Notes On Production Management

Notes
On
Production Management
1. Production Management
1. Production and Operations:

Production and operations may be defined as conversion or transformation of inputs into
outputs using physical resources to provide the desired utility to the customer while
meeting the organizational objectives of effectiveness, efficiency and adaptability.
Customer utilities are (1) Form, (2) Place, (3) Possession and (4) State.
Manufacturing of goods: Form utility
Petrol pump operations: Possession utility
Taxi services: Place utility
Out patient ward of a hospital: State utility
Resources: Men, Materials, Machines, Money - physical

Information, Energy, Methods - Non-physical
The output of production is goods which are tangible. The output of operations is services
which are not tangible.
A production system may be represented as shown below.
2. Production and Operations management (POM):

Definitions:
In general, production and operations management systems are described as providing
goods or services. It will be more appropriate to specify the four customer utilities and
the physical and non physical nature of inputs and out puts involved in the transformation
process.
Production and operations management may be defined as the process of conversion or
transformation of inputs into outputs using physical resources to provide the desired
K. Rao Pochiraju Page 1

utility to the customer while meeting the organizational objectives of effectiveness,
efficiency and adaptability.
Production management refers to all the activities involving in the production of goods.
Operations management refers to all the activities involving in the providing services.
Production and operations management ensures that the inputs are converted in to outputs
efficiently and the value of the output is greater than the sum of all the inputs.
Operations which do not add value are treated as waste or superfluous. Such operations
are to be avoided.
The management of the use of the physical resources for the conversion process is the
one which distinguishes production and operations management from other functions of
the organization such as personnel, marketing etc.
Production management is a process of planning, organizing, directing, monitoring and

controlling the activities of the production function.
3 Production System:
A large organization is divided into sub-systems such as Production, Finance, Marketing,

personnel etc. Each sub-system functions independently with their specific objectives to
support and achieve the overall objectives or goals of the organization. The sub-systems
are inter dependent and should function in coordination with each other.

The production system is that part of an organization which produces its products. The
products may be either goods or services which meet the requirements of the customers.
The production is the basic activity of all organizations. All other functions like finance,
marketing, personnel etc. are built to support and strengthen the production.
The structural relationship among the different functions (departments) and positions
(Persons) is graphically represented in a typical organization Chart shown above.
The functions of the sub-systems are as follows:
Production: To manufacture the products of right quality and quantity, meeting the
delivery schedules at pre-determined cost. It offers services to the
customers.
Marketing: To create the demand for the products of the company. It aims at
satisfying the needs of the customers through company’s products and
services. Its activities are market research, marketing planning, sales
administration and advertising.
Finance: To raise and allocate finance to various activities of the company. It meets
the long term and short term financial requirements. The activities include
financial planning, budgets and general and cost accounting.
Personnel: To plan for human resources and development. It aims at matching jobs
and skills of the personnel and creates a harmonious climate so that every
employee contributes positively to meet the organizational goals. The
functions include recruitment, placement, compensation, promotion and
training.
The production system is sub divided into
1. Materials management
2. Engineering department (R&D)
3. Quality management
4. Production or Works
The Production or Works is again sub divided into
1. Production Planning and Control (PPC)
2. Industrial Engineering
3. Maintenance
Characteristics of production system:
1. Production system is an organized activity with an objective.
2. The system transforms inputs into outputs.
3. Production system does not operate in isolation from the other systems of the
organization such as finance, marketing etc.
4. The system has feedback mechanism which is essential for control and
improvements.
4. Objectives of POM:
The broad objectives or criteria of performance of POM may be summarized as

1. Customer satisfaction

Customer needs may be satisfied by offering goods and services of Right
Quality in right quantity as per the predetermined time schedules at the
minimum cost.
2. Effectiveness:
It is to fulfill the multiple objectives optimally and possible prioritization
within the objectives. The effectiveness is to be viewed in terms of short
term and long term horizons.
A solution which appears to be effective in a particular period may not be
that effective in future. This requires the system to be flexible and
adaptive to the changed environment.
3. Efficiency:
It is the optimal utilization of resource inputs to create the desired outputs.
5. Scope of POM:
The scope of POM is to take decisions in different areas depending on the time period as
shown in the table given below.
Long term or strategic Intermediate time horizon Short term or operation
level level
Product design Product variations Production scheduling
Quality policy Method selection Materials allocation and
Technology to be Quality implementation, inspection handling
employed and control methods Scheduling of man power
Process selection Forecasting Break down maintenance
Site selection Deployment of man power Progress check and
Plant and machinery Over time decisions changing priorities in
selection Purchasing policy production scheduling
Man power training Vendor selection, development and Temporary man power
and development evaluation
Safety and Make or buy decisions
maintenance systems Preventive maintenance schedules
6. Functions of POM:
The functions of POM may be divided into the following four areas.
1. Technology selection and management
It pertains to long- term decision which may extend some times to
intermediate region.
Selection of technology is to be made to suit the objectives and
preparedness of the organization.
Management of man power, machinery, and materials depend on the type
of technology chosen.
The undesirable effects of deterioration, potential harmful by-products,
potential risk to users and non users are to be considered while taking a
decision of selecting a technology.
The technology decision is closely linked with the capacity and system
maintenance areas.

2. Capacity planning
It is very important for achieving the objectives of efficiency and
effectiveness.
Once capacity is planned in long term perspective, matching of capacity to
the varying demand is required in intermediate and short time horizons.
Lower capacity results in non fulfillment of customer services and other
objectives of the organization.
Higher capacity results in lower efficiency and surplus resources.
Some flexibility is to be built in capacity availability depending on the
type of production / operations system.
Large volume, low variety production needs capacities of machinery and
men which are inflexible.
Low volume, high variety production requires flexibility in capacity.
3. Scheduling
Scheduling is timing of various activities.
It involves time phasing of capacities to meet the demand as it fluctuates.
Scheduling and capacity management can not be viewed in isolation. Each
affects the other
Scheduling decisions affect the system effectiveness as well as efficiency.
In job shop type of production, scheduling is more critical compared to
mass production systems.
4. System maintenance
Vigilance is to be maintained so that the good work of capacity creation,
scheduling etc. is not negated.
Periodic checks on the performance of the system ensure the desired
output as scheduled.
System maintenance is regarding safe guards that only desired out puts
will be produced in the normal condition of the physical resources and the
normal condition is maintained.
Production Management Frame work:

The various activities of POM are related to 5 factors namely Product, Plant, Programme,
Processes and People (5 P’s). The functions of POM lie within the frame work of 5 ‘P’s.
1. Product:
• Performance
• Quality and reliability
• Aesthetics and ergonomics
• Quantity and selling price
• Delivery and warranty
2. Plant:
• Requires major investment. These are fixed assets
• Capacity should match the needs of the product, and volume of
production
• Design of lay out

• Performance, reliability and maintenance
• Safety of operations
• Financial constraints
3. Programme:
• Time table for production operations
• Purchasing
• Transforming or conversion
• Maintenance
• Cash requirements
• Storage and transport
4. Processes:
• Capacity matching
• Man power skills available
• Type of production
• Safety provisions
• Control of process parameters
• Maintenance requirements
• Manufacturing costs
5. People:
• Wage /salary administration
• Condition of work and safety
• Fixing of responsibility and delegation of authority
• Motivation
• Training of employees
• Training of employers
Some time the areas of 5 P’s are over lapping POM aims at optimum utilization of all
these factors.
7. Benefits of POM:
An effective and efficient Production Management offers many benefits to the
organization, customers, employees and Nation as well.
1. Benefits to organization:
• Higher productivity and profits
• Growth and reputation
• Scope for diversification and expansion
2. Benefits to customers or consumers:
• High quality and reliable products or services
• Prompt delivery of goods
• Customer satisfaction
• Availability of products at affordable costs
• Warranty and after sales services
• Trust and confidence
3. Benefits to Employees:
• Improved wage structure and other fringe benefits

• Job satisfaction and high morale
• High living standards due to increased wages
• Status, dignity and increased self confidence
4. Benefits to Nation:
• Increased per capital income
• Increase in national wealth and self reliance
• Improved general standard of living
• Better utilization of national resources
• Reputation in international markets
8 Types of production systems
1.0 Types of manufacture:
1. Continuous or process manufacture:
A product passes through various processes to become a final product. The
finished part of one process will be the raw material for the next process and the
final process turns out to be the finished product.
Ex: Textiles, sugar, paper industries.
2. Synthetic or assembly Industry:
Many raw materials are brought together in manufacturing process to make a final
product in synthetic industry.
Ex: Cement, Soap, Pants, Plastics etc.
Various components are assembled together to make a final product in assembly
industry.
Ex: Cycle, Automobile, radio, TV, etc.
3. Analytical industry:
One product is analyzed and many products are obtained as final products.
Ex: Crude oil refinery
4. Job order Industry:
In the job order industry different products as per the orders received are
manufactured. Each job will be different from one another. There will be no
standard product for manufacture and sell continuously.
Types: 1. Open job shop 2. Closed job shop
In open job shop, the orders from external customers are accepted and executed.
Orders once received may not be repeated.
In closed job shop, the industry caters to the internal requirements only. They do
no accept external orders. It produces inventorial items of standard design, which
have demand in the market. The items are produced repetitively.
2.0 Types of production:

A Conventional:
1. Job or Unit production 2. Mass production 3. Batch production
1. Job or Unit production:
• This type of production is used for the items which cannot be produced in
large scale.
• Individual requirements of consumers can be met.
• These are generally small in size (Ship building is an exception)
• Tools, dies are the examples for unit production

• Flexible and uses general-purpose machines.
• Each job is unique and may not be repeated.
Advantages:
1. Easy to manage. 4. Lower risk
2. Individual requirements can be met. 5. Flexibility in operations
3. Inexpensive & easily started
Disadvantages:
1. Lower operational economy
2. Higher raw material costs.
3. Skilled and intelligent workers are needed.
2 Mass production:
• It is a large scale and continuous production.
• Special layouts, special purpose equipment and costly jigs and fixtures are used.
• Standardization and simplification of products are made.
• Needs materials handling equipment as it handles materials in large scale.
Advantages:
1. Large scale operations economy.
2. Automation and use of SPMs reduces wastage.
3. Increased productivity and Quality.
4. Overheads are distributed on large quantities.
5. Due to automation a few skilled and the rest semi skilled workers are needed.
6. Demand can be forecast and produced in advance resulting in ready
availability.
Disadvantages:
1. Lack of flexibility
2. Idle cost is high in case of lack of orders.
3. Individual and lower requirements can not be met.
4. Monotony in operations.
3 Batch production:
• It is a stage in between Job production and mass production.
• The products are manufactured in lots or batches at regular intervals.
• Some of the machines may be special purpose and the rest are general purpose.
• More varieties of products are produced.
Advantages:
1. Less capital requirement compare to mass production.
2. The risk involved is less due to the variety of products.
3. More economy as compared to job production.
4. Higher flexibility in operations.
Disadvantages:
1. Cost of sales and advertisement is more.
2. Cost of raw materials may be high due to low quantity.
The characteristics of various types of production are shown in the diagram below.

B. Technological innovations in Manufacturing:
Competition in the international manufacturing segment is now all time high.
Today consumer demand, characterized by short product cycles and high
product diversity, has become increasingly complex and diverse.
The changing consumer expectations challenge manufacturing organizations
to reduce the lead-time and meet quality and reliability standards. The existing
organization structure is not flexible enough to respond to customer needs in a
timely manner.
Some manufacturers respond to the challenge by increasing the manufacturing
process flexibility i.e. by using robots, manufacturing cells, CAD/CAM,
Computer Integrated manufacturing and other innovative techniques such as
“Just- In -Time methods”, “Group technology”, “Flexible Manufacturing Systems” etc.

Notes
On
2. Product Design and Development
1. Product Life Cycle (PLC):

The demand for a product tends to follow a predictable pattern called product life cycle. The life
of a product consists of 4 different stages starting from introduction to decline. The time spans
of the stages differ from one product to the other.
1. Products have a limited life
2. Product sales pass through distinct stages, each posing different challenges, opportunities
and problems to the seller.
3. Profits rise and fall at different stages of the PLC.
4. Products require different marketing, financial, manufacturing, purchasing and human
resources strategies in each stage of the life cycle.
Stages of PLC:
A typical PLC pattern is shown below. The time period of the stages may vary.
1. Introduction
- Slow growth of sales
- No profits due to heavy expenditure incurred with introduction
- Few competition
- High cost per customer
2. Growth
Rapid market acceptance
Substantial profit improvement
Increased sales
Average cost per customer
Growing competition
3. Maturity
Slow down in sales growth
Stabilized profit or declining
Increase in competition
Competitors share the market.

