This is applicable for a product which has no
specific customer at the time of manufacturing. For example, tooth paste, soap,
etc.
Make-to-order aims to manufacture products only on orders. For
example, crane manufacturing, ship, boiler, etc.
The following six factors influence process selection from among the
.processes shown in Table
 Market conditions
 Capital requirements
 Labour
 Management skills
 Raw materials
 Technology
A good process selection requires a careful analysis of each of the
above factors through several types of studies. A market research study should

34
be done to assess potential demand and other market conditions. Future sales
should be projected in terms of a range of possible estimates like, 'pessimistic',
'most likely' and 'optimistic'.
Process Selection
In some cases, a number of alternative processes may be available and a
process planner has to choose a particular manufacturing process. For instance,
the turning operation on a part of component may be performed on an
automatic lathe, an engine lathe or a turret lathe. Process 'research may have to
be carried out to select the best process. Decisions regarding selection of
manufacturing process depend upon both economic and non-economic
considerations. The incremental cost of each alternative and the volume of
manufacture are important economic considerations. Non-economic
considerations may differ from situation to situation. For example, machine
availability may be an important consideration in the intermittent production of
custom-built parts. Similarly, in the case of a very difficult job, a machine that
holds closer tolerance may be a better choice.
In addition to the selection of manufacturing process, the process
planner is expected to specify the machines to be used, the type of tools
required, thespeed under which the process should be carried out.
Process Charts and Diagrams
After designing the manufacturing process, the process planner collects
and records all facts relating to the process. The sequence and inter-dependence
of operations are visualized with the help of charts, etc., for the guidance of
workers. Such recording and visualization help in a thorough analysis and
critical examination of the manufacturing process design so that any defects
may be detected and rectified. Various types of process charts are used to
record the movements of materials, labor operations and product inspection,
etc.
Process planning aids consist of assembly charts, operations process
charts, flow process charts, worker-machine charts, activity charts, etc. As
such, a large number of sheets, charts and diagrams are used in process
designing. Some of these charts and diagrams are described below:
A process chart is a pictorial representation of the flow of materials
through the production process. It indicates the operations involved, the time
for each operation and the inspection requirements. Vertical flow lines on the
chart indicate the order in which machines should be placed while the
horizontal lines indicate the points at which materials should be fed into the
process.

35
 A flow process chart is a process chart setting out the sequences of the
flow of product or a procedure by recording all events under review using the
appropriate process chart symbols. In addition to the sequence of operations, it
also indicates non-productive activities such as transportation, storage, delay,
etc.
There are three types of flow charts:
a. Man type indicating 'what the worker does'
b. Material type indicating 'what happens to material'.
c. Machine type indicating 'how the machines are used'.
Outline Process Chart: This chart graphically shows the overall-picture of a
manufacturing process. It contains a sequence of the main operations and
inspections for each component. It reveals how parts are brought together for
assemblies and final assembly. Therefore, it provides complete instructionson
how to produce an item. An outline process chart is a combination of 'explosion
chart' and 'assembly chart'. An explosion chart shows pictorially the operations
involved in the assembling of a product.
The assembly chart indicates in detail each step and detailed instructions
of assembly. It shows the sequence of components that makes up a mechanical
assembly. It uses standard symbols for operations. It is prepared to explain in
detail the explosion chart. It does not contain details of raw materials used in
the construction of a component. The operations involved in making
components and the standard time for each operation may be added to an
outline process chart to make it more useful.
Standard Process Sheets
The final design of the manufacturing process is recorded and
communicated in some form so that it may be useful to the production
department. Several forms are used for this purpose, e.g. master plan, process
sheet, route sheet, process and tooling record, etc. The same basic information
is recorded irrespective of the name or type of form used. The most appropriate
name is standard process sheet. It represents a plan for a standard way of
making a product. It gives in detail how each operation in the manufacturing
process is to be performed.
A clearly stated and complete process sheet serves as a constant guide
from which a worker can understand how a particular operation is to be
performed. A master file of standard process sheets represents the "know-how"
in the manufacture of a product. It is a very valuable asset of the manufacturing
firms. In a process sheet, every operation should be described clearly and
concisely leaving no room for misinterpretation. Every process sheet should be

36
kept up todate through periodical review and revision. An obsolete process
sheet will only misguide the workers.
Firms producing in a process or job shop type layout summarize the
operations for a given item on a route sheet. It specifies precisely how to
produce an item by identifying the equipment and tools to use, operations and
sequences to follow and the machine setup and run-time estimates.
Flow Process Chart: A flow process chart is a graphic presentation of the
flow of materials as it passes through different stages of the production process.
It indicates the work performed, distance moved, equipment used and time
taken. It is more detailed than an outline process chart. It lists chronological
steps in production, describing each activity in detail, the distance covered and
the time required for it. It is similar to an operation process chart or out
ineprocess chart except that it also shows non-productive activities of storage,
delay and transportation.
Certain standardized symbols are used in preparing process charts. The
American Society of Mechanical Engineers (ASME) has given these symbols
which are as follows:
Product Layout Process layout
Symbol
Operation Indicates main steps in a production process or
procedure. The operation may involve
modification of a material or part or its assembling.
Transportation
Denotes movement of materials, parts, equipment
or workers from one place to another. It involves a
change in the location of an object.
Inspection
Shows examination or a check on quality or
quantity of the product.
Delay Implies temporary retention of object, e.g., work
waiting between consecutive operations or object
Storage laid aside before next operation is performed on it.
It indicates a delay in the sequence of operations.
Refers to controlled retention of object to protect
against unauthorized removal. In this retention,
material is received and issued under some from of
authorisation

37
An Hypothetical example is given below:
12 Minutes Cast

2 Minutes Inspect for defects

10 Minutes Wait for truck

5 Minutes To warehouse

3 Days On to Shipment

Figure — Flow Process Chart

An operation process chart for a given product shows: (a) the materials
which enter into the production process, (b) the operations and inspections
carried out on these materials in the process of their conversion into finished
product. Such a chart is useful as it suggests the relative position which the
production and inspection departments should occupy. It also suggests the
relative locations of the involved production lines and enables the analyst to
visualize the appropriate layout. Activities to be performed in other
departments can be noted on the chart so that such departments may be located
near the Production lines.
Flow process charts may be prepared for materials, labor or equipment.
Man-type flow process charts indicate what the worker does. Material-type
flow process charts show what happens to materials. Equipment type chart
reveals how the machine or equipment is used.
Worker-Machine Charts
Worker-machine charts or Man-machine charts graphically portray the
simultaneous activities of a worker and a machine. It is often characterized by a
load-run-unload sequence. While the worker is at work, the machine is often
stopped. Worker machine charts can be used to show the activities of one
worker and one machine or several workers and several machines. They are
useful in process planning to ensure that the best possible use is made of these
facilities by selecting the best worker-machine combinations.
The operation and control of complex or mobile equipment often
restricts process activities for one worker per machine operation. Construction
and materials handling equipment are the examples. These activities can be

38
portrayed in an activity chart which is similar to worker-machine chart except
that all components represent machines or workers.
Cross Chart
If several products are being made or several processes are being carried
out at the same time, another type of chart is used to determine the ideal placing
of the machinery or operations. This is the cross chart.
The cross chart is drawn up by listing the various operations (or
machinery) through which the different products pass at the various stages of
production, on both the horizontal and vertical dimensions of the chart.
To complete this chart, take one product at a time and enter its sequence
of manufacturing in the appropriate place on the chart. If a product moves from
"Form" to "Normalize", a stroke is made in the square "Form/Normalize". If it
subsequently moves from "Normalize" to "Plate", a stroke is entered in the
corresponding square, and so on until the whole sequence of operations for that
particular product is entered. The same process is then repeated for each of the
other products.
The next step is to decide which operations should be placed adjacent to
each other. By following the same line of reasoning, it is possible to reach the
preferred sequence of operations.
A variation on this technique is to complete the cross chart by taking a
sample of the most frequently produced items. If the plant is producing over
100 different items, it may become cumbersome to follow the method indicated
above. However, investigation may reveal that, say, 15 or 20 items account for
possibly 80 per cent of the production volume. The sequence of operations of
these items would then be entered on the cross chart, and the flow determined
in the same way as that described above.

39
 Examples of various types of flow between work stations,
including flow in a multi-store building
The flow diagram can also be used for the study of movement on several
floors of a multi-store building, as can be seen from the example given in
figure. Ordinary flow diagrams of each floor can, of course, be made as well.
Developing the flow for one Product or Process
To develop a flow for only one product or process, it is customary to use
the flow process chart, supplementing it with a flow diagram. The flow process
chart is useful in recording travel distances and the time taken for the various
operations. Its value has in its use as an analytical tool to question the existing
method. The flow diagram on the other hand, is a plan of the factory or the
work area, correctly indicating the positions of machines. As a result of on-the-
spot observations, the paths of movement of the product or its components are
traced, sometimes using the process chart symbols to denote the activities
carried out at the various points.
Assembly Line Balancing
Assembly line balancing refers to the process of balancing work stations
on a product line in terms of equal lines required to meet the desired rate of
output. A balanced line has a series of progressive related operations with
approximately equal standard times for each so that the work flows at a steady
rate from one operation to the next.

40
 Assembly lines involve the arrival of individual component parts at the
work place and departure of these parts fastened together in the form of
assembly or sub-assembly. It contains a series of assembly stations through
which a product must pass in an orderly established sequence. The assembly
process can be broken down into work stations according to the procedure
requirements. An ideal situation would have equal work contract, measured in
terms of time, assigned to them. In this situation, perfect balance would exist.
But this seldom happens in practice.
Assembly line balancing problems can be approached in two ways:
(a) Fixed cycle time to optimize the number of work stations.
(b) Fixed number of work stations to minimize the cycle time.
Both the methods of analysis have widespread applications. The main
objectives of balancing are:
(i) to minimize the balancing loss
(ii) to minimize the number of work stations
(iii) to spread the loss between work stations
The Problem of Assembly Line Balancing arises due to the following factors
1. The finished product is the result of many sequential operations.
2. There is a difference in production capacities of different machines (The
output from different machines is not identical).
Assembly Line balancing is the apportionment of sequential work
activities into workstations in order to gain a high utilization of labor and
equipment so as to minimize the idle time.
For example, the production capacities of two machines lathe and
milling is as under for a particular job.
Lathe 50 pieces/hour
Milling 25 pieces/hour
Now, if only one machine of each is provided, then machine B will
produce 25 units/hour whereas the machine A can produce 50 units. But
because of the sequence, only 25 units are produced per hour, i.e., machine A
will work only 50 per cent of its capacity and for the remaining 30 minutes in
one hour, it remains idle. This idle time can be minimized by introducing one
more machine of kind B in the production line

41
Advantages of Assembly Line (or Flow Line)
1. Uniform rate of production.
2. Less material handling.
3. Less work-in-process.
4. Easy production control.
5. Effective use of facilities/labor.
6. Less congestion.
Activity Analysis: Activity analysis is the study and assessment of an
activity to ascertain its relevance/importance in the realization of the firm's
objectives. It also aims at finding ways and means of improving the method of
performing an activity. Each activity is analyses to determine its importance,
relative position and expected time value, while drawing project network
diagram.
PROCESS LAYOUT
Process layouts aim at minimising the costs of interdepartmental
movement. The cost of movement is the number of loads multiplied by the
distance between departments and the cost of moving one load. The loads are
standardised. They can be in terms of a single unit, a bin load or a pallet load of
material or a crate of materials that is normally moved from one location to
another. For example, in an automobile factory, a single car may constitute a
load. In a manufacturing unit making carburettor subassemblies, a crateful of
carburettors may constitute a load.
The next step is to calculate the movement of loads between
departments. The locations can then be laid out keeping those with maximum
flow between them adjacent to each other. Let us try and understand the
procedure with the help of an example.
Example
A metal fabrication unit has eight departments—shipping and receiving
(A), machining (B), drilling (C), welding (D), milling (E), grinding and
polishing (F), painting (G), and assembly (H). Let us assume that each

42
department requires 10 m by 10 m space and we have a hall in which to
accommodate them which is 20 m by 40 m. Materials are moved from one
department to the other in standard sized crates by a fork lift. The flows of
loads between departments have been based on data from another similar unit
and are given in Table .
Table: The Flows of Loads between Departments
A B C D E F G H
A 180 60 20 40 240 30 35
B 10 110 90 100 90 100
C 20 95 140 100 200
D 20 30 30 20
E 5 200 220
F 380 100
G 10
H

Let us assume that all movements are rectilinear and moving from one
department to an adjacent department involves the move over 10 m. Let us also
assume that the cost of moving over a distance of 10 m is Re. 1.

Solution: The space available and that required for the departments suggests
that the layout be in two rows of four departments each. Let us try and arrange
the departments in such a manner that departments with heavy movement
between them are kept adjacent to each other.
Let us assume that the first layout we arrive at is given in the Table .
Table Layout of Departments
B D E H
A F G C

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Let us now compute the load distances for this layout in Table.
Table Calculation of Load Distances between Departments
Department pair Load between Distance between Load X distance
Departments Departments
A—B 180 1 180
A—C 60 3 180
A—D 20 2 40
A—E 40 3 120
A—F 240 1 240
A—G 30 2 60
A—H 35 4 140
B—C 10 4 40
B—D 110 1 110
B—E 90 2 180
B—F 100 2 200
B—G 90 3 270
B—H 100 3 300
C—D 20 3 60
C—E 95 2 190
C—F 140 2 280
C—G 100 1 100
C—H 200 1 200
D—E 20 1 20
D—F 30 1 30
D—G 30 2 60
D—H 20 2 40
E—F 5 2 10
E—G 200 1 200
E—H 220 1 220
F—G 380 1 380
F—H 100 3 300

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 G—H 10 2 20
Total 4170
We could now manually try and improve this solution by interchanging
departments and recalculating the load—distance. However, it will be
appreciated that a large number of permutations are possible. The problem can
be solved with help of a computer. A number of software packages are
available. WinQSB also has a module that deals with layout problems. Most
computer systems follow the CRAFT algorithm. CRAFT stands for
Computerised Relative Allocation of Facilities Technique. The CRAFT method
is similar to the method shown. It requires a load matrix showing flow of loads
between departments and an initial suggested layout which enables the
programme to form a distance matrix.
Costs can also be applied, especially if they differ for loads between
certain departments. The programme then tries to improve the material
handling costs by exchanging pairs of departments iteratively. It then computes
the total material handling costs and if the cost reduces, the exchange is
accepted. The process is iteratively performed till no further reduction in cost is
possible. The programme is heuristic and does not guarantee the best cost
solution. WinQSB can handle up to 61 departments. The distances may be
considered rectilinear, Euclidean or squared Euclidean. The layout assumes that
the floor space is rectilinear and divided into rows and columns. Departments
which have a fixed location can be designated and the programme does not
include them in the exchange iterations. The solution arrived at by the WinQSB
package using rectilinear distances
The total load distance is 4060. It has been assumed that the cost to
move a load over a unit distance is the same and has been taken as one unit. As
can be seen there is an overall reduction from 4170 load distance units to 4060
load distance units.

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 NOTES
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 UNIT – III

Capacity Planning
OBJECTIVES
After studying this lesson, you should be able to:
 Explain the concept of Capacity Planning.
 Explain the Determine Capacity Requirement.
 Describe the Enterprise Resource Planning.
 Explain the Production Schedule.

Capacity planning
Capacity planning is central to the long-term success of an organization.
Capacity plans are made at two levels: (i) Long-term capacity plans which deal
with investments in new facilities and equipment covering the requirements for
at least two years into the future and (ii) Short-term capacity plans which focus
on work-force size, overtime budgets, inventories etc.
Importance of Long-term or Long-range Capacity Planning
Companies which are in business for the long-run must make continued
investment in people, technology, research and development and capital assets
(such as buildings, machinery and equipments etc.).
Long-term capacity planning is an important part of strategic planning
of the firm. It establishes some expectations about the capacity a company
acquires and develops over time which is vitally important to the company's
strategic success.
Managers need to address major capacity questions such as following :
(i) How should a plant be able to produce?
(ii) How many customers should a service facility be able to serve?
(iii) How much of a cushion is needed to handle variable, uncertain demand?
(iv) What kinds of problems arise as the production system expands?
(v) Should the capacity be expanded based on forecast of demand or should
the capacity expansion be taken up only after the demand becomes more
certain?
The managers must look at capacity from a strategic perspective-that is
how manufacturing and service firms plan capacity over the long run.
External environmental conditions such as economic, political,
technological, social and market conditions and forecasts of future levels of

47
demand provide important inputs into long-term strategic-planning and also
into shorter-term plans and decisions made by managers of the firm. Managers
must evaluate and consider trade-offs of a number of factors while establishing
a long-term capacity plan for their firms. Some of these factors are:
(i) Forecast growth in demand.
(ii) Future upgrading of technology which may become necessary to gain
competitive edge over others.
(iii) Anticipated moves by competing firms.
(iv) Reliance on learning curves without additional investment.
(v) Forecast of availability of funds for the future investments.
(vi) The cost of new capacities and capacities which can provide economies of
scale. Capacity decisions have long-term effects on many aspects of the
business. These are:
(i) Finance is affected because of the influence of capacity decisions on the
level of capital investment and the return on that investment.
(ii) Production is affected because capacity sets constraints within which
operations must work to meet its objectives of producing high quality
goods or services at competitive costs and lead times.
Long-range capacity decisions made in the previous years determine the
current level of capital assets such as buildings machinery and equipments in a
firm.
The capital assets represent a fixed capacity because they can not be
easily changed within the intermediate-range time horizon.
Adjustable capacity is the size of the workforce, the number of hours
per week they work, the number of shifts and the extent of subcontracting.
Long-Range Capacity Planning
Capacity planning is a long-term strategic decision (also referred to as
strategic capacity planning) that establishes a firm's overall level of resources.
Capacity may be defined as the amount of resource inputs available relative to
output requirements over a particular period of time.
The objective of strategic capacity planning is to provide an approach
for determining the overall level of capital intensive resources-facilities,
machinery, equipment and overall size of labour force-that best support the
firm's long-range competitive strategy. The level of capacity selected has a
critical impact on the firm's ability to respond to customer demand (i.e.,
response rate), its cost structure, its inventory policies and its management and
staff support requirements.

48
 Capacity decisions affect product lead time, customer responsiveness,
operating costs and a firm's ability to compete. Inadequate capacity can result
in loss of customers and limited growth. On the other hand excess capacity can
result in under utilization of machines, equipment and labor, excess inventory,
higher costs and lesser profits. Therefore the major capacity decisions involved
are(i) how much capacity to be installed. (ii) When to increase capacity and (iii)
How much to increase. Long-range capacity planning decisions usually involve
the following activities.
(i) Estimating the capacities of the current (existing) facilities.
(ii) Forecasting the long-range future capacity needs for all products and
services offered by the firm.
(iii) Identifying and analysing sources of capacity to meet future capacity
needs.
(iv) Developing capacity alternatives.
(v) Selecting from among the alternative sources of capacity.
Estimating the Capacities of Current (or Existing) Facilities
To estimate the capacities of existing facilities in a firm, it is necessary
to known about the various types of capacity and the measures of capacity.
Types of Capacity
(i) Production capacity is the maximum rate of production (or output) of
an organisation, for example, 100 cars per day or 200 refrigerators per
day etc. But several factors underlying the concept of capacity makes
its understanding and use somewhat complex. Variation in employee
absenteeism, equipment breakdowns, vacations, holidays, delays in
material procurement/delivery, work schedules (e.g., 5 days-week
work), working hours (hours/shift), use of overtime, temporary
workers, outsourcing etc., must be taken into account when
estimating the production capacity. Hence, the capacity is estimated
interms of sustainable practical capacity which is defined as "the
greatest level of output that a plant can maintain within the frame
work of a realistic work schedule, taking into account of normal
downtime, and assuming sufficient availability of inputs to operate
machinery and equipment in place".
(ii) Design capacity : Design capacity refers to the maximum output that
can possibly be attained. It is the maximum rate of output achieved
under ideal conditions.

