NDUSTRIAL MANAGEMENT AND ENGINEERING ECONOMY (MEng 5241)

JIMMA INISTUTE OF TECHNOLOGY

FACULTY OF MECHANICAL ENGINEERING

COURSE TITLE: - INDUSTRIAL MANAGEMENT AND ENGINEERING

ECONOMY

MEng 5241

LEARNING OBJECTIVES

After studying this topic, students are expected to understand and able to
explain:
 The meaning, functions and levels of management;
 The different categories and importance of good management skills;
 Differentiate among three levels of management, and understand the
tasks and responsibilities of managers at different levels in the
organizational hierarchy;
 The purpose of the organization;
 The use of management in improving productivity;
 The need of a Leader and Leadership;
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1. BASIC MANAGEMENT CONCEPTS

Application of Management theories & concepts are now all pervasive and all encompassing.
With best engineering skills and knowledge, professional cannot just sustain since any
operational issues require application of management techniques. Any engineer by profession is
also a manager, as engineers also qualify in the classical test of managerial roles, interpersonal
roles, and informational roles and decisional role.

1.1 INTRODUCTION
The theory of management goes back to the dawn of human civilization, when human being
started group activities for the attainment of some common objectives. Whenever a group is
formed and a group activity is organized to achieve certain common objectives, management is
needed to direct, coordinate and integrate the individual activities of a group and secure team
work to accomplish organizational objectives. The need for efficient management is highly felt
in business activities. The objectives of all business are attained by utilizing the scarce resources
like men, materials, machines, money etc. The basic economic objectives of business activity are
profit maximization or continuous growth and survival. It is only efficient management which
helps in achieving these objectives economically by effective utilization of the scarce resources.
Management is a universal process in all organized economic activities. It is found in every walk
of life where the economical and intelligent applications of scarce resources are involved. It is
not merely restricted to shop, factory or office. It is necessary for a business firm, government
enterprises, education and health services, military organizations, trade associations and so on. In
fact management is an operative force in all complex organizations trying to achieve some stated
objectives.
It can be generalized that no enterprise can enjoy a successful existence and survival without the
competent management. The slow rate of economic growth of under developed countries is due
the poor management. Peter Drucker has rightly remarked that there are no under developed
countries, there are under managed countries. According to Kolin Clark, an eminent economist,
the low rate of economic growth of under developed countries is not due to the dearth of capital,
but it is due to the dearth of the management.
1.2 DEFINITIONS OF MANAGEMENT
Management has been defined by different thinkers in a number of ways. For our understanding
management may be viewed as what a manager does in a formal organization to achieve the
objectives. Some of the important definitions of management are:
1. The art of getting things done through other people.
2. The art of applying the economic principles that underline the control of men and materials
in the enterprise under consideration.
3. The force that integrates men and physical plant in to an effective operating unit.
4. A task of planning, coordinating, motivating and controlling the efforts of others towards
specific objectives.
5. A multipurpose organ that manages a business manages a manager and manages workers
and work.
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6. The creation and maintenance of an internal environment in an enterprise where

individuals, working together in groups, can perform efficiently and effectively towards the
attainment of group goals.
7. Guiding human and physical resources in to dynamic organization units which attain their
objectives to the satisfaction of those served and with high degree of morale and sense of
attainment on the part of those rendering service.
8. The process of planning, organizing, leading and controlling the efforts of organization
members and of using all other organizational resources to achieve stated organizational
goals. The definition suggests that:
a. Management is a continuous process.
b. Several inter-related activities have to be performed by managers irrespective of
their levels to achieve the desired goals.
c. Managers use the resources of the organization, both physical as well as human,
to achieving the goals.
d. Management aims at achieving the organizations goals by ensuring effective use
of resources.
9. A social process involving coordination of human and material resources through the
functions of planning, organizing, staffing, leading and controlling in order to accomplish
stated objectives. There are five parts to a definition of management as a social process:
a. The coordination of resources.
b. The performance of managerial functions as a means of achieving coordination.
c. Establishing the objective or purpose of management process.
d. Management is art of getting things done through other people.
e. It is cyclic nature, i.e. an ongoing (continuous) process that represents planning-
action-control-re-planning cycle.
Planning Directing
Men
Materials
Machines Transformation processes Goals
Money Outputs
Markets
Resources
Organizing Controlling

Fig. 1.1 Process of Management

1.3 CHARACTERISTICS OF MANAGEMENT

The important characteristics of management are:
1. Management is purposeful activity: deals with the clear attainment of clearly defined
objectives.
2. It is an efficient handling of economic resources.
3. Management is a distinct process: consisting of planning, organizing, staffing,
directing and controlling.
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4. Management is universal: is found in every walk of life.