4. Decline
Competitors enter market with better product features
Slowdown in sales and drift
Reduction in profits
Low cost per customer
Special Categories of PLCs:
Style:
It is a basic and distinctive mode of expression appearing in the field of human endeavor.
It can last for generations.
A style is the manner in which a product is presented and certain styles come and go. The current style
for mobile phone is touch screen and this style will last until a new technology style appears. So the
shape of a style life cycle is like a wave, as one style fades out, another appears.
Fashion:
A fashion is a current trend which can have a long or short life cycle. Certain clothing fashions usually
last for a shorter period therefore the PLC will decline very rapidly.
Fad
It is the fashion that comes quickly into public view, adopts with great zeal, peaks early, and declines
very fast.
A fad is a product that is around for a short period and is generated by hype. As you can see sales
peak very quickly, as this product has a very short life cycle.
Marketing strategies:
1. Introduction stage
Pioneer advantage. Highly rewarding but risky and expensive. Speeding up innovation is
essential.
Offer basic product
Charge cost +
Build selective distribution
Build product awareness among early adopters and dealers
Use heavy sales promotion
Create product awareness and trial
2. Growth stage
Maximize market share
Offer product extensions, service, warranty
Price to penetrate i8n the market

Build intensive distribution
Build awareness and interest in the mass market
Reduce sales promotion cost to take advantage of heavy consumer demand
3. Maturity stage
Maximize profit while defending market share
Diversify brands and models
Price to match or best competition
Intensify distribution
Stress brand differences and benefits
Increase promotion to encourage brand switching
4. Decline stage
Reduce the expenditure and take the advantage of the brand
Cut price
Go for selective distribution. Phase out unprofitable outlets
Reduce advertising cost to the level needed to retain hardcore loyal
Reduce the sales promotion to minimal level
2. 0 Product Design and Development:

For survival and growth of any organization, there is a need for design, develop and introduction
of new products.
2.1 Reasons for the introduction of new products:
1. To survive and grow
2. To satisfy the unfulfilled needs of the customer
3. Due to declining sales of the existing products
4. Due to increased competition in the existing product line
5. To enter into new areas of business through diversification or integration
6. Due to declining profit margins
2.2 Considerations in the new Product Design:
1. Marketing aspects:
The product must fulfill the requirements of the customer. The demand for the product
must be assessed to ensure that a reasonable market share is possible. Suitable packaging
for the product is to be considered. To create demand or face competition, new and extra
features over the basic requirements are to be considered.
2. Product characteristics:
The product must have the following characteristics to satisfy the needs of the customer:
a. Functional aspect:
The basic function is to be clearly defined and made known to the customer.
Additional functions may be added to increase the demand and to meet the needs
of different customers. The design becomes more complicated with the addition
of more functions.
b. Operational aspect:
The product must be easy to handle and simple to operate. It must be adaptable to
various operating conditions. Unskilled users also may have to operate the
product. Operators may have to be trained for certain products like machine
tools, automobiles etc. The design becomes difficult with increase in versatility
of functions.

c. Durability and dependability:
Durability is defined as the length of active life of the product under the given
working conditions.
Dependability is the capability of the product to function without fail when called
upon to do its job. The selection of materials and the class of workmanship are
very important to achieve these parameters. In the design stage itself these are to
be taken care.
d. Aesthetic aspects:
It refers to the physical shape and appearance of the product. It is more critical
for fancy and consumer goods, house hold equipments like refrigerators,
domestic grinders, electronic and electrical devices. Aesthetic shapes and colours
are more important in marketing aspects.
Styling the shape is dominant factor in product design. It is often used to create
variants in the basic product like cars. It is achieved at low cost.
e. Economic analysis:
Economic analysis is important factor for the management to take decisions on
the product design policy. Economic analysis aims at finding the following
financial aspects.
Total capital expenditure
Expected cost of production of the product
Reasonable margin of profit
Expected sales
Competitiveness and future of the product
Breakeven analysis
3. Production aspects:
The product design must also be such that it can be manufactured with the facilities
available in the production shop. The following aspects of production engineering are to
be considered during the design.
Selection of processes
Selection of materials and components
Selection of workmanship and tolerances
2.3 Product Design Process:

The product design and development is carried out generally in the following stages.
1. Conception
The draft specifications for the proposed product are laid down incorporating the user
requirements. This is done by the marketing department. The following minimum
information on the design specifications should be furbished.
1. Functional requirements
2. Appearance or styling
3. Estimated quantity required
4. Maximum price within which the product should be offered

5. Probable date of introduction of the product in the market
2. Acceptance
After the feasibility study is completed and found feasible, the design process starts. The
design, model making and calculations are completed and accepted at this stage.
3. Execution
A proto type is made here as per the acceptance of specifications at the stage 2. This
model should conform to specifications. This will reveal the detailed feasibility aspects
of the proposed designs and special considerations. The cost of product is known at this
stage. This should be maintained by the production engineers.
4. Translation
The manufacturing feasibility is tested here. Production Engineering department is
involved at this stage. The detailed manufacturing drawings are prepared.
5. Pre-production
A small batch of the product is manufactured under the production conditions at this
stage. This pre-production run will ensure the quality, reliability of product as per the
specifications before the production will be started on commercial basis. This stage will
check the following;
1. Drawings
2. Final tools
3. Production techniques and estimates
4. Specifications
6. Standardization of product specifications and process of manufacturing:
Based on the test results of the pre-production and the necessary modifications, the final
specifications and the process are standardized for commercial production.
The stages in product design are shown in the diagram below.
3. Production cycle:
Production cycle is a repetitive cycle of operations starting from taking requirements of
customer, planning the process of production, executing the production order, inspection,
packing and dispatching the finished goods to the customer satisfying his needs as per the
mutually agreed terms and conditions.

Thus money is invested in raw materials, components, tools, labour etc to convert inputs into
finished goods and after selling the products, the money is received back with profit.
Production procedure or cycle consists of the following series of actions taken by different
departments. The shematic view of production cycle is also shown below.
1. Sales forecast:
Sales department either recieves orders from the customers or forecasts demand for the
product. It collects the details like requirements or specifcations, quantity required and
delivery time from the customers and submits to the management.
2. Preperation of production budget:
On receiving the proposals from sales department, finance department makes the budget
in consultation with production department. The management reviewsbudget and takes
the decision regarding the annual quantities to be produced.
3. Preperation of process details:
Engineering department then comes into action and prepares the necessary drawings, bill
of materials and final specifications. For the existing products, it may check and modify
the specifications, if necessary.
4. Production planning, routing and scheduling:

The Production Planning and Controel (PPC) department prepares the complete data on
methods, process sheets, production schedule. It plans all the activities for the

production. It cheks the inventories and initiates action for procurement of materials,
tools, jigs and fixtures etc. Make or buy decisions are also taken by PPC. PPC sends the
production schedules, routing and machine loading details to Dispatching section for
further action..
5. Dispatching:
6. Dispatching section releases the production orders to shop floor for starting the
production. Complete information regarding the process, sequence of operations,
machines to be used, and time schedules are provided.
7. Production control:
The progress of the work is continuousely monitered by PPC. Suitable corrective actions
are taken if the actual acivities deviate from the planned. The management is kept
informed about the progress of the work from time to time.
8. Inspection and evaluation:
Inspections are carried out and quality control ensures that actual specifications are in
conformance with the desired specifications. Evaluation is carried out after and before
the production so that corrective actions are devised to improve the methods and reduce
the down times. Reports are sent to management by both production and finance
departments. The finished goods are transferred to finished goods stock which will be
under the custody of sales department.
9. Packing and delivery:
After receiving the inspection and acceptance reports from Quality control department,
the product is suitably packed and delivered to the customer by the sales department.
The sales department interacts with the customer and recieves the money for the goods
supplied.
Thus the production procedure requires the coordinated efforts of all the departments. The
money collected will be deposited in the finance department. The finance department manages
the funds of the company and prepares the annual accounts like balance sheet, profit and loss
account etc.

Notes
On
3. Costing and Cost Analysis

1.0 Concept of cost:
Cost is the amount of resources sacrificed to achieve a specific objective which may be the
acquisition of goods or services. Cost is always expressed in terms of money.
Ex: While buying an item money is exchanged. Similarly repairing of a machine involves transfer
of money. Here the cost of the item bought or the cost of repair (service) is the money paid in
exchange.
1.1 Cost centre:
It is the location or item of equipment for which costs may be ascertained and used for the
purpose of cost control.
1.2 Costing:
Costing or cost accounting is the process of calculating the cost of an article as a basis to fix the
selling price. It records accurately every head of expenditure incurred on the manufacture of a
product by different sections of an organization.
Cost accounting has basic objective of reporting profit and loss incurred by the company which
is a statutory obligation.
This cost accounting differs from the method of costing for the purpose of managerial decision
making. Relevant costs, which are not actually incurred or due to incur, are also considered in
costing for decision making.
2.0 Types of Cost:
Costs may be divided in to two main categories.
1. Direct costs:
These are the costs which can be identified directly with the manufacture of a product.
These are the amount spent on a particular product or service.
2. Indirect costs:
These are the costs which are intended to be spent for more than one product or job.
These costs can be allocated to the jobs for which they are spent in some proportion.
2.1 Elements of costs:
1. Material cost
1. Direct material 2. Indirect material
2. Labour cost
1. Direct labor 2. Indirect labor
3. Expenses
All the charges other than materials and labor are termed as expenses.
1. Direct expenses: The expenses which can be directly attributed to a particular job
or product are known as direct expenses.
Ex. Lay out costs, design and drawing, Jigs and fixtures, tools
etc.
2. Indirect Expenses: The expenses which can not be directly attributed to a

particular job or product are known as direct expenses.
Ex. Rent of the buildings, Insurance premium, Telephone bills,
conveyance etc.

Expenses can also be classified as Fixed and variable expenses.
1. Fixed Expenses: Those expenses which remain relatively constant regardless of

the volume of production.
Ex. Taxes on land and buildings, depreciation arising out of
time, Rent etc.
2. Variable expenses: Those expenses which tend to vary with the volume of
production.
Ex. Royalties paid, depreciation arising from use etc.
2.2 Prime cost:
Prime cost = Direct material cost + Direct labor cost + Variable direct
Expenses
It is limited in its use to manufacturing division of the firm.
2.3 Over heads:
Over heads are the cost of indirect materials, indirect labor and indirect expenses.
The over head costs can not be directly attributed to a product. They are allocated to all the
jobs or products which utilize these costs according to some criteria.
Over heads are also known as ‘On costs’ or indirect costs.
2.3.1 Types of Overheads:

1. Factory over heads:
These are pertaining to the shop floor. They include salaries of the indirect labor and
supervisory staff, depreciation of buildings and machinery, indirect materials like
consumables etc.
2. Administrative Over heads:
They include expenses incurred in administrative office, salaries of administrative
staff, directors, GM etc., legal costs, rates and taxes, postage and telephones, bank
charges, audit fees, other miscellaneous expenses etc.
3. Sales Over heads:
They include expenses towards selling and marketing, business development,
salaries of sales personnel, packing, advertisement, after sales service, consumer’s
service etc.
4. Distribution Over heads:
Generally these are included in sales over heads. All expenses incurred towards
distribution of products are classified as distribution over heads.
5. R & D Overheads:
They include salaries of R&D personnel, all expenses spent towards research and
development.
2.3.2 Allocation of Overheads:
The over heads are apportioned to each product or job for which these are incurred.
The methods of allocation are:
1. Percentage of direct labor
2. Percentage of direct material
3. Percentage rate on prime cost
4. labor hour rate
5. Machine hour rate
6. Production unit rate

2.4 Selling Price:
Prime cost = Direct material cost + Direct labor cost + Variable direct
Expenses
Factory cost = Prime cost + Factory over heads
Administrative cost = Factory cost + Administrative over heads
(Cost of production)
Cost of sales = Administrative cost + Sales over heads (including
Distribution over heads)
Selling price = Cost of sales + Profit
Note:
1. Factory over heads may be given as a factor on direct labor cost
2. AOH may be given as a % of factory cost
3. SOH may be given as a % of administrative cost
4. Profit may be given as % of cost of sales
3.0 Depreciation:
Depreciation is defined as the reduction in value of a machine or building arising from the
passage of time, use or abuse, wear & tear or obsolescence.
Depreciation is applicable for buildings, plant and machinery, vehicles which suffer natural
deterioration in the course of time.
Depreciation, in effect, sets aside from each year’s income enough money so that funds will be
available to buy the new machine when the present one is worn out or becomes un-serviceable.
The money so collected in respect of each asset is called the depreciation fund.
3.1 Methods of depreciation:
1. Straight line method
2. Reducing balance method
3. Production based method
4. Repair provision method
5. Annuity method
6. Sinking fund method
7. Endowment policy method
8. Revaluation method
9. Sum of digits method
1. Straight line method:
ADC = (C-S)/ N Where
ADC = Annual depreciation charge
C = Cost of the equipment
S = Scrap or residual value
N = Serviceable life f the equipment
2. Reducing balance method:
It involves a non linear charge. A fixed % p of the un-depreciated balance every year is
charged towards depreciation fund.
The un-depreciated portion at any time t is given by

Ct = (1-p) t.C where t = 1 to N years
Scrap value at the end of N years: S = (1-p) N.C
The % p to be charged every year on the diminishing value of the equipment is given by:
p = 1- (S/C) 1/N

3. Production based method:
1. per unit method:
Rate of depreciation = Value of asset / No. of units of production
2. per hour method:
Rate of depreciation = Value of asset / No. of production hours
4. Repair provision method:
In this method repair and maintenance cost over the life of the equipment are added to
the original cost and then depreciation is calculated.
ADC = (C + R –S) / N where R = repairs cost
5. Annuity method:
It considers original cost and interest on the written down value of the asset
Rate of depreciation = [C (1+i) N – S] [1-(1+i)] / [1-(1+i) N]
Where i = fixed rate of interest
6. Sinking fund method:
It is based on the assumption of setting up of a fund called sinking fund and invest
outside the business so that it is accumulated with interest to replace the asset at the
proper time.
Rate of depreciation = i(C – S) / [(1+i) N - 1]
7. Endowment policy method:
An endowment policy is taken from an insurance company. Each year the sum charged
to the depreciation is paid as premium to the insurance company. At the end of the life
of the asset the sum payable is equal to the original cost of the equipment.
8. Revaluation method:
Each year the value of the asset is assessed. The difference of the value in the beginning
of the year and the end of the year is charged towards depreciation fund.
9. Sum of the digits method:
This method provides for depreciation by means of differing periodic rates. It charges at
decreasing rate each year.
If the life of the equipment is N years, then
Depreciation charge for
Year 1: [C-S] . N / (1+2+….+N)
Year 2: [C-S] . (N-1) / (1+2+….+N)
Year 3: [C-S] . (N-2) / (1+2+….+N)
.
.
Year N: [C-S] . 1 / (1+2+….+N)
4.0 Break even Analysis:

Breakeven analysis is an effective tool for management in decision making. It helps in choosing
an economical course of action among the various alternatives available. It establishes the
relationship among costs, revenue, volume of production or sales and profit. Its main aim is to
find out the level of output or sales at which no profit or loss is made. Any sales or output above
this value results in profit.
4.1 Break even Point:
At some point in operations, the total revenue obtained through the sales equals the cost of
production. This volume of out put is known as Break even point.
The break even point is the volume of out put at which neither a profit nor a loss is occurred.

