PRODUCTION PLANNING AND CONTROL

UNIT-I:
SYLLABUS: Introduction:-Objectives of production planning and control, definitions, functions
of production planning and control, organization of production planning and control department,
internal organization of department. Forecasting: Forecasting models, Aggregate production
planning, master production scheduling, materials requirements planning.
Requirement of PPC system:
1. Sound organisation structure with mechanism for proper delegation of authority and
fixation of responsibilities at all levels.
2. Information feedback system should provide reliable and up-to-date information to all the
persons carrying production planning and control functions.
3. Standardization of materials, tools, equipment, workmen etc.
4. Trained personal for using special tools or equipment and manufacturing process.
5. Flexibility to accommodate changes and bottlenecks and storage of material, power failure,
machine breakdown and absenteeism of employees.
6. Appropriate management policies for production levels and inventory levels.
7. Accurate assessment of manufacturing lead time and procurement lead time.
8. Planning capacity should be adequate to meet the demand.
Principle of PPC:
The highest efficiency in production is obtained by manufacturing the required quantity and
required quality of a product at required time by the best and the cheapest method.
PPC is a tool to coordinate all the manufacturing activities in a predefined system. PPC essentially
consists of planning the production in a manufacturing organization before the actual product
activities start and exercising control activities to ensure that planned production is released in
terms of quality, quantity, delivery schedule and cost of production.
Production planning involves in the following activities of a manufacturing system to produce a
product:
1.
2.
3.
4.
5.

Designing a product.
Determining equipment and capacity requirements.
Designing the layout of physical facilities.
Designing material handling system.
Designing sequence of operations.

Objectives of PPC:
1.
2.
3.
4.
5.
6.
7.
8.

To deliver quality goods in required quantities.

To ensure maximum utilization of resources.
To maintain optimum inventory levels.
To maintain flexibility in manufacturing operations.
To coordinate between the labour and the machines.
To ensure the effective cost reduction and cost control.
To prepare production schedule.
To remove bottlenecks in production.

Various phases in PPC function:

1. Planning Phase

Pre planning.
Active planning.

2. Action Phase.
3. Control Phase.
1) Planning phase:
a) Pre-planning: Pre-planning activities involve product planning and development, resource
planning and plant layout planning.
b) Active planning: It involves planning for quality.
2) Action Phase: It is the execution or implementation phase.
3) Control Phase: It includes status reporting, material control, equipment control, and quality
control.

Functions of PPC:
PPC
Production Planning

Production control

1) Estimating

1) Dispatching

2) Routing

2) Inspection

3) Scheduling

3) Evaluating

4) Loading

4) Expediting

Production Planning:
The main functions of Production Planning are:
1. Estimation: It decides the quantity of products to be produced and the cost involved on the
basis of sales forecast.
2. Routing: This is the process of determining the operation to be performed in the production
process.
3. Scheduling: It involves fixing the priorities for each job and determining the start and finish
time.
4. Loading: It involves deciding on which job is to be assigned to which work centre.
Production Control:
The main functions of Production control are:
1) Dispatching: It involves
i) Setting of production activities in motion.
ii) Providing movement to the raw materials.
iii) Issuing of job.
iv) Issuing of drawings, process sheets, job law sheet to the machine and assembly shops.
2) Evaluating: It involves checking of production with the planned schedule.
3) Inspection: It involves checking of production with the planned schedule.
4) Expediting: It ensures that the work is carried out as per the delivery schedule are met.
Organisation of production planning and control system:
There is no single pattern for the organization of a PPC activity. It depends on size of organization,
type of production system, and the type of product. There are two types of PPC system.
1) Decentralized PPC: In many small plants, the production planning functions such as routing,
loading, scheduling, will be included in the duties of the shop floor manager super intendment,
foremen, etc. But it is difficult to compete day to day work adequate planning and as a result,
it is often move feasible to break the PPC functions and assign them to qualified special. The
groups should be organized as staff section, normal reporting to the top manufacturing
executive.
2) Centralized PPC: Centralization of PPC staff depends upon the design of the PPC system. It a
completely centralized setup determination of shipping delivery, analysis of sales, stock,
preparation of routes, load charts, and scheduling charts and dispatching of work to the shop
floor, completes with the job tickets, and all the other necessary paper work would be
accomplished by the central PPC unit. In addition as the work is completed, a careful analysis
of actual performance could be made is completed and if corrective action actions were
required, it could be initiated by staff group.
Relationship with other manufacturing function:

Good relationships with the other function in the enterprise are essential for the effective
functioning of PPC.

Good relationship with the marketing group is necessary particularly in the new of the
importance of market conditions and the good will of customers.
Both product engineering and process engineering must help repeatedly informed as to
their plans to avoid the manufacturing of goods either by incorrect specification or by
improper method.

Internal organization of department :

It normally follows the functional pattern to describe the function of ppc.

Department is headed by the senior production engineer who is responsible for all
planning and control task connected with production and proper co-ordination of various
functions in order to ensure that the shops are provided with all the available instructions
and facilities.

FORECASTING:
A forecast is an estimate of an event which will happen in the future. The event may be a product,
rainfall, population of a country. The forecast value is not deterministic quantity. In an industry
forecasting is the first level division making activity. Forecasting provides a band for coordination
of plans for activities on various manufacturing activities in a company.
Forecasting Modules:
The forecasting techniques can be classified as qualitative and quantitative techniques.

Qualitative forecasting techniques: This technique uses subjective approach is useful where
no data is available and for new product.
1) Delphi Method.
2) Market surveys.
Quantitative forecasting techniques: these are based on historic data. These are more
accurate and computer can be used to speed up the process.
i. Simple moving average method.
ii. Single exponential smoothing method.
iii. Double exponential smoothing method.
iv.
Simple regression method.

SINGLE EXPONENTIAL SMOOTHING: This method keeps a running average of demand

and adjusts it for each period in proportion to the difference between the latest actual demand and
the latest value of average forecast.
Ft = Ft-1 + (Dt-1 Ft-1)
Where Ft = smooth average forecast for periodt.
Ft-1= previous period forecast.
= smoothing constant (0 < <1).
Dt-1 = previous period demand.

Problem: Using the exponential smoothing technique, compute the forecast from the following
data and two situations when = 0.3 and =0.7. Compute forecast for the periods assuming initial
forecast for the period 1to 27. Which forecast do you accept, and give reasons?
Period

10

Demand

27

30

32

31

28

27

30

33

33

31

Sol:
Period

Demand

Old forecast
(Ft-1)

=0.3

=0.7

Forecast error
(Dt-1 Ft-1)

=0.3

=0.7

Correction

New forecast

(Dt-1 Ft-1)

Ft-1 + (Dt-1 Ft-1)

=0.3

=0.7

=0.3

=0.7

27

27

27

30

27

27

0.9

2.1

27.9

29.1

32

27.9

29.1

4.1

2.9

1.23

2.03

29.13

31.13

31

29.13

31.13

1.87

-0.13

0.561

-0.091

29.691

31.030

28

29.631

31.039

-1.691

-3.039

-0.507

-2.127

29.1837

28.911

27

29.1837

28.911

-2.183

-1.911

-0.655

-1.331

28.52859

27.573

30

28.529

27.573

1.471

2.427

0.4413

1.6989

28.970

29.272

33

28.970

29.272

4.030

3.728

1.2090

2.6096

30.179

31.882

33

30.179

31.882

2.821

1.118

0.8463

0.7826

31.025

31.094

10

31

31.025

31.099

-0.025

-0.099

-0.007

-0.069

31.017

31.030

The new forecast for =0.7 is closer to demand than of =0.3.

Therefore forecast 2 is accepted.
Problem: A firm was simple exponential smoothing with =0.2 to forecast the demand forecast
for the first week of January was 400 units whereas the actual demand found out to be 450 units.
Find
a) Forecast the demand for second week of January.
b) Assume the actual demand for second week turned out to be 460 units, forecast the demand
up to third week of February assuming the subsequent demands as 465,434,420,498 and
462 units?

Sol:
a) Forecast demand =400+0.2(450-400) =410 units
Period

Demand

(Ft-1)

(Dt-1 Ft-1)

(Dt-1 Ft-1)

Ft-1 + (Dt-1 Ft-1)

1st week of Jan

450

400

50

10

410

2nd week of Jan

460

410

50

10

420

3rd week of Jan

465

420

45

429

4th week of Jan

434

429

430

1st week of feb

420

430

-10

-2

428

2nd week of feb

498

428

70

-14

442

3rd week of feb

462

442

20

446

PLANNING:
There are three types of production planning horizons.
1. Long term planning (5 to 10 yrs.)

Business forecasting.
Product and market planning.
Capacity planning.
Location and layout planning.
Financial planning.

2. Medium term planning. (6 months to 2 yrs.)

Aggregate and production planning.
Product forecasting.
Master production scheduling.

3. Short term planning (2 to 6 months)

Materials and purchasing control.

Scheduling.
Machine loading.
Job assignments.

Aggregate production planning: In APP, the objective is to develop plan that will satisfy or meet
the demands within the limits of available resources and at the least cost of the organization it
includes optimal combination of production rate, work force and investors level.
Strategies for aggregate production planning: One can use any one or a combination of following
strategy for smoothening the functions in demand.
Strategy 1: Building and utilizing inventory to constant work force.
Strategy 2: varying the size of work force.
Strategy 3: overtime utilisation.
Strategy 4: sub-contracting.
If a single strategy is used to meet the demands then it is called a pure strategy. If the
combinations of the above pure strategies are used to meet the demands then it is called a mixed
strategy. Several mixed strategies can be generated by taking the situation of two at a time or three
at a time of a pure strategy. The objective of aggregate planning is to generate such meaningful set
of pure or mixed strategies evaluate these select the most economical alternatives for
implementation.
Aggregate Planning Methods:
The various methods used to solve aggregate planning problems are classified as follows:
1) Graphical Method.

2) Heuristic method

3) Simulation.

1. Graphical method: In this method, cumulative demand values and cumulative production
capabilities are plotted and the same graph which would help us to identify the gap between
demand and the production capacity in different periods.

Problem: An industry has developed for a group of items that has the following demand
pattern.
Quarter

Demand

Cumulative demand

270

270

220

490

470

960

670

1630

450

2080

270

2350

200

2550

370

2920

a) Plot the demand as a histogram. Determine the production rate to meet the average demand
and plot the average demand forecast on the graph (production rate).
b) Plot the actual cumulative forecast requirement over the time and compare them with the
average forecast requirements. Indicate the excess inventory and back order on the graph.

The graph for the actual cumulative forecast requirement is shown in the figure above. In the same
figure it is compared with cumulative production unit based on the average production rate which
is equal to the demand. At any point, if actual cumulative forecast is more than cumulative
production units then there will be a shortage of items volume may be filled through back ordering
at a later date. Otherwise there will be excess stock which will be absorbed by the future demand.
2. Heuristic method:
In this method, a set of pure strategies and mixed strategies are generated and evaluated in terms
of cost. And finally either a pure strategy or a mixed strategy with minimum total cost is selected
for implementation. This concept is demonstrated by the following example.
Qmarket

Demand

Cumulative demand

270

270

220

490

470

960

670

1630

450

2080

270

2350

200

2550

370

2920

a) Suppose that the firm estimates that it costs Rs. 150 per unit to increase the product rates
Rs. 200 per unit to decrease the product rate, Rs. 50 per unit per quarter to carry the item
on inventory and Rs. 150 per unit of sub-contracted. Compare the cost incurred if pure
strategies are followed.
b) Given these costs, evaluate the following mixed strategy if company decides to maintain a
constant product of 250 units per quarter and permits 20% overtime when the demand
exceeds the production rate. The increment of overtime Rs. 25 per unit. It plans to meet the
excess demand by hiring and firing of words.

Quarter

Demand
forecast

Cost of
increase in
production on
level (Rs.)

Cost of
decrease in
production on
level (Rs.)

Total plan cost

270

220

10000

10000

470

37500

37500

670

30000

30000

450

44000

44000

270

36000

36000

200

14000

14000

370

25500

25500
197000

Strategy 2: Changing inventory levels:

In this pure strategy, the company calculates the average demand and sets its production capacity
to this average demand. This may result in excess of units in a particular period and shortage of
units on other periods. The excess units will be available in inventory for the future use. The
shortage of units can be fulfilled using the future inventory units. The adjustment of the inventories
and the cost of carrying the inventories are shown in the following table and the total cost of the
plan are calculated.

Quarter

Demand
forecast

Cumulative
demand

Average
production
level

Cumulative
production
level

Inventory

Adjusted
inventory

270

270

365

365

95

350

220

490

365

730

240

495

470

960

365

1095

135

390

670

1630

365

1460

-170

85

450

2080

365

1825

-255

270

2350

365

2190

-160

95

200

2550

365

2555

260

370

2920

365

2920

255

Strategy 3: Sub-contracting:
Some firms may be interested in acting up their regular type capacity to its minimum value and
meet the rest of the demand using sub-contracting. The cost of this plan is compares as follows:

Quarter

Demand
forecast

Production units

Sub-contracting
units

Cost of subcontracting

270

200

70

7000

220

200

20

2000

470

200

270

27000

670

200

470

47000

450

200

250

25000

270

200

70

7000

200

200

370

200

170

17000
132000

For this parts production, the ideal pure strategy would be strategy 2 i.e., changing
inventory.
1. Generating pure strategies

2. Various pure strategies are given below

a. Vary the work force size
b. Changing inventory levels
c. Sub-contracting
The method of computing cost in each of the above is demonstrated here:
Strategy 1: Varying the workforce size:
In this pure strategy, the size of workforce will be varied to meet the actual demand. This means
that during the period of low demand, the company must fire employees and at the time of high
demand, the company will have to hire employees.
These two extreme steps involve associated costs. As per this pure strategy,
the produced units will be equal to demand values in each period.

3. The mixed strategy has the following components

i. Maintain constant production rate of 250 units/ quarter.
ii. Permit 20% overtime when demand exceeds production rate. The incremental cost of
overtime is Rs. 25/ unit.
iii. To meet any further demand, it chooses to hire and fire workers.
This mixed strategy is computed in the following table:
Quarter

Units
Regular Additional Overtime Additional Cost of
Cost of
Cost of
production units after inventory inventory changing
of
time
units
workforce
demand production
needed
overtime
forecast
units
period
after
regular
time

Total
cost

270

250

20

50

-30

1500

1250

2750

220

250

-30

-30 (-60)

3000

3000

470

250

220

50

170 (10)

16500

1250

17000

670

250

420

50

370

39000

1250

40250

450

250

250

50

150

44000

1250

45250

270

250

20

50

-30

1500

30000

1250

32700

200

250

-50

-50 (-80)

4000

400

370

250

120

50

70 (-10)

500

1250

1700
147500

Master Production Schedule (MPS):

A master production schedule represents a plan for manufacturing. It is an anticipated built
schedule for manufacturing end production. It develops the quantities and dates to be exploited for
general per period requirement for sub-assemblies, parts and raw material.
It is a statement of product and not a statement of market demand. It is a feasible
manufacturing plan. It takes into account capacity limitations as well as desires full utilization of
capacity. It contains all products for which bill of materials exists.
1. MPS is a manufacturing planning tool that takes business inputs such as customer demand,
capacity, inventory levels and planned material deliveries.
2. MPS is a tool typically controlled by sales and operational planning functions and
administered by master planning schedules.

