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CH 2404 PROCESS ECONOMICS:

Unit I

Planning, Organization, Staffing, Coordination, directing, controlling, communicating, organization as a process and a

structure; Types of Organizations.

Method Study; Work measurement techniques, basic procedure, motion study, motion economy, principles of time

study, elements of production control, forecasting; planning; routing; scheduling; dispatching; costs and costs control;

inventory and inventory control

Organization:

An organization is a structured mechanism in which two or more individuals relate themselves to each other in a

systematized establishment for the accomplishment of mutually agreed goals and objectives. The need for an

organization is conceived from the point of view of planning and execution of various aspects of activities of

industries, enterprises, businesses and service sector.

Each and every organization will have its own mission and objective. The mission is the very reason and justification

for the existence of a firm, which is usually defined in terms of benefits, the firm provides to its customers. The

mission is subdivided into smaller workable objectives for managers down the line. Objectives are actions orientation

of the mission statement. Goals are derived from objectives and are intermediate time-bound targets, which are

necessary for the achievement of the objectives. The specific path of action chosen by the firm to achieve its

objectives is referred to as strategy.

Policies are important tools for management for ensuring the smooth running of the firms day-to-day activities. The programs deal with the scheduling of repetitive activities, which are derived from policies. Program relates to

scheduling of activities while procedures refer to the specific method and sequence by which an activity has to be

preformed.

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PLANNING:

Planning is the process of thinking before doing and determining the course of action to be taken. It is all about

looking ahead, to chart the best courses of future action. This is to achieve the desired results with greatest certainty

and economy, without which the activities of an enterprise may become confuses and ineffective. It is a decision

making process, to decide in advance, what is to be done, when it is to be done, how it is to be done, by whom it is to

be done, and where it is to be done. In total planning can be defined as a decision making process to determine

organizational objectives, policies, programs, procedures, schedules and methods to achieve them by considering

environmental factors that affect the planning.

Strategic planning: Long range planning to set organizational goals, objectives, and policies to determine strategies,

tactics, and programs for achieving them.

Top management makes strategic plans. Middle Management makes annual plans (to implement the above). For supervisors the planning period is usually a week, day, or shift (to deal with daily work)

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Forecasting: Predicting future needs on the basis of historical data, present conditions, and assured future. It controls

staffing, purchasing, and production decisions.

Qualities of good Planning: Provides a workable solution and meets the stated objectives. Is comprehensive; it raises

all relevant questions and answers them. It minimizes the degree of risks. It is specific as to time, place, supplies,

tools, etc. It has to be flexible (can be adapted to a change in the situation).

Types of Planning: (i). Standing Plan: It is established routine, formula, or set of procedures designed to be used in a

reoccurring situation. Potential drawback is rigidity, must make them flexible enough to deal with daily realities and

these plans must be updated regularly.

(ii). Single Use Plan: It is a onetime plan developed for a single occasion or purpose. The amount of time spend on it

depends on its nature and importance. Often its purpose is a major change of some sort or budgets.

(iii). Day to day planning: It is the top priority of the first line supervisor. Its primary concern is what is to be done,

who will be doing it, and adjusting various standing plans. It has to be planned before the day begins.

Planning for a change: In this first define problem and set objectives. Gather past, present, and probable future data.

Evaluate pros and cons, generate alternatives. Make the necessary decisions. Implement the plan. Planning for change

must be done carefully and thoroughly. It is very much like making other plans but the main differences are the extent

of forecasting, the degree of risk, and providing for the impact of the change.

ORGANIZING: Organization is a process by which positions are determined, authority and responsibility are

delegated, relationships are established and a structure is developed. It involves determining the activities required to

achieve goals, grouping of activities. The success of the firm is based on efficient organization. The proper optimal

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organization of the four major elements, men, money, machine and material is the responsibility of a manager. The

fifth element data management is also important.

STAFFING:

Staffing means filling and keeping filled, positions in the organisation structure.

The term Staffing in management consists of:

1. Selecting the right person for the right post. 2. Training and development. 3. Giving proper remuneration and motivation. 4. Performance appraisal of employees. 5. Proper promotions, transfers, etc.

Factors Affecting Staffing

The internal factors affecting staffing:

1. Promotion policy : Staffing is affected by the promotion policy of the organisation. If the organisation has a good promotion policy with prospects to career growth and development, only then efficient people will be attracted to

the organisation. Internal promotions are better for lower and middle-level jobs. This is because it increases the

morale and motivation of the staff. However, for top level jobs, the RIGHT person must be selected. The right person may be from within the organisation, or he / she may be selected from outside.

2. Future growth plans : Staffing is also affected by the future growth plans of the organisation. If the organisation wants to grow and expand then it will need many talented people. In order to grow and expand, the organisation

must select experts and give them continuous training and development.

3. Technology used : Staffing is also affected by the technology used by the organisation. If the organisation uses modern technologies then it must have a continuous training programs to update the technical knowledge of their

staff.

4. Support from top management : Staffing is also affected by the support from Top Management. If the top management gives full support to it then the organisation can have scientific selection procedures, scientific

promotion and transfer policies, continuous training programs, career development programs, etc.

5. Image of organisation : Staffing is also affected by the image of the organisation in the job market. If it has a good image then staffing will attract the best employees and managers. An organisation earns a good image only if it

maintains good staffing policies and practices. This includes job security, training and development, promotion,

good working environment, work culture, etc.

The external factors affecting staffing:

1. Labor laws : Labor Laws of the government also affect the staffing policy of the organisation. For e.g. The organisation has to support Social equality and upliftment policies of the government by giving job reservations to candidates coming from depressed classes like scheduled castes (SC), scheduled tribes (ST), other backward classes

(OBC), etc., and even to those who are physically handicapped (PH). It is mandatory for an organisation not to

recruit children in their workforce and stop child labor. The provisions of Minimum Wages Act guide an organisation to fix minimum salaries of employees and stop their economic exploitation.

2. Pressure from socio-political groups : Staffing is also affected by activities of socio-political groups and parties. These groups and parties put pressure on the organisation to grant jobs only to local people. The concept of Sons of Soil is becoming popular in India.

3. Competition : In India, there is a huge demand for highly qualified and experienced staff. This has resulted in competition between different organisations to attract and hire efficient staff. Organisations often change their

staffing policies, offer attractive salaries and other job benefits in order to add the best minds in their workforce.

4. Educational standards : Staffing is also affected by the educational standards of an area. If the educational standard of a place is very high then the organisation will only select qualified and experienced staff for all job

positions. For e.g. Some I.T. companies in India, only prefer skilled candidates with computer or I.T. Engineering

degree for the post of Software Developer.

5. Other external factors : Staffing is also affected by other external factors such as trade unions, social attitude towards work, etc.

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COORDINATION:

Co-ordination means to integrate (bring together) all the activities of an organisation. It is done for achieving the

goals of the organisation. There must be proper co-ordination throughout the organisation.

According to management experts, co-ordination is necessary because :-

1. "Co-ordination is the Essence of Management." i.e. co-ordination effects all the functions of management, viz., Planning, Organising, Staffing, etc.

2. Co-ordination is a function of management. 3. Co-ordination is a principle of management, and all other principles are included in this one principle, i.e. co-

ordination is the "Mother Principle".

4. According to Mary Parker Follett, Co-ordination is the "Plus value of the group". That is, if there is good Co-ordination then the combined group achievement will be greater than the total of the individual achievement, i.e.

2+2=5. This is impossible in the physical world, but it is possible in human affairs through co-ordination.

