Industrial Economics and Management

By Waqar Ali (12ME114)

Subject Contains: Economics, Management and Engineering

Resources:
A stock or supply of money, materials, staff and other assets that can be
drawn on by the person or organization in order to function effectively.

National Economy:
National economy of every country depends on 4 sectors i.e.
1) Agriculture
2) Manufacturing
3) Mining
4) Services

Gross Domestic Product: (GDP)

Gross domestic product is the market value of all officially recognized final
goods and services produced within a country in a year, or over a given
period of time.
GDP of Pakistan in: (US Billion Dollars)
2012: 215117
2013: 236737
2014: 238737

Human Development Index: (HDI)

A tool developed by the United Nations to measure and rank countries'
levels of social and economic development based on four criteria: Life
expectancy at birth, mean years of schooling, expected years of schooling
and gross national income per capita.

HDI of Pakistan is 0.515 and its globally rank is 146 and it comes in low
human development and 4th rank in neighbors.

HDI of neighbor’s countries:

1) Iran: Rank 1st With HDI 0.742
2) China: Rank 2nd With HDI 0.699
3) India: Rank 3rd With HDI 0.554
4) Afghanistan: Rank 5th With HDI 0.374
Important Factors For Site Selection Of An Industrial Plant:

1) Location is mainly affected by internal factors of organization like

technology and external factors like political and social environment.
2) Location of plant should be near to the market.
3) Site should be near to the raw material supply places.
4) Transportation facilities and availability of man power play a
significant role in site selection.
5) Community facility should be considered.
6) Waste disposal, ecology, pollution need to be considered.
7) Future extension needs to be considered.
8) The topography, soil structure and drainage must be suitable.
9) Land cost also play an important role in site selection.

Problem 1:
There are 3 potential sites and 5 relevant factors like transportation
cost/week, labor cost/week, finish material supply, maintenance facilities
and community attitude. The costs are in rupees where as for the last 3
factors points are assigned on 0 to 100 scales. The data are given below

Serial No Factors Site 1 Site 2 site 3

1 Transportation 800 640 500
cost per week
F1
2 Labor cost per 1180 1020 1160
week F2
3 Finished 30 80 70
material
supply F3
4 Maintenance 60 20 30
facilities F4
5 Community 50 80 70
attitude F5

The location exists as pre-established weights for various factors. This

includes a standard of 1 for each rupee, tell a week of economic advantage.
Other weights applicable are 2 on finished material supply, 0.5 on
maintenance facilities and 2.5 on community attitude. Also the organization
prescribes a minimum acceptable score of 30 for maintenance facilities.
Select the suitable site based on the above data.
Solution:

Table 1:
F1 + F2 Site 1 SIte 2 site 3
1980 1660 1660
I) Economic As this price is 1980-1660 = 320 1980-1660 = 320
advantage higher than S2
and S3 so this
will be 0 because
1980 – 1980 = 0
II) Monitory 0 / 10 = 0 (320 / 10 ) x 1 = (320 / 10 ) x 1 =
value converted 32 32
to points.

Table 2:
Factors Weights Site 1 Site 2 Site 3
I) Combined 1 0 32 32
( F1+F2)
advantage
F2 2 30 80 70
F3 0.5 60 20 30
F4 2.5 50 80 70

Composite Site Rating:

Factors Site 1 Site 2 Site 3
F1 + F2 1x0=0 1 x 32 = 32 1 x 32 = 32
F3 2 x 30 = 60 2 x 80 = 160 2 x 70 = 140
F4 0.5 x 60 = 30 0.5 x 20 = 10 0.5 x 30 = 15
F5 2.5 x 50 = 125 2.5 x 80 = 200 2.5 x 70 = 175
Total 215 402 362
Minimum acceptable score for maintenance is 30 so score of Site2 is 20
mean it is rejected and Site3 is acceptable.

Rate Of Return Method:

Rate of return. In finance, return is a profit on an investment. It comprises
any change in value, and interest or dividends or other such cash flows
which the investor receives from the investment. Ambiguously, return is also
used to refer to a profit on an investment, expressed as a proportion of the
amount invested.
Formula:
ROR = [ ( Total Sales – Total Expenses ) / Total Investment ] x 100

Problem 2:
Evaluating 3 locations for small glassware plant requiring an investment of
approximately 1 lack 80 thousand rupees is given below.
Market Location p Location q Location r
Annual Sales (A) 260,000 260,000 260,000
Selling Expenses 44,000 43,000 46,000
(B)
Net Income From 216,000 217,000 214,000
Sales

Production Costs location p Location Q Location r

Supplies and Raw 69000 71000 62000
Materials
Transportation 27000 26000 23000
Fuel,Power,Water 13000 17000 18000
Wages & Salaries 64000 63000 61000
Fixed cost other 11000 11000 11000
than interest
Miscellaneous 8000 8000 10000
items
Net Production 192k 196k 185k
Cost (C)

Selling + 236k 239k 231k

Production cost
(D) => D=B+C
Annual Profit (E) 24000 21000 29000
=> E = A-D

Formula For Rate Of Return is:

ROR = Annual Profit / Total Investment
By Putting the values we get

For Location P:
ROR = ( 24000 / 180000 ) x 100
ROR = 13.33 %

For Location Q:
ROR = ( 21000 / 180000 ) x 100
ROR = 11.6 %

For Location R:
ROR = (29000 / 180000 ) x 100
ROR = 16.1 %

Plant Layout:
I) Introduction
II) Objectives
III) Factors affecting layout
IV) Types
V) Principles
VI) Line balancing

Definition:
Plant layout refers to the physical arrangement of the machines, equipments
and other industrial facilities on the factory floor in such a manner that they
may be handle efficiently. It may be defined as “ Plant layout is the optimum
arrangement of different facilities including man, machine, equipment and
material etc. showing the space allocated for material movements, storage
and all supporting activities from the receipt of the raw material to the
shipping of finished goods for an overall economy of production.

Objectives of Layout:
I) Overall simplification of production process in terms of equipment
utilization, minimization of delay, reducing manufacturing time
and better provision of maintenance.
II) Overall integration of man, materials, machinery, supporting
activity and any other considerations that result in the best
compromise.
III) Minimization of material handling cost by suitably placing the
facilities in the best flow sequence.
 IV) Saving In floor space, effective space utilization and less
congestion.
V) Increased output and reduced inventories in process.
VI) Better supervision and control.
VII) Worker convenience and worker satisfaction.
VIII) Better working environment, safety of employees and reduced
hazards.
IX) Minimization of waste and higher productivity.
X) Avoid unnecessary capital investment.
XI) Higher flexibility and adoptability to changing conditions.

Types of Plant Layout:

I) Product layout.
II) Process / functional layout.
III) Fixed position layout.
IV) Group layout.

I) Product Layout:
In product layout machines and equipments are arranged in the sequence
of manufacturing operations required for the product. The material is
moved from one work station to another sequentially without any bad
tracking or deviation. It is also called line layout. Because machines are
mostly arranged in straight line. The raw materials are feed at one end
and taken out as the finished products on the other end. It is grouping of
machines in one sequence. A product layout may however assume a
straight line shape, U Shape or a circular shape.

Advantages of Product layout:

I) Low cost of material handling due to the straight and sharp path
and elimination of bad tracking.
II) Smooth and uninterrupted operation free from bottle neck
(trouble).
III) Continuous flow of work permits recognized handling of material.
IV) Lesser investment in inventory and work in progress.
V) Special purpose equipment can be operated by semi-skill labor.
VI) Optimum use of floor space and less congestion of work in
progress.
VII) Shorter processing time or quick output.
 VIII) Simple and effective inspection of work and simplified production
control.
IX) Lower cost of manufacturing per unit.

Disadvantages Of Product Layout:

I) High Initial capital investment in special purpose machines.
II) Heavy overhead charges.
III) Breakdown of one machine results in serious work stoppage for the
entire line of machines.
IV) Less flexibility of operation as layout can not be adapted to the
manufacture of any other type of product. Fluctuations in rate of
production will increase manufacturing cost. Even a minor change
in machine arrangement requires a complete change in layout.

Suitability of Product Layout:

I) Mass production of standardized products.
II) Simple and repetitive manufacturing process.
III) Operation time for different processes is more or less equal.
IV) Reasonably stable demand of product.
V) Interchangeability of parts.
VI) Continuous supply of materials.
VII) Large automobile assembly plants, food processing chains and
continuous process industries are examples where product layout is
suitable.

Process / Functional Layout:

In this type of layout machines of similar types are located together
according to their functions. Products move between the groups of
equipment in order of operations required.
Example:
All the lathe machines are placed in the lathe department.

Advantages of Process Layout:

I) Flexibility. The firm has the ability to handle a variety of
processing requirements.
II) Cost. Sometimes, the general-purpose equipment utilized may be
less costly to purchase and less costly and easier to maintain than
specialized equipment.
 III) Motivation. Employees in this type of layout will probably be able
to perform a variety of tasks on multiple machines, as opposed to
the boredom of performing a repetitive task on an assembly line. A
process layout also allows the employer to use some type of
individual incentive system.
IV) System protection. Since there are multiple machines available,
process layouts are not particularly vulnerable to equipment
failures.

