INDUSTRIAL.

ENGINEERING
AND
MANAGEMENT
INDUSTRIAL ENGINEERING
AND
MANAGEMENT

By
Dr. Ravi Shankar
PhD (IIT, Delhi), MBA (Systems & Operations),

M.Sc. (Engineering), B.E. Moldmedalist)

Revised By
Dr. G. Kannan

(761sGALGOTIA
'
Publications Pvt. Ltd.
5, Ansari Road, Darya Ganj, New Delhi-110 002
Dr. Ravi Shankar
INDUSTRIAL ENGINEERING AND MANAGEMENT

© Copyright 2000 by Galgotia Publications Pvt. Ltd.

All rights reserved.

No part of this book may be reproduced in any form, by photostat,

microfilm, xerography, or any other means, or incorporated into any
information retrieval system, electronic or mechanical, without the
written permission of the copyright owner.

· First Edition - 2000

· Second Edition - 2009
· Reprint - 2015
· Reprint - 2016 2017
· ISBN - 978-81-7515-605-0

Published by Galgotia Publications Pvt. Ltd.,

5, Ansari Road, Darya Ganj, New Delhi- 110 002

Printed at- Earam Offset Printers, Delhi- 110053

Galgotia Publications pvt. ltd.

- - -
 Dedicated to
my
respected Guru

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 PREFACE TO THE SECOND EDITION
The appearance of the large number of interesting and important developments prodded me to
make a substantial revision on the Book. The major addition to the book is as follo,v�:

Human Resource Management And Human Resource Planning: Human Resource Management.
Factors Contributing to the Growing Importance of HRM. Organizational Behaviour, The Goals of
Organizational Behavior, Individual, Group. Team, Human Resource Planning (HRP). Strategic·
Planning and the Human Resource Planning Process.

· Purchasing: Functions of Purchasing Department, Duties ofPurchasing Offtcer,.Methods ofPurchasing,

Purchasing Process/Procedure, PLtrchasing/Buying Decision as Per Procedure, Purchase Requisiiion
Form, Purchasing Proe:edure, Tenders. Notice Inviting Tenders,. Compar�tive Statement, Importance of
Materials Management. Store Records, Purchi;ising Systems/Buying Techniques, Purchasing/Buying
Techniques, Vendoy Rating.

Lean Manufacturing: Common Methods Used in Lean Manufacturing, Mechanisms for Environmental
Improvement through Lean Implementation, Barriers to Successful lmplementati_on. and Flexible
Manufacturing Systems (FMS)

Group Technology: Production Flow· Analysis (PFA), PFA Procedure. Objectives in Cellular
Manufacturing.

Industrial Psychology: Evolution oflndustrial Psychology, Primary Role oflndustrial Psychologists.

Service Operations And Service Products: Service Operations Management, Services Products and
Service Characteristics, Operations Management in the Service Sector.

Ergonomics: A Man-Machine System, Design and Types of Controls, Anthropometry, Principles in the
Application of Anthropometric Data, Anthropometry for Workplace Design, Ergonomics in Computer
Workstation, Positioning the Monitor Screen, LightirJg, Ventilation, Noise Levels in the Coinputer
Workstation, Computer Injuries. ·

Marketing Management: Marketing Concept, Marketing Mix, Functions of Marketing, Product Life
Cycle, Pricing, Type_s ofPricing, Market Research.

Six Sigma: Six Sigma Framework, Five Elements of the Six-Sigma Framework, Define-Measure­
Analyze-lmprove Control (DMAIC) Process. Total Quality Management ("TQM) c1nd Six Sigma,
International_Organization for Standardization (ISO) 9000 Series and Six Sigma.

Agile Manufacturing: Need for Agile- Manufacturing, Four Principles, Co1npa1'ison between Lean
Manufacturing and Agile Manufacturing, Difference between Traditional and Current Practice in
Manufacturing.

Author·
------------------------------��- PREFACE

Writing a book is a lonely and tiresome task. It requires a lot of reading, writing, typing and editing.
Before you get a book of around eight hundred pages, a lot of revisions and changes have already taken
place at different stages of the book preparation. But like any othe.r finished product, ultimately when
· the book comes out, it should contain some real value for its users. I believe that the effort that has
b_een put in structuring, writing and presenting the material for a textbook like this, would be of some
real use to its intended readers. ·
WHY THIS B00.K
Industrial Engineering and Management is one ofthe inost attractive specializations for Mechanical Engineering
graduates. This course is also a core course in almost. all the branches of Engineering. Howtver, at some
places, its name differs a little bit, for example: Engineering Mangement, Engineering Economy and Management,
Industrial Management, etc. This· book is aimed to cater to the need of these courses.
Th�re is really a dearth of a comprehensive book that covers both the traditional and 'recent issues
in Industral Engineering. Without exposure to the .recent developments, graduating engineers will certainly
be off-guarded in the industry/field. This book is an attempt to bridge the gap that most of the available
books in this subject seem to inherit and fail to the cover recent developments in a systematic manner.
COV�RAGE
The book is carefully crafted to cover the tradition a,reas as well as recent areas, change management
areas as well as IT-areas, quantitative models as well as management areas, and all that are relevant
for Industrial Engineers. The coverage of this book includes many focal areas such as:
Traditional Areas: Facility Planning, Material Handling, Inventory Control, Production Planning and ··
Control, Quality Control, Reliability, Scheduling, Product Development, Value Engineering, Work Study,'
Work Measure�ent, Job-evaluation and merit rating, Wage-inc.entive plans, etc.
Recent Areas: Just-in-Time, Supply Chain Management, Value Chain Management, Theory of Constraints,
etc.
Change Management: Continuous Improvement (TQM), Benchmarking and Reeng_ineering.
IT-areas: MRP, · MRP U, ERP, Emergence of e-business, etc..
• J ' .
'

Quantitative Models: Linear Programming, Transportation Model, Assignment model, Queuing Models,
CfM/PERT, Simulation, etc.
Engineering Economy: Break Even. Analysis, Replacement and Selection decisions, Engineering
Economy models.
 INDUSTRIAL ENGINEERING AND MANAGEMENT

Management Areas: Principles of Management, Organisation, Leadership, Entrepreneurship, type of

Business Systems, etc.
The coverage of the topics are planned to integrate concepts, models, numerial examples and idustrial
applications. Sufficient care has been taken to present the recent developments and trends in each area.
bespite this, it is always possible that some relevant topics outlined in the syllabus of few Universities
are still missing. We would appreciate if such gaps are brought to the attention of the author so that
improvements may be undertaken in the -.next edition .. We would also appreciate and acknowledge for
any constructive suggestion for the improvement of this book. The wide coverage of the book makes
it useful for many courses in M. Tech., M.B.A., PGDBM and D.B.A.Programmes, MCA and BCAProgrammes,
M.Com., CA, ICWA and AMIE Programmes, etc..

ACKNOWLEDGEMENTS
During the preparation of this book, literature from various journals, magazines, and on-line articles
have been referred. I express n1y gratitude to all such authors, publishers and institutions; many of them
have been listed in references. If some are left out inadvertly, I seek their pardon.
I express my sincere gratitude to Prof. Prem Vrat (IIT Delhi). His excellence in Industrial Engineering
is � benchmark. He is a role-model and inspiration for many like me. I wish to acknowledge my sincere
thanks to-Prof. S.G. Deshmukh (IIT Delhi), another role-model for excellence in teaching and research
of Industrial Engineering. It is no surprise that many of my understandings are influenced by what.
I have learned from my professors and students, I thank them all. There might be many gaps in the
book, but all these are due to my own limitations and , lack of perfection.
I also express my·sincere thanks t� Prof. D.K. Ban�et and Prof. Arnn' Kanda for their e�couragement.s.
I thank my other colleagues and friends , for inspiration and encouragement. I thank my publishers,
Mr. Suneel Galgotia and his Production M�nager, Mr. A.S. Khan for their g'reat support, hard work and
help during the preparation of this book.
I believe that the one who deserves all the best adjectives in this ackno�ledgment is none other
than my wife, Dr. Poonam. Without her support, it is impossible to write a book of this magnitude.
My two little children, Pratyush and Megha deserve special mention of'appreciation. Despite their tender
age, they are intelligent enough to understand that this work had some purpose and urgency. During
last couple of years. all the time spent in writing this Book actually belonged to · them.

Dr. RAVI SHANKAR

June 2000
·Department of Management Studies
UT, Delhi
New Delhi-110 016
email: sm717@usa.net
 CONTENTS
--------.-------------------------
Chapter Page No.

1. l�DUSTRIAL ENGINEERING : .... , .............. ......................................... ; .................. 1

1.1 Industrial Engineering .....................................-...........:.. :..................................................... 1
1.2 Historical Development oflndustrial Engineering ....................................... :....................-. 2
1.2.1 Pre-Industrial Revolution Era....... , .......................................... :................ :...... 2
1.2.2 Industrial Revolution and Post-Industrial Revolution Phase ............. :............. 3
1.3 Role ofIndustrial Engineer ................................ : .................... :· ......................................... 4
1.4 Application oflndustrial Engineering ................................................................................ 5
1.5 Industrial Engineei-ing and Production
. Management........................................................... 5
1.6 Industrial Engineering and Management Science.......................... :..... ,................ :............. 6
Review Questions .......................................................·...............'............... ,................. :...................... p
References ................ ,............................... :.................................. ,................... :....................... _........... 6

2. · PRODUCTION SYSTEM ......... ; .....................................·....................................... 9

2.1 Production .......................................................................................................................... 9
2.2 Life CycleApproach to a Production Syste� .................................................................... 10
2.3 . Types of Production System ............................................................................. ;............... 12.
2.3.1 Project Production............................................... :........................- ........ :....- .... 12
2.3.2 Job Shop Production .................................................................................: ... 12
2.3.3 Batch Production ................................... :......... 12
1 .............................................

2.3.4 · Mass Production................ : ........................................ :..................................•13

2.3.5 Continuous Production .................................................................................. 13
2.3.6 Comparison of Different Production Systems ......,........................................ 14
2.4 Supply Chain Management......... ,..................................................................................... 17
2.5 Concept of Value Chain.................. :.................................. :............................................... 17
.Review Questions ............ ,..........................................'................ :......................... :........................... 21
References....................................................... :................................................................................ 21
xii INDUSTRIAL ENGINEERING AND MANAGEMENT

3. PRODUCTIVITY ...............................,................... :..........·.................................... 23

3.1 Introduction ................ .'..................'.................................................... ...............................
· 23
3.2 Definition of Productivity ........................................................_..................... : ................... 23
3.3 Difference between Productivity and.Production ........:............................ :....................... 23
3.4 Productivity, Efficiency and Effectiveness· ......·....... :........ , ......................................'.......... 25.
3.5 Different Approaches to MeasureProductivity ................................................................ 26
3.5.1 Partial Productivity .................................. : ...................'.................................. 26
3.5.2 Total Factor Productivity ............................................................................... 27
3.5.3 Total Productivity .......................................................... : ............................... 28
3.6 Effect of.Base Period on Productivity. ................... :.......................................................... 28
3.7 Types of Productivity Index° ................................ , .................. , .................. ,...................... 28
3.8 Ways to Improve Productivity ..........................................................................................
· 30
Review Questions .................... : .......................................................
.
, ...............................................
. 32
·
References ...................................................................·........................... .'........................................ 32

4. FORMS OF BUSINESS ENTERPRISES ....................................... : ..................... 35

4.1 Introduction ................................................................. , ....................'................................ 35
4.2 Types ofOwnership ..................................................... : .............................................:...... 35
4.3 Sole Proprietor (Owner) Enterprise ......................... , ......................................................... 35
4.3.1 Salient Features ...................................... :....................................................... 35
·4.3.2 Merits of SoleOwnership .............................. :.: ............................................. 36
4.3.3 Limitations of SoleOwnership ...............: ...................................................... 36
4.3.4 Suitability of Sole Ownership ........................... ............................................ 36
4.4 Partnership Finn .............................'............... :.................................................................. 37
4.4.1 Salient Features of Partnership Finn ................ :......... : .................................. 37
4.4.2 Types of Partners .............. : ............................................................................
. 37
4.4.3 Merits of Partnership Finns .......................:-................................................... 38
. 4."4.4 Limitations of Partnership Finns ............................................................. : ...... 38
4.4.5. Suitability .........................-..................... : ............ .::......................................... 38
4.5 Joint Hindu Family Business ............................................................................................
. .
38
.
4.6 Joint StockCon1pany .............................................-....................... :.............................. :..... 39
4.6.1 Limitations of aCompany ................................................................... : ...... :.. 40
4.7 Classification ofC01npany ............................................................................................... 40
4.7.1 CharteredCompany ..... :...........................................................: ..................... 40
4.7.2 StatutoryCompanY, ............�.: ..... , ................................................................... 40
4.7.3 RegisteredCompany. :... : ........................
· _......................................................_..41
4.7.4 UnlimitedCompany ............................................................................:.......... 41
CONTENTS xiii

4.7.5 Linrited Co mpany...................................................................... :..................... 41

4.7.6 PrivateCo�pany...................... :............................................................ .-..... :.41
4.7.7 Public Co mpany............................................................................................ 41
4.7.8 Go vernment Co mpany............................................................... : ................... 41
4.8 Co mpariso n o f Public, Private and Jo int S ecto r Co mpanies ....'.............................. :......... 41
4.9 . Coo perativeOrganisatio n...................................................................... 1...... ,.................... 42
4.9.1 Merits o f Coo perative Or ganisations............................................................. 42
4.9.2 Limitations o f Coo perative Organisations.....................................................43 ·
4.10 Types o f Coo perative S ocieties.......................... :·..................... .'........................................ 44
4.10.1 Co nsumers' CooperatiyeSociety................................................... .-................ 44
4.10.2 Industrial Coo perative S ociet y ...................................................................... 44
4.10.3 Coo perativeMarket ing So ciety..................................................................... 44
4.10.4 Co operative Credit So ciety ................... :.................... ,......: ........................... 44
4.10.5 Coo perativeHo�1singS ociety ... '.................................................. ,.................. 44·
4.10.6 Co opera_tive Farming S ociety ........................................................................ 44
4.11 Co mparison o f Different Fo rms of Business Owner sh ip............... '................................... 45
Review·Quest ions ........ ,............. :..................................................................................................... 46
Ref erences ......... ·••.•···............. : ........... :...........� ..................................................... : ........................... 46

5. FORECASTING ............ ; .... ; .......... ,..................................................................... 47

5.1 Introduct ion................. :.................................................................................................... 47
5.2 Benefit s of Fo recasting............_ .......................................................................................... 47
5.3 Types of Fo recasting ................................................ _. ...........;...................
. : ......................... 49 ·
5.3.1 Long-Range Fo recasting ..................................'..........................................'..'. 49
5.3.2 . . Medium-Range Foiecast ing ... :....................... ,.................. :., ......................... 49
5.3.3 . Short-Range Forecasting ·······'··.-····························:····:······.. ·········.. ·\·············49
5.4 Co mmo nly Observed Demai1dPattern .............................................................................. 50
5.5 QualitativeMethods of Forecasting ................................................................................. 51
S.S.! Delph iMethod ......................................... :··.................................................. 51
5.5.2 MarketResearch ............................. : .............................................................. 51
5.5.3 Salesforce Fo recc1st......................................'.................................................. 51
5.5.4 Histo r i�al Analo gy....................'................................ ,....... :............................ 51
5.6 Accuracy of.Forecast........................................................................................................ 52
·
5.6.1 Measu res of For ecasting Err01: ..... :.................................................... :......... :.. 52
5.7 Quai1titativeMetho ds of For ecasting.................................................... :........................... 53
.
5.7 .1 Extrapolatio n.... : .......... '.......................:.......................................................... 53
5.7.2 S imple MovingAverage (SMA) .................................................................... 54
xiv INDUSTRIAL ENGINEE.RING AND MANAGEMENT

5.7.3 Weighted Moving Average ....................................................:.....................:. 56

5.7.4 ExponentialSmoothing ........................ :........................................................ 56
5.8 Statistical Forecasting...............................: ...........-................................ _. ........................... 61
Review Questions .: ................._ ............... :..................................................................................... :... 66
References .......... :....................................,, ....... :...............................................................'............... 68

6. FACILITY LOCATION ................................................................. : ..•.................... 69

6.1 Introduction .......................... ,........................................................ :.................... .............. 69
6.2 Factors in Facility Loc�tion ............................................................................... _.·............ 69
6.3 Considerations in Plant L_ocation..........................................................·..................-............ 70
6.4 Comparative Study of Rural and Urban Sites:.................................................................. 73
6.5 CaseStudy ............................. :...................... :................................................................... 74
6.6 Case 2: Selection of Site for XYZ Company .................................................................... 77
Review Questions ............................................................................ :················································ 78
References ........................................... .''. .......................................................................................... 79