5. Management is a system of authority: managers at different levels posses varying
degrees of authority that enables them to perform their functions effectively.
6. Coordination is the soul of management: necessary in group activities.
7. Management is dynamic: it works in ever changing social environment.
8. Management is decision making: managers decide about what to do, when to do,
where to do etc.
9. Management is a profession: management is not only a science but also an art.

1.4 ADMINISTRATION, MANAGEMENT AND ORGANIZATION

In the study of management there is a controversy in using the terms administration and
management. But it should be clear that administration, management and organization are neither
synonymous nor interchangeable. They have their own field of operation. Administration
determines the objectives and policies of an enterprise. Management caries out these policies to
achieve objectives of the enterprise, for administration and management to function effectively,
there must be proper structuring of the enterprise (organization).
Administration gives proper direction. Management properly executes, it is an execution
function. Organization is an effective machinery to achieve enterprise objectives in a team spirit.
Managements caries out the policies of administration through the framework of an organization.
The following table illustrates the distinctions between administration, management and
organization.

Table1.1.Distinctions between Administration, Management and Organization.

Administration Management Organization

Process of determining the Process of planning the work as Process of dividing work in
object to be achieved per the objective laid by the to different duties and tasks
administration as planned

Lays down policies and Executes policies and programs It organizes the work
principles
Prepares framework under Supervises and controls the Draws the line of authority
which one is asked to work and execution of assigned work and determines the line of
execute action

Provides: Coordinates activities It delegates the authority and

 Direction fixes responsibility
 Guidance and
 Leadership
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1.5 LEVELS OF MANAGEMENT

In any organization all those are responsible for the works of others are called managers. Though
their primary task remains the same getting the things done by other people, there is a wide
variation in their authorities and responsibilities. These differences are mainly due to the levels
of management.
Levels of management refer to a line of separation between different positions drawn with a view
to distinguish each other in respect of their duties, responsibilities, rights and authorities. The
three levels of management that are commonly found in organizations are:
a. Top management
b. Middle management
c. Lower level management
I. Top management: top management constitutes the highest level in the management
hierarchy. This is the policy making level in any organization. This level consists of small
group of executives, board of directors, chairman, managing director, personnel manager,
chief executive etc. they define the aim of the company, establish the primary objectives,
policies and strategies to be pursued to achieve these objectives. They also formulate the
plans of organization and procedure, inaugurate the board program, and approve specific
major objects in the program.
II. Middle order management: middle level occupies a central place in the hierarchy. It is
concerned with execution of the detailed policies and plans determined by top
management (Administration) through the framework of the organization. Middle level
management is answerable to top management. Its main functions are to plan, to guide, to
supervise, to coordinate, to exercise control over the lower level management.
III. Lower level management: this is the lowest level in the hierarchy of management.
Managers at this level function under the control and direction of middle level
management. Their functions are also to plan, to guide, to supervise, to coordinate, to
exercise control, but all these functions are performed to get work done from the
operating staff. This levels management takes orders from middle management and
explains to the workers at operating level. This level includes foreman, supervisor,
superintendent, inspector etc. The following graph makes the above hierarchy more clear:

Administration Top Management

Management
Low Level Management

Fig. 1.2 Levels of Management

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1.6 MANAGERIAL SKILLS

Managerial skill is the ability of a manager to make a smooth functioning team of people
working under him. Management job is different from other jobs. It involves obligation to make
effective utilization of human and material resources. It requires sound judgment to handle
complex situations. Further, the nature of the job becomes increasingly complex at each higher
level because of the increase in the scope of authority and responsibility. Thus the skills required
in management are different in nature at different management levels. Each higher level requires
increased knowledge, broader perspective and greater skills. Manager has to reconcile,
coordinate and upraise the various view points and talents of people working under him towards
the organization goals.
The skills required of a successful manager whether he is working in business organization, an
educational institute or a hospital can be classified as
I. Technical skills
II. Conceptual skills
a. Decision making skills b.Organizational skills
III. Human relation skills
a. Communication skills b. Motivating skills and c. Leadership skills
I. Technical skills refer to the ability to use methods, processes, tools, equipment, techniques
and knowledge of a specialized field. It is primarily concerned with the ways of doing
things. It refers to the proficiency in handling methods, techniques and related to a
specific field of activity. Technical skills are most important for low level managers,
because by nature their job involves supervision of the workers on the shop floor.
Effective supervision, guidance, direction and coordination of the work performed by
the subordinates, therefore depends on the technical skill possessed by the lower level
managers.
II. Conceptual skill is the ability to see the organization as a whole, to recognize inter-
relationships among different functions of the business and external forces and to
guide effectively the organizational efforts. Conceptual skill extend to visualizing the
relation of the organization to industry, to the community and to the political,
economic and social forces of the nation as a whole and even to forces which operate
beyond the national boundaries. It is a creative force within the organization which is
concerned with design and problem solving. A high degree of conceptual skill helps
in analyzing the environment and in identifying the opportunities and threats.
III. Human relation skills are primarily concerned with persons as contrasted with things.
Human skill refers to the ability to work effectively with others and build cooperative
group relations to achieve organizational objectives. It is the ability to work with,
understand and motivate people. He understands why people behave as they do and is
able to make his own behavior understandable to them. He can foresee their reactions
to possible courses of action and is able to take their attitudes in to account.
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Top management Conceptual

Human
Middle management

Low level management Technical

Fig. 1.3 Managerial Skills

2.0 FUNCTIONs OF MANAGEMENT

The job of management is to help an organization make the best use of its resources to achieve
its goals. How do managers accomplish this objective? They do so by performing five essential
managerial tasks: planning, organizing, staffing, leading, and controlling. The arrows linking
these tasks in Figure 1.4 suggest the sequence in which managers typically perform them. French
manager Henri Fayol first outlined the nature of these managerial activities around the turn of the
20th century in General and Industrial Management, a book that remains the classic statement of
what managers must do to create a high-performing organization.

Managers at all levels and in all departments whether in small or large companies, for profit or
not for profit organizations, or organizations that operate in one country or throughout the world
are responsible for performing these four tasks, which we look at next. How well managers
perform these tasks determines how efficient and effective their organizations are.

Figure1.4. Management Process

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2.1: PLANNING
To perform the planning task, managers identify and select appropriate organizational goals and
courses of action; they develop strategies for how to achieve high performance. The three steps
involved in planning are;

i. Deciding which goals the organization will pursue,

ii. Deciding what strategies to adopt to attain those goals, and
iii. Deciding how to allocate organizational resources to pursue the strategies that attain
those goals.
How well managers plan and develop strategies determines how effective and efficient the
organization is its performance level.

Planning strategy is complex and difficult, especially because planning is done under uncertainty
when the result is unknown so that success or failures are both possible outcomes of the planning
process. Managers take major risks when they commit organizational resources to pursue a
particular strategy.

Planning is determining the objectives and formulating the methods to achieve them. It is more
simply said than done. A job well planned is half done. During planning one needs to ask oneself
the following:

What am I trying to accomplish i.e. what is my objective?

What resources do I have and do I need to accomplish the same?

What are the methods and means to achieve the objectives?

Is this the optimal path?

2.1.1:Types of Planning
 Objectives-It is the ultimate goal towards which the activities of the organization are
directed,
 Strategies-general program of action and deployment of resources,
 Policies-general statement or understanding which guide or channel thinking in decision
making,
 Procedures-states a series of related steps or tasks to be performed in a sequential way,
 Rules-prescribes a course of action and explicitly states what is to be done,
 Programs-comprehensive plan that includes future use of different resources,
 Budgets-statement of expected results expressed in numerical terms.
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2.1.2: Principles of Planning

 Take Time to Plan,
 Planning can be Top to Down or Bottom to Top,
 Involve and Communicate with all those Concerned,
 Plans must be Flexible and Dynamic,
 Evaluate and Revise.
2.1.3: Steps in Planning
1. Determining the goals or objectives for the entire organization,
2. Making assumptions on various elements of the environment,
3. To decide the planning period,
4. Examine alternative courses of actions,
5. Evaluating the alternatives,
6. Real point of decision making and
7. To make derivative plans.
2.2: ORGANIZING
Organizing is structuring working relationships so organizational members interact and
cooperate to achieve organizational goals. Organizing people into departments according to the
kinds of job specific tasks they perform lays out the lines of authority and responsibility between
different individuals and groups. Managers must decide how best to organize resources,
particularly human resources.

