SRM RAMAPURAM B-SCHOOL

SRM UNIVERSITY

MEANING AND DEFINITION OF PRODUCTION

Production is the process by which raw materials and other inputs are
converted into finished products.

Study Material
MB13205 - Production and Operations Management
UNIT - 1
TOPIC 1
INTRODUCTION TO PRODUCTION & OPERATIONS
MANAGEMENT

Production is defined as the step-by-step conversion of one form of

material into another form through chemical or mechanical process to
create or enhance the utility of the product to the user. Thus
production is a value addition process. At each stage of processing,
there will be value addition.
Edwood Buffa defines production as a process by which goods and
services are created

Synopsis
MEANING AND DEFINTION OF POM
Meaning and Definition of Production
Meaning of Production & Operation Management

Production management refers to the application of management

principles to the production function in a factory. In other words,

Production as a system

production management involves application of planning, organizing,

directing and controlling to the production process

Scope of POM
Objectives of POM

The set of interrelated management activities, which are involved in

manufacturing certain products, is called as production management.

Functions of POM

If the same concept is extended to services management, then the

corresponding set of management activities is called as operations

POM relationship with other functional areas

management.

The following figure shows the process of production

PRODUCTION AS A SYSTEM
This view is also known as "systems concept of production". A system
is defined as the collection of interrelated entities. The systems
approach views any organisation or entity as an arrangement of

SCOPE OF PRODUCTION MANAGEMENT

management, men, information, materials, machine and capital.

interrelated parts that interact in ways that can be specified and to

some extent predicted. Production is viewed as a system which

converts a set of inputs into a set of desired outputs.

A production system has the following elements or parts: (i) Inputs, (ii)
Conversion process or transformation process, (iii) Outputs(iv)
Transportation subsystem, (v) Communication subsystem and (vi)
Control or decision making Subsystem.

Specifying and accumulating the input resources, i.e.,

Designing and installing the assembling or conversion process

to transform the inputs into output, and

Coordinating and operating the production process so that the

desired goods and services may be produced efficiently and at a
minimum cost.

The following diagram indicates production as a system

OBJECTIVES OF POM

1. Right Quality: The quality of product is established based upon the

activities of the production management. This activity is related to

customers need. The right quality is not necessarily being the best

production engineering and includes problems regarding design of

quality. It is determined by the cost of the product and the technical

tools and jigs, the design, development and installation of equipment

characteristics as suited to the specific requirements.

and the selection of the optimum size of the firm. All these areas

2. Right Quantity: The manufacturing organisation should produce

require the technical expertise on the part of the production manager

the products in right number. If they are produced in excess of demand

and his staff.

the capital will block up in the form of inventory and if the quantity is
produced in short of demand, leads to shortage of products.
3. Right Time: Timeliness of delivery is one of the important
parameter to judge the effectiveness of production department. So, the
production department has to make the optimal utilization of input
resources to achieve its objective.

c) Facilities location: the selection of an optimum plant location very

much depends upon the decision taken regarding production
engineering. A wrong decision may prove disastrous. Location should
as far as possible cut down the production and distribution cost. There
are diverse factors to be considered for selecting the location of a plant.

4. Right Manufacturing Cost: Manufacturing costs are established

d) Facilities layout and materials handling: plant layout deals with

before the product is actually manufactured. Hence, all attempts should

the arrangements of machines and plant facilities. The machine should

be made to produce the products at pre-established cost, so as to reduce

be so arranged that the flow of production remains smooth. There

the variation between actual and the standard (pre-established) cost.

should not be overlapping, duplication or interruption in production

flow. Product layout where machines are arranged in a sequence
required for the processing of a particular product, and process layout,

FUNCTIONS OF PRODUCTION MANAGEMENT

where machines performing the similar processes are grouped together

a) Product selection and design: the product mix marks the

are two popular methods of layout. The departments are layout in such

production system either efficient or inefficient. Choosing the right

a way that the cost of material handling is reduced. There should be

products keeping the mission and overall objective of the organization

proper choice of material handling equipment.

in mind is the key to success. It is the design of the product, which

makes the organization competitive or noncompetitive.

e) Capacity planning: This deals with the procurement of productive

resources. Capacity refers to a level of output of the conversion

b) Activities relating to production system designing: decision

process over a period of time. Full capacity indicates maximum level

related to the production system design is one of the most important

of output. Capacity is planned for short-term as well as for long term.

Process industries pose challenging problems in capacity planning,

tools, and so is included in production management. The raw materials,

requiring in the long run, expansion and contraction of major facilities

supplies etc should be purchased at right time, right quality, in right

in the conversion process.

quantity, from right source and at right price.

f) Production planning: the decision in production planning include

j) Quality control (QC)

preparation of short-term production schedules, plan for maintaining

Quality Control may be defined as a system that is used to maintain a

the records of raw materials, finished and semi-finished stock,

desired level of quality in a product or service. It is a systematic

specifying how the production resources of the concern are to be

control of various factors that affect the quality of the product. Quality

employed over some future time in response to the predicted demand

Control aims at prevention of defects at the source, relies on effective

for products and services

feedback system and corrective action procedure.

g) Production control: after planning, the next managerial production

function is to control the production according to the production plans
because production plans cannot be activated unless they are properly
guided and controlled.

k) Materials Management
Materials Management is that aspect of management function, which is
primarily concerned with the acquisition, control, and use of materials
needed and flow of goods and services connected with the production
process having some predetermined objectives in view. Its including
Purchasing and storekeeping of materials / goods.

h) Method study: the next decision regarding production system

design concerns the use of those techniques, which are concerned with
work environment and work measurement. Standard method should be
devised

for

performing

the

repetitive

functions

efficiently.

Unnecessary movements should be eliminated and suitable positioning

l) Maintenance management
In modern industry, equipment and machinery are a very important
part of the total productive effort. Therefore their idleness or downtime
becomes are very expensive. Hence, it is very important that the plant
machinery should be properly maintained.

of the workers for different processes should be developed. Such

methods should be devised with the help of time study and motion
study. The workers should be trained accordingly.
i) Inventory Control: inventory control deals with the control over
raw-materials, work-in-progress, finished products, stores, supplies,

POM RELATION WITH OTHER FUNCTIONAL AREAS

Marketing: This generates the demand or takes customers orders for
a product or service.

UNIT I

(ii) Production/Operations: this creates the product (goods or

services).

TOPIC 2

(iii) Finance/Accounting: which keeps track of how well the

organisation is performing, and takes care of cash inflow and cash

PRODUCTION SYSTEM

outflow.
Production/operations managers need to build and maintain strong

Synopsis:

relationships both intra organisationally and inter-organisationally.

Inter-organisational relationship exists between production/ operations
department and suppliers, whereas intra-organisational relationship

Meaning of production system

Types of production system

calls for cross-functional coordination.

Cross

functional

coordination

is

essential

for

effective

production/operations management. For example, Marketing function

MEANING OF PRODUCTION SYSTEM

determines the need for new products and services and the demand for

Production system is the framework within which the production

existing ones and operations managers must bring together human and

activities of an organization are carried out. At one end of a system are

capital resources to meet these demands effectively.

inputs and at the other output. Input and output are linked by certain

Also, operations managers must consider facility location and

relocations to serve new markets and the design of layouts for service
organisations must match the image that marketing seeks to project to
the customers. Operations managers must plan output rates and
capacities to match the demand forecasts and delivery promises made
to the customers

process or operations or activities imparting value to the inputs. These

processes, operations or activities may be called production system.
DEFINITION OF PRODUCTION SYSTEM
According to Webster, System is a regular interacting inter-dependent
group of items forming a unified whole. A system may have many
components and variation in one component is likely to affect the other
components of the system e. g. change in rate of production will affect

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inventory, overtime hours etc.

Therefore a standard set of processes and sequences of process can be

TYPES OF PRODUCTION SYSTEMS

adopted. Thus continuous or flow production refers to the

There are two main types of production systems

manufacturing of large quantities of a single or at most a very few

I. Continuous system

varieties of products with a standard of processes and sequences. The

mass production is carried continuously for stock in anticipation of

II. Intermittent system

demand.
CHARATERISTICS OF CONTINUOUS OR FLOW SYSTEM:

The volume of output is generally large (mass production) and

goods are produced in anticipation of demand.

The product design and the operations sequence are

standardised i.e. identical products are produced.

Special purpose automatic machines are used to perform

standardized operations.

Machine capacities are balanced so that materials are fed at one

end of the process and finished product is received at the other
end.

Fixed path materials handling equipment is used due to the

predetermined sequence of operations.

I. CONTINUOUS OR FLOW SYSTEM:

According to Buffa,

Continuous flow production situations are those where the facilities

are standardised as to routing and flow since inputs are standardised.

Product layout designed according to a separate line for each

product is considered.

MERITS OF CONTINUOUS OR FLOW SYSTEM:

meet any breakdowns resulting in production stoppages.

The main advantage of continuous system is that work in

progress inventory is minimum.

Any delay at any stage is automatically detected.

Handling of materials is reduced due to the set pattern of

production line. Mostly the materials are handled through
conveyer belts, roller conveyers, pipe lines, overhead cranes
etc.

Thus investments in machines are fairly high.

The quality of output is kept uniform because each stage

develops skill through repetition of work.

Moreover it is essential to maintain stand-by equipments to

Control over materials, cost and output is simplified.

TYPES OF CONTINUOUS PRODUCTION SYSTEM

(A)

Mass production

Mass production refers to the

manufacturing of standardized parts or components on a large scale.

Mass production system offers economies of scale as the volume of
output is large. Quality of products tend be uniform and high due to
standardized and mechanization. In a properly designed and equipped
process, individual expertise plays less prominent role.

The work can be done by semi- skilled workers because of their

specialisation.
(B)

Process production:

Production is carried on continuously

through a uniform and standardized sequence of operations highly

DEMERITS OF CONTINUOUS OR FLOW SYSTEM :

Continuous system, however, is very rigid and if there is a fault

employed in bulk processing of certain materials. The typical

in one operation the entire process is disturbed.

processing industries are fertilizers plants, petrochemical plants and

milk diaries which have highly automated systems and sophisticated

Due to continuous flow, it becomes necessary to avoid pilling

up of work or any blockage on the line.

sophisticated and automatic machines are used. Process production is

controls. They are not labourintensive and the worker is just an

operator to monitor the system and take corrective steps if called for.

Unless the fault is cleared immediately, it will force the

On the basis of the nature of production process, flow production may

preceding as well as the subsequent stages to be stopped.

be classified in Analytical and Synthetic Production.

In Analytical Process production, a raw material is broken into

must be a compromise that is best for all inputs considered together.

different products e. g. crude oil is analyzed into gas, naptha, petrol

In the industries following the intermittent production system, some

etc. Similarly, coal is processed to obtain coke, coal gas , coal tar etc..

components may be made for inventory but they are combined

Synthetic process of production involves the mixing of two or

more materials to manufacture a product for instance, lauric acid,
myristic acid, stearic acid are synthesised to manufature soap.

differently for different

customers. The finished product

is

heterogeneous but within a range of standardized options assembled by

the producers. Since production is partly for stock and partly for
consumer demand, there are problems to be met in scheduling,
forecasting control and coordination.

(C)

Assembly lines:

Assembly lines a type of flow production

which is developed in the automobiles industry in the U.S.A. A

manufacturing unit prefers to develop and employ assembly line

TYPES OF INTERMITTENT PRODUCTION.

because it helps to the efficiency of production. In an assembly line,

(A) Job production:

each machine must directly receive materials from the previous

single complete unit with the use of a group of operator and process as

machine and pass it directly to the next machine. Machine and

per the customers this is a special order type of production. Each

equipment should be arranged in such a manner that every operator has

job production or product is different from the other and no repetition

a free and safe access to each machine. Space should be provided for

is involved. The product is usually costly and non- standardized.

free movement of forklifts trucks etc. which deliver materials and

Customers do not make demand for exactly the same product on a

collect finished products.

continuing basis and therefore production become intermittent. Each

II.INTERMITTENT PRODUCTION SYSTEM

ACCORDING TO BUFFA, Intermittent situations are those where
the facilities must be flexible enough to enough to handle a variety of
products and sizes or where the basic nature of the activity imposes
change of important characteristics of the input (e.g. change in the
product design). In instances such as these, no single sequence pattern
of operation is appropriate, so the relative location of the operation

job production involves the manufacturing of

product is a class by itself and constitutes a separate job for production

process. Shipbuilding, electric power plant dam construction etc. are
common examples of job production
(B) Batch production :

it is defined as, The manufacture of a

product in small or large bathes or lots at intervals by a series of

operations, each operation being carried out on the whole batch before
any subsequent operation is performed

the batch production is

mixture of mass production and job production and job production

under it machines turn out different product at intervals, each product
being produced for comparatively short tome using mass production

DEMERITS OF INTERMITTENT PRODUCTION SYSTEM:

Job shop manufacturing is just most complex system of

production e. g. in building a ship thousand of individual parts

methods.

must be fabricated and assembles.

CHARACTERISTICS OF INTERMITTENT PRODUCTION
SYSTEM:

A complex schedule of activity is required to ensure smooth

flow of work without any bottleneck.

The product manufacture is custom-made or non standardized.

Volume of output is generally small.

Variable path materials handling equipment are used.

A wide range of general purpose machines like grinders,

drilling, press, shaper etc is used .

uneven and irregular flow of work.

It is flexible and can be adopted easily to change in product

design. A fault in one operation does not result into complete
stoppages of the process.

Workloads are unbalanced, speed of work is slow and unit

costs are high

Work-in-progress inventory is high and large storage space is

required.

MERITS OF INTERMITTENT PRODUCTION SYSTEM:

Raw materials and work-in-progress inventories are high due to

The main problem in batch production is ideal time between

one operation and other the work has to wait to until a
particular operation is carried out on the whole batch of the
product.

It is cost effective and time- effective since the nature of the

operation in a group are similar there is reduced materials
handling since machines are close in a cell.

The waiting period between operations is also reduced. This

also results in a work- in- progress inventory.

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UNIT I

OBJECTIVES OF PRODUCT DESIGN:

TOPIC 3

The overall objective is profit generation in the long run.

PRODUCT DESIGN

To achieve the desired product quality

Synopsis

To reduce the development time and cost to the minimum

Meaning of product design

To reduce the cost of the product.

Objectives of product design

To ensure produce ability or manufacturability to design for

Characteristics of product design

Steps involved in product design
Factors influencing product design
Types of product design

manufacturing and assembly

CHARACTERISTICS OF GOOD DESIGN:The characteristics of a well-designed product are:1. Functionality:- While designing the most important consideration is
the function that the product is expected to perform. Products are

Some important term related to product design

designed to with a core objective and for meeting a specific customer

need. If the product is unable to meet that very need, the whole
purpose of introducing a new product is defeated e.g. mobile - verbal

MEANING OF PRODUCT DESIGN

communication.

Product design is the process of creating a new product to be sold by a

2. Reliability:- It means the dependability on the performance of a

business to its customers. Product design refers to the development of

product for a designated period of time, without deterioration in the

the concept or idea of a product in terms of specifications which are

quality or performance of the product. While designing a product, the

required for transforming the idea into that product. These

life of the product which it should last is an important consideration. A

specifications are created keeping in mind the constraints of the

consumer expects a certain life span in the product

production process, feasibility to produce and meeting the customer

expectations without sacrificing the quality.

3. Producibility: - it can be defined as the possibility of producing the

standardization of parts and manufacturing process and choice of input

product in the required quantity at a feasible cost. A product may be

materials influence the cost of product

very well designed in terms of functionality and appearance but if it is

not produced in the required quantity and at a favourable cost, it will

STEPS INVOLVED IN PRODUCT DESIGN

not be successful in the market. Producibility includes number of

To obtain a flow of new-products ideas, the company can tap many

operations that form the manufacturing process, availability of the

sources. Major sources of product ideas include internal sources like

necessary materials technology requirements etc.

customers, competitors, distributors and suppliers. It has been found

4.Quality:- It means conformance to specifications. A good design

ensures the required quality in a product. The materials and their
specifications ascertained while designing play an important role in
making the product durable and reliable. Tolerances in the dimensions
of individual parts affect the final quality of the assembled product.

that more than 55 percent of all product ideas come from internal
sources. The steps are:
1. Idea screening: The purpose of idea generation is to create a large
number of ideas. The purpose of the succeeding stages is to reduce that
number. The first reducing stage is idea screening. The purpose of
screening is to spot good ideas and drop poor ones. Most companies

5. Standardization and Simplification:- Standardization means use

require their executive to write up the new product ideas on a standard

of minimum number of parts to serve the maximum number of

format that can be reviewed by a new product committee. The write up

purpose, in order to achieve economy in manufacture and to ensure

describes the product, the target market, the competition and makes

operational efficiency and efficiency and effectiveness Simplification

some rough estimate of market size, product development time and

is the process of making design simple. Complicating things which can

costs, manufacturing costs and rate of return. The committee then

be made simple is only going to add to costs.

evaluates the idea against a set of general criteria.

6. Maintainability:- The product design should be such that

maintaining it is simple and cost effective in terms of repair or
replacement of the defective part e.g. new automobile tubeless tyres
maintenance free inverter battery.

2. Concept Development and testing: Customers do not buy product

ideas, they buy the product concepts. The concept testing calls for
testing new product concepts with a group of target consumers. After
being exposed to the concept, consumers then may be asked to react to
it by asking a few questions.

7. Cost effective:- A products production cost gets determined at the

3. Market strategy development: The next step is market strategy

designing stage. At the designing stage, effective measures like

development, designing an initial marketing strategy for introducing

the concept to the market. The market strategy statement consists of

6. Test Marketing: If the product passes functional and consumer

three parts:

tests, the next step is test marketing, the stage at which the product and

The first part describes the target market; the planned product

marketing program are introduced into more realist marketing setting.

positioning, market share and profit goals for the first few

This allows the marketer to find potential problems so that these could

years.

be addressed.

The second part of the marketing strategy statement outlines

7. Commercialization: is introducing the new product into the market.

the product planned price, distribution and marketing budget

for the first year.