Benefits of MPS:
1. MPS discounts customer demand from manufacturing while customer demand is used as
planned variable.
2. MPS derives the manufacturing team and customer demand is determined from
manufacturing process.
3. MPS smoothes the demand. Most customer demand is spooky with peaks and troughs. It
can cause planning problems for manufacturing. A benefit of MPS is that it decomposes
the customer demand and optimises the production losses.
4. It protects lead time. Customer demand disconnected from manufacturing, the
manufacturing is scheduled from demand loaded within lead time and manufacturing just
works to MPS plan.

Customer demand
MPS

Manufacturing

5. It helps the sales team to predict when to promise the customers. MPS plan can support the
sales team by helping them at what time the end product is available to promise the
customers.
6. MPS acts as a single communication tool.

Problem: The following table the forecast for each of the next four weeks at 70 units. The starting
inventory is zero. The MPS rule is that whenever the projected inventory on hand is negative you
need to schedule production. The production lot size is 150 units. The following table shows
customer order as given below:
Week

Order

80

50

30

10

Solution:
Week

Order

Forecast

80

70

50

70

30

70

10

70

Week

Forecast

70

70

70

70

Firm Order

80

50

30

10

Start inventory

20

50

80

Requirement

80

70

70

70

Planned
production

100

100

100

Projection
inventory

20

50

80

10

Material Requirement Planning (MRP):

In MRP system, we are dealing with dependent or humpy demand. This humpy
demand is directly related to demand of some other products (components, sub-assemblies, raw
materials). Of manufacturing inventories.
Lead time:
In MRP, lead time are used to determine the starting date for assembling final products,
starting date for sub-assemblies for producing component parts and for initiation of orders of raw
materials.
Inputs to MRP system:
1. MPS
2. Bill of materials
3. Inventory record file

Service part requirement

material
Sales forecast

Customer order

MPS

Inventory transaction

Engineering changes
MRP process

Inventory record file

Bill of materials
O/p reports

Capacity v/s load (report)

Gross material required

Production order status

report
Shop floor planning report

Information from MPS is generated from two sources

i. Customer orders.

ii.

Sales forecast.

Based on these two information, MPS will give the requirement of particular product for each
period of duration (quarter is minimum).
2. BOM file: It is updated with any engineering changes like change in design of product or
change in material.
3. Inventory record file: This file is updated with inventory transactions and gives
information of status of inventory of items.
4. Service part required: These are requirements of parts in addition to normal requirement
for a particular product (like spare).

Example problems on MRP system:

Product structure of P1 and P2:
P1

P2

S1 (1)

S2 (2)

C1 (1) C2 (4) C3 (1) C4 (2)

(1)

S3 (1)

C5 (1)

C6 (1)

M4

S4 (1)
C4 (1) C5 (2) C7 (1)

M4

MPS
Week

Product P1

10

50

Product P2

70

100

80

25

Initial inventory for M4:

Period

C8

Item raw
material
(M4)
Gross
requirement
Schedule
receipt

40

On hand
50

40

Net
requirement
Planned
order

Lead time (in weeks)

Assembly

Manufacturing lead time

Ordinary lead time

P1 =1

C4 =2

M4 =3

P2 =1
S2 =1
S3 =1

Product P1

Gross requirement

10

50

100

50

100

Schedule receipt
On hand 0
Net
requirement

50

Planned
order
release
Product P2

Gross
requirement

100

70

80

25

70

80

25

80

25

10

Schedule
receipt
On hand 0
Net
requirement
Planned
order
release

70

Written, proof read and corrected by

T. Srikanth, D. Dileep Reddy

Unit-II
INVENTORY CONTROL
Syllabus: Objectives, scope of the problem, economic and social complications of inventory
management, control systems approach, limitations of inventory control. Functions of inventory,
demand and production characteristics. Measures of inventory performance. Systematic control of
inventory: Fixed order quantity systems, fixed interval systems, (s, S) systems, classification of
items in inventory. Computer based inventory control systems.
Objective of Inventory Control:
1. To minimize capital investment in inventory by eliminating excessive stocks.
2. To ensure availability of needed inventory for uninterrupted production and for meeting
consumer demand.
3. To provide a scientific basis for planning of inventory needs.
4. To tiding over the demand fluctuations by maintaining reasonable safety stock;
5. To minimize risk of loss due to obsolescence, deterioration, etc.
6. To maintain necessary records for protecting against thefts, wastes leakages of inventories
and to decide timely replenishment of stocks.
Scope of the problem:
The objective of a production planning, scheduling and inventory control in the face of uncertain
market conditions and in maintaining a reasonable level of inventories of all type is almost a
universal problem in business. Production planning problem arise from the need to manage the
internal operations of the production company in the face of outside demands. The objective of
production planning scheduling control of inventories is to minimize frictions in the internal and
external relationships. The problem of planning and scheduling the production of inventories
spread all over the operators concerned with the manner of production Vs time interaction between
production , distribution , locations and size of physical stocks. This problem occurs at almost
every step in the production process whether purchasing, production of in-process material,
finished production, distribution of finished product, or service to the customer. Some relatively
existing problems are cost factor and other factors are subjected to chance errors.
Economic and social implication of inventory management:
Inventories are a type of industrial asset which are far from earning no profit but serve definite
functions if effectively used and earn returns like other assets. The returns are expressed assetassert ultimately in terms of increased human productivity. Inventories may need lowered labour
and training cost, lessened requirement for other capital assets such as production capacities or
improved ability to meet customer need in most cases, inventory is essential to the operations a

production system as are plants, machines and transport equipment. However management of other
assets if they contribute fully to human productivity. Inventory accumulation and depletion have
long been recognized as a major contributing factor to the fluctuation in business activity.
Inventory accumulation and depletion have long been recognized as a major contributing factor to
fluctuations in business activities. Businessmen as individual cannot expect to eliminate entirely
the effect of inventory fluctuation .i.e., inventory build-up or depletion. When the forecast on
stability on community well-being is receiving from attention from economic groups.
Efficient inventory management and production planning are an essential part of a business
program to achieve employment stability. Inventories give the business flexibility at reasonable
cost to meet the demand of consumers
Control system approach;
Control over inventories means good long range and intermediate planning of production
planning, good production scheduling and good methods of control. The comprehensive and
integrated system including the production planning, scheduling and control must be closely
coordinated with other planning and control activities such as cash planning, capital budgeting and
sales forecast as it impinges on a wide range of production, sale financial policy, and other
operating decision.
The specific planning steps and timing will vary from one company to another depending on
product and process requirements but the essentials of an inventory control system can be grouped
into three broad classes;
1) Long range planning
2) Intermediate policy making
3) Short term scheduling
1. Long range planning: Long range planning is to budget capital for facilities and inventory
investment .This is done to arrive at a balanced capital budget in view of long business forecast
and possible errors in this forecast. The long term plan makes use of demand forecast and
preliminary policy decision on capital allocation the value of risk assumed. To show the
implications of policy choices and help refine them and then provide a basis for long term operating
decisions.
2. Intermediate policy making: It is a basis for short term scheduling. Decision must be made on
what money is currently north, what current service requirements are .General plans must be laid
out for using the existing facilities in the height of sales forecast. It helps in determining the level
of stocks that maybe needed to build-up in advance of sales peak, to stay within plant capacity,to
keep employment fluctuations at an acceptable level or to balance inventory and production costs.

3. Short term scheduling: Short term scheduling work arraignment is to keep the facilities, men

employed, stocks balanced in view of the demand for output. This must be done within consistent
framework of policies governing the level of production and employment to be maintained. Size
of inventory investment, service to customers, warehouse be maintained. The
inventory serve as cushions in each of these stages of planning to absorb the stocks of demand
forecast error and to permit more effective use of facilities and staff in case of demand fluctuations.
Functions of Inventory control:
a) The primary function of inventory is to use marketing and production to increase
profitability, to get the maximum amount for the business' investment.
b) Basically inventories serve to de-couple successive operations in the process of making a
product and getting it to customers.
c) Inventories will not force the consumption to adapt to the necessities of production.
d) Inventories free one stage of production distribution process from the next, permitting each
to operate economically.
e) Basically inventories serve to de-couple successive operations in the process of making a
product and getting it to customers.
f) Inventories will not force the consumption to adapt to the necessities of production.
g) Inventories free one stage of production distribution process from the next, permitting each
to operate economically.
h) To ensure against delays in deliveries.
i) To allow for possible increase in output.
j) Maintain smooth and efficient production flow.
k) To keep better customer relations.
l) To take advantage of quantity discounts.
m) To utilize to advantage price fluctuations.
n) To ensure against scarcity of materials in the market.
o) To have a better utilization of men and machinery.
Limitations of Inventory control:
a. Efficient inventory control method can reduce but not eliminate business risks.
b. Inventory planning and control procedures can only help business in assessing risks
and plan a strategy.
c. Best an inventory control system can do is force the business decision which
balances the objective of the firm.
d. The control of inventories is complex because of the many functions it performs. It
should be viewed as shared responsibilities.
e. The objectives of better sales through improved service to customer; reduction in
inventories to reduce size of investment and reducing cost of production by
smoother production operations are conflicting with each other.
f. Efficient inventory control method can reduce but not eliminate business risks.

g. Inventory planning and control procedures can only help business in assessing risks
and plan a strategy.
h. Best an inventory control system can do is force the business decision which
balances the objective of the firm.
Demand Characteristics:
The demand characteristics strongly influence the production and inventory control system in the
following ways:
1)
2)
3)
4)
5)

The size and frequency of order

Uniformity or predictability of demand
Service requirements or allowable delay in filling orders
The distribution pattern
The accuracy, frequency and detail of demand forecast

1. Size and frequency of order; The planning must take into account the characteristics size of
order. The same total volume sold in a large number of small order can characteristics be supported
by substantially less inventory than is sold in a few large order unless special measures are taken
to reduce uncertainty about the time when individual large orders are received.
2. Uniformity or predictability of demand: Handling large, unpredictable fluctuations requires
flexibility and additional capacity in the inventory production as well as carefully designed tools
for adjusting or controlling inventory balance, but where fluctuations are predictable, the advanced
planning technique can be used.
3. Service requirements or allowable delay in filling orders: Where allowable delays are small
inventories and production capacity must be corresponding greater. Care is required to be once
that control system really responds to the need.
4. The distribution pattern: If there are more number of stages between the shipment going from
the factory and reaching the consumer, the more inventory is required. Generally, the various
stages in this distribution system are field warehouse, wholesalers, retailers, etc.
5. The accuracy, frequency and detail of demand forecast: Fluctuations in stocks exits basically
as the forecasts are not exact/ precise. The inventory problem of a business is directly related to
its inability to forecast demand with precision. The responsibility of forecast errors for the
inventory needs should be recognized. A control system should be adapted to the types of
forecasts and forecasting accuracy that one possible.

Production Characteristics:
The Production Characteristics which include the scheme of production and inventory control are:
a.
b.
c.
d.
e.
f.
g.
h.

Type of production Organization

The number of manufacturing stages
The degree of specialization of product at specific stages.
The processing time required at every stage
Production flexibility
Capacity production and ware housing stages.
Kind of processing
Quantity requirement shelf life limits and obsoleteness risk.

Measurement of Inventory Performance:

The inventory in a stocks area will be depleted as the demand is based in a well run inventory
system, all normal demand on a stock area will be filled within some specified or the service time.
At some point of time, the control system will operate to place a demand for replenishment on the
operation feeding the stock area. The demand may call for replenishment in an economical batch.
Operations cannot proceed until all the items demanded are available. It will have to wait a time
equal to the longest serving time of a stock area feeding it. If all the materials are available, the
operation itself will take sometime which is known as processing time.
There is no single index that serves to describe the performance of a inventory. The three interrelated factors that must be considered in the rating the performances of an inventory are:
a. Size of the inventory
b. Cost of replenishment
c. The degree to which it provides the stock when demanded.
The inventory can be reduced if the firm is willing to buy or produce in small replenishment
quantities at an increased cost.

Systematic control of Inventory:

Task of inventory management is to control through the selection of the time order and quantity of
orders, taking into account the likely future requirement (demand) and the maintaining their
estimate, Inventory management, in short, implement the high level policy decision in a best sense.
Good decision regarding the timing of replenishment of the order quantity and forecast
considerations.

There are various forms of inventory control system. The choice of system for particular
application depends on the information available for its operation and the level of performances

desired of the inventory. The following are the three inventory control systems which are used
widely.
Fixed order Quantity system (Q-system),
Fixed Inventory system (P-system),
(s, S) system.
Fixed order quantity system (Q system):
It is probably the oldest and most common recording system which used fixed order quantity at a
variable ordering interval. Under this system, same quantity of material is always ordered. Time
of order placed is allowed to vary with fluctuation in usage. The working of this system is shown
in the following figure.
In this system an order is placed whenever inventory level is just sufficient to meet a reasonable
maximum demand over the course of replenishment lead time. A system with fixed order quantity
can be specified by
1. The lead time (L) between placing and receiving an order
2. The order size (q)
3. Safety stock (s)
4. The expected demand rate (d)
5. The expected inventory balance i.e., if demands were made uniformly at the expected rate
(e), then the inventory balance (I) over the time is safety stock + half the order size (q)
I = s + q/2.

Advantages

It is simple and reliable

It is comparatively cheap to operate and easy to explain to new stock control personnel
Reorder point is indicated easily
Each item can be purchased in its EOQ.
Disadvantages
When different items have to be ordered from the same supplier in order to reduce
transportation cost or to take advantage of credit or discount, it is necessary to order
several items simultaneously even when only one reaches the reorder point, while the
basic idea is that items are independent of each other in the replenishment procedure.
Because of absence of adequate data on stock levels and consumption rates in the
simpler form, it is difficult to re evaluate order quantity.
Two bin system or Q system is more suitable to class C items
P System: The use of fixed reorder cycle with variable order quantity is a major alternative open
to the use of fixed order system or Q system, where uncertainty forces departure from the pattern
of uniform order quantities placed at regular intervals. The periodic reordering system or fixed
interval systems are more popular and are frequently used particularly where some type of booked
inventory control is employed and where it is convenient to examine inventory stocks on a fixed
time cycle. Continuous review of inventory balances which is required in fixed quantity system
maybe awkward and extremely expensive. As an alternative to this system, inventory balance on
indicated items will be periodically renewed in fixed interval systems either daily, weekly or
monthly. A variety of rules or procedures can be used but the basic idea underlying all of them is
the same namely check of the stocks on a fixed frequency. Example: check once a month and place
the replenishment order based on the amount used or demanded since the last review as shown in
the figure.