Importance of Coordination

The need and importance of coordination can be judged from points below :-

1. Coordination encourages team spirit

There exist many conflicts and rivalries between individuals, departments, between a line and staff, etc. Similarly,

conflicts are also between individual objectives and organisational objectives. Coordination arranges the work and the

objectives in such a way that there are minimum conflicts and rivalries. It encourages the employees to work as a team

and achieve the common objectives of the organisation. This increases the team spirit of the employees.

2. Coordination gives proper direction

There are many departments in the organisation. Each department performs different activities. Coordination

integrates (bring together) these activities for achieving the common goals or objectives of the organisation. Thus,

coordination gives proper direction to all the departments of the organisation.

3. Coordination facilitates motivation

Coordination gives complete freedom to the employees. It encourages the employees to show initiative. It also gives

them many financial and non-financial incentives. Therefore, the employees get job satisfaction, and they are

motivated to perform better.

4. Coordination makes optimum utilisation of resources

Coordination helps to bring together the human and materials resources of the organisation. It helps to make optimum

utilisation of resources. These resources are used to achieve the objectives of the organisation. Coordination also

minimise the wastage of resources in the organisation.

5. Coordination helps to achieve objectives quickly

Coordination helps to minimise the conflicts, rivalries, wastages, delays and other organisational problems. It ensures

smooth working of the organisation. Therefore, with the help of coordination an organisation can achieve its

objectives easily and quickly.

6. Coordination improves relations in the organisation

The Top Level Managers co-ordinates the activities of the Middle Level Managers and develops good relations with

them. Similarly, the Middle Level Managers co-ordinates the activities of the Lower Level Managers and develops

good relations with them. Also, the Lower Level Managers co-ordinates the activities of the workers and develops

good relations with them. Thus, coordination overall improves the relations in the organisation.

7. Coordination leads to higher efficiency

Efficiency is the relationship between Returns and Cost. There will be higher efficiency when the returns are more and

the cost is less. Since coordination leads to optimum utilisation of resources it results in more returns and low cost.

Thus, coordination leads to higher efficiency.

8. Coordination improves goodwill of the organisation

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Coordination helps an organisation to sell high quality goods and services at lower prices. This improves the goodwill

of the organisation and helps it earn a good name and image in the market and corporate world.

DIRECTING:

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CONTROLLING:

Controlling consists of verifying whether everything occurs in conformities with the plans adopted, instructions issued

and principles established. Controlling ensures that there is effective and efficient utilization of organizational

resources so as to achieve the planned goals. Controlling measures the deviation of actual performance from the

standard performance, discovers the causes of such deviations and helps in taking corrective actions

According to Brech, Controlling is a systematic exercise which is called as a process of checking actual performance against the standards or plans with a view to ensure adequate progress and also recording such experience as is gained

as a contribution to possible future needs. According to Donnell, Just as a navigator continually takes reading to ensure whether he is relative to a planned action, so should a business manager continually take reading to assure himself that his enterprise is on right course.

Controlling has got two basic purposes

1. It facilitates co-ordination 2. It helps in planning

Features of Controlling Function

Following are the characteristics of controlling function of management-

1. Controlling is an end function- A function which comes once the performances are made in confirmities with plans.

2. Controlling is a pervasive function- which means it is performed by managers at all levels and in all type of concerns.

3. Controlling is forward looking- because effective control is not possible without past being controlled. Controlling always look to future so that follow-up can be made whenever required.

4. Controlling is a dynamic process- since controlling requires taking reviewal methods, changes have to be made wherever possible.

5. Controlling is related with planning- Planning and Controlling are two inseperable functions of management. Without planning, controlling is a meaningless exercise and without controlling, planning is

useless. Planning presupposes controlling and controlling succeeds planning.

COMMUNICATION:

It is the art of developing and attaining understanding between people. It is the process of exchanging information and

feelings between 2 or more people.

How can you make communication effective ?

a) Senders of messages must clarify in their minds what they want to communicate.

b) effective communication requires that encoding and decoding be done with symbols that are familiar to the sender

and the receiver of the message.

c) The planning of the communication should not be done in a vacuum.

d) It is important to consider the needs of the receivers of the information.

e) The tone of voice, the choice of language, and the congruency between what is said and how it is said influence the

reactions of the receiver of the message.

f) Communication is complete only when the message is understood by the receiver. Therefore feedback is essential.

g) Communication is vital for creating an environment in which people are motivated to work toward the goals of the

enterprise while they achieve their personal aims.

h) Effective communicating is the responsibility not only the sender but also of the receiver of the information.

Basics of Communication:

1. Communication is the process of transferring signals/messages between a sender and a receiver through various methods (written words, nonverbal cues, spoken words). It is also the mechanism we use to establish

and modify relationships.

2. Have courage to say what you think. Be confident in knowing that you can make worthwhile contributions to conversation. Take time each day to be aware of your opinions and feelings so you can adequately convey

them to others. Individuals who are hesitant to speak because they do not feel their input would be worthwhile

need not fear. What is important or worthwhile to one person may not be to another and may be more so to

someone else.

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3. Practice. Developing advanced communication skills begins with simple interactions. Communication skills can be practiced every day in settings that range from the social to the professional. New skills take time to

refine, but each time you use your communication skills, you open yourself to opportunities and future

partnerships.

4. Make eye contact. Whether you are speaking or listening, looking into the eyes of the person with whom you are conversing can make the interaction more successful. Eye contact conveys interest and encourages your

partner to be interested in you in return.

5. Use gestures. These include gestures with your hands and face. Make your whole body talk. Use smaller gestures for individuals and small groups. The gestures should get larger as the group that one is addressing

increases in size.

6. Dont send mixed messages. Make your words, gestures, facial expressions and tone match. Disciplining someone while smiling sends a mixed message and is therefore ineffective. If you have to deliver a negative

message, make your words, facial expressions, and tone match the message.

7. Be aware of what your body is saying. Body language can say so much more than a mouthful of words. An open stance with arms relaxed at your sides tells anyone around you that you are approachable and open to

hearing what they have to say.

a. Arms crossed and shoulders hunched, on the other hand, suggest disinterest in conversation or unwillingness to communicate. Often, communication can be stopped before it starts by body

language that tells people you don't want to talk.

b. Appropriate posture and an approachable stance can make even difficult conversations flow more smoothly.

8. Manifest constructive attitudes and beliefs. The attitudes you bring to communication will have a huge impact on the way you compose yourself and interact with others. Choose to be honest, patient, optimistic,

sincere, respectful, and accepting of others. Be sensitive to other people's feelings, and believe in others'

competence.

9. Develop effective listening skills: Not only should one be able to speak effectively, one must listen to the other person's words and engage in communication on what the other person is speaking about. Avoid the

impulse to listen only for the end of their sentence so that you can blurt out the ideas or memories your mind

while the other person is speaking.

10. Enunciate your words. Speak clearly and dont mumble. If people are always asking you to repeat yourself, try to do a better job of articulating yourself in a better manner.

11. Pronounce your words correctly. People will judge your competency through your vocabulary. If you arent sure of how to say a word, dont use it.

12. Use the right words. If youre not sure of the meaning of a word, dont use it. Grab a dictionary and start a daily habit of learning one new word per day. Use it sometime in your conversations during the day.

13. Slow your speech down. People will perceive you as nervous and unsure of yourself if you talk fast. However, be careful not to slow down to the point where people begin to finish your sentences just to help

you finish.