FACTORS INFLUENCING PRODUCT DESIGN

The third part of the marketing strategy statement describes the

planned long-run sales, profit goals, and marketing mix

1. Customers requirement and psychological effects: The designer

strategy.

must, first of all, ascertain the basic requirements and the psychology

4. Business Analysis: Once management has decided on its product

of the customers. For this purpose, he or she must prepare a

concept and marketing strategy, it can evaluate the business

comprehensive questionnaire keeping in mind the marketing and

attractiveness of the proposal. Business analysis involves a review of

economic aspects to analyse the psychology and needs of the

its sales, cost, and profit projections for a new product to find out

customers.

whether they satisfy the companys objectives.

2. Facility to operator: the second factor is the designer must consider

5. Product development: If the product concept passes the business

carefully, is the facilities available to the operator at the shop floor.

test, it moves into product development. Here, R&D or engineering

3. Functionality: the designer should not merely be stylish but should

develops the concept into a physical product. The R&D department

cover the utility aspects also. There must be a proper balance between

will develop one or more physical versions of the product concept,

beauty and utility.

R&D hopes to design a prototype that will satisfy and excite

4. Materials: next factor to be considered by the designer is the

consumers and that can be produced quickly and at budgeted cost.

materials to be used on the proposed product and the development of

When the prototype is ready it must be tested. Functional tests are then

improvements in this field as materials have profound influence over

conducted to make sure that the product performs safely and

the product.

effectively.

5. Work method and equipment: another important factor affecting

the product design is the work method and the equipment to be used in

the manufacture of proposed product. A designer must be aware of the

latest developments in the work method and equipment.

Packaging, particularly in a consumer product is a design

activity.

6. Cost /price ratio: cost is the one of the major factors which
influences the design of the product. Contract- based cost plus a
margin profit arrangement allows the designer the latitude for over
designing particularly if the margin is expressed as a percentage of
total cost.
7. Quality policy: quality of design ultimately reflects on a product
quality. The quality of a design must be fixed at the corporate level to
provide the designer with suitable guidelines.
8. Process capability: Product is governed by quality policy of the
firm on one side and availability on the plant and machinery to meet
specifications on the other side. Machines should also be capable of
meeting the needs of the designer with regard to the design quality.
9.Effects on the other products: The designer should also consider
the effects of the new product on the existing ones. If the new product
is to replace the existing one, it should
a. Fit into manufacturing and distribution plans of the
original product
b. Use the same standard parts and components, and
c. Accept the same manufacturing technology
10. Packaging: Good packaging is as important as a good design of
the product. Packaging is required for:

Protection of the product when in shelf or in transit and

Promotion of the product

TYPES OF PRODUCT DESIGN

Product design may be of four types: (a) Functional Design (b)
Aesthetic Design (c) Production Design and (d) Packing Design.
(a) Functional Design: Functional design involves developing
an idea into a rough model of the proposed product. Firstly
make a rough sketch of the proposed products then design a
mix draft room sketches of the proposed products, finally
experimental models are prepared which are thoroughly
tested for a certain period of time.
(b) Aesthetic design: Before production on a commercial scale
is undertaken another type of design must be integrated
with a functional design and its aesthetic design(style) for
market acceptability.
(c) Production Design: Product design pertains to a design
which may result in affecting the economics without
affecting its functional efficiency.
(d) Packing design : Different packing materials can be used
to suit the customers tastes and to maintain the chemical
properties of the products

SOME IMPORTANT TERMS RELATED TO PRODUCT

products are sold at 30 to 50% of the price of new product .e.g.

DESIGN

Printers, copiers, cameras, PCs and Cell/Telephones.

Design for Manufacturing (DFM): The designers consideration of

Modular design: Modular design is a form of standardization in

the organizations manufacturing capabilities when designing a

which component parts are subdivided into modules that are easily

product. The more general term design for operations encompasses

replaced or interchanged. It allows:

services as well as manufacturing. Manufacturability is the ease of

Easier diagnosis and remedy of failures

fabrication and/or assembly which is important for: Cost, Productivity

Easier repair and replacement

and Quality.

Simplification of manufacturing and assembly

A concept idolized in the IT industry for software development

Design for Assembly (DFA): Design focuses on reducing the number

of parts in a product and on assembly methods and sequence.

Reverse engineering: Reverse Engineering is the process of

disassembling the competitors product to analyze its design features.

Design for Disassembly (DFD): Design focuses on facilitating the

disassembly in a logical and an exact reverse sequential manner to the

Preliminary Design and Testing: Once a product idea has passed the

assembly methods and sequence.

screening stage, it is time to begin preliminary design and testing. At

this

stage,

design

engineers

translate

general

performance

Design for Recycling (DFR): Design allows and facilitates the

specifications into technical specifications. Prototypes are built and

recovery of material of materials and components from used products

tested.

for reuse. The designers consideration of the organizations

manufacturing capabilities when designing a product. The more

Final Design

general term design for operations encompasses services as well as

Following extensive design testing the product moves to the final

manufacturing.

design stage. This is where final product specifications are drawn up.

Design for Remanufacturing: Using some of the components of the

old products in the manufacture of new products. Remanufactured

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UNIT 1

3. Sequence of operations: the labour operations to be performed

TOPIC 4
PROCESS PLANNING

on each components and their sequence are decided.

4.

Tool design: The machines, equipment and tools most

Synopsis

appropriate for product and volume of output are then

Meaning of process planning

designed.

Factors affecting process planning

Steps/process involved in process planning

5.

Layout: The layout of the production, installation of

manufacturing facilities and auxiliary service is decided

6. Control system: Material, machines and man power is

established to ensure effective utilisation of the manufacturing
INTRODUCTION

facilities and most economical production of the product.

Any group of actions instrumental to the achievement of output

of an operational system in accordance with the specified measure of
effectiveness.
MEANING OF PROCESS PLANNING

FACTORS INFLUENCING PROCESS DESIGN

1. Volume of output: The quantity and rate of production affect
the method of production. In multi-product organizations

Process planning is concerned with the designing and

implementing work system that will produce the desired product in the
required quantities.

standardization of components parts and product are very

important in process designing.
2. Volume v/s Variety: One extreme is high variety but low
volume and other extreme is low variety but high volume.
Variety requires skilled technicians, general purpose machines.

PROCEDURE OF DESIGNING A PROCESS

High volumes require automation, mass production machines.

1. Product design: the consideration or a careful review of the

3. Quality of the product: Product quality determines the quality

product design and specifications to ensure that economical

of component parts and material which in turn determines the

manufacturing is feasible

methods and equipments to be used. Therefore, drawings,

2. Material list: All the material and the parts that will be used
are listed

specifications, bills of materials, parts list, etc. should be read

by the process engineer to determine process engineering.

4. Type of equipment: The process engineer should attempt to

UNIT - I
TOPIC 5

design manufacturing process that are adaptable to and will

balance the productive.
5. Environmental

Effect:

MAKE OR BUY DECISIONS

Process

selection

response

to

environmental changes , especially changes in technology.

Synopsis
Concept of make or buy decisions

6. Forms of transformation processes: Process selection also

refers to selection of sub processes, and the sub- process of

Factors for making and buying decisions

sub- processes also. It decides the sequence of operations,

process storage and transport from one work centre to another.
CONCEPT OF MAKE OR BUY DECIONS
The make-or-buy decision is the act of making a strategic choice
7. Produce to stock V/S produce to order:
Produce to stock: The system here is to anticipate the demand.
Standardization and variety reduction lead to batch production
which forms the inventory from which stocks to sell are drawn.

between producing an item internally (in-house) or buying it externally

(from an outside supplier). The buy side of the decision also is referred
to as outsourcing. Make-or-buy decisions usually arise when a firm
that has developed a product or partor significantly modified a
product or partis having trouble with current suppliers, or has

Produce to order: It is customerized producing where the

diminishing capacity or changing demand.

manufacturing process follows the respect of customers order.

Make-or-buy analysis is conducted at the strategic and operational
level. Obviously, the strategic level is the more long-range of the two.
8. Output characteristics V/S process selection: The selection
of process form-project-type, intermittent-type, and continuoustype depends upon the characteristics of the output.

Variables considered at the strategic level include analysis of the

future, as well as the current environment. Issues like government
regulation, competing firms, and market trends all have a strategic
impact on the make-or-buy decision.

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FACTORS CONSIDERATIONS THAT FAVOR MAKING A

cost considerations (less expensive to buy the item)

PART IN-HOUSE:

Small-volume requirements

Limited production facilities or insufficient capacity

Cost considerations (less expensive to make the part)

Desire to maintain a multiple-source policy

Desire to integrate plant operations

Indirect managerial control considerations

Productive use of excess plant capacity to help absorb fixed

Procurement and inventory considerations

overhead (using existing idle capacity)

Brand preference

Need to exert direct control over production and/or quality

Item not essential to the firm's strategy

Better quality control

Design secrecy is required to protect proprietary technology

Unreliable suppliers

No competent suppliers

Desire to maintain a stable workforce (in periods of declining

****************************************

UNIT - I
TOPIC 6

sales)

PRODUCTIVITY

Quantity too small to interest a supplier

Synopsis

Control of lead time, transportation, and warehousing costs

Meaning of productivity

Greater assurance of continual supply

Definition of productivity

Provision of a second source

Importance of productivity

Political, social or environmental reasons (union pressure)

Factors affecting productivity

Emotion (e.g., pride)

Measuring productivity

FACTORS THAT MAY INFLUENCE FIRMS TO BUY A PART

EXTERNALLY INCLUDE:

MEANING OF PRODUCTIVITY
Productivity is some relationship between inputs and outputs of an

Lack of expertise

enterprise. It is quantitative relationship between what we produce and

Suppliers' research and specialized know-how exceeds that of

the resources used.

the buyer

Productivity is defined in terms of utilization of resources, like

FACTORS AFFECTING PRODUCTIVITY

material and labour. In simple terms, productivity is the ratio of output

Economists site a variety of reasons for changes in productivity.

to input. For example, productivity of labour can be measured as units

However some of the principle factors influencing productivity rate

Produced per labour hour worked. Productivity is closely linked with

are:

quality, technology and profitability.

1. The technological factors can increase the output per unit of

input substantially. They can be defined in terms of technology
employed, tools and raw material used.

DEFINITION OF PRODUCTIVITY
According to Peter Drucker, productivity means a balance between all

2. The labor factors are characterized by the degree of skills of

factors of Production that will give the maximum output with the

the works force, health, and attitude towards management,

smallest efforts.

training and discipline

3. Managerial factors can be located in organizational structure,
scheduling of work, financial management, layout innovation,

IMPORTANCE OF PRODUCTIVITY:

The concept of productivity is of great significance for

personnel policies and practice work environment, material

undeveloped and developing countries. In both the cases there

management etc.

are limited resources which should be used to get the maximum

4. External factors or innumerable and identifiable in the

output i.e. there should be tendency to perform a job cheaper,

environment which an organization has to interact e.g., the

safer, and in quicker ways. The aim should be optimum use of

power and transport facilities, tariffs and taxes etc have

resources so as to provide maximum satisfaction with

important bearing on the levels of productivity. Some of these

minimum efforts and expenditure.

factors are controllable and some are uncontrollable and

Productivity analyses and measures indicate the stages and

demarcation should be made between the two.

situations where improvement in the working of inputs is

possible to increase the output.

MEASUREMENT OF PRODUCTIVITY

The productivity indicators can be used for different purposes

There are a number of ways to measure productivity. The main

viz. comparison of performance for various organizations,

criterion of measuring productivity is:

contribution of different input factors, bargaining with trade

unions etc.

In term of input performance by calculating changes in output

per unit of input.

On the basis of output performance by calculating changes in

available and the objective of investigation. In fact the measure of

input per unit in output.

productivity indicates the performance of inputs namely labor and

capital in an enterprise. Increase in output is not an indication of

Following are some of the measures in common use

increase in productivity. Production is an absolute measure and

productivity is a relative measure.

****************************************

Where output can be measured in total quantity produced and labor can

UNIT II

be measured in total manpower required to produce that output. Output

TOPIC 1

and labor can also be measured in terms of their value in money units.

PLANT LOCATION

Synopsis
Introduction
Factors affecting plant location
Selection of sites and its merits and demerits
Recent trends in plant location

INTRODUCTION
Every organisation has to face location problem one or the other day .
Before finding out those reasons for location decision and the factors
Each kind of measure needs some specific kind of information. The
appropriate measure can be selected on the basis of information

affecting thereof one would like to know the following:-

FACTORS AFFECTING THE PLANT LOCATION

1. Supply of raw material: It is necessary to consider the adequate

7. Natural factors--affect the location of those industries which

require a particular climate or weather conditions

supply of raw materials and the nature of raw materials. The cost of

8. Political factors-States with stable government attract more

raw materials is an important element of the total cost of production.

industries

2. Nearness to market: Nearness to market is important from the

9. Government Subsidies and Facilities- Government gives subsidies

point of view of control over the market. In those industries where the

and good industrial development facilities in backward areas.

raw materials are obtained from different source, nearness to source of

Industries reach these places to reap the benefits of such facilities.

raw materials is not as important as nearness to the market.

3. Transport Facilities: Speedy transport facilities are needed for the
regular and timely supply of raw materials at low.
4. Availability of labour: The supply of labour at low cost is
important .It should also be regular. Nearness to source of labour
supply is very important. Therefore, producers should have regular

10. Miscellaneous factorsa) Sufficient water supply

b) Disposal of waste
c) Dangers of air-attacks
d) Community attitude

labour supply by reducing absenteeism and strikes due to

unsatisfactory working conditions.
5. Power: power may be

electrical, diesel and atomic energy. All

types of power required must be in abundance in order to ensure

smooth flow of production.
6. Supply of capital: Industries require huge capital hence capital
market must be developed at industrial centres. Not only this,
industrial development banks and other financial services must also be
encouraged.

e) Ecological and environment considerations etc.

SELECTION OF SITE (URBAN, RURAL OR SUBURBAN
AREA)
There are broadly three possible alternatives open for the selection
of the locality of the industrial unit:
1. urban or city area
2. rural area
3. suburban area

The relative advantages and disadvantages of each area are discussed

5. Trade union movement is very strong.

as under:

6. The rates of taxes are also relatively high.

URBAN AREA
Due to certain typical advantages available only in the city
area, promoters show preference for the city area as the location of the

7. The industrialization in the city area gives birth to slums and

dirty residences which creates the typical problems of
sanitation and health.
RURAL AREA

industrial unit.
Advantages of Rural Area
ADVANTAGES OF CITY AREA

1. The land is available at cheaper rates.

1. Availability of good transportation facilities

2. Large plots of the land available.

2. Good and prompt postal and communication services

3. The rates of labour are relatively lower.

3. Banking and credit facilities.

4. The rate of labour turnover is low.

4. Services of insurance companies.

5. The industrial relations between labour and management are

5. Sufficient storing facilities.

6. Ample availability of skilled and unskilled workers.

relatively amicable.
6. The municipal restrictions, which are found in city areas, do

7. Vicinity of the market.

not exist in rural areas, e.g., height of building, constructed area

8. Facility of the ancillary and service units.

in total land etc.

9. Transport facilities by road and railways.

7. Slums and dirty residence are not found in rural areas.

10. Development of the training institutes.

8. No danger of bombardment in wartime.

11. Educational, medical and recreational institutes increase the

amenities of lives.
DISADVANTAGES OF URBAN OR CITY AREA
1. The cost of land is very high.

LIMITATIONS OF RURAL AREA

1. Transportation facilities are not available
2. Sometimes the services of post and telegraph and means of
communication are not available

2. Sufficient land is not available.

3. Banking and credit facilities are also not available

3. The cost of labour is relatively high.

4. Absence of insurance facilities

4. The rate of labour turnover is very high.

5. Storing and warehouse facilities

6. Passenger facilities are not available

7. The advantage of ancillary units and service unit is not
available
8. Such units are very far from the market place and this increases
the cost of distribution of finished goods
9. Skilled workers are not available
10. Municipal facilities like water supply, drainage, fire fighting
are not available in rural areas
11. There is absence of recreation facilities, good educational
institutes, good and sufficient medical facilities etc.
SUBURBAN AREA
The city area as a location of industrial unit has got many
negative aspects. The other extreme is a rural area, which again is not
free from many limitations. The better compromise in the decision is in
the selection of suburban area as the location of the industrial unit.
Suburban area is the area located on the outskirts of the city area.
Suburban area matches the advantages of the rural area with those of
city area which is located at a short distance, e.g. Odhav, narol,
kathawada, naroda, and vatva are the suburban areas of the ahmedabad
city.
Advantages of suburban area
1. Land is available at a cheaper rate
2. Adequate land is available
3. Infrastructure facilities like road, water supply, drainage etc.
4. Skilled and unskilled both type of labourers are available

5. It is possible to tap the advantage of industrial training

institutes, management development programmes etc, which
are available in nearby city area
6. The nearby city area provides a substantial market for the
products of the unit
7. Educational institutes, medical facilities and other recreational
facilities are available in the suburban area itself as well as in
the nearby city area
The limitation of suburban area as a site for industry is that in the
development process, it may be converted into a part of the urban area
with all its merits and demerits.
RECENT TRENDS IN THE LOCATION OF INDUSTRIES
The traditional factors like nearness of sources of materials,
motive power, nearness of markets, labour supply etc. have no longer
remained the effective pulling forces for location of industries. The
location trends have changed substantially due to the development of
substitute raw materials, network of electrification and transportation
by roads and railway, mobility of the labour and persuasive and
compulsive policies of the government for balanced regional
development.
The recent trends in the selection of industrial locations can be
described as under.
1. Priority for the sub urban areas: the industrialist shows their
preference of the sub urban area as the sight for establishment of a new

unit or relocation of the existing one. The industrial policy of the

are sold to the prospective promoters. The establishment of industrial

government does not permit the establishment of a new unit or

states has greatly affected the location of industry.

expansion of an existing one in city areas.