7. FACILITY LAYOUT (PLAN T LAYOUT) ..................................... ,......................... 8'1

7. I · Introduction ........................'...................................;........................................................... 81
7.2 · Objective of Good Facility Layout ........................................ :.......................................... 81
7 .3 Principles of Facility (Plant) Layout .................................................................. :.............. 82
7.3. I Principle of Least Material Handling ............................................................ 82
7.3.2 Principle of Worker Effectiveness ......................................... :....................... 82
7.3.3 Principle of High Productivity...................... :................................................ 82
7.3.4 Principle of Group Technology ..................................................................... 82
I
7.4 Different Types ofCommqn Layouts ............ :.................................................................. 83
7.4.1 Product or Line Layout........ :...........................................................:............. 83
7.4.2 Process' Layout ......................................................... , ......................... '..... :.. ··· 84
7.4.3 Fixed Position Layout ...: ...... : ...................................'..................................... 85
7.4.4 Cellular or Group Layout ............................................................. ,................ 86
7.5 Part-Machine IncidenceMatrix inCMS Design .............................................................. 89
7.6 Comparison of Layouts .................................... ,............................................................... 90
Review Questions :..................................................... :........ :·······································:....... :............ 90
References .......................,...... :............................................... :........................................................ 91

8. LINE BALANCING .........·........................................ ; ............................................ 93

8.1 Introduction ............... :................................... : ....................................... :.......................... 93
8.2 Objective in Line Balancing Problem .............................................................................. 93
8.3 Constraints in Line Balancing Problem ........ : ........ .. : ....................................................... 94
8.4 . Definition and Terminology in Assembly Line ................................................................. 94
 •
CONTENTS xv

8.5 Methods ofLiniy Balancing .............................................................................................. 96

8.6 Heuristic: Largest Candid�te Rule ................................... :..........,............................ ,......... 96
_
8.7 Kilbridge-Wester Heuristic for Line Balancing ................................................................ 99
8.8 Heuristic: Helgeson-Birnie (Ranked Positional Weight) Method ................................. :. 102
Review Questions· ........................................ :............ : ..... :........................................ , ....................... 105
References ....................................... :..............................................................................................
· 105

9. �RODUCT DESIGN , PLANNING AND DEVELOPM�NT ................................. 107

9.1 Introduction ............................................................ ,........................................................ 107 ·
9.t Requirements of a Good Product Design ............. :................................... :............. :....... 108
9.3 Product Developmept Approaches ..................: ................................... :.......................... 108
9.4 Product Development Process .......... ; ................... : .....................'.................................... 109
9.5 Some Concepts In Product Development ............... :·...........................'............... ,............ 109
9.5.1 Standardisation ............... , ........ :............................................................,..... : 109
9.5.2 Modular Design ................ :.... :.................................... :..........,: .................... 111
9.5.3 Sin1plification ..........................····;·................ ····...... .................................... 111
: _
. 9.5.4 Speed-to-Market ........................................................................ :................. 111
9.5.5 Concunent Engineering ............................................................................... 112
9.5.6 Quality Function Deployment (QFD) and House of Quality (HOQ) ........... 113
• 9.5.7 Design for Manufacturing (DFM) ............................................................... 114
9.5.8 Design for X (DFX) .................................. :................................................... 115
9.5.9 · Rapid Prototyping (RP) ............................................. :....:............................ 115
Review Questions : ................................................................................................. : ...................: ... 116
References· .............................. : ....... , .............. .'...........................................................:................... 116

10. · PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION ................. 125

IO.I Introduction .... : ...................................................................... : ............ : ........................... 125
10.2 Objectives of PPC .......................:............................... : .................................................. 125
t0.3 Functions of PPC ............................................................................................................ 126
10.4 Production Planning ... :.................................. ,.............................:····· ..···········:............... 127
10.4.l StrategicLevel Decisions .....................................................,....................... 129
10.4.2 TacticalLevel Decisions ................... , ......,............. : ... :................................ 129
10.5 Steps in Production Planning and ContTOI ...................... :.................. : ........................'.... 130
10.5.1 Routing ..................................................................................................:..... 131
10.5.2 Scheduling andLoading ..........................................'..................................... 132
10.5.3 Dispatching ...............:········:...................................................:........"............. 133
xvi INDUSTRIAL ENGINEl;RING AND MANAGEMENT

10.5.4 . Follow-up or Expediting or Progressing................................... , .................. 136

10.6 Effectiveness of l?PC ...................................................................................................... 136
Review Questions . _.................. ··;:·····························.. ····.···:·.. ······································...... ,._........... 137
� .
References ............_............................................................................................................ .-... ,........ 138

11. LINEAR PROGRAMMING .......... ! ............................................. :....................... 139

11.1 • Introduction ............'.......................................... ;..................................................·........... 139
11.2 Definition of Linear Programming ................................ '. ............ ,................................... 139
11.2.1 General Formulation of Linear Programming ...................... �...................... 140
11.2.2 How to Conv�rt,a Maximization Problem into a Minimization Problem? ... 140
11.2.3 · How fo deal with equal to(=) sign? ............................................................ 141
11.3 Graphical Method .................................................................................·........... :........ :..... 141
11.3.1 Characteristics of Corner Points .......·........................................................... 142
11.4 Maximization Case(Graphical Solution) ......... :............: ................................................ 143 -
115 Sensitivity Analysis in Graphical Solution ................................................................ :.... 145
11.6 Concept of Slack Va�iable .................. :...............................
· , ........................................... 146 .
11.7 Concept of Shadow Price .........................................................:...................................... 146
11.8 Multiple Optimum Solution ............................................................................................ 147
11.9 Infeasible Solution ..............................................:: ........................... ; ..........' ,.................... 147
11.10 Unbounded Problem............................. , ............................................. :........... :............... 148
11.11 Simplex Method to Solve LPP ........................ :.............................................................. 14�
• l l .11.1 · Augmentation of Objective Function(OF) ........................................_.......... 149
11.11.2 Explanations and Rules in Simplex ............................................................. 151
. .
Review Questions ....................................................................................... ·............................. :..... 156
References .............. :.. ,................................................._..,............................................................... 158

· 12. TRANSPO�TATION MOD�L .... ; .......................... .'........................... .'................ 159

12.1 Introduction ............................ :······················................. ,............................................... l59
12.2 Mathematical Fmmation of Transportation Problem... :..............................'................. :.. 160
12.3 How to Solve the ;rransportation Problem (TP)? ........................................ :.................. 161
Review Questions ............................................................................. :............................................ 176
References .......................................................................................................... .......................... 177

13. ASSIGNMENT MODEL ............. � ........................................ : ...•......................... 179

13.1 Introduction ..... :................................................ ,.........................................................'...... I 79
13.2 Mathematical Formulation of Assignment Problem ...................................... :................ I 79
13.3 Solution Methods for Assignment Problem ............................ :....................................... 180 .
13.4 · Algorithm.to Solve Assignment Model .......... :................................ .-.............................. 181
13.4.1 . Method to Find the Total Opportunity Cost Matrix ............ :........................ 181
CONTENTS xvii

13.4.2 Optimality Test of Total Opportunity Cost Matrix ...................................... 182

13.4.3 Illustration of Optimality Test and Assignment ........................................... 183
Review Questions .......................................................................................................................... 185
R:eferences ................... '.......... :........................................................................................................ 187

14. ENGINEERING ECONOMICS ........................................................................... 189

14.1 Concepfof Interest ......................................................................................................... 189
14.2· Sin1ple Interest ... :............................................................................................................ 189
14.3 Compound Inte�est .............................................................,.._ ........•................................... 190
14.3.1 Interest with Multiple Frequency ofCot1;1pounding ...................... :........:..... 190
14.3.2 Case ofContinuousCompounding .............................................................. 192
14.4 Present Value and Future Value .........................................................................., ............ 193
14.5 Relationship of Annuity.:.......... :........................................, .................. ,......................... 195
14.5. l Present Value of an Annuity ..................................... :.................................. 196
14.5.2 Sinking-Fund Factor ...................................................................... , ............. 196
14.5.3 Equal PaymentCapital Recovery Factor ..................................................... 197
14.6 . Profitability Projections (or Estimates of Working Results) ........................................... 199
14.7 ProjectedCash Flow Statement ...................................................................................... 200
14.8 Projected Balance Sheet .......... :.......................................................:.......·....... , ............... 201
Review Questions ................................................................................. :.......................................... 204
References ....................................................................................'................................................. 204

15. DEPRECIATION ...............................................-................................................ 207

15.1 W hat is Depreciation ...................................................................................................... 207
15.1.1 Notations Used .................... : ...................................... : ................................ 208
15.1.2 AccountingConcept of Depr�ciation .......................................................... 208
15,.1.3 ValueConcept of Depreciation .......................................�............................ 208
. .
15.2 Classification of Depreciation ..... , .............. ,, ......................: ........................................... 208
15.3 Methods toCharge Depreciatiou ................................................................................... 209
15.3. l Strnight Line Method (SLM) ... :................................................................... 209
15.3.2 Declining Balance Method (DBM) ......................................................... :... 210
15.3.3 Double Declining Balance Method (DDBM) ...................................... , ....... 210
15.3.4 Sum of Year Digits Method (SYD) ................................................... : ......... 211
15.3.5 Sinking Fund Method (SFM) ...................................................................... 212
15.4 Service Life of Asset ...................................................................................................... 215
Review Questions ......................................................:..................................................................... 215
References ................................................................_...............................................................'........ 216
xviii INDUSTRIAL ENGINEERING AND MANAGEMENT

16. BREAK-EVEN-ANALYSIS .................,..............................................; ............... 217

16.1 Introdu.ction ..................................................................................................................... 217
16.2 Assumptions .............................................................., .................................................... 218
16.3 Steps inBreak- Even-Analysis(BEA) ............................................................................. 218
16.4 fixed Cost ...... :.............................................................·........................ :.:....................... 218
16.5 · Variable Costs .................................................................................................................
. . 219
16.6 Purpose ofBEA ................................................................ :.................. : ........................... 219
16.7 Margin of Safety··························································:················: ......................... , ........ 220
16.8 Detenni�ingProduction-Volume for a givenProfit ............................................. :.......... 221
16.9 Formula forBreak-Even-Analysis(BEA) ·········································:···························· 221
.16.10 Angle of Incidence(0) ...............................•....................... , ... , ........................................ 221
16.ll Profit-VolumeGraph(PNGraph) ...................'..............�·····················:.......................... 221
Review Questions ............................................ : .............. :: .......... :: ................................................. 223
References ................................................................................... : ............................................ : .... 223

17. REPLACEMENT AND SELECTION ....................................................., ............ 225

17.1 Introduction ............. .'.............................'............................: ................ , ........................... 225
17.2 Nature of Selecti.onProblem ........... :........................................... , .................................. 225
17.3 Natur.e of ReplacementProblem ........................... , ........................................................ 226
17.4 Replacement. o.f Items which Deteriorate ....... . ................................................................ 226
1-7.5 Replacement of Machines whose Operating Cost Increases with
Time and theValue of Money also Changes with Time .................................................. 227
17:6 Capitalized Worth Method ....................................................'......................................... 230
Review Questions· .......................................................................................................................... 231
References .........................................................................................., ..: ............................:.......... 232

18. VALUE ENGINEERING ....................................................... :............................ 233

18.1 Intr�uction ·············································•.······································································· 233
18.2 Definition ...........................................::.......................................................................... 233
18.3 • Objective ofValue Engineering .............................. .-....................................................... 233
18.4 Other Related Terms ..................................................................................! .................... 234
18.5 Concept to Value Engineering ........................................................................................ 234
18.5.1 What isValue? ............................................................. : ............................... 234
18.6 Type ofValue ....................................................................:............................................ 234
.18.6..1 UseValue .................................................. : ................................................. 234
18.6.2 EsteemValue ...........'..........................:...................................................._. .... 234.
18.6.3 ScrapValue·················.····· ............................................................................ 23_5
CONTENTS xix

. 18.6.4 Cost Value ................................................................................. : ................. 235

18.6.5 Exchange Value ....................-............................................................._ .......... 235
18.7 Function ...................................................................................... .. . :... .........................
235
·18.8
_
1
Effect of Function and Cost on Value ......................................................................:...... 23 5
18.9 Cost and Worth ........... :............................................... ·;··;···············································236
18.10 Life Cycle of a Product and Value Engineering .............................................................. 236
18.11 Steps in Value Engineering .....................................................: ................... : .................. : 237
18.12 Methodology in Value Engineering ................................................................................ 238
. 18.13 Fast Diagram ....................... ,......................................................................_.............•...... 238
18.14 Matrix Method in Value Engineering .........................................................._. .................. 240
18.15 Other Approaches in :Value Engineering ......................................:...................... :........... 241
Review Questions ....... : ..........'.............., ................. ,....................................................................... 241
References ........................................................................ ·························································:····242

19. INVENTORY CONTROL ..................................... � ............................................. 243

19.1 Inventory ....................................................................... :................................................. 243
19.2- . Function of Inventory ....................'.................., .............................................................. 244
19.3 Inventory Costs·...................................................... :........................................................ 244 ·
19.3.1 . Unit Cost of Inventory .....'........................, ..........................:........................ 244
19.3.2 Ordering Cost .........'......,........................................................._..................... 245
19.3.3 Holding Cost or Carrying Cost .........................................................: .......... 245
19.3.4 Shortages Cost or Stock-out Cost ................................................................ 245
. .
19.4 Variables in Inventory Model ............: ............................_. ......................................... : ..... 245
19.5 Deterministic Inventory Models .........................................................'............................ 246
19.5.1 Model 1: Uniform Demand Rate, Infinite Production Rate .................... , .. :. 246
19.5.2 Operating'Policy oflnventory Control ........................................................ 2'47
19.5.3 Sensitivity ofEOQ Model .......................................................................... ,.247
19;6 Other Observations of Basic EOQ Model ............................................... : ................... :.. 249
\
19;6. l High Cost Item Inventory ............................................................................ 249
19.6.2 Optimum Ordering Interval ................. .' ............ ,.......................................... 249
19.6.3 .Optimum Number of Orders ................. :...................................................... 249
19.6.4 Optimum Number of Days Supply .............................................................. 249
19.6.5, Implication ofAssumption that Demand is known with Certa(nty .............. 249
19.7 Model 2: Gradual Replacement Model ........................ , ................................................ : 251
19.7.1 Other Characteristics of the Model .............. :............................................... 253
19.8 Model 3 ................ '. .................................................. :........................... :.......................... 25-4
19.8.1 Other Characteristics of this Model ............................................................. 257
,;
xx INDUS"l;RIAL ENGINEERING AND MANAGEMENT

19.9 Model 4: Detenninistic EOQ Model with Quantity Discount ...................... ................... 258
19.9.1 Case 1: Inventory Model with Single Discount ........................ : .................. 258
19.9.2 Method to Deal with Single Discount Model .... : ............................. :........... 259
19.9.3 Case 2: Inventory Model with Double Discount .....................................·.... 259
19.10 Strategies for Seleytive Inventory Control ...................................................................... 261
19.10.1 ABCAnalrsis ............................................................................................... 261
.
19.10.2 Other Apprpaches ........................................................................................ 263
19.11 Mufti-Item Inventory Systems with Constraints ............................................................ 264
19.12 Lagrangian Method ....................................:................................................................... 264
19.13 Fixed cycle (Equal-Order-Interval)°Method ...................................'................................ 265
Review Questions .......................................................................... '. ............................................... 268
References ....................................................................................................................................., 269

20. MATERIAL REQUIREMENT PLANNING (MRP) AND MRPall .......................... 271

20.1 Introduction .................................................................................................................... 271
20.2 Terms Used in Material Requirements Plaljiling ............................................................ 271
20.3 Depenaent Den1and .........., ............................................................................................. 272
20.4 Lumpy Den1and ................................................................................................... ............ 272
20.5 ,Lead Tin1e ............................................................................................. : ......................... 273
20.5.1 How MRP Uses Lead Ti.me information? ................................................... 273
20.6 Common Use Iten1S ................ : ....................................................................................... 274 .
. 20.6.l How MRP Uses Common use Items? .............................. , ........................... 274
20.7 Inputs to MRP ...................................................................................................·............. 274
20.7.1 Master Production Schedule (MPS) ............................................................. 274
20.7.2 Bill ofMaterial (BOM) File ......................................................................... 275
20.7.3 Inventory Status File ..........................................................._. ........................ 276
20.8 How MRP Works? .......................................................................................................... 277
20.9 Outputs cifMRP ..............................................................................., ............................. 278
29.9.1 Primary Output ............................................................................................ 278
20.9.2 Secondary MRP Outputs ................................................'............................. 279
20.10 Benefits ofMRP ......'..............................., ...............................: ................................: ...... 282
20.12 Drawbacks ofMRP ....................................................: ................................................... 182
20.12 _Order Point System vs MRP ........................................................ , ........................: ......... 283
20.13 Cfosed-Loop MRP ................................................... :..................................................... 284
20.14 Manufacturing Resource Planning (MRP II): ................................................................. 285
20.14.1 Benefits and Limitations ofMRP II ............... , ............................................ 286
e
�:;�::3; ��'.���...:::::::::::::::::::::::::::::::::::::::::::::·:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::�:�
CONTENTS xxi