.
Advantages:
The main advantage of this system over the two bin system is that all orders for
replenishment are issued at the same time.
The ordering mechanism is regular and not subjected to warning signals from the stores.
Disadvantages:
Usually more stock is held when this system is adopted than with two bin system
The ordering cycle system can be classified as
1. All items in one cycle in this type all the items are replenished every cycle. This method
is useful when the number of items are not too large and the rate difference is not too much
2. Multi cycle in this type the items are divided into groups and each group has its own
ordering cycle, independent of the other groups. The groups are formed either by selecting
items that have to be ordered from the same vendor or by taking items whose use rates are
fairly equal.
(s, S) System: This class of system is used to review inventory stocks on a periodic basis and

replenishes these stocks only when on hand and on order stocks have fallen to or below a
specified level. When this happens, an order is placed to bring the amount of stock on hand and
on order up to a specified maximum level. The frequency of review and the minimum and
maximum inventory points can be determined by the methods similar to the earlier ones. This
system of control is particularly useful when the cost of making the review and the cost of placing
an order are separate and significant. This class of system has been named the (s,S) system. The
ordering rule for an (s, S) system is very simply stated as if fewer than s units are available on
hand then order enough to bring the stock up to level S else do not order. The application of (s, S)
system is as follows:
1. Choose two inventory levels s and S, where S is larger than s
2. At each review period, compare the available inventory I with s and S
3. If I lies between s and S, place no order. If I is at or below the level s, place an order for an
amount equal to (S-I).
Classifications of Items in Inventory:
Inventory in accompany consist of thousands of different items in stoke. The control of all this
items creates series problems to the management if the same amount of control is exercised on each
of these items. Therefore in order to execute proper control it is necessary to take selective approach
and find the attention required for each item according to its important.
The
commonly used systems can be classified as:
1. ABC ANALYSIS ( Always Better Control Analysis) :

ABC classification is an important technique to classify the materials of inventory into three
categories on basis of cost and volume.
Class A items 5 15% of volume, 60 75% of cost
Class B items 30 35% of volume, 15 20% of cost

Class C items 50 60% of volume, 5 10% of cost.

Steps in ABC analysis:
1. Calculate the annual usage in units for each item.
2. Calculate the annual usage of each item in terms of rupees (annual usage unit cost).
3. Rank the item from highest annual usage in rupees to lowest annual usage in rupees.
4. Compute the total value.
5. Find the percentage of high, medium and low item in terms of total value of items.

Part

Unit cost $

Annual usage units

Total cost $

60

90

5400

350

40

14000

30

130

3900

80

60

4800

30

100

3000

20

180

3600

10

170

1700

320

50

16000

510

60

30600

10

20

120

2400

Part

Total volume

% of total value

% of total

% of cumulative

of product

Quantity

of quantity

30600

35.83

16000

18.7

11

14000

16.39

15

5400

6.64

24

4800

5.6

30

3900

4.6

13

43

3600

4.2

18

61

3000

3.5

10

71

2400

2.8

17

100

2. VED ANALYSIS (Vital Essential and Desirable Analysis ):

It pertains to the classifications of maintenance of spare parts. The spares are split into three
categories of importance form the view point of functional utility. V- Refers to Vital items without
which the production activities or any other activities of the company would come to a halt, or at
least be drastically affected. E- Refers to Essential items without which the performance or
efficiency of the equipment will be reduced non availability of these items may result in loss of
productivity. D- Refers to Desirable items, these items which do not cause any immediate loss in
production fall under this category.
3. SDE ANALYSIS (Scares Difficult and Easily available Analysis):
This analysis is based on availability position of each item. In this analysis S-Refers to Scarce items
which are short in supply and their availability is scarce .This includes important items. D- Difficult
items which cannot be produced easily. These items may not be available in local market and have
to procure from far of items .These items for which there are limited number of items. E- Refers to
items which are easy to acquire and which are available in the local market.
4. HML ANALYSIS (High Medium and Low Cost Inventory Analysis):
In ABC analysis total annual usage is considered we may come across quite a view of items which
fall in to B category although cost is high. In HML analysis unit cost is also considered in ordered
to find out the important of the items. Limits of unit cost are fixed for high cost items and all the
items are segregated into High, Medium and Low categories depending upon unit cost. This
analysis is quite useful in deciding safety cost in relation with availability of the material.
5. MNG ANALYSIS (Moving and Non Moving items Analysis):
In this analysis M-refers to the moving items. The rate of consumption of this items is quite high,
N-refers to Non-moving items. These items are those which are not consumed in the last 1 year.
This are those items which have nil balance both at the beginning and at the end of last financial
year and there was no transaction during the year. These are non-existing items for which the store
people keep bin cards showing the nil balance.
6. FSN ANALYSIS (Fast moving, Slow moving and Non-moving Analysis):
By doing FSN analysis materials can be classified based on their movement from inventory for a
specified period. Items are classified based on consumption and average stay in the inventory.
Higher the stay of item in the inventory, the slower would be the movement of the material.
FFastMoving
S- Slow Moving
N- Non moving
Sometimes the terms FNS is also being used, where
F Fast Moving
N- Normal Moving
S- Slow Moving.

The following steps in doing the FSN analysis:

1. Calculation of average stay and the consumption rate of the material in warehouse.
2. FSN Classification of materials based on average stay in the inventory
3. FSN Classification of the material based on consumption rate, finally classifying based on
above FSN analysis.
Computer based inventory control system:
Inventory management has been described as a task in control system operations. Decisions
regarding the timing and quantity if replenishment orders are made according to the rules derived
from the statements of management policy and observations of demand rates and costs in day to
day operations, the inventory manager monitors the status of the inventory and makes routine
application of these decision rules to order replenishment. For an inventory of few dozen parts, the
procedures of data collection and transmission, stock status review, demand forecasting and
ordering can frequently be reduced to simple, routine procedures and calculations which can be
handled manually or with simple computational aids. However, inventories with many thousands
of items in the distribution industries like food and drug wholesaling in a particular single stocking
point, more than 20,000 items and some of them might contain upwards of 100,000 items. Manual
control of inventories on such items does not permit manual effort and is not economically viable.
The advent of a strong programmed computer has shifted this point of economic balance. A greater
distance in the direction of effective control of inventory. It is now possible to apply the most
sophisticated decision making to the control of multi thousand item inventories by incorporating
inventory records (withdrawal and receipts) into the data processing system of a firm equipped
with the modern capacity computers. Such computers can maintain inventory records as part of the
normal flow of business transactional data. The decision rules can be programmed and stored for
use by the computer which can make the routine recording of decisions. Packaged programs for
forecasting, order quantity and the number of inventory analysis routines are available today, which
perform various operations related to inventory control.
By
Charla Saikishore-2210812213
Nallu Arun Reddy-2210812244

UNIT III
Syllabus: Cost factor: The importance of costs, elements of costs, principles of cost
determination and accounting systems, production and inventory cost factors, other costs to the
firm.
Economic quantities of manufacture or purchase: Lot size problems, finite production rates in
manufacturing, quantity discounts.
Uncertainty: Effects of uncertainty, demand and supply, safety stock, role of forecasting in
production and inventory control. Uncertainty in production cycling
IMPORTANCE OF COSTS:
Costs, balancing of opposing costs, lie at the center of all production and inventory
control problems. Costs are play an important in inventory control and production planning
problems as the cost involved helps the firm to decide how to maintain level of inventory and
manage the total capital present in the company to meet the customers order.
Cost information often can be obtained from accounting records but typically it
requires a reorganization or restatement of all the accounting costs to arrive at cost definitions
suitable to the particular problems at hand. There are, at times, costs which must be derived by
experimental methods or statistical means. There is a distinction between accounting costs for the
historical and financial reporting, and operational or functional costs to be used in aiming at policy
or day to day management decisions.
The accounting and operational costs are often confusing because accounting organizations and
records are usually the major source of cost information in production and scheduling problems,
and an essential early step in the analysis of production and inventory problems. The cost
accounting system employed in a particular process includes methods for collection of direct costs,
and allocation of overheads and the method for valuation inventories by which various cost
elements are assigned to management units.
Principles of cost determination and accounting systems:
Accounting costs are derived under the principles of accounting developed over
many years. In any particular business, the specific methods and the degree of accounting skill
might vary but all of them have the basic objective of accounting procedures to provide a fair,
consistent and conservative valuation of assets in the business. Accounting methods have
traditionally been strongly influenced by the objective of making a record of the flow of assets
through the business. In recent years accountants have tended to evaluate the controlled use of
costs in making operating decisions and exercising operating control,

Accounting systems typically distinguish three kinds of costs:

1. Direct costs: Direct costs are those which can be directly associated with a specific
joborder, batch of material, or item. Example: raw material (it includes raw material cost,
wage cost of workers directly operating the production equipment, and the cost of
production)
2. Indirect costs: This may include the cost of supplies used to service a machine, wages
ofprocess operators not directly related to a particular job such as the setup men, sweepers,
cleaners etc.
3. Overhead costs: Overhead items include factory overhead such as building andequipment
depreciation, factory supervision, and general overheads such as administrative staff and
sales staff etc.
The two basic types of accounting systems can be distinguished based on actual costs and standard
costs.
Under the actual costs system, the product costs are based on accumulation of the actual direct cost
incurred on a given job or item during a period of time.
Under the standard costs system, the actual cost will also be collected to varying degrees of detail
as a check on the reliability of the standards and control devices.
Functional and operative costs:
Contrasting the principles underlying accounting costs, the definition of costs for
production and inventory control may vary from time to time depending on circumstances and the
length of time being planned. These costs are defined subject to criteria:
1. The costs shall represent out of pocket expenditures i.e., cash actually paid out or
foregone opportunities for profit.
2. The costs shall represent only those out of pocket expenditures or foregone
opportunities for profit whose magnitude is affected by the schedule or plan.

Elements of costs:
The costs that are affected by the firms decision to maintain a particular level of
inventory are called the costs associated with inventory control or relevant inventory costs.
These relevant inventory costs play an important role in the study of an inventory system.
These costs may be classified as
1. Purchasing costs
2. Ordering costs
3. Inventory carrying costs
4. Storage costs
Total inventory costs: If unit cost of an item depends on the quantity purchased, that is
price discounts are available, then it is necessary to formulate an inventory policy which
takes into consideration the purchase cost of the item held in stock also. The total inventory
cost is given by
ITC = Purchase cost + total variable cost to maintain inventories
ITC = purchase cost + total ordering cost + inventory carrying cost+ storage cost
1. Purchase cost: The cost of purchasing a unit of an item is called purchase cost. It
is theactual price paid for procuring of items. The unit price of item depends on the
size of the quantity ordered or purchased or manufactured. This is given by the
relation
Purchase cost = cost per unit demand per unit time
= Cu S
2. Ordering cost: It is the cost of placing an order from a vendor. This includes all
the costsincurred from calling for quotations to the point at which the item is taken
into stock. It consists of the expenditure connected with
a. Receiving quotations
b. Processing purchased requisitions
c. Receiving materials and inspecting it
d. Following up and expediting purchase order
e. Processing seller invoice.

If C0 is the cost of placing an order and q is the quantity of order, then the unit cost of
placing an order is C0/q and this decreases as the order quantity is increased which means
the bigger the amount purchased in one lot, the lesser the unit ordering cost. If S is your
annual requirement, then annual ordering cost is (S C0/q)
3. Inventory carrying cost: Carrying costs, also known as inventory holding costs, are
thecosts incurred in maintaining the inventories in the firm. They are based on average
inventory and consists of
a. Storage costs, which includes rent of storage facilities, salaries of personnel, and
related storage expenses, electricity and maintenance etc.
b. Cost of obsoleteness: If too much of inventory is present in the course of time, the
product may cease its demand
c. Cost of deterioration and spoilage
d. Cost of insurance
e. Cost of capital etc.
If i = rate of interest then annual storage cost = Cu i x q/2
4. Shortage or stock out cost: When an item cannot be supplied, or the
consumersdemand, the penalty cost for running out of stock is called shortage or stock
out cost.
If the item is not in stock, some of the customers are not ready to wait and therefore,
there is a loss of scale, in this case, the shortage cost includes the loss of potential in
terms of unit of the item demanded, but where not available and loss of good will,
permanent loss of customers and its associated loss of profit in future sales. Shortage
cost in planning period maybe calculated as:
Shortage cost = cost of being short of one unit average no. of units short in the
inventory
Where, average no. of units short in the inventory for a planning period is determined
as follows:
Average no. of units short in the inventory = [+] time
2

Other costs to the firm:

1. Capital costs: It is the cost of obtaining capital for use in supporting or financing
operations. This may be obtained by
a. Cost of borrowing funds from bank.
b. Cost of diverting capital from other possible uses i.e. share markets etc.
Capital costs in inventory or production planning problems break down to
investment in inventory or other facilities. This is based on the rate charged per
dollar. The amount earned in return is the profit of the capital invested out-ofpocket.
Inventory investments are the out-of- pocket or unavoidable costs for material,
labour and overhead of goods in inventory.
2. Marketing costs: An important objective in most production planning and
inventory control systems is maintenance of reasonable customer service. An
evaluation of the worth of customer service or, alternatively, the loss suffered
through lack of customer service, is an essential aspect of the derivation of a
minimum-cost scheduling or inventory-control system. And other promotional
costs come under this criterion.

3. Clerical cost: Clerical costs are one of the most difficult costs associated with
production and inventory control to measure at the present time. Clerical costs
include such items as the cost of making out a requisition and placing an order, the
cost of time of personnel required for scheduling and the cost of inventory reviews
for reordering purposes.
Lot-size problems:
Case 1:
Determining Economic Order Quantity for Inventory Model with uniform demand:
The fixed order quantity system is based on selection that order quantity which will
minimize the total variable cost of managing the inventory. In determining Economic
Order Quantity it is assumed that the cost of two parts
Ordering cost and
Carrying cost

Economic Order Quantity (EOQ):

Economic Order Quantity is that order quantity which will minimize the total variable
cost of managing the inventory.
Methods of calculation of EOQ:
Assuming that the inventory decreases at a constant rate from the order quantity q to
zero and then replenished by another quantity.

Symbols used:
Let,
S=Annual consumption of the products (units),
. =Cost of placing an order,
. =Unit cost of an item (unit per Rs.),
q=Order quantity (units),
i=Interest rate charged per unit per year.
Now,
The total variable cost of managing the inventory per year
=Annual ordering cost+ Annual cost of carrying the inventory= E say.

Therefore,
E= (No. of orders per year)x(cost of placing an order)+(Average inventory)x(Inventory
carrying cost)

E=x + 2. .i
E=x + 2.
To determine EOQ(0 ) that minimizes the total cost of managing the inventory, we must
differentiate E w.r.t decision variable q and set the first derivative to zero, for minimum

total cost = 0.
Therefore

. =
.

