Industrial Management & Engineering Economy

(IEng 5241)

Kalkidan Mezgebu

MSc. in Production Engineering and Management

BSc. in Industrial Engineering
Industrial System Design & Operational Management Chair
 Outline of Presentation
Chapter 1: Basic Management Concepts and
Industrial Organization
 Introduction to management;
 Functions of management;
 Organizational structure;
 Basics of productivity;
 Efficiency and Effectiveness
Introduction
 A business develops in course of time with
complexities.
 With increasing complexities, managing the
business has become a difficult task.
 Every business unit has some objectives of its
own. These objectives can be achieved with a
coordinated efforts of several personnel.
 The work of number of persons are properly
coordinated to achieve the objectives through the
process of management.
 Management is essential not only for business
concerns but also for banks, schools, colleges,
hospitals, hotels, religious bodies etc.
Management - Definition
 Peter F. Drucker defines, “management is an
organ; organs can be described and defined
only through their functions”.

 Terry, “management is not a people; it is an

activity like walking, reading, swimming or
running”.

 Henry Fayol, defined as “to manage is to

forecast and plan, to organize, to compound,
to coordinate, and to control”.
 Management- Definition
 Management is the process of achieving goals and
objectives effectively and efficiently through and
with the people.

 “Management is a process of designing and

maintaining an environment in which individuals
work together in groups to effectively and
efficiently accomplish selected aims”.

 Management is getting work done through others.

 Management - Definition

Management is the process of achieving organizational

goals and objectives effectively and efficiently by using

management functions i.e. Planning, Organizing,
Staffing, Controlling
Management is a set of activities directed at an

organization's resources with the aim of achieving

organizational goals in an efficient and effective manner.
 Management - Characteristics
Management is a distinct activity having the following salient features:
1. Economic Resource:
 Like land, labor, machine and capital, management is also one of the
factors of production.
2. Goal Oriented:
 Management is a purposeful activity that coordinate the efforts of workers
to achieve the goals of the organization.
3. Distinct Process: consists of such functions as planning, organizing, staffing,
directing/leading and controlling.
4. Universal Application: it is universal in character meaning that, its principles
and techniques are equally applicable in the fields of business, education,
military, government and hospital.
5. Multidisciplinary subject:
 Functions of Management
For attainment of objectives, every organization has a group of person for
managing its affairs.
It is concerned with productivity, effectiveness and efficiency by
performing various managerial functions.
There is enough disagreement among management writers on the
classification of managerial functions.
Henry Fayol, the father of principles of management described various
functions of management as :
1. Forecasting and planning
2. Organizing
3. Staffing
4. Controlling and
5. Coordinating.
Planning
Planning is the process of establishing goals and suitable course
of action for achieving those goals.
It is deciding the present about the future objectives and
actions for achievement.
Planning involves setting the ‘right’ goals and then choosing
the ‘right’ means for attaining those goals
Planning is necessary to ensure proper utilization of resources
(men, materials, machine, time, and money) to achieve the
objectives.
Planning is performed by the managers at all levels.
Focuses with ‘what’, ‘how’ and ‘when’ of performance.
 Steps in Planning
Following steps are taken by the manager for the purpose of planning.

 Recognition of the need for planning

 Establishing objectives

 Building the premises or principles for planning (developing

strategies to be followed)
 Identifying alternative course of action

 Selecting a best course of action

 Organizing
Organising is providing everything essential for proper functioning and

combining the human power with other resources to give desired

output.
Organising involves the following:
1. Identification and classification of required activities
2. Grouping of activities in to jobs necessary to attain objectives
3. Assignment of these jobs and activities to a departments and
individuals
4. Delegation of responsibility and authority for performance and
5. Provision for vertical and horizontal coordination of activities.
Guidelines for Good Organization
A good organizing should have the following:
i. Allotment of work
ii. Grant of necessary authority
iii. Distribution of work in different departments
iv. Coordination among different department
v. Able to avoid wastage of labour, money and materials

