Study Material Prod Management 1

Production and Operations Management
Production &
Operations Management
Study Material For

BBA (IPU) 5th Semester
Compiled by:
Neelam Gulati
Assoc. Professor
DAV Institute Of Management, Faridabad
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CONTENTS
Unit I
Chapter1
Production Management
 Meaning, Nature , Scope and major decision areas of production
/operation management.
 Organizational chart of production management department
 Products vs. Services
 Objectives of production management
 Value analysis
Chapter II
Demand Forecasting
 Patterns of demand
 Factors affecting demand
 Methods of forecasting
Unit II
Chapter
Inventory control
 Meaning and objectives of material management
 Purpose of inventories
 Purchasing process
 Vendor development
 Economic order quantity
 Selective inventory control
Unit III
Chapter
Quality assurance
 Meaning
 Aspects of quality
 Importance of quality
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 How does management decide quality

 Quality insurance system
 Quality control through statistical techniques
Unit IV
Chapter
Facilities location
 Factors affecting size of the firm
 Factors affecting location of a firm
 Selection of a site (urban, rural, sub-urban)
 Recent trends in location
Chapter
Plant layout
 Meaning of plant layout
 Objectives of plant layout
 Types of layout
 Costs associated with layout
 Techniques of plant layout
Chapter V
Production system
 Meaning
 Types of production system
Evaluation of various production systems
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Unit 1
Chapter1
Nature and Scope of Production Management
 Meaning, Nature , Scope and major decision
areas of production /operation management.
 Organizational chart of production management
department
 Products vs. Services
 Objectives of production management
 Value analysis
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Meaning of Production
Production is an intentional act of producing something in an organized manner. It is the fabrication
of a physical object through the use of men, material and some function which has some utility e.g.
repair of an automobile, legal advice to a client, banks, hotels, transport companies etc.
The main inputs are information, management, material, land, labour and capital. This figure shown
below explains the production process of an organization.
PRODUCTION PROCESS SYSTEM

Information
INPUTS PROCESS OUTPUT
Management
Organization Transformation
Material & land
Goods
Labor, capital &
service
s
Meaning Of Production Management

A few definitions of production management are being reproduced here under to understand the
meaning of the term clearly:
1. “Production management is the process of effectively planning and regulating the operations
of that part of an enterprise which is responsible for actual transformation of materials into
finished products”.
Elwood S. Buffa has defined the term in a broader sense as:
2. “Production management deals with decision making related to production process so that
the resulting goods or services are produced according to specifications, in amounts and by
the schedules demanded and at a minimum cost”.
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Production management, thus, is assigned with the following tasks.
i. Specifying and accumulating the input resources, i.e., management, men, information,
materials, machine and capital.
ii. Designing and installing the assembling or conversion process to transform the inputs into
output, and
iii. Coordinating and operating the production process so that the desired goods and services
may be produced efficiently and at a minimum cost.
The production department in an enterprise is not only concerned with the full exploitation of
production facilities but also the human factor that indirectly affects the production, utilization of
latest techniques of production and the production of quality goods to the satisfaction of customers
of the product.
The various activities that form scope of production function can be studied in the following
broad areas:
Planning
Inventory
Control
Control
Product selection Activities relating to

& Design production system
Designing
Facilities
Location
Method
Study
Production Facilities layout

planning Capacity & materials handling
Planning
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i. Product selection and design: the product mix marks the production system either efficient
or inefficient. Choosing the right products keeping the mission and overall objective of the
organization in mind is the key to success. It is the design of the product, which makes the
organization competitive or noncompetitive.
ii. Activities relating to production system designing: decision related to the production
system design is one of the most important activities of the production management. This
activity is related to production engineering and includes problems regarding design of tools
and jigs, the design, development and installation of equipment and the selection of the
optimum size of the firm. All these areas require the technical expertise on the part of the
production manager and his staff.
iii. Facilities location: the selection of an optimum plant location very much depends upon the
decision taken regarding production engineering. A wrong decision may prove disastrous.
Location should as far as possible cut down the production and distribution cost. There are
diverse factors to be considered for selecting the location of a plant.
iv. Method study: the next decision regarding production system design concerns the use of
those techniques, which are concerned with work environment and work measurement.
Standard method should be devised for performing the repetitive functions efficiently.
Unnecessary movements should be eliminated and suitable positioning of the workers for
different processes should be developed. Such methods should be devised with the help of
time study and motion study. The workers should be trained accordingly.
v. Facilities layout and materials handling: plant layout deals with the arrangements of
machines and plant facilities. The machine should be so arranged that the flow of production
remains smooth. There should not be overlapping, duplication or interruption in production
flow. Product layout where machines are arranged in a sequence required for the processing
of a particular product, and process layout, where machines performing the similar processes
are grouped together are two popular methods of layout. The departments are layout in such
a way that the cost of material handling is reduced. There should be proper choice of material
handling equipment.
vi. Capacity planning: This deals with the procurement of productive resources. Capacity
refers to a level of output of the conversion process over a period of time. Full capacity
indicates maximum level of output. Capacity is planned for short-term as well as for long
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term. Process industries pose challenging problems in capacity planning, requiring in the
long run, expansion and contraction of major facilities in the conversion process.
Tools for capacity planning are marginal costing (Break Even Analysis), learning
curves, linear programming, and decision trees.
vii. Production planning: the decision in production planning include preparation of short-term
production schedules, plan for maintaining the records of raw materials, finished and semi-
finished stock, specifying how the production resources of the concern are to be employed
over some future time in response to the predicted demand for products and services
viii. Production control: after planning, the next managerial production function is to control the
production according to the production plans because production plans cannot be activated
unless they are properly guided and controlled.
Acc. To Soriebal and Lansburgh “Production control is the process of planning production
in advance of operations; establishing the exact route of each individual item, part or assembly;
setting, starting and finishing dates for each important item, assembly and the finished products; and
releasing the necessary orders as well as initiating the required follow-up to effect the smooth
functioning of the enterprise
ix. Inventory Control: inventory control deals with the control over raw-materials, work-in-
progress, finished products, stores, supplies, tools, and so is included in production
management. The raw materials, supplies etc should be purchased at right time, right quality,
in right quantity, from right source and at right price.
ORGANIZATIONAL CHART OF PRODUCTION MANAGEMENT DEPARTMENT
Managing Director
Works Manager
A B C D E
1 2 1 2 3 1 3 1 3 4
1 2
4
2 2
3
Sections Headed by Foreman or Superintendents
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PRODUCTS VERSUS SERVICES

The output is spoken as a “bundle of products and services” . The line between product & services is
not necessarily always clear. Nevertheless, there are important differences between them. Products
are tangible things that we can carry away with us, where as services are intangible and perishable
and are consumed in the process of their production. Products may be produced to inventory and
made available “ off-the-shelf” whereas the availability of the services requires keeping the
productive system that produces them in readiness to produce the services, as they are needed. In
addition the person being served often participates in the productive process. In product systems,
there is very little if any, contact between the producers and consumer
Characteristics Of Systems To Produce Products Versus Systems To Produce

Services
PRODUCTS SERVICES
Tangible Intangible and perishable; consumed
in the process of their production
Can be produced to inventory for-off the- Availability achieved by keeping the

shelf” availability productive system open for services
Minimal contact with ultimate consumer High contact with clients or customers
Complex and interrelated processing Simple processing
Demand on productive system is Demand commonly variable on

variable on weekly, monthly, and hourly, daily and weekly basis
seasonal basis
Markets served by productive system are Markets served by productive system

regional, national and international are usually local
Large units that can take advantage of Relatively small units to serve local
economies of scale markets
Location of system is in relation to Location dependent on location of

regional, national and international local customers, clients an users
markets
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PRODUCTS AS A PART OF SERVICE

Similarly, the clear line between products and services in a service-oriented system seems to fade. A
fast-food operation delivers physical product along with the service. An auto repair service repairs
the car and provides the required parts as well. Hospital care involves medication, bandages, X-ray
film, and so on
Thus, although it may be valid to think of systems as primarily producing either products or services,
it is better to think in terms of relative emphasis. Some manufacturing systems are predominately the
producers of goods and provide very little service. Some service organizations, such as tax
consultants, provide almost no physical product as a part of the service. But most productive systems
provide a bundle of products and services, and an appropriate analysis of the problems of
production/operations management should recognize both aspects of the outputs of the system.
OBJECTIVES OF PRODUCTION/ OPERATIONS MANAGEMENT
Every system (or organization) has a purpose, certain objectives & goals to achieve since the
objectives of an organization have hierarchical structure, sub-goals lead to accomplishment of goals,
which contribute, to the achievement of objectives and eventually the purpose or mission of an
organization .It is very important that these objectives should be unambiguously identified, properly
structured and explicitly stated.
In general terms, the objectives of an organization may be to produce the goods/or services in
required quantities and of quality as per schedule and at a minimum cost.
Thus quantity, quality and time schedule are the objectives that determine the extent of customer
satisfaction. If an organization can provide for these at a minimum cost then the value of goods
created or services rendered enhances and that is the only way to remain competitive. Thus various
objectives can be grouped as- performance objectives and cost objectives.
Performance Objectives
The performance objectives may include:
a) Efficiency or productivity as output per unit of input.

b) Effectiveness: It concerns whether a right set of outputs is being produced. Where efficiency
may refer to “doing things right”, effectiveness may mean “doing the right things”
c) Quality: Quality is the extent to which a product or service satisfies the customer needs. The
output has to conform to quality specifications laid down before it can be accepted
d) Lead times: Manufacturing lead-time or throughput time is the time elapsed in the conversion p
Minimization of idle time, delays, waiting etc. will reduce throughput time.
e) Capacity utilization: Percentage utilization of manpower, machines etc.
f) Flexibility: If the conversion process has the flexibility of producing a combination of
outputs, it is possible to satisfy a variety of customer needs.
Cost objectives
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Attaining high degree of customer satisfaction on performance front must be coupled with lower
cost of producing the goods or rendering a service. Thus cost minimization is an important systems
objective. Costs can be explicit or implicit. These could be tangible in economic terms or intangible
in social cost terms- such as delayed supplies, customer complaints etc. While managing production
systems we must consider the visible and invisible, tangible and intangible costs some examples of
these costs are:
a) Explicit costs:
 Material cost
 Direct and Indirect labour cost
 Scrap/rework cost
 Maintenance cost
b) Implicit costs:
 Cost of carrying inventory

 Cost of stock outs, storage, back-logging, lost sales
 Cost of delayed deliveries
 Cost of material handling
 Cost of inspection
 Cost of grievances, dissatisfaction
 Down time cost
 Opportunity cost
For the purpose of managerial decision-making, we should consider the total relevant
systems costs including visible and invisible. A longer term cost implication rather than only
short-term will help in arriving at better decision.
OPERATIONS MANAGEMENT DECISIONS

The process of management
Essentially management can be considered as a process of planning, organizing, coordinating and

control.
There are different ways in which the production management functions can be grouped . For
instance, all the decisions concerning the production system could be divided as:-
1. Periodic decisions which include selection, design and updating of resource, structure,
systems and procedures.
2. Continual decisions which are required in day-to-day operations and control of production
systems.
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Value Analysis
Value analysis is a cost reduction & control technique, which operates by attacking the basic design
of the product or service.
Value analysis is “an organized procedure for the efficient identification of unnecessary costs by
analysis of function --function being that property of product which makes it work or sell.”
This means value analysis involves:-

1. Identification of function- the first & most important, step in the value analysis is to make a
formal statement of the function of the product or service.
Function means- what is purpose of operation?
What does it do?
A lamp function is to ‘give light’
A beam function is to ‘support weight’
A cheques function is to ‘transfer cash’
A shaft’s function is to ‘transmit force’.
- Identification of function of product
- Examine alternative way in which this function can be done.
- Choosing the least cost alternative.
Value Engineering – The application of value analysis techniques at the design stage of a product
or service.
Value
1. Value may be equated with a price, which is that which must be given, done sacrificed to
obtain a thing and any product or service will have several different values.
Exchange value, the price a purchaser will offer. This is sum of two parts, value due to
usefulness & the value the ownership itself bestows.
Exchange value = use value + esteem value.
Use value = the price the purchaser will offer in order to ensure that the purpose (or function)
is achieved.
Esteem value = the price which is offered beyond the use value e.g. possession of ----------?
Exchange value is set by the market & is influenced by the usefulness & esteem in which the
product is held.
2. Cost value (intrinsic value)- sum of all the costs incurred in providing the product.
Profit = exchange value – cost value
The task of a value analyst is to increase exchange value & decrease cost value.
Carrying out a value analysis exercise:

Value analysis team – it must consist of a small core of experienced people + concerned people +
intelligent laymen to raise basic & fundamental questions.
A Structured Approach – gage has laid down a 12-step process for conducting value analysis
exercise.
1. Select the product to be analysis based on
- Multiplicity of components.
- Large forecast usage.
- Small difference between use value & cost value.
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- Considerable market competition.

- A long designed product.
- Generation of considerable documentation.
- Creation of organizational complexity.
2. Extract the cost of product – the cost required here is the marginal or out of pocket cost – as
overheads can distort the picture. Details of individual components at this stage are not
required.
3. Record the number of parts – the larger the number of parts, greater the chances of reduction.
4. Record all the functions – purpose of the product.
5. Record the number required currently & in future.
6. The above five questions are the fact finding – they firmly establish the bases upon which all
further work is created.
7. Determine primary function from all the functions already listed in ‘4’. Some priority must be
established among functions.
8. List of all other ways of achieving the primary function – here ‘creativity & brainstorming’
plays important role. This should include part wise/component wise discussion.
9. Assign costs to various alternatives.
10. Examine the 3 cheapest alternatives.
11. Decide which idea should be further developed.
12. See what other functions need to be incorporated – reexamining of step 11. Does its use
contribute value.’
Can anything be removed without degrading the product? Whilethe new product is being
developed the value analysis team can undertake the final step.
13. Ensure the new design is accepted. This will mean:
- A model
- Anticipated savings.
- Anticipated capital expenditure.
- Improvement in value.
- Critical path analysis.
Gage’s 12- value analysis.