4.2 Scope of break-even Analysis:
1. It determines the volume of sales necessary to cover
a) A reasonable return on capital employed
b) Dividends ( both preference and ordinary)
c) Reserves
2. To fix the sales budget
3. To compute the costs and revenues for various volumes of output
4. To find the selling price
5. To compare the various proposals of business
4.3 Assumptions in Break-even Analysis:

1. All costs related to production and distribution of the products can be divided in two
categories – Fixed and Variable and they remain so throughout the range of volume
under consideration. Thus there is a linear relation between sales volume and cost.
2. Selling price remain constant at all sales levels.
3. Production and sales quantities are equal.
4. No other factor influences the cost except quantity.
4.4 Calculation of Break-even Point:

The total cost of a product = Fixed cost + Variable cost
Fixed costs:
Fixed costs are those which tend to remain constant irrespective of the volume of
output or production.
Ex.: Staff salaries, depreciation, administrative expenses, rent, establishment
charges etc.
Variable costs:
Variable costs are those which vary directly with the volume of output.
Ex.: Direct materials, labor costs and expenses
Let
F = Fixed costs in Rs.
V = Variable cost per unit in Rs.
S = Selling price per unit in Rs.
Q = The quantity produced and sold in Nos.
P = Profit
Total cost = Fixed cost + variable cost
= F + Q.V
Total sales = S.Q
At Breakeven point Total sales = Total cost
S.Q = F + Q.V
1. Break even Quantity, BEP = F / (S -V) Nos.
BEP (units) = Fixed costs / contribution
Break even value = BEP x Selling price
= F x S / (S -V)
Break even value of sales = F / (1- V/ S)
2. Contribution = Sales – Variable cost
=S–V
3. Sales = fixed cost + variable cost + Profit

Q. S = F + Q.V + P
Q. (S -V) = F + P
Sales quantity Q = (F + P) / (S -V)
Sales quantity Q = (Fixed costs + Profit) / (contribution)
Sales (value) = Q. S
= (F + P) .S / (S -V)
= (F + P) / (1- V/ S)
Sales value = (F + P) / (1- V/ S)
4.4 Break-even Chart:
Break even chart is the graphical representation of the relationship between costs and revenue
at a given time. A typical breakeven chart is shown below.
4.4.1 Functions /Applications of break even chart:

1. It depicts a clear view of the position of business
2. It is an economic presentation rather than accounting concept
3. It portrays the likely profits and losses at various output levels
4. It determines the breakeven point
5. It portrays the margin of safety
6. It is a tool of management to take alternate decisions on costs and profits
• Helps to take make or buy decisions
• Helps in the selection of equipments or process amongst the alternatives.
• Helps to decide product mix. And promotion mix.
• Helps in the selection of plant locations.
4.4.2 Contribution:
It is the difference between sales and variable cost. It is also called Marginal profit or Gross
margins.
Contribution = Sales – Variable costs
Marginal profit provides the contribution towards fixed cost and profit.
If the contribution is less than the fixed cost, loss is incurred.
4.4.3 Margin of safety:

The margin of safety is the difference between the actual sales or output and the sales or output
at BEP.
Margin of safety = (Sales – Sales at BEP) x 100
Sales
It can also be expressed as
1. Ratio of actual sales to sales at BEP.
2. Ratio of budgeted sales to sales at BEP
If the margin of safety is small, a small reduction in production capacity (or a reduction in sale)
results in a drastic fall in profit.
Steps for improving the margin of safety;
1. Increase the sales price
2. Reduce the fixed and variable costs.
3. Increase the output.
4.4.4 Angle of incidence:
It is the angle at which total revenue line intersects the total cost line.
A high angle of incidence shows that the profits are at high rate. A large angle of incidence with
large margin of safety is a favorable business position.
4.5 Profit-Volume graph:

P/V graph is a modification of breakeven chart. Profit/ loss is plotted on Y-axis and quantity
(units) of production is plotted on X-axis. Fixed costs are shown negative on the y-axis.
At zero production the loss = fixed cost.

At full capacity, profit reaches maximum.
With these two values income line can be drawn. The breakeven point (BEP) is given by the
intersection of the income line with abscissa as shown in the figure, below.
Operation below the abscissa indicates loss and above it a profit.
The slope of the income line is P/V ratio.
P/V ratio = (S-V) / S
= contribution / sales
Important relations:
BEP (units) = Fixed cost / contribution
Contribution = sales x P/V ratio
BEP (Value) = Fixed cost / (P/V ratio)
Sales (Units) = (Fixed cost + profit) / contribution

Sales (Value) = (Fixed cost + profit )/ (P/V ratio)
5.0 Relevant costs:

These are the costs which are considered for decision making to choose optimum course of
action among the available alternatives.
1. Opportunity cost:
Opportunity cost for a particular decision is the benefit, derived from the best of the
alternative opportunities, lost due to the decision to choose a particular line of action.
Example:
In a decision to keep Rs 100 at home instead of in bank. The decision has an
opportunity cost of Rs 10 /- . Had the money kept in bank, it would have fetched
an interest @10%.
The decision to keep in bank has no opportunity cost. Since had it kept in house
no interest would have gained.
2. Incremental cost:
Incremental cost is the change in total cost resulting from a decision.
If we are referring to output, the incremental cost of added production is the difference
between the cost of producing the larger output and the cost of producing the previous
smaller output.
Similarly, if we are referring to sales, the incremental cost of selling an additional item
is the difference between the cost of selling with the item included and the cost of
selling without it.
3. Marginal cost:
Marginal cost may be defined as the addition to the total cost resulting from
producing one more unit.
4. Sunk cost:
Sunk cost is the expenditure incurred or due to incur irrespective the decision taken. In
other words the costs incurred in the past which are irrelevant to future decisions are
called sunk costs.
Example: Obsolescence part of the depreciation is a sunk cost which is irrelevant
for a decision once the equipment is bought.
6.0 Make or Buy Decisions:

The choice, whether a product or service should be purchased from outside sources or to be
manufactured within the company, refers to Make or Buy Decision. Generally the cost
influences make or buy decisions. Non-financial factors are also equally important in long term
horizons.
6.1 Occasions for make or buy decisions:

Make or buy decisions are necessary in the following situations.
1. Introduction of new product
2. The fluctuating demand for the existing product

3. Deteriorating quality and delivery commitments of the existing suppliers.
4. When cost reduction and value analysis are carried out.
6.2 Factors influencing make or buy decision:

Favorable conditions
Factor
Make Buy
1. Volume of production: High volume Low volume
2. Utilization of production Surplus capacity Inadequate capacity
capacity:
3. Integration of Vertical integration horizontal
production system:
4. Availability of Availability of skilled & Non-availability of skilled &
manpower: competent man power competent man power
5. Secrecy or protection of If Applicable If not critical
patent rights:
6. Availability of If not available If available
competent vendors
7. Quality and reliability of Not satisfactory High
vendors:
8. Cost analysis:
Breakeven analysis is very useful to take make or buy decision.

Total cost in case of making is sum of fixed costs & variable costs relating to the product.
Total cost in case of buying is evaluated considering price, transportation, taxes,
procurement cost, carrying cost and inspection costs.
BEP is the volume where these two costs are equal.
The volume of production above BEP favours Make decision where as the volume
below BEP favours Buy decision.
A typical BEP chart is shown above.

Notes
On
4. Sales Forecasting
1 Forecast
Forecasts are estimates of the occurrence, timing or magnitude of future events. Forecast
of demand are especially important to operation managers because they guide the firm’s
scheduling and production control activities.
Technological forecasts are concerned with the pace of new developments in technology.
Environmental forecasts are concerned with social, political and economic state of the
environment.
American Marketing Association defined Forecasting as “An estimate of sales in Dollars or
physical units for a specified future period under a proposed marketing plan or programme and
under an assumed set of economic and other forces outside the unit for which the forecast is
made”.
Prediction is an estimate of future events through subjective considerations other than just the
past data. It is based on skill, experience and judgment of the predictor.
Forecasting is an estimate of future event based on past data and it requires statistical
techniques to find the trend values.
1.1 Need for fore casting:

1. To take decisions regarding operations planning, scheduling, inventory control and
capacity planning.
2. Projecting cash generation and operating profits on the basis of sales forecasts.
3. To take decisions on investment proposals for expansion, modernization diversification
etc.
4. To make proper arrangements to train the man power to meet the future needs of
expertise.
2 Purpose of Forecasting:
For long term forecasting (Above 3 year):
• To plan for capital expenditure for future developments or to acquire new facilities.
• To determine expected cash flow from sales.
• To plan for future manpower requirements.
• To plan for material requirements.
• To plan for R&D projects.
For medium term forecasting (1- 2 years):
• To determine budgetary control over expenditure.
• To determine dividend policy.
• To plan and control maintenance expenditure
• To plan for capacity adjustments.
• To determine schedule of operations.
For short term forecasting (1-6 months):
• To estimate inventory requirement.
• To decide work loads on men and machinery.
• To plan for working capital.

• To provide transport facilities for finished goods.
• To set up production runs for products.
• To fix sales targets.
• To estimate over time requirements to meet delivery schedules.
2.1 Factors influencing forecasting:

1. Environmental changes
2. Changes in the preferences of the users
3. Number of competitive products
4. Disposable income of the consumers
2.2 Steps in Forecasting:

The following steps are generally followed in forecasting by any method.
1. Determine the objective of fore casting.
2. Select the period over which the forecast is needed. Is it for long term or medium term
or short term?
3. Select the appropriate method of forecasting.
4. Gather information to be used in the forecast. The information may be from primary
(from the firm itself) or secondary source (Out side sources such as magazines, data
sheets, Government records etc.).
5. Make the forecast using the information gathered.
2.3 Advantages and limitations of sales forecasting:

Advantages:
1. Forecasting forms the basis of planning which is the fundamental activity of
management. Planning may be for sales and marketing, production, manpower or
capacity.
2. Forecasts are used in the evaluation of project proposals and investment plans.
3. Forecasting helps in predicting the future technological developments and prepares to
adapt to the new technologies.
4. Sales forecasts are essential for fixing the annual targets for production and sales of any
organization.
Limitations or Pitfalls:
1. Different forecasting methods are needed for different purposes. No single forecast
method is adequate.
2. No forecast is accurate and needs constant monitoring to find reasons for deviations.
3. It is necessary to include a number of functional specialists in the forecasting team.
4. Forecast values change if the environment is changed from the one present at the time
of forecasting.
3 Methods of Demand forecasting:

Forecasting may be classified as (1) Qualitative and (2) Quantitative.
Qualitative fore casting Quantitative forecasting

These are subjective and depends on These are objective and based on past data.
judgment of forecaster

Forecast depends on the skill and experience These are based on statistical and
of the persons. It may vary from person to mathematical principles.
person. Hence collective opinions are taken.
Trends under laying the demand cannot be Trends under laying the demand can be
known determined
These are less reliable Fairly reliable
Forecast is likely to be biased Cause and effect of the parameters considered
to establish and utilize the relationship among
variables.
3.1 Qualitative Methods:

1. Jury of executive opinion method:
This involves soliciting the opinion of a group of experts on expected future sales and combining
them into a sales estimate.
Advantages: 1. Expeditious method
2. Considers variety of factors like economic climate, competitive environment, technical
developments etc.
Disadvantages: 1. Bias underlying subjective estimates
2. Reliability is questionable.
2. Delphi Method:
This technique is based on using the judgement of a panel of experts to arrive at a convergence
regarding the forecast. The panel is presented with a series of questions and their replies are
treated anonymously. The answers are fed back to the group along with other information such
as the mean, median, interquartile range and standard deviation. The panel of members may
also be asked to provide reasons for their forecasts and these may also be fed back
anonymously. Strict anonymity is observed to prevent members of the panel from being
influenced by each other.
The members of the panel are then asked to reconsider their answer and provide a second
opinion. Once again these are fed back to the panel. This process is repeated 4 to 6 times until
there is sufficient convergence between the members. The results of the last round are taken as
the final forecast.
3. Economic indicators method:

This method of forecasting is based on the occurrence of some events which indicate the
demand of certain items or services. These occurrences serve to describe the economic
conditions prevailing during the given time period. These are called as economic indicators.
The examples of economic indicators are:
• Construction contracts awarded indicate demand for building materials
• Farm income: for the demand of agriculture implements.
• Registration of automobiles: For accessories and petroleum products
• Personal income: consumer goods
These are 3 types:
1. Leading indicator:
It is the one whose value for a given period will reflect sales in a subsequent period.

Example: The No. of children born now indicates the requirement of school bags 3 or 4
years later. This type is most desirable because its value will be known at the time of
fore cast. It is suitable for long term fore casting.
2. Lagging indicator:
It is the one whose value for a given period will reflect sales in some preceding period.
Example: The present demand of spare parts of a machine is indicated by the sales of
the machines 1 or 2 years earlier. This type of economic indicators is useful for short
term forecasting.
3. Coincident indicator:
It is the one whose value for a given period will reflect sales in the same period.
Example: The present population growth indicates the demand for baby milk feeders
for the present period only. This type is not desirable because its value must be
estimated for the future period.
After knowing the data of economic indicators and the corresponding demand, forecasting
may be done using least square method.
3.2 Quantitative Methods:

1. Time series projection methods:
Time series is the past data arranged in a chronological order as a dependent variable
and time as independent variable.
1. Decomposition method:
2. Moving average method
3. Exponential smoothing method
4. Least square method
2. Causal methods:
• Regression and correlation analysis
• Econometric Models
• In-put Out-put analysis
• End use analysis
3.3 Decomposition method:
The time series analysis consists of determining the trend of the demand and
extrapolates the future trend. The time series is decomposed into 4 components.
Trend (T):
The long period tendency of the data to increase or decrease is called as secular trend. It
is estimated by statistical methods.
Cyclic variation (C):
It is wave like fluctuation about the trend line.
Seasonal variation (S):
It is regularly occurring periodic fluctuation. The period may be a week or a month or a
quarter of a year or a year. Generally it is influenced by factors like
1. Climatic and weather conditions
2. Social customs, festivals, habits and traditions
3. Government policies which are periodic
4. Preferences of consumers
5. Company policies like discounts, gifts etc.
Examples of seasonal fluctuations:

• The demand for umbrellas and rain coats is increased in monsoon and warm
cloths during winter.
• The sales of cloths and house hold items like refrigerator etc is high during
festival seasons.
• Lean sales during April/ May and peak sales during March due to financial
year starting / closing.
Importance of seasonal variations:

Measure of seasonal variations are necessary to correct the fore cast values for each
month or quarter of year obtained from the time series. The measure of seasonal
variations is known as seasonal index.
The multiplication of the corresponding seasonal indices with the forecast average will
give the forecast values for the seasonal periods.
Seasonal index = (month or quarter average / general average) x 100
Random or irregular variations (R):

These variations in business activity are highly unpredictable and irregular in nature.
The forecast can be made by the equation
Y = T.C.S.R where Y is the forecast value.
The trend value can be estimated by using the following methods.
3.4 Moving average method:

The basic principle consists of selecting a number of periods from the past data and calculating
the average of the figures to give an average past value (va ) of n periods. This (va ) is taken as the
forecast for the next period.
(va) = (v1 + v2 + …… vn) / n
In determining the average, the same No. of periods, n is always considered. But as new actual
figures are obtained the oldest one is dropped so the average moves in time.
Centering of the moving average:
A 3-period moving average is centered (located) at median / central period i.e 2- period in this
case.
A 5-month moving average is located at 3rd month.
In general n-period moving average is located at (n+1)/2th period.
Weighted moving average method:

Weighting technique can be used to ensure that recent event exert greater influence on the fore
cast.
Let wi be the weight of i th data such that w1+ w2+ ……… wn = 1
Then
Fore cast value F (t) = w1 x v1 + w2 x v2 + ……… wn x vn
3.4.1 Adjustment of seasonal variation:

Estimation of seasonal variations can be obtained by eliminating the trend cycles and irregular
fluctuations from the original time series data.