21. JUST IN TIME (JIT) IN PRODUCTION SYSTEM .............................................. 289

21.1 Introduction :.................................................................................................................... 289
21.2 JIT Philosophy ... .' ............................................................................................................ 290
2L3 Push Systems Vs Pull System ................................................. : ....................................... 292
21.4 Kanban and Pull System ................................................. : ............................................... 293
21.4.1 Calculation for Number of Kanban ........................... :................................. 295
21.5 MRP Vs JIT System ........................................................................................ : ............... 295
21.6 AnAnalogy toJIT ........................ : ................................................................................. 296
21.7 Requirements for ImplementingJIT ......................_ ......................................................... 298
21.7.1 Training ...................................... .'..................................-.............................. 298
21.7.2 Long-Term Planning ................... ............................................................... :299
2,1.7.3 Stockholders ................................................................................................ 299
21.7.4 Labor and Union ............. :........................................................................... 299
21.7.5 Gove1nment Support ........................................................ : ................'.......... 299
21.7.6 Management Support .......... :........... :.................................... ,...................... 299
21.7.7 Management and Labour Responsibilities ................................................... 299
21.7.8 Cellular Layout and Work Flow ..... , ............................................................ 299
21.7.9 Departn1ent Function ................ :............................................................._.....
_ 299
21.7.10 Supplier Management.................. ·:· ............................................................ 299
21.7.11 Reduction of Set-up Time................................................... : ........................ 300
21.8 Preliminaries toJIT Production ...................................................................................... 300
21.9 JIT Production Process .. :................................................................................................ 301
21.10 Benefits ofJIT ........................................................................................... , .................... 302
21.11 Evaluation ofJIT Production ....................................................................................... , . 302
Review Questi.ons ............................................... : .......................................................................... 303
References .............. :............................ :......................................................................................... 303

22. SUPPLY CHAIN MANAGEMENT ................................ : ..................................... 305

22.1 · Introduction .................................................................................................................... 305
22.1.1 Definition .................................................................................................... 305 ·
22.2 Stevans Model of Supply Chain Integration ................................................................... 308
22.3 Benefits of Supply-Chain Improvement ......................................................................... 310
22.4 Performance of Supply Chain.......................................................................................... 310
22.5 AIMS of SCM ........................................................... .'................ : ..................... : ............. 311
22.6 ERP Vs SCM .................................................................................................................. 313
.22.7 Dist01tion of Demand: A Case for ERP Implementation ...........................:.................... 313
22.8 W hat is in Offer ....................... : ........ , ............................................................................. 315
xxii INDUSTRIAL ENGINEERING AND MANAGEMENT

22.9 Third Party Logistics and Fourth Party Logistics ........:.................................................. 317
22.10 Vehicle.Routing Concept ..............................................................: ........................... : ...... 318
22.l .l Check.list for Make-buy Decision ................................................................................... 320
Review Questiorls .........................................: .....,........................................................... : .....:.......'... 321
' '

References ...................................................·........: ..........:.............................................................. 322

23.· MATERIAL HANDLING ..................... ; ....... : ............................... .'.; .. : .................. 325

23.l Introduction ......: ..................: ..................'.................. :........... :....................·..................... 325
23.2 Principles of Material Handling .....................................................................................
. 325
'
'
23.3 Material HandlingEquipment .........................., ................, ............................................ 326
23.3.l Pallets .......................................................................................................... 327
23.3.2 Conveyor ..................................................................................................... 327
23.3.3 Industrial Trucks ................................................................:......................... 328
23.3.4 Cranes-and Hoists .................: ....................................................................... 328
23.3.5 Elevators and Lifts ...................................................................., ...-.............. 331
· 23.3.6 Containers and Racks .................................................................................. 334
23.4 AS/RS ........ ; ...........................................'. ........................................................................ 334
23.5 Automated Guided Vehicle (AGV) ........ : ............. :..................................:...................... 334
23.5.1 Features ofAGV ................................. :....., .................................................. 334
23.5.2 Types ofAGV Systerns ................................................................................ 335
23.5.3 Comparison ofAGV Systems ...................................................................... 338
23.5.4 Safety Considerations for AGV .............., ................................................. :.. 340
23.5.5 Design ofAGV System ..........................:.........................: .......................... 341
Review Questions ............:................... "·····-'···········.............................: ....................... : ..............,.. 341
References ......................................................................................................., ............................. 341

24. ENTERPRISE.RESOURCE PLANNING (ERP) .............. �:...-............................. 343

24.l What is ERP? .....:................................................................ ........................: .................. 343
24.2 Main Features of ERP .........................................' ......:.....·..............................:................ 343·
24.3 !'urpose
r
of Modeling al!Enterprise ................................................................................
• . 344
24.4 Its Role inEnterp�ise Modeling ...: ................................................................................. 344
24.5 Information Mapping .........................',....................................._............: ......................... 346
_
24.6 Role of Common/SharedEnterprise Database ..............:................................................ 34 7
24,.7 Scope ofEnterprise System ............................................................................. ,.............. 347
24.8 Generic;_Model ofERP System ........................................................ : .............................. 348
24.9 · Selection ofERP ..._...............................................................:......................................... 348
24.l 0 Ditticulty in SelectingERP ..................................................................................... : ...... 350
24.11 Approach toERP Selection ...................................................................................._......�. 350
CONTENTS xxiii

24.12 The "Request For Proposal" Approach .:............................................. : .......................... 350

24.12.1 Li�tations ofRFP Approach .............................................: .......... ............. 351
24.13 ProofofConcept (POC) Approach .•................. : ..............: ...................'........................... 352
24.14 Application ofPOC-Approach .............................. ....................., ..............................'.... 353
24.15 Comparison ofRFP and POC Approaches ................................................................·..... 354
24.16 Narrowing ERP Alternatives .......................................................................................... 354
24.17 Analytic Hierarchy Process (AHP) Approach .................................:.............................. 355
24.17.1 Steps in AHP ..............:.:.......................'....................................................... 355
24.17 Application ofAHP in Evaluation of ERP ............. :....................................................... 355
24.18.1 Selection of Weights ......................................................................'.............. ' 358
24.19 '
Illustrative Problem ........................................................................................................ 358
24.19.l Problen1 Staten1ent ............................: ....................-..................................... 358
24.19.2 Solving the Illustrative Problem .................................. : ............................... 359
24.19.3 Calculation of Weights of Each Row ........................................................... 359
24.19.4 Calculation ofthe Overall Ranking ofeach Alternative of ERP Solution ... 362
24.19.5 Result ofthe Illustrative Problem ................................................................ 362
24.20 Methodology for ERP Implementation ........................................................................... 362
24.21 USA Principle for the Implementation ........................................................................... 363
24.22 Factors Involved in Successful Implementation .........................: .............:...............: ..... 364
24.23 Some useful Guidelines for ERP Implementation .......................................................f. .. 365
24.24 W hen ERP Implementation Fails? ...'................................: ............................................... 365
24.25 Summary ........................................................................................................................ 366
Review Question·s .......................................................................................................................... 366
· References ..................................................................................................................................... 367

25. WORK STUDY .................................................................................................. 36�

25.l Introduction ...............................................................:...:.....................................;·········· 369
25.2 Objectives of Work Study ..................................................................................: ............ 369
25:3 Steps in Work-Study .............................................................................................,.: ........ 370
25.4 Purpose of Method Study ........................................................................................: ....... 372
25.5 Procedure of Method Study .................................: ...............: ......:................................... 372
25.5.l Economic Considerations ............................................................................ 374
25.5.2 Technical Considerations .................................., ......................................... 375
25.5.3 Hulllan Reactions ...... ................................................................................... 376
25.6 Step 2: Recording Methods and Facts ............................................................................ 376
25.6. l Flow Type Diagrams ..............................,. .................................................... 376
25.6.2 String Diagram ......................: ............................................................._ ........ 377
xxiv INDUSTRIAL ENGINEERING AND MANAGEMENT

-25.6.3 Travel Chart (also Called as Cross Chart) .................................. :................ 378
25.6.4 MultipleActivity Chart (Figure 25.6) ....................................... :.................. 378
25.6.5 .Outline Process Chart (Figure 25.7) ............................................................ 379
25. 7 Flow Process Chart .........................................................................................·................ 381
25.8 Process Chart Symbol ............. : ................. , ..................................................................... 381
25.9 Step 3 of Method Study: Examine ........................................................................... : ...... 384
,
25.10 Step 4 of Method Study: Develop and Define .......................................:........................ 384
25.11 Steps 5 and 6 Method Study: Install and Maintain ......................................... : .. : ............ 384 ·
25.12 Motion Economy ............................................................................................................ 385
25.13 WorkingArea .......................................................� ......................................................... 386
Review Questions· .......................: .........................................................................................'......... 391
References ·················;·························..·····························:............................................ , .............. 391

26. WORK MEASUREMENT .......................'............................................. : ............. 393

26.1 Introduction .................................................................................................:................... 393
26.2 Purpose ofY{ork Measurement ....................................................................................... 393
. 26.3 Organisational Suitability .............................................................................. :................ 394.
26.4 Stop Watch Time Study .................................................................................................. 395
26.4.1 List of Time Study Equipment and Form ................................. : .................. 395
· 26.4.2 Steps in Timy Study (Stop Watch Method) .... :.............................................. 400
26.4.3 How to Determine the Sample, Size? .:........................, .......................: ........ 400
26.5 · Some Definitions (Based on JLO) ................................................................................... 401
26.5.1 W01k Content ..................................................................... '......................... 401
26.5.2 RelaxationAllowance ...................................•............................................. 401
26.5.3 ContingencyAllowance ...................................................................
. . ....
:........... 401 .
26.5.4 PolicyAllowances .................................................................... :.................. 401
26.5.5 SpecialAllowance ........................................................... '..: ......................... 401
26.6 Perfonnance Rating ............................._. .......................................................................... 402.
26.7 Standal'd Tin1e ..........................................................................._..................................... 403
26.8 Work San1pling ................................................................'................................................. 404
26.8.1 Procedure of Work Sampling ........................-.............................................. 404
26.8.2 Application of Work Sampling ........................................ :........................... 405
26.8.3 Sample Size for Work Sampling ... : ............................................ : ................. 405
26.9 Analytical Sampling and Synthetic Data .......... '. ............................................................. 408
26.9.1 Predetermine Motion Time Standards (PMTS) ........................................... 409
26.9.2 Method Time Measurement (MTM) ........................................................... 409
26.10 Comparison of Work Measurement Teclmiques ........................................._. ................... 409
CONTENTS XXV

26.11 Summary ........................................................................................................................ 411

Review Questions ............................................................................................... :........................... 411
References ...................................................... :.. :..................................... :...................................... 411

27. JOB EVA[UATION AND MERIT RATING ....... :................................................. 413

27.1 Introduction .................................................................................................................... 413
27.2 Job Evaluation .....................................................................................-............................ 413.
27.2.1 Objective of Job Evaluation ........................................................................ 414
27.7.2 Pre-Requisite of Job Evaluation ............................... : .................. , ............... 414
27.3 Benefits of Job Evaluation ........................._.................................................................... 414
27.4 Limitations of Job Evaluation ................................................ : .........., ............................. 414
27.5 Methods of Job Evaluation ............................................................................. : ............... 415
27.6 Merit Rating•......... : ......................................................................................................... 419.
27.6.1 Objectives of Merit Rating .......................................................................... 420
27.6.2 Advanta.ges of Merit Rating ........................................................................ 420
27.6.3 Limitations of Merit Rating .._., ........................................................-............. 421
27.7 Methods For Merit Rating .............................................................................................. 421
27.8 Requirements for Success of Merit Rating System ......................................................... 423
Review Questions ........................................................................................................................... 424
References ...................................................................................................................................... 424

28. WAGE-INCENTIVE PAYMENT PLANS ............................................................ 425

28.1 Introduction ........................... :.............................................................-............................ 425
28.2 Objectives of a Good Wage-Incentive Plan .................................................................... 426
28.3 Basis of a Good Wage-Incentive Plan ............... , ............................................................ 426
28.4 Types of Wages Incentive Plans ..................................................................................... 426
Review Questions ...................... y••·················· .. ·····································:................................. .'..... 433
References .........................................................................................: ...........;.:................. :........... 434

29. GOLDRATT'S THEORY OF CONSTRAINTS................: .. ,................................ 435

29.1 Introduction ........................................................................................................: ........... 435
29.2 Some Concepts used by Goldratt ..................................................................................-435
29.2.1 Why to Manage Inventory aiid Operating Expenses? .................................. 436
29.3 Constraint ....................................................................................................................... 437
29.3.1 An Example from Industry (A Case-Study) ................................ :............ :... 437
29.4 Theory of Constraints (TOC) ................................................ :........................................ 439
29.5 Rules for Bottleneck Scheduling in TOC ....................................................................... 440
29.5.1 Rule I ................................................................................................., ........ 440
29.5.2 Rule 2 ..........................................................................................'................ .440·
29.5.3 Rule 3 .......................................................................................................... 443.
xxvi INDUSTRIAL ENGINEERING AND MANAGEMENT

29.5.4 Rule 4 .......................................................................................................,.. 444

29.5.5 Rule 5 ......................................... :................................ :.............................:.444
29.5.6 Rule 6 .................... ... :................................................................................ 446
29.5.7 Rule 7 .................................................... :..........................:........................... 446
29.5.8 Rule 8 ..............................................................,........, .........:......................:.447
29,5.9 Ru!� 9 .:.................................. : ...................................... _.............................. 447
29.6 Synchronous Manufacturing ..................................:................... , .....: ............................... 447
29.7 Summary ..................................:...............................................' ...................................... 449
Review Questions ......................................................................
' :. .................................................. 449
References .......................................... , ............................................................................................ 449

30. ENTREPRENEURSHIP ........................................................: ............................ 451

30.1 Introduction ......................., ..................................... :................................................. : .... 45 l
30.2
30.3
.
Role of Entrepreneurship in Economy ........................................................................... -4'52
Qualities of Good Entrepreneur .......................... : ...'. ......... :................... :..................... , ... 453
30.4 Some Myth and Reality aboutEntrepreneurship ............................................................ 454
30.5 · Role of Motivation in Entrepreneurship .....:...................................................................455
30.6 Functions and Need for Developing Entrepreneurship ....... :........ T................................ 455
30.7 Entrepreneurial Failure and Remedial Measures ....................:........................:.............. 456
Review Questions ..............................:............................................................................................. 457
References '. .........................................................................................................,........................... 457

31. LEADERSHIP ................................................................................................... 459

31.1 .
Introduction ...'.......................................... :..,.................................................................:... 459
31.2 Lt'jadership and Management ..................'........................................................ :··· ...... : ..... 460
31.3 Qualities of Good Leadership ............................'.: ..... .'................................ :.................... 46q
31.4 Leadership Style ..................................................................................... :....................... 461
34.4.1 Aµtocratic or Authoritarian Leadership ·:..................................................... 461
· 31.4.2 · Participative, Consultative or Democratic Leadership ...........:.................... 463
31.4.3 Laissez-Faire or Free-Rein Leadership ........................................................ 463
35.4.4 Comparismi of Leadership Styles : .............:......._ ...............................:.......... 464
. 31.5 Leadership Grid .............................................................................................................. 4�4
31.5.1 Improvised Leadership ...........;.................................................................... 464
31.5.2 Authority Compliance ..................................... :... ,................. :............ .......... 464
31.5.3 Country Club Management .., ..................................................._................... 464
31.5.4 Middle of the Road Management .............................. : ................................. 465
31.5.5 Tea1n Manage1nent ................................., ............_... , .... ,................................ 465
Review Questions ..... :....... , .................................. , .....................-......................... , ........................... 465 .
References .. .. : ................................................ :.................................. : ............................................. 466
 CONTENTS xxvil

. 32. TO TAL QUALITY MANAGEMENT (TQM) AND

CONTINUOUS IMPROVEMENT .............................. :.......... : ......................... 467
32.1 · Introduction .... :.., ..............................................·..............·..............: ......... : ....................... 467
32.2 What isTotal inTQM? .................................................................................... : .............. 467
32.3 What is Quality? ...................................... : ................._............. : ....................................... 467.
. 32.3.1 Dimensions of Quality ................................................................................. 468
32.4 Total Quality Management (TQM) ................................................................................. 472 ·
32.5 Quality Guius· ................................................... :......................... , ................................... 474.
32.5.1 Philip B . Crosby ........... :................: .............: ............................................... 474
· 32.5.2
32.5.3
. .
Deming's A pproach toTQM ......'.......... :...................................................... 474
Joseph M . Juran ................................: .......................................................... 475
32.6 Principal objectives ofTQM ................................................................................, ......... 476
32.7 Management in TQM ...................................... : ......................... : .................................... 477
32.8 Qu,ality In1provement .............................................................., .................... , ...·............... 477
32.9 Quality Cost ......: ......................... : .......................................................... : ..······:·· ..····'····.. 480
32.10 Elements ofTQM ........................................................................................................... 482
32.11 Seven QC Tools for Improvement .................................................................... : ......'....... 487
�2.12 Implementation ofTQM .............................................. : ........................._......................... 491
32.13 ISO 9000 .................................., .................. , ....... :..........................................:............... 491
32.13.l ISO 9000 VSTQM ........................................................................................ 492
32.13.2 Basic Steps in Gaining ISO 9001 Registration ....... : .................................... 493
32.13.3 ISO 1400_0 Standaro .................................................................................... 494
32.13.4 Copies of an ISOStandard may be Obtained from the
following Addresses ................................................·......... : ....... ................ 494
32.13.5 Standar'ds Make up of the ISO 9000 Family ....................... : ......................_.. 496
32.13.6 Comparison of ISO 9001, ISO 9002 and ISO 9003 ....................._. ............. :496
32.14 Quality Awards ................... " .............. :........................................................................_.... 499
32.14.1 Comparison of Malcolm Baldrige Award Criteria 1994, 1996,
1997-A Shift in Focus ........................................................................... 500
32.14.2 · Guidelines for Rajiv Gandhi National Quality Award ........ , ........................ 503
Review Questions .... :........................... : ........................................................................................... 506
References ....'........: ..................................................................................... , .. .'................................ 507
33. STATISTICAL QUALITY CONTROL ................................................................. 511
33.1 Introduction ..........................................................·: ......................................................... 511
33.2 Process Control ................................................................................... ,............................ 511
33.3 Control Charts ......................... : ...................................................................................... 512
• xxviii INDUSTRIAL ENGINEERING AND MANAGEMENT