. 2 =

.
2

+ .i.2=0

.
2

2..
.i

Therefore,
2( ())( )

EOQ(0 ) =

Problem: A company requires 16000 units of raw materials costing Rs.2/- per unit. The
ordering cost is Rs.45/- and the carrying cost are 10% per year per unit of the average
inventory. Determine the economic order quantity, cycle time, total variable cost of
managing inventory?
Ans:

21600045

EOQ=

20.1

=2683 units
16000

Frequency = 2683
=6
Cycle time =
Variable cost =

12

1600045
2683

=2 months

20.12683

=Rs.536.65/-

Problem: A company needs 2000 units per months. cost of placing an order is Rs.40/-.In
addition to which Rs.0.50, the carrying cost are 10% per unit of average inventory per year.
When the purchasing cost is Rs.10/- per unit, find the economic lot size and the total
minimum cost?
220004012

Ans: EOQ=

1.5

=1131 units
Carrying cost (s)=24000
40

1131

Total minimum cost= 10*24000+24000*(1131)+1.50*(

(no storage cost here)

=Rs.241697/Case 2:
EOQ Problems with several production runs of unequal length:
EOQ problems with several production of unequal length replenishment instantaneous.
With varying demand rate the cost will be exhausted at different time periods. The policy
of ordering same quantity for replenishment of inventory, the situation can be represented
graphically,

Let
.1, .2, 3, . = demand in different time periods;
1 +2 + 3 ++. = Total demand in time T;
T = 1 +2 +3 +..+

Cost of ordering in time T = x

Cost of purchasing S units = S x

Now inventory carrying cost for time T = (Average inventory in time1 ) .i+(Average
inventory in time2 ) .i++(Average inventory in time ) .i
1

= 2(0 . 1 ) .i+ 2(0 . 2 ) .i+..+ 2(0 . ) .i

1

= 2(0 . .i)(1 +2 +3 +..+ )= 2(0 . .i)T

Hence the total cost incurred in time T
=

.
0

+ .S+ 2(0 . .i)T

Minimizing w.r.t 0 ,
2..

.0 =

.i.T

Here,

. =

1 +2 +3 ++.
1 +2 +3 +..+

= Average demand in different periods.

Case 3:
ECONOMIC ORDER QUANTITY WHEN STOCK REPLENISHMENT IS NOT
INSTANTANEOUS (GRADUAL REPLESHNISHMENT OR FINITE
REPLENISHMENT)
It is more general and realistic situation. Suppose it takes time 1 for replenishment and
time 2 is required for inventory to be exhausted. In this case each order cycle is of
(1 +2 ) time units. Again the demand rate in each cycle assumed to be uniform. The
inventory pattern under this model appears as shown in Fig.12.7

Fig 12.7
Let,
S = Annual consumption
= Cost per unit
= Cost of placing an order
p= rate of replenishment per unit of time (in units)
d= daily consumption rate
1 = time for replenishment
i= Inventory carrying cost (decimal)
Then inventory under this system builds up at the rate (p-d) and is maximum at the end of
production run.
Maximum in inventory at the end of production run = (p-d)1
Therefore, average inventory =
=

(Pd)
2

(pd)1
2

* 2 (where q= quantity replenished during time 1 =p* 1 )= 2(1-)

Thus, annual inventory carrying cost = 2 (1-). .i

And annual cost of ordering = *

Therefore,

Annual variable cost of managing the inventory = Annual cost of ordering + Annual
inventory carrying cost
.

E=

0 =

+ 2 (1-). .i

+ 2 (1-). .i.=0

(for minimum total annual cost)

2.

(1 ). .i

Case 4:
EOQ PROBLEMS WITH PRICE BREAKS :
The EOQ formulae under the basic EOQ model are based on the assumption that the
price per unit is fixed irrespective of the order quantity. However, sometimes suppliers
offer discount in large quantities are purchased. Quantity discounts reduce material cost
and procurement cost but increases the inventory carrying cost. Therefore, a decision has
to be whether the purchaser should stick to EOQ or raise the order the quantity to take
advantage of price discount.
When there is only one price break, the situation may be as follows:
Range of quantity

Purchase cost per unit

0Q1<1b1

Cu1

b1Q2b2

Cu2

Where, b is that quantity at and beyond which the quantity discount applies and
\the following procedure is adopted to take decision in such cases:

Step 1- calculate Q2 i.e., optimum order quantity for lowest price (highest discount) i.e.,
Cu12 and compare it with quantity b1
Step 2 -if Q2> b1 then optimum order quantity will be Q2 i.e., Q0 = Q2
Step 3 - if Q2 < b1
In order to obtain the optimum order quantity we have to compare the total inventory cost
for Q = Q1 with Q = b1
If T(Q1) > TC (b1) then Q0 = b1 otherwise Q0 = Q1
Problem: ABC manufacturing company requires special involute gears at the rate of 300
numbers per year. Each gear costs Rs.36. The procurement cost and inventory carrying
cost are estimated at Rs.30 and 20% respectively. If the supplier offers a discount of Rs.2
per gear or an order of 200 or above, will it be advisable to purchase higher quantity?
Ans: Here,
S= Annual consumption =300
= Procurement cost/order= Rs.30
. Cu1 = Basic price per unit= Rs.36
.

Cu2 = Discount price per unit= Rs.34

i = Inventory carrying cost =0.20

The above prices are valid for the following quantities:
Price/unit

Range of quantities

Rs.36

0=<1 <200

Rs.34

200=<2

The optimum order quantity 2 based on price Cu2 = Rs.34

.

2..

2 =

.i
230300

360.2

= 51 units

Since q2 is not equal to 200 or more than 200, therefore calculating q we get
q1 =

2C0 S
iCu1

230300

360.2

= 50

units

Calculating annual total cost (including material cost) for the quantity to be purchased at
the two price levels (for 50 and 200 units)
Cost

Order quantity 50

Order quantity 200

Annual cost of material

30036 = 10,800/-

30034 = 10,200/-

Annual procurement cost

30300/50 = 180/-

30300/200 = 45/-

Annual inventory carrying

cost

0.550360.2 = 180/-

0.5200340.2 = 680/-

Annual total cost C

10,800+180+180 = 11160

10,200+45+680 = 10,925

Since TC1 <TC2 , therefore optimum order quantity = 200 units.

Uncertainty:
Demand and supply:
If all demands or requirements for product were known exactly in advance,
deciding how much and when to buy or to make a product would be a relatively
straightforward task made difficult only by the problems of defining and measuring costs.
Generally one is not able to obtain his requirements immediately; there is some delay
between placing an order and receipt of goods. For example, suppose, in the fictitious
example of Brown & Brown, Inc. that the trackman had to make an all-day drive from the
factory to the supplier. He would have to pick up by Monday morning an order needed on
Tuesday, and another kind of inventory function would be introducedtransit stock
needed to buy the time in transit from supply to need. Figure 5.1 illustrates the change
in the total inventory because of the need for transit stock.
Transit delays in themselves cause no problem. All one has to do, if one knows
how long delivery takes and how much stock will be used during the delivery period, is to
order far enough in advance. However, variations in the delay, that is, in the resupply lead
time, can and frequently do cause problems. The combination of the uncertainty in resupply
time and the uncertainty in demand causes the principal problems that businessmen face in
managing their inventories. (Note that demand uncertainty by itself is likewise no problem
when there is no replenishment delay, i.e., when one can fill any requirements
immediately.)
The combination of transit delays and uncertainty can take a variety of forms.
For example, demand for switch coverings may be entirely fixed by the processing capacity
of the plant. However, perhaps the companys driver likes an occasional beer and may from
time to time show up 3 days late. On the other hand, the driver may be the ultimate in
responsibility, but the sales of switches, being strongly influenced by promotional
programs, may double overnight while he is away. Brown & Browns problem would then

become much more complex, basically because of an inability to react immediately to

random influences. Lacking ability to organize their manufacturing and sales activities
thoroughly enough to control both the driver s and their customers habits, the only way
out is to carry some additional stocksafety stock.
Safetystock:
Safety stock is needed to cover the demand during the replenishment lead time in excess
of the expected demand. The need results from a combination of the delay between the
time a replenishment order is placed and the time the material is received and uncertainty
as to how much material will be required during the replenishment lead time. In practice,
the safety stock held by an inventory is the stock on hand at the time replenishment stocks
are received.The approach to eliminating difficulties resulting from exhaustion of stocks
before a replenishment supply is received is clearly to keep some additional inventory on
hand which can be drawn upon in case of emergency, but not to count on this inventory in
determining when to place a replenishment order. The objective is to arrive at a reasonable
balance between the amount of extra inventory (and its capital, storage, and other cost) and
the protection obtained against stock exhaustion. As more and more inventory is set aside,
either figuratively or in fact, as safety stock, the chance of stock exhaustion becomes ever
less. However, the amount of protection which each additional unit of safety inventory
buys characteristically drops as more inventory is added, and thus the return from
increasing inventory balances diminishes rapidly. The question is: How much additional
inventory as safety stock can be economically justified?
Safety stocks illustrate how inventories decouple one stage in a production and
distribution system from the next, cutting the amount of over-all organization or control
needed. Safety stocks separate one part of the production and distribution system from the
uncontrollable shocks and uncertainties arising in another, e.g., as a result of sales
fluctuations and transit or production delays.
Most reordering systems, whether for in-process materials, for replenishing raw materials,
or for replenishing finished stocks in a warehouse, must be designed to take uncertainty in
usage rates or in delivery times directly into account. In circumstances like the Brown &
Brown case, where demand is fixed and constant, the result is a fixed amount reordered at
fixed intervals. However, where usage or demand is uncertain or fluctuates, it is not
possible to keep both the size of orders and the interval between orders fixed. A common
way to approach reordering problems in the face of uncertainty is to fix the size of the order
placed, by the means used in the Brown & Brown case, and then let the ordering frequency
vary to take up fluctuations in usage. Another common method is to fix the ordering
frequency or the length of time between orders and then let the size of orders vary with
usage. In either case an extra amount of inventory, or safety stock, must be carried to fill
unexpected surges in demand between placing and receiving orders.
Systems designed to handle uncertainty fall into two basic categories: those in which the
order size is fixed but the order interval depends on actual demand, and those in which the

inventory is reviewed periodically and restored to some predetermined level. The practice
of ordering a fixed quantity when needed, essentially the two-bin system in common
stock- room or factory use, assumes that individual inventories are under constant watch.
The plan for ordering at fixed periods, i.e., monthly, weekly, or quarterly, is frequently
used in warehouse control systems or for handling inventories involving a very large
variety of items under some form of clerical control. While the two schemes are basically
similar in concept, they produce somewhat different results, as will be seen. Other systems
intermediate between these two offer the advantages of each in particular circumstances,
while still others are designed to minimize effects of uncertainty through explosion
techniques.
Forecasting in Production:
The stages or steps in a production forecasting process are listed as follows:
1. Fix the forecasting objectives.
2. Decide what to forecast?
3. Determine the time frame.
4. Collect the data for forecasting.
5. Select the forecasting model
6. Build and test the forecasting model.
7. Prepare the forecasts.
8. Prepare the forecasts.
9. Compare events with the forecasts.
Now let's discuss each step of production forecasting process one by one.
1. Fix the forecasting objectives:
The production manager must first fix the forecasting objectives. That is, he must know
exactly why he is doing production forecasting. Forecasting objectives answers the
question like, why are we forecasting? Here, the answer to this question may be; we are
doing forecasting to help us in marketing planning, or we are doing forecasting to help us
in the plant capacity planning, etc. If we know exactly why we are forecasting, then we
can collect proper data for that purpose. This will result in more accurate forecasting.

2. Decide what to forecast?

After finding out why to forecasts, the production manager must answer the question,
what to forecast? That is, are we forecasting the volume of production, value of sales, the
amount of finance required, number of workers required for future production and so on.
The production manager must decide the units of measurement such as volume, value,
etc. for forecasting.
3. Determine the time frame:
The production manager then fixes or determine the time frame for the production
forecast. That is, he must answer the question, for what period are we making a forecast?
In other words, whether the forecast is made for a week, a month, three months, six
months, one year or more.
4. Collect the data for forecasting:
The production manager must fix the database. That is, he must decide from where he
will collect the data for forecasting. In other words, he must decide whether to collect
data from internal sources or external sources. He must also decide whether to use
quantitative data or qualitative data. So, in this fourth step, the production manager
decides about the type of data which he will use for forecasting.
4. Select the forecasting model:
5. In this step, the production manager must decide the method or model of
forecasting which he will use. There are many methods of forecasting. There
are qualitative and quantitative methods. The qualitative methods such
asNominal Group Technique, Delphi technique, etc. are more suitable for new
products. However, for existing products, with stable demand, quantitative
methods such as Simple Moving Average Technique should be used.
6. Build and test the forecasting model:
In this step, the production manager uses a part of the available data to build a forecasting
model. A model is a statistical or mathematical formula. He uses the other part of the data
to test the model. That is, he will apply the formula and see whether it gives the accurate
answer or not. If not, he will make necessary changes to the formula until he gets
satisfactory results.
7. Prepare the forecasts:
After selecting the forecasting model, the production manager must prepare the forecasts
for a specific period for the particular product. The period may be weekly, monthly, etc.

8. Present the forecasts:

In this step, the production manager gives or presents the forecasts to those who will use
it. He must also supply detailed information about, how the forecast was made, from
where the data was collected, what are the assumptions of the forecasts, etc.
9. Compare events with the forecasts:
Here, in this final step, the actual events or performance is compared with the forecasts.
The deviations are corrected, wherever possible or the forecasts are modified.

UNIT: IV
SYLLABUS: Scope of production planning, types of production planning, demand
analysis, seasonal and non-seasonal demand. Planning procedures. Setting the
production rate. Short term and long term planning-make and buy decisions, product
design and process selection, manufacturing planning.
SCOPE OF PRODUCTION PLANNING:
Allocation of production resources

Production planning is the process of deciding on the resources the firm will require for
its future manufacturing operations and allocating these resources to produce the desired
product in the required amounts at the least cost.
Production planning therefore involves setting the limits or levels of manufacturing
operations in for future. Arriving at a production plan requires business management to
make a number of important decisions. Some of these include deciding what the general
size of the labour force will be during the period planned, and if hiring campaigns or
layoffs are when capacities where these are and these will be; setting plant and
equipment being flexible and setting the desired or objective levels for inventory
control.
Production planning sets the framework within which detailed schedules and inventory
control schemes must operate. Production planning is specifically concerned with the
future, with layout to meet future sale with facilities which in some cases may not even
exist. The plan may cover a few months or several years. Typically, in a control system,
production plans may be drawn simultaneously and in possibly different degrees for
varying periods in the future.
For example: -

1) Plans covering the next several months or year may be used to set labor budgets
and inventory goals.
2) Plans covering, say, 5 years may be used to govern capital-equipment budgeting
for increased capacity.
3) Plans covering, say, 5 to 15 years may be used to govern plant construction and
product development.
Production plans are designed to fix some or all of the characteristics of manufacturing
and distribution operations that give more detailed planning or control.

