PRODUCTION MANAGEMENT

MBA
Second Semester

Bharathidasan University
Centre for Distance and Online Education
Chairman:
Dr. M. Selvam
Vice-Chancellor
Bharathidasan University
Tiruchirappalli-620 024
Tamil Nadu
Co-Chairman:
Dr. G. Gopinath
Registrar
Bharathidasan University
Tiruchirappalli-620 024
Tamil Nadu
Course Co-Ordinator:
Dr. A. Edward William Benjamin
Director-Centre for Distance and Online Education
Bharathidasan University
Tiruchirappalli-620 024
Tamil Nadu
The Syllabus is Revised from 2021-22 onwards

Author:

Dr.M.Elampirai, Asst Professor, Department of Management Studies, CDOE,

Bharathidasan University, Trichy
Reviewer
Dr. M. Lakshmi Bala, Asst prof. & Head, Dept. of Business of Admin., K.N. Govt. arts college for women, Thanjavur - 613 007

Authors
Prahlad Narain
Jayalakshmi Subramanian

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COURSE INTRODUCTION

Production and operations management, popularly referred to as POM, has become an important subject of
study. To a layman, POM can be explained as the planning, coordination and controlling of the resources of an
organization in a manner that will facilitate the production process. Simply put, POM is concerned with the
transformation of production and operational inputs into outputs that will meet the requirements of consumers,
when distributed. It is also an area of business that is concerned with the production of quality goods and services.
Among other things, it ensures that all the business functions such as production, design and product performance
operate smoothly in a manner that is not only efficient, but also effective.
This book, Production Management, discusses topics such as manufacturing systems, production planning
and control, plant location and layout, capacity planning and maintenance management, work study, JIT and
quality.
The learning material is presented in a structured format so that it is easy to grasp. Each unit begins with
an outline of the Learning Objectives followed by Introduction to the topic of the unit. The detailed content is then
presented in a simple language, interspersed with Check Your Progress questions to enable the student to test his
understanding as and when he goes through each unit. Let Us Sum Up provided at the end of each unit helps in
quick recollection. Possible Questions is also provided for further practice.
The book is divided into six units:
Unit 1: Introduction to Production and Operations Management
Unit 2: Plant Location and Layout
Unit 3: Plant Capacity and Line Balancing
Unit 4: Quality Assurance
Unit 5: Work Study
Unit 6: Materials Management
 PRODUCTION MANAGEMENT

DETAILED SYLLABUS

UNIT 1: Evolution of Production and Operations Management, Role of Operations Management in Total Management
System, Scope of Functions of POM, Production Cycle, Characteristics of Process Technologies, Production
Systems, Relationship between Product Life Cycle and Process Life Cycle.
UNIT 2: Facility Location, Factors Affecting Location Decision, Locating Foreign Operations Facilities, The Location
Decision Process, Location Decision for Warehouses, Need for Layout Planning, Types of Layout, Layout
Planning for Storage and Warehousing, Layout Planning Methodology.
UNIT 3: Production Planning, Production Planning Strategy, Functions of Production Planning and Control, Production
Control, Assembly Line Balancing, Production Scheduling, Job Sequencing.
UNIT 4: Definition of Quality, Costs of Quality, Characteristics of Quality, Statistical Methods, Specification and Control
Limits, Acceptance Sampling, The Operating Characteristic Curve, Control Charts, Total Quality Management,
Six Sigma.
UNIT 5: Definition of Work Study, Objectives of Work Study, Method Study, Work Measurement.
UNIT 6: Materials Management: An Overview, Economic Order Qunatity, Classification of Inventories, Inventory
Control Techniques, Inventory Management Systems, Material Requirement Planning, Just in Time (JIT)
Production, Purchasing Management, Methods of Purchasing.
 CONTENTS

UNIT 1 INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT 1-21

1.1 Learning Objectives
1.2 Introduction
1.3 Evolution of Production and Operations Management
1.4 Role of Operations Management in Total Management System
1.5 Scope of Functions of POM
1.5.1 Scope of POM
1.5.2 Production Management Function
1.6 Production Cycle
1.7 Characteristics of Process Technologies
1.7.1 Adoption of Appropriate Technology as Per Market Requirements
1.7.2 Process Design and Selection
1.8 Production Systems
1.8.1 Continuous Production System
1.8.2 Intermittent Production System
1.8.3 Difference Between Continuous and Intermittent Production Systems
1.8.4 Project Process
1.9 Relationship Between Product Life Cycle and Process Life Cycle
1.10 Let Us Sum Up
1.11 Further Reading
1.12 Answers to Check Your Progress
1.13 Possible Questions
1.14 Learning Outcomes

UNIT 2 PLANT LOCATION AND LAYOUT 23-50

2.1 Learning Objectives
2.2 Introduction
2.3 Facility Location
2.3.1 Definition and Objectives
2.3.2 Importance of Facility Location
2.4 Factors Affecting Location Decision
2.5 Locating Foreign Operations Facilities
2.6 The Location Decision Process
2.6.1 Factor Rating and Location Rating Technique
2.6.2 Break-Even Analysis Method
2.6.3 Simple Median Model
2.6.4 Centre of Gravity Method
2.6.5 Dimensional Analysis
2.6.6 Ardalan Heuristic Model
2.7 Location Decision for Warehouses
2.8 Need for Layout Planning
2.8.1 Layout Planning–Definition
2.8.2 Objectives of Plant Layout
2.8.3 Advantages of Good Plant Layout
2.9 Types of Layout
2.9.1 Product Layout
2.9.2 Process Layout
2.9.3 Project Layout
2.9.4 Group Layout
2.10 Layout Planning for Storage and Warehousing
2.11 Layout Planning Methodology
2.11.1 Line or Product Layout
2.11.2 Process Layout
 2.11.3 The Assignment Model
2.11.4 Closeness Rating
2.11.5 Load Distance Analysis
2.12 Let Us Sum Up
2.13 Further Reading
2.14 Answers to Check Your Progress
2.15 Possible Questions
2.16 Learning Outcomes

UNIT 3 PLANT CAPACITY AND LINE BALANCING 51-78

3.1 Learning Objectives
3.2 Introduction
3.3 Production Planning
3.3.1 Types of Plans
3.3.2 Elements of Production Planning
3.4 Production Planning Strategy
3.4.1 Capacity Planning
3.4.2 Aggregate Planning
3.5 Functions of Production Planning and Control
3.5.1 Benefits of Production Planning and Control
3.5.2 Yield Management
3.6 Production Control
3.6.1 Input/Output Control
3.6.2 Shop-Floor Control
3.7 Assembly Line Balancing
3.8 Production Scheduling
3.8.1 Objectives of Scheduling
3.9 Job Sequencing
3.9.1 Sequencing when there are Several Jobs and One Machine
3.9.2 Sequencing when there are Several Jobs and Several Machines
3.9.3 Index Method
3.9.4 Assignment or Job Loading
3.9.5 Gantt or Bar Charts Method
3.10 Let Us Sum Up
3.11 Further Reading
3.12 Answers to Check Your Progress
3.13 Possible Questions
3.14 Learning Outcomes

UNIT 4 QUALITY ASSURANCE 79-101

4.1 Learning Objectives
4.2 Introduction
4.3 Definition of Quality
4.4 Costs of Quality
4.5 Characteristics of Quality
4.6 Statistical Methods
4.6.1 Statistical Process Control
4.7 Specification and Control Limits
4.8 Acceptance Sampling
4.8.1 Types of Sampling Plans
4.9 The Operating Characteristic Curve
4.9.1 Parameters of an OC Curve
4.10 Control Charts
4.10.1 X-Bar Chart
4.10.2 R-Chart
4.10.3 P-Charts or Fraction Defective Charts
 4.10.4 C-Charts or Number of Defects Chart
4.11 Total Quality Management
4.11.1 Principles of TQM
4.11.2 Deming’s 14 Points
4.12 Six Sigma
4.12.1 Six Sigma Themes
4.13 Let Us Sum Up
4.14 Further Reading
4.15 Answers to Check Your Progress
4.16 Possible Questions
4.17 Learning Outcomes

UNIT 5 WORK STUDY 103-116

5.1 Learning Objectives
5.2 Introduction
5.3 Definition of Work Study
5.4 Objectives of Work Study
5.5 Method Study
5.5.1 Objectives of Method Study; 5.5.2 The Method Study Procedure
5.6 Work Measurement
5.6.1 Objectives of Work Measurement; 5.6.2 Techniques of Work Measurement
5.7 Let Us Sum Up
5.8 Further Reading
5.9 Answers to Check Your Progress
5.10 Possible Questions
5.11 Learning Outcomes
UNIT 6 MATERIALS MANAGEMENT 117-169
6.1 Learning Objectives
6.2 Introduction
6.3 Materials Management: An Overview
6.3.1 Role of Inventories in Profit; 6.3.2 Costs Associated with Inventories
6.4 Economic Order Qunatity
6.5 Classification of Inventories
6.5.1 Inventory Catalogue; 6.5.2 Classification of Inventory Control
6.6 Inventory Control Techniques
6.6.1 Item Reducing Techniques; 6.6.2 Quantity Reducing Techniques
6.7 Inventory Management Systems
6.8 Material Requirement Planning
6.8.1 Three Pre-Requisite Inputs for MRP; 6.8.2 The MRP Process
6.8.3 Definition of MRP-II; 6.8.4 MRP-II Process
6.9 Just in Time (JIT) Production
6.9.1 JIT Process; 6.9.2 The ‘Kanban’ System
6.9.3 Difference Between JIT and MRP Systems
6.10 Purchasing Management
6.10.1 Functions of Purchasing Management
6.11 Methods of Purchasing
6.12 Let Us Sum Up
6.13 Further Reading
6.14 Answers to Check Your Progress
6.15 Possible Questions
Learning Outcomes
Unit-1 Introduction to Production and Operations Management

UNIT 1 INTRODUCTION TO
PRODUCTION AND
OPERATIONS
MANAGEMENT
UNIT STRUCTURE
1.1 Learning Objectives
1.2 Introduction
1.3 Evolution of Production and Operations Management
1.4 Role of Operations Management in Total Management System
1.5 Scope and Functions of POM
1.5.1 Scope of POM
1.5.2 Function
1.6 Production Cycle
1.7 Characteristics of Process Technologies
1.7.1 Adoption of Appropriate Technology as Per Market Requirements
1.7.2 Process Design and Selection
1.8 Production Systems
1.8.1 Continuous Production System
1.8.2 Intermittent Production System
1.8.3 Difference Between Continuous and Intermittent Production Systems
1.8.4 Project Process
1.9 Relationship Between Product Life Cycle and Process Life Cycle
1.10 Let Us Sum Up
1.11 Further Reading
1.12 Answers to Check Your Progress
1.13 Possible Questions
1.14 Learning Outcomes

1.1 LEARNING OBJECTIVES

After going through this unit, you will be able to:

 Trace the evolution of production and operations management
 Highlight the role of production management in total management system
 Analyse the relationship between operations system and other related systems
 Describe the various activities in production cycle
 List the characteristics of process technologies
 Classify the different types of manufacturing systems

18 Production and Operations Management

Introduction to Production and Operations Management Unit-1

1.2 INTRODUCTION

The word ‘production’ immediately conjures up images of large rooms filled with
Production and opera-
machines of every shape and size, materials of all hues and colours, and people tions management:
working to fulfil their targets. The coordination between all these five Ms The management of the
(i.e.,man, machine, materials, money and method) takes place with the help of the efforts and activities of
sixth ‘M’, i.e., management. This is what production and operations management people, equipment and
other resources of the
is all about. It is concerned with the production of goods and services and is organization in chang-
responsible for ensuring that these operations are efficient and effective. Thus, in ing raw materials into
this unit, you will learn about the production process, the objectives of production finished goods and ser-
and operations management, its scope, and the importance of technology in vices.
production.
In other words, production and operations management refers to the
management of the efforts and activities of people, equipment and other resources
of the organization in changing raw materials into finished goods and services.

1.3 EVOLUTION OF PRODUCTION AND OPERATIONS

MANAGEMENT

Before learning further, it is important to take a look at the history of production

and operations management. This will help you to understand that technology is the
backbone of all production functions.
The Era of Industrial Revolution
The Industrial Revolution of Great Britain during the late 18th century brought
about extensive mechanization of production systems. It resulted in a shift from
home-based production to large-scale production outside the home. Different types
of equipment were created that could produce in large quantities. Workers reported
to a supervisor, who planned the work to be done and issued orders to workers.
Inventions such as James Watt’s steam engine, Jenny Cartwright’s power looms,
Maudslay’s cutting lathes, etc., contributed to the era of Industrial Revolution.
During this period, Adam Smith, the father of modern economics published
his book An enquiry into the Nature and Causes of Wealth of Nations, popularly
called The Wealth of Nations. The three main concepts propounded by him were
division of labour, pursuit of self-interest, and freedom of trade. He felt that costs
other than wages, such as rent and profit, also affect the price of a commodity.
Smith believed that division of labour could greatly increase production. He
wrote that ‘If one worker could make twenty pins a day and if ten people divided up
the eighteen steps required in making a pin, they could make a combined amount of
48,000 pins in one day.’
The Era of Scientific Management
It began in the United States in the early 20th century. Fredrick Winslow Taylor, is
called the father of scientific management. His four principles are listed as follows:
1. Replace rule-of-thumb work method with methods based on scientific study
of tasks.
Production and Operations Management 19
Unit-1 Introduction to Production and Operations Management
2. Scientifically select, train and develop each employee rather than leaving
them to train themselves.
3. Instruct and supervise each worker in detail.
4. Divide work nearly equally between managers and workers; the duty of
establishing standards and enforcing them rests with the management alone.
He propounded the ‘Time and Motion Study’ which involves breaking up a job into
its component parts and measuring each component in terms of the time required to
do it.
This study was carried forward by his associates, Frank B.Gilbreth and his
wife Lilian Gilbreth who coined the term ‘Motion Study’. The Gilbreths used the
camera to record and examine detailed micro-movements, and invented cyclographs
and chronocycle graphs to observe rhythm and movements.
Another pioneer of scientific management was Henry Gantt. The ‘Gantt Chart’
that he created is a visual display chart used for scheduling, based on time. He
showed the humane face of management and listed the conditions that have a
favourable psychological effect on the worker.
By the end of the 19th century, the internal combustion engine had been
invented; and the first assembly line manufacture of cars was started by Henry Ford
in Detroit, USA.
The Era of Human Relations
The impact of the behaviour of workmen on their performance was increasingly
recognized and some experiments were carried out at Hawthorne Works in Chicago,
USA. These tests, called Hawthorne studies, formed the basis of several behavioural
and motivation theories. Other important contributors of this era were A. Maslow,
F.Hertzberg and Douglas McGregor.
The Era of Quantitative Techniques
Quantitative techniques originated during World War II. Operations research teams
were formed to deal with strategic and technical problems faced by the military.
These were later used for non-military applications. George Dantzig developed the
simplex method of solving linear programming problems in 1947. Many
developments followed and computers have enabled people to solve a large variety
of industrial problems. The technology explosion continues and today digital
manufacturing has enabled companies to rapidly build to order, maintain non-stop
production, and integrate their supply chains.
The Era of Quality
Toyota first caught the world’s attention in the 1980s when the Company
manufactured automobiles with unbelievable consistency in processes and products.
Success came from their astounding quality reputation.
In-built quality became the necessity. This was followed by TQM or total
quality management and the focus shifted from quality control to quality assurance.
The ISO 9000 series for quality management systems, ISO 14000 environment
management standards are followed across the world. Companies now aim for six
sigma.
20 Production and Operations Management
Introduction to Production and Operations Management Unit-1
Definitions of Production and Operations Management
The Association of Operations Management (APICS) defines Operations
Management as, ‘The field of study that focusses on the effective planning,
scheduling, use and control of manufacturing or service organizations through the
study of concepts from design engineering, industrial engineering, MIS, quality
management, production management, industrial management and other functions
as they affect the organization.’
According to Sherin and Joel G. Siegel, Production and Operations
Management ‘is the management of all activities directly related to the production
of goods and services’. It may be remembered that goods are produced and services
are rendered.
In the early days, production involved the processes followed in mass
production of tangible goods. As the complexities of business grew, management of
the systems responsible for production became essential. Then services also began
to be ‘produced’ or rendered. These were intangible. So, some principles were needed
which could encompass the entire system that produced a good or delivered a service.
It was found that the same principles could be effectively applied in the management
of processes that were involved in the making of ‘goods’ as well as ‘services’. This
is what is meant by Production and Operations Management.
POM (as it is called), uses the decision-making tools of operations research
and the principles of industrial engineering, quantitative techniques, shop-floor
control, organizational behaviour, safety management, maintenance management,
etc.
Thus, we can say that POM deals with the concepts and principles employed
by organizations to make them efficient and effective.

1.4 ROLE OF OPERATIONS MANAGEMENT IN

TOTAL MANAGEMENT SYSTEM

Production is the primary business of an organization. All other divisions or activities

of an organization exist only if production exists. Without production or anything to
sell, there is no organization at all.
An organization usually has several departments and each department is
assigned a specialized function, as shown in Figure 1.1.
 Marketing establishes the demand for the goods and sells what is produced.
 Finance provides the capital for equipment and resources.
 Human resource management provides the manpower and takes care of
employees.
 Purchasing is concerned with procurement of materials needed to run the
organization.
 Materials management takes care of inventories.
 Law department safeguards the organization on legal issues.
 Public relations department builds the image of the organization.
Production and Operations Management 21
Unit-1 Introduction to Production and Operations Management
 R&D is responsible for research and development.
However, it is production which produces the goods and services. It plays a vital
role in achieving a firm’s strategic goals.

Materials
Marketing Management
Law

PRODUCTION
R&D
Finance

Human Public
Resources Relations

Fig. 1.1 Departments of an Organization

Production includes the bulk of a company’s employees and is responsible for a

large portion of company’s assets. It also has a major impact on the quality of goods
produced and their cost and is thus the visible face of the company.
Hence, we say that production is the heart of an organization.

1.5 SCOPE AND FUNCTIONS OF PRODUCTION AND

OPERATIONS MANAGEMENT

1.5.1 Scope of Production and Operations Management

The scope of production and operations management encompasses all the activities
involved in producing a good or a service. Imagine how an entrepreneur would go
about it. He would first decide what product or service he wants to sell. He then
decides what process he will use, where he will make it, etc. Following the same
line of thought, the scope of production and operations management is listed below.
1. Product selection and development: This deals with the study of how a
product is selected and developed for commercial production.
2. Process selection: This deals with how the process required to produce a
product for commercial purposes, is selected.
3. Facilities location: This concerns the parameters that need to be considered
for locating factory premises.
4. Layout planning: This deals with the study of how the factory or plant should
be laid out for optimum production.
5. Material handling: This deals with the study of the significance of material
flow in an organization, the different methods of material handling, etc.
6. Manufacturing system: It is the study of different types of manufacturing
systems and their applicability.
22 Production and Operations Management
Introduction to Production and Operations Management Unit-1
7. Production planning and production control: This concerns the methods
followed in different kinds of manufacturing systems. It includes methods
followed for job loading, scheduling, dispatching, PERT /CPM and linear
programming.
8. Work studies: This involves method study and work measurement
9. Materials management: This deals with methods to control inventory,
inventory analysis, etc.
10. Quality: This deals with quality standards and techniques, TQM, six sigma
etc.
11. Safety management: This involves safety management principles, methods,
etc.
Production Management Function
Just like any other field of management, production and operations management
can also be viewed as a continuous process of planning, organizing and controlling.
The jobs that would fall in each of these categories are given below.
Planning
Planning includes all the activities that precede the actual process of producing.
These activities guide future decision-making and involve,
(a) Product design and product development
(b) Production process selection
(c) Planning the facility or plant location
(d) Planning the facility layout
(e) Capacity planning
(f) Production planning
Organizing
Organizing includes all those activities that involve structuring of the tasks to be
performed and the authority required to perform them. In other words, it determines
Organizing: Includes the activities required to achieve the operations and the sub system goals and assigns
all those activities that responsibility and authority to carry them out. Organizing includes
involve structuring of
the tasks to be per- (a) Work study – motion study and time measurement
formed and the author-
ity required to perform
(b) Materials management
them. (c) Purchasing management
Controlling
Controlling includes all activities that ensure that the actual performance is as per
the planned performance. This is done by developing standards and communication
networks necessary to ensure that the organizing, staffing and directing functions
follow the planned objectives of the organization.
It includes the following:
(a) Stores management
(b) Value engineering or value analysis
Production and Operations Management 23
Unit-1 Introduction to Production and Operations Management

(c) Inventory management

(d) Quality assurance or quality control
(e) Maintenance management

CHECK YOUR PROGRESS-1

1. List the four principles of Taylor.

2. What are Hawthorne studies?
3. How did Sherin and Joel define production and operations management?
4. What is controlling?

1.6 PRODUCTION CYCLE

The production and operations of goods and services involve the conversion of
input into output through a transformation process. (see Figure 1.2).

TRANSFORMATION
PROCESS OUTPUT
INPUT

Fig. 1.2 Conversion of Input into Output

(a) Input: This includes the 6Ms, i.e., man, machine, materials, money, method
and now management.
(b) Transformation Process: This process converts inputs to output. It is a value-
addition process which modifies or adds value to the input and converts it
into a form that is more useful and sold to a customer. This value addition can
be done in any of the following ways:
 Alteration: This includes all the activities such as change in the physical
state of input, changing dimensions, adding chemicals, heating, rolling,
galvanizing, etc. The methods of transformation are numerous and there
is one distinct method for every available product in the market.
 Transportation: This refers to the physical movement of goods from one
place to another. Some firms such as traders specialize in buying goods
from one place (usually the place of manufacture) and transporting them
to a location where they can be sold.
 Storage: This refers to preserving the goods in a protected environment
so that they can be made available at a later date, for example, food grains.
This is also a kind of transformation process.

24 Production and Operations Management

Introduction to Production and Operations Management Unit-1

Value addition can also be done by inspection or transportation companies,

book publishers, etc. There are as many processes as there are products. The
process for every product is unique.
In short, any process that adds value to a product is part of the transformation
process.
(c) Output: It can be a good/product or a service. The major differences between
goods and services are listed below as shown in Table 1.1.
Table 1.1 Major Differences between Goods and Services

Goods Services
1. Goods are tangible; they have physical Services are intangible. They are just
parameters. ideas, concepts or information.
2. Goods can be produced, stored and Services cannot be produced beforehand,
transported according to demand since the stored or transported. Value is conveyed
value is stored in the product. as used.
3. They are produced in a factory environment, Services are produced in a market
usually away from the customer. environment in collaboration with the
customer.
4. Often, the goods are standardized. Often customized.
5. Quality is inherent in the product. Quality is inherent in the process since it
is a function of people.

As the complexities of organization grew, it was found that merely converting inputs
to output was not enough. Feedback from the output stage was necessary to adjust
the changes required in input or the transformation process. So, production control
was done to take care of fluctuation in inputs, if any. The quality of the produced
output was now constantly compared to the quality of the desired output and feedback
mechanisms were put in place to monitor the performance of transformation process.
Then, some random disturbances were found to be hampering the
transformation process. These random disturbances are unexpected and sometimes
unplanned; they occur due to external environment and can be in the form of strikes,
government interference, recession, etc. In effect, the cycle of production and
operations management looks like this as shown in Figure 1.3.

Random
Disturbances

INPUT OUTPUT
TRANSFORM
-ATION
PROCESS

Fig. 1.3 The Cycle of Production and Operations Management

1.7 CHARACTERISTICS OF PROCESS TECHNOLOGIES

Every process must possess certain critical dimensions, which will help to satisfy
its internal and external customers, now and in the future. These critical dimensions

Production and Operations Management 25

Unit-1 Introduction to Production and Operations Management

are called Competitive Priorities. The four major competitive priorities of any firm
are:
1. Cost
2. Time
3. Quality
4. Flexibility
Let us understand each of these in detail.
1. Cost
Lowering costs will increase demand and sales while increasing cost will
improve profits but will eat into sales. So the organization needs to arrive at
a process wherein the cost is the most optimum. This is arrived at by several
methods such as process redesign, scrap or rework, workforce optimization,
automation, etc. Firms should aim to achieve ‘Low cost operations’, i.e.,
produce goods and services at the lowest possible cost to the satisfaction of
the firms’ internal and external customers.
The efficiency of a production process is determined by its ability to produce
the required quality and quantity at the minimal costs. This is best achieved
when the products are produced in large volumes. But again, the decision on
volumes to be produced is based on the demand for that product in the market
and sales estimation from the marketing department. Depending on the
volume, the management must select the process that is most feasible for
producing the required volume of the required quality at the least cost.
2. Time
Time is money. The more a company delays in giving out its deliverables,
more does it lose in terms of customers, goodwill, demurrages, etc. Processes Demurrages: A charge
should be so designed that the product reaches the market at the quickest required as compensatio
possible time. This is possible only if the managers carefully define the steps for the delay of a ship or
freight or other cargo
and the time needed to deliver a product or service, and then analyse each beyond its schedule time
step to determine whether or not they can save time without reducing quality. of departure.
Process time is vital in the following situations:
 Deliveries: The time taken to deliver and order from the moment the
order is placed is called delivery lead time. Companies try to reduce lead
time as much as possible by improving processes, reducing delays in the
process, removing buffers, etc. The consumer demand and expectation
from a product in the current market scenario changes quickly. If there is
a delay in the product reaching the market, consumers may shift to other
brands or purchase a competitor’s products that are available in the market.
The demand for the product will then fall. So it is critical that the right
production process is chosen so that the product can reach the market
within the stipulated time frame. On-time deliveries (i.e., meeting delivery
time promises) have become an important parameter for judging the
effectiveness of services such as airlines and railways. Dominos, the pizza
chain is constantly improving processes so that it can deliver within 30
minutes of placement of order!

26 Production and Operations Management

Introduction to Production and Operations Management Unit-1

 Product development: In this rapidly changing business environment,

getting a product to the market first, ahead of the competitors has many
advantages for a firm. Time taken between idea generation and product
development should be as little as possible. Processes selected should be
such that the process of product development is fast, accurate and efficient.
3. Quality
Quality means conformance to customer’s requirements. Consistent quality
means the ability of a firm to produce the same set of goods consistently,
meeting the prescribed specifications every time. Process selected should be
such that it produces the goods and services of the same specifications every
time, under identical conditions. We will read more about quality in the
succeeding units.
Volume and variety of the products to be produced is significant. If the variety
is more but the volumes are less than the variety, management must try to
reduce fixed costs even though the variable costs will rise on account of
more variety. If the required volume for the product to be produced is high
and the variety is less, fixed cost can rise but variable costs will not be very
high.
Flexibility: The ability 4. Flexibility
of a firm to react to the
customers’ changing Flexibility means the ability of a firm to react to the customers’ changing
needs quickly and needs quickly and efficiently. Flexibility can be in terms of changing volumes,
efficiently. changing varieties or customization.
 Volume flexibility is most common and involves accelerating or
decelerating the rate of production to take care of fluctuations in demand.
It often supports other competitive priorities such as delivery speed or
development speed. Processes must be so selected that they can handle
variation in volumes quickly.
 Variety flexibility means the ability to handle an assortment of products
efficiently. Processes with variety flexibility should be able to focus on
the needs of the customers and efficiently shift their focus across a variety
of products and services.
 Customization is slightly different from variety flexibility in the sense
that customization refers to the unique needs of a specific customer. Such
products are usually ‘tailor made’, i.e., they cannot be sold elsewhere in
the market; they are more expensive and generally have longer lead times.
A process that has customization priority should be able to work closely
with its customers and satisfy their unique needs.
We can say that there is nothing like the best production process that should be
followed. We should arrive at the best production process by considering various
options and adopting the most suitable ones, under the given circumstances. The
right choice would be to choose a process that meets the maximum specifications
and constraints within the cost permissible, keeping in mind the competition.

Production and Operations Management 27

Unit-1 Introduction to Production and Operations Management

1.7.1 Adoption of Appropriate Technology as per Market

Requirements
When an entrepreneur decides to manufacture a product or deliver a service, he
first needs to select an appropriate technology for the same. A consideration of the
competitive priorities is a useful strategy to translate the goals of the company to
the level of the processes that actually do the work. We have already learnt that in a
business transaction, competitive priorities reflect what an external customer
considers important. This is essential, because a firm has to not only retain its current
business but also win future business. Appropriate competitive priorities must be
assigned to the firm’s core and supporting processes that not only reflect the needs
of external customers but of internal customers as well, and at the same time help it
to sustain in the market.
To get a better understanding of how competitive priorities are used, let us
study the services of an airline. We will consider two market segments: (i) first
class passengers and (ii) economy class passengers. The core services for both these
market segments are the same: ticketing and seat selection, baggage handling and
transportation to the customer’s destination. However, the peripheral services for
these two categories are quite different.
A first class passenger gets (i) a higher baggage allowance; (ii) separate airport
lounges; (iii) preferred treatment during check-in, boarding, and deplaning; (iv)
more comfortable seats; (v) better meals and beverages; (vi) a higher level of personal
attention (by cabin attendants who address them by name) and courtesy; (vii)
frequently attended to – at a higher price, of course. All these add to the feeling of
being special.
Economy class passengers, on the other hand, are satisfied with standardized
services, courteous flight attendants, and low prices.
Both market segments, however, expect the airline to keep to its schedules
and perform on-time every time. Therefore, we can say that the competitive priorities
for the first class segment is top quality and on-time delivery, whereas the competitive
priorities for the economy class market segment are low-cost operations, consistent
quality, and on-time delivery.
The airline knows its market segments as well as their requirements. The job
is now to correlate its capabilities with customer requirements. The airline cannot
adopt the same parameters for both segments. Serving a three-course meal to an
economy class traveller is not going to please him since he is looking for low cost
travel. Similarly, a first class traveller will not like to wait in queue to board the
aircraft.
This situation is the same for any other manufacturing organization. Every
organization, whether a manufacturer or a service provider, needs to first analyse its
core processes. The commonly considered core processes are customer relationship,
new service/product development, order fulfilment, and supplier relationship.
Every core process, generally, has many nested processes within it; for
example, customer relationship would mean top quality/consistent quality, timeliness,
variety, etc. New service/product development would include customization, speedy

28 Production and Operations Management

Introduction to Production and Operations Management Unit-1

development, and so on. Order fulfilment would include low-cost operations, on-
time deliveries, etc., and supplier relationship would include quality, delivery, variety
and low cost.
Competitive priorities are assigned to each core process in order to achieve
the service levels required to ensure complete customer satisfaction.
We can say that there is nothing like a best production process that should be
followed: we should arrive at the best production process by considering all the
options and then adopting the most suitable one, under the given circumstances. The
right choice would be to select a process that meets the maximum specifications
and constraints within the permissible cost, and keeping competition in consideration.
1.7.2 Process Design and Selection
Planning for manufacturing begins with an idea and proceeds through product
development. A common way of defining a product is by drawing it. In an assembly
drawing, the individual components of a product and their relationships to one
Assembly drawing: another are shown. Detailed engineering drawings provide the necessary technical
The individual
components of a
specifications for in-house manufacturing personnel, as well as for purchasing agents
product and their who are authorized to procure the item from a vendor. Such drawings are also useful
relationships to one for inspecting finished parts to determine if they confirm to specifications.
another are shown.
A parts list is then made. This provides detailed technical information that is
not found in an assembly drawing. A parts list includes such information as part
numbers, names, whether the part is manufactured or bought, and a detailed
engineering drawing number. Parts list also contains parts dimensions, material
specifications, and other manufacturing information.
Drawings and parts lists together determine what materials and machines are
required. As consumers, we often find assembly drawings packed along with
assembly instructions for a product which needs to be assembled by the consumer.

Process design: The Process Design

selection of inputs,
resources, workflows
The next step is Process design. It refers to the selection of inputs, resources,
and methods needed to workflows and methods needed to transform inputs to outputs. Process design
transform inputs to decision also deals with the mix of human skills and machines and which processes
outputs. are to be performed by whom. Decision about processes must be consistent with the
competitive priorities of the firm and the firm’s ability to obtain the resources
necessary to support them. Besides these parameters, process design decisions also
take into account other choices such as quality, capacity, layout and inventory.
The objective of process design is to determine how the physical resources of
a firm can be best organized; for example, one way of describing a factory is in
terms of units called work centres. A work centre can be a single machine or group
of machines in one location, a group of workers who perform a similar task or
closely related set of tasks (such as on an assembly line), or a set of different machines
that function together to perform a set of operations on one or more products.
Product design also affects the flexibility of a firm to adapt to changes in
product mix or volume, the amount of control required in planning and scheduling
and a variety of workforce-related management issues.

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Unit-1 Introduction to Production and Operations Management

The next stage is Process technology. It refers to the process of determining

the methods and equipment needed to manufacture the product. It is an essential
component of the organization’s manufacturing strategy.
Process Selection
Process design and process technology determine process selection. The latter is
the way by which processes must be selected such that it meets the competitive
priorities of the firm, viz. cost, time, quality and flexibility and is also able to meet
the financial and other constraints of the firm.
The issues involved in process selection can be classified under two headings:
(a) Technical
(b) Managerial
Technical issues in process selection
They include the following:
(i) The volume and variety of the products required
(ii) Specification of equipment for converting inputs to outputs
(iii) The physical transformation of materials— i.e., how the process works
(iv) Rate of output required and the rate of output that the process can achieve
(v) Short term and long-term economies of the process
(vi) Ability of the process to meet design specifications and achieve consistent
quality
(vii) Reliability of the process
Managerial issues in process selection
They include the following:
(i) Anticipating and mistake proofing – making a list of things that can go wrong
(ii) Estimating manpower requirement
(iii) Training manpower
(iv) Work studies
(v) Maintenance requirements
(vi) Simulation – to study how the process reacts to change
(vii) Assessment – Can the process meet strategic goals and objectives and also
give the firm a competitive edge?
(viii) Compatibility – Is it unique or compatible with other existing products in the
market?
Both technical and managerial issues need to be considered in making process
decisions. A narrow technical perspective can often lead to operating problems.
When Apple Macintosh introduced the personal computer, it was acknowledged
that the 32-bit processor and high-resolution graphics capability was superior to
that of the existing products of the time. But its major drawback was that it was not
compatible with the existing applications software. Hence, it could not succeed. On
30 Production and Operations Management
Introduction to Production and Operations Management Unit-1

the other hand, having good managerial abilities but a technically weak product to
sell can also result in failure of the organization. For an organization to be successful,
process-selection decisions must incorporate both technical and managerial
viewpoints.

CHECK YOUR PROGRESS-2

1. What do you mean by transformation process?

2. Define ‘consistent quality’.
3. What is a work centre?

1.8 PRODUCTION SYSTEMS

Production systems or manufacturing systems convert inputs into goods that have a
physical form. This value addition can happen in any of the different ways mentioned
earlier. Depending on the kind of manufacturing process adopted for converting
the input into output, we can classify them into certain major groups, as shown in
Figure 1.4.
MANUFACTURING SYSTEMS

CONTINUOUS PROJECT INTERMITTENT

PROCESS MASS & FLOW BATCH JOB

Fig. 1.4 Classification of Manufacturing Systems

Let us now learn about each of these systems.

1.8.1 Continuous Production System
Continuous production system involves a continuous or almost continuous physical
flow of material. It makes use of special purpose machines and produces standardized
items in large quantities. The processes usually operate round-the-clock to maximize
utilizations and to avoid expensive and time-consuming shutdowns and start-ups.
Characteristics of continuous production system
1. Standard products are manufactured, which have large demand throughout
the year. Production is usually ‘Made to stock’.
2. Standardized inputs and standardized sequence of operations, machine tools
and equipment are used.

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Unit-1 Introduction to Production and Operations Management

3. Division of labour is efficient and less supervision is required since the same
or similar products are always produced.
4. Inventories are low and material handling can be streamlined. It will be lower
than intermittent manufacturing systems.
5. There is a balanced flow of work. This will result in small work in progress.
Advantages of continuous production system
1. Reduced labour cost because highly skilled workers are not generally required.
Also, division of labour and job rotation is possible.
2. Once systems are set, strict supervision is not required since system takes
care of itself.
3. High volumes of production, so cost is low.
4. Low inventories and reduced material handling.
5. Minimum wastage seen as products are standardized.
6. Possible to use all the techniques of production control, material control/
inventory, maintenance systems, etc.
Disadvantages of continuous production system
1. Strict maintenance is necessary to avoid production hold-ups.
2. Adjusting to fluctuating demand is difficult as it takes time and capital
investment.
3. Huge capital investment.
4. Cannot make sudden or frequent changes in the production schedules since
the system is not flexible.
The two types of continuous production system are:
(a) Process production: Its name is derived from the way materials move through
the process. This system is used for manufacturing items for which the demand
is continuous or high. Here, a single raw material can be transformed into
different kinds of products at different stages of the production process.
Examples include petroleum refining – different fractions, viz. kerosene,
gasoline, etc., are recovered during the process of fractional distillation and
steel making (e.g., Integrated steel plants of SAIL).
(b) Mass or flow production: Few types of products are manufactured in large
quantities. The volumes are high and products are standardized which allows
resources to be organized around particular products. Standardization of
products, processes, materials, machines and uninterrupted flow of materials
are the main characteristics of this system. It lies between process production
and batch production. Examples include automobiles, appliances, computers,
Intermittent produc-
etc. tion: The goods are
generally manufactured
1.8.2 Intermittent Production System
to fulfil customers’
In intermittent production system, the goods are generally manufactured to fulfil orders rather than
producing against
customers’ orders rather than producing against stock. The flow of materials is stock.
intermittent. The production facilities are flexible enough to handle a wide variety
32 Production and Operations Management
Introduction to Production and Operations Management Unit-1

of products and sizes. Considerable storage between operations is seen. Individual

operations are usually carried out independent of the preceding and succeeding
operations.
Characteristics of intermittent production system
1. Products are manufactured in small quantities.
2. Variety of products is high.
3. Highly skilled workers are required.
4. Large work in progress.
5. System has high flexibility since variety and volume of products keep
changing.
6. Unbalanced workloads, since workload depends on the work in hand.
Advantages of intermittent production system
1. Can adjust to new situations and specifications and fluctuation in demand
can easily be taken care of.
2. Initial investment is not very high compared to continuous production.
Disadvantages of intermittent production system
1. As production is in small quantities, the cost of production per unit is high.
This makes the product costly.
2. Skilled people are required for each operation. So labour cost is high.
3. More inventory, high work in progress and large storage space are required.
The two types of intermittent production systems are (a) Job production, and
(b) Batch production.
(a) Job production: This is the production of a wide variety of products in
relatively low quantities; customization is high, there is considerable
complexity and divergence in the steps performed in production, thereby
creating a jumbled flow rather than a line flow. The system requires versatile
and highly skilled labour with high capital investment.
Examples – machining a metal casting, producing customized shelves
and cabinets.
(b) Batch production: Here, items are processed in lots or batches and a new
batch is undertaken for production only when the production on all items of
a batch is complete.
In fact, batch type production can be considered as an extension of job
type system. An example is the chemical industry where different medicines
are manufactured in batches. Other examples include production of machine
tools, printing press, etc.