4. Decentralization of industries: under the conscious industrial

2.Industrial development in the notified backward areas: in order

policy of the government, concentration of industrial units is prevented

to have balanced regional development, the central government as well

through licensing policy. New units are not permitted to be started and

as the state government has notified certain backward areas; example

certain industrially congested areas. Similarly, existing units are

punch mahals, bharuch and sunder nagar are the centrally notified

established in additional plants in a less developed areas or sometimes

backward district of gujarat state. Similarly, gujarat state government

relocate the whole unit in such areas.

has also notified certain backward talukas. Different types of

incentives like cash subsidy, tax relieves, concessional financial
assistance, cheaper land and power supply etc. are provided. So, many
such areas have been developed substantially in recent times. An
illustration can be cited for the industrial development of dhabol in
punch mahals, ankleshwar in bharuch and sunder nagar.
3. Establishment of industrial estate: industrial estate is a piece of
vast land divided into different plots wherein factory shades are
constructed. The government of India has planned a national policy for
the development of industrial estate. It has assigned a responsibility of
the development of the industrial estate to state governments. In each
state, the state development corporation (sdc) has developed many
industrial estates practically in all the districts of the state. Industrial
estates have also been developed by private entrepreneurs and
chambers of commerce. The plots of land along with factory shades
and infrastructure facilities are developed in the industrial estates and

5. Increased role of the government in the decision of location of

industries: government through persuasive and compulsive methods
greatly affects the location decisions in recent times. It provides certain
attractive incentives to the promoters to establish their units in less
developed areas, at the same time it does not permit excessive
industrialization in certain developed areas.
6. Competition between government and institutions: as industry
provides job opportunities to the local population, many local
organizations attempt to tempt the prospective promoters to establish
the units in their areas. They provide different types of incentives like
cheap land, relief in local taxes etc. Sometimes the objective of local
organizations and the government comes in conflict on the issue of the
location of the industries. Thus, the whole pattern of decision about the
location of industries has undergone substantial changes in recent
times.
**********************************************

UNIT II

convenience, appearance, safety and profit. A poor layout results in

congestion, waste, frustration and inefficiency.

TOPIC 2

According to James Moore, Plant layout is a plan of an optimum

PLANT LAYOUT

arrangement of facilities including personnel, operating equipment,

storage space, material handling equipments and all other supporting

Synopsis

services along with the design of best structure to contain all these

Meaning of Plant layout

facilities.

Objectives of plant layout

In the words of James Lundy, It identically involves the

Principles of plant layout

allocation of space and the arrangement of equipment in such a manner

Types of plant layout

that overall costs are minimized.

Factors influencing plant layout

OBJECTIVES OF A GOOD PLANT LAYOUT

Tools/techniques of plant layout

MEANING OF PLANT LAYOUT

There is the proper utilization of space

Waiting time of the semi-finished products is minimized.

Working conditions are safer, better (well ventilated rooms etc.)

and improved

Plant layout means the disposition of the various facilities

(equipments, material, manpower etc.) within the areas of the site

Material handling and transportation is minimized and efficiently

controlled.

selected. Plant layout begins with the design of the factory building
and goes up to the location and movement of work. All the facilities

The movements made by the worker are minimized.

like equipment, raw material, machinery, tools, fixtures, workers etc.

Suitable spaces are allocated to production centers.

are given a proper place. In the words of James Lundy, It identically

Plant maintenance is simpler.

involves the allocation of space and the arrangement of equipment in

There is increased flexibility for changes in product

such a manner that overall cost is minimized. According to

MoNaughton

Waynel,

good

layout

results

in

comforts,

design and for future expansion.

A good layout permits material to move through the plant

at the desired speed with the lowest cost

There is increased productivity and better product quality

(vi). Principle of safety, security and satisfaction: A good layout is

with reduced capital cost.

one that gives due consideration to workers safety and satisfaction and
safeguards the plant and machinery against fire, theft, etc.

PRINCIPLES OF FACILITY LAYOUT

(i). Principle of integration: A good layout is one that integrates men,

(vii). Principle of minimum handling: A good layout is one that

materials, machines and supporting services and others in order to get

reduces the material handling to the minimum.

the optimum utilisation of resources and maximum effectiveness.

(ii). Principle of minimum distance: This principle is concerned with

TYPES OR CLASSIFICATION OF PLANT LAYOUT

the minimum travel (or movement) of man and materials. The facilities
should be arranged such that, the total distance travelled by the men

1. Process or Functional Layout

and materials should be minimum and as far as possible straight line

It is also known as functional layout and is characterized by keeping

movement should be preferred.

similar machines or similar operation at one location (place). In other

(iii). Principle of cubic space utilization: The good layout is one that
utilise both horizontal and vertical space. It is not only enough if only
the floor space is utilised optimally but the third dimension, i.e., the
height is also to be utilised effectively.

words, separate departments are established for each specialized

operation of production and machines relating to that function are
assembled there. For example, all lathe machines will be at one place,
all milling machines at another and so on. This type of layout is
generally employed for industries engaged in job-order production and

(iv). Principle of flow: A good layout is one that makes the materials

non-standardized products.

to move in forward direction towards the completion stage, i.e., there

should not be any backtracking.
(v). Principle of maximum flexibility: The good layout is one that
can be altered without much cost and time, i.e., future requirements
should be taken into account while designing the present layout.

Advantages of process layout

In process layout machines are better utilized and fewer

machines are required.

Flexibility of equipment and personnel is possible in

along the product flow line i.e. machines are arranged in the sequence

process layout.

in which a given product will be operated upon. This type of layout is

Lower investment on account of comparatively less

preferred for continuous production i.e. involving a continuous flow

number of machines and lower cost of general purpose

in-process material towards the finished product stage.

machines.

Higher utilisation of production facilities.

A high degree of flexibility with regards to work

distribution to machineries and workers.

The diversity of tasks and variety of job makes the job

challenging and interesting.

Limitations of process layout

Backtracking and long movements may occur in the handling
of materials thus, reducing material handling efficiency.

Material handling cannot be mechanised which adds to cost.

Process time is prolonged which reduce the inventory turnover
and increases the in-process inventory.

Lowered productivity due to number of set-ups.

Throughput (time gap between in and out in the process) time

is longer.

Space and capital are tied up by work-in-process.

2. Product or line Layout

The flow of product will be smooth and logical in flow

lines.

Supervisors will become highly knowledgeable about

the functions under their department

Advantages of Product layout

In-process inventory is less.

Throughput time is less.

Minimum material handling cost.

Simplified production, planning and control systems are

possible.

Less space is occupied by work transit and for

temporary storage.

Reduced material handling cost due to mechanised

handling systems and straight flow.

Perfect line balancing which eliminates bottlenecks and

idle capacity.

Manufacturing cycle is short due to uninterrupted flow

of materials.

It is also known as line (type) layout. It implies that various operations

on a product are performed in a sequence and the machine are placed

Small amount of work-in-process inventory.

Unskilled

workers

can

learn

and

manage

the

production.
Limitations

A breakdown of one machine in a product line

may cause stoppages of machines in the
downstream of the line.

A change in product design may require major

alterations in the layout.

The line output is decided by the bottleneck

machine.

Comparatively high investment in equipments is

required.

4. Fixed or static Layout

Lack of flexibility. A change in product may

In this type of layout, the material, or major components remain in a

require the facility modification.

fixed location and tools, machinery, men and other materials are

3 Combination Layout

brought to this location. This type of layout is suitable when one or a

A combination of process and product layouts combines the

few pieces of identical heavy products are to be manufactured and

advantages of both types of layouts. A combination layout is possible

when the assembly consists of large number of heavy parts, the cost of

where an item is being made in different types and sizes. Here

transportation of these parts is very high.

machinery is arranged in a process layout but the process grouping is

then arranged in a sequence to manufacture various types and sizes of
products. It is to be noted that the sequence of operations remains same
with the variety of products and sizes. The following figure shows a
combination type of layout for manufacturing different sized gears.

Advantages of fixed Layout:

4. Group layout or cellular layout/ Technology

Flexible: This layout is fully flexible and is capable of

There is a trend now to bring an element of flexibility into

absorbing any sort of change in product and process. The

manufacturing system as regards to variation in batch sizes and

project can be completed according to the needs of the

sequence of operations. A grouping of equipment for performing a

customers and as per their specifications.

sequence of operations on family of similar components or products

Lower labour cost: People are drawn from functional

has become all the important.

departments. They move back to their respective departments

as soon as the work is over. This is economical, if a number of
orders are at hand and each one is in the different stage

of

progress. Besides, one or two workers can be assigned to a

project from start to finish. Thus it reduces labour cost.

Saving in time: The sequence of operations can be changed if

some materials do

Group technology (GT) is the analysis and comparisons of

items to group them into families with similar characteristics. GT can
be used to develop a hybrid between pure process layout and pure flow
line (product) layout. This technique is very useful for companies that
produce variety of parts in small batches to enable them to take
advantage and economics of flow line layout.

not arrive or if some people are absent.

Since the job assignment is so long, different sets of people

The application of group technology involves two basic steps;

operate simultaneously on the same assignment doing different

first step is to determine component families or groups. The second

operations

step in applying group technology is to arrange the plants equipment

used to process a particular family of components. This represents

Disadvantages of fixed Layout:

Higher capital investment: As compared to product or

process layout, capital investment is higher in this type of
layout. Since a number of assignments are taken, investments
in materials, men and machines are made at higher cost.

small plants within the plants. The group technology reduces

production planning time for jobs. It reduces the set-up time.
Thus group layout is a combination of the product layout and process
layout. It combines the advantages of both layout systems. If there are
m-machines and n-components, in a group layout (Group-Technology

Unsuitability: This type of layout is not suitable for

Layout), the m-machines and n-components will be divided into

manufacturing or assembling small products in large quantities.

distinct number of machine-component cells (group) such that all the

It is suitable only in case where the product is big or the

assembling process is complex.

components assigned to a cell are almost processed within that cell

This type of layout may not be feasible for all situations.

itself. Here, the objective is to minimize the inter cell movements.

If the product mix is completely dissimilar, then we may not

have meaningful cell formation

FACTORS INFLUENCING PLANT LAYOUT

The following are some important factors, which influence the
planning of effective layout to a significant degree.
a) Nature of the product: The nature of the product to be
manufactured will significantly affect the layout of the plant.
Stationary layout will be most suitable for heavy products while
line layout will be best for the manufacture for the light products
because small and light products can be moved from one machine
Advantages of Group Technology Layout
Group Technology layout can increase

to another very easily and, therefore, more attention can be paid to

machine locations can be paid to machine locations and handling
of materials.

Component standardization and rationalization.

Reliability of estimates.

Effective machine operation and productivity.

Customer service.

b) Volume of production: Volume of production and the

standardization of the product also affect the type of layout. If
standardized commodities are to be manufactured on large scale,
line type of layout may be adopted.

It can decrease the

c) Basic managerial policies and decisions: The type of layout

Paper work and overall production time.

Work-in-progress and work movement.

Overall cost

Limitations of Group Technology Layout

depends very much on the decisions and policies of the

management to be followed in producing the commodity with
regard to the size of plant, kind and quality of the product, scope
for expansion to be provided for, the extent to which the plant is to

be integrated, amount of stocks to be carried at anytime, the kind of

and (3) mass production. Under job production goods are produced

employee facilities to be provided etc.

according to the orders of the customers and therefore, specification

d) Nature of plant location: The size shape and topography of the

site at which the plant is located will naturally affect the type of
layout to be followed in view of the maximum utilization of the
space available .For e.g., if a site is near the railway line the
arrangement of general layout for receiving and shipping and for
the best flow of production in and out the plant may be made by
the side of the railway lines .If space is narrow and the production
process is lengthy, the layout of plant may be arranged on the land

vary from customer to customer and the production cannot be

standardized. The machines and equipment can be arranged in a
manner to suit the need of all types of customers. Batch production
carries the production of goods in batches or group at intervals. In this
type of manufacturing the product is standardized and production is
made generally in anticipation of sales. In such cases functional or
process layout may be adopted. In case of mass production of
standardized goods, line layout is most suitable form of plant layout.

surface in the following manner:

g) Nature of machines:-

e) Type of industry process: This is one of the most important

Nature of machines and equipment also affects the layout of plants. If

factors influencing the choice of type of plant layout. Generally the

machines are heavy in weight or create noisy atmosphere, stationery

types of layout particularly the arrangement of machines and work

layout may reasonably be adopted. Heavy machines are generally fixed

centers and the location of workmen vary according to the nature

on the ground floor. Ample space should be provided for complicated

of the industry to which the plant belongs. For the purpose of lay

machines to avoid accidents.

out, industry may be classified into two broad categories: (i)

Intermittent and (ii) continuous. Intermittent type of industries is

h) Climate:-

those, which manufacture different component or different

Sometimes, temperature, illumination and air are the deciding factors

machines.

in the location of machines and their establishments. For example, in

lantern manufacturing industry, the spray-painting room is built along

f) Types of methods of production: Layout plans may be different according to the method of production
proposed to be adopted. Any of the following three methods may be
adopted for production- (1) Job order production, (2) batch production,

the factory wall to ensure the required temperature control and air
expulsion and the process of spray painting may be undertaken.
i) Nature of material: -

Design and specification of materials, quantity and quality of materials

layout should also provide for the comforts to the workers such as

and combination of materials are probably the most important factors

provision of rest rooms, drinking water and other services etc.

to be considered in planning a layout. So, materials storage, space,

sufficient space is also to be provided for free movement of workers.

volume and weight of raw materials, floor load capacity, ceiling height
,method of storing etc. should be given special consideration. This will

l) Characteristics of the building: -

affect the space and the efficiency of the production process in the

Shape of building, covered and open area, number of storeys,

plant. It will facilitate economic production of goods and prompt

facilities of elevators, parking area and so on also influence the layout

materials flow and soundly conceived materials handling system.

plan. In most of the cases where building is hired, layout is to be

adjusted within the spaces available in the building. Although minor

j) Type of machine: -

modification may be done to suit the needs of the plants and

Machines and equipment may be either general purpose or special

equipment. But if any building is to be constructed, proper care should

purpose. In addition certain tools are used. The requirements of each

be given to construct it according to the layout plan drawn by experts.

machine and equipment are quite different in terms of their space;

Special type of construction is needed to accommodate huge or

speed and material handling process and these factors should be given

technical or complex or sophisticated machines and equipment.

proper consideration while choosing out a particular type of layout.

This should also be considered that each machine and equipment is

TOOLS AND TECHNIQUES OF PLANT LAYOUT

used to its fullest capacity because machines involve a huge

1)Charts and diagrams:

investment. For instance, under product layout, certain machines may

In order to achieve work simplification, production engineers make use

not be used to their full capacity so care should be taken to make full

of several charts and diagrams for summarizing and analyzing

use of the capacity of the machines and equipment.

production process and procedure. These include

k) Human factor and working conditions:-

a)Operation process chart:

Men are the most important factor of production and therefore special

It subdivides the process into separate operations and inspection. When

consideration for their safety and comforts should be given while

a variety of parts and products are manufactured which follow a

planning a layout, specific safety items like obstruction-free floor,

different path across several floor areas, an operation process chart

workers not exposed to hazards, exit etc. should be provided for. The

may be necessary for the important material items or products. The

flow lines of the charts indicate the sequence of all operation in the

(3) Templates: Template is the drawing of a machine or tool cut out

manufacturing cycle.

from the sheet of paper. Cutting to scale shows the area occupied by a

b) Flow process chart:

machine. The plant layout engineer prepares a floor plan on the basis
of reel vent information made available to him. The template technique

This chart is the graphic summary of all the activities taking place on

is an important technique because (i) it eliminates unnecessary

the production floor of an existing plant. By preparing this type of

handlings, (ii) minimize backtracking of materials, (iii) it makes the

chart, it can be found out as to where operations can be eliminated ,

mechanical handling possible, (iv) it provides a visual picture of

rearranged, combined, simplified or subdivided for greater economy.

proposed or existing plan of layout at one place, (v) it offers flexibility

3. Process flow diagram:

The diagram is both supplement and substitute of process flow chart. It
helps in tracing the movement of material on a floor plan or layout
drawing. A diagram may be drawn to scale on the original floor plan to
show the movement of work. It is a good technique to show long
materials hauls and backtracking of present layouts, thereby indicating
how the present layout may be improved. Colored lines can show the
flow of several standards products. Layouts, thereby indicating how
the present layout may be improved. Colored lines can show the flow
of several standard products.
(2) Machines data card: This card provides full information
necessary for the placement and layout of equipment. The cards are
prepared separately for each machine. The information generally given
on these cards include facts about the machine such as capacity of the
machines, scape occupied, power requirements, handling devices
required and dimensions.

to meet future changes in the production requirements.

(4) Scale models: Though the two-dimensional templates are now in
extensive use in the fields of layout engineering but it is not much use
to executives who cannot understand and manipulate them .One
important drawback of template technique is that it leaves the volume,
depth, height and clearance of the machines to the imaginations of the
reader of the drawing. These drawbacks of the template technique have
been removed through the development of miniature scale models of
machinery and equipment cast in metal.
(5) Layout drawings: Completed layouts are generally represented by
drawings of the plant showing wall, columns, stairways, machines and
other equipments, storage areas and office areas.
********************************************

UNIT II
TOPIC - 3
CAPACITY PLANNING

b) Affects operating costs: We already know that estimated or

forecasted demand differs from actual demand, so the ideal concept of
capacity matching demand is untrue. Organizations should be willing
to take a critical decision to balance the cost of over and under
capacity. Overcapacity reflects overkill of resources and under

Synopsis
Meaning of capacity
Importance of Capacity

capacity shows a weak management philosophy to make best use of an

available market.
c) Acts as a major determinant of initial costs: It is typical to see

Types of capacity

that greater the capacity of a productive unit, greater would be the cost.

Factors influencing capacity

This does not mean I am advocating a one to one relationship for

Capacity planning strategies

higher capacity for production to costs; in fact larger units tend to cost
proportionately less than smaller units. E.g. Pakistan Steel Mill at
Karachi is one good example, where higher costs are misunderstood as

MEANING OF CAPACITY
Capacity is the limiting capability of a productive unit to
produce within a stated time period, normally expressed in terms of
output units per unit of time.

the mills capacity is not being fully utilized

d) Involves long-term commitment: Once long term commitments of
resources have been taken, the difficulty of reversing would cost more.
Indicating a capacity increase or decrease for an organization set up

IMPORTANCE OF CAPACITY PLANNING

would mean additional costs.

a) Impacts ability to meet future demands: Capacity essentially

e) Affects competitiveness: This is very critical, if a firm has an

limits the rate of possible output. Having capacity to satisfy demand

excessive capacity or can quickly add capacity, which fact may serve

can allow a company of taking advantage of tremendous opportunities.

as a barrier against entry by other firms.