Types of Organization:
1. Line or scalar organization
2. Functional organization
3. Line and staff organization
 Staffing
After objectives are set, policies formulated etc, the next logical

step is in the management process is to recruit suitable personnel

for manning the jobs.
Staffing, now-a-days, also termed as human resources
management is defined as filling and keeping filled positions in
the organization structure.
Staffing function involves recruiting, selecting, placing,
promoting, appraising, carrier planning, training etc.
 Controlling
Controlling function of management can be defined as :

1. Controlling is a continuous process of measuring actual results in relation

to those planned
2. Controlling is a process which sets standards, measures job performance,
and takes corrective action, if required
3. Controlling, find out the deviation and take corrective actions.
Generally, it is the process of ensuring that the divisional, departmental,

sectional and individual performances are consistent with the predetermined

objectives and goals.
 Coordinating
It is the function of establishing such relationship among various parts of the

organization that they all together pull in the direction of organizational

objectives.
It involves the following sub-functions:

 Clearly definition of authority – responsibility relationships

 Unity of Direction

 Unity of Command

 Effective Communication

 Effective Leadership
 Fayol’s Principles of Management
A body of principles of management has been
developed by Henry Fayol; the father of modern
management.
He has proposed that there are 6 primary functions
of management and 14 principles of management,
Forecasting, Planning, Organizing, Commanding,
Coordinating, Controlling.
He held that there is a single administrative science,
whose principles can be used in all management
situation no matter what kind of organization was Henri Fayol (1841-1925)
being managed.
 Henri Fayol - 14 Principles
1. Division of Labor:
 Work of all kinds must be divided & subdivided and
allotted to various persons according to their
expertise in a particular area.
2. Authority & Responsibility are related:
 Authority refers to the right of superiors to get
exactness from their sub-ordinates. Responsibility
means obligation for the performance of the job
assigned. Note that responsibility arises wherever
authority is exercised.
3. Unity of Command:
 A sub-ordinate should receive orders and be
accountable to one and only one boss at a time. He
should not receive instructions from more than one
person.
 Henri Fayol - 14 Principles
4. Unity of Direction:
People engaged in the same kind of business or
same kind of activities must have the same
objectives in a single plan. Without unity of
direction, unity of action cannot be achieved.
5. Equity:
Equity means combination of fairness,
kindness & justice. The employees should be
treated with kindness & equity if devotion is
expected of them.
6. Order:
This principle is concerned with proper &
systematic arrangement of things and people.
Arrangement of things is called material order
and placement of people is called social order.
 Henri Fayol - 14 Principles
7. Discipline:
Discipline means sincerity, obedience, respect of
authority & observance of rules and regulations of
the enterprise. Subordinate should respect their
superiors and obey their order.
8. Initiative:
Initiative means eagerness to initiate actions without
being asked to do so. Management should provide
opportunity to its employees to suggest ideas,
experiences & new method of work.
9. Remuneration:
Remuneration to be paid to the workers should be
fair, reasonable, satisfactory & rewarding of the
efforts.
It should accord satisfaction to both employer and
the employees
 Henri Fayol - 14 Principles
10. Stability of Tenure:
• Employees should not be moved frequently from one job
position to another i.e. the period of service in a job
should be fixed.
11. Scalar Chain of command:
• Scalar chain is the chain of superiors ranging from the
ultimate authority to the lowest. Communications should
follow this chain. However, if following the chain creates
delays, cross-communications can be allowed if agreed
to by all parties and superiors are kept informed.
12. Sub-ordination of Individual Interest to common goal:
• An organization is much bigger than the individual it
constitutes. Therefore interest of the undertaking should
prevail in all circumstances. The interests of any one
employee or group of employees should not take
precedence over the interests of the organization as a
 Henri Fayol - 14 Principles
13. Espirit De’ Corps:
• It refers to team spirit i.e. harmony in the work
groups and mutual understanding among the
members.
• Espirit De’ Corps inspires workers to work harder.
14. Centralization:
• Centralization refers to the degree to which
subordinates are involved in decision making.
• Whether decision making is centralized (to
management) or decentralized (to subordinates) is
a question of proper proportion.
• The task is to find the optimum degree of
centralization for each situation.
 Levels of Management
1. Top Level:
Top management sets the mission and goals, develops policies, evaluates the
overall performance of various departments, responsible for the business as a
whole and is concerned mainly with long-term planning.
2. Middle Level:
Middle level management develops departmental goals, executes the policies,
plans and strategies determined by top management, develops medium- term
plans and supervises and coordinate lower-level managers’ activities.
3. Lower (Supervisory, frontline) Level:
Lower level management takes charge of day-to-day operations, is involved
in preparing detailed short-range plans, is responsible for smaller segments
of the business, executes plans of middle management, guides staff in their own
subsections and keep close control over their activities.
 Importance of Management
A scientific management is most essential as it fulfills the following
necessities:
 It maintains discipline by keeping proper control