Disadvantages of Process Layout:

I) Utilization. Equipment utilization rates in process layout are
frequently very low, because machine usage is dependent upon a
variety of output requirements.
II) Cost. If batch processing is used, in-process inventory costs could
be high. Lower volume means higher per-unit costs. More
specialized attention is necessary for both products and customers.
Setups are more frequent, hence higher setup costs. Material
handling is slower and more inefficient. The span of supervision is
small due to job complexities (routing, setups, etc.), so supervisory
costs are higher. Additionally, in this type of layout accounting,
inventory control, and purchasing usually are highly involved.
III) Confusion. Constantly changing schedules and routings
make juggling process requirements more difficult.

Comparison Chart Between Product And Process Layout:

Characteristics Product Layout Process Layout

1) Nature: A Sequence of facilities All similar facilities are
as per processing grouped together.
requirements of
product.
2) Application: High Volume, Few High volume, high
Products. variety.
3) Product: Standardized, stable Diversified or variety of
rate of output. products.
4) Workflow: Straight line, same Variable flow for each
sequence of operations product.
 for all products.
5) Material Handling: Flow predictable and Can not be automated
systematic and it can be as flow depends upon
automated easily. the product type.
6) Inventory: High turn over of raw Low turn over of raw
material and work in material and work in
progress inventory. progress.
7) Breakdown: Break down in one It can tolerate
machine stop breakdowns.
production line.
8) Flexibility: Has low flexibility. Has high flexibility.
9) Speed Utilization: Efficient. Low space utilization.
10) Product Cost: High fixed cost and low Low fixed cost and high
variable cost. variable cost.

Fixed Position Layout:

A production technique used to assemble products that are too large, bulky
or fragile to safely effective move to a location for completion. In a fixed
position layout, personnel, supplies and equipments are brought to the site
where the product will be assembled, rather than the product being moved
through an assembly line or set of assembly stations.
Example:
Battleships are not produced on assembly line. For Services: Example: A
hospital operating room where doctors, nurses and medical equipments are
brought to the patient room.

Advantages Limitations
I) Material movement is reduced. Personal and equipment movement is
increased.
II) When a team approach is use, May result in duplicate equipment.
continuity of operations and
responsibility results.
III) Provides job enrichment Requires great skill for personnel.
opportunities.
IV) Promotes pride and quality, Requires general supervision.
because an individual can complete
the whole job.
V) Highly flexible, can May result in increased space and
accommodate changes in product greater work in process.
design, product mix and production
volume.

Group Layout:
Group layout is kind of layout where persons doing similar activities or
machines doing similar operations are grouped together. The example of
group layout are keeping all accounting machines in one room and making
provisions for all typist in one room.

Advantages
I) By grouping products, higher
machine utilization.
II) Smoother flow lines and shorter
travel distance are expected than for
process layout.
III) Team atmosphere and job
enlargement benefits are often
results.
IV) Has some of benefits of product
layouts and process layouts; it is
compromise between the two.
V) Encourages consideration of
general purpose equipment.
Dis-advanatges
General supervision required.
Greater labor skill required for team
member to be skilled on all
operations.
Critically dependent on production
control balancing the flows through
the individual cells.
If flow is not balanced in each cell,
buffers and work in process storage
are required in the cell to eliminate
the need for added material handling
to and from the cell.
Has some of the disadvantages of
product layout and process layout; it
is a compromise between two.

Production System:
Adjustment Random Monitor
Needed Fluctuations Output
 INPUTS Conversion Process OUTPUTS
* Men * Goods & or
* Materials Services
*Machines
* Info/Know;
* Energy
Comparison Actual /
Desired

Types of Production:
1) Job type production.
2) Batch type production.
3) Mass type production.

1) Job Type Production: (Low Production Volume)

It is characterized by manufacturing of one or few quantities of products
designed and produced as per the specification of the customers within
the prefixed time and task.

Characteristics of Job Type Production:

I) High Variety and low volume.
II) General purpose machines and equipment to perform wider range
of operations.
III) The flow of materials and components between different work
stations is highly discontinues due to in balance in work contents.
IV) Manufacturing cycle time is more.
V) Highly skilled work force is required.
VI) Highly competent and qualified supervisors are required.
VII) Very large work in process inventory.
VIII) Flexible material handling system with a capacity to move objects
of various sizes and shapes along widely varying pats.
 IX) Difficulty in planning, scheduling, and of coordinating the
productions of numerous components of wide variety.

Batch Type Production: ( Medium Production Volume)

It is characterized by manufacturing of limited number of products produced
at regular intervals and stopped at ware house (storage place) awaiting to
sell.
Example:
Chemical industry, assembly shop etc.

Characteristics of Batch Type Production:

I) Short production runs.
II) The planted machinery is used for limited number of parts than it is
used to make different products.
III) More number of setups.
IV) The workers are expected to posses skill in one particular
manufacturing operation.
V) The amount of supervision required is less compared to job type.
VI) Plants and machines are flexible.
VII) Manufacturing cycle time is comparatively lower than job
production.
VIII) Large work in process inventory.
IX) Flexible material handling system.

Mass Type Production: (High Production Volume)

It is characterized by high volume of production, several standard products
are produced and stock in ware house as finished goods.
Example:
Plastic goods like, toys, manufacture of auto parts etc.

Characteristics of Mass Type Production:

I) Flow of material is continuous.
II) Special purpose machines are used.
III) Material handling system is mechanized most of the time by
conveners.
IV) Relatively lowered skill person can manage work.
V) Shorter cycle time.
VI) Work in process inventory is very low.
VII) Raw material inventory is very high.
VIII) Less flexibility of equipments and machines.
Production Planning and Control:
Production planning and control is a tool available to the management to
achieve the stated objectives. Thus, a production system is encompassed
by the four factors. i.e. quantity, quality, cost, time. Production Planning
starts with the analysis of the given data, i.e. demand for products,
delivery schedule etc, and on the basis of this information available, a
scheme of utilization of firms resources like machines, materials and men
are worked out to obtain the target in the most economical way.
Once the plan is prepared, then execution of plan is performed in line
with the details given in the plan. Production Control comes in the
action if there is the any deviation between the actual and planned. The
corrective action is taken so as to achieve the targets set as per plan by
using control techniques.

Production Control:
Inspite of planning to the minute details, most of time it is not possible to
achieve production 100 per cent as per the plan. There may be
innumerable factors which offset the production system and because of
which there is a deviation from the actual plan. Some of the factors that
affect are:
1) Non-Availability of materials. (due to shortage etc.)
2) Plant, equipment and machine breakdown;
3) Changes in demand and rush orders.
4) Absenteeism of workers; and
5) Lack of coordination and communication between various
functional areas of business. Thus, if there is a deviation
between the actual production and planned production, the
control function comes into action. Thus production control
reviews the progress of the work and takes corrective steps in
order to ensure that planned production takes place.

SMART: is the guidelines for planning, mean planning should be SMART.

SMART = Simple Measurable Achievable Realistic Tangible.
Difference Between Production Planning and Production Control:

Production Planning Production Control

1) PP is pre planned activity. PC will be in action when production
activity begins.
2) Planning involve the collection, Control is concerned with
maintenance and analysis of data communication of their information
W.R.T time standard, materials and and producing reports like output
their specifications. reports, productivity, rejection rate
etc.
3) Planning is useful to anticipate the Control involve in taking corrective
problems and devising remedial steps in case of failure to match
measures in the case problem arises. actual performance against the
planned performance.
4) Planning is centralized activity Control is a wide spread activity
and includes functions like material including functions such as
control, tool control, process scheduling, dispatching and
planning and control. inspection.
5) Planning ensures that all the Control need the track of activities
necessary resources are available to and ensures whether every thing is
make a production at right quality going as per schedule or not.
and time.

PPC And Production Types (System):

1) Job Production and Functions of PPC:
I) Materials are purchased on receipt of the order.
II) Standard tools are stocked and special tools are either made
in house or purchased from outside.
III) Process planning activity normally does not exist. Based
upon the drawings and specifications supervisor decide the
work methods, fixes up the machines and estimates time for
completion of the operation.
IV) Schedule is prepared to mark the beginning and finish of
each activity. The day to day scheduling is at the discretion
of the supervisor.
V) Progressing is through the meeting with the supervisors.
 2) Batch Production and Functions of PPC:
I) Materials control and tool control are more important and
systematic stock replenishment is essential.
II) Detail route sheets are prepared.
III) Loading and scheduling are should be worked out with
greater detail.
IV) Progressing function is crucial as detail data is to be
collected on the progress of work.

3) Mass Production and Functions of PPC:

I) Materials function is crucial.
II) No tools control because of nature of plant.
III) Scheduling is restricted to final quantity required.
IV) Progressing requires only recording of final production
quantity.

