2. MEANING OF PRODUCTION
• Production is an intentional act of producing something in an organized manner. It is
the fabrication of a physical object through the use of men, material and some
function which has some utility e.g. repair of an automobile, legal advice to a client,
banks, hotels, transport companies etc. Thus, irrespective of the nature of
organization, production is some act of transformation, i.e. inputs are processed and
transformed into some output. The main inputs are information, management,
material, land, labour and capital.
4. Thus, the basis of Production is the transformation of inputs into
goods and services.
The main objectives of a production process are:
(i) optimum use of resources at optimum cost.
(ii) manufacture of the desired quality and quantity of goods and
services.
5. Production System
• A system is a logical arrangement of components designed to achieve particular objectives according to
a plan.
• According to Webster, “System is a regularly interacting inter- dependent group of items
forming a unified whole” A system may have many components and variation in one component is
likely to affect the other components of the system e.g. change in rate of production will affect
inventory, overtime hours etc. Production system is the framework within which the production
activities of an organization are carried out.
• At one end of system are inputs and at the other end output. Input and output are linked by certain
processes or operations or activities imparting value to the inputs.
• These processes, operations or activities may be called production systems.
6. Elements of Production System
(i) Inputs: Inputs are the physical and human resources utilised in the production process. They consist
of raw materials, parts, capital equipment, human efforts etc.
(ii) Conversion Process: It refers to a series of operations which are performed on materials and parts.
(iii) Outputs: Outputs are the products or completed parts resulting from the conversion process.
Output generates revenue.
(iv) Storage: Storage take place after the receipt of inputs, between one operation and the other and
after the output.
(v) Transportation: Inputs are transported from one operation to another in the production process.
(vi) Information: It provides system control through measurement, comparison, feedback, and
corrective action.
7. Types of Production Systems
There are two main types of production systems:
(i) Continuous System
(ii) Intermittent System
8. Types of Production Systems
Production
System
Continuous
or Flow
Production
System
Mass
Production
Process
Production
Analytical Synthetic
Assembly
Lines
Intermittent
Production
System
Job
Production
Batch
Production
9. i) Flow or Continuous System: According to Buffa, “Continuous flow production
situations are those where the facilities are standardized as to routings and flow
since inputs are standardized. Therefore, a standard set of processes and
sequences of process can be adopted”. Thus, continuous or flow production refers to
the manufacturing of large quantities of a single or at most a very few varieties of
products with a standard set of processes and sequences. The mass production is carried
on continuously for stock in anticipation of demand.
10. Characteristics:
(i) The volume of output is generally large (mass production) and goods are produced in
anticipation of demand.
(ii) The product design and the operations sequence are standardized i.e. identical products are
produced.
(iii)Special purpose automatic machines are used to perform standardized operations.
(iv) Machine capacities are balanced so that materials are fed at one end of the process and finished
product is received at the other end.
(v) Fixed path materials handling equipment is used due to the predetermined sequence of
operations.
(vi) Product layout designed according to a separate line for each product is considered.
11. Merits:
(i) The main advantage of continuous system is that work-in-progress inventory is minimum.
(ii) The quality of output is kept uniform because each stage develops skill through repetition
of work.
(iii) Any delay at any stage is automatically detected.
(iv) Handling of materials is reduced due to the set pattern of production line. Mostly the
materials are handled through conveyer belts, roller conveyers, pipe lines, overhead cranes etc.
(v) Control over materials, cost and output is simplified.
(vi) The work can be done by semi-skilled workers because of their specialization.
12. Demerits:
• Continuous system, however, is very rigid and if there is a fault in one operation
the entire process is disturbed. Due to continuous flow, it becomes necessary to
avoid piling up of work or any blockage on the line. Unless the fault is cleared
immediately, it will force the preceding as well as the subsequent stages to be stopped.
Moreover, it is essential to maintain standby equipment to meet any breakdowns
resulting in production stoppages. Thus, investments in machines are fairly high.
13. Continuous production is of the following
types:
(a) Mass Production: Mass production refers to the manufacturing of standardized parts or
components on a large scale. Mass production system offers economies of scale as the volume of
output is large. Quality of products tends to be uniform and high due to standardization and
mechanization. In a properly designed and equipped process, individual expertise plays a less
prominent role.
(b) Process Production: Production is carried on continuously through a uniform and
standardized sequence of operations. Highly sophisticated and automatic machines are used.