Production and Operations Management 33

Unit-1 Introduction to Production and Operations Management

1.8.3 Difference Between Continuous and Intermittent Production

Systems

Continuous Production Intermittent Production

1. There is continuous flow of 1. The flow of raw material is in
raw material. batches or lots.
2. It is ‘Made to Stock’. 2. It is ‘Made to Order’.
3. It is not flexible – change in 3. It is highly flexible.
the process takes time and 4. Cost of labour is very high.
involves huge investment. 5. Has high work in progress.
4. Cost of labour is low. 6. High supervision and high skill set
5. Has low work in progress. are required.
6. High division of labour, lesser 7. High inventories and plenty of
supervision required. material handling are required.
7. Lesser inventories and lesser 8. Capital investment is relatively
material handling. low.
8. Huge capital investment
required.
1.8.4 Project Process
Project process: A
In a project process there is a very high degree of customization and the job is process in which there
undertaken to meet specific requirements. Each project is unique. For each project is a very high degree of
customization and the
the sequence of steps or process flows is defined. Project processes are valued more
job is undertaken to
on the basis of their capabilities to do certain kinds of jobs, rather than to produce meet specific
specific products at low cost. They tend to take a long time and involve several requirements.
interrelated tasks that must be completed. This requires close coordination. Resources
needed for a project are brought together at the beginning of the project and are
disbanded once the project is over.
Examples: Construction of bridges and aeroplanes.

CHECK YOUR PROGRESS-3

1. List any three advantages of a continuous production system.

2. List the disadvantages of intermittent production systems.
3. Define ‘job production’.

1.9 RELATIONSHIP BETWEEN PRODUCT LIFE

CYCLE AND PROCESS LIFE CYCLE

There is no one method for selecting a production process. The production method
selected should be such that it blends the marketing and manufacturing strategies.

34 Production and Operations Management

Introduction to Production and Operations Management Unit-1

Every method has its own pros and cons but the technology or method selected
should be able to fulfil the following objectives:
 Minimize cost
 Maximize output
 Provide consistent quality
Product-process A Product-Process Matrix determines how the appropriate technology or
matrix: Determines
how the appropriate manufacturing process must be selected. The matrix has three parameters
technology or manu- (see Figure 1.5)
facturing process must  Volume
be selected.
 Product design
 Process
Customization and volume

Product Design

Process One of a Low volume, Multiple Few High volume,

characterestics kind low products, major high
product, standardization moderate products, standardization
made to volume higher
customer volume
order
Complex and
highly Project
customized Process
process
Jumbled flows, Job
complex Process
processes
Disconnected
line flows, Batch
moderately Process
complex work
Connected line, Mass/Flow
routine work Process
Continuous Process
flows, highly Prodn.
repetitive work

Fig. 1.5 Product-Process Matrix

The above matrix shows that there are several process choices for a product. This
matrix can be applied either to the entire manufacturing process or to one specific
sub-process within the manufacturing process.
From the above matrix, we can see that the number of varieties required to be
produced and the volume of each variety influences the choice of production method.
High product variety requires highly skilled labour, well-equipped and adaptable
machines and good amount of planning and controlling. So job or batch process is

Production and Operations Management 35

Unit-1 Introduction to Production and Operations Management

suitable. Low product variety and high volumes require low skilled labour, high
automation and somewhat lesser planning and controlling. So mass or process
production system must be selected.
It is also possible for a company to choose another position on the matrix. For
example, suppose Honda Motor Company announces a redesign of its assembly
lines so that any model can be produced. This redesign will mean that with more
flexible lines, it will not be able to produce at the high volumes produced earlier.
This situation of lower volume with higher variety of products corresponds to a
horizontal move from line process to batch process.

ACTIVITY

1. Justify the statement ‘production is the heart of an organization’.

2. ‘Time is money.’ State whether or not you agree with this statement.
3. Find out from the Web/library the different quantitative techniques
developed during World War I. Discuss any two techniques which were
employed in the War.

1.10 LET US SUM UP

 Production and operations management concerns the efficient and effective

production of goods and services.
 Extensive mechanization of production systems in the late 18 th century
heralded the development of production and operations management.
 Activities of production and operations management include planning,
organizing and controlling.
 Process design refers to the selection of inputs, resources, workflows and
methods required to transform inputs to outputs.
 In continuous production systems, standard products which have large demand
all through the year are manufactured.
 In intermittent production systems, goods are manufactured to fulfil customers’
orders. The two types of intermittent production systems are job production
and batch production.
 Selection of a specific production process depends upon the marketing and
manufacturing strategies.

36 Production and Operations Management

Introduction to Production and Operations Management Unit-1

1.11 FURTHER READING

Aquilano, Chase and Jacobs. 2003. Operations Management for Competitive
Advantage. New Delhi: Tata McGraw-Hill.
Bhattacharya, D.K. 2000. Production and Operations Management. New Delhi:
Excel Books.
Evans, J.R., D.R. Anderson, D.J. Sweeney and T.A. Williams. 1984. Applied
Production and Operations Management. St. Paul M.N., US: West Publishing Co.
M.Selvam (2014) Maritime Logistics and Documentation , Lakshmi
Publications , New Delhi
M.Selvam (2013) Quality Management, Lakshmi Publications , New Delhi

1.12 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress–1

1. Fredrick Winslow Taylor, is called the father of scientific management. His
four principles are listed as follows:
(i) Replace rule-of-thumb work method with methods based on scientific
study of tasks.
(ii) Scientifically select, train and develop each employee rather than leaving
them to train themselves.
(iii) Instruct and supervise each worker in detail.
(iv) Divide work nearly equally between managers and workers; the duty of
establishing standards and enforcing them rests with the management
alone.
2. The impact of the behaviour of workmen on their performance was
increasingly recognized and some experiments were carried out at Hawthorne
Works in Chicago, USA. These tests, called Hawthorne studies, formed the
basis of several behavioural and motivation theories.
3. According to Sherin and Joel G. Siegel, Production and Operations
Management ‘is the management of all activities directly related to the
production of goods and services’.
4. Controlling includes all activities that ensure that the actual performance is
as per the planned performance. This is done by developing standards and
communication networks necessary to ensure that the organizing, staffing
and directing functions follow the planned objectives of the organization.
Check Your Progress–2
1. Transformations is the process by which the inputs are converted into output.
It is a value-addition process which modifies or adds value to the input and
converts it into a form that is more useful and sold to a customer.
2. Consistent quality means the ability of a firm to produce the same set of
goods consistently, meeting the prescribed specifications every time.
Production and Operations Management 37
Unit-1 Introduction to Production and Operations Management

3. A work centre can be a single machine or a group of machines in one location,

a group of workers who perform a similar task or closely related set of tasks
(such as on an assembly line), or a set of different machines that function
together to perform a set of operations on one or more products.
Check Your Progress–3
1. The following are the advantages of a continuous production system:
(i) High volumes of production, so cost is low.
(ii) Low inventories and reduced material handling.
(iii) Minimum wastage seen as products are standardized.
2. The following are the disadvantages of intermittent production system:
(i) As production is in small quantities, the cost of production per unit is
high. This makes the product costly.
(ii) Skilled people are required for each operation. So labour cost is high.
(iii) More inventory, high work in progress and large storage space are
required.
3. Job production is the production of a wide variety of products in relatively
low quantities; customization is high, there is considerable complexity and
divergence in the steps performed in production, thereby creating a jumbled
flow rather than a line flow. The system requires versatile and highly skilled
labour with high capital investment.

1.13 POSSIBLE QUESTIONS

Short-Answer Questions
1. How do goods differ from services?
2. How has technology helped in establishing production?
3. What is production?
4. What are the main parameters to be considered during process selection?
5. Write short notes on mass and flow type of production systems.
6. List the characteristics of process technologies.
7. Classify the different types of manufacturing systems.
Long-Answer Questions
1. Trace the evolution of production and operations management.
2. Explain the relevance of process selection to the profitability of an
organization.
3. What are the competitive priorities that a firm needs to have in order to survive
in the market?
4. Analyse the relationship between operations system and other related systems.
5. Describe the various activities in a production cycle.

38 Production and Operations Management

 Introduction to Production and Operations Management Unit-1

1.14 LEARNING OUTCOMES

 Trace the evolution of production and operations management
 Highlight the role of production management in total management system
 Analyse the relationship between operations system and other related systems
 The various activities in production cycle
 List the characteristics of process technologies
 Classify the different types of manufacturing systems

Production and Operations Management 39

Plant Location and Layout Unit-2

UNIT 2 PLANT LOCATION AND

LAYOUT
UNIT STRUCTURE
2.1 Learning Objectives
2.2 Introduction
2.3 Facility Location
2.3.1 Definition and Objectives
2.3.2 Importance of Facility Location
2.4 Factors Affecting Location Decision
2.5 Locating Foreign Operations Facilities
2.6 The Location Decision Process
2.6.1 Factor Rating and Location Rating Technique
2.6.2 Break-Even Analysis Method
2.6.3 Simple Median Model
2.6.4 Centre of Gravity Method
2.6.5 Dimensional Analysis
2.6.6 Ardalan Heuristic Model
2.7 Location Decision for Warehouses
2.8 Need for Layout Planning
2.8.1 Layout Planning–Definition
2.8.2 Objectives of Plant Layout
2.8.3 Advantages of a Good Plant Layout
2.9 Types of Layouts
2.9.1 Product Layout
2.9.2 Process Layout
2.9.3 Project Layout
2.9.4 Group Layout
2.10 Layout Planning for Storage and Warehousing
2.11 Layout Planning Methodology
2.11.1 Line or Product Layout
2.11.2 Process Layout
2.11.3 The Assignment Model
2.11.4 Closeness Rating
2.11.5 Load Distance Analysis
2.12 Let Us Sum Up
2.13 Further Reading
2.14 Answers to Check Your Progress
2.15 Possible Questions
2.16 Learning Outcomes

2.1 LEARNING OBJECTIVES

After going through this unit, you will be able to:

 Define facility location
 Discuss the importance of facility location
 Verify the factors that affect facility location
Production and Operations Management 23
Unit-2 Plant Location and Layout

 Explain the process by which location of a facility is decided

 Explain the different types of layouts

2.2 INTRODUCTION

When the ` 1 lakh people’s car, Nano, was launched by Sri Ratan Tata of Tata Sons,
there was widespread jubilation and anticipation of where the factory will come up.
Many state governments offered different kinds of concessions to the Tatas and
requested them to set up their facility in their state. West Bengal was selected as the
state to have the Nano plant and it began to come up at Singur. Not only the Tatas,
but even their joint venture partners invested crores of rupees to set up their respective
facilities. However, the choice of location proved wrong. Barely months before
commercial production was to begin, there was widespread agitation by the locals
in Singur. The situation got so out of hand that the Tatas were forced to abandon
their project at Singur and relocate to Sanand, Gujarat. So what went wrong? This
incidents does indicate that there are factors that need to be considered while selecting
the location for setting up a factory.

2.3 FACILITY LOCATION

Facility location is the selection of an apt site for the installation of a facility and it
is pertinent to make this decision carefully.
2.3.1 Definition and Objectives
Facility location is the selection of suitable location or site where the factory or
facility will be installed, and from where it will function. There are two fundamental
objectives to a facility location exercise. They are:
 Minimizing cost
 Maximizing revenue
Facility location: The
selection of an apt site Whatever may be the nature of the firm these two objectives will govern its location
for the installation of a decision exercise. The planning for ‘where’ to locate should start from ‘what’ the
facility. organization’s objectives, priorities, goals, strategies, etc. are, and what the
organization does to achieve it in the general socio-economic, technical and legal
environment. Unless the objectives and priorities are clear, the location cannot be
correct.
2.3.2 Importance of Facility Location
Why is facility location so important? What could happen if the location selection
wrong? These are some pertinent questions that Nano’s case has both raised and
answered.
(a) The following are the repercussions when a facility is run from an improper
and incorrect location.

24 Production and Operations Management

Plant Location and Layout Unit-2

(i) The company may have to close down the operation and liquidate assets.
In that case,
 Locating buyers for used equipment will be difficult.
 Price received for used equipment will be a fraction of the original
investment.
(ii) The company may relocate facility to a new location, just like the Tatas
have done. But this will involve,
 Large expenditure in shifting machinery, equipment, manpower,
etc.
 Taking new land lease/outright purchase, registration, etc., is time
taking and added cost
(iii) If the company continues its operation at the wrong location, then,
 It may accumulate losses.
 Competitors with better locations will have an edge.
 The company will lose market share/customer goodwill.
(b) Location facility is an issue for consideration both for
 Starting a new facility
 Starting additional facility
(c) Additional or multiple facilities can be due to the following reasons:
(i) Separate facilities for different products/services – for example.Videocon
has different plants for washing machine, TV, refrigerator, microwave
oven, etc.
(ii) Separate facilities to serve different geographical areas–for example.
LPG filling plants across the country to serve different locations’
(iii) Separate facilities for different processes–for example, a separate facility
to make pizza base.

2.4 FACTORS AFFECTING LOCATION DECISION

Proximity to customers and proximity to raw materials are the two factors that play
an important role while deciding the location for setting up a production facility.
1. Proximity to Customers (Markets)
When a plant is located near its customers/markets, the cost of transportation will
be very less. This will reduce the product cost. Most of the small ancillary units are
located near the big automotive factories. The OEMs (original equipment
manufacturers) are the institutional customers of small parts, components, or sub-
assemblies of these ancillary units. The Maruti Joint Venture Complex at Gurgaon
near the Maruti Suzuki Car factory is a good example of how proximity to the
customer reduces the transportation cost of auto ancillary units, which supplies
parts, components, sub-assemblies, etc., for making the Maruti car.

Production and Operations Management 25

Unit-2 Plant Location and Layout

Proximity to markets also allows companies to meet sudden spurt in demand,

thus providing an advantage over competitors located at far-off places. That is
why we find hospitals, schools, post offices, banks, insurance companies, etc.,
located in high-population zones so that they are able to serve a large number of
customers.
2. Proximity to Raw Material
Why are the integrated steel plants of SAIL located in Bihar, West Bengal and
Orissa? This is because of the large presence of iron ore, coal, dolomite and limestone
mines in these regions, which are the basic raw materials for making steel. Proximity
to the source of raw materials is an important consideration for facility location,
especially if the raw materials are bulky, and huge transportation costs will be incurred
in transporting them. Where it becomes absolutely necessary to transport them, it is
found that cost of the material is equal to the transportation cost thus making the
raw materials very costly at the point they are used.
3. Good Transportation Facilities
Good transportation facilities are necessary for the movement of goods and people.
Regions near metro cities have the advantage of good transportation facilities as
they have a good network of rail, air, water and road transportation.
4. Availability of Power Supply
Uninterrupted power supply is the basic requirement of most industries. Factories
have to set up their own DG sets or captive power plants if located in areas with
power problems. This increases the cost of the product, besides additional problems
of running the DG sets, captive power plants, etc.
5. Basic Amenities
The area for location of the plant should have certain basic facilities like sewage
system, piped water supply and security managed by the local municipality. It is
desirable to have roads that lead to the factory. If these basic amenities are present,
it will be easier for the workforce of the factory and they will be more willing to
work there. Availability of housing facilities, schools, colleges, banks, post office,
hospitals, etc. is an added advantage for locating a facility in an area.
6. Government Policies
Relaxed taxation policies, excise duty exemption and various other promotional
efforts help to attract industrial activity in a region. Pondicherry and Daman and
Diu are declared ‘no sales tax regions’ and many companies have their offices/
warehouses located there. Many state governments promote industrial activities in
their regions by creating Industry Development Zones, Special Economic Zones,
etc. The governments of Karnataka, Andhra Pradesh, Tamil Nadu and UP have
created Software Development Parks, where facilities such as high-speed Internet,
servers, etc., are provided to software companies at subsidized rates. Agriculture
gets maximum subsidies from the Central as well as many state governments. Various

26 Production and Operations Management

Plant Location and Layout Unit-2

processing plants of agricultural and horticultural products located in these states

can avail these advantages. Before locating a facility in a place, government policies
at that place must be considered.
7. Environmental and Community Consideration
Many state governments have strict environmental policies in place, which have
to be followed by the industries operating there. States such as Uttaranchal do not
give permission to set up in their state, industries that release toxic effluents.
Opposition from the community regarding the construction of a plant in their
region can disrupt the whole project. The Sardar Sarovar Dam project is an example
where opposition from the local people has been disrupting the construction of
the dam over the Narmada river. In the Chipko Movement started by S.L.
Bahuguna, all the locals embraced a tree each, when the officials came to cut the
trees in the forest. After the Union Carbide factory disaster in Bhopal, every new
factory is scrutinized closely.
8. Proximity to Sub-Contractors
The presence of ancillary units manufacturing small components/sub-assemblies is
important for any new factory. Ancillary units and joint ventures set up their facilities
near the OEM. The advantage to the ancillaries is that it will reduce the cost of their
components. But the advantage to the OEMs is that if they set up their facility near
these ancillaries, they can take advantage of these ancillaries. When Maruti Suzuki
wanted to set up their second facility, they set it up at Manesar near Gurgaon (where
their first facility is located) so that they can they can take advantage of the suppliers
present at the Maruti Joint Venture Complex at Gurgaon.
9. Easy Availability of Cheap Land
Land is the basic necessity for the construction of a new plant. Many big companies
set up their facilities in backward areas because of cheap availability of land.
10. Less Construction Costs
Construction costs of a plant may be low at a particular place due to cheap labour
available there. The construction material may also be cheaper at another place.
Such places are preferred for locating a plant.

2.5 LOCATING FOREIGN OPERATIONS FACILITIES

Globalization has made consumers expect the best products at the lowest prices
irrespective of where they are produced. So while considering the location of a
facility in a foreign country, in addition to all the factors listed above, the following
additional factors should also be considered.
1. Availability of Cheap, Skilled and Efficient Labour
Many companies locate their facilities at places where there is availability of cheap,
skilled and efficient labour. That is why many multinational companies are locating

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Unit-2 Plant Location and Layout

their branches in India because in India the labour is cheap and skilled and it is
believed that the people are more disciplined and efficient.
2. Trade Barriers
As per the import and export policy of the Government of India, there are restrictions
on the import of certain goods. For certain other goods import duties are levied,
which make these products expensive in the local market. Foreign companies can
overcome such trade barriers by locally producing the goods in that country.
3. Local Customers
If a foreign company has a large customer base in a country, it may be beneficial for
the company to start operations locally in that country. This way the company can
serve the customers better and take advantage of their brand loyalty.
4. Incentives
To increase the inflow of foreign direct investment, the Central and state governments
in certain countries provide industrial infrastructure, insurance, tax exemptions/
reductions, interest – free/subsidized loans, etc., to foreign companies willing to
establish operations and facilities in their region.
5. Share Prices and Goodwill
The market value of the firm may soar as international operations are deemed
prestigious by investors.
6. Offensive in Competitor’s Home
Initiating operations at the competitor’s home country may at times force the
competitor to concentrate more on the home turf and wind up or downsize its
international operations.

2.6 THE LOCATION DECISION PROCESS

There are various steps in location planning. Whenever a firm begins the process of
deciding on a facility location, they begin with listing down the various location
options. Then a list of identified advantages and disadvantages of each location is
made. This list is then compared with the list of factors that are necessary for that
particular industry, for instance the essential parameters, factors that would be of
advantage to that particular industry, etc. Then each location option is screened
using various models and the locations are rated based on these models. The outcome
of this exercise then indicates the most appropriate location. A flow diagram for the
same would look like this.

28 Production and Operations Management

Plant Location and Layout Unit-2

Generate a list of location options for the facility

Find out factors relevant to the planned facility

Screen location options

using various models

Select location that best

satisfies the criteria

Fig. 2.1 Flow Chart for Location Selection

There are various methods/models used today to arrive at the correct location. Some
of the important methods are given below.
2.6.1 Factor Rating and Location Rating Technique
Factor rating is the simplest method for arriving at the best location. The types of
rating that constitute this method are given below.
1. Every factor that is relevant to the industry that is going to be set up is given
a rating between one and five. These factors are those that are relevant to the
industry, irrespective of its location. This is called Factor Rating.
2. Every factor that has been listed in (1) above, is given a relative rating between
one and five for each of the locations proposed to be selected. This is called
location rating.
Example 2.1
The following example will help demonstrate how these two ratings are used to
arrive at the best location.
M/s Indiana Leathers has identified three locations, viz. Kanpur, Noida and
Lucknow to set up a new leather goods manufacturing facility. The factor ratings
and locations ratings have been given. Arrive at the best location using the factor
and location rating method.
Factor Location Rating
Factor rating Kanpur Noida Chennai
1. Proximity to market 3 4 6 3
2. Proximity to Raw 5 10 5 4
material
3. Transportation facility 4 9 10 5
4. Basic amenities 2 6 7 6
5. Acceptance of leather 4 8 3 7
factory by local
6. Availability of cheap 3 7 2 8
land
7. Low construction costs 1 5 1 6
8. Easy availability of 3 3 8 4
cheap and skilled labour

Factory ratings are 1 to 5 5 highest

Location ratings are 1 to 10 10 highest

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Unit-2 Plant Location and Layout

Solution
For each location find the product of factor and location ratings. Add them up for
each location. The location having the highest product will be the best location.
Product of factor and location ratings
Factor Kanpur Noida Chennai
1 12 18 9
2 50 25 20
3 36 40 20
4 12 14 12
5 32 12 28
6 21 6 24
7 5 1 6
8 9 24 12
Total 177 140 131

The highest score is for Kanpur. So it is the best location.

2.6.2 Break-Even Analysis Method
The break-even analysis method is based on the concept of break-even point. Break
even point is the point at which cost and revenue are equal, i.e., there is no loss or
gain. Cost is constituted of two components; fixed cost and variable cost. Fixed
cost includes capital expenditure on land, building, manufacturing and equipment.
This is irrespective of the volume of production and will be incurred even if there is
no production. Variable cost includes raw material, labour, etc. These variables are
directly involved in the production process and are proportional to the volume of
production. Total cost is the sum of fixed cost and variable cost. When the volume
of production is low, the component of fixed cost of the product is high and the
variable cost is low. As the volume of production increases, the variable cost
component too increases and the fixed cost component falls. This cycle continues
till a point is reached beyond which variable cost again begins to increase. This
point is called the breakeven point at which the total cost is lowest. This volume of
production is called breakeven volume. A company likes to have a low break even
volume so that its costs are recovered soon. Locations that provide the least break
even volume are preferred.
Total cost

Variable cost

Rs

Fixed cost

Breakeven volume

Unit

Fig. 2.2 Volume of Production (Units)

The following example shall demonstrate the above discussion.

30 Production and Operations Management

Plant Location and Layout Unit-2

Example 2.2
M/s Vignesh Steels intends to set up a rolling mill to roll different grades of high
carbon steels. Potential locations selected by the company are Alipore, Bhatinda
and Calicut. The cost structures for each of these locations are as shown. The product
is expected to sell at Rs 130 per kg.
(a) Find the most economical location for an expected volume of 6000 Kg per
year.
(b) Calculated the expected profit at that location.
(c) Which location offers the best output range?
FC VC / Kg
Alipore 150,000 75.00
Bhatinda 200,000 50.00
Calicut 400,000 25.00
Solution
Find the variable cost for producing 6000 Kg. Then add the fixed cost and variable
cost to arrive at the total cost.
FC VC/ Ton VC for 6000 Kg TC (FC+VC)
Alipore 150,000 75.00 450000 600 000
Bhatinda 200,000 50.00 300000 500,000
Calicut 400,000 25.00 150000 550,000

The place that offers the least total cost for a volume of 6000 Kg is the best location.
In this example, that place is Bhatinda.
(b)Selling price = 130 × 6000 = ` 780000
Profit = Selling price – Total cost = 780,000 – 500, 00 = 280,000/year
(c)Make a table for outputs 1000, 2000, 3000, 4000, 5000, 6000, 7000, 8000
units/year for each location.
For example, for Alipore, having FC = ` 150,000,
Qty 1000 2000 3000 4000 5000 6000 7000 8000
VC 75000 15000 225000 300000 375000 450000 525000 600000
For Alipore, breakeven is reached at 2000 T production. Why?
One can also draw the graph with Qty on X axis and cost on Y-axis. The point
where the lines of fixed cost and variable cost meet is the break-even point.
Similarly calculate/draw for the other locations.
2.6.3 Simple Median Model
The simple median model is based on the assumption that transportation cost is a
major consideration in facility location planning. This model helps to locate a new
facility such that the total transportation cost between a new facility and an existing
one is minimum. It assumes that movement of goods between two places can take
place only in two directions, namely the ‘x’ direction and ‘y’ direction. No diagonal
movement of goods is allowed.
Production and Operations Management 31
Unit-2 Plant Location and Layout

Example 2.3
M/s Karishma Textiles has spinning mills at 5 locations across North India, viz.
Bareilly, Lucknow, Gonda, Kanpur and Sultanpur. They now intend to set up a new
facility. The coordinates of the existing locations are given. Also given is the cost of
moving one unit of load by unit distance. Find the coordinates of the location where
the new unit should be located. Also, calculate the total transportation cost involved.

Facility Coordinate location Cost of moving one Annual load

(X,Y) unit by unit distance units
Bareilly 10,80 10 452
Lucknow 30,60 10 678
Gonda 80,50 10 483
Kanpur 50,10 10 711
Sultanpur 80,10 10 539
Existing facilities may be warehouse, factory market, to locate new plant. The annual
load is the goods to be moved between a facility and new plant.

80 Bareilly
(10, 80)
70
Lucknow
60
(30, 60)
Gonda
50 (80, 50)
40

30

20
Kanpur Sultanpur
(50, 10) (80, 10)
10

0 10 20 30 40 50 60 70 80

Step 1: Add all the total annual loads. This is the total load that will move in a year
in the organization.
Total of Annual load = 2863 units
Mid-point or Median Load is 2863 + 1 = 1432 units
2
(If the total is even, it is the number otherwise it is the number + 1, since it is
odd. 2 2
Step 2: To find the ‘x’ co-ordinate of the new location,
Start from left i.e. the existing location with the smallest ‘x’ co-ordinate
First is Bareilly – Load – 452 – It is less than 1432 units, the median load.
Next, move to Lucknow – load 678

32 Production and Operations Management

Plant Location and Layout Unit-2

678 + 452 = 1130. It is still less than 1432

Therefore move next to Kanpur – load 711
1130 + 711 = 1841 More than 1432
This means that the ‘x’ co-ordinate of Kanpur will be the ‘x’ co-ordinate of
the new plant.
So x of new plant = 50.
Step 3: In the same manner, find the ‘y’ co-ordinate of the new location.
Start from the bottom, i.e. the existing location with the smallest ‘y’ co-
ordinate.
First Kanpur and Sultanpur 711 + 539 = 1250; it is less than 1432, the median
load.
So move up to Gonda.
1250 + 483 = 1733. This includes the median load.
Therefore, Y of new plant = 50.
Therefore, the location of the new plant will be = (50, 50).
(b) To calculate total transportation cost involved. Coordinates of the new location
is (50, 50)

Facility Coordinate Distance Cost Annual Transportation

(D) (C) load cost *
Bareilly 10,80 (50-10) + (80-50) = 70 10 452 316400
Lucknow 30,60 (50-30) + (60-50) =30 10 678 203400
Gonda 80,50 (80-50) + (50-50) = 30 10 483 144900
Kanpur 50,10 (50-50) + (50-10) = 40 10 711 284400
Sultanpur 80,10 (80-50) + (50-10) = 70 10 539 377300
Total 1326400

* Transportation cost = Distance × Cost × Annual Load

Therefore, total transportation cost = 1326400 units.
2.6.4 Centre of Gravity Method
The centre of gravity method is an extension of the simple median model mentioned
above. In this method, the ‘x’ and ‘y’ co-ordinates of the new location are found out
using the following formulae:
Coordinates of new plant X0 Y0 are
X L Y L
X0  Li i Y0  Li i
i i

Where XiYi are the coordinates of existing facility and Li represents load to be
transported between existing facilities and new plant.
In the previous solved example, coordinates of the new location using the
centre of gravity method can also be found

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Unit-2 Plant Location and Layout

10  452  30  678  80  483  50  711 80  539

X0   49.66
452  678  483  711 539

80  452  60  678x  50  483x  x10  711 10  539

X0   39.64
452  678  483  711 539
The coordinates of the new method will be (49.66, 39.64)
2.6.5 Dimensional Analysis
Instead of considering each of the cost for each proposed location separately, the
Dimensional analysis: relative merits of each of the costs between locations are compared. The advantage
The relative merits of of this method is that some qualitative parameters such as people’s mindset cannot
each of the costs be- be quantified but can only be expressed relatively.
tween locations are
compared. For example, if A and B are two potential sites, 1, 2, 3… are factors, then for
factor 1 their ratio will be,
C1A
C This ratio will have a number.
1B

For n factors they are C1A C2A

,
C2B C2B
Now if each factor is given a weight age between 0 and 1, then
{C }w {C }w {C }w
R = {C }  {C }  {C } ⋯
1A 1 2A 2 3A 3
1B 2B 3B

If the cumulative ratio R is less than 1, site A is better.

If R is greater than 1, site B is better.
2.6.6 Ardalan Heuristic Model
The Ardalan heuristic model is most effective when we are deciding on the location
of service facilities like schools, hospitals and post offices. The following example
shall help better understand the model.
Example 2.4
Delhi Public School is planning to open new branches in four towns. DPS decides
that it would first open only one school in any one of these four places. Depending
on the performance of this school, it may open other branches, one after another.
Determine the sequence for opening the schools. The distance between each of
these places, their population and weight attached (according to the school’s criteria)
are provided below.

34 Production and Operations Management

Plant Location and Layout Unit-2

Location Distance to Population Weights

Brindavan Mahipalpur P. RaeBareli in ‘000
Nagar
Brindavan 0 8 12 10 10 0.7
Mahipalpur 8 0 15 6 11 1.2
Pant Nagar 12 15 0 11 5 1.1
Raebareli 10 6 11 0 8 0.9

Solution
Step 1: Calculate the weighted population distances. Multiply population x distance
x weights. Then add them up to get the total.

Location Weighted population distance to

Brindavan Mahipalpur P. Nagar Raibareli
Brindavan 0 56 84 70
Mahipalpur 105.6 0 198 79.2
Pant Nagar 66 82.5 0 60.5
Raebareli 72 43.2 79.2 0
Total 243.6 181.7 361.2 209.7

Step 2: Compare the cell value of all other locations column wise with that of
Mahipalpur. If the cell value is less than or equal to Mahipalpur, keep it as it is.
Else, replace it with cell value of Mahipalpur. Then again add them up to get the
total.

Location Weighted population distance to

Brindavan Mahipalpur P. Nagar Raebareli
Brindavan 0 56 56 56
Mahipalpur 0 0 0 0
Pant Nagar 66 82.5 0 60.5
Raebareli 43.2 43.2 43.2 0
Total 109.2 181.7 99.2 116.5

Pant Nagar is now the lowest at 99.2. So the next school will be opened at Pant
Nagar.
Step 3: The column for Mahipalpur should now be deleted and the same process
should be repeated as stated in Step-2, comparing to the numbers of Pant Nagar.
Then again add them up to get the total.

Location Weighted population distance to

Brindavan P. Nagar Raebareli
Brindavan 0 56 56
Mahipalpur 0 0 0
Pant Nagar 0 0 0
Raebareli 43.2 43.2 0
Total 43.2 99.2 56

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Unit-2 Plant Location and Layout
The third school should be at Brindavan. And the last school should be at Raebareli.
So the sequence of opening schools will be Mahipalpur, Pant Nagar, Brindavan
and Raebareli.

2.7 LOCATION DECISION FOR WAREHOUSES

Warehousing plays a crucial role in the overall distribution design. Suppose a firm
does not own any warehouses. If the factory also is located far from its supplies of
raw materials, the inbound transportation costs will be very high. Also longer delivery
times increase the chances of material shortages for production. If the factory is
also located far from its retail stores, then transportation costs incurred in shipping
from the plant to the retail stores (out bound transportation costs) are very high. The
delivery time increases the chance of out–of–stock situations, which reduce the
level of customer service. Both the situations, the presence of warehouses, both
close to the markets as well as close to the factory, can provide quick and efficient
functioning of the factory as well as delivery to retail stores. The centre of gravity
method is most commonly used for deciding the location of warehouse.
A number of factors, besides location, are relevant in case of warehousing.
The important ones are,
Which products should be stored in each warehouse?
Should public or private warehouses be used?
What type of material handling equipment should be used?
Which customers should be assigned to each warehouse?
Suppose that the firm owns several manufacturing plants, which produce a
variety of products. In the absence of a warehouse, the company’s distribution system
would look like this:

Plant A Retail Store 1

Product 1

Plant B Retail store 2

Products 2 & 3

Fig. 2.3 Distribution System Without Warehouse

Rather than ship small quantities of each product directly from the plants to retail
stores, a warehouse can be used for consolidation of orders, as shown below. The
economic advantage of such a system lies in the act that it is often cheaper to ship in
truckload or wagon loads of quantities than in small quantities. Productivity is
increased since transport vehicles are used more efficiently and unit costs are reduced.

Plant A Retail Store 1

Product 1
WAREHOUSE
(Products 1, 2 &3)
Plant B Retail Store 2
Products 2 & 3

Fig. 2.4 Distribution System With Warehouse

36 Production and Operations Management

Plant Location and Layout Unit-2

One fall out of this system could be that inventories and order-processing costs will
rise, with a corresponding increase in paperwork and other administrative costs.
The optimum number of distribution centres will therefore balance transportation
costs with inventory and order–processing costs.
The level of customer service also varies with the number of distribution
centres. Many different productivity measures can be used to evaluate customer
service. Common among these are:
 The average order processing time (the time between receipt of an order at
the warehouse and its shipment)
 The percentage of shipments delivered within x days of order receipt
 The percentage of orders that are accurately filled
 The number of damaged items, etc.
The managers responsible for location decisions must therefore make decisions
depending to a large extent on the overall goals and objectives of the firm and their
customer-service policies.

2.8 NEED FOR LAYOUT PLANNING

What happens when one plans to build a house? First, land is bought. Then a sketch
is drawn detailing where each unit of the house will be, example the bathroom, the
kitchen, the bedrooms, etc. This sketch or plan decides how the house is going to
be.
The same holds true for setting up a factory. Once the facility location has
been decided and the land acquired, a sketch or a plan is made to decide where each
department/section is going to be, the location of entrance, exit gates, restroom,
storage areas, etc. In the subsequent sections, we will see how planning is done.
2.8.1 Layout Planning–Definition
We can now define layout as the physical location of the various departments/units Layout: The physical
of a facility within the premises of the facility. location of the various
The departments must be located based on some consideration. The common departments/units of a
facility within the
considerations are,
premises of the facility.
1. Logical sequence of processing operation
2. Direction of material flow and material handling
3. Aesthetic considerations
4. Government regulations
5. Special requirements
The entrance and exit is usually of critical importance in the layout planning of
facilities.
2.8.2 Objectives of Plant Layout
Plant layout is the method to plan and arrange materials and facilities so that a
steady flow of production is ensured at minimum cost. A good plant layout always

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Unit-2 Plant Location and Layout

results in comfort and satisfaction of workmen and this automatically increases the
production. A bad plant layout leads to accidents and unnecessary problems.
A good plant layout is designed to achieve the following objectives:
1. Economic handling of materials and finished goods
2. Faster and good quality production
3. Better utilization of available space
4. Flexibility in change of plant design and possibility of expansion at a later
date
5. Improvement in work condition leading to higher productivity
6. Unidirectional/systematic flow of production operation
7. Reduction in waiting time
8. Reduction in manufacturing cost
2.8.3 Advantages of a Good Plant Layout
A good plant layout results in better production and less cost. The advantages of a
good plant layout are as follows:
1. Well-organized workspace
A good plant layout means well-organized workspace with adequate facilities
provided for both machines and workmen. The proper arrangement of
machineries and tools eliminates congestion. The required materials are stored
in their appropriate places to avoid confusion. Workmen are also distributed
to their respective departments and there is no confusion in work.
2. Better working conditions
A good plant layout results in labour satisfaction due to better and cleaner
working conditions. It has been well documented that motivation level
increases when lighting and other aesthetics are improved. Safety of workmen
is another very important factor. A good plant layout ensures that the machines
are properly placed, with adequate space in between so that there is no
congestion and no danger of the workmen getting injured. This provides safety
to the workmen and creates good work environment.
3. Minimization in material handling
A good plant layout minimizes materials handling costs. The machines and
equipment are placed in such a manner that there is no difficulty transferring
in materials between workstations. Provision of adequate material handling
systems will ensure that there is minimal labour cost, labour fatigue, etc., and
the labour can be utilized in other more productive jobs.
4. Minimization in damage and spoilage of materials
In a good plant layout materials are handled properly and this results in good
quality production. There is minimum damage and spoilage of materials.
Minimizing wastes also leads to increase in profits for the company.
5. Flexibility in changing production conditions
A good layout provides adequate space for future expansions, laying another
workstation, etc. The advantage is that in future if the market condition
changes, the firm can easily put up new machinery, etc., without having to

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Plant Location and Layout Unit-2

dismantle the existing ones and with minimum hindrance to the daily schedule
or work.

2.9 TYPES OF LAYOUTS

Figure 2.5 shows the four basic types of layouts.

LAYOUT

Product Process Project or Cellular

Fixed position
Fig. 2.5 Types of Layouts

2.9.1 Product Layout

The layout in which the equipment/machines and materials are placed in the order
in which they are used for producing the product is called product layout or line
layout. Product layout is found in industries where mainly assembling of materials
and parts takes place, such as the automobile industry. In such industries, the process
starts with feeding in the raw materials and ends at the end of the line with the final
product. Figure 2.6 shows the flow diagram of a line layout.

RECEIVING OPERATION-1 OPERATION-2

PACKING INSPECTION OPERATION-3

DISPATCHING

Fig. 2.6 Flow Chart of a Line Layout

Advantages of the product layout

1. There is low work in process since output of one stage is automatically the
input of the next stage.
2. Material handling is less since the process is automatic.
3. Labour costs less, as there is good division of labour.
4. Quality control is easier to implement.
5. Easy and accurate scheduling of materials is possible.
6. Production control is simpler due to less product variety.
Disadvantages of the product layout
1. It is not easy to change the product. This will involve change in the layout,
which is both expensive and time consuming. So this layout is not very flexible.

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Unit-2 Plant Location and Layout
2. The entire line stops even if one machine stops.
3. Expansion of work area or insertion of any machine in between other machines
Process layout: The is not possible or is very difficult.
layout in which all the
equipment/machines 2.9.2 Process Layout
performing similar
tasks are grouped
The layout in which all the equipment/machines performing similar tasks are grouped
together. together is called process layout or functional layout. For example, the milling
machines can be grouped together to form one department and the grinding machines
can be grouped together to form another department. Depending on their processing
requirements, parts are moved in different sequences among departments. Dividing
the whole workplace into small units helps in faster production and better utilization
of the workplace. The process layout can give a higher variety of products. For
example, in a garment plant the stitching machines are placed in one place, pressing
machines such as irons in another, knitting machines in another, and so on.