An international automobile manufacturer of good repute increased its

production by working on its capacity decision after its quality product
received a lot more demand than it was originally anticipated.

f) Affects ease of management: Capacity increase or decrease

decisions involves management to answer the question of operating the
organization as well as an increase or decrease in the plant capacity

g) Globalization adds complexity: Capacity decision often involves

labour. The system efficiency is expressed as ratio of actual measured

making a decision in a foreign country which requires the management

output to the system capacity.

to know about the political, economic and cultural issues.

System Efficiency (SE) = Actual output

h) Impacts long range planning: Capacity decisions extend beyond

18 months and thus get classified as long term in nature

System capacity
3. Licensed capacity: Capacity licensed by the various regulatory
agencies or government authorities. This is the limitation on the output

TYPES OF CAPACITY

exercised by the government.

1. Design capacity: Designed capacity of a facility is the planned or

4. Installed capacity: The capacity provided at the time of installation

engineered rate of output of goods or services under normal or full

of the plant is called installed capacity.

scale operating conditions. For example, the designed capacity of the

cement plant is 100 TPD (Tonnes per day). Capacity of the sugar

5. Rated capacity: Capacity based on the highest production rate

established by actual trials is referred to as rated capacity.

factory is 150 tons of sugarcane crushing per day.

2. System capacity: System capacity is the maximum output of the
specific product or product mix the system of workers and machines is

FACTORS AFFECTING CAPACITY DECISION

capable of producing as an integrated whole. System capacity is less

1. Facilities. The design of facilities includes the size as well as the

than design capacity or at the most equal, because of the limitation of

provision of expansion. Other important factors that are necessary

product mix, quality specification, breakdowns. The actual is even less

include transportation costs, distance to market, labor supply, energy

because of many factors affecting the output such as actual demand,

supply sources and the ease and smoothness with which work can be

downtime

performed. We should also include environmental factors such as

due

to

machine/equipment

failure,

unauthorized

absenteeism.
The system capacity is less than design capacity because of long range
uncontrollable factors. The actual output is still reduced because of
short-term effects such as, breakdown of equipment, inefficiency of

heating, lighting and ventilation which not only increase the

performance of the workforce but also act as source of motivation and
worker loyalty. A failure to comply with this would indicate poor
design which in reality translates to lack of managerial acumen.

2. Product and service factors can have a tremendous influence on

experienced shutting down of their facility if they could not provide

capacity. E.g. when items are similar, the ability of the system to

support to government regulations of pollution control.

produce those items is generally much greater than when successive

items are different and unique. The idea is more uniformity in the final

CAPACITY PLANNING DECISIONS AND STRATEGIES

product service output the greater capacity. I am making a reference to

Capacity planning is concerned with defining the long-term and the

a PC manufacturer in USA which decided that it would standardize its

short-term capacity needs of an organization and determining how

products and split its assembly lines only at the point where the a small

those needs will be satisfied. Capacity planning decisions are taken

differential product feature was required.

based upon the consumer demand and this is merged with the human,

3. Process factors refer to the quantity and quality requirements of a

material and financial resources of the organization.

process. Quantity always refers to capacity. Another added feature is

Capacity requirements can be evaluated from two perspectiveslong-

quality of output. If quality of output does not match the standard

term capacity strategies and short-term capacity strategies.

requirements it would generate inspection and possible reworks.

4. Human factors include skill, craftsmanship, training and
qualification to handle any job it also includes the motivational factors.

1. Long-term capacity strategies

Long-term capacity requirements are more difficult to determine
because the future demand and technology are uncertain. Forecasting

5. Operational factors with respect to effective capacity always refer

for five or ten years into the future is more risky and difficult. Even

to scheduling, late deliveries, acceptability of purchased materials,

sometimes companys todays products may not be existing in the

parts, quality inspection, control procedures and inventory problems.

future. Long range capacity requirements are dependent on marketing

Scheduling issues arise when an organization has a difference in

plans, product development and lifecycle of the product. Long-term

equipment capabilities for development of alternative capacities.

capacity planning is concerned with accommodating major changes

Inventory problems have a negative impact on capacity

that affect overall level of the output in long-term.

6. Supply chain factors relate to any short coming to suppliers,

1. Multiple products: Companys produce more than one product

warehouse processing, operational hick up or distribution issues.

using the same facilities in order to increase the profit. The

7. External factors include product standards, safety regulations,

unions and pollution control standards. At times organizations have

manufacturing of multiple products will reduce the risk of failure.

Having more than one product helps the capacity planners to do a

better job. Because products are in different stages of their life-cycles,

capacity and then take decisions as to when the capacity adjustments

it is easy to schedule them to get maximum capacity utilisation.

are needed.

2. Phasing in capacity: In high technology industries, and in

For short-term periods of up to one year, fundamental capacity

industries where technology developments are very fast, the rate of

is fixed. Major facilities will not be changed. Many short-term

obsolescence is high. The products should be brought into the market

adjustments for increasing or decreasing capacity are possible. The

quickly. The time to construct the facilities will be long and there is no

adjustments to be required depend upon the conversion process like

much time as the products should be introduced into the market

whether it is capital intensive or labour intensive or whether product

quickly. Here the solution is phase in capacity on modular basis. Some

can be stored as inventory. The short-term capacity strategies are:

commitment is made for building funds and men towards facilities

over a period of 35 years. This is an effective way of capitalising on
technological breakthrough.
3. Phasing out capacity: The outdated manufacturing facilities cause
excessive plant closures and down time. The impact of closures is not

1. Inventories: Stock of finished goods during slack periods to meet

the demand during peak period.
2. Backlog: During peak periods, the willing customers are requested
to wait and their orders are fulfilled after a peak demand period.

limited to only fixed costs of plant and machinery. Thus, the phasing

3. Employment level (hiring or firing): Hire additional employees

out here is done with humanistic way without affecting the community.

during peak demand period and layoff employees as demand

The phasing out options makes alternative arrangements for men like

decreases.

shifting them to other jobs or to other locations, compensating the

employees, etc.
2. Short-term capacity strategies
Managers often use forecasts of product demand to estimate the
short-term workload the facility must handle. Managers looking ahead
up to 12 months, anticipate output requirements for different products,

4. Employee training: Develop multi-skilled employees through

training so that they can be rotated among different jobs. The multiskilling helps as an alternative to hiring employees.
5. Subcontracting: During peak periods, hire the capacity of other
firms temporarily to make the component parts or products.
6. Process design: Change job contents by redesigning the job.

and services. Managers then compare requirements with existing

***************************************

UNIT- III
TOPIC 1
MATERIAL HANDLING
Synopsis

from the plant. It is in fact, the technique of getting the right goods
safely, to the right place, at the right time and at the right cost.
According to Hendry Fayol It is a system of auxiliary equipment that
improves flow of material which intern reduces stoppage in production
machines and thus increases productivity of machine. These equipment
are designed in order to supplement the production machines.

Introduction
Meaning of Material Handling
Principles of Material Handling
Types of material Handling Equipment

PRINCIPLES OF MATERIAL HANDLING

1. Planning principle: All handling activities should be planned.
2. Systems principle: Plan a system integrating as many handling
activities as possible and co-ordinating the full scope of operations
(receiving, storage, production, inspection, packing, warehousing,
supply and transportation).

INTRODUCTION
Material handling is the art and science involving the movement,
handling and storage of materials during different stages of
manufacturing. Thus the function includes every consideration of the
product except the actual processing operation. In many cases, the
handling is also included as an integral part of the process. Through
scientific material handling considerable reduction in the cost as well
as in the production cycle time can be achieved.

3. Space utilisation principle: Make optimum use of cubic space.

4. Unit load principle: Increase quantity, size, weight of load handled.
5. Gravity principle: Utilise gravity to move a material wherever
practicable.
6. Material flow principle: Plan an operation sequence and equipment
arrangement to optimise material flow.
7. Simplification principle: Reduce combine or eliminate unnecessary
movement and/or equipment.
8. Safety principle: Provide for safe handling methods and equipment.

MEANING AND DEFINITION OF MATERIAL HANDLING

Materials handling may be defined as the art and science of movement,
handling and storage of materials during different stages of
manufacturing considered as material flow into, through and away

9. Mechanisation principle: Use mechanical or automated material

handling equipment.
10. Standardisation principle: Standardise method, types, size of
material handling equipment.

11. Flexibility principle: Use methods and equipment that can

manoeuvrable and various attachments are provided to increase their

perform a variety of task and applications.

versatility. Material Handing Equipments may be classified in five

12. Equipment selection principle: Consider all aspect of material,

major categories.

move and method to be utilised.

a) CONVEYORS

13. Motion principle: Equipment designed to transport material

Conveyors are useful for moving material between two fixed

should be kept in motion.

workstations, either continuously or intermittently. They are mainly

14. Idle time principle: Reduce idle time/unproductive time of both

used for continuous or mass production operationsindeed, they are

MH equipment and man power.

suitable for most operations where the flow is more or less steady.

15. Maintenance principle: Plan for preventive maintenance or

Conveyors may be of various types, with rollers, wheels or belts to

scheduled repair of all handling equipment.

help move the material along: these may be power-driven or may roll
freely. The decision to provide conveyors must be taken with care,

MATERIAL HANDING EQUIPMENTS

since they are usually costly to install; moreover, they are less flexible

Broadly material handling equipments can be classified into two

and, where two or more converge, it is necessary to coordinate the

categories, namely:

speeds at which the two conveyors move.

(I) Fixed path equipments and (II) Variable path equipments.

b) INDUSTRIAL TRUCKS

(I) Fixed path equipments which move in a fixed path. Conveyors,

Industrial trucks are more flexible in use than conveyors since they can

monorail devices, chutes and pulley drive equipments belong to this

move between various points and are not permanently fixed in one

category. A slight variation in this category is provided by the

place. They are, therefore, most suitable for intermittent production

overhead crane, which though restricted, can move materials in any

and for handling various sizes and shapes of material. There are many

manner within a restricted area by virtue of its design. Overhead cranes

types of truck petrol- driven, electric, hand-powered, and so on. Their

have a very good range in terms of hauling tonnage and are used for

greatest advantage lies in the wide range of attachments available;

handling bulky raw materials, stacking and at times palletizing.

these increase the trucks ability to handle various types and shapes of

(II) Variable path equipments have no restrictions in the direction of

material.

movement although their size is a factor to be given due consideration

c) CRANES AND HOISTS

trucks, forklifts, mobile cranes and industrial tractors belong to this

The major advantage of cranes and hoists is that they can move heavy

category. Forklifts are available in many ranges, they are

materials through overhead space. However, they can usually serve

only a limited area. Here again, there are several types of crane and
hoist, and within each type there are various loading capacities.
Cranes and hoists may be used both for intermittent and for continuous
production.
d) CONTAINERS
These are either dead containers (e.g. Cartons, barrels, skids, pallets)
which hold the material to be transported but do not move themselves,
or live containers (e.g. wagons, wheelbarrows or computer selfdriven containers). Handling equipments of this kind can both contain
and move the material, and is usually operated manually.
e) ROBOTS
Many types of robot exist. They vary in size, and in function and
manoeuvrability. While many robots are used for handling and
transporting material, others are used to perform operations such as
welding or spray painting. An advantage of robots is that they can
perform in a hostile environment such as unhealthy conditions or carry
on arduous tasks such as the repetitive movement of heavy materials.
The choice of material-handling equipment among the various
possibilities that exist is not easy. In several cases the same material
may be handled by various types of equipments, and the great diversity
of equipment and attachments available does not make the problem
any easier.
In several cases, however, the nature of the material to be handled
narrows the choice. Some of the material handling equipment are
shown in Figs. 3.1 to 3.13.

UNIT- III
TOPIC 2
PRODUCTION PLANNING AND CONTROL

Synopsis
Introduction
Meaning of PPC
Importance of PPC
Functions of PPC

INTRODUCTION
Planning and control are basic managerial functions which are
essential to every organized activity. Proper planning and control of
manufacturing activities or the production system is equally essential
for efficient and economical production. Economy and productivity are
to a large extent directly proportional to the thoroughness with which
the planning and control functions are performed.

In a modern

enterprise, production is a complex system and steps must be taken to

ensure that goods are produced in the right quantity and quality, at the
right time and place and by the most efficient methods possible. This
is the task of production planning and control.

MEANING AND DEFINITION OF PPC

**************************************************

Production planning and control is a tool available to the management

to achieve the stated objectives. Thus, a production system is

encompassed by the four factors. i.e., quantity, quality, cost and time.

reasonable prices as per promised delivery dates. Delivery in time and

Production planning starts with the analysis of the given data, i.e.,

proper quality, both help in winning the confidence of customers,

demand for products, delivery schedule etc., and on the basis of the

improving relations with customers and promoting profitable repeat

information available, a scheme of utilisation of firms resources like

orders.

machines, materials and men are worked out to obtain the target in the
most economical way.
Production planning and control can be defined as the direction and
coordination of firms resources towards attaining the prefixed goals.
Production planning and control helps to achieve uninterrupted flow of
materials through production line by making available the materials at
right time and required quantity

IMPORTANCE

OF

PRODUCTION

PLANNING

AND

CONTROL
The system of production planning and control serves as the nervous
system of a plant. It is a co- ordinating agency which co-ordinate the
activities of engineering, purchasing, production, selling and stock
control departments. An efficient system of production planning and
control helps in providing better and more economic goods to
customers at lower investment. It is essential in all plants irrespective
of their nature and size. The principal advantages of production
planning and control are summarized below:

(i) Better Service to Customers: Production planning and control,

through proper scheduling and expediting of work, helps in providing
better services to customers is terms of better quality of goods at

(ii) Fewer Rush Orders :In an organization, where there is effective

are available to the workers in time as per the production schedule.

system of production planning and control, production, operations

Consequently, less man-hours are lost, which has a positive impact on

move smoothly as per original planning and matching with the

the cost of production.

promised delivery dates. Consequently, there will be fewer rush orders

(vi) Improved Plant Morale: An effective system of production

in the plant and less overtime than, in the same industry, without

planning and control co-ordinates the activities of all the departments

adequate production planning and control.

involved in the production activity. It ensures even flow of work and

(iii) Better Control of Inventory: A sound system of production

avoids rush orders. It maintains healthy working conditions in the

planning and control helps in maintaining inventory at proper levels

plant thus, there is improve plant morale as a by-product.

and, thereby, minimizing investment in inventory. It requires lower

(vii) Good public image: A proper system of production planning and

inventory of work-in-progress and less finished stock to give efficient

control is helpful in keeping systematized operations in an

service to customers. It also helps in exercising better control over

organization .Such an organization is in a position to meet its orders in

raw-material

time to the satisfaction of its customers. Customers satisfaction leads

inventory,

which

contributes

to

more

effective

purchasing.

to increased sales, increased profits ,industrial harmony and,

(iv) More Effective Use of Equipment : An efficient system of

ultimately, good public image of the enterprise .

production planning and control makes for the most effective use of

(viii) Lower capital requirements: Under a sound system of

equipment. It provides information to the management on regular basis

production planning and control , everything relating to production is

pertaining to the present position of all orders in process, equipment

planned well in advance of operations

and personnel requirements for next few weeks. The workers can be
communicated well in advance if any retrenchment, lay-offs, transfer,

FUNCTIONS OF PRODUCTION PLANNING AND CONTROL

etc. is likely to come about. Also, unnecessary purchases of equipment

Functions of production planning and controlling is classified into:

and materials can be avoided. Thus, it is possible to ensure proper

1. Pre-planning function

utilization of equipment and other resources.

2. Planning function

(v) Reduced Idle Time: Production planning and control helps in

3. Control function

reducing idle time i.e. loss of time by workers waiting for materials

The functions of production planning and controlling are depicted in

and other facilities; because ensures that material and other facilities

the Fig. 5.2.

Prepared by
Mrs.Vijayarani Anandan, MBA., M.Phil., NET., (Ph.D)
Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 42

4. PRE-PLANNING FUNCTION
Pre-planning is a macro level planning and deals with analysis of data
and is an outline of the planning policy based upon the forecasted
demand, market analysis and product design and development. This
stage is concerned with process design (new processes and
developments, equipment policy and replacement and work flow
(Plant layout). The pre-planning function of PPC is concerned with
decision-making with respect to methods, machines and work flow
with respect to availability, scope and capacity.
5. PLANNING FUNCTION
The planning function starts once the task to be accomplished is
specified, with the analysis of four Ms, i.e., Machines, Methods,
Materials and Manpower. This is followed by process planning
(routing). Both short-term (near future) and long-term planning are
considered. Standardisation, simplification of products and processes
are given due consideration.
6. CONTROL FUNCTION
Control phase is effected by dispatching, inspection and expediting
materials control, analysis of work-in-process. Finally, evaluation

********************************************

makes the PPC cycle complete and corrective actions are taken
through a feedback from analysis. A good communication, and
feedback system is essential to enhance and ensure effectiveness of
PPC.

Prepared by
Mrs.Vijayarani Anandan, MBA., M.Phil., NET., (Ph.D)
Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 43

UNIT IV
TOPIC - 1
INVENTORY CONTROL

Synopsis
Meaning of Inventory
Objectives of Inventory
Types of Inventory
Purpose of Inventory
Reason for carrying inventory

To ensure availability of material at all times.

To minimize wastage.

To Offer better service for customers.

To promote manufacturing efficiency.

To Control production level.

To economize on purchasing.

To Optimization of investment and efficient use of capital.

Costs involved in inventory

Inventory control techniques (MRP I and MRP II)
Selective Inventory control Techniques
Inventory models (EOQ / EBQ and P & Q system of inventory)

TYPES OF INVENTORY

Raw materials and purchased parts from outside

suppliers.

MEANING OF INVENTORY
Inventory are those stocks or items which are used to support
production (raw materials and work-in-process items), supporting
activities (maintenance, repair, and operating supplies), and customer
service (finished goods and spare parts).
The purpose of inventory management is to determine the amount of
inventory to keep in stock- how much to order and when to replenish,
or order.