14. Develop your voice A high or whiny voice is not perceived to be one of authority. In fact, a high and soft voice can make you sound like prey to an aggressive co-worker or make others not take you seriously. Begin

doing exercises to lower the pitch of your voice. Try singing, but do it an octave lower on all your favorite

songs. Practice this and, after a period of time, your voice will begin to lower.

15. Animate your voice. Avoid a monotone and use dynamics. Your pitch should raise and lower periodically. Radio DJ's are usually a good example of this.

16. Use appropriate volume. Use a volume that is appropriate for the setting. Speak more softly when you are alone and close. Speak louder when you are speaking to larger groups or across larger spaces.

Barriers of Communication:

1) Lack of planning 2) Un clarified assumptions 3) Semantic distortion 4) Poorly expressed messages 5) Communication barriers in the International Environment 6) Loss by transmission and poor retention 7) Poor listening and premature evaluation 8) Impersonal communication 9) Distrust, threat and fear.

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Organization as a process and a structure; Types of Organizations.

Organization is a particular pattern of structure, people, tasks and techniques. Any operating organization should have

its own structure in order to operate efficiently. For an organization, the organizational structure is a hierarchy of

people and its functions.

The organizational structure of an organization tells you the character of an organization and the values it believes in.

Therefore, when you do business with an organization or getting into a new job in an organization, it is always a great

idea to get to know and understand their organizational structure.

Formalization: The extent to which jobs activities and behaviour are standardized and the means by which the

standardization is accomplished.

Centralization: The degree to which decision-making power and control are concentrated.

Vertical differentiation: Hierarchical structure consisting of a vertical dimension of differentiated levels of authority

and responsibility. Differentiation by degrees of authority.

Horizontal differentiation: Differentiation by specialization often referred to as departmentalization. People with

similar abilities working together on specialized tasks. Growth is a key impetus for horizontal differentiation, but is

not the sole one. Environment and technology may also demand specialization. There are four major forms of

departmentalization:

1. -Function: departments are set up in an organization according to the function being carried out. E.g. manufacturing, finance, marketing, etc. This is the most common form of departmentation.

2. -Process: people and jobs are grouped together which are needed to implement a certain process. E.g. departments organized around machines or data processing equipment

3. -Location: segregation by territories, regions, districts or countries. Where location makes a difference, a rationale exists for departmentalization on this basis.

4. -Product or service: the grouping of jobs and activities that are associated with a specific product. GM is a prime example with its different divisions.

5. -Client: activities and positions are grouped together in a way that is compatible with the unique needs of specific clients.

These different types of departmentalization are usually applied in some combination. For example an organization

which has a product or location departmentation, may have functional units within the product or geographical

departments.

Span of control: refers to the number of subordinates a manager supervises. This number depends on the complexity

of the task performed and the amount of subordinate-superior interaction required. There is no optimal amount. Span

of control is reflected in the organization's height. Flat vs hierarchical. Flat is less centralized. The larger the span of

control, the flatter the organization.

Line and staff: Line refers to the basic person boss relationship or chain of command that extends from top to bottom

of the organization. Staff facilitates the work of the line performing services for it and providing advice and

information in their special areas of competence. Eg. personnel, marketing. This relates to the view of the organization

with its technical core and need for buffering.

Major Organizational Forms

i. Line organisation: It is perhaps the oldest and the simples organisational structure. In this kind of structure every

manager exercise a direct authority over his subordinate who in turn directly reports to their superiors. There is a

hierarchical arrangement of authority. Each department is self contained and works independently of other

departments. Lines of authority are vertical i.e. from top to bottom.

There are no staff specialists.

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Advantages

Simple to establish and operate

Promotes prompt decision making.

Easy to control as the managers have direct control over their subordinates.

Communication is fast and easy as there is only vertical flow of communication.

Disadvantages

Lack of specialisation.

Managers might get overloaded with too many things to do. Failure of one manager to take proper decisions might

affect the whole organisation.

However, line structures are suitable for small businesses where there are few subordinates organisations where there

is largely of routine nature and methods of operations are simple.

ii. Staff organisation: Staff organization structure refers to the hierarchical arrangements that a company puts into

place to ensure that personnel adeptly perform operating activities. The structure typically assigns tasks to workers

based on business unit, department and segment needs. Staff managers, on the other hand, sit outside of the official hierarchy, and are tasked with autonomously overseeing a

particular function, such as tax accounting.

Staff managers generally perform their job functions without managerial guidance or approval, allowing them

to work much more efficiently than line employees. Staff managers are placed in charge of vital issues that are best

handled by a single, highly specialized individual, or in which a formal chain of command would simply hinder

productivity and efficiency. Just as some job functions are best handled by a single individual, some individuals

simply work best when they are left alone. Staff management positions can allow companies to leverage the skills and

expertise of specialists who may not fit well in the formal hierarchy of the organization.

iii. Line and staff organisation:

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Line and staff structure is an extension of the standard line organizational structure, wherein staff supervisors and staff

specialists are attached to the line of authority. Staff supervisors advise line executives; for example, the CEO

represents a line executive and his administrative assistant, a staff official. The CEO has final decision-making power,

but staff officers heavily advise every choice. Therefore, the line execs retain the power, but staff officers guide them

they are the power behind the throne. This interaction causes problems for line and staff organizations.

The combined line and staff authority processes can result in confusion as well as disenfranchised employees. Line

officials have the power to make decisions, which upsets some staff officials since they tend to put in more mental

labor.

Since staff officials do most of the research, some line managers begin to rely too heavily on the staff expert's advice.

While usually not an issue, when the staff expert is wrong and the line exec doesn't notice, inefficient decision making

results. Whenever a decision results in higher returns, the staff specialists are rewarded. While this reward may be

justified, the line officials involved can become dissatisfied or begin to feel unappreciated, which leads to low

productivity.

Sometimes, the two authorities, line and staff, disagree, which causes conflict that hurts the efficiency and

productivity of the company. Minor conflicts are common and occur in any system, but serious conflicts of interest or

differing opinions can spread disruption through the entire operation.

IV. Functional organization: Functional organizations contain specialized units that report to a single authority,

usually called top management. Refereed to as functional units or areas, these specialized units contain personnel with

various but related skills grouped by similarities. Each functional unit handles one aspect of the product or service

provided: information technology, marketing, development, research, etc. Top management is responsible for

coordinating the efforts of each unit and meshing them together into a cohesive whole.

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When companies use a functional organizational structure, people with similar knowledge and skills are grouped

together. This makes it possible for employees to become specialists in their field. It requires a performance

management system that allows for the promotion, development and visibility of individual skills within their

functional area. The specialization that functional structures hone helps to bring about in-depth knowledge and skill

development among the employees, and this can help you achieve your company's functional goals.

Specialization leads to operational efficiencies and enhances productivity levels. Because of their expertise, workers

with specialized skills can perform tasks quickly, efficiently and with more confidence, thus reducing the occurrence

of work-related mistakes. In addition, the clear nature of the career path within the functional unit makes it possible

for employees to be highly motivated to advance their careers as they move up within the hierarchy. The main goal of

functional structures in organizations is to bring the entire human and informational resources together to meet the

organizations goals. This can be an ideal structure for small businesses that focus on one product or service because you can maximize performance by encouraging peer cooperation among different units at various levels of

management through supervision and coordination.

Communication in organizations with functional organizational structures can be rigid because of the standardized

ways of operation and the high degree of formalization. This can further make the decision-making process slow and

inflexible. Since it is more bureaucratic, functional units are often not accountable to each other, and poor horizontal

coordination within the departments can occur. Lack of innovation and restricted views of organizational goals, along

with too much focus, can affect employees' motivation.