33.4 Acceptance Plan .... : ........................................................................................................ 519

33.4.1 Advantages. of Acceptance Plan ......................'............................ :............... 520
33.4,2- Disadvanta�es of Acceptance Plan ...........................:.. : ........... '. ................... 520
33.4.3 Suitability .................................................................................................... 520
33.5 Acceptance Sampling ...._.................................................................. !.............................. 520
33.5.1 Nomenclature and Symbols used in Sampling Plan..........................'...... :.... 521
33.6 Single Sampling Plan (SSP) ........................................................................................... 522
33.7 Double Sampling Plan (DSP) ......... '...................... : ..·.............,................................._........ 522
33.8 Sequential Sampling Plan .................................................................... :.......................... 523
33.9 The Operating Characteristics Curve .......................................................... :.................. 524
33.9.1 - How to Draw the OC-Curve? ........'.............. .': .............................................. 525
33.9.2 Procedure of Drawing OC-Curve ................................................................ 526
33.9.3 Different Conditions in the OC-Curve ......................................................... 527
33.10 Average Outgoing Quality (AOQ) .................................................................................. 529
33.10.1 A Special Feature of AOQ Curve ....................................,....... :................... 530 .
Review Questions ...............................................- ............................................................................ 537
. '

References .......................................................... : ............................................................................ 538

34. RELIABILITY .................................................................................................... 539

34.1 Introduction ............................................................................................................ ....... 539
34.2 Relationship between Reliability, Failure Rate and MTBF ......: ..................................... 540
34.3 Bath Tub Curve .............................................................................................................. 542
34.4 The Expected Life of a System .................... :.................................................................. 543
34.5 Failure Rate and Hazard Function .................................................................................. 544
34.6 Component Reliability from Test Data ............................................................................ 546
34.7 · Constant Hazard Model ............................................................. : .................................... 548
34.7.1 Mean Time to Failure (MTTF) .............'....................................................... 548
34.7.2 Mean Time Between Failure (MTBF) ......................................................... 548
34.8 Reliability of a Series System ........................................................ : ................................. 549
34.9 Reliability of a Parallel System ................ : .............................._....................................... 550
34.9.1 Mean-Time Between-Failure (MTBF) ................................................. : ...... 551
34.9.2 A Three Unit Parallel System .................................... , ...'... :.......................... 552
34.10 Software Reliability ..................................................................................................., .... 552
34.11 Software Reliability Metrics .......: ............................... , ................................................... 553
34.11.1 Requirement Reliability Metrics .............................. , .................................. 554
34.11.2 Design and Code Reliability Meh·ics ........................................................... 554
34.11.3 Testing Reliability Metrics .......................................................................... 555
Review Questions ........................................................................................ :.................................. 555
References ...................... ,........................................................................... ................................... 555
CONTENTS xxix

35. BENCHMARKING ........................................................ :................................ : .. 557

. 35.1 Introduction ..................................................................................................... : ............... 557
35.2 · Terms used in Benchmarking ..... :.................................................................................... 558
35.3 Process ofBenchmarking ..................................................................... , ......................... 560
35.4. Types ofBenchmarking ............. �....................................................................................
I •
560
. �
35.4.1 Internal Benclunarking .............. :............................:.................................... 561
35.4.2 Competitive Benclrn1arking ................................ :........................................ 561
35.4.3 . Functional Benchmarking .....................................: ...................... ·: ............... 562
35.4.4 Best Practice Benchmark in ¥ .. '........'...............................................................
· 562
35.5 Process ofBenclu11arking ..... : ................. : ....................................................: .................. 563.
35.5.1 · Different Phases in Benchmarking Process ................................................. 565
35.6 Benefits ofBenchmarking .........................................,.................................................... 567
Review Questions ....................................................................................... " .................................. 5.68
References ..............................................................................................................................:....... 568

36. BUSI.NESS REENGINEERING ................... ; ..................................................... 571

36.1 Introduction ..................................................................................................................... 571
36.1.1 Definition ofReengineering ...................................................... : ................. 571
36.1.2 Radical .....·............. :..................................................................................... 572
36.1.3 Redesign ...................................................................................................... 572
· 36.1.4 Fundan1ental ................................................................................................ 572
36.1.5 Process ................................ .'...........................................................:........... 572
J6.1.6 Dramatic·...................................................................................................... 572
36.1.7 Rethinking ................................................................................................... 572
36.2 Other Ways to Look at B.PR ....., .................................................... :................................ 573
36.3 Conunon Myths aboi1t BPR ............ :.:............................................................................. 575
36.3.1 Process Improvement vs.Process Iimovation .............................................. 575
36.4 · The 7 Rs. ofReengineering ............................................................................................ 576
36.4.1 Reorchestrate ........'............................................................................: .......... 577
36.4.2 Realization ........................................... .'...................................................... 578
36.4.3 Require111ents .........................'...................................................................... 578
36.4.4 Rethink: .................................................................................... .......... :....... 579
36.4.5 Redesign ..........................................................................................:........... 579, ·
36.4.6 RetoQl .............................................................: ................. .'.......................... 580
· 36.4.7 Reevaluate . .'.................................................................................. :.............. 581
36.5 How to Minimize Failure of BPR Projects? ...................................:............................... 582
XXX INDUSTRIAL ENGINEERING-AND MANAGEMENT

36.6 BPR andIT .................................................................... ,............................................... 583

36.7 Recursive Relationship orERP/IT/E-Business andBPR ...................................... :........ 583
Review Questions ........................................................................................................................... 584
References ...................................................................................................................................... 585 ..

37. PRINCIPLES OF MANAGEMENT ......... .'.......................................................... 587

37.1 Introduction ..................................................................................................................... 587
37.2 Principles ofManagement.............................................................................................. 589
37.3 Approaches ofManagement Thoughts .... :...................................................................... 589
37.3.1. ScientificManagement.:.... ,................... :..................................................... 590
37.3.2 . Fayol's Principles·........................................................................................ 590
37.3.3. Human RelationsApproach........................... :..........................._;................. 591
37.3.4 Manag�ment Science and QuantitativeApproach .......:.............. ;............... 591
37.3.5 Systen1S Theoiy ....................... :....................................................................591.
37.3.6 ContingencyManagement.................................................._..............;.......... 592
37.4 Role of.Management ..:..... :.. :...........................:............... �.............. :............................... 592
.37.4.1 lnter,-,ersonal Role· .........................._........................................�............. :...... 592
37.4.2 Inforn1ational Roles................................... ;..... :........................................... 592
37.4.3 Decisional Roles............... :.......................................................................... 592
37.4.4 Knowledge Leadership Role ..... :........................... : ............................... :..... 593
37.4.5 Change Handler ............................................. :............. : ............................... 593
37.5 Functions ofManag�ment .........................····:·················..·············_-········:.:.................... 59'3
37.5.1 Planning............... :··........ :..........-....................... :..........._............ .'...................594
37.5.2 Organising.................................................................. :................................ 594
37.5.3 Motivating and Directing ................................................................... '...... ;.. 594
37.5.4 Contro1ling ··:·······················:······:···'.······,···········:..................................._...... 595
37.6 Leve.ls ofManagement .................................,.......................... :._.............. : ................. :.... 596
37.7 Management: Science orAits.......................................................................................... 597
· Review Questions .......................... "-.................: ......-......................................... :.................,............. 598
_
References .................................................................................... :................................................. 598

38. . ORGANISATION ............................................................................................. :. 601

38.1 Introduction................................................................................... :................................ 601
38.2 Principles of Sound Organisation ..................:................................................................. 602
38.3- Organisation Structure ........ :........................................................................................... 604
38.4 Organisation Desi�n .............................. ,..................................................................._..... 605
38.4.1 FunctionalApproach ......................................................... ......................... 605
•
38.4.2 FunctionalApproach with Lateral Relationship ................................ :.......... 607
CONTENTS xxxi

38.4.3 Divisional Approach of Organisation Strncture ........................................... 608

38.4.4 Hybrid Approach of Organisation Stmcture ................................................ 609
38.4.5 �atrix Approach of Organisation Strncture ..............: ..,. ......................... :.... 610.
38.5 Type of Organisational Structure and Relationship ........................................................ 611
38.5.1 Line Structure ........................................................................·...................... 611
38.5.2 Line and Staff Structure .......:........................................................................ 613
38.5.3 Functional Organisation ........................ :..................................................... 614
Review Questions· .......................,.: ................................................................................ 615
References· ..........................................: ................. : .....................·....................... : .......... 616

39. PROJECT MANAGEMENT AND CPIVI/PERT ............................................. , ..... 617

39.1 Introductiop .............. :·· .....................: ..····.............: ......................................................... 617
39.:Z Critical P-ath Method (CPM) ...........: ........: ................:............ : ....................................... 617
39.2.1 Assumptio�s in CPM .................................................................................... 618
39.2.2. Principles Involved in CPM ......................................................., ................. 618
39.3 Methodology of Critical Path Analysis (CPA) ................................................ , ............... 618
39.3.1 Advantages of Critical Path Analysis (CPM and PERT) ....................:........ 618
39.4 Terminology in Project Management ..............................: ............. :......'.............. ,........... 619
39.5 Symbols used in Network Planning ........... : .................................................................... 620
39.6 Connnon Flaws in Network ............................................................................................
' 621
39.7 Use of Dummy Activiti�s and/or Dummy Nodes ............................................ : ..........: ... 621
39.8 Rules for Constructing Network Diagram ...................................................................... 623
39.9 Numbering of Events in Network (Fulkerson Rule) ....................................................... 624
39.10 AON Vs AOA Approaches for Diagramming ................................................................. ' 625
39.11 Float or Slack ..........., ..............................................................................: ...................... 629 ·
39.12 Illustration of Floats ....................................................................................................... 631
39.12 Program Evaluation and Review Technique (PERT). ....................................'.................. 632
39: 13.1 Time Estimate in PERT ................................................ ' �.............................. 632
39.14 Difference between CPM and PERT ..................................:.: ............................................. 635
Review Questions ........................ .............................................................................................!.... 636
References .............................., ...................................... :...._................................, ........................... 637.

40. SCHEDULING .. :......................................., .............·............•............................. 639

40.l .
Introduction ................................................: ...................................................................
. 639 ·
40.1.1 Loading .. : .................................................................................................... 640
40.1.2 Sequencing .............................................................................................:.... 640
40.1.3 Detailed Scheduling .................................................................................... 640
40.1.4 Expedi.ting .................................................................................................... 640
40.1.5 Short-term Capacity (Input-output) Control ................................................ 649
xxxil INDUSTRIAL ENGINEERING AND MANAGEMENT

40.2 Scheduling Ru1es ... ,.......................... : ....................................... :..................................... 641

40.3 Gantt Chart ..................................................................................................................... 644
40.3.1· How to Prepare a Gantt Chart? .................................................................... 6�4
40.4 Johnson's Rule.for Optimal Sequence ofN Jobs on 2 Machine ..............:...,................... 645
40.5 Process n Jobs on 3 Machines (n/3 Problem) and Jackson Algorithm ............................ 649
40.6 Processing of 2 Jobs on m Machine (2/m) Problem ................... : ................................... 650
Review Questions ........................................................... .'...........: ................................................... 654
References· ...................................................................................................................................... 655

41. WAITING LINES: QUEUING MODELS ........... : ................................................ 657

41.l Introduction: ...................................... :........ .................................................................... 657
·
41.2 Issues Involved in Waiting Line ......: ........................................ :............................. ......... 657
,.
41.3 Characteristics of� Queuing Model ............................................................................... ($58
41.3.1 Ari'ival Characteristics
. .................................................................................
. 659
41.4 Queue Characteristics ..................................................................................................... 661
41.5 Service Characteristics ............... :......................................................... , .......... : .............. 661
41. 6 Custo:.ner Behaviour .................... :....... :!......................................................................... 662
44.7 Kendall Notations ........................................................... . ............................................... 662
41.8 Single-Line-Single-Server Model ........................................... : ......................................'. 662
41.9. Model II (M/M/1: N/FIFO) ..................................................................-.......................... 666
41.10 Model II (M/M/C: oo /FIFO) .............................. :.........................................'. ................. 667
41.10.1 Multiple Cha1mel Queuing Model ............................................................... 667
Review Questions ................................._..................., ....................................................................... 670
References ·······································/·························································�········ ·•························ (i,71
.
42. SIMULATION .................................................................................................... 673
42. l Introduction ....... :..................................-.......................................................................... 673
42.1.1 Purpose of Sin1t1lation ..........................................................- ....................... 673
42.1.2 Limitations of Simulation ............................................................................ 674
42.2 Monte Carlo Simulation ................................................................................................. 674
42.3 Steps in Si1nulation ............'............................................... ,............................................ :675
42.4 Sunu11ary ...........................:............................................................................................ 681
42.5 General Purpose Simulation System { GPSS) ........................................................ :........ 681
Revie,:v Questions ...................................................................................................................'........ 685
References .......·............·..................................................................................................... ............... 686

43. _ INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN ...................... 689

43.1 .Introduction ............................................... : .................................................................... 689
43.2 Changing Faces oflndustrial Engineering (IE) ......... : ............. :...................................... 689
CONTENTS xxxiii

43.3 Some Contemporary Trends .................................................................·.......................... 694

43.3. l Organisation Trenc! ........., ............................................................................ 694
43.3.2 Technology Trend ............... :·············.. ····················· .................................... 695
43.3.3 Other Trends ..................................................·.............................................. 696
43.4 What is the Future for Industrial Engineering (IE)? ....................................................... 697
43.5 Su1nn1ary ······:·: ..........:................:................................................................................... 697
Review Questions ........................................................................................... , ............................... 697.
References .............................................................. :... ........: .......................................................... 698

44. HUMAN RESOURCE MANAGEMENT AND HUMAN

RESOURCE PLANNING ............................................................................... 699
44.1 Human Resource Management ..............·......................................................................... 699
44.1.1 Factors Contributing to the Growing Importance of HR.J\tI .............. : ............ 704
44.2 Organizational Behaviour ................................... : ....................: ...................................... 705
44.2. l The Goals of Organizational Behavior ........................... ............................ 706
44.2.2 Individual .........................................................................,. .......................... 706
44.2.3 Group :.....................................................: ................................................... 707
44.2.4 Tean1 ................................................: ...........................: ............................... 709
44.3 Human Resource Plaiming (HRP) ...............................: .................................................. 710
44.3.1 Strategic Planning and the Humm� Resource Pla.11.11ing .Process ................... 711

45. PURCHASING ............................................................ , .. : .................................. 715

45.1 Introduction ...... :.. ............................................................................, .............................. 715
45.1.l Objective ..................................................................................................... 715
45.1.2 Functions ofPurchasing Department ....................................., ..................... 715·
45.1.3 Duties ofPurchasing Officer .......... ............................... : .............................. 716
45.2 Methods ofPurchasing ...........................................'......................................................... 716
45.3 Purchasing Process/Procedure ....... : .............................. :................................. : ............_ ... 718
45.3. l Purchasing/Buying De.cision as Per Procedure ............................................ 718
45.3:2 Purchase Requisition Form .......................................................... :........._...... 721
45.3.3 Purcl�asing �rocedure ................................................................................._. 722
45.4 Tenders .., ................. :.'......................·............................................... :............................... 723
45.4.l Notice Inviting Tenders ............................................................................... 723
45.4.2 Comparative Statement ............................................................................... 724
45.5 Importance of Materials Management ............................................................................ 725
45.5. l St9re Records .............................................................................................. 726
45.5.2 Purchasing Systems/Buying Techniques ...................................................... 728
45.5.3 Purchasing/Buying Techniques ....................................................................
.
728
t
45.6 Vendor Rating ............................................................·..................................................... 72'9
xxxiv INDUSTRIAL ENGINEERING AND MANAGEMEW

46. LEAN MANUFACTURING ................................................................................·. 731

46.1 Introduction .................................................................................................................... 73·1 ·
46.2 CommonMethods Used in Lean Manufacturing ............................................................ 732
46.3 Mechanisms for Environmental Improvement through Lean Implementation................ 736
46.4 Barriers to Successful Implementation ........................................................................... 7]7

47. GROUP TECHNOLOGY ................................................................................... 739

47.1 Introduction·......................................... :................................................................ : ......... 739
47.l.1 Definitions....................................................................................... ........... 739
47.2 Objectives......................................................................... : ..: ....... :................................... 739
47.3 Production Flow Analysis (PFA) .................................................................................... 744
47.3.1 PFA Procedure.......................................... :....................................... :.......... 744
47.3.2 Objectives inCellular Manufacturing ......................................................... 745

