IE Management Techniques

MENT 554: INDUSTRIAL ENGINEERING MANAGEMENT
1. Introduction
Industrial Engineering seeks to maximize the performance of interactive man-machine-material
systems; systems integration that cut across boundaries of functions within organizations and
across boundaries of organizations that together make a whole enterprise. Industrial engineering
is concerned with designing effective systems and developing the best processes with the
purpose of integrating people, machine and material resources for improved overall effectiveness
of organizations and delivering the products and services to the consumer. Industrial engineering
discipline enables interface engineering facilities and their operations for converting resources
into products and services, which are in turn delivered to the consumer.
Present techno-economic scenario is marked by increasing competition in almost every sector of
the economy. The expectations of the customers are on the rise and manufacturers have to
design, and produce goods in as many variety as possible (concept of economics of scale is no
more talked to cater to the demands of the customers. Thus, there is a challenge before the
industries to manufacture goods of right quality and quantity and at right time and at minimum
cost for their ml and growth. This demands an increase in productive efficiency of the
organizations. Industrial Engineering is going to play a pivotal role in increasing the
productivity. Various industrial engineering techniques are used to analyze and improve the
work methods, to eliminate waste and proper allocation and utilization of resources.
Industrial engineering is a profession in which a knowledge of mathematical and natural sciences
gained by study, experience and practice is applied with judgment to develop the ways to utilize
economically the materials and other natural resources and forces of nature for the benefit of
mankind.
Industrial Engineering is concerned with the design, improvement and installation of integrated
system of men, materials and equipment. It draws upon specialized knowledge and skills in the
mathematical, physical sciences together with the principles and methods of engineering analysis
and design to specify, predict and evaluate the results to be obtained from such systems.
The prime objective of industrial engineering is to increase the productivity by eliminating waste
and non-value adding (unproductive) operations and improving the effective utilization of
resources.
1.1 Objectives of Industrial Engineering
The basic objectives of industrial engineering departments are:
1. To establish methods for improving the operations and controlling the production costs, and
2. To develop programmes for reducing those costs.
The Functions of an Industrial Engineering Department include:
1. Developing the simplest work methods and establishing one best way of doing the work
(Standard Method)
2. Establishing the performance standards as per the standard methods (Standard Time)
3. To develop a sound wage and incentive schemes.
4. To aid in the development and designing of a sound inventory control, determination of
economic lot size and work-in-process for each stage of production.
Designed and prepared Dr. Charles M.M. Ondieki 1
5. To assist and aid in preparing a detailed job description, and job specification for each job and
to evaluate them.
6. Development of cost reduction and cost control programmes, and to establish standard costing
system.
7. Sound selection of site and developing a systematic layout for the smooth flow of work
without any interruptions.
8. Development of standard training programmes for various levels of organization for effective
implementation of various improvement programmes.
2. Work Study
Work Study forms the basis for work system design. The purpose of work design is to identify
the most effective means of achieving necessary functions. Work study aims at improving the
existing and proposed ways of doing work and establishing standard times for work
performance.
Work design involves job design, work measurement and the establishment of time standards
and worker compensation. Work Study is encompassed by two techniques - method study and
work measurement (time study):
a) Method study is the systematic recording and critical examination of existing and
proposed ways of doing work, as a means of developing and applying easier and methods
and reducing costs.
b) Work measurement (or Time study) is the application of techniques designed to
establish the time for a qualified worker to carry out a specified job at a defined level of
performance.
There is a close link between method study and work measurement. Method study is concerned
with the reduction of the work content and establishing the one best way of doing the job
whereas work measurement is concerned with investigation and reduction of any ineffective time
associated with the job and establishing time standards for an operation carried out as per the
standard method.
2.1 Importance of Work-Study
a) Work study is a means of enhancing the production efficiency (productivity) of the firm
by elimination of waste and unnecessary operations.
b) It is a technique to identify non-value adding operations by investigation of all the factors
affecting the job.
c) It is the only accurate and systematic procedure oriented technique to establish time
standards.
d) It is going to contribute to the profit as the savings will start immediately and continue
throughout the life of the product.
e) It is applied universally.
2.2 Advantages of Work-Study
a) It helps to achieve the smooth production flow with minimum interruptions.
b) It helps to reduce the cost of the product by eliminating waste and unnecessary
operations.
c) It creates better worker-management relations.
d) It assists in meeting the delivery commitment.
e) It helps in reducing rejections and scrap, and higher utilization of resources of the
organization.
f) It helps to achieve better working conditions.
g) It helps in designing better workplace layout.
h) It helps in improving upon the existing process or methods and helps in standardization
and simplification.
i) It helps in establishing the standard time for an operation or job which is used in
manpower planning, production planning.
2.3 Work-Study Procedure
Work-study is a procedure oriented and systematic study to establish the one best way (standard)
method of doing an operation by investigation and analysis of all the details regarding the job or
operation carried out as per the established standard method.
Steps Involved in Work-Study
l. SELECT Job or Process to be studied;
2. RECORD all the details concerning job using various recording techniques;
3. EXAMINErecorded facts critically by asking questions like who, what, when, why;
4. DEVELOP most economical method;
5. MEASURE the amount of work involved and set standard time to do that job;
6. DEFINE new method and standard time;
7. INSTALL the new method as a standard practice;
8. MAINTAIN new method as agreed standard.
2.4 Work Simplification and Work-Study
Any production system is characterized by the coordination of machines and materials and men.
Rapid change in technology and introduction of new technologies are making the processes and
methods more complex. Human factor has become all the more important though automation and
computer controls are catching up.
The process management is key to the success of the product and company. Method study aims
at identifying the key processes and process parameters. A detailed investigation is carried out to
get all the necessary details in order to analyze the existing process and break the process into
parts (operations) which helps to plan and control. A detailed analysis with respect to process
inputs (men, material, and money) and also the process parameters is carried out to improve the
process and to get the desired level of output both in terms of quality and quantity.
The work simplification starts with the analysis of the product and a detailed evaluation with
regards to whether it can be changed in such a way as to make it easier to produce by reducing
the waste, eliminating non-value adding operations, design modification, etc. Thus work-study is
a powerful tool to make work simplification.
2.5 Influence of Method and Time Study on Production Activities
The basic objective of production management is to manufacture the right quantity and quality of
goods at the predetermined time and pre-established cost. Work-study is tool to achieve this
objective. During the product design and process design, the methods of manufacture are fixed
and process planning is done using the standard times and standard method. Methods analysis
guide with respect to how the work is to be best accomplished and time standards indicate how
long it will take to complete the job.
Process analysis and standard times help to have a control on quality and quantity of
manufactured products. Based upon the standard times, standard costs are determined and this
helps to analyze the variance between actual and standard costs. Controlling of product cost
(which is a function of method and standard time) is very much essential to be in competition.
Standard time forms the basis for compensation. This helps to link wages and the work content.
Thus work-study applied in right spirit helps to accomplish the production objectives.
2.6 Concept of Work Content
The amount of work contained in a given job is referred to as work content. For a given job work
content is measured in terms of man-hours or machine-hours. Work content has two constituents:
(a) Basic work content - This is the minimum time theoretically required for doing an operation
or job. This cannot be reduced. Basic work content will result in the following conditions:
The design and the specification are perfect.
Process of manufacture is exactly followed.
No loss of working time due to any of the reasons.
Thus, the basic work content represents an ideal condition which is not possible to achieve.
(b) Excess work content - The actual time required to complete an operation or job is more than
the basic time in practical situations. This additional portion of the work content is called
excess work content.
2.7 Reasons for Excess Work Content
In a manufacturing company, the excess work content gets added because of the following:
(a) Work content added due to defects in design or specification of a product.
Typical causes under this classification are:
Bad design of the product.
Lack of standardization of components.
Incorrect specifications and quality standards.
Faulty design of components.
(b) Work content added due to inefficient methods of manufacture
Improper selection of a manufacturing process/machine,
Wrong selection of tools,
Lack of process standardization,
Improper layout of the shop/factory,
Inefficient methods of material handling.
(c) Ineffective time added due to shortcomings of the management
Bad working conditions,
Frequent production interruptions due to breakdowns,
Poor production planning and control,
Lack of safety measures,
Lack of quality mindedness,
Improper communication (lack of instructions),
Frequent changes in set-ups (smaller lot size),
Lack of performance standards,
Shortage of materials/tools.
(d) In effective time added due to reasons attributed to work man
Unauthorized absence from work,
Substandard performance,
Carelessness in working,
Unnecessary wastage of time (Idleness).
The figure below shows how manufacturing time is made up of.
Basic work content of Product or
Operation.
TWC
Work content added due to defects in
TTO design or specification of products.
Work content added by inefficient
methods of manufacture.
Ineffective time due to shortcomings
of management.
TIT
Ineffective time within the control of
workers.
Fig. How Manufacturing Time is made of
TWC Total Work Content; TIT Total Ineffective Time; TTO Total Time of Operation.
2.8 Techniques to Reduce Work Content
1. Management techniques to reduce work content due to product
(a) Product development.
(b) Standardization (variety reduction)
(c) Value analysis.
(d) Market research/consumer research.
2. Management techniques to reduce work content due to process or methods
(a) Process planning.
(b) Methods study.
3. Management techniques to reduce ineffective time due to management
(a) Product standardization and simplification.
(b) Product specialization.
(c) Standardization of component.
(d) Production planning and control.
(e) Materials control.
(J) Plant maintenance.
(g) Safety measures and improved working conditions.
4. Management techniques to reduce ineffective time within control of the workers
(a) Sound personnel policies.
(b) Operators training.
(c) Safety training.
BWC
A
B
C
D
(d) Financial incentives.
3. METHOD STUDY
The main purpose of method study is to eliminate the unnecessary operations and to achieve the
best method of performing the operation. Method study is also called methods engineering or
work design. Method engineering is used to describe analysis of techniques which focus on
improving the effectiveness of and machines.
Method study is the systematic recording and critical examination of existing and proposed
ways of doing work as a means of developing and applying easier and effective methods and
reducing cost. Fundamentally method study involves the breakdown of an operation or
procedure into component elements and their systematic analysis.
Method study scope lies in improving work methods through process and operation analysis,
such as:
(i) Manufacturing operations and their sequence.
(ii) Workmen.
(iii) Materials, tools and gauges.
(iv) Layout of physical facilities and work station design.
(v) Movement of men and material handling.
(vi) Work environment.
3.1 Objectives of Method Study
Method study is essentially concerned with finding better ways of doing things. It adds value and
increases the efficiency by eliminating unnecessary operations, avoidable delays and other forms
of waste.
The improvement in efficiency is achieved through:
a) Improved layout and design of workplace.
b) Improved and efficient work procedures.
c) Effective utilisation of men, machines and materials.
d) Improved design or specification of the final product.
The objectives of method study techniques are:
(i) To present and analyze true facts concerning the situation.
(ii) To examine those facts critically.
(iii) To develop the best answer possible under given circumstances based on critical
examination of facts.
3.2 Scope of Method Study
The scope of method study is not restricted to only manufacturing industries. Method study
techniques can be applied effectively in service sector as well. It can be applied in offices,
hospitals, banks and other service organizations.
The areas to which method study can be applied successfully in manufacturing are:
a) To improve work methods and procedures.
b) To determine the best sequence of doing work.
c) To smoothen material flow with minimum of back tracking and to improve layout.
d) To improve the working conditions and hence to improve labour efficiency.
e) To reduce monotony in the work.
f) To improve plant utilization and material utilization.
g) Elimination of waste and unproductive operations.
h) To reduce the manufacturing costs through reducing cycle time of operations.
3.3 Steps Involved in Method Study
SELECT the job to be analyzed.
RECORD all relevant facts about present method.
EXAMINE the recorded facts critically.
DEVELOP the most efficient, practical and economic method.
DEFINE the new method.
INSTALL the method as a standard practice.
MAINTAIN that standard practice.
3.4 Selection of the Job for Method Study
Cost is the main criteria for selection of a job, process, and department for methods analysis. To
carry out the method study, a job is selected such that the proposed method achieves one or more
of the following results:
a) Improvement in quality with lesser scrap.
b) Increased production through better utilization of resources.
c) Elimination of unnecessary operations and movements.
d) Improved layout leading to smooth flow of material and a balanced production line.
e) Improved working conditions.
4. WORK MEASUREMENT
Work measurement is also called by the name "Time study". Work measurement is absolutely
essential for both the planning and control of operations. Without measurement data, it is not
possible to determine the capacity of facilities or to quote delivery dates or costs. It is also not
possible to determine the rate of production and labour utilization and efficiency. Further it may
not be possible to introduce incentive schemes and standard costs for budget control.
Time study is defined as the application of techniques designed to establish the time for a
qualified worker to carry out a specified job at a defined level of performance."
4.1 Objectives of Work Measurement
The use of work measurement as a basis for incentives is only a small part of its total application.
The objectives of work measurement are to provide a sound basis

for:
1. Comparing alternative methods.
2. Assessing the correct initial manning (manpower requirement planning).
3. Planning and control.
4. Realistic costing.
5. Financial incentive schemes.
6. Delivery date of goods.
7. Cost reduction and cost control.
8. Identifying substandard workers.
9. Training new employees.
4.2 Techniques of Work Measurement
For the purpose of work measurement, work can be regarded as:
1. Repetitive work: The type of work in which the main operation or group of operations repeat
continuously during the time spent at the job. These apply to work cycles of extremely short
duration.
2. Non-repetitive work: It includes some type of maintenance and construction work, where the
work cycle itself is hardly ever repeated identically.
Various techniques of work measurement are:
Time study (stop watch technique),
Synthesis,
Work sampling,
Analytical estimating,
Predetermined motion and time study.
Time study and work sampling involve direct observation and the remaining are data based
analytical in nature.
Time Study: A work measurement technique for recording the times and rates of working for
specified job carried out under specified conditions and for analysing the data so time necessary
for carrying out the job at the defined level of performance.
Synthetic data: A work measurement technique for building up the time for a job or parts of
level of performance by totaling element times obtained previously from time obs containing the
elements concerned or from synthetic data.
Work Sampling: A technique in which a large number of observations are made over a period
of one or group of machines, processes or workers. Each observation records what is at that
instant and the percentage of observations recorded for a particular activity, or measure of the
percentage of time during which that activities delay occurs.
Predetermined Motion Time Study (PMTS): A work measurement technique whereby times
for basic human motions (classified according to the nature of the motion and which it is made)
are used to build up the time for a job at the defined level of most commonly used PMTS is
known as Methods Time Measurement (MTM).
Steps in Making Time Study
Stop watch time is the basic technique for determining accurate time standards. They are
economical for repetitive type of work. Steps in taking the time study are:
1. Select the work to be studied.
2. Obtain and record all the information available about the job, the operator and the working
conditions likely to affect the time study work.
3. Breakdown the operation into elements. An element is a distinct part of a specified activity
composed of one or more fundamental motions selected for convenience of observation and
timing.
4. Measure the time by means of a stop watch, taken by the operator to perform each element of
the operation; Either continuous method or snap back method of timing could be used.
5. At the same time, assess the operators effective speed of work relative to the observers
concept of "Normal" speed. This is called performance rating.
6. Adjust the observed time by rating factor to obtain normal time for each element
Normal time = Observed time x Rating
100
7. Add the suitable allowances to compensate for fatigue, personal needs, contingencies, etc. to
give standard time for each element.
8. Compute allowed time for the entire job by adding elemental standard times considering
frequency of occurrence of each element.
9. Make a detailed job description describing the method for which the standard time is
established.
10. Test and review standards where necessary.
4.3 Steps in Time Study
SELECT the job to be timed,
OBTAIN & RECORD details regarding method, operator, job and working Conditions,
DEFINE the elements, break the job into elements convenient for timing,
MEASURE time duration for each element and assess the rating,
EXTEND observed time into normal time (Basic time),
DETERMINE relaxation and personal allowances,
COMPUTE standard time for the operation for defined job or operation.
5. JOB EVALUATION AND MERIT RATING
The basic reason today in industrial disputes is regarding the wages. It is the tendency of the
employees to compare their wages and salaries in relation to those of others in the same
organization or working in the similar jobs in other organizations. Always the dissatisfaction is
amongst the employees if there is a difference in wages that other employees are getting the
same type of work performed.
One of the prime objectives of sound wage and salary administration is to eliminate inequalities
and see that comparable jobs should be paid the same wage. Even both employees and employers
accept the fact that jobs having the same amount of work content, same level of difficulty should
be paid same amount. But this is possible only, if wage structure is based on the classification of
jobs as per the difficulty. Thus job evaluation is a technique to systematically determine the
worth of each job and help in establishing basic wage rates of jobs.
Definition: Job evaluation is a process to determine in a systematic manner and analytically the
worth of each job in the organization based upon the set of carefully selected factors such as
skill, effort and responsibility demanded by the job and translating these worth of jobs into
monetary terms (i.e., pay and wages).
It is an attempt to determine and compare the demands which the normal performance of the
particular jobs makes on normal workers without taking account of the individual abilities or
performance of workers concerned. It is a job rating method and not the job ranking method. Job
evaluation aims at providing a means of establishing a wage structure acceptable to both workers
and management.
5.1 Objectives of Job Evaluation
a) To establish a sound wage and salary system by determining the worth of each job in
factory in relation to various factors like skill required, effort and responsibility;
b) To eliminate the wage inequalities;
c) To establish a general wage level for a given factory;
d) To clearly define the line of authority and responsibility;
e) To formulate an appropriate and uniform wage structure;
f) To provide a sound base for recruitment, selection, promotion and transfer;
g) To identify the training needs of the employees so as to prepare them for future positions;
h) A sound base for individual performance measurement;
i) To promote a good employee-employer relations.
5.2 Procedure for Job Evaluation
The steps involved in job evaluation are:
a) JOB ANALYSIS - Determine detailed facts about the jobs;
b) JOB DESCRIPTION - Describe clearly the requirement of jobs;
c) JOB SPECIFICATION - Specify the attributes possessed by employee to complete the job
satisfactorily;
d) JOB CLASSIFICATION - Determine the relative worth of jobs;
e) WAGE DETERMINATION - Compare jobs with predetermined job and arrive at suitable
wage structure;
f) EVALUATE PERFORMANCE - Based on job description and specification
5.3 Job Analysis
Job analysis is the process of determining the facts relating to the jobs. It involves a systematic
examination of the job to find out:
a) Nature of tasks performed by the workers,
b) Purpose or objectives of the tasks,
c) Working conditions under which the tasks are carried out,
d) Responsibility and skill required to perform the tasks,
e) Relationship between various jobs done in the department/organization.
Job analysis programmes are usually tailor made as the nature of the information to be collected
will depend on the organization and purpose for which it is undertaken. The information
gathered through job analysis is useful for:
a) Job evaluation,
b) Personnel and general management decisions, recruitment, selection, promotion, transfer
of staff in the organization,
c) Performance review and appraisal,
d) Manpower planning,
e) Design of training programme.
5.4 Stages in Job Analysis
Stage I. Job identification,
Stage II. Job information collection, and
Stage III. Qualification requirements.
Stage I. Job Identification
Study and gather general information on the organisation with a view to locate each job in its
overall context. The information can be sought through:
Organisational chart,
Diagram of production process and functional relationship between jobs,
Other sources of information should be consulted to construct or update the
organisational charts/process diagrams.
The list of jobs to be analysed must be identified. During this some problems may arise like:
i) Job titles may not be an indicative of job content,
ii) Need for judicious sampling of post to be analysed,
iii) Same job title may cover two or more basically different posts,
iv) Similar work may be done in posts with different job titles.
Stage II. Information Collection
At this stage a systematic collection of information on all jobs is carried out using a standard
questionnaire. The questions are carefully designed to uncover the essential characteristics of the
job. The questions such as:
Who does the work? What is the job title?
What are the essential tasks?
How are the tasks performed?
What are the equipment used?
What is the relationship between tasks of the job and tasks of other jobs?
What are job holders responsibilities towards his/her colleagues and towards the
machines and equipment?
Under what working conditions the task is performed? (Hours of work, noise,
temperature, lighting, etc.)
Methods of Information Collection
Questionnaire method - A carefully designed questionnaire is to be filled by the worker
and his/her supervisor;
Interview with the worker and his supervisor; and
Direct observations at the workplace.
Stage III. Qualification Requirements for Satisfactory Performance of the Job
a. Knowledge,
b. Level of education,
c. Skills including experience,
d. Physical ability,
e. Mental ability,
f. Aptitude (initiative, tact, etc.).
The qualification requirements must consider only those which are essential to do the job.
5.5 Job Description
Job description follows the job analysis. It gives all essential facts about the job like
responsibilities, working conditions and other required facts. Job description is composed of
three parts:
(i) Job identification containing the details like job title, department, section, job code,
names of supervisor and other details to identify the job.
(ii) Job summary gives the overall picture of the duties performed.
(iii) Work performed gives the details of both regular as well as occasional tasks
performed, machines and tools used, working conditions and hazards.
5.6 Job Specification
Job specifications are prepared from the data collected during job analysis. It is the statement of
qualities and capabilities that an employee must possess to perform the job satisfactory. Job
specification describe the extent to which each of the job factor such as education, experience,
physical effort, responsibility for others work, materials, machines and equipment, etc., present
in the job and the degree of difficulty present. The job descriptions and job specifications both
form the basic for job evaluation and so it is essential to make it sure that the facts are presented
correctly.
5.7 Merit Rating
Job evaluation evaluates the job and the merit rating assesses the worth of a person performing
the job. Merit rating is also called the performance appraisal. It evaluates, controls and reviews
the performance. Both job evaluation and performance appraisal are aimed at systematically
determining the wage rates paid to the employees
Benefits of Merit Rating
(i) Useful in rewarding the person and the reward can be linked to the performance.
(ii) Helps to identify the person's potential to perform the assigned jobs and to decide the future
positions he/she can take up.
(iii) Useful in identifying the training needs of the employees.
(iv) Helps in counseling employees regarding their strengths and weaknesses.
(v) It motivates employees to perform better.
(vi) Acts as a constructive performance appraisal system.
Requirements of a sound performance appraisal system:
(i) The merit rating system should be transparent in the sense that it should be known to
everyone.
(ii) The criteria should be fixed and known to the rater as well as to the ratee.
(iii) There should not be any bias or ambiguity.
(iv) The rating should be done at the prefixed intervals.
(v) It should be related to the job related behaviour only.
(vi) It should act as a basis for sound reward system.
Methods of Merit Rating
a) Ranking method: This is the conventional and easy method. Normally the employees
are ranked in the order from best to worst. This is applicable to industries where the
number of people is few. The limitation of this method is that it cannot indicate specific
strengths and weaknesses. Ranking becomes difficult as the number of employees
increase.
b) Paired comparison method: In this method, the rater compares each employee in a
group with all the remaining employees. The performance is the only parameter for
comparison. This also becomes difficult to compare if the group is large.
c) Forced choice method: In this method, for each trait or behaviour number of statements
is given and the rater is required to select only one statement which describes the
particular behaviour of the employee being evaluated. This method is called forced
choice because the rater is forced to check only one statement and is not allowed
behaviour in his own words. This is most popular method used for rating lower cadre
staff.
d) Check list method: These are the lists made up of series of questions or statements
which are concerned about the important aspects of employees performance on the job.
The process of rating simply consists of checking those questions concerned to rate and
answering the question in "YES" or "NO". It is easy to compare the employees by this
method.
e) Scale plan: This is widely accepted method in industries. The scale is constructed to
define the various degrees of the traits. There are two types of scale plans:
Continuous scale - Here the scale is constructed to represent the highest to lowest
degree of required trait: (a) Numerical scale, (b) Description scales;
Discontinuous scales: This is the scale which gives elaborate description of
needed for rating.
Revision Questions
What is job evaluation? What are its objectives?
How does job analysis differ from job description?
Describe various methods of job evaluation giving their advantages and limitations.
Explain the steps involved in point rating method of job evaluation.
What is merit rating and how it helps the industries?
Write short notes on:
i) Importance of job evaluation and merit rating,
ii) Job analysis, job description and job specification,
iii) Merit rating methods
iv)Job evaluation systems.
6. WAGES AND INCENTIVE SCHEMES
The study of work measurement leads to wage payments. Theoretically the wages that a worker
gets is proportional to the amount of work he/she does. Wages are supposed to increase effective
motivation to work hard and better. Wages constitute the principle source of income for the
workers for the service rendered. A rational wage policy is essential to compensate the workers
for their efforts. The compensation to the employees involves the following issues:
Determination of wage structure/levels for different positions in the organization;
Determining wage for each individual employee occupying the position;
Determining the method of wage payment.
DEFINITIONS
Wages: These are the payments made by the employer to the efforts put in by the
workers towards production. A wage determines the standard of living and it should
represent a fair return for the effort of the worker and also wages should be able to satisfy
the primary and secondary needs of the workers. They should be enough to provide
him/her a reasonable standard of living.
Nominal wages: It is the amount of money paid to the worker in cash for the efforts of
the worker towards production and no other benefits are given to the worker. This is
called money wage. The rates of wages vary from one place to another depending upon
the demand and supply of labour and the necessities of life.
Real wages: It represents the amount of necessaries, comforts, luxuries and cash payment
a worker gets in return for his/her efforts. Some organizations provide their employees
certain essential commodities, housing with free electric and water charges, uniforms and
other such facilities in addition to the money in cash. If all these amounts are considered
for wages, it becomes the real wage.
Living wages: When the wage rates are such that they are going to fulfill some of the
requirements of a family like foods, cloths, education and insurance against misfortune
along with other basic necessities, they are referred to as living wages.
Fair wage: It is a wage which is to be considered as a fair amount of return for the efforts
of the employees and should be able to cover the other necessities of life, apart from
basic necessities like food, clothes and shelter for his family. The rate for the fair wage
between real wage and minimum wage.
Minimum wage: Minimum wage may be defined as the wage, which not only provides
for basic subsistence but something more than this. It should be able to keep the
employees motivated and it should provide for some measure of education, medical
facilities and other essential requirements. It should also consider the cost of living.
6.1 Minimum Wage
Wage cannot be paid beyond the paying capacity of the industries or factories. The minimum
wage is fixed taking into consideration the factors such as cost of living, maintaining the
efficiency of the workforce, keeping them motivated and paying capacity of industries. The main
objectives of the minimum wages are:
i) To protect the sections of working population whose wages are very low.
ii) To prevent exploitation of the workers.
iii) To improve general standard of life.
iv) To give satisfactory compensation towards efforts expended by the worker.
6.2 Need for a Rational Wage Policy
A sound wage policy should be aimed at social justice and the workers should get their due share
for their efforts. The rational wage policy should consider the following aspects:
1. Fixing minimum wages.
2. Fixing ceilings on wages.
3. Wage structure.
4. Price stability and price index.
The rationalized wage policy should aim at reducing the relative propensity and improve the
living conditions of the working class.
6.3 Factors Influencing Wage System
It is very much complex to arrive at a wage which may be considered satisfactory for both
workers and management. The various factors that determine the wage level are:
1. Labour market, i.e., demand and supply of labour.
2. Legal and statutory restrictions (Minimum Wage Act, Payment of Bonus Act,
Employees Provident Fund, Factory Act, Payment of Gratuity Act, etc.).
3. Organizations ability and willingness to pay.
4. Bargaining capacity of the employer and the employees.
5. Prevailing wage structure in the specific sector or industry.
6. Workers skill, knowledge and experience.
7. Wage levels in the specific sector or industry.
8. Cost of living.
6.4 Characteristics of a Good Wage System
1. A good wage system should be acceptable to both employees and management,
2. It should guarantee a minimum wage to the employee,
3. It should be able to keep the worker motivated,
4. It should provide a scope for employees to get reward for their additional or extra effort
(incentives),
5. It should be consistent and should not be altered frequently,
6. It should be based on equal work-equal pay,
7. The system should be simple and understood by all concerned,
8. It encourage employees to utilize their full potential,
9. It should make the work challenging and interesting.
6.5 COMPENSATION
Compensation is a significant issue related to the design of work systems. It is important for
organizations to develop suitable compensation plans for their employees, especially since the
success or failure of a firm depends in large measure on employee efforts. If wages are too low,
organizations may find it difficult to attract and hold competent workers and managers.
Conversely, if wages are too high, the increased costs may result in lower profits or force the
organization to increase its prices, which might adversely affect demand for the organization's
products or services.
There are two basic methods of wage payments or compensation:
1. Wage payment on time basis, and
2. Wage payment on output basis.
1. Wage payment on time basis: Under this method, wages are paid to the employee based the
time for which he/she works. In this system the workers are paid for the time they work
irrespective of output. This system is applicable where output is not quantifiable and it is not the
criteria of payment, where work is of not repetitive type.
The advantages for this system are:
System is easy to understand and simple to operate,
Reduces the problems of industrial relations,
The quality of the work is maintained as employees are not in a hurry to increase
quantity,
The worker can show his/her efficiency and workmanship without loss to himself/herself,
There is a scope for improvement in work methods.
The disadvantages for this system are:
Does not provide any incentive to ambitious and more efficient employees,
The output will be lowered in the absence of strict supervision,
The basis for wage is time and not the output or efficiency; so it happens that less
efficient workers are paid equal to efficient workers,
Employer will gain or loose by increase or decrease in output.
2. Wage payment on the basis of output (piece rate system): In this system, wages are paid
employees in relation to the output produced. This method is very convenient where each
individual worker is capable of performing his work without any dependence on the other
workers and the output produced will be quantifiable. This method can be applied where output
is standardized, and the work is of repetitive nature.
The advantages for this system are:
It provides incentives to efficient workers,
Cost of supervision is low compared to time based system,
Higher speed increases the production rate and hence reduces the cost per unit,
Increases the utilization of production facilities,
Workers innovate new ways and methods of doing the work in order to reduce the time
per unit, and
Motivates workers to produce more.
The disadvantages for this system are:
Workers in order to increase their wages through faster working, may neglect the quality,
Because of speed, worker may be prone to accident as it is possible that he may neglect
Precautions and safety measures,
The security for the workers is low and this may seriously punish the aged and inefficient
workers.
6.6 Incentive Schemes
Incentive schemes are intended to increase workers motivation by allowing them proportionately
higher