V. Committee organisation: Committee can be defined as a group of organisational members who discuss and

develop solutions to problems. It can be either line or staff and can be established on a standing (permanent) or an

adhoc basis. In business enterprises, the board of directors constitutes the committee at the highest level. The purpose

of such committees is to discuss various problems and recommend solutions to the management. It is generally found

to co-exist with line and staff type of organisation. The Board of Directors of a company is an example of a committee

organisation. This form of organisation is suitable for taking decisions on policy matters or laying down broad

objective for the enterprise.

Merits or advantages: The committee form of organisation offers following advantages:

It is an excellent medium of discussion and education and of communication between

management and workers. It is extremely useful in coordinating plans as well as in facilitating their execution. Setting

organisational objectives, and developing and finalising plans and policies require

pooling of information, abilities and expertise, as well as integration of conflicting interests and viewpoints. It is not

one man's job, and is best performed by committees.

Sometimes problems are so complex or of inter-departmental nature that they are best solved

by committees composed of concerned executives. It is able to serve as a mechanism of participative decision making.

By participating in discussions or decision, a member feels motivated in accepting a situation or implementing a

decision. Committee form of decision making is, of course, a democratic process. It reduces the tyranny of executive

authority and provides for participative decision-making. It is extremely useful in coordinating plans as well as in

facilitating their execution.

Demerits or Disadvantages: It is an expensive device both in terms of time and cost.

Nobody is accountable for committee decisions. A committee decision is nobody's decision just

because it is everybody's decision. Often committees result into more conflict than problem solving.

The decisions taken in committee organisation are the result of compromise and hence they are

generally slow in forthcoming and weak.

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VI. Matrix Organisation: The matrix organizational structure divides authority both by functional area and by

project. In a matrix structure, each employee answers to two immediate supervisors: a functional supervisor and a

project supervisor. The functional supervisor is charged with overseeing employees in a functional area such as

marketing or engineering. Project supervisors manage a specific and often impermanent project. They absorb

employees from various functional areas to complete their project teams.

The matrix structure allows supervisors to focus on their areas of expertise. Functional supervisors focus on hiring,

training and managing employees in their field, while project supervisors can focus on achieving the goals of their

specific projects or products. When isolated in a functional area, employees may have more difficulty benefiting from

the skills and experiences of those in other areas. In a matrix structure, employees have constant contact with members

of other functional areas via their membership in project teams. Through the project team, employees have the

opportunity to develop a wider set of skills than they would in a purely functional structure.

Method study:

Method study is defined as the branch of science of eliminating un productive activities and in efficient motions.

Various resources utilized for a manufacturing process may be man material machines money time and technology.

The best combination of the above provides a basis to analyze the existing process and to develop most efficient

method. Method study is also defined as a systematic recording and critical examination of existing and proposed

methods of doing the job with an objective to develop simple and easier and more effective method with least cost.

Objectives

1) Improvement of process and procedure

2) Improvement of plant design and equipment

3) Improvement of plant layout

4) Improvement of utilization of various resources

5) Improvement of flow of production and activities

6) Improvement of safety standards

7) Efficient material handling

8) Economy in human effort and reduction of undesirable strain and fatigue

9) Methods standardization

10) Development of better work environment

Motion and Time Study:

Motion and time study can reduce and control costs, improve working conditions and environment, and motivate

people. The basic purpose is to improve the work and to reduce waste.

1. Motion analysis techniques

2. Time study techniques

3. Uses of time standards.

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Manufacturing management and engineering students are being prepared to design work stations, develop efficient

and effective work methods, establish time standards, balance assembly lines, estimate labor costs, develop effective

tooling, select proper equipment, and layout manufacturing facilities. However, the most important thing is to learn

how to train production workers in these skills and techniques so they can become motion and time conscious.

Motion study offers a great potential for savings in any area of human effort. We can reduce the cost by combining

elements of one task with elements of another. Motion study uses the principles of motion economy to develop work

stations that are friendly to the human body and efficient in their operation. Motion study must consider the operators safety.

Motion studies are performed to eliminate waste. Before any improvement in quality or quantity of output, any study

of operations time, any scheduling of work or balancing of workload or any calculation of standard time, a study of

the current and proposed method is required. Studies of overall factory flow or process, called macromotion studies,

and then additional studies of detail or operations, called micromotion studies, should be completed for a project.

Motion studies were conducted by Frank and Lillian Gilbreth about a century ago in a search for the one best way. It is important to note that such studies seek to minimize and simplify manual efforts.

Macromotion Study

Any process can be studied by dividing it into process activity. Although each activity is different, depending on the

product, there are five classes of activities that are included in all processes. Savings, may be found in the process by

reorganizing activities.

These activities found in every sequence of processes are Operations Changes in the properties of the product.

Transportations Changes in the location of the product. Inspection Confirmation that change fits to specification.

Delay Wait for start of operation, transportation, or inspection. Storage Wait until needed.

When the process is first studied, each activity is recorded and arranged into one of the five classes. All observed

activities are recorded, and activities not done are not recorded. The purpose of each activity should be studied.

Typically, the questions Who? What? Where? When? Why? and How? Must be answered. Next, each event is

observed in the following sequence:

Can the activity be eliminated? If not,

Can the activity be combined and done with another activity? If not,

Can the activity be rearranged so occur in the sequence at an easier time? If not.

Can the activity be simplified with shorter distances, mechanical assist, or

reduced complexity?

Once these questions are asked and the improvement sequence is defined, it is necessary to draw a chart or diagram

that shows the motion improvements.

Process Flow Plan A plan-view plant layout with activities overlaid

Process Operations Chart The sequence of serial and parallel operations

Process Chart All serial activities on a preprinted form.

Flow Process Chart All serial and parallel activities on a single page.

Work Cell Load Chart A plan view with repetitive operations.

Route Sheet A planning tool for scheduling operations Micromotion Study.

Considerable wasted motion and idle time can occur within an operation. This time cant be found with macromotion studies because is usually within one process operation. The improvement is gained from reducing the operation cycle

time.

Motion study comes first before the setting of time standards. Motion study is a detailed analysis of the work method

in an effort to improve it. Motion studies are used to

1. Develop the best work method.

2. Develop motion consciousness on the part of all employees.

3. Develop economical and efficient tools, fixtures, & production aids.

4. Assist in the selection of new machines and equipment.

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5. Train new employees in the preferred method.

6. Reduce effort and cost.

Motion study is for cost reduction, and time study is for cost control. Motion study is the creative activity of motion

and time study. Motion study is design, while time study is measurement. Once the importance of motion and time

study is understood and accepted, the techniques of motion and time study are introduced.

Flow diagrams Multi activity charts Operation charts Flow process charts Process charts Operations analysis chart Work station design Motion economy Flow patterns Predetermined time standards system (PTSS).

The techniques of time study start with the last motion study technique, which shows the close relationship between

motion study and time study. The techniques of time study are:

Predetermined time standards system (PTSS). Stopwatch time study Standard data formula time standards Work sampling time standards Expert opinion and historical data time standards.

TIME STANDARD

The definition of a time standard is the time required to produce a product at a work station with the following three conditions:

(1) a qualified, well-trained operator,

(2) Working at a normal pace,

(3) Doing a specific task.

These three conditions are essential to the understanding of time study.