Process production is employed in bulk processing of certain materials. The typical processing
Industries are fertilizers plants, petrochemical plants and milk dairies which have highly automated
systems and sophisticated controls. They are not labor-intensive and the worker is just an operator
to monitor the system and take corrective steps if called for.
14. On the basis of the nature of production process, flow production may be classified into
Analytical and Synthetic Production.
In Analytical Process of production, a raw material is broken into different products e.g. crude oil is
analyzed into gas, petrol etc. Similarly, coal is processed to obtain coke, coal gas, coal tar etc.
Synthetic Process of production involves the mixing of two or more materials to manufacture a product
for instance, lauric acid, myristic acid, stearic acid is synthesized to manufacture soap.
15. (c) Assembly Lines: Assembly line a type of flow production which is developed in the automobile
industry in the USA. A manufacturing unit prefers to develop and employ assembly line because it helps to
improve the efficiency of production. In an assembly line, each machine must directly receive material
from the previous machine and pass it directly to the next machine. Machine and equipment should be
arranged in such a manner that every operator has a free and safe access to each machine. Space should be
provided for free movement of fork lifts, trucks etc. which deliver materials and collect finished products.
https://youtu.be/zQeQWGqfFN0?si=MG4NFxyCp8AOuD8y
16. (ii) Intermittent Production System
• According to Buffa, “Intermittent situations are those where the facilities must be flexible
enough to handle a variety of products and sizes or where the basic nature of the activity
imposes change of important characteristics of the input (e.g. change. in the product design).
In instances such as these, no single sequence pattern of operations is appropriate, so the relative
location of the operation must be a compromise that is best for all inputs considered together”.
• In the industries following the intermittent production system, some components may be made for
inventory but they are combined differently for different customers. The finished product is
heterogenous but within a range of standardized options assembled by the producers. Since production
is partly for stock and partly for consumer demand, there are problems to be met in scheduling,
forecasting, control and coordination.
17. Characteristics:
(i) The flow of production is intermittent, not continuous.
(ii) The volume of production is generally small.
(iii) A wide variety of products are produced.
(iv) General purpose, machines and equipment are used so as to be adaptable to a wide variety of
operations.
(v) No single sequence of operations is used and periodical adjustments are made to suit different jobs or
batches.
(vi) Process layout is most suited.
18. Intermittent Production May be of two
types:
(a) Job Production: Job or unit production involves the manufacturing of single complete unit with the
use of a group of operators and process as per the customer’s order. This is a special-order type of
production. Each job or product is different from the other and no repetition is involved. The product is
usually costly and non-standardized. Customers do not make demand for exactly the same product on a
continuing basis and therefore production becomes intermittent. Each product is a class by itself and
constitutes a separate job for production process. Ship building, electric power plant, dam construction
etc. are common examples of job production.
19. Characteristics:
(i) The product manufactured is custom-made or non-standardised.
(ii) Volume of output is generally small.
(iii) Variable path materials handling equipment are used.
(iv) A wide range of general-purpose machines like grinders, drilling, press,
shaper etc. is used.
20. Merits:
It is flexible and can be adopted easily to changes in product design. A fault in
one operation does not result into complete stoppage of the process. Besides it
is cost effective and time-effective since the nature of the operations in a group
are similar. There is reduced material handling since machines are close in a cell.
The waiting period between operations is also reduced. This also results in a
reduced work-in-progress inventory.
21. Demerits:
Job shop manufacturing is the most complex system of production e.g. in
building a ship thousands of individual parts must be fabricated and assembled.
A complex schedule of activities is required to ensure smooth flow of work
without any bottlenecks. Raw materials and work-in-progress inventories are
high due to uneven and irregular flow of work. Workloads are unbalanced,
speed of work is slow and unit costs are high.
22. (b) Batch Production: It is defined as “The manufacture of a product in small or large batches or
lots at intervals by a series of operations, each operation being carried out on the whole batch
before any subsequent operation is performed”. The batch production is a mixture of mass production
and job production. Under it machines turn out different products at intervals, each product being
produced for comparatively short time using mass production methods.
Both job production and batch production are similar in nature, except that in batch production the
quantity of product manufactured is comparatively large.