48. FLEXIBLE MANUFACTURING SYSTEMS (FMS) ............................................ 751

48.1 Inh·oduction .................................................................................................................... 751

49. INDUSTRIAL PSYCHOLOGY ............................. :............................................. 759

49.1 Inh·oduction .................................................................... :............................................... 759
49.l.1 Definition .................................................................................................... 760
49.2 Evolution oflndustrial Psychology ................................................................................ 760
49.3 Primary Role ofindustrial Psychologists ....................................................................... 761
Review Questions ................................................................................................................... , ...... 762

50. SERVICE OPERATIONS AND SERVICE PRODUCTS ..................................... 763

50.1 Introduction .................................................................................................................... 763
50.2 Service OperationsManagement .................................................................................... 763
50.3 Services Products and ServiceCharac.teristics ............................................................... 764
50.4 OperationsManagement in the Service Sector ..........................·..................................... 764

51. ERGONOMICS ................................................................................................. 765

51.1 Definition of Ergonomics ............................ ,.-................................................................. 765
51.2 Objectives ....................................................................... ,................................................ 766
51.3 ls Ergonomics Related with Productivity? .................................................... :................ 766
51.4 A Man-Machine System ............ ,.................................................................................... 767
51.4.1 Design and Types ofCQntrols ..................................................................... 768
51.5 Anthropometry ............................................................................................................... 769
51.5.1 Principles in the Application of Anthropometric Data ................................. 769
51.6 Anthropometry for Workplace Design............................................................................ 770
51.7 Ergonomics inComputer WorJ.<station.............................. ,............................................. 773
CONTENTS XXXV

51.7.l Positioning the Monitor Screen ................................................................... 774

·
51.7.2 Lighting, Ventilation, Noise Levels in the Computer Workstation .............. 775
51.8 Co.mputer Injuries ......:....................................................................................: .............'.. 776

52. MARKETING MANAGEMENT .......................................................................... 779

52.l Introduction .................................................................................................................... 779
52.l .l Marketing Concept .............................................................................'.......... 779
52.1.2 Marketing Mix ........................................................., ................................... 780
52.1.3 Functions ofMai-keting ............................: .................................................. 780
52.1.4 Product Life Cycle ...................................... : ............................................... 781
52.2 Pricing ............................................................................................................................ 784
52.2.1 Types of Pricing ..._....................................................................................... 784
52.3 Market Research ............................. :................................................................: .............. 788

53. SIX SIGMA ....................................................................................................... 791

53.l What is Six Sigma? ....................................................................................................... : 79·1
. 53.2 Six Sigma Fran1ework .....................................- ........: ...................................................... 79�
53.2. l Five Elements ofthe Six Sigma Framework ................................................ 793
53.2.2 Define-Measure-Analyze-Improve Control (DMAIC) Process ................... 794
53.3 Total Quality Management (TQM) and Six Sigma .......................................�.... : ............ 795
53.4 International Organization for Standardization (ISO) 9000 Series and Six Sigma ......... 797

54. AGILE MANUFACTURING ................................................................................ 799

· 54.l Introduction ........, ........................................................................................................... 799
54.2 Need for Agile Manufacturing·················:·· .................................................................... 799
54.3 Four Principles .........................................................................................-...................... 800
54.4 Comparison between I.; an Manufacturing and Agile Manufacturing ............................ 80 I
54.5 Difference between Traditional and Ct rrent Practice in Manufacturing ........................ 802

APPE.��DIX ·................................................................................................................. 807

GLOSSARY AND TERMS ................................................................................. : ........ 809
INDEX .................................................................................................................... : ... 817
 INDUSTRIAL ENGINEERING
=sr

1.1 INDUSTRIAL ENGINEERING

Industrial engineering is a field, which concerns the design, improvement and installation of an integrated
system of people, material, equipment, energy and technology. The American Institute of Industrial Engineers
(AIIE) further defines that it draws upon specialized knowledge and skill in the mathematical, physical
and social sciences together with the principles and methods of engineering analysis and design to specify,
predict and evaluate the results to be obtained from such systems. Industrial engineering is thus concerned
with bringing together and effective utilization of various resources to facilitate efficient production operation.
Effective utilization of resources means that input to the production—operation system—such as people,
material, information and equipment are used in right way so that they form an integrated combination
to meet production/operation objectives. Efficient production/operation systems are those 'systems which
score high on norms of actual performance.
It is important to note that industrial engineering is concerned not merely with the system of material,
equipment and•processes but also with people who interact with this system. The impact of people on
the operating system is both from with-in and from out-side. People, who operate a machine, who plan
the process or those, who handle material are within the operating system. Therefore, work-study, ergonomics,
motivation, wage-incentive plan, time and motion study, etc., are integral part of industrial engineering.
In addition to the people inside the purview of production/operation system, those people, who are outside
also play important role. For example, customers, out-side the production/operation system, determine
the demand of the product. Customer's demand is dependent on product design, quality, price-discount,
etc. Therefore, industrial engineering also focusses on these aspects. With changed pardigm of quality
during recent years, the focus of Total Quality Management (TMQ) is now on customer-delight. Industrial
engin-ecs are now expected to work on continuous improvement on product and process.
Another important feature of industrial engineering is its generality. Industrial engineering is not
restricted only to manufacturing activities. It includes service sectors, like, banking, education, waste-
management, health care, transportation, distribution, etc. Thus, the scope. of industrial engineering is
quite big and certainly not restricted within the' boundary of industry (factory).
The scope of industrial engineering is illustrated in Figure 1.1. It includes design and improvement
of condition, design and improvement of organisation, design and improvement in work place, method
and procedure, and design and improvement in product and services. The details of various components
of industrial engineering will be discussed later in the book.
2 INDUSTRIAL ENGINEERING AND MANAGEMENT

INDUSTRIAL ENGINEERING

Desig i and Design and Design and Design and

improvement improvement improvement of improvement •
of condition of organisation work place, method. of product and
and procedure services

❑ Work study ❑ TQM (Total

Decision Quality
External Internal Operations
Theory Management)
Research ❑ System analysis
❑ Value
❑ Vender Oiganisational ❑ Layout planning engineering
❑ Ergonomics
development Issues
Lighting ❑ Planning
❑ Customer ❑ BRP
➢ Noise and ❑ Leadership
research and (Business
vibration ❑ Motivation ❑ Directing
need Process Re-
Fatigue engineering)
analysis, etc. ❑ Automation
)%. Ventilations, etc. ❑ Control
❑ Organisation
❑ Benchmarking
culture, etc.
❑ Scheduling, etc.

Figure 1.1 Scope 'of Industrial Engineering

1.2 HISTORICAL DEVELOPMENT OF INDUSTRIAL ENGINEERING

Industrial engineering has developed during past 250 years. Five different phases of industrial engineering
have almost passed. These phases are:
Phase Pre-Industrial Revolution Era (upto Early 1800's)
Phase II: Industrial Revolution (Early 1800's to Late 1800's)
Phase III: Scientific Management Phase (1890 to 1940)
Phase IV: Operations Research and Quantitative Phase (Late 1940's to Early 1980's)
Phase V: Automation and Computer Integrated Manufacturing Phase (Since Early 1980's).
The future trend is towards more automation, computer-controlled manufacturing, information handling
through computers, and integration of manufacturing systems. Now, we will briefly discuss the various
phases in Industrial Engineering.

1.2.1 Pre-Industrial Revolution Era

Prior to Industrial Revolution in early 1800's, there was focus on hand-operated manufacturing activity.
India was a major player in global trade. There are evidences that India had trading relations with her
neighbouring countries. However, there was no focussed factory concept. Mostly, handicraft, agriculture
products, etc., dominated the trade. Globally, the major developments were:
1764: James Watt developed steam engine.
1776: Adam Smith wrote Wealth of Nation and advocated the concept of division of labour, skill
development, specialization etc
INDUSTRIAL ENGINEERING 3

1933: Barnes' Work Study

1927-1933: Elton Mayo (Motivation) —1940: OR Group (OR)

Developments 1931: Shewart (QC) — r1974: Dantiz (LP)
and 1917: Harris (Inventory Control) — —1952: First Prototype NC M/C
'Productivity 1913: Gantt (Activity Scheduling)-- —1961: Initial Applications Robot
1911: Gilbreth (Motion Study) 1965:_ Concept of Flexible
_
1910: Taylor (Scientific Method)- Automation _...--- ---
1932: Babbage (Wage Factory
Payment Time Study) of
1998: Whitney (Interchangeabl Parts) Future.
1776: Adam Smith (Div. of Lal or) -1 Automa-
tion,
1764: James Watt (Steam engii e)— High
Operations Computer- Auto-
ResearCh Integrated
Scientific mation
and Manu-
Pre-Industrial Industrial. Management Quantitative facturing
Revolution Revolution Phase Robot-
Phase
Era i zed
Factory

1700 1750 1800 1850 1900 t 1950 1970 2000 2020

I
World War II
—.-- Period

Figure 1.2 Historical Developments in Production System

1.2.2 Industrial Revolution and Post-Industrial Revolution Phase

For the first time, industrial engineering emerged as a profession during the Industrial Revolution. This
was around year 1750. This was due to the need for technically qualified people, who were needed
to plan, organize and control the manufacturing processes. After the Industrial Revolution, Taylor's contribution
brought the era of scientific management. There was overall improvement in the planning, scheduling
and control of the industrial process. Need for supervisors was being realized.
It was then the era of Frank B. Gilberth and his wife, Dr. Lillian Gilberth. Frank Gilberth focussed
on identification, analysis, measurement and setting standard for the fundamental motions, which were
required to accomplish a job. His contributions were helpful in designing a job, deciding the time required
to , perform a job and improvement in ways to perform a job. Dr. Lillian Gilberth, who was the wife
of Frank, worked on human relation aspect of engineering: Her period spanned almost a century from
1878 to 1972.
A major pioneering contribution came from Henry L. Gantt. He provided the concept of planning
and scheduling the activities on a graphical chart. This type of chart is still widely used and is called
as Gantt Chart. This is very helpful in reviewing the progress and updating the schedule of a work.
Facto ies emerged in textile, steam engine, metal cutting and fabrication, machine tools, etc. It was realized
that the factories should be managed efficiently and processes should ,be effective to convert raw material
iniu the finished goods. This became the root of the inception of industrial engineering.
In early 1800's, Charles Babbage systematically observed factory operations in England and US.
He wrote his experiences in a book On the Economy of Machine?), and Manufacturing, in 1832. His
observations, regarding skill, match with operations and his conceptual foundations on division of labour
acted as the foundation block of some later developments in industrial engineering. It was around 1880
that a major contribution by Frederick W. Taylor almost changed the approach towards industrial management.
His focus was on improvement in work content, specialization and division of labour. His contributions
--
4 INDUSTRIAL ENGINEERING AND MANAGEMENT

are treated as the real beginning of industrial engineering by many authors. Taylor's approach was a
three step process for improvement:
Step 1: Observe, analyze and improve the method of performing a work or a work content.
Step II: Identify ways to reduce times required to perform a job.
Step HI: Set standard for time required to perform a job and monitor the performance.
Major building blocks of industrial engineering emerged in the period 1920-40. In 1924, W.A.
Shewhart developed the fundamental concept of statistical quality control. During this period, fundamental
approaches on inventory control, incentive plans, material handlirig, conceptions of organization, theory
and management, plant layout, etc., evolved. Ralph M. Barnes worked at Cornell University on motion
study for his doctoral work.
During 1940's, conceptual foundation for value engineering, system analysis and Operations Research
emerged. Mathematical and statistical tools were widely used. Optimization and system became the buzz
word after World War II. Simultaneously, use of computers in industrial engineering started dominating
the scene. Many research journals started coming out. After the advent of computerisation of manufacturing
activities, automation and application of flexible manufacturing system, the scene changed considerably.
Many research works started appearing which dealt with cycle-time reduction, flexibility, customer focus,
stockless production, etc. Manufacturing system is now being viewed on a much wider spectrum, which
includes vendors and customers both.
1.3 ROLE OF INDUSTRIAL ENGINEER
Industrial engineers are important link in an organisation for design, operation, control and decision-
making activities of firm. Their role is that of an expert, advisor, analyst, trainer and decision maker
(Fig. 1.4).
e-Commerce —
ER P —

1965: Concept of Flexible Automation —

1961: Initial application of Robot

1952: First Prototype N C Machine

Developments
and Factory
Technology 1732: Computer Concept of
Future
1764: —
Automa-
• (Steam High Auto-
tion,
Engine) OR mation &
Computer,
Scienti fie and , Integrated Robot-
Industrial Management QT Manu- . ized
Handicraft Phase Phase facturing Factory
Revolution
Age Age

1700 1750 1800 1850 1900 1950 1970 2000 2020

Figure 1.3 Development of Technology

Any organisation, ahether manufacturing or service, needs the services of industrial engineer. His
role is quite varied. It ranges from identifying areas for process improvement, quality control, work study,
etc., to business process re-engineering (BPR), where, major changes are made in the entire operations
of the organisation. His role will be more clear as we deal with next few chapters of the book.
INDUSTRIAL ENGINEERING 5

INDUSTRIAL ENGINEER

Adv'sor and Analyst of Trainer Dec'sion

• C.onsultant System Maker
Help in decision- — Motivates
•
making - Intaprets data — Ident fics system — Helps in work study — Uses OR and
faults QT
Helps in designing , - ReN eiws data
— Advises for — Analyses job at micro — Train the workers
the system — Develops and
improvement level in methods and
uses decision
motion study
tools
Expert in new — Suggests
— Coordinator
technology productivity — Applies new — Uses MIS and
like 131)12, TQM, tool technologies Computers
M RP, OR, etc. — Negotiator

Figure 1.4 Role of Industrial Engineer

1.4 APPLICATION OF INDUSTRIAL ENGINEERING

Industrial engineering is widely used in manufacturing as in well as the service sectors. Some examples are:

Sector Few Applications of Industrial Engineering

Manufacturing I. Formulation of production plan

2. Control of processes and products
3. Inventory control
4. Design of plant layout
5. Scheduling of machines and processes, etc.

Service 1. Construction project planning

2. Airlines operations
3. Hospital management
4. Transportation problems
5. Optimal use of natural resources, etc.

The concepts of industrial engineering and operations research are widely used in financial
basic
management, marketing management, logistics, purchasing etc. For example, the depreciation of machine
is required in financial 'management also.

1.5 INDUSTRIAL ENGINEERING AND PRODUCTION MANAGEMENT

Industrial engineering is closely related to production management. Many topics, found in the textbook
of production management, are also found in industrial engineering. Therefore, there is no water-tight
compartment between the two. However, the differences are as follows:
(i) The focus of industrial engineering is on the design, analysis, planning and control of productive
system, which includes both production and services. Production management is more focussed on
the management of production system.
6 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Industrial engineers are generally specialists who perform the role of staff-function in the organisation.
Their role is to advise the line managers. On the other hands, production managers are line managers.
It is, therefore, common that industrial engineers do not operate the system they design. Production
managers are directly responsible for the shop-floor operations of the system.

1.6 INDUSTRIAL ENGINEERING AND MANAGEMENT SCIENCE

Many tools and techniques developed in management science are used in the industrial engineering. These
techniques are decision theory, mathematical programming, network analysis, inventory model queuing
theory, simulation techniques, etc.

REVIEW QUESTIONS

1.1 What is Industrial Engineering? Outline the scope of this area.

1.2 Trace the evolution and historical development of Industrial Engineering.
1.3 Explain the role of an Industrial Engineer.
1.4 What are the application areas of Industrial Engineering?
1.5 How is industrial' engineering related to other disciplines, such as: (i) Management, (ii) Operation research,
(iii) Psychology, (iv) Production management?