returns from greater efforts. A wage incentive plan is a method of payment which directly
relates earning to production. This is a system that enables workers to increase their earning by
maintaining or exceeding an established standard of performance. Incentive Schemes are the
tools management use to stimulate the production by encouraging workers to produce more than
average in accordance with their productivity.
Incentive plans are of two basic types:
1. Financial incentives: These are the rewards paid to the employees efforts in cash.
2. Non-financial incentives: These are non-monetary incentives (other than cash); these may
include gift items, discount coupons, special holidays, etc. Some of the non-financial
incentives are:
i. Management may create a climate of competition amongst the employees to
contribute constructively towards the organization; this incentive promotes creativity
and idea generation.
ii. Management may give provision for good housing, with all modern amenities,
facilities, medical facilities, etc.
iii. Management may give promotion to employees and facilities for personal growth.
iv. Management may award foreign business or educational trips.
6.7 Individual and Group Incentive Schemes
Under individual incentive scheme, individual employee is paid incentive on the basis of the
individual performance or output. This incentive is regardless of the output or performance of the
department or organization. The employers are liable to pay incentive to those employees who
are producing more than the standard output.
Under group incentive scheme, each employee is paid incentive on the basis of performance of
collective performance of his/her group to which he/she belongs. This group incentive scheme

is
preferred by the management as in turn they are getting an output from the group. Within the
group, each employee is going to get equal share of the incentive. Highly competent or
productive employees are not in favour of this scheme.
6.8 Characteristics of a Good Incentive System
1. The plan should be simple to understand and easy to operate. The employee should be able to
calculate his earnings.
2. The incentive scheme should be consistent. Once installed, the incentive scheme should not
be altered too often.
3. The incentive scheme should be such that it should motivate the employees to produce more.
4. There should be direct relation between the effort and the reward.
5. The incentive system should not create disharmony amongst the employees.
7. MATERIALS MANAGEMENT
Materials - All physical items used during a production process.
Materials management - The purchasing, storage, and movement of materials during
production, and the distribution of finished goods.
For our purposes, materials are the physical items used during the production process. They
include not only the parts and raw materials that become the finished goods, but also the physical
items needed to support the production process, such as fuels, lubricants, tools, machinery and
anything else that is purchased, moved, stored, or shipped. Materials management is concerned
with purchasing, storage, and movement of materials during production and with distribution of
finished goods.
Fig.: Overview of Material Management
7.1 PURCHASING
The purchasing function is responsible for obtaining material inputs for the operating system.
Purchasing Interfaces: As a service function, purchasing has interfaces with a number of other
functional areas, as well as with outside suppliers. Purchasing is the connecting link between the
organization and its suppliers.
Operating units constitute the main source of requests for purchased materials, and close
cooperation between these units and the purchasing department is vital if quality, quantity and
delivery goals are to be met. Cancellations, changes in specifications, or changes in quantity or
delivery times must be communicated immediately for purchasing to be effective.
Accounting is responsible for handling payments to suppliers and must be notified promptly
when goods are received in order to take advantage of possible discounts.
Design and engineering usually prepare material specifications, which must be communicated to
purchasing. Because of its contacts with suppliers, purchasing is often in a position to pass
information about new products and materials improvements on to design personnel. Also,
design and purchasing people may work closely to determine whether changes in specifications,
design, or materials can reduce the cost of purchased items.
Receiving checks incoming shipments of purchased items to determine whether quality, quantity,
and timing objectives have been met, and moves the goods to temporary storage. Purchasing
must be notified when shipments are late; accounting must be notified shipments are received so
that payments can be made; and both purchasing and accounting must be appraised of current
information on continuing vendor evaluation.
Suppliers Receiving Storage Operations Storage
Distributors,
Retailers,
Customers
Purchasing Production Distribution
Suppliers or vendors work closely with purchasing to learn what materials will be purchased and
what kinds of specifications will be required in terms of quality, quantity and deliveries.
Purchasing must rate vendors on cost, reliability, and so on. Good supplier relations can pay
dividends on rush orders and changes, and vendors provide a good source of information on
product and material improvements.
7.2 Purchasing Objectives
The basic objectives of purchasing can be summarized as follows:
1. To determine the quality and quantity and when an item is needed.
2. To obtain a reasonable price.
3. To maintain good relations with suppliers.
4. To maintain sources of supply.
5. To be knowledgeable about prices, new products, and new services that become available.
7.3 The Purchasing Cycle
The purchasing cycle begins with a request from within the organization to purchase material,
equipment, supplies, or other items from outside the organization, and the cycle ends when the
purchasing department is notified that a shipment has been received in satisfactory condition.
The main steps in the cycle are:
1. The requisition is received by purchasing: The requisition includes (a) a description of
the item or material desired, (b) the quantity and quality necessary, (c) desired delivery
dates, and (d) who is requesting the purchase.
2. A supplier is selected: The purchasing department must identify suppliers who have the
capability of supplying the desired goods. If no suppliers are currently listed in the files,
new ones must be sought. Vendor ratings may be referred to in choosing among vendors,
or perhaps rating information can be relayed to the vendor with the thought of upgrading
future performance.
3. The order is placed with a vendor: If the order involves a large expenditure, particularly
for a one-time purchase of equipment, for example, vendors will usually be asked to bid on
the job, and operating and design personnel may be asked to assist in negotiations with a
vendor. Large-volume, continuous-usage items may be covered by blanket purchase
orders, which often involve annual negotiation of prices with deliveries subject to request
throughout the year. Moderate-volume items may also have blanket purchase orders, or
they may be handled on an individual basis. Small purchases may be handled directly
between the operating unit requesting the item and the supplier, although some control
must be exercised over those purchases or else they could get out of hand.
4. Monitoring orders: Routine follow-up on orders, particularly large orders or those with
lengthy delivery schedules, allows the purchasing department to foresee delays and relay
this information to the appropriate operating units. Likewise, changes in quantity and
delivery needs of the operating units must be relayed to suppliers so they have time to
adjust their plans.
5. Receiving orders: Incoming shipments from vendors must be checked for quality and
quantity. Purchasing, accounting, and the operating unit that requested the goods must be
notified. If the goods are not received in satisfactory condition, they may have to be
returned to the supplier for credit or replacement, or subjected to detailed inspection.
Again, purchasing, accounting, and the operating unit must be notified. In either case,
vendor evaluation records must be updated.
Definition: Purchasing cycle - Series of steps that begin with a request for purchase, and end
with notification of shipment received in satisfactory condition
7.4 Value Analysis
Value analysis refers to an examination of the function of purchased parts and materials in an
effort to reduce the cost and/or improve the performance of those items. Typical questions that
would be asked as part of the analysis include:
Could a cheaper part or material be used?
Is the function necessary?
Can the function of two or more parts or components be performed by a single part for a
lower cost?
Can a part be simplified?
Could product specifications be relaxed, and would this result in a lower price?
Could standard parts be substituted for nonstandard parts?
The table below provides a checklist of questions that can be used to guide a value analysis.
Definition: Value analysis - Examination of the function of purchased parts and materials in an
effort to reduce cost and/or improve performance.
7.5 Make or Buy
There are times when an organization must consider whether to make or buy a certain item. This
issue can arise in a number of ways, such as in response to unreliable suppliers, idle capacity of
an organization, the desire to achieve greater control over the production process, and increasing
costs. Generally, the following factors are taken into account in deciding whether to make or
buy:
1. Cost to make versus cost to buy, including start-up costs.
2. Stability of demand and possible seasonality.
3. Quality available from suppliers compared with a firms own quality capability.
4. The desire to maintain close control over operations.
5. Idle capacity available within the organization.
6. Lead times for making versus buying.
7. Who has patents, expertise, and so on, if these are factors.
8. Stability of technology; if a technology is changing, it may be better to use a
supplier.
9. The degree to which the necessary operations are consistent with, or in conflict with,
current operations.
7.6 Evaluating Sources of Supply (Vendor Analysis)
In many respects, choosing a vendor involves taking into account many of the same factors
associated with making a major purchase (e.g., a car or a stereo system). A company considers
price, quality, the supplier's reputation, past experience with the supplier, and service after the
sale; this process is called vendor analysis. The main difference is that a company, because of
the quantities it orders and production requirements, often provides suppliers with detailed
specifications of the materials or parts it wants instead of buying items off the shelf, although
even large companies buy standard items that way.
The main factors to look at when a company selects a vendor are:
1. Price. This is the most obvious factor, along with any discounts offered, although it may
not be the most important.
2. Quality. A company may be willing to spend more money to obtain high quality.
3. Services. Special services can sometimes be very important in choosing a supplier.
Replacement of defective items, instruction in the use of equipment, repair of equipment,
and similar services can be key in selecting one supplier over another.
4. Location. Location of a supplier can have impact on shipping time, transportation costs,
and response time for rush orders or emergency service. Local buying can create
goodwill in the community by helping the local economy.
5. Inventory policy of supplier. If a supplier maintains an inventory policy of keeping spare
parts on hand, this could be helpful in case of an emergency equipment breakdown.
6. Flexibility. The willingness and ability of a supplier to respond to changes in demand and
to accept design changes could be important considerations.
Definition: Vendor analysis - Evaluating the sources of supply in terms of price, quality,
reputation, and service.
7.7 Determining Prices
Prices are determined in essentially three ways:
published price lists,
competitive bidding, and
Negotiation.
In many instances, organizations buy products and services that have fixed or predetermined
prices. This is generally the case for standard items that are bought infrequently and/ or in small
quantities. For large orders of standard products and services, competitive bidding is often used.
This involves sending requests for bids to potential suppliers, which ask vendors to quote a price
for a specified quantity and quality of items or for a specified service to be performed.
Government purchases of standard goods or services are usually made through competitive
bidding.
Negotiated purchasing is used for special purchasing situations - when specifications are vague,
when one or a few customized products or services are involved (e.g., space exploration), and
when few potential sources exist. Several myths concerning negotiated purchasing should be
recognized:
1. Negotiation is a win-lose confrontation.
2. The main goal is to obtain the lowest possible price.
3. Each negotiation is an isolated transaction.
No one likes to be taken advantage of. Furthermore, contractors and suppliers need a reasonable
profit to survive. Therefore, a take-it-or-leave-it approach or one that capitalizes on the
weaknesses of the other party will serve no useful purpose and may have detrimental effects that
surface later. The most reasonable approach is one of give and take, with each side giving and
receiving some concessions.
7.8 Centralized versus Decentralized Purchasing
Centralized purchasing means that purchasing is handled by one special department, whereas
Decentralized purchasing means that individual departments or separate locations handle their
own purchasing requirements.
Revision questions
1. Briefly describe the materials management function.
2. Briefly describe how the purchasing department interacts with other functional areas of the
firm such as accounting and design.
3. Describe value analysis. Why is purchasing a good location for this task?
4. Should the supplier with the highest quality-lowest price combination always be selected
over others? Explain.
S. Discuss the issue of centralization versus decentralization of the purchasing function.
6. Discuss the determination of prices.
8. INVENTORY CONTROL
In majority of the organizations, the cost of material forms a substantial part of the selling price
of the product. The interval between receiving the purchased parts and final products varies from
industries to industries depending upon the cycle time of manufacture. Materials are procured
and held in the form of inventories. It is therefore necessary to hold inventories of various kinds
to act as a buffer between supply and demand for efficient operation of the system. Thus, an
effective control on inventory becomes a must for smooth and efficient running of the production
cycle with least interruptions.
Definition: Inventory generally refers to the materials in stock. It is also called the idle resource
of an enterprise. Inventories represent those items, which are either stocked for sale or they are in
the process of manufacturing or they are in the form of materials, which are yet to be utilized.
8.1 Types of Inventories
A manufacturing enterprise generally carries the following types of inventories:
1. Raw materials - Raw materials are those basic unfabricated materials, which have not
undergone any operation since they were received from the suppliers, e.g., round
bars, angle irons, channels, pipes, etc.
2. Bought out parts - These parts refer to those finished parts, sub-assemblies which are
purchased from outside as per the company's specifications.
3. Work-in-process inventories (WIP) - These refer to the items or materials in partly
completed condition of manufacturing, e.g., semi-finished products at the various
stages of manufacture.
4. Finished

goods inventories - These refer to the completed products ready for dispatch.
5. Maintenance, repair and operating stores - Normally these inventories refer to items,
which do not form the part of the final product but are consumed in the production
process, e.g., machine spares, oil, grease.
6. Tools inventory - Includes both standard tools and special tools.
7. Miscellaneous inventories - Miscellaneous inventories - office stationeries and other
consumable stores.
Inventories can also be classified as:
(i) Fluctuation inventories,
(ii) Anticipation inventories,
(iii) Lot size inventories, and
(iv) Transportation inventories.
Fluctuation inventories have to be carried for the reason that sales and production times for the
product cannot be always predicted with accuracy. There are variations in demand and lead times
required to manufacture items. Thus, there is a need for reserve stock or safety stock to account
for the fluctuations in demand and lead-time.
Anticipation inventories are built up in advance for big selling season, promotion programme
or anticipation of likely change in demand suddenly and in case of plant shutdown period. It is
the inventory for the future need.
Lot size inventory refers to producing and storing at the rate higher than the current
consumption rate. The production in lots is going to help the advantage of price discounts for
quantities in bulk and fewer set-ups and, hence, the lower set-up cost.
The transportation inventories exist because materials must be moved from one place to
another. When transportation requires a long time, the items in transport represent the inventory.
Thus, transportation inventory is a result of extended or longer transportation time.
8.2 Reason for Keeping Inventories
(i) To stabilize production: The demand for an item fluctuates because of the number of
factors e.g., seasonality, production schedule etc. The inventories (raw materials and
components) should be made available to the production as per the demand failing which
results in stock out and the production stoppage takes place for want of materials. Hence,
the inventory is kept to take care of this fluctuation so that the production is smooth.
(ii) To take advantage of price discounts: Usually the manufacturers offer discount for
bulk buying and to gain this price advantage the materials are bought in bulk even though
it is not required immediately. Thus, inventory is maintained to gain economy in
purchasing.
(iii) To meet the demand during the replenishment period: The lead-time for procurement
of materials depends upon many factors like location of the source, demand supply
condition, etc. So inventory is maintained to meet the demand during the procurement
(replenishment) period.
(iv) To prevent loss of orders (sales): In this competitive scenario, one has to meet the
delivery schedules at 100 per cent service level, means they cannot afford to miss the
delivery schedule, which may result in loss of sales. To avoid this organizations have to
maintain inventories.
(v) To keep pace with changing market conditions: The organizations have to anticipate
the changing market sentiments and they have to stock materials in anticipation of non-
availability of materials or sudden increase in prices.
(vi) Other reasons: Sometimes the organizations have to stock materials due to other reasons
like suppliers minimum quantity condition, seasonal availability of materials or sudden
increase in prices.
8.3 Inventory Control
Inventory control is a planned approach of determining what to order, when to order, how much
to order and how much to stock so that costs associated with buying and storing are optimal
without interrupting production and sales. Inventory control basically deals with two problems:
(i) When should an order be placed? (Order level), and
(ii) How much should be ordered? (Order
These questions are answered by the use of inventory models. The scientific inventory control
system strikes the balance between the loss due to non-availability of an item and cost of
carrying the stock of an item. Scientific inventory control aims at maintaining optimum level of
stock of goods required by the company at minimum cost.
8.4 Objectives of Inventory Control
1. To ensure adequate supply of products to customer and avoid shortages as far as possible;
2. To make sure that the financial investment in inventories is minimum (i.e., see that the
working capital is blocked to the minimum possible extent);
3. Efficient purchasing, storing, consumption and accounting for materials is an objective.
4. To maintain timely record of inventories of all the items and to maintain the stock within
the desired limits;
5. To ensure timely action for replenishment;
6. To provide a reserve stock for variations in lead times of delivery of materials;
7. To provide a scientific base for both short-term and long-term planning of materials.
8.5 Benefits of Inventory Control
It is an established fact that through the practice of scientific inventory control, the stocks can be
reduced to between 10 per cent and 40 per cent. The benefits of inventory control are:
1. Improvement in customers relationship because of the timely delivery of goods and services.
2. Smooth and uninterrupted production and, hence, no stock out.
3. Efficient utilization of working capital.
4. Helps in minimizing loss due to deterioration, obsolescence, damage and pilferage.
5. Economy in purchasing.
6. Eliminates the possibility of duplicate ordering.
8.6 Costs Associated