The outcome of organizing is the creation of an organizational structure, a formal system of task
and reporting relationships that coordinates and motivates members so they work together to
achieve organizational goals. Organizational structure determines how an organization’s
resources can be best used to create goods and services.

2.1.1: Process of Organizing

 Determine what is to be done/ Division of Work:
 Assign Tasks: Departmentalization:
 Link Departments: Hierarchy Development:
 Decide how much Authority to Designate/ Authority, Responsibility and Delegation:
 Decide the Levels at which Decisions are to be made / Centralization vs.
Decentralization:
 Decide how to Achieve Coordination.
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2.1.2: Techniques for achieving coordination.

 Coordination by Rules or Procedures
 Coordination by Targets or Goals:
 Coordination through the Hierarchy
 Coordination through Departmentalization
 Using a Staff Assistant for Coordination:
 Using a Liaison for Coordination:
 Using a Committee for Coordination
 Using Independent Integrators for Coordination:
 Coordination through Mutual Adjustment:
2.3:STAFFING
2.3.1: Definition of staffing
According to koontz and O Donnel “The managerial functions of staffing involves manning the
organizational structure through proper and effective selection, appraisal and development of
personnel to fill the roles designed in to the structure. Selecting and training individuals for
specific job functions, and charging them with the associated responsibilities.

Staffing is concerned with the human resources of the enterprise. It is concerned with acquiring,
developing, utilizing, and maintaining human resources. It is a process of matching jobs with
individuals to ensure right man for the right job.

2.3.2: Steps in staffing

i. Manpower planning,
ii. Recruitment, selection and placement,
iii. Training and development,
iv. Appraisal ,promotion and transfer,
v. Employee remuneration.
2.3.3: Features of staffing
 It is a function of management,
 It is an integral part of the process of management,
 It is concerned with the human resources,
 It is a pervasive function,
 Aims at optimum utilization of human resources.
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2.3.4: Importance of staffing

 It helps in discovering and obtaining competent employees for various jobs,
 It improves the quantity and quality of output by putting right man for right job,
 It improves job satisfaction of employees,
 It reduces cost of personnel by avoiding wastage of human resource,
 It facilitates the growth and diversification.
2.4: LEADING/DIRECTING
An organization’s vision is a short, succinct, and inspiring statement of what the organization
intends to become and the goals it is seeking to achieve its desired future state. In leading,
managers articulate a clear organizational vision for the organization’s members to accomplish,
and they energize and enable employees, so everyone understands the part he or she plays in
achieving organizational goals.

“Direction consist of the process and techniques utilized in using instructions and making
certain that operations are carried out as planned”

Leadership revolves around encouraging all employees to perform at a high level to help the
organization achieve its vision and goals. Another outcome of leader-ship is a highly motivated
and committed workforce. Directing is concerned with the execution of plans through organized
action. It is also known as commanding or actuating.

2.5:CONTROLLING
In controlling, the task of managers is to evaluate how well an organization has achieved its
goals and to take any corrective actions needed to maintain or improve performance. For
example, managers monitor the performance of individuals, departments, and the organization as
a whole to see whether they are meeting desired performance standards. Controlling involves
managers using their power, personality, influence, persuasion, and communication skills to
coordinate people and groups so their activities and efforts are in harmony.

The outcome of the control process is the ability to measure performance accurately and regulate
organizational efficiency and effectiveness. To exercise control, managers must decide which
goals to measure perhaps goals pertaining to productivity, quality, or responsiveness to
customers and then they must design control systems that will provide the information necessary
to assess performance that is, determine to what degree the goals have been met.