The importance of time standards can be shown by the three statistics 60%, 85%, and 120% performance. The time

standard is one of the most important pieces of information produced in the manufacturing department. It is used to

develop answers for the following problems:

Time standard helps us in determining the number of machine tools to buy, determining the number of

production people to employ, determining manufacturing costs and selling prices scheduling the machines, operations,

and people to do the job and deliver on time, determining the assembly line balance, determining the conveyor belt

speed, loading the work cells with the correct amount of work, and balancing the work cells, determine individual

worker performance and identifying operations that are having problems so the problems can be corrected, paying

incentive wages for outstanding team or individual performance, evaluating cost reduction ideas and picking the most

economical method based on cost analysis, not opinion, evaluating new equipment purchases to justify their expense

developing operation personnel budgets to measure management.

performance.

Problem: How Many Machines Do We Need?

One of the first questions arose when setting up a new operation or starting production on a new product is how many machines do we need? The answer depends on two pieces of information: a. How many pieces do we need to manufacture per shift?

b. How much time does it take to make one part? (Time standard)

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Procedure of method study

Following are the steps in the procedure

1) SELECT the work to be studied

The selection step involves the process of choosing by systematic means a specific problem to be solved, or an

area of work to be studied. Therefore, it is a step for deciding the potential area offering maximum reward offer for

this study. In this stage, we can also prioritize our scope of work.

2) RECORD all the relevant data of the present method by direct observation

3) EXAMINE the data critically by applying suitable techniques

4) DEVELOP the most efficient and economic method with less defectives (or) failures

After critical examination of records is complete, it is necessary to transform the learnings into the development of new methods. Some approaches are:

(a) Eliminate unnecessary activities.

(b) Combine two or more activities. For example, if one uses a combination tool for two operations, say, facing and

drilling, the total set-up time will reduce.

(c) Resequence activities so as to reduce time and effort.

(d) Simplify process to reduce number of operations or reduce effort or reduce throughput, etc.

(e) Attack on constraints, which are preventing the method to perform better.

5) DEFINE the new method with variables and parameters

6)INSTALL: Installation of new process is a major step towards fulfilling the objective of the entire approach. This

involves evolving a time-frame for installing the new (TO-BE) system. Training of the personnel, rearrangement of

machine, arrangement of tools and reorientation of workplace are some efforts to install the new system. In general,

four-phased strategy is needed:

(i) Selling the proposal:

Communication, approval and confidence of those, involved in installation and use.

(ii) Preparation for installation:

Purchase of required machine and equipment, relay out of plant, time-table for installation, planning, arranging and

rehearsing.

(iv) Commencement of new method

(v) Initial monitoring of installation activities:

After the installation of the new system, new method is to be maintained. Periodic review is necessary for maintaining

the new system.

6) MAINTAIN the standard method by regular or periodic test.

Tools for work study:

Two hand Process Chart:

The Two-Hand Process Chart The two-hand process chart, sometimes referred to as an operator process chart is a

motion study tool. This chart shows all movements and delays made by the right and left hands. Usually, it is not

practical to make a detailed study through the two-hand process chart unless a highly repetitive manual operation is

involved.

The two-hand process chart is an effective tool to:

Balance the motions of both hands and reduce fatigue. Reduce or eliminate nonproductive motions. Shorten the duration of productive motions. Train new operators in the ideal method.

Multiple Activity Chart

This chart is used to show the interactions and interferences between the work of several working as a team and

dependent on each other. It examines short cycle repetitive work and determines the utilization of operators and

machines working in a group. It enables group work to be designed that is effective and operates with high

productivity.

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Simultaneous Motion Cycle (SIMO) Chart:

A SIMO chart, is based on film analysis and records simultaneously on a common time scale the therbligs or groups

of therbligs performed by different parts of the body of one or more workers.

The SIMO Chart is the micro-motion form of the man type flow process chart. Because SIMO charts are used

primarily for operations of short duration, often performed with extreme rapidity, it is generally necessary to compile

them from films made of the operation which can be stopped at any point or projected in slow motion.

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Therbligs are 18 kinds of elemental motions used in the study of motion economy in the workplace. A workplace task

is analyzed by recording each of the therblig units for a process, with the results used for optimization of manual labor

by eliminating unneeded movements.

Therbligs are a creation of the early 20th century time and motion expert Frank Gilbreth, who was most famous as the

father in Cheaper by the Dozen.

PMTS Chart: Pre determined Motion time system:

PMTS is a work measurement technique where by times, established for basic human motions (Classified according to

the nature of the motion and conditions under which it is made) are used to build up the time for a job at a defined

level of performance.

PMTS also makes use of previously collected data, but it deals with the basic human motions of duration 0.1 seconds

or less. On the other hand, the synthetic time standards use duration of 3-4 seconds. PMTS uses video film (micro

motion study).

Applications: 1. For short cycle and highly repetitive jobs.

2. When more accuracy is required than stop watch time studies. 3. Where no rating factor is required but allowances need to be added. 4. But can deal only manual motions of the operations.

String Diagram: String Diagram is a scale layout drawing on which, length of a string is used to record the extent as well as the pattern

of movement of a worker working within a limited area during a certain period of time. It is a scale diagram on

which colour threads are wrapped around pins or pegs, which are used to indicate the paths taken by either worker or

material or equipment when processing is done on material from start to finish.

Cycle graph and Chrono cycle graph These are the techniques of analyzing the paths of motion made by an operator and were originally developed by the

Gilbreths. To make a cycle graph , a small electric bulb is attached to the finger, hand, or any other part of the body

whose motion is to be recorded. By using still photography, the path of light of bulb (in other words, that of the body

member) as it moves through space for one complete cycle is photographed. The working area is kept relatively less

illuminated while photograph is being taken. More than one camera may be used in different planes to get more

details. After the film is developed, the resulting picture (cycle graph) shows a permanent record of the motion pattern

employed in the form of a closed loop of white continuous line with the working area in the background. A cycle

graph does not indicate the direction or speed of motion.

It can be used for improving the motion pattern, and Training purposes in that two cycle graphs may be shown with

one indicating a better motion pattern than the other.

Memo motion or spaced-shot photography is a tool of time and motion study that analyzes long operations by using

a camera.

A study showed the following advantages of Memo-Motion in regard to other forms of time and motion study:

Single operator repetition work ...

Aerea studies, the study of a group of men or machines.

Team studies.

Utilisation studies.

Work measurement.

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As a versatile tool of work study it was used in the US to some extent, but rarely in Europe and other industrial

countries mainly because of difficulties in procuring the required cameras. Today Memo-Motion could have a

comeback because more and more workplaces have conditions which it can explore.

Time study can reduce cost significantly well. Time standards are goals to strive for. In organizations that

operate without time standards, 60% performance is typical. When time standards are set, performance improves to an

average of 85%. This is a 42% increase in performance:

85 % - 60 %

------------------ = 42% performance increase.

60%

Incentive systems can improve performance even further. Incentive system performances average 120%, that is

another 42% increase in performance:

120% - 85%

---------------------- = 42% performance increase.

85%

Manufacturing plants with no standards average 60% performance. Manufacturing plants with time standards average

85% performance. Manufacturing plants with incentive systems average 120% performance. If additional production

output is required, dont buy more machinery, dont add a second shift, and dont build a new plant. Just establish a motion and time study program. Motion and time study is considered to be the backbone of industrial engineering,

industrial technology, and industrial management programs because the information that time studies generate affects

so many other areas, including the following:

1. Cost estimating

2. Production and inventory control

3. Plant layout

4. Materials and processes

5. Quality

6. Safety

EXAMPLE:

The marketing department wants us to make 2,000 wagons per 8-hour shift.