REFERENCES

1. Abernathy, W.J., (1974), "The limits of the learning curve", Harvard Business Review, September-October,
pp. 109-19.
2. Ackoff, R.L., (1978), The Art of Problem Solving, Wiley, London.
3. BS 3375 Work Study and Organisation and Methods (O&M), Part I: 1984. Guide to Organisation Study.
British Standards Institution, London, 1984.
4. Bentley, T.J., (ed.), (1991), Management Services Handbook, Pitman (in association with the Institute of
Management Services), London.
5. Buffa, E.S. and Sarin, R.K., (1992), Moder, Production/Operations Management, John Wiley & Sons,
New York, NY.
6. Chase R. and Aquilano, J.J., (1992), Production and Operations Management, 6th ed., Irwin,
Homewood, IL.
7. Chase, R. and Garvin, D., (1989), "The service factory", Harvard Business Review, July-August,
pp. 61-9.
8. Crosby, P.B., (1979), Quality Is Free, McGraw-Hill, New York:
9. Dalela, S. and Shankar, R., (2000), A Textbook of Production Engineering, Galgotia Publication, New Delhi.
10. Deming, WE., (1986), Out of the Crisis, MIT Centre for Advanced Engineering Study, Cambridge, MA.
I1. Grandjean, E., (1971), Fitting the Task'to the Man, Taylor & Francis, London.
12. Garvin, D.A., (1983), "Quality on the line", Harvard Business Review, Vol. 61 No. 5, pp. 65-75.
13. Goldratt, E.M. and Cox, J., (1986), The Goal, North River Press, New York.
14. Hall, R.W., (1983), Zero Inventories, Dow Jones-Irwin, New York.
15. Hammer, M. and Champy J., (1993), Re-engineering the Corporation, Nicholas Brealey, London.
INDUSTRIAL ENGINEERING 7

16. Hayes: R. and Abernathy, W ., (1980), Managing our way to economic decline, Harvard l}usiness Review,
,
· . July-August, pp. 67-77.
17. Hayes, R. and Clark, K., (1986), "W hy some factories are more productive than others", Harvard Business
Review, Vol. 64 No. 5, pp. 66-73.
18. 1-fayes, R. and W heelwright, S., (1984), Restoring Our Competitive Edge, John W iley and Sons, New York.
19. Hayes, R., - H. and W heelwright, S. and· C_lark, IC, ( 1988), Dynamic Manufacturing: Creating the Leaming
Organiz�tion, The Free Press, New York, NY.
20. Heizer, J. Render, 8., (1991), Production and Operations Management, Allyn & Bacon, Boston, MA. .
21. Hill, T., (1989), Manufactw:ing Strategy, Irwin,, Homewood, IL..
22. Juran, J., (1986). The quality trilogy, Qualily Progress, Vol. 9 No. 8, pp. 19-24.
23. Kepner, C.J:I. and Tregoe, 8.8., (1976), The Ratio11al Manager, McGraw�Hill, New York.
24. Merrill, H.F., (Ed.) (1970), Classic in Management, AMA, New York.
25. Orlicky, J., (1975), Materials Req11ireine11t P/a111111 1 ;, McGraw-Hill, New York.
26. Osborne, D.J., (1987), Ergonomics at Work, 2nd edn., W iley, London.
27. Pugh, D.S., (Ed.) (1985)! Organization The01:i1 Viking Penguin, New York.
,

28. Schonberger, R.J., (1987), World Class Manufac t11ri11g: The - Lessons of Simplicity Applied, Free Press,
New York, NY.
29. Schroeder, R.G, (1993), Operations Management, McGraw-Hill, New York.
30. Shafritz, J.M. and W hitbeck, P.H., (Eds) (1978), Classics of Organization Theory, Moore, Oak Park, IL.
31. Shankar, R. and Jaiswal, S., (1999), Ente,prise Resource Planning, Galgotia Publications, New Delhi.
32. Shingo, S., (1985), Zero Quality Control: Source Inspection and the Poka-yoke System, translated by Dillon,
A.P., Productivity Press, Stamford, CT.
33. Skinner, W., (1974), The focused factory, Harvard Business Review; May-June, pp. 113-21.
34. Skinner, W ., (1986), The productivity paradox, Harvard B11siness J?evieiv, Vol. 64 No. 4 pp. 55-9.
35. S'tarr, M., (1984.), Global production and operations strategy, Columbia Joumal of World Business, Vol. 19
No. 4, pp. 17-22.
36. Stevenson, W.J., (1993), Production/Operations Management, Dow Jones Irwin, Homewood, IL.
37. Taylor, F., (1947), The Principles of Scientific Management, Norton & Co. New York.
38. Wagner, H.M. and W hitin, T.M., (1958), A dynamic version of the ELS model, Management Science, Vol. 5
No.I, pp. 89-96.
39. Weiss, H.J. and Gershon, M.E., (1989), Production and Operations Management, Allyn & Bacon, Needham
Heights, MA.
40. Wheelwright, S. and Hayes, R., (1985), Competing through manufacturing,
· Harvard Business Review, January-
February, pp. 99-109.
41. Whitmore, D.A., (1987), Work Measurement, Heinemann, available from the Institute of Management Services,
Enfield, EN2 600.
42. Winston, W.L., (1996), Operations Research: Applications and Algorithms, 3rd edn., Duxbury, London, (from
Thomson Business Press Supplied with software).
43. W right, 0., (I982), MRP II: Unlocking Ai11ericri '., Productivity Potential, CBI Publishing, Boston, MA.
8 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 PRODUCTION SYSTEM

2.1 PRODUCTION
The objective of an enterprise is to provide goods or services, and to earn some profit. These days,
many firms are focussing on continuous improvement and customer delight. A continuous search for
areas of improvement in the production system is needed. For this, a clear understanding of recent developments
in production system, industrial engineering and management is necessary. To achieve these objectives,
the firms need to convert some inputs like men, material, money, energy, information, etc., into useful
outputs like finished products and services in required quantity and quality. The transformation of the
inputs into pre-specified outputs is achieved through production process (Figure 2.1).

Departments as Internal
Customer (TQM) Concept

R Men
E Goods
0 Customer
S Machine • External
Transformation U
0
N Process Information T
U Technology
P P
R
C Finance U IQQ U
E T e.
e Data S S

Feedback
and Control -71Kirk
Customer Response After Sales
Production System Services

Figure 2.1 A Schematic Model of Production System as an Input-output System

The outlook of the management towards production system has changed during recent years. In
addition to profit as corporate goal, the focus now is on good quality, customer satisfaction and improvement
in the product and production system. For example, Philips (a multinational electronics goods company)
has been putting advertisements in which the line, which catches our attention is, "Let's make the thing.
better." The important aspect regarding a production process is the value addition on the raw material
10 •INDUSTRIAL ENGINEERING AND MANAGEMENT

before a customer uses it. Examples of such a systv :ire: automobile manufacturing unit, book publishing,
plastic injection, moulding unit, toy-making firm: cc.

2.2 LIFE CYCLE APPROACH TO A PROF.11CTION SYSTEM

It is important to understand the various phases in the life cycle of a production system. Life cycle
of a production system has different phases, which ore same as that of human beings. We can identify
eight distinct phases (Figure 2.2).
1. Birth of the production system.
2. Product design and process selection

Declining Drop in
Slow Growth Saturation Outout
Initial Rapid
Output Growth Growl,
((i) (7)
(5) (5)
(8)

(I) (2) (3) (4)

Idea Product Designing
Conceived Design II System

-6- 6 Months to 3 Years Start up

Time

Figure 2.2 Stage Product Life Cycle

3: Design of the system

4. Manning of the system
5. Start-up of the system
6. System in the steady state
7. Revision of the system
8. Termination of the system.
Some typical products at various levels of p luct life-cycle are shown in Figure 2.3.

Nu.• vice for

pr: t :.; irposes
Black &
Output Supe r
'White T.V.
COmpti
- Colour T.V.
Satallite automatic - Heavy Engineering
Super- T.V. Watches - Construction Industry
Conduc- -- Publishing
tor Diode
Fiber Radio
Neuclear
Devices for Opti •s
PSLV
Satellite Warfare

Months to 3 Years Start up

Time

Figure 2.3 Typical Products at Various Lewels of Product Life Cycle in Indian Industry
PRODUCTION SYSTEM 11

Every stage in the production system is concerned with different level of managerial decisions.
It is shown in Figure 2.4.

Stage Managerial Decision Making

Birth of the • What are the goals?

System • What are product/services?

2. Product Design and • Form and appearance of product

Process Selection • Technology of product.
Designing the System

3. • Facility location
• Lay-out
• Maintenance
• Desired Quality.

4. Manning of the • Job design for each worker

I System • Part planning
• Compensation to worker.

5. Start-up of the • Operation starting

System • Duration to reach desired-output.

6. Systerd in the • I-low to run the system?

I steady state
• I-low to improve system?
• How to deal with operational problem?

Revision of the • Revise system in light of external change

7. I System — New technology threat/opportunity
— Revision of market
— Newer method to manufacture
— New product
— Innovation.

8. Termination of • How does the system die?

the System • Salvage resources.

Figure 2.4 Managerial Decision Making in

Production Life-Cycle
12 INDUSTRIAL ENGINEERING AND MANAGEMENT

2.3 TYPES OF PRODUCTION SYSTEM

The production system varies from factory to factory and from product to product. However, one of
the most important issues is production volume. The most common type of production systems are:
(i) Job shop production
(ii) Batch production
(iii) Mass production.
Further, a particular type of job shop situation is project production. Similarly, the mass production
could be line (or flow production) and continuous production. We will discuss each in more detail.

2.3.1 Project Production

Many civil engineering projects for construction or military related activities are project production. In
this, complex and large manufacturing task is undertaken. Generally, work is carried out at the site of
the work rather than in factory. All resources such as tool, material, labour, etc., reach the site itself.
The shipbuilding activity is an example of project production. A fixed position plant layout is recommended
for this variety of production system.

2.3.2 Job Shop Production

The job shop production system is characterised by the low production volume. It has following characteristics:
1. Commonly used to meet, a particular customer need.
2. Production lot size is generally small.
3. Product variety is generally very high.
4. Production equipments are mostly general-purpose and flexible to meet specific customer order,
which varies from time to time.
5. Highly skilled labour is needed to handle the equipments, as variety and prod' .t range are very
high (Figure 2.5).

Activity
Job-Shop-Production
Set-up Process
Operation

Wait I Set-up I Process

l Wait

--.- Elapsed-Time

Machine time for one component = (Set-up time + Process time)

Total elapsed time = Y. (Set-up time + Process time + Waling time)

Figure 2.5 Activities vs Time in Job-Shop

2.3.3 Batch Production

Batch production is suited for medium volume lot of same variety. At regular intervals, the production
order is repeated. The importance of batch production in current manufacturing scenario can be well
PRODUCTION SYSTEM 13

realised, as according to a study, more than 75% parts manufactured worldwide are in batches of 50
or less. Batch production has the following characteristics:
1. Commonly used to meet repeated customer orders.
2. Production lot size is medium and ill batches. This may be despite continuous orders from the
customer, as part variety is also medium and, therefore, switch over from one part to another is
essential.
3. Suitable for moderate product variety.
4. Production equipments are general-purpose but suitable for higher production volume.
5. Specially designed jigs and fixtures may be used to reduce set-up time and increase the production
rate.
6. Skill level of labour in batch production should be reasonably high but may be less as compared
to job-shop: This is due to relatively less variety and variation (Figure 2.6).

Activity
Batch Production
Set-up PrOcess
xm
Operation

Wait Set-up! Process

xin ,
I Wait
nu =
in = Batch Size

Elapsed-time

1
Machine time for one component = — E (Set-up time + E Processing time per part)

Total elapsed time = Total set-up time + n Processing time per part

Figure 2.6 Activities vs Time in Batch Production

2.3.4 Mass Production

Mass production is suited for the manufacturing of continuous identical parts. Production rate is generally
very high. , It is characterised by the followings:
1. Particularly suited for high demand items.
2. Production lot size is very high and production rate is continuous.
3. Product variety is very low,' which may be one of its kind.
4. Special purpose tools and, equipments may be needed.
5. Skill level of workers may be moderately low as repeated work on same machine is needed.
6. Entire plant is designed to cater to few special varieties of products.
•r
7. Higher investment in machine is needed due to specialised machine and special purpose operation
(Figure 2.7).

2.3.5 Continuous Production

Continuous production is very common in food processing industry, oil refinery, drugs and pharmaceutical
unit, chemical processing unit, etc. This is a special type of mass production unit in which production
14 INDUSTRIAL ENGINEERING AND MANAGEMENT

does not stop. Unlike discrete parts production system, the flow of output is continuous. Generally, online
control and continuous system monitoring may be needed. All such controls are generally automatic and
computer controlled (Figure 2.8).

Activity

Process
ooel mini]

2 Process - - Mass Production

I

Transfer Time

Elapsed-Time

Machine time for one component = Processing time + Transfer time

Total elapsed time = Processing time + Transfer time

Figure 2.7 Activities vs Time in Mass Production

Fixed Process Cellular Product.

Layout Position Layout Layout Layout
Layout

General Purpose Special Purpose

Equipment

00.

It?

0 eke.
NoV.WC4 • %.
Factors
2.0-1 •
1‘\\":2Ne''C'ecItiVC°°\\

‘6.11°
VsZ.1<0

Project Job Shop Batch Flow Line Continuous

Production or Mass Production
Production

Figure 2.8 Type of Production System: Effect on some factors and preferred layout

2.3.6 Comparison of Different Production Systems

Comparisons of different production systems are shown in Table 2.1.
PRODUCTION SYSTEM 15

Table 2.1 Comparisons of various production system

Aspects Production System

Project Job shop Batch Mass Production Continuous

I. Product Variety Very highly High Low Standard

diversified
2. Production Volume One Low Very High
3. Flexibility in Change High Nil
of Product
4. New Design High No
Accommodation
5. Make to Order Yes Yes Some No No
6., Make to Stock No No Some Yes Yes
7. Layout Fixed position Job shop Group Technology Flow line
(Functional) based: cellular
8. Focus Product Process
9. Company Strength Capability and > Product and
Range specialization
10. Performance Criteria
(a) Important Quality and Price
Delivery
(b) Least dominant Price Product
11. Capital Investment Low or high Low High
12. Inventory
(a) Raw material As required Highly planned
(b) Work-in progress High High Low Low Very Low
(c) Finished goods Low High
13. Operation Flex,'.)ility High No
14. Setups Variable High Low No
IS, Technology Universal —> Dedicated
16. Better utilization Labour Process
17. Uncertainty in Nu High No
material Requirement
18. Level of Automation Low No High
in Material Handling
19. Inspection Individual > On-Line
(Off Line)
20. Processing Time Long Short
21. Plant Capacity Variable > Established
22. Process Control Difficult Easy
23. Machines Causing Very frequent Absent
Bottleneck, (waiting
of parts)
Contd...
6 INDUSTRIAL ENGINEERING AND MANAGEMENT

Aspects Production System

Project Job shop Batch Mass Production Continuous

24. Effect of Poor Depends upon Low Severe

Maintenance and type of (Very High)
Machine Breakdown operatidn
25. Quality Checks Intermittent All parts Sampling Built in the
Process
26. Operation Control Complex and Complex but More complex Straight-
Difficult depends on complex forward and
order Simple
27. Economies of scale Few None High
28. Information, Less High Low
Uncertainty and
Vagueness
29. Building of Plant Temporary Site Single/double Sometimes
Storey equipments
are outside
the plant

30. Floor Area per worker Variable High Low

31. Supervisor Highly Technical Semi-Skilled
32. Labour/Supervisor Variable 30 50 50 15
Ratio (approx) 20 to 50
(Indicative for
Comparision only)
33. Material flow All reaches the Intermittent As per the Highly
project site as requirement of continuous
per schedule batch for a
part family
34. Tools, Jigs and As per General Specially
Fixtures project purpose designed
35. Suitability Ship-building Casting unit, Machine tools, Food- Refinery
Civil construction Welding unit Clothes, Shoe- processing, Chemical
General pur- making, Medium T.V., Auto- Fertilizer
pose workshop to large industries mobiles, etc.
}1• gh
P P : Project Productio❑
C : Continuous Production
Job Shop
Product
Variety
Batch
Production

Mass
Production C

Low —► Production Volume High

Figure 2.9 Volume-variety Suitability for Different. Production Systems

PRODUCTION SYSTEM 17

2.4 SUPPLY CHAIN MANAGEMENT

Supply chain is a recent outlook to visualise a production system. In traditional system, production activities
appear as a system of conversion of raw-material input, processing and finished-product output. Supply-
chain is an integrated approach for managing the inter-related flows of products and information among
suppliers, manufacturers, distributors, retailers and customers (Figure 2.10). It is an approach towards
extended enterprise in which processes, storage, distribution and transportation functions of the production
system are inter-linked with customer and suppliers. Cohen and Lee (1988) have defined it as a process,
which encompasses the full range of intra- and intercompany activities, beginning with raw material procurement
by independent suppliers through manufacturing and distribution, and concluding with the successful delivery
of the product to the retailer or at times to the customer.

Factory

Manufacturer Distributor Retailer Customer

Suppliers and
Sub-contractor

Figure 2.10 Supply Chain

It is an approach where processes, distribution, transportation functions of the production system

are inter-linked with customer and suppliers. It has the following advantages:
(i) As compared to traditional way of looking at manufacturing system, it permits the coordination
of strategies and cross-functional synergy.
(ii) Profitability and efficiency of the enterprise can be significantly improved, if the system is modelled
in an integrated way from the supplier to the customer.
(iii) The corporate strategy is better visualized and implemented if the business process is not limited
to product and market.
(iv) Better inventory policies can be designed in this framework.
(v) Adequate response time for changes would be available, if the enterprise is modelled as supply-
chain rather than traditional input-processing-output type of model.
(vi) Supply chain has major advantage that it can operate as a make-to-stock process which is driven
by demand forecast.
Information is a major component in -integrating or chaining the processes. It acts as the pushing
agent for the flow of material. Customer demand, on the other hand, acts as the pulling agent for the
.naterial flow from supplier to the customer via factory (Figure 2.11). A detailed study of supply-chain
management will be presented in Chapter 22.
2.5 CONCEPT OF VALUE CHAIN
Value chain is defined -as inter-linked production system in which all those steps are included where
actual value is added in the product. Thus, it starts from supplier to customer. All the non-value added
activities, such as inspection or in-process inventory, are tried to be removed. The supporting functions
to the value chain are purchasing, marketing, finance, human-resource development (HRD) (Figure 2.12).
18 INDUSTRIAL ENGINEERING AND MANAGEMENT

Flow of Information/Control
Production and Strategic
—i— Flow of Material
Distribution Planning Planning
Force on System •

Pushing : Information Flow

Demand
Forecasting

Raw
Material Factory
Store
Customer.
Supplier
Field Warehouses

Pulling Material Flow

Figure 2.11 Information and Material Flow in the Supply Chain

Va Inc
Chain •• • •
• • Marketing •
• • •
Customer
Transformation Value Chain
•
• HI11711 •
• •

Environment (Govt. Legislation, etc.)