1. What is it?
2. What does it cost?
3. How many parts?
4. What does it do?
5. How many functions are required?
6. What is primary function?
7. What else will it do?
8. What will that cost?
9. Which 3 alternative ways of doing the job show the largest difference between ‘cost & use
value’?
10. Which ideas are to be developed?
11. What other functions & specification features must be incorporated?
12. What is needed to sell the ideas & forestall ‘road blocks’?
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Unit 1
Chapter II
Demand Forecasting
 Patterns of demand
 Factors affecting demand
 Methods of forecasting
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DEMAND FORECASTING
Forecasts are needed to aid in to determining what resources are needed, scheduling existing
resources, and acquiring additional resources. Accurate forecasts allow scheduler to use machine
capacity efficiently, reduce production times, and cut inventories.
Forecasting method may be based on mathematical modals using historical data available,
qualitative methods drawing on managerial experience, or a combination of both.
Forecasting demand in such situations require uncovering the underlying patterns from available
information.
Patterns of Demand
The five basic patterns of the most demand time series are-:
1. Horizontal, or the fluctuation of data around a constant mean;
2. Trend, or systematic increase or decrease in the mean of the series overtime;
3. Seasonal, or a repeatable pattern of increase or decrease in demand, depending on the time of
day, week, month, or season;
4. Cyclic, or less predictable gradual increases or decreases in demand over longer periods of
time (years or decades); and
5. Random, or unforecastable, variation in demand
Four of the patterns of demands- Horizontal, Trend, Seasonal, and Cyclic- combine in varying
degrees to define the underlying time pattern of demand for a product or service. The fifth pattern,
random variations, results from chance causes and thus cannot be predicted.
Factors Affecting Demand

Generally such factors can be divided into main categories: - External and Internals.
External Factors. External factors that affect demand for a firm’s products or services are
beyond management’s control.
Leading indicators. Such as the rate of business failures, are external factors with turning points
that typically precede the peaks and troughs of general business cycle. Coincident indicator, such
as unemployment figures, are the time series with turning points that generally match those of the
general business cycle.
Lagging indicators, such as retail sales, follow those turning points, typically by several weeks or
months.
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INTERNAL FACTORS: internal decision about product or service design, price and advertising
promotion, packaging design, sales persons quotas or incentive and expansion and contraction of
geographic market target areas all contribute to changes in demand volume. The term demand
management describes the process of influencing the timing and volume of demand or adapting to
the undesirable effects of unchangeable demand patterns.
Forecasting methods
The two general types of forecasting techniques used for demand forecasting are: Qualitative
methods and Quantitative methods
Qualitative Method:
Qualitative methods include judgment methods, which translate the opinions of managers, expert
opinions, consumer surveys and sales force estimates into quantitative estimates.
Quantitative Methods:
Quantitative methods include casual methods and time series analysis.
Casual Methods:
Use historical data on independent variables, such as promotional campaigns, economics conditions,
and competitors’ actions, to predict demand. Time series analysis is a statistical approach that relies
heavily on historical demand data to project the future size of demand and recognize trends and
seasonal patterns.
Judgement Methods
When adequate historical data are lacking, as new product is introduced or technology is expected to
change, firms rely on managerial judgment and experience to generate forecasts.
I Sales Force Estimate
Sales force estimates are forecasts compiled from estimates of future demand made periodically by
members of a company’s sales force. This approach has several advantages.
• The sales force is the group most likely to know which products or services customers will
be buying in the near future, and in what quantities.
• Sales territories often are divided by district or region. Information broken down in this
manner can be useful for inventory management, distribution, and sales force staffing
purposes.
• The forecasts of individual sales force members can be combined easily to get regional or
national sales.
But it also has several disadvantages.
• Individual biases of the salespeople may taint the forecast; moreover, some people are
naturally optimistic, other more cautious.
• Sales people may not always be able to detect the difference between what a customers
“wants” (a wish list) and what a customer “needs” (a necessary purchase).
• If the firm uses individual sales as a performance measure, salespeople may underestimate
their forecasts so that their performance will look good when they exceed their projections or
may work hard only until they reach their required minimum sales.
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II EXECUTIVE OPINION
Executive opinion is a forecasting method in which the opinions, and technical knowledge of one or
more managers are summarized to arrive at a single forecast. As we discuss later, executive opinion
can be used to modify an existing sales forecast to account for unusual circumstances, such as a new
sales promotion or unexpected international events. Executive opinion can also be used for technical
forecasting. This method of forecasting has several disadvantages. Executive opinion can be costly
because it takes valuable executive time. Although that may be warranted under certain
circumstances, it sometimes gets out of control. In addition, if executives are allowed to modify a
forecast without collectively agreeing to the changes, the resulting forecast will not be useful.
III MARKET RESEARCH
Market research is a systematic approach to determine consumer interest in a product or

services by creating and testing hypotheses through data-gathering surveys. Conducting a market
research study includes
1. Designing a questionnaire that request economic and demographics information from each
person interviewed and asks whether the interviewee would be interested in the product or
services;
2. Deciding how an administrative sample of household to survey, whether by telephone
polling, mailings, or personal interviews;
3. Selecting a representative sample of households to survey, which should include a random
selection within the market area of the proposed product or service; and
4. Analyzing the information using judgment and statistical tools to interpret the responses,
determine their adequacy, make allowance for economic or competitive factors not included
in the questionnaire, and analyze whether the survey represents a random sample of the
potential market.
Market research may be used to forecast demand for the short, medium, and long term. Accuracy is
excellent for the short term, good for the medium term, and only fair for the long term.
IV DELPHI METHOD
The Delphi method is process of gaining consensus from a group of experts while
maintaining their anonymity. This form of forecasting is useful when there are no historical data
from which to develop statistical models and when managers inside the firm have no experience on
which to base informed projections. A coordinator sends a question to each member of the group of
outside experts, who may not even know who else, is participating. The Delphi method can be used
to develop long-range forecasts of product demand and new product sales projections. It can also be
used for technological forecasting. The Delphi methods can be used to obtain a consensus from a
panel of experts who can devote their attention to following scientific advances, changes in society,
government regulations, and the competitive environment.
The Delphi method has some shortcomings, including the following major ones.
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• The process can take a long time (sometime a year or more). During that time the panel of
people considered to be experts may change, confounding the results or at least further
lengthening the process.
• Responses may be less meaningful than if experts were accountable for their responses.
• There is little evidence that Delphi forecasts achieve high degrees of accuracy. However,
they are known to be fair to good in identifying turning points in new product demand.
• Poorly designed questionnaires will result in ambiguous or false conclusions.
CAUSAL METHODS:
I LINEAR REGRESSION
In linear regression, one variable, called a dependent variable, is related to one or more independent
variables by a linear equation.
In the simple linear regression models, the dependent variable is a function of only one independent
variable, and therefore the theoretical relationship is a straight line:
Y=a + bX
Where Y = dependent variable
X = independent variable
a = Y-intercept of the line
b = slope of the line.
The objectives of linear regression analysis is to find values of a and b that minimize the sum of
squared deviations of the actual data points from the graphed line.
The sample correlation coefficient, r, measures the direction and strength of the relationship between
the independent variable and the dependent variable. The value of r can range from – 1.00 to + 1.00.
II TIME SERIES METHODS

Simple Moving Averages. The simple moving average method is used to estimate the average of
demand time series and thereby remove the effects of random fluctuation. It is most useful when
demand has no pronounced trend or seasonal influences.
Specially, the forecast period t + 1, can be calculated as
Ft+1 = sum of last n demands = Dt + Dt+1 + Dt-2 +…..Dt-n+1

n n
where Dt = actual demand in period t

n = total number of periods in the average
Ft+1 = forecast for period t + 1
Weight Moving Averages. In the simple moving average method, each demand has the same
weight in the average --namely, 1/n. In the weight moving average method; each historical demand
in the average can have its own weight. The sum of the weight equal 1.0.
The advantage of a weighted moving average method is that it allows you emphasize recent demand
over earlier demand. The forecast will be more responsive than the simple moving average forecast
to changes in the underlying average of the demand series. Nonetheless, the weighted moving
average forecast will still lag behind demand because it merely averages past demands. This lag is
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specially noticeable with a trend because the average of the time series is systematically increasing
or decreasing.
III EXPONENTIAL SMOOTHING.

The exponential smoothing method is a sophisticated weighted moving average method that
calculates the average of a time series by giving recent demands more weight than earlier demands.
It is the most frequently used formal forecasting methods because of its simplicity and the small
amount of data needed to support it.
Ft+1 =α (Demand this period) + (1-α ) (Forecast calculated last period)= α Dt+(1-α )Ft
Ft+1 =Ft + α (Dt-Ft)
Larger α values emphasize recent levels of demand and result in forecasts more responsive to
changes in the underlying average. Smaller α values treat past demand more uniformly and result in
more stable forecasts.
Exponential smoothing requires an initial forecast to get started. There are two ways to get this
initial forecast: Either use last period’s demand or, if some historical data are available, calculate the
average of several recent periods of demand. The effect of the initial estimate of the average on
successive estimate of the average diminishes over time because, with exponential smoothing, the
weights given to successive historical demands used to calculate the average decay exponentially.
Exponential smoothing has the advantages of simplicity and minimal data requirements. It is
inexpensive to use and therefore very attractive to firms that make thousands of forecasts for each
time period. However, its simplicity also is disadvantage when the underlying average is changing,
as in the case of a demand series with a trend.
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UNIT II
Chapter I
Inventory control
 Meaning and objectives of material management
 Purpose of inventories
 Purchasing process
 Vendor development
 Economic order quantity
 Selective inventory control
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INVENTORY
Inventory are those stocks or items which are used to support production (raw materials and work-
in-process items), supporting activities (maintenance, repair, and operating supplies), and customer
service (finished goods and spare parts).
The purpose of inventory management is to determine the amount of inventory to keep in stock- how
much to order and when to replenish, or order.
Reasons for holding inventory: - Inventory helps us in following areas

 Meeting variations in supplier lead time
 Getting quantity discounts
 Facing price changes
 Meeting scarcities of materials
 Controlling manufactured parts and goods
 Cover period between production runs
 Allow flexibility in production scheduling
 Cope up variations in product demand (safety stock)
 Getting economies of scale.
Types of inventories
Inventories include
Raw materials: purchased items or extracted materials that are converted via the manufacturing
process into components and products.
Work-in-process: a product or products in various stages of completion throughout the plant.
Finished-goods: Items ready for sale to a customer
MRO: maintenance, repair and operation supplies.
Important terms in inventory :-

Safety stock
To avoid customer services problem and the hidden costs of unavailable components, companies
hold safety stock.. Safety stock protects against uncertainties in demand, lead time, and supply.
Safety stocks are desirable when supplies fail to deliver the desired quantity on the specified date
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with acceptable quality or when manufactured items have significant amounts of scraps or rework.
Safety stock inventory ensures that operations aren’t disrupted when such problems occur, allowing
subsequent operations to continue.
Lead time
The lead time is the time between the moment an order is placed and when the merchandise arrives
in inventory . Lead times may vary greatly depending on the number of resources required and how
congested these resources are currently. If the order is placed to a wholesaler across the street who
carries adequate inventory, then few resources are involved and the lead time will be quite short. In
such a case, it is convenient to model the lead time as zero.
If long transportation times are involved, or if the vendor typically produces after receiving the
order, then it may be convenient to model the lead time as a constant.
However, if either transportation or the shop floor have variable loads over time, the lead time will
vary significantly and may be treated as probabilistic.
Selective Inventory Control

ABC Analysis
1.Select a criterion (sales / usage) based on importance
2. Rank the inventory items on criterion
3. Calculate the cumulative sales and/or usage for all items
4. Assign items into A, B, C groups
5. Assign inventory levels and warehouse locations for each item.
Based on Pareto’s Law of “Cause and Effect”

Means Always Better control
Indicates“ Vital few- Trivial many”
A- Few items are of key importance and value

B&C-Numerous in number, but less significant.
A – ITEMS: A items are those items which have a high rate of usage and/or high unit cost and
account for 80%of the total value of usage in the inventory .
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High consumption Value

Very Strict Control
No Safety Stock
Frequent Ordering
Weekly Control Statement
Many Sources of Supply
Rigorous Value Analysis
Accurate Forecast in Material Planning
Minimization of Waste Obsolete and Surplus
Maximum Efforts to Reduce Lead Time.
B – ITEMS: B items are those numbers of items which in total account for 15%of the total value of
usage.
Moderate consumption Value
Moderate Control
Low Safety Stock
Ordering Once in a week
Monthly control statement
Two or More sources of supply
Moderate value Analysis
Estimate based on past
Quarterly control
Moderate efforts
C – ITEMS: C are those great many items with low individual usage and or low unit value in total
and account for only 5% of the value of usage.
Low Consumption Value
Low Control
High safety stock
Bulk ordering once in 6 months
Quarterly control statement
Only Two source of supply
Minimum value Analysis
Rough estimate for planning
Annual review
Minimum clerical efforts
Inventory costs
There are three basic costs associated with inventory: Carrying (or Holding), Ordering Costs; and
Shortage Costs
Holding costs: associated with keeping stock over time
• Storage costs
• Rent/depreciation
• Labor
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• Overheads (e.g. heating, lighting, security)

• Money tied up (loss of interest, opportunity cost)
• Obsolescence costs (if left with stock at end of product life)
• Stock deterioration (lose money if product deteriorates whilst held)
• Theft/insurance
Ordering costs - associated with ordering and receiving an order
• Clerical/labor costs of processing orders
• Inspection and return of poor quality products
• Transport costs
• Handling costs
Shortage or Stock out Costs: A stock-out occurs when we have insufficient stock to supply
customers. Usually stock outs occur in the order lead-time, the time between placing an order and
the arrival of that order.
Given a stock-out the order may be lost completely or the customer may choose to backorder, i.e. to
be prepared to wait until we have sufficient stock to supply their order
The Master Production Schedule
A Master Production Schedule (MPS) represents a plan for manufacturing. When a firm uses
Material Requirement Planning System (MRP), the MPS provides the top-level input requirements.
It develops the quantities and dates to be exploded for generating per period requirement, for
subassemblies, piece parts, and raw materials. The MPS is not a sales forecast, but it is a feasible
manufacturing plan. It also serves as a customer order backlog system. It considers changes in
capacity or loads, changes in finished goods inventory, and fluctuations in demand. A detailed MPS
also determines the economics of production by grouping various demands and making lot sizes.
Thus MPS maintains the integrity of the total system backlogs, anticipated backlogs, and lower-level
component requirements. This is to say that master schedule or master production schedule
formalizes the production plan to converts it into specific material and capacity requirements.
The MPS should consistent with the aggregate production plan (APP) from which it is derived. It
should consider, in detail, the unit measure, such as tons for steel or number of units of a component
required per period, the efficiency, and the utilization factor of the system. There are different time
horizons, aggregation level, and time utilization factor of the system. There are different time
horizons, aggregation levels, and time brackets in MPS and APP. The relationship of MPS to other
manufacturing and control activities is given in figure number 15. The output of the aggregate
planning process is set of parameters indicating aggregate inventory or backlog levels, the number of
shifts to be operated, the number of employees to be hired or laid off, the anticipated amount of sub-
contracting, and the aggregate amount to be produced with in a certain time periods. The APP
provides a basis for decision making regarding specific production dates, available capacity, total
demand, lead-time, or inventory constraints that cannot be reconciled within the company policy
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objectives. Although this information is necessary, it is not sufficient for the smooth functioning of a
firm. What is necessary is a plan stated in terms of specific products that are to be produced in
certain quantities by certain dates. The process of deriving such an MPS that is consistent with the
overall APP is called desegregation.
It is important to recognize that the MPS is not a control technique or a system.
Rather, it is a logical representation of information for decision-making. The MPS highlights

conflicts that can be solved only by people. If the MPS is done properly, the rest of the system can
be harnessed to reach the desired objectives of management.
Forecasts and Orders
Domestic & End products