Thus the objective of production planning is to arrive at statements about the general
characteristicsthe framework of manufacturing operations during the period planned.
This framework should be designed to meet recognized company goalsfilling
customers' requirements to the extent they can be foreseen, meeting obligations to
employees and the community for stable operations and minimizing total costs. The costs
in this case include facility and capital costs, including such costs as equipment capacity
and inventory costs, costs of labor turnover, and costs of setting up multi-shift operations.
USES OF PRODUCTION PLANNING:
Production-planning methods have two important uses that need to be distinguished.
1) One is direct planning, i.e., drawing up production plans to be followed, subject to
costs that have been estimated and policies that have been agreed on, with respect
to finances, customer services, and labor stability. These plans can be used to
decide where extra capacity is needed and to set manufacturing operations.
2) The other important function of these planning techniques is to give
business management guides for use in setting the basic policies by themselves.
Business management often must make judgments about qualitative factors they
find difficult to weight. One method of helping to make these judgements is to lay
out plans under alternative assumptions about policy decisions, to make clear
impact on capacity and labor requirements, customer service, and financial needs
of alternative decisions in judgement areas.
For example, when forecasts of future demand are subjected to errors, as they usually are,
it may not be easy to decide how far to go in building plant and inventories to meet
demands. Showing the plant and inventory requirements and costs under alternative
decisions and the possible final outcomes will not eliminate the risk or the need for
decision, but it may help management arrive at a sound judgement, knowing the potential
gains and losses associated with alternative decisions. Production-planning methods can
also help direct research and engineering effort to bottlenecks or critical manufacturing
areas where modes and improvements might yield substantial payoffs in manufacturing
economy.
PLANNING TO MEET SEASONAL DEMAND:
Anticipation stocks are carried to meet planned or increases in demand rates. Such stocks
are built to buffer production rates and capacities from the effects of seasonal demand or
surges in demand due to promotional efforts, and to support sales over periods of planned
shutdown such as for plant vacation or maintenance shutdown. This buffering was
identified as one of the major inventory functions in Chapter 2. The approach to the
control of all forms of anticipation stocks is identical to that which applies to seasonally
fluctuating sales. The following discussion of planning for seasonal demand is intended
to treat all forms of anticipation stocks. Seasonal demand patterns result in new types of

planning problems. "crash " or short peak-season, problems which arise, for example, in
toy industry before Christmas or in certain fashion clothing during various festivals.
DEMAND ANALYSIS:
Demand:
A relation between the price of a good and the quantity the consumer is willing and able
to buy during a given period, other things are constant.
-

Demand is a relative concept not absolute.

It is related to price, time and place.

The demand for a commodity refers to the amount of it which will be bought per
unit of time at a particular price (in a particular market).

Types of demand:
1) Individual demand:
The quantity a consumer would buy at a given price, during a given period of time.
2) Market demand: Total demand of all buyers in the market taken to get a given
price during a given period time.
3) Price demand
4) Income demand
Law of demand curve:

Price

Demand

The above is the law of demand curve and from that we can see that as the price of the
commodity increases the demand for it decreases, and as the price for the commodity
decreases the demand for the product increases. This demand not only depends upon the
price factor but there are also other components which it does depend on.
Determinants of demand:

1)

Price of the product

2)

Price of the related goods

3)

Consumer income level

4)

Consumer tastes, preferences

5)

National per capita, target per capita, national gdp growth

6)

Advertisement

7)

Future price and demand expectations buy consumer

8)

Demography and growth rate of population

9)

Climate and weather conditions.

Exception to law of demand:

1) Conspicuous goods esteem goods
2) Giffen goods- inferior goods
3) Future expectation about price
4) Irrational consumer
5) Ignorance and unawareness of price
Causes of increase in demand:
1) Increase in consumer income :
-

Normal goods(income rises demand rises)

Inferior goods( income falls demand rises)

2) Change in price of related goods:

Eg-1-For example consider the competitors like coca cola and pepsi. These two
competitors are always trying to attract customers. Now let us consider that the price of
the cola is increased than the demand for the cola decreases and also the demand for
pepsi increases.

3) Change in price of related goods:

Eg-2-Now consider the automobile industry where the demand for the tyre manufacturing
is relative to the price of the car prices, if the price of the car decreases the demand for
the tyres increases.
4) Changes in consumer expectations:
Product is cheaper today than tomorrow.
Demand forecasting:
Forecast is an estimate of future events and trends and is arrived at by systematically
combining past data and projecting it forward in a predetermined manner.
Need for demand forecasting:
-

Capital investment

Procurement of raw materials

Production planning

Men requirement

High volume, high technology man production systems.

TYPES OF PRODUCTION PLANNING

S.no

Types of decisions

Time horizon(yrs)

Type of data

1)

Short term planning

One year

Specific items and the

demand

2)

Medium term
planning

Two or three

Aggregate demand of
technology and site selection

3)

Long term

Four to five

Broad data of technology

Levels of demand forecasting:

1) Firm level (micro level forecasting)
2) Industry level (group of companies)
3) National level
4) International level

Case study: 1) freedom 251

2) One plus one
The above two companies are allowing the booking of the mobile only by invitations or
pre registrations. It is like taking the order first and then producing the goods.
Main aim:

DEMAND=SUPPLY

Advantages:
-

Reduces transaction cost

Minimized depreciation of the product
Can manage capital cost effectively

SEASONAL DEMAND:
Consumers interest is in purchasing products only during a specific period with the
calendar year.
Problems:
-

Idling

Fixed cost

Excess expenditure on marketing and promotion

Strategies used:
-

To nurture the service consumption habit of customers so as to make the demand

unseasonal.

Recognize markets elsewhere in the world during the off season period .Ex:
Christmas card are not used throughout the year but this greeting card business
goes well with events like china new year, valentines day etc.

Demand to be studied frequently.

PRODUCTION PLANNING PROCEDURE:

The goal of the production planning efforts is the formulation of production plans. The
purpose is to ensure that the plans are implemented properly .These plans are for a
specified time period keeping in mind the stipulated costs and agreed policies. The costs
include the capital cost of the facility, assets and labor. The steps or the procedure
followed in production planning are as under:
1. Demand Forecasts: The production planning function is geared to the estimated
demand for the product. The demand forecasting represents an anticipated level of
demand and it also reflects on the pattern of the demand. If seasonal or other kind of
symmetry can be predicted, production can be planned to take advantage of the predicted
pattern of the demand.
2. Specification of Production requirement:
Though demand forecasts provide the basis for production planning, it is not everything
in production planning. The demand forecast must be converted into a specification of
production requirements. The forecast demands are adjusted as under while planning the
actual production:
a) On the basis of available production capacity, the forecast demand is put
on the calendar schedule.
b) Reasonable allowances are made for possible errors in the forecast

c) The deficiency of surplus of the existing production capacity ascertained

in terms of machine capacity and labor force. On the basis of the
temporary or permanent fluctuations in the demand, the adjustment in the
machine capacity and labor force are planned well in advance.
d) A schedule of material requirement is prepared. While deciding the
quantity of material due considerations is given to the seasonal advantage,
cost of excess inventories carrying, cost of stock outs etc. The above type
of production planning is made in the light of the specification of the
product or the customer orders within the prescribed tolerance limits.
3. Setting of Production Rate:
The production requirements are broken into periods and the schedule of production is
prepared. The production at any point of time is the result of the prescribed rated
capacity. In the light of the desired production, the production rate should be planned on
the basis of the existing production capacity, overtime working, extra shift working or
new additions to the existing production capacity. The inventory levels should be geared
to the production rates. On the basis of the set production rates, the schedule of the period
production and inventory holding should be prepared. The production rate is set with the
help of graphic technique.
The setting of the production rate is relatively difficult in case of the seasonal demand.
However, the adjustment can be made by continuing the average production throughout
the year and by manipulating the inventories if it releases some costs advantages. Various
mathematical programming methods are used in practice for planning the seasonal
production requirements.
4. Controlling Production: Once the production plan is made and set to operations , is
likely that the actual stocks of the finished goods inventory will fall below or exceed the
planned balances due to the discrepancies in the estimated an actual sales. The marginal
imbalance in the estimated and actual sales is solved by providing for certain safety level
of inventory. The size of the safety stock depends on the promptness of production
adjustment. In any way, such discrepancies would necessitate the periodic adjustment in
the production with the view to bring the inventories into the line. The adjustments in the
plan are made as under
a) Where only a short span of the planned cycle is over, the revisions I the original
forecast should be made by adjusting the excepted sales changes to the
cumulative forecast for the remainder of the planned cycle.
b) Where the planned cycle is on the verge of completion, the forecast may be
extended to cover the next planning cycle.

MAKE OR BUY DECISION:

The make-or-buy decision is the action of deciding between manufacturing an item
internally (or in-house) or buying it from an external supplier (also known as
outsourcing). Such decisions are typically taken when a firm that has manufactured a part
or product, or else considerably modified it, is having issues with current suppliers, or has
reducing capacity or varying demand. The decision of make or buy depends on the
following factors, which are divided based on make or buy.
Considerations which favour making the parts are:
1. Cost considerations: - less expensive to make the part
2. Desire to integrate plan operations
3. Productive use of excess plant capacity to help absorb fixed overheads.
4. Needs to exert direct control over production and/or quality
5. Design secrecy.
6. Unreliable suppliers.
7. No suitable supplier quotation
8. Desire to maintain a stable workforce in periods of declining sales
Considerations which favour buying the part:
1. Cost considerations less expensive to buy the part
2. Suppliers research and specialized know-how
3. Small volume requirements
4. Limited production facilities
5. Desire to maintain stable workforce in periods of rising sales.
6. Desire to maintain multiple source policy.
7. Governments policy favouring supportive industries.
8. Monopoly items which are rationed by the government and on which, the buyer has no
option.
Other Factors are:
Some companies, by tradition, prefer to make almost every component of their products.
Others prefer to buy as much as possible from outside suppliers. In general, an aggressive
company in an industry that is expanding rapidly with many technological changes (e.g.
electronics), will prefer to buy many of its components from outside suppliers. In such

industries, the company has many opportunities to employ its capital profitably through
horizontal diversification, expanding its line of finished products.
PRODUCT DESIGN AND PROCESS SELECTION
Most of us might think that the design of a product is not that interesting. After all, it
probably involves materials, measurements, dimensions, and blueprints. When we think
of design we usually think of car design or computer design and envision engineers
working on diagrams. However product design is much more than that.
It is exciting and creative, and it can spell success or disaster for a company. Product
design is the process of defining all the features and characteristics of just about anything
you can think of, from Starbucks cafe latte or Jimmy Deans sausage to GMs Saturn or
HPs Desk Jet printer. Product design also includes the design of services, such as those
provided by Salazars Beauty Salon, La-Petite Academy Day Care Centre, or Federal
Express. Consumers respond to a products appearance, colour, texture, performance. All
of its features, summed up, are the products design. Someone came up with the idea of
what this product will look like, taste like, or feel like so that it will appeal to you. This is
the purpose of product design. Product design defines a products characteristics, such as
its appearance, the materials it is made of, its dimensions and tolerances, and its
performance standards. Tangible versus Intangible Products.
The design elements just discussed are typical of industries such as manufacturing and
retail in which the product is tangible. For the service industries, in which the product is
intangible, the design elements are equally important, but they have an added dimension.
Service design is different from product design in that we are designing both the service
and the entire service concept. As with a tangible product, the service concept is based on
meeting customer needs.
These are the service elements of the operation, such as promptness and friendliness.
They also include the ambiance, image, and feel-good elements of the service.
Consider the differences in service design of a company like Canyon Ranch, which
provides a pampering retreat for health conscious but overworked professionals, versus
Golds Gym, which caters to young athletes. As with a tangible product, the preference
for a service is based on its product design. Service design defines the characteristics of a
service, such as its physical elements, and the aesthetic and psychological benefits it
provides. Strategic Importance of Product Design Product design is strategically
important to a company. Business needs a long-range plan or vision, called a business
strategy.
A companys business strategy maps out its business, customers, and competitors. The
activities a company engages in and the decisions a company makes must support this
business strategy. A companys product designs must also support the companys
business strategy. Suppose you are a software engineer at a start-up software company.
Your companys product is database management software geared to large clients with
substantial banks of data. Now there is talk about changing directions and making a

light version of the product for smaller clients with much less data. This could be a
danger signal for your company. Why? The answer is that a companys products define
the companys customers. Together, a companys products and customers define the
companys image, competition, future growth, and position in the marketplace. For these
reasons, product design is a major factor in a companys ability to keep and build its
customer base. Every company targets a particular customer group. Think about retailers
like The Gap, which caters to a young, modern clientele versus Talbots, which caters to a
slightly older and more conservative clientele. The process of defining all of the
products characteristics.
Service design is the process of establishing all the characteristics of the service,
including physical, sensual, and psychological benefits.
To summarize: a companys product design must match the needs and preferences of the
customer group targeted by the companys business strategy. Otherwise, the company
will lose its customer base and erode its market position.
STEPS IN PRODUCT DESIGN:Certain steps are common in the development of most product designs.
They are the following:
STEP 1- IDEA DEVELOPMENT:All product designs begin with an idea. Someone thinks of a need and a product design
that would satisfy it.

STEP 2 -PRODUCT SCREENING:Once an idea is developed, it needs to be evaluated. Often a business comes up with
numerous product ideas. At this stage we need to screen the ideas and decide which ones
have the greatest chance of succeeding.
STEP 3- PRELIMINARY DESIGN AND TESTING:This is the stage where preliminary design of the product is made and market testing and
prototype analysis are performed.
STEP 4- FINAL DESIGN :This is the last stage, where the final design of the product is made. Next we look at these
steps in a little more detail.

FACTORS TO CONSIDER IN PRODUCT DESIGN

DESIGN FOR MANUFACTURE:When we think of product design we generally first think of how to please the customer.
However, we also need to consider how easy or difficult it is to manufacture the product.
Otherwise, we might have a great idea that is difficult or too costly to manufacture.
Design for manufacture (DFM) is a series of guidelines that we should follow to produce
a product easily and profitably. DFM guidelines focus on two issues:
1. Design simplification means reducing the number of parts and features of the product
whenever possible. A simpler product is easier to make, costs less, and gives us higher
quality.
2. Design standardization refers to the use of common and interchangeable parts. By
using interchangeable parts we can make a greater variety of products with less inventory
and significantly lower cost and provide greater flexibility.

PRODUCT LIFE CYCLE:Another factor in product design is the stage of the life cycle of the product. Most
products go through a series of stages of changing product demand called the product life
cycle. There are typically four stages of the product life cycle: introduction, growth,
maturity, and decline. These are shown in Figure.