2.5.1: Controlling Concepts

 Feed Forward Control-Control that attempts to identify and prevent deviations before
they occur is called feed forward control, sometimes called preliminary or preventive
control.
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 Concurrent Control-Control that monitors ongoing employee activities during their

progress, to ensure they are consistent with quality standards, is called concurrent control.
 Feedback Control-In this case, the control takes place after the action. Sometimes called
post-action or output control.
2.5.2: Steps in the Control Process
 Establish Standards of Performance,
 Measure Actual Performance,
 Compare Performance to Standards, and
 Take Corrective Action
2.5.3: Principles of Effective Control
 Effective controls are timely.
 Control standards should encourage compliance.
 Setting effective standards is important
 Use management by exception.
 Employees should get fast feedback on performance.
 Do not over rely on control reports.
 Fit the amount of control to the task.
3.0 Organisation: Once the objectives, strategies and necessary plans to carry out are
formulated, the next phase in management process is that of organization. Every business needs
to be organized for effective and efficient performance. Organization is thus a function of
management which basically deals with the establishment of organizational structure.
Organization is a backbone of management which establishes relationship between people, work
and resources. Organization involves division of work among people whose efforts must be
coordinated to achieve specific objectives and to implement predetermined strategies.

3.1: Definition of Organisation: A process of

 Identifying and grouping the work to be performed,

 Defining and delegating the responsibility and authority, and
 Establishing the relationships for the purpose of enabling people work efficiently
together in accomplishing objectives.
Other definitions include :

 A process of defining and grouping the activities of an enterprise and establishing

the authority relationship among them.
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 The grouping of activities necessary to accomplish goals and plans, and

assignment these activities to appropriate departments and positions for authority
delegation and coordination.

3.2 Necessity Of Organization

A good organization is necessary for the following reasons:

 Complexity of industry-increasing size, introduction of modern machines, labour

problems, ...
 Growing competition-tough competition existing in market,
 Optimum utilization of resources-men, materials, machines, can be used efficiently
if there is organization.
 Fixation of responsibility and authority- individuals will be provided with
responsibility and authority with defined duties,
 Reduced labour problems-good employer-employee relations if there is good
organization,
 Coordination and directing efforts- a good organization makes it possible to direct
and coordinate the efforts of individuals, departments, etc,
 Facilitates administration-management and operation of the company will be
facilitated,
 Stimulates creativity-sound organization stimulates independent creative thinking
and initiative by providing well-defined areas of work with broad latitude of the
development of new and improved methods of doing work.
3.3 Essential Elements of Good Organization: The essential elements of good
organization are:
 It must be helpful in achieving objectives,
 There must be a harmonious grouping of activities,
 The activities of the organization must be coordinated properly,
 An organization must be complete in all respects, should include all the essential
activities, there should not be repetition of activities,
 The essential elements of good organization are:
 It must be helpful in achieving objectives,
 There must be a harmonious grouping of activities,
 The activities of the organization must be coordinated properly,
 An organization must be complete in all respects, should include all the essential
activities, there should not be repetition of activities,
 An organization should have an effective system of communication,
 The span of control should be reasonable,
 Provision of expansion should be there,
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 Clear and well defined policies and procedures,

 Employees’ satisfaction is essential,
 Proper division of authority and responsibility.

3.4: The Process of Organization: The logical steps involved in the process of organization
are:

 Determination of objectives, strategies, plans and policies,

 Determination of activities,
 Separation and grouping of activities,
 Delegation of authority and responsibility,
 Establishing inter-relationships,
 Providing physical facilities and proper environment,
 Preparation of organization chart.
3.5: Principles of Organization: Some of the important principles to be followed for developing
sound and efficient organization structure are:

1.Consideration of unity of objectives

The objectives must be clearly defined for the entire enterprise, for each department and even for
each position in the organization structure. There must be unity of objectives so that all efforts
can be concentrated on achieving the set goals at minimum cost.

2.Principle of specialization

The organization structure should be formulated in such a way that the activities of the
enterprise are divided according to functions. Work should be distributed among the persons
very carefully on the basis of their skill, experience and ability to do that work.

Some of the important principles to be followed for developing sound and efficient organization
structure are:

3.Principle of authority. Lines of authority should be clearly established in the structure of

organization in order to avoid overlapping, omission of facts, etc.

4. Principle of coordination. Coordination (between departments, sections...) is necessary

for unity of action.

5. Principle of unity of command. Each subordinate should have only one superior and dual
subordination should be avoided.
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6. Principle of span of control. A single executive should not have more people looking for
him for controlling and guidance than he can reasonably manage because the executive will
have limited time and energy/capacity.

The number of persons which can be effectively supervised by a single executive or

department head should be limited to six in average firm; however when the activities are
routine and closely related the span can be as large up to twenty.

7. Principle of exception. Only exceptionally complex matters should be referred to

executives for their decision and matters of routine nature should be decided by subordinates
themselves.