Figure 2.12 Value Chain in Production System

The .production system is therefore now an extended enterprise in the form of a supply chain or
value chain. Many earlier concepts and approaches are either phasing out or getting modified. The inclusion
of vendors in the value chain has tremendous bearing in the Just-in-time (JIT) manufacturing. In JIT,
the inventory level is kept minimal. Highly reliable vendors may be expected to deliver quality tested
material right at the shop floor. tt is also expected that vendor should supply right material in correct
quantity with perfect quality and to the right time when it is needed.
The inclusion of customer in the extended production system has its origin in Total Quality Management
(TQM). In TQM, the focus is on customer delight. The value chain analysis of the production system
provides a tool for the investigation on aspects such as: whether a company or network of companies
are putting their effort at the right place in the chain or whether there are attractive alternatives.
The boundaries of production system are thus extended and the emerging Unwept is known as
extended enterprise or virtual enterprise. This is an integrated and interconnected network of mutually
dependent organisations. Many organisations in India treat their vendors as a part of the extended enterprise.
For example, an organisation acting as vendor for supplying car steering to a separate automobile unit
is so reliable that it is often difficult to determine the organisational boundary of steering company and
PRODUCTION SYSTEM 19

the organisational boundary of main automobile unit. Many successful big organisations keenly develop
their vendor at their doorstep. It is better to have limited number of vendors, say one for each sub-
assembly. The prerequisite is: highly reliable vendor, who is fully trusted for quality and delivery.
Porter, who introduced the concept of value chain, interlinked the activities of the enterprise into
two segments:
(i) Value-added activities (ii) Supportive activities.
The importance of looking at the enterprise as a value chain lies in the fact that it provides a
focus for investigating if the company is putting right attention in the chain.

Key Point
Value chain is a sequence of activities describing the movement of products or services from
their basic form as an input or "raw material" through a series of enhancement or "value-
adding" steps such as manufacturing, distribution, and after-sales services to become a series
of outputs (Porter, 1990).

The Porter's model of the value. chain identifies the activities conducted in the organisation into
two different categories. These are: primary activities and secondary activities (Table 2.2).
Table 2.2 Primary Activities in Value Chain

Five Primary Activities Examples

1. Inbound Logistics • Raw Material Handling
• Warehousing
2. Operations • Machining
• Assembling
• Testing and Inspection •
3. Outbound Logistics • Warehousing
• Distribution of finished-products
4. Marketing and Sales • Advertising
• Promotion
•Pricing
• Channel relation
5. Services • Installation
• Repair
• Replacement.

In a value chain, these five primary activities are arranged sequentially. During the first primary
activity (i.e., in-bound logistics), the incoming material is processed by receiving and storing. Therefore,
some value is added to them. Similarly, during operation phase, the processing on raw material is performed
so that it may change its original shape, form, feature, etc. Here, value is added in making the product.
Third primary activity is Outbound logistics, where the product is prepared for delivery. The activities
invoive: packaging, storing or warehousing and shipping. Hence, additional value is added at this stage.
Fourth primary activity is marketing the finished item to the customer and fifth primary activity pertains
20 INDUSTRIAL ENGINEERING AND MANAGEMENT

to the service to the customer in the installation and maintenance of the system or product. An effective
value chain is a sequential arrangement of these primary activities, which should result into profits.
The five primary activities are supported by four support activities (Figure 2.13, and Table 2.3):

Firm Infrastructure

Human Resource Management

o •^
ta..>
z-"I
Technology Development
<
Procurement Profit
Margin .

In- Out-
Make-
bound Opera- bound Service
ting and
Logistics tions Logis-
c<
u Sal i
tics

Figure 2.13 Porter's Value Chain Model for a Manufacturing Firm

Table 2.3 Support Activities in Value Chain

Four Support Activities Examples

1. Firm Infrastructure • General Management
k
• Accounting
• Strategic planning and control
• Finance
• Communication system, etc.
2. Human Resource Management • Recruitment
• Manpower development
• Training
• Managing personnel, etc.
3. Technology Development • Improvement in product
• Improvement in process
• Improvement in system
• R & D, etc.

4. Procurement • Purchase of raw material

• Procuring machines
• Supplies, etc.

All the four support activities are for the support of one or more (or all) primary activities. These
can also support each other for an effective value chain.
The profitability of the company depends upon the difference between the total value put on
the product or service and the actual cost of getting this through different activities of the value
chain.
PRODUCTION SYSTEM ,21

REVIEW QUESTIONS

2.1 Explain the terms: (i) Production and (ii) Production system.
2.2 Explain different types of manufacturing systems. Differentiate between them.
2.3 What do you understand by system approach of the production system? Give example.
2.4 Explain the concept of supply chain management. What advantages do you foresee if production system is
analyzed in this way?
2.5 Explain the value chain approach.
2.6 Differentiate between job-shop, batch and mass production units.

REFERENCES
1. Elliott, B.B.R., (1996) "Ethical Issues in Operations Management" in Kitson, A. and Campbell, R. The Ethical
Organisation, Macmillan, Basin gsoke.
2. Gaither, N., (1994) Production and Operations Management, Dryden Press, Orlando, Florida.
3. Hayes, R. and Wheelwright, S., (1984) Restoring our Competitive Edge, Wiley, New York.
4. Hill, T., (1993) Manufacturing Strategy, Macmillan, Basingstoke.
5. Joiner, B., .(1994) Fourth Generation Management, McGraw-Hill, New York.
6. Krajewski, L.J. and Ritzman, L.P., (1996) Operations Management, Addison-Wesley, Reading, Massachusetts.
7. Lockyer, K. Muhleman, A. and Oakland, J., (1988) Production and Operations Management, Pitman, London,
5th edn.
8. Naylor, J., (1996) Operations Management, Pitman, London.
9. Porter, M., (1985) Competitive Advantage, Free Press, New York.
10. Schonberger, R. and Edward. K., (1994) Operations Management: Continuous Improvement, Irwin, Burr Ridge,
Illinois, 5th edn.
11. Skinner, W., (1978) Manufacturing in the Corporate Strategy, Wiley, New York.
12. Slack, N., (1991) The Manufacturing Advantage, Management Books 2000.
13. Shankar, R. and Jaiswal, S., (1999) Enterprise Resource Planning, Galgotia Publication, New Delhi.
14. Sperotto, F., (1994) In the Footsteps of Homo Industrialist, PICSIE Press, Sandton. South Africa
15. Stalk G and Hout, T.M., (1990), Competing against time, Free Press, NY.
16. Stevenson, W.J., (1993), Production/Operations Management. Irwin, Boston.
17. Upton, D., (1995) "What makes factories flexible?" Harvard Business Review. July/August. pp. 74-84.
18. Van Loggerenberg, B., (1988), Productivity Decoding of Financial Signals, Productivity Measurement Associates,
Pretoria.
19. Water, C.D.J., (1991) An Introduction to Operations Management, Addison-Wesley, Reading Massachusetts.
20. Womack, J.P., Jones, D.T. and Roos, D., (1990) The Machine that Changed the W9rld, Rawson Associates;
New York.
22 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 PRODUCTIVITY

3.1 INTRODUCTION
Productivity is one of the most commonly used buzz words in industrial engineering. It is a measure
of how well resources are utilized to produce output. The term, productivity, symbolizes the followings:
• It relates output to input in any system, where some value addition is performed on the input resource.
• It is a quantitative measure of performance.
• It integrates performance aspects of quality, efficiency and effectiveness.

3.2 DEFINITION OF PRODUCTIVITY

Productivity is formally defined by Organisation of European Economic Cooperation (OEEC) as:

Productivity is the quotient (ratio) obtained by dividing output by one of the factors of production.
Thus, it is possible to speak productivity of capital, investment or raw materials according
to whether output is being considered in relation to capital, investment or raw materials, etc.

Before we explain further, it is important to note that productivity is oftenly a misunderstood term.
Any particular value of productivity carries relevant meaning only when it is known how the productivity
has been 'calculated. For example, the productivity of labour and productivity of capital should not be
directly compared. We will further explain it later in this chapter.
Secondly, productivity and production, though related in many ways, are different. Thirdly, quite
often the terms, efficiency, effectiveness and productivity are confused with each other. To avoid indiscriminate
use of these terms, some clarifications are provided.

3.3 DIFFERENCE BETWEEN PRODUCTIVITY AND PRODUCTION

Production and productivity are different terms and carry different meaning. It is wrong to assume that
higher production will always lead to higher productivity or vice-versa.
Production is related to the activity of producing goods or service. It is a process (or system)
of converting input into some useful, value-added output.
Productivity is related to the efficient utilization of input resources into produced output in the
form of value-added goods or services.
24 INDUSTRIAL ENGINEERING AND MANAGEMENT

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. Its focus is on how well the input resource is used for conversion into output.
Example 3.1 A company is manufacturing 24,000 components per month by employing 100 workers
in 8 hour shift. The company gets additional der from government to supply additional 6,000 components.
The management decides to employ additional workers. What will be production and productivity level
when the number of additional workers employed are: (i) 30 (ii) 25 (iii) 20.
Solution: , Present production = 24,000 components
Present Production (i.e., output)
Present productivity (of Labour)
Total man-hours (i.e., input)
24,000 components
(100 workers) (8 hours) (30 days of the month)
24, 000
= 1 component/man-hour
24, 000
With increased order
(i) When additional 30 workers are hired
Producti6n = 24,000 + 6,000 = 30,000 components
Increased total production
Productivity (of labour)
Total man-hour
30, 000
='0.96 component/man-hour
(100 + 30) (8) (30)
(ii) When additional 25 workers are hired
Production = 24,000 + 6,000 = 30,000 components
30, 000
Productivity (of labour)
(100 + 25) (8) (30)
= 1 component/man-hour
(iii) When additional 20 workers are hired
Production = 24,000 + 6,000 = 30,000 components
= 30,000
Productivity (of labour) = 1.04 component/man-hour
(100 + 20) (8) (30)
In this example, it is clear that production has increased by 6,000 units. Therefore,
= 30,000 — 24,000x 100 = 25%
Increase in Production
24, 000
In case of productivity, the labour productivity falls below the initial level of 1 component per
man-hour if more than 25 workers are hired. This level of additional man-power may be termed as break-
even level from the labour productivity point of view. Therefore, other things remaining constant, no
more than 25 workers should be hired for this increased production.
We have understood three things from the above example:
1. Production and productivity are two different things.
2. Increase in production does not necessarily mean increase in productivity.
PRODUCTIVITY 25

t
I-.
Qr

bow Productivity ---- 1.04

24,000 30,000

Production (in units of component)

Figure 3.1 Effect of Production Volume and Workers on Productivity

3. Productivity is always associated with the context in which it is calculated. For example, in the
above case, we have calculated and interpreted labour productivity. In another case, come one may
like to know about material productivity or energy productivity. If labour productivity has decreased
due to some reason, it may not always mean that other forms of productivity, say material productivity,
will also fall. Various forms of productivity will be explained in sections to follow.

3.4 PRODUCTIVITY, EFFICIENCY AND EFFECTIVENESS (FIGURE 3.2)

Productivity is very often confused with the terms, efficiency and effectiveness. Though related, all the
three terms carry different meanings.
' Efficiency (1): It is the ratio of actual output attained to the standard expected output.
Therefore, efficiency indicates a measure of how well the resources are utilized to accomplish a
target or result.
Effectiveness (4)): It is the degree of accomplishing the objectives.
Therefore, effectiveness indicates a measure of how well a set of targets or results are accomplished.
Productivity is an integration of both efficiency and effectiveness. It indicates a combined effect
resource utilization (i.e., efficiericy) and performance (i.e., effectiveness).
The combined effect of efficiency and effectiveness is used in defining a term called productivity
index.
Performance achieved
Productivity Index
Input resources consumed
Effectiveness
Efficiency
Since, effectiveness is difficult to measure quantitatively and productivity index decreases
when efficiency increases at a given effectiveness (which is not acceptable), this definition is modified
as follows: •
f (Effectiveness)
Productivity Index
f2 (Efficiency)
where, f1 and f2 are two different functions.
26 INDUSTRIAL ENGINEERING AND MANAGEMENT

Legislations
Product Demand

External Environment

Production System

1--.—Customer

System
Productivity

Proper use of Input Proper use of System (System How. well Input gets converted into
(Effeciency) Effectiveness) Output (Productivity of System)

Organisation Product Quality

Capital
Product Mix Service Quality
Material Quality
Management Customer Delight
Material Availability
Level of Technology Low Cost
Labour Quality
Utilization of Machines High Production
Energy
Plant Utilization Better Resource Utilization
Plant Capacity

- 11111111•111 1 Optimum uses of Input

Proper use of Inputs so that
better Output is achieved
+ Quality mindset
Efficiency
Resources
Proper use of systems and
tools of doing things well +
Continuous Improvement
Productivity
Effectiveness

Figure 3.2 Efficiency, Effectiveness and Productivity of the Production System

3.5 DIFFERENT APPROACHES TO MEASURE PRODUCTIVITY

Productivity is an effective way to gauge how a system is performing over a period of time. It is important
to measure it quantitatively. FolloWing approaches are common to measure productivity:

3.5.1 Partial Productivity

Partial productivity is defined on the basis of the class of the input being considered. For example, if
the labour is increased by 18% during last financial year, its effect on the increased output is represented
by productivity. Similarly, capital productivity, material productivity, etc., may be defined (Table 3.1).
Advantages of Partial Productivity Measure
1. It is a good diagnostic measure to identify areas where improvements may be done.
2. Easy to calculate as independent of other inputs.
3. Easy to understand.
4. Management finds it easy to understand and pin-point the logic for its improvement.
PRODUCTIVITY 27

Table 3.1 Different Forms of Partial Productivity

Partial Productivity Formula Some Uses

Output
1. Labour Productivity or To understand the effect of increase/
Human Input
Human productivity decrease in hiring of labour and to see
how they perform
Output
2. Material Productivity In material management
Material Input
Output
3. Capital Productivity In financial asessment
Capital Input
Output
4. Energy Productivity In the consideration of energy required
Energy Input
by the system
Output
5. Advertising and Media In marketing management
Planning Productivity Advertising and Media planning Input
Output
6. Other Expense In the analysis of system
Productivity Other Expense Input

5. It is easy to benchmark (compare) with other industries. For example, the labour productivity of
a public limited company producing steel (Say SAIL) may be compared with labour productivity
of a private sector steel producing company (Say, TISCO).
6. Data may be easily generated for this.
Limitations of Partial Productivity Measure '
1. It can be misleading if used out-of-context.
2. It does not contain the overall effect of the system of performance.
3. Focussed areas of improvements are difficult to identify. Therefore, wrong areas of management
control may be identified.
4. It gives a myopic view of performance. This means, only limited factors are considered to effect
the output or performance.
5. It misses holistic (or totality) approach.

3.5.2 Total Factor Productivity

It is the ratio of net output to 'the sum of labour and capital inputs. Thus,
Net Output
Total factor productivity —
Labour + Capital Inputs
Total Output — Intermediate goods/Services purchased
Labour + Capital Input
Advantages of Total Factor Productivity
1.It is relatively easy to compile data from company records.
2. Economists prefer this as it is easy to compare in cross-industry context.
Limitations of Total Factor Productivity
1. Many important inputs, such as material, energy, etc., are ignored.
2. The net-output does not reflect the efficiency of production system in a proper way.
28 INDUSTRIAL ENGINEERING AND MANAGEMENT

3.5.3 Total Productivity

It is the ratio of total output to the sum of all input factors.
Advantages of Total Productivity
1. It considers all the outputs and input factors. Therefore, it is a more accurate representation of
real economic performance of the organisation.
2. It is easy for top management to understand the company performance.
3. If it is used along with partial productivity, focussed areas of improvements may be identified.
4. Easy for cost accountants to compare.
5. Easy to do sensitivity analysis.
Limitations of Total Productivity
1. Difficult to generate companywise and sectorwise data.
2. Many indirect measures of input/output are ignored.

3.6 EFFECT OF BASE PERIOD ON PRODUCTIVITY

Productivity is the ratio of the output produced, for use outside of an organisation with due allowance
for different kinds of products, divided by the resources used, all divided by a similar ratio from a base
period.
Aggregated output in the measured period
Resource input in the measured period
Mathematically, Productivity
Aggregated output in the base period
Resource input in •the base period
Alternately, the terms in (i) may be rearranged as,
Aggregated output in the measured period
Aggregated output in the base period
Productivity =
Resource input in the measured period
Resource input in the base period
Both, Equations (i) and (ii), give some value of productivity but their interpretations are different.
In Equation (i), the numerator (called as current performance index) and denominator (called as
base performance index) may be calculated in different time lengths. In Equation (ii), numerator (called
as output index) and denominator (called as input index) should be calculated for an equal period of
time so that they carry some useful meaning.