It takes us 0.400 minutes to form the wagon body on a press.

There are 480 minutes per shift (8 hours/shift x 60 minutes/hr).

50 minutes downtime per shift (breaks, clean-up, etc.)

There are 430 minutes per shift available @ 100%.

@ 75% performance (based on history) (0.75 x 430 = 322.5).

There are 322.5 effective minutes left to produce 2,000 units.

322.5

--------------- = 0.161 minutes per unit, or 6.21 parts per minute.

2,000 units

The 0.161 minutes per unit is plant rate. Every operation in the plant must produce a part every 0.161 minutes;

therefore, how many machines do we need for this operation?

Time standard = 0.400 minutes/unit

----------------------------------------------------- = 2.48 machines

Plant rate = 0.161 minutes/unit

This operation requires 2.48 machines. If other operations are required for this kind of machine, we would add all the machine requirements together and

round up to the next whole number.

In this example, we would buy three machines. (Never round down on your own. You will be building a bottleneck in

your plant.)

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How Many people should we hire?

Look at the operations chart shown in Figure 4-1. From a study of this chart, we find the time standard (or every

operation required to fabricate each part of the product and each assembly operation required to assemble and pack the

finished product. In the operation shown here (casting the handle), the 05 indicates the operation number. Usually, 05

is the first operation of each part. The 500 is the pieces per hour standard. This operator should produce 500 pieces per

hour. The 2.0 is the hours required to produce 1,000 pieces. At 500 pieces per hour, it would take us 2 hours to make

1,000. How many people would be required to cast 2,000 handles per shift?

Not many people, departments, or plants work at 100% performance. How many hours would be required if we work

at the rate of 60%, 85%, or 120%?

4 hours 4 hours 4 hours

----------- = 6.66 hours; ------------- = 4.7 hours; -------------- = 3.33 hours.

60% 85% 120%

Look again it use operations chart shown in Figure 4-1. Note the total 138.94 hours at the bottom right side. The

operations chart includes every operation required to fabricate, paint, inspect, assemble, and pack out a product. The

total hours is the total time required to make 1,000 finished products?

In our water valve factory, we need 138.94 hours at 100% to produce 1,000 water valves. If this is a new product, we

could expect 75% performance during the first year of production. Therefore,

138.94 hours per 1,000

---------------------------------- = 185 hours/1,000 where 75% = 0.75

75% performance

The marketing department has forecasted sales of 2,500 water valves per day. How many people are needed to make

water valves?

185 hours/1,000 X 2.5 (1,000) = 463 hours/day needed.

463 / 8 = 57.87 which is equal to 58 people.

Management will be judged by how well it performs to this goal. If less than 2,500 units are produced per day with the

58 people, management will be over budget, and that is not good. If it produces more than 2,500 units per day,

management is judged as being good at managing, and the managers are promotable.

For example, how many direct labor employees do we need for a multiproduct plant? Per day, 1,132 hours of direct

labor are needed. Each employee will work 8 hours; therefore,

1,132 hours

----------------------- = 141.5 employees.

8 hours/employee

We will hire 142 employees, and management will be evaluated on the performance of these 142 employees. Without

time standards, how many employees would you hire?

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Elements of Production control

Production planning and control (PPC) is most essential for any organisation. Planning process within an

organisation is dynamic and continuous. For production purpose, all the facilities should be arranged and the factory

itself has to be properly set up. PPC involves the planning of production, a decision on the sequence of operations to

achieve what has been planned , the setting of starting and finishing time for production, proper dispatching of the

material, and follow up action to check the progress of operations.

Planning and control generally involve the planning of manufacturing process. Especially it consists of the

planning of routing, scheduling, dispatching, inspection, and coordination, control of materials, methods, machines,

tools and operating times etc. The ultimate objective of PPC is to organize the supply and movement of materials and

labour, machines utilization and related activities, in order to bring about the desired manufacturing results in terms of

quality, quantity, time and place.

Production control regulates and stimulates the orderly show of materials in the manufacturing process from

the beginning to the end. Production planning may be defined as the technique of foreseeing every step in a long series

of separate operations, each step to be taken at the right time and in the right place and each operation to be performed

in maximum efficiency. Planning and control are the two most important and dynamic process of management.

Managers plan for different activities in their organisation and through control mechanism they take corrective actions

where ever required. Production planning consists of the evaluation and determination of production inputs such as

labour, machinery and equipment, materials and utilities to achieve the desired goal. The productivity of an

organisation can be improved by better planning efforts.

Production planning and control can be defined as the process of planning or deciding on the resources the firm will require for its future manufacturing operations and of allocating and time scheduling these resources to

produce the desired products on time at the least total cost.

Generally PPC is used in manufacturing organisations. But it can also be used in different non manufacturing units

also. For example, we can use PPC in any restaurant to provide customer service more efficiently.

There are basically four elements in PPC, which are stared as below:

1.Routing

2.Scheduling

3.Dispatching

4.Follow up

Routing

Routing is the planning process, which is undertaken to find the best possible path for manufacturing a certain

product. It determines what work will be done on a product and how it will be done. It establishes the operations, their

path and sequence, and the proper class of machines that require performing specific operations. Routing prescribes

the flow of work in the plant and it is related to the considerations of layout, temporary location for raw materials and

components and material handling system.

The main aim of routing is to determine the best and cheapest Production Planning and control.

Routing procedure involves the following different activities:

(1) An analysis of the article to determine what to make and what to buy.

(2) To determine the quality and type of material

(3) Determining the manufacturing operations and their sequence.

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(4) A determination of lot sizes

(5) Determination of scrap factors

(6) An analysis of cost of the article.

Scheduling

The next step after routing is scheduling. Scheduling is the allocation of resources applying the limiting factors of time

and cost to perform a collection of tasks. It involves the assignment of starting and completion times for the various

operations to be performed. Therefore scheduling can bring productivity in shop floor by providing a schedule/ routine

for processing a set of jobs. Scheduling finds the total time needed for manufacturing of a product. It also finds the

time required in each machines to perform each task. The purpose of scheduling is to execute a customers order well in time. For example, if we order for a car, the manufacturer will estimate the time required for its production and then

will give us the delivery date. Scheduling is that phase of production and control, which rates the work in order of its

priority and then provide for its release to the plant at the proper time and in correct sequence. Thus, scheduling is

concerned with when the work shall be performed on a product. Routing and scheduling activities are complementary

to each other. One cannot route properly without having previously designed schedule and scheduling is impossible

without the knowledge of required routing.

The essence of scheduling is to make allocation decisions pertaining to the starting and finishing times for

tasks. Scheduling can be classified into Single machine scheduling, Flow shop scheduling and Job shop scheduling.

Scheduling is mainly concerns with time element and priorities of a job. The pattern of scheduling differs from one

job to another which is explained as below:

Production schedule: The main aim is to schedule that amount of work which can easily be handled by plant and

equipment without interference.

Master Schedule: Scheduling usually starts with the preparation of the master schedule which is weekly or monthly

break-down of the production requirement for each product for a definite time period. This would enable the

production manager to shift the production from one product to another as per the changed production requirements.

This forms a base for all subsequent scheduling acclivities. A master schedule is followed by operator schedule which

fixes total time required to do a piece of work with a given machine or which shows the time required to do each

detailed operation of a given job with a given machine or process.

Best scheduling is not always possible because of the following conditions:

(i). Physical plant facilities of the type required to process the material being scheduled.