With Inventory
(i) Purchase (or production) cost: The value of an item is its unit purchasing (production)
cost. This cost becomes significant when availing the price discounts.
(ii) Capital cost: The amount invested in an item, (capital cost) is an amount of capital
available for other purchases. If the money were invested somewhere else, a return
investment is expected. A charge to inventory expenses is made to account for this
un-received return. The amount of the charge reflects the percentage return expected
from other investment.
(iii) Ordering cost: It is also known by the name procurement cost or replenishment cost or
acquisition cost. Cost of ordering is the amount of money expended to get an item
into inventory. This takes into account all the costs incurred from calling the
quotations to the point at which the items are taken to stock.
There are two types of costs - fixed costs and variable costs. Fixed costs do not
depend on the number of orders whereas variable costs change with respect to the
number of orders placed. The salaries and wages of permanent employees involved in
the purchase function and control of inventory, purchasing, incoming inspection,
accounting for purchase orders constitute the major part of the fixed costs. The cost of
placing an order varies from one organization to another. They are generally
classified under the following headings:
Purchasing: The clerical and administrative cost associated

with the purchasing,
the cost of requisitioning material, placing the order, follow-up, receiving and
evaluating quotations.
Inspection: The cost of checking material after they are received by the supplier
for quantity and quality and maintaining records of the receipts.
Accounting: The cost of checking supply against each order, making payments
and maintaining records of purchases.
Transportation costs: The cost of transporting goods, materials, etc.
(iv) Inventory carrying costs (holding costs): These are the costs associated with holding a
given level of inventory on hand and this cost vary in direct proportion to the amount
of holding and period of holding the stock in stores. The holding costs include:
Storage costs (rent, heating, lighting, etc.);
Handling costs: Costs associated with moving the items such as cost of labour,
equipment for handling;
Depreciation, taxes and insurance;
Costs on record keeping;
Product deterioration and obsolescence;
Spoilage, breakage, pilferage and loss due to perishable nature.
(v) Shortage cost: When there is a demand for the product and the item needed is not in
stock, then we incur a shortage cost or cost associated with stock out. The shortage
costs include:
Backorder costs,
Loss of future sales,
Loss of customer goodwill,
Extra cost associated with urgent, small quantity ordering costs,
Loss of profit contribution by lost sales revenue.
The unsatisfied demand can be satisfied at a later stage (by means of back orders)
or unfulfilled demand is lost completely (no back ordering, the shortage costs
become proportional to only the shortage quantity).
8.7 Inventory Control Terminology
1. Demand - It is the number of items (products) required per unit of time. The demand may
be either deterministic or probabilistic in nature.
2. Order cycle: The time period between two successive orders is called order cycle.
3. Lead time: The length of time between placing an order and receipt of items is called lead
time.
4. Safety stock: It is also called buffer stock or minimum stock. It is the stock or inventory
needed to account for delays in materials supply and to account for sudden increase in
demand due to rush orders.
5. Inventory turnover: If the company maintains inventories equal to 3 months consumption,
it means that inventory turnover is 4 times a year, i.e., the entire inventory is used up and
replaced 4 times a year.
6. R-order level (ROL): It is the point at which the replenishment action is initiated. When
the stock level reaches R.O.L., the order is placed for the item.
7. Re-order quantity: This is the quantity of material (items) to be ordered at the re-order
level. Normally this quantity equals the economic order quantity.
8.8 Inventory Cost Relationships
There are two major costs associated with inventory - Procurement cost (ordering cost) and
inventory carrying cost. Annual procurement cost varies with the number of orders. This implies
that the procurement cost will be high if the item is procured frequently in small lots.
Annual total cost
Annual inventory carrying
cost
Cost
Annual ordering cost

Q* (Economic Order Quantity)
Order Quantity
Fig: Inventory carrying cost
The annual inventory carrying cost (Product of average inventory x carrying cost) is directly
proportional to the quantity in stock. The inventory carrying cost decreases if the quantity
ordered per order is small. The two costs are diametrically opposite to each other. The right
quantity to be ordered is one that strikes a balance between the two opposing costs. This quantity
is referred to as "Economic order quantity" (EOQ). The cost relationships are shown in the figure
above.
8.9 Inventory Models
One of the basic problems of inventory management is to find out the order quantity so that it is
most economical from overall operational point of view. Here the problem lies in minimizing the
two conflicting costs, i.e., ordering cost and inventory carrying cost. Inventor models help to find
out the order quantity which minimizes the total costs (sum of ordering costs and inventory
carrying costs). Inventory models are classified as shown in below.
Fig: Inventory Models
Inventory Models
Deterministic
(Models assuming certainty)
Probabilistic
Fixed Qty.
System
Fixed Period
System
Fixed Qty.
System
Fixed Period
System
8.10 Model I: Economic Order Quantity with Instantaneous Stock Replenishment
(Basic Inventory Model)
1. Demand is deterministic, constant and it is known,
2. Stock replenishment is instantaneous (lead time is zero),
3. Price of the materials is fixed (quantity discounts are not allowed),
4. Ordering cost does not vary with order quantity.
Let D be the annual demand (units per year)
C
o
= Ordering costs
C
h
= Inventory carrying costs (KES./unit/unit time)
C
p
= Price per unit
Q = Order quantity
Q* = Economic order quantity
N = Number of orders placed per annum
T
c
= Total cost per annum
Annual ordering cost = No. of orders x Ordering cost/order
=
Quantity Order
demand Annual
x Ordering cost/order =
Q
D
x C
o
Annual inventory carrying cost = Average Inventory Investment x Inventory carrying cost
=
,
_

2
. . Inventory Min Inventory Max
x Inventory carrying
cost
=
2
h
QC
Total annual cost (T
c
) = Annual ordering cost + Annual inventory cost
=
Q
DC
o
+
2
h
QC
To determine the Economic Order Quantity (EOQ), differentiate T
c
with respect to Q, and set the
derivative equal to zero. This will give Q* =
h
o
C
DC 2
, which is the EOQ
Optimal number of orders placed per annum is given by N* =
Quantity Order Economic
demand Annual
=
*
Q
D
Optimal time interval between two orders is given by T* =
*
N
year a in days working of Number
Minimum total yearly inventory cost is given by T
cm
=
2
*
h
o
o
C Q
Q
DC
+
= h o
C DC 2
8.11 Model-II: Economic Order Quantity When Stock Replenishment is
Non-Instantaneous (Production Model)
This model is applicable when inventory continuously builds up over a period of after placing an
order or when the units are manufactured and used (or sold) at a constant rate. Because this
model is specially suitable for the manufacturing environment where there is a simultaneous
production and consumption, it is called "Production Model".
Maximum inventory level
Consumption
Stock level (Quantity)
Stock build up
t
p
t
c Time
T
Fig.: Production inventory model
Assumptions
1. The item is sold or consumed at the constant demand rate, which is known.
2. Set up cost is fixed and it does not change with lot size.
3. The increase in inventory is not instantaneous but it is gradual.
Let p be the production rate, and d be the demand or consumption rate.
Replenishment of inventory under this system build-up during the period t
p
and consumption
Takes place during the entire cycle T. Inventory under this situation, builds at the rate of (p - d)
units and inventory is maximum at the end of production period t
p
. Maximum inventory at the
end of production run = (p - d) x t
p
Average inventory =
( )
2
p
t d p
The quantity produced during production period (Q) = p x t
p;
i.e. t
p
= Q/p
Substituting for t
p,
Average inventory =
( )
2
p
t d p
= (p d).Q/ (2p) =
,
_
p
d Q
1
2
Annual inventory carrying cost = Average x Inventory carrying cost =
,
_
p
d Q
1
2
C
h
Annual set-up cost = No. of set-ups x set-up cost/ set-up = C
o
x D/Q
Total annual cost (T
c
) = C
o
.D/Q +
,
_
p
d Q
1
2
C
h
To determine the Economic Batch Quantity (EBQ) i.e. the Lot size, differentiate T
c
with respect
to Q, and set the derivative equal to zero. This will give Q* =
h
o
C
p
d
DC
,
_
1
2
, which the EBQ
Optimal total cost is given by T
cm
=
,
_
p
d
C DC
h o
1 2 ; and
Optimal number of production runs is given by N* =
Qty Batch Economic
demand Annual
=
*
Q
D
8.12 SAFETY STOCK
The economic order quantity formula is developed based on the assumption that the demand is
known and certain and that the lead-time is constant and does not vary. In actual practical
situations, there is an uncertainty with respect to both demand as well as lead time. The total
forecasted demand may be more or less than actual demand and the lead time may vary from the
estimated time. In order to minimize the effect of this uncertainty due to demand and lead time, a
firm maintains safety stock, reserve stock or buffer stock.
The safety stock is defined as "the additional stock of material to be maintained in order to meet
the unanticipated increase in demand arising out of uncontrollable factors." Because it is difficult
to predict the exact amount of safety stock to be maintained, by using statistical methods and
simulation, it is possible to determine the level of safety stock to be maintained.
Determination of Safety Stock: If the level of safety stock maintained is high, it locks up the
capital and there is a possibility of risk of obsolescence. On the other hand, if it is low, there is a
risk of stock out because of which there may be stoppage of production. When the variation in
lead time is predominant, the safety stock can be computed as:
Safety Stock = (Maximum Lead time - Normal lead time) x Consumption rate
The service level of inventory thus depends upon the level of safety stocks. Larger the safety
stocks, there is lesser risk of stock out and, hence, higher service level. Sometimes higher service
levels are not desirable as they result in increase of costs, thus, fixing up a safety stock level is
critical. Using the past date regarding the demand and lead time data, reliability of suppliers and
service level desired by the management, safety stock can be determined with accuracy.
8.13 Inventory Control System
The inventory systems are developed to cope with the situations where the demand or lead time
or both will fluctuate. The basic approach to all stock control methods is to establish a re-order
level which, when reached would indicate the signal for the replenishment action. Thus the
replenishment of the inventory means determining the quantity to be ordered and the time of
ordering. Basically there are two types of replenishment systems:
i) Fixed quantity system (Q-system), and
ii) Fixed period system (P-system)
a) Fixed Order Quantity System
This is also called perpetual inventory system or Q-system. In this system, the order quantity is
fixed and ordering time varies according to the fluctuation in demand. The characteristics of this
system are:
i) Re-order quantity is fixed and normally it equals Economic Order Quantity (EOQ).
ii) Depending upon the demand, the time interval of ordering varies.
iii) Replenishment action is initiated when stock level falls to Re-order level (ROL).
iv) Safety stock is maintained to account for increase in demand during lead time.
b) Parameters to Operate the System
i) Re-order level (ROL): This equals the sum of safety stock and lead time consumption.
R.O.L. =m + L x C;
where m - is the minimum or safety stock,
L - Lead time (days/weeks/months), and
C- consumption rate (per day/per week/per month).
ii) Re-order quantity (Q): This normally equals Economic Order Quantity (EOQ).
iii) Maximum stock level (M): It equals the Safety Stock + Order Quantity; M = m + Q
o
where Q
o
is order quantity
m = Safety stock
M = Max. stock
iv) Average inventory:
Average inventory = 1/2 (Min. stock + Max. stock)
= 1/2(m + M)
= 1/2 (m + m + Q
o
)
= m + Q
o
/2
c) The advantages of this system are:
Simple and cheaper to operate,
Stock control will be accurate as the replenishment action is initiated soon after the stock
reaches R.O.L.,
Suitable for low value items, and
Appropriate for variety of inventory maintained within the organization.
d) The limitations of this system are:
In this inventory system, there will be a load on the re-ordering system if many items
reach R.O.L. at the same time;
The stock level records and usage rate data are to be maintained.
9. FORECASTING
Forecasting plays a crucial role in the development of plans for the future. It is essential for
organizations to know for what level of activities one is planning before investments in inputs,
i.e. men, machines and materials are made. Before making an investment decision, many
questions will arise like:
What should be the size or amount of capital required?
How large should be the size of the work force?
What should be the size of the order and safety stock?
What should be the capacity of the plant?
The answers to the above questions depend upon the forecast for the future level of operations.
The planning of production activity is, therefore, essential so that the resources are put to their
best use. Planning is a fundamental activity of management. Forecasting forms the basis of
planning and forecasting enables the organization to respond more quickly and accurately to
market changes.
Forecasting is an estimate of sales in physical units (or monetary value) for a specified future
period under proposed marketing plan or programme and under the assumed set of economic and
other forces organization for which the forecast is made. Forecasting is a projection based on the
past data, and is not a guess work; it is the inference based on large volume of data on past
performance. Forecasting is an important