49
 (iii) Effective capacity: Effective capacity is the maximum possible output
given a product-mix, scheduling difficulties, machine maintenance,
quality factors, absenteeism etc.
Effective capacity is usually less than design capacity (it can not
exceed design capacity) because of capacity losses due to realities
such as product-mix changes, need for periodic preventive
maintenance of equipment, problems in scheduling and balancing
operations, coffee breaks, lunch breaks and so on.
Actual output can be lesser than effective capacity because of machine
breakdown, absenteeism, shortage of materials and quality problems.
(iv) Maximum capacity: Also known as peak capacity, it is the maximum
output that a facility can achieve under ideal conditions. Where
capacity is measured relative to equipment alone, it is known as rated
capacity.
(v) Measures of capacity: Different measures of capacity are applicable
in different situations. For example, capacity of an automobile plant
can be measured in terms of the number of automobiles produced per
unit of time (shift, day, week or month) whereas, capacity of a
hospital is measured in terms of the number of patients that can be
treated per day. Therefore, capacity of a facility can be either
measured in terms of outputs or in terms of inputs.
Output measures are usually used to express the capacity of line flow
processes whereas input measures are used for flexible flow processes. For
example, when a plant produces only one type of product or service, measuring
capacity in output is easier. Examples of measures of capacity include capacity
of a photocopy shop, a restaurant, a cinema hall or an aircraft.
An important measure of system effectiveness is the capacity utilisation
rate which reveals how close a firm is to its best operating point i.e., design
capacity.
Capacity used (i.e., actual output)
Capacity utilization rate =
Best operating level (or design capacity)
Best operating level is the level of capacity for which the facility was
designed and thus is the volume of output at which average unit cost is
minimum.
Another measure of system effectiveness is efficiency which is the ratio
of actual output to the effective capacity.

50
 Actual output
Efficiency =
Effective capacity
Determinants of Effective Capacity
Many decisions about design of the production system and operation of
the production system may have an impact on capacity. The main factors relate
to the following:
(i) Facilities, (ii) Product or services, (iii) Process (iv) Human resource
considerations, (v) Operations and (vi) External forces.
 Facilities factors: The key factor is the design of facilities including size
and provision for future expansion. Other location factors such as costs of
transportation, distance to market, supply of suitable labor, energy
sources etc., are also important. In addition plant layout, shop layout,
utilities such as heating; lighting, ventilation etc., may affect labor
efficiency and thereby effective capacity.
 Product/service factors: Uniformity of products/ services (e.g., a product
line rather than a product-mix) provides opportunities for standardization
of methods and materials, which leads to greater effective capacity.
 Process factors: The quantity and quality capability of a process or
equipment increase the rate of output and hence the effective capacity.
 Human resource factors : human factors that affect potential and actual
output are (i) job design, (ii) Variety of activities involved, (iii) Training,
skill and experience required to perform a job, (iv) Employer motivation,
(v) Employee absenteeism, (vi) Employee turn-over.
 Operational factors: Differences in capabilities of alternative equipments
and differences in job requirements may create scheduling problems.
Other factors such as inventory decisions, late deliveries by suppliers,
quality of purchased materials and parts, inspection and quality control
procedures may also have an impact on effective capacity.
 External factors: These relate to product standards, safety regulations,
labour activities, pollution control standards etc., which may often reduce
effective capacity.
Forecasting Long-term Future Capacity Demand
Long-range capacity planning involves providing facilities such as land,
buildings, machines, tools, equipment, materials, personnel and utilities.
Planning and establishing a new production facility could take 5 to 10 years
and therefore such a facility would be expected to remain economically
productive for another 15 to 20 years or so. Therefore, forecasting demand for

51
the products or services to be produced from such a facility must cover a timer
horizon of 10 to 30 years. But because of changes taking place in the external
business environment, forecasts over such long periods of time are difficult to
make and may not be reliable. Another factor to be considered is the product
life-cycle. The demand for the product will vary according to the stage of the
product in its life cycle and therefore the production capacity needed will also
vary. This makes it necessary that provisions must be made for expanding or
contracting production capacity of the production system. Also, technological
development must be anticipated and integrated into facility planning because
the manufacturing process and equipments used may have a significant impact
on the capacity of the plant.
Forecasting production capacity for a product or service usually involves
the following four steps:
(i) Estimate the total demand for a particular product from all producers
(ii) Estimate the marketshare for the company for which capacity has to be
forecasted
(iii) Estimate the demand for the company by multiplying the total demand by
its market share.
(iv) Translate the product and service demand for the company into capacity
needs.
Then the production capacity must be allocated to each product and
service based on the best estimates of demand for each product and/or service.
However the production capacity to be provided by a firm may not
necessarily equal the amount of product and services expected to be demanded.
There are several reasons for this. They are :
(i) The firm may not have enough capital and other resources to satisfy all the
demand.
(ii) Because of the uncertainties of forecasts and the need to link production
capacity to competitive priorities of the firm, a capacity cushion may have
to be provided. A capacity cushion is an additional amount of production
capacity over and above the required capacity to meet the expected
demand.
Advantages of having capacity cushion are :
(a) Extra capacity to meet demand in excess of forecasted demand
(b) Ability to satisfy peak demands
(c) Reduced production costs
(d) Product and volume flexibility

52
 (e) Improved quality of products and services
Another important consideration in determining much long-rang
capacity has to be provided by a firm for its products and services is how much
capacity its competitors are likely to add to their existing capacities. The firm
should examine the capacity situation in the industry (i.e., over capacity or
under capacity) and then decide whether to add capacity or not.
Identifying and Analyzing Sources of Capacity to Meet Future Capacity
Needs
There are many ways available to a firm to change its capacity. Firms
may either have shortage of capacity or excess capacity. The long-range
capacity needs of an organisation can be changed in the following ways:
(i) Where present capacity is not sufficient to meet the fore-cast demand for
the products and services, capacity can be expanded by:
(a) Subcontracting component parts, sub units or even entire products
to other firms (subcontractors).
(b) Acquiring other firms, facilities or resources.
(c) Building new plants and buying equipments/machinery etc.
(d) Expanding, modernising or modifying existing facilities.
(e) Reactivating facilities which are on stand-by status.
(ii) When the present capacity is in excess of the expected future needs,
capacity can be reduced by:
(a) Selling off existing facilities, selling inventories and laying-off or
transferring (redeploying) employees.
(b) Placing some facilities on standby status and selling the inventories
and laying-off or transferring employers of such surplus facilities.
(c) Developing and phasing in new products as other products decline,
so that capacity rendered surplus can be made use of.
ECONOMIES AND DISECONOMIES OF SCALE
The concept of "economies of scale" states that "the average unit cost of
a good or service can be reduced by increasing the rate of output". For a given
production facility, there is an annual volume of output which results in the
least average unit cost. This level of output is called the "best operating level"
of the facility.

53
 Economies and diseconomies of scale

Four principal reasons why economies of scale can drive costs down
when output increases are:
(i) Fixed costs can be spread over a large number of units produced.
(ii) Production or operating costs do not increase linearly with output levels.
(iii) Quantity discounts are available for material purchases and
(iv) Operating efficiency increases as workers gain experience.
Diseconomies of scale: Economics of scale do not continue indefinitely.
Above a certain level of output, additional volume of output results in ever-
increasing average unit costs. This phenomenon is referred to as diseconomies
of scale. Diseconomies of scale include overloading of machines, increased
congestion of materials and handling equipments, slower service times, poor
quality requiring more rework, increased use of overtime and the corresponding
increase in labour costs, difficulty in coordination and management activities
etc. The impact of diseconomies of scale increases when the production volume
increases beyond the best operating level.
Subcontractor networks: Developing subcontractor and supplier
networks provides a viable alternative to larger capacity production facilities.
The manufacturing firm focuses on lesser backward integration and instead
develops long-term contractual relationships with suppliers of parts,
components and assemblies. The manufacturing firm operates with less 'in-
house' manufacturing capacity because much of the firm's capacity needs have
been "outsourced" to subcontractors/suppliers This approach provides more
flexibility to the parent manufacturer to vary the firm's capacity during slack or
peak periods of demand. But the limitation of this approach is that outsourcing
may be affected when the suppliers/subcontractors face capacity shortages
situations.

54
 Also companies can increase their capacity to run their business by
outsourcing services such as janitory services, building maintenance,
recruitment, employee travel arrangements, desktop computer supply/
maintenance, installation/maintenance of information system, transportation,
warehousing, advertising, payroll accounting etc. Activities which have
potential to be outsourced include product design, telemarketing, customer
service, data processing, personal selling etc.
Economies of scope: This is another concept that must be taken into
consideration when considering economies of scale. Economics of scope refer
to the ability of a firm to produce many product types in one highly flexible
manufacturing facility at a lesser cost than in separate production facilities.
Traditionally it is believed that as capital investment, mechanisation and
automation are increased, product flexibility decreases and automated
production can be justified for high volume products because of economies of
scale. But in reality, highly flexible and programmable automation allows the
production system to change over to other products quickly and without much
expense. As a result, economies are created by spreading the cost of automated
facilities over a wide range of product lines.
The experience curve: This concept allows a firm to increase its
production capacity without additional capital investment. As plants produce
more and more, they gain experience in the best production methods and their
production costs can be reduced considerably. Also the workers take lesser time
to do their job, gaining experience (learning curve effect) while doing repetitive
jobs.
Large capacity plants can have a two-way cost advantage over their
competitors having lesser production capacities. The larger plant gains from
economics of scale and also from experience curve because it produces more.
Companies can use the dual advantage of economies scale and experience
curves as a competitive strategy by first building a large plant with economies
of scale and then using their lower costs to price their products aggressively
and increase their sales volumes and market shares. Because of their higher
volumes of production, these firms can have the advantages of experience
curve which will enable them to further reduce their costs and then the prices of
their products thereby increasing their sales volume further. However, for this
to happen, two criteria must be met i.e., (i) The products must be able to meet
customers’ needs and (ii) The demand for the products must be sufficiently
high to support the higher volume of production.

55
Developing Capacity Alternatives
To enhance capacity management, the following approaches to capacity
alternatives could be developed:
(i) Designing flexibility into the system: Designing flexible production
systems can offer potential benefits in long-range capacity planning
because of the risks inherent in longterm forecasts. For example, it would
be less expensive to provide for future expansion in the original design of
a structure rather than remodeling an existing structure to accommodate
higher production capacity. When flexibility is built in the design of the
system itself it would become easy to implement expansion plans later.
Other factors to be considered in flexible design include layout of
equipment, location and equipment selection, production planning,
scheduling and inventory policies.
(ii) Differentiating between new and mature products or services : Capacity
requirements of mature products can be predicted more precisely and
mature products may have limited life spans. The possible limited life
span of the matured products or service may necessitate finding an
alternative use for the resulting excess capacity at the end of the life span.
On the other hand, new products tend to carry higher risk because the
quantity demanded and duration of the demand cannot be predicted
accurately. Therefore having flexibility becomes a more attractive option
to production managers.
(iii) Taking a "big-picture" approach to capacity changes: When developing
capacity alternatives, a firm must consider how different parts of the
system interrelate. For example, when the management of a five star hotel
makes a decision to increase the number of rooms, it must also consider
probable increased demand for parking lots, restaurant seating capacity,
bigger dining hall and kitchen capacity, increase in the number of hotel
staff and house-keeping staff etc.
(iv) Preparing to deal with "chunks" of capacity: Usually, capacity increases
are often acquired in the .form of fairly large chunks of capacity rather
than small increments in capacity. For example, in a steel plant, the
existing capacity, of a furnace may not be enough to meet the demand,
but installing an additional furnace would result in having excess capacity
because additional furnaces cannot be installed in small capacity chunks.
(v) Attempting to smooth out capacity requirements: Having unevenness in
capacity requirement can be problematic. For example, during seasons of
bad or extreme weathers, more and more people may tend to use public
transport vehicles for their travel rather them using their own vehicles.

56
 Consequently the public transportation system may tend to alternate
between under utilisation and over utilisation. Demand for consumer
products could vary partly because of chance factors (i.e., random
variation) because of seasonality. Seasonal variations can be predicted
and hence can be better coped with than random variations. However,
seasonal variations can still pose problems because of their uneven
demands on the production system. (i.e., overloading and underloading).
This problem of seasonality can be overcome by producing products
having complementary demand patterns (for example, heating and air-
conditioning equipments). If products having complementary demand
patterns involve the use of the same resources but at different times
(seasons) then, the overall capacity requirements remain fairly stable.
(vi) Identifying the optimal operating level: The optimal operating level is the
ideal level of operation at which the cost per unit is the lowest for the
production unit. Larger or smaller volumes of output would result in
higher unit cost.
Selecting from Among the Alternative Sources of Capacity (or Capacity
Alternatives)
Before selecting the best alternative from among the several alternative
sources of capacity, an organisation needs to examine or evaluate the
alternatives for future capacity from several different perspectives.
The most important perspective is economic consideration. The questions to be
answered are:
(i) Will an alternative be economically feasible?
(ii) What would be the operating and maintenance costs?
(iii) How soon it can be acquired?
(iv) What would be the operating and maintenance costs?
(v) What would be its useful life?
(vi) Would it be compatible with present personnel and present operating
methods?
(vii) What would be the public opinion or reaction to a new facility? (i.e.,
community attitude).
For example, the decision to build a new power plant (coal fired or
nuclear) is almost certain to stir up hostile public reaction because of the need
to relocate the people residing in the area and also because of pollution
problems that would be created by the new plant.
The capacity planning and facility planning decisions can be analyzed
by different approaches such as :

57
 (i) Break-even analysis or cost-volume analysis
(ii) Financial analysis (or present value analysis and cash-flow analysis)
(iii) Decision analysis or decision-tree analysis and
(iv) Computer simulation and waiting-line analysis
These approaches are briefly discussed in the following sections:
(i) Break-even Analysis or Cost-volume Analysis
Break-even Analysis or cost-volume Analysis focuses on relationships
between cost, revenue and volume of output. Since this analysis facilitates
estimation of profit under different operating conditions, it is particularly useful
for comparing capacity alternatives.
The technique involves identification of all costs related to the
production of a given product. These costs are categorised as fixed costs and
variable costs. Fixed costs do not vary when volume of output changes. For
example, rent, property tax, equipment cost, administrative costs, heating and
air-conditioning expenses etc. variable costs vary directly with volume of
output, for example, material costs and labour costs. The total cost is equal to
the sum of the fixed cost and variable cost per unit multiplied by the volume of
output (Q) The total revenue associated with a given volume of output Q is:
total revenue = unit price x volume of output (Q).
The total profit is computed as
Total profit (P) = Total revenue — Total cost
i.e., P = TR — TC
Where TR = (Unit selling price) x Volume of output
= s Q
Total cost (TC) = Fixed cost + (Variable cost/unit x Volume of
output)
T.C = (F.C + vQ) where v is the variable cost/unit
P = TR — TC
=(sQ) — (FC + vQ)
= (s — v) Q — FC
Q = P+FC
(s — v)
When total revenue equal total cost, (i.e., at break-even point)
Total profit = Nil
Then FC
QBEP = (s — v)

58
 For cost-volume analysis to be a valuable tool for comparing capacity
alternatives, the following assumptions must be satisfied.
(i) One or a few products having the same cost characteristics are involved.
(ii) The volume of the product produced can be sold.
(iii) The variable cost per unit does not change with volume of output.
(iv) Fixed costs do not change when volume of output changes or they are set
up changes.
(v) The revenue per unit (i.e., selling price) is the same regardless of volume
sold.
(vi) Revenue per unit (i.e., selling price) exceeds variable cost per unit.
(ii) Financial Analysis
Financial analysis helps managers to take decisions regarding allocation
of scarce funds to alternative investment proposals. Two important terms used
in financial analysis are:Cash flow and (ii) Present value.
Cash flow refers to the difference between the cash received from sales
and cash outflow for labor, materials, overhead and taxes etc.
Present value expresses in current value the sum of all future cash flows
of an investment proposed. The three most commonly used methods of
financial analysis are:
(a) Pay-back period method
(b) Net present value method and
(c) Internal rate of return method. A detailed discussion of these methods is
beyond the scope of this book.
(iii) Decision Theory or Decision-Tree Analysis
Decision analysis is helpful for financial comparison of alternatives
under conditions of risk or uncertainty. A decision tree is a schematic model of
the sequence of steps in a problem and the conditions and consequences of each
step. Decision trees are used in situations involving multiphase decisions and
interdependent decisions that must be made in a sequence. Decision trees were
developed for multiphase decisions as aids to managers who must see clearly
what decision must occur and the interdependnce of the decision.
Decision-tree analysis provides (i) a way of structuring complex
multiphase decisions, (ii) a direct way of dealing with uncertain event and (iii)
an objective way of determining the relative value of each decision alternative.
The concept of expected value (EV) used in decision tree analysis gives
only relative measures of value and not absolute measures.

59
 The expected value is only a measure of value of one alternative relative
to the other alternatives. In long-range Capacity planning, facility planning
decision is a one-time decision and expected value is at best only a relation
measure of value.
Decision tree analysis allows decision makers to see clearly what
decision must be made, in what sequence they must occur, and their
interdependence.
A detailed discussion on decision tree analysis is beyond the scope of
this book.
(iv) Waiting Line Analysis
Waiting-line analysis or queuing theory is often used for designing of
service system by determining the service capacity and expected costs for
various levels of service capacity. A detailed discussion of waiting-line analysis
is beyond the scope of this book.
DETERMINING CAPACITY REQUIREMENT
Capacity planning decisions involve both long-term and short-term
considerations. Long-term considerations relate to overall level of capacity,
such as facility size; short-term considerations relate to probable variations in
capacity requirements created by such things as seasonal, random, and irregular
fluctuations in demand. Because the time intervals covered by each of these
categories can vary significantly from industry to industry, it would be
misleading to put times on the intervals. However, the distinction will serve as
a framework within which to discuss capacity planning.
We determine long-term capacity needs by forecasting demand over a
time horizon and then converting those forecasts into capacity requirements.
Figure 5.1 illustrates some basic 4..demand patterns that might be identified by a
forecast. In addition to basic patterns there are more complex patterns, such as
a combination of cycles and trends.
When trends are identified, the fundamental issues are (1) how long the
trend might persist, because few things last forever, and (2) the slope of the
trend. If cycles are identified, interest focuses on (1) the approximate length of
the cycles and (2) the amplitude of the cycles (i.e., deviation from average).
Short-term capacity needs are-less concerned with cycles or trends than
with seasonal variations and other variations from average. These deviations
are particularly important because they can place a severe strain on a system's
ability-to satisfy demand at some times and yet result in idle capacity at other
times.