The measure of seasonal variations, after eliminating the trend and irregular fluctuations, are
known as seasonal index. By using the seasonal index we can deseasonalize the time series. The
deseasonalized data is called seasonally adjusted data.
Two methods are generally used for calculating seasonal indices.
1. Simple averages method:
Example:
The data given below shows the sales data for a commodity during four quarters of the years
from 1970 to 1974. Calculate the seasonal index.
Year 1 Quarter 11 Quarter 111 Quarter 1V Quarter

1970 35 39 34 36
1971 35 42 37 40
1972 35 39 37 42
1973 40 46 38 45
1974 41 44 42 45
Solution:
Seasonal index = (month or quarter average / Year average) x 100. Averages of quarters and
yearly average are
Year 1 Quarter 11 Quarter 111 Quarter 1V Quarter calculated as
shown 1970 35 39 34 36 in the table
below. 1971 35 42 37 40
1972 35 39 37 42
1973 40 46 38 45
1974 41 44 42 45
totals 186 210 188 208
Averages 37.2 42 37.6 41.6
Year Average (37.2+42+37.6+41.6)/4 = 39.6
Seasonal index for 1 quarter = 37.2 / 39.6 x100 = 93.9%

Seasonal index for 11 quarter = 42/39.6 x100 = 106.1%
Seasonal index for 111 quarter = 37.6/39.6 x100 = 94.9%
Seasonal index for 1V quarter = 41.6/39.6 x100 = 105.1%
2. Moving averages method:

3.5 Exponential Smoothing method:
Forecast for the present period is found as the forecast for the last period + a portion of the
error made in the last forecast.
Present period forecast = Last period forecast + α (last period

actual – last period forecast)
α = smoothing constant
Ft = Ft-1 + α (Dt-1- Ft-1) 0< α <1 (1)
This forecast corrects for the past errors. This is also known as Adaptive forecasting.
Equation (1) can be written as
Ft = α .Dt-1 +(1- α ) (Ft-1) Ft -1 = α .Dt-2+(1- α ) (Ft-2)

Substituting value of Ft-1
Ft = α .Dt-1 + (1- α) [α .Dt-2+ (1- α) (Ft-2)]
= α .Dt-1 + (1- α) α .Dt-2+ (1- α)2 (Ft-2)
= α .Dt-1 + (1- α) α .Dt-2+ (1- α)2 α .Dt-3 + (1- α)3 (Ft-3) Substituting value of Ft-2
Ft = α .Dt-1 + α 1- α) Dt-2+ α (1- α)2 Dt-3 + α (1- α)3 (Dt-4) ..
… α (1- α)t-1 D t-t + (1- α)t (F0)
It can be seen from this equation that the weightage for each of the demands in the past is
discounted by a factor (1- α). The last term is negligible for large values of period.
Approximate relation of α to moving average
α = 2 / (No. of periods in moving average+1)
Age of average = (1- α) / α

For α =1, the age is zero which means that the present period forecast equals the last period actual
and there is no smoothing.
For α = 0 , the age is infinite indicating that the present period forecast equals the last period
forecast and is not influenced by actual values.
i.e. the forecast once set never changes so that there is infinite smoothing.
Simple exponential forecast is not suitable when trends are seasonal variations are present.
Advantages:
1. No waiting period for several sets of data.
2. The value of the weights decreases with the time and there is no cut off period
after which data are not considered.
3. Only 3 values are needed for forecast.
4. The value of α can be made to change or adapted to changed circumstances.
3.6 Least square method (Linear Regression analysis)
This type of forecasting consists of developing a model of cause and effect between the
collected data and then using this model to forecast the future.
The causes behind the figures need to be understood and then this is to be used to determine
how the various factors involved will change to affect the final result.
Common model is regression and the simplest example is single variable linear model.
A straight line assumed to be able to pass through the data such that the sum of the squares of
the variations from this line is equal to a minimum. This line is called as line of best fit. This gives
an equation for the line.
y = a + b.x b= slope of the line

a= Intersection of the line on y-axis.
x = independent variable
y = dependant variable
The values of constants a and b can be determined by two equations
Σy = Na + bΣx N = No. of data values
2
Σxy = aΣx + bΣx
If the time series consists of odd No. of years, the middle value of the time series is taken as
origin. This makes sum of deviations of the independent variable from the origin year, Σx is zero.
If the time series consists of even No. of years, the midway between the two mid values value of
the time series is taken as origin.
If the time series is such that Σx =0 then

a = Σy / N
b = Σxy / Σx2
If the independent variable is other than time periods, then Σx may not be zero.
If the Vme series is such that Σx ≠ 0 then
a = Σy. Σx2 – Σx. Σxy / [(N Σx2) – (Σx)2]
b = N.Σxy – (Σx. Σy) / [(N Σx2) –(Σx)2]
The above values are derived from the two simultaneous equations
Σy = Na + bΣx --1
2
Σxy = aΣx + bΣx --2
Having known the values of a and b, the forecast for future period is determined from the
formula
y = a + b.x
If b is positive the trend is increasing and if it is negative the trend is a decreasing one.

Notes
On
5. Production Planning and Control
3.0 Production planning and control:

Production Planning and Control may be defined as planning, organizing, directing and
controlling of firm’s resources to achieve the pre-fixed goals of the organisation.
It has three phases - Planning, Action and control
The planning phase involves in preparation of process details, selection of equipments and tools
to be used, fixing the time schedules of each operation and selection of persons to perform the
tasks.
The action phase releases the required orders and instructions to commence the work.
The control phase ensures that the planned programme is progressing as per the plan and takes
necessary steps to correct at appropriate time if deviations are observed.
1.1 Objectives and Principles of PPC:
1. To select the least expensive method.
2. Organizing the production of right quality of product in right quantity at right time.
3. Plan the work and work to the plan.
4. Best utilization of the resources available and minimizing the idle time of the equipment.
5. Planning and controlling the materials for un-interrupted production.
6. Prompt and shortest delivery schedules.
7. Coordination and liaison with various departments.
8. Providing status reports and progress reports.
9. To provide alternative production strategies in the case of emergent conditions.
1.2 Functions of PPC:

1. Planning 4. Dispatching
2. Routing 5. Follow up
3. Scheduling 6. Inspection
1.2.1 Planning:
It is the first step for all activities. Planning department decides each element of the job in
anticipation that what work shall be done where, how and when.
Requirements:
1. Details of the product along with drawings and specifications.
2. Quality and quantity needed.
3. Details of the equipment, tools and personnel available.
4. Standard time for each job.
5. Information about stores and delivery time.
Steps involved:
1. Selection of process
• Current production commitments
• Quantity to be produced
• Delivery dates
• Quality standards
2. Selection of material

3. Selection of jigs and fixtures
4. Preparation of process layouts/ charts
5. Providing the set up time and standard time
6. Determining the economic batch quantity
1.2.2 Routing:
It is the selection of the path which each part of the product will follow while being transformed
from raw material to finished product.
It is the sequence of operations to be adopted while manufacturing. Routing determines the
best and cheapest sequence of operations and to see that the sequence is followed rigidly.
Routing depends on the type of manufacture.
Continuous industry: The route is decided in the beginning as per the process and remains
same. The further control over the route is not needed
Assembly industry: Each component needs a different route. It needs good technical
knowledge of the PPC staff.
Job order industry: Since different products are made, each product needs its own routing.
Every time a different route has to be prepared suiting the product.
1.2.3 Scheduling:
It is the fixation of time and date for each operation. The start and finish times for each
operation are fixed initially. Schedules also indicate the sequence of operations. The planning
department prepares the schedules.
Railway map is an example for routing where as railway time table is an example for scheduling.
Principles of scheduling:
1. Principle of optimum task size:
When the task size is small, scheduling will be more efficient. All the tasks are to be of
equal magnitude.
2. Principle of optimum production plan:
The guiding principle is to plan the activities such that the load on all plants is equal.
3. Principle of optimum sequence:
If the work centers are arranged in the same sequence as that of the work, the
scheduling will be more efficient.
Types of schedules:
1. Master schedule: It is a weekly or monthly breaking of the production
requirement for each product.
2. Shop schedule: These are prepared after the master schedule. The detailed scheduling of
each product is given in these schedules.
Methods of scheduling:
Two methods are used in scheduling the jobs. They are (1) forward Scheduling (2) Backward
Scheduling.
1. Forward Scheduling:
If the schedule is prepared from the beginning of producing a product / job and the
delivery date is calculated by summing up the time required for all the operations
including set up and waiting times needed, then it is known as forward scheduling.
This is commonly used in job shops where customers place orders on “needed as soon
as possible” basis. Here the job and its components are prepared as early as possible.
Thus in-process inventory is built up for the next operations resulting in higher inventory
cost.

2. Back ward Scheduling:
If the schedule is prepared from the delivery date of a product / job and the starting and
finishing time of each component or operation is worked out, then it is known as back-
ward scheduling.
This is generally used in assembly type of jobs and specific delivery date is committed in
advance. Here the jobs are assigned latest available time slots. Each job is completed
when it is just due. Back ward scheduling minimizes the inventories since the jobs are
completed when they are ready to go for next operation.
1.2.4 Dispatch:
Dispatch is the release of orders to start the work in accordance with route sheets and schedule
charts. It gives the necessary authority to start the work.
Functions:
1. Issue of work orders to the concerned shops.
2. Issue of materials from stores to the respective machines.
3. Issue of Machine loading and schedule charts.
4. Issue of inspection orders.
5. Issue of Tools, jigs & fixtures and other essential articles.
Forms used:
1. Work order 4. Move tickets ( MIRs.)
2. Time cards 5. Tool tickets
3. Inspection tickets
1.2.5 Follow up:
This comes under control phase. It regulates and reviews the progress of the work. It ensures
that the production is being performed as per the schedules.
Functions:
1. Material follow-up
2. Job progress
3. Assembly
4. Control charts
The basic function of the follow-up is to identify and avoid delays and take remedial actions in
the right time.
Causes for delays:
1. Shortage or delay of materials
2. Equipment break-down
3. Errors in routing and scheduling
4. Lack of proper tools etc.
5. Maximum rejection and rework
1.2.6 Inspection:
Inspection is carried out for confirming that the products are made as per the pre-determined
specifications or standards.
During inspection the defective products are rejected. In-process inspection aims at reducing
the rejections of the finished products by eliminating the defective parts for further processing.
Inspection of raw materials, tools and equipment ensures the quality of the finished product.
PPC ensures that the QC department functions effectively and provides the necessary liaison
between production and QC.
1.3 Progress control charts:

These charts are used in progress reporting. Progress charts compare the progress of the work
against a prescribed target and point out the failures to achieve. They draw attention for an
action or investigation.
Types:
1. Bar chart:
Each operation is represented by a line showing the duration of the operation against a
time scale.
Activity Time in days

0 5 10 15 20
A ----------------------------------
B ------------------------------------
C -------------------------
2. Curve chart:
It is the graph between two variables like the No. of items produced V/S No. of days.
3. Gantt chart:
Gantt charts are used in scheduling, loading and expediting the progress of production.
It consists of a rectangular grid divided by a series of parallel horizontal and vertical
lines.
Vertical lines divide horizontal lines into time units. The time units may be days, weeks,
months or years.
It is a modified bar chart, where in load is marked against a time scale with one
horizontal bar or line allocated to each machine.
Gantt chart displays
1. Plan for future
2. Progress on present operations
3. Past achievements till date
4. Relationship among several variables
5. Focuses attention on situations likely to get delayed
6. Shows short fall of the plans
7. Cursor attached to the chart shows the work progress as on a particular date.

Types:
1. Order control chart:
In this chart Jobs to be completed are shown on the time scale against machines or
work centers.
2. Machine load chart:
In this chart, machines or work centers are shown on the time scale against Jobs to be
completed.
The sample charts are shown below.
1.4 Aggregate planning:

Production planning in the intermediate range is termed as aggregate planning. The time
horizon may vary from 3 months to 1 year. The physical facilities during this range of period can
be assumed to be fixed.
The demand on facilities and available capacities are specified in aggregate quantities. The total
expected demand is specified by sum of the individual demands of all the variants of the
product i.e. product mix.
Examples:
1. An automobile firm’s demand /capacity may be specified as say 1000 vehicles per
year. This is the sum all the types of vehicles.
2. Paint manufacturer may specify his capacity as 10,000 liters per annum. Here this
demand is the total demand for all the colours of paint.
Methods or techniques used for aggregate planning:
When the demand or forecast for the products is either more or less than the available capacity
of the plant, the following techniques may be used to match the capacity with the demand or
forecast.
1. Matching the capacity with the demand:
a) Hiring or lay off of employees:
The capacity is increased by hiring extra man power. When the demand is less some
employees are given lay off. The additional cost involved is to be taken into
consideration while deciding these options.
b) Over time or under time:
The existing employees are asked to work for more than normal working hours. The
premium rate is provided for the over time. The production may be reduced by
reducing the working hours. The cost of under time is to be taken into
consideration.
c) Use of temporary employees:
Instead of giving over time to existing employees, workmen can be engaged
temporarily to increase the capacity when required. The cost may be more or less
than the normal workers depending on the type of labour engaged.
d) Subcontracting:
The excess requirement may be subcontracting to other firms who can meet the
requirements of the product. The cost of each item may be slightly higher than the
item produced in-house.
e) Carrying inventory:
Inventory is made during slack time and stocked to meet the excess demand.
Inventory is replenished when used and acts as a safety cushion.
2. Matching the demand with the capacity:

a) Differential pricing:
b) Discounts in price are announced during lean period to increase the demand.
c) Advertising or Sales Promotion:
The advertisement and sales promotion activities are made vigorously during slack
times to increase the demand.
d) Backlogs:
Backlogs are made by requesting the customers to wait for deliveries. Thus demand
in peak periods are shifted to slack periods.
e) Development of complementary products:
This is more suitable for the products which are highly seasonal in nature. Some gift
items are produced during the slack time and offered to customers for increasing
the demand.
1.5 Master production Schedule:
Master production schedule gives the details of production plan from the aggregate
plan and converts this plan into specific material and capacity requirements. This is
derived from the aggregate plan.
Functions:
1. To translate aggregate plans into specific end items.
2. To evaluate alternative schedules
3. To generate material requirement
4. To generate capacity requirements
MPS can be worked out in 3 steps.
1. Consolidate all gross requirements for the master scheduled items.
2. Determine the net requirements of the items.
Net requirement = Gross requirement – inventory on hand
3. Group the net requirements into planned orders to be released.
The process of preparing the Master Production Schedule is shown in the flow chart given below.
1.6 Schedule charts:
Scheduling normally starts with a master schedule. Master schedule resembles like a
central office which processes the information about all the orders on hand. Master
schedule shows the break down of production requirements for a specified period say
weekly, monthly or yearly.
As the orders are received, they are marked on the master schedule depending on their
delivery dates or priorities if any.
When the shop capacity is full for the present week, the newly arrived orders are carried
over to the next week and so on. Master schedule is updated continuously and it stands
the basis for all subsequent scheduling techniques.
Months J F M A M J JUL A S O N D
Items
AC Motors
5 HP 15 - 30 - - 30 - - - - - 10
25 HP 20 25 20 15 15 15 15 15 15 15 20 20
DC Motors
20 HP - - - - - - 10 - - - 10 -
30 HP 5 - - 15 15 5 - - 10 - - 10
Master Schedule Chart

