Principles of Management

Module 2

Asif S
Assistant Professor
Division of Mechanical Engineering
School of Engineering, CUSAT

1
 Topics (Part 1)

 Productivity and Production

Measurement of Productivity

Productivity Index

Productivity Improvement Procedure

Organization by Product Function

2
 Productivity and Production
 Productivity is a measure of how much input is required to produce a
given output
 Productivity = output/input
 Productivity = Value of goods & services produced / Value of
resources utilized for this production.
 Productivity is the measure of how well the resources are brought
together in an organization and utilized for accomplishing a given set of
objectives.

 It can be defined as the output – input ratio within a time period with
due consideration for quality.

 It is applicable to all production systems

3
Productivity and Production

4
 Productivity and Production
 The formula indicates that productivity can be improved by:
1. Increasing the outputs with the same inputs

2. Decreasing the inputs by maintaining the same outputs or

3. Increasing the outputs and decreasing the inputs to change the ratio
favourably.

 Production and productivity are different terms and implies different

meaning. It should be noted that higher production need not necessarily
lead to higher productivity and vice versa.

5
 Productivity

 Productivity implies effectiveness and efficiency in individual and

organizational performance.

 Effectiveness is the achievement of objectives whereas efficiency is the

achievement of ends with the least amount of resources.

 Managers cannot know whether they are productive unless they first

know their objectives and goals and those of the organization.

6
 Production
 Production is a process (or system) of converting input into some

useful, value added output.

 Production is a measure of output produced. The emphasis is not on

how well the input-resources are utilized.

 Productivity, on the other hand, puts emphasis on the ratio of output

produced to the input used. That is, here the focus is on how well the

input resource is used for conversion into output.

7
 Productivity Vs Production

Productivity Production

• Relative term • Absolute term

• A measure of efficiency of • A measure of capacity of
system system
• Increases by efficient • Increases by utilizing more
utilization of inputs (4 M‘s *) inputs.
• It may or may not have a unit • It is expressed in terms of a
unit ( No of units or monetary
terms)

* Money, material, machine and manpower are the 4 M’s

8
 Problem
 A company is manufacturing 24,000 components per month by
employing 100 workers in 8 hours shift. Calculate the productivity?
Answer
Output in terms of production = 24000 components
Input in terms of man-hours = 100worker s × 8hours × 30days
(assuming 30 days in a month)
= 24,000 man-hours
Productivity = 24,000 components
24,000 − man hours

= 1 component/man hour

9
 Problem
 Suppose the company gets additional order to supply 6000 more
components and the management decides to employ additional workers,
calculate the productivity when the number of additional workers
employed are (i) 30 (ii) 25 and (iii) 20.
Answers

10
 Problem

Note:-
1. Increase in production does not necessarily mean increase in productivity
2. Productivity is always associated with the context in which it is calculated. For
example, we have calculated labour productivity
11
 Measurement of Productivity
 Total productivity

 It‘s the ratio of aggregate out put to aggregate input

 Partial productivity

 It‘s the ratio of the aggregate output to any single input

 Land and building

 Materials

 Machines

 Man power
 Objectives of measurement of productivity

 To study performance of a system over time.

 To have relative comparison of different systems for a given level.

 To compare the actual productivity of the system with its planned

productivity.
Relation of productivity and profit
 Aggregate output = Gross sales = G (in Rs)
 Aggregate input = cost = C (in Rs)

 Total productivity TP =

 Profit = P = G − C

 TP = 1 +

 when P= 0 , TP =1
 when P< 0 , TP <1
 Calculation of productivity
 Total Productivity Measure (TPM) – Total outputs to the sum of all tangible
input factors (labour, materials, capital, energy, other expenses, etc.)

Total Productivity Measure (TPM) = Total outputs / Sum of all Inputs

 Partial Productivity Measure (PPM) - Total output to one class of input.

 Total Factor Productivity (TFP) - total output to the sum of associated labor
and capital inputs.

Total Factor Productivity (TFP) = Total Output / (Labour + Capital Inputs)

Calculation of productivity
 Aggregate output (Z)
Let Xi = number of units of product ‗i‘ produced during the period.
Yi = the basic period price for product ‗i‘ ( in Rs)
Aggregate output Z= ∑ Xi Yi
 Material input (M)
Let Mi = quantity of material ‗i‘ used during the period for producing
the products
Ci= cost per unit of raw material ‗i‘ in the same base year
Material input, M= ∑ Mi Ci
 Labour input (L)
Let li = number of man hours put by labour category ‗i‘ during the
period under consideration
hi =hourly wage rate
Labour input L = ∑ li hi
Calculation of productivity
 Capital and land input (K)
It can be divided into two parts : Fixed assets and the Current assets
Let Di = Depreciation (Rs) for the fixed asset ‗i‘
I = Cost of capital in base period ( percentage)
A = Total working capital in the period ( Rs)
R = Rental or equivalent of the value of land in base period (Rs)
The capital and land input, K = ∑ Di +AI +R

 Total productivity = aggregate output /aggregate input

= =
 Advantages and Disadvantages of
Total Productivity Measure
Advantages Disadvantages

 More accurate representation of the  Difficulty in obtaining the data

total picture of the company  Requirement of special data

 Easily related to total costs collection system

 Considers all quantifiable outputs

and inputs
 Advantages and Disadvantages of
Partial Productivity Measure
Advantages Disadvantages

 Easy to understand and calculate  Misleading if used alone

 A tool to pinpoint improvement  No consideration for overall impact

 Advantages and Disadvantages of
Total Factor Productivity
Advantages Disadvantages

 Data required for the calculation is  No consideration for material and

relatively easy to obtain from company energy input

records  Difficult to relate value added

 Value added approach approach to production Efficiency

Productivity index

 Material productivity =number of units produced/cost of material

This can be increased by

 Proper choice of design

 Proper training and motivation of workers

 Better material planning and control

 Searching for cheaper alternate material etc..

 Productivity index
 Labour productivity = aggregate output / expenditure from labour

The unit may be number of units/man hours or in monetary terms

This can be increased by

Proper selection of design and process

Proper training

Motivate workers by financial and other incentives

Providing facilities and chances for self development

 Productivity index
 Capital productivity = turn over / capital employed
This can be improved by
 Better utilization of capital resources
 Careful make or buy decision

 Machine productivity = output / actual machine hours utilized

This can be improved by
 Preventive maintenance
 Use proper machine settings
 Using method study techniques
 Using properly skilled and trained workers etc.

 General measure of productivity

Aggregate productivity = output /(land+labour+material+capital+other inputs)
Factors Influencing Productivity
 Controllable factors (Internal Factors)
1. Product
2. Plant and equipment
3. Technology
4. Materials
5. Human factors
6. Work methods
7. Management style
8. Financial factors

 Uncontrollable factors (External factors)

1. Natural Resources
2. Government Policy
3. Political Stability
Ways to Improve Productivity
 Productivity of any system can be improved by proper use of
resources and optimum utilization of system or processes. These
include the following.

 Technology Based

 Acquire new technology

 Automation in assembly

 Modern maintenance techniques

 Energy technology

 Flexible Manufacturing Systems (FMS)

Ways to Improve Productivity

 Employee Based

 Financial and non-financial incentives at individual and group level

 Suggestion scheme

 Safe work-place

 Workers participation in management

Ways to Improve Productivity

 Material Based

 Material Planning and control

 Purchasing, logistics

 Material storage and retrieval

 Source selection and procurement of quality material

 Waste elimination

 Use of Automated Guided Vehicle (AGV) for material

transportation
Ways to Improve Productivity
 Process Based

 Methods engineering and work simplification

 Job design, Job evaluation, Job safety

 Human factors engineering

 Product Based

 Value analysis and value engineering

 Product diversification

 Standardization and simplification

 Reliability engineering

 Promotion
Ways to Improve Productivity
 Management Based

 Management style

 Communication in the organization

 Work culture

 Motivation

 Promoting group activity

Productivity improvement procedure
 Improving the existing method of plant operation

 Use of method study and work measurement procedures

– The steps involved in it are

 Gather all information about the existing methods

 Present it in form of charts and diagrams

 Do critical examination of these data (why, when , who and

how)

 Develop improved methods

Productivity improvement procedure

 Design of part

 Simplify the design

 Standardize the materials, tools, procedures, etc ..

 Efficient system of quality control

 Use better and economic material

Productivity improvement procedure

 Tolerance and specifications.

 Designers keep tight tolerances.

 Lack of consideration of the cost factor, knowledge of

production processes and process capability

 Designers should interact with production engineers and

cost analysis group
Productivity improvement procedure
 Effective utilization of materials

 The utilization of material should be increased by taking

improvement measures in

 Design stage

 Process or operation stage

 Productivity improvement procedure
 Process of manufacture

 Selection of proper process

 Use of proper tools, equipments ,parameters etc

 Productivity improvement procedure
 Set up and tools

- Use of special tooling depends upon

 The quantity to be produced

 Chance of repeated orders

 The amount of labour involved

 Amount of capital requirements

- the productivity will improve by
 Reduction in set up time

 Design of tooling to use full capacity of machines

 Productivity improvement procedure
 Working conditions

 Lighting

 Control of temperature

 Adequate ventilation

 Control sound

 Promote orderliness, cleanliness and good house keeping

 Proper waste disposal

 Provide protective equipments

Productivity improvement procedure
 Material handling

 Use mechanical equipments

 Proper planning and scheduling

 Proper maintenance of equipments and training to workers

 Plant layout

 It should facilitate smooth flow of materials and men

 It should reduce distance moved by men and materials

 Storage places should be properly arranged to reduce

searching and handling
Benefits of increasing productivity
 For management
 to earn good profit
 to have better utilization of resources
 to stand better in the market

 For workers
 higher wages
 better working conditions, improved morale
 higher standards of living
 job security and satisfaction
Benefits of increasing productivity
 For consumers
 better quality goods at reduced prices
 more satisfaction

 To government
 more revenue by taxation
 improvement in economy
 better utilization of resources
 increased per capita income
 development of the nation
 Topic (Part 2)

Material Management

40
 Material management

 Materials are one of the main inputs.

 It accounts for the 50 to 85% of the total cost of production.

 Any savings in the material leads to significant increase in profit.

 This is a basic function which directly adds value to the product.

 In modern industrial organizations it has a very important place.

 Definition

• Material management is the planning, directing, controlling and

coordinating those activities which are concerned with materials and
inventory requirements, from the point of their inception to their
introduction into the manufacturing process.

• It begins with the determination of materials schedule and ends with

issuance to production to meet customers demand as per schedule and at
the lowest cost .

• Material management deals with controlling and regulating the flow of

material in relation to the changes in variables like demand, prices,
availability, quality, delivery schedules etc.
 Objectives of Material Management
 Minimizing cost of materials

 To procure and provide materials of desired quality when required, at the

lowest possible overall cost of the concern

 Receiving and controlling material safely and in good condition.

 Identification of surplus stocks and taking appropriate measures to reduce

it.

 To cut down the costs through simplification, standardization, value

analysis, import substitution etc.

 To train personnel in the field of materials management in order to increase

operational efficiency.

 Efficient record keeping and prompt reporting

 Functions of Material Management
 Planning function

 Translation of the sales projection into long term requirements of

the materials

 Adjust the material requirement as per updated production plan

 Arrange the facilities required for the materials management.

 Production control

 Determining requirements of materials and parts to be purchased

and manufactured

 Schedules of production and purchasing

 Issue work order to departments and purchase order to suppliers

 To dispatch the materials to the production department.

 Functions of Material Management
 Purchasing

 Selection of acceptable suppliers and issue of purchase order

 To expedite the delivery of materials to meet the inventory

requirements

 To look for new materials and suppliers

 Inventory and stores control

 Requisition of materials according to requirements at appropriate

time

 Keep updated records of the materials received, issued and balance

 Do physical verification of materials

 Functions of Material Management
 Shipping /physical verification

 To receive, verify and store finished goods

 Pack and label finished goods

 To prepare shipping documents

 Report about the shipment to the accounting department and sales

department

 Material handling

 To handle in-plant materials

 Maintenance of material handling equipments

 Functions of Material management

 Transportation/ traffic control

 To carry raw materials from the suppliers to plant

 To carry finished goods to customers

 To control routes and rates of hired vehicles

 To maintain the fleet of delivery vehicles

 Factors Providing Economy in Material
Management

1) Volume of purchases

2) Nearness to sources of materials

3) Design and engineering of the product

4) Inspection

5) Make or buy decision

6) Disposal of scrap
 Inventory Control
 Inventory is the list of movable goods which directly or indirectly used
in the production of goods for sale.

 Inventory is money kept in the store room in the form of raw material,
in-process material and finished goods

 ―Inventory control refers to the process whereby the investment in

materials and parts carried in stock is regulated within the
predetermined limits set in accordance with the inventory policy
established by the management‖

 It is the scientific method of finding how much stock should be

maintained in order to meet the production demands at the minimum
cost.
 Inventory Control
 Classification

 Direct inventories

 Raw materials

 In process inventories (work in progress)

 Purchased parts

 Finished goods

 Indirect inventories - will not be part of product

 Tools:- machine tools and hand tools

 Supplies:- accessories of machines, cleaning materials,

lubricants, office stationary.
Need for Inventories (Functions or Advantages)

 To ensure against delays in deliveries due to variation in lead time

 To allow for possible increase in output due to variation in demand

 Maintain smooth and efficient production flow

 To keep better customer relations

 To take advantage of quantity discounts

 To utilize advantage of price fluctuations

 To ensure against scarcity of materials in the market

 To have better utilization of men and machinery

 Determining Inventory Level

 Objective is to minimize inventory cost and maximize profit

 Variables which affect level of inventory are

 Order quantity

 Lead time

 Safety stock

 Reorder point
 Determining inventory level
 Order quantity

The quantity of materials ordered in a single order. It should be decided after

considering cost (EOQ)

 Lead time

Time Interval between initiating the order and the material is actually received.

It consists of

o time taken to deliver purchase order to seller

o time for the seller to get or prepare the inventory for dispatch

o time taken for transportation to and reception of inventory by the

customer
 Determining inventory level
 Safety stock

The use rate and lead time are varying because

 supplier may fail to keep delivery promise

 the forecast of use rate may be inaccurate

 So extra inventory is needed in order to avoid shortage. This is called reserve

stock, safety stock or buffer stock

 It should be optimum depending upon

 Lead time demand

 Carrying charges

 Importance of items
 Determining inventory level
 Reorder point

This indicates the time (level of inventory) at which the purchase order

should be initiated and if not done so, the production may stop due to
shortage.

Eg: Reorder point

= safety stock + (lead time *consumption rate)

= 100 units + ( 1 month* 200 units/month)

= 300 units
Inventory Vs time
Without safety stock
 Inventory Models

 Inventory Models seek to find the best balance between finance, production

& marketing.

 When to order and how much to order.

 Inventory Models

 Static Inventory Models

 Static applies when one decision is allowed, about how much to buy for a
constrained marketing window such as seasonal goods, perishable goods
like vegetables, bread etc.

 In simple, only one order can be placed to meet the demand.

 Repeat orders are either impossible or too expensive.

 Inventory Models
 Dynamic Inventory Models

 Dynamic situations require continuous decisions about how much to

order at different points in time, ie. repeat orders can be placed.

a) Deterministic models
 demand and lead time of an item is constant, ie. known
exactly
o Purchase model
o Production inventory model
b) Probabilistic models
 Variation in demand and lead time
 Inventory cost
Total inventory cost = Ordering cost + Carrying cost (Holding cost)

• Cost of ordering = Cₒ (Rs)

• Order quantity =q

 Unit cost of ordering = Cₒ / q

If ‗s‘ is the annual demand, then

 Annual Ordering cost= Cₒ / q * s

 Annual Carrying cost =Cu * i * q/2

» Cu = Unit purchase cost

» i = Interest rate

» q/2 = avg. inventory level

 Economic Order Quantity (EOQ)
 The economic order quantity is the size of an inventory order which

minimizes the inventory cost. The inventory cost is the sum of procurement

cost and carrying cost.

To determine EOQ two extreme views are encountered:

 Order for very large lots (Produce in very large lots) to minimize the

procurement cost (to minimize set up cost)

 Order for every small lots (produce in very small lots) to minimize

the storage cost or carrying cost.

 Economic Order Quantity (EOQ)

Procurement cost =
Carrying cost

Purchasing Model with No Shortage

Assumptions
 Fixed demand rate ( fixed production rate)
 Instantaneous replacement (Lead time = 0)
 No shortage is permitted.
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ)
Economic Order Quantity (EOQ)
Material Requirement Planning (MRP)
 Material Requirements Planning (MRP)

 Material Requirement Planning (MRP) refers to the basic

calculations used to determine component requirements from end
item requirements.

 It also refers to a broader information system that uses the

dependence relationship to plan and control manufacturing
operations.

 MRP is a technique for determining the quantity and timing for the
acquisition of dependent demand items needed to satisfy master
production schedule requirements.
 Material Requirements Planning (MRP)

 Computer-based information system for ordering and scheduling of

inventories, i.e. what is needed, how much is needed, and when is it

needed

 Functions of MRP system

Control of inventory levels

Assignments of priorities for components

Determination of capacity requirements at a detailed level

Objectives of MRP

 Inventory reduction

 Reduction in the manufacturing and delivery lead times

 Realistic delivery commitments

 Increased efficiency
MRP Inputs MRP Processing MRP Outputs

Changes
Order releases
Master
schedule Planned-order
schedules
Primary
reports Exception reports
Bill of Planning reports
materials MRP computer Secondary
Performance-
programs reports control
reports

Inventory
records Inventory
transaction
MRP Inputs
 Master Production Schedule (MPS) – States which end items are
to be produced, when they are needed, and in what quantities. It
controls the timing and quantity of production for products or
product families

 Bill of Materials (BOM) – a listing of all of the raw materials,

parts, and sub-assemblies needed to produce one unit of a product

 Inventory Records – includes information on the status of an item

during the planning horizon, eg. quantity, supplier, order lead time,
lot size
 MRP Outputs

Primary Reports
 Planned Orders Schedule - indicating the amount and timing of
future orders

 Order Releases - Authorization for the execution of planned orders

 Changes - revisions of due dates or order quantities, or cancellation

of orders
MRP Outputs

Secondary Reports
 Performance-control reports - Evaluation of system operation,
including deviations from plans and cost information

 Planning reports - Data useful for assessing future material

requirements

 Exception Reports - Data on major discrepancies encountered

Benefits of MRP
 Improved customer service
 Quicker response to changes in demand
 Better machine utilization
 Greater productivity
 Reduction in lead time
 Reduction in work- in- process
 Reduction in past due orders
 Elimination of annual inventory
 Reduction in safety stock
 Increase in productivity
 Capacity constraints are better understood
ABC Analysis

 ABC analysis, also known as Selective Inventory Control is a

business term used to define an inventory categorization

technique often used in materials management.

 It can be observed that in a typical industrial situation nearly 10%

of items have 70% of the annual inventory consumption, 20% of

the items have 20% of annual inventory consumption, and 70%

of the items have only 10% of the annual inventory consumption.

ABC Analysis

 Since 70% of the annual consumption of inventory is covered by

only 10% of the items in the inventory, these items deserve highest

attention and are classified as ‗A‘ items.

 Similarly 20% of the items covering 20% of the inventory

investment are B class items and require moderate attention.

 Balance 70% of the inventory items are termed as C class items and

require least attention as .they consume only 10% of the total

inventory cost.
 Steps in ABC Analysis
1) Determine the annual usage in units for each item for the past one-
year.

2) Multiply the annual usage quantity with the average unit price of each
item to calculate the annual usage for each item in monetary terms.

3) Item with highest money usage annually is ranked first. Then the next
lower annual usage item is listed till the lowest item is listed in the
last.

4) Arrange the items in the inventory by cumulative annual usage

(Rupees) and by cumulative percentage. Categorize the items in A, B,
and C categories.
Advantages of ABC Analysis
 A Close and strict control is facilitated on the most important items
which constitute a major portion of overall inventory valuation or
overall material consumption & due to this, costs associated with
inventories maybe reduced.

 The investment in inventory can be regulated in proper manner &

optimum utilization of available funds can be assured.

 A strict control on inventory items in this manner helps in

maintaining a high inventory turnover rates.
 Topic (Part 3)

Project Management

81
Project Management

Project management is the application of processes, methods,

skills, knowledge and experience to achieve

specific project objectives according to the project acceptance

criteria within agreed parameters. Project management has final

deliverables that are constrained to a finite timescale and budget.

Project Management

A key factor that distinguishes project management from just

'management' is that it has this final deliverable and a finite

timespan, unlike management which is an ongoing process.

Because of this a project professional needs a wide range of

skills; often technical skills, and certainly people management

skills and good business awareness.

Project Manager

In the broadest sense, project managers (PMs) are responsible

for planning, organizing, and directing the completion of

specific projects for an organization while ensuring

these projects are on time, on budget, and within scope

 Functions - Project Management

 Managing the risks, issues and changes on the project;

 Monitoring progress against plan;

 Managing the project budget;

 Maintaining communications with stakeholders and the project

organisation;

 Closing the project in a controlled fashion when appropriate.

Characteristics - Project Management
Characteristics - Project Management

 Scope: defines what will be covered in a project.

 Resource: what can be used to meet the scope.

 Time: what tasks are to be undertaken and when.

 Quality: the spread or deviation allowed from a desired

standard.

 Risk: defines in advance what may happen to drive the plan off
course, and what will be done to recover the situation.
 Feasibility Study

A feasibility study is an analysis that takes all of

a project's relevant factors into account—including economic,

technical, legal, and scheduling considerations—to ascertain the

likelihood of completing the project successfully.