Components: subassemblies that are awaiting final

assembly.

Work in process: all materials or components on the

production floor in various stages of production.

Finished goods: final products waiting for purchase or

to be sent to customers.

Supplies: all items needed but that are not part of the
finished product, such as paper clips, duplicating

OBJECTIVES OF INVENTORY

machine toner, and tools.

Prepared by
Mrs.Vijayarani Anandan, MBA., M.Phil., NET., (Ph.D)
Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 44

PURPOSES OF INVENTORY

operational support. These inventories include spare parts of

production machinery, consumables, like lubricants and welding rods,

To maintain independence of operations

To meet variation in product demand

To allow flexibility in production scheduling

To provide a safeguard for variation in raw material delivery

clients. This is closely related to the level of customer service offered

time

by the company.

To take advantage of economic purchase-order size

4. Hedging against future expectations: To take care of shortages of

chemical etc. 3.Customer service considerations: Products like

equipment, machinery or appliances require replacement of spare parts
for trouble free and smooth operations. Suppliers maintain an
inventory of these parts to extend after sales services to their valued

material availability in the market or an anticipated increase in the

prices of the product, the customer buys in excess and keeps the
REASONS FOR CARRYING INVENTORY

material in stock, in order to keep his operations running without

interruptions. This obviously increases the inventory level for a short

Inventory is required for producing finished goods, extending service

to the customers and keeping the buyers manufacturing operation

period. However the benefits derived from keeping excess inventory

outweighs its carrying cost.

running. Hence, inventory plays an important role in the supply chain

of the organization. Following are the reasons for carrying inventory:

COSTS INVOLVED IN INVENTORY

a) Carrying Costs

1. Meeting production requirement: Raw materials, components and

parts are required for producing finished goods. The manufacturing

Carrying costs cover the cost incurred as a result of carrying inventory.

organization keeps stocks of these materials to meet the requirement of

These costs include the money tied up in inventory, the costs of storing

production. Companies operating on JIT principle also keep some

and managing the inventory, such as warehouse costs, equipment costs,

inventory in stock to meet contingencies.

inventory management systems, personnel etc. Costs associated with the

risk of damage, loss, scrap, wear and tear, and obsolescence must also

2. Supporting operational requirement: To support production

operations, inventories are required for repairs, maintenance and
Prepared by
Mrs.Vijayarani Anandan, MBA., M.Phil., NET., (Ph.D)
Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 45

be included here, along with the cost of insuring against some of these

repacking the product. Moreover, by the time a problem is identified

risks.

and fixed, other volumes of product are likely to have been produced
with similar or different defects. The cost associated with this could be

b) Purchasing Costs

considerable.

An organization has to invest funds to buy the relevant components

and raw materials in order to build up the inventory. This investment
comes from savings, cash flow, or borrowings.

f) Cost of Obsolescence
The greater the level of inventory in a process, the higher the risk that
components or finished products may have to be scrapped because of

c) Storage Costs

obsolescence. For example, if engineering personnel decide to change a

Regardless of the type of inventory held, space will be needed to store

feature on a product in response to customer demands, the customers

the material. The cost of space is significant in any business, and

might not want the older model. An engineering change may also mean

unnecessary levels of stock should be avoided. Warehousing costs

that a particular component is no longer needed for the organizations

include maintenance of warehouse and equipment, the capital cost of the

products.

storage facility (for example rental), and, most significantly, the cost of
labor required to manage and move materials.

g) Cost of Ordering
Inventory management can reduce the overall ordering costs of raw

d) Insurance Costs

materials and components by ordering in larger quantities, which

Most manufacturing organizations insure their goods against losses due

decreases the number of orders. However, the total landed cost of the

to factors such as fire, flood, and theft. Therefore, the higher the value of

item, and not just the price of the item itself, needs to be taken into

goods in storage, the higher the insurance costs.

account. This includes the cost of receivers who take in material, the
costs of setting up suppliers, and the cost of material planners and

e) Quality Costs

buyers, and any other cost associated with placing orders on either the
If there are large amounts of inventory in storage and a quality problem

factory or suppliers.

is identified in the manufacturing process, significant costs will be

incurred in unpacking, retesting, and, if necessary, reworking, and

h) Cost of Items

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Mrs.Vijayarani Anandan, MBA., M.Phil., NET., (Ph.D)
Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 46

Suppliers do offer bargains and discounts for bulk buying. However, it

inventories can result in counting errors and recounts. The greater the

should be remembered that the total landed cost of the component is

in-house inventory, the greater the resource requirement and the

more important than the price of the component itself. The potential cost

likelihood of error becomes.

associated with poor quality, storage space, obsolescence, and insurance

for these bargain components must be considered.

l) Capacity-Related Costs
These costs result from changes to levels of manufacture. They include

i) Cost of Production Setup

overtime and undertime costs, hiring, layoff and training of staff, and

In many manufacturing organizations, the setup cost is considerable.

shift premiums. They can be avoided by levelling production and

This cost can be reduced by having machines processing the same

building inventory in slack periods that will be used to help meet

material and producing the same product for longer periods of time.

demand in busy periods.

Frequent changeover of the stock slows production down.

j)Cost of Stockouts and Lost Sales
If deliveries are not made on time to customers or if products are not
available on the market consistently, sales are likely to be lost. The cost

INVENTORY CONTROL TECHNIQUES:

1. Material Requirement Planning (MRP I)
2. Manufacturing Resource Planning (MRP II)

of a missed sale is very difficult to calculate, but the potential of losing

1. MATERIALS REQUIREMENT PLANNING (MRP- I) -

a customer and sales must be factored into any cost analysis.

Introduction
Material requirement planning is basically a planning tool,

k) Cost of Assessing Inventory

Most manufacturing organizations perform a physical inventory at
least annually, and production

which is based on sales forecast used in the production schedule.

Whether production schedule is based on historical past sales data or
market forecast, it takes into account the changes in the demand for the

activities cease during this period. Physical inventories are timeconsuming and usually require human and time resources for stock
count and discrepancy rectification. The manual nature of physical

end-products.
The idea of MRP is not entirely new. It was developed in the 1970s
and used before for job-lot production or custom build order.

Prepared by
Mrs.Vijayarani Anandan, MBA., M.Phil., NET., (Ph.D)
Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 47

However with the advent of Computers and Information Technology

rather than quantity, gives this planning tool a new meaning

the availability of quick information and data processing is now

eliminating carrying cost altogether

facilitated

Materials Requirement Plan [MRP I] is a Popular concept in

Basically MRP performs the following five functions:

1. It keeps track of a computerised Inventory Control.
2. It manages an efficient Production Planning System.

1960&1970. Consists of a computer system, a manufacturing

information system, and building on inventory, production scheduling
and administering all inputs to production and a concept and
philosophy of management.

3. Management Information system.

4. Manufacturing Control System.

MRP system consists of a set of logically related procedures,

decision rules, and records designed to translate a master production
schedule into time phased net inventory requirements and the planned

5. Time-phasing of requirements using posted average lead times.

The demand for the end-products is independent as also some
service parts and some service parts and some other higher order
assemblies sold direct to customers. Other requirements of materials,
components and parts have dependent demands based on endproducts, which are quantitatively expressed in the production
schedule. In MRP, safety stock at the item level disappears and the

coverage of such requirement for each component item needed to

implement schedule. An MRP system re-plans net requirements and
coverage as a result of changes in either the master schedule, demand,
and inventory status or product composition. MRP systems meet their
objective by computing net requirements for each inventory item,
time-phasing them, and determining their proper coverage
MEANING OF MRP I

order quantity formula which assumed a fairly constant demand, with

Material

some minor fluctuations, need not be calculated for discrete demands

for most of the dependant demand inventory items.

planning

is

Computer-based

information system that translates master schedule requirements for

end

The recognition of the fact that time is a more important element

requirements

items

into

time-phased

requirements

for

subassemblies,

components, and raw materials.

with respect to delivery and materials availability as per schedule

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Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 48

MRP is a systematic planning and control methodology for

of end products as specified in the master production schedule.MRP

production and inventory. Specifically, it is a procedure for planning

starts with customers demand for the quantity of end product and the

and controlling the raw material, purchased parts, and work in progress

time when the products are needed.

(WIP) inventories required in manufacturing in a product. MRP is

designed to answer three questions:
i.

What is needed,

ii.

How much is needed, and

iii.

When is it needed?

OBJECTIVES
a) Ensure the availability of materials components and products
for planned production and customer delivery.

MRP process consist of two elements:- 1. MRP Inputs and 2.

MRP outputs

b) Maintain the lowest possible inventory level.

c) Plan

manufacturing

activities,

delivery

schedules

and

The MRP I inputs are Master production schedule, bill of materials

inventory status file and product structure file.

purchasing activities.

a) Master production schedule (MPS)

PROCESS OF MRP - I
MRP is a simple system of calculating arithmetically the

Master Production Schedule is designed to meet the market demand

requirements of the input materials at different points of time based on

(both the firm orders and forecasted demand) in future in the taken

actual production plan. MRP can also be defined as a planning and

planning horizon. MPS mainly depicts the detailed delivery schedule

scheduling system to meet time-phased materials requirements for

of the end products. However, orders for replacement components can

production operations. MRP always tries to meet the delivery schedule

also be included in it to make it more comprehensive.

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Page 49

A Master Production Schedule or MPS is the plan that a

MRP Process get information from bill of materials record on what

company has developed for production, inventory, staffing, etc. It sets

type of raw materials, sun-components are required to produce the

the quantity of each end item to be completed in each week of a short-

required end product

range planning horizon. A Master Production Schedule is the master of

all schedules. It is a plan for future production of end items.
Master Production schedule provide information and details of
how many end items will be produces within specifies periods of time
to the MRP I.

c) Inven tory Status Fil e

Inventory status file keeps an up-to-date record of each item in the
inventory. Information such as, item identification number, quantity on
hand, safety stock level, quantity already allocated and the
procurement lead time of each item is recorded in this file.

b) Bill of materials (BOM)

II.MRP I ou tputs

Bill of Materials represents the product structure. It

encompasses information about all sub components needed, their

a) Planned Orders future

quantity, and their sequence of buildup in the end product. Information

This is the order quantity of an item that is planned to be ordered so

about the work centers performing buildup operations is also included

that it is received at the beginning of the period under consideration to

in it.

meet the net requirements of that period. This order has not yet been

A bill of materials (BOM) is a list of the raw materials, subassemblies, intermediate assemblies, sub-components, components,
parts and the quantities of each needed to manufacture an end product.
No physical dimension is described in BOM. Bill of materials is a
record of all the components of an item, the parent component
relationship and usage quantities of a particular product. The bill of
material information is derived from engineering design.

placed and will be placed in future.

b) Planned Order Release
This is the order quantity of an item that is planned to be ordered in the
planned time period for this order that will ensure that the item is
received when needed. Planned order release is determined by
offsetting the planned order receipt by procurement lead time of that
item.
c) Order Rescheduling

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Page 50

This highlights the need of any expediting, de-expediting, and

cancellation of open orders etc. in case of unexpected situations.

A limitation of software as adapting to specific situations is

difficult. So modification of the software is necessary

Advantages of MRP I

Improved business results [ROI, profits]

SELECTIVE INVENTORY CONTROL TECHNIQUES

Improved manufacturing results

For facilitation of procurement, consumption and costing, the materials

Better manufacturing control

More accurate and timely information

are classified in several ways discussed below.

a) ABC Analysis
To make investment on working capital effective, ideally the amount

Less inventory

Time phased ordering of materials

Less materials obsolescence

Higher reliability

More responsiveness to market demand

logged in each item of inventory should be analyzed. However, with

large amounts of such items and their speedy turnover, detailed
analysis is not easily possible. ABC analysis is based on the
assumption that 20% of all items held on inventory share 80% of its
total cost.

Group A consists of top 5 to 10% items which constitute 70 to

75% of total inventory cost.

Reduced production costs

Disadvantages of MRP - I

10 to 15% of cost.

Due to small lot purchases high material acquisition costs and

high ordering costs

Group B constitutes the middle 10 to 15% items and represent

Group C constitutes the remaining 75 to 85 % items costing 5

to 10% of the total inventory.

Stock out costs are more as safety stock protection is low

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The managements concern for these items follow Thick on

the best and thin on the rest focus the attention on the care, use and
disposal of the costliest few items and let the smaller value lot be
bought and stocked in plenty. Thus money locked is minimum and
purchase processing cost is minimized. This system was so popular
that the ABC System was once called Always Best Control.
However with automated inventories its use is gradually reducing.

e) FSN Classification
This classification is based on consumption pattern; items are
classified into Fast, Slow and Non moving items.
f) SDE Classification
This classification is based on Lead Time analysis for procurement or
purchasing. The items are classified into Scarce, Difficult or Easy to

b) VED Analysis

procure.

This system adds a new dimension to ABC analysis. The materials are

g) GOLF Classification

classified into Vital (like Head in a human being), Essential (like arms)
and Desirable (like hair). To cater for those items which can bring the
normal functioning of a factory to a standstill? EG. Critical machine

This is based on the supply resources and for formulating strategy for
procurement, items are classified into Government controlled,
ordinarily available in open market, Local and Foreign items.

spares or items in limited production.

h) S OS Classification
c) VEIN Analysis
This classification is based on seasonal or non seasonal availability of
In this system four classes. Vital, Essential, Important and Normal are

items. Items are classified as Seasonal and Off Seasonal.

used for classification. This classification may be combined with VED

or ABC Analysis to give a set of 12 strategies for the type of material
to be handled by an organization.

i) HML Classification
This classification is based on the individual costs. Items are classified

d) XYZ Classification

into High, Medium or Low cost items.

This is based on value of items in storage and used to review the

INVENTORY MODELS

inventories and their uses at scheduled interval. It helps in reduction

and control of obsolescence of inventories.
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Page 52

Inventory models deal with idle resources like men, machines,

1) Constant or uniform demand: Although the EOQ model assumes

money and materials. These models are concerned with two decisions:

constant demand, demand may vary from day to day. It also assumes

how much to order and when to order so as to minimize the total cost.

that the usage rate can be predicted exactly. If demand is not known in

For the first decisionhow much to order, there are two basic costs

advance the model must be modified through the inclusion of safety

are considered namely, inventory carrying costs and the ordering or

stock.

acquisition costs.

2) Constant unit price: The EOQ model assumes that the purchase

I. ECONOMIC ORDER QUANTITY (EOQ)

Economic order quantity (EOQ) is that size of the order which gives
maximum economy in purchasing any material and ultimately

price per unit of material will remain unaltered irrespective of the

order quantity. It also assumes a constant cost throughout the year. It
does not take into account the quantity discounts offered.

contributes towards maintaining the materials at the optimum level and

3) Constant carrying costs: Unit carrying costs may vary

at the minimum cost. In other words, the economic order quantity

substantially as the size of the inventory rises, perhaps decreasing

(EOQ) is the amount of inventory to be ordered at one time for

because of economies of scale of storage. This is not taken into

purposes of minimizing annual inventory cost.

consideration in EOQ. Same is the case with economy of transporting

The quantity to order at a given time must be determined by balancing

larger volumes. It is also assumed that this cost can be determined

two factors:

precisely.

(1) The cost of possessing or carrying materials and

4) Constant ordering cost: EOQ assumes that ordering cost are

(2) The cost of acquiring or ordering materials.

constant and can be determined precisely.

Purchasing larger quantities may decrease the unit cost of acquisition,

5) Instantaneous Delivery: it is assumed that the delivery of goods is

but this saving may not be more than offset by the cost of carrying

instantaneous, and further that there is no goods in transit.

materials in stock for a longer period of time.

Assumptions of EOQ Model:

6) Independent Orders: if multiple orders result in cost saving by

reducing paper work and the transportation cost, the original EOQ

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Page 53

model must be further modified. Thus, the EOQ model does not take

week; some can be ordered monthly, depends on how feasible it is

into aacount multiple products orders.

for eth firm. Further the model does not work well in case of

7) Availability of Finance: it is also assumed that there is no

constraint in the availability of funds.
Limitation of the EOQ Formula:
1. Erratic Changes usage: the formula presumes the usages of
materials are both predictable and evenly distributed. When this is
not the case, the formula becomes useless.
2. Faulty Basic Information: Order cost varies from commodity to
commodity and the carrying cost can vary with companys
opportunity cost of capital. Thus the assumption that the ordering
cost and the carrying cost remains constant is faulty and hence
EOQ calculations are not correct

seasonal items.
5. EOQ ordering must be used by Judgment:

sometimes

guidelines provide a conflict in ordering where an order strategy

conflicts with an operational goal, order strategy should be
changed to permit honoring the goal.
6. Quantity Discounts: in the EOQ analysis, it has been assumed
that material prices and transportation costs are constant factor for
the range of order quantities considered. In practice some
situations occur in which the delivered unit cost of material
decreases significantly if a slightly larger quantity than the
originally computed EOQ is purchased. Quantity discounts, freight
rate schedules and price increases may create such situations.

3. Costly Calculations: the calculation required to find out EOQ is

extremely time consuming. More elaborate formula is more

P AND Q SYSTEM OF INVENTORY OR METHODS OF EOQ

expensive. In many cases, the cost of estimating eth cost of

MODELS

ordering and carrying and calculating EOQ exceeds the savings

made by buying that quantity.
4. No formula is a substitute for a common sense: sometimes the
EROQ may suggest that we order a particular commodity every
week based on the assumption that we need it at eth same rate for

1. Fixed order quantity system or Q system

2. Periodic Review system or P system

I. Fixed order quantity system or Q - system

the next one year. However we have to order iot in eth quantities
according to our judgment. Some items can be ordered every
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Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 54

In this system, the order quantity is fixed and the frequency of

ordering varies and is determined by the fluctuations in demand. In
such a system four quantities serve as critical decision rules:

Disadvantages

Many times may reach reorder level at the same time, thus
overloading the reordering system.

(1) Maximum inventory which are the most items ever to be stocked.
(2) Minimum inventory which is the safety reserve below which
should not fall

There are no records of stock level and usage rates data.

It does not lend itself to ordering more items simultaneously

from the same source.