1.7 Scheduling techniques:
Johnson’s Rule:
Classification of scheduling techniques:
1. Series machines
2. Parallel machines
3. Series-parallel machines
These are referred as N jobs- M machines problem or simply N/M problem in
sequencing.
1. N jobs- 1 machine:
1 2 3 N M
Jobs Machines
Many of the priority rules can be used to solve this problem. They provide the sequence
in which the jobs are to be processed by the single facility.
Priority Rules:
1. FCFC (First cum first served)
2. EDD (Earliest due date)
3. SPT (Shortest Processing Time) – Min. in-process inventory
4. LPT (Longest Processing Time)
5. TSPT (Truncated Shortest Processing Time)
6. LS (Least Slack)
7. COVERT (Cost Over Time) Expected delay cost / Processing time.
Largest ratio is selected first.
2. N jobs- 2 machines in Series ( No Passing):

No passing means that no job is allowed to pass any other job while the first job is
waiting between facilities and no job can be started before the previous job is
completed.
1 3 N 1 2
2
Jobs Machines
This type of problem can be optimally solved by John’s Rule.
Steps:
1. Select the operation of shortest duration
2. If the shortest duration operation requires the first m/c. schedule the job in the first
available position in the sequence. If it requires the second m/c. schedule the job in the Last
available Position in the sequence.
3. Remove the assigned job from further consideration and return to step 1 for the next job.

Example:
Job Duration in hrs.
M/c. 1 M/c. 2
A 3 6
B 5 2
C 1 2
D 7 5
3. N jobs- 3 Machines in series:

The optimum solution is quite complicated. If either or both of the following conditions are met, the
solution is given by the N/# John’s rule.
1. The smallest duration on M/c. 1 is at least as great as the largest duration on M/c. 2.
2. The smallest duration on M/c 3 is at least as great as the largest duration on M/c. 2
1 3 N 1 2 3
2
Jobs Machines
Jobs Machines
Duration in Hrs.
M/c1 M/c2 M/c3
ti1 ti2 ti3
A 13 5 9
B 5 3 7
C 6 4 5
D 7 2 6
Here both the conditions are satisfied; hence we can apply the algorithm.
Form a new matrix as follows.
ti1 + ti2 ti2 + ti3
A 18 14
B 8 10
C 10 9
D 9 8
Now we can apply john’s rule for the N/2 problem and get the optimum sequence.
B, A, C, D
Essentially John’s rule converts a N/3 problem into a N/2 problem provided that certain
conditions are met. Even if these conditions are not met , the rule still provides a near
optimal solution.
Example
Determine the total elapsed time with best sequence for the following using Johnson’s algorithm
method. Calculate also the idle time of machines.

Jobs A B C D E F G
M1 3 8 7 4 9 8 7
M2 4 3 2 5 1 4 3
M3 6 7 5 11 5 6 12
From the data,
Least time job on m/c M1 is A .and time, Tm1 = 3
Least time job on m/c M3 is C .and time, Tm3 = 5
Max. time on m/c M2 is C or E .and time, Tm2 = 5
Conditions for feasibility of solving by Johnson’s method are
1. Tm1≥ Tm2 or
2. Tm3 ≥ Tm2
Here condition 2 is satisfied and hence Johnson’s method can be used for scheduling.
Let MG and MH be the two machines such that
Time on Time on MG = sum of the times on M1 and M2
Time on Time on MH = sum of the times on M2 and M3
Converting the problem into Two m/c s problem Table is drawn below.
Job MG = M1+M2 MH = M2 + M3
A 7 10
B 11 10
C 9 7
D 9 16
E 10 6
F 12 10
G 10 15
Sequence as per Johnson’ algorithm:
(Least time on MG allotted from the beginning and least time on MH allotted from the end)
A D G B F C E
Now allocation can be done for 3 m/cs according to this sequence as shown in the table below.
M1 M2 M3 Job M/c Idle time
Job
IN OUT IN OUT IN OUT Idle M1 M2 M3
A 0 3 3 7 7 13 - - 3 7
D 3 7 7 12 13 24 1 - - -
G 7 14 14 17 24 36 7 - 2 -
B 14 22 22 25 36 43 11 - 5 -
F 22 30 30 34 43 49 9 - 5 -
C 30 37 37 39 49 54 10 - 3 -
E 37 46 46 47 54 59 7 - 7 -
Total idle time 0 25 7
From the table:
The total elapsed time is 59
Idle time for M2 is 25 and for M3 is 7
4. N jobs – M machines in series:
1 3 N 1 2 m
2
Jobs Machines

An efficient heuristic procedure suggested by Campbell, Dudek & Smith is known as
CDS algorithm. The CDS algorithm extends the N/3 John’s rule to a general N/m
problem and provides a near optimal solution
Jobs Machines (Duration in Hrs.)
M/c1 M/c2 M/c3 M/c 4
A 3 1 11 13
B 3 10 13 1
C 11 8 15 2
D 5 7 7 9
E 7 3 21 4
The algorithm generates (m-1) two M/c solutions. The sequence that yields the minimum make
– span is chosen.
Solution 1:
Consider only the duration of First & last M/cs. As M1 & M2. By Johnson’s rule
sequence is : A,D,E,C,B
Solution 2:
From original data add the durations of the first 2 M/cs for M1 and that of Last 2 M/cs. For M.2.
Sequence: A,E,D,B,C
Solution 3:
From original data, form M1 = sum of the time durations of the First 3 M/cs.
M2 = sum of the time durations of the Last 3 M/cs.
Sequence : A,D,E,C,B
Smallest of the 3 solutions is A,D,E,C,B ( 72 hrs.)
5. N jobs, M machines in Parallel:
N jobs may be processed by any of the machines available. A simple yet effective heuristic
solution is given by the LPT (Longest processing Time) priority rule.
1.8 Flow process charts:

A chart representing the sequence of operations of a process is called the Flow process chart.
1.8.1 Symbols used in process chart:
1. Operation : 5. Inspection :
6. Operation cum
Transport :
7. Inspection cum
2. Storage: operation :
or Temp. Storage :
8. Change point :
3. Delay : cum operation :
4. Transport :
1.8.2 Types of flow process charts:
1. Outline process chart: Gives over all picture of the process giving main events
sequence wise.
2. Flow process chart
3. Two handed process chart
4. Multiple activity charts

Flow process chart: A detailed version of outline process chart.
1. Sets out sequence of low

2. Records all he events in sequence using symbols
3. Marks distances traveled and time taken by an event
Types:
1. Man type : Records activities of an operator
2. Equipment type: Records the usage of equipment
3. Material type : Records the changes in material in location or
condition
S.No. Activity Operations Distance Time in Remarks

moved Minute
meters s
1 Casting in foundry
Moved to gas
2 cutting m/c 10 3 By trolley
Wait- setting m/c 5

3
Raisers cut
4 20
Wait for trolley
5 10
Moved to m/c shop
6 20 6 By trolley
Inspection before
machining 15
7
--
--
Material type Flow process chart
2.0 Materials Requirement Planning (MRP):
MRP is a computational technique that converts Master Production Schedule (PMS) for end
products into a detailed schedule for the raw materials, components and sub-assemblies used in
the end product.
• Appropriate control procedure for inventory type 1 & 2 i.e. raw materials &
components and Work-in-process.
• Ensures that materials and components are available in the right quantity and at the
right time so that the end product can be completed according to MPS.
• Effective tool for minimizing unnecessary inventory investment.

Functions:
1. Control of inventory
2. Assignments of priorities for components depending on their delivery dates.
3. Determination of capacity requirement at detailed level.
Capacity Requirement Planning is a system for determining if a planned schedule can be
accomplished with the available capacity and, if not, making adjustments as necessary.
Customer Sales Service

orders Forecasts parts
Engg. MSP Inventory

Changes transactions
Inventory
BOM MRP
record file
Output
Structure of MRP System

Inputs to MRP:
1. The master production schedule
MPS gives the list of the end products and their quantities along with the
delivery times.
2. The bill of materials file which defines the product structure
BOM comprises the list of raw materials, components and sub-assemblies that
make up each product.
The product structure is the breakup of all RM, components and sub-assemblies
of the end product.
P1 Level 0
Level 1
S1 S2
C1 C2 C3 C4 C5 C6 Level 2
3. The inventory record file

• Accurate current data on inventory status is important for MRP. This is
accomplished by utilizing a computerized inventory system which maintains
the inventory record file or Item master file.
• Lead time for raw materials, components and sub-assemblies are to be
determined and maintained in the inventory record file.
Working of MRP:
1. The existing stock of materials, components and sub-assemblies must be considered

for determining the requirements for meeting MPS.
2. MRP should determine the starting time for assembling sub-assemblies, purchasing
or manufacturing components considering their respective lead times.
3. The common materials or components used in various end products are to be
identified and the quantity requirements are combined into a single net
requirement for the item.
4. As MPS provides time phased delivery requirements for the end products, MRP
should calculate the time phasing of the individual RM, Components and sub-
ssemblies.
Output of MRP:
1. Primary outputs
• Order release notes
• Reports showing planned orders to be released in future periods.
• Rescheduling notes indicating the changes in due dates for open orders.
• Cancellation notices
• Inventory status reports.
2. secondary outputs
• Performance reports of various types indicating costs, item usage, actual v/s
planned lead times etc.
• Exception reports showing deviation from schedule, over due orders, scrap
and so on.
• Inventory forecasts.
Benefits of MRP:
1. Reduction in inventory 4. Better machine utilization

2. Improved customer service 5. Greater productivity
3. Quick response to changes
3.0 Materials Handling Equipment:

Material handling is defined as art and science involving movement, packaging and storing of
materials in any form by means of gravity, manual effort or power actuated machinery within
the plant.
Material handling involves the movement of materials with in the plant either manually or
mechanically in batches or item wise. It emphasizes upon the need of installing efficient and
safe equipments for handling the materials.

3.1 Objectives:
1. Minimize cost of material handling
2. Minimise delays and interruptions by making available the materials at the
point of use of right quantity at right time.
3. Maximize the utilization of material handling equipment
4. Safety in material handling through improvement in working conditions
5. Prevention of damages to materials during handling
6. Lower investment in in-process inventory.
3.2 Principles of material handling:
1. Planning principle:
Planning involves recognition of the fundamental relationship of materials
movement and storage.
a) Planning is done for over-all economy.
b) Revise the lay-out for reducing the handling of materials.
c) Over head handling is utilized for saving in space.
d) Utilize live storage (storage on move)
2. Operating principle:
Mechanization and innovative techniques in handling operations are evolved
resulting in the necessity of the following principles.
a) Efficient handling is the safe handling
b) Avoid re-handling.
c) Move the material in unit load.
d) Use gravity for moving where ever possible.
e) Establish schedules and procedure for maintenance of handling
equipment.
3. Equipment principle:
Availability of variety of handling equipments necessitated certain guide lines
for selection.
a) Select the proper equipment for the job.
b) Consider all aspects of material, move, and method to be utilized.
c) Integrate the equipment into plant handling system.
d) Select the equipment for flexibility.
4. Costing principle:
a) Select the equipment for lowest over-all handling cost.
b) Amortize the equipment within a reasonable length of time.
c) Keep track of handling cost.
3.3 Functions:
1. Minimize the movements involved in production area.
2. Bulk handling with the help of containers, forming into pallet etc.
3. Employment of mechanical aids in place of manual labor.
4. Optimization of process and sequence to minimize back tracking and duplication.
5. Use of gravity where ever possible.
6. Design of Safe, standard, efficient and flexible handling equipment
7. Design of containers, packaging to economic handling and reducing the possibility of
damage or accidents.