Aggregate Plan
International and
Service parts
Tentative Master Schedule
Trial FVT on
MRP CRP
System
Revise System Revise
Master Master
Schedule Schedule
1. The effect of capacity on the

Is MPS Is
Materia Capacit
l y
The importance Noof an accurate and feasible schedule
Adequa
No
cannot be overemphasized.
Adequa The MPS is an
te?
important input in deriving rough-cut te? as exhibited in figure 5.15. The existing
capacity planning,
capacity and changes to it over the planning horizon become a major constraint. Considerations to
capacity should include actual
Yes number of shifts scheduled,Yes number of days scheduled in a week,
overtime policy, available equipment, Firm
and Master
workforce levels. The capacity should be expressed in
terms of what is feasible, rather than inSchedule
theoretical possibility estimates. In addition to scheduling
hours, factors such as efficiency and utilization should be included.
To MRP & CRP
Systems
When the total requirement
Figure 15:specified by the
Relationship between inputs
MPS and otherexceeds
systems. available capacity, the MPS should
indicate a need for corrective action. The alternative decision may involve extending the delivery
date, changing capacity, finding ways to divert parts from other activities, and so forth that may need
critical inputs from management, especially when policy guidelines are inadequate.
Inputs such as labour, material machinery, and equipment needed for each job must be computed
and as such MPS derives the production inventory system of any organization. MPS is the key
element of a firm’s production systems and such it should continually reflect what the firm can and
will do. The key functions of MPS are:
i) To translate plan into specific end item,
ii) To evaluate alternative schedules,
iii) To generate materials requirements,
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iv) To generate capacity requirement,

v) To facilitate information processing,
vi) To maintain valid priorities and
vii) To effectively utilize capacity.
The time required in MPS depends upon various factors such as: type, volume and component lead
time of the product being produced. However, a common interval used in MPS is weekly schedule
as this time interval generally coincides with the time brackets used in most MRP system. MPS can
be done in three steps, they are:
1. Consolidate all gross requirements for the master schedule items. In this stage along
with customer’s orders and forecasts, service parts and interplant demands are also
included in gross requirement.
2. Net out the requirements. (Net out requirement = Gross requirement – on hand
inventory)
3. Group the net requirements into planned orders to be released in a time-phased
schedule.
Once scheduling is over, the planning stage comes to an end. Now the plan is to be executed this is
done by dispatching the orders and by having a close watch on production activities, so that delivery
promises are met with.
Objective of Materials Management
Materials management function is a staff function and it has to support the objectives of the
undertaking as a whole they are: (i) Survival and Growth, (ii) Maximum satisfaction to customers,
(iii) Good working conditions to employees, (iv) Technological lead over competitors. In addition
objectives of materials management are:
i) Maintaining continuity of productive operations by ensuring a uniform flow of materials,
ii) Reducing materials cost by using systematic inventory control techniques,
iii) Releasing working capital for productive purposes, by efficient control of inventories
iv) Increasing the competitiveness of end products by ensuring right quality at right price in
both national and international markets.
v) Saving foreign exchange through economic use of foreign purchases and import
substitutes.
vi) Establishing good buyer and seller relations.
vii) Ensuring low departmental costs and high efficiency, and
viii) Setting high ethical standards.
By careful financial analysis, it can be shown that a 5% reduction in material costs will result in
increased profits equivalent to a 36% increase in sales. Reduction of materials cost is more
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preferable by a manager than achieving an increase in sales. To increase sales, lot of efforts are to be
made and as it deals with external environment and uncertainties, it will be easier to tackle the
problem of reducing the materials cost.
Y
A.B.C. Analysis
100 –
Cumulative annual turnover in percentage

90 –
B
70 –
O X
10 40 100
Percentages of item
Figure 1: A.B.C. Analysis
Problem 1. 20 items stocked in a firm is given below. Other particulars such as annual consumption
value etc are given in descending order. Draw ABC curve.
Item no. Cumulative Annual Unit price in Annual Cumulative
% of items consumption Rs. consumption percentage
% units value in Rs. %
1 2 3 4 5 6
1 5 100 400 40000 40.00
2 10 500 60 30000 70.00
3 15 200 75 14000 84.00
4 20 25 200 5000 89.00
5 25 25 100 2500 91.50
6 30 65 20 1300 92.80
7 35 50 25 1250 94.05
8 40 50 20 1000 95.05
9 45 30 30 900 95.95
10 50 50 14 700 96.65
11 55 20 30 600 97.25
12 60 90 05 450 97.70
13 65 40 10 400 98.10
14 70 35 10 350 98.45
15 75 20 17.50 350 98.80
16 80 50 6 300 99.10
17 85 100 3 300 99.40
18 90 25 10 250 99.65
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19 95 20 10 200 99.85
20 100 25 6 150 100.00
In the above table second column shows cumulative percentage of total items and column number 6
shows cumulative percentage of percentage of annual consumption cost with respect to total cost of
inventory. In the table 10 percent of the items (Column Number 2) consumes 70 percent of annual
consumption cost. Item number 3 to 5 i.e. another 15% of the items cover 20 percent of annual
consumption cost. From item number 6 to 20 i.e. 75% of items consume only 10 percent of the
annual consumption value. First 10% of items are known as A class items, second 20% of items are
known as B class of items and the last 75% of items are C class items. It shows that by exercising
control over first two items, we are exercising the control over 70% of inventory cost. Even if you
save 10% of the value, it is substantially handsome savings. Hence top level managers are involved,
while purchasing A class items, middle level managers are involved, while purchasing the B class
items and C class items are purchased in bulk by lower level personnel, like store keeper.
VED Analysis
In addition to the intrinsic or market value of materials, which is invested in the materials, there is
sometimes a nuisance value to the materials. In ABC analysis, we have seen that annual
consumption value; quantity of material consumed and the unit cost plays a vital role. This is to say
that ABC Analysis deals with the annual consumption value of the item due to their presence and not
any other aspect such as the criticality of the martial or the nuisance value. The nuisance value is the
cost associated with materials due to their absence. Some of the materials are important by their
absence and not merely by their presence. In case they are not available, the whole production
system may come to standstill and involve high cost of loss of production. Here the cost of the item
is not the question, but the availability is the matter. The investment in these materials may be small
but for non-availability of the item the costs or losses that the company going to involve will be very
high. These are critical items, which are required in adequate quantity.
With the above discussion, we can understand that materials may be classified depending upon their
criticality, i.e. on functional basis. The degree of criticality can be stated as whether the material is
vital to the process of production, or essential to the process of production or desirable for the
process of production. This classification is known as VED analysis, V stands for vital, E stands for
essential and D stands for desirable items. In addition to the conventional ABC analysis, VED
analysis also plays an important role in materials management. VED ranking may be done on the
basis of the shortage costs of materials, which can be either quantified or qualitatively expressed.
a) Combination of ABC and VED analysis: ABC and VED analysis, used for classification,
one depending on the consumption value and the other on the criticality of the item both are
important. In case we combine the both and classify the materials depending both on the
consumption value and the criticality, it will give us a fruitful result. This can be made in
nine ways, which is shown in the matrix given below:
V E D V E D
A AV AE AD A 90 80 70
B BV BE BD % % %
C CV CE CD B 95 85 75
ABC-VED classification matrix. % % %
C 99 90 80
% %
%
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This type of classification helps the management to decide the materials policy and what
service levels are expected to see that no difficulty is faced. An item belongs to both V class
and A class, is costlier (more annual consumption), at the same time of higher critically, the
management should see that it should be available any time the need arises and the stock
levels to be controlled properly to see that inventory carrying costs are kept under control.
The service levels to be maintained are shown in the matrix for various combinations.
b) Fast moving, Slow moving and Non-moving analysis: (FSN analysis) This analysis relates
to the demand for the materials and stock-moving pattern. Fast moving materials are to be
stocked nearer to the store keeper and slow moving materials are stocked at a considerable
distance and the non-moving materials are stocked in a place without causing inconvenience
to day-to-day movement of men and materials. Similarly, fast moving materials must be kept
in a place easily reached by the storekeeper. Non-moving materials are kept in a remote
place, as they are required for use. This analysis will help for optimal utilization of space
available and materials handling time of the storekeeper.
In addition to the above analysis, we can also use some of the characteristics of material for
classification. For example, perishable or obsolescence. These characteristics are particularly
helpful for chemicals and drugs, which have low shelf life. Here classification is made on the
basis of shelf life as long shelf life, medium shelf life and short shelf life. This classification
is known as PQR classification. Sometimes the bulk versus weight of the materials is of
importance in terms of providing space for the materials in the stores, and therefore another
classification i.e. XYS classification is used. Here the classification is bulky and not bulky
materials.
Inventory control problems
Two basic factors, which we have to answer when dealing with inventory problems, are (i) When to
order (produce or purchase)? (ii) How much to order or purchase?
1. When to order?
This is related to the lead-time of an item. Lead-time may be defined as the time interval between the
placing an order and to receipt of material. It may be replenishment order on an outside firm or
within the works. There should be enough stock for each item so that customer’s order can be
reasonably met from this stock until replenishment. This stock level, known as reorder level, has,
therefore, to be determined for each item. It is determined by compromising the cost of maintaining
stocks and the disservice to the customer if his orders are not filled in time.
2. How much to order
Each order is associated with it the ordering cost or acquiring cost. To keep it low, the number of
orders should be as few as possible i.e. the order size should be large. But larger the size of the
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order, higher will be the inventory carrying costs. These two are contradictory to each other. Hence a
balance is achieved by selecting the right quantity for each order. This quantity is known as
‘Economic order quantity’ when dealing with purchase models and ‘Economic batch quantity’, when
dealing with manufacturing models. Next section deals with some important inventory models.
These models depend on the nature of demand. Whether the demand is deterministic or probabilistic
in nature. They are known as deterministic models or probabilistic models respectively. Before
discussing the models, let us try to understand what are Fixed quantity System and Fixed Period
System. They are generally known as p-System and q-System. These two are also inventory control
methods.
i) p-System or Fixed Period System: Here orders for materials are placed every time at a
fixed period, say on every first of the month or once in every 15 days and so on. But the
quantity for which order is placed will differ from order to order depending on the
demand or rate of consumption. That is the period of order is fixed but he quantity varies.
ii) q-System or Fixed Quantity System: In this system, the order quantity remains same
with all orders placed for a material but the period of placing order for the material will
differ. This period once again depends on the demand or the rate of consumption. This is
also known as ‘two – bin’ system. Both are shown in figure 2.
Level of inventory
Level of inventory
Y Y
Fixed quantity Fixed quantity

system system
q3
q q2
d3 d1
d1
q1 d2
Materials requirementdplanning (MRP) 2
d3
Material requirement planning or MRP as it is called, is a special technique to plan the requirement
of materials
O
t fort production.
t This is different
X fromO EOQ model discussed above. In X spite of safety
Time 1 2 3 Time
stock maintained to meet the Figure
uncertainties in system
2: Fixed period delivery times
and Fixed of inventory,
Quantity System. sometimes, production
requirements are not met with. Many production managers come across a problem, where raw
materials required for production are purchased as per EOQ and still they do not have the
availability of material required at the time when demand arises. This is particularly true when the
product requires many raw materials or components. Out of many components or materials even one
of them is not available when needed the production cannot be continued. It is because the service
levels of each stock of materials are not taken into account.
Let us consider an example that a product requires 10 different components for assembly. The
manager fixed 95% service level for the stock of each component. This means that only 5% of the
time there may a stock out position and 95% of the time the stock available for production. But the
manager experiences more stock out positions than his expectations. The manger needs 10
components all at one point of time. Each material is stored with 95% service level. The probability
that each material is separately available over a long length of time is 0.95. But, the probability that
all the ten materials are available simultaneously is equals to (0.95)10 = approximately 0.60. This
means to say that actual availability is only 60% of the time. That is 40% of the time he experience
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shortage of components. Hence the statistical methods must be understood properly and applied to
the situations to avoid difficulty. EOQ and Safety stock calculations are made for individual
components and not for bunched requirement of components. In such cases, instead of adopting
statistical safety calculations, better we go for Materials Requirement Planning.
Material requirement planning deals with the requirement of raw materials of components, which
directly depend upon the requirement of production. It seems, it would be better if we know the
production plan or production schedule for the assembly of the finished product and accordingly
arrange for all the raw materials that go into the finished products, rather than depending upon the
statistics and probabilities and EOQ and safety stock. This is exactly what we do in Materials
Requirement Planning (MRP). It is simple system of calculating arithmetically the requirement of
the input materials at different point of time based on the actual production plan. In fact it is a good
old method. When the factory system was in infant state, the artisan, who has to produce a product,
use to calculate the requirement of material arithmetically depending on the number of products he
has to produce and use to purchase that amount and never felt shortage of materials during
production.
There are no probabilities involved anywhere, only the derivation of the requirement of input
materials based on the requirement or plan for production of the final product. Such a system will
work well for materials that have no direct demand of their own, but have only a derived demand.
These materials can be called as dependent demand items. Finished assembly has the direct demand
of its won and therefore it is an independent demand item. In EOQ mode the order quantity is
calculated by using a formula, which has been worked out by averaging the demand (or the stock of
material). The problem of shortage of dependent materials arises because of averaging the
consumption of materials. Present day industrial scene shows that industries use hundreds of
materials for their product and hence computerized packages are used for calculating the
requirement of materials. The success of MRP depends on the pre-requisites of the system. The
requisites are:
i) This system is suitable for dependent demand materials.
ii) The demand for dependent material is derived from the master-schedule for the final
finished goods and the requirement should take lead-time into consideration.
iii) A firm delivery schedule should be available.
iv) MRP should incorporate flexibility.
v) MRP should incorporate self-correcting mechanism depending on the changes in
demand.
Better result may be obtained by using MRP and EOQ together.
Summary
Production planning in the intermediate range of time is termed as “Aggregate Planning” . It is
thus called because the demand on facilities and available capacities is specified in aggregate
quantities e.g. aggregate quantities of thousands of litres of paint , or tons of fabrication work , or
number of automobiles etc.
Aggregate planning is made within the broad framework of the long-range plan. Usually the
planning horizon for such plan is from a month to a year . The physical plant and equipment
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capacity would be fixed over this planning horizon . Therefore the sales orders have to be met by
strategies like : -
1. Overtime
2. Additional temporary workers .
3. Inventory .
4. Sub- contracting .
5. Having backlog of orders .
6. Smoothening of demand .
7. Turning down some sales orders .
Each of these strategies has a cost associated with it . The marginal cost of overtime is easy to
estimate , whereas the costs of undertime are not easy to determine . The hiring costs include
the costs of selection , the costs of training and the cost of maintaining additional records . There
are also costs associated with learning on the job of a newly hired employee.
Costs of inventory include the cost of capital for carrying the inventory , the cost of
obsolescence , taxes and insurance etc.
Stock- out costs are cost due to loss of goodwill and loss of sales of the customer . The cost of
subcontracting is the amount by which the subcontracting costs is greater than the
manufacturing cost at the higher level of production .
Characteristics of aggregate planning:

• Considers a "planning horizon" from about 3 to 18 months, with periodic updating
• Looks at aggregate product demand, stated in common terms
• Looks at aggregate resource quantities, stated in common terms
• Possible to influence both supply and demand by adjusting production rates, workforce
levels, inventory levels, etc., but facilities cannot be expanded.
Production Plan (manufacturing aggregate plan):
A managerial statement of the period-by-period (time-phased) production rates, work-force
levels, and inventory investment, given customer requirements and capacity limitations.
Staffing Plan (service aggregate plan):
A managerial statement of the period-by-period staff sizes and labour-related capacities,
given customer requirements and capacity limitations.
Objective of aggregate planning frequently is to minimize total cost over the planning
horizon.
Other objectives which should be considered:
• maximize customer service
• minimize inventory investment
• minimize changes in workforce levels
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• minimize changes in production rates

• maximize utilization of plant and equipment
Aggregate Planning Strategies

Active strategy:
• Attempts to handle fluctuations in demand by focusing on demand management
• Use pricing strategies and/or advertising and promotion
• Develop counter-cyclical products
• Request customers to backorder or advance-order
• Do not meet demand
Passive strategy (reactive strategy):

• Attempts to handle fluctuations in demand by focusing on supply and capacity management
• Vary work force size by hiring or layoffs
• Vary utilization of labour and equipment through overtime or idle time
• Build or draw from inventory
• Subcontract production
• Negotiate cooperative arrangements with other firms
• Allow backlogs, back orders, and/or stockouts
Mixed strategy:
• Combines elements of both an active strategy and a passive (reactive) strategy
• Firms will usually use some combination of the two
Passive (reactive) Strategies in Aggregate Planning: Basic Approaches
Chase approach:
Capacities (workforce levels, production schedules, output rates, etc.) are adjusted to match
demand requirements over the planning horizon.
Advantages:
• anticipation inventory is not required, and investment in inventory is low
• labour utilization is kept high
Disadvantages:
• expense of adjusting output rates and/or workforce levels
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• alienation of workforce
Level Approach
Capacities (workforce levels, production schedules, output rates, etc.) are kept constant over
the planning horizon.
Advantages:
• stable output rates and workforce levels
Disadvantages:
• greater inventory investment is required
• increased overtime and idle time
• resource utilizations vary over time
UNIT III
Chapter II
Quality assurance
 Meaning
 Aspects of quality
 Importance of quality
 How does management decide quality
 Quality insurance system
 Quality control through statistical techniques
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Quality Assurance
What is Quality?
1. Is it customer satisfaction?
2. Is it fitness for use?
3. Is it attributes or properties of the product?
4. Does it mean the lowest price?
5. What is perfect from customers’ point of view?
6. Is honoring the commitment made to the customer?
7. Is it influenced by purchasing power of the customer?
8. Is it excellence in every thing you do?
9. Is it minimization of chances of poor quality or defectives?
10. Does it affect goodwill of the firm?
All the above questions reveal the meaning of quality. Quality is fitness for use whether for a
product or a service.
C. D. Lewis defined quality as “ the degree to which a specific product satisfies a particular class
of consumers or consumers in general or the degree to which it confirms to a design specification
or the distinguishing feature of a product’s taste, colour, appearance etc”.
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Product quality has entered the consciousness of the managers with a vengeance. It has become
crystal clear that high quality products have a distinct advantage in the marketplace, that market
share can be gained or lost over the quality issue. Therefore quality is the competitive priority.
The top management sets basic quality standards and goals based on corporate and market
inputs, engineering and R&D express these standards in terms of detailed specifications,
purchasing and incoming inspections attempt to ensure that meet specifications, the production
system must be designed so that it is capable of meeting quality standards and must then produce
the requisite quality; inspection and quality controls establish the procedures to ensure that quality
is actually produced maintenance keeps equipment capable of producing the requisite quality and
so on.
The slogan, “Quality is everyone’s job” is really true. In order to produce quality products
everyone should be in on the act. Quality assurance is designed to maintain reliability of the entire
productive system to do what it was designed to do.
The following are the typical quality measures of the output of the productive
systems: -
TYPE OF SYSTEM MEASURE OF OUTPUT

Manufacturing Dimensions, tolerances on dimensions, chemical composition,
surface finish, performance tests
Medical service False positive diagnosis, false negative diagnosis
Postal service Waiting time at post office, errors in delivery, overall delivery
time.
Banks Waiting time at windows, clerical errors
Produce what consumer wants

Product quality is what is perfect from customers’ point of view. There is no point in making
chemically pure salt for the consumer market because the customer will not accept it . The goods
must be delivered constantly and as per the specifications required by the customers. Some
customers feel that high priced product is of right quality. The idea behind this is that they do not
want cheap quality. But they will also not pay too much for their requirements because customer’s
purchasing power becomes the upper limit for customer’s willingness to pay. Hence best quality for
a customer is best product at the price he can sacrifice.
Aspects of quality
1. Quality of design
2. Quality of conformance
Quality of design refers to properties and characteristics acquired by the product at the design and
development stage. These properties depend on the type of material used, safety factors allowed,
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knowledge and skill of design, personnel employed etc. . Quality of design is the fundamental
requisite.
Quality of conformance is adherence to the quality of design while the product is being actually
produced.
Howsoever successful the production is in achieving quality of conformance; it cannot go beyond
quality laid down by design. Design itself should consider the type of manpower available and the
equipment used. If design is blind to these aspects, the quality of conformance is likely to drop.
Quality is a collaborative effort of the designer and the production engineer.
Importance of quality
 Existence of manufacturing organization depends on the quality of the product or services it

manufactures or supplies.
 Employees feel proud to be associated with a producer of quality product and service.
 Departments and branches in the same organization also feel proud when appreciated for higher
quality.
 Customers also like to buy products of high ranked companies.
 A producer of high quality products and services earns high profits and goodwill in the long run.
 Quality is the only tool to compete in today’s world.
 Quality product manufacturer’s attract highly skilled and professional people.
Cost of poor quality
 Reduction in sales, thus reduction in profits.

 Re-establishment of goodwill lost due to poor quality is difficult and time consuming.
 Cost of rework of the defectives.
 Need of more rigorous inspection and testing.
 People in organisation shift responsibility of defectives on others.
 Indemnity in case of guarantees to customers.
 Replacement of inferior quality products sold.
 Sale of substandard products at low price.
 Defective products may cause delays and stoppages in production processes.
 Supplier may have to incur legal cost to face the suits and claim under consumer protection act.
 Forcible withdrawal of substandard product by instruction of the court.
 Wrong use of a product may happen because of improper instructions and labels on the product
packing. This may lead to enormous problems.
Two dimensions of quality-positive and negative
Positive costs
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These costs are attributed to having a spell out optimum quality right from procurement of raw
materials to the delivery of the finished product to the final customer.
These costs have two aspects, costs for formulation of strategic policies for total quality. There is
an attempt to prevent problems, and solve them when they arise. There are training costs to have a
quality culture. Another aspect of positive cost is the inspection cost. Both these aspects are
investments, which no organisation can avoid. The positive costs should not exceed 6 p.c. Of total
turnover, which is a trivial cost to bear considering the benefits, which accrue therefrom.
Negative Costs
They are three types:
1) Costs attribute defects creeping in the manufacturing process.

2) Costs due to rectification of defects like after –sales service costs.
3) Costs on account of rejection of a consignment by a customer for sub-standard quality goods,
especially by an importer.
Many a time, non- production departments contribute a great deal to the negative costs e.g.
purchase department, maintenance department, design and engineering department.
How does the manufacturer decide quality ?

The marketing department in terms of quality, quantity and price makes the assessment or study of
customer needs. This information is passed on to the design-engineering department. Then a
detailed specification is prepared by the design engineer with the help of heads of all departments.
The cost of production and ability to produce are also considered while developing the detailed
specifications. Thus one can say that specifications are the detailed description of product’s design
in quantitative terms. Generally three types of specifications are used: -
1) Technical specifications- physical and chemical properties desired in the product. When the
desired properties are in the measurable form, they are termed as
2) Performance specifications - describe, the performance or use of the products of the products
or the services that a product will give. The conformance to the quality can be conformed by
using the product.
3) Brand Name - Performance specification s are extensively used in purchasing highly

technical military and space products and also complicated machines and machine tools with
sophisticated technology. When it becomes very costly to develop performance or technical
specifications or such a practice does prove satisfactory, purchases are made on the basis of
brand names.
It should be noted that on the basis of strict specifications, materials parts, and tools etc. may not
be available continuously. In such circumstances, if a slight difference in specifications does not
affect the quality of the final product or the performance of the product ‘ materials or parts or
tools should not be rejected. Considerable judgement should be applied while taking decision of
acceptance or otherwise.
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The quality assurance system
Processes Outputs
Inputs
Breakdowns
Monitor quality and quantity of

output
Standards
Readjust processes
to conform to
standards Interpret
results
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Maintain equipment through repair

and preventive programs
Control loops for maintaining system reliability by monitoring quality

and quantity of output
Figure 1
Figure 1 suggests the nature of control loops for quality and maintenance control However it is
local in nature and great deal unsaid We must ask where did the standards come from? What is the
nature of productive system, and is it appropriate for the quality tasks?
Establishment of policies regarding quality

desired in relation to markets, investments
requirements, return on investment,
potential competition, etc.
Quality and the design of Design of productive system to
products and services in be compatible with quality,
relation to productive system cost, and capacity requirements
Quality standards for

materials processes
performance of: services
products
Inspection and
control of
Information for Information incoming
revision of nature for revision of materials
of services offered quality
and product standards Neelam Gulati
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Production of
goods and services
Inspection and control of

processes and Maintenance and
performance of products preventive maintenance
and/or services systems
Schematic representation of the relationships among policies, design of products and services,
design of the productive system, and the maintenance of system reliability for qualities and
quantities.
Fig 2 places the reliability system in context. The organisation must set policies regarding the
desired quality in relation to markets and needs, investment requirements, return on investment
potential competition, and so forth. For profit making organisations, this involves the judgement
of where in the market the organisation has a relative advantage. Thus one can say that the
production system must be designed so that it is capable of meeting quality standards and must
then produce the requisite quality; inspection and quality control establish procedures to ensure that
the quality is actually produced; maintenance keeps equipment capable of producing the requisite
quality; and so on.
The slogan “quality is every one’s job” is really true. In order to produce quality products, every
one must be on the act. Quality assurance is designed to maintain the reliability of the entire
productive system to do what it was designed to do.
Statistical Quality Control

Historical perspective
Quality Control has been with us for a long time. It is safe to say that when manufacturing began and
competition accompanied manufacturing, consumers would compare and choose the most attractive
product (barring a monopoly of course). If manufacturer A discovered that manufacturer B's profits
soared, the former tried to improve his/her offerings, probably by improving the quality of the
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output, and/or lowering the price. Improvement of quality did not necessarily stop with the product -
but also included the process used for making the product.
The process was held in high esteem, as manifested by the medieval guilds of the Middle Ages.
These guilds mandated long periods of training for apprentices, and those who were aiming to
become master craftsmen had to demonstrate evidence of their ability. Such procedures were, in
general, aimed at the maintenance and improvement of the quality of the process.
In modern times we have professional societies, governmental regulatory bodies such as the Food
and Drug Administration, factory inspection, etc., aimed at assuring the quality of products sold to
consumers. Quality Control Science of statistics is fairly recent.
On the other hand, statistical quality control is comparatively new. The science of statistics itself
goes back only two to three centuries. And its greatest developments have taken place during the
20th century. The earlier applications were made in astronomy and physics and in the biological and
social sciences. It was not until the 1920s that statistical theory began to be applied effectively to
quality control as a result of the development of sampling theory.
Walter Shewhart first advanced the concept of quality control in manufacturing
The first to apply the newly discovered statistical methods to the problem of quality control was
Walter A. Shewhart of the Bell Telephone Laboratories. He issued a memorandum on May 16, 1924
that featured a sketch of a modern control chart.
Shewhart kept improving and working on this scheme, and in 1931 he published a book on statistical
quality control, "Economic Control of Quality of Manufactured Product", published by Van
Nostrand in New York. This book set the tone for subsequent applications of statistical methods to
process control.
Two other Bell Labs statisticians, H.F. Dodge and H.G. Romig spearheaded efforts in applying
statistical theory to sampling inspection. The work of these three pioneers constitutes much of what
nowadays comprises the theory of statistical quality and control. There is much more to say about
the history of statistical quality control and the interested reader is invited to peruse one or more of
the references.
Control Charts
Control charts are used to routinely monitor quality. Depending on the number of process
characteristics to be monitored, there are two basic types of control charts. The first, referred to as a
univariate control chart, is a graphical display (chart) of one quality characteristic. The second,
referred to as a multivariate control chart, is a graphical display of a statistic that summarizes or
represents more than one quality characteristic.
Characteristics of control charts
If a single quality characteristic has been measured or computed from a sample, the control chart
shows the value of the quality characteristic versus the sample number or versus time. In general, the
chart contains a center line that represents the mean value for the in-control process. Two other
horizontal lines, called the upper control limit (UCL) and the lower control limit (LCL), are also
shown on the chart. These control limits are chosen so that almost all of the data points will fall
within these limits as long as the process remains in-control. The figure below illustrates this.
Chart demonstrating basis of control chart
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The control limits as pictured in the graph might be .001 probability limits. If so, and if chance
causes alone were present, the probability of a point falling above the upper limit would be one out
of a thousand, and similarly, a point falling below the lower limit would be one out of a thousand.
We would be searching for an assignable cause if a point would fall outside these limits. Where we
put these limits will determine the risk of undertaking such a search when in reality there is no
assignable cause for variation.
Variables Control Charts
During the 1920's, Dr. Walter A. Shewhart proposed a general model for control charts as follows:
Shewhart Control Charts for variables
Let w be a sample statistic that measures some continuously varying quality characteristic of interest
(e.g., thickness), and suppose that the mean of w is w, with a standard deviation of w. Then the
center line, the UCL and the LCL are
UCL = w + k w
Center Line = w
LCL = w - k w
where k is the distance of the control limits from the center line, expressed in terms of standard
deviation units. When k is set to 3, we speak of 3-sigma control charts.
Historically, k = 3 has become an accepted standard in industry.
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The centerline is the process mean, which in general is unknown. We replace it with a target or the
average of all the data. The quantity that we plot is the sample average, . The chart is called the
chart.
We also have to deal with the fact that is, in general, unknown. Here we replace w with a given
standard value, or we estimate it by a function of the average standard deviation. This is obtained by
averaging the individual standard deviations that we calculated from each of m preliminary (or
present) samples, each of size n. This function will be discussed shortly.
It is equally important to examine the standard deviations in ascertaining whether the process is in
control. There is, unfortunately, a slight problem involved when we work with the usual estimator of
. The following discussion will illustrate this.
Sample Variance
If 2 is the unknown variance of a probability distribution, then an unbiased estimator of 2 is the
sample variance
However, the sample standard deviation is not an unbiased estimator of . If the underlying
distribution is normal, then s actually estimates c4 , where c4 is a constant that depends on the
sample size n. This constant is tabulated in most text books on statistical quality control and may be
calculated using C4 factor
To compute this we need a non-integer factorial, which is defined for n/2 as follows:
Fractional Factorials
With this definition the reader should have no problem verifying that the c4 factor for n = 10 is .
9727.
Mean and standard deviation of the estimators
So the mean or expected value of the sample standard deviation is c4 .
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The standard deviation of the sample standard deviation is
What are the differences between control limits and specification limits ?
Control limits vs. specifications
Control Limits are used to determine if the process is in a state of statistical control (i.e., is
producing consistent output).
Specification Limits are used to determine if the product will function in the intended fashion.
How many data points are needed to set up a control chart?
How many samples are needed?
Shewhart gave the following rule of thumb:
"It has also been observed that a person would seldom if ever be justified in
concluding that a state of statistical control of a given repetitive operation or
production process has been reached until he had obtained, under presumably the
same essential conditions, a sequence of not less than twenty five samples of size four
that are in control."
It is important to note that control chart properties, such as false alarm probabilities, are generally
given under the assumption that the parameters, such as and , are known. When the control limits
are not computed from a large amount of data, the actual
General rules for detecting out of control or non-random situaltions