 It distributes the work and machine among the workers to get

maximum output
 It keeps coordination among the staff

 It improves efficiencies

 It suggests new idea and improvements

 It develops means of marketing and publicity

Importance of Management
Process designed to achieve an organization’s
objectives by using its resources effectively &
efficiently in a changing environment
Make decisions – utilization of resources – achieve
objectives:
• Planning
• Organizing
• Staffing
• Directing
• Controlling
• New Product Development
Areas of Management

• Finance
• Production
• Operations
• Human Resources
• Marketing
• Administration
 Areas of Management
Financial Management –
Focus on obtaining money necessary for
the successful operations and using funds
to further organizational goals

Production & Operations Management–

Develop & administer activities to
transform resources into goods, services,
and ideas for the marketplace.
 Areas of Management
Human Resources Management –
Handle staffing function and deal with
employees in a formalized manner

Marketing Management –
Responsible for planning, pricing, and
promoting products and making them
available to customers
 Organizational Structure

Organizational structure refers to the way in

which a group is formed, its lines of

communication, and its means for
channeling authority and making decisions.
It clarifies the formal relationships of
individuals in the various positions within the
organization.
 Why do we need an Organizational Structure ?

 All Organizations have a management structure that

determines the relationships between functions and

positions and subdivides and delegates roles,

responsibilities and authority to carry out defined tasks.

 Organizational Structure: Purpose
Divides work to be done in specific jobs & department.

Assigns tasks and responsibilities associated with individual jobs.

Coordinates diverse organizational tasks.

Establishes relationship between individuals, groups and departments.

Establishes formal lines of authority.

Allocates organizational resources.

Clusters jobs into units.

 IMPORTANCE OF ORGANIZATIONAL STRUCTURE

It enables members to know what their responsibilities

It frees the manager and the individual workers to concentrate on

their respective roles and responsibilities

It coordinates all organization activities so there is minimal

duplication of effort or conflict.

Avoids overlapping of function because it pinpoints responsibilities.

Shows to whom and for whom they are responsible

ORGANIZATIONAL RELATIONSHIP
 FORMAL STRUCTURE
Formal structure, through departmentalization and work division,

provides a framework for defining managerial authority, responsibility

and accountability.
FORMAL STRUCTURE
 INFORMAL RELATIONS

Informal structure is generally social, with

blurred or shifting lines of authority and

accountability.
It also has its own channels of
communication, which may distribute
information more broadly and rapidly than the
formal communication system.
Informal Structure
Types of Organizational Structure
 Centralized Organizational Structure
Large, complex organizations often require a taller

hierarchy.
In its simplest form, a tall structure results in one long

chain of command similar to the military.

As an organization grows, the number of management

levels increases and the structure grows taller.

In a tall structure, managers form many ranks and each

has a small area of control.

 Centralized Organizational Structure
ADVANTAGES: DISADVANTAGES:
1. The quality of performance will improve due to close 1.Tall Organization creates many levels of management.
supervision. 2.There are many delays and distortion in communication.

2. Discipline will improve. 3.Decisions and actions are delayed.

4.It is very costly because there are many managers. The
3. Superior - Subordinate relations will improve.
managers are paid high salaries.
4. Control and Supervision will become easy and
5. It is difficult to coordinate the activities of different levels.
convenient.
6.There is strict supervision. So the subordinates do not
5. The manager gets more time to plan and organize the have any freedom.
future activities. 7.Tall Organization is not suitable for routine and
6. The efforts of subordinates can be easily coordinated. standardized jobs.