3.4 Selection:
Factors to be considered for selection of appropriate material handling equipment:
1. Materials to be moved
Size, shape, weight, delicacy, type, chances of damage etc.
The choice of material handling equipment depends on the following material
characteristics.
1. Size and shape
2. Quantity and weight of the material
3. State- solid, liquid or semi solid
4. Properties like rigidity, fragility, corrosive, inflammable and explosive
nature
2. Plant, buildings and layout
Width of aisle, Flow levels, width & heights of doors, ceiling heights, process layout,
sequence of operations etc.
The parameters of buildings or plant that affect the choice of material handling
equipment are:
1. Type of building like single or multi storied
2. Floor load carrying capacity
3. Space and height of working area
4. Provision for over head cranes and conveyors
5. Size of doors and aisles
3. Type of production machines

Size and type of machines, output rates
4. Material flow pattern
Vertical flow – elevators, conveyors, pipes etc.
Horizontal flow – trucks, over head bridge cranes, conveyors etc.
The path of the movement of materials varies widely in different applications.
Different movements required are Horizontal, Vertical and inclined either
upwards or down wards. The directions of movement may be constant or
changing. The paths may be straight, zigzag or to and fro. The paths may be
inside the building or outdoors. The proper choice of material handling
equipment should be based on these considerations.
Conveyors are preferable when path is fixed and between two points
Two wheeled, 4 wheeled trucks and industrial trucks are suitable when paths
are changing.
Transporting equipments are useful for horizontal, straight or curved paths
along fixed or variable routes.
Elevating equipments are chosen for vertical, inclined paths with continuous
or intermittent.
5. Type of production
Mass prodn. – conveyors
Batch prodn. – powered trucks
6. Cost of matl. Handling equipment
7. Handling costs
8. Life of the equipment
9. Maintenance of equipments

3.5 Characteristics:
• Materials
Unit load, Bulk, packaged, state
A number of items or bulk material grouped to pick up as a single object for
handling purpose is known as unit load. Unit load will be too large for manual
handling.
• Movements
Vertical, horizontal, combination
• Supervision required
Close, little, automatic / semi automatic
• Paths followed
Variable, fixed, fixed area
• Speed
Variable, fixed
• Power
Electric, IC engines, gravity, manual, pneumatic, hydraulic
3.6 Classification:
1. Industrial trucks
Manual
Power – Driver walk / driver ride
Fork lift, platform truck, pallet truck
2. Cranes – Over head, Jib crane, gantry crane
3. Hoists - chain type, Pneumatic, Electrical
4. Conveyors – Trolley, carrier
5. Slides and chutes – Belt, Roller gravity, roller line, Bucket conveyor, Pipe line
(Pneumatic), Wheel conveyor
6. Lifts – Bucket / trays
7. Tractors and trailers

Notes
On
6. Materials Management
1.0 Definition:
Materials management is an integrated approach of different sections of a company dealing
with the materials and related activities so as to obtain the maximum coordination and
minimum expenditure on materials.
2.0 Functions:
1. Materials planning 5. Standardization
2. Purchase 6. Materials handling
3. Receiving, storing & Maintaining 7. Vendor development
4. Inventory control 8. Disposal of surplus, scrap and
obsolete materials
3.0 Objectives:
2. To minimize material cost
3. Procurement of right materials of right quality at right time
4. Control the inventories to the min. cost
5. To identify the new sources of supply
6. To report changes in market conditions and other factors
7. To modify the paper work procedures to reduce the delays in the procurement.
Materials management covers all aspects of material costs, supply and utilization. As the
material cost constitutes around 60-70 % of the product cost, the control of materials is very
important.
The various functions of Integrated Materials Management are diagrammatically shown below.
4.0 Inventory control:

Inventory is an idle resource that has economic value.
Adequate inventories are required for maintaining un-interrupted production. But excessive
inventory locks up the funds which are otherwise required.

4.1 Types:
2. Raw materials
3. Work-in-progress
4. Finished goods
4.2 Objectives:
2. To keep the required quantities of materials to ensure smooth and efficient. production
flow.
3. To identify non-moving items and take steps for disposal and prevention.
4. To determine the economical order quantities.
5. Classification of materials and effecting the control depending on their nature.
6. Carrying out stock taking periodically.
7. To store and maintain the stocks effectively.
8. Identifying obsolete and deteriorated items and their disposal.
4.3 Inventory Models:

Inventory models are aimed at determining when and how much inventory to carry.
4.3.1 Types of Inventory models:
1. Quantitative models
• Simple EOQ model ( Basic inventory model)
• EOQ model with stock-outs allowed

Stock out means running out of stock. The out of stock situation will lead to back
orders or lost sales. Since back order and lost sales costs can not be estimated
accurately, management may specify that stock out should not occur more than 2 %
of the time.
Q is the order quantity
t1 is the time of material availability
t2 is Stock out time
EOQ Q = (2.U.P/CI)1/2x {(C.I+B)/B}1/2
M = Q.B/ (CI+B)
Where C= cost of one unit
I = Inventory carrying cost in% per annum
B = cost incurred for each back order
M = Max. Inventory

`
2. Probabilistic models
• Inventory models under risk
In case of fluctuating demand it is logical to set reorder level above the lead-time
demand. A stock-out may occur if the demand exceeds the average lead-time
demand. To protect from this undesirable large stock-out situations, safety stocks
(reserve) are maintained.
Safety stock can be defined as the difference between the order level and the
average lead-time demand.
4.4 Economic Order Quantity:

Economic order quantity depends on two types of cost:
1. Inventory procurement cost consisting of
1. Receiving quotations, placing orders, follow up etc.
2. Receipt of materials & inspection
3. Processing vendor’s invoice etc.
Procurement cost decreases as order quantity increases.
2. Inventory carrying cost consisting of
1. Interest on capital investment
2. Cost of insurance, taxes etc.
3. Cost of storage facility, record keeping etc.
Carrying costs increase as order quantity increase.
4.5 Assumptions made for EOQ analysis:
1. Demand is constant and known
2. Stock arrivals (replenishment) are instantaneous.(lead time is zero)

3. Price of the material is fixed for all quantities.(No Quantity Discounts)
4. Ordering cost is same for any order quantity.
Let
Q = Economic order quantity
C = Annual carrying cost/unit
P = Procurement cost associated with one order
U = Total quantity used annually
No. of purchase orders = U/Q
Total procurement cost = No. of purchase orders x cost per one order
Tp = P.U/Q
Inventory carrying cost = Average inventory x carrying cost / unit
Tc = Q/2 x C
Total cost T = Tp + Tc
= P. U/Q + C. Q/2
dT / dQ = - U.P/Q2 + C/2 = 0
Q2 = 2.U.P/C
EOQ, Q = √ (2.U.P/C)
Optimal No. of orders placed per annum, N
N = Annual demand / EOQ = U / Q
Optimal Time interval between two orders, T
T = No. of working days in a year / N
Total inventory cost (Minimum), = Q.C
= √ (2.U.P.C)
The graphical solution for EOQ is shown below. The total cost is the least at EOQ as seen from
the graph.
4.6 Causes for poor Inventory Control:

The various causes for poor inventory control are as follows:
1. Over buying without regard to the forecast or demand to take advantage of
favourable market.
2. Excess production or early production before the customer needs it.
3. Over stocking to ensure immediate deliveries.
4. Cancellation of orders.
5. Stipulation of minimum order quantity by suppliers.
4.7 Techniques of Inventory Control:

Inventory control is a planned approach to determine optimally when to order, how much to
order and how much to stock. The techniques used for inventory control are
1. Fixed period system ( p-System):
In this method, orders for materials are placed at a fixed period. The quantity of order
may vary from order to order depending on the demand or rate of consumption. The
period of ordering may be every month or once in every 15 days etc. The stock is
reviewed at periodic intervals and the quantity Q which will bring the inventory to
maximum stock level is ordered.
2. Fixed quantity system (q-system):

In this method, the order quantity is fixed and ordering time varies according to
fluctuation in demand or consumption. Replenishment action is initiated when the stock
level falls to re-order level. The quantity will be generally equal to Economical Order
Quantity. EOQ is determined according to various inventory models such as basic model,
model with stock outs permitted, safety stock model etc.
This method is also known as 2-Bin system. The stock is stored in 2 bins. Second bin
contains the re-order-level quantity and the balance is stored in the first bin. Order is
initiated when the first bin is exhausted.
3. ABC analysis:
Generally in any medium or large scale industries there will be thousands of items in the
inventory. It is neither possible nor preferable to exercise equally tight management
control over these different items varying in their value, size and necessity.
It is statistically noticed that a small No. of items account for a large proportion of the
annual turnover in value of the inventory. More management attention on these items
yields lot of savings in money, time and efforts.

For the purpose of managerial control, the materials are divided in to 3 categories, (1.)
Class A, (2) Class B and (3) Class C based on the value of annual consumption of
materials.
Class A items are high valued but are a few in number. It is generally observed that
about 70% of the total inventory cost pertains to about 10% of the total items. Hence
these items need careful and close inventory control. A detailed record of their receipts
and issues are to be maintained.
Class B items are medium valued and their number lies in between A & C items. They
approximately account for 20 % – 15 % of the total inventory cost and their number may
be about 15% - 20% of the total items.
Class C items are low valued but are very high in number. They account for 10% - 15% of
the total inventory cost and their number may be around 75% of the total items. These
items do not need any control since it would be uneconomical to exercise control.
Generally they are procured on long period requirement.
4. VED analysis:
The materials are classified according to criticality as Vital, Essential and Desirable. Vital
items are those items the unavailability of which stops the production. Essential items
are those items the unavailability of which costs very high. Desirable items are those
items the unavailability of which results in normal costs.
The severity of inventory control varies as per the classification.
5. FSN (Fast, Slow, Non moving items):
Materials are classified according to the rate of consumption of the materials.
Frequently drawn materials are stored nearer and handy places to the store keeper for
easy handling. Non- moving items are rarely drawn from the stores and hence they may
be stored in remote areas. Slow moving items may be stored in far or interior areas.
Inventory control is similar to ABC analysis.

5.0 Stores Management:
Definition:
Store keeping is defined as the function of materials management to keep the materials under
the safe custody until the issue to the production department and looking after the items and
controlling their flow.
5.1 Functions of stores organization:
Basic functions of stores are related with receiving, safe custody in stores and issuing the
material against authorized requisition at the minimum cost. The functions can be outlined as
below.
1. Planning of warehouse i.e. space, layout, storage and handling equipment
2. Preparing annual requirement by processing requisitions from various sections.
3. Receipt of materials.
4. Arranging inward inspection of materials.
5. Safe custody of stocks.
6. Issue of stores to user departments.
7. Adequate maintenance and preservation of materials.
8. Prepare and maintain accurate stock records.
9. Carrying out periodic physical stock verification.
10. Prepare identification by proper codification.
11. Coordination with various sections.
12. Better housekeeping.
5.2 Classification of materials:
Various materials stored in the stores may be classified as follows:
1. Raw materials and components
2. Work-in-progress
3. Finished goods
4. Bought out items and sub-assemblies
5. Consumables, cleaning items, cloth and uniform items
6. Office supplies, furniture fittings and stationery
7. Tools, jigs and fixtures
8. Machinery and test equipments
9. Maintenance and spare parts
10. Lifed items
11. Dangerous goods and explosives and chemicals
12. scrap
5.3 Identification of materials:
Many items in inventory in industries are used in different names by different
departments. This results in separate requisitions and separate purchase orders for
procuring. This causes increase in inventory and variety.
Example: A nut and bolt is also termed as fastener; a pipe is also named as conduit.
Hence it is essential to uniquely identify a material by codifying. i.e. giving a unique
code number for each item.
Provision of good identifying system in stores assists to keep the items in correct places
and also in finding them when needed for operations.
Methods of identification:
1. Putting tags or cloth on various items
2. Putting labels on items

3. Putting colour code of items
4. Putting code number on items.
5.3.1 Codification:
Coding means to give a unique number to particular item in the inventory for
identification. Every item is given the same No. of digits for the code number. Different
methods of coding are as follows. De-codification details are to be provided for
reference.
1. Codification by group classification:
The number given for an item consists of groups such that each group of numbers
describes the classification and characteristics of materials. In each group the
relevant details are sequentially numbered.
Different industries may follow different numbering system.
Group 1 may give class of material
Group 2 may give shape
Group 3 may give material of construction
Group 4 may give composition, use, characteristic etc.
Group 5 may give capacity, specification etc.
Groups
1 2 3 4 5
01 Raw materials 1 Wire 01 MS 01 cold rolled 01 5 Amps
02 Bought out item 2 Tube 02 SS 304 02 Tempered 02 15 Amps
03 spare parts 3 Rod 03 SS 316 03 Normalized 03 25 amps
04 Tools 4 Bar 04 SS ... 04 Annealed .
05 Fixtures & patterns 5 Sheet 05 SS ... 05 Hardened .
06other supplies 6 Strip 06 Copper .
07Work-in-Process 07 brass .
08 Finished goods 08 Bronze
09 Capital equipment 09 Al
.
Example:
08 1 06 03 01 indicates
Finished product, Wire, of copper, normalized, for 5 amps capacity.
2. Mnemonic coding:
Alphabets closely associated with the name of the item are utilized in this method
along with numerals. This may not be suitable if large number of items is present.
Ex: SH 015 60 for a Shunt, 15 amp. 60 mV.
3. Hybrid system of coding:
A combination of group classification and mnemonic coding is used in hybrid
system.
Ex. PI 1 1015 for A pipe, PVC, 10 mm ID x 15 mm OD
5.3.2 Characteristics of a good coding system:

The following points are to be considered while codifying the items:
1. Flexibility
2. Precision
3. Brevity
4. Comprehensiveness

5.4 Standardization of materials:
Standardization consists of reducing the variety of items stocked in the inventory to a
workable minimum, by fixing sizes, shapes, dimensions and other characteristics of the
item.
Inventory can be considerably reduced by a proper standardization programme.
A good system of coding helps in standardization.
Advantages:
1. Low inventory levels and storage space
2. Lower purchase costs
3. Reduced paper work
4. Streamlining of materials planning process
5.5 Lay out of stores:

It is the physical arrangement of storage facilities for efficient receipt, storage and issue
of materials.
5.5.1 Objectives:
1. To achieve minimum wastage of space
2. To achieve maximum ease of operations.
5.5.2 Factors to be considered for stores lay out:
1. Type of materials to be stored:
• Size
• Nature, shape etc.
Common storage means are cup boards, racks, bins, trays, platforms, floor etc.
2. Stock volume:
The weight and volume of the materials to be stored affect the layout of stores.
Bulky and heavy stocks may need materials handling equipment which needs
sufficient passages in the stores.
3. Availability of space:
The arrangement of cup boards, racks bins etc. depends on the space available for
stores. Inadequate space limits the storage capacity and excess area may cause
more handling cost.
4. Physical factors:
Good environmental conditions like lighting, ventilation, temperature noise etc.
protects the materials from deteriorating. It also improves the efficiency of people
working in the stores.
5.5.3 Principles of layout:
1. The layout should minimize the handling and transportation costs.
2. Optimum utilization of storage space.
3. Ensure easy receipt, store and issue of materials.
4. Accessible for materials handling equipment both manual and power
operated.
5. Storage space must be protected against fire, damage and pilferage.
6. Racks, bins, shelves etc. must be arranged in such way that the items are
easily stored and quickly located.