WECO stands for Western Electric Company Rules
Any Point Above +3 Sigma

--------------------------------------------- +3 LIMIT
2 Out of the Last 3 Points Above +2 Sigma
--------------------------------------------- +2 LIMIT
4 Out of the Last 5 Points Above +1 Sigma
--------------------------------------------- +1 LIMIT
8 Consecutive Points on This Side of Control Line
=================================== CENTER LINE
8 Consecutive Points on This Side of Control Line
--------------------------------------------- -1 LIMIT
4 Out of the Last 5 Points Below - 1 Sigma
---------------------------------------------- -2 LIMIT
2 Out of the Last 3 Points Below -2 Sigma
--------------------------------------------- -3 LIMIT
Any Point Below -3 Sigma
Trend Rules:
6 in a row trending up or down. 14 in a row alternating up and down
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Attributes Control Charts
Attributes data arise when classifying or counting observations

The Shewhart control chart plots quality characteristics that can be measured and expressed
numerically. We measure weight, height, position, thickness, etc. If we cannot represent a particular
quality characteristic numerically, or if it is impractical to do so, we then often resort to using a
quality characteristic to sort or classify an item that is inspected into one of two "buckets".
An example of a common quality characteristic classification would be designating units as
"conforming units" or "nonconforming units". Another quality characteristic criteria would be
sorting units into "non defective" and "defective" categories. Quality characteristics of that type are
called attributes.
Note that there is a difference between "nonconforming to an engineering specification" and
"defective" -- a nonconforming unit may function just fine and be, in fact, not defective at all, while
a part can be "in spec" and not fucntion as desired (i.e., be defective).
Examples of quality characteristics that are attributes are the number of failures in a production run,
the proportion of malfunctioning wafers in a lot, the number of people eating in the cafeteria on a
given day, etc.
Types of attribute control charts
Control charts dealing with the number of defects or nonconformities are called c charts (for count).
Control charts dealing with the proportion or fraction of defective product are called p charts (for
proportion).
There is another chart which handles defects per unit, called the u chart (for unit). This applies when
we wish to work with the average number of nonconformities per unit of product. Counts
Control Charts
Defective items vs individual defects
The literature differentiates between defect and defective, which is the same as differentiating
between nonconformity and nonconforming units. This may sound like splitting hairs, but in the
interest of clarity let's try to unravel this man-made mystery.
Consider a wafer with a number of chips on it. The wafer is referred to as an "item of a product".
The chip may be referred to as "a specific point". There exist certain specifications for the wafers.
When a particular wafer (e.g., the item of the product) does not meet at least one of the
specifications, it is classified as a nonconforming item. Furthermore, each chip, (e.g., the specific
point) at which a specification is not met becomes a defect or nonconformity.
So, a nonconforming or defective item contains at least one defect or nonconformity. It should be
pointed out that a wafer can contain several defects but still be classified as conforming. For
example, the defects may be located at noncritical positions on the wafer. If, on the other hand, the
number of the so-called "unimportant" defects becomes alarmingly large, an investigation of the
production of these wafers is warranted.
Control charts involving counts can be either for the total number of nonconformities (defects) for
the sample of inspected units, or for the average number of defects
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Acceptance Sampling
Contributions of Dodge and Romig to acceptance sampling

Acceptance sampling is an important field of statistical quality control that was
popularized by Dodge and Romig and originally applied by the U.S. military to the testing
of bullets during World War II. If every bullet was tested in advance, no bullets would be
left to ship. If, on the other hand, none were tested, malfunctions might occur in the field
of battle, with potentially disastrous results.
Definintion of Lot Acceptance Sampling
Dodge reasoned that a sample should be picked at random from the lot, and on the basis of
information that was yielded by the sample, a decision should be made regarding the
disposition of the lot. In general, the decision is either to accept or reject the lot. This
process is called Lot Acceptance Sampling or just Acceptance Sampling.
"Attributes" (i.e., defect counting) will be assumed
Acceptance sampling is "the middle of the road" approach between no inspection and
100% inspection. There are two major classifications of acceptance plans: by attributes
("go, no-go") and by variables. The attribute case is the most common for acceptance
sampling, and will be assumed for the rest of this section.
Important point
A point to remember is that the main purpose of acceptance sampling is to decide whether
or not the lot is likely to be acceptable, not to estimate the quality of the lot.
Scenarios leading to acceptance sampling
Acceptance sampling is employed when one or several of the following hold:
• Testing is destructive
• The cost of 100% inspection is very high
• 100% inspection takes too long
Acceptance Quality Control and Acceptance Sampling
It was pointed out by Harold Dodge in 1969 that Acceptance Quality Control is not the
same as Acceptance Sampling. The latter depends on specific sampling plans, which when
implemented indicate the conditions for acceptance or rejection of the immediate lot that is
being inspected. The former may be implemented in the form of an Acceptance Control
Chart. The control limits for the Acceptance Control Chart are computed using the
specification limits and the standard deviation of what is being monitored (see Ryan, 2000
for details).
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An observation by Harold Dodge

In 1942, Dodge stated:
"....basically the "acceptance quality control" system that was developed encompasses the
concept of protecting the consumer from getting unacceptable defective product, and
encouraging the producer in the use of process quality control by: varying the quantity and
severity of acceptance inspections in direct relation to the importance of the characteristics
inspected, and in the inverse relation to the goodness of the quality level as indication by
those inspections."
To reiterate the difference in these two approaches: acceptance sampling plans are one-
shot deals, which essentially test short-run effects. Quality control is of the long-run
variety, and is part of a well-designed system for lot acceptance.
An observation by Ed Schilling
Schilling (1989) said:
"An individual sampling plan has much the effect of a lone sniper, while the sampling plan
scheme can provide a fusillade in the battle for quality improvement."
Acceptance Sampling
A lot acceptance sampling plan (LASP) is a sampling scheme and a set of rules for making
decisions. The decision, based on counting the number of defectives in a sample, can be to accept
the lot, reject the lot, or even, for multiple or sequential sampling schemes, to take another sample
and then repeat the decision process.
Types of acceptance plans to choose from
LASPs fall into the following categories:
• Single sampling plans:. One sample of items is selected at random from a lot and the
disposition of the lot is determined from the resulting information. These plans are usually
denoted as (n,c) plans for a sample size n, where the lot is rejected if there are more than c
defectives. These are the most common (and easiest) plans to use although not the most
efficient in terms of average number of samples needed.
• Double sampling plans: After the first sample is tested, there are three possibilities:
1. Accept the lot
2. Reject the lot
3. No decision
If the outcome is (3), and a second sample is taken, the procedure is to combine the results of
both samples and make a final decision based on that information.
• Multiple sampling plans: This is an extension of the double sampling plans where more than
two samples are needed to reach a conclusion. The advantage of multiple sampling is smaller
sample sizes.
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• Sequential sampling plans: . This is the ultimate extension of multiple sampling where items
are selected from a lot one at a time and after inspection of each item a decision is made to
accept or reject the lot or select another unit.
• Skip lot sampling plans:. Skip lot sampling means that only a fraction of the submitted lots
are inspected.
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Unit IV
Chapter I
Facilities location
 Factors affecting size of the firm
 Factors affecting location of a firm
 Selection of a site (urban, rural, sub-urban)
 Recent trends in location
FACILITIES LOCATION
Every organisation has to face location problem one or the other day . Before finding out those
reasons for location decision and the factors affecting thereof one would like to know the
following :-
FACTORS AFFECTING SIZE OF THE FIRM
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1. Availability of capital: the size of the firm depends upon the availability of capital.
2. Entrepreneurial ability and efficiency: the ability experiences and managerial efficiency of
the entrepreneur is one of the important factors that determine the size of the business unit.
3. Risk of uncertainties: firms have to face fluctuations in demand for their products and
accordingly adjust their policies and strategies in order to survive and maintain the
positioning the market.
TYPE OF ORGANIZATION:
The size of the firm also depends on the type of organization, e.g., sole trading business concern or
individual proprietorship, partnership firm, private companies that are managing business on small
and medium scale. Joint Stock Companies require capital on large scale.
Availability inputs: The size can be larger if the inputs are available on a large scale. Where the
inputs will have to be transported from a distance and there is also some uncertainty, the size is
bound to be small.
Nature of product: In the case of processing of raw materials resulting in the production of joint
and by products, the scale is naturally more if the entrepreneur decides to process all the products. In
case of production of less standardized and more artistic products the size is bound to be small.
Laws of returns: But where increasing returns apply, large production will result in lower cost, so
that the firms can keep on growing larger in size provided the demand for the product is elastic.
Government regulation or licensing policy of government: The size of the firm depends on the
decision taken by the entrepreneur and on the attitude in the government.
FACTORS AFFECTING THE PLANT LOCATION

Supply of
Raw-material
1. Primary factors
Supply
Of Nearness
Capital
to market
Transport Availability
facilitities of power
Labour
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2. Secondary factors
Miscellaneous
Factors
Natural
Personal Factors
Factors
Initial start Political

& & goodwill Factors
Historical Govt.
& Religious Subsidies &
Factors Facilities
FACTORS OF LOCALISATION:
a)Primary factors
1.Supply of raw material: It is necessary to consider the adequate supply of raw materials and the
nature of raw materials. The cost of raw materials is an important element of the total cost of
production.
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2.Nearness to market: Nearness to market is important from the point of view of his control over the
market. In those industries where the raw materials are obtained from different source, nearness to
source of raw materials is not as important as nearness to the market.
3.Transport Facilities: Speedy transport facilities are needed for the regular and timely supply of raw
materials at low .
4.Supply of labour :The supply of labour at low cost is important .It should also be regular .
Nearness to source of labour supply is very important . Therefore , producer s should have regular
labour supply by reducing absenteeism and strikes due to unsatisfactory working conditions .
5.Power: power may be electrical , diesel and atomic energy . All types of power required must be
in abundance in order to ensure smooth flow of production.
6.Supply of capital :Industries require huge capital hence capital market must be developed at
industrial centres . Not only this , industrial development banks and other financial services must
also be encouraged .
b)Secondary Factors
1.Natural factors--affect the location of those industries which require a particular climate or weather
conditions
2.Political factors-States with stable government attract more industries
3.Government Subsidies and Facilities- Government gives subsidies and good industrial
development facilities in backward aras . Industries reach these places to reap the benefits of such
facilities.
4.Historical and Religious Factors- S ome places have industrial importance and some have
religious importance e.g. Kohlapur, benaras ,agra ,nasik etc. Industries grow because of these
important features.
5.Initial Start and Goodwill- Once one industry starts at a certain place other industries come their.
E.g. Jamshedpur became an industrial town in the following manner .
6.Personal Factor: Personal likeness for a place affects the establishment of business at a place .
7.Miscellaneous factors-
a)sufficient water supply
b)Disposal of waste
c)Dangers of air0-attacks
d)Community attitude
e)Ecological and environment considerations etc.
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Selection Of Site (Urban, Rural Or Suburban Area)
There are broadly three possible alternatives open for the selection of the locality of the industrial
unit:
1. urban or city area

2. rural area
3. suburban area
The relative advantages and disadvantages of each area are discussed as under:
URBAN AREA
Due to certain typical advantages available only in the city area, promoters show preference for the
city area as the location of the industrial unit.
ADVANTAGES OF CITY AREA
1. Availability of good transportation facilities

2. Good and prompt postal and communication services
3. Banking and credit facilities.
4. Services of insurance companies.
5. Sufficient storing facilities.
6. Ample availability of skilled and unskilled workers.
7. Vicinity of the market.
8. Facility of the ancillary and service units.
9. Transport facilities by road and railways.
10. Development of the training institutes.
11. Educational, medical and recreational institutes increase the amenities of lives.
DISADVANTAGES OF URBAN OR CITY AREA
1. The cost of land is very high.

2. Sufficient land is not available.
3. The cost of labour is relatively high.
4. The rate of labour turnover is very high.
5. Trade union movement is very strong.
6. The rates of taxes are also relatively high.
7. The industrialization in the city area gives birth to slums and dirty residences which creates
the typical problems of sanitation and health.
RURAL AREA
The following are its advantages and limitations.
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Advantages of Rural Area
1. The land is available at cheaper rates.