60
 An organization can identify seasonal patterns using standard
forecasting techniques. Although commonly thought of as annual fluctuations,
seasonal variations are also reflected in monthly, weekly, and 'even daily
capacity requirements. Table 5.3 provides some examples of items that tend to
exhibit seasonal demand patterns.
When time intervals are too short to have seasonal variations in
demand, the analysis can often describe the variations by probability
distributions such as a normal, uniform, or Poisson distribution. For example,
we might describe the amount of coffee served during the midday meal at a
luncheonette by a normal distribution with a certain mean and standard
deviation. The number of customers who enter a bank branch on Monday
mornings might be described by a Poisson distribution with a certain mean. It
does not follow, however, that every instance of random variability will lend
itself to description by a standard statistical distribution. Service systems in
particular may experience a considerable amount of variability in capacity
requirements unless request for service can be scheduled. Manufacturing
systems, because of their typical isolation.
From customers and the more uniform nature of production, are likely
to experience less variations. Waiting-line models and simulation models can
be useful when analyzing service systems.
Irregular variations are perhaps the most troublesome: They are difficult
or impossible to predict. They are created by such diverse forces as major
equipment breakdowns, freak storms that disrupt normal routines, foreign
political turmoil that causes oil shortages, discovery of health hazards (nuclear
accidents, unsafe chemical dumping grounds, carcinogens in food and drink),
and so on.
The link between marketing and operations is crucial to realistic
determination of capacity requirements. Through customer contracts,
demographic analyses, and forecasts, marketing can supply vital information to
operations for ascertaining capacity needs for both the long term and the short
term.
Calculating Processing Requirements
A necessary piece of information is the capacity requirements of
products that will be • processed. To get this information, one must have
reasonably accurate demand forecasts for each product and know the standard
processing time per unit for each product, the number of workdays per year,
and the number of shifts that will be used.
A department works one eight-hour shift, 250 days a year, and has'these
figures for usage of a machine that is currently being considered:

61
 Processing
Annual Standard Processing
Product Time
Demand Time per Unit (Hr)
Needed (Hr)
#1 400 5.0 2,000

#2 300 8.0 2,400

'#3 700 2.0 1,400
5,800

Working one eight-hour shift, 250 days a year provides an annual capacity
of 8 X 250 = 2,000 hours per year. We can see that three of these machines
would be needed to handle the required volume:
- 5,800 hours
2,000 hours/machine = 2.90 machines
The task of determining capacity requirements should not be taken
lightly. Substantial losses can occur when there are misjudgments on capacity
needs. One key reason for those- misjudgments can be overly optimistic
projections of demand and growth. Marketing personnel are generally
optimistic in their outlook, which isn't necessarily a bad thing. But care must be
taken so that that optimism doesn't lead' to overcapacity, because the resulting
underutilized capacity will create an additional cost burden. Another key reason
for misjudgments may be focusing exclusively on sales and revenue potential,
and not taking into account the product mix that will be needed to generate
those sales and revenues. To avoid that, marketing and operations personnel
must work closely to determine the optimal product mix needed and the
resulting cost and profit. .
A reasonable approach to determining capacity requirements is to obtain
a forecast of future demand, translate demand into both the quantity and the
timing of capacity requirements, and then decide what capacity changes
(increased, decreased, or no changes) are needed.
Long-term capacity alternatives include expansion or contraction of an
existing facility, opening or closing branch facilities, and relocation of existing
operations. At this point, a decision must be made on whether to make or buy a
good, or provide or buy a service.
ENTERPRISE RESOURCE PLANNING
"Resource Requirement Planning", a brief account of "Enterprise
Resource Planning" was presented to the readers. Since information technology

62
is revolutionizing the way in which we live and work and changing all aspects
of our life and life style, we need to manage information both in our personal
life as well as in our professional life.
Information technology has ushered in a new era in the management of
business organisations. It helps to automate the process of data collection,
collation and refinement and to deliver high quality information to the decision-
makers at the right time. Hence, to survive, thrive and beat the competition in
today's brutally competitive world, managers have to manage the future by
managing information.
All organisations, whether engaged in manufacturing goods or rendering
services, have certain objectives and goals to be achieved through the
coordination and integration of activities of its various business units or
departments. Sometimes, there may exist some conflicts between the various
business functions. To resolve these conflicts and make them to do what is
good for the organisation as a whole, sharing of information is crucial.
Organisations should stop functioning as islands of information and the various
business units or departments should cease to function in isolation. For this,
business units or departments should share information among them and know
how the decisions/actions of one unit or department affects other units or
departments. Advancements in information technology facilitate this kind of
information sharing. The enterprise-wide data sharing has many benefits like
automation of the procedures, availability of high quality information for better
decision making and faster response time etc.
What Is Enterprise Resource Planning? (ERP)
Before we try to understand the meaning of ERP, we need to understand
the importance of resources of a business organization for its success. The three
important factors for any successful business venture are: (i) An enterprise (ii)
Its Resourtes and (iii) Planning the _ management of the resources of the
enterprise.'
An Enterprise, is a group of people with a common goal, which has
certain resources at its disposal to achieve that goal.
Resources include money, manpower, materials and all other things that
are required to run the enterprise.
Planning is done to ensure that all necessary functions are performed in
the right manner at the right time.
Thus Enterprise Resource Planning or ERP is a method of effective
planning of all the resources in an enterprise or organization.

63
 Enterprise Resource Planning includes the techniques and concepts
employed for an integrated management of business as a whole, from the view
point of the effective use of resources, to improve the efficiency and
effectiveness of an enterprise.
ERP is a software package that organizes and manages a company's
business processes by sharing information across all functional areas in the
organization. It encompasses all business areas such as sales, distribution,
accounting, costing, maintenance etc. It includes all, from suppliers to
customers. It transforms transactional data like sales into useful information
that supports business processes such as invoicing, distribution and accounting,
In addition, ERP connects with supply chain and customer management
applications, helping businesses share information both inside and outside the
enterprise. In this way, ERP serves, as the backbone for an organization’s
information needs, as well as its e-business initiatives.
Evolution of ERP
Prior to the development of ERP, most companies employed program
developers who developed programs for their business applications from
scratch or developed complicated interfaces to allow pre-packaged applications
from several vendors for flow of data back and forth as necessary to complete
business transactions throughout the enterprise. The drawbacks of this process
were: (i) costly, time consuming and error prone, (ii) communication among
various areas of business was difficult and (iii) managers could not get a
comprehensive view of how the business was doing at any point of time.
SAP AG, a German software company created generic ERP software
package to integrate all business processes together for use by any business in
the world. The software was updated to client server architecture in the 1990s
and with essentially one product, SAP became the third largest Software
Company in the world.
An ERP System
An ERP system is a set of integrated business applications or modules
which carryout common business functions such as general ledger accounting,
accounts payable, accounts receivables, material requirement planning, order
management, inventory control and human resource management. Usually
these modules are purchased from a software vendor. In some cases, a company
chooses to buy only a subset of these modules from a particular vendor and mix
them with modules from other vendors and with the company's existing
applications.
With ERP, companies could integrate their accounting, sales,
distribution, manufacturing, planning, purchasing, human resources and other

64
transactions into one application software. This enabled transactions to be
synchronized throughout the entire system. For example, a customer order
entered into an ERP system would ripple through the company, adjusting
inventory, part supplies, accounting entries, production schedules, shipping
schedules and balance sheets.

An ERP system differs from earlier approaches to developing or

purchasing business applications in at least two ways.
(i) The ERP modules are integrated, primarily through a common set of
definitions and a common database. As a transaction is processed in one
area, such as the receipt of a customer order, the impact of this transaction
is immediately reflected in all other related areas such as accounting,
production scheduling and purchasing.
(ii) The ERP modules have been designed to reflect a particular way of doing
business — a particular set of business processes. ERP systems are based
on a value-chain view of the business in which functional departments co-
ordinate their work. To implement an ERP system, then, a company is
committing to changing its business processes. If a company purchases an
ERP system, it may need to change its processes to conform to those
embedded in the software package. The company adapts to the ERP
software package, not vice versa, because of the high costs of system
modification.

65
Advantage of ERP Systems
Installing ERP system has many advantages:
(i) ERP systems help companies manage their resources efficiently and at the
same time, better serve their customers.
(ii) ERP simplifies customer interaction and speeds production with its
configure-to-order capabilities. Customers ordering on-line or through a
sales person can quickly choose from a variety of options, for which bill-
of-material is automatically generated and sent to production.
(iii) Data entered once into an ERP system, say from manufacturing, need not
be reconciled with accounting or warehouse records because the records
are all the same.
(iv) With broader, more timely access to operating and financial data, ERP
systems encourage flatter organisational structures and more decentralized
decision making.
(v) ERP systems also centralise control over information and standardise
processes. Standardised transactions make businesses more efficient and
shared data makes them more creative.
(vi) The direct advantages of ERP include improved efficiency, integration of
information for better decision making, faster response' time to customer
queries etc.
(vii) The indirect benefits include better corporate image, improved customer
good-will, customer satisfaction etc.
Disadvantages of ERP Systems
(i) Implementation of an ERP system is extremely difficult because the
company must change its way of doing business.
(ii) ERP systems are very expensive. A typical large-scale ERP
implementation costs several crores of rupees and takes a year or more.
These implementation costs include not Only the software licenses but
also hardware and network investments and consultihg Casts.
(iii) Choosing the right ERP software is a difficult task. The leading vendors
are SAP, Bann, TD Edwards, Oracle and People soft. Several small
companies also offer ERP software. For ERP purchases, choosing a single
vendor may provide the advantage of the tight integration of applications
and standardisation of processes. But it will reduce flexibility for the
adopting company "A" best-of-breed or mix-and-match approach with
multiple vendors may enable the company to meet more of its unique
needs and reduce relianceon a single vendor, but such an approach

66
 typically makes implementation more time consuming and complicates
system maintenance.
(iv) For multi-divisional firms, implementing an ERP system is a very
complex, challenging task that needs the best minds and careful attention
of internal information system specialists, internal business managers and
external consultants.
However, whatever may be the disadvantages, the potential pay-off of
an ERP system in terms of better information for strategic and operational
decision making and planning and greater efficiency, profitability, and growth,
makes the efforts and costs worthwhile.
PRODUCTION SCHEDULING
A master production schedule (MPS) is a product-wise plan for
manufacturing products. When a firm uses an MRP (Material Requirement
Planning) system, the MPS provides the top-level input requirements. This
gives the volumes of production during various periods in the planning horizon.
As mentioned earlier, aggregate planning aims at an overall plan
without distinguishing products. But, master production plan/schedule aims to
prepare a product-wise schedule which is consistent with the aggregate
planning. This process of generating a feasible master production schedule is
known as disaggregation planning. The relationship of the MPS to other
manufacturing and control activities is shown in Fig. 10.4.
The aggregate planning problem provides a basis for decision making
regarding specific production dates, available capacity, total demand, lead time,
or inventory constraints. These information may not be sufficient for the
smooth functioning of a firm. So, we need a plan stated in terms of specific
products that are to be produced in certain quantities by certain dates which is
known as master production schedule/disaggregation schedule.
It specifies (1) the sizing and timing of production orders for specific
items, (2) the sequencing of individual jobs and (3) the short-term allocation of
resources to individual activities and operation. We can broadly categorize the
existing disaggregation techniques into (1) cut-and-fit methods, (2)
mathematical programming methods, (3) heuristic methods. The cut-and-fit
technique is briefly explained in this section.
In production planning, due consideration should be given in deciding
planning horizon. The objectives of any system is to smooth the production
process, enabling uniform production of items over the period and thus
avoiding production of a month's quota during the last week of the month. If
the length of the planning period is too long, it may result in deviated plans

67
which in turn lead to some control problems. On the other hand, if the planning
period is too small, it will result in excessive overhead in terms of data
processing and updating costs. Hence, a desirable planning horizon should be
selected such that the production process is smooth as also practicable to
implement in terms of minimum cost of implementation and monitoring. For
most manufacturing firms, a week or a fortnight is a satisfactory length of time.
The total time horizon usually consists of twelve weekly periods.

Relationship of mps to others manufacturing Planning and Control activities

Cut-and-Fit Methods
Assume that a company manufactures product A and product B. A
sample master production schedule of these products is consists of four parts.
Part (a) shows the aggregate forecast, production and aggregate inventory
levels. The average of the aggregate forecasts is taken as the weekly production
quantity. One can observe the fact that this aggregate plan leaves a final
inventory of 800 units at the end of the 8th week which is the same as the initial
inventory.

68
 In part (b) of the table, product-wise forecast figures are shown. In part
(c), a sample master production schedule is presented. One can verify the fact
that the aggregate planning capacities in part (d) of the table match with the
corresponding aggregate forecasts in part (a) of the table. So, the deviation
between the aggregate planning forecast and aggregate planning capacities is
zero for all the periods. This does not mean that the master production schedule
is the optimum schedule in terms of the number of set-ups and associated set-
up costs or the in-process inventory for the production line. Only the use of
several alternative master schedules or the use of optimizing methods can
guarantee that the MPS is feasible.
WORK ENVIRONMENT
The work environment refers to the conditions which surround the work
place where the worker performs his work. These conditions affect his well-
being and his efficiency towards work. Bad work environment increase strain
to workmen, reduce their efficiency and ultimately result in lower productivity.
Even the most meticulously improved methods are unlikely to yield good
results if the work place where the operator does his work has insufficient light,
excessive heat, unbearable noise, heavy concentrating of toxic or non-toxic
dust, etc. Some of the important environment factors to be looked into are
lighting, noise, vibration, heat, ventilation, housekeeping, selection of colours,
amenities, etc.
1. Lighting: Productivity of a worker to a great extent is influenced by the
extent to which his/her eyes are able to perform the work comfortably. Both
quality as well as quantity of light affects work performance. Poor lighting (i.e.,
wrong distribution or glare) may cause headache or fatigue among the workers
and in the long run may prove disastrous to safety and personal health. Some
basic principles of lighting are:
 Lighting should be so designed that the employee works in complete
comfort with minimum of eye strain and physical fatigue
 Light should be sufficient in intensity and be suitable to the type of
level, the greater the illumination, the better the eye function.
 Natural light and artificial light should be integrated to provide good
general lighting.
Light should be diffused and glare-free. Glare cause discomfort and
reduces visual effectiveness. Glare is produced either when the parts of the
visual field are excessively bright in relation to the surroundings (e.g., the light
source directly in the field of vision) or due to reflection of light from the bright
surface. Glare can be subdivided into discomfort glare and disability glare.
Discomfort glare is one which produces a sensation of high discomfort in

69
vision but does not significantly reduce the ability to see whereas disability
glare is one which reduces the ability to see.
Glare can be reduced by (i) reducing the brightness of the light source,
(ii) increasing the general level of illumination of the surroundings of the glare
source so that a contrast between the glare source and the surroundings is
reduced, (iii) placing the light source away from the direct field of vision, (iv)
diffusing the light by baffles, window shade, etc., and (v) using light shields or
hoods if glare cannot otherwise be reduced.
The working areas should be illuminated more than their surroundings.
This may be achieved by supplementary lighting located at the appropriate
places.
Lighting should be designed to allow safe movements of employees
from one area to another. Since eyes take some time to adjust to the change in
illumination, accidents can occur while passing from a well-lit room to a
poorly-lit corridor, staircase or store. The luminaries over the walkways,
passages and staircase leading to the exit point should be designed to act
themselves as an indicator of the routes.
The light should not permit marked shadows. Windows and skylights
must be kept clean both inside and outside and should be shaded or white
washed to protect workers from direct sunlight and glare. Fluorescent tubes in
general provide the right quality of light and are most suitable for colour
identification.
2. Noise: Noise may be defined as the unwanted sound. Noise (or any sound)
is caused by the disturbance of the air which vibrates the ear drums. The higher
the frequency of the vibrations, the higher is the pitch of the sound. Another
important aspect of noise is the frequency of the sound. Unexpected, irregular
and infrequent bangs irritate workers more than continuous noise of the same
intensity. Researchers have concluded that in qualitative form, intermittent
noise of medium and high intensity affects digestion and hearing of those who
are exposed to such noise regularly. Since noise is barrier to worker's
productivity and well being, every attempt should be made to curb the noise
level to its minimum and if it is not possible to do, women should not be
exposed too long to such noises. To counteract the effect of noise, the
following general principles are recommended:
i. Noise and vibrations should be recognised as barriers to employee's
productivity and must be considered appropriately while preparing
initial layout of the plant and design of the building.

70
 ii. Machines which cause strong vibrations should be located on the
ground-floor and installed on proper mounting to absorb noise and
counteract vibrations.
iii. Lighter equipment should be mounted on spring, cork pads and other
noise damping materials.
iv. Impact equipment and excessively noisy operations should be isolated
by constructing proper enclosures so that amount of noise transmitted
beyond the enclosures is reduced.
v. Baffles and sound absorbent materials should be installed near and
above the noise sources to reduce noise level.
vi. Acoustical sound absorbed materials should be used on roofs and walls
to reduce reverberation and dampen noise levels.
vii. Worn out parts such as gear, bearings, etc., should be replaced on time
so that they do not unnecessarily add to the noise of the equipment. The
noise producing parts — gears, shafts, etc., should be studied and
redesigned to reduce noise level.
viii. Administrative offices should be insulated by sound resistant walls and
false ceilings.
ix. In severe noise situations, workers should be provided with personal
protection devices such as ear plugs, ear muffs, or helmets.
3. Vibration: Usually, vibrations of the air are detected as sound but air
vibrations below 20 1-1zoare not heard but can be felt. Vibrations can affect the
performance on target tracking. Ideally vibrations should be minimised at
source. Normally protection from residential vibration is achieved by reducing
the force transmitted, by converting vibration energy into thermal energy by
using mechanical or hydraulic dampers and by altering body position and body
support.
4. Thermal Conditions (Temperature, Humidity and Airflow):
Human physiology needs a condition of constant temperature. Poor heat and
humid conditions produce thermal stresses in employees which affect their
efficiency, concentration and manual dexterity of the members of the body. A
working temperature of 60-65 Fis considered normal, although it varies
according to the type of work (e.g., example, sedentary work requires higher
temperature while heavy manual work needs lower temperature). Blood
circulation and sweat glands are the two automatic heat regulatory mechanism.
of human body which keep the body closer to normal temperature. An air
temperature of 16-18C is generally ideal for working and as such air
conditioning of environment may be a general solution to remove the adverse
effects of the health. But, unfortunately this may not be possible where plants
and processes require heat. In such cases, it is important that effects of heat on

71
human physiology is limited to its minimum by appropriate management
actions.
Heat alone does not cause heat stresses. Equally important are the other
two related aspects (i) humidity of the air and (ii) air flow. The effect of heat on
employees can be minimised by
 Scheduling/isolating heat sources to reduce direct transmission by
radiation of heat between the body and the heat source.
 Installing adequate local ventilation systems to get rid of fumes and dust
and maintain continuous even air flow.
 Providing protective clothing specially designed for maximum air flow
and efficient heat dissipation. Permitting rest pauses in cool place at
shorter intervals between works shifts.
 Rotating personnel in extreme hot areas.
 Making adequate arrangement of supply of cool water to enable
frequent drinking of water.
 Raising salt content in worker's food to make up for the salt loss.
5. Ventilation: Cool and fresh of air is vital to make an occupied space
comfortable. Generally, occupants and their activities greatly affect the
atmosphere of an occupied building. Heat from the human body, carbon
dioxide, water vapours and bacteria are continuously discharged during
breathing, coughing and smoking. Some industrial processes also release
flames, fumes, gases, or dust which contaminate/pollute the atmosphere.
Consequently, the stale air needs to be expelled outside the occupied space to
allow inflow of fresh air and maintain satisfactory standard of fresh and clean
air.
Ventilation is the process of displacement of stale air of the factory
building by fresh air in order to reduce the presence of bad smell, concentration
of carbon dioxide, humidity and temperature. Ventilation is essential not only
for physical well-being but also to minimise danger of infection. A good
ventilation system provides fresh air and gets rid of odours and smoke without
causing droughts.
Most common methods of ventilation are: (i) Windows and ventilators
provide natural ventilation. Fresh air enters the building from windows and
forces out stale air through windows and ventilators located in the opposite
walls. (ii) Exhaust fans extract the stale air. Fresh air from the surrounding area
rushes in to equalize the pressure and as a result, air renewal or ventilation
takes place.