A typical stores layout is shown below.
5.6 Physical Control of Materials:

It is necessary to verify the stock of materials to have effective inventory control.
Sometimes the balances shown in the stores ledger or bin cards may not tally with the
actual physical balances due to various reasons such as pilferage, improper storing and
issuing, deterioration etc.
The periodical verification of materials physically is known as stock taking.
5.6.1 Purpose of physical verification:
1. To ensure the correctness of stocks held by comparing each item with the balance
shown in the stock ledger.
2. To avoid shortage of materials in the stock due to wrong recording in bin cards.
3. To check losses in inventory due to
i. Theft
ii. Breakage
iii. Improper placement
iv. Deterioration etc.
4. To correct and update store records
5. To calculate the value of stock needed for the balance sheet as well as profit and
loss account.
5.6.2 Methods of Physical Verification:
1. Annual physical Verification:
The stores is closed for a few days for the purpose of verification around the end of
the every financial year. A team of trained stores personnel check and count every
item with reference to the ledger or bin cards.
During the checking, the damaged and spoiled or broken items are traced and
recorded.
The advantage is that all the items are checked at a time and hence there is no room
for confusion.
This process is tiresome and cumbersome. There is scope for errors in counting.
2. Continuous or Perpetual Physical Verification:
Under this system stock verification is done on continuous basis every time after the
receipt and issue of material. The balance is recorded. Discrepancies found are
corrected. No shut down of stores is needed.
3. Periodical Verification:
In this type of verification, all inventories grouped by type or place of locations are
checked at regular intervals. The period of verification varies with the importance and
value of the items.
5.7 Pricing of stores:
The pricing of stocks may be carried out in the following ways.
1. Cost price:
Cost pricing uses actual purchase price paid up to point of delivery. This
price is considered for the purpose of receipt and issue of the material.
2. Average price:
It is the average of the prices of the item received at various times during the
year. This is used for computing the issues and stock balances.
3. Market price:
This is pricing of all material issues or stocks at the prevailing market price at
the time of issues or stock accounting. It is very difficult to get current market
price especially in a fluctuating price situation.
4. Standard price:
Standard pricing is a pre-determined (standard) price fixed on the basis of the
knowledge of market prices and trends.
5.8 Receipt and Issue of stores:

Receipt of materials:
Receiving department of the stores receives the materials from outside agencies.
The materials are unpacked and checked for quantity and the condition as per the packing
slip provided by the supplier and compared with the purchase order.
A material receipt report as per the prescribed format is prepared and sent to account
department.
Inspection department inspects the material and gives the inspection report along with the
reasons for rejection, if any.
The store keeper receives the accepted material and stores in the correct place in
accordance with the material code and location code.
Issue of materials:
Materials should be issued by store keeper on the presentation of a properly authorized
with drawl form called as Material issue Requisition (MIR) in the prescribed format. MIR
is prepared in triplicate. After entering the quantity issued and endorsing, the original is
retained by the store keeper for his records. The duplicate copy is given to the indenter

and the third copy is sent to cost accountant for costing the job for which the material is
drawn.
The transfer of material from one department to another department is done on
presentation of Material Transfer Note (MRN).
5.9 Advantages of good store keeping:

By practicing good store keeping methods the following benefits can be derived.
1. Easy identification of materials at the time of requirement.
2. Minimum inventory carrying cost.
3. Timely action for procurement when stocks reach reordering level.
4. Excess stocking and stock outs are minimized.
5. Identifying slow moving stocks and obsolescent goods.
6. Optimum utilization of space.
7. Safe handling of goods without causing damage or accidents.
8. Easiness in issue of materials.
9. Neat and better appearance of store area.
6.0 Purchase Organization:

Definition:
Purchasing may be defined as a technique of procuring materials/goods, machine tools,
supplies, services etc. for the plant / industry and for maintaining the equipments.
6.1 Objectives of purchasing:

The fundamental objective of purchase department is to ensure that the company operates in a
profitable manner without interruption due to shortage of materials. Following are the main
objectives of Purchasing:
1. To maintain the continuity of operations
2. Minimum investment in inventory
3. To avoid duplication of purchases
4. Minimization of procurement costs
5. To fight competition by procuring quality materials at competitive prices.
6.2 Functions of purchase organization:
Following are the functions of purchase department.
1. All purchases are made on properly authorized requisitions with full details like
specifications, quantity and delivery time.
2. To procure the right quality, and type of materials at minimum rates at right time.
3. To ensure that delivery of goods is effected within the specified time.
4. To verify that the goods received are as per the order placed.
5. Updating and maintain the list of suppliers.
6. Vendor evaluation and rating.
7. To prepare the specifications for calling quotations and making comparative
statement for selecting and placing orders on reliable suppliers.
8. To enter into rate contract to ensure uninterrupted supplies.
9. To maintain the required records.
10. To ensure the prompt payments to suppliers on acceptance of the material
purchased.

11. To liaison between vendors and various user departments for better understanding
of requirements.
12. To take action for surplus disposal and salvage of waste materials.
13. To advise the management in make or buy decisions.
14. To purchase small items directly from the market without calling for quotations.
15.
6.3 Methods of purchasing:
The methods of purchasing depend on policy of the organization, nature of the demand,
behavior of the market, and classification of products. The following methods are generally
used.
1. Hand to mouth purchasing.
Purchasing is done when ever requirement arises. These are not kept as
inventories. This method is suitable for firms having less working capital. This is
also termed as cash-purchase.
2. Purchasing for some specified future period.
This method is generally used for the standard items which are consumed
regularly but having low requirement and price fluctuation is also low. The
benefit is that the production can be started as soon as the order is received.
3. Market purchasing
Market purchasing takes the advantage of high fluctuation of prices of certain
items. When the price very low in the market, items are purchased. Here
purchasing is related with price fluctuation and not with production needs.
4. Rate contract purchasing
The purchase department enters into agreement with various vendors to supply
items /goods in large quantities with staggered deliveries. Long term rate
contracts provide price discounts. Uninterrupted supply is ensured.
5. Central purchase organizations:
Certain big government and private organizations may have section wise stores at
various locations. A central store keeps on supplying certain common materials
to sectional stores. The central store buy in large quantities and thus has a chance
of good bargain on price front.
6. Through Directorate of Supplies and Disposal (DGSD)

DGSD is a Central Purchase organization which provides supply of different
products at relatively cheaper rates for different Govt. departments and
organizations. DGSD enters into contract with various organizations/firms/
manufacturers for supply of certain materials to various Govt. departments during
the year at agreed rates. These vendors have to certify that they are not supplying
and shall not supply to other purchasers same materials at lower rates during the
year.
6.4 Purchase cycle or procedure:
The main objective of purchase department is to procure items/goods of specified quantity
and quality at lowest price. The purchase cycle consists of the following 7 stages.
1. Receipt and analysis of requirements from user departments and processing of

requisitions.
2. Identification of probable suppliers.

3. Request, receipt and analysis of quotations received from the bidders.
4. Choosing of supplier with coordination of user department and placing orders.
5. Follow-up and expediting the purchase orders.
6. Verification of vendor’s invoices and arranging payment after processing
discrepancies and rejections.
7. Closing completed orders and maintenance of records.
Thus the cycle of purchase is completed. Purchase cycle is shown in the diagram below
6.5 Import and Export:

The Import and export(EXIM) policies and procedures are the two important documents which
guide and control the activities of importing and exporting. Foreign Trade policy 2009-14 with
annual supplement 2012-13 is the present policy for regulating the imports and exports in India.
The purchase managers must refer and follow the provisions of this document for buying items
from abroad.
Import of components and capital goods:

As per the new policy, no import licence is needed except for restricted and canalised items.
Chief Controller of Imports and Exports (CCI&E) and his deputies give licence for restricted and
canalised items based on application submitted in the prescribed form and manner.
Custom duty of components and capital goods are prescribed in the EXIM policy and
amendments issued from time to time.
Items received are to be cleared by customs officers posted at sea ports or air ports.
The various types of custom duties are
• Basic Customs duty (BCD)

• Auxiliary Customs Duty (ACD)
• Countervailing Customs Duty (CVD)
• CESS – These are levied by authority of specific Acts.
The procedure for Custom clearance is furnished in the EXIM policy.
Definition of terms used in EXIM policy:
CIF: Cost Insurance and Frieght. This is the value of goods at the time and place of
importation. CIF = FOB + Frieght + Insurance
FOB: Free On Board
OGL: Open General Licence
EOU: Export Oriented Unit
EPZ: Export Promotion Zone
FTZ: Free Trade Zone
EPCG: Export Promotion Capital goods
SSI: Small Scale Industries
PMP: Phased Manufacturing programme
CCP: Custom Clearance Permit

Notes
On
7. Quality Control
1.0 Quality:
It is fitness for purpose at lowest cost
It is the degree of perfection
It is the degree to which it fulfills the requirements of the customer.
1.1 Quality control:
It is the control of quality during manufacturing and design.
It is the technique by means of which products of uniform acceptable quality are
manufactured by effectively controlling the application of materials, men, machines,
process and working conditions.
QC is concerned with making things right rather than discovering and rejecting those
made wrong.
QC is everybody’s business- not only of the inspectors.
1.2 Inspection:
Inspection is the process of measuring the quality of a product or service in terms of
established standards.
1.3 QC v/s Inspection:

Inspection Quality Control
Inspection sorts out good and defective QC looks into the causes for variations and
pieces seeks solutions and remedial action
Inspection verifies the parameters against QC verifies the effectiveness of the process
specifications and process capability
Inspection is concerned with the quality of QC is concerned with quality of future

past production production
Inspection is mainly the responsibility of Every employee is responsible and

inspectors contributes to QC
Inspection uses precision measuring QC uses statistical quality control

instruments such as vernier calipers, techniques such as control charts, sampling
micrometer, microscope, flaw detectors etc. plans etc.
Inspection will not improve quality but Effective QC reduces the amount of
removes defectives inspection.
Both inspection and QC try to assure Both inspection and QC try to assure
quality quality
1.4 Objectives of inspection:

1. Ensuring the adequate quality of a product
2. Timely detection of defects in raw materials, in-process items and final products
3. Preventing further work on defective components
4. Ensures the safe working of products
5. Improving the reputation of the firm
6. Helps in reducing the customer complaints
1.5 Kinds of inspection:

1. Roving, process, patrolling or floor inspection
2. Fixed
3. Key point
4. Final
5. Incoming materials
6. In-process
7. Finished goods
8. Tools inspection
9. First piece inspection
10. Random inspection
11. Pilot piece inspection
1.6 Objectives of Quality Control:

1. Assuring the quality of outgoing products of the company.
2. To reduce the cost of production by effecting proper quality control resulting in the
reduction of cost of inspection.
3. To achieve interchangeability.
4. To develop quality consciousness in the organization.
5. To make the products more acceptable to the customers and increase the market share of
the company.
1.7 Quality characteristics:

Quality characteristics are the physical or chemical properties of a product which
contribute quality aspects to the product. They are classified as follows.
1. Technical - Length, Diameter, Frequency, Viscosity etc.
2. Psychological -Taste, Odour, Beauty etc.
3. Time based - Life, Reliability, and Maintainability etc.
4. Contractual - Guarantee, Safety etc.
5. Ethical - Honesty, Integrity etc.
The term quality involves two complementary aspects, quality of design and quality of
conformance. So, good quality can be attained only when both of them are controlled
satisfactorily. Quality is designed into a product as much as it is built in during its
production or service processes.
Quality of design:
Quality of design is the quality which the producer or supplier is intending to offer to the
customer. When the producer is making the quality of design of the product, he should

take into consideration the customer's requirements in order to satisfy them with fitness
for use of the product.
Quality of conformance:
Quality of conformance is the level of the quality of product actually produced and
delivered through the production or service process of the organization as per the
specifications or design. When the quality of a product entirely conforms to the
specification (design), the quality of conformance is deemed excellent.
For example, in case of a service product like maintenance of law and order by
governmental agencies, the quality of design is reflected in the relevant acts and rules,
whereas quality of conformance depends upon the extent to which these acts and rules are
complied by the enforcement agencies. In spite of having excellent rules and regulations,
the quality of law and order of society cannot be rated as good, if these rules and
regulations are not adhered to properly.
1.8 Types of quality control:
There are two types of quality control. They are (1) process control (2) product control.
Process control is exercised during the process through control charts.
Product control is exercised after the production of goods through sampling inspection
also known as acceptance inspection.
2.0 Statistical Quality Control:

It is the quality control system using the statistical techniques for controlling the quality
and solving quality problems.
The fundamental basis of SQC is the theory of probability and the distribution pattern.
Evaluates the batch quality
Controls the quality of processes and products
The variations in the product parameters may be due to
1. Assignable causes. - Mistakes are assignable
Posses greater magnitude
Easily traceable
2. Random or chance causes - Errors are random
No control over them
Characteristic to the process / machine
Effects each component in separate way
They may cancel effects of each other
They will be close to the middle of the extreme values
2.1 Probability
1. Additional law: for mutually exclusive (only one event can occur at a time)
p = p1 + p2 p1= probability of occurrence of event 1

p2= probability of occurrence of event 2
p = probability of occurrence of event 1 or 2
2. Multiplication law: for mutually independent ( not exclusive)
p = p1.p2 p= probability of occurrence of event 1and 2

3. Binomial theorem:
(p + q)n = nC0 p n + nC1 p n − 1 q + nC2 p n − 2 q 2 + nC3 p n − 3 q 3 + ... + nCn q n
Where p = probability of a component defective

q = probability of a component Non-defective
p+q=1
The probability of achieving ‘r’ successes is given by the term p (r) of the above binomial
expansion
p(r) = nCr qr.pn-r
2.2 Distribution pattern:

1. Normal distribution curve
Symmetrical -
Skewed - pulled to one side
Lepto kurtic - Peak higher than normal curve
Platy kurtic - Peak lower than normal curve
2. Bimodal - Has 2 peaks ( may be made on 2 m/cs.)
3. Triangular - May be due to defective m/c.
2.3 Techniques used by SQC:

1. Sampling inspection
2. Analysis of the data
3. Control charts
2.4 100% inspection v/s Sampling inspection:
100% Inspection Sampling inspection

Very tiring and expensive Represents the lot in quality
Prone to errors Saving in labor & cost
Can not assure 100% accuracy Controls the average outgoing quality
Not applicable for destructive tests Only way for destructive tests
2.5 Sampling inspection:

Def: It is a technique to determine whether the lot should be accepted or
rejected on the basis of the number of defective parts found in randomly
selected samples from the lot.
Sample: A sample may be defined as the number of items, parts or component
drawn from a lot, batch or population for the purpose of inspection to
estimate the quality of the lot from which it is drawn.
Sampling: It is an act of drawing the samples from the batch on random basis which
represents the lot truly.
Sample size: The number of samples drawn from the lot for accurately estimating the
quality of the lot and depends on the size of the lot and the degree of the
quality required.
Advantages: 1. Less amount of inspection