2. Large plots of the land available.
3. The rates of labour are relatively lower.
4. The rate of labour turnover is low.
5. The industrial relations between labour and management are relatively amicable.
6. The municipal restrictions, which are found in city areas, do not exist in rural areas, e.g.,
height of building, constructed area in total land etc.
7. Slums and dirty residence are not found in rural areas.
8. No danger of bombardment in wartime.
LIMITATIONS OF RURAL AREA
1. Transportation facilities are not available

2. Sometimes the services of post and telegraph and means of communication are not available
3. Banking and credit facilities are also not available
4. Absence of insurance facilities
5. Storing and warehouse facilities
6. Passenger facilities are not available
7. The advantage of ancillary units and service unit is not available
8. Such units are very far from the market place and this increases the cost of distribution of
finished goods
9. Skilled workers are not available
10. Municipal facilities like water supply, drainage, fire fighting are not available in rural areas
11. There is absence of recreation facilities, good educational institutes, good and sufficient
medical facilities etc.
Suburban area
The city area as a location of industrial has got many negative aspects. The other extreme is a rural
area, which again is not free from many limitations. The better compromise in the decision is in the
selection of suburban area as the location of the industrial unit. Suburban area is the area located on
the outskirts of the city area. Suburban area matches the advantages of the rural area with those of
city area which is located at a short distance, e.g. Odhav, narol, kathawada, naroda, and vatva are the
suburban areas of the ahmedabad city.
Advantages of suburban area
1. Land is available at a cheaper rate

2. Adequate land is available
3. Infrastructure facilities like road, water supply, drainage etc.
4. Skilled and unskilled both type of labours are available
5. It is possible to tap the advantage of industrial training institutes, management development
programmes etc, which are available in nearby city area
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6. The nearby city area provides a substantial market for the products of the unit
7. Educational institutes, medical facilities and other recreational facilities are available in the
suburban area itself as well as in the nearby city area
The limitation of suburban area as a site for industry is that in the development process, it may be
converted into a part of the urban area with all its merits and demerits.
Recent trends in the location of industries
The traditional factors like nearness of sources of materials, motive power, nearness of markets,
labour supply etc. have no longer remained the effective pulling forces for location of industries. The
location trends have changed substantially due to the development of substitute raw materials,
network of electrification and transportation by roads and railway, mobility of the labour and
persuasive and compulsive policies of the government for balanced regional development.
The recent trends in the selection of industrial locations can be described as under.
1. Priority for the sub urban areas: the industrialist shows their preference of the sub urban
area as the sight for establishment of a new unit or relocation of the existing one. The
industrial policy of the government does not permit the establishment of a new unit or
expansion of an existing one in city areas.
2. Industrial development in the notified backward areas: in order to have balanced regional
development, the central government as well as the state government has notified certain
backward areas; example punch mahals, bharuch and sunder nagar are the centrally notified
backward district of gujarat state. Similarly, gujarat state government has also notified
certain backward talukas. Different types of incentives like cash subsidy, tax relieves,
concessional financial assistance, cheaper land and power supply etc. are provided. So, many
such areas have been developed substantially in recent times. An illustration can be cited for
the industrial development of halol in punch mahals, ankleshwar in bharuch and sunder
nagar.
3. Establishment of industrial estate: industrial estate is a piece of vast land divided into
different plots wherein factory shades are constructed. The government of India has planned
a national policy for the development of industrial estate. It has assigned a responsibility of
the development of the industrial estate to state governments. In each state, the state
development corporation (sdc) has developed many industrial estates practically in all the
districts of the state. Industrial estates have also been developed by private entrepreneurs and
chambers of commerce. The plots of land along with factory shades and infrastructure
facilities are developed in the industrial estates and are sold to the prospective promoters.
The establishment of industrial states has greatly affected the location of industry.
4. Decentralization of industries: under the conscious industrial policy of the government,

concentration of industrial units is prevented through licensing policy. New units are not
permitted to be started and certain industrially congested areas. Similarly, existing units are
established in additional plants in a less developed areas or sometimes relocate the whole
unit in such areas.
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5. Increased role of the govt in the decision of location of industries: government through
persuasive and compulsive methods greatly affects the location decisions in recent times. It
provides certain attractive incentives to the promoters to establish their units in less
developed areas, at the same time it does not permit excessive industrialization in certain
developed areas.
6. Competition between government and institutions: as industry provides job opportunities

to the local population, many local organizations attempt to tempt the prospective promoters
to establish the units in their areas. They provide different types of incentives like cheap land,
relief in local taxes etc. Sometimes the objective of local organizations and the government
comes in conflict on the issue of the location of the industries. Thus, the whole pattern of
decision about the location of industries has undergone substantial changes in recent times.
UNIT IV
Chapter III
Plant layout
 Meaning of plant layout
 Objectives of plant layout
 Types of layout
 Costs associated with layout
 Techniques of plant layout
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MEANING OF PLANT LAYOUT

Plant layout means the disposition of the various facilities (equipments, material, manpower etc.) within th
areas of the site selected. Plant layout begins with the design of the factory building and goes up to th
location and movement of work. All the facilities like equipment, raw material, machinery, tools, fixture
workers etc. are given a proper place. In the words of James Lundy, “It identically involves the allocation o
space and the arrangement of equipment in such a manner that overall cost are minimized”. According t
MoNaughton Waynel, “A good layout results in comforts, convenience, appearance, safety and profit. A
poor layout results in congestion, waste, frustration and inefficiency”.
Plant layout is very complex in nature as it involves concept relating to such fields as engineering
architecture, economics and business administration. Hence a plant layout, with proper design
encompasses all production and service facilities and provides for the most effective utilization of men, wit
materials and machines constituting the process, is a master blue print for coordinating all operations.
Objectives of a Good Plant Layout
The principal objective of a proper plant layout is to maximize the production at the minimum of the cost
This objective should be kept in mind while designing a layout for a new plant as well as while making th
necessary changes in the exiting layout in response to change in management polices and processes an
techniques of production with the production system, i.e. workers, supervisors and managers.
If a layout is to fulfill this goal, it should be planned with the following clear objectives in mind.
1) There is the proper utilization of cubic (i.e. length, width and height). Maximum use of volum
available should be made. For example, conveyors can be run above head height and used as movin
work in progress or tools and equipments can be suspended from the ceiling. The principle
particularly true in stores where goods can be stored at considerable height without inconvenience.
2) Waiting time of the semi-finished products is minimized.
3) Working conditions are safer, better (well ventilated rooms etc.) and improved
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4) Material handling and transportation is minimized and efficiently controlled. For this , one has t
consider the movement distances between different work areas as well as the number of times suc
movements occur per unit period of time.
5) The movements made by the worker are minimized.
6) Suitable spaces are allocated to production centers.
7) Plant maintenance is simpler.
8) There is increased flexibility for changes in product design and for future expansion. It must b
capable of incorporating, without major changes, new equipment to meet technological requiremen
or to eliminate waste.
9) A good layout permits material to move through the plant at the desired speed with the lowe
cost.
10) There is increased productivity and better product quality with reduced capital cost.
11) Boosting up employee morale by providing employee comforts and satisfaction.
12) The work should be so arranged the there is no difficulty in supervision, coordination an
control. There should be no ‘hiding-places’ into which goods can be mislaid. Goods – raw materia
and ready stocks – must be readily observed at all times. It will reduce the pilferage of material an
labour.
It should be noted here that the above stated objectives of plant layout are laudable in themselves; it
is often difficult to reconcile all of them in a practical situation. And as such, the highest level of
skill and judgment are required to be exercised. For this, close association between the entrepreneurs
and experienced engineers is a must.
Types of Plant Layout

There are three basic types of plant layout:
(1) Functional or process layout,
(2) Product or line layout,
(3) Stationary layout. However the choice of one or the other type of layout depends upon the
machine and techniques used in the production.
(a) Process Layout: It is also known as functional layout and is characterized by the keeping
similar machines or similar operation at one location (place). In other words, separate
departments are established for each specialized operation of production and machines
relating to that functions are assembled there. For example, all lathe machines will be at
one place, all milling machines at another and so on. This type of layout is generally
employed for industries engaged in job-order production and non-standardized products.
The process layout may be illustrated in the
(b) Diagram given below.
z
Receiving Services Shipping
Surface
Lathe Milling Packaging
Deptt Deptt
Finishing
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F I C E S
Advantages:
1) Wide flexibility exits as regards allotment of work to equipments and workers.
The production capacity is not arranged in rigid sequence and fixed rate capacity
with line balancing. Alteration or change in sequence of operation can easily be
made as and when required without upsetting the existing plant layout plan.
2) Better quality product, because the supervisors and workers attend to one type of
machine and operations.
3) Variety of jobs, coming as different job orders make the work more interesting for
workers.
4) Workers in one section are not affected by the nature of operations carried out in
another section. E.g. the rays of welding do not affect a lathe operator, as the two
sections are quite separate.
5) Like product layout, the breakdown of one machine does not interrupt the entire
production flow.
6) This type of layout requires lesser financial investment in machines and
equipments because general-purpose machine, which are usually of low cost, are
used and duplication of machine is avoided. Moreover, general-purpose machine
do not depreciate or become obsolete as rapidly as specialized machines. It results
in lower investment in machines.
7) Under process layout, better and efficient supervision is possible because of
specialization in operation.
Disadvantages:
1) Automatic material handling is extremely difficult because fixed material

handling equipment like conveyor belt cannot be possible to use.
2) Completion of same product takes more time.
3) Raw material has to travel larger distances for getting processed to finished
food. This increases material handling and the associated costs.
4) It is not possible to implement the group incentive schemes on the basic of
quantity of the product manufacturing.
5) This type of layout requires more floor space than the product layout because
a distinct department established for each operation.
6) Compared to line layout inventory investment are usually higher in case of
process layout. It increases the need of working capital in the form of inventory.
7) Under process layout, cost of supervision is high because (i) the number of
employees per supervisor is less that result in reduced supervisory span of control,
and (ii) the work is checked after each operation.
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© Product Layout: it is also known as line (type) layout. It implies that various operations on
a product are performed in a sequence and the machine are placed along the product flow line i.e.
machines are arranged in the sequence in which a given product will be operated upon. This type
of layout is preferred for continuous production i.e. involving a continuous flow in-process
material towards the finished product stage.
IN OUT
Operation1 operation2 operation3 operation4 operation4
Advantages:
i) Automatic material handling, lesser material handling movement, times and cost.
ii) Product completes in lesser time. Since material is fed at one end of the layout and
finished product is collected at the other end, there is no transportation of raw material
backward and forward. It shortens the manufacturing time because it does not require any
time-consuming interval transportation till the completion of the process of production.
Line balancing may eliminate idle capacity.
iii) Smooth and continuous flow of work. This plant ensures steady flow of production with
economy because bottlenecks or stoppage of work at different point of production is got
eliminated or avoided due to proper arrangement of machine in sequence.
iv) Less in-process inventory. The semi-finished product or work-in-progress is the
minimum and negligible under this type of layout because the process of production is
direct and uninterrupted.
v) Effective quality control with reduced inspection points .It does not require frequent
changes in the machine set-up. Since production process is integrated and continuous,
defective parts can easily be discovered and segregated. This makes inspection easy and
economical.
vi) Maximum use of space due to straight production flows and reduced need of interim
storing.
Disadvantages:
i) Since the specific product determines the layout, a change in product involves major
changes in layout and thus the layout flexibility is considerably reduced.
ii) The pace or rate of working depends upon the output rate of the slowest machine. This
involves excessive idle time for other machines if the production line is not adequately
balanced.
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iii) Machines being scattered along the line, more machines of each type have to be
purchased as stand by, because if one machine in the line fails, it may lead to shut down
of the complete production line
iv) It is difficult to increase production beyond the capacities of the production lines.
v) As the entire production is the result of the joint effort of all operation in the line, it is
difficult to implement individual incentive schemes.
vi) Since there is no separate department for various types of work, supervision is also
difficult.
vii) Under this system, labour cost is high because
(a) Absenteeism may create certain problems because every worker is specialist in his
own work or he specializes on a particular machine .In order to avoid the
bottleneck, surplus workers who are generalists and can be fitted on a number of
machines will have to be employed;
(b) Monotony is another problem with the workers .By doing the work of repetitive
nature along assembly line, they feel bored. They have no opportunity to
demonstrate their talent;
(c) Noise, vibrations, temperature, moisture, gas etc. may cause health hazards .In this
way, labour costs are high.
It is now quite clear from the above discussion that both the systems has their own merits and
demerits. Advantages of one type of layout are generally the disadvantages of other type. Thus with
a view to securing the advantage of both the systems a combined layout may be designed.
(c) Static Product Layout or Project Layout or Stationary Layout
The manufacturing operations require the movements of men, machines, and materials, in the
product layout and process layout generally the machines are fixed installations and the operators are
static in terms of their specified workstations. It is only the materials, which move from operation to
operation for the purpose of processing. But where the product is large in size and heavy in weight,
it tends to be static e.g. ship building. In such a production system, the product remains static and
men and machines move performing the operations on the product.
Advantages of stationery Layout:
The advantages of this type of layout are as under:
1. Flexible: This layout is fully flexible and is capable of absorbing any sort of change in
product and process. The project can be completed according to the needs of the customers
and as per their specifications.
2. Lower labour cost: People are drawn from functional departments. They move back to their
respective departments as soon as the work is over. This is economical, if a number of orders
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are at hand and each one is in the different stage of progress. Besides, one or two workers
can be assigned to a project from start to finish. Thus it reduces labour cost.
3. Saving in time: The sequence of operations can be changed if some materials do not arrive
or if some people are absent. Since the job assignment is so long, different sets of people operate
simultaneously on the same assignment doing different operations
4.Other benefits:
(1) It requires less floor space because machines and equipment are in moving position and there
is no need of fixing them.
(2) This arrangement is most suitable way of assembling large and heavy products.
Disadvantages Of Stationery Layout:
The disadvantages of this type of layout are:

1. Higher capital investment: As compared to product or process layout, capital investment is
higher in this type of layout. Since a number of assignments are taken, investments in
materials, men and machines are made at higher cost.
2. Unsuitability: This type of layout is not suitable for manufacturing or assembling small
products in large quantities. It is suitable only in case where the product is big or the assembling
process is complex.
Factors influencing plant layout