REMANUFACTURING:Remanufacturing is a concept that has been gaining increasing importance, as our society
becomes more environmentally conscious and focuses on efforts such as recycling and
eliminating waste. Remanufacturing uses components of old products in the production
of new ones. In addition to the environmental benefits, there are significant cost benefits
because remanufactured products can be half the price of their new counterparts.
Remanufacturing has been quite popular in the production of computers, televisions, and
automobiles.

PROCESS SELECTION
So far we have discussed issues involved in product design. Though product design is
very important for a company, it cannot be done separately from the selection of the
process. In this section we will look at issues involved in process design. Then we will
see how product design and process selection issues are related.

TYPES OF PROCESSES:When you look at different types of companies, ranging from a small coffee shop to
IBM, it may seem like there are hundreds of different types of processes. Some are small,
like your local Starbucks, and some are very large, like a Ford Motor Company plant.
Some produce standardized off the shelf products, like Pepperidge Farms frozen
chocolate cake, and some work with customers to customize their product, like a gourmet
bakery that makes cakes to order.

1) INTERMITTENT OPERATIONS:Intermittent operations are used to produce many different products with varying
processing requirements in lower volumes. Examples are an auto body shop, a tool and
dye shop, or a health-care facility. Because different products have different processing
needs, there is no standard route that all products take through the facility. Instead,
resources are grouped by function and the product is routed to each resource as needed.
Think about a health-care facility. Each patient, the product, is routed to different
departments as needed. One patient may need to get an x-ray, go to the lab for blood
work, and then go to the examining room. Another patient may need to go to the
examining room and then to physical therapy.

2) CONTINUOUS OPERATIONS:Continuous operations are used to produce one or a few standardized products in high
volume. Examples are a typical assembly line, cafeteria, or automatic car wash.
Resources are organized in a line flow to efficiently accommodate production of the
product. Note that in this environment it is possible to arrange resources in a line because
there is only one type of product. This is directly the opposite of what we find with
intermittent operations.
The most common differences between intermittent and continuous operations relate to
two dimensions:
a) The amount of product volume produced.
b) The degree of product standardization.
THE CONTINUUM OF PROCESS TYPES:Dividing processes into two fundamental categories of operations is helpful in our
understanding of their general characteristics. To be more detailed, we can further divide
each category according to product volume and degree of product standardization as
follows. Intermittent operations can be divided into project processes and batch
processes. Continuous operations can be divided into line processes and continuous
processes. All together we have the following processes:-

1. Project processes
2. Batch processes
3. Line processes
4. Continuous processes.

MANUFACTURING PLANNING

The nature of the process of production required by these three different types of
production system are distinct and require different conditions for their working.
Selection of manufacturing process is also a strategic decision as changes in the same are
costly. Therefore the manufacturing process is selected at the stage of planning a business
venture. It should meet the basic two objectives i.e. to meet the specification of the final
product and to be cost effective.
TYPES OF MANUFACTURING PROCESS :
The manufacturing process is classified into four types:1) Jobbing production
2) Batch production
3) Mass or flow production
4) Process Production
(i) Jobbing Production: - Herein one or few units of the products are produced as per the
requirement and specification of the customer. Production is to meet the delivery
schedule and costs are fixed prior to the contract.
(ii) Batch Production: - In this, limited quantities of each of the different types of
products are manufactured on same set of machines. Different products are produced
separately one after the other.
(iii) Mass or flow production: Under this, the production run is conducted on a set of
machines arranged according to the sequence of operations. A huge quantity of same
product is manufactured at a time and is stocked for sale. Different product will require
different manufacturing lines. Since one line can produce only one type of product, this
process is also called as line flow.
(iv) Process Production: Under this, the production run is conducted for an indefinite
period.

FACTORS AFFECTING MANUFACTURING:

Following factors need to be considered before making a choice of manufacturing

process.
a) Effect of volume/variety: This is one of the major considerations in selection of
manufacturing process. When the volume is low and variety is high, intermittent process
is most suitable and with increase in volume and reduction in variety continuous process
become suitable. The following figure indicates the choice of process as a function of
repetitiveness. Degree of repetitiveness is determined by dividing volume of goods by
variety.

b) Capacity of the plant: Projected sales volume is the key factor to make a choice
between batch and line process. In case of line process, fixed costs are substantially
higher than variable costs. The reverse is true for batch process thus at low volume it
would be cheaper to install and maintain a batch process and line process becomes
economical at higher volumes.

c) Lead time: - The continuous process normally yields faster deliveries as compared to
batch process. Therefore lead-time and level of competition certainly influence the choice
of production process.
d) Flexibility and Efficiency: - The manufacturing process needs to be flexible enough
to adapt contemplated changes and volume of production should be large enough to
lower costs.

Hence it is very important for entrepreneur to consider all above mentioned factors
before taking a decision regarding the type of manufacturing process to be adopted as for
as SSI are concerned they usually adopt batch processes due to low investment.

UNIT V
Production control:
Syllabus: Control objectives, problems in production control, types of production and
production control systems, Controlling production, routing, scheduling and dispatching,
Layout of the physical system, Design of production planning and control systems,
Application of computers in production planning and control.
Control objectives
Control, in the sense in which the term is used here, means the adjustment of operations
to conform to plans. As noted earlier, a principal source of difficulty in the management
of production is the uncertainty of future requirements. The fundamental function of
production control is the timely issuance of orders to the production facility for
replenishment stocks in response to short-term fluctuations in demand. For example, they
protect individual products over the period required for delivery of an order or between
inventory reviews. The effectiveness of control, however, depends on the ability of the
control system to restore these safety stocks in case of depletion.
If total demand varies and stocks are being restored from production operations, the
ability to restore stocks depends on the ability of the production facilities to react to
chance fluctuations in demand. In order to get low inventories, the process must have fast
reactions properly controlled or, equivalently, in some cases, large "capacity." If reactions
are slow or limited, then inventories must be large. Inventory, in effect, serves another
type of protective function, namely, protection of production rate or capacity from the
stresses of demand fluctuation.
Problems in Production Control:
Problems resulting from demand fluctuation arise in a variety of types of manufacturing
organizations. For example, changes in the through-put rate of chemical-processing
equipment may be slow and difficult or expensive. The output level of an assembly-line
operation may depend on the number of stations that are manned or on the number of
shifts working. Some time may be required to effect changes in the production rate, by,
say, changing the number of stations manned at each point along the line. The production
output of job-shop operation may likewise be influenced by the rate at which new
workers can be hired and trained, or the cost of making changes in the manning level by
bringing in new untrained workers or laying off people. Simultaneous control of
production rates and inventories requires a clear-cut control system with well-specified
rules of operation. Sometimes a company will devote great effort to "inventory control"
setting "economical" reorder levels, fixing safety stocks or reorder points, etc., without
clearly taking the effect of production fluctuations into account. The management calmly
assumes that the replenishment orders the system generates will give production
operations a reasonable load. A system which might be reason-ably efficient for

controlling inventories of purchased items may be in-efficient where production and

inventories are under single management.
Types of production Systems:
The types of production systems can be broadly grouped into:
1. Functional/ Job order production
2. Batch production
3. Continuous production
Job order Production:
Job order production is the manufacture of products to meet specific customer
requirements of special orders. The quantity involved is small, usually one off or several
off. These types of production are mainly concerned with special projects, models,
prototypes etc.
Examples: turbo generators, large machines, ship buildings etc.
Products flow through departments in batches corresponding to individual orders. This
type of organization is found in industries characterized by substantial basic-product
diversity. It has the advantages of flexibility
Three types of job production can be defined, according to the regularity of manufacture:
1. A small number of pieces produced only once.
2. A small number of pieces produced intermittently when the need arises.
3. A small number of pieces produced periodically at known intervals of time.
Characteristics of lob Order Production:
Small production runs. Job order production is characterized by the manufacturing of one
or a few numbers of single products designed and manufactured customer's specification.
The flow of materials: The flow of materials and components between different stages of
manufacture is highly discontinuous due to imbalanced operation wise work content.
Manufacturing cycle time: Relatively long delays occur at the assembly as well as at the
material processing stages due to lack of materials or components, imbalanced work
flow, design changes, design errors detected during manufacturing etc. Moreover, at
times, the time needed to design the special project undertaken exceeds its manufacturing
time. All these factors tend to lengthen the manufacturing cycle time.
Layout of plant and equipment: The machines are arranged according to process layout,
because the operations and their sequence change from product to product.

Skill required: Highly skilled and versatile workers are necessary. They are expected to
do the work independently and display a great deal of initiative and judgment.
Quality of supervision: Highly competent general engineers are usually engaged as
supervisors, practical men with thorough training, capable of taking independent charge
of each contract are employed to work at site. Close supervision is also necessary.
Cost of production: The unit cost of production is high because the firm cannot take the
advantages of large scale buying and automation.

Batch Production:
Batch production is the manufacture of a number of similar articles, either to meet a
specific order or to satisfy continuous demand. When the production of the batch is
terminated, the plant and equipment are available for the production of similar or other
products.
In batch production, too, three types can be mentioned:
1. A batch produced only once.
2. A batch produced repeatedly at irregular intervals when the need arises.
3. A batch produced periodically at known intervals to satisfy continuous demand.
The planning and control become more simplified as more quantities increase and as
manufacture becomes more regular. Two principal problems arise in batch production,
the size of the batch (number of components to be produced per lot) and scheduling of
production.
The solution of these problems depends on whether production is governed by external
orders or whether the plant is producing for internal consumption. In the case of external
orders, the batch size is normally determined by the customer to suit his specific
circumstances. But when the plant produces to stock both the batch size then scheduling
problems are matters of internal management decisions.
It is necessary to determine the optimum batch sizes, considering the set up costs, which
are involved before each production run, and the carrying costs incurred when the
finished product is held in stock. Once the suitable batch size is selected, then master
schedule is prepared to balance the total production requirements against the available
plant capacity. Batch production is a very common feature in industry. Machine tool
work, especially capston and turret lathes, press work, forging and casting processes,
some glass manufacturing and chemical processes very often operate on a batch basis.

Characteristics of Batch Production:

Short runs: Batch production is characterized by short production runs and
frequent changes in set ups.
Investment: Batch production needs high investment. The production is generally
made to stock.
Skill of labor: Skilled labor capable of handling variety of jobs is required.
Quality of supervision: The supervisors need considerable knowledge of specific
process. The amount of supervision required in batch production is lower than
that of job order production.
Plant layout: Plant and equipment are procured and arranged to obtain flexibility.
General purpose machines and handling equipment capable of performing variety
of operations with minimum set up times are installed according to process
layout.
Material handling: Material handling in batch production is less as compared to
job order production.
Flexibility in production schedule: Disruptions due to machine breakdown or
absenteeism do not seriously affect production as another machine can be used or
another operator from another machine can be shifted.
Continuous Production:
Continuous production is the specialized manufacture of identical articles, on which the
equipment is fully engaged. Continuous production is normally associated with large
quantities and high rate of demand. As identical articles are produced, the operations are
repetitive, producing auxiliary aids, such as special tools, jigs and fixtures material
handling system, inspection devices can be used advantageously.
Continuous production can be classified in two types:
I. Mass production
2. Flow production
In mass production, a large number of identical articles are produced, but in spite of
advanced mechanization and tooling, the equipment need not be specially designed for
this type of article only. Both plant and equipment are flexible enough to produce other
products involving same production processes.
In flow production, the plant, its equipment and layout are primarily designed to
manufacture the product in question. Flexibility in selection of products to manufacture is
confined to minor modifications in layout or design of models. Notable examples are
automobiles, engines, household machinery, chemical plants etc. A decision to switch
over to a different kind of product may not only result in extensive tooling (this is often

needed even when only the model is changed) but also in basic changes in layout and
equipment policy especially when special purpose machines and complex material
handling systems are involved.
Production planning and control in continuous production is usually far simpler than in
job or batch production.
Characteristics of Mass and Flow Production:
Flow of material: The flow of materials is continuous and there is little or no
queuing at any stage of processing.
Machines and plant layout: Special purpose machines are used and plant and
assembly stages are laid out on the basis of product layout.
Material handling: Material handling is comparatively less firstly because
materials move through a short distance between stages and secondly the material
handling activity is mostly mechanized by conveyors and transfer machines.
Skill of labor: Relatively low skilled labor is necessary.
Manufacturing cycle time: The manufacturing cycle time is very short. The
machine capacities are balanced by line balancing.
Quality of supervision: Supervision is relatively easier as only a few instructions
are necessary only at the starting of the job; as standard jobs are produced.
Flexibility in production schedules: Interruptions due to breakdowns and
absenteeism seriously affect production as stoppage of one machine in the line
usually disturbs the working of other machines. Systematic preventive
maintenance is necessary to prevent interruptions in production.

Controlling production:
Once the production plan has been made, it and the sales forecast dictate a sequence of
planned inventory balances. However, as sales experience accumulates, actual stocks will
fall below or exceed the planned balances. The minimum inventory balance or safety
stock which has been (or should have been) set up will absorb the immediate effects of
departures of actual sales from forecast, but it will be necessary to keep adjusting
production plans periodically to bring inventories into line. The size of the needed safety
stock depends on the way production adjustments are made.
Two types of adjustments to the plan may be made. Periodically the cumulative forecast
for the remainder of the planned cycle may be adjusted as sales expectations change, or,
as the end of the cycle approaches, the forecast may be extended to cover the next
planning cycle. Either the basic forecast or the maximum-demand forecast may be

changed. In this case, the plan can be redrawn, taking into account the existing
inventories. Between revisions in the forecast (which may be made quarterly or even less
frequently) short-term adjustments in the production level may be made, based on the
discrepancy between existing and planned inventories.
ROUTING:
Routing may be defined as the selection of the path, which each part of the product will
follow, while being transferred from raw material to finished products. Path of the
product will also give sequence of operations to be adopted while manufacturing.
In other words, routing means determination of most advantageous path to be followed
from department to department and machine, till the raw material gets its final shape.
Routing is related to considerations of layout, temporary storage of in-process inventory
and material handling. According to Alford and Beatty Routing is Specification of the
flow or sequence of operations and the processes to be followed in producing a particular
manufacturing lot"
Routing is an important function of the production planning and control because it has a
direct bearing on the "time" as well-as on the "cost" of the operations. Defective routing
may involve backtracking and long routes. This will unnecessarily prolong the processing
time.
Moreover it will increase the cost of material handling. The prolonged processing time
will increase cycle time and will slow down the rate of production involving the increase
of overheads on the production. Routing is affected by the plant layout; in fact, routing
and plant layout are closely related. In the product layout, the routing is short and simple
while under the process layout, it tends to be long and complex.

Routing determines:

What work (operations) will be done on a product.

Where (on which machine/department) these operations will be performed.

How these operations will be performed.

In which sequence the job (from raw material stage to finished product (stage)
will move in the plant.