23. Inventory
Inventory simply means ‘a stock of goods. It can simply be divided into three categories i.e. raw materials,
finished goods, and work in process. It is any tangible property that is:
• held for sale in the ordinary course of a business (Finished Goods)
• held in the production process (Work in process)
• consumed in the production process (Raw Materials)
It includes –
• Raw Material
• Consumables
• Finished goods
• Supplies and spares
• Equipment and Components
24. According to Bolten S.E., “It refers to a stock-pile of a product, a firm is offering for sale and
components that make up the product.”
The inventory may be classified into three categories:
• Raw material and supplies: It refers to the unfinished items which go in the production process.
• Work in Progress: It refers to the semi-finished goods which are not 100% complete but some work has
been done on them.
• Finished goods: It refers to the goods on which 100% work has been done and which are ready for sale
25. Motives for Holding Inventory
• Transaction Motive i.e. finished goods for the purpose of sale, raw materials for production.
• Precautionary Motive i.e. raw materials and finished goods to meet unforeseen circumstances or
emergencies.
• Speculative Motive i.e. to capitalize on market opportunities (shortage in market) and make profit.
26. Types of Inventory
(1) Movement Inventory – It refers to stock of goods that take substantial amount of time to be transported from one
place to another. They are also known as transit inventories.
(2) Buffer Inventory – Goods held in stock to meet the uncertainties related to demand and supply of goods are called
buffer inventories. These are goods that require a substantial lead time (time taken between placing an order and having
the good ready for use) and hence are held in excess of the expected demand to meet emergency situations and
fluctuations in demand or supply.
(3) Anticipation Inventories – It refers to stock of goods that are held in bulk due to an anticipated shortage or
expected demand rise in the future. For e.g. Rain coats and Umbrellas kept in stock just before a rainy season, or stock of
Air conditioners before summers.
27. (4) Decoupling Inventories – Stock of goods held between different stages in a production process to
decouple or disengage one stage from the other are known as decoupling inventories. The main purpose
of holding such goods is to ensure smooth running of the production process, therefore, even if one
machine required for a particular stage breaks down, work on other stages in production won’t be
hampered.
(5) Cycle Inventories – Cycle inventories are maintained for goods that are sold in bulk or big quantities,
therefore, rather than making frequent purchases in small amounts which increases the cost of obtaining
the products, goods are bought in very large lots to reduce to cost of obtaining goods.
28. Inventory Costs
• Purchase Costs – Cost of purchasing raw materials from various sources.
• Ordering Cost / Procurement Cost – Cost associated with replenishment of raw material i.e.
processing of order, transportation, quality inspection etc.
• Carrying Cost / Holding Cost – Cost related to storage of goods like rent of warehouse, electricity,
heating and lighting, staff salaries etc.
• Stock Out Cost – Cost associated with lack of goods or not serving the customers due to shortage of
goods.
29. Factors affecting the level of inventory
1. Nature of business: The level of inventory will depend upon the nature of business whether it is a
retail business, wholesale business, manufacturing business or trading business.
2. Inventory turnover: Inventory turnover refers to the amount of inventory which gets sold and the
frequency of its sale. It has a direct impact on the amount of inventory held by a business concern.
3. Nature of type of product: The product sold by the business may be a perishable product or a durable
product. Accordingly, the inventory has to be maintained.
4. Economies of production: The scale on which the production is done also affects the amount of
inventory held. A business may work on large scale in order to get the economies of production.
30. 5. Inventory costs: More the amount of inventory is held by the business; more will be the operating cost
of holding inventory. There has to be a trade-off between the inventory held and the total cost of inventory
which comprises of purchase cost, ordering cost and holding cost.
6. Financial position: Sometimes, the credit terms of the supplier are rigid and credit period is very short.
Then, according to the financial situation of the business the inventory has to be held.
7. Period of operating cycle: If the operating cycle period is long, then the money realization from the
sale of inventory will also take a long duration. Thus, the inventory managed should be in line with the
working capital requirement and the period of operating cycle.
31. Inventory Control
Inventory control or stock control is the process of managing inventory items in a
company’s warehouse and other locations. It consists of systems and procedures that
monitor the movement and storage of goods to help businesses maintain a sufficient
supply in good condition. Establishing an inventory control system empowers businesses
to satisfy customer demands and maximize profits.
32. Methods of Inventory Control
• FIFO (first in first out) – This method assumes that goods that are added to the inventory first must
also be removed from the inventory first i.e. goods that are bought first must be sold first. This method
is generally used by firms dealing with perishable goods or goods that are subjected to quick
obsolescence.