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 Positioning of the exhaust fans is an important consideration. For good
ventilation, exhaust fan should be installed at the highest possible point and
away from open doors at d windows (to prevent short circuiting of air
movementbetween the fan and adjacent inlets and to ensure that fresh air drawn
in permeates the whole room).
6. Housekeeping: Good housekeeping makes work areas. look pleasant and
more satisfying. It reduces fatigue and discomfort among the workmen and
stimulate them to work. The essentials of good housekeeping are:
1. Suitable place should be provided for everything connected with the job
and the workmen should be asked to keep everything in its place.
2. Plant and offices should be divided into zones, there being one person
responsible for good housekeeping and orderliness of the zone.
3. Plant and machinery should be free from leakages, of oil, air, water,
steam, etc., since they make area dirty.
4. Containers should be placed at the strategic locations in the plant to
enable workmen to deposit waste materials, oily cotton lumps, torn
handgloves, etc., directly into them rather than being allowed to be
thrown away on the shop floor. Spittoons should be provided in each
shop at the appropriate places.
5. Portable equipment should be placed at appropriate places;and not
allowed to hamper personnel and materials movement.
6. Materials should be stored properly. Piling and stacking unless otherwise
on pallets should be avoided to prevent materials to tip off. Also materials
should not be allowed to protrude out of racks or bins.
7. Windows should be kept clean and jam free. Broken glasses should be
replaced as soon as such breakages are observed/reported.
8. Walls should be painted periodically with paints that are soothing to the
eyes.
9. Floor should be kept clean, free from oil, garbage, dirt, debris and general
waste.
10. Employee's facilitates like drinking taps, toilets, locker rooms and
canteen should be kept clean.
11. Lamps, flporescent tubes and their reflectors should be cleaned
periodically.
12. Work place should be periodically cleaned against insects and
mosquitoes.
13. Safety and general signs and bulletin boards should be kept clean.

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 7. Selection of Colours:Colours influence the worker's feelings of warmth.
Properly selected colours improve lighting and add to the general feeling of
well being. Psychologically, a fresh new coat of paint gives workmen the
feeling that the management is interested in their welfare.
Some basic principles of colouring are:
 The selection of the colours should be such that it gives a sense of
pleasure and well being.
 Red and yellow are hot colours that express warmth while blue and
green colours are cold colours, exuding tranquillity.
 Lighter shades make a small room look larger, while dark shades make
a large room appear smaller.
 Cream colour and grey colour walls are generally liked by all workmen.
Light green colours usually gives a feeling of warm conditions (and
hence suitable for cool areas) while buff colours give a feeling of cool
conditions.
 Workmen may be invited to express their preferences.
 Storage areas and aisles should be clearly marked for which white lines
are mostly preferred.
 Colour combinations should be fixed for vital machine controls so that
workmen do not require to remember the movement effect by the
control. Push buttons and actuators should also be standardised for
colours to increase effectiveness.
8. Amenities: Amenities should be provided to the workmen without giving
them a feeling of generosity. Workers should be conveyed in no uncertain
terms that the management gives the best amenities to obtain the best work
from their workmen.
 Availability of lockers to the workmen to deposit their private
belongings which not be taken to the actual place of work.
 Adequate number of clean washrooms and toilets.
 Canteen should supply good quality food at subsidised rates. Clean
drinking water should be made available for all.
 Enough care and attention should be paid towards developing sports and
recreation.

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 UNIT – IV

MATERIAL MANAGEMENT

OBJECTIVES
After studying this lesson, you should be able to:
 Explain the concept of Material Management.
 Explain the Materials Requirement Planning.
 Describe the Purchase management.
 Explain the Inventory control.

Material Management
Material management may be defined as the planning, acquiring,
storing, moving and controlling of materials to optimize the usage of facilities,
personnel and capital funds and to provide service to the user in line with the
organizational aims.
Three distinct functions are involved—materials planning and
controlling, purchasing of materials and store and inventory control functions.
Materials planning and controlling: A forecast requirement of materials
is prepared based on the forecast demand and the production plan. Budget is
prepared for materials. A forecast of inventories to be held is also prepared.
Based on the forecasts orders are scheduled and progress is monitored in
relation to production and sales.
Purchasing: This includes selection of sources of supply, finalizing the
terms of purchase, placing orders; follow up of placed orders and approval of
payments to suppliers. The source must be able to supply materials in the
desired quantity and of the desired quality. The source should be reliable and
should continue to supply the materials as required. Smooth relations must be
maintained with suppliers. Another important function related to purchase is
vendor rating. Vendors are rated according to their ability to deliver materials.
Stores and inventory control: Storage of materials requires special care.
Stores must be preserved. Obsolescence and damage should be minimized
through timely disposal and efficient handling. Proper records should be
maintained. These include records of receipts and issues, prices, sources and so
on. Stores must be properly located and laid out to reduce material handling to
the minimum. Periodic verification of stores must be carried out.

76
 Inventory control includes setting inventory levels, fixing levels of
safety stock to be maintained, carrying out lead time analysis and employing
techniques to reduce the inventory. Safety stock is the stock maintained as a
reserve to deal with fluctuations in demand and lead time. The time between
placing an order and actually receiving the material is called lead time.
Materials management aims at providing materials of the right quantity,
of the right quality, at the right price, at the right place, at the right time and
from the right source.
Objectives of Materials Management
The primary objectives of the material management department are:
 Low procurement price: The materials management department should
procure materials at the lowest possible price in keeping with other
requirements like quality, delivery and so on. Quantity discounts should
be carefully weighed against the costs involved in holding higher levels
of inventory.
 High inventory turnover: High inventory turnover should be ensured.
This will reduce carrying costs and prevent obsolescence.
 Low cost of acquisition and possession: The materials manager should
ensure that materials have a low cost of acquisition and storage. Policies
should be laid down so that items of high usage value are not stocked in
excess else the cost of materials and their storage will be high.
 Continuity of supply: Vendors should be so selected that continuity of
supply is maintained. This is particularly true in case of materials
procured from abroad. For instance, when procuring defence weapon
systems from foreign vendors, vendors from a friendly nation who will
continue to supply spares, parts and ancillaries like ammunition would
be preferred over a vendor who may refuse to supply especially during
emergency situations like the outbreak of war, even though the latter
vendor may supply materials at a cheaper cost.
 Consistent quality: Materials procured should be of consistent quality.
 Low payroll costs: Optimum utilisation of manpower employed in the
materials management function will ensure low pay roll costs.
 Favourable supplier relations: Favourable relations should be
maintained with suppliers so that the organisation and the supplier both
stand to gain from the mutual relationship. The organisation should
understand the supplier's problems and help them to improve the quality
of supplies.

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  Maintenance of good records: Accurate and updated records should be
maintained. These will facilitate forecasts for the future and help in
analysing requirements and evolving stocking policies.
The secondary objectives of material management are:
 New materials, processes and products: Material managers keep a watch
for new materials and new products that may become available and may
be substituted for existing materials and products with advantage. They
also keep a track of new processes that may facilitate the existing
manufacturing process.
 Economic make or buy decisions: Materials managers must evaluate
options and take make or buy decisions. These are dependent on the
quality and quantity requirements. Cost aspects must be borne in mind.
Making involves fixed and variable costs. Buying may involve payment
terms extending over a period of time. If suppliers who can supply
required quantity of the desired quality are not available a firm may
have to decide in favour of make. Sometimes political considerations,
desire to develop own capabilities and the need to safeguard processing
secrets may favour a make decision even though it may be more
economical to buy.
 Standardisation: Materials should be standardised. This will result in a
decrease in inventory levels and will facilitate the purchase process.
 Product improvement: This is an important secondary objective of
materials management. As the materials manager is in touch with the
user through the suppliers, valuable feedback can be obtained to
improve the product.
Centralisation VersusDecentralisation
Centralisation of any function reduces overall costs but reduces
responsiveness. Materials management is no exception. Centralisation of the
materials management function will minimise duplication of effort resulting in
savings. Orders for the same material when consolidated will result in larger
quantities being ordered and quantity discounts may be offered on the higher
quantities. More effective inventory control is possible in a centralisedsystem.
As the material management function is centralised, it leads to development of
purchase specialists. Record keeping is reduced and line managers are not
burdened with the additional responsibility of procuring materials.
Despite these advantages, decentralisation will be more effective when
a single raw material is to be procured like tobacco or cotton and where prices
of the natural product fluctuate widely. Companies which operate many plants
in different locations may prefer decentralised procurement systems as

78
advantage can be taken of local variations in price and transportation costs can
be avoided. Organisations involved in research and development work may
also prefer decentralised procurement as the items to be procured may vary
widely and the requirements may best be appreciated by the concerned section.
Inventory Management
The inventory figure constitutes the bulk of the current assets for most
firms. A stock out can result in loss of profit from the missed sale, the loss of a
customer and good will, and in case of a production unit, lack of inventory of
raw materials will result in production coming to a halt. At the same time
excessive inventory increases the costs of carrying the inventory. These
carrying costs include the interest on the money locked up in inventory, the cost
of storage, deterioration, obsolescence, pilferage, security, accounting and so
on. It is thus important for the manager to understand the implications of
inventory and to correctly manage it in the most economical way.
Any idle resource with economic value is inventory. It may be in the
form of raw materials, work-in-progress or finished goods. Even cash can
sometimes form inventory, for instance the cash available at an hotel's front
office cash counter for encashing traveller's cheques.
Inventory helps to smoothen out irregularities in supply. For instance,
tobacco is harvested only once a year but the production of tobacco products is
throughout the year. This is possible only if sufficient stocks of tobacco are
procured during the harvesting season and stored for use throughout the year. If
this is not done, we will have to stop production due to lack of raw materials.
MATERIAL REQUIREMENTS PLANNING (MRP)
MRP is driven by the master planning schedule. It is a process of
working backwards the materials, parts and components required and
determining when they should be ordered or produced so that delivery
schedules mentioned in the Master Production Schedule (MPS) can be met. A
bill of materials is maintained for each end product. It is simply a hierarchal
sequence of every thing that goes into the final product. It is also called product
structure tree, or schedule or flow diagram. For example, a bicycle consists of a
frame, two wheel assemblies, a handle bar assembly and a gear wheel and
chain assembly. The wheel assembly itself is made of a hub, wheel spokes, a
wheel rim, a tube and a tyre. The product structure tree for the wheel assembly
may be as shown in Figure.

79
 Wheel assembly

Wheel Tube Tyre

Wheel rim Wheel hub Wheel spokes

Bill of Materials for Wheel Assembly.

Every organization also maintains inventory data. This gives
information about the stock in hand of various items and the stock-on-order.
The MPS, bill of materials and the inventory status provide inputs for the MRP.
MRP is based on dependent demand. The demand for an end product is
independent demand, but the demand for the parts and components depends on
the total units of the end product required. Computing the requirement of the
parts and components is only a multiplicative process. For example, the
demand for bicycles may vary, but once the figure is known, the number of
wheel assemblies required is the number of bicycles multiplied by two.
Similarly the components for the wheel assembly can be worked out once the
number of wheel assemblies required is known. The requirement of dependent
demand items tends to be more lumpy as we go further down the hierarchy.
Lumpiness means that the requirement tends to bunch together rather than
being evenly distributed over a period of time. This is also caused by the
manufacturing process. If we manufacture in lots, then the items required for
the lot are drawn from the inventory at the same time rather then being spread
out over a period of time.
MRP is most useful where production is in batches or lots using the
same processes. MRP is most useful to companies which assemble products
rather than those that fabricate them. It is not very useful if the annual
production is very low or where very complex products are involved which
require research and design and have long and uncertain lead times.
MASTER PRODUCTION SCHEDULE (MPS)
The MPS is derived from the aggregate production plan. As explained
in Chapter 13, the aggregate plan deals with product families and not individual
products. At the MPS formulation stage the planned production is

80
disaggregated to individual products. An MRP is then derived from the MPS.
The requirements of components and parts and their schedule are then
examined for feasibility. The MPS is finalised only after it is found that there
are adequate resources and the completion times are reasonable. Figure 15.3
shows how an aggregate plan is broken into a master production schedule.
Aggregate plan
Month 1 2
Cars 900 1200

Week 1 2 3 4 5 6 7 8
Maruti 800 100 100 200 300 100
Alto 100 100 200 100 100
Wagon R 100 100 100 100 200 100

Master production schedule

Aggregate Plan and Master Production Schedule for Cars .
Let us see how a master production schedule is developed for a make-to-
order item with the help of an example.
EXAMPLE
The forecast demand for inkjet printers for the next six weeks is 35, 30,
32, 38, 30 and 32. The number of orders booked at the start of the MPS
planning period is 30, 40, 25, 45, 22 and 20. The inventory on hand is 40. Lead
time is one week. The production lot size is 75. Prepare an MPS for the inkjet
printer.
Solution: The production schedule for the six weeks is shown in Table.
Master Production Schedule for Six Weeks

Week 1 2 3 4 5 6

Forecast 35 30 32 38 30 32
Orders 30 40 25 45 22 20
Inventory 5 40 8 38 8 51
MPS quantity 75 75 75
MPS start 75 75 75

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Week 1:
Opening inventory = 40
Forecast demand = 35
Closing inventory = 5
No production is required to meet the forecast demand which is greater than the
orders. Week 2:
Opening inventory = 5
Orders = 40
We shall need to produce a lot.
Since we manufacture in lots of 75, the inventory will be 75 + 5 = 80
Closing inventory = 80 — 40 = 40
As the lead time is 1 week, we shall have to start production of the lot in the
first week itself.

Week 3:
Opening inventory = 40
Forecast = 32
Closing inventory = 8
No production quantities needed.
Similarly, the production schedule for other weeks can be worked out.
The number of orders received will lead to changes in the MPS. How
flexible should the MPS be? The flexibility depends on product lead times,
commitment of parts and components to specific end use item, relationship
between the manufacturer and the vendor, excess capacity available and the
willingness or otherwise to make changes. It is obvious that total flexibility is
neither possible nor desirable.
Organisations lay down time fences. These are periods defining the
flexibility available for making changes. For instance, an organisation may
freeze the MPS for the next 6 weeks. This may mean no changes to be made to
the plan for the next six weeks or only the most minor change. It may define
the period from week 6 to week 12 as moderately firm. This may mean that the
organisation may allow changes in specific products within a particular group
as long as parts are available. The organisation may define the period from
week 12 to week 24 as flexible. This may imply that any variations may be
made keeping in view the overall capacity constraint and the lead time
constraint.

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PURCHASE MANAGEMENT
Definition
In its narrow sense, the term 'purchasing' refers merely to the act of
buying an item at a price. This very narrow conception of purchasing has been
gradually widened during the last 70 years.
A broader meaning of purchasing makes it a managerial activity, which
goes beyond the simple act of buying and includes the planning and policy
activities covering a wide range of related and complementary activities.
Included in such activities are the research and development strategies required
for the proper selection of materials and sources from which those materials
may be bought, the follow-up to insure proper delivery, the development of
proper procedures, methods, and forms to enable the purchasing department to
carry out the established policies; the co-ordination of the activities of the
purchasing department with such other internal divisions of the concern as
traffic, receiving, store-keeping, and accounting, so as to facilitate smooth
operations; and the development of a technique of effective communication
with the top management of the company so that, a true picture of the
performance of the purchasing function is presented.
Some writers use the term 'procurement' instead of purchasing. The
term procurement is broad in its meaning and covers the duties performed by
purchasing as well as such additional functions of materials supervision and
management as inventory control, receiving, incoming inspection and salvage
operations.
The term procurement is too broad and hence is not used by many
writers on the subject and by people who practise the profession. The term
purchasing is most appropriate and hence is in popular usage.
The buyers or purchasing officers are the people responsible for
discharging purchasing functions. They are the full time staff of the company.
The head of the section or the department is purchasing agent also variously
known as the purchasing officer, purchasing manager or simply buyer. The
department where all the purchases operate is called the purchase department.
The purchasing department is often called the supply department when
the former is also responsible for storing things bought and stock control of
what is stored.
We prefer to use the term purchasing department to supply department.
For us, storing and stock or inventory controls are independent functions to be
handled by separate staff. They cannot, therefore, be attached to purchasing
department.

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Importance of Purchasing
1. Purchasing function provides materials to the factory without which
wheels of machines cannot move.
2. A one percent saving in materials cost is equivalent to a 10 percent
increase in turnover. Efficient buying can achieve this.
3. Purchasing manager is the custodian of his/her firm's purse as he/she
spends more than 50 per cent of his/her company's earnings on purchases.
4. Increasing proportion of one's requirements arenow bought instead of
being made as was the practice in the earlier days. Buying, therefore,
assumes significance.
5. Purchasing can contribute to import substitution and save foreign
exchange.
6. Purchasing is the main factor in timely execution of industrial projects.
7. Materials management organisations that exist now have evolved out of
purchasing departments.
8. The stream of salesmen and direct mail advertisement entering the
purchasing department day-in and day-out brings information about new
products, materials and new ways of doing old jobs.
9. Other factors like (i) post-war shortages, (ii) cyclical swings of surpluses
and shortages and the fast rising materials costs, (iii) heavy competition,
and (iv) Growing world-wide markets have contributed to the importance
of purchasing.
Objectives of Purchasing
The purchasing objective is sometimes understood as buying materials
of the right quality, in the right quantity, at the right time, at the right price, and
from the right source. This is a broad generalization, indicating the scope of
purchasing function, which involves policy decisions and analysis of various
alternative possibilities prior to the act of purchase.
The specific objectives of purchasing are:
1. To pay reasonably low prices for the best values obtainable, negotiating
and executing all company commitments.
2. To keep inventories as low as is consistent with maintaining production.
3. To develop satisfactory sources of supply and maintain good relations with
them.
4. To secure good vendor performance including prompt deliveries and
acceptable quality.
5. To locate new materials or products as required.