(3)The reorder point that the level of inventory at which a

replenishment order should be placed is calculated by the formula:

fast- moving, etc., and to make it easier, to group such items of

Reorder point = Average usage rate x Lead time .The order size:

each category according to supplier wherever possible.

Usually the replenishment order quantity is invariably the E.O.Q

2. Periodic review inventory system or P system

Advantages

The drawback could be set off by classifying as slow-moving .

This system has a fixed ordering interval but the size of order

Simple cheap to operate and reliable.

quantity may vary with the functions in demand. This system is

Preferable for consumption value items.

Appropriate for widely different types of inventory within the

same firm.

specified for any item by: Review period and requisitioning objective
or replenishment level (ROL)
Advantages

Most suitable when inventory carrying cost is measurable and

significant.

there is no flexibility in the order time. Thus the fluctuation in

demand is taken care of by the safety stock.

Automatic generation of replenishment order at the appropriate

time by the comparison of stock level against re-order level.

The inventory being reviewed at periodic intervals, therefore

Somewhat more responsive to fluctuations in demand.

All stock items are reviewed periodically so that there is more

chance of obsolete items being eliminated.

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Page 55

It is preferable whenever inventory carrying cost is

meaningless.

It requires additional labor to review items of stock at items

other than when receipts and issues are being posted.

Larger quantity discounts may be obtained when a range of

stock items are ordered at same time from a supplier.

Difference between Q- system and P - system

The ordering inventory costs are low. The suppliers also give
better price discounts since the sale is guaranteed. The service
i.e., keeping to delivery schedule, is better since suppliers
known to your requirements in advance and can plan for it.

Q- SYSTEM

P - SYSTEM

1) There is continuous surveillance of Normally, the stock level is

Because orders will always be in the same sequence, there may

the stock level. The moment the stock checked

at

fixed

regular

be production economics due to more efficient production

in hand touches ROL, order equal to interval and the order is placed

planning and lower set-up costs.

EOQ, is placed.

for a quantity to replenish to

the maximum pre determined

Disadvantages

level.

This system requires more inventory on hand, for a given

frequency or shortage, as compares to the fixed order inventory

2)The average inventory is less The average inventory level is

compared to P system

expected to be more compared

system.

to Q system.

Less responsive to changes in consumption. If the rate of usage

changes shortly after a review, a stock out may well occur
before the next review.

3) The probability of stock out is low. The probability of stock out

It is more sensitive to the demand could be higher .It is not
fluctuations

and

Unless demands are reasonably consistent, it is difficult to set

promptly

to

any

appropriate periods for review.

demand behaviors.

can

respond sensitive

to

unanticipated

unanticipated demand behaviors

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Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 56

4) The order quantity is fixed but the The review period is fixed but
review period is variable

order quantity is variable

The demand (D) is known and constant within a certain period

of time

safety stock se at level to The safety stock is required to

The unit cost of the inventory item (U) is constant

guard against demand fluctuations cater the demand fluctuation

The annual holding-cost per unit (Ch) is constant

during the replenishment period lead during the replenishment lead

The setup-cost per batch (C) is constant

The production time (tp) is known and constant

We are dealing with one kind of product

There is no interaction with other products

The aspect of time does not play a role, just the setup time does

The setup cost is constant and does not act upon the batch

5) The

time

time plus the review period

therefore higher stock levels
are required

II. Economic Batch Quantity (EBQ)

Economic batch quantity (EBQ), also called "optimal batch

quantity.
***************************************

quantity" or economic production quantity, is a measure used to

determine the quantity of units that can be produced at minimum
average costs in a given batch or production run. Economic Production
Quantity model (also known as the EPQ model) is an extension of the
Economic Order Quantity model. The Economic Batch Quantity
model, or production lot-size model, is similar to the EOQ model in
that we are attempting to calculate an optimum for the batch quantity
we have to produce.
These principal assumptions are:

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Page 57

UNIT IV

the required function (function or a combination of functions of an

item which are considered necessary to provide a given service).

TOPIC - 2
MAINTENANCE MANAGEMENT

maintenance objectives or priorities (defined as targets assigned and

accepted by the management and maintenance department), strategies

Synopsis

(defined as a management method in order to achieve maintenance

Meaning and Definition of Maintenance

objectives), and responsibilities and implement them by means such as

maintenance planning, maintenance control and supervision, and

Objectives of Maintenance

several improving methods including economical aspects in the

Types of Maintenance

organization.

Bath-Tub curve

MEANING

All the activities of the management that determine the

OBJECTIVES OF MAINTENANCE MANAGEMENT

AND

DEFINITION

OF

MAINTENANCE

MANAGEMENT

To achieve minimum breakdown and to keep the plant in good

working condition at the lowest possible cost.

Maintenance encompasses all those activities that maintain

facilities & activities equipment in good working order so that a
system can perform as intended. Maintenance can also be termed as

To keep the machines and other facilities in such a condition

that permits them to be used at their optimal capacity without
interruption.

asset management system which keeps them in optimum operating

To ensure the availability of the machines, buildings and

condition.

services required by other sections of the factory for the

Maintenance is defined as the combination of all technical,

performance of their functions at optimal return on investment

administrative and managerial actions during the life cycle of an item

intended to retain it in, or restore it to, a state in which it can perform

TYPES OF MAINTENANCE

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The design life of most equipment requires periodic

Advantages

maintenance. Belts need adjustment, alignment needs to be maintained,

Cost effective in many capital intensive processes.

proper lubrication on rotating equipment is required, and so on. In some

Flexibility allows for the adjustment of maintenance

cases, certain components need replacement,e.g., a wheel bearing on a

periodicity.

motor vehicle, to ensure the main piece of equipment (in this case a car)

Increased component life cycle.

last for its design life. Different approaches have been developed to

Energy savings.

know how maintenance can be performed to ensure equipment reaches

Reduced equipment or process failure.

or exceeds its design life. In addition to waiting for a piece of equipment

Estimated 12% to 18% cost savings over reactive

to fail (reactive maintenance) the other approaches are preventive

maintenance,

predictive

maintenance,

or

reliability

centered

maintenance program.
Disadvantages

maintenance.

Catastrophic failures still likely to occur.

1. Preventive Maintenance

Labour intensive.

Preventive maintenance can be defined as,Actions performed on a time

Includes performance of unneeded maintenance.

or machine-run-based schedule that detect, preclude, or mitigate

Potential for incidental damage to components in

degradation of a component or system with the aim of sustaining or

extending its useful life through controlling degradation to an acceptable

conducting unneeded maintenance.

While preventive maintenance is not the optimum maintenance
program, it does have several advantages over that of a purely reactive

level.

program. By performing the preventive maintenance as the equipment

Preventive maintenance is a means to increase the reliability of
their equipment. By simply expending the necessary resources to
conduct maintenance activities intended by the equipment designer,
equipment life is extended and its reliability is increased. In addition to
an increase in reliability, lot of amount will be saved over that of a

designer envisioned, we will extend the life of the equipment closer to

design. This translates into dollar savings. Preventive maintenance
(lubrication, filter change, etc.) will generally run the equipment more
efficiently resulting in dollar savings. While we will not prevent
equipment catastrophic failures, we will decrease the number of

program just using reactive maintenance. Studies indicate that this

savings can amount to as much as 12% to 18% on the average.
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Page 59

failures. Minimizing failures translate into maintenance and capital

cost savings.

Our labour cost associated with repair will probably be higher

than normal because the failure will most likely require more extensive
repairs than would have been required if the piece of equipment had

2. Breakdown (Reactive) Maintenance

not been run to failure. Chances are the piece of equipment will fail
during off hours or close to the end of the normal workday. If it is a

Breakdown maintenance is basically run it till it breaks

critical piece of equipment that needs to be back on-line quickly, we

maintenance mode. No actions or efforts are taken to maintain the

will have to pay maintenance overtime cost. Since we expect to run

equipment as the designer originally intended to ensure design life is

equipment to failure, we will require a large material inventory of

reached. Studies as recent indicate that, this is still the predominant

repair parts. This is a cost we could minimize under a different

mode of maintenance.

maintenance strategy.

Advantages to breakdown maintenance can be viewed as a doubleedged sword. If we are dealing with new equipment, we can expect

Advantages

minimal incidents of failure. If our maintenance program is purely

Involves low cost investment for maintenance.

reactive, we will not expend manpower or incur capital cost until

Less staff is required.

something breaks. Since we do not see any associated maintenance cost,

we could view this period as saving money. In reality, during the time
we believe we are saving maintenance and capital cost, we are really

Disadvantages

spending more money than we would have under a different

Increased cost due to unplanned downtime of

equipment.

maintenance approach. We are spending more money associated with

Increased labour cost, especially if overtime is needed.

capital cost because, while waiting for the equipment to break, we are

Cost involved with repair or replacement of equipment.

shortening the life of the equipment resulting in more frequent

Possible secondary equipment or process damage from

replacement. We may incur cost upon failure of the primary device

associated with its failure causing the failure of a secondary device. This

equipment failure.

Inefficient use of staff resources.

is an increased cost we would not have experienced if our maintenance

program was more proactive.
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There are many advantages of predictive maintenance. A well-

3. Predictive Maintenance
Predictive maintenance can be defined asMeasurements that detect the
onset of a degradation mechanism, thereby allowing causal stressors to
be eliminated or controlled prior to any significant deterioration in the
component physical state. Results indicate current and future functional
capability.
Basically,

orchestrated predictive maintenance program will eliminate catastrophic

equipment failures. Schedule of maintenance activities can be made to
minimize or delete overtime cost. It is possible to minimize inventory
and order parts, as required, well ahead of time to support the
downstream maintenance needs and optimize the operation of the
equipment, saving energy cost and increasing plant reliability. Past

predictive

maintenance

differs

from

preventive

studies have estimated that a properly functioning predictive

maintenance by basing maintenance need on the actual condition of the

maintenance program can provide a savings of 8% to 12% over a

machine rather than on some preset schedule. Preventive maintenance is

program utilizing preventive maintenance alone. Depending on a

time-based. Activities such as changing lubricant are based on time, like

facilitys reliance on reactive maintenance and material condition, it

calendar time or equipment run time. For example, most people change the

could easily recognize savings opportunities exceeding 30% to 40%.

oil in their vehicles every 3,000 to 5,000 miles travelled. This is effectively

Independent surveys indicate the following industrial average savings

basing the oil change needs on equipment run time. No concern is given to

resultant from initiation of a functional predictive maintenance

the actual condition and performance capability of the oil. It is changed

program:

because it is time. This methodology would be analogous to a preventive

maintenance task. If, on the other hand, the operator of the car discounted
the vehicle run time and had the oil analyzed at some periodicity to
determine its actual condition and lubrication properties, he may be able to
extend the oil change until the vehicle had travelled 10,000 miles. This is the
fundamental difference between predictive maintenance and preventive
maintenance, whereby predictive maintenance is used to define needed
maintenance task based on quantified material/equipment condition.

Advantages

Increased component operational life/availability.

Allows for pre-emptive corrective actions.

Decrease in equipment or process downtime.

Decrease in costs for parts and labour.

Better product quality.

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Page 61

Improved worker and environmental safety.

Improved worker moral.

Energy savings.

Estimated 8% to 12% cost savings over preventive

The concept of reliability can be matched with systems concept.

Generally, products/equipments will have many components which
may function with serial relationship or parallel relationship. So, the
individual components reliability affects the reliability of the product.
Hence, enough attention must be given at the design, stage such that

maintenance program.

the products reliability is maximized. The cost of maintenance is also

to be considered along with the reliability while improving it.

Disadvantages
The general failure pattern of any product is given in the following

Increased investment in diagnostic equipment.

Increased investment in staff training.

figure. This is called bath-tub curve. In the following Figure, there will
be large number of failures in the early period. This is mainly due to
nonalignment

Savings potential not readily seen by management.

while

shipping

the

product,

or

misfit

while

manufacturing (assembling), or very high initial friction between

moving parts, etc.

4 .Routine Maintenance
ongoing maintenance activities such as cleaning washrooms,
grading roads and mowing lawns, which are required because of
continuing use of the facilities.
CONCEPT OF RELIABILITY IN MAINTENANCE ( BATH
TUB CURVE)
Reliability is the probability of survival under a given operating
environment. For example, the time between consecutive failures of a
refrigerator where continuous working is required is a measure of its

*********************************************

reliability. If this time is more, the product is said to have high

reliability.
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UNIT V
CHAPTER - 1
WORK STUDY

investigation of all factors which affect the efficiency and economy of

the situation being renewed, in order to effect improvement.
OBJECTIVES OF WORK STUDY
Provide more and improved physical means to motivate the

Synopsis

workers.

Meaning of Work study

Improve the basic process by research and development.

Objectives

Improve the methods of operation.

Techniques of Work study

Simplify and improve the product and reduce the variety, i.e.

a) Method study ( meaning, techniques and process)

b) Work Measurement (Meaning, techniques and process)
MEANING AND DEFINITION OF WORK STUDY
According to the ILO, Work Study is a term used to embrace the
techniques of method study and work measurement, which are
employed to ensure the best possible use of human and material
resources in carrying out a specified activity.

standardize the product.

Improve organization, product planning and control.
Improve manpower efficiency at all levels.
TECHNIQUES OF WORK STUDY
Techniques of work study consists of Method study and work
measurement

According to British Standards Institute, Work study is

generic term for those techniques, particularly method study and
work measurement which are used in the examination of human
work in all its contexts and which lead systematically to the

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Objectives of Method Study

1) To study the existing / proposed method of doing any job, operation
or activity.
2) To develop an improved method to improve productivity and to
reduce operating costs
3) To reduce excessive materials handling or movement and thereby
reduce fatigue of workmen
4) To improve utilization of resources.

I. METHOD STUDY

5) To eliminate wasteful and inefficient motions.

Meaning and definition of Method Study

Work methods analysis or Method study is a scientific technique of
observing recording and critically examining the present method of
performing a task or job or operation with the aim of improving the
present method and developing a new and cheaper method. It is also
known

as

methods

improvement

or

work

improvement.

It

6) To standardize work methods or processes, working conditions,

machinery, equipments and

as tools

Steps involved in Method Study or Method study procedure

The various steps involved in method study are as follows:

encompasses the study of work processes, working conditions and

1) Select: The work or job to be studied and define the objectives to

equipments and tools used to carry out the job.

be achieved by method study. The job selected to have maximum

According to British Standard Institute, Method Study may be

understood as the systematic recording and critical examination of
existing and proposed ways of doing work, as a means of developing
and applying easier and more effective method and reducing costs

economic advantage, shall offer vast scope for work improvement

through reduction of excessive materials handling and fatigue of
workmen, offer scope for improving the working conditions and
improving the utilizations of resources.

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2) Record: All the relevant facts or information pertaining to the

existing method using the recording techniques such as:

a) What is done? What is the purpose of the operation? Why

should it be done? What would happen if it were not done? Is
every part of the operation necessary?

i) Process charts
a) Outline (operation) process chart / operation process chart
b) Flow process chart-material type, man-type and machine type /
equipment type.

b) Who does the work? Why does this person do it ? Who could
do it better? Can changes be made to permit a person with less
skill and training to do the work?
c) Where is the work done? Why is it done there? Could it be

c ) Two handed process chart

done somewhere else more economically?

d) Multiple activity chart/Man-machine charts

e) Simultaneous motion chart (SIMO Chart)

d) When is the work done? Why should it be done then? Would it

be better to do it at some other time?
e) How is the work done? Why is it done this way

ii) Diagrams such as

4) Develop: The improved method by generating several alternatives

a) Flow diagram

and selecting the best method. The factors to be considered while

b) String diagram

evaluating alternatives and selecting the best method are:

c) Cycle graph

i) Cost of implementation

d) Chrono cycle graph

ii) Expected savings in time and cost.

3) Examine : The recorded facts critically, challenging everything

iii) Feasibility

being done and seeking alternatives, questioning the purpose (What is

achieved?), the means (How is it achieved?), sequence (When is it

iv) Reducibility

achieved?), place (Where is it achieved?), and the person (Who

v) Acceptance to design, production planning and control, quality

achieves it?).

control, production and sales departments.

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vi) Reaction of employees to the new method.

vii) Short term or long term implication of the alternative.

workplace. These are first used by Frank Gilbreth, the founder of

motion study and further rearranged and amplified by Barnes,
Maynard and others. The principles are grouped into three headings:

Establish the new method by providing suitable equipment design,

(a) Use of the human body.

mechanical aids, jigs and fixtures, tools, working conditions, material

(b) Arrangement of workplace.

handling equipments, workplace layout and work, planning and

(c) Design of tools and equipment.

control techniques.

(A) Uses of human body

5) Install: The improved (new) method in three phases planning,

arranging and implementing phases. In the first two phases, the
programmes of installation and a schedule (i.e. time table) are planned
and necessary requirements such as resources, equipments, tools,
operating instructions to workers are provided. The implementation
phase involves the introduction of the developed method as standard
practice to achieve the desired results.

1. The two hands should begin and complete their movements at the
same time.
2. The two hands should not be idle at the same time except during
periods of rest.
3. Motions of the arms should be made simultaneously.
4. Hand and body motions should be made at the lowest classification
at which it is possible to do the work satisfactorily.
5. Momentum should be employed to help the worker, but should be

6) Maintain: The new method by ensuring that the installed method is

reduced to a minimum whenever it has to be overcome by muscular

functioning well. This is done by periodic checks and verifications at

effort.

regular intervals. Proper control procedures are used to ensure that the

6. Continuous curved movements are to be preferred to straight line

new method is practiced to achieve the benefits of methods study and

motions involving sudden and changes in directions.

also to achieve higher productivity.

7. Ballistic (i.e., free swinging) movements are faster, easier and

more accurate than restricted or controlled movements. Rhythm is

Techniques of method study

essential to the smooth and automatic performance of a repetitive

There are a number of principles concerning the economy of

operation.

movements which have been developed as a result of experience and

8. The work should be arranged to permit easy and natural rhythm

which forms the basis for the development of improved methods at the

wherever possible.

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9. Work should be arranged so that eye movements are confined to a

3. Two or more tools should be combined where possible.

comfortable area, without the need for frequent changes of focus.