STORES GRINDING FOUNDRY

PRODUCTION
RECEIVING PLANNING DESPATCH
CONTROL

MILLING WELDING CASTING

Fig. 2.7 A Process Layout Scheme

Advantages of the Process Layout

1. Flexibility in adapting to changing volumes, changing variety.
2. Helps workmen learn more skills as job rotation will enrich their skills.
3. Problem in one machine does not affect the other machines and production
need not stop.
4. In case of future expansion or increase in varieties, the existing set-up need
not be pulled out.
Disadvantages of the Process layout
1. Space requirement increases if the work volume increases.
2. Mechanization of material handling is not possible or it is very costly.
3. High work in progress inventory as jobs have to queue up for each operation.
4. Difficulties in scheduling work as different jobs have different operation
sequences.
5. High level of supervision is required. Production, planning and control is
more difficult.
Project layout: The
layout in which the 2.9.3 Project Layout
production operation is
performed in a fixed The layout in which the production operation is performed in a fixed position is
position is called called project layout or fixed position layout. Aeroplane and ship building industries
project layout or fixed use this type of layout. While making a rocket (the real ones, not fire crackers!) the
position layout. workmen/scientists, machines and tools and the raw materials are moved to the

40 Production and Operations Management

Plant Location and Layout Unit-2

place of construction of the rocket. Building bridges, roads, Metro rail, etc., are all
projects.
MANPOWER

RAW MATERIAL OUTPUT TOOLS

PRODUCED

MACHINE

Fig. 2.8 A Project Layout Scheme

Advantages of a project layout

1. It minimizes movement of machineries and equipments
2. More continuity in production; several activities can take place simultaneously.
Disadvantages of a project layout
1. Skilled and versatile workers are required. The necessary combination of
skills may be difficult to find and high pay level may be necessary.
2. Once the project is over, the equipment/materials need to be moved away.
This is not only expensive but equipment utilization is also low since the Group layout:
equipment is idle during the time it is being shifted. Consists of groups of
2.9.4 Group Layout different machines
(called cells) that are
Group layout is a combination of the layouts studied so far and is more commonly necessary for the
seen in the industry today. Group technology, or cellular manufacturing, as it is production of families
called, has the advantages of both process layout as well as line layout. In group of parts.
technology, parts are grouped into families. The layout consists of groups of different
machines (called cells) that are necessary for the production of families of parts.
For the purpose of illustration, consider a facility that produces two families
of parts. The first group of parts is cylindrical and requires operations on a lathe,
then milling and drilling. The second family requires shearing, milling, and drilling.
The group concept establishes a separate machine grouping of milling and drilling
machines for each part family. Since part families have similar features, retooling is
much easier, hence set-up times are reduced and the system operates much like an
assembly line.
Advantages of group technology
1. Design of new products is much easier.
2. Production control is simpler than process layout or projects since scheduling
of machines becomes less complex and fewer tools and materials are required.
3. Material handling costs are lesser than process layout.
4. Savings in set-up time so increased production is possible.

2.10 LAYOUT PLANNING FOR STORAGE AND

WAREHOUSING

The design and layout of a warehouse is slightly different from the layout of a
production unit. A warehouse is used for storing raw materials and supplies, tools

Production and Operations Management 41

Unit-2 Plant Location and Layout

and equipment and semi-finished and finished goods. Warehouses are often located
at a distance from the actual production or customer locations.
A warehouse should focus on achieving high productivity in the day-to-day
activities of material management. These productivity objectives are:
1. Maximum utilization of space
2. Efficient stock location and identification
3. Conservation of time, labour, and equipment
4. Rapid and easy transfer to and from storage
Meeting these goals depends on a variety of factors, such as the size and shape of
the physical facility, type of material-handling equipment available, placement and
arrangement of stock, and the nature and usage of the items.
Small firms may provide storage space within their own production facilities
or in an adjacent warehouse. Larger corporations, particularly multi-plant companies
and pure distribution systems such as grocery chains or retail department stores use
cubic footage to its fullest extent. Pallets or portable platforms are used to take
advantage of vertical stacking capability. They are moved easily by forklift trucks
and other handling equipment. Other storage methods should be used for small
items or those for those that are used infrequently. Racks, shelves and bins are used
for small items and they are usually picked by hand.
The arrangement of items in storage depends on a variety of factors. The type
of material often dictates special storage considerations. Items subject to
deterioration, such as foodstuff, medical supplies, iron or paints, must be protected
from dampness, insects, or extreme temperatures. These types of items would also
require a first–in–first–out (FIFO) retrieval policy. Other methods of retrieval are
Last–in–first out (LIFO), next-in-first-out (NIFO), etc.
Valuable items need special storage locations with security provisions.
Hazardous materials require special attention and location. The size, weight and
shape of items affect storage and handling. For example, fragile items cannot be
stacked very high, and heavy or bulky items are best stored near the shipping area to
reduce handling needs. Produce turnover also affects storage and handling. Fast
moving items need to be handled quickly, while slow movers can be stored in less
desirable locations or locations that require slower handling.

2.11 LAYOUT PLANNING METHODOLOGY

2.11.1 Line or Product Layout

Product layout is easier to plan since the machines have to be arranged or laid out as
per the sequence of operations involved in converting the raw material to finished
goods. The problem in line layout is not of how to sequence or relatively position
the work areas, but to group the work element in such a manner that there is very
little idle time between the work centres. The problem is therefore one of balancing.

42 Production and Operations Management

Plant Location and Layout Unit-2

2.11.2 Process Layout

The problem in process layout is one of arranging the different work areas in such
a way that the material movement costs are kept to a minimum. It is assumed that
the other relevant costs of layout will also be reduced on account of this optimizing
procedure.
The material handling costs between two work areas (departments) = {distance
between the two work areas} x {load handled between the two departments
during a unit period of time}. Here, load means the total number of units of
different products any department processes.
The sum of these products, for all the combinations of departments should be
minimum for an optimal plant layout. This can be expressed as follows:
Minimize  DIJ  LIJ
ij
Where, Dij is the distance between departments i and j, and Lij is the number of
loads per unit time moved (handled) between departments i and j.
The starting point in such a mathematical optimization procedure for the
process layout is therefore, the gathering of the date on the number offloads per unit
time moved between different combinations of the work areas. This data is called
load summary and is presented in matrix fashion.
2.11.3 The Assignment Model
The assignment model is a commonly used method which assigns machines to
various locations in such a way that minimum cost is incurred in material handling.
Consider the following example.
Example 2.5
M/s Trailor Strip Steel wants to add new capacity to their existing facility. It has to
install three machines M1, M2 and M3 at 3 locations A, B & C. The material handling
cost in Rs ‘00/hr with respect to various combinations is shown.
A B C
M1 7 3 1
M 5 6 9
2

M3 6 4 X
There is a constraint – Machine M3 cannot be located at C. So it is written as X.
Assign machines to locations such that total material handling cost is minimum.
Also find the material handling cost.
Solution
Step 1: Find the smallest value in each row; subtract it from every cell in the row.
(For e.g. the smallest value in 1st row is 1. So subtract it from 7, 3 and 1) The matrix
now becomes:
A B C
M1 6 2 0
M2 0 1 4
M3 2 0 M

Production and Operations Management 43

Unit-2 Plant Location and Layout

Step 2: Find the smallest value in each column and subtract it from every entry in
the column. (For e.g. the smallest value in 1st column is 0. So subtract it from 6, 0
and 2, the matrix now appears as follows:
A B C
M1 6 2 0
M2 0 1 4
M3 2 0 M
Step 3: Make horizontal and vertical lines to cover all zeroes.
A B C
M1 6 2 0
M2 0 1 4
M3 2 0 M

3 lines are formed; the number of machines is also 3. So we can now allocate as
follows:
M3 – B M2 – A M1 – C

Note: In case the number of lines covering all zeroes is not equal to the number of
machines, we have to find the smallest number amongst those not covered by any
line. Subtract it from the numbers not covered by any line and add it to the numbers
at the intersection of the line. Then again draw fresh lines and proceed.
Material handling cost M3 – B = 400
M2 – A = 500
M1 – C = 100
––––––
` 1000
––––––
2.11.4 Closeness Rating
Closeness ratings indicate the relative degree of desirability of having one department
near another. These are very effective tools, especially in service facility layout
planning. For example, in an MBA institution, it is desirable to have the library and
computer centre as close as possible to the lecture theatres. The boys’ and girls’
hostel should be as far as possible. The girls’ hostel is usually located near the
teachers’ residential premises.
The closeness rating can be indicated as shown below
Closeness rating Importance
Absolutely necessary 1
Highly important 2
Important 3
Slightly important 4
Unimportant 5
Undesirable 6

44 Production and Operations Management

Plant Location and Layout Unit-2

Example 2.6
Indiana Hospital has made the matrix shown below to show the closeness ratings of
the various departments for its proposed new building. The matrix shows that the
closeness rating between departments D1 and D2 is 2, departments D1 and D3 is 4,
D6 and D1 as 5, and so on.
Make a layout for the hospital building keeping in view the closeness ratings.
D1 D2 D3 D4 D5 D6 D7 D8 D9
D1
D2 2
D3 4 6
D4 1 5 1
D5 4 4 5 4
D6 5 4 3 4 6
D7 4 5 5 5 2 5
D8 5 6 3 1 4 5 3
D9 1 4 3 6 5 4 3 1

Solution
Step 1: Make a list of department pairs with ratings 1. This is absolutely necessary.
D1 – D4
D3 – D4
D1 – D9
D4 – D8
D8 – D9
Make a list of department pairs with ratings 6. This is undesirable.
D2 – D3
D5 – D6
D2 – D8
D4 – D9
Step 2: Now make a network of departments having the rating 1, with the department
occurring most frequently (D4) at the centre.

D3 D8
D4

D1 D9
Similarly, make a network of departments having the rating 6, with the department
occurring most frequently (D2) at the centre.

D3 D2 D8

D5 D6 D4 D9
Now, keeping in view the above combinations, place the departments in the nine
cells as shown below. This placement satisfies all the conditions of not only

Production and Operations Management 45

Unit-2 Plant Location and Layout

departments with ratings 1 and 6 but also those with other ratings. While making
the placements, we have to consider only ratings 1 and 6, the other ratings being
automatically satisfied.
Table

D2 D4 D3
D6 D1 D8
D7 D9 D5
Closeness ratings require a trial and error method for placement of departments.
Several computer software such as automated layout design programs (ALDEP)
and computerized relationship layout planning (CORELAP) are based on the
closeness ratings method. Another software, computerized relative allocation of
facilities (CRAFT), is based upon the load distance analysis method explained below.
2.11.5 Load Distance Analysis
In this method, two or more layouts can be compared to find out the layout which
minimizes the total load distance value of the product manufactured. The following
example shall explain this method.
Example 2.7
The figure below shows two layout options for a facility- Layout-A and Layout-B.
The distance between any two adjacent departments is 10 m. No diagonal movement
is possible e.g. if a load has to be moved from department 7 to department 5 in
layout A, it can be either through departments 8, 9, and 6 or through departments 3,
1 and 2 by travelling a distance of 40 m. Table below shows the department processing
sequence of various products and their quantity produced per month. Which layout
is better in terms of lower total load distance value?
LAYOUT-A

1 2 5
3 4 6
7 8 9

LAYOUT- B

5 3 4
9 6 1
2 7 8

PRODUCT PROCESSING QTY/MONTH

SEQUENCE
V 5 – 7– 2 – 9 3000
W 4–3–8–1–5 4000
X 3–9–4–1 2000
Solution: Find the total distance travelled by a product while getting processed,
according to the given sequence.

46 Production and Operations Management

Plant Location and Layout Unit-2

. DISTANCE .
PRODUCT PROCESSING LAYOUT-A LAYOUT-B
SEQUENCE

V 5–7–2–9 40 + 30 + 30 = 100 30+10+10=50

W 4–3–8–1–5 10 + 20 + 30 + 20 = 80 10+30+10+30=80
X 3–9–4–1 30 + 20 + 20 = 70 20+ 30 + 10 = 60

Now multiply the load, i.e. quantity per month with the distance calculated.

PRODUCT QTY QTY X DISTANCE

LAYOUT-A LAYOUT-B

V 3000 300000 150000

W 4000 320000 320000
X 2000 140000 120000

760000 590000

The total load distance of Layout – B is lesser than Layout – A.

Hence, layout-B is a better option.

CHECK YOUR PROGRESS-1

1. What do you mean by facility location?

2. What are the advantages of factor rating method?
3. What do you mean by plant layout?
4. What are the objectives of a good plant layout?

ACTIVITY

1. Visit a local firm and find out the factors that played a major role in selecting
its location decision.
2. Prepare a list of modern-day strategies employed in deciding the plant
layout.

Production and Operations Management 47

Unit-2 Plant Location and Layout

2.12 LET US SUM UP

 Facility location is the selection of suitable location or site where a firm or
factory can be installed.
 Proximity to customers and proximity to raw materials are the two factors
that play an important role in deciding the facility location.
 Factor rating is the simplest method for arriving at the best location.
 The centre of gravity method is the most common method used for deciding
the location of a warehouse.
 A good plant layout results in labour satisfaction due to better and cleaner
working conditions.
 There are four basic types of layouts—product, process, project and cellular
layouts.

2.13 FURTHER READING

Aquilano, Chase and Jacobs. 2003. Operations Management for Competitive
Advantage. New Delhi: Tata McGraw-Hill.
Bedi, Kanishka. 2007. Production and Operations Management. New Delhi: Oxford
University Press.
Bhattacharya, D.K. 2000. Production and Operations Management. New Delhi:
Excel Books.
Evans, J.R., D.R. Anderson, D.J. Sweeney and T.A. Williams. 1984. Applied
Production and Operations Management. St. Paul M.N., US: West Publishing Co.
Besterfield .H (2018) Total Quality Management

2.14 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress–1

1. Plant location may be understood as the function of determining where the
plant should be located for maximum operating economy and effectiveness.
The selection of a place for locating a plant is one of the problems, perhaps
the most important, which is faced by an entrepreneur while launching a new
enterprise. A selection on pure economic considerations will ensure an easy
and regular utilization of production capacity and reduced cost of production.
An ideal location may not, by itself, guarantee success, but it certainly
contributes to the smooth and efficient working of an organization. A bad
location, on the other hand, is a severe handicap for any enterprise.
2. Factor rating method has the following advantages:
(i) Simplicity, which facilitates communication about why one location/
site is better than another.
(ii) Fosters consistency of judgements about location alternatives.
48 Production and Operations Management
Plant Location and Layout Unit-2

(iii) Enables bringing diverse location considerations into the evaluation

process.
3. Plant layout is the repositioning of machineries and equipment of a plant for
economic and better quality productions. Plant layout begins with the selection
of work site for the facilities required in production and then arranging all the
machineries so that there is steady flow of production operations. Additionally,
plant layout includes arrangement of workmen, materials available, storage
space and all other supporting services such as design and maintenance of a
plant.
4. The following are the objectives of a good plant layout:
(i) Economic handling of materials and finished goods
(ii) Better supervision for faster and good quality production
(iii) Better utilization of available space
(iv) Flexibility in change of plant design and workspace expansion
(v) Improvement in work condition
(vi) Unidirectional flow of production operation

2.15 POSSIBLE QUESTIONS

Short-Answer Questions
1. Write a short note on the parameters which affect the location of a plant in a
foreign country.
2. How is the break-even concept used in location decision?
3. Differentiate between line layout and process layout.
Long-Answer Questions
1. What do you mean by ‘facility location’ or plant location? Why is it so
important for the success of an organization?
2. Describe the parameters that affect plant location.
3. Discuss the steps involved in selecting a location for a facility.
4. Discuss the factor and location rating method.
5. What is layout planning? What is its relevance to an organization?
6. What are the objectives of layout planning? Discuss the benefits of a good
layout.
7. What is group technology? What is its relevance?
8. Solve the following process layout problem. The management of a firm has
decided to locate the six departments of its factory in a way that will minimize
interdepartmental material handling costs. They make an initial assumption
(to simplify the problem) that each department is 20 × 20 feet and that the
building is 60 feet long and 40 feet wide.

Production and Operations Management 49

Unit-2 Plant Location and Layout

9. The number of loads of product moved each week between departments is

given in the table. Moving a load between adjacent departments costs $2 per
load, while moving a load between non-adjacent departments costs $3. Find
the layout of departments that minimizes costs, and determine the overall
cost of material handling for your layout. Each department can only be adjacent
to a maximum of two other departments.
Receiving Printing Assembly Packaging Shipping
Receiving 50 30 10 0
Printing 60 30 15
Assembly 45 30
Packaging 55
Shipping

10. A manufacturing company requires a new plant in Europe. The management

has developed factors weights to be used in the decision, and has determined
the following ratings. Find out the ideal location where the plant should be
constructed.
Score Weighted Score
Factor Weight England Germany Belgium England Germany Belgium
Labour 0.3 60 70 65
Attitude
Corn 0.4 70 40 55
Quality
Butter 0.3 55 60 75
Quality
Sum 1.0

11. Assume that a new medical facility is to be located in New Delhi. The location
factors, factor rating and scores for two potential sites are shown in the
following table. Deduce the best location based on the factor rating method.

S.No. Location Factor Factor Rating Rating

Location 1 Location 2
1. Facility utilization 8 3 5
2. Total patient per month 5 4 3
3. Average time per 6 4 5
emergency trip
4. Land ad construction costs 3 1 2
5. Employee preferences 5 5 3

2.16 LEARNING OUTCOMES

 Facility location
 The importance of facility location
 Verify the factors that affect facility location

50 Production and Operations Management

Plant Capacity and Line Balancing Unit-3

UNIT 3 PLANT CAPACITY AND LINE

BALANCING
UNIT STRUCTURE
3.1 Learning Objectives
3.2 Introduction
3.3 Production Planning
3.3.1 Types of Plans
3.3.2 Elements of Production Planning
3.4 Production Planning Strategy
3.4.1 Capacity Planning
3.4.2 Aggregate Planning
3.5 Functions of Production Planning and Control
3.5.1 Benefits of Production Planning and Control
3.5.2 Yield Management
3.6 Production Control
3.6.1 Input/Output Control
3.6.2 Shop-Floor Control
3.7 Assembly Line Balancing
3.8 Production Scheduling
3.8.1 Objectives of Scheduling
3.9 Job Sequencing
3.9.1 Sequencing when there are Several Jobs and One Machine
3.9.2 Sequencing when there are Several Jobs and Several Machines
3.9.3 Index Method
3.9.4 Assignment or Job Loading
3.9.5 Gantt or Bar Charts Method
3.10 Let Us Sum Up
3.11 Further Reading
3.12 Answers to Check Your Progress
3.13 Possible Questions
3.14 Learning Outcomes

3.1 LEARNING OBJECTIVES

After going through this unit, you will be able to:

 Explain production planning and strategy
 List the functions of production, planning and control
 Explain production control, production scheduling and job sequencing

3.2 INTRODUCTION

In the previous units, you learnt that production and operations management is
about how raw materials are converted into finished goods through the process of
value addition. What is also understood is that these activities are not sporadic.
It requires a lot of planning and coordination to see that these activities are carried
Production and Operations Management 51
Unit-3 Plant Capacity and Line Balancing

out in a systematic manner, so that just the right amount of raw materials are
purchased, the right number and kind of people are in place, the right type of
operations are being done on the right kind of machines, and so on.
Just as holidays are systematically planned, the activities of production too
require planning. These activities also need to be controlled at every step so that
there is no deviation from the plan.
Production can basically be divided into two types of activities.
 Production planning
 Production control
In this unit, you will learn these in detail.

3.3 PRODUCTION PLANNING

The five known Ms of business that form the input are man, machine, materials,
Production planning: money and method. Production planning involves planning for business inputs
Involves planning for over a specified period of time so that a planned output is obtained.
business inputs over a
specified period of 3.3.1 Types of Plans
time so that a planned
output is obtained. Depending on the timeframe of planning, the type of plan can be:
 Long-term or strategic planning – focuses on a horizon greater than one year.
 Medium term or intermediate range – usually covers a period of six to eighteen
months. When done annually, the same is called aggregate planning.
 Short-term – routine planning may be daily, weekly or monthly.
3.3.2 Elements of Production Planning
Production planning is a very complex activity, encompassing the following:

Maintenance
planning

Manpower Quality planning

planning

Production
planning

Aggregate
planning Distribution
planning

Materials
planning

Fig. 3.1 Elements of Production Planning

52 Production and Operations Management

Plant Capacity and Line Balancing Unit-3

Here, distribution planning refers to distribution of capacities for the various products,
their volumes, etc.
Of these activities, this unit will discuss manpower planning capacity planning,
aggregate planning and distribution planning. Materials planning will be dealt with
in unit 6, and Quality in unit 4.

3.4 PRODUCTION PLANNING STRATEGY

There are three parameters that affect the nature of production planning. They are:
 Number of workers
 Utilization of workers
 Size of inventory
The following are the three basic production planning strategies based on the above
variables. In each of these strategies, one variable is varied and the other two are
kept constant.
(a) Level output rate plan
The inventory size is varied keeping the workforce size and utilization of
workers constant throughout the time period under consideration. During
months of low demand, the units produced in excess of demand are
accumulated as inventory. This is utilized during periods of high demand.
The advantage of this plan is that the cost of hiring and training new workers
is zero. Also, the cost of laying-off workers is zero, as the workforce size is
constant. The employee morale is high due to a sense of job security. The
disadvantage of this method is that during periods of low demand, there is a
high inventory cost due to its large size.
(b) Chase plan
The workforce size is varied according to demand, keeping the utilization of Chase plan: The
workers and inventory size constant. During period of low demand, the workforce size is
workforce size is decreased and the extra workers are laid off. Similarly, varied according to
during periods of high demand, more workers are hired. The hiring and laying- demand, keeping the
utilization of workers
off costs are substantial in this plan. Since production is in tune with demand,
and inventory size
inventory is almost negligible. During the period of heavy demand, overtime constant.
may be required on the part of workers, for which the company incurs overtime
cost. The workers’ morale could be low due to a sense of insecurity.
(c) Varying utilization plan
The utilization of workers is varied keeping the workforce size and inventory
size constant. The plan keeps the number of workers constant. When demand
is low, the workers produce less and have a lot of idle time. On the other
hand, when demand is high, the excess units required over regular production
are produced by the workers during overtime. The idle time on the part of
workers during months of low demand is a loss to the company, which pays
full wages to its employees. On the other hand, the company incurs overtime
costs during periods of high demand. Overtime is usually expensive compared
to the regular wages given to workers. In addition, excess overtime leads to
less efficiency on the part of workers and more accidents due to lack of
Production and Operations Management 53
Unit-3 Plant Capacity and Line Balancing
concentration. Nonetheless, the company saves on inventory costs, which
are also negligible, in this plan.
Preferably, these basic planning strategies should not be used in isolation
from each other, as each one of these has typical drawbacks. A combination
of these strategies is used in preparing the aggregate production plan. The
following example will illustrate the use of a combination of these strategies.
Example 3.1
M/s Cooperative Textiles is a cooperative society that makes bedspreads. A worker
makes a 100 bedspreads per month. In the month of October, there are 25 workers
on roll. The salary per worker is ` 4000/month. The cost of hiring a worker is ` 500
and for laying off, a worker has to be paid 20 per cent of a month’s salary. If the
forecast for November and December is 2000 and 3000 blankets respectively, prepare
the production plan. Consider the inventory carrying cost as ` 1/blanket/month.
Solution
Case 1: Chase Plan
November:
No. of workers required = 2000/100 = 20
Total salary to be paid = ` 4000 × 20 = ` 80,000
Since there are 25 workers on the roll in October, 5 workers need to be laid of.
Therefore, laying off cost = 20% × 4000 × 5 = ` 4000
Obviously, no worker is hired.
December:
No. of workers required = 3000/100 = 30
Total salary = 4000 × 30 = ` 1,20,000
Since there are 20 workers on the roll in November, 10 more workers need to be
hired.
Hiring cost = 500 × 10 = ` 5000
Lay off cost = 0
Total additional expenditure = ` 4000 + 5000 + 80,000 + 1,20,000= ` 209,000
Case 2: Level Output Rate Plan
If 25 workers produce in November,
Number of blankets produced = 25 × 100 = 2500 blankets
Since demand is 2000, number of blankets left in inventory = 500
Inventory carrying cost = 10 × 1 × 500 = ` 5000
This will be consumed in December as 2500 blankets will be produced and demand
is 3000.
Salary in November and December = 4000 × 25 × 2 = ` 2,00,000
Therefore, grand total cost = 2,00,000 + 5000 = ` 2,05,000

54 Production and Operations Management

Plant Capacity and Line Balancing Unit-3

Example 3.2
M/s Advani Castings employs 20 workers at a salary of ` 2000/month. It takes
4 hours to produce one casting. The cost of hiring a worker is ` 1500 and the cost of
laying-off is ` 1000 per worker. (Assume 8 working hours per day)
Find the total cost.
Month April May June July August Sept.
Demand 1000 2340 864 1674 1408 1512
No. of 25 26 24 27 22 18
Working days

Solution
Case 1
Calculate the number of workers required every month.
Example, April –
Number of castings produced in April by one worker = 25 × 8/4 = 50
Number of workers required = 1000/50 = 20
Salary paid = 20 × 2000 = ` 40,000
No hiring or laying-off cost.
Similarly, calculate for the other months.
Month Demand Working days Men required Salary Hiring Cost Layoff cost
April 1000 25 20 40000 0 0
May 2340 26 45 90000 37500 0
June 864 24 18 36000 0 2000
July 1674 27 31 62000 16500 0
August 1408 22 32 64000 18000 0
Sept. 1512 18 42 84000 33000 0

Total Cost = Salary + Hiring cost + Laying off cost = ` 4,83,000

Case 2: If in the above example, the number of workers employed should remain
constant at 30 and the inventory carrying cost is ` 6/casting/month and shortage
cost is ` 100/casting/month. Then find the total cost. Compare the two and suggest
the better method.
Solution
Calculate the quantity of castings produced every month.
Example April – 30 × 25 × 8/4 = 1500
The inventory column is to be filled like this –
For example for May, inventory from previous month April is 500.
Production in May is 1560 and demand for May is 2340.
So, 2340 – (1560 + 500) = 280. There is a shortage of 280 units.

Production and Operations Management 55

Unit-3 Plant Capacity and Line Balancing

Month No. of Qty. Demand Inventory Inventory Shortage Salary

workers produced carrying cost cost
April 30 1500 1000 500 3000 0 60000
May 30 1560 2340 –280 0 28000 60000
June 30 1440 864 296 1576 0 60000
July 30 1520 1674 242 1452 0 60000
August 30 1320 1408 154 924 0 60000
Sept. 30 1080 1512 –278 0 27800 60000

Total cost = Salary + inventory carrying cost + shortage cost = ` 4,22,752.

The second method is better since the total cost is lesser.
3.4.1 Capacity Planning
Capacity planning is another aspect of production planning. Whatever a company
may plan to produce, manpower it may employ, unless it has the necessary capacity
or machinery to produce, all its plan will remain on paper. So capacity is the ability
to produce and capacity planning is the process of identifying the capacity of a
Capacity planning: production unit that is required to meet the current and future production demands.
The process of A company does capacity planning when:
identifying the capacity
1. It is starting a new manufacturing unit.
of a production unit
that is required to meet 2. It is increasing the volumes of an existing manufacturing unit.
the current and future 3. When new products are being introduced.
production demands.
4. When there is a change in demand, i.e., addition, or deletion of products.
The following are factors affecting capacity planning:
1. Type of product or service: The capacity of a company depends on the
products it manufactures. If it is a tailor-made product, the number of
products cannot be high. But if it is a general or standard product the
volumes will be high.
2. Type of process: Whether the process employed is manual or automated
also affects capacity. In manual processes, capacity is low. More manpower
needs to be employed to increase capacity. Even then there will be problems
of variations in products, variation in performance, etc. In automated
processes, the volume of output will be uniformly high.
3. Type of technology: Capacity also depends on the technology employed.
A high-end technology will give better products much faster and there
will be lesser wastages. Availability of facilities such as space and power
also affect capacity.
4. Skill level of workers affect capacity: If the workers are better trained
and motivated, the output will increase.
5. Availability: Ease of raw material availability will also affect capacity to
some extent.
6. External factors: External factors such as government policies, tax limits
and production limits also affect capacity.
 Methods to Modify Capacity
Strategies to modify the capacity can be broadly classified into short-term and long-
term capacity.
56 Production and Operations Management
Plant Capacity and Line Balancing Unit-3

1. Short-term response: Methods that are short-term will change the capacity
or quantity produced in the short-term. However, they cannot be long-term
solutions to vary the capacity of the organization. They are:
(a) Inventories – Companies may continue to produce during periods of
low demand and pile up stock. This can be used to take care of increased
demand.
(b) Labour – Companies hire during periods of high demand and lay off
during periods of low demand. They may also pay overtime for extended
working hours or allow relaxed working during low demand.
(c) Some companies develop multi skills in their employees. Job rotation
can also be done to take care of fluctuating demand.
(d) Process redesign – Sometimes, changing job content at each workstation
can also take care of fluctuating demand.
(e) Sub-contracting – Many companies sub-contract part of their jobs. For
example, during peak demand, some companies get their product made
from outside the firm, then inspect it and give it their brand name.
(f) Maintenance – Some companies reschedule their routine maintenance
to periods of less demand so that their production during high demand
periods is not affected.
2. Long-term response: These are long-term methods. They cannot change the
capacity overnight. They can be of two types:
(a) Capacity expansion
(b) Capacity contraction
(a) Capacity expansion – They require considerable investment such as
more land, new machines and more manpower. They can again be of
two types.
(i) Expand once in five or more years – This method is adopted when
the company has to borrow externally for expansion. It requires
huge investment, but the company is ensured that its supply will
always meet the demand in the following years.
(ii) Expand a little every year – The advantage of this method is that
the company need not borrow heavily for investment; often, the
funds are generated internally. A company adopts this practice if it
feels that the demand will increase a little every year.
(b) Capacity contraction – When a company feels that its products have
entered the decline phase of its life cycle, it may decide to diversify or
discontinue the product. Then it sells off or transfers technology and
skill to other companies. The capacity may also be reduced and allocated
to other products of the company.
The capacity of a work centre is an important element for process
design. Capacity is usually specified in terms of available hours, either
for machines or labour. Capacity should include an efficiency factor
reflecting downtime for failure and maintenance. The following
examples will illustrate the same.

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Example 3.3
A work centre consists of four machines, each of which is used during an 8-hour,
one-shift operation. The efficiency of each machine is 85 per cent (that is, the
machines are expected to be down 15 per cent of the time). Find the capacity of the
work centre.
Solution
The capacity of one machine in the work centre in one shift
8 × 0.85 = 6.80 hours
For 4 machines: 6.80 × 4 = 27.2 hours
3.4.2 Aggregate Planning
Aggregate plan is the total plan of a company for producing a product over a certain
period of time, say the following twelve months. Formulation of an aggregate plan
is the starting point for any manufacturing planning and is based on orders expected
Aggregate plan: The during the planning period. Various forecasting techniques are used to determine
total plan of a the approximate aggregate demand for the product family. The plan must be firmed
company for producing
up for a reasonable period of time, because overall production volume cannot be
a product over a certain
period of time.
changed abruptly without incurring significant unplanned costs.
Every production volume utilizes a given mix of labour, materials and
equipment. When the output volume is changed, a new optimal mix must be achieved
by re-adjusting the usage of the various resources. Even though it is possible to
change in the long run, in the short run, it is difficult to do it efficiently.
A master production schedule is the dis-aggregating of an aggregate plan.
This means it gives information about the number of various models and sub-models
of a product planned to be produced in a given duration. The master schedule shows
the quantity and timing of each specific product for a time horizon. It gives details
about the quantities and timing of the planned production of every product of an
organization. The MPS provides the sales personnel with information about how
many units of a product they can commit to customers in a given time period.
The following example illustrates the difference between aggregate plan and
master production schedule for a toy manufacturing company.

Aggregate Plan Figures in ’000

April May June July August Sept.
300 400 350 375 350 290

Master Production Schedule

April May June July August Sept.
Model A 100 120 110 130 125 90
Model B 100 80 125 125 110 100
Model C 100 100 115 120 115 100

The sum total of the Master Production Schedule will be the aggregate plan.
The time interval used in MPS varies from firm to firm. It depends on the
type of products used, the volume of production and the lead times of the materials
used. This span of time that the MPS covers is called the planning horizon. Typically,

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within the framework of a six-to-twelve month aggregate plan, the master production
schedule is updated weekly to reflect changing sales demand and also internal
problems which require scheduling.
In manufacturing, the planning process can be summarized as follows:
The production control group inputs existing or forecast orders into an
aggregate plan. From this, the MPS is derived. The MPS generates the amounts and
dates of specific items required for each order. Rough cut capacity planning then
verifies that production and warehouse facilities, equipment, and labour are available
and that key vendors have allocated sufficient capacity to provide materials when
needed. Material Requirements Plan (MRP) is then made. This plan specifies when
the products need to be made, what are its raw materials, when and how many are
required and when the order should be placed on the vendors. The final planning
activity is daily or weekly order scheduling of jobs to specific machines, production
lines, or work centres.
Example 3.4
Study the product structure tree given below. If 100 units of A are to be supplied in
8 weeks, prepare the bill of materials and planned order releases.
A LT-2

B (2) LT-1 C (4) LT-3 D (3) LT-2

E (3) LT-3 F (3) LT-3 G (5) LT-3 H (6) LT-1

Solution
If A is to be ready in 8 weeks, B, C, D should be ready in the 6th week because it
takes 2 weeks to make A.
Similarly, if B has to be ready in the 6th week, E and F should be ready in
6 – 1 = 5th week.
G and H should be ready in 6 – 2 = 4th week.
So order should be placed, E = 5 – 3 = 2 weeks.
Now, B has to be ready in the 6th week and it takes 1 week to make it ready
or buy it. So order for B should be placed in the 5th week.
For 1 unit of A, 2 units of B are required. So for 100 units of A, 200 units of
B will be required.
For 1 unit of B, 3 units of E are required. So for 2units of B, 2 × 3 = 6 units of
E will be required.
Calculating for all the items and tabulating them, you get,

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Item Number required For 100 units Lead To be To be

of A time ready ordered
in week# in week#
A 1 100 2 8 6
B 2 200 1 6 5
C 4 400 3 6 3
D 3 300 2 6 4
E 6 600 3 5 2
F 6 600 3 5 2
G 15 1500 3 4 1
H 18 1800 1 4 3

CHECK YOUR PROGRESS-1

1. List the various parameters that affect the nature of production planning.
2. Under what situations does a company undertake capacity planning?
3. What is a master schedule?

3.5 FUNCTIONS OF PRODUCTION PLANNING AND

CONTROL

The main activities encompassing production planning and control are as follows:
1. Order Preparation: The work of PPC begins once an order is received from
the sales department. This order is then converted into a work-order or shop-
order and sent to various departments concerned, for planning action at their
end.
2. Materials Planning: Once the order is received, the PPC decides on the raw
materials required for its manufacture taking into account the capacity of
various production shops, the bill of materials, inventory on hand and lead
time for procurement.
3. Routing (or process planning): Routing means determination of the sequence
of operations for manufacturing a product or service. This path is determined
in advance and forms the basis for most of the scheduling and dispatching
functions. According to Kimball and Kimball, ‘routing is the selection of
path or route over which each piece is to travel in being transformed from
raw material into finished product.’
Routing includes the following activities:
 Deciding the volume of production
 Selecting the men, machine and materials to be used in its production
 Deciding the type, number, and sequence of production operations
 Deciding the place where production is to be carried on

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When routing or process planning is being done, the production planning and
control prepares a route sheet. This is prepared in the following manner:
(i) The product is analysed with respect to its constituent parts. A decision
is then taken as to what parts are to be manufactured and what to be
purchased.
(ii) The specifications, grade, quality and quantity of materials to be used
for production are determined.
(iii) The number of manufacturing operations and their sequence is
determined and listed on the route sheet.
(iv) The process time for each operation and the type and number of machines
necessary to produce are determined.
(v) The lot size for production is determined keeping in mind the customers’
orders and rejections and spoilage anticipated during the course of
manufacturing.
4. Estimating: This involves establishing the operation times for every process.
It also leads to fixation of performance standards for both men and machines.
5. Scheduling: According to Spriegal and Lanburgh, ‘scheduling involves
establishing the amount of work to be done and the time when each element
of work will start or order of the work.’
Thus, scheduling includes the following activities:
 Determination of quality and rate of output of the plant or department
 Allocation of time for each operation
Scheduling indicates when the work will be released to the plant in a prescribed
order and in proper sequence. It fixes the time of start and completion of the
operation.
The scheduling function begins when the following information is furnished:
(i) Date of delivery specified by the customer’s order
(ii) Time required for assembly and sub-assembly process
(iii) Time to be taken in the production of component parts
(iv) Time required to make purchases
(v) Time required for moving the materials from one station to another,
inspection, etc.
(vi) Priority of orders
Necessary provisions for unforeseen contingencies such as power breakdown,
strike, and lockout, absence of workers or rush of orders of extreme importance
are usually made when a schedule is prepared.
6. Loading: This involves allocating jobs to machines as per the capacity of
machines and priority of jobs to be done, so that the machinery is utilized to
the maximum possible extent. It includes the following activities:
 Preparation of machine loads
 Fixation of actual dates of various operations or sequence of operations to
be performed on the jobs
 Coordination with the sales department to confirm delivery dates and
keeping them informed about the status of the schedules

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7. Dispatching: This involves preparation and distribution of work orders and
manufacturing instructions to the concerned departments in accordance with
the details worked out under routing and scheduling functions. The work
orders received by the various departments are an authority for them to start
the work according to that schedule.
According to Spriegal and Lansburgh,
‘Dispatching involves the meeting of schedules by proper utilization of
machines workplaces, materials and workers, as designed by the routing.
The dispatching unit of the planning department, thus includes persons whose
duty is to see that orders are issued to the shop, that materials are at the work
place, that tools are provided, that job cards are issued, and, in general all
necessary steps are taken to ensure that the schedules will be properly carried
out.’
8. Progressing: This involves controlling the process of production, collection
of data from various manufacturing shops, recording the progress of work
and comparing the progress against the plan.
9. Expediting and Follow-up: Follow-up refers to verifying whether the work
is being carried on according to the plan and orders and instructions issued.
It ascertains that the materials, tool and equipment are supplied at the job at
the right time and to the right person or job. Follow-up is the means by which
the progress and execution of the plan is evaluated from time to time and the
divergence from the plan is noted. The reasons for such divergence are then
found out and efforts are made to eliminate them from the plan.
10. Inspection: This refers to comparing the actual with the written down or
expected specifications and assessing whether they have been met. Inspection
can be process inspection or product inspection, in which the process or the
product is inspected respectively.
11. Cost Control: PPC is responsible for cost control and cost reduction by
reducing or eliminating wastes, value analysis, etc.
12. Miscellaneous Functions: In addition to the above usual functions of PPC,
they also perform certain miscellaneous functions such as building cost
estimates for products, fixing standards with the help of industrial engineering
department, capacity planning, making or buying decisions, making
specifications of raw materials, process improvement, etc. Taking corrective
measures is also among their many functions. If the production manager feels
that routing is defective or scheduling is rigid and unrealistic, he can rectify
the route and lay down realistic and flexible schedules. Workload, machines
and men should be determined scientifically, and an effective and optimum
utilization of the plant’s capacity should be the objective.
Sometimes, abnormal situations like strike and power or machinery breakdown
upset work schedules. In such situations, the production manager should adjust
the schedules and make up for delays. Production manager is also responsible
for appraising the performance of personnel working in the production
departments.