Therefore, the main objective of routing is the selection of best and cheapest way to
perform a job. It depends upon:

Type of available machines.

Capability of each machine.

Labor required for each machine.

Availability of tools, jigs, fixtures and other resources.

Efficiency of employees.

Types and quantities of the products to be manufactured.

Department (shop, in which the production is to be carried out).

Routing Procedure:
1. Analysis the product: The finished part is analysed to determine the parts
components in sub-assemblies etc. required for the product.
2. Make or buy decision: It means to decide whether all components are to be
manufactured in the plant itself or some are to be purchased from outside
suppliers. Make or buy decision depends upon the workload in the plant already
existing, availability of equipment, skills, know how and economic
considerations. In slack period, there is a tendency to make as much of the
product as possible simply to keep men and machines busy.
3. Raw material requirements: A part list is prepared, which contains drawings,
specifications, standard of quality and identification symbols. A bill of material is
also prepared combined with the part list. It shows name of part, identification
number, quantity required, material specification, amount of material required for
each part. This helps the inventory control section to determine the adequacy of
the materials in stock or on order and to initiate the purchase of any additional
materials needed.
4. Determine the manufacturing operations and their sequence: The operations
necessary to manufacture the article are determined. They are arranged in proper
sequences and listed.
5. Determine the scrap factor and rejections at each stage of production.
6. Estimate the cost of the product: The routing section also helps the cost
accounting department for cost estimation of the product. The estimate is based
largely on the routing information obtained.
7. Machines to be used, their capacity are also listed.
8. Time required for each operation and sub-assemblies is listed.
9. Prepare route sheet: The data thus obtained is utilized for preparing mute sheets,
production order form, job card, labor card, inspection card, tool ticket, move
ticket etc.

Advantages of Routing:
1. Efficient use of available resources.
2. Reduction in manufacturing costs.
3. Improvement in quantity and quality of the output.
4. Provides a basis for scheduling and loading.
SCHEDULING:
Scheduling may be defined as the assignment of work to the facility with specification of
times, and the sequence, in which the work is to be done. Scheduling is actually time
phasing of loading. The facility may be manpower, machine or both. Scheduling deals
with orders and machines. It determines which order will be taken up on which machine,
in which department, at what time and by which operator.
Scheduling may also be defined as the fitting of specific jobs in to a general time table so
that orders may be manufactured in accordance with the contractual liability or in mass
production, so that each component may arise at and enter in to assembly in the order at
the time required.
Objectives of Scheduling:
1. Scheduling aims to achieve the required rate of output with a minimum of delay,
and disruption in processing.
2. To provide quantities of goods necessary, to maintain finished inventories at
levels predetermined to meet delivery commitments.
3. The aim of loading and scheduling is to have maximum utilization of men,
machines and materials by maintaining a free flow of materials along the
production line.
4. To prevent unbalanced allocation of time among production departments or work
centers with a view to eliminate idle capacity.
5. To keep the production cost minimum.
Since sales forecasts and customer's orders provide the information for scheduling, close
cooperation should exist between planning department and the sales department.
Example: The planning department should, when necessary, make special provisions to
fill "rush" orders and thus aid in giving new business, and the sales department should
endeavour to forecast sales sufficiently far in advance to enable the PPC department to
plan steady production, employment and procurement.

Factors Affecting Scheduling:

The following factors govern the scheduling and are to be considered before scheduling
plan:
1. External Factors:
The external factors are the factors, which are not within the control of the management.
They are dictated by the outside forces, to which the management tries to adjust.
The important external factors are as under:
i.

Customer demand.

ii.

Customer delivery dates.

iii.

Stock of goods already lying with dealers and retailers.

Customer's demand: It is estimated by the sales forecasting. In the continuous production,

scheduling is based on the forecasts of the expected sales of the specific items. In the
intermittent production, the forecast is made on the basis of the expected volume of
business in rupee terms.
Customer's delivery dates. In a continuous production with seasonal demand, the
scheduling should be made in such a way that it may maintain a balanced production
throughout the year reducing the stock of inventories with a constant level of production.
In the intermittent production, the seasonal demand may be adjusted by giving delivery
on agreeable delivery dates to the customer order. Generally, the additional orders are not
accepted if they are not fitting into the planned production.
Stock of goods already lying with dealers and retailers: This situation arises in case of
continuous production of standardized items. Usually, the dealers and retailers are
maintaining certain stock levels with them. The scheduling should be made in the light of
the stock position with the dealers and retailers.
2. Internal factors
These are the factors, which are within the control of the management. These factors
should be manipulated in such a way that objectives of the production function can be
achieved most efficiently and economically.
Some important internal factors are as under:
i.

Stock of finished goods with the firm.

ii.

Time interval to process finished goods from raw material.

iii.

Availability of equipment and machines.

iv.

Availability of manpower.

v.

Availability of materials.

vi.

Additional manufacturing facilities if required,

vii.

Feasibility of economic production runs.

Stock of finished goods with the firm: In the continuous production where the production
is made to, stock, the scheduling should be adjusted to the stock of the finished goods
with the dealers. Generally, the stock is maintained at certain months supply on hand.
The new sales forecast should be made and the scheduling should be made in the light of
the fluctuations in the stock holding.
Time interval to process finished goods from raw material: In other words, how much
time will be required to manufacture each component, subassembly and then assembly
(i.e., the final product).
Availability of machines: The machines and equipment have varying production
capacities. Moreover, their occupancy scheduling can be made with the help of
"machine-load charts".
Availability of manpower: The scheduling should to, made in the light of the
availability of the manpower: The rushing of production should be adjusted to overtime
working, extra shift working or hiring of the temporary labor. These slacks should be
adjusted through transfers, if possible. Due consideration should be given to the factors
like induction and training to new employees. As far as possible the layoffs should be
minimized
Availability of materials: Sometimes the production flow is interrupted by the stock
outs. In continuous production, proper stock levels should be maintained to facilitate
scheduling. In case of probable stock outs of strategic items, extra efforts should be made
to procure them as far as possible and the limited stock in hand should be issued only to
critical operations. The scheduling should be adjusted in the light of such situation. In
intermittent production, the materials should be acquired according to "the bill of
materials" enlisting the need of specific order. Such processes will smoothen the
scheduling task.
Manufacturing facilities: The manufacturing facilities in terms of power requirements,
material handling services, storekeeping, work bench area and such other facilities should
be provided in adequate quantities so that it may not affect the smooth flow of the
production adversely. Such situations will facilitate the scheduling function.
Feasibility of economic production runs. Under the economic lot production, generally
two costs are compared set-up cost and the carrying cost. At economic lot production,
these two costs are equated.

Dispatching:
Dispatch function executes planning function. It is concerned with getting the work
started. Dispatching ensures that the plans are properly implemented. Dispatch function
authorizes the workers to do the work. The information collected in scheduling and route
sheet is transmitted into the orders. The prepared orders are released to the concerned
departments for actual implementation. Every care is taken to issue clear cut instructions,
in a simple form in written sheets, which can be easily understood and correctly
implemented by the concerned persons and there is no confusion.
Duties of dispatcher:
After the schedule has been completed, the production planning and control department
makes a master manufacturing order with complete information including routing, the
desired completion dates within each department or on each machine and the engineering
drawings. From this master manufacturing order, departmental manufacturing orders can
be made giving only the information necessary for each individual foreman. These
include inspection tickets and authorization to move the work from one department to the
next. When a foreman of a particular department receives the manufacturing order, he is
authorized to begin production in his department.
The dispatching of these orders and instructions at the proper time to the proper people is
usually done by a person known as 'Dispatcher'.
Thus, dispatching function consists of issuing the orders and instructions, which sets the
production in motion in accordance with production schedules and routing.
If product is made of several parts, the production order is broken down accordingly, and
for each operation there is a material tools issue, a job card that details about the task and
the methods to be used an inspection order and information about the next destination of
the components. Finally the dispatching function is responsible for keeping records of
actual operation times, idle man and machine hours, length and causes of breakdowns,
and any other relevant information about maintaining the schedule or deviating from it.
Layout of physical system:
Every entrepreneur is faced with the problem of deciding the best site for location of his
plant or factory. Plant location refers to the choice of region and the selection of a
particular site for setting up a business or factory.
But the choice is made only after considering cost and benefits of different alternative
sites. It is a strategic decision that cannot be changed once taken. If at all changed only at
considerable loss, the location should be selected as per its own requirements and
circumstances. Each individual plant is a case in itself. Businessman should try to make
an attempt for optimum or ideal location.

What is an ideal location?

An ideal location is one where the cost of the product is kept to minimum, with a large
market share, the least risk and the maximum social gain. It is the place of maximum net
advantage or which gives lowest unit cost of production and distribution. For achieving
this objective, small-scale entrepreneur can make use of locational analysis for this
purpose.
Location analysis is a dynamic process where entrepreneur analyses and compares the
appropriateness or otherwise of alternative sites with the aim of selecting the best site for
a given enterprise. It consists the following:

Demographic Analysis: It involves study of population in the area in terms of

total population (in no.), age composition, per capita income, educational level,
occupational structure etc.

Trade Area Analysis: It is an analysis of the geographic area that provides

continued clientele to the firm. He would also see the feasibility of accessing the
trade area from alternative sites.

Competitive Analysis: It helps to judge the nature, location, size and quality of
competition in a given trade area.

Traffic analysis: To have a rough idea about the number of potential customers
passing by the proposed site during the working hours of the shop, the traffic
analysis aims at judging the alternative sites in terms of pedestrian and vehicular
traffic passing a site.

Site economics: Alternative sites are evaluated in terms of establishment costs and
operational costs under this. Costs of establishment is basically cost incurred for
permanent physical facilities but operational costs are incurred for running
business on day to day basis, they are also called as running costs.

Two sites A and B are evaluated in terms of above mentioned two costs as follows:

Table 1: Comparative Costs of Alternative Locations

Costs

Site A (Rs.)

Site B (Rs.)

Land and Buildings

350000

230000

Equipment

60000

60000

Transport facilities

20000

30000

Materials, freight and carriage

34000

24000

Taxes and insurance

10000

7500

Labor

100000

70000

Water, power and fuel

10000

8000

Total

584000

429500

Cost of establishments:

Cost of operations:

The above cost statement indicates that site B is preferable to site A keeping in mind
economic considerations only although in some respects site A has lower costs. By
applying the definition of ideal location which is the place of maximum net advantage or
which gives lowest unit cost of production and distribution, site B would be preferred.

Selection Criteria:
The important considerations for selecting a suitable location are given as follows:

Natural or climatic conditions.

Availability and nearness to the sources of raw material.

Transport costs-in obtaining raw material and also distribution or marketing

finished products to the ultimate users.

Access to market: small businesses in retail or wholesale or services should be

located within the vicinity of densely populated areas.

Availability of Infrastructural facilities such as developed industrial sheds or sites,

link roads, nearness to railway stations, airports or sea ports, availability of
electricity, water, public utilities, civil amenities and means of communication are
important, especially for small scale businesses.

Availability of skilled and non-skilled labor and technically qualified and trained
managers.

Banking and financial institutions are located nearby.

Locations with links: to develop industrial areas or business centers result in

savings and cost reductions in transport overheads, miscellaneous expenses.

Strategic considerations of safety and security should be given due importance.

Government influences: Both positive and negative incentives to motivate an

entrepreneur to choose a particular location are made available. Positive includes
cheap overhead facilities like electricity, banking transport, tax relief, subsidies
and liberalization. Negative incentives are in form of restrictions for setting up
industries in urban areas for reasons of pollution control and decentralization of
industries.

Residence of small business entrepreneurs want to set up nearby their homelands

One study of locational considerations from small-scale units revealed that the native
place or homelands of the entrepreneur was the most important factor. Heavy preference
to homeland suggests that small-scale enterprise is not freely mobile. Low preference for
Government incentives suggests that concessions and incentives cannot compensate for
poor infrastructure.
Plant Layout:
The efficiency of production depends on how well the various machines; production
facilities and employees amenities are located in a plant. Only the properly laid out plant
can ensure the smooth and rapid movement of material, from the raw material stage to the
end product stage. Plant layout encompasses new layout as well as improvement in the
existing layout.
It may be defined as a technique of locating machines, processes and plant services
within the factory so as to achieve the right quantity and quality of output at the lowest

possible cost of manufacturing. It involves a judicious arrangement of production

facilities so that workflow is direct.

Definition:
Plant layout refers to the arrangement of physical facilities such as machinery,
equipment, furniture etc. within the factory building in such a manner so as to have
quickest flow of material at the lowest cost and with the least amount of handling in
processing the product from the receipt of material to the shipment of the finished
product.
Importance:
Plant layout is an important decision as it represents long-term commitment. An ideal
plant layout should provide the optimum relationship among output, floor area and
manufacturing process. It facilitates the production process, minimizes material handling,
time and cost, and allows flexibility of operations, easy production flow, makes economic
use of the building, promotes effective utilization of manpower, and provides for
employees convenience, safety, comfort at work, maximum exposure to natural light and
ventilation. It is also important because it affects the flow of material and processes, labor
efficiency, supervision and control, use of space and expansion possibilities etc.
Essentials:
An efficient plant layout is one that can be instrumental in achieving the following
objectives:
a. Proper and efficient utilization of available floor space
b. To ensure that work proceeds from one point to another point without any delay
c. Provide enough production capacity
d. Reduce material handling costs
e. Reduce hazards to personnel
f. Utilize labor efficiently
g. Increase employee morale
h. Reduce accidents
i. Provide for volume and product flexibility
j. Provide ease of supervision and control
k. Provide for employee safety and health
l. Allow ease of maintenance

m. Allow high machine or equipment utilization

n. Improve productivity
Types of Layout:
As discussed so far the plant layout facilitates the arrangement of machines, equipment
and other physical facilities in a planned manner within the factory premises. An
entrepreneur must possess an expertise to lay down a proper layout for new or existing
plants. It differs from plant to plant, from location to location and from industry to
industry. But the basic principles governing plant layout are more or less same.
As far as small business is concerned, it requires a smaller area or space and can be
located in any kind of building as long as the space is available and it is convenient. Plant
layout for Small Scale business is closely linked with the factory building and built up
area.
From the point of view of plant layout, we can classify small business or unit into three
categories:
1) Manufacturing units
2) Traders
3) Service Establishments

1. Manufacturing units
In case of manufacturing unit, plant layout may be of four types:

Product or line layout

Process or functional layout

Fixed position or location layout

Combined or group layout

a) Product or line layout:

Under this, machines and equipments are arranged in one line depending upon the
sequence of operations required for the product. The materials move from one
workstation to another sequentially without any backtracking or deviation. Under this,
machines are grouped in one sequence. Therefore materials are fed into the first machine
and finished goods travel automatically from machine to machine, the output of one
machine becoming input of the next, e.g. in a paper mill, bamboos are fed into the
machine at one end and paper comes out at the other end. The raw material moves very

fast from one workstation to other stations with a minimum work in progress storage and
material handling.
A line layout for two products is given below.