84
6. To develop good procedures, together with adequate controls and
purchasing policy.
7. 'To implement such programmes as value analysis, cost analysis, and
make-or-buy to reduce cost of purchases.
8. To secure high caliber personnel and allow each to develop to his/her
maximum ability.
9. To maintain as economical a department as is possible, commensurate with
good performance.
10. To keep top management informed of material development which could
affect company profit or performance.
11. To achieve a high degree of co-operation and co-ordination with other
departments in the organisation.
Purchasing Cycle
The purchasing functions listed above will be performed in tandem to
complete a transaction from its completion. Certain steps can be noticed in the
process of initiating and completing the transaction. The steps are:
1. Recognition of need.
2. Description of need.
3. A suitable source is selected for the purchase. Often a source has to be
developed.
4. Price and availability are determined.
5. Purchase order is prepared and sent out to the supplier.
6. Acceptance of the purchase order is obtained from the supplier.
7. Follow up is done by the purchasing department to ensure timely delivery
of the material.
8. Checking the invoice and approving it for making payment to the supplier.
1. Recognition of Need
The recognition of need refers to the means by which a needed item is
officially brought to the attention of the purchasing department. Two
procedures are followed. One involves the issuance of requisitions or demand
notes by the user department or the stores department, the other involves the
issuance of a bill of materials.
A purchase requisition describes the needed item and becomes the basis
for action by the purchasing department. Requisitions are signed by authorised
individuals to avoid irresponsible purchase requests.

85
 Requisitions are prepared by the stores department in which case they
are called routine requisitions. Requisitions from using departments are
generally routed through the stores department, and if the item is in stock, it is
supplied from there instead of being purchased. Requisitions for items not in
stock are sent on to the purchasing department for action.
A bill of materials is a list of all items to be incorporated into a finished
product that the company produces. Such bills are generally prepared at the
time when engineering blueprints for the items are made. Under this method of
establishing need, the purchasing departments is notified of the manufacturing
scheduled by the Production Planning and Control (PPC) department. The
buyer then multiplies the items listed in the bill of materials by the total units
planned for production to determine the total requirement. After the total needs
have been adjusted to make use of existing inventories the quantity to be
purchased is known. The bills of materials procedure is primarily applicable to
the purchase of standard parts and small expendable tools. Supplies and similar
needs are usually handled by the requisition procedure.
2. Description of Requirement
The purchase requisition described the required item. In order to assure
complete and accurate information for ordering, the requisition must include all
necessary information in a form that can be readily checked and verified.
The buyer must check a requisition on the basis of his/her own
knowledge of the item, records of past purchases and vendor catalogues.
He/she should not change an inadequate requisition, interpret sketchy
descriptions, or in any way make judgements about a questionable requisition.
He/she should refer it back to the originating department seeking clarifications.
Even what appear to be obvious errors should be checked with the using
department because production can be delayed if the user wanted an item for
some purpose different from that assumed by the buyer and such avoidable
delays can be very costly.
3. Selection of Source
After a need has been recognized and described, the purchasing
department proceeds to select the source of supply. In most cases the
purchasing department would know from where the material could be bought.
A regular list of approved suppliers, called Register of Suppliers, is maintained
by the purchasing department. Often it becomes necessary to advertise in the
press inviting tenders from suppliers.
Whatever the method, it is essential that a right source must be selected.
A right supplier is one who delivers materials of the correct specifications on
the stipulated delivery dates. He/she is ethical in his/her behaviour, stands by

86
the promises and has a high regard for cordial buyer-seller relationship. He is
progressive in his business and seeks technological advancement in improving
the quality of his products. His price is reasonable. In short, he can be wholly
relied upon. Further, he is at all times honest and fair in his dealings with the
customers, his own employees, and himself, who has adequate plant facilities
and know-how, so as to be able to provide material which meets the purchaser's
specifications in the quantities required and who realises that, in the last
analysis his own interests are best served when he serves his customers.
Single vs Multiple Sources
Before selecting a right source, a relevant issue that needs solution is
whether to have a single source or multiple sources. The issue is often decided
after a careful consideration of arguments for both the possibilities.
Arguments for Single Source
A single source has the following arguments in its favour :
(i) The supplier may be the exclusive owner of certain essential patents or
processes, and therefore, be the only possible source. Under such
circumstances, the purchaser has no choice, provided that no satisfactory
substitute item is available.
(ii) A given supplier may be so outstanding in the quality of his product or in
the source provided as to preclude serious consideration of buying
elsewhere.
(iii) The order may be so small as to make it just not worthwhile, if only
because of added clerical expenses, to divide it.
(iv) Concentrating purchases may make possible certain discounts or lower
freight rates that could not be had otherwise.
(v) The supplier is more co-operative, interested and more willing to please if
he knows all the buyer's business. This argument, of course, loses much
of its weight even if the total order amounts to, but little or although fairly
large, represents but a very small proportion of the seller's total sales.
(vi) A special case arises when the purchase of an item involves a die, tool, or
mold charge. The expenses of duplicating this equipment is likely to be
substantial. Under such circumstances, probably most buyers confine
their business to the possessor of the die, tool or mold.
(vii) When all orders are placed with one supplier, deliveries may be more
easily scheduled.
(viii) The cost of the purchasing department are lowered because of dealing
with small number of suppliers.

87
(ix) Long-term relationship with suppliers encourages loyalty and reduces the
risk and interruption in the supply.
Several well known companies are said to have single source policy. For
example, Ford Motors, Austin, Rover and Volvo follow single source policy.
Nearer at home, in a CMM seminar held in Bangalore, Mr. M. L. Kapoor, the
then president of the international body of Materials Management, International
Federation of Purchasing and Materials Management, had cited an interesting
example of how his company, Dunlop, had successfully brought down costs by
encouraging a single source of supply which had benefited both the sides.
It does not mean that policy of multiple sources is not followed. Several
companies follow multiple sourcing because of certain benefits.
Arguments for Multi-sources
(i) It is the most common practice among the majority of buyers to use more
than one source, especially on the important items.
(ii) Knowing that competitors are getting some of the business tends to keep
the supplier more alert to the need of giving good prices and services.
(iii) Assurance of supply is increased, since should fire, breakdowns or similar
accidents occur to any one supplier, deliveries can still be obtained from
the others.
(iv) Should floods, railway strikes, or other wide spread occurrences develop
which may affect all suppliers to some extent, the chances of securing at
least a part of the goods are increased.
(v) Some companies diversify their purchases because they do not want to
become the sole support of one company, with the responsibility that such
a position entails.
(vi) Assigning orders to several suppliers gives a company a greater degree of
flexibility, because it can call on the unused capacity of all the suppliers
instead of only one.
Factors in Source Selection
The selection of particular source(s) must be based on such factors as
reliability, technical abilities, after sale service availability, buying
convenience, past experience, location, financial position, labour relations,
reciprocal relations and the like.
These and other related factors must be carefully considered and time
and money should be spent on selecting a right supplier. Once a good choice
has been made, succeeding orders can be placed economically and with
confidence. Satisfactory experience with a chosen supplier is the best possible
basis for repeat orders.

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4. Determination of Price and Availability
The next step in the purchasing cycle is to secure the price for the items
to be purchased. This may be accomplished in three ways. For standard items,
vendor's catalogues and price lists are available and for such items the buyer
need only check current listings to obtain the price. Negotiation is the second
method of establishing price. Negotiation implies bargainingbetween buyer and
seller. Inviting tenders or quotations is the third method. Inviting tenders is a
must in government undertakings.
5. Placing the Order
The legal order is placed with the supplier on a form known as a
purchase order: Most companies insist that every purchase be placed in this
manner. When an order is placed by telephone or telegraph, it is the practice to
confirm the order by sending the supplier a regular purchase order. Such an
order should be clearly marked "confirming" to avoid the possibility of the
supplier taking it as a second order.
6. Order Acknowledgement
Some companies insist on order acknowledgement from the supplier,
acknowledging the receipt of purchase orders and agreeing to supply the items
stated in the order.
Acknowledgement is to get a definite commitment from 'the supplier
about the supply of items on time.
7. Follow Up and Expediting
Follow up is done to ensure that the items ordered are delivered by the
supplier on time. Theoretically, no special expediting procedure should be
needed. If good production planning is made by the buyer, if engineering
changes are rare and kept to a minimum, if an adequate system of inventory
control is operative, if the purchase order was properly prepared, if a reliable
supplier has been selected, and if reasonable tolerance and mutual
helpnessexists on the part of both, then no particular follow up device would
have to be resorted to. These conditions have too many "ifs" and to assume that
all these "ifs" will become "yes" is to take things for granted.
It is necessary, therefore, that follow-up should be done. Though a
general policy should be established for the entire purchasing department, the
immediate responsibility for expediting is likely to rest on the buyer who
placed the order. Thus, the purchase manual of one of the Bangalore based
organisation says:

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Extension of Delivery Period
If the supplies are not effected within two weeks after the delivery date
or if the suppliers ask for extension of time, the attention of the authority who
signed the order shall be drawn. If financial implications are involved, approval
of the next higher authority shall be taken. While granting extension of delivery
time, financial implications shall be examined and financial concurrence
obtained where it involves financial implications.
Cancellation of Orders and Penalty
For cancellation of the order the approval of the next higher authority
shall be obtained. Before imposing any penalty less than what has been laid
down in the terms and conditions of the supply the approval of the General
Manager shall be obtained.
The actual methods differ, of course, varying from writing series of
letters, telephone calls, personal visits, to the use of resident urgers or
expediters whose work it is to see that shipments are made at the time specified
in the order.
8. Checking The Invoice and Approval
The-last step in the purchasing cycle is to check the invoice and approve
it for payment. Since the bill constitutes a definite claim against the buyer, it
needs to be handled with great care.
The bill sent by the supplier is compared with the Order and the Good
Received Note that is made out when the material is received. If the bill is
correct in all respects, it is approved and given to accounting department for
payment.
Blanket Orders : Blanket order is a method wherein the buyer issues
an order covering the requirement of a small item for one year. The order is
relevant for one year. Whenever the stock of the item reaches low, the buyer
simply telephones the supplier and requests him to supply the item against the
outstanding blanket order. Blanket orders are useful in more than one way (1)
paper work is reduced (2) time of buyers is saved, (3) facilitate price
negotiation because one order covering a year's requirement is placed once, and
(4) facilitate inventory contract of small items.
Stockless Buying : Also called 'systems contracting', stockless buying,
is a special type of blanket order. It operates on the following lines:
(a) The buyer places a blanket order for a family of items, such as fasteners,
at firm prices.

90
(b) On a telephone call from the buyer, supplier will deliver the items to the
inventory area set aside in the buyer's plant. The items are still owned by
the vendor.
(c) Vendor submits a single invoice monthly for all items supplied.
(d) Buyer makes a single payment for all items used.
(e) Computer prepares a summary report, at regular predetermined intervals,
showing the items and quantity used, for both the buyer's and vendor's
analysis, planning and re-stocking.
Stockless buying differs from blanket ordering in one respect in the
former the stock of items is kept in buyer's plant, ownerhship of the stock being
with the supplier. This is not the case in blanket order buying.
Stockless buying offers the advantages of centralised purchasing (with
professional negotiation of a basic agreement covering the organisation's total
needs) without incurring the disadvantage of excessive paper work on relatively
minor transactions. The technique should be limited to relatively minor
purchases that are made as and when the need arises. It should not be used for
major purchases.
The purchasing function is influenced by certain policies. The policies
refer to (a) ancillarisation, (b) make or buy decision, (c) speculative buying, (d)
vendor rating, (e) ethics in purchasing, (f) reciprocity, (g) purchasing for
employees, (h) gifts, (i) and value analysis.
VENDOR SELECTION
The ability to select reliable vendors is a mark of successful purchasing
action. The familiar saying 'tell me who your friends are, and I will tell what
you are' can be applied to purchasing. Rather it should be: 'tell me who your
vendors are, and I will tell you what kind of purchasing department you have'.
It is not always easy to identify good vendors; in many cases, purchasing
department is unjustly criticized because of poor vendor performance. In this
context there is no substitute for an objective means of vendor appraisal.
An objective and accurate vendor rating can become an asset and
valuable tool in the hands of a buyer in making his purchase decisions as also
providing feedback to suppliers with low rating to encourage improvement in
their performance. In the absence of such an improvement over a reasonable
time, black listing or grey listing the vendor may follow.
A drawback to vendor rating is that despite considerable effort to set up
good system, the end results have too often been a group of antagonized
suppliers and an impractical, meaningless mass of data which take too much
effort to comply and is worthless to the purchasing department. Some

91
companies make' the error of adopting without changes, a rating plan which
was developed for another company when, obviously, each system must be
lifted to the specific requirements of one particular organization. Too often,
also in attempting to ensure precision, the goal of improving quality and
reliability of purchased item is lost. No system can be of any value unless it
results in better vendor performance, nor can it work well unless the people
involved understand it and are convinced that is worthwhile.
RATING TECHNIQUES
There are several rating techniques now being used. Whatever the
technique, the vendors are assessed on the basis of a wide variety of factors or
criteria which might include but are not limited to the following:
 Price,
 Discounts received,
 Maintenance of specifications,
 Compliance with other specifications,
 Promptness of delivery,
 Freight and delivery charges,
 Installation costs,
 Service,
 Market information,
 Co-operation,
 Management competence,
 Credit terms,
 Disposition of rejects,
 Employee training,
 Adjustment policies,
 Cost reduction suggestions,
 Inventory plans,
 Financial position.
A few important techniques of vendor rating are described here.
Categorical Plan
Under this plan, personnel from various divisions maintain informal
evaluation records. Individuals involved traditionally include personnel from
purchasing, engineering, quality control, inspection and receiving. For each
major supplier, each person prepares a list of performance factors which are
important to him. At a monthly meeting, each major supplier is evaluated
against each evaluator's list of factors. Each supplier is then assigned an overall

92
group evaluation, usually expressed in simple categorical terms such as
'preferred', 'neutral', or 'unsatisfactory'.
The categorical plan is simple, easy to operate, and hence is most
commonly used technique.
The Weighted Point Plan
Under this plan, the performance factors to be evaluated (quality
delivery, price and services) are given "weights", for instance, quality might be
weighted 25, delivery 20, price, 30 and service 25. The weights selected in any
specific situation represent buyer's judgement about the relative importance of
the respective factors.
After the performance factors have been selected a specific procedure
must be developed for measuring actual vendor performance on each individual
factor. Supplier performance on each factor must be expressed in quantitative
terms. To determine a supplier's overall rating, each factor weight is multiplied
by the supplier's corresponding performance number; these products (for each
factor) are then totalled to get the supplier's final rating for the period in
question.
The responsibility of vendors rating shall rest with a committee
comprising Chief/ Sr. Commercial Manager, Quality Control Manager,
Accounts Manager, and Chief Production Engineer. This Committee shall meet
every quarter to review each vendor's performance. Assistance of computers
shall be obtained for the vendor rating as far as possible. Vendor'sshould be
classified as class 'A', 'B' and 'C' based on their performance results. Future
enquiries shall not be sent to class 'C' vendors. A price preference of 5% to
class 'A' and 2% to class 'B' vendors shall be accorded over the prices quoted
by class 'C' vendors."
Critical Incidents Method
Evaluating vendors by this method requires that a record of events and
occurrences related to the buyer-vendor relationship is maintained in each
vendor's file. The data and comments recorded should be significant, not trivial.
They ought to reflect positive and negative aspects of actual performance. This
kind of documentation can be used as a basis for discussing ways and means of
overcoming difficulties, improving performance, acknowledging the existence
of good business relationships, determining the competence of a vendor, and if
necessary, considering termination. Because the critical incidents method is
relatively easy to implement, it is particularly useful for small organisations.

93
Checklist System
Some companies use a simple check list to evaluate their vendors.
Designed to facilitate vendor rating from the stand point of financial strength,
size, product service, price, quality and the like, the check system is quite
useful to evaluate suppliers. A typical check list is given below.
Buyer's Checklist for Evaluating Vendors
A. Reliability
1. Is supplier a reputable, stable, financially strong company?
2. Are the supplier's ability and integrity proved by past performance?
3. Is supplier giving me savings along with product improvements?
B. Technical Capabilities
1. Will supplier provide engineering assistance?
2. Will supplier's analytical engineering help improve the efficiency of my
basic processes?
3. Will supplier provide design assistance?
4. Can supplier handle special needs and designs?
5. Does supplier contribute to general advancement through basic
research?
C. After-sale Service
1. Does supplier have a service shop organisation available when and
where I may need it?
2. Is emergency service available?
3. Will renewal parts be available when I need them?
D. Availability
1. Will supplier assure on-time delivery?
2. Are stocks available locally on short notices?
3. Is supplier's location an advantage to me?
4. Does supplier plan shipment to minimise my inventory?
5. Can supplier be depended upon to provide a steady flow of products or
materials?
E. Buying Convenience
1. Does supplier offer a full line of related products?
2. Does supplier package his product conveniently for my use?
3. Does supplier have a local sales contact? Is he qualified to help me?
Can he call upon specialists for my difficult problems?

94
 4. Will supplier help me cut acquisition such as qualifying visits,
telephone calls, lab tests, incoming inspections, spoilage and waste,
rejects and complaints?
F. Sales Assistance
1. Does the supplier help develop mutual markets? Will he recommend our
products?
2. Will the appearance of supplier's product enhance the appearance of my
product?
All the above techniques, categorical plan, weighted plan, critical
incidents, and the checklist system involve varying degrees of subjectivity and
guesswork. The mathematical treatment of data in one plan often tends to
obscure the fact that the results are no more accurate than the assumption on
which the quantitative data are based. In the final analysis, therefore, supplier
evaluation must represent a combined appraisal of facts, quantitative
computations, and value judgements. It simply cannot be achieved effectively
by formulas alone.
Besides, the vendor appraisal is concerned with the adequacy of the
suppliers with whom the company is currently dealing. Decision taken many
years ago may well have been correct at that time. However, since then things
may have changed. For example, additional qualified suppliers may be
available, new processes may have been developed, new markets have opened
up and currency relationships may have changed. A most important part is that,
in the key decision areas, both long and short-term effects are considered and
subsequently renewed. With a new technology, and a "shrinking world" such
reviews may well need to be carried out more frequently in future.
METHODS OF VENDOR SELECTION
1. Categorical Plan
This is the simplest method of all the rating methods. It relies heavily on
the judgment and experience of the decision maker. The purchaser maintains a
list of his suppliers and their products. An evaluation committee comprising of
all representatives reviews the vendor performance periodically. Depending
upon the performance, the vendor is given a plus point, neutral or minus. The
performance over a period of time are built up and the vendor with increasing
trend of plus point is chosen on the basis of experience and periodical meetings,
a list of factors can be established on the suppliers performance in each area
and each factor is given a grading as 'never seldom usual always' etc. The
system though non quantitative, provides a means of systematic record keeping
on performance criteria.