component of strategic and operational planning; it
establishes a link between planning and controlling. It is essential for planning, scheduling and
controlling the system to facilitate effective and efficient output of goods and services.
9.1 Forecasting and Prediction
Prediction is an estimate of future event through subjective considerations other than just the past
data. For prediction, a good subjective estimation is based on managers skill, experience and
judgment. There is an influence of one's own perception and bias in prediction. So it is less
accurate and has low reliability. Forecasting is an estimate of future event achieved by
systematically combining and casting forward in a predetermined way using data about the past.
Forecasting is based on the historical data and it requires statistical and management science
techniques. When we refer to forecasting, usually it is some combination of forecasting and
prediction.
9.2 Need for Forecasting
1. Majority of the activities of the industries depend upon the future sales.
2. Projected demand for the future assists in decision-making with respect to investment in
plant and machinery, market planning and programmes.
3. To schedule the production activity to ensure optimum utilization of plant's capacity.
4. To prepare material planning to take up replenishment action to make the materials
available at right quantity and right time.
5. To provide information about the relationship between demands for different products in
order to obtain a balanced production in terms of quantity required of different products
as a function of time.
6. Forecasting is going to provide a future trend which is very much essential for product
design and development.
Thus, in this changing and uncertain techno-economic and marketing scenario, forecasting helps
to predict the future with accuracy.
9.3 Long-Term and Short-Term Forecasts
Depending upon the period for which the forecast is made, it is classified as long-term
forecasting and short-term forecasting. Forecasts, which cover the periods of less than one year
are termed as short-term forecasts, and those over one year (5 years or 10 years) future are
termed as long-term forecasts.
Short-term forecasts are made for the purpose of materials control, loading and scheduling and
budgeting. Long-term forecasts are made for the purposes of product diversification, sales and
advertising budgets, capacity planning and investment planning.
9.4 Classification of Forecasting Methods
A large number of forecasting techniques with various degrees of complexity are available to the
forecaster these days. In general, forecasting methods are classified as:
Judgmental techniques,
Time Series methods,
Casual methods (Econometric Forecasting).
The judgmental technique is a method which relies on the art of human judgment. This is a
subjective method that relies on the past experience of the person and skill; this technique has
been used for a long time. The other two techniques are relatively new and they heavily use
statistics for analyzing the past data.
In econometric forecasting, the analyst tries to establish cause and effect relationships between
sales and other parameter that are related to sales, i.e., the demand for cement depends upon the
projected growth of construction industry. The objective this method is to establish a cause and
effect relationship between changes in the sales level of the product and set of relevant
explanatory variable. It utilizes regression and correlation analysis.
Time series analysis, identifies the historical pattern of demand for the product and project or
extrapolates this demand into the future. The important method of making inference about the
future on the basis of what has happened in the past is called time series analysis. The time series
method does not study the factors that influence demand and in this method all the factors that
shape the demand are grouped into one factor-time and demand is expressed as a series of data
with respect to time.
9.5 Least Square Method of Forecasting (Regression Analysis)
This is the mathematical method of obtaining the "the line of best fit between the dependent
variable (usual demand) and an independent variable. This method is called least square method
as the sum of the square of the deviations of the various points from the line of best fit is
minimum or least. It gives the equation of the line for which the sum of the squares of vertical
distances the actual values and the line values are at minimum.
In a simple regression analysis, the relationship between the dependent variable y and some
independent variable x can be represented by a straight line
y =a +bx
where b is the slope of the line
a is the y-intercept.
The values of the constants a and b are determined by the two simultaneous equations.
y= Na + bx ... (1)
xy = a x + b x
2
... (2)
These two equations are called normal equations.
To compute the values of a and b,
(i) Calculate the deviation (x) for each period and also the sum of deviations.
(ii) Find the value of x
2
(iii) Find the value of xy
(iv) Calculate the values of a and b
(v) Make the sum of deviations x = 0
Substituting the value of x = 0 in equations (1) and (2),
We get, y = Na; and y = b x
2
which gives the values of a and b as; a = y/N; and b = xy/ x
2
Note: (i) If the Time Series consists of odd number of years to make x = 0, the middle value of
the time series is taken as the Origin.
(ii) If the time series consists of even number of years, the midway period between two
middle periods is taken as origin to make x = 0.
Problem 1: The following data gives the sales of the company for various years. Fit the straight
line. Forecast the sales for the year 2007 and 2008.
Solution
Year: 1998 1999 2000 2001 2002 2003 2004 2005 2006
Sales (000); 13 20 20 28 30 32 33 38 43
Year Sales (y) Deviation
(x)
x
2
xy
1
2
3
4
5
6
7
8
9
13
20
20
28
30
32
33
38
43
-4
-3
-2
-1
0
1
2
3
4
16
9
4
1
0
1
4
9
14
-52
-60
-40
-28
0
32
66
114
172
N=9 y = 257 x =0 x
2
= 60 xy = 204
Now, substituting the values in the equations to get
a = y/n = 257/9 = 28.56,
b = xy / x
2 =
204/60 = 3.4
The equation of the straight line of best fit is: y = 28.56+ 3.4x
(i) Sales for the year 2007,
y
07
= 28.56+ 3.4 x 5 = 45.56 x 1,000 = Ksh.45, 560
(ii) Sales for the year 2008,
y
08
= (28.56+ 3.4 x 6) x 1,000 = Ksh.49, 000
Problem 2: The past data regarding the sales of IN-MAT for the last five years is given. Using
the least square method fit a straight line. Estimate the sales for the year 2006 and 2007.
Solution
Year: 2001 2002 2003 2004 2005
Sales (000); 35 56 79 80 40
Year Sales (y) Deviation
(x)
x
2
xy
2001
2002
2003
2004
2005
35
56
79
80
40
-2
-1
0
1
2
4
1
0
1
4
- 70
- 56
0
80
88
N=5 y = 290 x =0 x
2
= 10 xy = 42
In this case as the number of periods is odd, to make the x = 0, the deviations are calculated
from the middle period, i.e., 2003.
Now, substituting the values in the equations to get,
a = y/n = 290/5 = 58; and b = xy /x
2 =
42/10 = 4.2
The equation of the straight line of best fit is: y = 58 + 4.2x
(i) Sales for the year 2006 (the deviation, i.e. x = 3),
y
06
= 58 + 4.2 x 3 = 70.6 x 1,000 = Ksh.70, 600
(ii) Sales for the year 2007(the deviation, i.e. x = 4),
y
07
= (58 + 4.2 x 4) x 1,000 = Ksh.74, 800
Problem 3: The sales for the domestic water pumps manufactured by IN-MAT are given.
Forecast the demand for the pumps for the next three years using least square method.
Year of manufacture: 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Sales (No. of pumps); 30 33 37 39 42 46 48 50 55 58
10. Scheduling
Scheduling is the establishment of the timing of the use of specific resources of within an
organization. Scheduling relates to the use of equipment, facilities, and human activities.
Scheduling occurs in every organization, regardless of the nature of its activities. For example,
manufacturers must schedule production, which means developing schedules for workers,
equipment, purchases, maintenance, and so on. Hospitals must schedule admissions, surgery,
nursing assignments, and support services such as meal preparation, security, maintenance, and
cleaning. Educational institutions must schedule classrooms, instruction, and students. And
lawyers, doctors, dentists, hairdressers, and auto repair shops must schedule appointments.
In the decision-making hierarchy, scheduling decisions are the final step in the transformation
process before actual output occurs. Many decisions about system design and operation have to
be made long before scheduling decisions. They include the capacity of the system, equipment
selection, selection and training of workers, and design of products and services. Consequently,
scheduling decisions must be made within the constraints established by many other decisions,
making them fairly narrow in scope and latitude. Generally, the objectives of scheduling are to
achieve trade-offs among conflicting goals, which include efficient utilization of staff,
equipment, and facilities, and minimization of customer waiting time, inventories, and process
times.
[Scheduling is the establishment of the timing of the use of equipment, facilities, and human
activities in an organization.]
10.1 Scheduling Manufacturing Operations
Scheduling tasks are largely a function of the volume of system output. High-volume systems
require approaches substantially different from those required by job shops, and project
scheduling requires still different approaches.
a) Scheduling in High-Volume Systems
Scheduling encompasses allocating workloads to specific work centers and determining the
sequence in which operations are to be performed. High-volume systems are characterized by
standardized equipment and activities that provide identical or highly similar operations on
customers or products as they pass through the system.
Consequently, the goal is to obtain a smooth rate of flow of goods or customers through the
system in order to get a high utilization of labour and equipment. High-volume systems are often
referred to as flow systems; scheduling in these systems is referred to as flow-shop scheduling.
Examples of high-volume products include autos, personal computers, radios and televisions,
stereo equipment, toys, and appliances. In process industries, examples include petroleum refin-
ing, sugar refining, mining, waste treatment, and the manufacturing of fertilizers. Examples of
services include cafeteria lines, news broadcasts, and mass inoculations, etc.
Because of the highly repetitive nature of these systems, many of the loading and sequence
decisions are determined during the design of the system. The use of highly specialized tools and
equipment, the arrangement of equipment, the use of specialized material-handling equipment,
and the division of labour are all designed to enhance the flow of work through the system, since
all items follow virtually the same sequence of operations. A major aspect in the design of flow
systems is line balancing, which concerns allocating the required tasks to workstations so that
they satisfy technical (sequencing) constraints and are balanced with respect to equal work times
among stations. Highly balanced systems result in the maximum utilization of equipment and
personnel as well as the highest possible rate of output.
In spite of the built-in attributes of flow systems related to scheduling, a number of scheduling
problems remain. One stems from the fact that few flow systems are completely devoted to a
single product or service; most must handle a variety of sizes and models. Each change involves
slightly different inputs of parts, materials, and processing requirements that must be scheduled
into the line. If the line is to operate smoothly, the flow of materials and the work must be
coordinated. This requires scheduling the inputs, the processing, and the outputs, as well as
scheduling purchases. In addition to achieving a smooth flow, it is important to avoid excessive
buildup of inventories. Again, each variation in size or model will tend to have somewhat
different inventory requirements, so that additional scheduling efforts will be needed.
One source of scheduling concern is possible disruptions in the system that results in less than
the desired output. These can be caused by equipment failures, material shortages, accidents, and
absences. In practice, it is usually impossible to increase the rate of output to compensate for
these factors, mainly because flow systems are designed to operate at a given rate. Instead,
strategies involving subcontracting or overtime are often required although subcontracting on
short notice is not always feasible. Sometimes work that is partly completed can be made up off
the line.
The reverse situation can also impose scheduling problems although these are less severe. This
happens when the desired output is less than the usual rate. However, instead of slowing the
ensuing rate of output, it is usually necessary to operate the system at the usual rate, but for fewer
hours. For instance, a production line might operate temporarily for seven hours a day instead of
eight.
High-volume systems usually require automated or specialized equipment for processing and
handling. Moreover, they perform best with a high, uniform output. Consequently, the following
factors often determine the success of such a system:
1. Process and product design. Here, cost and manufacturability are important, as is achieving a
smooth flow through the system.
2. Preventive maintenance. Keeping equipment in good operating order can minimize
breakdowns that would disrupt the flow of work.
3. Rapid repair when breakdowns occur. This can require specialists as well as stocks of critical
spare parts.
4. Optimal product mixes. Techniques such as linear programming can be used to determine
optimal blends of inputs to achieve desired outputs at minimal costs. This is particularly true
in the manufacture of fertilizers, animal feeds, and diet foods.
5. Minimization of quality problems. Quality problems can be extremely disruptive, requiring
shutdowns while problems are resolved. Moreover, when output fails to meet quality
standards, not only is there the loss of output but also a waste of the labour, material, time,
and other resources that went into it.
6. Reliability and timing of supplies. A shortage of supplies is an obvious source of disruption
and must be avoided. On the other hand, if the solution is to stockpile supplies, that can lead
to high carrying costs. Shortening supply lead times, developing reliable supply schedules,
and carefully projecting needs are all useful.
[Scheduling is the establishment of the timing of the use of equipment, facilities, and human
activities in an organization. Flow system is a high-volume system with standardized equipment
and activities. Flow-shop scheduling is the scheduling for the high-volume flow system.]
b) Scheduling in Intermediate-Volume Systems
Intermediate-volume system outputs fall between the standardized type of output of the high-
volume systems and made-to-order output of job shops. Like the high-volume systems,
intermediate-volume systems typically produce standard outputs. If manufacturing is involved,
the products may be made for stock rather than for special order. However, the volume of output
in such cases is not large enough to justify continuous production. Instead, it is more economical
to process these items intermittently. Thus, intermediate-volume work centers periodically shift
from one job to another. In contrast to a job shop, the run sizes are relatively large. Examples of
products made in these systems include canned foods, baked goods, paint, and cosmetics.
c) Scheduling in Low-Volume Systems
The characteristics of low-volume systems (job shops) are considerably different from those of
high- and intermediate-volume systems. Products are made to order, and orders usually differ
considerably in terms of processing requirements, materials needed, processing time, and
processing sequence and setups. Because of these circumstances, job-shop scheduling is usually
fairly complex. This is compounded by the impossibility of establishing firm schedules prior to
receiving the actual job orders. Job-shop processing gives rise to two basic issues for schedulers:
how to distribute the workload among work centers and what job processing sequence to use.
The three basic issues in the three scheduling systems are the run size of jobs, the timing of jobs,
and the sequence in which jobs should be processed.
[Job-shop scheduling is scheduling for low-volume systems with many variations in
requirements.]
10.2 Loading
Loading refers to the assignment of jobs to processing (work) centers. Loading decisions involve
assigning specific jobs to work centers and to various machines in the work centers. In cases
where a job can be processed only by a specific center, loading presents little difficulty.
However, problems arise when two or more jobs are to be processed and there are a number of
work centers capable of performing the required work. In such cases, the operations manager
needs some way of assigning jobs to the centers.
When making assignments, managers often seek an arrangement that will minimize processing
and setup costs, minimize idle time among work centers, or minimize job completion time,
depending on the situation. Gantt charts are used as visual aids for loading and scheduling
purposes. The purpose of Gantt charts is to organize and clarify the actual and intended use of
resources in a timeframe.
[Loading is the assignment of jobs to processing centers.]
10.3 Sequencing
Although loading decisions determine the machines or work centre that will be used to process
specific jobs, they do not indicate the order in which the jobs waiting at a given work center are
to be processed. Sequencing is concerned with determining job processing order. Sequencing
decisions determine both the order in which jobs are processed at various work centers, and the
order in which jobs are processed at individual workstations within the work centers.
If work centers are lightly loaded and if jobs all require the same amount of processing time,
sequencing presents no particular difficulties. However, for heavily loaded work centers,
especially in situations where relatively lengthy jobs are involved, the order of processing can be
very important in terms of costs associated with jobs waiting for processing and in terms of idle
time at the work centers.
Typically, a number of jobs will be waiting for processing. Priority rules are simple heuristics
used to select the order in which the jobs will be processed. The rules generally involve the
assumption that job setup cost and time are independent of processing sequence. In using these
rules, job processing times and due dates are important pieces of information. Job time usually
includes setup and processing times. Jobs that require similar setups can lead to reduced setup
times if the sequencing rule takes this into account. Due dates may be the result of delivery times
promised to customers, Material Requirements Planning (MRP) processing, or managerial deci-
sions. They are subject to revision and must be kept current to give meaning to sequencing
choices.
The priority rules can be classified as either local or global. Local rules take into account
information pertaining only to a single workstation; global rules take into account information
pertaining to multiple workstations. Global rules require more effort than local rules. A major
complication in global sequencing is that not all jobs require the same processing or even the
same order of processing. As a result, the set of jobs is different for different workstations. Local
rules are particularly useful for bottleneck operations, but they are not limited to those situations.
[Sequencing is the determination of the order in which jobs at a work center will be processed.
Workstation is an area where one person works, usually with special equipment, on a
specialized job. Priority rules - These are simple heuristics used to select the order in which jobs
will be processed. Job time is the time needed for setup and processing of a job.]
10.4 Conclusion - Operations Strategy
Scheduling can either help or hinder operations strategy. If scheduling is done well, products and
services can be made or delivered in a timely manner. Resources can be used to best advantage
and customers will be satisfied. Scheduling not performed well will result in inefficient use of
resources and possibly dissatisfied customers.
The implication is clear: Management should not overlook the important role that scheduling
plays in the success of an organization, giving a competitive advantage if handled well or
disadvantage if done poorly. Time-based competition depends on good scheduling. Coordination
of materials, equipment use, and employee time is an important function of operations
management. It is not enough to have good design, superior quality, and the other elements of a
well-run organization if scheduling is done poorly - just as it is not enough to own a well-
designed and well-made car, with all the latest features for comfort and safety, if the owner
doesn't know how to drive it!
10.5 Summary: Scheduling
Scheduling involves the timing and coordination of operations. Such activities are fundamental
to virtually every organization. Scheduling problems differ according to whether a system is
designed for high volume, intermediate volume, or low volume. Scheduling problems are
particularly complex for job shops (low volume) because of the variety of jobs these systems are
required to process.
The two major problems in job-shop scheduling are assigning jobs to machines or work centers,
and designating the sequence of job processing at a given machine or work center. Gantt load
charts are frequently employed to help visualize workloads, and they are useful for describing
and analyzing sequencing alternatives. In addition, both heuristic and optimizing methods are
used to develop loading and sequencing plans. For the most part, the optimization techniques can
be used only if certain assumptions can be made.
11. Process Selection and Capacity Planning
Product and service choices, process selection, capacity planning, and choices about location and
layout are among the most basic decisions managers must make because those decisions have
long-term consequences for the organization.
11.1 Process Selection
Process selection refers to the way an organization chooses to produce its goods or its services.
Essentially it involves choice of technology and related issues, and it has major implications for
capacity planning, layout of facilities, equipment, and design of work systems. The figure below
provides an overview of where process selection fits into system design. Process selection occurs
as a matter of course when new products or services are being planned. However, it also occurs
periodically due to technological changes in equipment.
Figure: Process selection and system design
11.2 Make or Buy
The very first step in process planning is to consider whether to make or buy some or all of a
product or to subcontract some or all of a service. A manufacturer might decide to purchase
certain parts rather than make them; sometimes all parts are purchased, with the manufacturer
simply performing assembly operations. Many firms contract out janitorial services, and some
contract for repair services. If a decision is made to buy or contract, this lessens or eliminates the
need for process selection.
In make or buy decisions, a number of factors are usually considered:
(i) Available capacity: If an organization has available capacity, it often makes sense to produce
an item or perform a service in house. The additional costs would be relatively small compared
with those required to buy items or subcontract services.
(ii) Expertise: If a firm lacks the expertise to do a job satisfactorily, buying might be a
reasonable alternative.
(iii) Quality considerations: Firms that specialize can usually offer higher quality than an
organization can obtain itself. Conversely, special quality requirements or the ability to closely
monitor quality may cause a firm to perform the work itself.
(iv) The Nature of Demand: When demand for an item is high and steady, the organization is
Forecasting
Product and
Service Design
Capacity
Planning
Facilities and
Equipment
Layout
Process
selection
Work Design
often better off doing the work itself. However, wide fluctuations in demand or small orders are
usually better handled by others who are able to combine orders from multiple sources, which
results in higher volume and tend to offset individual buyer fluctuations.
(v) Cost: Any cost savings achieved from buying or making must be weighed against the
preceding factors. Cost savings might come from the item itself or from transportation cost
savings.
In some cases, a firm might choose to perform part of the work itself and let others handle the
rest in order to maintain flexibility and to hedge against loss of a subcontractor. Moreover, this
provides a bargaining tool in negotiations with contractors, or a head start if the firm decides
later to take over the operation entirely.
If the organization decides to perform some or all of the processing, then the issue of selection
becomes important.
11.3 Types of Processing
There are basically five types of processing systems: continuous, repetitive/assembly, batch, job
shops, and projects.
(i) Continuous processing systems produce large volumes of one highly standardized item.
There is little or no processing variety. Sugar is produced by a continuous processing system.
(ii) Repetitive/assembly operations can be thought of as semi-continuous because they tend to
involve long runs of one or a few similar items. The output of these operations is fairly standard,
involving very little processing variety. Automobiles, for example, are produced in repetitive
systems.
(iii) Batch processing is sometimes referred to as an intermittent processing system because
many jobs are performed with frequent shifting from one job to another.
Intermittent systems tend to have a high to moderate processing variety range. Many food items
are produced by batch systems.

(iv) Job shops are also considered as intermittent processing systems because small quantities
are produced.
(v) Projects are a special case - a type of processing that is employed to handle a non-routine job
encompassing a complex set of activities.
Continuous and intermittent processing systems have some key differences which affect how
these systems are managed. The following sections highlight these key differences.
11.4 Continuous and Semi-Continuous Processing
High volumes of standardized output are produced by continuous processing systems.
Ultimately continuous processing produce a single product such as flour or sugar. Generally,
these products are measured on a continuous basis rather than counted as discrete units. Products
of process industries include plastics, chemicals, petroleum, grain, steel, liquid and powder
detergents, and water treatment. Operations are usually around the clock to avoid costly
shutdowns and start-ups. Industries that use continuous processing are sometimes referred to as
process industries. The output of these systems is highly uniform (standardized).
Semi-continuous processing systems produce output that allows for some variety; products are
highly similar but not identical. Examples include televisions, computers, calculators, cameras,
and video equipment. Typically, these are produced in discrete units. This form of processing is
often referred to as manufacturing.
The highly standardized output of these systems lends itself to highly standardized methods and
equipment. Because of division of labor, skill requirements of workers are usually fairly low.
Equipment tends to be highly specialized, which tends to make it expensive relative to more
general-purpose equipment, but the high volumes of output result in a low cost per unit. As a
general rule, products of these systems are made for inventory rather than customer order.
11.5 Intermittent Processing
When systems handle a variety of processing requirements, intermittent processing is used.
Volume is much lower than in continuous systems. Intermittent systems are characterized by
general-purpose equipment that can satisfy a variety of processing requirements, semiskilled or
skilled workers who operate the equipment, narrower span of supervision than for most
continuous systems.
One form of intermittent processing occurs when batches, or lots, of similar items are processed
in the same manner (e.g., food processing). A canning factory might process a variety of
vegetables; one run may be sliced carrots, the next green beans, and the next corn or beets. All
might follow a similar process of washing, sorting, slicing, cooking, packing, but the equipment
needs to be cleaned and adjusted between runs.
Another form of intermittent processing is done by a job shop, which is designed to handle a
greater variety of job requirements than batch processing. Lot sizes vary from large to small,
even a single unit. What distinguishes the job shop operation processing is that the job
requirements often vary considerably from job to job. This means that the sequence of
processing steps and the job content of the steps also vary considerably. An auto repair shop is an
example of a job shop. Each car is handled on an individual basis. Large repair shops may have
specialists who deal in one kind of repair (e.g., brake jobs), but cars are still handled one at a
time. For large jobs processing many of a single item or a few of many items, there is usually so
much variety among successive jobs that the batch described for the canning factory would be
too restrictive. Differences in job requirements add routing and scheduling complexities, as well
as a frequent need to adjust equipment settings or make other alterations for successive jobs.
Processing cost per unit is generally higher than it is under continuous or semi-continuous
processing.
Further examples of intermittent processing are textbook publication, bakeries, health systems,
and educational systems. In some cases, the outputs are made for inventory (clothing, automobile
tires); in others, they are designed to meet customer needs (health care) or specifications (special
tools, parts, or equipment). Marketing efforts in these systems often directed toward promoting
system processing capabilities or customized services.
11.6 Projects
To handle complex jobs consisting of unique sets of activities that must be completed in a
limited time span, projects are set up. Examples include large or unusual construction projects,
new product development or promotion, space missions, and disaster relief efforts. Because of
their limited life spans and the non-repetitive nature of activities, these systems differ
considerably from continuous and intermittent processing systems.
11.7 Match the Process and the Product
A key concept in process selection is the need to match product requirements with process.
The difference between success and failure in production can sometimes be traced to choice of
process. Products range from highly customized to highly standardized. Generally, volume
requirements tend to increase as standardization increases; customized products tend to be low
volume, and standardized products tend to be high volume. These factors should be considered in
determining which process to use.
Certain processes are more amenable to low-volume, customized products, while others more
suited to moderate-variety products, and still others to higher volume, highly standardized
products. By matching product requirements with process choices, producers can achieve the
greatest degree of efficiency in their operations. The table below illustrates this concept.
Projects These include complex jobs consisting of unique, non-repetitive sets of activities with
limited life spans.
Table: Matching the process with product variety, equipment flexibility, and volume
requirements.
Product Variety High Moderate Low Very Low
Equipment Flexibility High Moderate low Very Low
Low Volume Job Shop
Moderate Volume Batch
High Volume Repetitive Assembly
Very Volume Continuous Flow
Notice that the examples all line up along the diagonal of the table. This is the most efficient
alignment. If a producer chooses some other combination (e.g., assembly line for a customized
product or service), he or she would find that the highly customized requirements of the various
products are in direct conflict with the more uniform requirements needed to effectively operate
in the assembly-line mode. Similarly, a job shop arrangement (machines and personnel are
capable of handling a wide variety of processing requirement) would be wasted on a highly
standardized product; equipment and personnel need to be highly specialized.
The table can also help managers in selecting processes and managing existing operations. For
new products, decision makers should make every attempt to achieve a matching of product and
process requirements. For an ongoing operation, a manager should examine existing processes in
light of the table to see how well processes and products are matched. Poor matches suggest the
potential for improvement, perhaps with a substantial increase in efficiency and lowering of cost.
Another consideration is that products and services often go through life cycles that begin with
low volume but which increase as products or services become better known. When that
happens, a manager must know when to shift from one type of process (e.g., job shop) to the next
(e.g., batch). Of course, some operations remain at a certain level (e.g., magazine publishing),
while others increase (or decrease as markets become saturated) over time. Again, it is important
for a manager to assess his or her products and services and make a judgment on whether to plan
for changes in processing over time.
12. Capacity Planning
The term capacity refers to an upper limit or ceiling on the load that an operating unit can handle.
The operating unit might be a plant, department, machine, store, or worker. The load can be
specified in terms of either inputs or outputs. For instance, a machine may be able to process
20Kg of raw material per hour; its input capacity is thus 20Kg per hour. Another machine might
produce 18 castings per hour; its capacity in the castings output is 18 pieces per hour. Whether
to use input or output capacity is times a matter of choice, and sometimes it is dictated by the
situation.
The capacity of an operating unit is an important piece of information for planning purposes: It
enables managers to quantify production capability in terms of inputs or outputs, and thereby
make other decisions or plans related to those quantities. The basic questions in capacity
planning of any sort are the following:
1. What kind of capacity is needed?
2. How much is needed?
3. When is it needed?
The question of what kind of capacity is needed relates to the products and services that
management intends to produce or provide. Hence, in a very real sense, capacity planning is
governed by those choices.
The most fundamental decisions in any organization relate to the products and/or services it will
offer. Virtually all other decisions relative to capacity, facilities, location, and the like are
governed by product and service choices. Thus, a decision to produce high quality steel will
necessitate certain types of processing equipment and certain kinds of labor skills, and it will
suggest certain types of arrangement of facilities. It will influence the size and type of
building as well as the plant location. If the choice were to operate a family restaurant, or to
operate a hospital each of these factors would be different.
In some instances, capacity choices are made very infrequently; in others, they are made much
more regularly, as part of an ongoing process. Generally, the factors that influence this frequency
are the stability of demand, the rate of technological change in equipment and product design,
the type of product or service and whether style changes are important (e.g., automobiles and
clothing), and competitive factors. In any case, management must review product and service
choices periodically to ensure that changes will be made when they are needed for cost,
competitive effectiveness, or other reasons.
12.1 Importance of Capacity Decisions
Capacity decisions are among the most fundamental of all the design decisions that managers
must make because of the following reasons:
The importance of capacity decisions relates to their potential impact on the ability of the
organization to meet future demands for products and services; capacity essentially limits
the rate of output possible.
The importance of capacity stems from the relationship between capacity and operating
costs. Ideally, capacity and demand requirements will be matched, which will tend to
minimize operating costs. In practice, this is not always achieved because actual demand
either differs from expected demand or it tends to vary (e.g., cyclically). In such cases, a
decision might be made to attempt to balance the costs of over- and under-capacity.
The importance of capacity decisions also lies in the initial cost involved, of which
capacity is usually a major determinant. Typically, the greater the capacity of a
productive unit the greater its cost. This does not necessarily imply a one-for-one
relationship; larger units tend to cost proportionately less than smaller units.
The importance of capacity decisions stems from the often required long-term
commitment of resources and the fact that, once they are implemented, it may be difficult
or impossible to modify those decisions without incurring major costs.
12.2 Defining and Measuring Capacity
Capacity often refers to an upper limit on the rate of output. Even though this seems simple
enough, there are subtle difficulties in actually measuring capacity in certain cases. These
difficulties arise because of different interpretations of the term capacity and problems with
identifying suitable measures for a specific situation. In selecting a measure of capacity, it is
important to choose one that does not require updating. For example, money is a poor measure
of capacity (e.g., capacity of Ksh.30 million a year) because price changes necessitate continual
updating of that measure.
Where only one product or service is involved, the capacity of the productive unit may be
expressed in terms of that item. However, when multiple products or services are involved, as is
often the case, using a simple measure of capacity based on units of output can be misleading.
For example, an appliance manufacturer may produce both refrigerators and freezers. If the
output rates for these two products are different, it would not make sense to simply state capacity
in units without reference to either refrigerators or freezers. The problem is compounded if the
firm has other products. One possible solution is to state capacities in terms of each product.
Thus, the firm may be able to produce 100 refrigerators per day or 80 freezers per day.
Sometimes this approach is helpful, sometimes not. For instance, if an organization has many
different products or services, it may not be practical to list all of the relevant capacities. This is
especially true if there are frequent changes in the mix of output, because this would necessitate
a continually changing composite index of capacity. The preferred alternative in such cases is to
use a measure of capacity that refers to availability of inputs. Thus, a hospital has a certain
number of beds, a factory has a certain number of machine hours available, and a bus has a
certain number of seats and a certain amount of standing room.
No single measure of capacity will be appropriate in every situation. Rather, the measure of
capacity must be tailored to the situation. The table below provides some examples of commonly
used measures of capacity.
Table : Measures of capacity
Business Inputs Outputs
1. Auto Manufacturing Labour hours, Machine hours Number of cars per shift
2. Steel Mill Furnace size Tons of steel per day
3. Oil Refinery Refinery size Litres of fuel per day
4. Farming Number of acres, number of cows Bushels of grain per acre per year,
litres of milk per day
5. Restraurant Number of tables, seating capacity Number of meals served per day
6. Theater Number of seats Number of tickets sold per
performance
7. Retail Sales Square metres of floor space Revenue generated per day
12.3 Definitions of Capacity
Capacity can be defined in terms of:
(i) Design capacity: the maximum output that can possibly be attained.
(ii) Effective capacity: the maximum possible output given a product mix, scheduling
difficulties, machine maintenance, quality factors, and so on.
(iii) Actual output: the rate of output actually achieved. It cannot exceed effective capacity and
is often less than effective capacity due to breakdowns, defective output, shortages of materials,
and similar factors.
Design capacity is the maximum rate of output achieved under ideal conditions. Effective
capacity is usually less than design capacity (it cannot exceed design capacity) owing to realities
of changing product mix, the need for periodic maintenance of equipment, lunch breaks, coffee
breaks, problems in scheduling and balancing operations, and similar circumstance. Actual
output cannot exceed effective capacity and is often less because of machine breakdowns,
absenteeism, and other problems outside the control of the operations managers.