8. Principle of flexibility. The organization structure should be flexible enough to permit

slight alterations and expansions whenever needed, due to changes in circumstances.

9. Principle of simplicity. The organization structure should be simple with minimum

number of levels. If the organization has a large number of levels, the problem of effective
coordination and communication may arise.

10. Principle of responsibility. The superior should be held responsible for the acts of his
subordinates to whom he has delegated authority.

11. Principle of balance. There should be balance between activities and sizes of various
departments, authority and responsibility, standardization of procedures and flexibility,
centralization and decentralization, etc.

12. Principle of continuity. The organizational structure should be set in such a way that it
enables to continue its useful existence for a longer period. This is possible if it is dynamic
and capable of adopting itself to the needs of changing circumstances.

13. Principle of scalar chain. Organization is a vertical hierarchy specifying various chains
of command from top to bottom level. The links of chain should be continuous from top to
bottom. The authority originating from the top should flow below without interruption.

14. Principle of parity between authority and responsibility. Authority means the ability
of the superior to command. Conversely responsibility means the obligation of the
subordinates to a superior to perform the assigned work.

15. Principle of efficiency. The organization structure should enable the enterprise to attain
objectives with minimum cost and effort. It should allow the optimum utilization of its scarce
resources.

16. Principle of communication. A good communication subsystem is essential for smooth

flow of information. For better results it should have free two-way communication. Not
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only executive should pass down information to the subordinates, there should be
feedback

3.6 Organization Structure: Organizational structure is a skeleton or framework that

divides the total activities in to related groups, develops superior and subordinate relationships
among the persons by prescribing the authorities. Thus it indicates the hierarchy, authority
structure and reporting relationships. There are three main types of organizational structure:

i. Functional structure,
ii. Divisional structure and
iii. Matrix structure.
Each structure has its own strong and weak points.

3.6.1: Functional Structure: The employee will work in departments based on what they are
doing.

 It enhances the experience of each function.

 It saves us money because of the economies of scale.
 It makes the coordination between different departments more difficult than other
structures.
 It also does not allow for flexibility because of the centralization.

3.6.2: Divisional Structure:

 Divisional structure divides the employees based on the product/customer

segment/geographical location.
 This structure is a decentralized structure and thus allows for flexibility and quick
response to environmental changes.
 It also enhances innovation and differentiation strategies.
 On the other hand, this structure results in duplication of resources.
 It does not support the exchange of knowledge between people working in the same
profession.
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3.6.3: Matrix Structure:

 Matrix structure combines both structures.

 Some employees will have two managers: functional manager and product manager.
 This type of structure tries to get the benefits of functional structure and also of divisional
structure; however, it is not easy to implement because of the dual authority.
 This structure is very useful for multinational companies.

3.7 Productivity: productivity may be defined as the ratio between output and input. Output
means the amount produced or the number of items produced and inputs are the various
resources employed, e.g, land, building, equipment and machinery, materials, labours, etc.
According to Peter Drucker, “Productivity means a balance between all factors of production that
will give the maximum output with smallest efforts.

3.7.1 Factors affecting productivity:

Factors affecting National Productivity

–Human Resources
–Technology and Capital Investment
–Government Regulation

Factors affecting Productivity in Manufacturing and Services Sectors

–Product and System Design
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–Machinery and Equipment

–Skill and Effectiveness of the Worker
–Production Volume

3.7.2 Measurement of productivity: The basic objectives of productivity measurement are:

–To study performance of a system overtime.
–To have relative comparison of different systems for a given level; and
–To compare the actual productivity of the system with its planned productivity.
The most common way is to express both outputs and the inputs in monetary terms.
•If the outputs and inputs for the period for which productivity is measure, are expressed in
rupees, then
–Aggregate output = Gross sales= G(say); and
–Aggregate input= Cost= C (say)
Aggregate output
Thus total Aggregate Productivity = Aggregate input

3.7.3 Kinds of Productivity Measurement

1. Land Productivity: The productivity of land and building is said to have increased if the
output of goods and services within that area is increased.
2. Material Productivity: The productivity of the materials becomes key factor in economic
production / operation.