95
2. Weighted Point Plan
Each vendor is scored on quality, price and service. These factors are
given appropriate weight ages (say 40, 35 and 25 percentages respectively). A
composite rating (on a scale of 0 to 100) is then calculated for each vendor.
In this plan, perfect co-ordination between quality control, user and
purchasing department is necessary to develop the weight ages of these factors.
The quality rating number is expressed in a product of acceptable lots percent
and the chosen weight age. The price rating is obtained as the difference in
percentage between lowest price and the net price and then multiplied by the
weight age. The service factor is gauged by the percentage of delivery promises
kept. The above weighted ratings are added to get a composite rating of the
supplier. The main drawback of this system is allocating the weight ages to the
factors, which are subjective.
3. Cost Ratio Plan
This method relates to identifiable purchasing and receiving costs to the
value of the shipments received from respective suppliers, the higher the ratio
of costs to shipments, the lower the rating applied to the supplier.
Here, the total shipment cost includes price quotation, quality costs,
delivery and service costs. Thus, the following cost ratios can be determined.
1. Quality cost ratio
2. Delivery cost ratio
3. Service cost ratio
Thus, vendor rating is an important defect prevention device. It is a
useful decision tool to the materials manager.
JUST-IN-TIME SYSTEM
Kanban is a tool for realizing just-in-time. For this tool to work fairly
well, the process must be managed to flow as much as possible. This is really
the basic condition. Other important conditions are levelling the product as
much as possible, and always working in accordance with standard work
methods.
Objectives
 Understand the basics of JIT system
 Study the underlying philosophy of JIT
 Examine the measures to eliminate waste
 Study the Kanban production control system
 Examine how the Japanese show respect for people

96
  Understand the implications of Kaizen and the 5S approach to JIT
improvement
 Examine the JIT implementation requirements
Just-in-time (JIT) is an integrated set of activities designed to achieve
high-volume production using minimal inventories of raw materials, work in
progress, and finished goods. Parts arrive at a workstation just when they are
required and move through the operation quickly. It is based on the logic that
nothing will be produced until it is needed. JIT works on a pull system. When
an item is sold, the market pulls a replacement from the last workstation, that
is, finished goods. The last workstation in turn pulls parts or subassemblies
from the station upstream of it and assembles another unit. The upstream
station in turnpulls from the station immediately upstream of it and so on back
to the release of raw materials. For the pull system to work smoothly, high
quality, strong vendor relationship and a fairly steady demand is required.
JIT can be viewed either as Big JIT or Little JIT. Big JIT is also referred
to as lean production and aims at eliminating waste from all aspects of the
company's production activities—human relations, vendor relations, technology
and the management of materials and inventories. Little JIT takes a narrow
view of providing goods and service resources where and whenever needed.
JIT became popular in the 1970s, when Tai-ichiOhno of Toyota Motors
used JIT successfully to take Toyota to the forefront of car quality and delivery
time. The Toyota production system has become a bench mark for others. We
shall refer to the Toyota production system frequently in this chapter as it is the
basis of all JIT systems.
INVENTORY CONTROL
Vilfredo Pareto, an Italian economist, mathematician and physicist
carried out a study on the distribution of the wealth in Milan. He observed that
20 percent of the people control 80 percent of the wealth while 20 percent of
the wealth was divided between the remainder 80 percent of the population.
This was later observed to be true for the entire nation and was extended to
other fields. It came to be known as the 80:20 rule or Pareto's Law. In any
activity involving human Endeavour, 20 percent of the effort achieves 80
percent of the result and 80 percent is required to achieve the balance. For
example, if we consider an athlete trying to run a mile under four minutes, a
certain amount of effort brings the athlete close to the four minute target, but
after that level, improvement of every hundredth of a second in the timing
requires effort many times more than the initial effort. The 80:20 rule also
applies to inventory.It has been observed that inventory can be classified

97
according to its annual usage value (numbers used in a year multiplied by the
cost per unit) into A, B and C categories. Their distribution is shown in Table
Table
Category Inventory items (%) Annual usage value (%)
A Items 5 to 10 70 to 75
B Items 20 20
C Items 70 to 75 5 to10
It, therefore, follows that A items are much more important and should
receive much more attention than C items. The stocking policy and ordering
policy should be different.
- Steps in conducting ABC analysis:
1. Prepare a list of items and estimate annual consumption
2. Determine unit price
3. Obtain annual usage value in Rs.
4. Arrange in descending order of annual usage value
5. Calculate cumulative cost percentage of total value
6. Calculate cumulative item percentage
7. Plot (5) vs (6) and segregate into A, B and C categories. There is a
sharp rise in the curve for A items and a distinct levelling off for C
items
Let us consider an example. Table 14.3(a) gives the details of 20 items
held by a store. The column (e) gives the annual usage value which is the
product of the annual usage and the cost of the item per unit. The rest of the
columns in the table are self-explanatory
Table
Cost Annual Annual Cumulative Cumulative Cumulative
(%)
S. Annual Revised
Item per usage Rank Item usage usage item
No. usage rank usage
unit value value (%) (%)
(a) (b) (c) (d) (e) (f) (9) (h) (i) 0) (k) (I)
1 A 50 5 250 14 1 L 35000 35000 34.9 5
2 B 100 12 1200 10 2 G 22000 57000 56.9 10
3 C 160 55 8800 4 3 P 10500 67500 67.4 15
4 D 30 6 180 16 4 C 8800 76300 76.2 20
5 E 10 1 10 20 5 I 5400 81700 81.6 25
6 F 18 90 1620 9 6 N 5400 87100 87.0 30
7 G 200 110 22000 2 7 K 3880 90980 90.8 35
8 H 20 8 160 18 8 Q 3640 94620 94.5 40
9 I 180 30 5400 5 9 F 1620 96240 96.1 45
10 J 50 12 600 12 10 B 1200 97440 97.3 50

98
11 K 40 97 3880 7 11 M 720 98160 98.0 55
12 L 140 250 35000 1 12 J 600 98760 98.6 60
13 M 60 12 720 11 13 R 300 99060 98.9 65
14 N 600 9 5400 6 14 A 250 99310 99.2 70
15 0 36 5 180 17 15 S 200 99510 99.4 75
16 P 420 25 10500 3 16 D 180 99690 99.5 80
17 Q 260 14 3640 8 17 0 180 99870 99.7 85
18 R 100 3 300 13 18 H 160 100030 99.9 90
19 S 200 1 200 15 19 T 110 100140 100.0 95
20 T 22 5 110 19 20 E 10 100150 100.0 100
The items are rearranged in a descending order according to the annual
usage value in column (h). A graph is plotted between the cumulative usage
value expressed as a percentage and the items or SKUs(Stock Keeping Units)
expressed as a percentage. As the total number of items is 20, the column (1)
shows a 5% increase per item in the cumulative value. It must be noted that we
are referring to the number of items (column (a)) and not to the total number of
units of various items used (column (c)). The graph is given in Figure
`From the graph it can be observed that the graph rises sharply for the
first four items. It then smoothens out to a more uniform gradient for the next
four items and then flattens out for the remaining 12 items. The items covered
by the steep gradient of the graph i.e. the

99
first four items—L, G, P and C are classified as A items. The next four items—
I, N, K and Q are classified as B items and the remainder are classified as C
items. The distribution for this example is shown in Table
Table
Category Inventory items (%) Cost (%)
A Items 20 76
B Items 20 18
C Items 60 6
The A items must be ordered frequently so that the average inventory
held reduces. B items can be ordered less frequently than A items and bulk
orders can be placed for C items. Let us see the effect of such a policy with the
help of an example.
PURPOSE OF INVENTORY
The stock of anything that is tangible in order to meet future demand is
the subject of inventory theory. In production management and in any type of
operation management, the term ‘inventory’ generally refers to the material in

100
stock. The materials inventory in stock. The material inventory in operations is
maintained, typically, for the purposes of (a) transaction, (b) precaution and (c)
speculation. While speculation inventory cannot be encouraged particularly in a
developing country starved of resources, there is a need for transaction or
regular inventory due to the lack of perfect synchronization of inflow and
outflow of the material and for precautionary or safety inventory to provide
cover for any inability to predict demand and supply of the material.
INVENTORY MODEL
Inventory Model under Certainty
In case of Inventory Model under Certainty:
Demand is certain and hence constant
Supply is timely and hence no overstocking or understocking
Thus the only two costs relevant in this case are:
(i) Cost of inventory carrying
(ii) Cost of Ordering
Depending on quantity to be ordered for purchase, the inventory
carrying cost increases with increase in purchase quantity whereas the ordering
cost decreases as the number of orders to be placed decreases. Thus ordering
costs and inventory carrying costs oppose each other. This indicates that there
exists a point at which the total inventory carrying cost is minimum.
Let, D - be the Annual Demand (Constant)
A - be the Cost of Ordering
I -be the Inventory Carrying Cost
C - be the Unit Cost of the item
Q - is the order-quantity
Then, Ordering Cost = D/Q × A ...(i)
Inventory carrying cost = Q/2 (C.i) ...(ii)
(Average inventory carried is Q/2)
Total Annual Cost = (i) + (ii) = D/Q × A + Q/2 C.i.
iQ(opt.) = EOQ = 2ADlC i
Another method to find out EOQ is by opposing nature of costs i.e.
Ordering Costs and Inventory Carrying Cost.
EOQ MODEL
Let us derive a relationship for the most Economic Order Quantity,
generally referred to as EOQ.
Let A be the annual usage of the item, that is, numbers used per year.

101
 S be the cost per order
C be the cost per unit of the item
i be the carrying cost expressed as a percentage of the cost of average
inventory held.
Q be the size of each order in number of units.
Then
Number of orders N = A
Q
Ordering cost = AxS
Q
Average inventory = Q + 0
2
Cost of average inventory held = QC
2

Inventory carrying cost = QCi

2
Total cost is minimized when the carrying cost = ordering cost.
This can be mathematically proved by taking the first derivative of the total
cost with respect to Q and equating it to zero. Equating the two, we get:
QCi =AxÃS
`Q2 =2AS/Ci
Q=√2AS/Ci
This is the basic EOQ model.
Q=√2AS/Ci
We get:
QC=√2ASC/i
Number of orders N=A/Q==√ACi/2S
Interval between orders = 365/N =√2(365)2S/ACi
ACV
Assumptions: The model derived is based on certain assumptions. These are:
1. Annual usage can be estimated
2. Demand or usage rate is constant or nearly constant
3. An order is received all at once
4. Lead time is constant

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 5. Ordering costs and carrying costs can be computed with reasonable
accuracy
These assumptions do not always hold good, but there are methods to
overcome these limitations. Let us study the application of this model with the
help of an example.
EXAMPLE: Mohan is a confectioner. He buys plastic boxes in bulk and
uses them to pack his chocolates. His annual requirement of boxes is 1200, and
each box costs him Rs. 30. He has estimated that his ordering costs are Rs. 10
per order and his carrying costs are 20%. How many boxes should he order at a
time so as to minimize his expenses?
Solution:
A = 1200
C = Rs. 30
S= Rs. 10
i = 0.20
EOQ = √2ASC/i
= √2 x 1200 x 10/√30×0.2
=63 boxes

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 UNIT – V

QUALITY CONTROL
OBJECTIVES
After studying this lesson, you should be able to:
 Explain the concept of Quality Control.
 Explain the Maintenance management.
 Describe the Work Measurement.
 Explain the Work study, Time study and Standard time.

Quality control
This chapter covers quality control. The purpose of quality control is to
assure that processes are performing in an acceptable manner. Companies
accomplish this by monitoring process output using statistical techniques.
Quality control is a process that measures output relative to a standard, and acts
when output does not meet standards. If the results are acceptable, no further
action is required; unacceptable results call for corrective action.
INTRODUCTION
Quality assurance that relies primarily on inspection of previously
produced items is referred to as acceptance sampling. It is described in the
chapter supplement. Quality control efforts that occur during production are
referred to as statistical process control, and these we examine in the following
sections.
The best companies emphasize designing quality into the process,
thereby greatly reducing the need for inspection or control efforts. As you
might expect, different business organizations are in different stages of this
evolutionary process: The least progressive rely heavily on inspection. Many
occupy a middle ground that involves some inspection and a great deal of
process control. The most progressive have achieved an inherent level of
quality that is sufficiently high that they can avoid wholesale inspection
activities and process control activities by mistake prevention. That is the
ultimate goal.

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Inspection before/after inspection and corrective quality
built in to the process
Production action during production

Continuous
Acceptance sampling Process sampling
improvement

The least progressive The most progressive

Inspection
Inspection is an appraisal activity that compares goods or services to a
standard. Inspection can occur at three points: before production, during
production, and after production. The logic of checking conformance before
production is to make sure that inputs are acceptable. The logic of checking
conformance during production is to make sure that the conversion of inputs
into outputs is proceeding in an acceptable manner. The logic of checking
conformance of output is to makes final verification of conformance before
passing goods on to customers.
Inspection before and after production often involves acceptance
sampling procedures; monitoring during the production process is referred to as
process control.
whether a process is functioning as intended or to verify that a batch or
lot of raw materials or final products does not contain more than a specified
percentage of defective goods, it is necessary to physically examine at least
some of the items in question. The purpose of inspection is to provide
information on the degree to which items conform to a standard. The basic
issues are
1. How much to inspect and how often.
2. At what points in the process inspection should occur.
3. Whether to inspect in a centralized or on-site location.
4. Whether to inspect attributes (i.e., count the number of times something
occurs) or variables (i.e., measure the value of a characteristic).
Statistical Process Control
Quality control is concerned with the quality of conformance of a
process: Does the output of a process conform to the intent of design? Toward
that end, managers use statistical process control to evaluate the output of a
process to determine if it is statistically acceptable. To do this, they take

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periodic samples from the process and compare them with a predetermined
standard.
An important tool in statistical process control is the control chart. A
control chart is a time-ordered plot of representative sample statistics (e.g.,
sample means) obtained from an ongoing process. It has upper and lower
limits, called control limits, that define the range of acceptable (i.e., random)
variation for the sample statistic. The purpose of a control chart is to monitor
process output to see if it is random. A necessary (but not sufficient) condition
for a process to be deemed "in control" or stable, is for all the data points to fall
between the upper and lower control limits: Conversely, a data point that falls
outside of either limit would be taken as evidence that the process output is
nonrandom and, therefore, the process is not "in control." If that happens, the
process would be halted to find and correct cause of the nonrandom variation.
The essence of statistical process control is to assure that the output of a
process is random so that future output will be random.
Process Capability
The variability of a process can significantly impact quality. Three
commonly used terms refer to the variability of process output. Each term
relates to a slightly different aspect of that variability, so it is important to
differentiate these terms.
Specifications or tolerances are established by engineering design or
customer requirements. They indicate a range of values in which individual
units of output must fall in order to be acceptable.
Control limits are statistical limits that reflect the extent to which
sample statistics such as means and ranges can vary due to randomness alone.
Process variability reflects the natural or inherent (i.e., random) variability in a
process. It is measured in terms of the process standard deviation.
Control limits and process variability are directly related: control limits
are based on sampling variability, and sampling variability is a function of
process variability. On the other hand, there is no direct link between
specifications and either control limits or process variability. They are specified
in terms of the output of a product or service, not in terms of the process by
which the output is generated. Hence, in a given instance, the output of a
process may or may not conform to specifications, even though the process
may be statistically in control. That is why it is also necessary to take into
account the capability of a process. The term process capability refers to the
inherent variability of process output relative to the variation allowed by the
design specifications. The following section describes capability analysis

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ACCEPTENCE SAMPLING
Acceptance sampling is a form of inspection that is applied to lots or
batches of items either before or after a process instead of during the process. to
the majority of cases, the tots represent incoming purchased items or final
products awaiting shipment to warehouses or customers. The purpose of
acceptance sampling is to decide whether a lot satisfies predetermined
standards. Lots that satisfy these standards arc passed or accepted; those that do
not are rejected. Rejected lots may be subjected to 100 percent inspection, or in
the case of purchased goods, they may be returned to the supplier for credit or
replacement (especially if destructive testing is involved).
Acceptance sampling procedures are most useful when one or more of
the following conditions exist:
1. A large number of items must be processed in a short time.
2. The cost consequences of passing defectives are low.
3. Destructive testing is required.
4. Fatigue or boredom caused by inspecting large numbers of items leads
to inspection errors.
Acceptance sampling procedures can be applied to both attribute
(counts) and variable (measurements) inspection. However, inspection of
attributes is perhaps more widely used, so for purposes of illustration, the
discussion here focuses exclusively on attribute sampling plans.
Sampling Plans
A key element of acceptance sampling is the sampling plan. Sampling
plans specify the lot size, N; the sample size, n; the number of samples' to be
taken; and the acceptance/rejection criteria. A variety of sampling plans can be
used. Some plans call for selection of a single sample, and others call for two or
more samples, depending on the nature of the plan. The following paragraphs
briefly describe some of the different kinds of plans.
(a) Single-Sampling Plan
In the single plan, one random sample is drawn from each lot, and every
item in the sample is examined and classified as either “good” or “defective.” If
any sample contains more than a specified number of defectives, c, that lot is
rejected.
(b) Double-Sampling Plan
A double-sampling plan allows for the opportunity to take a second
sample if the results of the initial sample are inconclusive. For example, if the
quality of the initial sample is high, the lot can be accepted without need for a
second sample. If the quality in the initial sample is poor, sampling also can be

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terminated and the lot rejected. For results between those two cases, a second
sample is then taken and the items inspected, after which the lot is either
accepted or rejected on the basis of the evidence obtained from both samples. A
double-sampling plan specifies the lot size, the size of the initial sample,
accept/reject criteria for the initial sample, the size of the second sample, and a
single acceptance number for the combined samples.
With a double-sampling plan, two values are specified for the number
of defective items, a lower level, c1, and an upper level, c2. For instance, the
lower level might be two defectives and the upper level might be five
defectives. Using those values as decision rules, the first sample is taken. If the
number of defective items in the first sample is less than or equal to the lower
value (i.e., c1), the lot is judged to be good and sampling is terminated.
Conversely, if the number of defectives exceeds the upper value (i.e., c2), the
lot is rejected. If the number of defectives falls somewhere in between, a
second sample is taken and the number of defectives in both samples is
compared to a third value, c3. For example, c3 might be six. If the combined
number of defectives does not exceed that value, the lot is accepted; otherwise,
the lot is rejected.
(c) Multiple-Sampling Plan
A multiple-sampling plan is similar to a double-sampling plan except
that more than two samples may be required. A sampling plan will specify each
sample size and two limits for each sample. The values increase with the
number of samples. If, for any sample, the cumulative number of defectives
found (i.e., those in the present sample plus those found in all previous
samples) exceeds the upper limit specified for that sample, sampling is
terminated and the lot is rejected. If the cumulative number of defectives is less
than or equal to the lower limit, sampling is terminated and the lot is passed. If
the number is between the two limits, another sample is taken. The process
continues until the lot is either accepted or rejected.
Choosing a Plan
The cost and time required for inspection often dictate the kind of
sampling plan used. The two primary considerations are the number of samples
needed and the total number of observations required. Single-sampling plans
involve only a single sample, but the sample size is large relative to the total
number of observations taken under double- or multiple-sampling plans. Where
the cost to obtain a sample is relatively high compared with the cost to analyze
the observations, a single-sampling plan is more desirable. For instance, if a
sample of moon soil is needed, clearly the cost of returning for a second or
third sample far outweighs the cost of analyzing a single large sample.