4. Where each finger performs some specific movement, as in

(B) Arrangement of the workplace

typewriting, the load should be distributed in accordance with the

1. Definite and fixed stations should be provided for all tools and

inherent capacities of the fingers.

materials to permit habit formation.

5. Handles such as those used on screw drivers and cranks should be

2. Tools and materials should be pre-positioned to reduce searching.

designed to permit maximum surface of the hand to come in contact

3. Gravity fed, bins and containers should be used to deliver the

with the handle.

materials as close to the point of use as possible.

6. Levers, cross bars and wheel bars should be in such position that

4. Tools, materials and controls should be located within a maximum

operator can manipulate them with least body change and with greatest

working area and as near to the worker as possible.

mechanical advantage.

5. Materials and tools should be arranged to permit the best sequence

II. WORK MEASUREMENT

of motions.
6. Drop deliveries or ejectors should be used wherever possible, so
that the operative does not have to use his hands to dispose of finished
parts.
7. Provision should be made for adequate lightning and a chair of type
and height to permit good posture should be provided. The height of
the workplace and seat should be arranged to allow alternate standing
and seating.
(C) Design of tools and equipments
1. The colour of the workplace should contrast with that of work and

Work measurement is also called by the name time study.

Work measurement is absolutely essential for both the planning and
control of operations. Without measurement data, we cannot determine
the capacity of facilities or it is not possible to quote delivery dates or
costs. We are not in a position to determine the rate of production and
also labour utilisation and efficiency. It may not be possible to
introduce incentive schemes and standard costs for budget control.
Objectives of Work Measurement
1. Comparing alternative methods.

thus reduce eye fatigue.

2. The hands should be relieved of all work of holding the work
piece where this can be done by a jig or fixture or foot operated

2. Assessing the correct initial manning (manpower requirement

planning).

device.
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3. Planning and control.

3. Work sampling: A technique in which a large number of

observations are made over a period of time of one or group of

4. Realistic costing.

machines, processes or workers. Each observation records what is

5. Financial incentive schemes.

happening at that instant and the percentage of observations recorded

for a particular activity, or delay, is a measure of the percentage of

6. Delivery date of goods.

time during which that activities delay occurs.

7. Cost reduction and cost control.
4. Predetermined motion time study (PMTS): A work measurement
8. Identifying substandard workers.

technique whereby times established for basic human motions

(classified according to the nature of the motion and conditions under

9. Training new employees.

which it is made) are used to build up the time for a job at the defined
Techniques of Work Measurement
Various techniques of work measurement are:
1. Time study: A work measurement technique 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. In other words measuring the time through stop

level of performance. The most commonly used PMTS is known as

Methods Time Measurement (MTM).
5. Analytical estimating: A 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.

watch is called time study.

Steps involved in Work Measurement

2. Synthetic data: A work measurement technique for building up the

1. Select: Select the work to be studied

time for a job or pans of the job at a defined level of performance by

totaling element times obtained previously from time studies on other
jobs containing the elements concerned or from synthetic data.

2. Define: Breakdown the operation into elements. An element is a

instinct part of a specified activity composed of one or more

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fundamental motions selected for convenience of observation and

performance. Standard time may be defined as the, amount of time

timing.

required to complete a unit of work:

3. Obtain & Record: Obtain and record all the information available
about the job, the operator and the working conditions likely to affect

(a) Under existing working conditions,

(b) Using the specified method and machinery

the time study work.

4. Measure: Measure the time by means of a stop watch taken by the
operator to perform each element of the operation. Either continuous

(c) By an operator, able to the work in a proper manner, and (d) at a

standard pace.

method or snap back method of timing could be used. At the same

time, assess the operators effective speed of work relative to the
observers

concept of normal speed. This is called performance

Thus basic constituents of standard time are:

1. Elemental (observed time).

rating. Adjust the observed time by rating factor to obtain normal time
for each element. Add the suitable allowances to compensate for
fatigue, personal needs, contingencies etc. to give standard time for

2. Performance rating to compensate for difference in pace of working.

3. Relaxation allowance.

each element.
5. Compute: Compute allowed time for the entire job by adding
elemental standard times considering frequency of occurrence of each

4. Interference and contingency allowance.

5. Policy allowance

element.
6. Determine: Make a detailed job description describing the method

***********************************************

for which the standard time is established. Test and review standards
wherever necessary.
STANDARD TIME
Standard time is the time allowed to an operator to carry out the
specified task under specified conditions and defined level of

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consumers requirements. Quality assurance usually associated with

UNIT - V

some form of measurement and

CHAPTER 2
QUALITY CONTROL

DIMENSIONS OF QUALITY
Dimensions of products quality

Synopsis
Meaning of Quality

1. Performance: a products primary operating characteristics.

Dimensions of Quality

2. Feature: the bells and whistles of a product.

Objectives of quality control

Importance of quality control

3. Reliability: the probability of a products surviving over a specified

Cost of Quality

period of time under stated conditions of use.

Seven Quality control Tools

4. Conformance: the degree to which physical and performance

Statistical quality control

characteristics of a product match pre-established standards.

Operating Characteristics curve

5. Durability: the amount of use one gets from a product before it
physically deteriorates or until replacement is preferable.

MEANING OF QUALITY
C. D. Lewis defined quality as the degree to which
product satisfies a particular class of consumers

a specific

6. Serviceability: the ability to repair a product quickly and easily.

or consumers in

general or the degree to which it confirms to a design specification or

the distinguishing feature

of a products taste, colour, appearance

Dimensions of service quality:

etc.
1. Reliability: How much reliable is the service provider?
Quality assurance refers to any planned and systematic activity
directed toward providing consumers with products (goods and
services) of appropriate, along with the confidence that products meet

2. Accessibility and convenience: Is the service easy to obtain?

3. Timeliness: Will a service be performed when promised?

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4. Completeness: Are all items in the order included?

5. Consistency: Are services delivered in the same fashion for every
customer, and every time for the same customer?
6. Empathy or Courtesy: Do frontline employees greet each

IMPORTANCE OR BENEFITS OF QUALITY

Improving the quality of products and services.

Increasing the productivity of manufacturing processes,

commercial business, corporations.

customer cheerfully?
7. Responsiveness: Can service personnel react quickly and resolve

Reducing manufacturing and corporate costs.

Determining and improving the marketability of products and

unexpected problems?

services.

OBJECTIVES OF QUALITY CONTROL

Reducing consumer prices of products and services.

Improving and/or assuring on time deliveries and availability.

Assisting in the management of an enterprise

1. To improve the companies income by making the production more

acceptable to the customers, i.e., by providing long life, greater

COST OF QUALITY

usefulness, maintainability etc.

Its a term thats widely used and widely misunderstood. The cost

2. To reduce companies cost through reduction of losses due to

of quality is not the price of creating a quality product or service. Its

defects.

the cost of NOT creating a quality product or service. Every time work

3. To achieve interchangeability of manufacture in large scale

is redone, the cost of quality increases.

production.
4. To produce optimal quality at reduced price.
5. To ensure satisfaction of customers with productions or services or
high quality level, to build customer goodwill, confidence and

Types of Cost of quality

1. Prevention Costs
The costs of all activities specifically designed to prevent poor quality

reputation of manufacturer.

in products or services. Examples are the costs of:

6. To make inspection prompt to ensure quality control.

New product review

7. To check the variation during manufacturing.

Quality improvement projects Quality education and training

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.Quality improvement team meetings

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 Quality planning

Supplier capability surveys

Processing customer complaints

Customer returns

Process capability evaluations

Warranty claims

Product recalls

2. Appraisal Costs

SEVEN TOOLS FOR QUALITY CONTROL

The costs associated with measuring, evaluating or auditing products

To make rational decisions using data obtained on the product, or

or services to assure conformance to quality standards and

process, or from the consumer, organizations use certain graphical

performance requirements. These include the costs of:

tools. These methods help us learn about the characteristics of a

Incoming and source inspection/test of purchased material

process, its operating state of affairs and the kind of output we may

In-process and final inspection/test

expect from it. Graphical methods are easy to understand and provide

Product, process or service

audits

Associated supplies and materials

Calibration of measuring and

test equipment

comprehensive information; they are a viable tool for the analysis of

product and process data. These tools are effect on quality
improvement. The seven quality control tools are:

3. Failure Costs

1. Pareto charts 2. Check sheets 3. Cause and effect diagram

The costs resulting from products or services not conforming to

4. Scatter diagrams 5. Histogram 6. Graphs or flow charts 7. Control

requirements or customer/user needs. Failure costs are divided into

charts

internal and external failure categories.

1. PARETO CHARTS

a) Internal Failure Costs

Pareto charts help prioritize by arranging them in decreasing order of

Failure costs occurring prior to delivery or shipment of the product, or

importantce. In an environment of limited resources these diagrams

the furnishing of a service, to the customer. Examples are the costs of:

help companies to decide on the order in which they should address

Scrap

Rework

Re-inspection

problems. The Pareto analysis can be used to identify the problem in a

Re-testing

Material review

Downgrading

number of forms.

b) External Failure Costs

(a) Analysis of losses by material (number or past number).

Failure costs occurring after delivery or shipment of the product -- and

(b) Analysis of losses by process i.e., classification of defects or lot

during or after furnishing of a service -- to the customer. Examples are

rejections in terms of the process.

the costs of:

(c) Analysis of losses by product family.

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(d) Analysis by supplier across the entire spectrum of purchases.

(e) Analysis by cost of the parts.
(f) Analysis by failure mode.

3. CAUSE AND EFFECT DIAGRAM

It is sometimes called as Fish-bone diagram. It is first developed by
Kaorv Ishikawa in 1943 and is sometimes called as Ishikawa diagram.
The diameter helps the management trace customer complaints
directly to the operations involved. The main quality problem is
referred to Fish-head; the major categories of potential cause structural
bones and the likely specific causes to ribs. It explores possible causes
2. CHECK SHEETS

of problems, with the intention being to discover the root causes. This

Check sheets facilitate systematic record keeping or data collection

diagram helps identify possible reasons for a process to go out of

observations are recorded as they happen which reveals patterns or

control as well as possible effects on the process.

trends. Data collection through the use of a checklist is often the first
step in analysis of quality problem. A checklist is a form used to
record the frequency of occurrence of certain product or service
characteristics related to quality. The characteristics may be
measurable on a continuous scale such as weight, diameter, time or
length.

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characteristics, the bar height indicates the number of times a

4. SCATTER DIAGRAM (SCATTER PLOTS)

particular quality characteristic was observed.

It often indicates the relationship between two variables. They are

6. FLOW CHARTS (OR) GRAPHS

often used as follow-ups to a cause and effect analysis to determine

It shows the sequence of events in a process. They are used for

whether a stated cause truly does impact the quality characteristics.

manufacturing and service operations.

Flow charts are often used to diagram operational procedures to
simplify the system. They can identify bottlenecks, redundant steps
and non-value added activities. A realistic flow chart can be
constructed by using the knowledge of the person who are directly
involved in the particular process. The flow chart can be identifies
where delays can occur.

5. HISTOGRAM (OR) BAR CHARTS

It displays the large amounts of data that are difficult to interpret in
their raw form. A histogram summarizes data measured on a
continuous scale showing the frequency distribution of some quality
characteristics (in statistical terms the central tendency and the
dispersion of the data).

7. CONTROL CHARTS
It distinguish special causes of variations from common causes of
variation. They are used to monitor and control process on an ongoing
basis. A typical control chart plots a selected quality characteristic
Often the mean of the data is indicated on the histogram. A bar chart is
a series of bare representing the frequency of occurrence of data

found from sub-group of observations as a function of sample number.

Characteristics such as sample average, sample range and sample

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proportion of non-conforming units are plotted. The centre line on a

Statistical process control (SPC) is the application of statistical

control chart represents the average value of characteristics being

techniques to determine whether the output of a process conforms to

plotted. Two limits know as the upper control limit (UCL) and lower

the product or service design. It aims at achieving good quality during

control limit (LCL) are also shown on control charts. These limits are

manufacture or service through prevention rather than detection. It is

constructed so that if the process is operating under a stable

concerned with controlling the process that makes the product because

system of chance causes, the problem of an observation falling outside

if the process is good then the product will automatically be good.

these limits is quite small. Figure 6.7 shows a generalized

I. Control Charts

representation of a control chart. Control chart shows the performance

SPC is implemented through control charts that are used to monitor the

of a process from two points of view. First, they show a snapshot of

output of the process and indicate the presence of problems requiring

the process at the moment the data are collected. Second, they show

further action. Control charts can be used to monitor processes where

the process trend as time progresses. Process trends are important

output is measured as either variables or attributes. There are two

because they help in identifying the out of- control status if it actually

types of control charts: Variable control chart and attribute control

exists. Also, they help to detect variations outside the normal

chart.

operational limits, and to identify the cause of variations. Fig. 6.7

1. Variable control charts: It is one by which it is possible to

shows a generalised representation of a control chart.

measures the quality characteristics of a product. The variable control

charts are X-BAR chart, R-BAR chart, SIGMA chart.
2. Attribute control chart: It is one in which it is not possible to
measures the quality characteristics of a product, i.e., it is based on
visual inspection only like good or bad, success or failure, accepted or
rejected. The attribute control charts are p-charts, np-charts, ccharts, u-charts. It requires only a count of observations on
characteristics e.g., the number of nonconforming items in a sample.

STATISTICAL PROCESS CONTROL

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Acceptance sampling deals with accept or reject situation of the

incoming raw materials and finished goods. Let the size of the
incoming lot be N and the size of the sample drawn be n.
The probability of getting a given number of defective goods parts out
a sample consisting of n pieces will follow binomial distribution. If the
lot size is infinite or very large, such that when a sample is drawn from
it and not replaced, then the usage of binomial distribution is justified.
II. Acceptance Sampling

Otherwise, we will have to use hyper-geometric distribution.

The objective of acceptance sampling is to take decision whether to

accept or reject a lot based on samples characteristics. The lot may be
incoming raw materials or finished parts.

An accurate method to check the quality of lots is to do 100%

inspection. But, 100% inspection will have the following
limitations:

Specifications of a single sampling plan will contain a sample size (n)

and an acceptance number C. As an example, if we assume the sample
size as 50 and the acceptance number as 3, the interpretation of the
plan is explained as follows: Select a sample of size 50 from a lot and
obtain the number of defective pieces in the sample. If the number of
defective pieces is less than or equal to 3, then accept the whole lot

The cost of inspection is high.

Destructive methods of testing will result in 100% spoilage of

the parts.

from which the sample is drawn. Otherwise, reject the whole lot. This
is called single sampling plan. There are several variations of this plan.
In this process, one will commit two types of errors, viz., type-I error

Time taken for inspection will be too long.

and type-II error. If the lot is really good, but based on the sample

When the population is large or infinite, it would be impossible

information, it is rejected, and then the supplier/ producer will be

or impracticable to inspect each unit.

penalized. This is called producers risk or type-I error. The notation

Hence, acceptance-sampling procedure has lot of scope in practical

for this error is . On the other hand, if the lot is really bad, but it is

application. Acceptance sampling can be used for attributes as well as

accepted based on the sample information, then the customer will be at

variables.

loss. This is called consumers risk or type-II error. The notation for
this error is . So, both parties should jointly decide about the levels of
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producers risk () and consumers risk () based on mutual

agreement.
OPERATING CHARACTERISTIC CURVE (O.C. CURVE)
The concepts of the two types of risk are well explained using an
operating characteristic curve. This curve will provide a basis for
selecting alternate sample plans. For a given value of sample size (n),
acceptance number (C), the O.C. curve is shown in Fig. 6.8. In Fig.
6.9, per cent defective is shown on x-axis. The probability of accepting
the lot for given per cent defective is shown on y-axis. The value for
per cent defective indicates the quality level of the lot inspected. AQL
means acceptable quality level and LTPD indicates lot tolerance per
cent defectives. These represent quality levels of the lot submitted for
inspection.
If the quality level of the lot inspected is at AQL or less than AQL,
then the customers are satisfied with the quality of the lot. The
corresponding probability of acceptance is called 1 . On the other

SINGLE SAMPLING PLAN

hand, if the quality level is more than or equal to LTPD, the quality of

The design of single sampling plan with a specified producers risk

the lot is considered to be inferior from consumers viewpoint. The

and consumers risk is demonstrated in this section. The required data

corresponding probability of acceptance of the lot is called . The

for designing such plan are as follows:

quality levelling between AQL and LTPD is called indifferent zone.

(a) Producers Risk ()

(b) Consumers Risk (b)
(c) Acceptable Quality Level (AQL)
(d) Lot Tolerance Per cent Defectives (LPTD) The objective of this
design is to find out the values for the sample size (n) and

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acceptancenumber (C). The values for n and C are to be selected such

that the O.C. curve passes through the following two coordinates:
_ Coordinate with respect to the given and AQL.

MEANING AND DEFINITION OF PURCHASING

_ Coordinate with respect to the given and LTPD.

Purchase is the procurement of goods or services from some external

But, the values of n and C should be integers. So, it will be very

sources.

difficult to find n and C exactly for the given parameters of the design.
Hence, we will have to look for approximate integer values for n and C
such that the O.C. curve more or less passes through the above two
coordinates.

Purchasing is the procuring of materials, tools, stores (or

supplies) and services required for the manufacture of a product,
maintenance of the machines, and uninterrupted running of the
manufacturing plant in a manner that guarantees the marketing of the

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UNIT V
CHAPTER - 2
PURCHASING

company's products in the quantities desired, at the time promised and

at the competitive price consistent with quality desired.
According to Alford & Betty Purchasing is defined as the
procurement of the materials, supplies, machines, tools and operation
of a manufacturing plant.

Synopsis
OBJECTIVES OF PURCHASING
Meaning of Purchasing
To acquire the goods or services at minimum cost.
Objectives of Purchasing
To ensure the continuous flow of production.
Functions and Responsibilities of Purchase department / manager
To develop the main and attenuate sources of supply.
Procedure or steps involved in Purchasing
To ensure timely delivery.
Types of Purchasing
8Rs or Principles of Purchasing

To make optimum utilization of capital.

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Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

Page 78

 To acquire quality product so that quality output is served to

the consumer.