Production Planning

Capacity Planning Process Planning Materials Resources Planning

(MRP)

Capacity Planning:
Capacity Planning is the aggregate planning. Capacity Planning is the
process of determining the production capacity needed by an organization to
meet changing demands for its products.
It is the process used to determine how much capacity is needed (and when)
in order to manufacture greater product or begin production of a new
product. A number of factors can affect capacity—number of workers,
ability of workers, number of machines, waste, scrap, defects, errors,
productivity, suppliers, government regulations, and preventive
maintenance. Capacity planning is relevant in both the long term and the
short term.
Capacity planning has seen an increased emphasis due to the financial
benefits of the efficient use of capacity plans within material requirements
planning systems and other information systems. Insufficient capacity can
quickly lead to deteriorating delivery performance, unnecessarily increase
work-in-process, and frustrate sales personnel and those in manufacturing.
However, excess capacity can be costly and unnecessary. The inability to
properly manage capacity can be a barrier to the achievement of maximum
firm performance. In addition, capacity is an important factor in the
organization's choice of technology.
We follow three basic steps of capacity planning.
1. Determine Service Level Requirements
The first step in the capacity planning process is to categorize the work done
by systems and to quantify users’ expectations for how that work gets done.
2. Analyze Current Capacity
Next, the current capacity of the system must be analyzed to determine how
it is meeting the needs of the users.
3. Planning for the future
Finally, using forecasts of future business activity, future system
requirements are determined. Implementing the required changes in system
configuration will ensure that sufficient capacity will be available to
maintain service levels, even as circumstances change in the future.

Measurement Of Capacity:
The capacity of the manufacturing unit can be expressed in number of units of output per period.
In some situations measuring capacity is more complicated when they manufacture multiple
products.
I) Design Capacity.
II) System Capacity.
III) Actual Capacity.
Design Capacity:
Designed capacity of a facility is the planned or engineered rate of
Output of goods or services under normal or full scale operating conditions.
For example, the designed capacity of the cement plant is 100 TPD (Tones
per day).
Capacity of the sugar factory is 150 tones of sugarcane crushing per day.
System capacity:
System capacity is the maximum output of the specific product or
Product mix the system of workers and machines is capable of producing as
an integrated whole.
System capacity is less than design capacity or at the most equal, because of
the limitation of product mix, quality specification, breakdowns. The actual
is even less because of many factors affecting the output such as actual
demand, downtime due to machine/equipment failure, unauthorized
absenteeism.
Actual Capacity:
The actual output is still reduced because of short-term effects such as,
breakdown of equipment, inefficiency of labor. The system efficiency is
expressed as ratio of actual measured output to the system capacity.
System Efficiency (SE) = Actual output / System capacity

Aggregate Planning:
Aggregate planning is an intermediate term planning decision. It is the
process of planning, the quantity and timing of output over the medium term
time scale.
Guideline for Aggregate Planning:
I) Determine the corporate policy regarding controllable variable.
II) Use a good forecast as a basics for planning.
III) Plan in proper units of capacity.
IV) Maintain the stable work force.
V) Maintain needed control over inventories.
VI) Maintain flexibility to change.
VII) Respond to demand in a controlled manner.
VIII) Evaluate planning on regular bases.

Problem: ABC company produces toilet soap at their certain factory.

Aggregate planning we have used by company in tons of soap which
includes making and packages of soaps. The planning is done for a
period of one year and four quarters.
Quarter 1 2 3 4
DEMAND 40 60 50 45
The company has a regular work force which can produce 35 tons of
output per quarter. If the workers are allowed to work overtime with a
restriction that the extra time can not be more than 20% of the regular
time. The output rate is 25% higher than the regular time during
overtime but the overtime expenses are 40% more than that of regular
time. The company sub-contract the soap making and packaging
operation to another unit but only at the cost of 50% premium than the
cost of regular production. The regular time production costs are rupees
ten thousand / ton. No shortages are allowed as per company policy.
Inventory carrying costs are rupees 5000 / ton / annum. Design the cost
efficient aggregate plan assuming zero starting inventory. Compute
total production cost.
Solution:
Step 1:
List the production planning operations. PP options are:
I) Regular Time (RT) Production.
II) Over Time (OT) Production.
III) Sub-Contracting
IV) Carrying inventory.

Step 2:
Calculate production cost of each option.
1) RT Production cost = RS 10,000 / ton
2) OV Production cost = RT Cost + 0.4xRT Cost = RS 14,000 / ton
3) Sub-Contracting cost = RT Cost + 0.5xRT Cost = RS 15,000 / ton
4) Carrying inventory cost = OT Cost + Inventory cost / 4 = 14000 +
5000/4 = 14000 + 1250 = 15250

Step 3:
Maximum Production by Overtime.
= 20% x 35 x 1.25
= 0.2 x 35 x 1.25
= 8.750 tons
Total: 35+8.75 = 43.75 tons

Quarter Output
Regular Time Over Time Sub-Contract Total
1 35 5 ------ 40
2 35 8.75 16.25 60
3 35 8.75 6.25 50
4 35 8.75 1.25 45
Ans……………………………………………………………………………

Problem:
The Forecasted demand for a product for a six month cycle is shown in
table below
JAN FEB MAR APR MAY JUN
Forecasted 300 500 400 100 200 300
Demand
Work 22 19 21 21 22 20
Days
Worker 176 152 168 168 176 160
Hour at 8 /
day
Each Unit requires 10 main hours & labor cost `is rupees 6 / hour on
regular time and rupees 9 / hour over time. The total cost per unit is
estimated to be rupees 200 and can be sub-contracted at the cost of
rupees 208 per unit. Currently there are 20 workers employed and
hiring and training cost for additional workers are rupees 300 per
person where as lay-off cost are rupees 400 / person. Company policy is
to relay a safety stock equal to 20% of the monthly forecast and each
month safety stock becomes the beginning inventory for the next one.
There are currently 50 units in start carried at a cost of rupees 2 /
month. Stock out cost is rupees 20 / unit per month. 3 aggregate plants
are proposed.
1) Plant vary the work force size to meet the demand.
2) Plant to maintain a constant workforce of 20 and use
over time, and idle time to meet demand.
3) Maintain constant workforce of 20 and build
inventory or incur stock out cost. The firm must begin
in January with 50 units inventory in hand. Compare
the cost of 3 plants.

+++++++++++++++++++++++++++++++++++++++++++++++++++++
-----^ Incomplete Problem
+++++++++++++++++++++++++++++++++++++++++++++++++++++

Process Planning:
Definition:
Process planning may be defined as the systematic determination of methods
by which a product is to be manufactured economically and comp actively.
It consists of selecting the proper machines, determining the sequence of
operations, specifying the inspection stages, tools, jobs and fixtures such that
the product can be manufactured as per the required specification.

Explanation:
Process Planning establishes the shortest root that is followed from raw
material stage till it leaves as a finish part or product

Information Requirements:
I) Assembly and components drawing and bill of material.
These details gives the information regarding the general description of
part to be manufacture raw material specification dimensions and
tolerances required, the surface finish and treatment require.

II) Machine / Equipment details with respect to the various possible

operations that can be perform. The dimensions that can be
manufactured or the machines. The accuracy of the dimensions
that can be obtain. Available feeds and speeds on the machines.

III) The standard time for operating and details of setup time for
operating and details of setup time for each job. This help to
compute the standard time of the operation and the production rate.

IV) Availability of tools including standard and special purpose tools.

Some Definitions:

1) Work Station:
A work station is a location on assembly line where given amount of work is
formed.

2) Cycle Time (T):

It is the amount of time for which a unit that is assembled is available to any
operator on the line.
OR
It is the time the product spends at each work station.

3) Machine Output:
Machine output is inversely proportional to the cycle time. If the cycle time
is (T) minutes, theoretical output per machine is given by
QTh = (60/Cycle time (T) ) * Units per hour.

4) Machine Requirement:
If N = No of machine(s) required

N = Standard time to operation * Maximum production required in specific

time
---------------------------------------------------------------------------------------
Machine Capacity * Utilization of Machine capacity in %

N = (ST*MP) / (MC*UC)

Problem:
A job is performed on milling machine, the standard time for job is 6
min. It is required to produce 70,000 jobs. Machine can be run for 2,000
hours per month. But it can be utilized for 90% of its time. How many
machines will be required for the production.
Solution:

ST = 6 min / 60 = 0.1 hour

MP = 70,000
MC = 2,000 hours per month
UC = 90%

We have the formula

N = (ST*MP) * (MC*UC)
By putting the values we get
N = (0.1*70,000)*(2,000*90) = 3.88 = 4 Machines
Ans-----------------------------------------------------------------------------------

Problem:
Machine Preparation cleaning
operation time min/day
time Min/day
Machine Processing Total
A 2 2.5 45 15 10
B 3 10 13 30 10
C 2 5 7 35 10
An article is processed on three machines A,B,C as shown in table. A
study reveal that if the jobs for machine B And C work to be re-design,
loading and unloading time can be reduced to 2 min and 1 min
respectively.
I) find the number of pieces produced per day during single shift
of 8 hours.
II) Costing has shown that unless production is increased by 20%,
the installation of new jibs could not be worth while. Would
you recommend the redesign of jibs.
III) If the number to be produced is large, suggest changes in
present arrangement and estimate new production rate.

--------------------------------------------------------------------------------------------
Incomplete Problem ..^

MRP ( Materials Resource Planning:

MRP may be defined as a technique for determining the quantity and timing
for the acquisition of dependent demand items needed to satisfy master
production schedule requirements.

MPS

Inventory Status File MRP Processing Bill Of Materials

Logic (BOM)

Order Release Order Re- Placed Orders

Requirements (Orders Scheduling (Future)
Placed Now)
The inputs to MRP system are:
I) Master Production schedule.
II) An inventory status file
III) Bill of materials
Using these information sources the MRP processing logic provides 3
output information.
I) Order release requirement.
II) Order re-scheduling
III) Plan orders.

Master Production schedule is a series of time faced quantities for each item
that a company produces, indicating how many are to be produced and made
and made. MPS initially develop from customer orders or from forecast of
demand before MRP system begins to operate. The MRP system accepts
whatever the master schedule demand and translates MPS end items into
specific component requirements, Most systems than make a simulated trail
run to determine whether the proposed master schedule can be satisfied.

Lecture # 19 Not Written

(MRP)
MPS Planner (Master Production Schedule):
Master Production Schedule has multi-warehouse / plant capability and is
designed to set production schedules in just-in-time, make-to- order, make-
to-stock and repetitive environments. MPS is designed to accept forecast
data from a variety of sources and the MPS may be presented in units or
currency. The MPS is bucket less with a user-defined series of reporting
periods for easy reference. The master scheduler establishes three planning
time fences: the planning horizon, the firm planning time fence and the
demand time fence (when MPS is frozen). The planner can maintain
planning exception messages and priority and filter levels for each message.
A wide range of planning characteristics can be established at the item and
plan level to define the planning rules. As planned orders are authorized, the
capacity plan is automatically maintained. The MPS includes features such
as statistical forecasting, independent forecast, rounding mechanism
definition, variable period size and abnormal demand masks.

Purchasing:
 - Changes to keep priorities valid.
- Order release
- Planned order release

Capacity Planning and Scheduling:

Our Capacity Planning and Scheduling feature provides you with a
“dashboard” type screen that displays manufacturing work centers by several
user-defined criteria. You can quickly view work centers that are near or
over capacity and re-schedule work orders as needed. This is done as a
snapshot outside of the current manufacturing schedule, allowing for what-if
scenarios prior to committing your changes back to the actual schedule. You
can even include planned orders in the snapshot to get a picture of your
plants capacity prior to release.

Production Control:
Functions of Production Control

OUTPUT PLAN

Loading

Sequencing

Scheduling

Expediting
Loading:
Loading is function of production control in which we assign specific jobs to
each work centre for the planning period.

Sequencing:
Sequencing is function of production control, determining the order of all
jobs at each work centre.

Scheduling:
Establishing staff and finish time of all jobs at each work center.

Expediting:
Expediting is function of production control. Monitoring performance,
diagnosing problem and apply corrective measure.

Definition of Production Control:

Production control is the function of management which plans, directs and
control the material supply and processing activities of an enterprise so that
specified products are produced by specific methods to meet an approve
sales program.

Definition of Loading:
Each job may have unique product specification and as a unique routing
through various work centers, when the job orders are released, they are
allocated to the work centers thus establishing the quantity of load each
work center should carry during the specific planned period. This
assignment is called loading. Load is the work assigned to a machine or an
operator and capacity is the volume of output capable of being produced in
any convenient period of time. We can say that loading is the study of
relationship between load and capacity at work centers. Gant charts and
visual load profiles are often used for loading purpose.

Definition of Sequencing:
When a job is completed at a work center we then face a question that which
job should be done next. For this purpose we often follows priority
sequencing rules. Some of the priority sequencing rules are like that;
1) FCFS ( First Come First Served)
2) EDD (Earliest Due Date)
3) SPT (Shortest Processing Time)
 4) LS (Least Slack)
5) PCO (Preferred Customer)

1) FCFS ( First Come First Served)

Gives up top priority to waiting job that arrive earliest in the production
system.

2) EDD (Earliest Due Date)

Gives top priority to the waiting job whose due date is earliest.

3) SPT (Shortest Processing Time)

Gives top priority to the waiting job whose operation time at one center is
shortest.

4) LS (Least Slack)
Slack is calculated as the difference of length of time remaining until the job
is due and the length of its operation time.

5) PCO (Preferred Customer)

Preferred customers are those whose previous record is good and clear,
so if they order than their orders are processed as soon as possible.

What Is Inventory ?
Inventories are assets of the firm and require investment and hence involve
the commitment of firm’s resources. The inventories need not be viewed as
an idle asset rather these are an integral part of firm’s operations. If the
inventories are too big, they became a strain on the resources, however, if
they are too small the firm may loose the sales. Therefore, the firm must
have an optimum level of inventories.
Inventory is defined as a stock or store of goods. These goods are
maintained on hand at or near a business location so that the firm may meet
demand and fulfill its reason for existence. If the firm is a retail
establishment, a customer may look elsewhere to have his or her needs
satisfied if the firm does not have the required item in stock when the
customer arrives. If the firm is a manufacturer, it must maintain some
inventory of raw materials and work-in-process in order to keep the factory
running. In addition, it must maintain some supply of finished goods in order
to meet demand. Sometimes, a firm may keep larger inventory than is
necessary to meet demand and keep the factory running under current
conditions of demand.

Types Of Inventory:
Generally, inventory types can be grouped into four classifications: raw
material, work-in-process, finished goods, and MRO goods.
I) Raw Materials Inventory.
II) Work-In-Progress.
III) Finished Goods.
IV) Transit Inventory.
V) Buffer Inventory.
VI) Decoupling Inventory.

Raw Materials Inventory:

Raw materials are inventory items that are used in the manufacturer’s
conversion process to produce components, subassemblies, or finished
products. These inventory items may be commodities or extracted materials
that the firm or its subsidiary has produced or extracted. They also may be
objects or elements that the firm has purchased from outside the
organization. Even if the item is partially assembled or is considered a
finished good to the supplier, the purchaser may classify it as a raw material
if his or her firm had no input into its production. Typically, raw materials
are commodities such as ore, grain, minerals, petroleum, chemicals, paper
wood, paint, steel, and food items. However, items such as nuts and bolts,
ball bearings, key stock, casters, seats, wheels, and even engines may be
regarded as raw materials if they are purchased from outside the firm.
Generally, raw materials are used in the manufacture of components. These
components are then incorporated into the final product or become part of a
subassembly. Subassemblies are then used to manufacture or assemble the
final product. A part that goes into making another part is known as a
component, while the part it goes into is known as its parent. Any item that
does not have a component is regarded as a raw material or purchased item.
From the product structure tree it is apparent that the rolling carts raw
materials are steel, bars, wheels, ball bearings, axles, and caster frames.

Work-In-Progress:
(WIP) is made up of all the materials, parts (components),assemblies, and
subassemblies that are being processed or are waiting to be processed within
the system. This generally includes all material raw materials that has been
released for initial processing up to material that has been completely
processed and is awaiting final inspection and acceptance before inclusion in
finished goods. Any item that has a parent but is not a raw material is
considered to be work-in-process. A glance at the rolling cart product
structure tree example reveals that work-in-process in this situation consists
of tops, leg assemblies, frames, legs, and casters. Actually, the leg assembly
and casters are labeled as subassemblies because the leg assembly consists
of legs and casters and the casters are assembled from wheels, ball bearings,
axles, and caster frames.

Finished Goods:
A finished good is a completed part that is ready for a customer order.
Therefore, finished goods inventory is the stock of completed products.
These goods have been inspected and have passed final inspection
requirements so that they can be transferred out of work-in-process and into
finished goods inventory. From this point, finished goods can be sold
directly to their final user, sold to retailers, sold to wholesalers, sent to
distribution centers, or held in anticipation of a customer order. Any item
that does not have a parent can be classified as a finished good. By looking
at the rolling cart product structure tree example one can determine that the
finished good in this case is a cart.

Transit Inventory:
Transit inventories result from the need to transport items or material from
one location to another, and from the fact that there is some transportation
time involved in getting from one location to another. Sometimes this is
referred to as pipeline inventory. Merchandise shipped by truck or rail can
sometimes take days or even weeks to go from a regional warehouse to are
tail facility. Some large firms, such as automobile manufacturers, employ
freight consolidators to pool their transit inventories coming from various
locations into one shipping source in order to take advantage of economies
of scale. Of course, this can greatly increase the transit time for these
inventories, hence an increase in the size of the inventory in transit.

Buffer Inventory:
As previously stated, inventory is sometimes used to protect against the
uncertainties of supply and demand, as well as unpredictable events such as
poor delivery reliability or poor quality of a suppliers products. These
inventory cushions are often referred to as safety stock. Safety stock or
buffer inventory is any amount held on hand that is over and above that
currently needed to meet demand. Generally, the higher the level of buffer
inventory, the better the firms customer service. This occurs because the
firm suffers fewer "stock-outs" (when a customers order cannot be
immediately filled from existing inventory) and has less need to backorder
the item, make the customer wait until the next order cycle, or even worse
cause the customer to leave empty-handed to find another supplier.
Obviously, the better the customer service the greater the likelihood of
customer satisfaction.

Decoupling Inventory:
a decoupling inventory that serves as a shock absorber, cushioning the
system against production irregularities. As such it "decouples" or
disengages the plants dependence upon the sequential requirements of the
system (i.e., one machine feeds parts to the next machine).The more
inventory a firm carries as a decoupling inventory between the various
stages in its manufacturing system (or even distribution system), the less
coordination is needed to keep the system running smoothly. Naturally, logic
would dictate that an infinite amount of decoupling inventory would not
keep the system running in peak form. A balance can be reached that will
allow the plant to run relatively smoothly without maintaining an absurd
level of inventory. The cost of efficiency must be weighed against the cost
of carrying excess inventory so that there is an optimum balance between
inventory level and coordination within the system.

MRO Goods Inventory:

Maintenance, repair, and operating supplies, or MRO goods, are items that
are used to support and maintain the production process and its
infrastructure. These goods are usually consumed as a result of the
production process but are not directly a part of the finished product.
Examples of MRO goods include oils, lubricants, coolants, janitorial
supplies, uniforms, gloves, packing material, tools, nuts, bolts, screws, shim
stock, and key stock. Even office supplies such as staples, pens and pencils,
copier paper, and toner are considered part of MRO goods inventory.

Why Inventory is Necessary ?

Inventory is necessary:
• Keeping the production on as on-going basis.
 • Giving satisfaction to customers in terms of quality-care, competitive price
and prompt delivery.
• Inducing confidence in customers and to create trust and faith.
• To keep pace with changing market conditions.
• To meet the demand during the replenishment period.

Advantages And Disadvantages of Inventory:

Advantages disadvantages
* Inventory allows customers to be served * Items can deteriorate while they are
quickly and conveniently. being kept. Clearly this is significant for
the food industry whose products have a
limited life.
* Inventory can be used so a company can * It can be very expensive and the return
buy in bulk, which is usually cheaper. on investment can take a long time.
* Reduce certain costs such * There is also the cost of keeping the stock
as (ordering cost, stock out cost etc). in warehouses or containers.
* Reduces the loss of orders (sell)
* Reducing administrative workload.
* Inventory is insurance if there is an
unexpected interruption in supply from
outside the operation
or within the operation.
* Also eliminates the possibility of
duplicate order.

What are the different costs associated with inventory ?

There are various costs associated with inventory management which affects
on overall process of materials management. Generally we categorize into
three types – Purchase cost, Ordering cost and carrying costs.
Costs Associated with Inventory:
1) Purchase cost.
2) Ordering cost.
3) Carrying cost.
4) Stock out cost.
5) Warehousing cost.
6) Damage, Pilferage (Stealing) and obsolescence cost.
7) Exchange rate differentials.

What is Inventory control and what are its objectives ?

Inventory Control is the supervision of supply, storage and accessibility of
items in order to ensure an adequate supply without excessive oversupply.

Objectives of Inventory Control:

Keep the item control cards match to the item cards in aim to control
the movements in warehouses the registration in those cards from the
actual prove documents.

Keep the cards of trust permanent items released to employees as
personnel trust, and also trust for department and division belongs to
university.

Keep the documents that prove constraints.

Undertake all procedure and control constraints of movement of items
in cards.

Perform periodical match for income constraints in item control card
with those in item cards.

Define and follow up the items which decide to fix or gif or sale or
damage according periodical report send to deputy of the university.

Make necessary studies to determine the suitable level of store, and
determine economical way for store to avoid decrease or increase in
stored items.

What is Inventory Model:

Inventory model is mathematical equation or formula that helps a firm in

determining the economic order quantity, and the frequency of ordering, to
keep goods or services flowing to the customer without interruption
or delay.

MODEL 1:
EOQ With Instantaneous Stock Replenishment.
 EOQ = Economic Order Quantity.
Assumptions:

1) Demand is deterministic, constant and it is known.

 2) Start replenishment is instantaneous (lead time is zero).
3) Prize of material is fixed (quantity discounts are not allowed).
4) Ordering cost does not vary with order quantities.

Let
D = Annual Demand
Co = Ordering cost
Ch = Inventory holding cost (Rs /unit/unit time)
Cp = Price per unit
Q = Order Quantity
Q’ = Economic order.
N = Number of orders per year.
Tc = Total cost per year.

 (1) equation
Tc = (Annual Order Cost + Annual Inventory Cost) =

Annual Order cost = Number of orders * order cost / order

= Annual Demand / Order Quantity

 (2) equation
Annual Order Cost = (P*Co) / Q =

Annual Inventory cost = Average inventory * inventory holding cost

 (3) equation
Annual Inventory Cost = ½(Q * Ch) =

 (4) equation
Tc = (D/Q)*Co + ½(Q * Ch) =

For finding EOQ (Q’) differentiate equation 4 W.R.T Q and equal it to

zero.

dTc / dQ = - (D*Co)/Q2 + Ch/2 = 0

D*Co/Q’2 = Ch/2

Q’ = sqrt((2*D*Co)/Ch) =
 (5) A equation

If Ch is expressed as percentage of total inventory investment then

Q’ = sqrt((2*D*Co)/Cp*I) =
 (5) B equation
Optimum Number Of Orders (N’)

N’ = P/Q’ =
 (6) equation

 (7) equation
Tcm = sqrt(2*D*Co*Ch) =

Problem:
ABC company has a demand for particular production and 10000 units
per year. The cost per unit is rupees 2 and it cost rupees 36 to place an
order and process delivery. The inventory carrying cost is estimated
and 9% of average inventory investment. Determine
(1) Economic order quantity.
(2) Optimum number of orders to be placed per year.
(3) Minimum total cost of inventory per year.

Data:

D = 10,000
Co = 36 / order
Cp = 2 / unit
I = 9% = 0.09
(1) Q’ = ?
(2) N’ = ?
(3) Tcm = ?

Solution:
(1)

We have a formula for EOQ

Q’ = sqrt((2*D*Co)/Cp*I)

By putting the values we get

Q’ = sqrt((2*1000*36)2*0.09) = 2000 Units. Ans

(2)

N’ = D/Q’
N’ = 10,000 / 2000 = 5 Ans

(3)

Tcm = sqrt(2*Co*Ch*D)
 Ch = Cp*I = 2*0.09 = 0.18

Tcm = sqrt(2*36*0.18*10,000)
Tcm = 360 / year Ans

MODEL 2:
EBQ When Stock Replenishment is Non-Instantaneous (Production
Model)
 EBQ = Economic Batch Quantity.
Assumptions:
(i) The item is sold or consumed at the constant demand rate which is
known.
(ii) Setup cost is fixed and it does not change with lot size.
(iii) The increase in inventory is not instantaneous but it is gradual.

Let

P = Production rate
d = Consumption rate

Replenishment of inventory under this model built up during the period

tp and consumption takes place during the entire cycle time T under this
situation inventory is building up at the rate of (P-d) and inventory is
maximum at the end of period tp.

Max Inventory = (P-d)*tp

 (1) equation
Average Inventory = ½(P-d)*tp =
 Min Inv = 0

(P-d) The quantity Q Produced during tp

Q = P*tp  tp = Q/P
Average Inventory = ((P-d)*Q)/2*P

Average Inventory = Q/2 *(1 – d/P)

Annual holding inventory cost = Average inventory * Inventory holding

cost

 (2) equation
Annual holding cost = Q/2* (1 – d/P)*Ch =

Annual Setup cost = No of setups * setup cost / setup

 (3) equation
Annual Setup cost = 1/Q*(P*Co) =

Total cost = Annual Inventory holding cost + Annual Setup cost

 (4) equation
Tc = Q/2*(1-d/P)*Ch + D/Q*(Co) =

Differentiate equation 4 W.R.T Q and equate it to zero.

dTC/dQ = ½(1-d/P)*Ch +D*Co/Q2 = 0

Q’ = sqrt((2*D*Co)/(1-d/P)*Ch) =
 (5) equation

Optimum Number of Orders

N’ = D/Q’ =
 (6) equation

 (7) equation
Tcm = sqrt(2*D*Co*Ch(1 – d/P)) =

Problem:
ABC company produces a cable at the rate of 5000 meters / hour.
The cable is used at the rate of 2500 meters / hour. The cost of the
cable is rupees 5 / meters. The inventory carrying cost is 25% and
setup cost is rupees 4050 per setup. Determine the optimum number
of cycles required in the year for manufacturing of the cable.

Data:
P = 5000 m/hour
d = 2500 m/hour
Cp = 5 rupees/unit
I = 25% = 0.25
Co = 4050
N’ = ? for year

Solution:

We have a formula N’ = D/Q’ =

 (1) equation

D = 2500*365*8  365 days in year and 8 standard working hours.

D = 7,300,000

Q’ = sqrt((2*D*Co)/(1-d/P)*Ch)

By Putting the values we get

Q’ = sqrt((2*7300000*4050)/(1-2500/5000)*5*0.25)
 Ch = Cp*I

Q’ 3.8448

By putting the values of Q’ and D in to the equation (1) we get

N’ = D/Q’ = 7300000/3.8448 = 18.9867 Ans

Problem:
A Constructor undertake to supply diesel engine to truck
manufacturer at the rate of 25/day, he finals that the cost of holding
a completed engine in stock is Rupees 16/month. Production of
engine is in batches and each time new batch is started, there are
setup cost of rupees 10,000. How frequently should the batches be
started and what will be the min average inventory cost and
production time, if production rate is 40 engines /day. Assume 300
working days in a year.

Date:
d = 25/day
Ch = 16/month = 16*12 = 192
Co = 10,000
P = 40/day
D = 300*25 = 7500
Q’ = ?
N’ = ?
T=?
Tcm = ?

Solution:
(1)
Q’ = sqrt((2*D*Co)/Ch(1-d/P))

By Putting the values we get

Q’ = sqrt((2*7500*1000)/(192*(1-25/40))

Q’ = 1443.37

(2)

N’ = D/Q’ = 7500/1443.37 = 5.196

(3)

T = 1/N’ = 1/5.196 = 0.192

(4)

Tcm = sqrt(2*D*Co*Ch(1-d/P))

Tcm = sqrt(2*7500*10000*192(1-25/40))

Tcm = 103923 Ans

Problem:
An automobile manufacturing company is purchasing an item from
outside suppliers. Demand is 10,000 units per annum. Cost of the
item is rupees 100/order. Cost of holding inventory is 25%. If the
consumption rate is constant determine economic order quantity. In
the above problem, if the company decides to manufacture the above
item with an equipment which produce 100 units/day. The cost of
unit thus produced is rupees 3.5 / unit. Setup cost is rupees 150. what
would be the difference between two situations.

Data:
D = 10,000
Co = 100 / order
I = 25% = 0.25
Q’ = ?

Solution:
(a)
Q’ = sqrt((2*D*Co)/Cp*I)
Q’ = sqrt((2*10,000*100)/(5*0.25))
Q’ = 1265

(b)
P = 100 /day
Cp = 3.5 / unit
Co = 150
Q’ = ?

Solution:

Q’ = sqrt((2*D*Co)/(1-d/P)*Cp*I

Q’ = sqrt((2*10,000*150)/((1-10,000/30,000)*3.5*0.25))

Q’ = 2268.9 Ans

Selective Control Of Inventory:

Selection control refers to the variation in method of control from item to
item on some selected bases. There are many criteria used for this
purpose. They are;
1) Based on the cost of product
2) Lead time
 3) Usage rate
4) Procurement difficulties

ABC Analysis (Pareto Principle)

Is technique of selective control of
inventory. The inventory of an industrial organization generally consists of
thousands of items with varying prices, usage rate and lead time. It is neither
desirable nor possible to pay equal attention to all the items, for example A
T.V set has about 5% of its parts contribute to 80% of total cost. This is two
of majority of items like car, refrigerator etc. ABC analysis is a basic
analytical tool which enables management to concentrate its efforts where
results will be greater. ABC analysis is based upon the Pareto principle.

Problem:
10 items are kept in inventory. The details regarding the number of
items used per annum and price per unit are given below.
item no annual usage price
101 200 40
102 100 360
103 2000 0.2
104 400 20
105 6000 0.04
106 1200 0.8
107 120 100
108 2000 0.7
109 1000 1
110 80 400
Classify the items into A, B and C classes.

Solution:
Step 1:
Find The annual usage value and rank of the item.

Table: 1
item no Annual usage value rank

101 200*40 = 8000 4

102 100*360 = 36000 1
103 2000*0.2 = 400 8
104 400*20 = 8000 4
105 6000*0.04 = 240 9
106 1200*0.8 = 960 7
107 120*100 = 12000 3
108 2000*0.7 = 1400 5
109 1000*1 = 1000 6
110 80*400 = 32000 2
 Rank is given upon the highest annual usage value.

Table: 2
ITEM ANNUAL COMMULATIVE CAUV% % OF CLASS
NO USAGE AUV ITEMS NAME
IN
CLASS
102 36000 36000 30% 2/10 = A
20%
110 32000 68000 68%
--------- ------------- ----------------------- ------------ ---------- ----------
107 12000 80000 80% 3/10 = B
30%
101 8000 88000 88%
104 8000 96000 96%
--------- ------------ ----------------------- ------------ ---------- ----------
108 1400 97400 97.4% 5/10 = C
50%
109 1000 98400 98.4%
106 960 99360 99.36%
103 400 99760 99.76%
105 240 100000 100%
 AUV = Annual Usage value.
 C = Cumulative
 CAUV% = single/total
Forecasting:
Forecasting is the process of making statements about events whose actual
outcomes (typically) have not yet been observed. Forecasting is predicting
the future not an exact science but instead consists of a set of statistical tools
and techniques that are supported by human judgment and intuition.
Forecasting is projecting future values by looking at past data.
• Business forecasting generally attempts to predict future customer
demand for a firm’s goods or services.
• Macroeconomic forecasting attempts to predict future behavior of the
economy and identify business cycle turning points.

Applications of forecasting
* Operations management: forecast of product sales; demand for services
* Marketing: forecast of sales response to advertisement procedures, new
promotions etc.
* Finance & Risk management: forecast returns from investments
* Economics: forecast of major economic variables, e.g. GDP, population
growth, unemployment rates, inflation; useful for monetary & fiscal policy;
budgeting plans & decisions
* Industrial Process Control: forecasts of the quality characteristics of a
production process
* Demography: forecast of population; of demographic events (deaths,
births, migration); useful for policy planning

Forecast Methods:
There are two type of forecast methods.
1) Qualitative Methods
2) Quantitative Methods

Qualitative forecasting techniques are subjective, based on the opinion and

judgment of consumers, experts; they are appropriate when past data are not
available. They are usually applied to intermediate- or long-range decisions.
Examples of qualitative forecasting methods are informed opinion and
judgment, the Delphi method, market research, and historical life-cycle
analogy.
Quantitative forecasting models are used to forecast future data as a
function of past data; they are appropriate when past data are available.
These methods are usually applied to short- or intermediate-range decisions.
Examples of quantitative forecasting methods are last period demand,
simple and weighted N-Period moving averages, simple exponential
smoothing, and multiplicative seasonal indexes.

The three most widely used forecasting models

-time series
-Smoothing models
- Regression

Some Definitions:

Time Series:
A set of chronologically ordered points of data.
In forecasting a time series it is generally assumed that factors which caused demand in
the past will persist into the future.

Decomposition Techniques:
Separating a time series into several unobservable components, generally in an additive
or multiplicative fashion.
Such components usually include a trend, seasonal, cycle, and residual or irregular.

Seasonal Component:
Regularly occurring, systematic variation in a time series according to the time of year.
Not found in annual data, or data of lower frequencies.

Problem:

year 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
SALES 13 20 20 28 30 32 33 38 43 ? ?

Solution:
As sales are time dependent, i.e. we will find base year, base year is the mid
year. In this base year is 1993
year SALES(y) Deviation(x) X2 xy
1 13 -4 16 -52
2 20 -3 9 -60
3 20 -2 4 -40
4 28 -1 1 -28
5 Base year 30 0 0 0
6 32 1 1 32
7 33 2 4 66
8 38 3 9 114
9 43 4 16 172
N=9 ∑Y = 257 ∑X = 0 ∑X2 ∑XY
= 60 = 204

 Deviation (X) = year – base year

We have a formula
y = a+bx  equation (1)
Where x = number after base year.

and formulae to find a and b are

a = ∑Y/N = 257/9 = 28.56

b = ∑XY/X2 = 204/60 = 3.4

By Putting the values of a and b in equation (1) we get.

For year 1998

y = 28.56 + 3.4(5)
y = 45.56 Ans

For year 1999

y = 28.56 + 3.4(6)
y = 48.96 Ans

Problem:
A company manufacturing washing machines establishes a fact that
there is a relationship between sales of washing machine and population
of the city. The market research carried out reveals the following
information.
Population 5 7 15 22 27 36
SALES 28 40 65 80 96 130
 Population in Millions and Sales in thousands.
Forecast the demand of washing machines for a city with population of
45 million.

Solution:
N Population(x) Sales(y) x2 xy
* 5 28 25 140
* 7 40 49 280
* 15 65 225 975
* 22 80 484 1760
* 27 90 729 2430
* 36 130 1296 4680
∑N = 6 ∑X = 112 ∑Y = 433 ∑X2= 2808 ∑XY=10265

We have a formula
y = a+bx  equation (1)
formulae to find values of a and b are

(∑Y* ∑X2) – (∑X* ∑XY)

a= ---------------------------------
(N*∑X2) – (∑X)2

(433* 2808) – (112* 10265)

a= ---------------------------------
(6*2808) – (112)2

a = 15.37 Ans

(N* ∑XY) – (∑X* ∑Y)

b= ---------------------------------
(N*∑X2) – (∑X)2
 (6* 10265) – (112* 433)
b= ---------------------------------
(6*2808) – (112)2

b = 3.04 Ans

By Putting the values of a and b in equation (1) we get

y = 15.37 + 3.04(45)
y = 15.37 + 136.8
y = 152.17 Ans

Problem:

month Jan feb mar apr may jun jul aug sep oct nov dec
SALES 400 490 570 500 640 680 710 800 820 910 860 950
Describe the sales of ABC company for the 12 months of the year 1996.
I) Compute 3 months moving averages.
II) Forecast the demand for the month of January 1997
III) If the actual demand for the month of January 1997 is 905
units, what should be the forecast for the month of February
1997.

Solution:

I)

Month sales rs 000 moving total moving average

Jan 400 -------------------- ---------------------
Feb 490 1460 487
Mar 570 1560 520
Apr 500 1710 570
May 640 1820 607
Jun 680 2030 677
Jul 710 2190 730
Aug 800 2330 777
Sep 820 2530 844
Oct 910 2590 864
Nov 860 2720 907
Dec 950 --------------------- ---------------------
 Moving Total = Previous+(Value)+Next
 Moving Average = (Moving Total)/3

II) Forecast demand for month of January 1997 will be 907

III) Forecast for February 1997 =
(Last moving total + demand for January 1997 – Demand for October
1996) / 3

= (2720 + 905 – 910) / 3

= 905 units ANS

Exponential Smoothing:
One of the disadvantages of the moving average forecasting is difficulties
in maintaining the data for previous years. In comparison to moving
average method, we can use alternative forecasting technique that is
exponential smoothing.
Exponential smoothing requires only the current demand and the
forecasted demand for the current month. Simple moving average method
gives the equal weight age to the all the periods. Exponential smoothing
is distinguish by the fact that it assign weights to all the previous data and
the pattern of rates assign are of exponential form. Demand for the most
recent data is given more weight age and weight age given to older
period decrease exponentially. Thus exponential forecasting ensures that
the forecast made by this method keep paste with changing business
trade. Exponential smoothing forecast can be worked out as
Forecast for the period t(Ft )= Forecasted demand for the last period (Ft-1)
+ α [Actual demand for last period – Forecasted demand for last period]

Ft = Ft – 1 + α [Dt-1 – Ft-1]
Where α is called smoothing constant.

Problem:
The demand for the disposal plastic cubic for a general hospital is
300 units and 350 units for September and October respectively.
Using 200 units as forecast for September; compute the forecast for
the month of November; Assume the value of (α) as 0.7
Solution:
Ft = α Dt-1 + (1-α) Ft-1
 FNov =?
DSep = 300
DOct = 350
FSep = 200
α = 0.7

FNov = α DOct + (1-α) FOct  (A)

So FOct is missing, first find FOct = ?

FOct = α DSep + (1-α) FSep

By putting the values we get

FOct = 0.7 x 300 + (1-0.7) x 200

FOct = 270 Ans

By putting the values in equation (A) we get

FNov = 0.7 x 350 + (1-0.7) x 270

FNov = 245 + 81
FNov = 326 Ans

Problem:
The demand for the particular product is given for the last 8 periods.
Compute the exponentially smooth forecast for the periods taking α = 0.1
& 0.3. which of these forecast is better. Take Ft for period 1 is 15 and at α
= 0.3 also 15.
Period 1 2 3 4 5 6 7 8
DEMAND 10 18 29 15 30 12 16 8
Solution:

Period demand dt forecast ft error dt – Forecast Ft error dt - ft

at alpha = Ft at alpha =
0.1 0.3
1 10 15 -5 15 -5
2 18 14.5 3.5 13.5 4.5
3 29 14.85 14.15 14.85 14.15
4 15 16.26 -1.26 19.09 -4.09
5 30 16.14 13.86 17.86 12.14
6 12 17.52 -5.52 21.5 -9.5
7 16 16.97 -0.97 18.65 -2.65
8 8 16.87 -8.87 17.85 -9.85
∑ = 9.89 ∑ = -0.3

Ft for period 2 at α = 0.1

Ft2 = αD1 + (1-α) x F1
Ft2 = 0.1 x 10 + (1-0.1) x 15
Ft2 = 13.5

Ft for period 3 at α = 0.1

Ft3 = αD2 + (1-α) x F2
Ft3 = 0.1 x 18 + (1-0.1) x 14.5
Ft3 = 14.85

Ft for period 4 at α = 0.1

Ft4 = αD3 + (1-α) x F3
Ft4 = 0.1 x 29 + (1-0.1) x 14.85
Ft4 = 16.26

Ft for period 5 at α = 0.1

Ft5 = αD4 + (1-α) x F4
Ft5 = 0.1 x 15 + (1-0.1) x 16.26
Ft5 = 16.14

Ft for period 6 at α = 0.1

Ft6 = αD5 + (1-α) x F5
Ft6 = 0.1 x 30 + (1-0.1) x 16.14
Ft6 = 17.52

Ft for period 7 at α = 0.1

Ft7 = αD6 + (1-α) x F6
Ft7 = 0.1 x 12 + (1-0.1) x 17.52
Ft7 = 16.97

Ft for period 8 at α = 0.1

Ft8 = αD7 + (1-α) x F7
Ft8 = 0.1 x 16 + (1-0.1) x 16.97
Ft8 = 16.87

Ft for period 2 at α = 0.3

Ft2 = αD1 + (1-α) x F1
Ft2 = 0.3 x 10 + (1-0.3) x 15
Ft2 = 13.5

Ft for period 3 at α = 0.3

Ft3 = αD2 + (1-α) x F2
Ft3 = 0.3 x 18 + (1-0.3) x 14.5
Ft3 = 14.85

Ft for period 4 at α = 0.3

Ft4 = αD3 + (1-α) x F3
Ft4 = 0.3 x 29 + (1-0.3) x 14.85
Ft4 = 16.26

Ft for period 5 at α = 0.3

Ft5 = αD4 + (1-α) x F4
Ft5 = 0.3 x 15 + (1-0.3) x 16.26
Ft5 = 16.14

Ft for period 6 at α = 0.3

Ft6 = αD5 + (1-α) x F5
Ft6 = 0.3 x 30 + (1-0.3) x 16.14
Ft6 = 17.52

Ft for period 7 at α = 0.3

Ft7 = αD6 + (1-α) x F6
Ft7 = 0.3 x 12 + (1-0.3) x 17.52
Ft7 = 16.97

Ft for period 8 at α = 0.3

Ft8 = αD7 + (1-α) x F7
Ft8 = 0.3 x 16 + (1-0.3) x 16.97
Ft8 = 16.87

Ans
Statistical Quality Control (SQC):

Quality:
The standard of something as measured against other things of a similar
kind, the degree of excellence of something. Quality is inversely
proportional to variability

Statistical Quality Control:

• Statistical process control is a collection of tools that when used
together can result in process stability and variance reduction
The seven major tools are
1) Histogram
2) Pareto Chart
4) Cause and Effect Diagram
5) Defect Concentration Diagram
6) Control Chart
7) Scatter Diagram
8) Check Sheet
Basic Principles
• A process that is operating with only chance causes of variation
present is said to be in statistical control.
• A process that is operating in the presence of assignable causes is said
to be out of control.
• The eventual goal of SPC is the elimination of variability in the
process

Control Charts:
Control Charts show sample data plotted on a graph with Center Line
(CL), Upper Control Limit (UCL), and Lower Control Limit (LCL).
Basic Principles

Where
 k = distance of the control limit from the center line
µw = mean of some sample statistic, W.
σw = standard deviation of some statistic, W.
Important uses of the control chart
1. Most processes do not operate in a state of statistical control
2. Consequently, the routine and attentive use of control charts will
identify assignable causes. If these causes can be eliminated from the
process, variability will be reduced and the process will be improved
3. The control chart only detects assignable causes. Management,
operator, and engineering action will be necessary to eliminate the
assignable causes.