(ii). Personnel who possess the desired skill and experience to operate the equipment and perform the

type of work involved and,

(iii). Necessary materials and purchased parts.

While preparing schedules, the types of orders and their promised delivery dates must be taken into

consideration. Some orders may call for overtime work because they have to be delivered soon. Such rush orders

should receive priority over repeat orders, which can be scheduled for completion in the normal course.

Despatching

Dispatching is the transition from planning phase to action phase. In this phase, the worker is ordered to start

manufacturing the product. Dispatching involves the actual granting of permission to proceed according to plans

already laid down. In dispatching, orders are issued in terms of their priority.

The dispatch section of the PPC is responsible for the following task:

(i). Checking the availability of material and then taking appropriate action to have it transferred from the main stores

to the point at which it is needed.

(ii). Ensuring that all production aid is ready when needed and then having them issued to manufacturing departments.

(iii). Obtaining specific drawings from the drawing office.

(iv). Informing the process section that production is commencing.

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(v). At the conclusion of the manufacturing, ensure that all the drawings, layout and tools are withdrawn and returned

to their correct location.

Dispatching is an important step as it translates production plans into actual production.

Once production has been set in motion, it is necessary to check that it is proceeding according to the plan.

Every production programme involves determination of the progress of work, removing bottlenecks in the flow of

work and ensuring that the productive operations are taking place in accordance with the plans. It spots delays or

deviations from the production plans. It helps to reveal defects in routing and scheduling, misunderstanding of orders

and instruction, under loading or overloading of work etc. All problems or deviations are investigated and remedial

measures are undertaken to ensure the completion of work by the planned date.

Generally production is assumed to progress as expected. But there may be differences which may arise due to the

following reasons:

(i). Materials may be delivered late or may not be delivered at all.

(ii). Associated departments may have fallen behind in their own production.

(iii). There may be excessive absenteeism on the part of the worker.

(iv). The customer may insist on changing the specification or delivery date.

(v). Machines may break down.

(vi). There may be errors in drawings.

(vii). There may be too many rejections due to poor material quality.

Other things related to production are inspection and corrective actions.

Inspection: This is mainly to ensure the quality of goods. It can be required as effective agency of production control.

Corrective measures: Corrective action may involve any of those activities of adjusting the route, rescheduling of

work, changing the workloads, repairs and maintenance of machinery or equipment, control over inventories, poor

performance of the employees. Certain personnel decisions like training, transfer, demotion etc. may have to be taken.

Alternative methods may be suggested to handle peak loads.

COSTS AND COST CONTROL:

Production control is the process of planning production in advance of operations, establishing the exact route of each

individual item part or assembly, setting, starting and finishing for each important item, assembly or the finishing

production and releasing the necessary orders as well as initiating the necessary follow-up to have the smooth function

of the enterprise. The production control is of complicated nature in small industries. The production planning and

control department can function at its best in small scale unit only when the work manager, the purchase manager, the

personnel manager and the financial controller assist in planning production activities. The production controller

directly reports to the works manager but in small scale unit, all the three functions namely material control, planning

and control are often performed by the entrepreneur himself. Production control starts with dispatching and ends up

with corrective actions.

Production technique is an updating and revising procedure, through which the requirements of implementation, the

labour assignments, the machine assignments, the job priorities, the production routes etc may be revised. It is a

correcting mechanism which goes on throughout the implementation process of the already drawn out production plan

and schedule. In order to perform the function of PPC properly, managers require some techniques to control any

deviations.

Following are the some of the technical tools used by the managers:

1. Control Charts and Graphs: Gantt chart is an effective control chart used to gauge the planned and actual progress.

Again a simple graph will be highly useful to compare actual progress with the scheduled progress.

2. Control Boards: A control board is a device for automatically indicating the progress of the work. Control boards

are generally used for repetitive productions.

3. Communication systems: Quick exchange of information and instructions is highly useful for controlling

productions.

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4. Quantitative techniques: With the help of quantitative techniques like, PERT, CPM or linear programming,

managers can control production.

Following are the advantages of using PPC in any plant:

(i). PPC forecasts sales orders and makes sales order more economical in production.

(ii). It co-ordinates the operations of several departments.

(iii). It ensures better service to customers by delivering quality goods within the specified time period.

(iv). Reduces production costs through orderly scheduling of work activities and reducing wastages.

(v). Reduces employee idle time.

(vi). Ensures a better control of material and contributes to efficient buying.

INVENTORY AND INVENTORY CONTROL: The term inventory is used to indicate various items of stores kept

in stock in order to meet future demands. In any organization, there may be following four types of inventory:

(a) Raw materials & parts-- These may include all raw materials, components and assemblies used in the manufacture

of a product;

(b) Consumables & Spares -- These may include materials required for maintenance and day-to-day operation;

(c) Work in progress -- These are items under various stages of production not yet converted as finished goods;

(d) Finished Products -- Finished goods not yet sold or put into use.

Need for Inventory: (i). The time to procure regular raw materials may be longer due to various reasons and it may

not be possible to procure these materials when instantaneously required. It is, therefore, necessary to keep stocks of

such items.

(ii). Even for those items which are readily available in the market, it may not be economical to buy these items every

time as buying in piecemeal involves additional costs to the administration. Therefore, we may find it cheaper to buy

in bulk and to stock some of these items and supply our indenters through such stocks.

(iii).There is always some fluctuations in demand as well as fluctuations in the time within which material can be

procured. It is therefore, not possible to forecast our requirements exactly and time the purchases in such a way so that

the materials will arrive just when they are physically required. It, therefore, becomes necessary to maintain stocks of

these items.

BASIC PROBLEMS OF INVENTORY MANAGEMENT :

From the above discussions, it will be seen that on the one hand inventories are idle and valuable resource i.e. capital

remains locked up in the inventories which can be used for other productive purposes but on the other hand, they are

desirable to satisfy manufacturing, maintenance or operation requirement of the organization. Hence basic problem of

inventory management is to optimize the stock levels of different materials so that their stocks are maintained at

optimum levels without affecting the production or day-to-day maintenance.

Three basic problems associated with this optimization of stocks are ;

(a) When to initiate purchase of the materials

(b) How much quantities are to be purchased at a time and

(c) What should be the stock levels of different items.

Various Costs Related To Inventory Management:

(i). Costs Of Ordering Or Costs Of Acquisition: For a large organization, it becomes necessary to have a separate

purchase office to purchase thousands of items. The demands received are technically scrutinized and for purchasing

them, inquiries are issued, tenders are received and evaluated, orders are progressed, materials are received and

25

inspected and lastly, the payments are arranged. All these mean additional costs to the organization. All these costs

together constitute what is called cost of ordering or cost of acquisition.

(ii). Inventory Carrying Costs: The very fact that the items are required to be kept in stock means additional

expenditure to the organization. The different elements of costs involved in holding inventory are as follows:

(a) Interest on capital / cost of capital / opportunity costs: When materials are kept in stock money representing the

value of materials is blocked. In a developing economy, capital is extremely scarce and as such, the real value of

capital is much higher than the nominal rate of interest which the organization may be paying. The, money which is

blocked up is not available to the organization to do more business or to use it for alternative productive investment.

This opportunity to earn more profits which we lose can be expressed as opportunity cost. While working out the

inventory carrying cost in an organization, the higher of the three factors viz., interest, cost of capital or opportunity

cost should, be taken into consideration. This may be roughly 20% per annum.