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Conversely, where item inspection costs are relatively high, such as destructive
testing, it may be better to use double or multiple sampling because the average
number of items inspected per lot will be lower. This stems from the fact that a
very good or very poor lot quality will often show up initially, and sampling
can be terminated.
STATISTICAL QUALITY CONTROL
Products can be designed for high quality, but unless processes are
compatible, the quality desired of the product may never be achieved.
Processes determine the degree of conformance to quality. Quality can never be
inspected into a product, it must be 'built in'. Correct and 'in control' processes
ensure that the product is made right, the first time.
Three main issues are involved.
1. Is the process capable of producing the quality desired in the product?
For instance, if a piece of metal is to be cut to a length of 604 mm with
a tolerance of ±0.01 mm, and the process is being performed with a
manually operated saw, the process may not be capable of keeping
within this fine tolerance. Clearly the process cannot deliver the
quality desired of it and is unsuitable.
2. Is the process meeting or not meeting the requirement at any time? No
matter how precise a machine may be, variations will always take
place. Some of these variations occur due to faulty set up or due to the
tools not being proper or insufficiently trained operators and so on and
can be controlled. Other variations take place due to heating up of the
machine, vibrations which may be as small as those caused by a
vehicle moving outside the building, draughts, atmospheric
temperature changes, electrical fluctuations, and changes in the
physical and emotional condition of the operator. There is inherent
variation in the testing process too because of similar causes. If only
such random variations are present, the process is said to be in
statistical control. No specific causes can be assigned to such random
variations and little can be done other than to revise the process. When
an assignable cause of variation is present, the variability will be
excessive and the process is considered to be out of control.
3. If the process is not meeting the requirements, make adjustments to
correct the process.
Statistical Process Control (SPC) or Statistical Quality Control (SQC)
aims at addressing the above issues and providing means to check whether the
process is capable of delivering the quality standards required of it, determining
whether the process is in control or not, and laying down the actions to be taken

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when the process is out of control. SQC techniques are applicable to both
production processes and service processes. For instance, Domino's Pizza must
ensure that home delivery is always within half an hour. The process of
preparing and delivering the pizza must conform to this design specification.
The techniques involve taking periodic samples, testing the samples for quality
and based on this data determining whether the process is in control or not. If
the process is out of control, corrective action is taken to bring it within control.
Since the process involves the use of samples and draws conclusions based on
samples, an understanding of very basic statistics is necessary.
The Central Limit Theorem forms the basis of sampling theory. The basic
precepts are:
1. The distribution of sample means (called the sampling distribution of
mean) follows a normal distribution irrespective of the distribution of
the population.
2. The mean of the sample means is the same as the population mean.
3. The standard error of mean that is, the standard deviation of the
sample mean distribution is equal to the standard deviation of the
population divided by the square root of the sample size.
Process Capability
When we design a part, we specify that certain dimensions should be
within the upper and lower tolerance limits. Suppose we are to make a shaft for
a bearing and the specified dimensions of the diameter are 500 mm ± 0.005
mm, then a shaft which has a diameter between 499.995 mm (Lower Tolerance
Limit (LTL)) and 500.005 mm (Upper Tolerance Limit (UTL)) would be
acceptable.
The manufacturing process follows a normal distribution curve as
shown in Figure .The curve shows that three standard deviations (three sigma)
on either side of the mean cover 99.74% of the values. In order to meet the
requirements, the machine should be capable of producing most of the shafts
with a diameter between 499.995 mm and 500.005 mm. A 99.74 % probability
of producing such shafts would exist if the machine had the capability to
produce shafts with a mean diameter of 500 mm and three sigma value on the
lower side should not have a value lesser than 499.995 and on the upper side
the value should not exceed 500.005 mm. The standard deviation for the
machine should be:
σ = 500 – 499.995
a = 0.00167 mm

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 This implies that if the machine has a standard deviation exceeding
0.00167 mm, the chances of producing defective shafts would increase
considerably.

—3σ —20σ —16σ µ=0 1 σ2σ 3σ

Normal Distribution Curve.
The machine may be having a standard deviation of 0.00167 mm but
the mean value of the machine may itself be off centre. For instance if the mean
value of the shafts produced by the machine is 500.001 mm, then the three
sigma limits for the dimension would be 499.996 and 500.006. Clearly the parts
with the upper dimension would be unacceptable as they would be beyond the
Upper Tolerance Limit (UTL). The capability index (Cpk) of the machine is the
position of the mean and the extreme values (three sigma) in relation to the
design specifications. Because the mean can shift in either direction, the
direction of shift and its distance from the design specifications set limit on the
process capability. The direction of the shift is towards the smaller number.
Six Sigma Quality
If the process capability index is 1, then the process is capable of
conforming to the tolerance limits 99.74% of the times, and there is still a
0.0027 probability of producing a defective which translates to 2.7 defectives
per thousand. Motorola felt that this was not an acceptable risk for producing
defectives. They introduced the six sigma level. This implies that the upper and
lower tolerance limits should be ±60' from the mean. If we consider the
example mentioned in section 8.2, the standard deviation of the machine should
be 0.00083 mm. The probability of values lying beyond ±6a is 0.000000002 or
2 in one billion. Even if we assume that the process has shifted off the mean by
1.56; the chance of producing a defective is 3.4 per million. For six sigma
levels, the acceptable process capability index, Cpk = 1.5 to 2.
Process Control
Process control monitors the quality of the product or service while it is
being produced. Process control provides information about whether the
product or service is being produced in conformance with the design

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specifications or not and provides warning signals whenever the process is out
of control indicating that future production may not meet the design
specifications. It consists of taking small random samples at periodic intervals
and drawing inferences from them about the process.
Quality characteristics may be measurable or countable. Characteristics
like weight, length, diameter, time and so on are measurable. They are
continuous variables and can adopt any value on a continuous scale. For
instance, the length of a piece of metal that is between 5 and 6 cm may have
exact dimensions lying anywhere on the continuum of values between 5 and 6
cm. It may be 5.2 or 5.11 or 5.123 or any other value as long as it is between 5
and 6 cm. On the other hand characteristics like a polished surface or a woven
cloth may have a number of defects on it. These can only be counted and can
only take on discrete values. Measurable characteristics follow a normal
distribution and are controlled with the help of .TY and R charts (mean and
range charts).
Countable data may be of two types. Parts may be defective or non-
defective, functioning or not functioning, working or not working. Whenever
the attribute has only two options (defective or non-defective, pass or fail, yes
or no), we use p charts or proportion charts. This type of data follows the
binomial distribution and we can find the proportion of defectives and non-
defectives and so on. If we consider a polished surface or a roll of cloth, every
point on the surface or every woven thread on the roll of cloth could be
potentially defective, yet there are only a few defects that can be actually
counted. Attribute data of this type follows a Poisson distribution and is
controlled through c control charts, where c is the number of defects.
Process Control for Attributes -P Charts
Measurement by attributes that follow a binomial distribution involves
taking samples and using a single decision the item is good or bad. Simple
statistics can be used to preparea control chart. To prepare the control chart, a
number of samples are taken. The sample size should be such that we can
expect to count the attribute twice in each sample. For example, if a machine
produces 1% defectives, then the appropriate sample size is 200. The
proportion of defectives can be found from the samples and upper and lower
control limits.
MAINTENANCE MANAGEMENT
Maintaining the production capability of an organisation is an important
function of production and operations management in any production system.
Maintenance refers to the upkeep and protection of plant, building, machinery,
and other fixed assets of a firm which are subject to deterioration due to their

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use and exposure to environmental conditions over a period of time.
Maintenance encompasses all those activities required to keep the physical
facilities and equipments in good working condition and making necessary
repairs when breakdowns occur, so that the system can perform as intended.
Two categories of maintenance activities in a firm are :
(i) Maintaining buildings, parking lots, lawns, fences, services and utilities.
(ii) Maintaining equipments, machinery, material handling equipments,
transport vehicles, tools, metrology tools, (inspection gages), test
instruments, office equipments (computer, fax, xerox machines) etc.
What Is Maintenance?
Maintenance is defined as "that function of production management that
is concerned with the day-to-day problem of keeping the physical plant in good
operating condition. It is an essential activity in every manufacturing firm,
because it is necessary to ensure the availability of the machines, buildings and
services needed by other parts of the organisationfor the performance of their
function at an optimum return on investment in machines, materials and
employees".
What is Maintenance Engineering?
Maintenance engineering is that function of production management
that is concerned with the day-to-day problems of keeping the physical plant in
good operating condition.
What is Maintenance Management?
Maintenance management is concerned with the direction and
organisation of resources in order to control the availability and performance of
the industrial plants to some specified level. It is a function supporting
production function and is entrusted with the task of keeping the machinery,
equipment and plant services in proper working condition. It also involves
maintenance planning, maintenance scheduling, execution of maintenance
activities (repair, breakdown and preventive maintenance) and also controlling
costs of maintenance.
Scope of Maintenance
Every manufacturing organization needs maintenance because machines
break down, parts wear out and buildings deteriorate over a period of time of
use. All segments of a factory — buildings, machinery, equipments, tools,
cranes, jigs and fixtures, heating and generating equipments, waste disposal
systems, air-conditioning equipments, wash rooms, dispensaries and so on need
attention.

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Maintenance covers two broad categories of functions as outlined below.
(a) Primary functions
(i) Maintenance of existing plant and equipments.
(ii) Maintenance of existing plant buildings and grounds.
(iii) Equipment inspection and lubrication.
(iv) Utilities generation and distribution.
(v) Alterations to existing equipments and buildings.
(vi) New installations of equipments and buildings.
(b) Secondary functions
(i) Storekeeping (keeping stock of spare parts)
(ii) Plant protection including fire protection.
(iii) Waste disposal.
(iv) Salvage.
(v) Insurance administration (against fire, theft, etc.).
(vi) Janitorial services.
(vii) Property accounting
(viii) Pollution and noise abatement or control.
(ix) Any other service delegated to maintenance by plant management.
Importance of Maintenance Management
1. Dependability of service is one of the performance measures by which a
company can distinguish itself from others. To establish a competitive
edge and to provide good customer service, companies must have reliable
equipments that will respond to customer demand when needed.
Equipments must be kept in reliable condition without costly work
stoppage and down time due to repairs if the company is to remain
productive and competitive.
2. Maintenance is an important factor in quality assurance which is another
basis for successful competitive edge. Inconsistencies in equipments lead
to variability in product characteristics and result in defective parts that
fail to meet the established specifications. Beyond just preventing break
downs, it is necessary to keep equipments operating within specifications
(i.e., process capability) that will produce high level of quality.
3. Many manufacturing organizations, particularly those with JIT (Just-In-
Time) programs are operating with inventories so low that they offer no
protection in the event of a lengthy equipment failure. Beyond the cost of
idle equipment, idle labor and lost sales that can result from a breakdown,

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 there is a danger of permanently losing market shares to companies that
are more reliable. Maintenance function can help prevent such an
occurrence.
4. Good maintenance management is important for the company's cost
control. As companies go in for automation to become more competitive,
they increasingly rely on equipments to produce a greater percentage of
their output. It becomes more important that equipments operate reliably
within specifications. The cost of idle time is higher as equipment
becomes more high-tech and expensive, e.g., NC/CNC machines and
robots.
5. Organizations like airlines and oil refineries have huge investment in
equipment. Equipment failure will be disastrous for such companies. They
need proper maintenance to maintain equipment in good condition.
Impact of Poor Maintenance
Maintenance operations include all efforts to keep production facilities
and equipments in acceptable operating condition. Failure or malfunctioning of
machines and equipments in manufacturing and service industries have a direct
impact on the following :
1. Production Capacity : Machines idled by breakdowns cannot produce,
thus the capacity of the system is reduced.
2. Production Costs : Labour costs per unit rise because of idle labour due to
machine breakdowns. When machine malfunctions result in scrap, unit
labour and material costs increase. Besides, cost of maintenance which
includes such costs as costs of providing repair facilities, repair crews,
preventive maintenance inspections, spare parts and standby machines
will increase as machines break down frequently.
3. Product and Service Quality : Poorly maintained equipments produce low
quality products. Equipments that have not been properly maintained
have frequent break downs and cannot provide adequate service to
customers. For example, air craft fleets of the airline, railway and road
transport services not maintained well can cause poor service to
customers.
4. Employee or Customer Safety : Worn-out equipment is likely to fail at
any moment and these failures can cause injuries to the workers, working
on those equipments. Products such as two wheelers and automobiles if
not serviced periodically, can break down suddenly and cause injuries to
the users.

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 5. Customer Satisfaction : When production equipments break down,
products often can not be produced according to the master production
schedules due to work stoppages. This will lead to delayed deliveries of
products to customers.
Objectives of Maintenance Management
The following are some of the objectives of maintenance management.
1. Minimizing the loss of productive time because of equipment failure (i.e.,
minimizing idle time of equipment due to break down).
2. Minimizing the repair time and repair cost.
3. Minimizing the loss due to production stoppages.
4. Efficient use of maintenance personnel and equipments.
5. Prolonging the life of capital assets by minimizing the rate of wear and
tear.
6. To keep all productive assets in good working condition.
7. To maximize efficiency and economy in production through optimum use
of facilities.
8. To minimize accidents through regular inspection and repair of safety
devices.
9. To minimize the total maintenance cost which includes the cost of repair,
cost of preventive maintenance and inventory carrying costs due to spare
parts inventory.
10. To improve the quality of products and to improve productivity.
Areas of Maintenance
The major areas of maintenance are :
1. Civil Maintenance
Building construction and maintenance, maintaining service facilities
such as water, gas, steam, compressed air, heating and ventilating, air
conditioning, painting, plumbing and carpentry work. Also included in civil
maintenance are janitor, service, house—keeping, scrap disposal, fencing, land
scaping, gardening and maintaining drainage, lawns and fire fighting
equipments.
2. Mechanical Maintenance
Maintaining machines and equipments, transport vehicles, material
handling equipments, steam generators, boilers, compressors and furnaces.
Lubricating the machines is also part of mechanical maintenance work.

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3. Electrical Maintenance
Maintaining electrical equipments such as generators, transformers,
switch gears, motors, telephone systems, electrical installations, lighting, fans,
meters, gages, instruments, control panels and battery charging.
TYPES OF MAINTENANCE
In all the above stated areas, organisation may use any or all the five
type of maintenance.
(i) Break down maintenance or corrective maintenance,
(ii) Preventive maintenance,
(iii) Predictive maintenance,
(iv) Routine maintenance,
(v) Planned maintenance.
(i) Break Down Maintenance or Corrective Maintenance
As the name suggests, corrective maintenance occurs when there is a
work stoppage because of machine breakdown. In this sense, maintenance
becomes repair work. Repairs are made after the equipment is out of order —
an electric motor will not start, a conveyor belt is ripped, or a shaft has broken.
In cases such as these, the maintenance department checks into the difficulty
and makes the necessary repairs. Role of the department is almost passive.
Nevertheless, corrective maintenance seeks to achieve the following
objectives :
1. To get equipment back into operation as quickly as possible in order to
minimise interruption to production. This objective can directly affect
production capacity, production costs, product quality and customer
satisfaction.
2. To control the cost of repair crews, including regular time and overtime
labour costs.
3. To control the cost of the operation of repair shops.
4. To control the investment in replacement spare parts that are used when
machines are repaired.
5. To control the investment in replacement spare machines which are also
called standup or backup machines, These replace manufacturing
machines until the needed repairs are completed.
6. To perform the appropriate amount of repairs at each malfunction. The
decision about how far to go with a repair ranges from a band-aid and
bubble gum fix to a complete overhaul. Some parts can be replaced early
to extend the time until the next repair is required.

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(ii) Preventive Maintenance
In marked contrast to corrective maintenance is preventive
maintenance, which is undertaken before the need arises and aims to minimise
the possibility of unanticipated production interruptions or major breakdowns.
Preventive maintenance consists of :
1. Proper design and installation of equipment,
2. Periodic inspection of plant and equipment to prevent break downs before
they occur,
3. Repetitive servicing, upkeep and overhaul of equipment, and
4. Adequate lubrication, cleaning and painting of buildings and equipment.
The key to all good preventive maintenance is inspection. Inspection
should cover virtually everything, including production machinery, motors,
controls, materials handling equipment, process equipment, lighting, buildings
and plant services. Some organisationsinspect only costly items, but others
cover almost all. As a rule, if a failure in upkeep may harm an employee, stop
production, or waste plant assets, then consideration should be given to
including it in the preventive maintenance programme. Suitable statistical
techniques have been developed for determining how often to inspect.
A well-conceived preventive maintenance programme should contain the
following features :
1. Proper identification of all items to be included in the programme.
2. Adequate records covering, volume of work, cost and so forth.
3. Inspections on a definite schedule — with standing orders on specific
assignments.
4. Use of checklists by inspectors.
5. An inspection frequency schedule — may vary from as often as once
every six hours to as little as once a year.
6. Well-qualified inspectors — have craftmen familiar with items being
inspected and capable of making simple repairs as soon as a trouble is
noticed.
7. Use of repair budgets for major items of equipment.
8. Administrative procedures that provide necessary fulfillment and follow-
up on programme.
Benefits of Preventive Maintenance
Preventive maintenance offers several benefits to the users. They include
greater safety for workers, decreased production downtime, fewer large scale
and repetitive repairs, less cost for simple repairs made before breakdown, less

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standby equipment required, better spare parts control, identification of items
with high maintenance costs, and lower unit cost of manufacture.
(iii) Predictive Maintenance
One of the newer types of maintenance that may be anticipated to gain
increasing attention is called predictive maintenance. In this, sensitive
instruments (e.g., vibration analysers, amplitude meters, audio gauges, optical
tooling, pressure, temperature and resistance gauges) are used to predict
trouble. Conditions can be measured periodically or on a continuous basis and
this enables the maintenance people to plan for overhaul. This will allow an
extension to the service life without fear of failure.
(iv) Routine Maintenance
This includes activities such as periodic inspection, cleaning, lubrication
and repair of production equipments after their service life. Routine
maintenance may be classified as :
1. Running maintenance in which the maintenance work is carried out while
the equipment is in the operating condition (i.e., performing some
operation) e.g., greasing or lubricating the bearings while the machine is
running.
2. Shut down maintenance in which the maintenance work is carried out
when the machine or equipment is out of service i.e., after shutting down
the machine or equipment. e.g., repairing (i.e., discaling) boiler tubes of a
boiler.
(v) Planned Maintenance
Break-down of a machine or an equipment does not occur in a planned
manner but maintenance work can be planned well in advance. Planned
maintenance according to a predetermined schedule is also known as scheduled
maintenance or productive maintenance. It involves inspection of all plant and
equipments, machinery, buildings in order to service, overhaul, lubricate or
repair before actual break down or deterioration in service occurs. It aims to
reduce machine stoppage due to sudden breakdowns necessitating emergency
maintenance.
Work Measurement
Definition
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 labourutilisation and

120
efficiency. It may not be possible to introduce incentive schemes and standard
costs for budget control
Time study has been defined by British standard institution 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."
Objectives of Work Measurement
The use of work measurement as a basis for incentives is only a small part
of its total application The objectives of work measurement are to provide a
sound basis for :
1. Comparing alternative methods. --
2. Assessing the correct initial manning (manpower requirement planning)
3. Planning and control
4. Realistic costing
5. Financial incentive schemes
6. Delivery date of goods-
7. Cost reduction and cost control
8. Identifying substandard workers
9. Training new employees.
Techniques of Work Mesurement
For the purpose of work measurement, work can be regarded as,
10. Repetitive Work - The type of work in which the main operation or
group of operations repeat continuously during the time spent at the job.
These apply to work cycles of extremely short duration.
11. Non repetitive work - It includes some type of maintenance and
construction work, where the work cycle itself is hardly ever repeated
identically.
Various techniques of work measurement are:
12. Time study (stop watch technique)
13. Synthesis
14. Work sampling
15. Analytical estimating
16. Predetermined motion and Time study.