7. Tall Organisation encourages development of staff. 8. Here, managers may became more dominating.

8. There is mutual trust between superior and subordinates

 Decentralized Organizational Structure.
Flat structures have fewer management levels,
with each level controlling a broad area or group.

Flat organizations focus on empowering

employees rather than adhering to the chain of
command.

By encouraging autonomy and self-direction, flat

structures attempt to tap into employees’ creative
talents and to solve problems by collaboration.
 Decentralized Organizational Structure
ADVANTAGES
1.Flat Organization is less costly because it has
only few managers.
2.It creates fewer levels of management.
3.Quick decisions and actions can be taken
because it has only a few levels of management.
4. Fast and clear communication is possible among
these few levels of management.
5.Subordinates are free from close and strict
supervision and control.
6.It is more suitable for routine and standardized
activities.
7.Superiors may not be too dominating because of
large numbers of subordinates.
DISADVANTAGES
1.There are chances of loose control because there are many
subordinates under one manager.
2.The discipline in the organization may be bad due to loose
control.
3.The relations between the superiors and subordinates may
be bad. Close and informal relations may not be possible.
4.There may be problems of team work because there are
many subordinates under one manager.
5.Flat organization structure may create problems of
coordination between various subordinates.
6.Efficient and experienced superiors are required to manage
a large number of subordinates.
7.It may not be suitable for complex activities.
8.The quality of performance may be bad
 Productivity - Introduction
Productivity is the quantitative relation between what we produce and

what we use as a resources to produce them.

Productivity = Output / Input
Productivity refers to the efficiency of the production systems.

Definitions of productivity:

 Productivity is the measures of how well the resources are brought together
in an organization and utilized for accomplishing a set of objectives.
 Production and Productivity
Production system is an organized process of conversion of
raw materials into useful finished products as shown in figure
below.
Transformation
Input Output
process

Men
Machine
Materials Goods and
Money services
Management
Energy
Production System
 Production and Productivity
The concept of production and productivity are totally different:

Production refers to absolute output.

Productivity is a relative term where in the output is always

expressed in terms of inputs.

If the production is increased for the same input, then there is

an increase in productivity.
 Measurement of Productivity
Productivity can be measured, the amount of output per unit

of input.
In a factory, it might be measured based on the number of

hours it takes to produce a good.

While in service industry, might be measured based on the

income generated by an employee divided by his/her salary.

 Productivity Measures
Productivity
Measures

Partial
Total Productivity Total Factor
Productivity
Measures (TPM) Productivity (TFP)
Measures (PPM)
Advantages
Advantages Advantages
•Easy and more accurate
i.Easy to understand and calculate •Data are obtained easily
representation total picture of
ii.A tool to pinpoint improvement •Value added approach
company
Limitations : Limitations :
•Easily related to total cost
i. Misleading if used alone •No consideration of
Limitations :
ii. No consideration of overall materials and energy.
•Difficulties to obtaining the
impact
data
 Partial Productivity
The resources of productivity when measured separately are

called partial productivity.

“Apple to Apple” comparison.
Partial Productivity
 Total Productivity
The method of calculating productivity considering all the resources is
called total productivity.
It is systematic and qualitative approach to compete in quality, price
and time.
Total productivity provides systematic framework and structure to an
organization and increase profitability.
Productivity Benefits
Increase in income/profitability.

Lowering running cost/operational costs.

Maximizing the use of all of the company’s resources such as

land, equipment/machineries, factory, workers, and etc.

Gaining a greater share of the market.

More cash flows mean more opportunity for the company to

expand and grow.

 Factors influencing productivity
Factors influencing productivity

Controllable or Internal factors Non-controllable or External

factors

Product
Plant and equipment Structural adjustment
Technology Natural resources
Materials Government policy
Human factors
Work methods
 Productivity Improvement Techniques
Technology Based Material Based

Productivity
Employee
Product Based Improvement Based
Techniques

Task Based
 Contd..
Efficiency means whatever you produce or perform; it should
be done in a perfect way. (Doing things right)

Although, Effectiveness has a broader approach, which means

the extent to which the actual results have been achieved to
fulfill the desired outcome i.e. doing accurate things. (Doing
the right things)

Consider a 10th standard student example…