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3.5.1 Benefits of Production Planning and Control

The above establishes that production planning and control, is the nerve centre of
any production organization. An effective production planning and control system
gives many benefits to an organization. They are:
(a) Better quality of products
(b) Better utilization of resources
(c) Reduction in inventories
(d) Reduction in manufacturing cycle time
(e) Better customer services due to adherence in delivery dates
(f) Lower production costs so profits will increase
(g) Improved market share caused due to goodwill caused by better products at
lower costs
(h) Competitive advantage to the firm when compared to its competitors with
poorer PPC system
(i) Dependability on the firm that results in its earning goodwill in the market
3.5.2 Yield Management
Media these days is bombarded with advertisements saying Airlines tickets are
available from ` 99 onwards, etc. How are airlines able to give tickets at such cheap
prices? Why do the prices increase if tickets are booked just a week before the air
travel? Vice versa, sometimes at the airport, tickets can be purchased at a price
cheaper than if they had been booked a week in advance. Why? The answers lie in
the practice known as yield management.
Yield management can be defined as the process of allocating the right type Yield management:
of capacity to the right type of customer, at the right price and time, to maximize The process of
revenue or yield. Yield management is an approach to making demand more allocating the right
predictable, which is important to aggregate planning. Its commercial application type of capacity to the
right type of customer,
began with American Airlines’ computerized reservation system (SABRE), at the right price and
introduced in the mid-1980s. The system allowed the airline to change ticket prices time, to maximize
on any route instantaneously as a function of forecast demand. Basically, the system revenue or yield.
enabled hour-by-hour updating on competing routes so that the airline could match
or better prices whereever its competitors were flying.
Yield management principles are practised when:
 Fixed costs are high and variable costs are low.
 Inventory is perishable.
 Product can be sold in advance.
 Demand is highly variable.
Hotels illustrate these characteristics well. They offer one set of rates during vacations
and another set during off-season. The variable costs associated with a room (such
as cleaning) are low in comparison to the cost of adding rooms to the property.
Available rooms cannot be transferred from night to night, and blocks of rooms can
be sold to conventions or tours. Finally, potential guests may cut short their stay or
not show up at all. Most organizations (such as airlines, rental car agencies, cruise
lines, and hotels) manage yield by establishing decision rules for opening or closing
rates as a function of expected demand and available supply.

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CHECK YOUR PROGRESS-2

1. Define ‘routing’.
2. List some benefits of production planning and control.
3. When does a company follow the principles of yield management?

3.6 PRODUCTION CONTROL

3.6.1 Input/Output Control

One aspect of production control is input–output control. Its concept is that the
planned work input for a work centre should never exceed the planned work output.
When the input exceeds the output, backlogs build up at the work centre, congestion
occurs, processing becomes inefficient, and the flow of work to downstream work
centres becomes sporadic. The control process would entail finding the cause of
upstream problems and adjusting capacity and inputs accordingly.
3.6.2 Shop-Floor Control
Shop-floor control is also called production activity control. It is the heart of any
manufacturing organization. The APICS dictionary defines a shop-floor control
system as, a system for utilizing data from the shop floor as well as data processing
files to maintain and communicate status information on shop orders and work
centres.
The major functions of shop-floor control are:
(a) Assigning priority of each shop order
(b) Maintaining work-in-process information
(c) Maintaining shop-order status information
(d) Providing actual output data for capacity control purposes
(e) Providing information for inventory and accounting purposes
(f) Measuring efficiency, utilization, and productivity of manpower and machines

3.7 ASSEMBLY LINE BALANCING

For high-volume continuous production, a line layout is preferred. This is also called
an assembly line.
The production planning problem in an assembly line is:
 to establish production rates of the final product, from the line.
 to obtain this production rate with optimal workforce level so that the
costs are reduced and there is smooth and regulated flow of material
through a sequence of operations at a uniform rate. This is done by a
process called assembly line balancing.

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Suppose, in a line, one operation takes ten minutes and the next operation takes two
minutes only. Then the rate of production in this line will be one unit in ten minutes
that is, the rate of production in a line will always be the rate of the slowest operation
in the line.
The operator of the second operation will be idle for 10 – 2 = 8 minutes,
every ten minutes. What a waste!
Assembly line balancing tries to reduce this idle time between operations so
that the operations take place at the lowest possible time. This is done by equalizing
the output rates of groups of operations, by balancing them, hence the term assembly
line balancing
Before proceeding further, it is important to understand what work centres
are. A work centre is an area in a business in which productive resources are Work centre: An area
organized and work is completed. The work centre may be a single machine, a in a business in which
group of machines, or an area where a particular type of work is done. These work productive resources are
organized and work is
centres can be organized according to function in a job-shop configuration, or by completed.
product in a flow, assembly line, or group technology cell (GT cell) configuration.
The following example will illustrate assembly line balancing.
Example 3.5
A tricycle manufacturing assembly line has the following work elements, with the
sequence as indicated:

Work Element Description Immediate Predecessor Time

Nomenclature of work element of work element taken
A Drilling for fixing Nil 4
Front Wheel
B Drilling for fixing Nil 4
rear Wheels
C Making the skeleton B 3
Or tricycle frame
D Fix handle bar A, C 2
E Fix seat D 2
F Fix back rest D 3
G Mount front wheel E, F 5
H Mount rear wheels E, F 8
I Install rubber mountings G, H 1
J Install bell on handle I 1
Solution
First and foremost we have to draw the precedence diagram from the given
information.

A D E H I

B C F G

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The next step is to group the work elements to for work stations. We have to group
those jobs which are independent of each other.
Work Station 1 : A&B = 4+4 = 8 minutes
Work Station 2 : C,D &F = 8 minutes
Work Station 3 : E = 2 minutes
Work Station 4 : H = 8 minutes
Work Station 5 : G, I &J = 7 minutes
Cycle time–This is the time required to produce one unit of the finished product
or the time available at each workstation.
In this problem, the cycle time is 8 minutes.
Total time of all the elemental tasks = 33 minutes
Next find the balance delay.
Total idle time for assembly line
Balance Delay = –––––––––––––––––––––––––––––––––––––––––––––––––––
Total time taken by a product from the first to last workstation
5 × 8 – 33
= × 100 = 17.5%
5×8
This is not the only way to group the workstations. They can be grouped in any
manner as long as the technological and other sequential requirements are not
violated.
This visual method is too simplistic for complex problems involving a large
number of elemental tasks. The heuristic methods are generally used in assembly
line balancing.

3.8 PRODUCTION SCHEDULING

The following discusses production planning for job or batch processes, where
different products are produced on the same set of machines. As stated earlier, a
schedule is a timetable for performing activities, utilizing resources or allocating
facilities. It schedules, dispatches, tracks, monitors, and controls production on the
factory floor. In the case of the job shop, jobs need to be routed through a sequence
of work centres to complete the work.
Scheduling systems can use either infinite or finite loading. Infinite loading
occurs when work is assigned to a work centre on the basis of what is needed to be
done, without considering the capacity or resources required to complete the work
or the sequence of the work to be done. Study of infinite loading is beyond the
scope of this unit.
In finite loading, the work is assigned to a work centre only after careful
consideration of each resource such as capacity of machine, materials available,
manpower available, and so on. If an operation is delayed due to material shortage,
the order will wait for the part to become available from a preceding operation.
Theoretically, all schedules are feasible when finite loading is used.

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Scheduling systems can also be based on whether the schedule is generated

forward or backward in time. Forward scheduling refers to the situation where the
system takes an order and then schedules each operation that must be completed
forward in time. The system will then project the earliest date that an order can be
completed.
Backward scheduling starts from some date in the future (generally the due
date) and schedules the required operations in reverse sequence. The backward
schedule tells when an order must be started in order to be done by a specific date.
The Material Requirements Planning (MRP) system is an example of an infinite,
backward scheduling system for materials. In MRP, each order has a due date
sometime in the future. The system then calculates the required parts by backward
scheduling the time that the operations will be run to complete the orders. The time
required to make each part (or batch of parts) is estimated based on historical data.
3.8.1 Objectives of Scheduling
Why is scheduling so important in production planning and control? This is because
it enables the organization to:
 Meet due dates
 Minimize lead time
 Minimize set-up time and set-up cost
 Minimize work-in process inventory
 Maximize machine and labour utilization
There are several methods used in industry for work centre scheduling, or simply
called job scheduling. The most important ones are discussed here.

3.9 JOB SEQUENCING

The process of determining which job to start first, and in what order other jobs
should be processed, on the machine or work centre is known as job sequencing or
priority sequencing. Priority rules are used in obtaining a job sequence. Jobs are Priority rules: The
generally sequenced according to processing time, due date or order of arrival. This rules used in obtaining
method can be used for both finite loading as well as infinite loading and forward as a job sequence.
well as backward sequencing.
The following are the common bases on which sequencing is done:
1. Meeting due dates of customers or downstream operations
2. Minimizing the flow time (the time a job spends in the process)
3. Minimizing work-in-process inventory
4. Minimizing idle time of machines and workers
There can be several situations: there may be number of jobs and one machine or
there may be ‘n’ jobs and n machines. For each situation, there are methods for
sequencing. The important methods of sequencing are discussed here.

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3.9.1 Sequencing when there are Several Jobs and One Machine
In the first case, jobs may be sequenced according to any of the following rules:
1. Minimum Process Time (MINPRT) Method. This is also known as shortest
operation time method (SOT). Under this rule, the job with the shortest process
time is first scheduled, followed by next lowest process time, and so on.
2. Due Date Method (DD Method). In this method, the job with earliest due
date is done first.
3. First Come First Served (FCFS) Method. In this method, jobs are scheduled
in the order in which they are received by the company.
4. Longest Process Time (LPT) Method. This method is just the reverse of
MINPRT method as job with longest processing time is attended first.
5. Dynamic Slack/Remaining Operation (DS/RO) or Minimum Slack per
Operation (MINSOP) Method. In this method, first Dynamic Slack (DS) is
computed. (This is the difference between due time and processing time).
This is divided by Remaining Operation (RO) time. Unless specified, RO
will be assumed as one. Final scheduling of the job under this method is done
as per the ranking. Job with lowest DS/RO value is assigned Rank 1 and
attended first. The next higher value gets Rank 2 and so on.
Which particular rule is more appropriate for a given situation will depend on the
average job lateness and average number of jobs in the system The lesser the job
lateness, the better it is as it will ensure customer satisfaction, optimum utilization
of machine, reduced slack time, etc.
The following solved example will help explain all the above methods.
Example 3.6
Four jobs W, X, Y and Z need to be done at the same work centre. Their process
times and due dates are as given below. Sequence the jobs by different methods.

JOB PROCESS TIME DUE DATE

(number of days) (days from today)
W 5 12
X 6 18
Y 7 21
Z 10 14
Solution
1. Minimum Process Time (MINPRT) Method
W is done first since it has the lowest process time.
Next X is done (By now, total days required = 5 + 6 = 11, It is below 18)
Next do Y, Total days required = 11 + 7 = 18, it is below 21. So no delay will
be caused
Next do Z, total days 5 + 6 + 7 + 10 = 28.
It is beyond 14 by 14 days. So delay is 14 days.
Job Z gets delayed by 14 days

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2. Due Date (DD Method) Method

Process time Flow time Due dates Job

(Cumulative Process time) lateness
W 5 5 12 0
Z 10 15 14 1
X 6 21 18 3
Y 7 28 21 7

First the jobs are rearranged in the increasing order of due dates, i.e., W, Z,
X Y.
Total completion time = 5 + 10 + 6 + 7 = 28 days
Next, calculate flow time
For W = 5
Then Z completed after 5 + 10 = 15 days
X = 15 + 6 = 21, Y = 21 + 7 = 28 days
Cumulative or Total = 5 + 15 + 21 + 28 = 69 days
Average Completion time = 69/4 = 17.25 days
Average Job lateness = (0 + 1 + 3 + 7)/4 = 11/4 = 2.75
3. First Come First Serve (FCFS) Method – Irrespective of the process times or
due dates, the jobs received first are done first.
4. Longest Process Time (LPT) Method

Process time Flow time Due dates Job

(Cumulative Process time) lateness
Z 10 10 14 0
Y 7 17 21 0
X 6 23 18 5
W 5 28 12 16
28 78 21
In this case, the jobs are rearranged in the decreasing order of Process Times
i.e., Z, Y, X, W.
Total completion time 28 days.
Average Completion time = 78/4 = 19.5
Av. Job lateness = 21/4 =5.25
5. Dynamic Slack/Remaining Operation (DS/RO) or Minimum Slack per
Operation (MINSOP) Method
Assume that the number of operations for each job are W = 2, X = 3, Y = 2,
Z = 4. (Number of operations means the number of activities which need to
be done to make W)
Delivery date – Process time
DS/RD ratio = –––––––––––––––––––––––––
No. of operation

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DS/RD ratios are = W = (12 – 5)/2 = 7/2 = 3.5
Similarly, X = 4, Y = 7, Z = 1.
Rank them Z being the lowest is 1. W = 2, X = 3, Y = 4
Rearranging them in the increasing order of their rank, we get

Process time Flow time Due dates Job

(Cumulative Process time) lateness

Z 10 10 14 0
W 5 15 12 3
X 6 21 18 3
Y 7 28 21 7
13
Total completion time = 28 days
Average Completion time = 74/4 = 18.5
Average Job lateness = 13/4 = 3.25 days
Tabulating all the results:

Sequencing Total Av. Completion Av. Job

Rule completion time time lateness
MINPRT 28 15.5 4.25
FCFS 28 15.5 2.21
LPT 28 19.5 5.25
DD 28 17.25 2.75
DS/RD 28 18.5 3.25
Rules can be selected depending on the requirement.
3.9.2 Sequencing when there are Several Jobs and Several Machines
This method was developed by S.M. Johnson, to minimize idle time by prudent job
allocation.
Example 3.7
In a job shop, several jobs A, B, C, D, E, F and G have to be performed on two
machines M1 and M2 in the same sequence, i.e., M1 first and then M2. The time
taken by each job on each machine is given below. Determine the sequence of the
jobs.
JOB M1 M2
A 9 2
B 5 4
C 8 10
D 3 5
E 4 6
F 1 11
G 7 6

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Solution
(a) Lowest time taken on M1 is job F. So F is first.
(b) Next ‘2’ is taken by job A on M2. So A will be last.
(c) Next ‘3’ is job D on M1. So D is 2nd job.
(d) Next ‘4’ is job E on M1. So E is 3rd.
(e) Also ‘4’ is job B on M2 . So B is before A.
(f) Next ‘5’ is job D on M2. But D is already scheduled. So ignore.
(g) Next ‘6’ is Job E on M2. Ignore since E is already scheduled.
(h) ‘6’ is also job G on M2. So G is before B
(i) Left over is C. So place it after E.
So the sequence decided is F, D, E, C, G, B, A.
The situation becomes difficult when several jobs have to be assigned to
several machines. The index method and assignment methods are used for this
purpose.
3.9.3 Index Method
Index method is a method of finite job loading and backward scheduling. The lowest
time or cost required by a particular job–machine combination is considered as the
base and the indices for the other combinations are made based on the base index.
While allocating, the capacity of the respective machines and the time available are
considered, which should not be exceeded under any circumstance.
The following example will help understand this method.
Example 3.8
In a job shop, five products, A, B, C, D and E need to be produced on four machines
1,2,3 and 4. The number of days it will take if A is made on Machine 1 is 10, A on
2 is 9 days and so on. Allocate the 5 jobs to the 4 machines so that all the jobs are
completed within the total time available of 20 days.

WORK CENTRE (NO. OF DAYS)

JOB 1 2 3 4
A 10 9 8 12
B 3 4 5 2
C 25 20 14 16
D 7 9 10 9
E 18 14 16 25
No. of days
Available 20 20 20 20

Solution
Assign an index number first. For every job, assign the number 1 to the job-machine
combination having the lowest number of days. In this example, for job A, 8 is
assigned index 1, For B, 2 is 1, for C, 14 is 1, for D 7 is 1 and for E 14 is 1.

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Then calculate the ratios for the other numbers and tabulate as below.

WORK CENTRE
JOB 1 Index 2 Index 3 Index 4 Index

A 10 1.25 9 1.13 8 1.0 4 1.5

B 3 1.5 4 2.0 5 2.5 2 1.0
C 25 1.78 20 1.42 14 1.0 16 1.14
D 7 1.0 9 1.28 10 1.47 9 1.28
E 18 1.28 14 1.0 16 1.14 25 1.78

Days available 20 20 20 20

Days assigned 7 14 8 2 + 16 = 18
In the Table, A has the lowest index for Work Centre 3. So A is allocated Work
Centre 3.
Similarly, D is assigned line 1.
E = line 2
B = line 4
For C, the lowest index is at work centre 3. But if it is allotted, it will take 8 + 14 =
22 days, will exceed the available 20 days. So if C goes to 1.14 index, that is line 4.
Then line 4 will be booked for 2 + 16 = 18 days.
3.9.4 Assignment or Job Loading
In most job shops, there may be more than one workstation available to perform a
job. It then becomes necessary to choose between different alternatives and jobs are
allocated to the most time and cost–effective job-machine combination. Assignment
or job loading technique is a quantitative method which optimizes our decision on
job scheduling.
Example 3.9
Four jobs W, X, Y and Z have to be assigned to four machines 1, 2, 3 & 4. The
manufacturing cost in Rupees for various job-machine combinations is given. Assign
the jobs to the machines such that the total cost is minimum.

Machine #
JOB 1 2 3 4
W 8 4 7 14
X 15 12 9 3
Y 9 18 12 16
Z 10 20 15 5

Solution
Step 1: Subtract the smallest number in a column from all the other numbers in that
column. For e.g. In the first column, 8 is the smallest number. So we subtract 8 from
8,15,9 and 10. The revised matrix is as follows:

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1 2 3 4
W 0 0 0 11
X 7 8 2 0
Y 1 14 5 13
Z 2 16 8 2
Step 2: Subtract the smallest number in a row from all other numbers in that row:
The revised matrix is as follows:

1 2 3 4
W 0 0 0 11
X 7 8 2 0
Y 0 13 4 12
Z 0 14 6 0
Step 3: How many lines can be shown to cover all zeroes? One could draw three
lines. This means that one machine will be idle (Since there are four jobs and four
machines). However this is not cost-effective.
(Note: If minimum number of lines is not equal to the number of columns, it means machines will
remain idle. Lines represent the machines, so we must continue this step till we get the number of
lines covering all zeroes equal to the number of machines.)
So, now look for the smallest number which is not covered by any line. It is 2
here. So subtract 2 from all the numbers, which have not been covered by the three
lines and add 2 to all the numbers at the intersection of the lines.
The matrix now becomes:

1 2 3 4
W 2 0 0 13
X 7 6 0 0
Y 0 11 2 12
Z 0 12 4 0
Step 4: Y = 1 (since there is only 1 zero).
W = 2 or 3
X = 3 or 4
Z = 1 or 4
So by elimination, the assigned values are, Z = 4, X = 3, W = 2, Y = 1.
3.9.5 Gantt or Bar Charts Method
Gantt method was introduced by Henry Gantt in 1917 for use in production planning,
scheduling and control. It is a type of bar chart that plots tasks against time. They
are used for project planning as well as to coordinate a number of scheduled activities.
In a Gantt chart, the time frame, which may be in terms of hours, days, weeks or
months, is on the ‘X’ axis. The activities are plotted on the vertical or ‘Y’ axis.

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Gantt charts are used as

 Scheduling or progress charts, to show the sequence of job progress
 Load charts, to illustrate the work assigned to work group or allocated to
machines
 Record charts, to keep a track on the actual time spent and delays, if any
Gantt charts require updating at regular intervals, like when starting of work is
delayed, when work continues beyond the time schedule, or when progress of work
is not in accordance with the actual plan. For unforeseen eventualities also, at times,
it may be essential to initiate corrective action, which will require corresponding
changes in Gantt charts.
The advantages of Gantt charts are as follows:
(i) They are simple and inexpensive and can be developed even by a
supervisory staff with some amount of training.
(ii) The chart can clearly show the decided time and work schedules for
every job.
(iii) Updating and changes can be made quickly and with less cost
involvement.
(iv) These type of chart boards are available in standard sizes from the market,
which substantially saves the cost of developing customized (specific
to one’s requirement) Gantt chart boards.
Disadvantages of Gantt charts are as follows:
(i) Interrelationships and inter-dependencies between jobs cannot be shown.
(ii) Cost aspect of jobs cannot be indicated.
(iii) Other alternatives for project completion cannot be shown.
Depending on the nature of requirement, the shape and form of Gantt charts
may be different.
Smaller job shops and individual departments of large ones employ the Gantt
chart to help plan and track jobs. The following example will help understand how
to draw and interpret a Gantt chart.
Example 3.10
Two jobs J1 and J2 need to be performed on two machines in that sequence, that is
M1 first and then M2. The time taken by each job on each machine is given below.
Draw a Gantt Chart and use it to allocate the jobs to the machines.
M1 M2
J1 3 9
J2 5 11

Solution
Suppose we follow sequence J1, J2.

M1 J1 J2

M2 IDLE J1 J2

0 2 4 6 8 10 12 14 16 18 20 22

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When J1 is on M1, M2 is idle. After 3 hours, when J1 goes to M2, J2 starts in M1.
Total time required in this sequence = 3 + 9 + 11 = 23 hours.
Suppose we follow sequence J2, J1.

M1 J2 J1

M2 IDLE J2 J1

0 2 4 6 8 10 12 14 16 18 22 24 26
When J2 is on M1, M2 is idle. After 5 hours, when J2 goes to M2, J1 starts in M1.
Total time required in this sequence = 5 + 9 + 11 = 25 hours.
So, J1 J2 is a better sequence since time taken in lesser.

CHECK YOUR PROGRESS-3

1. Define ‘shop-floor control’.

2. What is forward scheduling?
3. List some disadvantages of Gantt charts.

ACTIVITY

1. A steel melting shop is designed for production of 60 tonnes/heat, and the

efficiency is 90 per cent. The furnace runs 168 hours in a week, i.e., 7 days
running. If the average heat time is 4 hours/heat, find the rated capacity of
the steel melting shop per week.
2. Discuss how airlines and hotels practise yield management.

3.10 LET US SUM UP

 Production planning involves planning for business inputs over a specified

period of time, so that a planned output is obtained. It is a very complex
activity and encompasses many elements such as quality planning,
maintenance planning, manpower planning and aggregate planning.

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Unit-3 Plant Capacity and Line Balancing
 The three commonly used production planning strategies are the level output
rate plan, chase plan and the varying utilization plan.
 Capacity planning is the process of identifying the capacity of a production
unit that is required to meet the current and future production demands.
Depending on the demand, firms adopt either a short-term strategy or long-
term strategy to modify the production capacity.
 Routing is the determination of the sequence of operations for manufacturing
a product or service.
 Some of the benefits of an effective production planning and control system
include better quality products, inventory reduction, optimum utilization of
resources and lower production costs.
 Yield management is the process of allocating the right type of capacity to
the right type of customer, at the right price and time, to maximize revenue or
yield.
 Production control encompasses both input/output control and shop-floor
control. Some of the major functions of shop-floor control are assigning
priority to each shop order, maintaining work-in-process information and
maintaining shop-order status information.
 Infinite loading occurs when work is assigned to a work centre on the basis of
what is to be done, without considering the capacity or resources required to
complete the work or the sequence of the work to be done.
 Job sequencing refers to the process of determining the sequence of different
jobs and the order in which they should be processed. There are many methods
of job sequencing such as the Index method, job loading and the bar chart
method.

3.11 FURTHER READING

Aquilano, Chase and Jacobs. 2003. Operations Management for Competitive
Advantage. New Delhi: Tata McGraw-Hill.
Evans, J.R., D.R. Anderson, D.J. Sweeney and T.A. Williams. 1984. Applied
Production and Operations Management. St. Paul M.N., US: West Publishing Co.
M.Selvam (2014) Maritime Logistics and Documentation , Lakshmi
Publications , New Delhi
M.Selvam (2013) Quality Management, Lakshmi Publications , New Delhi

3.12 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress–1
1. There are three parameters that affect the nature of production planning. They
are:
 Number of workers
 Utilization of workers
 Size of inventory

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2. A company undertakes capacity planning when:

(i) It is starting a new manufacturing unit.
(ii) It is increasing volumes of an existing manufacturing unit.
(iii) When new products are being introduced.
(iv) When there is a change in demand, i.e., addition or deletion of products.
3. A master schedule shows the quantity and timing of each specific product for
a time horizon. It gives details about the quantities and timing of the planned
production of every product of an organization. The MPS provides the sales
personnel with information about how many units of a product they can
commit to customers in a given time period.
Check Your Progress–2
1. Routing means determination of the sequence of operations for manufacturing
a product or service. This path is determined in advance and forms the basis
for most of the scheduling and dispatching functions.
2. An effective production planning and control system gives many benefits to
an organization. They are:
(a) Better quality of products
(b) Better utilization of resources
(c) Reduction in inventories
(d) Reduction in manufacturing cycle time
(e) Better customer services due to adherence in delivery dates
(f) Lower production costs so profits will increase
3. Yield management principles are practised when:
 Fixed costs are high and variable costs are low.
 Inventory is perishable.
 Product can be sold in advance.
 Demand is highly variable.
Check Your Progress–3
1. Shop-floor control is also called production activity control. It is the heart of
any manufacturing organization. The APICS dictionary defines a shop-floor
control system as, a system for utilizing data from the shop floor as well as
data processing files to maintain and communicate status information on shop
orders and work centres.
2. Forward scheduling refers to the situation where the system takes an order
and then schedules each operation that must be completed forward in time.
The system will then project the earliest date that an order can be completed.
3. Disadvantages of Gantt charts are:
(i) Interrelationships and inter-dependencies between jobs cannot be shown.
(ii) Cost aspect of jobs cannot be indicated.
(iii) Other alternatives for project completion cannot be shown.

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3.13 POSSIBLE QUESTIONS

Short-Answer Questions
1. What are the ways by which we can modify the capacity of an organization?
2. Describe in brief the steps involved in production control.
3. What are work centres? Why is shop-floor control important?
4. Write a short note on assembly line balancing.
Long-Answer Questions
1. What is production planning? What are the different areas where planning is
done in an organization?
2. Differentiate between long-term, short-term and medium-term plans with
examples.
3. What is capacity planning? What are the factors that affect capacity planning?
4. What is aggregate planning and master production schedule?
5. What do mean by ‘sequencing’? What are the situations when sequencing is
done and name the methods used.
6. What is Gantt chart and where it is used?

3.14 LEARNING OUTCOMES

 The production planning and strategy
 The functions of production, planning and control
 Production control, production scheduling and job sequencing

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Quality Assurance Unit-4

UNIT 4 QUALITY ASSURANCE

UNIT STRUCTURE
4.1 Learning Objectives
4.2 Introduction
4.3 Definition of Quality
4.4 Costs of Quality
4.5 Characteristics of Quality
4.6 Statistical Methods
4.6.1 Statistical Process Control
4.7 Specification and Control Limits
4.8 Acceptance Sampling
4.8.1 Types of Sampling Plans
4.9 The Operating Characteristic Curve
4.9.1 Parameters of an OC Curve
4.10 Control Charts
4.10.1 X-Bar Chart
4.10.2 R-Chart
4.10.3 P-Charts or Fraction Defective Charts
4.10.4 C-Charts or Number of Defects Chart
4.11 Total Quality Management
4.11.1 Principles of TQM
4.11.2 Deming’s 14 Points
4.12 Six Sigma
4.12.1 Six Sigma Themes
4.13 Let Us Sum Up
4.14 Further Reading
4.15 Answers to Check Your Progress
4.16 Possible Questions
4.17 Learning Outcomes

4.1 LEARNING OBJECTIVES

After going through this unit, you will be able to:

 Define costs and the characteristics of quality
 Verify statistical methods
 Acquaint yourself with acceptance sampling
 Analyse control charts
 Explain TQM, Deming’s 14 points and Six Sigma

4.2 INTRODUCTION

Quality is an important dimension of production and operations management. A

company may produce volumes of a product and reach it to the market at the right
time, but unless the product adheres to a defined set of specifications, it will not
sustain in the market. This characteristic of a product, which makes it acceptable to
a consumer, is called quality.
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Two American consultants of quality, W. Edward Deming and Joseph Juran
did not get any importance in USA. However, they were invited by Japan to teach
their concept of quality to the Japanese industry. This helped the Japanese produce
goods and sell in the US market at prices much less than the cost of producing
similar American products. The Americans woke up with a jolt and began to learn
lessons from Japan.
So what is unique about the Japanese way of production? Till that point people
thought that quality meant superiority or innate excellence. But the Japanese taught
that quality is actually a precise and measurable concept and the difference in quality
actually reflects a difference in the quantity of some product attribute.
One of the most interesting approaches to preventing quality problems, started
by the Japanese, involves working with suppliers of purchased material in order to
improve their quality. Japanese manufacturers often provide free assistance to their
suppliers in developing quality assurance programmes or solving quality problems.
They believe that if a manufacturer knows that its suppliers are producing quality
products, then less effort will have to be spent on verifying the quality of incoming
material and reworking or scrapping defects that may be found in later stages of
production. Companies around the world now work more closely with suppliers
and are beginning to insist on sound quality practices throughout their organizations.
The attributes of quality, and how they can be measured and controlled will be the
topics of this unit.

4.3 DEFINITION OF QUALITY

Quality is determined by what a customer wants and is willing to pay for. It is a

written or unwritten commitment to a known or unknown consumer in the market.
Thus quality can be defined as fitness for intended use or, in other words, how well
the product performs its intended function. Quality also means conformance to
specifications. That is, quality of conformance is defined as how well the
manufacturing is able to meet design specifications. A quality product is one that
provides a predetermined level of performance at an acceptable price or provides
conformance to design specifications at an acceptable cost.
As stated earlier, quality is determined by what a customer wants and is willing
to pay for. Quality does not mean producing the best; it means consistently producing
the products and services that give customers their money’s worth. McDonalds, the
burger giant, is famous for having built quality into its service delivery process. It
literally industrialized its service delivery system, so that part time, casual workers
could provide the same eating experience anywhere in the country.
Often, the term quality assurance is referred when talking about quality.
Quality assurance: Quality assurance refers to the entire system of policies, procedures and guidelines
Refers to the entire established by an organization in order to achieve and maintain quality. The objectives
system of policies, of quality assurance are:
procedures and
guidelines established  To improve quality
by an organization in
 Reduce costs
order to achieve and
maintain quality.  Increase productivity

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Quality assurance is the result of two activities:

 Quality engineering
 Quality control
Quality engineering means to include quality at the time of designing the products
and processes. Predicting potential quality problems too exists within the gamut of
quality engineering. Quality control consists of making a series of planned
measurements in order to determine if quality standards are being met. If they are
not being met, it also involves taking corrective and/or preventive action in order to
maintain quality. Statistical techniques are extremely useful in quality control. Quality
engineering and quality control are also known as quality or design and quality of
conformance respectively. The financial performance of an organization depends
heavily on these two issues. To achieve high quality of design and conformance, the
firm must incur costs associated with developing and maintaining the quality system.
These procedures will be discussed further in this unit.

4.4 COSTS OF QUALITY

The benefit of quality products for an organization is two fold. For one, the
organization stands to gain in terms of profits. In addition, such products also improve
the image of an organization. Further, they reduce cost of external failure. Also,
appraisal will be required less since the products will be correctly made the first
time. Quality efforts cost money; they must be well planned and quality costs must
be understood at every level of the organization.
Philip Crosby, the quality guru suggested that ‘quality is free’ in his book by
the same title. However, another authority on quality, J.M. Juran, propounded the
concept of costs of quality. Quality costs are any costs that are incurred by a company
to ensure that a product provides perfect quality. Each time work needs be redone,
for example, re-manufacturing a defective item or re-testing an assembly, the cost
of quality increases. Many such costs are overlooked or not recognized because
traditional accounting systems are not designed to identify them.
Quality cost data provide useful managerial information for measuring
performance and identifying improvement opportunities. This data is also used in
strategic planning, budgeting, and capital investment decisions along with production
and marketing cost data today. Companies such as Motorola, GE, Texas Instruments,
etc. have saved billions of dollars by initially incurring a high cost for implementing
quality philosophies like six sigma, preventing of defects in their products.
The following are the major costs of quality.
(a) Prevention costs Prevention costs:
Costs that are incurred
Costs that are incurred in preventing the manufacture of non-conforming products in preventing the
and stopping any such product from reaching the customers are called preventive manufacture of non-
costs. Preventive costs include a range of costs such as process planning costs, conforming products
process control costs, training costs and general management costs. Process planning and stopping any such
product from reaching
costs include the development costs for establishing procedures, manufacturing the customers.

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Unit-4 Quality Assurance

controls and setting up instructions for testing and inspection, reliability studies,
new equipment design, etc. Process control costs include cost of analysis of
production processes in order to improve operations and the implementation of
process control plans. Training costs are associated with developing and operating
formal training programmes or attending seminars on quality assurance. General
management costs include those for clerical staff, supplies, and communications
related to quality efforts.
(b) Appraisal costs
Appraisal costs are incurred while maintaining quality levels through measurement
and analysis of data in order to detect and correct problems. Testing and inspection
costs are incurred while testing and inspecting incoming materials, work in process
and finished goods and include salaries for inspectors, supervisors, and other
personnel. Testing and inspection costs also include cost of equipment, cost of
maintaining instruments, calibrating gauges and test equipment, repair, etc.
Internal failure costs: (c) Internal failure costs
Result from unsatisfac-
tory quality that is Internal failure costs result from unsatisfactory quality that is found prior to the
found prior to the delivery of a product to the customer. It includes scrap and rework costs, costs of
delivery of a product to corrective action arising from time spent determining the causes of failure and
the customer. correcting production problems. Lost revenue on account of selling a product at a
lower price because it does not meet specifications is also an internal failure cost.
(d) External failure costs
External failure costs occur after poor quality products reach the customer. Costs of
investigating complaints, product recall costs, warranty claim costs, which include
the cost of repair or replacement of products during warranty periods, and product
liability costs of legal action and settlements are a major source of external failure
costs. It is estimated that sixty to ninety per cent of total quality costs are the result
of internal and external failure problems. In the past, increasing inspection has been
the stereotype reaction to high failure costs. This approach, however, leads to higher
appraisal costs. While this approach may reduce external failures, internal failures
are bound to rise. So overall, there is hardly any improvement in quality or
profitability. The key then, to improving quality and profitability is prevention. Better
prevention of poor quality will clearly reduce internal failure costs since fewer
defective items will be made. Consequently, external failure costs will also be
reduced. In addition, appraisal will be required less since the products will be
correctly made the first time.

4.5 CHARACTERISTICS OF QUALITY

What do we mean by quality? What are the characteristics of a product or a service

that a consumer considers, in order to judge quality? A product is called a quality
product only when it satisfies various criteria for its functioning. From the consumer
point of view, the most common characteristics of a product or service, that are
judged while assessing quality are as follows:

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1. Performance: How well does the product perform with respect to its intended
use?
2. Safety: How much care has the company taken to make the product safe for
users before, during or after use?
3. Features: What special features does the product have? These are usually in
addition to the basic function of a product, for example, a mobile phone
having camera, calculator, games and MMS, etc.
4. Customer Service: How is the behaviour and treatment of the seller with the
customer before, during and after the sale of the product?
5. Reliability: What is the probability of breakdowns, need for adjustments,
replacement of parts, etc., in the product?
6. Appearance: How pleasant is the outward look, smell, taste, feel or sound of
the product for customers?
7. Serviceability: How easily, cheaply and speedily can the product be repaired
and serviced? How fast is the response of the company to a complaint?
8. Durability: How long can the product perform before needing any repair or
replacement of parts?
From a producer’s point of view, the characteristics of quality are as follows:
(a) Innate: Quality is innate or inherent in the product. It is not based on any
comparison regarding the features and characteristics with other similar
products.
(b) Measurable: Quality is measurable, i.e., conformance to quality can be
quantified by measuring the variation.
(d) Usability based: Quality means making products based on specific
requirements. So quality of a product is based on the usability or ability to
satisfy the given need. A mobile phone may have several additional features
but these do not improve the quality for a customer whose need is a basic
mobile phone with listening and speaking clarity, at a low cost.
(e) Design based: Quality is defined by the design specified for a particular
product, that is, a product is designed such that it has a particular quality.