The following are some important factors, which influence the planning of effective layout to a
significant degree.
1) Nature of the product: The nature of the product to be manufactured will significantly
affect the layout of the plant. Stationary layout will be most suitable for heavy products while
line layout will be best for the manufacture for the light products because small and light
products can be moved from one machine to another very easily and, therefore, more attention
can be paid to machine locations can be paid to machine locations and handling of materials.
(2) Volume of production: Volume of production and the standardization of the product also
affect the type of layout. If standardized commodities are to be manufactured on large scale, line
type of layout may be adopted.
(3) Basic managerial policies and decisions: The type of layout depends very much on the
decisions and policies of the management to be followed in producing the commodity with
regard to the size of plant, kind and quality of the product, scope for expansion to be provided
for, the extent to which the plant is to be integrated, amount of stocks to be carried at anytime,
the kind of employee facilities to be provided etc.
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(4) Nature of plant location: The size shape and topography of the site at which the plant is located
will naturally l affect the type of layout to be followed in view of the maximum utilization of the
space available .For e.g., if a site is near the railway line the arrangement of general layout for
receiving and shipping and for the best flow of production in and out the plant may be made by the
side of the railway lines .If space is narrow and the production process is lengthy, the layout of plant
may be arranged on the land surface in the following manner:
IN
IN OUT
OUT
(5) Type of industry process: This is one of the most important factors influencing the choice of
type of plant layout. Generally the types of layout particularly the arrangement of machines and
work centers and the location of workmen vary according to the nature of the industry to which the
plant belongs. For the purpose of lay out, industry may be classified into two broad categories:
(i) Intermittent and (ii) continuous. Intermittent type of industries is those, which manufacture
different component or different machines.
Such industries may manufacture the parts, when required according to the market needs. Examples
of such industries are shipbuilding plants. In this type of industry functional layout may be the best.
The second type of industry in ‘continuous industry. in this type of industry raw material are fed at
one end and the finished goods are received at another end. A continuous industry may either be
analytical or synthetic . A analytical industry breaks up the raw material into several parts during the
course of production process or changes its form, e.g. oil and sugar refineries. A synthetic industry
on the other hand mixes the two or more materials to manufacture one product along with the
process of production or assembles several parts to get finished product. Cement and automobiles
industries are the examples of such industry. Line layout is more suitable in continuous process
industries.
6. Types of methods of production: -

Layout plans may be different according to the method of production proposed to be adopted. Any
of the following three methods may be adopted for production- (1) Job order production, (2) batch
production, and (3) mass production. Under job production goods are produced according to the
orders of the customers and therefore, specification vary from customer to customer and the
production cannot be standardized. The machines and equipment can be arranged in a manner to suit
the need of all types of customers. Batch production carries the production of goods in batches or
group at intervals. In this type of manufacturing the product is standardized and production is made
generally in anticipation of sales. In such cases functional or process layout may be adopted. In case
of mass production of standardized goods, line layout is most suitable form of plant layout.
7. Nature of machines:-
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Nature of machines and equipment also affects the layout of plants. If machines are heavy in weight
or create noisy atmosphere, stationery layout may reasonably be adopted. Heavy machines are
generally fixed on the ground floor. Ample space should be provided for complicated machines to
avoid accidents.
1. Climate:-
Sometimes, temperature, illumination and air are the deciding factors in the location of machines
and their establishments. For example, in lantern manufacturing industry, the spray-painting room is
built along the factory wall to ensure the required temperature control and air expulsion and the
process of spray painting may be undertaken.
9.Nature of material: -
Design and specification of materials, quantity and quality of materials and combination of materials
are probably the most important factors to be considered in planning a layout. So, materials storage,
space, volume and weight of raw materials, floor load capacity, ceiling height ,method of storing etc.
should be given special consideration. This will affect the space and the efficiency of the production
process in the plant. It will facilitate economic production of goods and prompt materials flow and
soundly conceived materials handling system.
10. Type of machine: -

Machines and equipment may be either general purpose or special purpose. In addition certain tools
are used. The requirements of each machine and equipment are quite different in terms of their
space; speed and material handling process and these factors should be given proper consideration
while choosing out a particular type of layout. This should also be considered that each machine and
equipment is used to its fullest capacity because machines involve a huge investment. For instance,
under product layout, certain machines may not be used to their full capacity so care should be
taken to make full use of the capacity of the machines and equipment.
12.Human factor and working conditions:-

Men are the most important factor of production and therefore special consideration for the their
safety and comforts should be given while planning a layout, specific safety items like obstruction-
free floor, workers not exposed to hazards, exit etc. should be provided for. The layout should also
provide for the comforts to the workers such as provision of rest rooms, drinking water and other
services etc. sufficient space is also to be provided for free movement of workers.
13. Characteristics of the building: -
Shape of building, covered and open area, number of storeys, facilities of elevators, parking area
and so on also influence the layout plan. In most of the cases where building is hired, layout is to be
adjusted within the spaces available in the building. Although minor modification may be done to
suit the needs of the plants and equipment. But if any building is to be constructed, proper care
should be given to construct it according to the layout plan drawn by experts. Special type of
construction is needed to accommodate huge or technical or complex or sophisticated machines and
equipment.
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Costs Associated With Plant Layout
The costs associated with a decision on plant layout are:
 Cost of movement of material from one work area to another.

 Cost of space.
 Cost of production delay, if any, which are indirect costs.
 Cost of spoilage of material, if any, when the materials are staged or stored in condition which
determine the quality of the material
 Cost of labor dissatisfaction and health risks
 Cost of changes required, if the operational conditions changed in the future. This is the long-
term cost.
A good layout should minimize all these costs put together.
Techniques of plant layout

In designing or improving the plan of plant layout, certain techniques or tools are developed and are
in common use today. The techniques or tools are as follows:
1)Charts and diagrams:

In order to achieve work simplification, production engineers make use of several charts and
diagrams for summarizing and analyzing production process and procedure. These include
a)Operation process chart:
It subdivides the process into separate operations and inspection. When a variety of parts and
products are manufactured which follow a different path across several floor areas, an operation
process chart may be necessary for the important material items or products. The flow lines of the
charts indicate the sequence of all operation in the manufacturing cycle.
Flow process chart:
This chart is the graphic summary of all the activities taking place on the production floor of an
existing plant. By preparing this type of chart, it can be found out as to where operations can be
eliminated to rearrange, combined, simplified or subdivided for greater economy.
Process flow diagram:
The diagram is both supplemented and substitute of process flow chart. It helps in tracing the
movement of material on a floor plan or layout drawing. A diagram may be drawn to scale on the
original floor plan to show the movement of work. It is a good technique to show long materials
hauls and backtracking of present layouts, thereby indicating how the present layout may be
improved. Colored lines can show the flow of several standards products.
Layouts, thereby indicating how the present layout may be improved. Colored lines can show the
flow of several standard products.
This diagram can be used to analyze the effectiveness of the arrangement of the plant activities, the
location of specific machines, and the allocation of space. It shows how a more logical arrangement
and economical flow of work can be devised.
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(2) Machines data card: This card provides full information necessary for the placement and layout
of equipment. The cards are prepared separately for each machine. The information generally given
on these cards include facts about the machine such as capacity of the machines, cape occupied,
power requirements, handling devices required and dimensions.
(3) Templates: Template is the drawing of a machine or tool cut out from the sheet of paper.
Cutting to scale shows the area occupied by a machine. The plant layout engineer prepares a floor
plan on the basis of reel vent information made available to him. The template technique is an
important technique because (i) it eliminates unnecessary handlings, (ii) minimize backtracking of
materials, (iii) it make the mechanical handling possible, (iv) it provides a visual picture of proposed
or existing plan of layout at one place, (v) it offer flexibility to meet future changes in the production
requirements.
(4) Scale models: Though the two-dimensional templates are now in extensive use in the fields of
layout engineering but it is not much use to executives who cannot understand and manipulate
them .One important drawback of template technique is that it leaves the volume, depth, height and
clearance of the machines to the imaginations of the reader of the drawing. These drawbacks of the
template technique have been removed through the development of miniature scale models of
machinery and equipment cast in metal.
With scale models, it has now become possible to move tiny figures of men and machines around in
miniature factory .The miniature machines and models of material handling equipment are placed in
a miniature plant and moved around in pawn on a chessboard.
(5) Layout drawings: Completed layouts are generally represented by drawings of the plant
showing wall, columns, stairways, machines and other equipments, storage areas and office areas.
The above techniques and tools are used for the planning of layout for the new plant.
Construction of new building
For effective and efficient operation of the plant, design of the building is one of the main
considerations. The building housing the plant should be designed in such a way that it can meet the
requirements of the concern operation and its layout. According to JAMES LUNDY, “An ideal plant
building is that which is built to house with most efficient layout that can be provided for the process
involved, yet which is architecturally ultra active and of such a standard shape and design as most
flexible in its use and expensive units construction”.
The layout may be said to efficient if it is housed in the building that ensures comforts and health of
the workers engaged to the plant with reference to heat, light, humidity, circulation of air etc. and on
the other hand, it protects the plant and equipment and materials from the weather.
These are several factors, which are to be considered in constructing a new building for housing the
plant. These are:
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1. Adaptability: The building structure should be fully adaptable to the needs and requirements
of the plant .In the beginning, most of the enterprises carry their business in rented buildings
which is generally not suitable to the needs and special requirements of the industries with
the obvious reason that the landlord constructs the building to suit average conditions of a
manufacturing units and they cannot be persuaded to make the necessary changes effecting
the flexibility. As to the degree of adaptability, it may be needed that buildings are more
easily adapted to fit the needs of the continuous process than to those of any other.
2. Provision for additions and extensions: In designing and constructing a new factory
building, care must be taken to provide for additions and extensions, which may arise to meet
the necessary and peculiar needs in due course of time. There must be every possibility to
add more units without disturbing the existing the manufacturing system. KIMBALL AND
KIMBALL had rightly suggested that “an ideal building plan is one built on same ‘unit’
system like a sectional book case, so that additional units can be added at any time without
disturbing the manufacturing system and organization “. As a general rule extension can be
made most conveniently at right angles to the direction of flow of work.
3. Number of storeys: Another important decision while designing new plant building is to
consider number of storeys to be built. Before taking a decision towards number of storeys,
the management should bear in mind the comparative advantages and disadvantages of one
storey and many storeys.
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UNIT II
Chapter IV
Production system
 Meaning
 Types of production system
 Evaluation of various production systems
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Production Systems
TYPES OF PRODUCTION SYSTEMS
Looking from a different point of view, the entire problem of production/operations management
can be visualized as that of managing the “material” flow into, through, and out of the production
system. If we try to detail out the flow characteristics inside the conversion systems, we shall find
that some systems have very smooth and streamlined flow; some others may have more complex
flow characteristics. In general, the more complex the flow characteristics inside the system, the
more difficult it becomes to manage the system. On the bases of material flow characteristics, the
production system can be grouped in to the following 4 categories;
a) Mass production or flow line production system

b) Batch production system
c) Job shop
d) Unit manufacture of projects.
The main focus of production management problems will therefore depend upon the type of the
system. Problems, which are very crucial for mass production, may not be relevant for batch
production and vice-versa. It is therefore very important to identify the type of systems we are
managing and then focus on main problems of planning and control relevant to that system. A brief
description of these problems is given in the following sub-sections. Figure given below is helpful
for understanding the characteristics of a typical production system.
Material Flow Characteristics Of A Typical Production System
Inputs Output
Materials Products
Labour
Machines
Facilities
Energy
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Information
Technology
These systems have simplest flow characteristics constituting straight-line flow. Facilities are
arranged according to sequence of operations where the output of one stage becomes input to the
next stage. The whole system is cascaded.
Major production management problems in mass production systems are- balancing of production
assembly lines, machine maintenance and raw material supply. A production line consists of the
series of production centers, if work load is unbalanced then the most bottle-necked production stage
will govern the whole output rate. This will result in increased through put time and poor capacity
utilization thus contributing to low productivity. Hence a production or assembly line should be
designed such that its workload is as evenly balanced as possible. Maintenance becomes important
because if any production is under breakdown it will block the whole line unless quickly restored
back into operational effectiveness. Raw material to first stage is important to avoid shortage and
subsequent starvation of the whole line.
There are methods and techniques available to attend to the above mentioned problem areas.
Batch production system
If a variety of products are made with relatively small volume of production, it may not be possible
to layout a separate line for each product. In such cases, batch production concept is adopted when a
product is made in a certain quantity called as “Batch quantity” on a machine, and after a while it is
discontinued and another product is scheduled in a certain batch quantity. Thus various products
compete for the share of a machine. The machines are for general purpose. Some prominent problem
areas are:
a) Optimal layout planning for the production system.

b) Aggregate production planning to absorb demand fluctuations economically.
c) Machine job allocation problem.
d) Determination of economic batch quantity.
e) Scheduling and sequencing of operations.
Production control assumes significance in such systems as the status of progress of various
products must be chased up and effectively monitored.
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EXERCISE 1
Fill up the blanks in the following statements with appropriate words,
phrases or short sentences:
1. In selective inventory management one of the methodology used is known as

VED analysis. VED stands for………
2. ABC Analysis is selection control of times based on……….
3. FSN stands for………..
4. ABC stands for………..
5. MRP stands for……….
6. Aggregate planning is planning for……term and is not for………….planning
7. SQC stands for………
8. SPC stands for…….and does control of process through……..charts.
9. Various types of control charts used are…….and……charts,……..charts,
and……….charts
10.The SQC technique used for incoming inspection of material is called…………
plans.
11.JIT concept in quality means………..
12.QC stands for………and QA stands for……..
13.ISO 9001,ISO 9002 and ISO 9003 are the three modules which are for
certification.
ISO 9001 involves…….. ,…………..,……….. and………
ISO 9002 involves……...,…………..and………….
ISO 9003 involves…………..and ………..only.
Where ISO…….and ISO……….are only guidelines for Quality Assurance for
selection of……..and………elements respectively.
14.Ordering cost and inventory carrying costs are………..in nature and hence they
give rise to a point of intersection at which Total Inventory Carrying cost
is………
15.A quality circle is a small……….of employee in companies who discuss and
try to improve the quality of the output and other work related matters.
16. The ‘p’ chart is used for………type of data and ‘c’ type of chart is used
for……….type of data.
17.Quality costs can be mainly divided into 3 costs………costs,………….. cost
and………cost.
18.TQM stands for………..
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EXERCISE 2
State whether the following statements are True (T) or False (F)
1. A forklift can be used for horizontal as well as vertical movements
2. Mobile cranes cannot move from one place to another.
3. Selection of material handling equipment depends upon the nature of the
commodity to be handled.
4. Line layouts generally involve low investments by way of equipment and
machinery.
5. Plant layout and material handling are closely interred related.
6. A stock item is a part of inventory.
7. EOQ strikes a balance between inventory carrying cost and ordering costs.
8. Decrease of death rate due to advancement in medical sources is associated
into trend analysis of Time Series.
9. Increase sale of cloth and garments during the months of Oct. and Nov. is
associated with Trend analysis of Time Series.
10.Decline of ice-cream sales during winter season is associated with seasonal
analysis of Time Series
11.Senior executive spend more time on ‘A’ items than on ‘B’ or ‘c’ items.
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CASE I
PART EMPORIUM
It’s June 6, Sue McCaskey’s first day in the newly created position of materials manager for parts
Emporium. A recent graduate of a prominent business school, McCaskey is eagerly awaiting her
first real-world problem. At approximately 8:30.It arrives in the form of status reports on inventory
and orders shipped. At the top of an extensive computer printout is a handwritten note from Joe
Donnell, the purchasing manager: “Attached you will find the inventory and customer services
performance data. Rest assured that the individual inventory levels are accurate because we took a
complete physical inventory count at the end of last week. Unfortunately, we don’t keep compiled
records in some of the areas as you requested. However, you’re welcome to do so yourself.
Welcome aboard!”
A little upset that aggregate information isn’t available, McCaskey decide to randomly select a small
sample of approximately 100 items and compile inventory and customer service characteristics to
get a feel for the “total picture.” The results of this experiment reveal to her why Parts Emporium
decided to create the position she now fills. It seems that the inventory is in all the wrong places.
Although there is an average of approximately 60 days of inventory, a customer service is
inadequate. Parts Emporium series to backorder the customer orders not immediately filled from
stock, but some 10 percent of demand is being lost to competing distributorships. Because stockouts
are costly relative to inventory holding costs, McCaskey believes that a cycle-services level of at
least 95 percent should be achieved.
Parts Emporium, Inc., was formed in 1967 as a wholesale distributor of automobile parts by two
disenchanted auto mechanics, Dan Block and ED sprigs. Originally located in Block’s garage, the
firm showed slow but steady growth until 1970, when it relocated to an old, abandoned meatpacking
warehouse on Chicago’s South Side. With increased selection, combined with the trend toward
longer car ownership, led to an explosive growth of the business in the mid to late 1970s. By 1991,
Parts Emporium was the largest independent distributor of auto parts in the North central region.
In 1993, Part Emporium relocated in a sparkling new office and warehouse complex off interstate 55
in suburban Chicago. The warehouses space alone occupied more than 100,000 square feet.
Although only a handful of new products have been added since the warehouse was constructed, its
utilization has increased from 65 percent to more than 90 percent of capacity. During this same
period, however, sales growth has stagnated. These conditions motivated Block and sprigs to hire the
first manager from outside the company in the firm’s history.
Sue McCaskey knows that although her influence to initiate changes will be limited, she must
produce positive results immediately. Thus she decides to concentrate on two products from the
extensive product line: the EG151 exhaust gasket and the DB032 drive belt. If she can demonstrate
significant gains from proper inventory management for just two products, perhaps Block and sprigs
will give her the backing needed to change the total inventory management system.
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The EG151 exhaust gasket is purchased from an over seas supplier, Haipei, Inc. actual demand for
the first 21 weeks of 1994 is shown in the following table
Week Actual Demand Week Actual Demand