(b) Obsolescence and depreciation: The costs because of obsolescence and depreciation are very important even

though they are very difficult to assess. This factor is relatively higher for spare parts inventory as against raw material

inventory. Larger the stock we keep more the risk of obsolescence and as such, the costs are expressed as the

percentage costs to the average inventory holding and can be between 2 to 5%.

(c) The cost of storage, handling and stock verification: There are additional costs because of the clerical work

involved in handling of materials in the ward, in stock verification, in preservation of materials as well as the costs

because of various equipments and facilities created for the purpose of materials. A part of this cost is of a fixed

nature. The major portion of the cost including the cost of staff, however, can be treated as variable costs at least in the

long run. This cost can be roughly 3 to 5% of the inventory holding.

(d) Insurance Costs: Materials in stocks are either insured against theft, fire etc., or we may have to employ watch &

ward organization and also fire fighting organizations. Cost of this may also be 1 to 2%. The average inventory

carrying costs can, therefore, be as follows:

Interest/costs of capital/opportunity cost 15 to 25%

Obsolescence and depreciation cost 2 to 5%

Storage, handling etc. 3 to 5%

Insurance costs 1 to 2%

Total 21 to 37%

Shortage Or Stock Out Costs: Whenever an item is out of stock and as such cannot be supplied, it means that some

work or the other is delayed and this, in turn, leads to financial loss associated with such stoppage or delay of work.

Stock out costs can vary from item to item and from situation to situation depending upon the emergency action

possible. No attempt therefore, is normally made to evaluate a stock out cost of an item. Nevertheless, it is important

to understand the concept of stock out costs, even though the actual quantification is not possible. We should have a

rough grading of the items depending upon the possible stock out costs.

Systems Costs: These are the costs which are associated with the nature of the control systems selected. If a very

sophisticated model of the relationship between stock out costs, inventory holding cost and cost of ordering is used

and operated with the help of a computer, it may give the theoretical minimum of the other costs but the cost of such

control system may be sufficiently high to offset the advantages achieved.

INVENTORY MANAGEMENT - CONSTRAINS & PROBLEMS :

Problems of inventory management vary from organization to organization depending upon various variables; some of

them are as under:

(a) Whether the demand for the goods is one time (static) or of repetitive nature (dynamic).

(b) In case of demands of dynamic (repetitive) items, whether future requirements can be assessed with certainty or

uncertainty or under risk (probability). Also, whether the demand is fixed over a time or is variable.

(c) Whether the material is manufactured in house or is to be purchased through outside suppliers.

(d) Whether the lead time during which material can be arranged is fixed or is variable.

Economic Order Quantity:

Depending upon various variables, different inventory models have been developed. Different models take

different costs into account. One of the popular model developed for items of repetitive nature (dynamic), future

demands for which can be projected with certainty is Economic Order Quantity (EOQ) model.

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In addition to factors mentioned above, this model assumes that price of the material remains constant with

time and also does not vary with order quantity. This model can be developed mathematically by differentiating total

cost of inventory (ordering cost + inventory carrying cost) with respect to Quantity. The formula so derived is given

below:

Economic Order Quantity (EOQ) =

Where

R = Annual Consumption Quantity

C = Cost of placing one order

F = Annual inventory carrying cost represented as fraction

P = Unit Cost (Rate/Unit) of the material

H =

INVENTORY CONTROL:

Inventory Control is the art and science of maintaining the stock level of a given group of items, incurring the least

total cost, consistent with other relevant targets and objectives set by the management. Generally, this is measured in

terms of service level which is measured in terms of percentage of compliance of demands (requisitions for materials)

of user departments and Inventory Turnover ratio as explained above.

Inventory Control Techniques : Various techniques employed for controlling stock levels are ;

(a) Selective Management :- In this technique, various items of stores are classified in various classifications

depending upon their consumption, value, unit price, criticality for the organization, source of supply, purchasing

problems, rate of drawal from stores, seasonality and stores balances on a particular date. Different approaches of

control are being followed for different types of items. Two such classifications ABC & VED are described in

paragraphs 13.6.2 & 13.6.3.

(b) Management by exception-- In this technique, items with certain exceptions are tackled on different points of time.

For example, overstock items, surplus items and inactive items may require more attention.

(c) Designing of recoupments policies -- Recoupments policies are designed in such a manner that average stocks of

materials are optimum.

(d) Rationalization :- Techniques of standardization and variety reduction are used to minimize lead time of the

material, and reduce unnecessary inventory carrying costs.

(e) Value Analysis :- Functions performed by the materials are analyzed and alternative designs/raw materials are

suggested to achieve the same function at minimum cost.

(f) Computerization :- Computer Outputs can be used for scientific forecast of demand to solve many inventory

models, providing optimum safety stocks and for controlling funds.

A-B-C Analysis :This analysis is based upon Pareto Principle according to which in many situations, majority of the

activity (70 to 80%) is governed by very few (10 to 20) attributes.

Hence if all the stock items are analyzed in terms of their annual consumption value, major part of total consumption

value on a Railway (about 70-80%) is of only few high consumption value items (say 10 to 20%). These items may be

classified as A category.

15 to 20% of total consumption is represented by another 15 to 20% items which may be classified as B category .

Remaining 5 to 10% consumption is represented by a large no. of small consumption value items which may be

classified as C category.

Actual ABC classification depends upon management decision. In Railways, we have decided that

All high consumption value items which represent 70% of total issues, will be classified as A category,

Items which represent 20% of total issue will be classified as B category .

All remaining items will be C category.

This analysis is done on the computer as explained below:

(a) First of all annual issue values of all the items which were issued from all the depots are added together to find

total issues (in rupees) of the Railway;

(b) Then all the items are sorted in descending sequence of their issue value on the entire Railway (i.e. after adding

issues of individual depots);

(c) Then we go on counting the items adding issue value of the item to a 'cumulative issue value' counter. When the

value in this counter represents 70% of total issue- value worked out in step (a), after reading a particular item, all the

items from top to this item are classified as 'A' category items;

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(d) The reading of items is further continued when after reading a particular item and adding its issue value to

'cumulative issue value' counter, value in the counter is equal to 90% of total issues, we mark all items from item next

to last A category item to this item as B category item;

(e) All remaining items are classified as C category items.

V-E-D Classification: A-B-C Classification is on the basis of consumption value of an item and does not give

any importance to the criticality of the item and therefore, only A-B-C Classification is not

adequate. Classification done on the basis of criticality of the item is known as V-E-D, where the items are

classified as Vital, Essential and Desirable.

Vital items are those items which are very critical for the operations and do not permit any

corrective time i.e. they cannot be procured off the shelf if they are not available.

Essential items are comparatively less vital and work without them cannot be managed for few days.

All remaining items are known as Desirable items. A-B-C / V-E-D Matrix: Tackling the items on the basis of their consumption value and also criticality improves the

service to the customer as well as we are able to control the inventory.

We can design the stock levels in such a manner that

Maximum service is provided for C category vital items

While for A category Desirable items service can be minimum desirable .

For remaining items, service levels can be in between these two levels and average stock holdings can be designed

accordingly.

Tackling the items on the basis of their consumption value and also criticality improves the service to the customer as

well as we are able to control the inventory.

Numbers indicate the focus priority for best results both in terms of service as well as resources required We can

design the stock levels in such a manner that maximum service is provided for C category vital items which provide

high satisfaction levels at very little cost, while for A category Desirable items service can be minimum desirable as

the require large resources and provide very low satisfaction. For remaining items, service levels can be in between

these two levels and average stock holdings can be designed accordingly.