4.6 STATISTICAL METHODS

You have learnt that performance of a product means the functions and services
which it must provide its consumer. This means, a watch should show accurate
time, a pen should write legibly on paper or the eraser should erase pencil marks
clearly without leaving black marks or imprint of the writing, on paper. The same
quality of physical performance should be available over a reasonable length of
time. Thus, time is also an essential aspect of quality.
There are three aspects of assuring quality
 Assurance of incoming raw material’s quality
 Assurance that proper processes are operating on the raw materials
 Assurance of the quality of the outgoing finished goods

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Unit-4 Quality Assurance

Assurance of incoming raw material’s quality is done by several measures such as

inspection of incoming materials, stringent specifications, supplier being made
responsible for his quality, buying from companies which are ISO certified, etc.
Assurance of the quality of the outgoing finished goods: Previously, it was
discussed how output is obtained when a process acts on input. It follows that output
will be assured if both input and process are assured. Input in turn can be assured by
the methods listed in the above paragraph. For an assured process, statistical and
quantitative methods need to be implemented. These methods help by identifying
the deviations in the processes, which cause deviations in the product. Once the
causes have been identified, organizations take necessary steps to them.
4.6.1 Statistical Process Control
As seen above, the objective of process control is to set a process to convert the
inputs (raw materials) into output (finished goods) and then monitor the processes
frequently. Any deviation from the set processes should be corrected when required.
Process control is the monitoring of the various physical variables operating on the
materials and the correction of the variables when they deviate from the previously
established norms.
The following are the definitions of some terms that are used in common.
(a) Variations
Variation refers to the small difference between the written down specifications and
the actual. All processes have some variations due to causes, which may or may not
be inherent to them. In any case, the causes responsible for the deviation of the
processes from the established norms have to be rectified. The variations which are
inherent to nature of a particular process and which are random since they are not
traceable to any particular cause are considered to be due to random causes or
chance causes. For example, a machine filling tooth paste in tubes may not fill all
tubes with exactly the same amount of paste; there will be some variations. In process
control, one is concerned only with those causes which can be rectified. Such causes
are called assignable causes. The organization can do nothing about chance causes.
The problem in this situation is to know when a particular deviation in the process
is occurring due to chance causes and when it is occurring due to assignable causes.
If a cause like worn-out tool, mistake on the part of a worker in processing the item,
improper adjustment of the machine, etc., is found, it is termed as an assignable
cause. Whenever variations are due to assignable causes, the process is said to be
out of control. The assignable causes of variation are rectified in order to bring the
process under control.
Random variations are due to the inherent nature of the process. Some expected
random variations are present in every process. The process is said to be in control
if variations are only due to random variations. In the above example of an automated
machine filling toothpaste in tubes, the machine is programmed to fill a particular
weight of toothpaste in every tube. It is quite possible that the weight in one tube
may be 100.051 grams, in another it may be 100.010 grams, and in still another one
it may be 99.998 grams. The machine is not designed to be capable of detecting
variation in weight up to the third place of decimal in grams. Therefore, it is expected
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that this much variation in weight will take place because of the inherent nature of
the machine. Such small variations bother neither the manufacturer nor the customer.
The difference between chance causes and assignable causes are shown in
Table 4.1.
Table 4.1 Chance Causes vs Assignable Causes

Chance Causes Assignable causes

1. Natural or inherent to the process. Unnatural or external, due to causes that
can be traced.
2. All causes taken together give A single assignable cause can cause a
variation. substantial variation.
3. Slight variation in the machine, could Faulty machine set-up gives rise to
be inherent to it. variation.
4. Lack of human perfection in setting the Lack of human perfection in reading the
instrument. instrument.
5. Cannot be economically eliminated. Once detected, can be eliminated.

(b) Monitoring the process

The process can be monitored in two ways:
 Actually measuring the variables operating on the raw materials
 Measuring the characteristics of the output product
When a number of variables operate on a product, it becomes easier to observe the
quality of the product coming out of the process, rather than monitor the variables
operating in the system. That is why in statistical process control, one seeks to
monitor the output of the processes and thus control the processes by locating the
causes for the deviations (if any) and rectifying the same.
(c) Specification limits for the output
When describing the quality of a particular product, the appropriate range of its
performance is referred to. One does not say that the diameter of the pipe has to be
exactly 3 centimetres. Rather, one would say that it should be 3 centimetres plus or
minus a difference of 0.002 centimetres. This range is called the specification range
or specification limits of the output.
(d) Control limits
A product should not exceed the specification limits. To ensure this, the limits for
process control purposes should be narrower than the specification limits. These
limits, called control limits, should be such that when exceeded, a danger signal is
given. However, at this point it is only a signal and the product is not designated as
defective.
(e) Cost aspects in designing control limits
While designing the control limits or the danger signals, cost aspects need to be
kept in mind as well. There is no point in worrying over every small variation in the
output and wasting efforts in rectifying the processes operating on the materials. A
certain margin of error, even if the error is assignable, is allowed for.
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(f) Central tendency and dispersion

Variations in any process can be described in general in terms of two parameters,
namely central tendency and dispersion. Central tendency has to do with accuracy
and dispersion with precision. The following example will help understand these
two concepts.
Suppose a book weighs 150 grams. There are two weighing machines and
they show the following readings for its weight:

Machine No.1 Machine No. 2

140, 151, 159 grams 139, 139.5, 140 grams
Machine number 1 gives an average of 150 grams and is therefore, an accurate
machine. Its central tendency (150 grams) does not show deviation, but it has a lot
of dispersion (140–159). Machine number 2 is precise, but it is not accurate because
its central tendency is 139.5 lb (and not 150 grams) but its dispersion is quite low,
ranging from 139–140. The above example shows that in controlling errors one has
to control not only the central tendency, but also the dispersion. In other words,
both the mean and the amplitude of variation need to be controlled. It needs to be
checked whether a process has gone out of control in terms of the central tendency,
or dispersion, or both.
During the transformation process of a batch, samples of items are taken at
regular intervals and inspected for any variation from established standards. If there
are variations, the cause must be found. Whenever variations are due to assignable
causes, the process is said to be out of control. The assignable causes are then
rectified to bring the process under control. The process is said to be in control if
variations are only due to random causes. Such small variations bother neither the
manufacturer nor the customer. But whenever a variation beyond a certain limit is
observed by the QC manager, it is time to look for assignable causes.
Two methods are generally followed for monitoring variations:
 The first way is to monitor all the physical variables such as tools, machines
and equipment, and labour skills acting on the material inputs in the
transformation process. Are all the machines working in ideal conditions?
Are the workers working according to specified methods? Are the tools
properly calibrated?
 The second way is to monitor the variations in the output product or service.
If the output product satisfies the specifications evolved during its development
stages, it possesses the desired quality. Samples of the output are inspected at
regular intervals of time and any variation from previously established
standards is detected. This method of monitoring the output is most popularly
used to monitor variation in all industries.
Organizations that are ISO certified follow the first method of monitoring the
outputs in combination with the second one, wherein it is ensured that an
overall quality system takes care of variations in the physical variables in the
transformation process.

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CHECK YOUR PROGRESS-1

1. List the objectives of quality assurance.

2. What are appraisal costs?
3. What is process control?

4.7 SPECIFICATION AND CONTROL LIMITS

As discussed earlier,the desired value of a variable during the design and development
stages of a product is not expressed in terms of an absolute value but in terms of a
range. These specification limits or tolerance limits are set by the manufacturer at
the design stage of the product or specified by a customer. It is very important for a
QC manager to ensure that the specification limits are never exceeded during the
production process, because if this happens, the defective unit produced will be
rejected leading to a loss for the company. For example, the diameter of a pencil is
expressed by its manufacturer not as 7 mm but as 7 mm ± 0.05 mm. Thus, the
diameter of a pencil produced by the manufacturer can vary from 6.95 mm – 7.05
mm. If these limits are exceeded in a produced pencil the pencil is rejected.
In a control chart, these specification limits are shown along the y-axis. The
value 7.00 mm is shown as the central line (CL) and is the targeted value.
Theoretically, it is aimed that every pencil produced should have a diameter of
exactly 7.00 mm, no more and no less. Because of random variations, though, the
diameter of the pencils produced may vary slightly on either side of the CL. The
value 6.95 mm becomes the lower specification limit (LCL) and 7.05 mm becomes
the upper specification limit (UCL).

7.05 mm ------------------------------------------------- Upper Specification Limit (USL)

Mean 7.00 mm Central Line (CL)

6.95 mm ------------------------------------------------- Lower Specification Limit (LSL)

Fig. 4.1 Control Chart Showing Specification Limits for the Diameter of a Pencil

As stated earlier, in order to ensure that the specification limits are never exceeded,
control limits are established inside the specification limits. These limits serve as a
danger signal or indication for the QC manager. Whenever these limits are exceeded
by the output, the manager has to look for assignable causes. The lower control

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limit (LCL) is set usually at M – 3 and the upper control limit (UCL) at M + 3.
Here, M is the mean or the targeted value of the diameter for all the pencils to be
made, i.e. 7.00 mm, and  is the standard error of the mean (i.e. the standard deviation
of the distribution of sample means).
This can be interpreted thus: suppose n pencils (sample size = n) are drawn
at random and their diameters are measured and the mean of these measurements is
taken. This sample mean should fall within the control limits. If the sample mean
for any sample falls either above the UCL or below the LCL, the process is out of
control.

4.8 ACCEPTANCE SAMPLING

Acceptance sampling: Acceptance sampling is a technique which uses the statistical inspection method
A technique, which to evaluate the quality of a complete batch. A company conducts inspection at two
uses the statistical stages: one, at the time the raw materials are received, inspection is conducted to
inspection method to
evaluate the quality of
confirm that they are as required and the second inspection is conducted to ensure
a complete batch. that the finished goods are as per specifications. In both these inspections, either
each piece can be tested, or only some out of a lot can be tested. If each and every
piece has to be tested, it would require considerable time, effort and resources,
which is just not worth the trouble. What then is generally done in industry is that
only a few pieces from a whole batch or lot is inspected to verify that the specified
and acceptable standards of quality are met. If the sample conforms to the specified
standards, then the whole batch or lot is considered accepted, else it is rejected.
Since, only a few pieces from a lot are inspected, it is possible that the decision to
accept or reject the whole lot may not be correct. Therefore, the sample should be
chosen at random from the whole lot so that every portion of the lot has an equal
representation. This type of sampling is called random sampling.
After a lot has been defined, an acceptance sampling plan is made. An
acceptance sampling plan consists of the following:
 A set of rules that define the procedures for preparing a batch or lot
 Rules for selecting samples, e.g., they can be picked at random, or every fifth
piece can be a sample, and so on
 Procedure for conducting inspection of the samples
 Fixing the criteria for accepting or rejecting the batch
In other words, an acceptance sampling plan specifies the sample size (n) and the
number of defectives (c) that are allowed in a batch of acceptable pieces. If the
number of defectives in the sample is equal to or less than the permissible number
of defectives, then the lot is accepted; otherwise, it is rejected.
4.8.1 Types of Sampling Plans
Different types of sampling plans are used, for acceptance sampling depending on
the level of accuracy required. The common ones are as below.

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1. Single sampling plan

In this sampling plan, the inspection results of a single sample size decide whether
to accept or reject the complete lot. The lot size is defined from the outset based on
which the organization decides the number of samples to be drawn. Thereafter, the
acceptance number ‘a’ is defined. This is the maximum number of defective units
which are acceptable. If the number of defectives is a + 1 or more, the lot will be
rejected. (a + 1) is also called the rejection number.
For example, in a single sampling plan:
Suppose, Lot size (N) = 5000
Sample size (n) = 150
Acceptance number a = 2
This means 150 pieces are selected from the batch of 5000 pieces and inspected. If
the number of defectives is 0, 1 or 2, accept the lot and if the number of defectives
is 3 or more, the lot will be rejected.
2. Double sampling plan
In double sampling plan, the inspection results of two sample sizes are used to
decide whether to accept or reject the complete lot. After defining the lot size, the
number of samples to be drawn is defined for the first time as well as for the second
time. Two acceptance numbers ‘a1 and a2’ are defined. Consequently, there will be
two rejection numbers.
In the above example, if there is a double sampling plan:
Lot size (N) = 5000
Sample sizes: n1 = 150 and n2 = 150
Acceptance number: a1 = 2 and a2 = 8
First, a sample of 150 pieces is selected from the batch of 5000 pieces and
inspected. If the number of defectives is 0, 1 or 2, the lot is accepted and if the
number of defectives is 8 or more, the lot will be rejected. But if the number of
defectives is either 4, 5, 6 or 7, a second sample of 100 units will be drawn.
The combined samples (n1 + n2) i.e. 250 units is inspected; if the number of
defectives is 10 or less, the lot will be accepted; otherwise, rejected.
3. Multiple sampling plan Multiple sampling
plan: More than two
When more than two samples are used for deciding the acceptance or rejection of a samples are used for
lot, it is called multiple sampling plan. As the number of samples increases, the deciding the accep-
complexity of implementation becomes greater. tance or rejection of a
lot.
Which plan the organization chooses for quality control depends on the amount
of precision required, the economic aspect and the feasibility of the quality control
set up. These vary from company to company and from product to product.

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4.9 THE OPERATING CHARACTERISTIC CURVE

The sampling plan has the ability to separate the good pieces from the batch,
which is shown by the operating characteristics (OC) curve. It clearly shows how
a sampling plan can separate out the lots of varying quality and evaluates the
risks associated with any sampling plan. Acceptance sampling decisions, i.e.,
whether to accept or reject a batch of items are based on the OC curve. A good
sampling plan ensures that the good lots are always accepted, while the bad
ones are always rejected. The OC curve can be made more strict (greater quality
control) in three ways:
1. By increasing the sample size n, while keeping the acceptance number constant
2. By decreasing the acceptance number a, while keeping the sample size n
constant
3. By simultaneously increasing the sample size n and decreasing the acceptance
number a
Construction of the OC curve
The OC curve (Figure 4.2) shows the percentage defectives (p) in a batch along the
X axis and the probability of acceptance (Pa) of the batch along the Y axis. As the
percentage defectives increase, the probability of accepting the batch reduces.
Therefore, a batch having zero percentage defectives will always be accepted.
1.00 Producer’s Risk

Probability 0.90
of
accepting 0.80
the
lot 0.60

0.50

0.40

0.30

0.20
AQL
0.10 LTPD
Consumer’s Risk
0 10 20 30 40 50 60 70 80

Fig. 4.2 The Operating Characteristics (OC) Curve

4.9.1 Parameters of an OC Curve

There are four parameters associated with an OC curve:
(a) Acceptable Quality Level (AQL): It is the level of quality at which the lot is
defined as a good lot. AQL represents the percentage at which the sampling
plan will accept the lot. This level indicates the maximum permissible number
of defects in the sample (n) if the lot is to be accepted.

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(b) Lot Tolerance Percentage Defectives (LTPD): It is the level of quality at

which the lot is declared to be a bad lot. LTPD represents the percentage at
which the sampling plan will reject the lot. This level is measured in terms of
rejection number ‘r,’ which sets the limit for accepting the lot. In other words,
it indicates the maximum permissible number of defectives in the sample (n)
if the lot is to be accepted. This level is also called unacceptable quality
level.
(c) Producer’s Risk (): It represents the probability of rejecting a good lot by
the sampling plan. This risk may vary between 0.01 – 10 per cent. Aproducer’s
risk is measured in terms of the probability that the lots of AQL will not be
accepted.
(d) Consumer’s Risk (): Represents the probability of accepting a bad lot by
the sampling plan. A consumer’s risk is measured in terms of the probability
that the lots of the LTPD will be accepted.
There is a strong interrelationship between AQL and producer’s risk as well as the
LTPD and consumer’s risk. While selecting a sampling plan, both producer and
consumer must agree on the level of inspection that is governed by the AQL and
LTPD values. Lower the value of AQL, higher is the probability of accepting a good
lot.

4.10 CONTROL CHARTS

In process control, a check is kept on both central tendency and dispersion by a

graphical method. The graphs which are used for such monitoring are called control
charts. Process control relies mostly on such graphical or visual representations,
and monitoring thereafter.
The procedure that is generally adopted is as follows:
(a) Take a few samples at a time.
(b) Measure their quality characteristics.
(c) Find the mean of the sample.
(d) Measure the range of dispersion in the sample.
(e) Gather statistics for the ranges and the means of the various samples taken
over frequent or regular intervals of time.
(f) Plot the results appropriately on a graph paper.
The charts thus obtained will guide us as to when a particular process needs to be
rectified and in what manner.
Several kinds of quality charts are in use. The following is a description of
the most commonly used charts.
4.10.1 X-Bar Chart X-Bar chart: Used for
analysing the control
X-bar chart is used for analysing the control of the mean value of a variable or of the mean value of a
control of the central tendency. The mean values are plotted in this chart. With the variable or control of
help of the x-chart, a track can be kept on the quality of the product by determining the central tendency.

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its central tendency. The upper and lower limits of the quality values required by
the customer are determined first.
In the diameter of a pencil stated earlier, the specification provided by the
manufacturer is 7 mm ± 0.05 mm. Thus, the diameter of a pencil produced by the
manufacturer can vary from 6.95 mm to 7.05 mm. 6.95mm denotes the lower control
limit (LCL), 7.05 mm denotes the upper control limit (UCL), and 0.05 denotes the
maximum allowed deviation from the standard diameter, which is 7 mm. If these
limits are exceeded in a pencil produced, the pencil is rejected.
Here, the value mathematical equations to calculate the LCL and UCL are:
LCL = µ – 3
UCL = µ + 3
Any time the sample means overshoots the UCL or undershoots the LCL, a red
signal is given. This means that assignable causes are looked for by checking the
machine/equipment or process that is producing the particular product.

UCL
µ + 3σ

µ ? 3σ LCL

Fig. 4.3 X-bar Chart

R-Chart: Used for 4.10.2 R-Chart

analysing the control
of the variability of a R-chart is used for analysing the control of the variability of a variable or dispersion.
variable or dispersion. The standard deviation and range of a particular quality control variable is first
calculated. The range of a variable is defined as the difference between the maximum
and the minimum values of the observations in a sample. The distribution of the
samples (R) can be denoted by the following equation:
R = d2 *  population
Where d2 is a constant whose value depends on the sample size n.
 population represents the standard deviation for population.
This means R is a function of the standard deviation of a population. By
maintaining R within limits, we can maintain  population .

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0 R (Mean of R) values of R

Fig. 4.4 The R-Chart

When the R values fall below the central line, it indicates that the process has less
dispersion than the average values of the same. This is desirable and what one
works for. If the narrowing down of the dispersion becomes permanent, it should be
incorporated and a revised R chart made. However, it needs to be ruled out that this
desirable result is not due to some uneconomical methods which might have been
employed or some inspection error.
4.10.3 P-Charts or Fraction Defective Charts
Not in all cases can we describe the samples in terms of their measurable
characteristics. Often, inspection is of the go/no – go, or accept/ reject type which
means the sample is either defective or not defective. Control charts for such
inspection procedures have been named p-charts, where p stands for the fraction
defective in a sample. These charts are used to control the overall number of
defectives in units of product. The procedure of constructing the p-chart is as follows:
Suppose about 25 samples are taken and it is found that the average fraction
defective, p - this is the central line. The normal distribution for the fraction defective
data of these 25 samples is assumed. Note that though this is a typical case for the
application of the binomial distribution, one can approximate the distribution to a
normal distribution when np  10. If this requirement is met, then based on the
normal distribution assumption, we set the limits for the upper and lower controls
as follows:
p(1  p)
UCL  p  3
n

p(1  p)
LCL  p  3
n

p(1  p)
Note that the variance for the fraction defective is: .
n

4.10.4 C-Charts or Number of Defects Chart

Often, a product is considered defective not just based on one measurement, but on
the basis of a number of defects present in a sample. All the defects have to be taken
into account before a decision to accept or reject it can be arrived at. In such situations,

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where the number of defects is the criterion for acceptance or rejection, a special
kind of chart called the c-chart is used. The procedure is to take a sample of fixed
size, count the defects in the sample (the number of defects is denoted by c), then
plot the distribution of cs for all samples. A Poisson distribution for this will have a
mean of c and a standard deviation of c– and the control limits will be c ± 3 c.
Figure 4.5 shows a c-chart.

UCL
c+3?c

Central Line
c

LCL
c-3?c

Fig. 4.5 The C-Chart

4.11 TOTAL QUALITY MANAGEMENT

Total quality management is a management approach that originated in the 1950s

and steadily became more popular since the early 1980s. Total quality is the
description of the culture, attitude and organization of a company that provides
customers with products and services that satisfy their needs. The culture requires
quality in all aspects of the company’s operations, with processes being done right
the first time and defects and waste eradicated from operations. The term total
quality management (TQM) was first used by the Department of the Navy of USA
in 1985. TQM is a method by which all the employees of an organization become
involved in the continuous improvement of the production of goods and services. It
is a combination of quality and management tools aimed at increasing business and
reducing losses due to wasteful practices.
Total = Quality involves everyone and all activities in the company.
Quality = Conformance to requirements (Meeting Customer Requirements).
Management = Quality can and must be managed.
Therefore, TQM is a process for managing quality; it must be a continuously evolving
way of life; a philosophy of perpetual improvement in everything we do. JIT and
TQM have merged in theory as well as practice.
The International Organization for Standardization (ISO) defines TQM as,
‘TQM is a management approach to an organization, centered on quality, based on
the participation of all its members and aimed at long term success through customer
satisfaction, with benefits to the members of the organization and the society.’

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TQM seeks to integrate all organizational functions (marketing, finance,

design, engineering, production, customer service, etc.) to focus on meeting customer
needs and organizational objectives. It is based on the premise that employees want
to contribute, and management must create a climate in which this can happen
easily. TQM views an organization as a collection of processes. It postulates that
organizations must strive to continuously improve these processes by incorporating
the knowledge and experiences of its workers. The objective of TQM is to ‘do the
right things, right the first time, every time.’ Some of the companies that have
implemented TQM include Ford Motor Company, Phillips Semiconductor, SGL
Carbon, Motorola and Toyota Motor Company.
4.11.1 Principles of TQM
The concept of TQM is based on the following principles:
(a) Quality can and must be managed.
(b) Everyone has a customer and is a supplier.
(c) Processes, not people are the problem.
(d) Every employee is responsible for quality.
(e) Problems must be prevented, not just fixed.
(f) Quality must be measured.
(g) Quality improvements must be continuous.
(h) The quality standard is defect free.
(i) Goals are based on requirements, not negotiated.
(j) Talk life cycle costs, not front end costs.
(k) Management must be involved and must lead.
(l) Plan and organize for quality improvement
In other words, processes must be managed and improved. This involves:
 Defining the process
 Measuring process performance (metrics)
 Reviewing process performance
 Identifying process shortcomings
 Analysing process problems
 Making a process change
 Measuring the effects of the process change
 Communicating both ways between supervisor and user
The Concept of Continous Improvement by TQM
TQM is concerned with continuous improvement in all work, from high-level
strategic planning and decision-making, to detailed execution of work elements on
the shop floor. It reinforces the belief that mistakes can be avoided and defects can
be prevented. Continuous improvement means not only improving results, but more

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importantly improving capabilities to produce better results in the future. A central

principle of TQM is that mistakes may be made by people, but most of them are
caused, or at least permitted, by faulty systems and processes. Therefore, the root
cause of such mistakes can be identified and eliminated by changing the process.
There are three major mechanisms to prevent such mistakes:
(a) Preventing mistakes (defects) from occurring (Mistake - proofing or Poka-
Yoke).
(b) Where mistakes cannot be absolutely prevented, detect them early to prevent
them from being passed down the value added chain (Inspection at source or
by the next operation).
(c) Where mistakes recur, stopping production until the process can be corrected,
to prevent the production of more defects. (Stop in time).
TQM encourages participation amongst shop floor workers and managers.
4.11.2 Deming’s 14 Points
W. Edwards Deming was an American statistician who is credited with the invention
of total quality management (TQM) and also the rise of Japan as a manufacturing
nation. Deming went to Japan just after World War II to help set up a census of the
Japanese population. While he was there, he taught statistical process control to
Japanese engineers—a set of techniques which allowed them to manufacture high-
quality goods without expensive machinery. In 1960 he was awarded a medal by
the Japanese Emperor for his services to the industry. Thereafter, Deming returned
to the US and spent some years in obscurity before the publication of his book Out
of the Crisis in 1982. In this book, Deming set out fourteen points which, if applied
to the US manufacturing industry, would save the US from industrial doom at the
hands of the Japanese.
The fourteen points of Deming are outlined here:
1. Create constancy of purpose towards improvement: Replace short-term
reaction with long-term planning.
2. Adopt the new philosophy: The implication is that management should actually
adopt his philosophy, rather than merely expect the workforce to do so.
3. Cease dependence on inspection: If variation is reduced, there is no need to
inspect manufactured items for defects, because there would not be any.
4. Move towards a single supplier for any one item: Multiple suppliers mean
variation between the raw materials.
5. Improve constantly and forever: Constantly strive to reduce variation.
6. Institute training on the job: If people are inadequately trained, they will not
all work the same way, and this will introduce variation.
7. Institute leadership: Deming makes a distinction between leadership and mere
supervision. He said that supervision is merely target based.
8. Drive out fear: Deming sees management by fear as counter-productive in
the long term, because it prevents workers from acting in the organization’s
best interests.
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9. Break down barriers between departments: Another idea central to TQM is

the concept of the internal customer, that each department serves not the
management, but the other departments that use its outputs.
10. Eliminate slogans: Another central TQM idea is that it is not people who
make the most mistakes, it is the process they are working within which
allow errors. Harassing the workforce without improving the processes they
use is counter-productive.
11. Eliminate management by objectives: Deming saw production targets as
encouraging the delivery of poor-quality goods.
12. Remove barriers to pride of workmanship: Many of the other problems
outlined reduce worker satisfaction.
13. Institute education and self-improvement.
14. Transformation is everyone’s job.

4.12 SIX SIGMA

Organizations have proceeded beyond TQM and are now adopting six sigma as a
solution to produce products that are free of defects. So what is six sigma?
Six sigma is a data driven, structured problem-solving methodology for solving Six sigma: A data
chronic issues facing a business. It is a breakthrough management process that is driven, structured
used to improve a company’s performance by variation reduction. The method problem-solving
methodology for
encompasses breaking down customer requirements into steps to pinpoint problem solving chronic issues
areas in a process. This results in the reduction of defects and sustenance of process facing a business.
improvement. Six sigma is defined as a broad and comprehensive system for building
and sustaining business performance, success and leadership. The key focus of Six
sigma is on processes, but with measurement of both processes and products. Six
sigma advocates variation as an enemy of quality. With six sigma, companies strive
to achieve the statistical six sigma goal of near perfection as measured at defects
per million opportunities (DPMO). It is calculated as follows:

No. of Defects ×10, 00,000

DMPO 
No. of opportunities for error/unit  No. of units

Here, defect is any item or event that does not meet the customers’ requirement
The six sigma process is basically as follows:
1. Six sigma starts with the customer, that is, a clear definition of customer’s
requirements.
2. Once the requirement has been defined, defect too can be defined and one
can measure almost any type of activity or process. Late deliveries, incomplete
shipments, part shortages, etc., are some examples of defects.
3. Set a goal. Having an entire organization focused on a performance objective
of three defects per million opportunities can create significant momentum
for improvement.

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The difference between TQM and six sigma is that TQM programmes focus on
improvement in individual operations with unrelated processes, whereas six sigma
focuses on making improvements in all operations within a process.
4.12.1 Six Sigma Themes
The six themes or doctrines on which the entire philosophy is based are stated
below.
Theme one—Focus on customer
In six sigma, customer focus is the top priority. Six sigma improvements are defined
by their impact on customer satisfaction and value.
Theme two—Data and fact-driven management
Six sigma begins by outlining the steps necessary to gauge business performance. It
then uses the data to build an understanding of the key variables for optimizing
results.
Theme three—Focus on process
Six sigma considers the process as the key vehicle of success irrespective of whether
the organization is producing a product or a service.
Theme four—Proactive management
Proactive management means defining clear goals and reviewing them frequently,
setting clear priorities, focusing on problem preventions instead of fire fighting,
questioning why one does things instead of blindly defending them as ‘how one
does things here,’ etc.
Theme five—Boundary-less collaboration
Six sigma emphasizes total collaboration within the company, with their suppliers
as well as customers. It seeks to eliminate disconnect and competition between
groups that should be working for a common cause, i.e., providing value for
customers.
Theme six—Drive for perfection, intolerance for failure
No company will get anywhere close to six sigma without launching new ideas and
approaches, which always involve some risk. If people who see a possible path to
better service, lower costs, new capabilities, etc., are too afraid of the consequences
of mistakes, they will never try.
Successful implementation of six sigma is based on sound personnel practices
as well as technical methodologies. A brief introduction of practices that are
commonly followed in six sigma implementation is given below.
Executive Leaders and Champions: Champions are drawn from the rank of
executives and their job is to identify appropriate metrics in the project and make
certain that the improvement efforts do not lose focus of company objectives. They
promote it throughout the organization and take ownership of the processes that are
to be improved.

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Professionals are given training in six sigma techniques and given martial
arts titles reflecting their skills and roles. Different companies use different
combinations of these belts. Thus one has,
Black belts – They lead a six sigma improvement team. They are also
responsible for providing the proof that the problems are fixed permanently.
Master black belts – They perform the same functions of black belts but for
a larger number of teams.
Green belts – They are employees who have received enough six sigma
training to participate in a team or in some companies to work individually on a
small-scale project directly related to their own job.
It is the responsibility of the top management to set the objectives for
improvement. Continuous reinforcement and rewards are essential in order to sustain
the interest on six sigma. Six Sigma forms a major part of GE’s operations. The
company spends over $600 million on six sigma projects every year, mostly on
salaries for the experts and employees, who have undergone basic training. They
believe that each step or activity in the company represents an opportunity for defects
to occur and six sigma programmes seek to reduce the variation in the processes
that lead to these defects.

CHECK YOUR PROGRESS-2

1. What is a double sampling plan?

2. When is a c-chart employed?
3. What is the difference between TQM and six sigma?

ACTIVITY

1. ‘Quality is free’—is a popular statement. What then are the costs of quality?
2. ‘Systems, not people, are responsible for mistakes’. Explain this in the
context of TQM.

4.13 LET US SUM UP

 All organizations have adopted quality management in some form or the other.
However varied the methods may be, the objective is the same, i.e., quality is
the most important consideration of an organization.

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 Quality products derive two types of benefits to an organization—improved

profits and enhanced image.
 Quality costs can be any of the four types, namely prevention costs, appraisal
costs, internal failure costs and external failure costs.
 Some of the characteristics of a product which are taken into consideration
while evaluating its quality are performance, safety features, customer service,
reliability and durability.
 Various statistical methods are employed to evaluate product quality.
 Total quality management (TQM) is a method by which all employees of an
organization become involved in the improvement of the production of goods
and services.
 Six sigma is a method to measure quality.

4.14 FURTHER READING

Aquilano, Chase and Jacobs. 2003. Operations Management for Competitive
Advantage. New Delhi: Tata McGraw-Hill.
Bedi, Kanishka. 2007. Production and Operations Management. New Delhi: Oxford
University Press.
Evans, J.R., D.R. Anderson, D.J. Sweeney and T.A. Williams. 1984. Applied
Production and Operations Management. St. Paul M.N., US: West Publishing Co.
M.Selvam (2014) Maritime Logistics and Documentation , Lakshmi
Publications , New Delhi
M.Selvam (2013) Quality Management, Lakshmi Publications , New Delhi

4.15 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress–1

1. The objectives of quality assurance are:
 To improve quality
 Reduce costs
 Increase productivity
2. Appraisal costs are incurred while maintaining quality levels through
measurement and analysis of data in order to detect and correct problems.
Testing and inspection costs are incurred while testing and inspecting incoming
materials, work in process and finished goods and include salaries for
inspectors, supervisors, and other personnel. Testing and inspection costs also
include cost of equipment, cost of maintaining instruments, calibrating gauges
and test equipment, repair, etc.
3. Process control is the monitoring of the various physical variables operating
on the materials and the correction of the variables when they deviate from
the previously established norms.
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Check Your Progress–2

1. In double sampling plan, the inspection results of two sample sizes are used
to decide whether to accept or reject the complete lot. After defining the lot
size, the number of samples to be drawn is defined for the first time as well as
for the second time.
2. Often, a product is considered defective not just based on one measurement,
but on the basis of a number of defects present in a sample. All the defects
have to be taken into account before a decision to accept or reject it can be
arrived at. In such situations, where the number of defects is the criterion for
acceptance or rejection, a special kind of chart called the c-chart is used.
3. The difference between TQM and six sigma is that TQM programmes focus
on improvement in individual operations with unrelated processes, whereas
six sigma focuses on making improvements in all operations within a process.

4.16 POSSIBLE QUESTIONS

Short-Answer Questions
1. Define the terms – quality, quality assurance and quality control.
2. What is sampling? What are the different types of sampling plans?
3. What are the common parameters of quality?
Long-Answer Questions
1. What is the relevance of inspection in ascertaining quality? Why are statistical
methods used?
2. Discuss the OC curve. What is its relevance to a producer?
3. What is a control chart? Briefly explain any three types of control charts.
4. What is TQM?
5. Discuss the themes of six sigma.

4.17 LEARNING OUTCOMES

 Define costs and the characteristics of quality
 Verify statistical methods
 Acquaint yourself with acceptance sampling
 control charts
 TQM, Deming’s 14 points and Six Sigma

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UNIT 5 WORK STUDY

UNIT STRUCTURE
5.1 Learning Objectives
5.2 Introduction
5.3 Definition of Work Study
5.4 Objectives of Work Study
5.5 Method Study
5.5.1 Objectives of Method Study; 5.5.2 The Method Study Procedure
5.6 Work Measurement
5.6.1 Objectives of Work Measurement; 5.6.2 Techniques of Work Measurement
5.7 Let Us Sum Up
5.8 Further Reading
5.9 Answers to Check Your Progress
5.10 Possible Questions

5.1 LEARNING OBJECTIVES

After going through this unit, you will be able to:

 Define the concept of work study
 List the objectives of work study
 Explain the method study procedure
 List the objectives of measuring work
 Explain the techniques of measuring work or output

5.2 INTRODUCTION
In the preceding units, the focus was on the design and control of the physical
parameters that support production. Although a significant level of automation has
been implemented in many factories, human beings still control a large part of the
manufacturing process. Clearly, personnel also need to be ‘managed’. The workplace
has people of diverse cultural and educational backgrounds. This, coupled with
the organization’s objectives, warrants a clear definition of jobs for the workforce
so that maximum productivity is possible—in addition to the highest levels of quality,
service and responsiveness. Also, the job should be safe, satisfying and motivating
to the worker. This is achieved by a concept called work study, which you will learn
in this unit. You will also learn the definition and objectives of work study, and the
techniques of measuring work/output.

5.3 DEFINITION OF WORK STUDY

Work study means study of human work. British Standard 3138: 1969 defined work
study as, ‘A management service based on those techniques, particularly method
study and work measurement, which are used in the examination of human work in
all its contexts and which lead to the systematic investigation of all the resources
and factors which affect the efficiency and economy of the situation being reviewed,
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in order to effect improvement.’ This means that it is a procedure for understanding
and determining the activities of the people, plant and machineries, identifying the
factors which affect their efficiency and achieving economy through their optimum
utilization.
Work study is a generic term for two inter-dependent techniques, i.e., method
study and work measurement.
In the same British standard, method study has been defined as ‘… the
systematic recording and critical examination of the factors and resources involved
in existing and proposed ways of doing work, as a means of developing and applying
easier and more effective methods and reducing costs’. Method study, therefore, is
concerned with the way in which the work is done.
Work measurement is defined by the same British standard as ‘The application
of techniques designed to establish the time for a qualified worker to carry out a
specified job at a defined level of performance’.
The difference between work study and other productivity improvement
techniques is that the latter involves major capital expenditure in plant or equipment.
But work study ensures productivity by using existing resources. In work study, the
human element is emphasized and importance is given to operation rather than to
the technical process.

5.4 OBJECTIVES OF WORK STUDY

The primary objectives of work study are:

1. Effective use of plant and equipment
2. Effective use of human effort
3. Evaluation of human work
If the techniques of work study are not properly applied, they are likely to
encounter resistance at all levels. Even trade unions acknowledge that work study
provides the following benefits to workers:
(a) Eliminates drudgery, frustration and unhealthy working environment
(b) Provides opportunity to workers to increase their earnings (by achieving
increased rate of output)
(c) Strengthens the health of the organization at the micro level and the nation as
a whole at macro level
In 1952, the International Labour Organization emphasized the importance of work
study and consultation and cooperation between employers and workers in its 35th
session held at Geneva.
In the following sections you will learn the two techniques, i.e., method study
and work measurement.
Method study: A
method for examining,
recording and 5.5 METHOD STUDY
analysing the existing
way of doing work and As you have learnt, method study is a method for examining, recording and analysing
proposing a method for
improving the effi-
the existing way of doing work and proposing a method for improving the efficiency
ciency of a system. of a system. There may be unnecessary costs being incurred in the existing methods.

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In the method study, the reasons for these costs are identified. The critical examination
of proposed methods also prevents unnecessary costs in the new jobs.
5.5.1 Objectives of Method Study
The main objectives of method study are as follows:
1. To identify the proper sequence of production operations
2. To optimize the utilization of machineries
3. To reduce the manufacturing cycle time by reducing the idle time of machinery
4. To choose the right kind and amount of materials and reduce the raw material
consumption per unit of production
5. To reduce wastages and production of defective products
6. To enhance the tool life and therefore reduce the tool cost per unit of production
7. To allocate workforce optimally and reduce idle time of the operator by optimal
utilization of human resources
8. To improve the processes and procedures involved in production
9. To improve the working environment in the workplace
5.5.2 The Method Study Procedure
Method study is a scientific and systematic method by which an organization can
determine the most appropriate method to manufacture a product. Now, why should
an organization study a process? It should study a process to identify delays; reduce
transport distances for both materials and labour; economize processes; reduce
requirements of processing time; and thereby make the total operation simple. By
doing a method study, the organization aims to eliminate any stage or step in the
process that does not add any value to the process.
We begin the method study by first making a flow chart for the process.
The basic procedures involved in method study are as follows:
Selection of jobs

Recording of facts

Critical examination

Development and selection

Installation

Maintenance
Fig. 5.1 Flow Chart of the Method Study Procedure

(a) Selection of jobs

Selection of a job for which method study is to be done is a managerial responsibility.
The considerations for selecting a job could be economic, technical or human.

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(i) Economic considerations

Economic considerations include operations which could be holding up other
production operations, such as:
 Needless movement of workmen and materials over long distances
 Operations that involve great deal of manpower
 Operations that involve poor utilization of men and machines
 Sections or departments from which too many suggestions for improvement
are received
(ii) Technical considerations
 Operations that produce a great deal of waste or defectives
 Operations that involve repetitive work
 Complaints that performance standards cannot be achieved
 Operations requiring frequent supervision
 Jobs with incompatible quality
 Operations involving discrepancies in materials and tool performance
 Jobs involving greater number of man hours for checking and rechecking
work
(iii) Human considerations
 Workers complaints about being overworked
 Poor worker morale
 Frequent accidents and health hazards
 Inconsistency in the earnings of the employees due to overtime
(b) Recording of facts
Accurate and precise recording of facts related to a method determines the success
of the method study. A method study generally uses the graphical method to record
facts such as completion time and labour required in a method. The graphical method
uses five symbols to record the facts related to a method. They are:
Operation This symbol indicates that an activity is being done. Generally,
an operation is any activity that adds some value to a product. It is a
transformation process.
Transportation This symbol indicates that the product, service or worker is
moving from one location to another.
Inspection This symbol stands for checking/observing for quality/correctness/
adherence to specifications, etc.
Delay This symbol indicates that the subject of study (product, service or
worker) has to wait before starting the next process.
Storage This symbol indicates storage. Sometimes, T or P is written inside
the triangle to indicate temporary storage or permanent storage respectively.