Lathe

Drill Grinder

Assembly

Paint shop

(1)

(2)

(3)

(4)

(5)

Planer

Grinder

Miler

Lathe

Welding

(1)

(2)

(3)

(4)

(6)

Product A

Product B

Advantages: Product layout provides the following benefits:

Low cost of material handling, due to straight and short route and absence of
backtracking Smooth and uninterrupted operations

Continuous flow of work

Lesser investment in inventory and work in progress

Optimum use of floor space

Shorter processing time or quicker output

Less congestion of work in the process

Simple and effective inspection of work and simplified production control

Lower cost of manufacturing per unit.

Disadvantages: Product layout suffers from following drawbacks:

High initial capital investment in special purpose machine

Heavy overhead charges

Breakdown of one machine will hamper the whole production process

Lesser flexibility as specially laid out for particular product.

Suitability: Product layout is useful under following conditions:

Mass production of standardized products

Simple and repetitive manufacturing process

Operation time for different process is more or less equal

Reasonably stable demand for the product

Continuous supply of materials

Therefore, the manufacturing units involving continuous manufacturing process,

producing few standardized products continuously on the firms own specifications and
in anticipation of sales would prefer product layout e.g. chemicals, sugar, paper, rubber,
refineries, cement, automobiles, food processing and electronics etc.

b) Process layout:

In this type of layout machines of a similar type are arranged together at one place. E.g.
Machines performing drilling operations are arranged in the drilling department,
machines performing casting operations be grouped in the casting department. Therefore
the machines are installed in the plants, which follow the process layout.
Hence, such layouts typically have drilling department, milling department, welding
department, heating department and painting department etc. The process or functional
layout is followed from historical period. It evolved from the handicraft method of
production. The work has to be allocated to each department in such a way that no
machines are chosen to do as many different job as possible i.e. the emphasis is on
general purpose machine.

The work, which has to be done, is allocated to the machines according to loading
schedules with the object of ensuring that each machine is fully loaded. Process layout is
shown in the following diagram.

Drilling

Planning

Grinding

(1)

(2)

(5)

(2)

(5)

(3)

Milling

Welding

Assembly

(1)
(3)

(4)

(4)

(6)

(6)

Product A:

Product B:

Process layout showing movement of two products

The grouping of machines according to the process has to be done keeping in mind the
following principles

The distance between departments should be as short as possible for avoiding

long distance movement of materials

The departments should be in sequence of operations

The arrangement should be convenient for inspection and supervision.

Advantages: Process layout provides the following benefits

Lower initial capital investment in machines and equipments. There is high

degree of machine utilization, as a machine is not blocked for a single product

The overhead costs are relatively low

Change in output design and volume can be more easily adapted to the output of
variety of products

Breakdown of one machine does not result in complete work stoppage

Supervision can be more effective and specialized

There is a greater flexibility of scope for expansion.

Disadvantages: Product layout suffers from following drawbacks

Material handling costs are high due to backtracking

More skilled labor is required resulting in higher cost.

Time gap or lag in production is higher

Work in progress inventory is high needing greater storage space

More frequent inspection is needed which results in costly supervision

Suitability: Process layout is adopted when

Products are not standardized

Quantity produced is small

There are frequent changes in design and style of product

Job shop type of work is done

Machines are very expensive

Thus, process layout or functional layout is suitable for job order production involving
non-repetitive processes and customer specifications and non-standardized products, e.g.
tailoring, light and heavy engineering products, made to order furniture industries,
jewellery

c) Fixed Position or Location Layout

In this type of layout, the major product being produced is fixed at one location.
Equipment labor and components are moved to that location. All facilities are brought
and arranged around one work center. This type of layout is not relevant for small scale
entrepreneur. The following figure shows a fixed position layout regarding shipbuilding.

Ship building yard

Material
Labor

Finished

Equipment

Products (ship)

Advantages: Fixed position layout provides the following benefits

It saves time and cost involved on the movement of work from one workstation to
another.

The layout is flexible as change in job design and operation sequence can be
easily incorporated.

It is more economical when several orders in different stages of progress are

being executed simultaneously.

Adjustments can be made to meet shortage of materials or absence of workers by

changing the sequence of operations.

Disadvantages: Fixed position layout has the following drawbacks

Production period being very long, capital investment is very heavy

Very large space is required for storage of material and equipment near the
product.

As several operations are often carried out simultaneously, there is possibility of

confusion and conflicts among different workgroups.

2. Traders:
When two outlets carry almost same merchandise, customers usually buy in the one that
is more appealing to them. Thus, customers are attracted and kept by good layout i.e.
good lighting, attractive colors, good ventilation, air conditioning, modern design and
arrangement and even music. All of these things mean customer convenience, customer
appeal and greater business volume.
The customer is always impressed by service, efficiency and quality. Hence, the layout is
essential for handling merchandise, which is arranged as per the space available and the
type and magnitude of goods to be sold keeping in mind the convenience of customers.
There are three kinds of layouts in retail operations today.

Self-service or modified self-service layout

Full service layout

Special layouts

The self-service layouts, cuts down on sales clerks time and allow customers to select
merchandise for themselves. Customers should be led through the store in a way that will
expose them to as much display area as possible, e.g. Grocery Stores or department
stores. In those stores, necessities or convenience goods should be placed at the rear of
the store. The use of color and lighting is very important to direct attention to interior
displays and to make the most of the stores layout.
All operations are not self-service. Certain specialty enterprises sell to fewer numbers of
customers or higher priced product, e.g. Apparel, office machines, sporting goods,
fashion items, hardware, good quality shoes, jewelry, luggage and accessories, furniture
and appliances are all examples of products that require time and personal attention to be
sold. These full service layouts provide area and equipment necessary in such cases.
Some layouts depend strictly on the type of special store to be set up, e.g. TV repair shop,
soft ice cream store, and drive-in soft drink stores are all examples of business requiring
special design. Thus, good retail layout should be the one, which saves rent, time and
labor.
3. Services centers and establishment:
Services establishments such as motels, hotels, restaurants, must give due attention to
client convenience, quality of service, efficiency in delivering services and pleasing
office ambience. In todays environment, the clients look for ease in approaching
different departments of a service organization and hence the layout should be designed
in a fashion, which allows clients quick and convenient access to the facilities offered by
a service establishment.

Factors influencing layout:

While deciding his factory or unit or establishment or store, a small-scale businessman
should keep the following factors in mind:

a) Factory building: The nature and size of the building determines the floor space
available for layout. While designing the special requirements, e.g. air
conditioning, dust control, humidity control etc. must be kept in mind.
b) Nature of product: product layout is suitable for uniform products whereas
process layout is more appropriate for custom-made products.
c) Production process: In assembly line industries, product layout is better. In job
order or intermittent manufacturing on the other hand, process layout is desirable.
d) Type of machinery: General purpose machines are often arranged as per process
layout while special purpose machines are arranged according to product layout
e) Repairs and maintenance: machines should be so arranged that adequate space is
available between them for movement of equipment and people required for
repairing the machines.
f) Human needs: Adequate arrangement should be made for cloakroom, washroom,
lockers, drinking water, toilets and other employee facilities, proper provision
should be made for disposal of effluents, if any.
g) Plant environment: Heat, light, noise, ventilation and other aspects should be duly
considered, e.g. paint shops and plating section should be located in another hall
so that dangerous fumes can be removed through proper ventilation etc. Adequate
safety arrangement should also be made.
Thus, the layout should be conducive to health and safety of employees. It should ensure
free and efficient flow of men and materials. Future expansion and diversification may
also be considered while planning factory layout.

Design of production planning and control system:

A sound production-control system depends on:
1. A forecast of demand, expressed in units of production capacity.
2. A production plan or preliminary budget which establishes the inventory and
production budget.

3. A control procedure for deciding how fast to restore inventories to budget levels
when errors in the demand forecast cause inventories to exceed or fall below
budget. Some methods for designing a procedure of this type are described below.
A first requirement is to get a measure of production or demand that is useful and can be
applied to production, inventories, and demand equally well. Production, inventories, and
demandespecially the latter twoare frequently quoted in physical units such as
ounces, dozens, carloads, etc., and sometimes in dollars sold. On the other hand, a
company's business can be thought of as selling time of its employees and time of use of
its physical assets. The finished product demanded by a customer, or the finished or
processed item in stock, is a block of processing time plus raw materials in more or less
permanent form. Production-control decisions are answers to questions about how much
time to make available and how to use it in view of customer demand for time and the
time "stored" in inventory.
How does this bear on the question of a measure of demand? It means, first, that
production control is concerned with the availability and use of common interchangeable
pools of machine and/or employee time. Second, product forecasts, actual demand, and
inventories must be convertible into amounts of time of each of the common production
pools.
For example, many consumers packaged and bottled goods are produced on mechanized
blending and packaging lines. This equipment is readily shifted from one product or
package to another, and the same employees are required, whatever the particular item.
Sometimes two or more lines may be set up in parallel, but employees can be shifted
from one line to another without retraining. In cases like this there is no point in
forecasting demand for each item in detail for purposes of controlling the line operation.
What is needed is a forecast and control of the hours of line operation in total, to plan the
proper number of shifts and arrange for appropriate employees. If the right amount of
employee and line time is planned, decisions on what product to make can be reached day
to day to keep stocks balanced as actual demand materializes.
Many companies, particularly those supplying industrial customers with items like
meters, tools, small-volume chemicals, motors, or equipment, have a different problem.
They supply a wide range often many thousands of items. Manufacture of different
groups of items will call for distinctly different routings through the plant, and each
routing may require a number of processing and assembly steps. However, different
routings may call for use of common equipment or people, e.g., a particular machining
centre.
Despite apparent differences between the two cases, the control principles are the same.
In the second case, products should be grouped for forecasting purposes so that within
each group all products go through the same pools of interchangeable employees and
machines, as far as possible. The forecast demand for product groups can then be
exploded' into forecast demand for individual production pools.

Application of computer in production planning and control:

Computer is a tool whose main function is to provide management with information, on
the basis of which decisions can be made. Computer can supply the relevant information
at the time that is required to arrive at the right decision.
Some examples of application of computers in production planning and control problems
for data acquisition, analysis and results are as under:

Simple stuck control and re-ordering problem.

A capacity loading problem.

Order analysis problem.

Operation details and bills of material problem.

Scheduling problem.

Stock control problem.

Works order documentation problem.

Integration of production control and other control function problem.

1. Simple Stock Control and Reordering Problem:

A computer can be programmed to compare the recorded stock balance of an item with
the reorder level. It the stock balance is below the reorder level, it can search the files for
the supplier's name and address and raise an order for replenishment. For the simplest
system, the re-order level and the order quantity can be specified by a human being. For a
more sophisticated system, the computer can be programmed to analysis the demand data
for a stock item and to calculate the re-order parameters, on the basis of the analysis
without human intervention.
Thus, in such a case, the decision to replenish a stock item is made by computer.
2. Capacity loading problem:
The operations details and bill of materials for the manufacture of a product can be held
on a computer file. When an order for the product is obtained from the customer, the
computer, if suitably programmed, can explore the product in to its component parts and
load each manufacturing operation in to its appropriate cost centre, at a time when
capacity is available and in accordance with a time schedule which ensures that
production can proceed with least possible delay between manufacturing stages.
In case of overload situation, a qualitative decision will have to be made, as to which
orders will be delayed. Such a decision is beyond the practical capability of the computer

and should be made by managerial staff. However, to assist the manager with his
decision, the computer can be programmed to produce relevant information of the
following types:
A forward load report, showing which and when cost centers are over loaded, and
A list of all orders loaded for production in the appropriate cost centers during the
overload weeks, showing for each order, priority, and customer, value of order, capacity
required and production stage.
3. Order Analysis:
Details of all orders for a company's products can be retained in a memory store
accessible by the computer on demand. The commonly used file media for this purpose
are magnetic discs and magnetic tape. The data can be analyzed in various ways, enabling
the available information to be presented in different forms according to a particular
problem, on which decision is required.
For example, the computer can be programmed to group orders in to different categories
and to determine demand trends for each category. From these, it can forecast what the
future demand for each product category is likely to be, assuming that the current trend
patterns continue in the future.
Such an analysis assists in the development of the short term programmed.
It also enables the sales forecast to be monitored in advance, indicating to the sales
department which product groups are likely to result in short fall of sales, compared with
the sales forecast, and for which product groups demand is likely to exceed production
capacity.
It, thus, enables the sales management to determine where the sales effort would most
beneficially be applied (i.e., which products should be pushed).
Monitoring in advance also indicates to production supervisors where and when increases
or decreases in capacity are likely to be required and enable them to take necessary
action.
Past orders can also be analyzed under different headings, such as profitability
geographical locations of customers and value of orders per salesman.
4. Operation Details and Bills of Materials:
Details of the raw materials, purchased items, jigs and tools required to make a finished
product and the set-up, operating and tear-down time for each manufacturing stages can
be retained in a 'post file' held in a magnetic memory store.
The computer can be programmed to use this information for determining the dates, b
which materials should be purchased and manufacturing should be started so as to meet
the customer requirements by a given time.

The computer can also be programmed to analyze the actual operation time and compare
these with standard time to indicate where inefficient working occurs. The statistics of
machine breakdowns, labor absenteeism and the rate of scrap production can be analyzed.
5. Scheduling problem:
The computer at present has a limited use for scheduling. For some types of
manufacturing operations, it can produce and update schedules with reasonable accuracy
e.g. by the use of linear programming or line balancing technique. The computer can scan
the forward order book, select orders for identical products with similar due dates and
batch them in order to reduce set-up and tear-down time.

6. Stock control problem:

As already stated, the computer can be used for simple stock recording and for order
initiation when the stock of an item falls below the reorder print. More sophisticated
systems can be used for automatic determination of reorder points and re-order quantities
of finished products, brought out and manufactured stock items and raw materials.
7. Work order documentation:
The computer can be programmed to produce complete work documentation, either in the
form of master for an ancillary operation, such as spirit duplication, dye line copying or
as a multi-copy printout.
ADVANTAGES OF USING COMPUTERS FOR PPC:

Reduction in clerical costs.

Maximization of machine utilization.

Minimization of work in progress.

Minimization of delays for all jobs.

Minimization of total machine set-up and tear down times.

More accurate forecasts.

Reduction in lead times.

Reduction of investment in stocks.

Thus, the use of computer widens the scope of PPC, compared with conventional manual
systems.

Development of computer-aided PPC systems is a costly affair, which only, few

companies can afford. However, many companies have developed practical system at
very much lower cost, by concentrating their efforts on the design and implementation of
these portions of the total system, which would be expected to give the greatest potential
saving.
Most leading computer manufactures have written standard programmes, which are
available to assist computer-aided production planning and control. Although these may
be expensive and further expense has to be incurred in preparing the basic data files,
utilization of these packages considerably cheapens the cost of installing systems.

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