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WORK STUDY
INTRODUCTION
Productivity has always been a concern for production and operations
managers. Higher productivity can be achieved through better utilisation of
available resources. F.W. Taylor advocated in his Scientific Management
Theory that there is a best method for doing any task and we must establish it.
Work study is a group of management techniques, particularly method study
and work measurement which have a special reference to improving human
performance.
Work study can be defined as a general term for those techniques
particularly method study and work measurement which are used in the
examination of human work in all its context and which lead systematically to
the investigation of all the factors which affect the efficiency and economy of
the situation being reviewed in order to effect improvement.
We have seen in the previous chapter that process design defines the
activities to be performed and how they have to be performed. Work study
attempts to find out improved ways of performing these activities. Method
study deals with the review of methods, layout and equipment and work
measurement measures work load in terms of time standards so that
productivity standards that may be expected of a worker performing a certain
task can be laid down.
Behavioral Impact of Work Study
Work study involves observing the worker at work. The methods used
by the worker are observed and recorded. In a work measurement study, the
time taken by the worker to carry out an operation is recorded. These
observations have a behavioural impact on the worker. The worker associates
such studies related to his productivity with a feeling of insecurity. Often the
worker fears that if he is found to be inefficient, his services would be
terminated. He may, therefore, not perform according to his normal manner but
may work faster or slower than he normally does. He may also adopt methods
which are not routinely followed. Such observations will mislead the work
study analyst and defeat the very purpose of the study. In extreme cases, the
workers union may even force the study to be cancelled.
It is important that the workers are taken into confidence and briefed
about the aim of the study, its purpose and how the analyst will conduct it so
that all misgivings are put to rest. Workers must be reassured that the study will
not result in the loss of job.

122
TIME STUDY
It is a direct observation technique. The work is broken down into
identifiable elements and an observer times the worker as he performs the,
work. A stop watch can be used for timing the worker. The worker may work
faster or slower while he is being observed. In order to compensate for this, the
observer rates the worker. He mentally compares the observed worker with a
qualified operator working at standard performance.
Rating a worker is a difficult task. Not only is the speed of work
involved but also the quality of the work performed as well as due regard given
to safety while performing the work. A worker may be working just as fast as a
worker with standard performance but he may not be performing the work with
the precision it requires. Alternately the precision achieved may be much more
than desirable. Rating the worker is a specialist's task and only a properly
trained work study analyst can rate workers. The analyst is required to rate a
worker in real time and carry out the comparison mentally on multiple factors
as explained before. The analyst is specially trained for the task. The training is
carried out through video rating films. The analyst is shown a number of tasks
being performed by different workers on film and is asked to rate the worker.
He compares his rating with the rating given by the film. The process is
repeated by showing the same actions but in a different sequence after a time
interval. Gradually the analyst develops consistency in his rating skills.
Different rating scales are used, but the one most commonly used rates
a worker with standard performance as 100. A worker who works slower by
one third is rated at 70 and a worker who works faster by one third is rated at
135. Ratings are not assessed in increments smaller than 5 units. The timing is
adjusted to bring it in line with a worker whose rating is 100. A number of
observations are taken and then averaged out as basing timings on one
observation would lead to incorrect results. Since these are sample
observations, the larger the number the more accurate the results. The exact
number of observations to make or the sample size can be statistically
determined.
Example
Consider an example of a worker whose task has been broken into three
elements—A, B and C. Four cycles of work were timed and the results of
observations performance rating, to adjust the observed times to an "average"
pace. A normal rating is 1.00. A performance rating of .9 indicates a pace that
is 90 percent of normal, whereas a rating of 1.05 indicates a pace that is slightly
faster than normal. For long jobs, each element may be rated; for short jobs, a
single rating may be made for an entire cycle.

123
 When assessing performance, the analyst must compare the observed
performance to his or her concept of normal. Obviously, there is room for
debate about what constitutes normal performance, and performance ratings are
sometimes the source of considerable conflict between labor and management.
Although no one has been able to suggest a way around thesesubjec-,tive
evaluations, sufficient training and periodic recalibration of analysts using
training films can provide a high degree of consistency in the ratings of
different analysts.
STANDARD TIME
The normal time does not take into account such factors as personal
delays (getting a drink of water or going to the restroom), unavoidable delays
(machine adjustments and repairs, talking to a supervisor, waiting for
materials), or rest breaks. The standard time for a job is the normal time
multiplied by an allowance factor for these delays.
The standard time is
ST = NT X AF
where
ST = Standard time
AF = Allowance factor
Allowances can be based on either job time or time worked (e.g., a workday). If
allowances are based on the job time, the allowance factor is computed using
the formula
AFjob = 1 + A; A = Allowance percentage based on job time
This is used when different jobs have different allowances. If allowances are
based on a percentage of the time worked (i.e., the workday), the appropriate
formula is
AFday = 1 A = Allowance percentage based on workday
1 – A’
This is used when jobs are the same or similar and have the same allowance
factors.
MEASUREMENT TECHINIQUES
Techniques of Work Measurement
For the purpose of work measurement, work can be regarded as,
1. Repetitive Work - The type of work in which the main operation or
group of operations repeat continuously during the time spent at the job.
These apply to work cycles of extremely short duration.

124
 2. Non repetitive work - It includes some type of maintenance and
construction work, where the work cycle itself is hardly ever repeated
identically.
Various techniques of work measurement are :
3. Time study (stop watch technique)
4. Synthesis
5. Work sampling
6. Analytical estimating
7. Predetermined motion and Time study
Time study and work sampling involve direct observation and the
remaining are data based and analytical in nature time study. A work
measurement techniques for recording the times and rates of working for the
elements of a specified job carried out under specified conditions and for
analysing the data so as to determine the time necessary for carrying out the job
at the defined level of performance.
Synthetic Data - A work measurement technique for building up the time
for a job or parts of the job at a defined level of performance by totalling
element times obtained previously from time studies on other jobs containing
the elements concerned or from synthetic data
Work Sampling - A technique in which a large number of observations are
made over a period of time of one or group of machines, processes or workers.
Each observation records what is happening at that instant and the percentage
of observations recorded for a particular activity, or delay is a measure of the
percentage of time during which that activities delay occurs.
Predetermined Motion Time Study (PMTS) - A work measurement
technique whereby times established for basic human motions (classified
according to the nature of the motion and conditions under which it is made)
are used to build up the time for a job at the defined level of performance.
The most commonly used PMTS is known as Methods Time Measurement
(MTM). Analytical Estimatinga work measurement technique, being a
development of estimating, whereby the time required to carry out elements of
a job at a defined level of performance is estimated partly from knowledge and
practical experience of the elements concerned and partly from synthetic data.
The work measurement techniques and their application is shown in table

125
 Table Work Measurement techniques and their application
Techniques Applications
Unit of Measurement

Time study Short cycle repetitive Centi minute ( 0.01

jobs. Widely used for min).
direct work

Working sampling Long cycle Minutes

jobs/heterogeneous
operations.

Synthetic Data Short cycle repetitive Centi minutes

MTM jobs Manual operations TMU (1TUM =
confined to one work 0.006min)
centre

Analytical Short cycle non Minutes

estimating repetitive job

Reference Books:
1. Production and Materials Management – P. Saravanavel& S. Sumathi –
Margham Publications (2003).
2. Text Book of Production Management – K. ShridharaBhat – Himalaya
Publishing House (2004).
3. Production and Operations Management –R.B.Khanna – PHI Learning
Private Limited (2011).
4. Production and Operations Management – K. Aswathappa –
K. ShridharaBhat – Himalaya Publishing House (2014).
5. Operations Management and Control – Dr. C.B.Gupta – Sultan Chand &
Sons (2006).
6. Production and Operations Management – R. Panneerselvam PHI Learning
Private Limited (2012) New Delhi.
7. Production Management – Mart and T.Telsang, S. Chand & Company
LTD. (2009).

126
 Model Question paper, August 2015
PRODUCTION MANAGEMENT
Time : Three hours Maximum : 100 Marks
Answer ALL questions.
PART A – (10 x 2 = 20 marks)
1. What are the objectives of production management?
2. Describe the various characteristics of production systems.
3. State the signification of materials management in production system.
4. How would you determine Economic Order quantity?
5. What are alternative sources to increase the capacity of a plant?
6. Describe the uses of expert systems.
7. What is job shop scheduling?
8. Write short note on resource levelling techniques.
9. What is meant by work study?
10. What is performance rating?
PART B – (5 x 16 = 80 marks)
11. (a) Discuss the principles of computer Integrated manufacturing system.
Or
(b) Discuss the function involved in production and operations management.
12. (a) M/s. classic Bearing Ltd. Is committed to supply 24,000 bearing per
annum to M/s. Deluxe fans on a steady basis.It is estimated that it costs 10
paise as inventory holding cost per bearing per month and set up cost per run of
bearing manufacture is Rs 324.
i. What should be the optimum run size for bearing manufacture?
ii. What should be the interval between two consecutive optimum runs?
iii. Find out the minimum inventory holding cost.
Or
(b) Explain in detail about the procedural steps involved in MRP.
13. (a) Explain in detail about the various applications of CAD.
Or
(b) (i) Explain the concepts of capacity requirement planning.
(ii) State the required inputs for capacity requirement planning.
14. (a) Consider the following data summarizing the details of a project
involving 14 activities.

127
 Project Details

Activity Immediate Predecessor (s) Duration (Months)

A ---- 2
B ---- 6
C ---- 4
D B 3
E A 6
F A 8
G B 3
H C,D 7
I C 2
J E 5
K F,G,H 4
L F,G,H 3
M I 13
N K 7
Or
(b) Consider the problem of project scheduling as shown below. Obtain
schedule which will minimize the peak manpower requirement and also smooth
out period variation of manpower requirement.
Activity Duration (Weeks) Manpower Requirement
1-2 8 7
1-3 6 13
1-4 8 9
2-4 12 11
2-5 4 6
3-5 4 3
4-6 10 15
5-6 10 5

128
15. (a) What is time study? Discuss its applications.
Or
(b) Write short note on the following:
i. CRAFT (4)
ii. CORELAP (4)
iii. ALDEP (4)
iv. Fly D (4)

Model Question paper, February / March 2015

PRODUCTION MANAGEMENT
Time : Three hours Maximum : 100
Marks
Answer ALL questions.
PART A – (10 x 2 = 20 marks)
1. What are the functions of production and operations management?
2. What is benefit of computer integrated manufacturing in service systems?
3. Define EBQ.
4. What is the need of MRP – II in material management?
5. Write the two application of Expert system.
6. List any two Forecasting techniques.
7. Define float.
8. Define slack.
9. What is meant by ALDEP?
10. Write any two advantages of work sampling?
PART B – (5 x 16 = 80 marks)
11. (a) (i) Explain the need and functions of POM in service sector.
(8)
(ii) Describe the basic model of POM
(8)
Or
(b) Enumerate in details about the global trade operations and supply network
applications.
12. (a) (i) Explain the quantity discount model with a case study.
(8)

129
 (ii) List out the application of automated storage and retrieval system
(ASRS). (8)
Or
(b) (i) Differentiate the MRP- I and MRP- II
(8)
(ii) Explain the two types of kanban system adopted in the
manufacturingindustries.
(8)
13. (a) Explain in detail with its merits and demerits of aggregate and capacity
planning system .
Or
(b) (i) List out the various qualitative and quantitative forecasting
techniques. (6)
(ii) Discuss in detail about the method of identifying and reducing the
error in forecasting with the selection of best forecasting methods.
(10)
14. (a) Illustrate with numerical example about the procedure in solving the
scheduling problem using Johnsons algorithm for n jobs through m
machines. (8)
Or
(b) (i) Discuss the standard steps in the resource leveling techniques.
(8)
(ii) Describe the role of gantt chart for stores managers.
(8)
15. (a) Briefly explain the following with example:
(i) Facility layout decisions.
(6)
(ii) White color measurement and learning curves.
(10)
Or
(b)Enumerate in detail about the procedure involve in time study and method
study.(16)

130
 Model Question paper, August 2014.
PRODUCTION MANAGEMENT
Time : Three hours Maximum : 100 Marks
Answer ALL questions.
PART A – (10 x 2 = 20 marks)
1. what is meant by CIMSS?
2. Write any two applications of operations and supply network.
3. Differentiate ABC with kanban system.
4. What is meant by EBQ?
5. List any two applications of forecasting.
6. Define aggregate planning.
7. What is the important of network analysis?
8. Define job scheduling.
9. What is meant by line balancing?
10. What is the important feature of CRAFT?
PART B – (5 x 16 = 80 marks)
11. (a) (i) Explain the need for and function of operations management.
(8)
(ii) Briefly illustrate the global operations in the manufacturing chain
(8)
Or
(b) Explain computer integrated manufacturing and services systems.
(16)
12. (a) Explain with neat sketch (block diagram) in detail about ASRS with it’s
application in processing industry.
(16)
Or
(b) (i) Illustrate with example about the role of quantity discount model in
Production management
(8)
(ii) Explain the E-business and E-operational strategies with its
advantage and limitation
(8)

131
13. (a) (i) Discuss in detail about strategic, tactical and operational
management process (8)
(ii) Explain the application of expert system in operations management.
(8)
Or
(b) (i) Identify the relationship between capacity planning and process
selection. (6)
(ii) Enumerate the importance of accuracy in forecasting? briefly
explain the criteria used in selecting the best forecasting methods
(10)
14.(a)(i) Briefly explain the following with example
(i) Gannt chart
(6)
(ii)Resource leveling
(8)
(iii)critical ratio
(2)
(or)
(b)(i) A maintenance activity consists of following jobs .Draw the network for
the project and calculate the total float and free float for each activity.
What can you say about the slacks of the project?
(8)
Job Duration (in days)
1-2 3
2-3 4
3-4 4
3-7 4
4-5 2
4-7 2
5-6 3
6-7 2
(ii) Find the optimum sequence for the following problem.
(8)

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JOBS
A B C D E F G H
M1 14 26 17 11 9 26 18 15 Machine-1
M2 21 15 16 21 22 12 12 25 Machine-2
Find also the minimum total elapsed time and idle time on the
machine-1 and machine -2
15 (a) Compare the various facility layouts with their advantages and
disadvantages(16)
Or
(b) (i) Explain in detail about work sampling technique with its
applications.(8)
(ii) Compare and illustrate using the flow chart about the application
and working methodology of CORELAP and ALDEP in detail.
(8)

133
 Model Question paper, February/March 2014.
PRODUCTION MANAGEMENT
Time : Three hours Maximum : 100 Marks
Answer ALL questions.
PART A – (10 x 2 = 20 marks)
1. List the types of production management.
2. Write the needs of production system.
3. What are the benefits of ABC analysis?
4. Differentiate between e-business and e-operations strategies.
5. What are the applications of Expert systems?
6. What are the methods of forecasting?
7. What is meant by critical path?
8. Write the uses of Gantt charts.
9. What are the types of layouts?
10. Define method study.
PART B – (5 x 16 = 80 marks)
11. (a) Discuss the scope of production and operation management with
suitable example.
Or
(b) Explain the computer integrated manufacturing systems with suitable
example.
12. (a) Briefly explain ABC analysis with a suitable example.
Or
(b) The annual demand for an automobile component is 36,000 units. The
carrying cost is Rs.0.50/unit/year, the ordering cost is Rs 25.00 per
order and the shortage cost is Rs 15.00/unit/year. Find the optimal
values of the following:
(i) Economic Ordering Quantity
(3)
(ii) Maximum inventory
(3)
(iii) Maximum shortage quantity
(3)
(iv) Cycle time
(3)

134
 (v) Inventory period
(2)
(vi) Shortage Period
(2)
13. (a) The product line manufacturing electric motors has seven stations. The
individual capacity of the critical station is limited to 1000 units per
week. If, the actual output of the product line is 800 units per week,
find
(i) The system capacity, and
(8)
(ii) The system efficiency
(8)
(b) The sales report of a company for 13 years of operation is furnished
below
Years Lumber sales
1 96
2 116
3 119
4 127
5 146
6 145
7 153
8 158
9 160
10 165
11 177
12 190
13 205
(i) Find a simple regression for the above data.
(8)
(ii) Forecast the sales for the 14th year of operation
(8)

135
14. (a) Consider the following two machines and 6 jobs flow shop problem.
Job Machine 1 Machine 2
1 5 7
2 10 8
3 8 13
4 9 7
5 6 11
6 12 10
Obtain the optimal schedule and corresponding makespan for the above
problem.
Or
(b) Consider the following 3 machines and 5 jobs flow shop problem. Check
whether Johnson’s rule can be extended to this problem. If so, what is the
optimal schedule and the corresponding makespan?
Job Machine 1 Machine 2 Machine 3
1 11 10 12
2 13 8 20
3 15 6 15
4 12 7 19
5 20 9 7
15. (a) Describe the types of layout with suitable examples.
Or
(b) (i) Discuss the steps of work sampling.
(8)
(ii) Explain the steps of time study using a suitable example.
(9)

136
 Model Question paper, August 2013
PRODUCTION MANAGEMENT
Time : Three hours Maximum : 100 Marks
Answer ALL questions.
PART A – (10 x 2 = 20 marks)
1. What are the definite components of production function?
2. What are Computer Integrated Manufacturing and services Systems?
3. Write the uses of automated storage and Retrieval Systems (ASRS)?
4. What are the objectives of materials management?
5. What is demand forecasting?
6. Distinguish between standardization and specialization?
7. What is Job Scheduling?
8. What are the uses of Gantt charts?
9. Define Work sampling and state its objective.
10. What is an allowance? Why it is provided?
PART B – (5 x 16 = 80 marks)
11. (a) Discuss the scope and objectives of production and operations
management(POM).
Or
(b) Trace the evolution and principles of computer integrated
manufacturing.
12. (a) Explain the assumptions which are necessary to use the basis Economic
Order Quantity. How would you determine the Economic Order
Quantity?
Or
(b) A Firm has several items of inventory. The average number of each of
these items as well as their unit cost are listed below:
Item Average Number of units in Average cost per
Unit (Rs.)
Inventory
1 4,000 1.96
2 200 10.00
3 440 2.40
4 2,000 16.80
5 20 165.00

137
 6 200 6.0
7 160 76.00
8 3,000 3.00
9 1,200 1.90
10 6,000 0.50
11 1,800 25.00
12 130 2.70
13 4,400 9.50
14 3,200 2.60
15 1,920 2.00
16 800 1.20
17 3,400 2.20
18 2,400 10.00
19 120 21.00
20 320 4.00
The firm wishes to adopt ABC inventory system. How should the items be
classified into A,B and C?
13. (a) What is simplication in product development? What are the important
considerations in simplification? What are its advantages and disadvantages?
Or
(b) Explain in detail about the Qualitative and `1
(10)
Activity Immediate Predecessor (S) Duration in weeks
A - 5
B - 11
C - 8
D C 7
E A 9
F A,B,D 4
G C 12
H C 5
I E,F,G 10
J F,G 5
K H 5

138
L H 9
M J,K 3
N L 6
Or
(b) List and explain the types of time estimate that are used in PERT.
Explain the application of standard normal statistic in PERT.
15. (a) State the factor which should be kept in mind while deciding upon a
suitable type of plant layout. Explain the principles of good layout.
Or
(b) Describe the steps in making time study and computing the standard
time. What is performance rating? What are the requirements of a good
rating method?

139
 NOTES
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