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The advantages of the graphical method over the descriptive method are as follows:
 It takes less effort and time.
 It helps isolate the valuable areas of a method from the useless areas.
 Critical examination becomes easier and more effective because it is
visually clear.
(c) Critical Examination
Critical examination means analysing the facts related to a method. In critical Critical examination:
examination, the facts related to a method should be examined as they are and not Analysing the facts
related to a method.
as they should be. Each step should be analysed in a logical sequence and hasty
decisions should be avoided.
A systematic and methodical questioning process is used to conduct the critical
examination. In the questioning process, all the activities—whether related to
processing, inspection, material handling or any other aspect of a method—are
recorded in a chart. After recording all the activities involved in a method, each
activity is then examined carefully. There are five major factors related to an activity
that need to be considered during the questioning process. These factors include:
(i) Purpose: Analyses whether the selected activity is necessary for completing a
method or not.
The types of questions asked are – What activity is being done? Why is that activity
being done? What will happen if that activity is not done? What else can be done?
What should be done?
(ii) Place: Analyses whether the selected activity occurs at a specified place or not.
Questions asked are – Where is that activity done? Why is it done there? What will
happen if it is not done at that location and done elsewhere? Where else can it be
done?
(iii) Sequence: Analyses whether the selected activity occurs at specified time and
in a specific sequence or not. Questions asked are – When is the activity done? Is
the performance of the activity at that time critical or can it be done at any time or
in any sequence? Could it be combined with some other activity in the process?
(iv) Person: Analyses whether or not the right person performs the selected activity.
Questions asked are – Who does the activity? Why should that person do that activity?
Can it be done by someone else? Should the worker possess a high level of skills or
will a lower skill level do?
(v) Means: Analyses whether or not the selected activity is done using proper
materials, tools, jigs and fixtures, measuring instruments and gauges. Questions
asked are – How is the activity done? Why is it done that way? Is there a better way
to do the activity?
Development:
(d) Development and Selection
Involves an analysis of
Development involves an analysis of all the ideas generated during critical all the ideas generated
examination and implementing these ideas practically. All the ideas generated during during critical exami-
nation and implement-
critical examination may not be practical. So the organization first needs to isolate ing these ideas
the practical ideas from the conceptual ones. The selected ideas are then refined practically.

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and developed during the development and selection process. The development
process comprises three functions: evaluation, investigation and selection.
(i) Evaluation phase: All the ideas generated during critical examination are
evaluated to assess their true value and determine whether they should be
pursued or discarded. To isolate the practical ideas from the useless ones,
they are first categorized as:
 Useful ideas
 Ideas with technical flaws
 Ideas that cannot be used immediately because of insufficient data or lack
of requisite knowledge
 Ideas with more disadvantages than advantages
Ideas which are similar are clubbed. The cost of testing and implementation is
estimated.
(ii) Investigation phase: The ideas generated in the evaluation phase are
investigated to determine how a suitable idea can be taken up for practical
implementation. The investigation phase includes preparing layouts,
organizing discussion with personnel from various departments such as design
and quality control, making prototypes, conducting trial runs, getting work
measurement studies redone from industrial engineering and preparing fresh
cost estimates. Every idea is investigated to check its economic and technical
feasibility.
(iii) Selection: The selection stage involves choosing the best possible alternative
from the available options. Various factors are taken into consideration such
as investment required, production rate expressed in terms of cycle time per
unit of product, manufacturing cost per unit of production and physical effort
required for performing the method. Every factor is assigned some points.
The points acquired by every factor are added and the alternative that acquires
maximum points is selected.
(e) Installation
Implementation of the proposed method is known as installation. The proposal for
change in method is presented to the management indicating the sequential steps
that must be taken to implement the changed proposal. On receipt of formal approval,
the implementation plan is prepared. A demonstration of the proposed method can
be held to clear misconceptions and apprehensions. Training of the employees who
will use the new methods can also be done.
(f) Maintenance
After implementing a method, it is important to monitor the performance of the
method. A feedback mechanism is needed to inform the concerned authorities about
the results of the monitoring process. The savings accrued by using the new method
should be audited to determine whether or not the implementation work is complete.
The audit will also reveal additional factors that can enhance profits and then the
whole cycle will start again.

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The approach followed by the practitioner is also reviewed at this stage.

 Did he follow the effective approach? Does it need any correction?
 Was the implementation process efficient favourable? If not, what changes
are required in the approach so that the implementation of future projects
is smooth?
 Which methods were used for efficient data collection? Can these methods
be used in similar projects in future?
Performance appraisal: The last step in the maintenance stage involves
performance appraisal. This helps determine the productivity gains of the proposed
method that are evaluated at regular intervals.
As human reactions play an important role in a method study, human
consideration forms an important part in selecting a job. Workers should accept
changes proposed by the method study. A change which is not fully accepted by the
workers is not considered a good change. It is human nature to resist change.
Opposition by the workers can be avoided by taking them into confidence. The
following points should be considered in order to avoid resistance by the workers:
 Proposed changes should be intimated to the workers in advance because
any surprise change is likely to be opposed.
 Approved methods must be properly introduced into the organization.
 Changes should be made slowly so that the organization can easily absorb
them. This helps the workers to gradually adapt themselves to the changed
methodology.
 Implement the methods in such a way that the entire human resource of
the organization is won over.

5.6 WORK MEASUREMENT

Work measurement:
Work measurement, as defined in the preceding units, is a technique to find out
A technique to find out
the time required to do any activity, at a predetermined level of performance, by a the time required to do
qualified worker. In order words, it is a technique to develop time standards for the any activity, at a
performance of jobs. predetermined level of
performance, by a
To establish usable standards, the operation must first be trained to do a qualified worker.
particular job. These methods analysis and study should provide work measurement.
5.6.1 Objectives of Work Measurement
The primary objectives of work measurement are:
(a) To establish the standard time for completing a job.
(b) To fix the salary of employees and to determine and calculate incentives
based on their performance.
(c) To estimate the machine and labour requirements for planning and scheduling
of production, the time required for jobs and when deliveries are possible,
etc.
(d) To distribute workload among the workers.

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(e) To calculate the number of employees needed for various tasks of the
organization.
(f) To determine the number and nature of machines that a worker can run.
(g) To help managements accurately determine the costs incurred in production.
(h) To compare the efficiency of various alternative methods and determining
the best alternative among them.
(i) To establish standards for the performance of employees and utilization of
machinery. This way, substandard workers can be identified.
(j) To control costs by uncovering wastages of both machine and labour and
thus help to increase the operating efficiency.
(k) To track the performance of workers, their training needs, etc.
5.6.2 Techniques of Work Measurement
There are several techniques for measuring work. The most common are:
1. Time study
2. Work sampling
3. Standard data
4. PMTS – Predetermined motion time studies
1. Time study
The time study method of work measurement is generally used when the work is
repetitive. It is a sampling process in which a few observations of a sample are
taken. The inferences drawn from the study of the sample are used to determine the
time required for the performance of the subsequent cycles by the worker.
First, the job or task selected for time studies is split or broken down into
activities. Then each activity is timed separately using devices such as stopwatch.
Some principles are followed in breaking down the job into its activities.
These are:
1. Each activity should be of short duration, but at the same time long enough
for it to be timed with a stopwatch.
2. The activities of the operator and that of the machinery should be distinguished.
Both should be timed separately.
3. Delays of the operator and the equipment should also be indicated separately.
Several readings need to be taken for each activity. The average of these readings
will give the average time for an activity. The average time for each activity of a job
is added to get the average time for a job.
The time thus obtained must be ‘normalized’ to make it usable for all the
workers. So a rating factor is used to give the normal time. To take an example, if an
operator completes a task in two minutes and it is estimated that he is performing
20 per cent faster than normal, then the performance rating of the operator is said to
be 1.2 times or 120 per cent of the normal.
The normal time for the task will be 2 minutes × 1.2 = 2.4 minutes.

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So Normal time (NT) = Observed performance time per unit × Performance

rating.
When an operator is observed for a period of time during which he produces
a number of units, then the normal time is given as:
Time worked
NT   Performance rating ... 5.1
No. of units produced
Standard time is calculated by adding allowances for personal needs (such as breaks
for freshening up or for drinking tea), inevitable work delays (such as lack of material
or breakdown of machinery), and worker fatigue (physical or mental), to the normal
time.
Standard time (ST) = Normal time (NT) + (Allowances × Normal time) ... 5.2
(Note: Allowances may be given in minutes or as a percentage of the normal time)
ST = NT (1+ Allowances) ...5.3
This equation is most often used in practice.
2. Work sampling
Work sampling is another technique for measuring an activity. This method is similar
to Time Study in that here also, we observe a portion or sample of the work activity.
Inferences are drawn based on the findings in this sample and this is applied for the
activity in general.
For example, if a blacksmith is observed 100 random times during a week
and it is found that he is making a hammer 30 out of the 100 times, it can be inferred
that the blacksmith spends 30 per cent of his time in making hammers.
(Note: The time required to make an observation is dependant on the object or activity that
is being observed. Often, only a glance is required to determine the activity, and most of the
studies require only few seconds’ of observation.)
In work sampling, the size of the sample is a major issue. The level of statistical
confidence desired in the results is considered before deciding the sample size. The
account of observations needed in a work sampling study can be fairly large, ranging
from several hundred to several thousand, depending on the activity and level of
accuracy required.
The three primary applications for work sampling are:
1. To determine the average time that the machine and labour are idle or running.
This is also called ‘activity time’ for personnel and machinery.
2. To develop a performance index for workers. These performance measures
help in performance evaluation of the workers, fixing of pay, bonus, penalties,
etc.
3. To fix time standards, that is, the standard time required for a task.
The following is the sequence of activities in doing a work sampling study:
1. Identify the activity for which the study is to be done.
2. Estimate the percentage of time the selected activity takes, to the total time
(e.g., the machine is working 80 per cent of the time). These estimates are

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made by the analyst from existing data, guesswork or a pilot work sampling
study.
3. State the degree of accuracy desired in the study results.
4. Determine the particular times when each observation is to be made.
5. Two or three times during the study period, the data collected are examined
and if necessary, the required sample size and the number of observations to
be made are altered.
In a work sampling study, the number of observations to be taken is equally divided
over the study period. Thus, if 500 observations are to be made over a period of 10
days, observations are usually scheduled at 500/10, or 50 per day. A specific time
may also be assigned for each day’s observations.
Work sampling compared to time study
Work sampling has several advantages over time study:
1. One observer can simultaneously conduct several work sampling studies.
2. Generally, the observer is not highly skilled. Only the analysts need to be
highly trained.
3. Timing devices are not required in work sampling.
4. Work of a long cycle time may be studied with fewer observer hours.
5. Since the duration of the study is longer the effect of short-term variations is
negligible.
6. The study can be temporarily delayed, without affecting the results.
7. Since work sampling involves observations made over a longer period, the
worker has less chance of influencing the findings by changing his or her
work method.
The disadvantages of work sampling over time study are:
1. Work study is not economical in case of a short cycle time. In such cases,
time study is more appropriate.
2. Observers in work sampling tend to develop repetitive time of taking
observations and route of travel. This can make the observations predictable
and the inferences may be erroneous. So the observer should adopt a random
sequence of observations to lessen these errors.
3. Work sampling is more accurate when the system is stable. In a dynamic
situation, work sampling may give erroneous results.
3. Standard data
For jobs in which there are a large number of repetitive operations with similar
characteristics, companies often develop standard data through time studies or
predetermined data. The advantage of having standard data is that each job need
not undergo a time study. Standard data is applied in a similar manner as
predetermined motion time data, except on a less detailed level.

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For instance, an income tax service may develop standard data on the time
required to fill out different tax forms. From this data, it is easy to provide an estimate
of the cost for a client based on information about the forms required for the client.
Standard data is also useful in estimating times for jobs with different characteristics
through regression type equations.
Standard data is used in the following manner.
For example in a warehouse the standard time required to unload 10 Kg boxes from
a truck is 2 minutes per box. Due to increasing allowances for fatigue, suppose this
goes up by 0.10 minutes for each additional 2 kgs. The standard time for a box of
weight ‘b’ is 2 + 0.10/2 (b – 10) minutes.
Therefore, if 50 boxes, each weighing 18kgs are to be unloaded, the standard
time required is 50 {2 + .05 (18 – 10)} = 50 × 2.4 = 120 minutes, or 2 hours.
Having an adequate database of standard data makes such calculations easy
to compute.
4. Predetermined motion time studies (PMTS)
An alternative to time study is the use of standard times for work elements that have
been predetermined from long periods of observation and analysis. The major
advantage of this method is that only motion patterns must be known; alternatives
may be evaluated prior to actually trying them out. In order for such a system to be
universally applied, it is necessary to define a basic set of motions into which any
task can be split into.
However, these motions must be refined to account for various degrees of
difficulty; for example, lifting a bag of 5 kg is easier than lifting 5 kg of cotton
wool, and thus should be expected to take lesser time.
Since it is necessary to apply micro-motion analysis to such systems, these
systems are often costly to use. There are a number of different motion time systems.
One of the best known and most widely used is methods time measurement (MTM).
This system was developed in 1948 from studies of motion picture films of assembly
operations. The basic elements used in MTM are:
1. Reach
2. Move
3. Turn and apply pressure
4. Grasp
5. Position
6. Release
7. Disengage
8. Eye travel time and eye focus
9. Body, leg, and foot motions
10. Simultaneous motions

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Unit-5 Work Study

Each of these has several subcategories. For example, there are five types of reach:
a. Reach to an object in a fixed location or in the other hand
b. Reach to an object in a general location
c. Reach to objects jumbled together
d. Reach to very small objects
e. Reach to an indefinite location, such as moving the hand out of the way
Element times are measured in TMUs (time measurement units), where one TMU
is .00001 hour, or .0006 minutes. Tables of times have been developed for each
activity, so that employees take an active role in increasing productivity and quality
and in reducing costs.

CHECK YOUR PROGRESS-1

1. List the primary objectives of work study.

2. What are some of the economic considerations for selecting a job?
3. What functions comprise the development process?
4. What is the time study method?
5. List any three advantages of work sampling over time study.

ACTIVITY

1. Discuss the ways in which work measurement helps an industrial engineer.

2. Is work sampling a better technique than time study for measuring work?
Give reasons and examples to justify your answer.

5.7 LET US SUM UP

 Work studies come under the umbrella of activities of industrial engineering.

 Industrial engineering is a branch of study that deals with the design, progress,
enhancement, operation and estimation of an assembled structure of people,
knowledge, tools, energy, materials and processes.

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 In a manufacturing organization, an industrial engineer is responsible for

reducing wastages of time, money, materials, energy and all other resources.
 Work study is the most commonly used set of techniques for studying the
work done by workers.

5.8 FURTHER READING

Aquilano, Chase and Jacobs. 2003. Operations Management for Competitive
Advantage. New Delhi: Tata McGraw-Hill.
Bedi, Kanishka. 2007. Production and Operations Management. New Delhi: Oxford
University Press.
Bhattacharya, D. K. 2000. Production and Operations Management. New Delhi:
Excel Books.
M.Selvam (2014) Maritime Logistics and Documentation , Lakshmi Publications ,
New Delhi
M.Selvam (2013) Quality Management, Lakshmi Publications , New Delhi

5.9 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress–1

1. The primary objectives of work study are:
 Effective use of plant and equipment
 Effective use of human effort
 Evaluation of human work
2. The considerations for selecting a job could be economic, technical or human.
Economic considerations include operations which could be holding up other
production operations, such as:
 Needless movement of workmen and materials over long distances
 Operations that involve great deal of manpower
 Operations that involve poor utilization of men and machines
 Sections or departments from which too many suggestions for
improvement are received
3. The development process comprises three functions: evaluation, investigation
and selection.
4. The time study method of work measurement is generally used when the
work is repetitive. It is a sampling process in which a few observations of a
sample are taken. The inferences drawn from the study of the sample are
used to determine the time required for the performance of the subsequent
cycles by the worker.
5. Work sampling has several advantages over time study:
 One observer can simultaneously conduct several work sampling studies.
 Generally, the observer is not highly skilled. Only the analysts need to be
highly trained.
 Timing devices are not required in work sampling.
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Unit-5 Work Study

5.10 POSSIBLE QUESTIONS

Short-Answer Questions
1. What are the objectives of work study?
2. What is the relevance of method study?
3. How does work measurement help an industrial engineer?
4. Write short notes on PMTS, use of symbols in method studies, work sampling
and time studies.
Long-Answer Questions
1. Explain the steps involved in method study, giving suitable examples.
2. Write a detailed note on the objectives and techniques of work measurement.
3. Is work sampling a better technique than time study for measuring work?
Give reasons and examples to justify your answer.

5.11 LEARNING OUTCOMES

 The concept of work study

 List the objectives of work study
 The method study procedure
 List the objectives of measuring work
 The techniques of measuring work or output

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Materials Management Unit-6

UNIT 6 MATERIALS MANAGEMENT

UNIT STRUCTURE
6.1 Learning Objectives
6.2 Introduction
6.3 Materials Management: An Overview
6.3.1 Role of Inventories in Profit; 6.3.2 Costs Associated with Inventories
6.4 Economic Order Qunatity
6.5 Classification of Inventories
6.5.1 Inventory Catalogue; 6.5.2 Classification of Inventory Control
6.6 Inventory Control Techniques
6.6.1 Item Reducing Techniques; 6.6.2 Quantity Reducing Techniques
6.7 Inventory Management Systems
6.8 Materials Requirement Planning
6.8.1 Three Prerequisite Inputs for MRP; 6.8.2 The MRP Process
6.8.3 Definition of MRP-II; 6.8.4 MRP-II Process
6.9 Just-in-Time (JIT) Production
6.9.1 JIT Process; 6.9.2 The ‘Kanban’ System
6.9.3 Difference Between JIT and MRP Systems
6.10 Purchasing Management
6.10.1 Functions of Purchasing Management
6.11 Methods of Purchasing
6.12 Let Us Sum Up
6.13 Further Reading
6.14 Answers to Check Your Progress
6.15 Possible Questions
6.16 Learning Outcomes

6.1 LEARNING OBJECTIVES

After going through this unit, you will be able to:
 Explain the classification of inventory
 Discuss inventory control techniques
 Explain various inventory management systems
 Explain the concept of materials requirement planning (MRP)
 Define purchasing management
 Elaborate upon the various functions of purchasing management
 List the factors that the purchasing department has to consider before
purchasing
 Analyses the various methods of purchasing that are employed by
organizations
 List the different types of tenders

6.2 INTRODUCTION
The main objective of any business enterprise is to earn ‘return on investment’ or
what is normally called ‘profit’. The profit motive of a company is hidden in all its
activities. That is why the concept of ‘profit centre’ has evolved, to evaluate the
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Unit-6 Materials Management
purpose, performance and contribution of each and every division of the company
to its common goal. Any amount of money saved on material cost will improve the
bottom line of the company in terms of liquidity, working capital and overall profit
of the company and will help withstand the onslaught of competition.
In most manufacturing firms today, inventories constitute the second largest
category of assets in the balance sheet, exceeded only by physical facilities like
land, machinery and equipment. Inventories frequently account for more than thirty
per cent of the firms’ invested capital.
Since inventories play such an important role in the functioning of an
organization, its proper utilization and efficient management are very important
tasks for managers. This unit will discuss various methods of inventory classification
and control. Further, this unit will discuss various new systems that have evolved in
the recent past, which have benefitted many organizations immensely.
This unit focuses on how an organization purchases various materials that it
uses in the production process. Purchasing is a vital production activity not only
because it makes up for the largest expenses of a manufacturing firm, but also
because there can be no manufacturing activity without materials and materials
need to be purchased.
This unit also also discusses the various objectives that the purchase
department must keep in mind. However, the responsibilities of the purchasing
department is not merely limited to the purchasing function, and are many. This
unit also analyses the different methods through which an organization can make
its purchases.

6.3 MATERIALS MANAGEMENT: AN OVERVIEW

(i) Definition of materials management

Materials manage- Materials management can be defined as the control and management of materials/
ment: Can be defined stock in a way that guarantees the maximum return for a business. Materials
as the control and management involves determining the purchase, location, storage, account-keeping
management of
materials/stock in a
and transportation of stock. By transportation of stock, we mean the planning of
way that guarantees the movement of stock through various processes of manufacturing, warehouses and
maximum return for a channels of distribution.
business. Materials management is concerned with the planning, organizing and
controlling of all those actions that are chiefly concerned with the inflow and outflow
of materials into a business. The reach of materials management differs between
organizations, and may include production planning, materials planning and control,
inventory control and stores management, purchasing, movement of materials in
the waste management.
(ii) Functions of materials management
Materials management generally includes the following activities:
 Purchasing
 Procurement
 Distribution
 Warehousing

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In materials management, the business operates by toeing the line between its
financial parameters and the needs of its internal customers, i.e., workforce. Effective
materials management relies upon the personal involvement of supply and purchase
managers and supervisors in executing various supply functions. Some functions of
materials management carried out in various supply areas directly affect stock and
they are as follows:
 Maintenance of allowance list
 Processing of issue orders
 Processing of receipts
 Count and reconciliation of physical inventory
 Maintenance of stock record
(iii) Importance of materials management
Materials management involves the purchasing mix. It is to do with material
acquisition and the ability to forecast the goods available in the store and the
goods to be supplied on request. The functions are chiefly executed by the store
manager and it is his duty to make sure that goods supplied meet the expectations
of the customers.
The most important role of materials management is to ensure that the stores
and supply manager streamlines the business’s demand, sales and issues as to enable
the manager to be alert to when the organization is running short of stock and will
avoid making use of its buffer stock.
6.3.1 Role of Inventories in Profit
In any manufacturing firm, more money is spent in purchases of materials and
services than for all other expenses combined, including expenses for wages,
depreciation, taxes and dividends. Generally, cost of materials is approximately
two-and-a-half times the value of all labour and wages and nearly one-and-a-half
times the cost of labour plus all other expenses of running a business. Figure 6.1
shows the major items of expenditure of a typical manufacturing organization. It
can be seen that raw materials and stores and spares together account for 64 per
cent of the total expenditure of the firm in a year.
Interest
7%

Admn & other

24%

Raw Materials
59%
Personnel
5%
Stores & Spares
5%
Fig. 6.1 Pie Diagram showing Expenditures of a Firm

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Advantages of holding a sizeable inventory are:

1. Inventory makes possible the smooth and efficient operation of a
manufacturing concern by de-coupling the individual segments of the total
operation. For example, if one of the processes in an assembly line has broken
down or is under repair, this need not stop the entire assembly line and the
rest of the activities can proceed using the inventories.
2. The daily production can be planned with flexibility and unforeseen problems
in producing a given component can be reduced and a different component
can be produced at short notice if the required raw materials are in hand.
3. The marketing manager can sell different products depending on the market
demand. The company can react swiftly to changing demand and release
goods in the market ahead of their competitors.
4. Purchasing manager can place fewer and larger orders, thus reducing the
ordering costs. Larger orders also give volume discounts from suppliers. They
can plan the procurement depending on market conditions, without depending
too much on the shop floor operations.
The disadvantages of carrying a large inventory are:
1. Inventory hides quality problems. Sometimes, suppliers supply poor quality
and off-spec materials. If this goes unnoticed at the time of receiving the
goods, it is a severe loss since the supply has been paid for. For, either the
supply will not be consumed and remain in the inventory, or else, if it is
consumed, it will lead to substandard finished goods. Either way, it amounts
to loss.
2. Inventory hides production inefficiencies. On a given day, if the daily
production plan does not get fulfilled, it does not get highlighted because of
the existing inventory which does not cause any slippages in the next process.
An unfulfilled daily production plan and high inventory of a particular sub-
assembly/assembly reveals a more dangerous situation; that there is
dissimilarity in capacities between a particular activity and its next activity.
Productivity inefficiencies also get camouflaged due to high inventory.
3. Inventory adds unnecessary costs to the production operation, such as
inventory carrying costs, insurance costs, cost of deterioration/ obsolescence,
and so on.
Thus, inventory can be defined as the blocked working capital of an organization in
the form of materials. Since this is the blocked working capital, theoretically, it
should be zero, although it is impossible to do so.
6.3.2 Costs Associated with Inventories
Besides the cost of the material itself, there are four categories of costs associated
with holding inventories in an organization. These are:
1. Inventory carrying costs
2. Inventory acquisition or ordering costs
3. Understocking or stock-out costs
4. Overstocking costs

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Of these, the first two are the most relevant and important. Therefore, they
will be studied in great detail.
1. Inventory carrying costs: This includes all the costs associated with holding
an inventory. When inventory is stored, we are actually storing company’s
money, which attracts a huge interest rate. It comprises five major cost
elements. They are:
(i) Opportunity costs: When a firm spends money, buys material and keeps
it in its inventory, it has that much less money to spend for other purposes.
Had this money been invested on productive equipment or on external
securities, it would have earned a return for the company. This income,
which the company foregoes on account of blocking the money on
inventory, is called the ‘opportunity costs’ associated with inventory
investment. It is a notional cost.
(ii) Insurance costs: Most firms insure their inventory against fire or any
other forms of damage. More the inventory more is the money required
for insurance.
(iii) Property taxes: Inventory is an asset. Property tax is levied on a firm’s
assets, so property tax is levied on inventory. More the inventory, greater
is the asset value, greater is the tax liability.
(iv) Storage costs: More the inventory more is the cost of storing the material.
More space is needed to store the material, more rent, more money
spent on acquiring land, building sheds, racks, tarpaulin covers and other
preservation items, pest control, etc. This cost is conceptually charged
against inventory occupying the space. Besides these costs, there is also
the cost incurred on facilities such as electricity, water, maintenance,
salary to stores staff and security services, which are all part of the
storage costs.
(v) Obsolescence costs: In any inventory, there is always a certain amount
of stock that is damaged, broken, pilfered, deteriorated, evaporated, shelf
life expired, obsolete. Obsolescence can also take place due to
discontinuation of product line, change in design, change in machinery/
equipment and existence of spare parts when machines are scrapped.
Consequently, more the inventory more is this loss.
In India, carrying cost is taken as 30–35 per cent of the inventory value,
with its five major elements being,
 Opportunity costs – 15–20 per cent
 Insurance cost – 2–4 per cent
 Property taxes – 1–3 per cent
 Storage costs – 1–3 per cent
 Obsolescence and deterioration – 5–10 per cent
2. Acquisition or ordering costs: These are the costs associated with
procurement of the materials that constitute the inventory. It is the sum of the
costs of performing various activities that go into the purchasing cycle.

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It may be more for imported products, less for class C items, and so on. These
costs include,
(i) Portion of the wages and operating expenses of departments such as
purchasing and supply, production control, receiving, inspection, stores
and accounts, etc., involved in the procurement process.
(ii) Cost of supplies such as stationery, engineering drawings, envelopes
and forms used in departments such as purchasing and supply, production
control, receiving, inspection, stores, and so on.
(iii) Cost of services such as computer time, fax, telephone, postage, courier,
advertisements, travel, negotiations, entertainment, and so on.
(iv) Cost of source development.
(v) Rent and depreciation of the space utilized by purchase department.
(vi) Receiving and inspection costs, cost of effecting payment.
Acquisition costs are a function of the number of orders placed or deliveries
received during a given period of time.
3. Understocking or stock-out costs: This cost occurs due to not carrying an
inventory at all or carrying fewer inventories than required. This includes the
loss in revenue due to drop in production caused by non-availability of the
materials. It is a notional cost.
4. Overstocking costs: When substantial amount of money is invested in stock
that is either not found required or becomes excessive or useless, then in such
situations a higher expenditure on inventory due to overstocking is incurred.
Carrying cost is incurred when the item is finally used, but when it is not
used, it becomes overstocking cost.

6.4 ECONOMIC ORDER QUANTITY

Whenever one has to make decisions about managing an inventory, three basic
questions have to be asked:
 How much of each item must be stocked?
 When should an order be released?
 For what quantity should the order be released?
Depending on the frequency of ordering, two situations can arise:
 More orders can be placed and cause an increase in ordering cost.
 One can have large supplies with few orders and carry more inventory, thus
incurring high inventory carrying costs.
Both situations are not desirable. Therefore, a balance needs to be maintained
between the two and only such quantity should be ordered each time wherein both
the costs are optimum and therefore the total cost is minimum. That quantity which
when ordered and delivered results in the total costs being minimum is called the
economic order quantity (EOQ). In this situation, the ordering cost is equal to the
inventory carrying cost.
The method of determining EOQ is important. The first example determines
it by the trial and error method.

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Example 6.1
Suppose an item has an annual consumption of 10,000 units, price of the unit is ` 1,
inventory carrying cost is 30 per cent per annum and ordering cost is ` 60 per order.
If only one order is placed in a year, the ordering cost will be ` 60 but inventory
carrying cost will be,
10000 1 30
 1500
2 100
(Average inventory for an order of 10,000 units is 10,000/2)
Total cost in rupees = 1500 + 60 = 1560 (in `)
A similar calculation for different quantities per order can be done and the
results tabulated as follows:
Sl Quantity No. of Ordering cost Inventory Total cost
No. per order orders carrying cost (`)
10000 1  30
1 10000 1 60 × 1 = 60  100 1560
1500  2
5000 1 30
2 5000 2 60 × 2 = 120  750 870
2 100
4000 1 30
3 4000 2.5 60 × 2.5 = 150  600 750
2 100
2000 1 30
4 2000 5 60 × 5 = 300  300 600
2 100
1000 1 30
5 1000 10 60 × 10 = 600  150 750
1100
500  1 30
6 500 20 60 × 20 = 1200  75 1275
2 100

From the table above it is observed that the total cost is minimum when the ordering
quantity is 2,000 units. Below it as well as above it, the total cost increases. Also,
when the total cost in minimum, the ordering cost is equal to the inventory carrying
cost. When these figures are plotted on a graph, it looks as given in Figure 6.2.

Annual Total Cost

Cost

CC
OC

Ordered/ delivered quantity

Fig. 6.2 Determination of EOQ by Calculation

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Consider the graph above. At the point O, where the curves of inventory
carrying costs and ordering costs meet, the total cost is minimum. Hence the level
of inventory would be the lowest. Below this point, the carrying cost is high and
above this point, ordering cost increases.
The inventory carrying costs can be worked out in Figure 6.2.
Carrying cost/year = (average inventory value) × (inventory carrying cost as a
percentage of inventory value)
(Carrying cost/year) = (average inventory) × (material unit cost) × (inventory
carrying cost as a percentage of inventory value)
or CC = Q × C × I/2
where CC = Carrying cost per year for the material in question
Q = Ordered of delivered quantity per order, in units
C = Unit cost
I = Inventory carrying cost, expressed as a percentage of inventory
Value
(Average inventory can be calculated by averaging the inventory of the 12 months
in a year or by adding the opening and closing inventories of a year and dividing
by 2.)
Ordering cost/year = (No. of orders placed/year)  (Ordering cost/order)

or AC = U×A
Q
Where AC = Ordering cost/year for the material in question
U = Expected annual usage of the material, in units
Q = Ordered or delivered quantity per order, in units
A = Ordering cost/order or per delivery of the material
As discussed before,
Annual Demand
No. of orders = Quantity per Order

Total Ordering Cost = Cost of ordering × No. of Orders

Average Inventory = (Quantity per Order)/2
Cost of Carrying inv. = Average inv. × Unit cost × Inv. Carrying cost
Total cost = ordering cost + inventory carrying cost
Representing the same arithmetically,
If A = annual consumption in units
C = Unit Cost
U = Cost/order
I = Inv carrying cost as a percentage of average inv.
Q = Quantity to be ordered per order

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Then,
No. of orders = A/Q

U×A
Ordering Cost =
Q
Average inventory = Q/2
Q×C×1
Carrying cost =
2
At EOQ conditions, the ordering cost is equal to the inventory carrying cost.

U×A Q×C×1

Q 2
Or, Q² × C × I = 2A × U
2A×U
Or, Q² =
C×1

2A×U
Or, Q=
C×1

Substituting the numbers of the earlier example,

2×10,000×60
EOQ = = 2,000
1×0.30

6.5 CLASSIFICATION OF INVENTORIES

To begin a study of the inventories, it is first necessary to classify or group them on

the basis of some parameters. Several methods of classification are practised in the
industry.
Depending on the nature of materials, they can be classified into four broad
groups.
1. Production inventory: This includes the raw materials, parts and components Production inventory:
that are directly used in the production process and go into making the final Includes the raw
materials, parts and
product. They may either consist of standard items sourced ‘off the shelf’ or components that are
special tailor made items. All raw materials obtained from the earth fall in directly used in the
this category. Some organizations such as the FMCG and engineering goods, production process and
buy their components/sub-assemblies from other vendors. They concentrate go into making the
more on producing and assembling the critical parts only. Many companies final product.
prefer taking this route these days, including Volkswagen, Dell Computers
and General Motors.

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2. MRO inventory: This stands for maintenance, repair and operating supplies.
These items are very much required in the production process although they
do not go into making the final product. They include:
(a) Consumables which are usually available off the shelf and are used by
more than one usage departments. Their inventory levels are fixed based
on past consumption. They include lubricating oils, safety items,
electrical items such as lights, fans.
(b) Spare parts which are the parts of machines used in the production
process. Their requirement is determined by the nature of the spare and
may often lead to a huge loss to the organization if not present.
(c) Packing material is used to give a face lift to the product, to protect it
during transportation and storage. In the pharmaceutical industry,
packing cost is substantial and is considered a part of raw materials. In
some cases, packing materials are a part of consumables e.g. industries
where the finished product is in a liquid form such as juices and syrups.
3. In-process inventory: Also called work in process (WIP) inventory. It
comprises the semi-finished products formed at various stages of the
production process. Typically, the output of one stage in an assembly line is
the input for the next stage.
4. Finished goods inventory: This comprises all the final products made by
the company, ready for shipment and sale.
In many companies, the production and MRO inventories represent the biggest
segment of the total inventory investment.
6.5.1 Inventory Catalogue
Before beginning any type of classification of inventories, it is necessary to have a
list of all the items in the inventory. This list should ideally contain the following:
 An identifiable individual number or a code for each item. Various methods
of codification are in use in the industry, numeric, alpha numeric, etc.
 The description of the item. This should include the dimensions, weight,
identity of the mother equipment, drawing numbers, part number, etc.
 Annual consumption of at least the previous three years.
 Names of suppliers who have supplied the item in the previous three years.
 Average life of the item.
 Stock of the item.
Such a list of items in the inventory is called the inventory catalogue. It helps to
identify the items in the inventory and helps in standardization and variety reduction.
Cataloguing is mandatory for computerization of the inventory records. By logging
in the catalogue number, the history of an item can be known. The catalogue number
serves the same purpose as a PAN number or a passport number.
6.5.2 Classification of Inventory Control
Irrespective of the nature and size of the industry, there are items varying from the
smallest to the largest in terms of value, size, complexity and criticality. It is not
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possible and also feasible to exercise strict management control over all these items.
It will only be too much effort with too little benefit. Hence, the principle of
management by exception is applied here. The items are classified based on certain
criteria to facilitate selective control. Such control minimizes waste of efforts as
well as confusions.
The following are the various inventory classification methods.
1. ABC analysis: This is the most commonly used method of classification.
It is based on the annual consumption value of the items and goes by the
principle of ‘vital few, trivial many’. This means that a small number of
items account for a major portion of the total expenditure, and there are
several items which together are many in number but account for a
small portion of the annual expenditure.
The actual percentages vary from one firm to another, but it can be
taken as a general rule that 10 per cent of the items account for 70 per
cent of the cost. They are called the class A items and require maximum
attention. Similarly, around 70 per cent of the items account for only 10
per cent of the cost. They are called class C items and should not be
given too much attention. The remaining items are called class B items.
The ABC analysis is also called the Pareto analysis, developed by
the Italian economist Vilfredo Pareto. It can be represented as shown in
Figure 6.3.

100 –
Percentage of
Total 80 -
Inventory
60 -

40 -

20 - A B C

| | | | | |
20 40 60 80 100
Percentage of no. of items in Inventory
Fig. 6.3 ABC Analysis

The ABC analysis is usually carried out annually. Once the items in the
inventory have been identified, their usage record for the year is built. Then
the items are sorted and ranked in the decreasing order of their consumption
value. The value of each item is then expressed as a percentage of the total.
By going down the list and successively cumulating the individual percentages
of each item, one can determine which items make up the first 70 per cent of
inventory investment, the next 20 per cent and the balance 10 per cent. The
groups are called A, B and C respectively and the items within the group are

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called item A, B or C. Separate policies are usually adopted for class A items
and class C items. Class C items need to be monitored on a daily basis, decision
is taken on class C items based on the objectives of minimizing acquisition
cost, maximizing service and reliability, minimizing inventory investment,
minimizing indirect costs associated with inventory and utilizing personnel
and their time effectively.
2. XYZ analysis: This classification is based on the stock value of the items.
Items having a very high stock value are classified as ‘X’. Items with least
stock value are classified as ‘Z’. The method of arriving at the classification
is the same as for ABC classification described above. Only, instead of taking
the annual consumption value into account, the annual stock value for each
item should be taken into account. The rest of the procedure remains the
same.
3. VED analysis: This classification is based on the relative importance of the
item in the production process. If certain items are not available they can
hold up production and result in high costs of shut down. These items may or
may not be priced high but their stock-out costs are very high. These items
are called vital items, designated by ‘v’. The ‘E’ stands for ‘essential.’Although
these items are not very critical to production their stock-outs are expensive.
The ‘D’ stands for ‘desirable’. It is better to avoid stock-outs for these items
although a stock out for a short period will not affect production.
4. FSN analysis: Items can also be classified as fast moving, slow moving or
non-moving based on their pattern of issue from the stores. This denotes how
soon a material is consumed after it has been purchased and taken into stock.
This classification helps in controlling obsolescence.
Items which are very fast moving and are used once every week or,
every month are classified as ‘F’. Items which are not consumed even once
in say two or three years are classified as non-moving or ‘N.’ Keeping non-
moving items in the inventory is dangerous. They block useful working capital
and eat into the profitability of the company. The company should declare
them as surplus or obsolete and find alternate uses of the material or else
dispose them off, so that it leads to money realization as well as space saving.
All items which are neither ‘fast’ nor ‘non-moving’ are termed as ‘slow
moving’ items. This classification is again of great importance to companies
who need to keep a check on where their money is spent.
5. PQR classification: Besides value and criticality of the items, another
commonly used method to classify items is based on the shelf life of the item.
Shelf life is defined as the useful life of an item that is the time period within
which the item can display the complete characteristics, for which it is meant.
Items having a low shelf life and thus requiring frequent attention are classified
as ‘P’. Items having the longest shelf life and thus requiring the least attention
are classified as ‘R’. All the other items which are not ‘P’ or ‘R’ fall within
‘Q’. The time period in which to define ‘P’, ‘Q’ and ‘R’ varies from industry
to industry. This classification is more relevant in industries producing
perishable goods such as confectioneries.