The purchase manager should examine the cost of the material

and other aspects. And selection should be made after analyzing all the

To achieve economy in cost of materials by adopting latest

techniques like value analysis, ABC analysis etc
To maintain steady flow of materials to ensure uninterrupted
production or operation

relevant issues.
(iii) Contract Negotiations and Communication Interface
Once a vendor is selected, the purchasing manager should
negotiate and establishes the terms and conditions of contract to be

To create goodwill and enhance the company's reputation for

fairness and integrity through dealings with the suppliers.
To enable the company to maintain a competitive position and
earn a fair return on its investment

drawn between the two parties.

(iv) Order Preparation
Once selected the source of supply, the next step is to authorise
the selected supplier to supply material, which is done by placing the
purchase order. A purchase order is a formal document (a written
commitment) prepared by the buying department on behalf of the

FUNCTIONS AND RESPONSIBILITIES OF PURCHASING

company to authorise (request) the supply of the goods and services in

DEPARTMENT

the quantities, at the time and at the price specified in the document.

Functions of purchasing department or often categorized as the

responsibilities of Purchasing Manager are:(i) Vendor Development

(v) Follow-up
Follow-up is the function of seeing that the suppliers effect
deliveries on time. Follow up has become the foremost function of

The primary responsibility of a purchase manager is to search

for and identify a list of possible suppliers. He should ensure that
sources of supplies are reliable and stable.

buyers. Vendors, be it a small manufacturer, a trader or a supplier at a

distance, take little initiative in delivering the goods on time.
(vi) Value Analysis

(ii) Selection of Suppliers

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The purchasing manager conducts value analysis that aims at

achieving cost effectiveness and maintaining the required level of
quality

Disposal of surplus, obsolete and scrap materials

Advising management on new materials, new products,
forward buying etc.

The responsibilities and functions of Purchasing Manager are also

include:

suppliers for timely payment of bills

Locating, selecting and developing sources of supply

Attending to periodical activities like applying

Scrutinizing purchase indents and deciding suitable method of

buying
Floating

Acting as a link between companies finance department and

for import

licence, quota etc

Maintaining companies image among suppliers

enquiries,

processing

quotations,

conducting

negotiations and releasing purchase orders

PROCEDURE OR STEPS INVOLVED IN PURCHASING

1. Purchase Requisition: All the departments of the organisation are

Pre-delivery follow up and shortage chasing

asked to make a requisition for purchase.

Co-ordination with inward inspection including timely return

of defective materials back to suppliers

2. Decision of Purchase: Collecting requisition from various

departments and handed it to Purchase department / committee head.

Endorsing suppliers invoices for payment

Purchase head decide what to purchase and in what quantity.

Processing suppliers requests for price increases including

3. Study of Market conditions: Market trends are analysed to

price negotiations

generate an idea of price and availability of product.

Attending to suppliers representatives and travelling salesmen

4. Selection of Vendors.

Arranging

5. Placing of Purchase order.

discussion

meetings

representatives and companys officials

between

suppliers

6. Receiving of order

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The general pattern for handling purchase orders is as follows:

1. A department initiates a request for goods or services and sends it to
the Purchasing Department.
2. Purchasing staff verifies that the specifications are complete and

5. You must send an invoice with the purchase order number noted on
the invoice to the Accounts Payable Department before a payment can
be made
8 Rs OR PRINCIPLES OF PURCHASING

selects potential sources.

1. RIGHT PRICE

3. Purchasing staff follows good business practices in determining the

It is the primary concern of any manufacturing organization to get an

best offer for required materials or services. We review quotations

item at the right price. But right price need not be the lowest price. It is

based upon:

very difficult to determine the right price; general guidance can be had
from the cost structure of the product. The tender system of buying is

unit costs and total costs;

completeness of the order and adherence to the specifications

be to identify the lowest responsible bidder and not the lowest

listed;

bidder. The technique of learning curve also helps the purchase agent

normally used in public sector organizations but the objective should

to determine the price of items with high labour content. The price can

delivery costs;

delivery time; and

negotiation also helps to determine the right prices.

warranties, maintenance, installation, etc., e.g., service

2. RIGHT QUALITY

be kept low by proper planning and not by rush buying. Price

4. When we award an order, we will FAX or mail the purchase order

Right quality implies that quality should be available, measurable and

form containing a purchase order number to place an order. In some

understandable as far as practicable. In order to determine the quality

circumstances, we may telephone in an order with a purchase order

of a product sampling schemes will be useful. The right quality is

number.

determined by the cost of materials and the technical characteristics as

suited to the specific requirements. The quality particulars are
normally obtained from the indents. Since the objective of purchasing
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is to ensure continuity of supply to the user departments, the time at

important role in buyer-seller relationships. In emergencies, open

which the material is provided to the user department assumes great

market purchases and bazaar purchases are restored to.

importance.

5. RIGHT QUANTITY

3. RIGHT TIME

The right quantity is the most important parameter in buying.

For determining the right time, the purchase manager should have lead

Concepts, such as, economic order quantity, economic purchase

time information for all products and analyse its components for

quantity, fixed period and fixed quantity systems, will serve as broad

reducing the same. Lead time is the total time elapsed between the

guidelines. But the buyer has to use his knowledge, experience and

recognition of the need of an item till the item arrives and is provided

common sense to determine the quantity after considering factors such

for use. This covers the entire duration of the materials cycle and

as price structure, discounts, availability of the item, favourable

consists of pre-contractual administrative lead time, manufacturing and

reciprocal relations, and make or buy consideration.

transporting lead time and inspection lead time. Since the inventory
increases with higher lead time, it is desirable to analyse each

6. RIGHT CONTRACTS

component of the lead time so as to reduce the first and third

The buyer has to adopt separate policies and procedures for capital and

components which are controllable. While determining the purchases,

consumer items. He should be able to distinguish between indigenous

the buyer has to consider emergency situations like floods, strikes, etc.

and international purchasing procedures. He should be aware of the

He should have contingency plans when force major clauses become

legal and contractual aspects in international practices.

operative, for instance, the material is not available due to strike, lock-

7. RIGHT TRANSPORTATION

out, floods, and earthquakes.

Right mode of transportation have to be identified as this forms a
4. RIGHT SOURCE

critical segment in the cost profile of an item. It is an established fact

The source from which the material is procured should be dependable

that the cost of the shipping of ore, gravel, sand, etc., is normally more

and capable of supplying items of uniform quality. The buyer has to

than the cost of the item itself.

decide which item should be directly obtained from the manufacturer.

8. RIGHT PLACE OF DELIVERY

Source selection, source development and vendor rating play an

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Specifying the right place of delivery, like head office or works, would
often minimize the handling and transportation cost.

Disadvantage

Tender buying is costly and time consuming and therefore used

by private sector undertaking only when the value of purchase
is high.

METHODS OR TYPES OF PURCHASING

2) Group purchasing

1) Tender Buying
Government department and public sector undertakings in
India follow this method of buying. Private sector organizations to
adopt tender buying if the value of the purchase exceeds the prescribed

Group purchasing refers to buying of items of trivital value in

a single purchase order. Characteristics

limits, say Rs. 25000 or Rs. 50000 fixed by the management as policy
decision.

each classified group.

Characteristics

Stocks on hand are reviewed periodically, say once a month or

once in 12 months

The buying department establishes bidders list and invites

them to submit bids.

Minimum and maximum levels are fixed for each item within

Quantity equal to the difference between the maximum level

and stock on hand is procured for each item

Bids on receipt are evaluated by comparison and the right

3) Hand to mouth buying

supplier is selected.
Hand to mouth buying also called buying according to the
Advantages

requirements refers to the frequent purchases of an item in small

Tender buying is the purchasers most important single tool to

select qualified supplier on the basis of competitive prices.

It eliminates possibility of favoritism, patronage, and personal

quantities.
Characteristics

Purchases are made only when demand arises.

preferences.
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Purchases are made to cover immediate requirements.

Quantity purchased is generally small though at time at large

Characteristics

the supplier.

quantity may be purchased.

The terms of contract is negotiated.

A purchase order covering annual requirements is placed with

The supplier is given the estimate of the procurement needs

covering a mutually agreed period of time.

Advantages

Lower inventory investment.

Low carrying charges.

Reduced deterioration and obsolescence of materials.

Limitation of losses from price declines.

completion of the previous schedule

Monthly deliveries are usually specified except for perishable

material, bulky items and others required in large quantities or
where supplier has setup production facilities especially for the

Disadvantages

Fresh delivery schedules are given to the supplier prior to

buyer.
Advantages

Comparatively higher price due to urgencies and loss of

quantity discounts.

Both buyer and seller enjoy the savings resulting from

regularity of production and small inventories.

Possible losses occasioned by an upward jump in prices.

Acceptance of sub standard goods in emergency.

of business.

1) Scheduled buying

Buyer is assured of supply of goods while supplier is assured

Supplier can effectively plan his factors of production while

buyer can plan his requirements of finance

Scheduled buying is the process of procuring an item in

staggered deliveries according to the delivery schedule furnished to the

5) Blanket orders

supplier by the buyer.

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Blanket orders refer to the purchase of variety of items from

single sources, usually a middleman.

Stores organization may be defined as a systematic coordination and

combination of efforts in manner, which would result in optimum

Characteristics

MEANING

A blank order specifies the category of items covered by the

efficiency with a minimum of expenditure.

The term Store, Storehouse, or Warehouse refer to a building or room

order,

or place where materials are kept.

The items covered by the order generally have low unit value.

More than one middle man may be selected to avoid hold-ups

OBJECTIVES OF STORES MANAGEMENT

in case of non-availability of an item with one

To facilitate a balanced and smooth flow of raw materials, components

,tools ,and any other items necessary to meet production requirements
To maintain optimum stock of materials to compensate for

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UNIT V
CHAPTER 3
STORES MANAGEMENT

irregular supplies by suppliers.

To achieve efficient utilization of storage space
To reduce of materials handling equipments.
To provide codification of stored items for easy recognition

Synopsis

To enable flexibility on production schedules

Meaning

To facilitate quantity purchases at discount prices

Objectives
Functions and roles and responsibilities of stores department / manager

To keep the account of all goods kept in stores

Store organisation

To prevent theft ,damage, wastage and deterioration of stored

Methods of storage system

materials
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 To maintain record of all incoming materials and issue of

materials to user dept

becomes easy to retrieve and issue subsequently. Storage should also

ensure protection against deterioration, damage and pilferage. Detailed

FUNCTIONS OF STORES DEPARTMENT

1. Receipt:

system is adopted for location and labeling of items while in storage.

Storage plan is made keeping in mind,
Nature of the product- physical state, toxicity, inflammability and

It refers to the flow diagramme. Any item of goods or material

that enters the organization always enters through the stores. Similarly,
every item unless specifically excluded, has to leave through the store.
Stores isthe final account keeper of all materials. Material sent by any
supplier after the security clearance comes to the stores. Stores check
the document carried by the carrier, known as Delivery Challan,

other hazards
Volume and weight- heavy or light
Movement frequency- fast moving or slow moving
3. Retrieval:

against the copy of the Purchase Order placed on the supplier by the

Easy and quick retrievability of items that are demanded by the

organization. Once the adequacy is established and quantityis verified,

internal customers. Easy identification, maximum space utilization and

the material is sent for testing for quality parameters. Some times

minimum handling are key factors to retrieval functions. It is common

quality control teats are elaborate and time consuming. If the policy of

knowledge in many of the companies that after hours of searching for

receipt is to unload the material subject to quality control acceptance,

the item is declared to be out of stock.

it is cleared for unloading. Unloaded material is kept on the hold if it

not yet cleared by quality control department. If the material is rejected
it is sent back to the supplier after clear documentation.
2. Storage:

This causes hold up of production process and avoidable urgent

purchase of out of stock material. This function takes place as per
established retrieval system.
4. Issue:

Once the quality control department, as per the quality plan in the
quality system, approves the unloaded material it is moved to a
specific place in the stores layout. The material is so stored that it

It refers to the flow diag., fulfilling customer demand for the item in
minimum time, keeping quality high and cost minimum is issue. An
internal customer doesnt pay the price but he has to fulfill

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Asst. Prof SRM Ramapuram B-School, SRM University, Ramapuram, Chennai - 89

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requirement of authorization for the demand. A duly authorized indent

Effective disposal system for unneeded material to reduce inventory

or requisition for the item is the key

cost and proactive

measures to

eliminate deterioration and

obsolescence. Ref. To the note on obsolete, surplus and scrap

5. Records:

management.

It is maintaining records of receipt and issue. Updating the stock

levels as per movement of materials. Basic records of store are bin

9. Verification:

card and stock register. Bin card is placed on the bin in which items

Stock verification to eliminate gap between information and physical

are stored. This gives information about receipt, issue and balance.

stock. In stores some items are maintained as stock items. The stores

Stock register gives all the information in the bin card and also the

triggers the procurement cycle for such items when a predetermined

value.

reorder level is reached. Hence correct stock position through

verification is critical to ensure no shortage and no excess for the

6. Housekeeping:

item.

Maintenance of spic and span cleanliness in the store and ensuring

principle of Place for Everything and Everything in its place is fully
implemented. Good housekeeping ensures satisfactory work practices

10. Interaction & coordination:

Very close interaction between Purchasing, production, quality control
and engineering functions is obviously needed in the discharge of the

7. Control:

functions discussed so far. It also becomes necessary to coordinate the

Taking measures to ensure material plan is being adhered to. Any

flow of material samples and information through a network of

changes in consumption pattern or replenishment pattern are closely

departments for performance of stores functions. Besides, every

monitored for corrective action. Material movement is watched to

management function being an internal customer interaction is very

identify nonmoving material for disposal. Effective control puts into

important

effect management objective of no shortage and no excess.

DUTIES AND RESPONSIBILTY OF STORES DEPARTMENT
8. Surplus management:

A storekeeper would have several duties and responsibilities,

which he may carry out himself or through his subordinates. These are:
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a) To receive incoming materials, including all work connected

stores. And a common command can reduce cost and increase

therewith, like opening of packages, counting and checking.

effectiveness. And also keep material accounting outside the scope of

b) To stare materials in the right place and in the best suited

prescribed manner.

procurement function.
Centralized or Decentralized stores organization

c) To ensure that materials are properly preserved, periodical

inspection and correct methods.
d) To carry out all movements of materials including movement
to Storage from receipt and Storage to Dispatch, Packing and

Centralized stores concept is to store all items at a central place and

control materials movement from this central place. Whereas
decentralization concept is moving the material to the respective
consumer function or directly to the points of use.
Features of centralized stores organization

Forwarding.
e) To maintain complete, up-to-date and correct records both for
physical storage financial accounts.
STORES ORGANIZATION

Effective supervision and control.

Issue at single point reduces cost of issue
Reduced personnel requirement

Store is a function of materials management in an organization.

Hence it is generally found that stores function reports to the materials
manager. But in some situations stores function reports to the
production function.

Efficient layout for stores

Better handling technology
Better inventory checks

The earlier type of arrangement is based on the concept that

Maintenance of optimum stores

stores along with other functions of materials management can be

integrated into the materials organization. This will stream line all

Fewer redundant and obsolete items

materials management functions effectively. The other arrangement is

Elaborate documentation

leaning on the fact that production function is very closely linked to

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Features of Decentralized stores organization

In this system material is stored near point of use and there is

restriction on consumption. Control passes on to the operations

Reduced handling

department

Customer friendly

c) Random access stores system: There is no fixed location for an

Diluted risk of fire

item. Item occupies the available physical slot when it enters the store.

Fewer production stoppages

Stores address is fixed to the occupying item electronically. For issue

the item is located by this address. This system facilitates maximum

Visual management is easier

space utilization but electronic control is needed.

2. Stores record system

STORAGE SYSTEMS

In stores management two types of records are fundamental one is

called bin card or stock card and the other is stores ledger.

1. Physical systems
Physical storage of material is very important from the point of view
of identification, retrieval and issue. Various methods adopted for
physical storage are mentioned below.

a) Stock card or bin card: bin card, fixed on the bin shows the
quantity received, issued and balances. Copy of this record is
maintained for reference by the stores in charge. This record also
triggers purchase activity when Reorder level of an item is reached

a) Closed door system:

store ledger, contains value in addition to the physical stock which is

The stored material is held under lock and key. Entry into the store is
restricted authorized persons only. Physical movement of the material

also shown on the bin card.

3. Issue system

is only with authorized documents only. Maximum security and tight

control on movement are features of this system

From the stores material is issued for internal consumption and

sometimes issued to outside parties for processing.

b) Open stores system:

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a) Issue to consuming department: Material is issued to consuming

departments against a material requisition slip which is duly
authorized and made with reference to a work order for production.
Quantity needed for production is mentioned in the work order and

Tax

Packaging charges, etc. .

Methods of Stores accounting system

stores employees are not authorized to issue excess quantity. Hence an

automatic control is exercised on consumption. The work order
mentioned above is raised based on the bill of materials for production.
b) Issue to outside parties for processing:

a) FIFO System:
First in first out system- when the material is issued it is assumed that
the one, which came first, is going out. Hence the rate pertaining to the
first in is applied. To the stock latest price is applied When there are

Procedure is same but a rigid control is exercised.

several price changes this system becomes complex

4. Stores accounting systems

b) LIFO System:

Purpose of stores accounting is to know

Last in first out at the time of issue. When the material is issued latest

Cost of materials consumed in production

entrant is assumed to be going out. Hence latest prices are applied to

the issue. And receipt price is applied to stock.

Levels of wastage produced

Value of material lying in stock

For ascertaining the above following factors are taken into account

c) Average cost system:

An average is established with price of each item in every shipment
taken into account. Total items received and price paid for these items
is calculated. And average price for each item from this lot is

Material price

Freight charges

Insurance

Duties

calculated and applied to the issue and stock.

d) Market value system:
While issuing current market price is applied. Stock value is calculated
at receipt price
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e) Standard cost method:

Based on price trend a standard price is fixed for a particular period
and this price is applied .
5. Stock verification systems
Discrepancies invariably occur between physical stock and books in
spite of good store keeping. Hence a system is needed to locate this
gap and apply correction.
Purpose of Stock verification is:

To reconcile stock figures with books

To identify areas for tighter control

To keep a check on pilferage and fraudulent practices

To back up balance sheet stock figures

********************* ALL THE BEST****************

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