• LIFO (last in first out) – This method assumes that goods that are added to the inventory last must be
sold first or removed from the inventory first. This method is usually used by firms dealing with goods
that are not perishable or do not become obsolete quickly.
33. Techniques of Inventory Control
• EOQ Model – Economic Order Quantity
• ABC Analysis – Always Better Control
• HML Analysis – High, Medium, Low
• VED analysis – Vital, Essential, Desirable
• MRP – Material Requirement Planning
• Max Mini System
• Two Bin system
• Buffer Stock
• JIT – Just in Time etc.
34. 1. ECONOMIC ORDER QUANTITY (EOQ)
• The EOQ refers to the order size that will result in the lowest total of order and carrying costs for an
item of inventory. If a firm place unnecessary orders it will incur unneeded order costs. If a firm places
too few order, it must maintain large stocks of goods and will have excessive carrying cost. By
calculating an economic order quantity, the firm identifies the number of units to order that result in the
lowest total of these two costs.
• Economic order quantity can be calculated from any of the following two methods:
Formula Method
Graphic Method
35. Formula Method:
• It is also known as ‘SQUARE ROOT FORMULA’ or ‘WILSON FORMULA’ as given below:
• EOQ = √ 2RO /C
Where, EOQ = Economic Order Quantity
• R = Annual Requirement or consumption in units
• O = Ordering Cost per order
• C = Carrying Cost per unit per year
• No. of orders = R/EOQ
• Time gap between two orders = No. of days in a year/No. of orders
• Total Cost = Purchase Cost + Carrying Cost + Order Cost
= (R x Unit Price) + (EOQ/2 x C) + (R/EOQ x O)
36. Graphic Method
• The economic order quantity can also be determined with the help of graph. Under this method, ordering
costs, carrying costs and total inventory costs according to different lot sizes are plotted on the graph. The
intersection point at which the inventory carrying cost and the ordering cost meet, is the economic order
quantity. At this point the total cost line is also minimum.
37. Assumptions:
The following assumptions are made:
The rate of consumption of inventory is assumed to be constant.
Costs will not change over time.
Lead time is assumed to be known and constant.
Per order cost, carrying cost and unit price are constant.
Carrying or holding costs are proportionate to the value of stock held.
Ordering cost varies proportionately with the price.
38. EOQ
Q.1. Calculate the economic order quantity from the following particulars:
Annual requirement =2,000 units
Cost of materials per unit =Rs. 20
Cost of placing and receiving one order= Rs. 40
Annual carrying cost of inventory, 20% of inventory value.
39. 2. RE-ORDER POINT
After determining the optimum quantity of purchase order, the next problem is to specify the point of time
when the order should be placed. Re-order level is that level of inventory at which an order should be placed for
replenishing the current stock of inventory. The determination of re-order point depends upon the lead time,
usage rate and safety stock. These terms are explained below:
1. Lead Time: Lead time refers to the time gap between placing the order and actually receiving the items
ordered.
2. Usage Rate: It refers to the rate of consumption of raw material per day.
Usage Rate = Total annual consumption / No. of days in a year.
3. Safety Stock: It is the minimum quantity of inventory which a firm decides to maintain always to protect
itself against the risk and losses likely to occur due to stoppage in production and loss of sale, due to non-
availability of inventory.
40. Formulae:
• Re Order Point = (Lead Time x Usage Rate) + Safety Stock or
• Re Order Point = Maximum usage x Maximum Re Order Period
• Safety Stock = Usage Rate x Days of safety
41. 3. Fixing Stock Levels
• Fixing of the stock levels is necessary to avoid increased cost on account of high inventory levels and to avoid loss of sales or
stoppage of production due to low level of inventory. Therefore, efforts should be made to keep the inventory level within
the specified minimum and maximum limits. The maximum & minimum stock levels are fixed after considering the following
factors:
Availability of ample storage space.
Lead time involved i.e. time required in receiving the goods ordered.
Availability of working capital to meet the routine expenses.
Average rate of consumption of material
Cost of storage and insurance of inventory.
Risk of obsolescence and deterioration of the inventory.
Economy in prices such as making bulk purchases during period of low prices.
Re-order level.