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6. SDE classification: This classification is based on the ease of obtaining an

item. ‘S’ stands for scarce. Such items are not easily available in the market
and might require source development or else it might be an item which is
difficult to manufacture or there are only one or two known manufacturers
who have to be given orders several months in advance, and so on. All these
require special efforts for procurement. ‘D’ stands for difficult to obtain and
‘E’ for easy to obtain. An organization needs to concertedly focus on items
that are both A as well as S.
7. GOLF classification: This classification is based on the nature of the source
for an item. ‘G’ stands for government, O for open market, ‘L’ for local and
‘F’ for foreign sources of supply. Items which are channeled through the State
Trading Corporations, Minerals and Metals Trading Corporation, etc., come
under the ‘G’ category. They require special procedures for procurement and
as such common procedures for inventory management may not be fully
applicable to them. The transactions require more paperwork and lead times
are longer. For ‘O’ items, there are a number of suppliers. Quality and
availability is good. Most big organizations depend on the local market only
for emergency supplies and low value procurement. For ‘F’ the source of
supply is abroad, this involves considerable paperwork and lead time is high.
8. SOS classification: This classification is based on the nature of the time of
availability for an item. ‘S’ stands for seasonal and ‘OS’ for off-seasonal.
This is more relevant in case of items which are derived from nature, such as
jute and, cotton, which are available more during their harvest time and less
available during the monsoons when it rains. They require separate purchasing
and stocking strategies. The inventory management system will have to
balance out between the stocking cost and lower prices at which it will be
available. ‘OS’ items are ordinary items which are not seasonal and can be
subject to any other classification for selective control.
9. HML classification: This classification is based on the unit price of material.
‘H’ stands for high, i.e., high price per unit of the item, ‘M’ stands for medium
and ‘L’ for low unit price of the item. This classification is particularly relevant
when it comes to deciding the procedure to be followed for procurement.

CHECK YOUR PROGRESS-1

1. What are inventory carrying costs?

2. What is ABC analysis?

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6.6 INVENTORY CONTROL TECHNIQUES

An inventory is made up of a large number of items in varying quantities. Good
management of an inventory means that it is to be maintained at optimum levels to
synchronize with the demand and supply requirements. The various methods by
which inventory can be reduced are:
 Reducing the number of items
 Reducing the quantities of the items
 Reducing the lead time of procurement
6.6.1 Item Reducing Techniques
Several techniques help in reducing the number of items in the inventory. The most
important amongst them are:
1. Preferred number series
2. Value analysis/value engineering
3. Standardization
4. Codification
5. Bar coding
6. Analysis of frequency distribution of demand/use
These are detailed out below.
1. Preferred number series: If the pattern of consumption of items is analysed,
it is found that the demand is often concentrated around a few types or sizes.
In such cases, a series of standard sizes in suitable steps would be required.
These are generally determined by preferred numbers which are numbers
derived from five series in geometric progression.
Preferred numbers owe their origin to Charles Renard, a French
Balloonist and the five series he formulated are known as R-5, R-10, R-20,
R-40 and R-80. The basic series for R-5 provides a geometric increment of
approximately sixty percent between steps to reach from any size to the next
standard size. When mathematically derived, the steps for a five step increase
would be 1, 1.58, 2.51, 3.98, 6.31 and 10. This has been simplified to 1, 1.6,
2.5, 4.6 and 10. (This is stated in IS 1970-1957). That is why one finds electric
bulbs of wattages of 10, 15, 25, 40, 60 and 100, which are the standard
wattages. All these are commonly available in the market. To obtain finer
incremental steps other sister series could be adopted, like R-10, with
increment of 26 per cent between steps, like R-10 with increment of twenty-
six per cent between steps, R-20 with increment of twelve per cent between
steps, R-40 with increment of 6 per cent between steps, and so on.
2. Value analysis/value engineering: The concept of value engineering that
was discussed in the context of new product development can be applied for
reducing the number of items in inventory as well. The principles and
methodology are the same and the methods are very effective.
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3. Standardization: The dictionary meaning of standardization states that it is

an activity that gives solutions for repetitive applications, to problems
essentially in the spheres of science, technology and economics, aimed at the
achievement of the optimum degree of order in a given context. Generally,
the activity consists of the process of formulating, issuing and implementing
standards.
As per the International Standards Organisation (ISO), ‘standardisation is
the process of formulating and applying rules for an orderly approach to a
specific activity for the benefit and with the cooperation of all concerned and
in particular for the promotion of optimum overall economy taking due account
of functional conditions and safety requirements’.
Standardization is a tool to promote the use of minimum number of parts to Standardization: A
serve the maximum number of purposes, in order to achieve economy in tool to promote the use
of minimum number of
manufacture, minimize whole life costs and maintain the quality and reliability parts to serve the
necessary to ensure operational effectiveness and efficiency. Standardization maximum number of
is achieved through the process of variety reduction, i.e., reducing the numbers, purposes, in order to
achieve economy in
sizes and categories of a given product or item and still meeting almost the manufacture, minimize
entire range of demands of the customers. Simplification, on the other hand, whole life costs and
is the process of making the design simple but standardization is the process maintain the quality
and reliability neces-
where the same standard part is fixed in many varieties of the product different sary to ensure opera-
size, shape, etc. tional effectiveness and
efficiency.
Some of the benefits of standardization are:
 Easy understanding of requirement.
 It will improve the quality of the end product.
 It will lower the cost of production, as non-standard parts would be costlier.
 Smaller range of machinery required results in a smaller range of spares
being carried for after-sales-service to customers.
 It will enable the reduction of varieties.
There are four types of standards:
(a) International Standards: e.g., ASTM (American Society of Testing and
Materials), ASME (American Society of Mechanical Engineers), BS
(British Standards), JIS (Japanese Industry Standards), etc.
(b) National Standards: e.g., BIS (Bureau of Indian Standards).
(c) Industry Standards: e.g., IPSS (Interplant Standards Sub-Committee for
Steel Industry).
(d) Company Standards: They are applicable company-wide which may
include some of the earlier three types of standards and go beyond.
4. Codification: The inventory of any company has several items which will
only keep increasing if steps are not taken to reduce them. To begin the process
of consolidation, the first step required is to uniquely and unambiguously
identify each and every one of the items. This is done by allotting a number
to each item called a code and this process is called codification. The code
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would consist of digits or alphabets or both. It should be allotted to every

item on the basis of some standards or system of codification say, the intrinsic
characteristics of the item, how or where they are used or who is using it, its
composition, sizes, etc. The system should ensure a unique code to each item
and enable easy identification of the item.
The advantages of codification are:
(i) Duplicate stocks under different descriptions for the same item are
avoided.
(ii) Accurate identification of items by all consumer departments and
customers/users.
(iii) Posting of receipts, issues, accounting records, etc., in a systematic and
accurate manner since they will be posted only once.
(iv) Codification is the fundamental requirement for computerization of
materials management activities.
(v) It helps in standardization and variety reduction.
The British system and the Kodak system are two examples of
codification systems. They are a seven digit and ten digit systems respectively.
Each organization develops its own system of codification based on its number
of items and characteristics of items. Care must be taken to ensure that there
are no unnecessary items or duplicate/multiple identifications and the number
of different unique items are absolutely necessary.
The simplest form of codification can be seen in the system of tiffin-
carriers or ‘dabbawallahs’ of Mumbai. Each dabbawallah handles over
thirty-five lunchboxes a day and together they deliver over 2,00,000
lunchboxes daily, over a radius of 60–70 kilometres in Mumbai. Initially, the
‘box identification system’ was a unique coding system wherein the
dabbawallahs would tie coloured threads, cloth swathes or cutting to identify
and separate the boxes, along with symbols such as +, = and #, various versions
of Hindu swastika, or triangles, circles and squares. However as the number
of boxes grew exponentially, this system was found to be inadequate; so a
system was devised in the early 1970s which involved colour coding of
alphabets, with a maximum of seven basic VIBGYOR colours signifying the
group handling the boxes and signifying the point of origin and point of
destination. 10-9/M/16 would translate to 10 being the destination i.e. Nariman
Point in South Mumbai, 9 is the specific area in Nariman Point, M for Mittal
Towers and 16 for the 16th Floor. This simple system has won the
dabbawallahs the coveted Forbes’six sigma certification.
5. Bar coding: Bar coding is one of the IT tools used today for automatic data
capture. It enables data capture with 100 per cent accuracy. It helps in making
the apparently long meaningless string of numbers, i.e., codes into user-friendly
readable labels. It is a step towards automation of physical handling. Bar
coders translate the digital/alphanumeric codes into groups of thick and thin
bars or vertical lines, which can be printed on to items or labels easily and
reconverted into decipherable digital/alphanumeric codes by the bar code
readers. Bar codes are extensively used worldwide, across industry sectors
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and trade for a wide number of applications. Some applications of bar coding
are the following.
(i) In manufacturing: For inventory management of finished goods/raw
materials, work-in-progress and product tracking during manufacturing
process
(ii) In retail: At point-of-sale, stock management, demand forecasting,
automated stock ordering and track and trace of products
(iii) In transport: For consignment track and trace, consolidation and
container stuffing, ensuring correct dispatches and correlation between
transport documents and consignments, facilitating trans-shipments and
loading/unloading operations
Today, bar coding companies can be found all over India. They supply
labels/tags as per supplier’s/buyer’s designs. Label cost is low—from
50 paise/label upwards. They can also be printed on product package itself.
EAN India, a non-profit organization and Government-industry initiative,
responsible for allocation of international numbering standards used in bar
coding has been extending technical advice to the Indian industry.
6. Analysis of frequency distribution of demand/use: The starting point of
any programme for variety reduction of stores is purchase order analysis or
analysis of stores issued over a period. This will reveal the situation prevailing
in the stores and indicate areas where action for variety reduction can be
profitably started. The relevant information to be collected is:
(i) Frequency of demand for each type, size, material, etc., of an item in
terms of quantity or numbers purchased
(ii) Proportion of standard items in all stores purchased
(iii) Proportion of standardizable items
The collected data should then be plotted as a graph with sizes/types on the X-axis
and frequency on the Y-axis. This would give a normal frequency distribution curve.
In this curve, the sizes/types at the peaks could be retained. For the other sizes,
study would be needed whether they are to be retained or eliminated or reduced,
using several other techniques such as preferred number series, value analysis/value
engineering, standardization or codification.
6.6.2 Quantity Reducing Techniques
The following are the techniques that can be used to reduce the quantities of items.
The process begins by asking the following questions:
 Should this particular item be stocked at all?
 If so, when should it be ordered?
 How much should we order at one time?
Each and every item in the inventory, however cheap or low in value it may be,
should be subjected to these three questions. A careful review based on examination
of the advantages of stocking, the costs, consumption, sources of supplies, availability
and the various associated costs should be done and a decision taken regarding

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quantities. This analysis should not be a one-time activity. It should ideally be an

annual activity wherein all the items in the inventory are reviewed.
The quantity reducing techniques commonly used in the industry today are:
1. Ad hoc approach to inventory management
2. Inventory control through stock levels
1. Ad hoc approach to inventory management: Decisions in this method are
taken on an ad hoc basis, often based on past practices or what has always
been done. This method is unscientific and useful only in case of very small
companies, where the cost of inventory does not justify the time and money
spent in analysing the same. Some examples of the ad hoc approach are:
(a) A company buys twenty pairs of gloves at a time (its monthly
requirement) for ` 20 each. The drawback is that every month, the
company incurs expenditure on purchasing costs, transportation, packing,
forwarding, receiving, inspection, etc, when the total monthly
consumption of the item is only ` 400 and the item is also not perishable.
A company buys 1800 helmets at a time for ` 1500 each. Monthly
requirement is 300 pieces. Helmets are available off the shelf, they do
not cause direct loss of production, they are non-perishable, storage
space is occupied and leads to unnecessary handling and inventory
carrying costs are incurred.
(b) In a company, the machine set-up costs in production are high and take
from several hours to several days. Yet, short production runs are
scheduled. This will cause a rise in production costs. This adds up to the
cost of the finished goods, which will rise.
(c) In a company, the machine set-up costs in production are low. Yet, long
production runs are scheduled. This will result in the requirement of
large inventories of raw materials to support the long production runs.
Also, finished goods stock gets built up which apart from leading to
high inventory carrying costs, might lead to problems of shortage of
space and sometimes deterioration of the products if they have low shelf
life.
(d) In a company the stock level of finished goods is maintained at previous
levels irrespective of whether the demand of the goods is rising or falling.
This could either result in loss of sales and revenue, and act as a welcome
to competition, or result in huge losses due to accumulation of stock.
The situations shown above illustrate how unscientific inventory
decisions can spell disaster to a company’s profitability. Hence, the need
for a scientific approach based on quantitative tools plus judgement of
the inventory manager to carry the optimum inventory for the
organization.
2. Inventory control through stock levels: Every company fixes certain ‘levels’
for holding inventory. These are called stock levels. The important ones are
as follows.

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(a) Maximum stock level: Maximum stock level is the maximum stock
which a company can hold for a particular item. This will depend on the
storage space, sunk costs, etc. The company should order only that much
quantity so that the sum of the delivered quantity plus the safety stock/
existing stock, etc. do not cross the maximum stock level.
(b) Minimum stock level: This is the quantity that should be carried by the
company so that the production is not affected before the next delivery
arrives. It is often same as the safety stock. The next delivery should
ideally arrive when the stock reaches the minimum stock level.
(c) Re-order level: This is the point when the stocks are just sufficient to Re-order level: The
meet demands during one normal lead time without dipping below the point when the stocks
minimum level or into safety stocks. At this level, the orders should be are just sufficient to
placed so that stocks arrive just when the stock reaches the minimum meet demands during
one normal lead time
stock level. without dipping below
(d) Danger warning level: This is a level at which stock levels are just the minimum level or
sufficient to meet the demands during one normal lead time without into safety stocks.
getting totally exhausted, resulting in stock-outs. This would be lower
than reorder level by the quantum of planned and provided safety stocks.
It is the point after which stock-out is inevitable if any delay occurs. At
such a time, the purchase department should put extra pressure on the
supplier and see that the delivery is received without any delay. Good
supplier relationships will be of help here.
(e) Safety/buffer stock level: This is also called an amber zone. This stock
is required to take care of fluctuations in supply. Any fluctuations beyond
this will result in stock-out. At this stage, the purchase department, in
addition to putting extra pressure on the supplier and ensuring that the
delivery is received without any delay, should also try for supplies from
an alternate source and inform production to revise their production
plan and plan to manufacture items for which materials are available in
plenty.
(f) Stock-out level: This level is also called a red zone. It is a situation in
which no material is left in stock. The purchase department should take
emergency measures such as borrowing from other similar organizations,
buying from stockists at listed price, and so on. It always extracts a
price from the organization, hence should be absolutely avoided.
By exercising continuous vigilance, the purchase manager can operate in the green
zone without having to enter into the amber zone or red zone.
Safety stock
To meet the uncertainties arising from fluctuating demands, fluctuating lead times,
unforeseen situations, etc., an extra stock is invariably maintained for each item in
the inventory. This extra stock is termed as buffer stock or safety stock. Safety
stocks arise due to variations in consumption rates and variations in lead times.

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Don’t most people keep a ` 500 note in the inner recess of their wallets to meet any
unforeseen expenditure? At home, rice, wheat and sugar never go out of stock.
When the stock of these items reaches a certain limit say 1 kg, a fresh lot is bought
and replenished. This is safety stock. Therefore, the essential function of safety
stock is to protect against stock-outs.
Three are various factors that influence the determination of safety stock.
1. Nature of the item: Items which are tailor made, i.e., needed for a particular
equipment or machinery, which are made based on drawings or specifications
require a safety stock to be maintained to take care of the lead time required
to manufacture those items. Standard items, i.e., those available off the shelf,
such as motors, batteries, tyres, etc., may not require a safety stock to be
maintained as they can be procured immediately.
2. Annual usage: Class A items having high consumption would be more prone
to fluctuations than class B or class C items, and require more safety stock.
3. Lead time of manufacture: Items having longer lead times for manufacture
and/or supply are more prone to fluctuations, and therefore, require a safety
stock to be maintained, for example., imports, mechanical spares, etc.
4. Stock-out cost: If the stock-out cost of an item is high, i.e., non-availability
of the item would result in high loss of production, such items should have a
considerable safety stock.
5. Seasonality: For items that are manufactured only during a particular season,
it may be sensible to stock till the next season arrives. Even though the item
may be available throughout the year, the factor of price comes into play.
6. Risk of obsolescence/deterioration: For items that have low shelf life e.g.
medicines, vulcanizing solution, certain electronic items, etc., it may not be
prudent to carry a large stock. A small safety stock would be sufficient.
7. Macro/environmental issues: Uncertainty in supplies such as impending
war, change in policies, government restrictions, etc., may cause a larger
safety stock to be maintained.
Therefore, how much safety stock should be maintained? It should neither be so
high as to lock scarce working capital, not so low as to result in stock-outs.
Safety stock is a function of two parameters, which are:
 Consumption rate
 Lead time
Four combinations of the two factors are possible. These are:
1. Both consumption rates and lead times are constant.
2. Consumption rate varies but lead time is constant.
3. Consumption rate is constant but lead time varies.
4. Both consumption rate and lead time vary.
We now proceed to explain each of these in detail.
1. Both consumption rates and lead times are constant: This is an ideal
situation. Supply against fresh order arrives just when the quantity against
the previous order has exhausted. No safety stock is required (Figure 6.4).

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Order Order arrival

Inventory placed next order placed
200

Average
inventory
100

0 10 20 30 40 days

Fig. 6.4 Constant Consumption Rate and Lead Time

Most homes buy a set amount of milk every day. Otherwise, this system is
too simplistic and is not usable in industry. It should be learnt for theoretical
purposes.
2. Consumption rate varies but lead time is constant: In the previous example,
consumption rate (CR) is 200/10 = 20 units/ day.
Let the CR increase to 25 units/ day, while lead time remains at 10 days.
The inventory would become zero on day-8 (200/25). So there would
be a stock out for 2 days, i.e., stock-out of 50 units in total.
Hence if the variation in demand is + or – 5 units, it is necessary to
maintain a safety stock of 50 units to take care of variations in demand.
The average inventory would therefore be 200/2 + 50 = 150 units.
This can be represented diagrammatically as shown in Figure. 6.5.

Order Order arrival

Inventory placed next order placed
200

Average
150 inventory

50 Safety Stock

0 10 20 30 40 days

Fig 6.5 Constant Lead Time and Varied Consumption Rate

3. Consumption rate is constant but lead time varies: The previous example
is continued here.
Let CR remain at 20 units/day, while lead time varies by 2 days. If it arrives
2 days early, there is no problem. But if it arrives 2 days late, there would be
a stock out for 2 days. So, the stock-out quantity will be 20  2 = 40 units.

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Hence, one can say that if the variation in lead time is + or – 2 days and never
more, thus it would be necessary to maintain a safety stock of 40 units to take
care of variations in lead time.
The average inventory would therefore be: 200/2 + 40 = 140 units.
This can be represented diagrammatically as shown in Figure 6.6.

Inventory
200

Average
140 Inventory

Safety Stock
40

0 10 12 20 30 days
Fig 6.6 Constant Consumption Rate and Varied Lead Time

4. Both consumption rate and lead time vary: As in the previous examples,
let the consumption rate (CR) increase to 25 units/day, and lead time increase
to 12 days.
The inventory would become zero on day-6, i.e., there would be a stock-
out for 4 days at 25 units per day, i.e., stock-out of 100 units in total.
Therefore, a safety stock of 100 units would be required to be maintained,
to take care of variations in demand.
The average inventory would therefore be: 200/2 + 100 = 200 units.
This can be represented diagrammatically as shown in Figure 6.7.

Inventory
200
Average
inventory

100 Safety Stock

0 10 12 20 30 days
Fig. 6.7 Varied Consumption Rate and Lead Time

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Based on these four situations, one decides when to order an item. By the same
logic, there are two parameters which decide when to place an order. They are:
 Quantity
 Interval between orders
A combination of these two parameters could lead to four situations.
1. Both quantity and interval between orders are fixed.
2. Order quantity is fixed but interval between orders is variable.
3. Order quantity is variable but interval between orders is fixed.
4. Both order quantity and interval between orders are variable.

6.7 INVENTORY MANAGEMENT SYSTEMS

Inventory management systems based on the above situations are discussed are:
1. Fixed quantity fixed interval order system: This is the most simplistic
system in which a fixed quantity, usually the EOQ, is ordered at fixed, regular
intervals. It can be adopted in small activity organizations such as bakeries.
A small safety stock may also be added for safety (like milk procurement in
homes).
2. Fixed order quantity system: This is also known as fixed order system,
Q-system or re-order point system, perpetual review system, etc., and is based
on the fact that the order quantity for each item is fixed but the timing of
order is variable.
This system works on the following assumptions:
 Annual requirement of the item is predetermined and there will be no
deviations.
 Consumption rate is constant.
 Price charged per unit will be constant throughout the year.
The stock level is continuously monitored and whenever it reaches the ROL (Re-
Order Level), an order for the fixed quantity is released. This fixed quantity is
usually the EOQ or the closest convenient suppliable quantity. The ROL is fixed as
the quantity likely to be consumed during normal lead time plus the safety stock.
Example 6.2
Company A has a purchasing lead time of 1 week for a consumable. The consumption
rate for the consumable is 50 units/week, with +/– 10 per cent variation over the
long run. At what inventory level should the new order be placed?
Solution
CR = 50 units/week.
This means, maximum usage during lead time50 + 10% of 50 = 55 units
Average usage during lead time50 units
Minimum usage during lead time50 – 10% of 50 = 45 units
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Since the lead time is 1 week and the maximum usage is 55 units, the new order
should be placed when the stock level falls to 55 units. Under these conditions, the
new order will arrive just when the stock reaches zero.
What happens when the usage is 50 units in a week? The new order will
arrive when there is a stock of 5 units (55–50). This is the safety stock.
Therefore, in a fixed order system, the safety stock can be defined as maximum
lead time usage minus average lead time usage.
The advantage of this system is that it is simple, reliable and cheap to operate;
is possible by visual or documentary control; and is ideal for low consumption
items such as B and C items. However, it is not possible to operate this system
where the number of items is very large; they have long and variable lead times; the
ROL for the different items are reached at different times; and the consumption
rates are not constant. The most serious drawback is that it works on the basis of
historical rather than actual demand data. Therefore, the order point is often incorrect
and results in inventories much higher than a comparable MRP system. This system
is often used in schools, hospitals, banks, etc.
Two examples of the fixed order system are the two-bin and the three bin
system.
(a) Two-bin system: The two bin system physically keeps its stocks in two separate
bins. The lower bin contains stock equal to the reorder point level. The upper
bin contains the stock equal to the difference between the maximum stock
level and the reorder point level. As soon as the upper bin gets empty, the
next order is placed. The stock of the lower bin is now being used and just
when it reaches zero, the new order arrives. Upon receipt of the new order,
the proper quantities are again placed in the two bins.
The biggest advantage of this method is its simplicity and reduction in
clerical work. Issues do not have to be posted to determine the reorder time.
However, it is too simplistic for complex industrial operations.
(b) Three-bin system: The three bin system is a slight modification of the two
bin system in that the lower bin is split into two bins. One bin contains the
reorder level while the other bin contains the safety stock. While the next
order is placed upon reaching the reorder level, when this bin also becomes
empty the safety stock starts getting used and the purchase department is
warned of depleting stocks and requested to hasten the order. When supplies
are received, all the bins are topped to the requisite levels.
Example 6.3
Find the economic order quantity and reorder point, given that,
Annual Demand (D) = 1000 units
Ordering Cost (U) = ` 500 per order
Holding Cost (Inv. Carrying Cost ) = ` 125 per unit per year
Lead Time (L) = 5 days
Cost/unit = ` 1250

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Define the inventory policy for the item and find the total cost incurred for the item.
Solution
EOQ = 2A×U
C×I

Substituting,

EOQ = 2×1000×500 = 89.4 units, or say, 89 units

125

100  5
Reorder level = = 13.7 units, or 14 units
365
The inventory policy would therefore be as follows:
‘When the inventory position drops to 14 units, place an order for 89 more
units’
The total annual cost would be,
TC = Item Cost + Ordering Cost + Inv Carrying Cost
1000  500  89 125
TC = 1000 1250 
89 2
TC = 250000 + 5618 + 5563
TC = ` 1261181
3. Fixed interval order system: Fixed interval order system is also known as
fixed time ordering system, P-system or periodic reorder system, cyclic order
system, etc., and is a time based operation. It involves scheduled periodic
reviews of the stock level of the items. When the stock level of a given item
is not sufficient to sustain the production operation until the next scheduled
review, an order is placed to replenish the supply. The quantity or ‘how much
to order’, will vary according to the fluctuations in consumption rate, and
can even be zero. The frequency of review is determined by the management.
It is often set as the EOQ divided by the consumption rate, to that the order
quantity is as close to the EOQ quantity as possible. It may also be fixed as
quarterly/ monthly/ yearly, etc., for administrative convenience.
In order to calculate how much to order after each review period, the consumption
during the review period is taken into account. The stock in hand and on order
immediately after a review date must be enough to last till the next review date.
Thus,
Q = MSL – (Stock in hand + Stock on Order)
Where,
Q = Quantity to be ordered
MSL = Maximum stock level which is fixed by the management and should
at least be equal to the consumption during review period plus
consumption during lead time plus safety stock.

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It may be noted that in this system, the safety stock has to provide protection not
only during the whole of the review period, but also the lead time following it for
receipt of supplies. Hence, it will be slightly higher than the fixed order quantity
system.
The advantages of this system are:
 Consolidation is possible since review can be possible according to the
nature of items/same or similar suppliers, etc.
 It permits even distribution of workload throughout the year.
 It is possible to vary the order quantity at every review, thus stricter
inventory control is possible.
The disadvantages of this system are:
 It leads to higher inventory levels due to higher safety stock.
 It may cause problem to suppliers since order quantity is not fixed.
 Review is possible only by the higher levels of management.
One example of the fixed interval system is the flow control system.
Flow control system
Flow control system: Flow control system is applicable in continuous manufacturing operations that
Applicable in continu- produce the same basic product in large quantities day after day. The materials used
ous manufacturing are often purchased on term contracts with deliveries on a daily or weekly basis and
operations that produce materials flow through the plant on a continuous basis. Inventory can therefore be
the same basic product kept low.
in large quantities day
after day.
In such an operation, an open stores system is used and the material is stored
near the production line, i.e., near the point of use. Stores personnel visually review
the level of all material stocks daily and report any imbalances to
the purchasing department. Changes in production schedules must be
communicated immediately to the suppliers so that the delivery schedules can be
altered accordingly.
4. Variable order variable interval system: This system is also called the S-
system or optional replenishment system or perpetual inventory system. In
this system, the maximum stock level is fixed as in the fixed interval system
and designated as ‘S’. A reordering level is fixed similar to the fixed order
quantity system and designated as ‘S’. At every opportunity to order, i.e.;
when bulk orders are received or at fixed intervals or when any change in
marketing environment occurs, the sum of (stock in hand + stock on order) is
compared with ’S’. If it is lower, then an order is placed.
The inventory management system that should be chosen for a concern will depend
on many more factors besides the consumption rate and its fluctuations, lead time
and its fluctuations, the cost of inventory, etc. Many modifications to the basic
systems explained herein are available and practised in the industry.

6.8 MATERIALS REQUIREMENT PLANNING

All processes begin with planning. In the given context, one needs to plan and
calculate the requirements and schedules of the materials to be supplied, based on
the demand. The time phased priority planning system is called the materials

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requirement planning (MRP). McGraw Hill has defined MRP as, ‘a computer-based
production management system that uses sales forecasts to make sure that needed
parts and materials are available at the right time and in the right place’. MRP is a
powerful tool in the planning and control of manufacturing inventories. It helps us
to determine our procurement in terms of:
 What needs to be procured
 How much should be procured
 When should it arrive
The output of the MRP system would be:
 Current order releases to the purchase department and/or to previously selected
suppliers, with firm due dates of delivery
 Planned order releases for the successive time periods
The following are the definitions of some commonly used terms.
1. Dependant demand: Dependant demand means that the demand for an
item is related directly to the demand for some other product. The item
may be a component, raw material or sub-assembly. It should be
remembered that demand for a company’s end product may often be
forecasted, but the demand for raw materials and component parts is not
forecasted but calculated. The assumption generally made is that demand
for the item in the inventory will occur at a gradual, continuous rate.
However, in reality in a manufacturing situation, demand for the raw
materials and components may occur in large increments rather than in
continuous units. Such demand is called lumpy demand. The large
increments may correspond to the quantities needed to make a certain
batch of the final product. MRP is the appropriate approach for dealing
with inventory situations characterized by lumpy demand.
2. Lead time: The lead time for a job is the time that must be allowed to
complete the job from start to finish. In manufacturing, there is ordering
lead time as well as manufacturing lead time. The ordering lead time
encompasses the time required from initiation of the purchase requisition
to the time the material is received at stores. Manufacturing lead time is
the time required for the part to be manufactured/processed through the
sequence of machines till the final product. MRP considers all these lead
times. The order placement dates are obtained from the dates the material
is required, after considering the lead time of the item. Each order when
released in the time period shown by the MRP output should arrive exactly
at the time it is needed by the next production stage.
6.8.1 Three Prerequisite Inputs for MRP
Three prerequisite inputs for making MRP work are:
1. Master Production Schedule (MPS)
2. Bill of Materials (BOM)
3. Inventory Records File
1. Master production schedule (MPS): Formulation of an aggregate plan
is the starting point for MRP and is based on the expected receipt of a

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certain number of orders for a given family of products during the planning
period. Various forecasting techniques are used to determine an
approximate aggregate demand for the product family. The plan must be
firmed up for a reasonable period of time because overall production
volume cannot be changed abruptly without incurring significant
unplanned costs. Every production volume utilizes a given mix of labour,
materials and equipment. When the output rate is changed, a new optimal
mix must be achieved by re-adjusting the usage rate of the various
resources. Even though it is possible to change in the long run, in the
short run, it is difficult to do it efficiently.
The master production schedule is derived from the aggregate plan. It translates the
aggregate plan into specific numbers of specific products to be produced in identified
time periods.
The example illustrates the difference between aggregate plan and master
production schedule for a car manufacturing company.
Aggregate Plan Figures in ‘000
Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
No. of 70 80 80 60 55 52 55 60 70 70 75 75
cars

Master Production Schedule (for producing the cars) Figures in ‘000

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Model 25 30 30 25 20 20 25 20 25 25 25 25
A
Model 30 35 30 25 25 22 20 25 30 30 30 30
B
Model 15 15 20 10 10 10 10 15 15 15 20 20
C

The time interval used in MPS varies from firm to firm. It depends on the type of
products used, the volume of production and the lead times of the materials used.
This span of time that the MPS covers is called the planning horizon. Typically,
within the framework of a six to twelve month aggregate plan, the master production
schedule is updated weekly to reflect changing sales demand and also internal
problems which require scheduling.
2. Bill of materials (BOM): The list of all the materials and their quantities
required to manufacture an item is called its bill of materials. This is used
for calculating the specific material requirements for a given production
schedule during a specific time period. It is also called the product structure
file or product tree.
3. Inventory records file: This comprises the item wise inventory records
indicating the item as well as the quantities in stock, besides a host of
other information with respect to every item in the inventory.
6.8.2 The MRP Process
For an accurate MRP system, it is first and foremost essential to have an accurate
MPS, accurate bill of materials and accurate inventory records as shown in
Figure 6.8.
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Sales
Forecast
Customer Service Parts
orders requirement

Aggregate
Plan

MPS

Bill of MRP Inventory

Materials Processor Records

Output
Reports

Fig. 6.8 The MRP Process

The flow chart illustrates the MRP process. The MPS, bill of materials and inventory
records are fundamentally used to build the MRP system.
Every item to be manufactured/assembled requires some items of independent
demand and some items of dependant demand. The independent demand items are
forecast and specified on MRP. The dependant demand items are calculated based
on the bill of materials and relationship of the products. For instance, suppose 1
unit of product A requires 1 unit of product B and two units of Product C;
If 1,000 units of Product A have to be manufactured, 1,000 units of B and 2,000
units of C will be required. Besides calculating the exact requirement thus, MRP
can also reschedule the requirement of B and C if schedule of A is changed.
The next issue is the lead time. The time taken to procure the raw materials,
component parts, sub-assemblies and assembling the final product are represented
in the form of various levels depending upon the lead time each of them take.
For example:
Level 0End product
Level 1Assemblies and sub-assemblies
Level 2Component parts
Level 3Raw materials
Independent demand items are listed in the MPS at Level 0 in the bill of
materials.
The MPS is first exploded to level 1to reflect the demand for assemblies. If
there are enough assembles in the inventory to take care of production, it stops
there. If not, MRP subtracts the available inventory from the demand to find out
how many assemblies need to be ordered. MRP then offsets the assemblies’ lead
time to find out when the order is to be placed.

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The MPS is next exploded to Level 2 to reflect the demand for component
parts. If there are enough component parts in the inventory to take care of production,
it stops there. If not, MRP subtracts the available inventory from the demand to find
out the number of parts that need to be ordered. MRP then offsets the lead time to
find out when the order is to be placed.
A similar process is then carried out for Level 3.
The purchase department then takes action to order, defer, expedite or cancel
orders. The following example will help illustrate the same.
Example 6.5
Study the following table.

Time Period (in months)

1 2 3 4 5 6
Requirement 20 20 20
Orders placed 20 20 20 20
For Period 1, 20 units are required and ordered. MRP recommends the order
for 20 units. Inventory would be zero at the end of Period 1.
In Period-2, there is no requirement but there is an order of 20 units. MRP
will recommend deferring the order to Period-3.
In Period 3, there is a requirement of 20 units but no order. If the order is not
deferred in period 2, there will be idle inventory for one period.
In Period 4, there is a requirement of 20 units but no order. However in Period
5, there is an order of 20 units. MRP would, therefore, recommend expediting or
preponing the order to period 4 so that there is no stock out.
In Period 5, there is an order for 20 units but no requirement. So MRP will
recommend cancelling the order.
Thus, MRP is a very powerful tool which can adapt to change in requirement
by manipulating the purchase orders suitably. It thus helps reduce shortages,
improve productivity and minimize inventory.
Example 6.6
Product ‘A’ is made up of one unit of ‘B’ and one unit of ‘C’. Item B is made up of
two units of C and one unit of D. The question is to calculate the requirements of
items B, C and D.
First, the master production schedule for independent demand for product A
is developed. Then, its bill of materials is exploded to calculate the dependant demand
for parts B and C.
Note: The steps have to be followed separately for each item.
Next, find out the on-hand inventory and the due dates for receipt of the
released orders. Based on this information, MRP will calculate the planned order
releases.
Begin with item B. For this item, it is assumed that the order quantity is 10
units and lead time is 2 weeks.
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Item Time periods

On
1 2 3 4 5
hand
Master Production Schedule:
A 10 15 15
Requirements:
B 10 15 15
Released Order Due:

B 10
Projected on-hand inventory (taking into account the released order due)
B 10 0 0 -5 -5 -20
The problem is that the on hand inventory began with a stock of 10 units.
This takes care of the requirement in period 1. Supply of 10 units received in period
3 will take care of requirement in period 3 but there will still be a shortfall of 5
units. There will be no stock to meet the requirement of period 5.
The MRP, therefore, will recommend two orders of 10 units to be released so
that stock is received in period 3 as well as period 5. At the end of period 3, 5 units
will be left behind. Another order of 10 units received in period 5, will take care of
the requirement of period 5.
Planned orders due:
B 10 10
Planned orders release (if lead time is 2 weeks):
B 10 10
Having worked out for item B, work out for item C. For C assume that the
order quantity is 10 units and lead time is 2 weeks. Inventory available on hand is
25 units.
With this information, the table will be as follows:
Item Time periods
A On 1 2 3 4 5
hand
Master Production A 10 15 15
Schedule
Planned order B 10 10
release
Requirement for A C 10 15 15
Requirement for B C 20 20
Total requirement C 30 35 15
Released Order due C 20 20
Projected on hand C 25 15 -20 0 -15
Planned order due C 20
Planned orders C 20
release

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The problem on hand is that the inventory began with a stock of 25 units. The
requirement in period is 30 units and a stock of 20 units also arrives. So, there is a
balance of 15 units.
In period 3, 35 units are required but the stock is available for 15 units only.
So, order should be placed for 20 units such that it is received in period 3. In period
4, a stock of 20 units arrives. This will take care of requirement in period 5 and a
stock of 5 units will be left over.
Similarly, one can work out the requirement of item D.
Most firms which use MRP systems run the programme once a week. The
computer system exports the requirement of materials to all the lower level
components and prints out the planned order releases based on the minimum order
quantities and lead times specified for each item.
The mid 1980s to mid 1990s was characterized by increasing technology and
price competition, global and cross functional business units, total quality concepts,
more customer focus and efforts for more and more customer satisfaction.
Manufacturers had to face very high pricing pressure caused primarily by increased
competition and easy availability of goods globally. Further, competition was based
on supply chain excellence. Companies realized that delivering excellent customer
service profitably across complex global supply chain required excellent business
processes, highly trained people and integrated software systems. All these forced
the manufacturers to further evolve the MRP systems and integrate it with other
manufacturing and business functions. This renaissance is commonly known as
manufacturing resource planning (MRP-II).
The MRP system studied above had certain drawbacks. They were:
1. It could not take into account variation in capacity.
2. It was unable to convert the operation/production plan into financial terms,
hence financial planning and control was not possible in this system.
3. It was not possible to simulate situations, i.e., if management asked ‘what if
…’ questions, it was not possible to provide answers under this system.
Initially, a capacity requirements planning (CRP) module was developed and linked
to the original MRP module. With further development in the master production
schedule concept, most of the planning activities were integrated into a single
planning and scheduling package. This integrated package was called a closed loop
MRP system. This system was built around material requirements that included the
additional planning functions of sales and operations (production planning, master
production scheduling and capacity requirements planning). Once the plans have
been accepted, its execution begins. These include input–output (capacity)
measurement, detailed scheduling and dispatching, anticipated delay reports from
both the plant and the suppliers, supplier scheduling, etc. The term ‘closed loop’
implies that not only are each of these elements included in the overall system, but
also that feedback is provided by the execution functions so that the planning can
be valid at all times. This took care of the capacity variable. But still, the financial
aspect of running a business had not yet been integrated.

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The next step in the evolutionary process is the development of MRP-II. This
new system simply added two new capabilities to the closed loop MRP system.
They were the financial interface and simulation capability. Ollie Wight termed it
manufacturing resources planning to reflect the idea that more and more of the firm
was becoming involved in the programme.
The fundamental manufacturing questions are:
 What are we going to make?
 What does it take to make it?
 What do we have?
 What do we have to get?
6.8.3 Definition of MRP-II
Manufacturing
MRP-II or manufacturing resources planning can be defined as an information resources planning:
system that integrates all manufacturing and related applications, including decision An information system
support, MRP, accounting and distribution. It is a system which allows manufacturers that integrates all man-
ufacturing and related
to optimize materials, procurement, manufacturing processes, etc., and provide applications, including
financial and planning reports. decision support, MRP,
According to the American Production and Inventory Control Society, Inc. accounting and
distribu-tion.
(APICS), MRP-II is a method for the effective planning of all resources of a
manufacturing company. Ideally, it addresses operational planning in units, financial
planning in dollars, and has a simulation capability to answer ‘what if’ questions. It
includes business planning, sales and operations planning, production scheduling,
material requirements planning (MRP), capacity requirements planning, and the
execution of support systems for capacity and materials. Output from these systems
is integrated with financial reports such as the business plan, purchase commitment
report, shipping budget, and inventory projections in dollars. MRP-II is a direct
outgrowth and extension of closed-loop MRP. Companies like Nissan have integrated
MRP-II into their production planning processes, and have combined it with radical
changes in management philosophy needed to bring about total quality and
continuous improvement.
6.8.4 MRP-II Process
MRP-II is a company-wide system concerning all facets of business including
sales, production, engineering, inventory and cash flows (see Figure 6.9)
The primary control focus of an MRP system is order entry. Once an order is
entered, all the manufacturing functions are put into motion. These include:
(a) Cost estimates: Cost builds can be ordered from information in the other
modules.
(b) Inventory control: Existing stock of the product ordered.
(c) Bill of materials: What parts are needed to produce the product and in what
quantity?
(d) Inventory control: What parts called for by the BOM are in stock and how
much? This much is not to be bought.
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(e) Purchasing: What parts listed in the BOM have to be bought, how much to
buy and when do they have to be here?
(f) Production control and scheduling: Controlling and allocation of personnel
and resources.
(g) Invoicing: An invoice and shipping documents are made against the order.
Partial shipments and periodic shipments are allowed for, and will draw down
the order quantity.