1 104 12 97
2 103 13 99
3 107 14 102
4 105 15 99
5 102 16 103
6 102 17 101
7 101 18 101
8 104 19 104
9 100 20 108
10 100 21 97
11 103
A quick review of past orders, shown in another document, indicates that a lot size of 150 units is
being used and that the lead-time from Haipei is fairly constant at two weeks. Currently, the end of
week 21, no inventory is on hand; 11 units are backordered, and there is a scheduled receipt of 150
units.
The DB032 drive belt is purchased from the Bendox Corporation of Grand Rapids, Michigan. Actual
demand so far in 1994 is shown in the following table.
Week Actual Demand Week Actual Demand

11 18 17 50
12 33 18 53
13 53 19 54
14 54 20 49
15 51 21 52
16 53
Because this product is new, data are available only since its introduction in week 11. Currently, 324
units are on hand; there are no backorder and no schedule receipts a lot size of 1000 units is being
used, with the lead-time fairly constant at three weeks.
The wholesale price that part Emporium charges their customers are $ 12.99 for the EG151 exhaust
gasket and $8.89 for the DB032 drive belt. Because no quantity discount are offered on these two
highly profitable items, gross margins based on current purchasing practices are 32 percent of
wholesale price for the exhaust gasket and 48 percent of the wholesales price for drive belt.
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Parts Emporium estimates its cost to hold inventory at 21 percent of its inventory investment. This
percentage recognizes the opportunity costs of tying money up in inventory and the variable costs of
taxes, insurance, and shrinkage. The annual report notes other warehousing expenditures for utilities
and maintenance and debt services on the 100,000- square-foot warehouse, which was built for $1.5
million. However, Mc Caskey reasons that these warehousing costs can be ignored because they
won’t change for the range of inventory policies that she is considering.
Out-of-pocket costs for Part Emporium to place an order with suppliers are estimated to be $20 per
order for exhausts gaskets and $ 10 per order for drives belts. On the outbound side, there can be
delivery charges. Although most customers pick up their parts at parts Emporium, some orders are
delivered to customers. To provide this services, Parts Emporium contracts with a local company for
a flat fee of $21.40 per order, which is added to the customer’s bill. McCaskey is unsure whether to
increase the ordering costs for parts Emporium to include delivery charges.
Questions
1. Put yourself in sue Mc Caskey’s position and prepare a detailed report to Dan Block and Ed
Sprigs on managing the inventory of the EG151 exhaust gasket and the DB032 drive belt. Be
sure to present a proper inventory system and recognize all relevant costs.
2. By how much do your recommendations for these two items reduce annual cycle inventory,
stock out, and order dering costs?
Source: Professor Robert Bregman, university of Houston, provided this case.
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CASE II
Fitness Plus, Part A
Fitness Plus, Part B, explores alternatives to expanding a new downtown facility and is include in
the Instructor’s Manual. If you’re interested in this topic, ask your instructor for a preview.
Fitness Plus is a full-service health and sports club in green boro, North Carolina. The club provides
a range of facilities and services to support three primary activities: fitness, recreation, and
relaxation. Fitness activities generally take place in four areas of the club: the aerobics room
equipped with free weights; a workout room with 24 pieces of Nautilus equipment; and a large
cardiovascular workout room containing 29 pieces of cardiovascular equipment. This equipment
includes nine stairsteppers, six treadmills, six life-cycle blikes, three airdyne bikes, two cross-
aerobics machines, two rowing machines, and one climber. Recreational facilities comprise eight
recquetball courts six tennis courts, and a large outdoor pool. Fitness Plus also sponsors softball,
vollyball, and swim teams in city recreation leagues. Relaxation is accomplished through yoga
classes held twice a week in the aerobics room, whirlpool tubs located in each locker room. And a
trained message therapist.
Situated in a large suburban office park, fitness Plus opened its doors in 1988. during the first two
years, membership was small and use of the facilities was light. By 1992, membership had grown as
fitness began to play a large role in more people’s lives. Along with this growth came increased use
of club facilities. Record indicates that, in 1992, an average of 15 members per hour checked into the
club during a typical day. Of course, the actual number of member per hour varied by both day and
time. On some days during a slow period, only 6 to 8 members would check in per hour. At a peak
time, such as Mondays from 4 :00 P.M to 7:00 P.M, the number would be as high as 40per hour.
The club was open from 6:30 A.M. to 11:30 P.M. Monday through Thursday. On Friday and
Saturday the club closed at 8:00 P.M., and on Sunday the hours were 12:00 noon to 8:00 P.M.
As the popularity of health and fitness continued to grow, so did fitness Plus. By may 1997, the
average number of members arriving per hour during a typical day had increased to 25. The lowest
period had a rate of 10 members per hour; during peak periods 80 members per hour check in to use
the facilities. This growth brought complaints from members about overcrowding and unavailability
of equipment. Most of these complaints centered on the Nautilus, cardiovascular, and aerobics
fitness areas. The owners begin to wonder whether the club was indeed too small for its
membership. Past research has indicated that individuals work out an average of 60 minutes per
visit.Data collected from member survey showed the following facilities usage pattern: 30 percent of
the members do aerobics, 40 percent use the cardiovascular equipment, 25 percent use the Nautilus
machines, 20 percent use the free weights 15 percent use the racquetball courts and 10 percent use
the tennis courts. The owners wondered whether they could use this information to estimate how
well existing capacity was being utilized.
If capacity levels were being stretched, now was the time deciding what to do. It was already May,
and any expansion of the existing facility would take at least four months. The owners knew that
January was always a peak membership enrollment month and that any new capacity needed to be
Neelam Gulati
78
ready by them. However, other factors had just received a major facelift, and many new offices and
business were moving back to it, causing resurgence in activity.
With this growth came increased competition. A new YMCA was offering a full range of services at
a low cost. Two new health and fitness facilities had opened within the past year in locations 10 to
15 minutes from fitness Plus. The first, called the Oasis, catered to the young adult crowd and
restricted the access of children under 16 years old. The other facility. Gold’s Gym provided
excellent weight and cardiovascular training only.
As the owners thought about the situation, they had many question: were the capacities of the
existing facilities constrained, and if so, where? If capacity expansion was necessary, should the
existing facility be expanded? Because of the limited amount of land at the present site, expansion of
some services might require reducing the capacity of others. Finally, owing to increased competition
and growth downtown, was now facility would take six months to renovate, and the financial
resources were not available to do both.
Questions
1. What method would you use to measure the capacity of fitness Plus? Has fitness plus reached
its capacity?
2. Which capacity strategy would be appropriate for fitness Plus? Justify your answer.
3. How would you link the capacity decision being made by fitness plus to other types of
operating decision?
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ASSIGNMENTS
Guidelines for attempting the assignments
 Only left margin of reasonable size should be made.

 Diagram(s)/figure(s) should be given in each answer .
 Each answer should have the layout in this manner .
1)introduction .
2)subject matter (body).
3)conclusion (summary )of the answer.
 Attempt should be neat and clean as far as possible and in a good
handwriting.
Unit 1
Chapter1
Nature and scope of Production Management
1.Define production. Give a brief history of the development of production management .
2. Define production management and discuss its scope .
3.“ Production management deals with decision making related to production processes so that the
resulting goods or services are produced according to the specifications , in the amounts and by
the schedules demanded and at a minimum cost”. Discuss.
Chapter II
Demand Forecasting
3.“ Production management deals with decision making related to production processes so that the
resulting goods or services are produced according to the specifications , in the amounts and by
the schedules demanded and at a minimum cost”. Discuss.
Unit 2
Chapter I
Inventory control
1.What is inventory .Why is it called a necessary evil for an organisation?
2.What do you favour --inventory depletion or inventory accumulation ? Explain.
3.Explain various methods of inventory control with a special stress on ABC analysis .
4. Explain selective inventory control and its techniques ?
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UNIT 3
Chapter II
Quality assurance
1.Explain the meaning of quality ? How does a manufacturer determine it.
2. Define quality control and tell how does it differ from inspection ?
3.In quality control what is meant by a process being in control?
UNIT 4
Chapter I
Facilities location
1.What factors affect the choice of a suitable place for location of a plant ?
2.Discuss the importance of facilities location decision in operations planning .
3.Why are some industries located near the source of raw materials, whereas some other
industries are located near the markets for their finished goods ?
Chapter II
Plant layout
1. What is plant layout ? What are the objectives which management desires to attain through
the efficient plant layout ?
2. What are the different types of layout ? What are the advantages and disadvantages of each type
of layout ?
3. What are the factors to be borne in mind while deciding upon plant layout ?
4. Write short notes on the following :
(a) Techniques of plant layout .
(b) Factors affecting construction of plant building.
(c) Line balancing .
Chapter IV
Production system
1.What are the important types of production systems ? Explain
2.Make a comparative study of different types of production systems .
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Sample Question Paper-I

PRODUCTION MANAGEMENT
Unit-1
1) Explain the concept and objectives of production management. Discuss the contributions of
scientific management principles, introduction of moving assembly line and Hawthorne
studies in the development in the area of production management.
2) Distinguish between quantitative and qualitative techniques of forecasting. Discuss the

market research method, Delphi method and regression method of forecasting.
Unit-2
3) Discuss the steps involved in capacity planning. What are the major capacity considerations
in a plant? How is capacity requirement determined?
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82
4) What are the features of a good layout? For which type of production system, product layout
is used and why?
Unit-3
5) What are the characteristics of intermittent production systems? Why is preparation of

schedules in this system, a very complex process?
Unit-4
6) A company requires 12000 units of raw material per annum and each unit cost Rs. 30.
Ordering cost is Rs. 10 per order and carrying costs are 20%. Calculate EOQ and total
inventory cost. The supplier has offered a 2% discount if order size is 800 units. Should this
offer be accepted?
7) What is OC curve? How is it drawn on a graph? Show using an illustration. Explain the
following in context of OC curve:
i) Producer’s risk
ii) Consumer’s risk
iii) AOQL
iv) LTPD
v) Learning curve
Neelam Gulati
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Production and Operations Management

Study Material For

DAV Institute Of Management, Faridabad

 How does management decide quality

PRODUCTION PROCESS SYSTEM

Meaning Of Production Management

Elwood S. Buffa has defined the term in a broader sense as:

Production management, thus, is assigned with the following tasks.

Product selection Activities relating to

Production Facilities layout

ORGANIZATIONAL CHART OF PRODUCTION MANAGEMENT DEPARTMENT

PRODUCTS VERSUS SERVICES

Characteristics Of Systems To Produce Products Versus Systems To Produce

Can be produced to inventory for-off the- Availability achieved by keeping the

Complex and interrelated processing Simple processing

Demand on productive system is Demand commonly variable on

Markets served by productive system are Markets served by productive system

Location of system is in relation to Location dependent on location of

PRODUCTS AS A PART OF SERVICE

OBJECTIVES OF PRODUCTION/ OPERATIONS MANAGEMENT

The performance objectives may include:

a) Efficiency or productivity as output per unit of input.

 Cost of carrying inventory

OPERATIONS MANAGEMENT DECISIONS

Essentially management can be considered as a process of planning, organizing, coordinating and

This means value analysis involves:-

Carrying out a value analysis exercise:

- Considerable market competition.

Gage’s 12- value analysis.

Factors Affecting Demand

III MARKET RESEARCH

Market research is a systematic approach to determine consumer interest in a product or

II TIME SERIES METHODS

Ft+1 = sum of last n demands = Dt + Dt+1 + Dt-2 +…..Dt-n+1

where Dt = actual demand in period t

III EXPONENTIAL SMOOTHING.

Reasons for holding inventory: - Inventory helps us in following areas

Work-in-process: a product or products in various stages of completion throughout the plant.

Finished-goods: Items ready for sale to a customer

MRO: maintenance, repair and operation supplies.

Important terms in inventory :-

Selective Inventory Control

Based on Pareto’s Law of “Cause and Effect”

A- Few items are of key importance and value

High consumption Value

• Overheads (e.g. heating, lighting, security)

It is important to recognize that the MPS is not a control technique or a system.

Rather, it is a logical representation of information for decision-making. The MPS highlights

Forecasts and Orders

Domestic & End products

Tentative Master Schedule

1. The effect of capacity on the

iv) To generate capacity requirement,

Objective of Materials Management

Cumulative annual turnover in percentage

Figure 1: A.B.C. Analysis

Inventory control problems

2. How much to order

Fixed quantity Fixed quantity

Characteristics of aggregate planning:

• minimize changes in production rates

Aggregate Planning Strategies

Passive strategy (reactive strategy):

Passive (reactive) Strategies in Aggregate Planning: Basic Approaches