42. Formulae:
• Maximum Level = (ROL + ROQ) – (Minimum Usage x Minimum Re Order Period) or
• Maximum Level = Safety Stock + EOQ
• Minimum Level = Re-order level – (Normal Usage Rate x Normal Re-order period) = Re Order Level –
(Normal Usage x Average Re Order Period)
• Average stock level = (Maximum level + Minimum level) / 2 or
• Average stock level = (Minimum level + 1/2 Re- order Quantity)
Note: ROL – Re Order Level
ROQ – Re Order Quantity
ROQ is also known as EOQ (Economic Order Quantity)
43. DANGER LEVEL
• Danger level refers to the level below the minimum stock level. The following factors should be considered to determine
the danger level:
Causes for failure of regular supplies
Easy and quick sources of supply
Rescheduling of work- order in the light of such exigencies
Quickest means of transportation
Emergency period of procurement.
Formula
Danger Level = Average Consumption x Maximum reorder period for emergency purchases
44. 4. SELECTIVE INVENTORY CONTROL
Controlling all inventory in the stock is a very difficult task especially where huge inventories are
maintained of variety of items. In such circumstances, following smart techniques for managing and
controlling the different types of inventories held are as follows:
(i) ABC Analysis: ABC analysis may be defined as a technique where inventories are analyzed with
respect to their value so that costly items are given greater attention and care by the management.
Three categories are created namely A, B and C. Following table represents the approximate
classification of items along with their value and quantity.
45. ABC Analysis:
Category % of Total Value % of Total Quantity
A 70-80 5-10
B 20-25 20-30
C 5-10 60-70
46. Criteria for ABC classification
"A" Category:
• These items generally represent approximately 15%-20% of an overall inventory by quantity, but represent 80% of the value of an
inventory.
• These are high value items and are extremely important.
• By paying close attention to the optimization of these items in inventory, a significantly positive impact may be created with a
nominal increase in the inventory management costs.
• Very strict control is kept on these items.
• Accurate records need to be maintained for these items.
• Because of the high value of these items, frequent value analysis is required.
• Appropriate order pattern should be chosen such as ‘Just- in- time’ to avoid excess capacity
47. "B" Category:
• These items represent 30%-35% of inventory items by item type, and about 15% of the value.
• These are intermediary value items.
• These items can generally be managed through period inventory and should be managed with a formal inventory
system.
• Comparatively less control than ‘A’ category items is needed.
• Proper records should be maintained for these items.
48. "C" Category:
• These items represent 50% of actual items but only 5% of the inventory value.
• These are low value items and are marginally important.
• Most organizations can afford a relatively relaxed inventory process surrounding these items.
• Least amount of control is required.
• Minimum possible records should be maintained in the simplest form.
49. (ii) VED Analysis: VED stands for Vital, Essential and Desirable. Highest control is over vital items, medium control
is exercised over essential items and least control is inferred over desirable items.
• Vital (V): These are the most critical or most important items you can say. Without them, a system or business can’t
work. So, It’s necessary to always have them in stock. Examples are raw materials, components, oxygen tanks, motors,
etc.
• Essential (E): These items are important but not as critical as vital items. If they are unavailable, the system can still
function for a short time. but it will eventually face problems if it stays unavailable for a long time. Examples are
surgical gloves, safety gear, spare parts, office supplies, etc.
• Desirable (D): These are the least important items. They’re nice to have and can make things easier, but not having
them won’t cause major issues. Examples are promotional items, coffee machines, luxury items, etc.
50. (iii) SDE Analysis: SDE stands for Scarce, Difficult and Easy. Highest control is over
scarce items, medium control is exercised over difficult items and least control is inferred
over easily available items.
(iv) FSN Analysis: FSN stands for Fast Moving (F), Slow Moving (S) and fast-moving
(N). Highest control is kept over fast-moving items, medium control is exercised over
slow-moving items and least control is inferred on non-moving items.
51. INVENTORY CONTROL RATIOS
• Ratios related to inventory are calculated and further used as a
measure of control.
• Stock Turnover = Cost of goods sold / Average Stock
52. TWO BIN SYSTEM
• Under two bin system, all the inventory items are stored in two separate bins. Bin means container of
any size. In the first bin, a sufficient amount of inventory is kept to meet the current requirement over a
designated period of time. In the second bin, a safety stock is maintained for use during lead time.
When the stock of first bin is completely used, an order for further stock is immediately placed. The
material in second bin is then consumed to meet stock needs until the new order is received. On receipt
of new order, the stock used from the second bin is restored and the balance is put in the first bin.
Therefore, depletion of inventory in the first bin provides an automatic signal to re-order. Thus, this
technique is traditional yet logical and can be used by illiterate workers also without using any formula.