2. Saving in time and cost
3. Reduced fatigue and boredom of inspectors
4. Accuracy can be expected
5. Less handling of the lot
6. Only possible way for destructive tests
7. Risk of rejection ensures care and attention
Types:
Sampling by attributes:
• Defective – non-defective
• No quantitative measurement
• Compares – Go – No-Go gauging
• Involves % of defects
Sampling by variables:
• Measuring quality characteristics
• Involves average of measurements
• Generates more information and trend
Lot by lot:
• Divided into No. of lots
• Suitable for batch production
Continuous:
• During mass and continuous production samples are drawn at some
regular intervals
2.6 Sampling by attributes:
Steps involved in inspection by Attributes:
1. Select a sampling plan
No. of samples to be selected (n)
No. of defective parts that can be tolerated to accept the lot (c or a)
(Acceptance number)
Acceptable quality level (AQL):

It indicates a small proportion of bad components in a lot such that the lots
having less than the proportion of bad components have a high probability of
getting accepted.
Lot Tolerance Percent Defective (LTPD): (Limiting Quality)
It indicates a small proportion of bad components some what larger than AQL in a
lot such that the lots having more than this proportion of defective components
have a small probability of getting accepted.
Manufacturer’s Risk (MR):
It is the small probability of a batch being good or even better than AQL but
yielding a bad sample and thus getting rejected.
Purchaser’s Risk (PR):
It is the probability of a lot being bad or even worse than LTPD but yielding a
good sample and thus getting accepted.
2. Determine the Operating Characteristic Curve for the chosen plan

Draw the graph of Probability of acceptance (Pa) of the lot v/s actual Percent
Defectives (p) present in the lot.
Probability of acceptance can be calculated for various distribution models like
Binomial, Poisson’s and Normal etc.
d=c
n
P (a) = d=0Σ Cd. pd (1-p)n-d for Binomial distribution
d=c
P(a) = d=0Σ λd . e-λ / d!
where λ is mean value = n.p - for Poisson’s Distribution
d=c
P(a) = d=0Σ e-1/2(d-µ/σ)2 / σ.2π
where µ is mean value = n.p; σ = [n.p(1-p)]1/2 for Normal Distribution
The OC curve for a particular combination of ‘n’ and ‘c’ shows how well the
sampling plan discriminates the good and bad lots.
2.6.1 Average Outgoing Quality Limit (AOQL):

Under a given sampling plan, the defectives entering into the plant due to the acceptance
of a lot given by the product of probability of acceptance, P(a) and the percent defectives
in the lot, p. This is called Average outgoing Quality.
Average Outgoing Quality, AOQ = P (a). p
AOQ varies with percent defectives of the lot.
The maximum value of AOQ is called as the Average Outgoing Quality Limit, AOQL.
By drawing a graph AOQ v/s percent defectives (p), the maximum value of AOQ can be
obtained as shown below.

2.7 Sampling by variables:
The inspection is carried out by measuring the quality characteristics of a product.
Ex.: Dimensions, weight etc.
Variables involve the averages of measurement.
Attributes deal with the % of parts rejected
Inspection by variables is more detailed and contains more information,
Involves higher inspection and cost per unit.
Attributes – A discrete distribution such as binomial or Poisson’s distribution is used.

Variables – Continuous distribution such as Normal distribution is used.
2.8 Sampling Plans:
1. Single 2. Double 3. Multiple 4. Sequential
Single sampling Plan:
A lot is accepted or rejected on the basis of a sample drawn from the lot.
Method: Draw a single sample of size n parts depending on the size of the lot and
the AQL. The size can be found from the tables available.
Inspect the sample and find the No. of defective parts
If the defective parts exceed the acceptance No. ‘C’ the lot is rejected.
In case of rejection inspect each and every piece of the lot and replace the
defectives or salvage and correct the defects.
Characteristics:
1. Easy to design.
2. Lower cost of inspection
3. Accurately estimates the lot quality.
Double Sampling Plan:

If it is not possible to decide the fate of the lot on the basis of a single sample, a second
sample is drawn out of the same lot and decision is taken on the basis of the combined
results of both the samples.
Steps:
Let C1 and C2 are the acceptance numbers. (C2>C1)
Inspect a sample of size N1

Count the defectives K1
If K1 >C2 If C1<K1<C2 If K1≤ C1

Reject the lot Draw a second sample of size N2 Accept the lot
( Total sample size = N1+N2 )
Count the defective parts (K1+K2)
If (K1+K2) >C2 If (K1+K2) ≤C2
Reject the lot Accept the lot
Characteristics:
1. More expensive 5. Involves more records
2. Involves less inspection than single sampling 6. Not as accurate as of single
3. A second chance is given to the lot sampling plan
4. Involves more overheads
Multiple sampling Plan:

A lot is accepted or rejected based upon the results obtained from a several samples
drawn from the lot. It involves smaller first sample as compared to single & double
sampling plans.
Sequential sampling Plan:

It involves increasing the sample size by one part at a time till the size becomes
sufficiently large and contain sufficient No. of defects to take a decision to accept or
reject.
2.9 Control Charts:
Control chart is a graphical presentation of the measured or otherwise judged quality

characteristics of the items or the samples, being manufactured on day to day basis.
The chart show the trend of variations while production is going on, thus helping to take
corrective action at appropriate time.
Purpose and advantages:

1. Indicates whether the process is under control or out of control.
2. Determines the process variability and detects unusual variations.
3. Gives warning signal if the process is affected by assignable causes.
4. Ensures the process capability and Quality level.
5. Increases the reputation of the firm.

2.9.1 Types:
Control charts
Variables control charts Attribute control charts
̅ - Chart p- Chart
R- Chart np-chart
σ- Chart c-Chart
U-Chart
Differences between variable and attributes control charts:
Variable charts Attributes charts

Involve measurement of the job Differentiate between defective and non-
dimensions defective items
These are more detailed and contain These are based on Go, No-go data and
more information contain less information
These are expensive because of Need bigger samples but still less expensive
collection of measured data. because no measurements are needed.
Essential for non-measurable parameters’
Not suitable for qualitative parameters. inspection
2.9.2 & R– Charts:

These two chats are used together. The charts are drawn to show the mean
̅ and the range R against the sample numbers on respective graphs.
Sample size : n
No. of samples: S
Mean of the sample: ̅
Mean of the means:
Range of the values: R = Max. – Min. in the sample
Mean of Ranges :
For ̅ – chart:
UCL: Upper control limit = +A2.
LCL: Upper control limit = –A2.
For R- chart:
UCL: Upper control limit = D4.
LCL: Upper control limit = D3.
A2, D3, D4 are constants based on normal distribution and are available in tables depending
on the sample size.

2.9.2.1 Table for values A2, D3 and D4:
Sample size A2 D3 D4
(No. of items in each ( Limit average ) (Range lower ( Range upper
sample) limit) limit)
2 1.88 0 3.27
3 1.02 0 2.57
4 0.73 0 2.28
5 0.58 0 2.11
6 0.48 0 2.00
8 0.37 0.14 1.86
10 0.31 0.22 1.78
12 0.27 0.28 1.72
2.9.3 p- Chart:
This chart is drawn among the fraction defectives or % defectives and the sample Nos. or
the dates of production.
Fraction defective p = No. of defectives found
No. of items inspected
Percent defectives %p = 100 x p
Mean = ̅ = Σ p / No. of samples
UCL = ̅ + 3√ [ ̅ (1- ̅ ) / n]
LCL = ̅ - 3√ [ ̅ (1- ̅ ) / n]
2.9.4 np- Chart (No. Defective chart):

This chart is drawn among the No. of defectives and the sample Nos.
Fraction defective p = No. of defectives found
No. of items inspected
Percent defectives %p = 100 x p
Centre Line = n ̅ where ̅ = Σ p / No. of samples

n = sample size.
UCL = n ̅ + 3√ [n. ̅ (1- ̅ )]
LCL = n ̅ - 3√ [n. ̅ (1- ̅ ) ]
2.9.5 c- chart:
The No. defects in an item, which is big in size, are plotted against No. of items
inspected.
1. The sample size is constant.
2. It controls the No. of defects observed per unit.
3. c- chart is preferred for large and complex parts.
No. of defects found in a part = c
Mean ̅ = Σ c/No. of parts inspected
UCL = ̅ + 3√ ( ̅ )
LCL = ̅ - 3√ ( ̅ )

2.10 Economics of quality:
Quality management is not only concerned with maintaining the quality characteristics of
a product but also with doing the same at least cost. There are 3 categories of cost of
quality.
1. Costs of appraisal: These are costs incurred towards implementation of quality
plan, testing, monitoring and controlling.
2. Costs of prevention: These are the costs to prevent bad quality output. They
include costs of activities such as quality planning, prevention of wrong
sampling plans, bad quality raw materials entering production etc.
3. Costs of failure: These are losses due to rejects, rework, spoilage etc.
The increase in revenue, due to quality plan, limits the amount that can be incurred
towards achieving quality.
3.0 Just In Time (JIT) Manufacturing:

JIT is considered in two ways:
1. As a philosophy of waste reduction
2. As a set of techniques for the reduction of inventory and waste.
JIT is one of the many improved philosophies that are now in vogue such as
1. Total quality management (TQM)
2. World class manufacturing
3. Zero inventories
JIT has the concept that the right part should be at the right place at the right time.
Get the material to the next work center or customer just in time for the next
production set up. Hence inventory between production stages is reduced.
Definition:
Just-in-Time (JIT) is a production system which has a philosophy of waste reduction and
a set of techniques for the reduction of inventory and waste. JIT has the concept that the
right part should be at the right place at the right time.
3.1 Objectives:
1. Eliminate waste 4. Reduce costs
2. Improve quality 5. Improve productivity
3. Minimize lead times
4.
3.2 Key elements to successful JIT:
1. House -keeping – Organize the work place for higher productivity
2. Quality improvement through process improvement – Ensuring no interruptions in
flow due to defective material.
3. Reduced set up times – allows smaller lots.
4. Preventive maintenance to avoid breakdowns.
5. Incremental inventory is reduced to force problems to open.
6. Worker’s cross training for higher efficiency
7. A level schedule is maintained so that flow is easier to balance throughout the
process.

8. Operations are balanced to allow even flow and to prevent inventory between work
centers.
A fully implemented JIT system has so little inventory that the production process forces
a pulling of material through the system in response to the final assembly schedule.
3.3 Implementation of JIT:
1. JIT is implemented through a continuous improvement of process
2. Lot sizes are reduced
3. Problems must be located and solved
4. Quality must be improved
5. Work force management – Educative and training are needed. Allow workers to
bring forth observations and improvements in the manufacturing process.
3.4 The block diagram of JIT production System is shown below.
3.5 JIT Purchasing:

1. Suppliers of materials must also participate in the process of JIT implementation for
full advantage. Suppliers also should schedule their production to meet the
requirements of the buyers.

2. Dock-to-stock or dock-to-line plans may be followed to speed up the delivery of
goods to the shop floor.
3. The following benefits may be derived from JIT purchasing:
1. Reduced inventory levels in WIP between work centers.
2. Reduced cycle time
3. Less space for shop floor inventory resulting in new layouts.
4. Growing competitive
5. Smaller lot sizes allow more responsiveness to customer needs
6. Special orders can be accommodated without any significant set up cost.
7. Improvement in quality in production processes and materials.
3.6 Kanban system
It is one of the methods developed by Toyota in Japan. Kanban means card or sign.
These kanbans are used to instruct the work centers either to manufacture or with draw
the materials for production. The card used for manufacture is known as Production
Order Kanban (POK). The card used for with drawl is known as Withdrawl Kanban (WK).
The working of kaban system is shown in the diagram below.
There are two types Kanban systems.

1. Single Kanban – Withdrawal or move Kanban:
In this system, only with drawl card (WK) is used to authorize user work centre to
with draw the material or parts in the accompanying container, for its production or
assembly. The empty container along with WK is sent back to supply work centre for
replenishing. Thus the parts are made when they are needed by the preceding work
centre. Thus the materials or parts are pulled from the source as and when
required.

2. Two Kanban - withdrawal Kanban & Production Order Kanban:
In this system, two cards (WK and POK) are used. When the container of parts is
emptied at user work centre, the empty container along with WK is sent back to
supply work centre. The POK from a full container at supply work centre is replaced
by WK and the full container along with WK is sent to user work centre. The POK is
tagged to the empty container which is the signal for supply work centre to produce
one more lot.
This cycle continues till completion.
Thus WK and POKs keep shuffling between work centres.

Notes On Production Management

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1. Production and Operations:

Resources: Men, Materials, Machines, Money - physical

2. Production and Operations management (POM):

K. Rao Pochiraju Page 1

Production management is a process of planning, organizing, directing, monitoring and

A large organization is divided into sub-systems such as Production, Finance, Marketing,

K. Rao Pochiraju Page 2

The broad objectives or criteria of performance of POM may be summarized as

K. Rao Pochiraju Page 3

K. Rao Pochiraju Page 4

Production Management Frame work:

K. Rao Pochiraju Page 5

K. Rao Pochiraju Page 6

2.0 Types of production:

K. Rao Pochiraju Page 7

K. Rao Pochiraju Page 8

K. Rao Pochiraju Page 9

1. Product Life Cycle (PLC):

K. Rao Pochiraju Page 10

Special Categories of PLCs:

K. Rao Pochiraju Page 11

2. 0 Product Design and Development:

K. Rao Pochiraju Page 12

2.3 Product Design Process:

K. Rao Pochiraju Page 13

K. Rao Pochiraju Page 14

4. Production planning, routing and scheduling:

K. Rao Pochiraju Page 15

K. Rao Pochiraju Page 16

3. Costing and Cost Analysis

2. Indirect Expenses: The expenses which can not be directly attributed to a

K. Rao Pochiraju Page 17

1. Fixed Expenses: Those expenses which remain relatively constant regardless of

2.3.1 Types of Overheads:

K. Rao Pochiraju Page 18

The un-depreciated portion at any time t is given by

K. Rao Pochiraju Page 19

4.0 Break even Analysis:

K. Rao Pochiraju Page 20

4.3 Assumptions in Break-even Analysis:

4.4 Calculation of Break-even Point:

K. Rao Pochiraju Page 21

4.4.1 Functions /Applications of break even chart:

4.4.3 Margin of safety:

K. Rao Pochiraju Page 22

4.5 Profit-Volume graph:

At zero production the loss = fixed cost.

K. Rao Pochiraju Page 23

5.0 Relevant costs:

6.0 Make or Buy Decisions:

6.1 Occasions for make or buy decisions:

K. Rao Pochiraju Page 24

6.2 Factors influencing make or buy decision:

Breakeven analysis is very useful to take make or buy decision.

K. Rao Pochiraju Page 25

1.1 Need for fore casting:

K. Rao Pochiraju Page 26

2.1 Factors influencing forecasting:

2.2 Steps in Forecasting:

2.3 Advantages and limitations of sales forecasting:

3 Methods of Demand forecasting: