Industrial Management Engg. Economy

Course: Industrial Management & Engineering Economy
Year: V Semester : II
CHAPTER I: BASIC MANAGEMENT CONCEPTS & INDUSTRIAL ORGANIZATION
1.1. Definition, nature, scope and evolution of Management

I. Management definition
Frenchman Henri Fayol (1841 -1925) considers management to consist of six functions: forecasting,
planning, organizing, commanding, coordinating, controlling.
Mary Parker Follett (1868–1933), who wrote on the topic in the early twentieth century, defined
management as "the art of getting things done through people". She described management as
philosophy.
Management is the utilization of scientifically derived principles to examine and improve collective
efforts of production.
Management in all business and organizational activities are the acts of getting people together to
accomplish desired goals and objectives efficiently and effectively.
Because organizations can be viewed as systems, management can also be defined as human action,
including design, to facilitate the production of useful outcomes from a system
General definition
Even though there exists no precise and single definition of management (decision oriented definition,
people oriented definition, function oriented definition and production or efficiency oriented definition)
in general we define the management as follow; ―Management is the process involving planning,
organizing, staffing, directing and controlling human efforts to achieve stated objectives in an
organization.”
II. Nature of Management
Management as Disciplinary: Management as Disciplinary Management is basically multidisciplinary.
This implies that, although management has been developed as a separate discipline, it draws knowledge
and concepts from various disciplines. It draws freely ideas and concepts from psychology, sociology,
anthropology, economics, ecology etc. Management integrates the ideas and concepts taken from these
disciplines and presents newer concepts which can be put into practice for managing the organization. In
fact the integration of knowledge of various disciplines is the major contribution of management and
this integrated discipline is known as management.
Dynamic Nature of Principles: Dynamic Nature of Principles Principle is a fundamental truth which
establishes causes and effect relationships of function. Management has framed certain principles on the
basis of integration and supported by practical evidences. These principles are flexible in nature and
with the changed in the environment in which an organization exists. Because of the continuous
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development in the field, many older principles are being changed by new Principles. In fact, there is
nothing permanent in the landslide of management.
Relative, not absolute Principle: Relative, not absolute Principle Management principles are relative,
not absolute and they should be applied according to the need of the organization. Each organization
may be different from others. The difference may exist because of time, place, socio-culture factors .
However individuals working within the same organization may also differ. Thus a particular
management should be applied in the light of prevailing conditions.
Management Science or Art? There is a controversy whether management is science or art.

Management is both science and Art. Management as Science: Management as an art. Management:
science and art both:
III. Scope of Management

1) Production Management: (a) designing the product (b) location and layout of plant and building (c)
planning and control of factory operations (d) operation of purchase and storage of materials (e) repairs
and maintenance (f) inventory cost and quality control (g) research and development etc.
2) Marketing Management: Marketing involves following activities (a) Marketing research to determine
the needs and expectation of consumers (b) Planning and developing suitable products (c) Setting
appropriate prices (d) Selecting the right channel of distribution, and (e) Promotional activities like
advertising and salesmanship to communicate with the customers
3) Financial Management: 1. selecting the appropriate source of funds 2.raising the required funds at the
right time 3.administration of earnings 4.Estimating the volume of funds
4) Personnel Management: (a) Manpower planning (b) Recruitments, (c) Selection, (d) Training (e)
Appraisal, (f) Promotions and transfers, (g) Compensation, (h) Employee welfare services, and (i)
Personnel records and research, etc.
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IV. Evolution of Management thought
I. F.W. Taylor and Scientific Management

Scientific Management: The systematic study of the relationships between people and tasks for the purpose of
redesigning the work process to increase efficiency.
Four Principles of Scientific Management
1) Study the way workers perform their tasks, gather all the informal job knowledge that workers possess and
experiment with ways of improving how tasks are performed
• Time-and-motion study
2) Codify the new methods of performing tasks into written rules and standard operating procedures
3) Carefully select workers who possess skills and abilities that match the needs of the task, and train them to
perform the task according to the established rules and procedures
4) Establish a fair or acceptable level of performance for a task, and then develop a pay system that provides a
reward for performance above the acceptable level
Problems with Scientific Management

• Managers frequently implemented only the increased output side of Taylor‘s plan.
– Workers did not share in the increased output.
• Specialized jobs became very boring, dull.
– Workers ended up distrusting the Scientific Management method.
• Workers could purposely ―under-perform.‖
– Management responded with increased use of machines and conveyors belts.
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The Gilbreths
1. Break up and analyze every individual action necessary to perform a particular task into each of its
component actions
2. Find better ways to perform each component action
3. Reorganize each of the component actions so that the action as a whole could be performed more
efficiently-at less cost in time and effort
II. Administrative Management Theory
Administrative Management is the study of how to create an organizational structure that leads to high
efficiency and effectiveness.
Max Weber
Developed the principles of bureaucracy as a formal system of organization and administration designed
to ensure efficiency and effectiveness.
Weber’s Principles of Bureaucracy
1) A manager‘s formal authority derives from the position he holds in the organization.
2) People should occupy positions because of their performance, not because of their social standing or
personal contacts.
3) The extent of each position‘s formal authority and task responsibilities and it‘s relationship to other
positions should be clearly specified.
4) Authority can be exercised effectively when positions are arranged hierarchically, so employees know
whom to report to and who reports to them.
5) Managers must create a well-defined system of rules, standard operating procedures, and norms so they
can effectively control behavior.
Rules, SOPs and Norms

Rules – formal written instructions that specify actions to be taken under different circumstances to
achieve specific goals
Standard Operating Procedures (SOPs) – specific sets of written instructions about how to perform a
certain aspect of a task
Norms – unwritten, informal codes of conduct that prescribe how people should act in particular
situations
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Fayol’s Principles of Management
Division of Labor: allows for job specialization.

 jobs can have too much specialization leading to poor quality and worker dissatisfaction.
Authority and Responsibility
 both formal and informal authority resulting from special expertise.
Unity of Command
 Employees should have only one boss.
Line of Authority
 A clear chain of command from top to bottom of the firm.
Centralization
 The degree to which authority rests at the top of the organization.
Unity of Direction
Equity - The provision of justice and the fair and impartial treatment of all employees.
Order - The arrangement of employees where they will be of the most value to the organization and to
provide career opportunities.
Initiative - The fostering of creativity and innovation by encouraging employees to act on their own.
Discipline
 Obedient, applied, respectful employees are necessary for the organization to function.
Remuneration of Personnel
 An equitable uniform payment system that motivates contributes to organizational success.
Stability of Tenure of Personnel
 Long-term employment is important for the development of skills that improve the
organization‘s performance.
Subordination of Individual Interest to the Common Interest
 The interest of the organization takes precedence over that of the individual employee.
Esprit de corps
 Comradeship, shared enthusiasm foster devotion to the common cause (organization).
III. Behavioral Management Theory

Behavioral Management is the study of how managers should personally behave to motivate employees
and encourage them to perform at high levels and be committed to the achievement of organizational
goals.
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Mary Parker Follett
Concerned that Taylor ignored the human side of the organization
Suggested workers help in analyzing their jobs
If workers have relevant knowledge of the task, then they should control the task
The Hawthorne Studies
Studies of how characteristics of the work setting affected worker fatigue and performance at the
Hawthorne Works of the Western Electric Company from 1924-1932.
– Worker productivity was measured at various levels of light illumination.
Researchers found that regardless of whether the light levels were raised or lowered, worker
productivity increased
Human Relations Implications
– Hawthorne effect — workers‘ attitudes toward their managers affect the level of workers‘
performance
• Human relations movement – advocates that supervisors be behaviorally trained to manage subordinates
in ways that elicit their cooperation and increase their productivity
Implications
• Behavior of managers and workers in the work setting is as important in explaining the level of
performance as the technical aspects of the task
• Demonstrated the importance of understanding how the feelings, thoughts, and behavior of work-group
members and managers affect performance
IV. Management Science Theory
A sing Contemporary approach to management that focuses on the use of rigorous quantitative
techniques to help managers make maximum use of
organizational resources to produce goods and services.
– Quantitative management — utilizes linear and nonlinear programming, modeling, simulation,

queuing theory and chaos theory.
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– Operations management —techniques used to analyze any aspect of the organization‘s
production system.
– Total Quality Management (TQM) —focuses on analyzing input, conversion, and output
activities to increase product quality.
– Management Information Systems (MIS) — provides information vital for effective decision
making.
V. Organizational Environment Theory
Organizational Environment –The set of forces and conditions that operate beyond an organization‘s
boundaries but affect a manager‘s ability to acquire and utilize resources
Contingency Theory
―There is no one best way to organize‖

The idea that the organizational structures and control systems manager choose depend on—are
contingent on—characteristics of the external environment in which the organization operates
Type of Structure
Mechanistic Structure
– Authority is centralized at the top.
– Emphasis is on strict discipline and order
– Employees are closely monitored and managed.
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– Can be very efficient in a stable environment.
Organic Structure
– Authority is decentralized throughout the organization.
– Departments are encouraged to take a cross-departmental or functional perspective
– Works best when environment is unstable and rapidly changing
2.2. Basic Management Functions
I. Planning
II. Organizing
III. Staffing
IV. Communicating
V. Directing
VI. Controlling
I. Planning
Planning is the function that decides what needs to be done in order to achieve organization‘s goals and
objectives.
It involves the predetermining of the course of action to be taken in relation to the known event.
It focuses on broader perspective of business and also the tactical methods to get the desired result.
It includes anticipation of the possibilities of future problems that might appear.
Planning process
(I). Setting primary and intermediate goals
Principal goals are set by top management
Intermediate goal which help to clarify the primary goals are set by middle mgmt.
(II). Search for opportunities
Data collection activity where by the environment opportunities of business is examined
It includes forecasting events and identifying changes in demand, competition, technology, finance
etc.
(III). Formulation of plans
Translation or covert ion of the opportunity discovered in to strategies and policies directed towards
the primary and intermediate goals.
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The formulation of plans is carried out by plan/program developers or assistants to the manager.
(IV). Target setting
Translation of the broader plan in to specified detail quantities and times for workers.
(V). Follow up of plans
Continuous checking of the operating plan to make sure that deviations are minimum if existed to
correct them up.
Types of plans
I. Based on period
a. Short term plans
b. Medium term plans
c. Long term plans
II. Based on importance
a. Operational plans
b. Tactical plans
c. Strategic plans
II. Organizing
The structure and process by which a group allocates its tasks among its members, identifies r/n ships
and integrates its activities towards common objectives.
It includes forming the structure, arranging dpts. Assigning tasks to workers and coordinating their
effort.
A manager has to view the organization as a social arrangement b/c the organization is composed of
people rather than physical objects
Principle of organization
i. Unity of command
ii. Exception principle
iii. Span of control
iv. Scalar principle
v. Departmentalization
vi. Decentralization
III. Staffing
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Includes the process of placing the right person in the right organizational position
It is the process of matching the workers and the jobs
The personnel dpt. Is responsible to administer the staffing function that generally includes recruitment,
placement, training and development to meet the needs of the organization.
After hiring staffing function shifts to administration human asset to the development of compensation
system
Man power planning, forecasting future needs of orgn. Conflict resolution are some of the
responsibilities of staffing function
IV. Communicating
Communication/coordination serves as a linkage by which the other functions are tied together.
Communication is a means by which the tasks of an organization are dispatched among workers and
inter and intra departmental coordination‘s are favored to accomplish the tasks.
There are three types of communication flows in orgns.
– Down ward communication
– Horizontal type
– Informal
V. Directing/Leading
Different terms for directing; leading, executing, supervising, ordering and guiding.
The idea of directing is to put in to effect the decisions and plans that have been worked out.
Directing includes,
– Issuing of orders that are clear, complete and within the capabilities of workers
– Programming a continual tracking activity in w/c subordinates are given instructions
– Motivating the workers to discharge their duty up to the expectation of the mgr.
– Maintaining discipline and rewarding those who perform properly
Leadership styles
1. Dictatorial leader
Maintains highly critical and negative attitude in his rln with subordinates.
Advocates the accomplishment of tasks through fear of penalties.
2. Benevolent-autocratic Leader
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Assumes a paternalistic role w/c forces the workers to relay on him for satisfaction.
This type of leader must exceptionally be strong and wise individual so that his personality
generates respect allegiance.
3. Democratic Leader
Suggests better methods and tries to improve the workers attitude.
Depends not only in his capabilities but encourage consultation with subordinates in planning,
decision making and organizing
With this type of leader ship satisfaction is gained through a feeling of group accomplishment.
4. Laissez-fair
Leader assumes the role of just another member of the group and depends completely on
subordinates to establish their own goals and make their own decision.
VI. Controlling
It is the process that measures current activity and guides it towards some predetermined goals.
Controlling is effected by checking the status of activities against desired result, measuring
deviations and taking corrective actions.
The basic principle of control

i. Strategic point control
ii. Feed back
iii. Flexible control
iv. Organizational stability
v. Self-control
vi. Direct control
vii. Human factor
2.3. Managerial decision making

Decision (defined):- an act involving mental process at a conscious level in choosing a course of action
from available alternatives for the purpose of attaining a desired result.
Managers are responsible for making decisions rather than performing the actions themselves.
Decision making is the one that is truly distinctive characters tics of managers.
Decision, decision maker and decision making process are the profiles of decision.
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Scope of decision
Individual decision making
Group decision making
Organizational decision making
Meta organizational decision making
Decision categories
i. Routine, recurring, certainty with regard to the out come
ii. Non-routine, non-recurring, uncertainty with regard to the outcome.
Decision making strategies
i. Computational
ii. Judgmental
iii. Compromise
iv. Inspirational
Concept of decision making

strategies
Knowledge regarding the Preference for the out come
out come
Strong preference Weak preference
High level of knowledge Computational decision Compromise decision making

making strategy strategy
Low level of knowledge Judgmental decision making Inspirational decision making
strategy strategy
Top management makes category ii decision

Operating mgmt. makes category I decision
Middle mgmt. supervise the making of category I decision and support the making of category ii
decision
Characteristics of managerial decisions
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Long range organizational objectives.
Decision involves organizational change.
Decision requires commitment of resources
Choice is a means to an end not an end to itself.
Setting managerial objectives
Objectives constitute the foundation for rational decision making.

Objectives are the ends for the means of management decision making.
Attainment of the objective is the ultimate measure of decision success.
Searching for alternatives

Create as many alternatives as possible in the constraint of time and money.
Make a conscious effort neither to be bogged down in details too soon nor to be limited to single
variations of the existing condition
Do not be satisfied or reject ideas at early stage.
Comparing and evaluating alternatives

Alternative result from search.
There are usually 3-5 alternatives.
One alternative is to do nothing.
Alternatives are evaluated using criteria derived from the objective.
Evaluation should include an anticipation of the likely outcome for each alternative.
Evaluation should also anticipate obstacles at the time of implementation.
Act of choice
The choice is the commutation of the process.

The best choice is likely to result from the right approach.
The choice should be the alternative most likely to result in the attainment of the objective.
Implementing decision
Decision success is a function of decision quality and implementation.

In decision implementation the implementers should act accordingly for the success of the decision.
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Follow up of the decision

Follow up and control is essential to ensure that an implemented decision meets its objectives.
Performance is measured by observing the implemented decision in r/n to std. derived from the
objective.
Unacceptable variance should elicit timely and appropriate corrective action.
Corrective actions may result in implementation of another alternative
If implementation of another alternative fails it may result in the revision of the original objective.
1.3. Operation Management

It is that activity where by resource lowing with in a defined system are combined and transformed in a
controlled manner to add value in accordance with organizational objectives.
The definition of operation management contains the key concepts of Resource, Systems, Transformation and
Value adding activities:
Resources: are human, materials and capital inputs. Human beings (both physical and intellectual) are
the key assets. Material input includes plant, equipment inventories and supplies such as energy. Capital
inputs in the form of equity, debt, taxes and contributions are store of values which regulate the flow of
other resources.
Systems: are arrangements of components designed to achieve objectives according to plans. Our social
and economic environment contains many levels of systems and sub systems which are in turn
components of larger systems. A system approach emphasizes the integrative nature of activities and
stresses the relationship and cooperation that should exist within the total system. For example a factory
is a system but it is also part of the industrial system which in turn is part of the overall economic
system.
Transformation and value adding activities: combine and transform the resources using some form of
technology (mechanical, chemical, medical, electronic etc.). This transformation creates new goods and
services that have a higher value to consumers than the acquisition and processing costs of the inputs
have to the organization
1.4. Functions of an Industrial Enterprise

The main functions of an industrial enterprise may be grouped in to the following four groups:
I. Manufacturing functions
This group includes the function directly related to the manufacturing or movement of the product:
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1) Receiving: has the responsibility for accepting raw material from the carrier, presenting for inspection
and getting it to the plant.
2) Warehousing: ha the responsibility for storing raw material until needed for production, and storing
finished goods until ready to be shipped to the customers.
3) Transportation: has the responsibility for moving all types of materials with in the plant area from the
supplier.
4) Production: has the responsibility for transforming the raw material in to an acceptable and economical
finished product.
5) Shipping: has the responsibility for packing and delivering the finished goods to customers.
II. Engineering functions
This group includes those functions concerned with the engineering aspects of a manufacturing operation:
1) Product design: has the responsibility for development of new and salable products and preparation of
product description, product drawings and product specifications.
2) Process design: has the responsibility for the development of efficient process for the manufacture of
the products developed by the product design unit.
3) Plant engineering: has the responsibility for the design and installation of new facilities and ensuring
that proper working conditions are maintained.
4) Cost estimation: has the responsibility for determining cost involved on product manufacture. This
includes design and development cost of the product prior to manufacture.
III.Control functions
This group includes those functions concerned with the controlling of production, cost and quality:
1) Production control: has the responsibility for establishing forecasts, production plans, inventory levels
and product distribution.
2) Quality control: has the responsibility for establishing and maintaining the necessary control of quality
for raw materials, intermediate products and finished goods. It is also responsible for the inspection of
raw materials and finished products for conformity to quality specifications.
3) Cost control: has the responsibility for determining and reporting the design cost, the manufacturing
cost and comparing these costs with the amounts allocated in the budgets.
IV. Supporting functions
This group includes those functions which support the activities of the above mentioned functions. The
following are the supporting functions.
1) Purchasing: has the responsibility of buying the necessary materials of the proper quality and quantity
at the most favorable price and securing deliveries on time according to schedules established.
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2) Sales: has the responsibility for selling the company‘s product and for liaison after material has been
delivered.
3) Maintenance: has the responsibility for the execution of preventive maintenance, repair of old
equipment, installation of new equipment and provision of facilities.
4) Personnel: has the responsibility for hiring, administering and training workers and for the termination
of employments.
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CHAPTER-2
PLANT DESIGN
2.1. PLANT (FACILITY) LAYOUT DECISIONS
Plant (Facility) layout decision entails determining the placement of departments, workstations, machines, and
stockholding points within a productive facility. Its general objective is to arrange these elements in a way that
ensures a smooth workflow (in a factory) or a particular traffic pattern (in a service organization). The inputs to
the layout decision are:
1. Specification of objectives of the system in output and flexibility.

2. Estimation of product or service demand on the system.
3. Processing requirements in number if operations and amount of flow between departments and work
centers.
4. Space availability within the facility itself.
All these inputs are, in fact, outputs of process selection and capacity planning. How layouts are developed
under various formats (or workflow) structures. Our emphasis is on quantitative techniques used in locating
departments within a facility and on workstation arrangements and balance in the important area of assembly
lines.
2.1.1. STRATEGIC IMPORTANCE OF LAYOUT DECISIONS
Layout is one of the decisions that determine the long-run efficiency of operations. Layout has numerous
strategic implications because it establishes a firm competitive priority in regard to capacity, processes,
flexibility, and cost, as well as quality work life. An effective layout can help a firm to achieve the following:
1. Higher utilization of space, equipment, and people.

2. Improve flow of information, materials, or people.
3. More convenience to the customer.
4. Improved employee morale and safer working conditions.
The objective of layout strategy is to develop economic layout that will assist in these four areas while still
meeting the firm‘s competitive requirements.
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2.2. TYPES OF LAYOUT
Layout decisions include the best placement of machines (in a production setting), offices and desks (in an
office setting), or service centers (in settings such as hospitals or department stores). An effective layout
facilitates the flow of materials, people, and information, within and between areas. Management‘s goal is to
arrange (layout) the system so that it operates at peak effectiveness and efficiency. To achieve these layout
objectives, a variety of approaches have been developed. Among them are the following:
1. Fixed-position layout-addresses the layout requirements of large, bulky projects such as ships and
buildings.
2. Process-Oriented layout deals with low-volume, high-variety production (also called ―job shop‖ or
intermittent production).
3. Office layout- positions workers, their equipment, and spaces/offices to provide for movement of
information.
4. Retail/service layout-allocates shelf space and responds to customer behavior.
5. Warehouse layout – addresses trade-offs between space and material handling.
6. Product-oriented layout – seeks the best personnel and machine utilization in repetitive or continuous
production.
Of these six layout strategies, only a few have undergone extensive mathematical analysis. The layout and
design of physical facilities is still as much an art as it is a science. Here we will consider some of the art as well
as some of the science for effective and efficient layouts.
2.2.1. FIXED-POSITION LAYOUT
A fixed-position layout is one in which the project remains stationary and require workers and equipment to
come to one work area. Examples of this of project are a ship, a highway, a bridge, a house, and a burning oil
well.
The techniques for addressing the fixed-position layout are not well-developed. Construction sites and
shipbuilding sites address this issue on an ad hoc basis. The construction industry usually has a ―meeting of the
trades‖ to assign space for various time periods. As you would suspect, this often yields less than an optimum
solution, as the discussion may be more political than analytical. Shipyards on the other hand, have loading
areas called ―platens‖ adjacent to the ship, which are loaded by a scheduling department.
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The fixed-position layout is complicated by three factors:
1. Space is limited at virtually all sites

2. At different stages in the construction process different materials are needed therefore, different items
become critical as the project develops. This adds the dynamics of scheduling to the layout problem.
3. The volume of materials needed is dynamic. For example, the rate of use of steel panels for the hull of a
ship changes as the project progresses.
Because the fixed-position layout is so difficult to solve well at the site, an alternative strategy is to complete as
much of the project as possible off site. This approach is used in the shipbuilding industry when standard units,
say pipe holding brackets, are assembled in a nearby line process (a product-oriented facility
2.2.2. PROCESS-ORIENTED LAYOUT
The process-oriented layout can simultaneously handle a wide variety of products or services. In fact, it is most
efficient when making products that have different requirements or when handling customers who have
different needs.
A big advantage of process-oriented layout is its flexibility in equipment and labor assignments. The
breakdown of one machine, for example, need not halt an entire process; work can be transferred to other
machines in the department. Process-oriented layout is also especially good for handling the manufacture of
parts in small batches, or job lots, and for the production of a wide variety of parts in different sizes or forms.
The disadvantages of process-oriented layout come from the general-purposes of the equipment. Orders take
more time and money to move through the system because of difficult scheduling setups, and material handling.
In addition labor skill requirements and work-in-process inventories are higher because of larger imbalances in
the production process. High labor skill needs increase the required level of training and experience; high work-
in-process increases capital investment.
CELLULAR LAYOUT
A special case of process-oriented layout is the work cell, a work cell takes machines that would ordinarily be
dispersed in various process departments and arranges them is a small group so that the advantages of product-
oriented systems can be brought to bear on a particular batch or family of batches. The work cell is built around
the product.
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Designing Process Layout
Process layout involves three basic steps, whether the design is for a new layout or for revising an existing
one:
Step-1 Gather Information
Step-2 Develop a Block Plan, and
Step-3 Design a Detailed Layout
Step-1: Gather Information
Step-2: Develop a Block Plan
The second step in layout design is to develop a block plan that best satisfies performance criteria and area
requirements. The most elementary way to do so is by trial and error. Because success depends on the
designer‘s ability to spot patterns in the data, this approach doesn‘t guarantee the selection of the best or
even a nearly best solution. When supplemented by the use of a computer to evaluate solutions, however,
such an approach often compares quite favorably with more sophisticated computerized techniques.
Step-3: Design a Detailed Layout
After finding a satisfactory block plan, the layout designer translates it in to a detailed representation, showing
the exact size and shape of each center, the arrangement of elements(e.g., desks, machines, and storage areas),
and the location of the aisles, stairways, and other service space. These visual representations can be two
dimensional drawings, three-dimensional models, or computer aided graphics. This step helps decision makers
discuss the proposal and problems that might otherwise be overlooked.
1.2.3. OFFICE LAYOUT

The criteria for a rational approach to office layouts in terms of workflow are the same as those for
manufacturing tangible goods. That is, we can organize around either processes or products. In most
organizations, however, there is some middle ground where, for example, the accounts receivable department
handles receivables the order department handles incoming orders, and the accounts payable department
handles results or purchases and other bills. This middle ground can be thought of as cellular organizations
arranged and rearranged as work procedures and volumes change. The frequent rearrangement of offices is
witness to the flexibility of this cellular relationship.
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As a final comment on the layout of offices, we should note two major trends, First, technology, such as cellular
phones, beepers, faxes, the internet, home offices layout laptop computers, and personal digital assistants,
allows ever increasing flexibility when information can be moved electronically. Second, virtual companies
create dynamic needs for space and services. These two changes require fewer office employees on sit.
1.2.4. RETAIL STORE LAYOUT

Retail store layouts are based on the idea that sales vary directly with customer exposure to products. Thus,
most retail store operations managers try to export customers to as many products as possible. Studies do show
that the greater the rate of exposure the greater the sales and the higher the return on investment. The operations
manager can later both with the overall arrangement of the store and the allocation of space within that
arrangement to various products.
Five ideas are helpful for determining the overall arrangement of many stores.
1. Locate the high-draw items around the periphery of the store. Thus we tend to find dairy products on one
side of a supermarket and bread and bakery products on another.
2. Use prominent locations for high-impulse and high-margin items such a house wares, beauty aids, and
shampoos.
3. Distribute what are known in the trade as ―power items‖ – items that may dominate a purchasing trip-to both
sides of an aisle, and disperse them to increase the viewing of other items.
4. Use end aisle locations because they have a very high exposure rate.
5. Convey the image of the store by careful selection in the positioning of the lead-off department; some stores
will position the bakery and deli up front to appeal to convenience-oriented customers who want prepared
foods.
Once the overall layout of a retail store has been decided, the products need to be and angel for sale. Many
considerations go into this arrangement. However the main objective of retail layout is to maximize profitability
per square foot of sheet space.
1.2.5. WAREHOUSING AND STORAGE LAYOUT

The objective of warehouse layout is to find the optimum trade-off between handling cost and warehouse space.
Consequently, management‘s task is to maximize the utilization of the total ―cube‖ of the warehouse-that is,
utilize its full volume while maintaining low material-handling costs. We define material handling cost as all
the costs related to the incoming transport, storage, and outgoing transport of the material. These costs include
equipment, people, material, supervision, insurance, and spoilage of material within the warehouse.
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Management minimizes the sum of the resources spent on finding and moving material plus the deterioration
and damage to the material itself. The variety of items stored and the number of items ―picked‖ has direct
bearing on the optimum layout. A warehouse storing a few items lends itself ―picked‖ has direct bearing on the
optimum layout. A warehouse storing a few items lends itself to higher density more than a warehouse storing a
variety of items. Modern warehouse management is, in many in stances, an automated procedure utilizing
automatic stacking crane, conveyors, and sophisticated controls that manage the flow of materials.
As important component of warehouse layout is the relationship between the receiving/unloading area
and the shipping/loading area. The facility design depends on the type of supplies unloaded, what they are
unloaded from (trucks, rail cars, barges, and so on), and where they are unloaded. In some companies the
receiving and shipping facilities, or docks, as they are called, are even the same area-sometimes they are
receiving docks in the morning and shipping docks in the afternoon. Figure 2.3 illustrates the simplest type of
warehouse layout. The A-1 Distributio system warehouse receives items at the dock and moves them to a
storage area. Later, stockpickers withdraw inventory to fill individual customer orders. For example, Table 2.5
shows that 280 trip per week are made between the dock and the storage area for toasters.
Storage area
Dock Aisle
Storage area
FIGURE 2.3 Layout for A-1 Distribution Systems warehouse
TABLE 2.5
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A Layout Solution
We could find a layout solution by the method used in Examples 2.1 and 2.2. However, because all travel takes
place between dock and individual departments and there is no travel between departments, we can use an even
simpler method, which is guaranteed to minimize the ld score. The decision rule is as follows:
1. Equal area. If all departments require the same space, simply place the one generating the most trips
closer to the dock, the one generating the next-largest number of trips next closest number of trips next
closest to the dock, and so on.
2. Unequal area. If some departments need more space than others, give the location closest to the dock to
the department with the largest ratio of trip frequency to block space. The department with the second-
highest ratio gets the next-closest location, and so on.
EXAMPLE 2.3 Determining a Warehouse Layout
Determine a new layout for the A-1 distribution systems warehouse that minimizes the ld score (Table 2.5).
Solution
Because the departments have different area requirement, we must first obtain the ratio of trip to block space.
TABLE 2.6
Department 3 (microwaves) has the highest ratio and, therefore, ranks fist. Although 360 trips per week are
involved, the department occupies only one block of space. Ranking the remaining departments by their ratio,
we get 1, 5, 6, 4, 2, and 7. Figure 2.4 shows the layout derived from this ranking. Department 3 and first choice
and could have been placed in either of the two locations nearest the dock. We chose the north one and assign
the south one to department 1.
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Storage area
3 5 5 6 4 2 7
Dock Aisle
1 5 5 4 4 2 7
Storage area
FIGURE 2.4 Best block plan for A-1 Distribution systems Warehouse
Decision Point Management implemented this layout, although it is changed from time to time because demand
is seasonal. Thus radios are placed closer to the dock for Christmas, and air conditioning moved near the dock
during the summer.
2.2.6. PRODUCT-ORIENTED LAYOUT

Product-oriented layouts are organized around a product or a family of similar high volume, low-variety
products. The assumptions are:
1. Volume is adequate for high equipment utilization.

2. Product demand is stable enough to justify high investment in specialized equipment.
3. Product is standardized or approaching a phase of its life cycle that justifies investment in specialized
equipment.
4. Supplies of raw material and components are adequate and of uniform quality (adequately standardized) to
ensure they will work with the specialized equipment.
One version of a product-oriented layout is a fabrication line; another is an assembly line. The fabrication
line builds components, such as automobile tires or metal parts for a refrigerator, on a series of machines. An
assembly line puts the fabricated parts together at a series of workstations. That is, the work performed on one
machine must balance with the work performed on the next machine in the fabrication line, just as the work
done at one workstation by an employee on an assembly line must balance with the work done at the next
workstation by the next employee.
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Fabrication lines tend to be machine paced and require mechanical and engineering changes to facilitate
balancing. Assembly lines, on the other hand, tend to be paced by work tasks assigned to individuals or to
workstations. Assembly lines therefore, can be balanced by moving tasks from one individual to another. In this
manner, the amount of time required by each individual or station is equalized.
The central problem in product-oriented layout planning is to balance the output at each workstation on
the production line so that it is nearly the same, while obtaining the desired amount of output. Management‘s
goal is to create a smooth continuous flow along the assembly line with a minimum of idle time at each person‘s
workstation. A well- balanced assembly line has the advantage of high personnel and facility utilization and
equity between employee‘s workloads. Some union contracts include a requirement that workloads must be
nearly equal among those on the same assembly line. The term most often used to describe this process is
assembly line balancing. Indeed the objective of the product-oriented layout is to minimize imbalance in the
fabrication or assembly line.
The main advantage of product-oriented layout is the low variable cost per unit usually associated with high-
volume, standardized products. The product-oriented layout also keeps material handling costs low, reduces
work-in-process inventories, and makes training and supervision, easier. These advantages often outweigh the
disadvantages of product layout, namely:
1. High volume is required because of the large investment needed to set up the process.
2. Work stoppage at any one point ties up the whole operation.
3. Little flexibility exists when manufacturing a variety of products or production rates.
2.3. ASSEMBLY LINE BALANCING

Line-balancing is usually undertaken to minimize imbalance between machines or personnel while meeting a
required output from the line. In order to produce at a specified rate, management must know the tools,
equipment, and work methods used. Then the time requirements for each assembly task (such as drilling a hole,
tightening a nut, or spray-painting a part) must be determined. Management also needs to know the precedence
relationship among the activities, that is, the sequence in which various tasks need to be performed.
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2.3.1. Steps in assembly line balancing:
The steps in balancing an assembly line are straightforward:
1. Specify the sequential relationships among tasks using a precedence diagram. The diagram consists of
circles and arrows. Circles represent individual tasks; arrows indicate the order of task performance.
2. Determine the required cycle time (C), using the following formula:
Production time per day

C=
Output per day (in units)
3. Determine the theoretical minimum number of workstations (Nt) required to satisfy
the cycle time constraint, using the following formula:
Sum of task times (T)

Nt 
Cycle time (C)
4. Select a primary rule by which tasks are to be assigned to workstations, and a secondary rule to break ties.
5. Assign tasks, one at a time, to the first workstation until the sum of the task times is equal to the cycle time,
or no other tasks are feasible because of time or sequence restrictions. Repeat the process for workstation 2,
Workstation 3, etc., until all tasks are assigned.
6. Evaluate the efficiency of the balance derived using the formula:
Sum of task times (T)

Efficiency =
Actual number of workstations (N a ) x Cycle time (C)
7. Evaluate solution.
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EXAMPLE 2.4 Assembly Line Balancing
A certain Model Wagon is to be assembled on a conveyor belt. Five hundred wagons are required per day.
Production time per day is 420 minutes, and the assembly steps and times for the wagon are given in
workstations, subject to cycle time and precedence constraints.
TABLE 2.7 Assembly Steps and Times for the wagon
Task Performance Description Tasks that

Time(in seconds) Must Precede
A 45 Position rear axle support and hand fasten four -

Screws to nuts
Insert rear axle

B 11 A
Tighten rear axle support screws to nuts
C 9 B
Position front axle assembly and hand fasten with
D 50 -
Four screws to nuts
Tighten front axle assembly screws

E 15 D
Position rear wheel #1 and fasten hub cap
F 12 C
Position rear wheel #2 and fasten hub cap
G 12 C
Position front wheel #1 and fasten hub cap
H 12 E
Position front wheel #2 and fasten hub cap
I 12 E
Position wagon handle shaft on front axle
J 8 assembly and hand fasten bolt and nut
Tighten bolt and nut F,G,H,I
K 9
195 J
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Solution:
1. Draw a precedence diagram. Figure 2.5 illustrates the sequential relationships identified in Table 2.7.
(The length of the arrows has no meaning)
2. Cycle time determination. Here we have to convert to seconds since our task times are in seconds.
Production time per day 60 sec. x 420 min 25,000
C = = = 50.4
Output per day 500 wagons 500
3. Theoretical minimum number of workstations required (the actual number may be greater):
T 195 sec onds
Nt    3.86
C 50.4 sec onds
12
45 11 9 F
B C
12
8 9
G
J K
12
50
15 H
D E
12
FIGURE 2.5 Precedence Diagram for the assembly of the Wagon
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4. Select assignment rules. Research has demonstrated that some rules are better than others for certain
problem structures. In general, the strategy is to use a rule assigning tasks that either have many
followers or are of long duration since they effectively limit the balance achievable. In this case, we use
as our primary rule:
a. Assign tasks in order of the largest number of following tasks. Out secondary rule, to be invoked
where ties exist from our primary rule, is
b. Assign tasks in order of longest operating time.
TABLE 2.8
Task Number of
following tasks
A 6
B or D 5
C or E 4
F, G, H, or I 2
J 1
K 0
5. Make task assignments to form Workstation 1, Workstation 2, and so forth, until all tasks are assigned.
The actual assignment is given in Table 2.9.
6. Do the efficiency calculation.
7. Evaluate solution. An Efficiency of 77 Percent indicates an imbalance or idle time of 23 percent (1.0 -
0.77) across the entire line. From Table 2.9 we can see that there are 57 total seconds of idle time, and
the ―choice‖ job is at Workstation 5.
Is a better balance possible? In this case, yes. Try balancing the line with rule b and breaking ties with rule a.
(This will give you a feasible four-station balance.)
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TABLE 2.9 Balance made according to largest number of following tasks rule
Task Task Time Remaining Feasible Task with Task with

Sections (in Unassigned Remaining most Longest
seconds) Time (in Tasks Followers operation
seconds) Time
Section 1 A 45 5.4idle None
Section 2 D 50 0.4idle None
B 11 39.4 C, E C, E E
Section 3 E 15 24.4 C, H, I C H,I
C 9 15.4 F, G, H, I F, G, H, F, G, H, I
F* 12 3.4 idle None
G 12 38.4 H, I H, I H, I
Section 4 H* 12 26.4 I
I 12 14.4 J
J 8 6.4 idle None
Section 5 K 9 41.4 idle None
*Denotes task arbitrarily selected where there is a tie between longest operation times.
T 195
Efficiency =   .77 or 77%
NC (5)(50.4)
2.3.2. SPLITTING TASKS
Oftentimes the longest required task time forms the shorts cycle time for the production line. This task time is
the lower time bound, unless it is possible to split the task into two or more workstations.
Consider the following illustration: Supposing that an assembly line contains the following task times in
seconds: 40, 30, 15, 25, 18, and 15. The line runs for 7 1 hours per day and demand for output is 750 per day.
2
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The cycle time required to produce 750 per day is 36 seconds ([7 ½ hours x 60 minutes x 60 seconds] / [750].
How do we deal with the task that is 40 seconds long?
There are several ways that we may be able to accommodate the 40-second task in a 36-second cycle.
Possibilities are:
1. Split the task. Can we split the task so that complete unit is processed in two workstations?
2. Share the task. Can the task somehow be shared so an adjacent work-station does part of the work? This
differs from the split task in the first option because the adjacent station acts to assist, not to do some
units containing the entire task.
3. Use a more skilled worker. Since this task exceeds the cycle time by just 11 percent, a faster worker
may be able to meet the 36-second time.
4. Work overtime. Predicating at a rate of one every 40 seconds would produce 675 per day, 75 short of the
needed 750. The amount of overtime required to do the additional 75 is 50 minutes (75 x 40 seconds/ 60
seconds).
5. Redesign. It may be possible to redesign the product to reduce the task time slightly.
Other possibilities to reduce the task time include equipment upgrading a roaming helper to support the line, a
change of materials, and multi skilled workers to operate the line as a team rather than as independent workers.
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ASSIGNMENT
1. An assembly line is to operate 8 hours per day with a desired output of 240 units per day. The following table
contains information on this product‘s task, task time, and precedence relationship.
Task Task Time (Seconds) Immediate predecessor
A 60 -
B 80 A
C 20 A
D 50 A
E 90 B, C
F 30 C, D
G 30 E, F
H 60 G
A. Draw the precedence diagram

B. Determine the cycle time.
C. Balance the line using the longest task time.
D. What is the efficiency of your line balance?
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CHAPTER-3
FORECASTING
3.1. INTRODCUTION
Forecasting is the art and science of predicting future events. While managerial judgment is still required for
forecasting, managers today are aided by sophisticated mathematical tools and methods. Forecasting has indeed
come a long way from the black art of fortune- telling by use of the stars, tea leaves, or crystal balls. Forecasting
methods must be carefully selected for the particular use it is intended to serve. There is no universal
forecasting method for all situations.
Forecasts are vital to every business organization and for every significant management decision. Forecasting is
the basis of corporate long-run planning. In the functional areas of finance and accounting, forecasts provide the
basis for budgetary planning and cost control. Marketing relies on sales forecasting to plan new products,
compensate sales personnel, and make other key decisions. Production and operations personnel use forecasts to
make periodic decisions involving process selection, capacity planning, and facility layout, as well as for
continual decisions about production planning, scheduling, and inventory.
Bear in mind that a perfect forecast is usually impossible. Forecasts will always be wrong. It is rare for sales to
equal the exact amount of forecast. A little variations from the forecast can often be absorbed by extra capacity,
inventory, or rescheduling of orders. Forecasting has strong impact on operations and, indeed, all functions in
the business.
Too many factors in the business environment cannot be predicted with certainty. Therefore, rather than search
for the perfect forecast, it is far more important to establish the practice of continual review of forecasts and to
learn to live with inaccurate forecasts. This is not to say that we should not try to improve the forecasting
method available, within reason.
When forecasting, a good strategy is to use two or three methods and look at them for the commonsense view.
Are there expected changes in industrial and private consumer behaviors? Will there be a shortage of essential
complementary items? Continual review and updating in light of new data are basic to successful forecasting. In
this chapter we look at qualitative and quantitative forecasting and concentrate primarily on several quantitative
time series techniques.
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3.2. A Forecasting Framework
Although there are many types of forecasting, this chapter will focus on the forecasting of demand for output
from the operations function. Demand and sales, however, are not always the same thing. Whenever the demand
is not constrained by capacity other management policies, the forecasting of demand will be the same as the
forecasting of sales. Otherwise, sales may be somewhat below real customer demand.
We should also clarify at the outset the difference between forecasting and planning. Forecasting deals
with what we think will happen in the future. Planning deals with what we think should happen in the
future. Thus, through planning, we consciously attempt to alter future events, while we use forecasting only to
predict them. Good planning utilizes forecast as an input. If the forecast is not acceptable, a plan can sometime
be devised to change the course of events.
Forecasting is one input to all types of business planning and control both inside and outside the operations
function. Marketing uses forecasts for planning products, promotion, and pricing. Finance uses forecasting as
an input to financial planning. Forecasting is also an input for operations decisions on process design, capacity
planning, and inventory.
In general terms, forecasting methods can either be qualitative or quantitative. Qualitative forecasting methods
rely on managerial judgment; they do not use specific models. Thus, different individuals can use same
qualitative methods and arrive at widely different forecasts. Qualitative methods are useful however, when
there is a lack of data or when past data are not reliable predictors of the future. In this case, the human decision
maker can utilize the best available data and a qualitative approach to arrive at a forecast. Quantitative methods
utilize an underlying model to arrive at a forecast. The basic assumption for all quantitative forecasting method
is that past data and data patterns are reliable predictors of the future.
3.3. DEMAND MANAGEMENT
The purpose of demand management is to coordinate and control all of the sources of demand so the productive
system can be used efficiently and the product delivered on time.
Where does demand for a firm‘s product or service come from, and what can a firm do about it? There are two
basic sources of demand: dependent demand and independent demand. Dependent demand is the demand for a
product of service caused by the demand for other products or services. For example, if a firm sells 1,000
tricycles, then 1,000 front wheels and 2,000 rear wheels are needed. This type of internal demand does not need
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a forecast, simply tabulation. As to how many tricycles the firm might sell, this is called independent demand
because its demand cannot be derived directly from that of other products.
3.3.1. COMPONENTS OF DEMAND
In most cases, demand for products or services can be broken down into six components:
1. Cyclical factors are more difficult to determine because the time span may be unknown or the cause of
the cycle may not be considered. Cyclical influence on demand may come from such occurrences as
political elections, war, economic conditions, or sociological pressures.
2. Random variations are caused by chance events. Statistically, when all the known causes for demand
(average, trend, seasonal, cyclical, and auto correlative) are subtracted from total demand, what remains
is the unexplained portion of demand. If we cannot identify the cause of this remainder, it is assumed to
be purely random chance.
3. Autocorrelation denotes the persistence of occurrence. More specifically, the value expected at any
point is highly correlated with its own past values. In waiting line theory, the length of a waiting line is
highly autocorrelated. That is, if a line is relatively long at one time, then shortly after that time, we
would expect the line still to be long.
4. Trend lines are the usual starting point in developing a forecast. These trend lines are then adjusted for
seasonal effects, cyclical, and any other expected events that may influence the final forecast.
Seasonal Trend
Number of
units
demanded
Average
1 2 3 4
Year
Figure 1: Historical product Demand Pattern
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3.4. TYPES OF FORECASTING TECHNIQUES
Forecasting can be classified into two basic types:
 Qualitative and
 Quantitative
3.4.1. QUALITATIVE FORECASTING TECHNIQUES
Qualitative techniques are subjective or judgmental and are based on estimates and opinions.
Grass roots Derives a forecast by compiling input from those at the end of the hierarchy who
deal with what is being forecast. For example, an overall sales forecast may be
derived by combining inputs from each salesperson, which is closest to his or her
own territory.
Market research Sets out to collect data in a variety of ways (surveys, interviews, etc) to test
hypotheses about the market. This is typically used to forecast long-range and
new-product sales.
Panel consensus Free open exchange at meetings. The idea is that discussion by the group will
produce better forecasts than any one individual. Participants may be executives,
salespeople, or customers.
Historical analogy Ties what is being forecast to a similar item. Important in planning new products
where a forecast may be derived by using history of a similar product.
Delphi method Group of experts responds to questionnaire. A moderator compiles results and
formulates a new questionnaire which is submitted to the group. Thus, there is a
learning process for the group as it receives new information and there is no
influence of group pressure or dominating individual.
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3.4.2. QUANTITATIVE FORECASTING TECHNIQUES
1. Time Series Analysis Based on the idea that the history of occurrences over time can be used to
predict the future.
Simple moving average A time period containing a number of data points is averaged by dividing the sum
of the point values by the number of points. Each, therefore, has equal influence.
Weighted moving average Specific points may be weighted more or less than the others, as seen fit
by experience.
Exponential smoothing Recent data points are weighted more with weighting declining exponentially as
data become older.
Regression analysis Fits a straight line to past data generally relating the data value to time. Most
common fitting technique is least squares.
Box Jenkins technique Very complicated but apparently the most accurate statistical technique available.
Relates a class of statistical models to data and fits the model to the time series by
using Bayesian posterior distributions.
Shiskin time series Developed by Julius Shiskin. An effective method to decompose a time series
into seasonals, trends, and irregular. It needs at least three years of history. Very
good in identifying turning points, for example, in company sales.
Trend projections Fits a mathematical trend line to the data points and projects it into the future.
2. Causal Tries to understand the system underlying and surrounding the item being
forecast. For example, sales may be affected by advertising, quality, and
competitors.
Regression analysis Similar to least square method in time series but may contain multiple variables.
Basis is that forecast is caused by the occurrence of other events.
Econometric models Attempts to describe some sector of the economy by a series of interdependent
equations.
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Input/output models Focuses on sales of each industry to other firms and governments. Indicates the
changes in sales that a producer industry might expect because of purchasing
changes by another industry.
Leading indicators Statistics that move in the same direction as the series being forecast but move
before the series, such as an increase in the price of gasoline indicating a future
drop in the sale of large cars.
3. Simulation models Dynamic models, usually computer-based, that allow the forecaster to make
assumptions about the internal variables and external environment in the model.
Depending on the variables in the model, the forecaster may ask such questions
as: What would happen to my forecast if price increased by 10 percent? What
effect would a mild national recession have on my forecast?
1. TIME SERIES ANALYSIS
Time series analysis, which is the primary focus of this chapter, is based on the idea that data relating to past
demand can be used to predict future demand. Past data may include several components, such as trend,
seasonal, or cyclical influences, and is described in the following section.
Time series forecasting models try to predict the future based on past data. For example, sales figures collected
for each of the past six weeks can be used to forecast sales for the seventh week. Quarterly sales figures
collected for the past several years can be used to forecast future quarters. Even though both examples contain
sales, different forecasting time series models would likely be used for forecasting.
While recognizing that terms such as short, medium, and long are relative to the context in which they are used,
in business forecasting short-term usually refers to under three months; medium-term, three months to two
years, and long-term, greater than two years. In general, the short-term models compensate for random variation
And adjust for short-term changes (such as consumers‘ responses to a new product). Medium-term forecasts are
useful for seasonal effects, and long-term models detect general trends and are especially useful in identifying
major turning points.
Which forecasting model a firm should choose depends on
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1. Time horizon to forecast.

2. Data availability.
3. Accuracy required.
4. Size of forecasting budget.
5. Availability of qualified personnel.
In selecting a forecasting model, there are other issues such as the firm‘s degree of flexibility. (The greater the
ability to react quickly to changes, the less accurate the forecast needs to be.) Another item is the consequence
of a bad forecast. If a large capital investment decision is to be based on a forecast, it should be a good forecast.
A. SIMPLE MOVING AVARAGE

When demand for a product is neither growing nor declining rapidly, and if it does not have seasonal
characteristics, a moving average can be useful in removing the random fluctuations for forecasting. Although
moving averages are frequently centered, it is more convenient to use past data to predict the following period
directly. To illustrate, a centered five-month average of January, February, March, April, and May gives an
average centered on March. However, all five months of data must already exist. If our objective is to forecast
for June, we must project our moving average-by some means-from March to June. If the average is not
centered but is at the forward end, we can forecast more easily, though we may lose some accuracy. Thus, if we
want to forecast June with a five-month moving average, we can take the average of January, February, march,
April, and May. When June passes, the forecast for July would be the average of February, March, April, May
and June.
Although it is important to select the best period for the moving average, there are several conflicting effects of
different period lengths: The longer the moving-average period, the greater the random elements are smoothed
(which may be desirable in many cases). But if there is a trend in the data-either increasing or decreasing – the
moving average has the adverse characteristics of lagging the trend.
B. WEIGHTED MOVING AVARAGE

Whereas the simple moving average gives equal weight to each component of the moving-average database, a
weighted moving average allows any weights to be placed on each element, providing, of course, that the sum
of all weights equals 1. For example, a department store may find that in a four-month period, the best forecast
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is derived by using 40 percent of the actual sales for the most recent month, 30 percent of two months ago, 20
percent of three months ago, and 10 percent of four months ago. If actual sales experience was
However, if the data are seasonal, for example, weights should be established accordingly. Bathing suit sales in
July of last year should be weighted more heavily than bathing suit sales in December (in the Northern
hemisphere).
The weighted moving average has a definite advantage over the simple moving average in being able to vary
the effects of past data. However, it is more inconvenient and costly to use than the exponential smoothing
method, which we will examine next.
C. EXPONENENTIAL SMOOTHING
In the previous methods of forecasting (simple and weighted moving average), the major drawback is the need
to continually carry a large amount of historical data. (This is also true for regression analysis techniques, which
we soon will cover.) As each new piece of data is added in these methods, the oldest observation is dropped,
and the new forecast is calculated. In many applications (perhaps in most), the most recent occurrences are
more indicative of the future than those in the more distant past. If this premise is valid-that the importance of
data diminishes as the past becomes more distant – then exponential smoothing may be the most logical and
easiest method to use.
Exponential smoothing is the most used of all forecasting techniques. It is an integral part of virtually all
computerized forecasting programs, and it is widely used in ordering inventory in retail firms, wholesale
companies, and service agencies.
Exponential smoothing techniques have become well accepted for six major reasons:
1. Exponential models are surprisingly accurate.

2. Formulating an exponential model is relatively easy.
3. The user can understand how the model works.
4. Little computation is required to use the model.
5. Computer storage requirements are small because of the limited use of historical data.
6. Tests for accuracy as to how well the model is performing are easy to compute.
Forecast Errors
In using the word error, we are referring to the difference between the forecast value and what actually
occurred. In statistics, these errors are called residuals. As long as the forecast value is within the confidence
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limits, as we discuss later in ―Measurement of Error,‖ this is not really an error. But common usage refers to the
difference as an error.
Demand for a product is generated through the interaction of a number of factors too complex to describe
accurately in a model. Therefore, all forecasts certainly contain some error. In discussing forecast errors, it is
convenient to distinguish between sources of error and the measurement of error.
Sources of Error
Errors can come from a variety of sources. One common source that many forecasters are unaware of is
projecting past trends into the future. For example, when we talk about statistical errors in regression analysis,
we are referring to the deviations of observations from our regression line. It is common to attach a confidence
band (i.e., statistical control limits) to the regression line to reduce the unexplained error. But when we then use
this regression line as a forecasting device by projecting it into the future, the error may not be correctly defined
by the projected confidence band. This is because the confidence interval is based on past data; it may or may
not hold for projected data points and therefore cannot be used with the same confidence. In fact, experience has
shown that the actual errors tend to be greater than those predicated from forecasts models.
Errors can be classified as bias or random. Bias errors occur when a consistent mistake is made. Sources of bias
include failing to include the right variables; using the wrong relationships among variables; employing the
wrong trend line; mistakenly shifting the seasonal demand from where it normally occurs; and the existence of
some undetected secular trend. Random errors can be defined as those that cannot be explained by the forecast
model being used.
Several of the common terms used to describe the degree of error are standard error, mean squared error (or
variance), and mean absolute deviation. In addition, tracking signals may be used to indicate any positive or
negative bias in the forecast.
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CHAPTER – 4
MATERIAL MANAGEMENT
4.1 PURCHASING
Purchasing is an important function of materials management. In any industry purchase means buying of
equipment, materials, tools, parts etc. required for industry. The importance of the purchase function varies with
nature and size of industry. In small industry, this function is performed by works manager and in large
manufacturing concern; this function is done by a separate department.
The moment a buyer places an order he commits a substantial portion of the finance of the corporation which
affects the working capital and cash flow position. He is a highly responsible person who meets various
salesmen and thus can be considered to have been contributing to the public relations efforts of the company.
Thus, the buyer can make or mar the company‘s image by his excellent or poor relations with the vendors.
4.1.1 OBJECTIVES OF PURCHASING
The basic objective of the purchasing function is to ensure continuity of supply of raw materials, sub-contracted
items and spare parts and to reduce the ultimate cost of the finished goods. In other words, the objective is not
only to procure the raw materials at the lowest price but to reduce the cost of the final product.
The objectives of the purchasing department can be outlined as under:
To avail the materials, suppliers and equipments at the minimum possible costs:
These are the inputs in the manufacturing operations. The minimization of the input cost increases the
productivity and resultantly the profitability of the operations.
To ensure the continuous flow of production through continuous supply of raw materials,
components, tools etc. with repair and maintenance service.
To increase the asset turnover: The investment in the inventories should be kept minimum in relation
to the volume of sales. This will increase the turnover of the assets and thus the profitability of the
company.
To develop an alternative source of supply: Exploration of alternative sources of supply of materials
increases the bargaining ability of the buyer, minimization of cost of materials and increases the ability
to meet the emergencies.
To establish and maintain the good relations with the suppliers: Maintenance of good relations with
the supplier helps in evolving a favorable image in the business circles. Such relations are beneficial to
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the buyer in terms of changing the reasonable price, preferential allocation of material in case of
material shortages, etc.
To achieve maximum integration with other department of the company: The purchase function is
related with production department for specifications and flow of material, engineering department
for the purchase of tools, equipments and machines, marketing department for the forecasts of sales
and its impact on procurement of materials, financial department for the purpose of maintaining levels
of materials and estimating the working capital required, personnel department for the purpose of
manning and developing the personnel of purchase department and maintaining good vendor
relationship.
To train and develop the personnel: Purchasing department is manned with varied types of personnel.
The company should try to build the imaginative employee force through training and development.
Efficient record keeping and management reporting: Paper processing is inherent in the purchase
function. Such paper processing should be standardised so that record keeping can be facilitated.
Periodic reporting to the management about the purchase activities justifies the independent existence of
the department.
4.1.2 PARAMETERS OF PURCHASING
The success of any manufacturing activity is largely dependent on the procurement of raw materials of right
quality, in the right quantities, from right source, at the right time and at right price popularly known as ten
‘R’s’ of the art of efficient purchasing. They are described as the basic principles of purchasing. There are other
well known parameters such as right contractual terms, right material, right place, right mode of transportation
and right attitude are also considered for purchasing.
1. Right price: It is the primary concern of any manufacturing organization to get an item at the right price. But
right price need not be the lowest price. It is very difficult to determine the right price; general guidance can be
had from the cost structure of the product. The ‗tender system‘ of buying is normally used in public sector
organizations but the objective should be to identify the lowest ‗responsible‘ bidder and not the lowest bidder.
The technique of ‗learning curve‘ also helps the purchase agent to determine the price of items with high labor
content. The price can be kept low by proper planning and not by rush buying. Price negotiation also helps to
determine the right prices.
2. Right quality: Right quality implies that quality should be available, measurable and understandable as far as
practicable. In order to determine the quality of a product sampling schemes will be useful. The right quality is
determined by the cost of materials and the technical characteristics as suited to the specific requirements. The
quality particulars are normally obtained from the indents.
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Since the objective of purchasing is to ensure continuity of supply to the user departments, the time at which the
material is provided to the user department assumes great importance.
3. Right time: For determining the right time, the purchase manager should have lead time information for all
products and analyze its components for reducing the same. Lead time is the total time elapsed between the
recognition of the need of an item till the item arrives and is provided for use. This covers the entire duration of
the materials cycle and consists of pre-contractual administrative lead time, manufacturing and transporting lead
time and inspection lead time. Since the inventory increases with higher lead time, it is desirable to analyze each
component of the lead time so as to reduce the first and third components which are controllable. While
determining the purchases, the buyer has to consider emergency situations like floods, strikes, etc. He should
have ‗contingency plans‘ when force major clauses become operative, for instance, the material is not available
due to strike, lock-out, floods, and earthquakes.
4. Right source: The source from which the material is procured should be dependable and capable of
supplying items of uniform quality. The buyer has to decide which item should be directly obtained from the
manufacturer. Source selection, source development and vendor rating play an important role in buyer-seller
relationships. In emergencies, open market purchases and bazaar purchases are restored to.
5. Right quantity: The right quantity is the most important parameter in buying. Concepts, such as, economic
order quantity, economic purchase quantity, fixed period and fixed quantity systems, will serve as broad
guidelines. But the buyer has to use his knowledge, experience and common sense to determine the quantity
after considering factors such as price structure, discounts, availability of the item, favorable reciprocal
relations, and make or buy consideration.
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Fig. 4.1 Purchase parameters
6. Right attitude: Developing the right attitude too, is necessary as one often comes across such statement:
‗Purchasing knows the price of everything and value of nothing‘; ‗we buy price and not cost‘; ‗when will our
order placers become purchase managers?‘; ‗Purchasing acts like a post box‘. Therefore, purchasing should
keep ‗progress‘ as its key activity and should be future-oriented. The purchase manager should be innovative
and his long-term objective should be to minimize the cost of the ultimate product. He will be able to achieve
this if he aims himself with techniques, such as, value analysis, materials intelligence, purchases research,
SWOT analysis, purchase budget lead time analysis, etc.
7. Right contracts: The buyer has to adopt separate policies and procedures for capital and consumer items. He
should be able to distinguish between indigenous and international purchasing procedures. He should be aware
of the legal and contractual aspects in international practices.
8. Right material: Right type of material required for the production is an important parameter in purchasing.
Techniques, such as, value analysis will enable the buyer to locate the right material.
9. Right transportation: Right modes of transportation have to be identified as this forms a critical segment in
the cost profile of an item. It is an established fact that the cost of the shipping of ore, gravel, sand, etc., is
normally more than the cost of the item itself.
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10. Right place of delivery: Specifying the right place of delivery, like head office or works, would often
minimize the handling and transportation cost.
4.1.3 PURCHASING PROCEDURE
The procedure describes the sequence of steps leading to the completion of an identified specific task. The
purchasing procedure comprises the following steps as indicated in Fig. 4.4.
1. Recognition of the need: The initiation of procedure starts with the recognition of the need by the needy
section. The demand is lodged with the purchase department in the prescribed Purchase
Requisition Form forwarded by the authorized person either directly or through the Stores Department.
The purchase requisition clearly specifies the details, such as, specification of materials, quality and quantity,
suggested supplier, etc. Generally, the low value sundries and items of common use are purchased for stock
while costlier and special items are purchased according the production programs.
Generally, the corporate level executives are authorized signatories to such demands. Such purchases are
approved by the Board of Directors. The reference of the approval is made on requisition and a copy of the
requisition is sent to the secretary for the purpose of overall planning and budgeting.
2. The Selection of the supplier: The process of selection of supplier involves two basic aspects: searching for
all possible sources and short listing out of the identified sources. The complete information about the supplier
is available from various sources, such as, trade directories, advertisement in trade journals, direct mailing by
the suppliers, interview with suppliers, salesmen, suggestions from business associates, visit to trade fair,
participation in industries convention, etc.
Identification of more and more sources helps in selecting better and economical supplier. It should be noted
that the low bidder is not always the best bidder. When everything except price is equal, the low bidder will be
selected. The important considerations in the selection are the price, ability to supply the required quantity,
maintenance of quality standards, financial standing etc. It should be noted that it is not necessary to go for this
process for all types of purchases. For the repetitive orders and for the purchases of low-value, small lot items,
generally the previous suppliers with good records are preferred.
3. Placing the order: Once the supplier is selected the next step is to place the purchase order. Purchase order
is a letter sent to the supplier asking to supply the said material. At least six copies of purchase order are
prepared by the purchase section and each copy is separately signed by the purchase officer. Out these copies,
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one copy each is sent to store-keeper, supplier, accounts section, inspection department and to the department
placing the requisition and one copy is retained by the purchase department for record.
Fig. 4.2 Purchasing procedure
4. Follow-up of the order: Follow-up procedure should be employed wherever the costs and risks resulting
from the delayed deliveries of materials are greater than the cost of follow-up procedure, the follow-up
procedure tries to see that the purchase order is confirmed by the supplier and the delivery is promised. It is also
necessary to review the outstanding orders at regular intervals and to communicate with the supplier in case of
need. Generally, a routine urge is made to the supplier by sending a printed post card or a circular letter asking
him to confirm that the delivery is on the way or will be made as per agreement. In absence of any reply or
unsatisfactory reply, the supplier may be contact through personal letter, phone, telegram and/or even personal
visit.
5. Receiving and inspection of the materials: The receiving department receives the materials supplied by the
vendor. The quantity are verified and tallied with the purchase order. The receipt of the materials is recorded on
the specially designed receiving slips or forms which also specify the name of the vendor and the purchase
order number. It also records any discrepancy, damaged condition of the consignment or inferiority of the
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materials. The purchase department is informed immediately about the receipt of the materials. Usually a copy
of the receiving slip is sent to the purchase department.
6. Payment of the invoice: When the goods are received in satisfactory condition, the invoice is checked before
it is approved for the payment. The invoice is checked to see that the goods were duly authorized to purchase,
they were properly ordered, they are priced as per the agreed terms, the quantity and quality confirm to the
order, the calculations are arithmetically correct etc.
7. Maintenance of the records: Maintenance of the records is an important part and parcel of the efficient
purchase function. In the industrial firms, most of the purchases are repeat orders and hence the past records
serve as a good guide for the future action. They are very useful for deciding the timings of the purchases and in
selecting the best source of the supply.
8. Maintenance of vendor relations: The quantum and frequency of the transactions with the same key
suppliers provide a platform for the purchase department to establish and maintain good relations with them.
Good relations develop mutual trust and confidence in the course of the time which is beneficial to both the
parties. The efficiency of the purchase department can be measured by the amount of the goodwill it has with its
suppliers.
4.1.5 MAKE OR BUY DECISION
These two views set the stage for discussion of a topic that historically has been referred to as the make-or-
buy decision. More recently, the term outsourcing has evolved to connote the buy side of the issue. When a
firm considers which components or subsystems it should make and which it should buy, it should analyze
the issue at two levels-strategic and operational or tactical. The strategic, obviously, is the more important of
the two as far as the future of the firm is concerned. So this initial analysis has a forward-looking, futuristic
aura about it.
STRATEGIC DECISIONS
The starting point most firms use in conducting the strategic analysis is to identify the major strengths of the
firm-and then build on them. What is it we really do well-better than most firms? Do our strengths lie in
certain design skills, unique production skills and equipment, different types of people skills? A thorough
investigation of these types of questions is what many people today call identifying the firm‘s existing core
competencies.
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TACTICAL DECSIONS
After the strategic ―make‖ and outsourcing decisions are finalized, and as operations progress, a number of
situations inevitably arise that require additional make-or buy analyses at something less than a strategic level.
Unsatisfactory supplier performance in the case of some outsourced items, changing sales demands, restricted
manufacturing capacity, and the modification of an existing product are just a few of the operating factors that
generate these needs. As general rule, from a ―make‖ perspective these tactical make-or buy situations involve
items for which the firm already possesses most of the necessary production resources. Small investments in
tooling, minor equipment, or a few additional personnel usually are all that would be needed to do the job in-
house. Consequently, these investigations tend to be driven by operating considerations of efficiency, control
of quality and reliability, cost, capacity utilization, and so on.
BREAK-EVEN ANALYSIS FOR MAKE-OR-BUY DECISION
To evaluate an idea for a new product or service or to assess the performance of an existing
one, determining the volume of sales at which the product or service breaks even is useful.
The break-even point is the volume at which total revenues equal total costs.
Use of this technique is known as break-even analysis. Break-even analysis can also be
used to compare production methods by finding the volume at which two different
processes have equal total costs.
4.2 INVENTORY CONTROL OR MANAGEMENT
4.2.1 Meaning of Inventory
Inventory generally refers to the materials in stock. It is also called the idle resource of an enterprise.
Inventories represent those items which are either stocked for sale or they are in the process of manufacturing or
they are in the form of materials, which are yet to be utilized. The interval between receiving the purchased
parts and transforming them into final products varies from industries to industries depending upon the cycle
time of manufacture. It is, therefore, necessary to hold inventories of various kinds to act as a buffer between
supply and demand for efficient operation of the system.
Thus, an effective control on inventory is a must for smooth and efficient running of the production cycle with
least interruptions.
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4.2.2 Reasons for Keeping Inventories
1. To stabilize production: The demand for an item fluctuates because of the number of factors, e.g.,
seasonality, production schedule etc. The inventories (raw materials and components) should be made available
to the production as per the demand failing which results in stock out and the production stoppage takes place
for want of materials. Hence, the inventory is kept to take care of this fluctuation so that the production is
smooth.
2. To take advantage of price discounts: Usually the manufacturers offer discount for bulk buying and to gain
this price advantage the materials are bought in bulk even though it is not required immediately. Thus,
inventory is maintained to gain economy in purchasing.
3. To meet the demand during the replenishment period: The lead time for procurement of materials
depends upon many factors like location of the source, demand supply condition, etc. So inventory is
maintained to meet the demand during the procurement (replenishment) period.
4. To prevent loss of orders (sales): In this competitive scenario, one has to meet the delivery schedules at 100
per cent service level, means they cannot afford to miss the delivery schedule which may result in loss of sales.
To avoid the organizations have to maintain inventory.
5. To keep pace with changing market conditions: The organizations have to anticipate the changing market
sentiments and they have to stock materials in anticipation of non-availability of materials or sudden increase in
prices.
Sometimes the organizations have to stock materials due to other reasons like suppliers minimum quantity
condition, seasonal availability of materials or sudden increase in prices.
Meaning of Inventory Control
Inventory control is a planned approach of determining what to order, when to order and how much to order and
how much to stock so that costs associated with buying and storing are optimal without interrupting production
and sales. Inventory control basically deals with two problems:
(i) When should an order be placed? (Order level), and

(ii) How much should be ordered? (Order quantity). These questions are answered by the use of
inventory models. The scientific inventory control system strikes the balance between the loss due to
non-availability of an item and cost of carrying the stock of an item. Scientific inventory control
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aims at maintaining optimum level of stock of goods required by the company at minimum cost to
the company.
4.2.3 Objectives of Inventory Control
1. To ensure adequate supply of products to customer and avoid shortages as far as possible.
2. To make sure that the financial investment in inventories is minimum (i.e., to see that the working
capital is blocked to the minimum possible extent).
3. Efficient purchasing, storing, consumption and accounting for materials is an important objective.
4. To maintain timely record of inventories of all the items and to maintain the stock within the desired
limits
5. To ensure timely action for replenishment.
6. To provide a reserve stock for variations in lead times of delivery of materials.
7. To provide a scientific base for both short-term and long-term planning of materials.
4.2.4 Benefits of Inventory Control
It is an established fact that through the practice of scientific inventory control, following are the benefits of
inventory control:
1. Improvement in customer‘s relationship because of the timely delivery of goods and service.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilization of working capital. Helps in minimizing loss due to deterioration, obsolescence
damage and pilferage.
4. Economy in purchasing.
5. Eliminates the possibility of duplicate ordering.
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Chapter 5:
Project Management
Objectives :
 Describe project management objectives
 Describe the project life cycle
 Diagram networks of project activities
 Estimate the completion time of a project
 Compute the probability of completing a project by a specific time
 Determine how to reduce the length of a project effectively
 Describe the critical chain approach to project management
Project Management Applications
 What is a project?
 Any unique endeavor with specific objectives
 With multiple activities
 With defined precedent relationships
 With a specific time period for completion
 Examples?
 A major event like a wedding
 Any construction project
 Designing a political campaign
Project Life Cycle:
 Conception: identify the need
 Feasibility analysis or study: costs benefits, and risks

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 Planning: who, how long, what to do?
 Execution: doing the project
 Termination: ending the project
Network Planning Techniques
 Program Evaluation & Review Technique (PERT):
 Developed to manage the Polaris missile project
 Many tasks pushed the boundaries of science & engineering (tasks‘ duration = probabilistic)
 Critical Path Method (CPM):
 Developed to coordinate maintenance projects in the chemical industry
 A complex undertaking, but individual tasks are routine (tasks‘ duration = deterministic)
Both PERT and CPM
 Graphically display the precedence relationships & sequence of activities
 Estimate the project‘s duration
 Identify critical activities that cannot be delayed without delaying the project
 Estimate the amount of slack associated with non-critical activities
Network Diagrams
 Activity-on-Node (AON):
 Uses nodes to represent the activity
 Uses arrows to represent precedence relationships
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Estimating the Probability of Completion Dates
 Using probabilistic time estimates offers the advantage of predicting the probability of project
completion dates
 We have already calculated the expected time for each activity by making three time estimates
 Now we need to calculate the variance for each activity
 The variance of the beta probability distribution is:
where p=pessimistic activity time estimate
o=optimistic activity time estimate
po
2
σ 
2

 6 
Reducing Project Completion Time
 Project completion times may need to be shortened because:
 Different deadlines
 Penalty clauses
 Need to put resources on a new project
 Promised completion dates
 Reduced project completion time is ―crashing‖

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 Crashing a project needs to balance
 Shorten a project duration
 Cost to shorten the project duration
 Crashing a project requires you to know
 Crash time of each activity
 Crash cost of each activity
Crash cost/duration = (crash cost-normal cost)/(normal time – crash time)
Adding Feeder Buffers to Critical Chains
 The theory of constraints, the basis for critical chains, focuses on keeping bottlenecks busy.
 Time buffers can be put between bottlenecks in the critical path
 These feeder buffers protect the critical path from delays in non-critical paths
Project Management within OM: How it all fits together
 Project management techniques provide a structure for the project manager to track the progress of
different activities required to complete the project. Particular concern is given to critical path (the
longest connected path through the project network) activities.
Any delay to a critical path activity affects the project completion time. These techniques indicate the expected
completion time and cost of a project. The project manager reviews this information to ensure that adequate
resources exist and that the expected completion time is reasonable.
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Project Management OM Across the Organization
 Accounting uses project management (PM) information to provide a time line for major expenditures
 Marketing use PM information to monitor the progress to provide updates to the customer
 Information systems develop and maintain software that supports projects
 Operations use PM to information to monitor activity progress both on and off critical path to manage
resource requirements
Summary
 A project is a unique, one time event of some duration that consumes resources and is designed to
achieve an objective in a given time period.
 Each project goes through a five-phase life cycle: concept, feasibility study, planning, execution, and
termination.
 Two network planning techniques are PERT and CPM. Pert uses probabilistic time estimates. CPM uses
deterministic time estimates.
 Pert and CPM determine the critical path of the project and the estimated completion time. On large
projects, software programs are available to identify the critical path.
 Pert uses probabilistic time estimates to determine the probability that a project will be done by a
specific time.
 To reduce the length of the project (crashing), we need to know the critical path of the project and the
cost of reducing individual activity times. Crashing activities that are not on the critical path typically do
not reduce project completion time.
 The critical chain approach removes excess safety time from individual activities and creates a project
buffer at the end of the critical path.
Work-breakdown structure
A work-breakdown structure in project management and systems engineering, is a deliverable-oriented

breakdown of a project into smaller components. A work breakdown structure is a key project deliverable that
organizes the team's work into manageable sections.
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The main purpose of a WBS is to reduce complicated activities to a collection of tasks. This is important for
the project manager because she can oversee the tasks more effectively than the complex activities. Tasks must
be measurable and independent, with clearly defined limits.
This technique is used to define and organize the total scope of a project.
WBS is organized around the primary products of the project (or planned outcomes) instead of
the work needed to produce the products (planned actions).
Types of WBS – 2 types
1. Deliverable-oriented WBS
2. A process-oriented WBS
A deliverable-oriented WBS (also known as product-oriented WBS) decomposes the project scope into smaller
and more manageable deliverables. Deliverable are tangible components that need to be delivered to complete
the project. They are typically a physical component or an item that needs to be produced, obtained, or supplied
as a result of executing project activities. These deliverables are either interim or ultimate deliverables that are
delivered to satisfy project requirements. In construction projects, preliminary plans and specifications, bid
documents, and pre-construction mockups are example interim project deliverables. Example of ultimate project
deliverables in a construction project may include concrete structures, structural steels, building facade, and a
building‘s mechanical system.
A process-oriented WBS, on the other hand, defines the project scope of work in terms of process steps (i.e.,
work phases, or functions)[5]. A process-oriented WBS defines what process steps need to be taken to deliver
each of the project deliverables. WBS elements in a process-oriented WBS are typically in the form of a verb.
They may also identify different work disciplines that are involved to work on various project deliverables.
Example WBS elements in a process-oriented WBS include engineering, detailed design, procure, install, and
construct. These WBS elements are provided in a hierarchical structure to breakdown the project scope into
different functions or process steps. For example, a WBS element such as install may need to be broken down
into mechanical and electrical installation depending on a particular project‘s scope of work and the scope of
responsibilities of the party that is developing the WBS. The following figure provides an example process-
oriented WBS for a piping project.
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Project management is the practice of initiating, planning, executing, controlling, and closing the work of a
team to achieve specific goals and meet specific success criteria at the specified time. ... This information is
usually described in project documentation, created at the beginning of the development process.
The Role of the Project Manager. A project manager is a person who has the overall responsibility for the
successful initiation, planning, design, execution, monitoring, controlling and closure of a project. ...
The project manager should make sure they control risk and minimise uncertainty.
Project management is the process of defining, planning, organizing, leading, and controlling the development
of an information system. Its main objective is to deliver an information system that is acceptable to users and is
developed on time and within budget.
Risk
Often overlooked, ignored, but affects outcome. Risk must be managed!
Some Potential Risks
• Team members change

• Field manager and supervisors change
• Staff changes
• New or ―refined‖ state office guidance issued
• Weather
• Changes in customer preferences
How Do You Manage Risk?

Often overlooked, ignored, but affects outcome. Risk must be managed!
Some Potential Risks
• Team members change

• Field manager and supervisors change
• Staff changes
• New or ―refined‖ state office guidance issued
• Weather
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• Changes in customer preferences
How Do You Manage Risk?
• Identify – develop a complete list, use your team.

– (financial, external, technical, legal, procurement)
• Analyze – what is probability, what is impact

• Prioritize – which are worthy of attention
• Plan – what will be the response to risks
• Execute
• Evaluate
• Document
Human Resources
Who will be involved?
Competencies of team?
Do team members need training?
How do build team support?
What reward and recognition?
Human Resources
• Human nature to underestimate work and be overly optimistic about time, cost, and
scheduling
• How can you increase capacity?
Partnerships
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CHAPTER 6. Investment Evaluation
Introduction:
Investment Evaluation is the two-fold task of balancing investment risk against anticipated return. ...
Each provides some measure of the estimated return on an investment based on various assumptions
and investment horizons. When a future investment is examined we compare its cost vs its revenue.
What is investment evaluation criteria?
The investment decision rules may be referred to as capital budgeting techniques, or investment criteria. A
sound appraisal technique should be used to measure the economic worth of an investment project. ...
It should help top choose among mutually exclusive projects that project which maximizes the shareholders'
wealth.
Total cost. ... Investment view of total cost. Total cost refers to all of the costs incurred to make an investment,
which includes the cost of the investment, plus any broker commissions, taxes, licenses, and fees related to the
transaction. All of these costs should be considered when deriving the return on investment.
The calculation is:
(Average fixed cost + Average variable cost) x Number of units =Total cost.
For example, a company is incurring $10,000 of fixed costs to produce 1,000 units (for an average
fixed cost per unit of $10), and its variable cost per unit is $3.
The two basic types of costs incurred by businesses are fixed and variable.
Fixedcosts do not vary with output, while variable costs do.
Definition
• A project is a set of activities that are related to one another; and all the activities must be completed in order
to complete the project.
• A project is generally deemed successful if it meets predetermined targets set by the client, performs the job it
was intended to do, or solves an identified problem within
predetermined time, cost, and quality constraints
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Project cycle
• The chain of stages in which work is taking place in several distinct stages
• The stages are closely linked to one another and follow a logical progression, with the later stages helping to
provide the basis for renewal of the cycle throughout subsequent
project work.
Project cycle process: World bank project cycle
1. Evaluation Identification
2. Preparation
3. Appraisal/Evaluation
4. Implementation
i) Identification:
Concerned with identifying project ideas that appear to represent a high-priority
use of an organization‘s or a country's resources to achieve an important growth/development objective.
2) Preparation:
• After identification "test", it must be advanced to the point at which a firm

decision can be made whether or not to proceed with it.
• This requires a progressive refinement of the design of the project in all its
dimensions technical, economic, financial, social, institutional, and so on.
3. Appraisal: Before approving a loan, external agencies normally require a formal process of appraisal to
assess the overall soundness of the project and its readiness for
implementation.
4. Implementation: The implementation stage covers the actual development or construction of the project,
up to the point at which it becomes fully operational. It includes monitoring of all aspects of the work or
activity as it proceeds.
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Project Success factors
• Financially sound, feasible and affordable project

• The country risks must be manageable (political instability and Change in law)
• Strong gov‘t support ( private-public partnership)
• The project must rank high on the host government's list
• Efficient administrative framework
• Fair and transparent bidding procedure
• Financial strength of sponsors
• Experienced and resourceful construction contractors
• The currency, foreign exchange and inflation issues.
• Coordinated contractual framework
Total Investment Costs
• Investment costs are defined as the sum of fixed capital (fixed investments plus
production capital costs) and net working capital.
• Fixed capital constitutes the resources referred for constructing and equipping an
investment project and working capital corresponding to the resources needed to
operate the project totally or partially.
Pre-production Capital Expenditure
• Includes a number of items that originated during the various stages of project formulation and
implementation.
• These include
company like legal fees for preparation of
memorandum, articles of association and similar documents;
services and
supervision of erection and construction;
personnel engaged during the pre-production period;

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ores, etc;
stipends of the trainees.
Working Capital
• Working capital indicates the financial means required to operate the project according to its production
program.
• It is defined as the current assets minus current liabilities.
• Working Capital = Current Assets - Current Liabilities
• Current assets comprise receivables, inventories (raw material, auxiliary material, supplies packaging
materials, spares and small tools), work in progress, finished products and cash.
• Current liabilities consist mainly of accounts payable
(creditors).
Project Financing
• Project financing involves the funding of projects on the merits of the projects.
Sources of Financing
i) Equity Capital Providers: The main source of equity capital for a project comes from the project sponsors
or other investors that have an active interest in the
project.
participate as investors), contractors, equipment suppliers
ii) Commercial and Development Banks:
• The most traditional source of debt financing are commercial and dev‘t banks.
iii) Export Credit Agencies(ECA) are considered to be an important source of long-term credit.
iv) Bilateral and Multilateral Aid Agencies- low interest rate.

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Engineering Economics
• Is the application of economic techniques to the evaluation of design and engineering

alternatives.
• The role of engineering economics is to assess the appropriateness of a given project,
estimate its value, and justify it from an engineering standpoint.
• The time value of money is the central concept in Engineering Economy.
• The time value of money is the value of money figuring in a given amount of interest earned or inflation
accrued over a given amount of time.
• The ultimate principle suggests that a certain amount of money today has different buying power than the
same amount of money in the
future.
• This notion exists both because there is an opportunity to earn interest on the money and because inflation will
drive prices up, thus changing the "value" of the money.
• Interest is a fee which is paid for having the use of money Borrower Money (principal) lender
Interest
Depositor Money (principal) Saving institution
Interest
Terminologies and Symbols
P-Present sum of money ($)- Principal

S-Future sum of money ($)- Maturity Value
t- time duration of the loan/deposit/cash flow
n-Number of interest periods (n= mt)
r -Interest rate per annum
i -Interest rate per period ( r/m)
m- number of compounding times per year
Simple Interest
• An interest which is computed only based on principal, not
interest of previous period.
• I = Prt
• S = P(1+rt)
Page 64 of 67
• P = S/1+rt
Present value The current worth of a future sum of money or stream of cash
flows given a specified rate of return.
E.g.
• Dedebit Credit and Saving Union has issued a 3-year loan of Birr 50,000 for machine replacement for Mr
Abebe. Simple interest is charged at a rate of 10% per year. The principal plus the interest is to be repaid at the
end of the third year. Compute the interest for the 3-year period. What amount will be paid at the end of the
third year?
Compound Interest
• Interest calculated based on the remaining principal plus any accumulated interest
charges at the beginning of that period.
• S = P (1+i)n
• P= S((1+i)-n
E.g. Assume you and your colleague want to make an investment of Birr 250,000. The interest rate is 12% per
year, and interest is compounded quarterly. If all interest is
reinvested at the same interest rate, what will be the value of investment after 8 years?
Annuity
• An annuity is a series of equal payments or receipts that occur at evenly spaced
intervals.
• It is uniform-Series-of-Payment Situation
• Leases ,rental, amortization payments are
examples.
• The payments or receipts occur at the end of each period for an ordinary annuity while
they occur at the beginning of each period
• S= R (1+i) n- 1 …Future value of ordinary annuity
i
e.g. A person plans to deposit $1000 in a saving account at the end of this year and equal sum at the end of each
following year. If interest is expected to be earned at the rate of 6% per year compounded annually, to what sum
will the investment grow at the time of the fourth deposit?
Sinking Fund
• A fund in to which periodic payments are made in order to accumulate a specified
Page 65 of 67
amount at some point in the future.
R= Si
(1+i) n- 1
e.g. Kidist wants to settle a debt of Birr 12,000 which she borrowed to buy a machine for her business to be paid
10 years from now. If deposit earn interest at a rate of 5%
compounded annually, how much money should she deposit at the end of each year for coming 10 years and
what is the amount of interest earned?
Project Evaluation Techniques
• The first, and most difficult, step in project analysis is estimating the relevant cash flows.
• Cash flow is the stream of monetary values- costs (inputs) and benefits (outputs)- resulting from a project
investment.
• Once the cash flows are projected, d/t techniques can be used to evaluate projects and include them in to
capital budgeting.
Br2000
Br1000 Cash flow diagram
1. Payback Period
•Is the expected number of years required to recover the original investment, used to
evaluate capital budgeting projects.
Pay Back = Year before full recovery + uncovered cost at start of year
Cash flow during year
Page 66 of 67
Net Present Value (NPV)
• Better method to improve the effectiveness of project evaluations than payback periods, which relies on
discounted cash flow (DCF) techniques.
• To implement this approach, we proceed as follows:
1. Find the present value of each cash flow, including all inflows and outflows, discounted at the project‘s
cost of capital.
2. Sum these discounted cash flows; this sum is defined as the project‘s NPV.
3. If the NPV is positive, the project should be accepted, while if the NPV is negative, it should be
rejected.
Note: If two projects with positive NPVs are mutually exclusive, the one with the higher NPV should be
chosen.
Internal Rate of Return (IRR)
IRR is defined as the discount rate that equates the present value of a project‘s expected cash inflows to the
present value of the project‘s costs:
Page 67 of 67

Industrial Management Engg. Economy

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Industrial Management Engg. Economy

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Course: Industrial Management & Engineering Economy

CHAPTER I: BASIC MANAGEMENT CONCEPTS & INDUSTRIAL ORGANIZATION

1.1. Definition, nature, scope and evolution of Management

Management Science or Art? There is a controversy whether management is science or art.

III. Scope of Management

I. F.W. Taylor and Scientific Management

Four Principles of Scientific Management

Problems with Scientific Management

Rules, SOPs and Norms

Division of Labor: allows for job specialization.

III. Behavioral Management Theory

The Hawthorne Studies

IV. Management Science Theory

– Quantitative management — utilizes linear and nonlinear programming, modeling, simulation,

V. Organizational Environment Theory

―There is no one best way to organize‖

2.2. Basic Management Functions

The basic principle of control

2.3. Managerial decision making

Concept of decision making

High level of knowledge Computational decision Compromise decision making

Top management makes category ii decision

Characteristics of managerial decisions

Setting managerial objectives

Objectives constitute the foundation for rational decision making.

Searching for alternatives

Comparing and evaluating alternatives

The choice is the commutation of the process.

Decision success is a function of decision quality and implementation.

Follow up of the decision

1.3. Operation Management

1.4. Functions of an Industrial Enterprise

2.1. PLANT (FACILITY) LAYOUT DECISIONS

1. Specification of objectives of the system in output and flexibility.

2.1.1. STRATEGIC IMPORTANCE OF LAYOUT DECISIONS

1. Higher utilization of space, equipment, and people.

2.2.1. FIXED-POSITION LAYOUT

1. Space is limited at virtually all sites

2.2.2. PROCESS-ORIENTED LAYOUT

Step-1 Gather Information

Step-2 Develop a Block Plan, and

Step-3 Design a Detailed Layout

Step-1: Gather Information

Step-2: Develop a Block Plan

Step-3: Design a Detailed Layout

1.2.3. OFFICE LAYOUT

1.2.4. RETAIL STORE LAYOUT

1.2.5. WAREHOUSING AND STORAGE LAYOUT

FIGURE 2.3 Layout for A-1 Distribution Systems warehouse

EXAMPLE 2.3 Determining a Warehouse Layout

2.2.6. PRODUCT-ORIENTED LAYOUT

1. Volume is adequate for high equipment utilization.

2.3. ASSEMBLY LINE BALANCING

The steps in balancing an assembly line are straightforward:

Production time per day

3. Determine the theoretical minimum number of workstations (Nt) required to satisfy

the cycle time constraint, using the following formula:

Sum of task times (T)

Sum of task times (T)

EXAMPLE 2.4 Assembly Line Balancing

TABLE 2.7 Assembly Steps and Times for the wagon

Task Performance Description Tasks that

A 45 Position rear axle support and hand fasten four -