Aggregate Plan
(AP)

Sales &
Operations Plan
(S&OP)

Demand
Management
(DM)
Master
Production
Schedule (MPS)

Bill of
Inventory Materials
Record Material & (BOM)
(IR) Capacity Planning
(MRP & CRP)

Process
Work steps/
centre Plant & Supplier
scheduling routes
capacity

Fig. 6.9 The MRP-II Process

This system works through several modules. The common among them are explained
below.
1. Master planning module: This module derives the requirement from the
annual business plan/aggregate plan/demand/customer orders/forecasts made.
It enables strategic planning and master scheduling of activities. It reports
status of availability of products and raw materials on a time period.
2. Materials planning module/ inventory module: This module makes possible
online transactions of receipts and issues at stores and records the material
available on stock. It also maintains a record of the detailed specifications
including the part/subpart number, drawings, make/buy details, rate of usage,
where used, etc. It also enables the study of inventory such as the amount of
surplus and obsolete inventory, ABC/XYZ/FSN analysis, reconciliation with
respect to physical inventory, allocation of materials for in-house orders, etc.,
printing of purchase requisitions, stores receipt vouchers, goods reciept note
and, sometimes, purchase orders is also possible in this module.

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3. Materials and capacity planning module: This module uses the master
production schedule and the bill of materials to determine the requirements
of various raw materials/components/sub-assembles/assemblies, etc. It is also
used to compare the production schedule with the availability of critical
resources and provides MRP reports. This module also takes into account
aspects such as machining capacities, fabricating capacity, assembling
capacity, finishing capacity, testing capacity, packaging capacity, among others.
4. Purchasing module: Purchase orders are printed either in this module or the
materials planning module. Besides, this module maintains data on suppliers
and analyses vendor performance, rates vendors and correlates it for
negotiations and placement of orders.
5. Shop floor control module/engineering data module: This module is
responsible for tracking information on manufacturing. It sequences the tasks
that are to be performed for manufacturing a particular product and tracks
the work order from the time it is initiated till its completion. All the parameters
such as cost of material, labour and overheads are recorded and monitored. It
includes feedback from the shop floor on how the work has progressed, to all
levels of the schedule so that the next run can be updated on a regular basis.
It also maintains a record of maintenance: periodicity, parts required, status
of machines indicating their life, repair records, etc.
6. Cost accounting module: This module calculates the absorbed overhead of
materials and labour and does the costing. Financial reports are also generated
such as overheads for each work centre, work-in-process cost, purchase price
reports, etc.
The modules stated above are not complete by themselves. Combinations of
derivations of these modules are used in the industry. For instance, large companies
would have a separate shop floor control module and a separate engineering data
module, separate material control module and a separate inventory module, etc.
The expertise is in identifying the requirements of the company and designing the
modules accordingly.
An ABC analysis of the requirements of an MRP system shows that it relies
on the
 Skill of people 75% (A class)
 Data accuracy 15% (B Class)
 Computer system 10% (C Class)
When implemented, the system streamlines the processes in a company by giving
information to plan, responds to changes, meets delivery schedules and keep all the
costs under control. MRP can be applied even by very small manufacturing
companies to ensure a smooth flow of production.

6.9 JUST-IN-TIME (JIT) PRODUCTION

American companies did not pay much attention to the Japanese way of
manufacturing till the 1980s. In the 1970s, the Japanese had taken substantial market
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share in ‘basic’ industries such as steel and in 1980s, started establishing their
leadership in other industries such as automobiles and electronics. The full impact
of the Japanese challenge hit the Americans. Companies like Xerox realized that
the retail prices listed by the Japanese for small copiers were at or below even its
own costs. Ford found that a Japanese Escort-sized car cost $1800 lesser than the
Ford Escort in USA. When these companies investigated causes, they found that
the manufacturing efficiency of the Japanese enabled the latter to manufacture their
products at far lower costs.
Study teams flew to Japan to see and learn what they were doing. They found
that the Japanese had a different philosophy for manufacturing called
‘just- in-time’ or more commonly, JIT. Just-in-time (JIT) is a management
Just-in-time (JIT): A
management
philosophy that strives to eliminate sources of manufacturing waste by producing
philosophy that strives the right part in the right place at the right time. JIT can also be defined as an
to eliminate sources of operations management philosophy. Its dual objectives are:
manufac-turing waste
by produc-ing the right
 To reduce waste
part in the right place  To increase productivity
at the right time.
JIT (also known as lean production or stockless production) improves profits and
return on investment by reducing inventory levels (increasing the inventory turnover
rate), reducing variability, improving product quality, reducing production and
delivery lead times and reducing other costs (such as those associated with machine
set-up and equipment breakdown). In a JIT system, underutilized (excess) capacity
is used instead of buffer inventories to hedge against problems that may arise.
JIT applies primarily to repetitive manufacturing processes in which the same
products and components are produced over and over again. Flow processes are
established (even when the facility uses a jobbing or batch process layout) by linking
work centres so that there is an even, balanced flow of materials throughout the
entire production process, similar to that found in an assembly line.
The Textron Automotive Trim Division Plant at Michigan manufactures lower
and upper interior door panels and other inside trim products such as arm rests for
Daimler Chrysler cars, as well as the mini vans. The plant’s high volume, high mix
manufacturing process requires 134 door panels and thirty-seven additional interior
components, with nine different colour combinations and twelve different fabric
materials. The company had won many quality and safety awards and knew they
were good. Nonetheless, their problem was that they had too much work in process
and finished goods inventory. The surplus created production bottlenecks and hogged
floor space. The excess inventory forced the company to lease space in another
facility to make back side panels for the Chrysler minivans.
The company then adopted the JIT principle. This created a quantum leap in
production, WIP plummeted by more than 60 per cent, and average finished goods
inventory dropped from eight–ten hours to two hours. This inventory reduction
freed more than 10,000 square feet of space and the company terminated the lease
for production of backside panels for the Chrysler minivan and took it into its
production line.
Over the years, lot sizes have been cut by 80 per cent and mold change time
has been reduced by 50 per cent. The current mold change time is twenty-one minutes
and the company has set itself a target of fifteen minutes in two years.

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The plants’ lean manufacturing success has enabled it to go after new

businesses. They have now signed a contract with General Motors to supply them
interior trim products. All this within the same factory premises!
The basic elements of JIT were developed by Toyota in the 1950s, and became
known as the Toyota Production System (TPS). JIT was firmly in place in numerous
Japanese plants by the early 1970s.
The JIT concept is built around the philosophy that inventory is evil. But it is
not just a method to reduce inventories. It is a method of producing what is needed
when needed and no more.
JIT is fundamentally based on the following two tenets:
1. Elimination of waste
Waste is defined as any activity that does not add value. Anything over the
minimum amount necessary is waste. Waste results from any activity, that
adds to its cost without adding value to it, such as moving and storing.
Shigeo Shingo, a prominent management guru who promoted the use of JIT
in manufacturing listed the ‘famous seven wastes’ as follows:
 Waste of overproduction
 Waste of waiting
 Waste of transportation
 Waste of stocks
 Waste of motion
 Waste of making defects
 Waste of processing (when the product should not be made or the process
should not be used)
In other words, waste includes excess inventory, scrap and rejects, excessive
materials handling, movement and time spent waiting for resources to become
available, and overhead related to set-up times and inspections.
2. Respect for humans
This tenet recognizes that for a system to work, humans must be actively
involved. In addition, they must work as a team toward a common goal. In a
JIT environment, considerable effort is dedicated to building teams. Work is
handled by teams on the shop floor, rather than by individuals. Rather than
have each worker on the assembly line responsible for a narrowly defined
task, teams are charged with the responsibility to assemble the entire part.
Workers are given more responsibility. In JIT companies, the following is
seen:
 Expanded job scope
In addition to performing their tasks, workers should suggest ways to improve
their performance, perform routine maintenance on their machines and
perform their own housekeeping chores. Often, similar parts are grouped
into families, and the machineries required to manufacture these parts are
grouped together to form work cells. This eliminates queuing (and waiting)
time and movement between operations, reduces inventory and reduces the

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manpower required. Workers, however, will have to run several machines

and processes hence their skill level increases. This increases their job security
and commitment to the company.
 Factory layout
For JIT to work, the factory layout should encourage communication among
team members by placing successive operations in a compact cell. In addition
to making it easier for workers to communicate, it facilitates materials
handling. Another interesting fact to note is that the Japanese build small
specialized plants rather than large vertically integrated manufacturing
facilities. Toyota has twelve plants located in and around Toyota city. They
find large operations and their bureaucrats difficult to manage. The bulk of
Japanese plants (around 6,000 and counting) have between 30 and 1,000
workers.
 Automation and process redesign
Monotonous and repetitive jobs are automated or designed out of the process.
This makes the work environment better for the worker.
 Employee empowerment
Workers are given the authority to stop the line. Thus they become inspectors,
personally responsible for the quality of their output. They can also set the
pace of work and thus maintain quality at the source.
These changes require that both management and workers think of their work
differently. The physical changes associated with JIT such as factory layouts,
can be implemented within finite time frames. The change to the work culture
takes longer and is an ongoing process.
6.9.1 JIT Process
Figure 6.10 shows a normal operation in a factory.

Receiving Receiving Inventory

materials inspection

Sub- Work-In- Final assembly

assembly-1 process
inventory inventory

Fig. 6.10 Normal Operation in a Factory

In this figure, after incoming material is received and counted, it is inspected for
quality and adherence to specification. If found all right it is accounted for and
taken into the inventory. This is then sent to sub-assembly operation-1 shop floor,
where it becomes the shop floor inventory. Work-in-process inventory follows sub-
assembly operation-1. This goes to sub-assembly operation-2, and so on till the
final assembly.

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When JIT is implemented, the receiving inspection is completely eliminated

and the responsibility of quality for incoming material rests with the supplier.
Incoming material is delivered directly at the point of use at the shop floor. This
eliminates the duplicate shop floor inventory. JIT calls for a thorough streamlining
of the manufacturing processes at the shop floor. Production scheduling should be
based completely on units of the finished product rather than on the production of
sub-assemblies. This helps to eliminate pile up of work in process inventory and
also helps in continuous production, as shown in Figure 6.11.

Receiving Final
materials assembly

Fig. 6.11 JIT Inventory Process

In JIT, the management focuses on one goal: reducing work-in-process inventory.

The question that is asked over and over again is, ‘why is inventory required?’ The
answer usually identifies a constraint brought about by existing production practices
such as set-up times, quality or machine availability. Fixing these problems improves
efficiency.
Companies that have implemented JIT have recorded phenomenal success.
Harley Davidson returned from the brink of bankruptcy to regain its market share.
Hewlett-Packard reported a $16 million reduction in inventory and a 65 per cent
reduction in assembly floor space at its Waltham Plant. Corning reduced customer
lead time from five weeks to a few days while achieving a 98 per cent on-time
delivery to customers.
The advantages of implementing JIT are:
1. Reduction in set-up times
When the set-up time is large, economics dictates that the lot size must also be
large. By reducing the set-up time, lot sizes can be smaller and more production
time is now available. Several products can be made at shorter intervals of time.
Inventories can be reduced, capacity can increase and the company can respond
more quickly to changes in demand. Set-up time reduction can be accomplished by
changing the process, introducing flexible automation or changing the set-up
procedure. One of the advantages of short set-up times is that they facilitate the
early discovery of poor quality parts, making it possible to correct the root cause of
a problem. In fact, JIT proponents consider the ideal lot size to be one.
2. Improvement in quality
As inventory is reduced, pressure for improving quality increases. When a part is
defective, it may bring the next operation to a halt if there is no inventory to act as
a buffer. The key is to do it right the first time.
The impact of poor quality on the cost of a product is significant. Any good
quality system includes clear specifications and documented tests for conformance.

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JIT also emphasizes process capability and design for manufacturability. Process
capability means the ability of the process to make parts with the desired
specifications. Design for manufacturability means that product designers take into
account the manufacturing capabilities, as they design the product. This task is
often done by integrating design and manufacturing activities.
The benefits of improving quality are as follows:
 Less rework
 Less allowance for scrap
 Less handling
 Let set-ups
 Less substitution of tools and materials
3. Steps in the production process
Each step in the production process should be included only if it adds value to the
product and eliminates activities that do not add value. For example, when materials
are moved from a work centre to the stockroom and later from the stock room to
another work centre, the double handling adds to cost with no increase in value.
Sometimes, the process steps can be reduced by changing the design of the
product. Another example is the receiving inspection activity in most traditional
factories. In a JIT factory, materials are directly delivered to the line at the point of
use.
4. Emphasis on maintenance
For equipment to produce quality parts consistently, they must be in good condition.
Japanese factories did not have modern equipment, they employed equipment that
has been well maintained as a result, runs better.
A JIT factory has the discipline to allocate maintenance time on a regular
basis. Workers are involved in performing maintenance activities. Therefore, the
operators understand their equipment better and this reduces the chance of
unexplained defects. It also allows operators to enhance the process’ capability.
5. Reduction in inventory
A reduction in inventory brought about due to JIT gives a substantial reduction in
throughput time as well as labour productivity for the organization. All these will
directly translate into reduction in the manufacturing costs and resulting in an increase
in profits for the company.
6. Consolidating the supplier base
In JIT, the supplier base is reduced to a manageable few, and communications with
them are encouraged. The aim is to improve the suppliers’ understanding of the
company’s needs, ensuring that the materials supplied have the correct specifications.
In JIT, the focus is on reducing the supplier base and placing all orders for an
item with a single source. Emphasis is given on developing partnerships and longer
term relationships to provide better quality products and reliable deliveries at
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competitive costs. By reducing the number of suppliers, purchasing can manage its
suppliers better, deliveries can be scheduled more easily. For the supplier, it may
yield economies in the suppliers that can be passed on to the buyer in terms of lower
costs. The Japanese have been very successful in using this approach. They put
together a tightly knit family of suppliers called keiretsu and have succeeded in
obtaining a better quality at lower costs than their American competitors.
Even though JIT does an excellent job in reducing lead times and work-in-
process, it has several disadvantages. They are:
(a) JIT has been successful basically in assembly line manufacturing.
(b) JIT requires a stable production plan (that is, without frequent changes in
production plan).
(c) JIT is more effective when the number of products produced is less.
(d) JIT still requires some work in process so that there is ‘something to pull’.
This means that some amount of completed work must be stored at each
workstation, to be pulled by the next workstation.
(e) Suppliers need to be located nearby because the system depends on smaller,
more frequent deliveries.
6.9.2 The ‘Kanban’ System
‘Kanban’ means ‘signboard’ in Japanese. It is the name given to small cards attached
to containers which hold a standard quantity of a single part number. To understand
the Kanban system, imagine two work centres A and B. Work centre A produces a
part which is kept in a bin. Work centre B uses the parts from that bin. When the bin
gets empty, it is a signal for work centre A to refill it. This empty bin is the Kanban
signal.
The following example shows how the Kanban system works in an industrial
set-up.
Company A buys parts at the rate of 1,000 per day; these are delivered in
containers each carrying 50 parts, i.e., 20 containers per day. The supplier makes
one delivery per day. The truck leaves his premises at 9.00 AM, delivers them at
noon and returns to the supplier by evening.
This means the supplier should be getting ready 1,000 parts for supply the
next day. There should also be 20 empty containers available at the supplier’s factory,
by the evening of the previous day.
On Day 1, the truck leaves the supplier’s premises with 20 full containers. At
noon, when it reaches Company A, it delivers the 20 full containers and picks up
the 20 empty containers available with them. Meanwhile, the supplier has been
working at filling the empty containers and has filled 10 of them. By the end of the
day, when the truck has returned, the supplier has completed the 20 containers of
work. On Day 2, the same schedule repeats.
This system has 60 Kanban containers. The inventory in the system is 30 full
containers.

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Hour of Day Supplier Truck Company A
9.00 AM 20 E 20 F 10 F, 10E
12.00 noon 10F, 10E 20 F 20E
The two-card Kanban system: In practice, companies use systems consisting of
two types of Kanban cards.
 A Move card to authorize the movement of parts from one work centre to the
next
 A Production card to authorize the production of parts by the work centre.
The Toyota system offers a good illustration of the two-card Kanban system. Each
part made in a plant is sourced from a single vendor. Also, the entire production
inventory is located on the plant floor. At each work centre, they have established
points where incoming inventory would be delivered. The objective is to have
inventory easily accessible. When the work centre finishes the work, the completed
part is all at one location. At Toyota, parts are moved in containers or bins. For any
pair of work centres, the containers are a standard size, which are fixed lot sizes.
The standard container size also affects the inventory level.
The following example will demonstrate how to calculate the number of
kanbans required.
Example 6.7
The demand at a work centre A is 100 units per hour. The container size is 25 units.
Assume that the materials handler comes every hour to check the box and that if
there is a move card, it will take another hour to fill the request. Using a safety
factor of 5 per cent, how many production and move kanbans are required? What is
the average inventory level? What happens when the container size is increased
from 25 units to 50 units? If the materials handler picks up the kanbans every half
hour, calculate the number of kanbans required and the average inventory level.
Solution
No. of containers required per hour = 100/25 = 4
Lead time2 hours (i.e., materials handler comes every hour to check and
then it takes one more hour to fill)
Therefore, no. of kanbans required4  2  (1 + 0.05) = 8.4 or 9 kanbans
Average inventory level9  25/2 = 112.5 units
If container size is 50, no. of kanbans required is 9/2 = 4.5, or 5
Average inventory level5  50/2 = 125 units
If materials handler checks every half hour, lead time1 + 1/2 = 1.5 hours
No. of kanbans required6.3 or 7 (by the same method)
Average inventory level7  25/2 = 87.5 units
6.9.3 Difference Between JIT and MRP Systems
The MRP system is a push system, meaning that the production at one work centre
depends on its detailed production schedule, it is produced and ‘pushed’ to the next

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production stage, without considering whether the second stage needs it or not. But
JIT is a pull system, i.e., parts are pulled from the previous work station only when
required. A push system such as MRP starts with a forecast of customer demand
and production lead times are then estimated. Incorrect forecasts and estimates result
in excess inventory and longer lead times. The weakness of JIT is that the system
allows no room for even a slight error in judgement. Smaller lot sizes and near zero
inventory gives no room for force majeure conditions, which are beyond control.
In MRP, the administrative costs are high. It relies on technology and its
effective use for success. However, JIT is a very simple system that requires almost
no administrative cost to maintain it. Commitment of humans is the only investment.
Inventory turns are very high due to almost zero inventory. Where there is human
commitment, JIT system is bound to succeed.

CHECK YOUR PROGRESS-2

1. What do you know about just-in-time (JIT)?

2. What is materials requirement planning (MRP)?

6.10 PURCHASING MANAGEMENT

One of the most important activities of materials management is purchasing.

Purchasing ensures that:
RIGHT materials are purchased
at RIGHT price
from RIGHT suppliers
at RIGHT time and delivered
at the RIGHT place
The purchasing department in any organization acts as an interface between suppliers
of materials and the production function. Since materials comprise one of the largest
components of expenditure in any manufacturing firm, their procurement requires
careful management.
The responsibilities of a purchasing (also called procurement) department
include learning the material needs of the organization, selecting suppliers and
negotiating price, ensuring delivery, monitoring cost, quality and delivery
performance.
The purchase department must work with certain objectives in mind.
These objectives are:

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1. To buy competitively: Buying competitively involves keeping abreast of the

forces of supply and demand that regulate prices and availability of materials
in the marketplace. It also involves an understanding of supplier’s cost
structure, even develop the ability to help improve this cost structure, and
then to negotiate price and service arrangements that are mutually beneficial.
A buyer who pays lesser for a given product than his competitor is not
necessarily buying competitively. His total costs may be higher.
2. To buy wisely: Buying wisely involves a continual search for better values
that yield the best combination of quality, service and price, relative to the
buyer’s needs. This invariably involves coordination with users in defining
the need, a knowledge of suppliers’ capabilities and cross functional teams to
achieve optimal value considering mutual benefit. A firm that purchases high-
grade bond paper for use in internal office communications that could be
performed as well with less expensive, softer stock paper usually is not buying
wise. It is the combination of buying competitively and buying wisely that
will contribute most to the profitability of the firm.
3. To keep inventory investment and inventory losses at a practical
minimum: Although maintaining a large inventory would ease a lot of
production problems, it is very costly. The cost of carrying inventory in most
manufacturing firms varies between 25 and 35 per cent of the average
inventory cost. Just-in-time production helps greatly in reducing inventories
and keeping it at a minimum level.
Inventory losses also occur due to theft, pilferage, obsolescence,
deterioration etc. Through proper buying, packaging, and storing, such losses
can be minimized.
4. To develop effective and reliable sources of supply: Most suppliers who
are willing to work with a buyer to help solve the buying firm’s problems and
to minimize its materials-related costs. The identification, investigation,
selection, and in some cases, development of competent and responsive
suppliers is a buyer’s paramount responsibility. Many firms have developed
partnering arrangements or strategic alliances with their key suppliers.
5. To develop good relationships with the supplier community and good
continuing relationships with active suppliers: Even after a foolproof
purchase contract has been signed with a supplier, myriad operating problems
inevitably arise throughout the life of the contract and these can be much
more easily and effectively solved when the relationship is sound and mutually
beneficial. Suppliers direct their research, provide advance information on
new products and prices and in general give better service to such customers.
6. To achieve maximum integration with the other departments of the firm:
It is essential for buyers to understand the needs of their using departments,
so that these needs can be translated into materials support actions. Purchase
department can effectively contribute in developing materials standardization
programmes, forecasting future prices and general business conditions,
programmes economic make-or-buy analyses, and serving as a repository of
information and data from suppliers regarding new materials, processes, prices,
and materials availability.
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7. To handle the purchasing and supply management function in a

professional, cost-effective manner: Purchase department is the window of
the organization to the outside world, so they have a responsibility in projecting
the image of the organization. The reputation of the organization in the market
will be determined by how the purchase managers conduct themselves. The
training and development of personnel, operating policies and procedures,
moral and ethical standards, all contribute to the accomplishment of
departmental objectives in the most cost-effective manner.
6.10.1 Functions of Purchasing Management
The fundamental functions of purchasing are to do with price and vendor relations,
quality in purchased parts, vendor reliability, maintenance and return policies, and
other aspects of customer service. Moreover, they must continually seek new vendors
and products and be able to evaluate their potential to the company. Good relations
with vendors are essential, so that matters such as expediting shipments can be
easily accomplished and when necessary must be reviewed.
The main functions of purchase management are as follows:
1. Receive purchase requisitions: Purchase requisition (also called the ‘indent’)
is a statement of requirement of the production or user department. Receiving
the purchase requisition is the starting point for procurement activity.
2. Review and evaluate requisitions: The indents are reviewed by the purchase
department to check whether all the relevant information has been furnisheds
such as item description, drawings quantity, estimated price or last purchased
price, consumption (means usage) in the last 3 years, time when this material
is required, provision, etc. Such checking is also called ‘scrutiny’. After
scrutiny, if the indent is found complete in all respects it is accepted by the
purchase department for procurement. The lead time for procurement is
calculated from the day the indent is accepted by the purchase department.
3. Supplier selection: The real job of procurement begins with the purchase
department deciding on the mode of procurement, depending on the nature
of the items in the indent. Then an ‘invitation to tender’ is issued to the
prospective supplier. The ‘invitation to tender’ is a letter giving the details of
the buyer’s requirement and requesting him to offer his prices and other terms
and conditions if he is interested in supplying the said items.
4. Scrutiny of offers: The reply of the supplier to the invitation to tender is
called an ‘offer’. The offer from the prospective supplier is scrutinized for
it’s specifications offered, prices and other terms and conditions offered. Most
often, the purchase department takes the help of the user department in
scrutinizing the offers.
5. Order placement: Purchasing department selects the suppliers based on price,
quality, delivery performance, reliability for placement of order and places
the order/contract/agreements with the selected supplier.
6. Follow-up and expediting: It is the responsibility of the purchase department
to follow up with the suppliers, monitor supplies, expedite deliveries, etc.

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7. Market research and information: Purchase department is the window of
the organization to the outside world. It arranges discussions and meetings
between suppliers’ representatives and company’s officials. It keeps itself
abreast of the latest developments with respect to the company and its products
through sales contacts, buyers’ conventions, trade magazines, etc. It studies
the market and keeps the track of new suppliers, new developments in
production materials and processes that are of interest to the company.
8. Payment authorization: Purchasing must work closely with receiving and
accounting to ensure that all ordered goods are delivered before payment is
authorized.
9. Cost reduction: It is achieved through import substitution, value analysis
and engineerings, etc. It supports engineering and user departments for
developing correct and healthy descriptions and standards of materials.
10. Record-keeping: With thousands of products and materials, hundreds of
suppliers, requisitions in various stages of review, order processing, and so
on, an accurate information system is essential.
11. Miscellaneous activities: Various other functions are performed such as,
applying for import license, liaisoning with government agencies, disposal
of secondary items such as defectives, scrap, surplus, etc.

6.11 METHODS OF PURCHASING

The role of the purchase department is to provide all the production materials that
are required by a company. Any functional department can request for the materials.
The materials can range from a complicated spare part to a commonly used
consumable such as screens and washers. The same method cannot be used for
procurement of all the items. We will discuss some of the commonly used methods
of purchasing.
1. Market Purchasing
Purchasing of sufficient quantity of items in advance when the prices of these items
are low is termed as market purchasing or forward purchasing or seasonal purchasing.
When this method is applied to buy the annual requirement of an item during its
season of availability, it is termed as seasonal buying. Such items are required for
food processing and other similar industries. Following are the significant
characteristics of forward purchasing:
 Purchases are made to cover production requirements for a considerable
period, usually a year.
 Quantity of items purchased is generally large.
 The atmosphere is usually favourable for negotiation.
 Purchases are made when the prices are low.
Advantages
 Helps in lowering the purchase price.
 Greater margin of profit on finished goods.

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 As purchases are usually consolidated, it leads to saving in procurement

expenses.
 Provides security against shortage of required items.
Disadvantages
 Firm may suffer financial loss if price expectations are not realized.
 Higher inventory holding charges.
 Change in design of product can result in large-scale expenses.
In order to contain the disadvantages, it is the responsibility of the purchasing
department to keep track of the market conditions to be able to forecast the changing
trends. Decision must be taken after considering the high inventory carrying charges
and deterioration on storage against price advantage. This method of purchasing is
applicable to:
 Non-perishable items
 Items that have stable and usual consumption
 Materials that are less susceptible to specifications changes
 Seasonal items
 Pre-budget purchases
2. Speculative Purchasing Speculative purchas-
ing: The process of
The process of buying large quantities of items when its price is low so that tentative buying large quantities
profits can be obtained by selling them at higher prices, is termed as the speculative of items when its price
purchasing. It is commonly done by trading companies. Following are the important is low so that tentative
characteristics of speculative purchasing: profits can be obtained
by selling them at
 Purchase of items is not related to a company’s production programme. higher prices.
 Purchasing decisions in this method are not based on quantity.
 The main aim of this method is to earn speculative profits.
 Large quantities are purchased to be sold at the appropriate time, depending
upon the finance of a company.
The main advantage of this method is the probability of earning large speculative
profits that can be obtained by selling them at higher prices.
3. Group Purchasing
The process of buying items of insignificant value in a single purchase order is
termed as the group purchasing. For example, drills and taps are placed in one
group, plug gauges in other group, hardware in another group and so on. Items of
every classified group have fixed inventory levels. Stocks-on-hand are reviewed at
regular intervals, say once a month or once in two months and if the stocks have
fallen below the reorder level, replenishment action is taken for these items.
Blanket order purchasing
A variation of group purchasing is blanket order purchasing. In a blanket order also,
one order is placed for several items of insignificant value. The difference lies in
the fact that in a blanket order, exact quantities are not given. The user department

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directly calls up the supplier and can ask for deliveries of any item in the blanket
order. A large stockist known for his sincerity and consistency is selected for
placement of the blanket order.
This method is common for procurement of low-value items such as
stationeries, where a blanket order is placed on a supplier for different kinds of
stationery. The purchasing department should check up whether the demand for
any item has risen considerably, so that it can be removed from the group and is
purchased as an individual item.
4. Tender Purchasing
The tender purchasing method is generally followed by the government departments
and public sector undertakings in India. This method is applied by the private
sector organization if the value of the purchase exceeds a prescribed limit fixed by
the management as policy decision. Following are the important characteristics of
tender purchasing:
 The purchasing department invites suppliers to submit their bids or offers for
a specific requirement.
 Offers or bids received from the prospective suppliers are opened at a
designated date and time.
 Bids obtained from different suppliers are compared to select the right supplier.
Generally, a lowest price criterion is used to compare different bids except
when a supplier quoting the lowest price has questionable delivery time,
quality, reliability or financial stability.
Advantages
 Using this method, we can select the qualified supplier on the basis of
competitive prices.
 This method yield the lowest price for an item.
 This method is very transparent and eliminates possibility of discrimination
and personal preferences.
Types of tenders
The following are the four types of tenders:
(a) Single tender: The tender system in which the details of the requirements are
communicated only to a single firm is known as the single tender. In this
type of tender, there is no competition. This type of tender is generally used
when there is a single known supplier for an item. For example, spare parts
for a Siemens motor can be purchased only from Siemens. So, a single tender
is issued to Siemens for that spare part.
(b) Limited or closed: The tender system in which the enquiry is sent to a limited
number of suppliers and bids are received and accepted only from them is
known as limited or closed tender. The management decides on the suppliers
to whom enquiry must be sent. The suppliers selected usually have similar
capability to produce the item in question. The offers received are compared
and order placed on the lowest acceptable offer.

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(c) Open tender: The tender system in which the required enquiry is advertised
in the newspapers or journals of the home country and bids are received in
response to the advertisement is termed as open tender. The tender system is
also known as advertised tender or unlimited tender. This system of tendering
is generally used when the suppliers are not clearly known or when the value
is large. Most government departments fix a certain prescribed value beyond
which all requirements have to be advertised.
(d) Global tender: The tender system in which the enquiry is advertised in the
newspapers and trade journals of not only the home country but also of foreign
countries, is termed as the global tender. This system of tendering is used for
purchase of very high value good involving plant and machinery or purchase
of technology for starting new projects, etc.
4. Hand–to–mouth Purchasing
Hand–to–mouth purchasing is also known as ‘buying according to the requirements’.
In this method, items are purchased often in small quantities, only when there is
demand for those items. It is not bought in advance and stocked.
Advantages
 This method helps in lowering inventory investment.
 Helps in lowering inventory carrying charges.
 Helps in reducing the worsening and obsolescence of materials.
 Helps in reducing losses that occur from price declines.
Disadvantages
 Hand-to-mouth purchasing leads to high price of materials since they are
often bought from the local market in small quantities, so no quantity discounts.
 Needs to accept the sub-standard goods in case of emergency.
This method is effective only when the items are purchased from a vendor known
for quality, reliability and integrity, and who can fulfil a buyer’s order without taking
advantage of the situation. This method is best suited for:
 Sample items and products that are under development
 Items that are used rarely and are not required to be stocked
 Items that have a limited shelf life and are not stocked for fear of perishability
 Items that are bulky and need lot of space for storage
5. Scheduled Purchasing
The process of buying items that are in the form of distributed deliveries, according
to the delivery schedule provided by the buyer to the supplier, is termed as the
scheduled purchasing. This type of purchasing is suitable for the procurement of
materials and production items that are of regular use. Following are the prominent
characteristics of scheduled purchasing:
 Purchase order usually covers the annual requirements of a company.
 Confirmed and tentative schedules, of periodic intervals, say weekly or
monthly, are provided in the order.
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 Fresh delivery schedules are provided to the supplier before the completion
of the previous schedule.
 This method is suitable for perishable materials, bulky items and other items
are required in large quantities or where supplier has set up production facilities
especially for the buyer. It is also suitable for items that are produced according
to buyer’s design and requires long leads time to manufacture and proprietary
items with long-term schedules.
Advantages
 Regularity in supplies and smaller inventories result in saving time and money
of both the buyer and seller.
 It provides security of business to the supplier.
 A supplier can easily plan his advance production while a buyer can plan his
requirements of finance.
Three types of contracts are usually placed under this system:
(a) Rate: In this contract, rate is fixed and not the quantity. Also it indicates
some probable requirements.
(b) Running: In this contract, both rate and quantity are fixed for the contract
period. The contract comes to an end as soon as the vendor supplies the
specified quantity.
(c) Service: In this contract, services from the supplier are obtained
periodically, e.g. servicing of computers, air conditioners, etc.
6. Subcontract Purchasing
The process of employing another firm to perform some of the manufacturing
operations or to provide certain parts and sub-assemblies that are required to be
incorporated into the buyer’s end product is termed as the sub-contract purchasing.
Sub-contracting may be done when:
 When a company receives a big order, it may be possible that it produces
some quantity of the final product and buys the remaining from other buyers
if it feels that it may not be possible for it to complete the order within a
specified time.
 In some cases, company produces certain items of the assembly and buys
other items from other buyers.
 When a company does not have required manufacturing facilities, it gets
certain operations done by other firms.
 Certain operations are required to be performed by a special expertise.
It is the responsibility of the purchasing department to establish and choose
sub-contractors who can supply parts of good quality, in right quantities, in the
required time schedule and at the right price. The purchaser should put in place an
effective quality assurance system with the sub-contractor.

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CHECK YOUR PROGRESS-3

1. How do inventory losses occur?

2. What are the other terms used for market purchasing?
3. Name the four types of tenders.

ACTIVITY

1. Among the different inventory reducing methods, which according to you

will be beneficial for an organization? Justify your reason.
2. Visit a local manufacturing firm and find out the type of coding system it
follows.

6.12 LET US SUM UP

 Materials management involves determining the purchase, location, storage,

account keeping and transportation of stock. Thus, it involves four various
activities, purchasing, procurement, distribution and warehousing.
 Other than the cost of material, four other categories of costs are associated
with holding inventories. These are inventory carrying costs, ordering costs,
understocking costs and overstocking costs.
 Different firms utilize different techniques to classify inventory. Of these, the
ABC analysis is the most common technique.
 MRP is a computer-based production management system which ensures that
the right quantity of the required material is available at the right place.
 There are three prerequisites which ensure that the MRP is efficient. These
are the master production schedule (MPS), bill of materials (BOM) and
inventory records file.
 MRP-II is an information system that integrates all manufacturing and related
applications, including decision support, MRP, accounting and distribution.
 JIT is an operations management philosophy, the objectives of which are
reduction of waste and improvement of productivity.

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 Purchasing management is an important activity of materials management.

The responsibilities of the purchasing department include identifying the
material needs of the organization, selecting suppliers and negotiating price,
ensuring delivery, monitoring cost, quality and delivery performance.
 Some of the important methods of purchasing are marketing purchasing,
speculative purchasing, group purchasing, tender purchasing and scheduled
purchasing.

6.13 FURTHER READING

Adam, E.E. and R.J. 1993. Ebert. Production and Operations Management:
Concepts, Models and Behaviour. New Delhi: Prentice-Hall.
Bedi, K. 2007. Production and Operations Management. New Delhi: Oxford
University Press.
Gaither, N. 2002. Production and Operations Management. Mumbai: Thomson
Learning.
Besterfield .H (2018) Total Quality Management
M.Selvam (2014) Maritime Logistics and Documentation , Lakshmi Publications
New Delhi
M.Selvam (2013) Quality Management, Lakshmi Publications , New Delhi

6.14 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress–1
1. Inventory carrying costs include all the costs associated with holding an
inventory. When inventory is stored, one is actually storing company’s money,
which attracts a huge interest rate. It comprises five major cost elements.
They are: (a) opportunity costs, (b) insurance costs, (c) property Taxes,
(d) storage costs, (e) obsolescence cost.
2. ABC method of classification is based on the annual consumption value. A
small number of items account for a major portion of the total expenditure,
and there are several items which together are many in number but account
for a small portion of the annual expenditure. The actual percentages vary
from one firm to another, but it can be taken as a general rule that 10 per cent
of the items account for 70 per cent of the cost.
Check Your Progress–2
1. Just-in-time (JIT) is a management philosophy that strives to eliminate all
sources of manufacturing waste by producing the right part, by the right
method, using the right raw materials, in the right place at the right time. Its
aim is to reduce waste and increase productivity.
2. MRP is a computer-based production management system whose function is
to schedule production, to control the inventory of needed parts and materials

168 Production and Operations Management

Materials Management Unit-6

and ensure that they are available at the right time and in the right place. It
helps determine what needs to be procured, how much needs to be procured
and when it needs to arrive.
Check Your Progress–3
1. Inventory losses occur due to theft, pilferage, obsolescence, deterioration,
etc.
2. The other terms used for market purchasing are ‘forward planning’ and
‘seasonal purchasing’.
3. The four types of tenders are single tender, limited or closed tender, open
tender and global tender.

6.15 POSSIBLE QUESTIONS

Short-Answer Questions
1. Give the classification of inventory.
2. What are the different ‘item reducing techniques’ of inventory?
3. Write a short note on MRP-II.
4. Why is JIT called a stockless production system?
5. What are the responsibilities of the purchasing department?
6. State the various functions of purchasing management.
Long-Answer Questions
1. What is inventory and what are its advantages and disadvantages?
2. What are the costs associated with inventory?
3. What is EOQ? What is its relevance?
4. What is an inventory catalogue? What is the need for classification of
inventory?
5. What are the various stock levels which help to keep control on inventory?
6. Distinguish between the P system and Q system of inventory management.
7. What is MRP? What are its inputs and outputs? How does it work?
8. Compare and contrast MRP and JIT.
9. What are the advantages of implementing JIT?
10. Discuss any three methods of purchasing with suitable examples,.
11. Explain the term purchasing management with specific reference to its
functions.

Production and Operations Management 169

6.16 LEARNING OUTCOMES

 The classification of inventory

 Inventory control techniques
 Various inventory management systems
 The concept of materials requirement planning (MRP)
 Purchasing management
 The various functions of purchasing management
 List the factors that the purchasing department has to consider before
purchasing
 The various methods of purchasing that are employed byorganizations
 The different types of tenders