Number of units produced

Material Productivity = Cost of material

Raw material productivity can be increased by:

–Proper choice of design;
–Better handling of materials and reduction of rejection;
–Recycling and reuse of materials.
–Searching alternative cheaper material.
3. Labour Productivity: Output can be measured in total quantity produced and labour can be
measured in total man hours required to produce that output.
Number of units produced
Labour Productivity = Man hours utilised

Output and labourcan also be measured in terms of their value in money value. Thus,
Total revenue from production
Labour Productivity = Expenditure on labnour

Labourproductivity can be increased by:

–Providing training to use best method of production.
–Constantly motivating the workers by providing financial and non-financial incentives
–Keeping high morale of the employees.
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–Improving working condition on the plant.

Example: A worker was assembling10 pieces of mobile sets per hour and the same
worker, by improved methods of the work is able to produce13 pieces of mobile sets. The
productivity is improved by 30%.
4. Machine Productivity:
Outputcanbemeasuredintotalquantityproducedandmachinecanbemeasuredintotalmachinehoursreq
uiredtoproducethatoutput.
Actual out put
Machine Productivity = Machine hours utilised

Machine productivity can be improved by:

–Preventive maintenance; –Use of proper speed, feed, etc.
–Using method study techniques (Using best method)
–Use of skilled, properly trained workers.
5. Capital Productivity
Turn over
Capital Productivity = Machine hours utilised

Capital productivity can be improved by:

–Better utilization of capital resources like land, building machines etc.
–Careful make or buy decision.
-By using modern techniques of production, maintenance, flexible manufacturing system, proper
plant layout etc.
3.8 Leadership: Getting things done through others
It is the process of influencing and directing people towards the accomplishment of a goal or
objective. We all practice leadership of some kind daily if not hourly. When take the initiative
and organize a group of friends or coworkers for a fund rising drive to help the needy or for a
weekend together, you have shown leadership.
The leader has to have some traits like: sense mission, Integrity, High character, Loyalty, Job
competence, Commitment, Good judgment, Energy, Decisiveness and selflessness.
Some functions of a leader;
 Determines the goals of the organization.
 Educates the personnel and Works as expert.
 Set the example for the others to follow.
 Provides counseling and guidance.
 Ensures work is done properly.
 Enforces policies and regulations
 Acts as a spokesperson for workers
 Motivates the workers towards the goals.
 Facilitates open communication and establishes performance standards.
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CH2. FORECASTING

2.0 Forecasting, planning and goals: When a product is produced for a market, the demand
occurs in the future. The production planning cannot be accomplished unless the volume of the
demand known. The success of the business in supplying the demand in the most efficient &
profitable way will then depend on the accuracy of the forecasting process in predicting the
future demand.
Forecasting is a common statistical task in business, where it helps inform decisions about
scheduling of production, transportation and personnel, and provides a guide to long-term
strategic planning. However, business forecasting is often done poorly and is frequently confused
with planning and goals. They are three different things.
Forecasting is about predicting the future as accurately as possible, given all the information
available including historical data and knowledge of any future events that might impact the
forecasts.
Goals are what you would like to happen. Goals should be linked to forecasts and plans, but this
does not always occur. Too often, goals are set without any plan for how to achieve them, and no
forecasts for whether they are realistic.
Planning is a response to forecasts and goals. Planning involves determining the appropriate
actions that are required to make your forecasts match your goals.
Forecasting should be an integral part of the decision-making activities of management, as it can
play an important role in many areas of a company. Modern organizations require short-,
medium- and long-term forecasts, depending on the specific application.
Short-term forecasts are needed for scheduling of personnel, production and transportation. As
part of the scheduling process, forecasts of demand are often also required.
Medium-term forecasts are needed to determine future resource requirements in order to
purchase raw materials, hire personnel, or buy machinery and equipment.
Long-term forecasts are used in strategic planning. Such decisions must take account of market
opportunities, environmental factors and internal resources.
An organization needs to develop a forecasting system involving several approaches to
predicting uncertain events. Such forecasting systems require the development of expertise in
identifying forecasting problems, applying a range of forecasting methods, selecting appropriate
methods for each problem, and evaluating and refining forecasting methods over time. It is also
important to have strong organizational support for the use of formal forecasting methods if they
are to be used successfully.
2.1 Demand Forecasting: Forecasting product demand is crucial to any supplier, manufacturer,
or retailer. Forecasts of future demand will determine the quantities that should be purchased,
produced, and shipped. Demand forecasts are necessary since the basic operations process,
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moving from the suppliers' raw materials to finished goods in the customers' hands, takes time.
Most firms cannot simply wait for demand to emerge and then react to it. Instead, they must
anticipate and plan for future demand so that they can react immediately to customer orders as
they occur. In other words, most manufacturers "make to stock" rather than "make to order" –
they plan ahead and then deploy inventories of finished goods into field locations. Thus, once a
customer order materializes, it can be fulfilled immediately – since most customers are not
willing to wait the time it would take to actually process their order throughout the supply chain
and make the product based on their order. An order cycle could take weeks or months to go
back through part suppliers and sub-assemblers, through manufacture of the product, and through
to the eventual shipment of the order to the customer.
Firms that offer rapid delivery to their customers will tend to force all competitors in the
market to keep finished goods inventories in order to provide fast order cycle times. As a result,
virtually every organization involved needs to manufacture or at least order parts based on a
forecast of future demand. The ability to accurately forecast demand also affords the firm
opportunities to control costs through leveling its production quantities, rationalizing its
transportation, and generally planning for efficient logistics operations.
In general practice, accurate demand forecasts lead to efficient operations and high levels
of customer service, while inaccurate forecasts will inevitably lead to inefficient, high cost
operations and/or poor levels of customer service. In many supply chains, the most important
action we can take to improve the efficiency and effectiveness of the logistics process is to
improve the quality of the demand forecasts.