Types of control charts

• Variables Control Charts
– These charts are applied to data that follow a continuous
distribution.
– Are used to monitor characteristics that can be measured, e.g.
length, weight, diameter, time, etc.
–
• Attributes Control Charts
– These charts are applied to data that follow a discrete
distribution
– Are used to monitor characteristics that have discrete values
and can be counted, e.g. % defective, number of flaws in a shirt,
number of broken eggs in a box, etc.

Popularity of control charts

1) Control charts are a proven technique for improving productivity.
2) Control charts are effective in defect prevention.
3) Control charts prevent unnecessary process adjustment.
4) Control charts provide diagnostic information.
5) Control charts provide information about process capability.

Control Charts for Variables

 Mean (x-bar) charts
Tracks the central tendency (the average value observed) over time
 Range (R) charts:
Tracks the spread of the distribution over time (estimates the observed
variation)
Constructing a X-bar Chart:
A quality control inspector at the Cocoa Fizz soft drink
company has taken three samples with four observations each of
the volume of bottles filled. If the standard deviation of the bottling
operation is .2 ounces, use the data below to develop control charts
with limits of 3 standard deviations for the 16 oz. bottling
operation.
Time Time Time
1 2 3
Observation 15.8 16.1 16.0
1
Observation 16.0 16.0 15.9
2
Observation 15.8 15.8 15.9
3
Observation 15.9 15.9 15.8
4

Step 1:
Calculate the Mean of Each Sample

Time Time Time

1 2 3
Observation 15.8 16.1 16.0
1
Observation 16.0 16.0 15.9
2
Observation 15.8 15.8 15.9
3
Observation 15.9 15.9 15.8
4
Sample 15.875 15.975 15.9
means (X-
bar)

Step 2: Calculate the Standard Deviation of the Sample Mean

σ  .2 
σx = =   = .1
n  4
 Step 3: Calculate CL, UCL, LCL

 Center line (x-double bar):

15.875 + 15.975 + 15.9
x = = 15.92
3
 Control limits for ±3σ limits (z = 3):
UCLx = x + zσ x = 15.92 + 3 (.1) = 16.22
LCLx = x − zσ x = 15.92 − 3 (.1) = 15.62

Step 4: Draw the Chart

An Alternative Method for the X-bar Chart Using R-bar and

the A2 Factor
Use this method when sigma for the process distribution is not
known. Use factor A2 from Table 6.1

Factor for x- Factors for R-

Sample
Size A D D4
2 2
1.88 3
0.00 3.27
3 1.02 0.00 2.57
4 0.73 0.00 2.28
5 0.58 0.00 2.11
6 0.48 0.00 2.00
7 0.42 0.08 1.92
8 0.37 0.14 1.86
9 0.34 0.18 1.82
10 0.31 0.22 1.78
11 0.29 0.26 1.74
12 0.27 0.28 1.72
 Time 1 Time 2 Time 3
Step 1: Observation 15.8 16.1 16.0 Calculate the
Range of Each 1 Sample and
Average Range Observation 16.0 16.0 15.9
2
Observation 15.8 15.8 15.9
3
Observation 15.9 15.9 15.8
4
Sample 0.2 0.3 0.2
ranges (R)

0.2 + 0.3 + 0.2

R = = .233
3
Step 2: Calculate CL, UCL, LCL
 Center line:
15.875 + 15.975 + 15.9
CL = x = = 15.92
3
 Control limits for ±3σ limits:

UCLx = x + A2 R = 15.92 + (0.73) .233 = 16.09

LCLx = x − A2 R = 15.92 − (0.73) .233 = 15.75

Control Chart for Range (R-Chart)

Center Line and Control Limit calculations:
Factor for x- Factors for R-
Sample
0.2 + 0.3 + 0.2 Size A D D4
CL = R = = .233 2 2
1.88 3
0.00 3.27
3
3 1.02 0.00 2.57
4 0.73 0.00 2.28
5 0.58 0.00 2.11
UCL = D4R = 2.28(.233) = .53
6 0.48 0.00 2.00
LCL = D3R = 0.0(.233) = 0.0 7 0.42 0.08 1.92
8 0.37 0.14 1.86
9 0.34 0.18 1.82
10 0.31 0.22 1.78
11 0.29 0.26 1.74
R-Bar Control Chart:

Control Charts for Attributes –P-Charts & C-Charts:

 Use P-Charts for quality characteristics that are discrete and involve
yes/no or good/bad decisions
 Percent of leaking caulking tubes in a box of 48
 Percent of broken eggs in a carton

 Use C-Charts for discrete defects when there can be more than one
defect per unit
 Number of flaws or stains in a carpet sample cut from a
production run
 Number of complaints per customer at a hotel

Constructing a P-Chart:
A Production manager for a tire company has inspected the number of
defective tires in five random samples with 20 tires in each sample. The
table below shows the number of defective tires in each sample of 20 tires.
Sample Sample Number
Size (n) Defective
1 20 3
2 20 2
 3 20 1
4 20 2
5 20 1
Step 1:
Calculate the Percent defective of Each Sample and the Overall Percent
Defective (P-Bar)
Sample Number Sample Percent
Defective Size Defective
1 3 20 .15
2 2 20 .10
3 1 20 .05
4 2 20 .10
5 1 20 .05
Total 9 100 .09

Step 2: Calculate the Standard Deviation of P.

p(1-p) (.09)(.91)
σp = = =0.064
n 20
Step 3: Calculate CL, UCL, LCL
 Center line (p bar):

CL = p = .09

 Control limits for ±3σ limits:

UCL = p + z (σ p ) = .09 + 3(.064) = .282

LCL = p − z (σ p ) = .09 − 3(.064) = −.102 = 0

Step 4: Draw the Chart

 Constructing a C-Chart:
The numbers of weekly customer complaints are monitored in a
large hotel. Develop a three sigma control limits For a C-Chart using the
data table below.
Week Number
of Complaints
1 3
2 2
3 3
4 1
5 3
6 3
7 2
8 1
9 3
10 1
Total 22

Calculate CL, UCL, LCL

 Center line (c bar):
#complaints 22
CL = = = 2.2
# of samples 10

 Control limits for ±3σ limits:

UCL = c + z c = 2.2 + 3 2.2 = 6.65
LCL = c − z c = 2.2 − 3 2.2 = −2.25 = 0
Some Definitions:

Elastic Demand:
If demand behave in same manner or of market situation, or
Demand follows market situation.
<== Market Value

<== Demand

In-Elastic Demand:
If demand is irresponsive to market value than it is in-elastic demand.

Law of Demand:
The law of demand says that the higher the price, the lower the quantity
demanded, because consumers’ opportunity cost to acquire that good or
service increases, and they must make more tradeoffs to acquire the more
expensive product.

Law of Supply and cost:

The law of supply says that as the price of an item goes up, suppliers will
attempt to maximize their profits by increasing the quantity offered for sale.

Money:
A current medium of exchange in the form of coins and banknotes, coins
and banknotes collectively. Or the assets, property, and resources owned by
someone or something.

Time value of money:

The idea that money available at the present time is worth more than the
same amount in the future due to its potential earning capacity. This core
principle of finance holds that, provided money can earn interest, any
amount of money is worth more the sooner it is received.
Also referred to as "present discounted value".

Interest:
Interest is a fee paid by a borrower of assets to the owner as a form of
compensation for the use of the assets. It is most commonly the price paid
for the use of borrowed money, or money earned by deposited funds
 Interest rate is fixed on the basis of policy. There are two types of policies.
1) Monitory Policy
2) Fiscal Policy
Monitory Policy:
Monetary policy is the process by which the monetary authority of a country
controls the supply of money, often targeting a rate of interest for the purpose of
promoting economic growth and stability. The official goals usually include
relatively stable prices and low unemployment.

Fiscal Policy:
In economics and political science, fiscal policy is use by the government
revenue collection (mainly taxes) and expenditure (spending) to influence
the economy.

Inflation:
* In economics, inflation is a sustained increase in the general price level of
goods and services in an economy over a period of time. When the general price
level rises, each unit of currency buys fewer goods and services.
* Persistent increase in general price level.
Types of Inflation:
1) Demand pull inflation
2) Cost push inflation
3) Hyper inflation

Demand-pull inflation is asserted to arise when aggregate demand in an

economy outpaces aggregate supply. It involves inflation rising as real gross
domestic product rises and unemployment falls, as the economy moves along
the Phillips curve.

Cost-push inflation is an alleged type of inflation caused by substantial

increases in the cost of important goods or services where no suitable
alternative is available.

Hyperinflation occurs when a country experiences very high and usually

accelerating rates of inflation, rapidly eroding the real value of the local
currency, and causing the population to minimize their holdings of the local
money.
Management:
Management in business and organizations is the function that coordinates the
efforts of people to accomplish goals and objectives using available resources
efficiently and effectively. Management comprises planning, organizing,
staffing, leading or directing, and controlling an organization to accomplish the
goal.

Gross National Product (GNP):

Gross national product (GNP) is the market value of all the products and services
produced in one year by labor and property supplied by the citizens of a country.
GNP = GDP + Foreign income