These different definitions of capacity are useful in defining two measures of system
effectiveness: efficiency and utilization. Efficiency is the ratio of actual output to effective
capacity. Utilization is the ratio of actual output to design capacity.
) (i
apacity EffectiveC
ut ActualOutp
Efficiency
) (ii
city DesignCapa
ut ActualOutp
n Utilizatio
It is common for managers to focus exclusively on efficiency, but in many instances, this
emphasis can be misleading. This happens when effective capacity is low compared with design
capacity. In those cases, high efficiency would seem to indicate effective use of resources when
it does not. The following example illustrates this point.
Given the information below, compute the efficiency and the utilization of the vehicle repair
department:
Design capacity = 50 trucks per day
Effective capacity = 40 trucks per day
Actual output = 36 units per day

% 90
40
36

y unitsperda
y unitsperda
apacity EffectiveC
ut ActualOutp
Efficiency
% 72
50
36

y unitsperda
y unitsperda
city DesignCapa
ut ActualOutp
n Utilizatio
Thus, compared with the effective capacity of 40 units per day, 36 units per day looks pretty
good. However, compared with the design capacity of 50 units per day, 36 units per day is much
less impressive although probably more meaningful.
Because effective capacity acts as a lid on actual output, the real key to improving capacity
utilization is to increase effective capacity. Hence, increasing utilization depends on being able
to increase effective capacity, and this requires knowledge of what is constraining effective
capacity.
12.4 Determinants of Effective Capacity
Many decisions made concerning system design have an impact on capacity. The same is true for
many operating decisions. The main determinants of effective capacity are:
12.4.1 Facilities
The design of facilities, including size and provision for expansion, is very important. Locational
factors, such as transportation costs, distance to market, labor supply, energy sources, and room
for expansion, are also important. Likewise, layout of the work area often determines how
smoothly work can be performed, and environmental factors such as heating, lighting, and
ventilation also play an important role in determining whether personnel can perform effectively
or whether they must struggle to overcome poor design characteristics.
12.4.2 Products or Services
Product or service design can have a tremendous influence on capacity. For example, when items
are similar, the ability of the system to produce those items is generally much greater than when
successive items differ. For example, a restaurant that offers a limited menu can usually prepare
and serve meals at a faster rate than a restaurant with an extensive menu. Generally speaking, the
more uniform the output, the more opportunities there are for standardization of methods and
materials, which leads to greater capacity. The particular mix of products or services rendered
must also be considered since different items will have different rates of output.
12.4.3 Processes
The quantity capability of a process is an obvious determinant of capacity. A more subtle
determinant is the influence of output quality. For instance, if quality of output does not meet
standards, the rate of output will be slowed by the need for inspection and rework activities.
12.4.4 Human Considerations
The tasks that make up a job, the variety of activities involved, and the training, skill, and
experience required to perform a job all have an impact on the potential and actual output. In
addition, employee motivation has a very basic relationship to capacity, as do absenteeism and
labor turnover.
12.4.5 Operations
Scheduling problems may occur when an organization has differences in equipment capabilities
among alternative pieces of equipment or differences in job requirements. Inventory stocking
decisions, late deliveries, acceptability of purchased materials and parts, and quality inspection
and control procedures also can have an impact on effective capacity.
For example, inventory problems had a negative impact on capacity when General Motors first
introduced its front-wheel-drive cars. Unexpected high demand, created by shortages and rapid
price increases of gasoline, exceeded the supply of cars. Company officials lamented that they
could not take advantage of the opportunity to increase sales because of a shortage of
component parts, which the company could not quickly overcome. Thus, insufficient capacity in
one area affected overall capacity.
12.4.6 External Forces
Product standards, especially minimum quantity and performance standards, can restrict
management's options for increasing and using capacity. Thus, pollution on products and
equipment often reduce effective capacity, as does paperwork required by government regulatory
agencies by engaging employees in nonproductive activities. A similar effect occurs when a
union contract limits the number of hours and type 0fwork an employee may do.

A summary of all these factors is presented in the table below. In general, inadequate planning
is a major limiting determinant of effective capacity.
Table: Factors that determine effective capacity
Facilities Product/
Service
Process Human Factors Operational External
Factors
1. Design
2. Location
3. Layout
4. Environment
1. Design
2. Product
or service
mix
1. Quantity
capabilities
2. Quality
capabilities
1. Job content
2. Job design
3. Training and
experience
4. Motivation
5. Compensation
6. Learning rates
7. Absenteeism
and labour
turnover
1. Scheduling
2. Materials
management
3. Quality
assurance
4. Maintenance
policies
5. Equipment
breakdowns
1. Product
standards
2. Safety
regulations
3. Unions
4. Pollution
control
standards
12.5 Determining Capacity Requirements
Capacity planning decisions involve both long-term and short-term considerations. Long-term
considerations relate to overall level of capacity, such as facility size; short-term considerations
relate to probable variations in capacity requirements created by such things as seasonal, random,
and irregular fluctuations in demand. Because the time intervals covered by each of these
categories can vary significantly from industry to industry, it is misleading to put times on the
intervals. Nevertheless, the distinction will serve as a framework within which to discuss
capacity planning.
We determine long-term capacity needs by forecasting demand over a time horizon and then
converting those forecasts into capacity requirements. When trends are identified, the
fundamental issues are (1) how long the trend might persist, since few things last forever, and (2)
the slope of the trend. If cycles are identified, interest focuses on (1) the approximate length of
the cycles, since cycles are rarely uniform in duration, and (2) the amplitude of the cycles (i.e.,
deviation from average).
Short-term capacity needs are less concerned with cycles or trends than with seasonal and other
variations from average. These deviations are particularly important because they can place a
severe strain on a system's ability to satisfy demand at some times and yet result in idle capacity
at other times.
Seasonal patterns can be identified using standard forecasting techniques. Although thought of
as annual fluctuations, seasonal variations are also reflected in monthly, weekly, and even daily
capacity requirements. Often the analysis describes the variations by probability distributions
such as a normal, uniform, or Poisson distribution when time intervals are too short to have
seasonal variations in demand.
Irregular variations are perhaps the most troublesome: They are virtually impossible to predict.
They are created by such diverse forces as major equipment breakdowns, freak storms that
disrupt normal routines, foreign political turmoil that causes oil short shortage, discovery of
health hazards (nuclear accidents, unsafe chemical dumping grounds, carcinogens in food and
drink), and so on.
The link between marketing and operations is crucial to realistic determination of capacity
requirements. Through customer contracts, demographic analyses, and forecasts, marketing can
supply vital information to operations for ascertaining capacity needs both the long-term and the
short-term.
12.6 Developing Capacity Alternatives
The following considerations can assist in developing capacity alternatives:
12.6.1 Design flexibility into systems
The long-term nature of many capacity decisions and the risks inherent in long-term forecasts
suggest potential benefits from designing flexible systems. For example, provision for future
expansion in the original design of a structure frequently can be obtained at a small price
compared to what it would cost to remodel an existing structure that did not have such a
provision. Hence, if future expansion of a restaurant seems likely, water lines, power hookups,
and waste disposal lines can be put in place initially so that if expansion becomes a reality,
modification to the existing structure can be minimized. Other considerations in flexible design
involve layout of equipment, location, equipment selection, production planning, scheduling, and
inventory policies.
Another consideration for managers contemplating capacity increases is whether the capacity is
for a new product or service, or a mature one. Mature products or services tend to be more
predictable in terms of capacity requirements, and they may have limited life spans. New
products tend to carry higher risk because of the uncertainty often associated with predicting the
quantity and duration of demand. That makes flexibility appealing to managers.
12.6.2 Take a "big picture" approach to capacity changes
When developing capacity alternatives, it is important to consider how parts of the system
interrelate. For example, when making a decision to increase the number of rooms in a motel,
one should also take into account probable increased demands for parking, entertainment and
food, and housekeeping. This is a "big picture" approach.
12.6.3 Prepare to deal with capacity "chunks
Capacity increases are often acquired in fairly large chunks rather than smooth increments,
making it difficult to achieve a match between desired capacity and feasible capacity. For
instance, the desired capacity of a certain operation may be 60 units per hour, but suppose those
machines used for this operation are able to produce 40 units per hour each. One machine by
itself would cause capacity to be 20 units per hour short of what is needed, but two machines
would result in an excess capacity of 20 units per hour.
12.6.4 Attempt to smooth out capacity requirements
Unevenness in capacity requirements also can create certain problems. For instance, during
periods of bad weather, public transportation ridership tends to increase substantially relative to
periods of pleasant weather. Consequently, the system tends to alternate between underutilization
and over utilization. Increasing the number of buses or subway cars will reduce the burden
during periods of heavy demand, but this will aggravate the problem of overcapacity at other
times and certainly add to the cost of operating the system. Unfortunately, no simple solutions
exist for these problems.
The unevenness in demand for products and services can be traced to a variety sources. The bus
ridership problem is weather-related to a certain extent, but demand could be considered to be
partly random (i.e., varying because of chance factors). Still another source of varying demand is
seasonality. Seasonal variations are generally easier to cope with than random variations because
they are predictable. Consequently, allowances can be made in planning and scheduling
activities and inventories. However, seasonal variations can still pose problems because of their
uneven demands on the system: At certain times the system will tend to be overloaded, while at
other times it will tend to be under loaded. One possible approach to this problem is to identify
products or services that have complementary demand patterns, that is, patterns that tend to
offset each other. The ideal case is one in which products or services with complementary
demand patterns involve the use of the same resources but at different times, so that overall
capacity requirements remain fairly stable.
Variability in demand can pose a problem for managers. Simply adding capacity by increasing
the size of the operation (e.g., increasing the size of the facility, the workforce, or the amount of
processing equipment) is not always the best approach, because that reduces flexibility and adds
to fixed costs. Consequently, managers often choose to respond to higher than normal demand in
other ways:
One way is through the use of overtime work.
Another way is to subcontract some of the work.
Still a third way is to draw down finished goods inventories during periods of high
demand and replenish them during periods of slow demand.
12.6.5 Identify the optimal operating level
The other solution to (12.6.4) above is to identify the optimal operating level so that under-
utilization and over-utilization are both reduced.
Production units typically have an ideal or optimal level of operation in terms of unit cost of
output. At the ideal level, cost per unit is the lowest for that production unit; larger or smaller
rates of output will result in a higher unit cost. At low levels of output, the costs of facilities and
equipment must be absorbed (paid for) by very few units. Hence, the cost per unit is high. As
output is increased, there are more units to absorb the "fixed" cost of facilities and equipment, so
unit costs decrease. However, beyond a certain point, unit costs will start to rise. To be sure, the
fixed costs are spread over even more units, so that does not account for the increase, but other
factors now become important: worker fatigue; equipment breakdowns; the loss of flexibility,
which leaves less of a margin for error; and, generally, greater difficulty in coordinating
operations.
Both optimal operating rate and the amount of the minimum cost tend to be a function of the
general capacity of the operating unit. For example, as the general capacity of a plant increases,
the optimal output rate increases and the minimum cost for the optimal rate decreases. Thus,
larger plants tend to have higher optimal output rates and lower minimum costs than smaller
plants.
In choosing the capacity of an operating unit, management must take these relationships into
account along with the availability of financial and other resources and forecasts of expected
demand. To do this, it is necessary to determine enough points for each size facility to be able to
make a comparison among different sizes. In some instances, facility sizes are given, whereas in
others, facility size is a continuous variable (i.e., any size can be selected). In the latter case, an
ideal facility size can be selected. Usually, management must make a choice from given sizes,
and none may have a minimum at the desired rate of output.
13. TOTAL QUALITY MANAGEMENT (TQM)
Brief Summary of Quality Control and TQM
Quality Control processes in business are aimed at ensuring a good or service is of the standard
of quality that the manufacturer or supplier has determined. Under the concept of total quality
management (TQM), quality control extends to every aspect of the way a business operates. In
the case of a manufactured good it means that during design, production, and servicing the
quality of work and materials must be up to the standard laid down.
The emphasis put on quality control in many countries in recent years was to a large extent a
response to the competitive edge Japanese businesses had achieved by paying attention to
quality. However, it was an American management consultant, W. Edwards Deming, who
brought the message to the Japanese that the consumer is the most important part of the
production line, and who taught them methods that would help them control quality. Another
American, Joseph Juran, also played a key role in promoting the idea that quality is all-
important and in developing quality-control methods. Among the steps he laid down for
improving quality were:
build awareness of the need to maintain quality;
recognize the opportunities for improvement;
set goals and make changes that will help achieve those goals (set up projects to solve
specific problems, for example);
involve the workforce fully through training, communication, and recognition;
Review systems and processes regularly so as to maintain momentum.
The enthusiasm that emerged for total quality management in the 1980s has had a far-reaching
effect in putting quality high on the list of corporate priorities and reducing or even eliminating
the quality lead that Japanese companies had enjoyed. It is perhaps because such strides have
been made that the (TQM) concept has come into conflict with other corporate aims, as
companies balance the desirability of quality with, say, the need to reduce costs.
Broadly defined, quality refers to the ability of a product or service to consistently meet or
exceed customers needs and expectations i.e. quality is fitness for use. Three types of quality
can be considered - quality of design, quality of conformance, and quality of performance.
Quality of design has to do with intentional differences between goods and services with the
same basic purpose. A given level of design quality may satisfy some consumers and may not
satisfy others. Designing quality into a product or service is extremely important. A good
product design will prevent problems in manufacturing and will result in satisfied customers.
The product design will specify a set of tolerances (specifications) that must be met if the
product is to operate/perform acceptably. [This is the Design Stage].
Quality of conformance has to do with the ability of a process (for instance, a manufacturing
process) to meet the specifications set forth by the design. The types and quality of raw
materials, the design and efficiency of the production process, the amount of training given to
workers, the care and attention paid by workers and the extent to which quality control practices
are employed will all affect the ability to meet the design specifications. [This is the Process
Stage].
Quality of performance has to do with how well the product or service actually performs in the
marketplace. The quality of performance in the marketplace will determine the ultimate market
share of the product or service. Quality of performance studies can reveal two kinds of quality
problems. A quality problem will exist when the product design (the set of quality characteristics
and specifications set forth in the design) does not exceed the needs of the consumer. However,
even if the product design is well conceived, a quality problem will exist if the production
process produces quality characteristics that exhibit too much variation. [This is the
Operation/Performance Stage].
13.1 The Consequences of Poor Quality
Some of the major ways that quality affects an organization are:
i) Loss of business,
ii) Liability,
iii) Productivity,
iv) Costs
i. Loss of business: Poor designs or defective products or services can result in loss of business.
Failure to devote adequate attention to quality can damage a profit-oriented organization's image
and lead to a decreased share of the market, or it can lead to increased criticism and/or controls
for a government agency or nonprofit organization.
ii. Liability: Organizations must pay special attention to their potential liability due to damages
or injuries resulting from either faulty design or poor workmanship. This applies to both products
and services. Thus, a poorly designed steering arm on a car might cause the driver to lose control
of the car, but so could improper assembly of the steering arm.
iii. Productivity: Productivity and quality are often closely related. Poor quality can adversely
affect productivity during the manufacturing process if parts are defective and have to be
reworked or if an assembler has to try a number of parts before finding one that fits properly.
Similarly, poor quality in tools and equipment can lead to injuries and defective output, which
must be reworked or scrapped, thereby reducing the amount of usable output for a given amount
of input. Conversely, improving and maintaining good quality can have a positive effect on
productivity.

iv. Costs: Poor quality increases certain costs incurred by the organization. These include scrap
and rework costs, warranty costs, replacement and repair costs after purchase, and any other
costs expended for transportation, inspection in the field, and payments to customers or discounts
used to offset the inferior quality. In some instances, substantial costs, such as liability claims
and legal expenses, can be incurred.
Other costs can also be substantial: Rework costs involve the salaries of workers and the
additional resources needed to perform the rework (e.g., equipment, energy, and raw materials).
Beyond those costs are items such as inspection of reworked parts, disruption of schedules, the
added costs of parts and materials in inventory waiting for reworked parts, and the paperwork
needed to keep track of the items until they can be reintegrated into the process. Aside from these
out-of-pocket costs is opportunity costs related to sales lost to competitors because dissatisfied
customers switch their business.
13.2 The Costs of Quality
Any serious attempt to deal with quality issues must take into account the costs associated with
quality. Those costs can be classified into three categories:
Prevention costs,
Appraisal costs, and
Failure costs (internal or external failures).
a) Prevention costs relate to attempts to prevent defects from occurring. They include costs such
as planning and administration systems, working with vendors, training, quality control
procedures, and extra attention in both the design and production phases to decrease the
probability of defective workmanship.

b) Appraisal costs relate to inspection, testing, and other activities intended to uncover defective
products or services, or to assure that there are no defectives. They include the cost of inspectors,
testing, test equipment, labs, quality audits, and field testing.

c) Failure costs are incurred by defective parts or products, or faulty services. These can be
classified into two:
Internal failures are those discovered during the production process; they occur for a
variety of reasons, including defective material from vendors, incorrect machine settings,
faulty equipment, incorrect methods, incorrect processing, carelessness, and faulty or
improper material handling procedures. The costs of internal failures include lost
production time, scrap, and rework, investigation costs, possible equipment damage, and
possible employee injury.
External failures are those discovered after delivery to the customer; these are defectives
or poor service that go undetected by the producer. Resulting costs include warranty
work, handling of complaints, replacements, liability/litigation, and loss of customer
goodwill.
There are three basic assumptions that justify an analysis of the costs of quality; these are:
Failures are caused.
Prevention is cheaper.
Performance can be measured.
Spend more money on prevention and you should be able to reduce appraisal and failure costs.
The rule of thumb says that for every shilling you spend in prevention, you can save Ksh.10 in
failure and appraisal Costs. Often, increases in productivity occur as a by-product of efforts to
reduce the cost of quality.
13.3 Quality at the Source
Quality at the source means that each worker is a quality inspector for his or her own work. This
view changes the often adversarial practice of having a QC inspector, typically from the QC
department, making decisions about good or bad quality. This philosophy, as currently practiced,
extends beyond the worker to include the work group, all departments, and to the suppliers of
parts and services to the organization.
To make quality at the source effective requires a host of philosophical changes and actions on
the part of all members of the organization. As usual, it starts with top management's
commitment to empower workers to make quality decisions. This commitment must be backed
up by training in the tools to both prevent defects and to fix them when they occur. It also
requires a change in role of the quality control department from that of being a police officer to
that of being a provider of technical assistance in designing the methods and tools to prevent
defects. Inspections within the process itself can be used not only to identify defects but also to
correct them before the product goes to the next stage of production.

13.4 Review of Quality Management
The quality idea has been around for hundreds of years. It has progressed from inspection to
today's Total Quality Management. Inspection and protection was established as a management
idea. Products were inspected and the quality image of the company protected by the removal of
poor quality products before the customer applied their own inspection and reaction. Inspection
and protection is however little more than reactive management, reacting when poor quality has
already entered the product. Nowadays, quality has encompassed an entire organization
including all the processes and functions. Mere inspection of products has become a primitive
idea instead quality management has become proactive; making plans to bring about continuous
quality improvement and to achieve a more desirable future. The objective here is to get rid of
poor quality from the product rather than get rid of poor quality product. Quality management
has progressed, establishing proactive rather than reactive organizations. A step ahead towards
quality management is Total Quality Management (TQM). TQM is a whole system concept
recognizing the need to manage sets of interacting issues; technical, cultural and political nature.
13.5 Evolution of Quality Management
Traditionally, building quality into product was the aim of skilled craftsman. Tradesman gained
the reputation for quality products through craftsmanship that was maintained. Industrial
revolution, which led to the establishment of factories and mass production, led to inspection,
which was the sole guarantee of quality. The First World War demanded yet large-scale
production and demanded reliable products. This in part led to the formation of associations and
institutions and to the publication of formalized ideas. The Second World War led to the
formation of American Society for Quality Control (ASQc) by the thousands of quality
specialists who have been trained mostly by the war production board. However, the real success
story for quality thinking ironically emerged in one of the defeated nations.
The Japanese launched a new nationalistic drive for expansion, pursuing economic rather than
military goals. One famous guru who played a dominant role in the process of quality
improvement in Japan was W. Edward Deming, but there were others from United States such as
J.M. Juran. They have the benefit of an intimate involvement in working out sound techniques
during the war and in the post war period. By the 1970s, the Japanese had become "Masters" at
achieving quality in their manufacturing sector. But they never stopped on this achievement and
their quest for superior production by continuous improvement in knowledge, methods and
techniques is still continuing. The Japanese were prime in switching commercial interests from
competition in productivity to competitiveness in quality.

13.6 Total Quality Management (TQM)
The Japanese success story has, however urged some managers in western and other countries to
wake up to the quality issue. People have recognized that Japanese success was not only due to
national, cultural and social differences but reflected strongly a new attitude and desire of
Japanese management to ensure that consumers receive what is promised. The 1980's therefore
became an era of competitive challenge with increasing number of companies adopting quality
Management System. The development of International Quality Assurance Management system
Quality Inspection:
Salvaging, Sorting;
Investigating;
Corrective actions;
Identifying sources
of non conformance
and dealing with
them
Quality Planning:
Developing quality
manuals; Producing
process performance
data; Planning for
quality
Quality Management:
Statistical process
control; Third party
approval; Quality system
audit; Use of quality
costs, Involvement of
non-production
operations
Total Quality
Management (TQM):
Continuous improvement
system perspective
involves all operations and
at all levels (company
wise); Undertakes
performance measurement;
Focus on leadership,
teamwork and participation
(ISO 9000) standards in the 1980's -1990's has also acted as a catalyst in many countries. During
1990's and beyond, the quality management has become International Management Philosophy.
Total Quality Management incorporates the features like: products that meet customers needs,
and control of processes to ensure their ability to meet design requirements and quality
improvements for the continued enhancement of quality.
Customer is the driving force behind quality of design. Customer satisfaction is based on the
subjective comparison between the expectations and the actual quality received. The sales of the
product clearly generate the hard currency; one must also recognize that customer satisfaction is
derived from ancillary services associated with product and the sensitivity and timeliness with
which the problems are handled. Quality system should possess a sound behavioural as well as
technical perspective. To develop such a quality system, the management should research the
customer preferences, train employees to be sensitive to customer needs and reward employees
for making customer satisfaction a primary objective. .
Total quality management is based on the premise that any production and/or service can be
improved and that successful organization must consciously seek out and exploit improvement.
The essence of TQM is continuous improvement through collaborative efforts across functional
boundaries and between organizational levels with the ultimate goal of providing customer
satisfaction. Each work in TQM has a special significance. Total means here comprehensive
ways of dealing with complex sets of interacting issues - involving everyone at all levels,
addressing all major issues. It is also referred to as performance encompassing both the
quantitative and qualitative aspects of product/service. "Quality" can be defined in variety of
ways. The following definition takes into account several ideas expressed by quality Gurus.
Quality means meeting customers (agreed) requirements, formal and informal at lowest cost, first
time and every time.
Total quality means that everyone should be involved in quality at all levels and across all
functions ensuring that quality is achieved according to the requirements in everything they do.
The word "Total" injects a systematic meaning idealness into quality. "Management" in TQM
denotes the system supporting the achievement of quality and performance on a continuously
improving path. The management responsibility refers to the need for every one to be
responsible for managing their own jobs, which incorporates managers with workers and all
others concerned. Thus, TQM portrays a whole systems view for quality management.
An Organization that endures itself to the ultimate customer also fulfills commitments in terms
of performance levels demanded by a number of related sets of customers. Such customers
could be shareholders who expect a sizable return on their investment; employee's serving such
an institution. Naturally respects it for providing a livelihood, the suppliers to the company as
well as the dealers who distribute products are very similar to employees of the company, they
enjoy considerable confidence in being associated with its long term planning. In turn, they are
motivated to make the best use of their services available. All these sets of people are referred to
as stakeholders, whether they are users of the product, employees, shareholders, vendors or
dealers. They all have the expectation of qualitative and quantitative performance being fulfilled
by the organization they patronize and serve.
At the product level, a customer may consider performance reflected in material factors such as
safety, reliability and value for money. In terms of service, performance can mean the delivery
of the product on time at committed schedules without any hidden costs. However, a customer
can equally evaluate organizational performance from the standpoint of qualitative measures
e.g. prestige associated with use of the product and pleasure or ease of use associated with the
product and the quality of the customer support. If the customer feels confident in dealing with
the product, it generates brand loyalty on an ongoing process. This in turn generates a feeling
where the customer confidently recommends the product and the company to friends and
associates.
The relevance of TQM to business is world-class productivity. Basically, the essence of TQM is
value addition. A business unit draws on its resources and adds value in order to create an
output that delivers customer delight. TQM perspective of productivity recognizes both the
qualitative and quantitative aspects of relationship between inputs and outputs. It recognizes the
qualitative aspects. of input other than considering organization as a mechanical system
transforming inputs into outputs. It considers creative talent as well s the motivation with which
people engage themselves in the' creation of the final output. Value addition is not merely
reflected in physical transformation in shape, size, structure but the organizational learning that
occurs in the process and the patented know how. The output from the system does not confine
itself only to physical goods but includes the added dimensions of prestige, pride of ownership,
warmth and pleasure in long lasting relationships with customer. .
13.7 TQM Approach
Quality is a continuous process that can be broken anywhere in the system of supply and
customer service. By letting every person know how their activities help fulfill customer's
requirements, the organization can motivate their employees and supplies to provide quality
consistently. They must also realize that throughout the organization they will have both internal
customers and' supplies to those outside the organization. In general, a process helps to change a
set of inputs into desired output in the form of products or services. Proper investigation of the
inputs and outputs of the organization help to determine the action to be taken for the
improvement of the quality. The quest for continuous improvement of quality is a continuous
cycle. The process on which continuous improvement is based is generally known as "Deming
Wheel". The wheel represented in Fig (28.1) shows a continuous movement in a certain
direction. The idea behind this that the input, which generates activities with measurable output,
is process and the perfection of the process is the ultimate objective.

Fig: PDCA Cycle
In a Deming's wheel, the plan defines the process, which ensures documentation and sets mea-
surable objectives against it. The "Do" executes the process and collects the information
required. The CHECK analyses the information in suitable format. The ACT obtains corrective
action using TQM techniques and methods and assesses future plans. At the end of each cycle
the process is either standardized or targets are adjusted based on the analysis and the cycle
continuous.
Fig: Supplier-Customer continuous improvement interface
The TQM approach is both a practical working process and a quality philosophy for the
organizations committed to growth and survival. TQM approach starts with a vision that a
concentrated management action can improve the quality of service and products of the
organization at a very competitive cost satisfying customer's need and increasing the market
share. This increased market share will be stable because it has been earned with the help of solid
customers goodwill and not by gimmickry advertising.
Table: Principles and Actions of TQM
Principles Actions
The approach Management led
The scope Company wide
The scale Every one is responsible for quality
The philosophy Prevention not detection
The standard Right first time
The control Cost of quality
The theme Continuous improvement
The dimensions Human, technical and cultural
To develop TQM process the organization has to be guided through the following basic rules of
action and is given by the following principles and actions as represented in the table above.
13.8 Stages of Implementation of TQM
The process of implementing TQM in an organization can be organized in the following four
stages:
(i) Identification and Preparation
This stage is concerned with identifying and collecting information about the organization in the
prime areas where improvement will have most impact on the organizations performance and
preparing the detailed basic work for the improvement of the organizations activities. It is also
important to find out the cost of quality, which incorporates the total cost of waste, error
correction, failure appraisal and prevention in the organization. It is also required to understand
the views and opinions of the customers, suppliers the managers and the employees. The
differences between their views and opinions will provide an idea of the scale of the problem
Customer
Voice of Customer
and task ahead. The measurements of the cost of quality made at the beginning of the TQM
process can be compared with measurement at a later stage to establish the achieved
improvements. The initial measurements of the costs will also indicate the potential areas for
improvement and direct efforts towards the areas where they are most needed. All data and
information must therefore be identified, prepared and summarized in a manner to ensure that
the managers get the correct information to make their decision.
(ii) Management Understanding
This step is concerned with making sure that the management understands the objective and
methodology of TQM and is ready to adopt them all the time. For many companies, TQM means
a major change in the management practice and it is difficult to implement over a short period of
time. However, to make a significant change in management practice, it is necessary to educate
the managers in their understanding and approach to TQM. Once they have mastered the
principle and practice of TQM the managers can then demonstrate their total commitment and
take the lead in the quality improvement process.
(iii) Scheme for Improvement
This stage is concerned with identifying quality issues and affects a resolution of them by
management led improvement activities. To develop quality improvement scheme, it is
necessary to identify the quality problems in each division, in each department and throughout
the whole organization. A scheme of training for improvement can be established after the
realization of the following aspects of the organization. They are:
Purpose of the department,
Customer's and suppliers relationship,
Meeting customer needs,
Problem causes and best solutions,
Prevention of recurring problems,
Customer satisfaction,
Priorities for improving efficiency
At this stage it is essential to know that any scheme for improvement requires substantial
investment in training, management time and communication.
(iv) Critical Analysis
This stage starts with new targets and. take the complete improvement process to everybody
indicating supplier and customer links in the quality chain. It also obtains information about
progress and consolidates success. To focus quality aspects, everybody in the organization must
assess the TQM process. It is essential to incorporate the perception of both internal and external
customers. It is also important to ensure that everybody in the organization gets some feedback
of the success on a regular basis and at the same time the individual and team contributions are
given the recognition. Setting up of new targets as required by customers at this stage will
automatically upgrade the quality standard of the organization and maintain the competitive
position in the market place.
List of Techniques for TQM
1. Customer's perception surveys; 2. Quality function deployment; 3. Cost of quality statement;
4. Top team workshops; 5. Total quality seminars; 6. Departmental purpose analysis;
7. Quality training; 8. Improvement action team; 9. Quality circles; 10. Suggestion schemes;
11. Help calls; 12. Visible data; 13. Process management; 14. Statistical process analysis;
15. Process capability analysis; 16. Fool proofing; 17. Just in Time Manufacturing (JIT);
18. Business Process Reengineering (BPR); 19. Quality Improvement Team (QIT).
13.9 TQM Model
Customer satisfaction is the focus of TQM. The model shown in the figure below highlights how
the implementation of TQM benefits the company in both long term and short term and in turn
achieves the customer satisfaction.
Fig: Total Quality Management Model
Basically, the customer satisfaction depends upon the gap between the expected and actual
quality of products offered to the customer. When the customer's expectations of product/service
quality balance the actual product quality offered by the company, the customer satisfaction
results. If the customers expectations exceed the actual results in customer delight, TQM aims at
customer delight going one step ahead of mere satisfaction of customers. The delighted customer
will become the loyal customer and have a complete trust in the offering of the company's
products and services. The quality of the product results in higher reliability of which in turn
helps to attain the retention of loyal customer base.
The quality of the product depends on the ability of the company to identify both stated and
unstated needs, translation of these needs into design specifications, and designing and managing
the process to keep quality level as per design specifications and ensuring performance. This in
turn is possible through a well-designed quality system and involvement of each and every
employee at levels. The continuous improvement in quality is the result of empowered
People Involvement for
continuous improvement
Quality System
Process quality management
Bench marking
Process performance
Competitiveness
Market Standing
Customer Preference
Profit
Organizational Gains
(i) Costs,
(ii) Employee turnover,
(iii) Cycle Time,
(iv) Creativity and innovations,
(v) Employee satisfaction
Product and Service Quality
Reliability
On time Delivery
Error free products
Customer Satisfaction
Attracting and retaining
customers
Trust Building
Need Identification
employees and the leadership of the management. Thus, higher quality levels of
products/services accompanies by loyal and satisfied customer base results in enhancing
competitive position of the company. The organizational benefits of implementing TQM include
- reduces cost and cycle time, job satisfaction and reduced turnover of employees, increase in
productivity and a good reward for all the stakeholders.
13.10 TQM Critical Success Factors
The successful implementation of TQM depends upon the following key factors.
1. Training
2. Bench marking
3. Customer satisfaction surveys
4. Recognition and rewards
5. Management commitment
13.11 TQM Dimensions
Total quality management has basically three dimensions: Technological dimension, Human
(people) dimension and cultural dimension. The technological dimension is concerned with the
process of designing and building quality into the product/service, human dimension is
concerned with empowering people to demonstrate mastery over the tasks performed and the
cultural dimension encompasses the organizational environment to foster quality mindedness.
The three dimensions together create an organizational climate where continuous improvement
results because of the innovations and creativity, technology and the channeling potential of the
people.
13.12 Major Principles of Total Quality Management (TQM)
Different companies have different approaches to implementing TQM. Besides the above five
procedures/TQM programs the following principles (which are common to all companies) must
be adhered to for the successful TQM implementation:
1. Continuous improvement. TQM is a long-term process that entails achieving
improvements in the companys operations. This means that management should establish
targets for improvement and measure progress by using reliable criteria. The quest for
quality and better service to the customer should be a continual, never-ending one.
Competitors will seek to provide better service and customers will come to expect it.
Hence, to cease improvement efforts will likely lead to loss of competitive advantage and
a decreased level of customer satisfaction.
2. Customer focus. In TQM, the customer is believed to be the ultimate judge of quality.
Therefore, the company must remain close to the customer and understand how he or she
views and judges quality.
3. Strategic planning and leadership. Achieving quality and market leadership requires a
viable competitive strategy that outlines goals and desired outcomes. Moreover, senior
executives should be responsible for introducing and supporting TQM programs.
4. Competitive benchmarking. This means identifying companies or other organizations
that are the best at something and then modeling your own organization after them. The
company need not be in the same line of business as yours.
5. Employee empowerment. TQM is based on humanistic management principles that
suggest employee involvement and participation is essential for success. Giving workers
the responsibility for improvements and the authority to make changes to accomplish them
provides strong motivation for employees. This puts decision making into the hands of
those who are closest to the job and have considerable insight into problems and solutions.
Empowered to bring about changes in their workplace, employees can creatively
contribute to their companys well being.
6. Teamwork approach. The use of teams for problem solving and to achieve consensus
takes advantage of group thinking, gets people involved, and promotes a spirit of
cooperation and shared values among employees. Further, teamwork creates opportunities
for learning and exchanging ideas.
7. Knowledge of tools. Everyone in the organization is trained in the use of quality control
and improvement tools.

The entire organization must be subject to the search for improved ways of performing; nothing
should be regarded as sacred or untouchable. A sometimes helpful view is to consider the
internal customers and strive to satisfy them; that is, every activity in an organization has one
or more customers who receive its output. By thinking in terms of what is needed to satisfy these
customers, it is often possible to improve the system and, in doing so, increase the satisfaction of
the final customer.

The term quality at the source refers to the philosophy of making each worker responsible for
the quality of his or her work. This incorporates the notions of do it right and if it isnt right,
fix it. Workers are expected to provide goods or services that meet specifications and to find
and correct mistakes that occur. In effect, each worker becomes a quality inspector for his or her
work. When the work is passed on to the next operation in the process (the internal customer)
or, if that step is the last step in the process, to the ultimate customer, the worker is certifying
that it meets quality standards.

This accomplishes a number of things:
1. It places direct responsibility for quality on the person(s) who directly affect it;
2. It removes the adversarial relationship that often exists between quality control inspectors
and production workers; and
3. It motivates workers by giving them control over their work as well as pride in it.
13.13 TQM and Strategic Control
Learning in TQM can occur from the interaction of employees and managers. When this occurs,
new ways of defining the tasks and carrying them out are found. Moreover, employees become
aware of the competitive challenge facing the company and take necessary steps to identify and
solve problems that impede organizational progress.
Successful TQM is an ongoing process that sustains the enthusiasm and support of management
and employees. It also fosters a culture that is committed to continuous improvements. In turn,
success in continuous improvement demands reengineering operations, by redesigning them to
avoid bottlenecks and duplication of effort. Reengineering can be based on feedback from the
company's control systems. Reengineering can pay off in enhancing efficiency, reducing waste,
and achieving greater coordination among functions.

The strategic management process is incomplete without effective strategic controls. An ongoing
control system ensures the validity of the company's planning assumptions, creates commitment
to the chosen strategy, and provides data for evaluating the company's success in strategy
execution. An effective strategic control system is future-oriented and keeps attention focused on
doing the right things right. It fosters individual and organizational learning and promotes
continuous improvements.
13.14 International Standardization
Standards make an enormous contribution to most aspects of our lives - although very often, that
contribution is invisible. It is when there is an absence of standards that their importance is
brought home. For example, as purchasers or users of products, we soon notice when they turn
out to be of poor quality, do not fit, are incompatible with equipment we already have, are
unreliable or dangerous. When products meet our expectations, we tend to take this for granted.
We are usually unaware of the role played by standards in raising levels of quality, safety,
reliability, efficiency and inter-changeability - as well as in providing such benefits at an
economical cost.
ISO (International Organization for Standardization) is the world's largest developer of
standards. Although ISO's principal activity is the development of technical standards, ISO
standards also have important economic and social repercussions. ISO standards make a positive
difference, not just to engineers and manufacturers for whom they solve basic problems in
production and distribution, but to society as a whole.
The International Standards which ISO develops are very useful. They are useful to industrial
and business organizations of all types, to governments and other regulatory bodies, to trade
officials, to conformity assessment professionals, to suppliers and customers of products and
services in both public and private sectors, and, ultimately, to people in general in their roles as
consumers and end users.
ISO standards contribute to making the development, manufacturing and supply of products and
services more efficient, safer and cleaner. They make trade between countries easier and fairer.
They provide governments with a technical base for health, safety and environmental legislation.
They aid in transferring technology to developing countries. ISO standards also serve to
safeguard consumers, and users in general, of products and services - as well as to make their
lives simpler.
When things go well - for example, when systems, machinery and devices work well and safely -
then it is because they conform to standards. And the organization responsible for many
thousands of the standards which benefit society worldwide is ISO.
ISO is a network of the national standards institutes of 157 countries, on the basis of one member
per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system.
ISO is a non-governmental organization: its members are not, as is the case in the United Nations
system, delegations of national governments. Nevertheless, ISO occupies a special position
between the public and private sectors. This is because, on the one hand, many of its member
institutes are part of the governmental structure of their countries, or are mandated by their
government. On the other hand, other members have their roots uniquely in the private sector,
having been set up by national partnerships of industry associations.
When the large majority of products or services in a particular business or industry sector
conform to International Standards, a state of industry-wide standardization can be said to exist.
This is achieved through consensus agreements between national delegations representing all the
economic stakeholders concerned - suppliers, users, government regulators and other interest
groups, such as consumers. They agree on specifications and criteria to be applied consistently in
the classification of materials, in the manufacture and supply of products, in testing and analysis,
in terminology and in the provision of services. In this way, International Standards provide a
reference framework, or a common technological language, between suppliers and their
customers - which facilitates trade and the transfer of technology.
13.14.1 How ISO standards benefit society
For businesses, the widespread adoption of International Standards means that suppliers can
base the development of their products and services on specifications that have wide acceptance
in their sectors. This, in turn, means that businesses using International Standards are
increasingly free to compete on many more markets around the world.
For customers, the worldwide compatibility of technology which is achieved when products and
services are based on International Standards brings them an increasingly wide choice of offers,
and they also benefit from the effects of competition among suppliers.
For governments, International Standards provide the technological and scientific bases
underpinning health, safety and environmental legislation.
For trade officials negotiating the emergence of regional and global markets, International
Standards create "a level playing field" for all competitors on those markets. The existence of
divergent national or regional standards can create technical barriers to trade, even when there is
political agreement to do away with restrictive import quotas and the like. International
Standards are the technical means by which political trade agreements can be put into practice.
For developing countries, International Standards that represent an international consensus on
the state of the art constitute an important source of technological know-how. By defining the
characteristics that products and services will be expected to meet on export markets,
International Standards give developing countries a basis for making the right decisions when
investing their scarce resources and thus avoid squandering them.
For consumers, conformity of products and services to International Standards provides
assurance about their quality, safety and reliability.
For everyone, International Standards can contribute to the quality of life in general by ensuring
that the transport, machinery and tools we use are safe.
For the planet we inhabit, International Standards on air, water and soil quality, and on
emissions of gases and radiation, can contribute to efforts to preserve the environment.
Without the international agreement contained in ISO standards on quantities and units, shopping
and trade would be haphazard, science would be - unscientific - and technological development
would be handicapped.
More than half a million organizations in more 149 countries are implementing ISO 9000 which
provides a framework for quality management throughout the processes of producing and
delivering products and services for the customer.
ISO 14000 environmental management systems are helping organizations of all types to improve
their environmental performance at the same time as making a positive impact on business
results.
ISO 9000 is concerned with "quality management". This means what the organization does to
enhance customer satisfaction by meeting customer and applicable regulatory requirements and
continually to improve its performance in this regard. ISO 14000 is primarily concerned with
"environmental management". This means what the organization does to minimize harmful
effects on the environment caused by its activities, and continually to improve its environmental
performance.
13.14.2 ISO 9000
ISO 9001 2000 has replaced the old ISO 9001 1994 standard. I SO 9000 is sweeping
the world. It is rapidly becoming the most important quality standard. Thousands of companies
in over 149 countries have already adopted it, and many more are in the process of doing so.
Why? Because it controls quality, it saves money. Customers expect it. And competitors use it.
ISO 9000 applies to all types of organizations. It doesn't matter what size they are or what they
do. It can help both product and service oriented organizations achieve standards of quality that
are recognized and respected throughout the world. I SO is the International Organization
for Standardization. It is located in Switzerland and was established in 1947 to develop
common international standards in many areas. Its members come from over 120
national standards bodies.
The term I SO 9000 refers to a set of quality management standards. ISO 9000 currently
includes three quality standards: ISO 9000:2005, ISO 9001:2000, and ISO 9004:2000. ISO
9001:2000 presents requirements, while ISO 9000:2005 and ISO 9004:2000 present
guidelines. All of these are process standards (not product standards).
ISO' s purpose is to facilitate international trade by providing a single set of standards that
people everywhere would recognize and respect. The ISO 9000 2000 Standards apply to all
kinds of organizations in all kinds of areas e.g. manufacturing, processing, servicing, science,
engineering, etc.
13.14.3 How does ISO 9000 Work?
Here's how it works. You decide that you need to develop a quality management system that
meets the new quality standard. That's your mission. You choose to follow this path because
you feel the need to control or improve the quality of your products and services, to r educe
the costs associated with poor quality, or to become more competitive. Or, you choose this
path simply because your customers expect you to do so or because a governmental body
has made it mandat or y. You then develop a quality management s ys t em that meets the
requirements specified by ISO 9001:2000.
In the course of doing so, you may also wish to consult the ISO 9000:2005 and ISO 9004:2000
guidelines. However, please remember that your quality management system must meet ISO's
r equi r ement s , not its guidelines. Once your quality management system has been fully
developed and implemented, you carry out an Internal Audit to ensure that you've met every
single ISO 9001 2000 requirement.
When you're ready, you ask a Registrar to audit the effectiveness of your quality management
system. If your auditors like what they see, they will certify that your quality system has met
ISO's r equi r ement s . They will then issue an official cer t i f i cat e to you and they will record
your achievement in their r egi s t r y. You can then announce to the world that the quality of
your products and services is managed, controlled, and assured by a registered ISO 9001
Quality Management System.
However, you don't have to be registered. ISO does not require formal registration (certification).
You can be in compliance without being registered by an accredited auditor. But, your customers
are more likely to believe that you have an effective quality management system
if an independent external auditor says so.
13.14.4 Why is ISO 9000 Important?
ISO 9000 is important because of its orientation. While the content itself is useful and important,
the content alone does not account for its widespread appeal. ISO 9000 is important because of
its international orientation. Currently, ISO 9000 is supported by national standards bodies
from more than 120 countries. This makes it the logical choice for any organization that does
business internationally or that serves customers who demand an international standard of
quality.
ISO is also important because of its systemic orientation. We think this is crucial. Many people
in this field wrongly emphasize motivational and attitudinal factors. The assumption is that
quality can only be created if workers are motivated and have the right attitude. This is fine, but
it doesn't go far enough. Unless you institutionalize the right attitude by supporting it with the
right policies, procedures, records, technologies, resources, and structures, you will never
achieve the standards of quality that other organizations seem to be able to achieve. Unless you
establish a quality attitude by creating a quality system, you will never achieve a wor l d- cl as s
s t andar d of qual i t y. Simply put, if you want to have a quality attitude you must have a
quality system. This is what ISO recognizes, and this is why ISO 9000 is important.
13.14.5 ISO 9000 2000 Principles
According to ISO, the new ISO 9000 2000 standards are based on eight quality management
principles. ISO chose these principles because they can be used to improve organizational
performance and achieve success. But how can you make sure that your organization applies
these principles? The answer is to implement a quality management system that meets the new
ISO 9001 2000 standard. If you do so, your organization will automatically apply these
principles. This is because they permeate the new standard and will therefore be built into any
quality system that is based on this standard. So if you want to improve the performance of your
organization, you need to develop and implement an ISO 9001:2000 quality management system
that applies the eight principles listed below.
13.14.6 The benefits of ISO 9000:2000 series
Customers and users benefit by receiving the products that are:
Conforming to the requirements,
Dependable and reliable,
Available when needed,
Maintainable
People in the organization benefit by:
Better working conditions,
Increased job satisfaction,
Improved health and safety,
Improved morale
Society benefits by:
Fulfillment of legal and regulatory requirements,
Improved health and safety,
Reduced environmental impact,
Increased security
Owners and investors benefit by:
Increased return on investment,
Improved operational results,
Increased market share,
Increased profits
ISO 9000 2000 Quality Management Principles
1

Focus on your customers Organizations rely on customers. Therefore:
Organizations must understand customer needs.
Organizations must meet customer
requirements.
Organizations must exceed customer
expectations.
2 Provide leadership
Organizations rely on leaders. Therefore:
Leaders must establish a unity of purpose and
set the direction the organization should take.
Leaders must create an environment that
encourages people to achieve the organization's
objectives.
3 Involve
your
people
Organizations rely on people. Therefore:
Organizations must encourage the
involvement of people at all levels.
Organizations must help people to
develop and use their abilities.
4 Use a process approach Organizations are more efficient and effective
when they use a process approach . Therefore:
Organizations must use a process approach
to manage activities and related resources.
5 Take a systems approach Organizations are more efficient and effective
when they use a systems approach. Therefore:
Organizations must identify interrelated
processes and treat them as a system.
Organizations must use a systems approach
to manage their interrelated processes.
6 Encourage continual
improvement
Organizations are more efficient and effective
when they continually try to improve. Therefore:
Organizations must make a permanent
commitment to continually improve
their overall performance.
7 Get the facts before you
decide
Organizations perform better when their
decisions are based on facts. Therefore:
Organizations must base decisions on the
analysis of factual information and data.
8 Work with your suppliers Organizations depend on their suppliers
to help them create value. Therefore:
Organizations must maintain a mutually
beneficial relationship with their suppliers.
Summary
Total Quality Management is a philosophy about quality that involves everyone in the
organization in the quest for quality; this extends to suppliers and customers, with the customer
as the focal point and customer satisfaction as the driving force.
Total quality management is based on the premise that any production and/or service can be
improved and that successful organization must consciously seek out and exploit improvement.
The essence of TQM is continuous improvement through collaborative efforts across functional
boundaries and between organizational levels with the ultimate goal of providing customer
satisfaction. Quality means meeting customers (agreed) requirements, formal and informal at
lowest cost, first time and every time.
Total involvement is important; everyone, from the chief executive officer on down, must be
involved and committed. Successful TQM programs are, therefore, built through the dedication
and combined efforts of everyone in the organization. The TQM approach can be described as
follows:
1. Find out what customers want. This might involve the use of surveys, focus groups,
interviews, or some other technique that integrates the customers voice in the decision
making process.
2. Design a product or service that will meet (or exceed) what customers want. Make it easy
to use and easy to produce.
3. Design a production process that facilitates doing the job right the first time. Determine
where mistakes are likely to occur and try to prevent them. When mistakes do occur, find
out why so that they are less likely to occur again. Strive to make the process mistake-
proof.
4. Keep track of results, and use those to guide improvement in the system. Never stop trying
to improve.
5. Extend these concepts to suppliers and to distribution.
14. MAINTENANCE ENGINEERING
Maintaining the production capability of an organization is an important function in any
production system. Maintenance encompasses all those activities that relate to keeping facilities
and equipment in good working order and making necessary repairs when breakdowns occur, so
that the system can perform as intended.
Maintenance activities are often organized into two categories: (1) buildings and grounds, and
(2) equipment maintenance. Buildings and grounds is responsible for the appearance and
functioning of buildings, parking lots, lawns, fences, and the like. Equipment maintenance is
responsible for maintaining machinery and equipment in good working condition and making all
necessary repairs.
Maintenance: All activities that maintain facilities and equipment in good working order so that
a system can perform as intended.
The goal of maintenance is to keep the production system in good working order at minimal cost.
Decision makers have two basic options with respect to maintenance. One option is reactive: It is
to deal with breakdowns or other problems when they occur. This is referred to as breakdown
maintenance. The other option is proactive: It is to reduce breakdowns through a program of
lubrication, adjustment, cleaning, inspection, and replacement of worn parts. This is referred to
as preventive maintenance.
Breakdown maintenance: Reactive approach; dealing with breakdowns or problems when they
occur.
Preventive maintenance: Proactive approach; reducing breakdowns through a program of
lubrication, adjustment, cleaning, inspection, and replacement of worn parts.
Decision makers try to make a trade-off between these two basic options that will minimize their
combined cost. With no preventive maintenance, breakdown and repair costs would be
tremendous. Furthermore, hidden costs, such as lost production and the cost of wages while
equipment is not in service, must be factored in. So must the cost of injuries or damage to other
equipment and facilities or to other units in production. However, beyond a certain point, the cost
of preventive maintenance activities exceeds the benefit.
As an example, if a person never had the oil changed in his or her car, never had it lubricated,
and never had the brakes or tires inspected, but simply had repairs done when absolutely
necessary, preventive costs would be negligible but repair costs could be quite high, considering
the wide range of parts (engine, steering, transmission, tires, brakes, etc.) that could fail. In
addition, property damage and injury costs might be incurred, plus there would be the
uncertainty of when failure might occur (e.g., on the expressway during rush hour, or late at
night). On the other hand, having the oil changed and the car lubricated every morning would
obviously be excessive because automobiles are designed to perform for much longer periods
without oil changes and lubrications. The best approach is to seek a balance between preventive
maintenance and breakdown maintenance. The same concept applies to maintaining production
systems: Strike a balance between prevention costs and breakdown costs. This concept is
illustrated in Figure below.
The age and condition of facilities and equipment, the degree of technology involved, the type of
production process, and similar factors enter into the decision of how much preventive
maintenance is desirable. Thus, in the example of a new automobile, little preventive
maintenance may be needed since there is slight risk of breakdowns. As the car ages and
becomes worn through use, the desirability of preventive maintenance increases because the risk
of breakdowns increases. Thus, when tires and brakes begin to show signs of wear, they should
be replaced before they fail; dents and scratches should be periodically taken care of before they
begin to rust; and the car should be lubricated and have its oil changed after exposure to high
levels of dust and dirt. Also, inspection and replacement of critical parts that tend to fail suddenly
should be performed before a road trip to avoid disruption of the trip and costly emergency repair
bills.
Optimum
Amount of preventive maintenance
14.1 Preventive Maintenance
The goal of preventive maintenance is to reduce the incidence of breakdowns or failures in the
plant or equipment to avoid the associated costs. Those costs can include loss of output; idle
workers; schedule disruptions; injuries; damage to other equipment, products, or facilities; and
repairs, which may involve maintaining inventories of spare parts, repair tools and equipment,
and repair specialists.
Preventive maintenance is periodic. It can be scheduled according to the availability of
maintenance personnel and to avoid interference with operating schedules. Preventive
maintenance is generally scheduled using some combination of the following:
1. The result of planned inspections that reveal a need for maintenance.
2. According to the calendar (passage of time).
3. After a predetermined number of operating hours.
Ideally, preventive maintenance will be performed just prior to a breakdown or failure because
this will result in the longest possible use of facilities or equipment without a breakdown.
Predictive maintenance is an attempt to determine when to perform preventive maintenance
activities. It is based on historical records and analysis of technical data to predict when a piece
of equipment or part is about to fail. The better the predictions of failures are, the more effective
preventive maintenance will be. A good preventive maintenance effort relies on complete
records for each piece of equipment. Records must include information such as date of
installation, operating hours, dates arid types of maintenance, and dates and types of repairs.
[Predictive maintenance: An attempt to determine when best to perform preventive maintenance
activities.]
Some Japanese companies have workers perform preventive maintenance on the machines they
operate, rather than use separate maintenance personnel for that task. Called total preventive
maintenance, this approach is consistent with JIT systems and lean production, where
employees are given greater responsibility for quality, productivity, and the general functioning
of the system.
Total preventive maintenance: JIT approach where workers perform preventive maintenance
on the machines they operate.
In the broadest sense, preventive maintenance extends back to the design and selection stage of
equipment and facilities. Maintenance problems are sometimes designed into a system. For
example, equipment may be designed in such a way that it needs frequent maintenance, or
maintenance may be difficult to perform (e.g., the equipment has to be partially dismantled in
order to perform routine maintenance). An extreme example of this was a certain car model that
required the engine block to be lifted slightly in order to change the spark plugs! In "such cases,
it is very likely that maintenance will be performed less often than if its performance was less
demanding. In other instances, poor design can cause equipment to wear out at an early age or
experience a much higher than expected breakdown rate. Consumer Reports, for example,
publishes annual breakdown data on automobiles. The data indicate that some models tend to
break down with a much higher frequency than other models.
One possible reason for maintenance problems being designed into a product is that other aspects
of design have been accorded greater importance. Cost is one such aspect. Another is
appearance; an attractive design may be chosen over a less attractive one even though it will be
more demanding to maintain. Customers may contribute to this situation; the buying public
probably has a greater tendency to select an attractive design over one that offers "ease of
maintenance."
Obviously, durability and ease of maintenance can have long-term implications for preventive
maintenance programs. Training of employees in proper operating procedures and in how to
keep equipment in good operating orderand providing the incentive to do soare also
important. More and more, US. organizations are taking a cue from the Japanese and transferring
routine maintenance (e.g., cleaning, adjusting, inspecting) to the users of equipment, in an effort
to give them a sense of responsibility and awareness of the equipment they use and to cut down
on abuse and misuse of the equipment.
14.2 Breakdown Programs
The risk of a breakdown can be greatly reduced by an effective preventive maintenance program.
Nonetheless, occasional breakdowns still occur. Even firms with good preventive practices have
some need for breakdown programs. Of course, organizations that rely less on preventive
maintenance have an even greater need for effective ways of dealing with breakdowns.
Unlike preventive maintenance, breakdowns cannot be scheduled but must be dealt with on an
irregular basis (i.e., as they occur). Among the major approaches used to deal with breakdowns
are the following:
1. Standby or backup equipment that can be quickly pressed into service.
2. Inventories of spare parts that can be installed as needed, thereby avoiding lead times involved
in ordering parts, and buffer inventories, so that other equipment will be less likely to be affected
by short-term downtime of a particular piece of equipment.
3. Operators who are able to perform at least minor repairs on their equipment.
4. Repair people who are well trained and readily available to diagnose and correct problems
with equipment.
The degree to which an organization pursues any or all of these approaches depends on how
important a particular piece of equipment is to the overall production system. At one extreme is
equipment that is the focal point of a system (e.g., printing presses for a newspaper, or vital
operating parts of a car, such as brakes, steering, transmission, ignition, and engine). At the other
extreme is equipment that is seldom used because it does not perform an important function in
the system, and equipment for which substitutes are readily available.
The implication is clear: Breakdown programs are most effective when they take into account the
degree of importance a piece of equipment has in the production system, and the ability of the
system to do without it for a period of time. The Pareto phenomenon exists in such situations: A
relatively few pieces of equipment will be extremely important to the functioning of the system,
thereby justifying considerable effort and/or expense; some will require moderate effort or
expense; and many will justify little effort or expense.
14.3 Replacement
When breakdowns become frequent and/or costly, the manager is faced with a trade-off decision
in which costs are an important consideration: What is the cost of replacement compared with
the cost of continued maintenance? This question is sometimes difficult to resolve, especially if
future breakdowns cannot be readily predicted. Historical records may help to project future
experience. Another factor is technological change; newer equipment may have features that
favor replacement over either preventive or breakdown maintenance. On the other hand, the
removal of old equipment and the installation of new equipment may cause disruptions to the
system, perhaps greater than the disruptions caused by breakdowns. Also, employees may have
to be trained to operate the new equipment.
Finally, forecasts of future demand for the use of the present or new equipment must be taken
into account. The demand for the replacement equipment might differ because of the different
features it has. For instance, demand for output of the current equipment might be two years,
while demand for output of the replacement equipment might be much longer.
These decisions can be fairly complex, involving a number of different factors. On the other
hand, most of us are faced with a similar decision with our personal automobiles:
When is it time for a replacement?
SUMMARY
Maintaining the productive capability of an organization is an important function. Maintenance
includes all of the activities related to keeping facilities and equipment in good operating order
and maintaining the appearance of buildings and grounds.
The goal of maintenance is to minimize the total cost of keeping the facilities and equipment in
good working order. Maintenance decisions typically reflect a trade-off between preventive
maintenance, which seeks to reduce the incidence of breakdowns and failures, and breakdown
maintenance, which seeks to reduce the impact of breakdowns when they do occur.
Discussion and Review Questions
1. What is the goal of a maintenance program?
2. List the costs associated with equipment breakdown.
3. What are three different ways preventive maintenance is scheduled?
4. Explain the term predictive maintenance and the importance of good records.
5. List the major approaches organizations use to deal with breakdowns.
6. Explain how the Pareto phenomenon applies to:
Preventive maintenance,
Breakdown maintenance.
7. Discuss the five key terms as they relate to maintenance of an automobile.
MAINTENANCE CHART
Designed and prepared Dr. Charles M.M. Ondieki
PREVENTIVE
MAINTENANCE
BREAKDOWN
MAINTENANCE
EMERGENCY
MAINTENANCE
RUNNING
MAINTENANCE
CONDITION
BASED
(PRETECTIVE)
MAINTENANCE
SHUTDOWN
MAINTEN
RUNNING
MAINTENANCE
SHUTDOWN
MAINTENENCE
REHABILITATION
CORRECTIVE
MAINTENANCE
MAINTENANCE & REPAIR
PLANNED
MAINTENANCE
75
15. Plant Reliability and Maintainability
Various studies have indicated that for large manufacturing systems or pieces of equipment,
maintenance and its support account for as much as 60 to 75 percent or more of their life cycle
costs. The increasing demands on high quality products have brought the maintenance problem
into even sharp focus. This, therefore, has put more emphasis on maintainability during product
design. The process of optimizing the life cycle costs of an asset or equipment is studied under
Terotechnology. Life cycle cost is the sum of all costs incurred during the life time of an asset
that is, the total of procurement and ownership costs. Life cycle costs are categorized as: cost of
acquisition, cost of use, and cost of administration. Life Cycle Cost (LCC) of any physical asset
is influenced by the plant reliability and plant maintainability. In the process of optimizing life
cycle costs, therefore, a thorough understanding of plant reliability and maintainability is very
crucial.
Maintainability is the action taken during the design and development of assets to include
features that will increase ease of maintenance and will ensure that when used in the field the
asset will have minimum downtime and Life-cycle support costs i.e. its serviceability,
reparability, and cost-effectiveness of maintenance are increased.
Reliability is the probability that an item will carry out its stated function adequately for the
specified time interval when operated according to the designed conditions, i.e. to define
reliability of any equipment:
We must state the planned working life e.g. a new car might be very reliable if we only
expect it to last for 5 years; less reliability over a period of 10 years; and completely
unreliable if we are expecting a useful life of say 40 years.
Similarly we shall need to know the intended conditions of use, and the routine
maintenance which is required, e.g. if a car engine seizes because there is no water in the
radiator this is a failure of maintenance rather than a failure of reliability; if a car is
driven carelessly and fails this is a misuse failure.
Since no two equipments are identical due to manufacturing differences however the designer
and control engineers try to eliminate any defects, reliability is given in percentages (for
mathematical reasons, it is expressed in decimals of 1.00). Suppose that out of every 100 cars of
a particular type, 99 prove to be trouble free if used and maintained correctly, and one fails to
work as intended. Then we can say that the reliability of each car is 99 percent, meaning that the
chances are 99 in 100 that it will prove reliable. The longer we expect anything to last the more
likely it is to fail during that time i.e. reliability falls as time increases.
Reliability at time t = R(t) = (No. surviving at instant t)/ (No. at start when t=o)
15.1 Mean Time Between Failures (MTBF) and Mean Time to Repair (MTTR)
i) Mean time between failures (MTBF): This is the mean value of the length of time
between consecutive failures (computed as the ration of the total cumulative observed
time to the total number of failures) for a stated period in the life of an item i.e. MTBF
tells us how long on average, equipment operates before it fails, and this we want to be as
long as possible. MTBF, therefore, depends on reliability.
ii) Mean Time to Fail (MTTF): This is the ratio of cumulative time to the total number of
failures for a stated period in the life of an item. The only difference between MTBF and
MTTF is in their usage. MTTF is applied to items that are not repaired, such as bearings,
and transistors, and MTBF to items, which are repaired. It must be remembered that the
time between failures excludes the down time.
iii) The Mean Time To Repair (MTTR) tells us how long on average, it takes to put the
equipment right after it has failed, and this we want to be as short as possible. MTTR,
therefore, depends on maintainability.
15.2 Specifications for Reliability
It is usually best to express a customer or market specifications in terms of the service to be
performed, or result to be achieved, rather than of the hardware envisaged. The specification
must contain full information about everything, which is required. The required reliability must
be expressed in figures. There are three main ways of expressing reliability in a specification:
i) Directly in terms of reliability for a specified useful life. Because reliability is related to a
particular life span, this is not always convenient, and MTBF or failure rate is usually
preferred.
ii) MTBF or MTTF This method is common, especially in the electronics industry, where
the failure rate is often approximately constant.
iii) Failure Rate Since the failure rate is directly related to the MTBF, it can be used
provided it is reasonably constant.
15.3 Reliability of Parts and Components
A system will be made of parts and components, and since in some cases the failure of one of
these may cause the whole system to fail, it must be ensured that each is as reliable as possible.
Further the greater the number of parts, the greater the risk of including one which is faulty.
Hence there are two basic rules:
(i) Use as few parts as possible.
(ii) Ensure that each part is reliable.
15.4 Parts in series
Suppose we have a system consisting of a number of parts and:
we know the reliability of each part;
Every part is vital in the sense that, if one fails, the whole system will fail.
Example: Consider a transformer and rectifier set, used to convert mains electricity to a suitable
voltage and frequency. Suppose each part has a reliability of 0.9. If we require only a transformer
and nothing else, then the system will have the same reliability as the one part it contains.
Therefore, for 1 part Reliability = 0.9
If however we require a rectifier, then we have two things, which can go wrong. Therefore, for 2
parts Reliability = 0.9 x 0.9 = 0.81; for 3 parts reliability = (0.9)
3
= 0.73; and for 10 parts
reliability = (0.9)
10
= 0.35.
15.5 Reliability and Quality
Quality is sometimes defined as fitness for purpose and can be broken roughly into:
Physical features, e.g. whether an item has a satisfactory appearance, all its dimensions
within limits etc.
Performance, i.e. whether it works correctly.
Reliability is the probability that an item will perform as required, under stated conditions, for a
stated period of time. Hence since performance is an aspect of quality, we might say that
reliability is the probability an item will retain its quality, under stated conditions, for stated
period of time. Thus quality and reliability are very closely related. Hence the quality of a
product from the manufacturer will affect its reliability. The quality of the product is also
affected by:
(i) the method of manufacture
(ii) Production equipment
(iii) Inspection and test equipment
(iv) Supplies and/or selection of raw materials and parts etc.
(All these assume that the design and development of the product has been done correctly).
15.6 The Role of Design in Reliability
According to the definition of reliability, design is keystone. The design strategy used to ensure
reliability can fall between two broad extremes.
The fail-safe approach is to identify the weak spot in the system or component and
provide some way to monitor that weakness. When the weak link fails, it is replaced.
At the other extreme is an approach where all the product components are designed to
have equal life so the system will fall apart at the end of its useful lifetime.
The obsolete worst-case approach is frequently used where the worst combination of
parameters is identified and the design is based on the premise that all can go wrong at
the same time. This is a very conservative approach, and it often leads to over design.
Two major areas of engineering activity determine the reliability of an engineering system. First,
provision for reliability must be established during the earliest design concept stage, carried
through the detailed design development, and maintained during the many steps in manufacture.
Once the system becomes operational, it is imperative that provision be made for its continued
maintenance during its service.
15.7 Improving Reliability
Because overall system reliability is a function of the reliability of individual components;
improvement in their reliability can increase system reliability. System reliability can be
increased by the use of backup components (i.e. redundancy). Failures in actual use can often be
reduced by upgrading user education and refining maintenance recommendations or procedures.
It may be possible to increase the overall reliability of the system by simplifying the system
(thereby reducing the number of components that could cause the system to fail) or altering
component relationships (e.g. increasing reliability of interfaces). Generally the potential ways to
improve reliability are:
Improve component design
Improve production and/or assembly techniques
Improve testing
Use redundancy
Improve preventive maintenance procedures
Improve user education
Improve system design.
15.8 Causes of Unreliability
The malfunctions that an engineering system can experience can be classified into five general
categories:
i) Design mistakes: Among others the common design errors are failure to include all
important operation factors, incomplete information on loads and environmental
conditions, erroneous calculations, and poor selection of materials.
ii) Manufacturing defects: Although the design may be free from error, defects
introduced at some stage in manufacturing may degrade it. Some common examples
are (1) poor surface finish or sharp edges (burrs) that lead to fatigue cracks and (2)
decarburization or quench cracks in heat-treated steel. Elimination of defects in
manufacturing is a key responsibility of the manufacturing engineering staff, but a
strong relationship with the R&D function may be required to achieve it.
Manufacturing errors produced by the production work force are due to such factors
as lack of proper instructions or specifications, insufficient supervision, poor working
environment, unrealistic production quota, inadequate training, and poor motivation.
iii) Maintenance: Most engineering systems are designed on the assumption they will
receive adequate maintenance at specified periods. When maintenance is neglected
or is improperly performed, service life will suffer. Since many consumer products
do not receive proper maintenance by their owners, a good design strategy is to make
the products maintenance-free.
iv) Exceeding design limits: If the operator exceeds the limits of temperature, speed,
etc., for which it was designed, the equipment is likely to fail.
v) Environmental factors: Subjecting equipment to environmental conditions for
which it was not designed, e.g., rain, high humidity, and ice, usually greatly shortens
its service life.
15.9 Cost of Reliability
Reliability costs money, but the cost nearly always is less than the cost of unreliability. The cost
of reliability comes from the extra costs associated with designing and producing more reliable
components, testing for reliability, and training and maintaining a reliability organization. The
figure below shows the cost to a manufacturer of increasing the reliability of a product. The
costs of design and manufacture increase with product reliability. Moreover, the slope of the
curve increases, and each incremental increase in reliability becomes harder to achieve. The
costs of the product after delivery to the customer, chiefly warranty or replacement costs,
reputation of the supplier, etc., decrease with increasing reliability. The summation of these two
curves produces the total cost curve, which has a minimum at an optimum level of reliability.
Other types of analyses establish the optimum schedule for part replacement to minimize cost.
Total Cost
Cost
Cost of Design
and Manufacture
Costs after Delivery
Rm
Reliability
Figure: Influence of Reliability on Cost
Rm Optimum reliability
15.10Reliability and Failure Patterns
(a) Definition: When an item no longer works as intended we say it has failed. Failure,
therefore, is the termination of the ability of an item to perform its required function.
(b) Classification of Failures - Failures are classified according to the:
i) Cause;
a. A misuse of failure is a failure attributable to the application of stresses beyond
the stated capability of the item i.e. ill treated.
b. An Inherent Weakness failure is a failure attributable to weakness inherent in the
item itself, when subjected to stresses within the stated capabilities of the item i.e.
failure is probably due to a design or manufacturing fault.
ii) Suddenness;
a. A sudden failure is one which could not be anticipated by prior examination.
b. A gradual failure is one, which could be anticipated by prior examination i.e. it is
possible to predict that it will occur since it takes place gradually.
iii) Degree;
a. A partial failure is one resulting from deviations in characteristics beyond
specified limits, but not such as to cause complete lack of the required function
i.e. the item does not work as well as it should, but it has not completely failed.
b. A complete failure is one resulting from deviations in characteristics beyond
specified limits, such as to cause complete lack of the required function.
c. Combination of the above terms-
i. A catastrophic failure is one which is both sudden and complete.
ii. A degradation failure is one, which is both gradual and partial.
15.11 Maintainability
Maintainability is the action taken during the design and development, and installation of a
manufactured product to include features that will increase ease of maintenance, reduce required
man-hours, tools, logistic costs, skill levels and facilities and ensure that when used in the field
the product will have minimum downtime, and life-cycle support costs.
From this definition, the general principles maintainability, therefore, include lowering or
eliminating altogether the need for maintenance, reducing life cycle maintenance costs, lowering
the number, frequency, and complexity of required maintenance tasks; establishing the extent of
preventive maintenance to be performed; reducing the mean time to repair (MTTR); and
providing for maximum interchangeability. On the other hand maintenance refers to the
measures taken by the users of a product to keep it in operable condition or repair it to operable
condition.
15.12The importance, Purpose, and Results of maintainability efforts
The objectives of applying maintainability engineering principles to engineering systems and
equipment include:
Reducing projected maintenance time and costs through design modifications
directed at maintenance simplifications.
Determining man-hours and other related resources required to carry out the projected
maintenance.
Using maintainability data to estimate item availability or unavailability.
When maintainability engineering principles have been applied effectively to any product, the
following results can be expected.
Reduced downtime for the product and consequently an increase in its operational
readiness or availability.
Efficient restoration of the products operation condition when random failures are
the cause of downtime.
Maximizing operation readiness by eliminating those failures that are caused by age
or wear-out.
Because engineering should consider maintenance requirements before designing a product,
maintainability design requirements can be determined by processes such as maintenance
engineering analysis, the analysis of maintenance tasks and requirements, the development of
maintenance concepts, and the determination of maintenance resource needs.
Because equipment downtime consists of many components and sub-components, there are
numerous engineering and analytical efforts required to reduce downtime. The three main
components of equipment downtime are logistic time, administrative time, and active repair
time.
(a) Logistic time is that portion of equipment downtime during which repair work is delayed
because a replacement part of other component of the equipment is not immediately
available. Logistic time, therefore, is largely a matter of management. By developing
effective procurement policies can minimize it.
(b) Active repair time is that portion of equipment downtime during which the repair staff is
actively working to effect a repair. Its six elements are fault location time, preparation
time, failure verification time, actual repair time, part acquisition time, and final test time.
Usually, the length of active repair time reflects factors such as product complexity,
diagnostic adequacy, nature of product design and installation, and the skill and training
of the maintenance staff.
(c) Administrative time is that portion of equipment downtime not taken into consideration
in action repair time and in logistic time. This time (that normally include wasted time)
is a function of the structure of the operational organization and is influenced by factors
such as work schedules and the non-technical duties of maintenance people.
15.13Maintainability Costs
Maintainability is an important factor in the total cost of equipment. An increase in
maintainability can lead to reduction in operation and support costs. For example, a more
maintainable product lowers maintenance time and operating costs. Furthermore, more efficient
maintenance means a faster return to operation or services, thereby decreasing downtime.
Ways to improve equipment maintainability are:
Design of built-in test points,
Use of reduced maintenance parts,
Increase in automatic test equipment use,
Increase in self-checking features,
Easier access for maintenance,
Improvement and number of detailed troubleshooting manuals, and
Discard-at-failure maintenance.
15.14 Maintainability Design Characteristics
The maintainability design characteristics are the features and design characteristics that help
reduce downtime and enhance availability. The goals of maintainability design include
minimizing preventive and corrective maintenance tasks; increasing ease of maintenance.
Decreasing support costs; and reducing the logistical burden by decreasing the resources required
for maintenance and support, such as spare parts, repair staff, and support equipment.
The most important maintainability design features are standardization, modularization, inter-
changeability, simplification, accessibility, and identification. The most frequently addressed
maintainability design factors, ranked in descending order, are: accessibility, test points;
controls; labeling and coding; displays; manuals; check lists, chart and aids; test equipment;
tools; connectors; cases; covers and doors; mounting and fasteners; handles; and safety factors;
Other factors are standardization, modular design, inter-changeability ease or removal and
replacement, indication and location of failures, illumination, lubrication, test adapters and test
hook ups, servicing equipment, adjustments and celebrations installation, functional packaging,
fuses and circuit breakers; cabling and wiring, weight, training requirements, skill requirements,
required number of personnel, and work environments.
15.15General Maintainability Design Guidelines
Some of the important general maintainability design guidelines are:
(i) Design to minimize requirements for tools, maintenance skills, adjustments, and other
aspects of maintenance.
(ii) Group sub system for easy location and identification.
(iii) Provide trouble shooting techniques, test points, etc.
(iv) Used standard parts to extent possible.
(v) Provide for visual inspection.
(vi) Avoid the use of large cable connectors.
(vii) Use plug-in modules.
(viii) Design for safety.
15.16Comparisons of Maintainability and maintenance costs
The level of maintainability of a product determines the kinds of maintenance work that can and
will need to be performed at each point in the products life cycle, and the difficulty and expense
of performing them. Maintainability features, such as mean time to repair (MTTR), therefore
influence maintenance costs such as required manpower. For example if the design calls for the
inclusion of built-in test equipment, the time to fault detection and isolation should be lower.
Usually, higher maintainability means less required maintenance, and therefore lower
maintenance costs. In early equipment design, several alternative levels of built-in test
equipment and other factors that can reduce maintenance costs should considered.
The objective of performing an economic trade-off analysis is to determine all costs for each
alternative under consideration and then to compare them. Usually, the alternative with the
lowest cost should be selected. This approach is also useful in determining whether items should
be designed to be thrown away or to be repaired. The factors to be considered include the cost of
hardware, manpower, training, test equipment and tools, and repairs facilities, replacement parts,
packaging and shipping, repair parts, and supply, administration, and cataloguing.
15.17Comparisons of Reliability and maintenance Costs
The cost of achieving any desired reliability and the subsequent cost of maintenance are related
to each other roughly as shown in the figure below:
minimum
cost
E total F B cost of achieving
Cost C cost reliability
per cost of maintenance
item and repairs
Produced
A
D
Low Reliability Rm High Reliability
Reliability
Fig: The relation between reliability and maintenance costs
At A the reliability is very low and the amount spent on reliability is also low. If we go on
improving reliability we gradually reach the situation where all the obvious things have been
done, and from now on we shall have to spend increasingly more to achieve very little reliability
improvement. If we were unwise enough to demand an impossible reliability of 1.00, costs will
sweep away to infinity beyond B.
However, when reliability is low, maintenance costs from all the breakdowns are inevitably high,
as shown at C. As the reliability improves so the cost of maintenance falls, until at D, as
reliability approaches 1.00, maintenance costs approach zero.
By adding reliability and maintenance costs we get curve EF, and find that there is a particular
reliability Rm for which the overall cost is a minimum.
Although the above concept is useful, the actual case is nearly always complicated than suggests
since:
i) It does not follow that an improvement in reliability must inevitably cost more.
Better designs, different materials, better quality control during productions, etc. may
achieve improved reliability at little or no extra cost. If scrap is reduced at the same
time, the overall cost may acutely come down (i.e. reliability cost is difficult to
estimate).
ii) Maintenance costs are also difficult to estimate. When an equipment fails, we are
unlikely to be able to foresee associated costs such as:
o The value of production lost through breakdowns, including the cost of the late
deliveries, split batches, idle operators, etc. on the production line.
o The cost of having a piece of equipment out of action. This probably depends
very much on whether it happened to be required for use during the time it was
under repair.
iii) Costs are inextricably mixed up with all the factors related to reliability as discussed
above. We must define precisely what we mean by reliability costs, or the figures we
assign to them will have no meaning.
15.18 Factors affecting Reliability and Maintenance Costs
Any project may embrace some or all of the following costs:
i) Research. Design and Development Costs:
Research into reliability problems for which solutions are yet not known.
Design costs.
Cost of building and testing prototypes.
Cost of modification to design, and of further tests until the required reliability is
achieved.
(ii) Manufacturing and Installation Costs;
Development and purchase of new manufacturing plant, equipment, tooling, etc.
Installation and commissioning costs, when the equipment we have made is installed
in our customers premises.
(iii) Utilization costs
Day to day running costs, including the costs of routine servicing, repairs etc.
Costs of support equipment, which is necessary to operate the equipment efficiently.
Spares, test equipment, etc.
Training of operators.
16. Project Management
The concept of project management encompasses a set of economic principles, methods and
techniques that helps in the effective planning and completion of tasks under the given
constraints imposed on a project. The basic characteristics of a capital expenditure (project) are
that it generally involves a current outlay (investment) of funds that generate benefits for the
future period. The formulation of sound projects is of significance in industrial development of
any planned economy. A systematic evaluation of proposed projects based on thorough
investigation of their economic and technical feasibility is a pre-requisite for selecting viable
projects and providing financial and technical resources to them. Project formulation and
evaluation are particularly important in any developing country because of limited resources in
capital and skills. In order to make most rational distribution and select those financial resources,
it is essential to identify and select those projects which are to be given priority over other
projects competing for the same resources. This leads to systematic analysis and planning using
suitable criteria, which may form the basis for evaluating projects before an investment decision
is taken.
16.1 Characteristics of Project
1. A project is a one time activity which will never be repeated exactly the same manner.
2. A project has a definite start and finish, i.e., a project is executed in a definite time bound
schedule.
3. A project uses cross-functional relationships because it needs diversified skills and talents
from different professions.
4. A project has definable goals or end results that can be defined in terms of cost, schedule
and performance requirements.
5. Project demands the investment (current outlay) and the benefits are spread for number of
future periods.
6. Once the project goals are achieved, the project team will be either disbanded or
reconstituted for another new project.
7. Project passes through several distinct activities which constitute a project life cycle.
16.2 Project Life Cycle
The size, length, and scope of projects vary widely according to the nature and purpose of the
project. Nevertheless, all projects have something in common: They go through a life cycle,
which typically consists of five phases.
1. Concept, at which point the organization recognizes the need for a project or responds to a
request for a proposal from a potential customer or client;
2. Feasibility analysis, which examines the expected costs, benefits, and risks of undertaking
the project;
3. Planning, which spells out the details of the work and provides estimates of the necessary
human resources, time, and cost;
4. Execution, during which the project itself is done. This phase often accounts for the
majority of time and resources consumed by a project;
5. Termination, during which closure is achieved. Termination can involve reassigning
personnel and dealing with any leftover materials, equipment (e.g., selling or transferring
equipment), and any other resources associated with the project.
These phases can overlap, so that one phase may not be fully complete before the next phase
begins. This can reduce the time necessary to move through the life cycle, perhaps generating
some competitive advantage and cost saving. Although subsequent decisions in an earlier phase
may result in waste for some portion of the activity in a following phase, careful coordination of
activities can minimize that risk.
16.3 Work Breakdown Schedule
Because large projects usually involve a very large number of activities, planners need some way
to determine exactly what will need to be done so that they can realistically estimate how long it
will take to complete the various elements of the project and how much it will cost. This is often
accomplished by developing a work breakdown structure (WBS), which is a hierarchical
listing of what must be done during the project. This methodology establishes a logical
framework for identifying the required activities for the project:
The first step in developing the work breakdown structure is to identify the major
elements of the project.
The next step is to identify the major supporting activities for each of the major elements.
Then, each major supporting activity is broken down into a list of the activities that will
be needed to accomplish it.
The work breakdown structure becomes the focal point for planning the project.
[Work breakdown structure (WBS) is a hierarchical listing

of what must be done during a
project.]
16.4 Planning and Scheduling With Gantt Charts
The Gantt chart is a popular tool for planning and scheduling simple projects. It enables a
manager to initially schedule project activities and then to monitor progress over time by
comparing planned progress to actual progress.
Example 1: Gantt chart for a companys plan to establish a new marketing
department
Activity Duration in Weeks
2 4 6 8 10 12 14 16 18 20
Locate new facilities
Interview prospective staff
Hire and train staff
Select and order furniture
Remodel and install phones
Furniture received and setup
Move in/ startup
To prepare the chart the manager in charge of the project identifies the major activities that will
be required. Next, time estimates for each activity are made, and the sequence of activities is
determined. Once completed, the chart indicates which activities are to occur, their planned
duration, and when they are to occur. Then, as the project progresses, the manager is able to see
which activities are ahead of schedule and which ones are delaying the project. This enables the
manager to direct attention where it is needed most to speed up the project in order to finish on
schedule.
The obvious advantage of a Gantt chart is its simplicity, and this accounts for its popularity.
However, Gantt charts fail to reveal certain relationships among activities that can be crucial to
effective project management. For instance, if one of the early activities in a project suffers a
delay, it would be important for the manager to be able to easily determine which later activities
would result in a delay. Conversely, some activities may safely be delayed reveal without
affecting the overall project schedule. The Gantt chart does not directly reveal this because it is
most useful for simple projects or the initial project planning on more complex projects, which
then gives way to the use of networks (i.e. PERT and CPM).
16.5 PERT AND CPM
PERT (program evaluation and review technique) and CPM (critical path method) are two of the
most widely used techniques for planning and coordinating large-scale projects. By using PERT
or CPM, managers are able to obtain:
1. A graphical display of project activities.
2. An estimate of how long the project will take.
3. An indication of which activities are the most critical to timely project completion.
4. An indication of how long any activity can be delayed without lengthening the project.
Although the two techniques were developed independently, they have a great deal in common.
Moreover, many of the initial differences between them have disappeared as users borrowed
certain features from one technique for use with the other. For example, PERT originally stressed
probabilistic activity time estimates, because the environment in which it developed was typified
by high uncertainty. In contrast, the tasks for which CPM was developed were much less certain,
so CPM originally made no provision for variable time estimates. At present, either technique
can be used with deterministic or probabilistic times.
16.6 The Network Diagram
One of the main features of PERT and related techniques is their use of a network or
precedence diagram to depict major project activities and their sequential relationships. For
example Gant chart shown above, the diagram will be as shown below.
4
2
1 5 6
3
Fig: A simple Project Network Diagram
1-2: Locate facilities
1-3: Interview
2-4: Order furniture
3-5: Hire and train
2-5: Remodel
4-5: Furniture setup
5-6: Move in
The diagram is composed of a number of arrows and nodes. The arrows represent the project
activities. The network diagram shows the sequential relationship of activities much clearer than
the Gantt chart. For example, it is apparent that ordering the furniture and remodeling both
require that a location for the office has been identified. Likewise, interviewing must precede
training. However, interviewing and training can take place independently of activities
associated with locating a facility, remodeling, and so on. Hence a network diagram is generally
the preferred approach for visual portrayal of project activities.
Under the above convection, which is commonly referred to as activity-on-arrow (A-O-A),
the arrows designate activities and the nodes represent the starting and finishing of activities;
nodes are called events. Activities consume resources and/or time. Events are points in time;
they neither consume resources nor time. Activities can be referred to either by their endpoints
(e.g. activity 2-4) or by a letter assigned to an arrow (e.g. activity c).
1 2 4 5
a c d
The network diagram describes sequential relationships among major activities on a project. For
instance, activity 2-4 cannot be started, according to the network, until activity 1-2 has been
completed. A path is a sequence of activities that leads from the starting node to the finishing
node. Thus the sequence 1-2-4-5-6 is a path; others are 1-2-5-6 and 1-3-5-6. The length (of time)
of any path can be determined by summing the expected times of the activities on the path. The
path with the longest time is of particular interest because it governs project completion time, i.e.
expected project duration equals the expected time of the longest path. If there are any delays
along the longest path, there will be corresponding delays in project completion time.
Conversely, attempt to shorten project completion must focus on the longest sequence of
activities. Because of its influence on project completion time, the longest path is referred to as
the critical path, and its activities are referred to as critical activities.
Paths that are shorter than the critical path can experience some delays and still not affect the
overall project completion time as long as the ultimate path time does not exceed the length of
the critical path. The allowable slippage for any path is called slack, and it reflects the difference
between the length of a given path and the length of critical path. The critical path, then, has zero
slack time.
When two activities both have the same beginning and ending nodes, a dummy node and
activity is used to preserve the separate identity of each activity. In the diagram below, activities
a and b must be completed before activity c can be started. However, the start of activity d is
dependent only on completion of activity b, not on the completion of activity a. The primary
function of dummy activities is to clarify relationships. As far as time is concerned, a dummy
activity has an activity time equal to zero.
a c
b Dummy activity
d
16.7 Deterministic Time Estimates
The main determinant of the way PERT and CPM networks are analyzed and interpreted is
whether activity time estimates are probabilistic or deterministic. If time estimate can be made
with a high degree of confidence that actual times will not differ significantly, we say the
estimates are deterministic. If the estimates are subject to variation, we say the estimates are
probabilistic. Probabilistic time estimates must include an indication of the extent of probable
variation.
Example of estimating deterministic times using network diagram in example 1 above:
Activity (and Length) Path Length in weeks Slack in weeks
1-2: Locate facilities (8)
2-4: Order furniture (6)
4-5: Furniture setup (3)
5-6: Move in (1) 1-2-4-5-6 8+6+3+1 = 18 20-18 = 2
1-2: Locate facilities (8)
2-5: Remodel (11)
5-6: Move in (1) 1-2-5-6 8+11+1 = 20* 20-20 = 0
1-3: Interview (4)
3-5: Hire and train (9)
5-6: Move in (1) 1-3-5-6 4+9++1 = 14 20-14 = 6
*Critical Path
Terms used for computerization of times on the network diagram are:
ES the earliest time activity can start, assuming all preceding activities start as early as
possible;
EF - the earliest time activity can finish;
LS - the latest time activity can start and not delay the project;
LF - the latest time activity can finish and not delay the project.
Once these values have been determined, they can be used to find:
Expected project duration;
Slack time; and
Those activities on the critical path.
Exercise: For the example1 find the values of ES, EF, LS, LF and Slack time for each activity.
a) Computing ES and EF Times Computation of the earliest starting and finishing times is
aided by two simple rules:
1. The earliest finish time for any activity is equal to its earliest start time plus its expected
duration, t, i.e. EF = ES + t;
2. ES for activities at nodes with one entering arrow is equal to EF of the entering arrow. ES
for activities leaving nodes with multiple entering arrows is equal to the largest EF of the
entering arrow.
b) Computing LS and LF Times Computation of the latest starting and finishing times is aided
by two simple rules:
1. The latest starting time for each activity is equal to its latest finishing time minus its
expected duration, t, i.e. LS = LF - t;
2. For nodes with one leaving arrow, LF for arrows entering that node equals the LS of the
leaving arrow. For nodes with multiple leaving arrows, LF for arrows entering that node
equals the smallest LS of leaving arrows.
Finding ES and EF times involves a forward pass through the network; finding LS and LF
times involves a backward pass through the network. Hence, we must begin with the EF of the
last activity and use that time as the LF for the last activity. Then we obtain the LS for the last
activity by subtracting its expected duration from its LF.
16.8 Probabilistic Time Estimates
The above discussion assumed that activity times were known and not subject to variation.
Where the assumptions are not appropriate, a probabilistic approach is used to estimate activity
times. The probabilistic approach involves three time estimates for each activity instead of one:
Optimistic time, o The length of time required under optimum conditions;
Pessimistic time, p - The length of time required under the worst conditions;
Most likely time, m - The most probable amount of time required.
Of special interest in the network analysis are the average or expected time for each activity t
c
,
and the variance of each activity time i
2
. The expected time is computed as a weighted average
of the three times.
t
c
=
6
4 p m o + +
The size of the variance reflects the degree of uncertainty associated with an activitys time: the
larger the variance, the greater the uncertainty. Thus,
2
=
( )
2
6
1
]
1
o p
or
( )
36
2
o p
The standard deviation of the expected time for each path is, therefore, given by:
path =
( )
path on activities of iances var

16.9 Advantages and Limitations of PERT
PERT and similar project scheduling techniques can provide important services for the project
manager. Among the most useful features are:
1. Use of these techniques forces the manager to organize and quantify available
information and to recognize where additional information is needed.
2. The techniques provide a graphic display of the project and its major activities.
3. They identify;
a. Activities that should be closely watched because of the potential for delaying the
project and
b. Other activities that have slack time and so can be delayed without affecting
project completion time. This raises the possibility of reallocating resources to
shorten the project.
The limitations of PERT and similar project scheduling techniques are:
1. When developing the project network, one or more important activities may be omitted.
2. Precedence relationships may not all be correct as shown.
3. Time estimates may include a fudge factor; managers feel uncomfortable about making
time estimates because they appear to commit themselves to completion within a certain
time period.
16.10 Monitoring and Control of Projects
Effective management of a project during its entire life cycle requires a well-organized control
system be designed, developed and implemented so that effective and efficient feedback on the
project's progress can be attained. The monitoring and control stage starts as soon as the
execution of the projects. In fact, the execution process could be considered to start as soon as a
project is conceived. The main objective of monitoring is to ensure that various time and cost
targets are met and the network as well as its operational plans prepared for execution of the
projects are adhered to.
Monitoring process ensures some positive action and sees that there is no gap between the
desired and actual achievements and targets. What is to be measured, reviewed and reported will
depend on who is to take action and what action he is likely to take. The project organization has
various levels and each level has different duties and takes different types of actions which fall
under their jurisdiction.
Steps in monitoring:
1. Setting a monitoring environment; the role of projector monitor is well-defined, known
and accepted by all the participating agencies whose activities are to be monitored. The
project manager sets up an environment in which he/she exercises his/her authority and
responsibilities.
2. Setting performance standards; the project monitor on behalf of the project manager, sets
systems and procedures for monitoring the projects. He/She also reviews performance in
terms of time schedule, budget and quality of the project against given standards.
3. Measuring the progress of the Project; the project monitor keeps a close watch on the
progress of activities by the way of collecting information regarding "what has been done
with respect to". He then quantifies them for comparison with targets. Then the corrective
actions can be devised based on feedback.
4. Reviewing; In case of non-permissible activities, he/she takes the corrective decision as to
how these should be handled.
5. Reporting; The project monitor reports to project manager if it is not possible to take early
action.
6. Action; The project manager acts promptly on all unresolved issues.
Monitoring and-control system starts from the point when the planning phase is over, i.e. when
time plans, schedules, as well as the operational plans are ready and are to be implemented. The
monitoring areas are as follows:
i) Monitoring of time,
ii) Monitoring of manpower,
iii) Monitoring of material resources,
iv) Monitoring of costs in relation to work done, and
v) Monitoring of funds.
16.11 Summary: Project Management
Projects are composed of a unique set of activities established to realize a given set of objectives
in a limited time span. The non-routine nature of project activities places a set of demands on the
project manager that are different in many respects from those the manager of more routine
operations activities requires, both in planning and coordinating the work and in the human
problems encountered.
PERT and CPM are two commonly used techniques for developing and monitoring projects.
Although each technique was developed independently and for expressly different purposes, time
and practice have erased most of the original differences, so that now there is little distinction
between the two. Either provides the manager with a rational approach to project planning and a
graphical display of project activities. Both depict the sequential relationships that exist among
activities and reveal to managers which activities must be completed on time to achieve timely
project completion. Managers can use that information to direct their attention toward the most
critical activities.
Two slightly different conventions can be used for constructing a network diagram. One
designates the arrows as activities; the other designates the nodes as activities. The task of
developing and updating project networks quickly becomes complex for projects of even
moderate size, so computer programs, which involve the use of some computing algorithm, are
often used.
A deterministic approach is used for estimating the duration of a project when activity times can
be fairly well established. When activity times are subject to some uncertainty, a probabilistic
approach is more realistic, and estimates of the length of such projects should be couched in
probabilistic terms.
In some instances, it may be possible to shorten, or crash, the length of a project by shortening
one or more of the project activities. Typically, such gains are achieved by the use of additional
resources, although in some cases, it may be possible to transfer resources among project
activities. Generally, projects are shortened to the point where the cost of additional reduction
would exceed the benefit of additional reduction, or to a specified time.
By Dr. Charles M.M. Ondieki

IE Management Techniques

Încărcat de

Informații document

Descriere originală:

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

IE Management Techniques

Încărcat de

Drepturi de autor:

Formate disponibile

MENT 554: INDUSTRIAL ENGINEERING MANAGEMENT

path on activities of iances var

S-ar putea să vă placă și