2.2 Commonly used methods: Typically, businesses use relatively simple forecasting methods
that are often not based on statistical modeling. However, the use of statistical forecasting is
growing and some of the most commonly used methods are listed below.
1. Naïve techniques - adding a certain percentage to the demand for next year.
2. Opinion sampling - collecting opinions from sales, customers etc.
3. Qualitative methods
4. Quantitative methods - based on statistical and mathematical concepts.
2.2.1 Qualitative Forecasting methods:
1. Executive Committee Consensus: Knowledgeable executives from varous departments
within the organization form a committee charged with the responsibility of delivoloping
a sales forecast. The committee may use many inputs from all parts of the organization
and may have staff analysts provide analysis as needed. This method is the most common
forecasting method.
2. Delphi Method: This method is used to achieve consensus within a committee. In this
method executives anonymously answer a series of questions on successive rounds. Each
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response is fed back to all participants on each round, and the process is then repeated. As
many as six rounda may be required before consensus is reached on the forecast. This
method can result in forecasts that most participants have ultimately agreed to inspite of
their initial disagreement.
3. Survey of sales force: Estimates of the future regional sales are obtained from individual
members of the sales force. These estimates are combined to form an estimate of sales for
all regions. Managers must then transform this estimate into a sales forecast to ensure
realistic estimates. This is a popular forecasting method for companies that have a good
communication system in place and that have sales persons who sell directly to
customers.
4. Survey of customers: Estimates Estimates of the future sales are obtained directly from
customers. Individual customers are surveyed to determine what quantities of the firm’s
products they intend to purchase in future time period. A sales forecast is determined by
combining individual customers’s responses. This method may be preferred by
companies that have relatively few customers.
5. Historical Analogy: This method ties the estimate of furure sales of a product to
knowledge of a similar product’s sales. Knowledge of one product’s sales during various
stages of its product life cycle is applied to the estimate of sales for a similar product.
This method may be particularly useful in forecasting sales of new products.
6. Market Research: In market surveys, mail questionaries, telephone interviews, or field
interviews form the basis for testing hypotheses about real markets. In market tests,
products marketed in target regions or outlets are statistically extrapolated to total
markets. These methods are ordinarly preferred for new products or for existing products
to be introduced in new market segments.
2.2.2 Quantitative Methods of Forecasting
1. Causal –There is a causal relationship between the variable to be forecast and another
variable or a series of variables. (Demand is based on the policy, e.g. cement, and build
material.
2. Time series –The variable to be forecast has behaved according to a specific pattern in
the past and that this pattern will continue in the future.
1. Causal:
Demand for next period = f (number of permits, number of loan application …….)
2. Time series: D = F( t), where D is the variable to be forecast and f(t) is a function
whose exact form can be estimated from the past data available on the variable.
The value of the variable for the future is a function of its values in the past. D t+1=f(
Dt, Dt-1, Dt-2,…..). The most common technique for estimation of equation is
regression analysis.
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