3.7 TYPES OF PRODUCTIVITY INDEX

1. Labour productivity
2. Direct labour cost productivity
3. Capital productivity
4. Direct cost productivity
5. Total cost productivity
6. Foreign exchange productivity
7. Energy productivity
8. Raw material productivity.
PRODUCTIVITY 29

Example 3.2

Item Year 1 Year 2

Number of outputs (all of one kind) (Rs. 50,000 per unit) 100 200
Direct labour hours (@ Rs. 10 per hour) 5,000 8,000
Direct labour cost (in Rs.) 40,000 45,000
Capital depreciation (in Rs.) 5,000 6,000
Capital book value (in Rs.) 20,000 25,000
Total indirect cost (in Rs.) 40,000 46,000
Foreign exchange used $4,500 $100
Energy used (@ Rs. 4 per watt) 500 kW 1,800 kW
Raw material used (@ Rs. 1,000 per ton) 10 ton 16 tons
Services of consultant hired (Rs.) 10,000 15,000
Calculation Productivity Index
200/8,000
(i) Labour productivity index = x100 = 125
100/5,000
200/45,000 •
(ii) Direct labour productivity index = x 100 = 177.8
100/40,000
200/6,000
(iii) Capital depreciation productivity index = x 100 = 166.7
100/5,000
200/25,000
(iv) Capital book value productivity index = x100 = 16
100/20,000
200/46,000
(v) Total indirect cost productivity index = x100 = 174
100/40,000
200/100 •
(vi) Foreign exchange productivity index = x100 = 9,000
100/4,500
x 4)
(vii) Energy used productivity index = 200/(1,800x 100.= 55.5
100 (500 x 4)

(viii) Raw material productivity index = 200/(16xx

1,000)
100 = 125
100/(10 x1,000)
Net output
(ix) Total factor productivity
(Labour + Capital) Input
Total output - (Material purchased + Services hired)
' (Labour + Capital) Input
200 x 50,000 - (16 x1,000 +15,000)
(45, 000 x1-0) + 25,000
100 x 50,000 - (10 x 1,000 + 10,000)
(40, 000 x 10) + 20,000
20.987
= 1.756.
11.952
30 INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 3.3 The price index for year 1998 and 1999 are given in table below for 100 being
in 1997 as base year Calculate different productivity measures for a factory whose financial statement
is given below:

1998 1999
Item Current Rs. Price Current (Rs.) Price
(in 000's) Index (in 000's) Index

I. T ales 1,500 107 2,200 130

2. Labour 200 108 380 135
3. Material 800 105 1,200 140
4. Services 300 106 370 120
5. Depreciation (after compensated for price rise) 90 120

Solution:

Item 1998 1999 • Productivity

Rise
Current Rs. Price Compensated Current Rs. Price Compensated
1998 to
(in 000's) Index at 1997 (in 000's) Index at 1997
1999
(a) (b) [(a) ÷ (b)] x 100 (c) (d) 1(c) ÷ (d)] x 100

1. Net Sales 1,500 107 1,402 2,200 130 1,692

2. Labour 200 108 185 480 135 355
3. Material 800 105 762 1,200 140 857
4. Services 300 106 283 370 120 308
5. Depreciation — — 90 ' — — 120
6. Total Inputs 1,320 1,640
(2)+(3)+(4)+(5)
7. Net output 357 527
(1)—(3)—(4)
8. Labour Capital 275 475
Input = (2)+(5)
9. • Labour pro- 1.93 1.48 —23.31%
ductivity (Fall)
(7)÷ (2)
10. Labour Capital 1.298 1.109 —14.56%
productivity (Fall)
= (7)÷ (8) •
11. Total produc- 1.062 1.032 —2.82%
tivity (Fall)
(1)±(6)

3.8 WAYS. TO IMPROVE PRODUCTIVITY

Productivity of any system can be improved either by proper use of resources or by effective utilization
of system or processes. Some action plans are:
1. Machine • Manual labour be replaced by machines
• Reliable machines
• Automation.
PRODUCTIVITY 31

2. Management • Motivated workforce

• Better planning and co-ordinations
• Effective control of processes.
3. Process • Computerization of system
• Use of Management Information System (MIS)
• Improvement in scheduling
• Better material flow
• Fast and accurate retrieval of parts
4. Work Design • Improve job-design
• Better work method
• On-job training
5. Work Environment • Better lighting and illumination
• Better ventilation
• Safe work-place
• Total Quality Management (TQM).
6. Program • Quality circle
• Suggestion scheme
• Incentive schemes
• Revise pay or policy.
7. Technology • Acquire new technology such as electro-chemical machining
(ECM), etc
• Acquire automation in assembly, for example, surface mounting
technology (SMT) for printed circuit board assembly unit
• Acquire computer controlled machines, such as CNC or DNC
• Use automated guided vehicle (AGV) for material transportation.
8. Manufacturing strategy • Change the manufacturing system from functional to cellular layout
if it is a batch production unit
• Adopt stockless production strategy and Just-in-Time framework in
the production unit
• Keep work-place clean and environment friendly (also termed as green-
production system)
• Go for total change in the process/product or strategy if the system
is not working properly (also known as business process re-engineering
or BPR).
9. External Environment • Better political stability
• Boosting economy and purchasing capacity of buyers
• Globalization and open market economy.
32 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 3.2 Means to Improve Productivity for Different Planning Horizons

Planning Horizon Means to Improve Productivity I Effect on Result

Long-term Improve basic process by proper research and No limit to results
development (Use EPR: refer to Chapter 36)
—> Heavy capital deployment

Improve existing process and provide better plant

and equipment (Use TQM/Kaizan: refer to Chapter 32)
—> No major capital deployment
Medium-term Simplify the product, reduce and standardize the
product range
—> May require some capital deployment ,
Results are subjected to
Short-term Improve existing methods of plant operation, effort and commitments
Improve work planning and use of manpower
Increase effectiveness of all employee
—> May require little or no capital deployment

REVIEW QUESTIONS

3.1 Define the term productivity. How is it different from production? Give examples, using yuur own numbers.
3.2 Explain partial productivity and total productivity. Give examples.
3.3 What measures would you suggest to improve productivity of a firm?
3.4 Consider a company XYZ. The data for output and input for a particular time period is as follows:
Output revenue = Rs. 1,00,000
Human input = Rs. 30,000
Material input = Rs. 20,000
Capital input = Rs. 30,000
Energy input = Rs. 10,000
Other expense input = 5,000
Calculate various forms of productivity.
(Atm: Human productivity Rs./Rs. 3.33. Material productivity Rs./Rs. 5, Capital productivity Rs./Rs. 3.33,
Energy productivity Rs./Rs. 10, Other expenses productivity Rs./Rs. 20, Total factor productivity Rs./Rs. 0.583,
Total productivity Rs./Rs. 1.053).
3.5 Consider the balance sheet of company for two successive years. Analyze it from the productivity point of
view.
3.6 State the advantages and limitation of the productivity measures.

REFERENCES

1. Aggarwal, S.C., 1981, A study of productivity measures for improving benefits, International Journal ofProduction
Research, 18(1); 83-103.
2. Craig, C.E., and Harris, C.R., 1973, Total productivity measurement at the firm level, Sloan Management
Review 14(3), 13-39.
I' PRODUCTIVITY 33

3. Dewitt, F., 1970, "Technique for measuring management productivity", Management Review, 59, 2-11. •
4. Eilon, S. and Judith, T., 1993, "On measures of productivity", OMEGA 1(5), 565-75.
5. Endosomwan, 1988, Productivity and Quality Improvement, IFS Publication, England.
6. Kendrick, J.W., 1984, Improving 'Company Productivity: Handbook with Case Studies. The John Hopkins
University Press, Baltimore, Maryland.
7. Mundel, 1976, "Measures of Productivity", Industrial Engg., 8(5), 32-36.
8. Sardana, G.D. and Vrat, P., 1984, Models of Productivity Measurement, Productivity xxv (3), 271-89.
9. Sink, D.S., 1985, Productivity Measurement, Improvement, Evaluation and Control, John Wiley Publication,
NY.
10. Sumanth, D.J., 1984, Productivity Engineering and Management,. McGra*-Hill Book Co., New York.
11. Taylor, B.W. III and Davis R.K., 1977, "Corporate productivity, getting all together", Industrial Engg., 9(3),
32-36.
12. Vrat, P. and Sardana, GD., 1984, Concept of Productivity: Pleas for Reapraisal, Udyog Pragati, VIII (1),
16-24.
13. Vrat, P., Sardana, GD. and Sahay, B.S., 1998, Productivity Management; A Systems Approach, Narosa Publishing
House, New Delhi.
34 IN.DUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

' .
 FO MS OF BJSINESS ENTERPRISES
E7i1 Emm mmm ma mum faiD =A =A ETA I= LIA ESA

4.1 INTRODUCTION
Business refers to a combination of economic activities involving production or purchase or sale of goods
and services. The objective of these activities is to earn profit through the satisfaction of consumer needs.
Business is a quite wide term. It encompasses small-size business like shoe-repair shop; medium-size
business like automobile-repair shop, cloth-merchant, medicine shop or relatively large business like automobile
factory, LIC, etc. It is important to note that business activity involve both production and service sectors.
The service sectors are: banking, insurance, transportation, etc.
Business is started and run by a person or a group of persons. They are called as owner(s). The
owners of the business arrange funds to start and run the business and carry the risk of running it successfully.
4.2 TYPES OF OWNERSHIP
A business may he owned by an individual or a group of persons haVing some common interest. When
it is run by an individual, the ownership is termed as Sole Trader Enterprise. In case of more than one
owner, the ownership may be a partnership firm, a company or a cooperative society.
On the basis of size, the business may be classified as cottage industry, small scale industry (SSI),
medium or heavy industry. Similarly, if the business may be owned by private sector, Government or
public sector, or combination of these two (also, called as joint sector company).
4.3 SOLE PROPRIETOR (OWNER) ENTERPRISE
The scic- trader (proprietor or owner) enterprise is one of the most common forms of business ownership.
Its mf .n characteristics are one man's business in which the sole owner is fully responsible for: (a) arranging
the capital, (b) bearing the risk of enterprise, and (c) managing the business. This type of enterprise
is easy to form as there is not much legal formality.
4.3.1 Salient Features
1. Individual ownership and one-man effort.
2. Enterprise and owner entity is same.
3. All risks related to business are covered by one owner.
4. All profits after deduction of taxes go to the proprietor.
36 INDUSTRIAL ENGINEERING AND MANAGEMENT

5. Minimal legal formality to start.

6. Unlimited Liability: In case of loss, the entire debt or loan is recovered from the assets of owner.
7. Ownership and management have no separate entity.

4.3.2 Merits of Sole Ownership

1. Easy formation and closure.
2. Flexibility in Management: Easy to change the product/services, policies and control.
'3. Extremely easy decision-making.
4. High Motivation: Due to single ownership, all profits and growth of business are shared by one
owner. He is, therefore, highly motivated to work for improvement and profit.
5. Full control of business activities.
6. Secrecy: Trade secrets are easy to maintain. There is no compulsion to publish the account.
7. Personal touch for excellence.
8. Simple and less complicated operation.
9. Indirect support for family employment: Generally, the sole-trader firm is passed to the next generation
in the family as there is no other stake-holder.
10. Liberal Government Support: Generally, this type of business is cottage or small-scale industry.
Government provides liberal loans for starting and running these businesses. Generally, the electricity
and water rate is less for small and' cottage industries.
11. Self-employment of individual is generated widely.

4.3.3 Limitations of Sole Ownership

1. Limitation on resources: Due to financial capacity of sole owner.
2. Limitation of managerial skill: Due to human limitation of excellence in all spheres such as production,
marketing, finance, liaison, etc.
3. Unlimited liability: In case of failure or loss in business, the trader loss is not covered by anybody
else.
4. Lack of continuity: In case the trader is ill or .busy in his family affairs, the business has to close
down.
5. Absence of specialized knowledge in more than one or two areas of business operation.
6. Unduly stressed owner due to variety of jobs.
7. Generally, due to work pressure and limited capital, sole traders are exploited by big industries.
8. Not suitable for large-size operations: Due to limited resources.
9. Comparatively less stable: Due to non-availability of another person to share the responsibility.
10. Limited checks and control.
11. Limited scope for economies of scale: When the production volume is less (as the case of sole
ownership), the over-head costs are not widely distributed on the price of the product. This may
be a cause of high cost of product:

4.3.4 Suitability of Sole Ownership

Small business operations, which need less capital, less material and processing efforts, less management
skill and more personal attention for customers, are suited for this. Some examples are: medical practice,
hair-cutting saloon, hoe-making and repair shop, glossary shop, etc.
FORMS OF BUSINESS ENTERPRISES 37

4.4 PARTNERSHIP FIRM

As compared to sole trader form of ownership, partnership firm has two major differences:
1. Number of owners are more than one but less than 20.
2. More capital, asset and diversified expertise are available due to more than one owner.
As per Indian Partnership Act, 1932, partnership is the relation between persons, who have agreed
to share the profit of business carried on by all or any of them acting for all. Partners, while
joining together, agree to share capital resources and expertise. In lieu, they share profit (or loss)
as per the agreed proportion mentioned in the partnership agreement.

4.4.1 Salient Features of Partnership Firm

1. More than one but less than twenty partners are needed. However, for banking sectors, upper limit
is ten partners.
2. There must be an agreement among partners which could be written, oral or implied. Therefore,
it is a contractual togetherness for business purpose, being governed by partnership deed.
3. Joint liability of all partners in case of liquidation (which may be proportional to their share in
deed).
4. In case of death or indisposition of one partner, the deed becomes null. Then after, new deed
is required to be forced.
5. Deed must be for gain in business and not for charity.
6. Transfer of share of one partner is possible only after all other partners agree.
7. Each partner may act as the agent or representative of the firm.
8. Success of the partnership firm is possible when there is full trust and honesty. Sharing of information,
transaction and client dealing is must.
9. Registration of the partnership firm is not necessary. However, if registered with the registrar of
firms, legal complications are minimized in case of disputes.
10. Time span of partnership firm depends upon the 'will' of all partners. It can be dissolved on death
or any time when all partners agree.

4.4.2 Types of Partners

Based on different characteristics, the following variety of partners may exist:
_ I. Based o►► extent of participation
1. Active (or working) partner: Takes active part in business.
2. Sleeping (or dormant) partner: Simply invests in the business aid collects profit but does
no interfere in day-to-day management.
II. Based on profit sharing
1. Nominal partner: Only lends name to the business but does not invest in capital nor participate
in day-to-day management. He shares profit due to lending his goodwill to the company.
2. Partner in profit: Only shares profit (but not the loss). He does not participate in the management.
It is suited for a partner, who is still a minor.
III. Based on exhibited Conduct and behaviour
1. Estoppel partner: Behaves in public as a partner of the firm. He does not share profit but
covers partial liability of the firm.
2. Partner by holding out: Represents raelLanother person is also a partner of the firm.
38 INDUSTRIAL ENGINEERING AND MANAGEMENT

IV. Based on liabilities

1. Limited partner: Covers liabilities limited to the contributed capital.
2. General partner: He covers unlimited liability irrespective of contributed capital. Unlike limited
partner, he participates in the day-to-day management of the firm.

4.4.3 Merits of Partnership. Firms

1. Ease in formation: By an agreement or partnership deed.
2. Larger pooling of financial resources: Due to more number of capital sharing members.
3. Sharing of managerial skill by partners.
4. Collective business decisions by partners.
5. Flexibility in change-over due to lesser number of mutually interactive members.
6. Secrecy due to lesser members.
7. Active interest by members due to major share in capital and direct risk in business dealings.
8. Check and control due to watchfulness of all partners.
9. The interest of partners is fully projected. In case of dissatisfaction, any partner can press for dissolution
of deed.

4.4.4 Limitations of Partnership Firms

1. Limited, capital as compared to joint stock company.
2. Unlimited liability in case of dissolution of firm.
3. Uncertainty of existence due to death, bankrupty or demand of a partner.
4. Risk of sharing loss due to other partner's misdeeds.
5.' Risk of disharmony due to difference of opinion among partners.
6. Lack of public and institutional confidence: This is due to not so disclosed accounts and progress
report of the firm.
7. Difficulties in expansion and modernisation: This is because not more than 20 partners can be
accommodated in the firm. Therefore, future fund generation is difficult.
8. Difficult to withdraw from firm: This is because consent of all other partners may not be readily
forthcoming.

4.4.5 Suitability
Moderate-size business such as dealership, construction company, transport agency, automobile workshop,
petrol pump ownership, etc.

4.5 JOINT HINDU FAMILY BUSINESS

It is a form of family business governed by the Hindu law. Two systems of inheritance are common:
(a) Dayabhaga: Both male and female members of the family can become co-partners in the family
business or property. It is only found in West Bengal in India.
(b) Mitakashara: This system is found in India at places other than West Bengal. Only the male members
of the family can become the co-partner in the family business.
Property of a Hindu is inherited after the death by his son, grand sons and great grand sons, i.e.,
by next three generations. Each member of the three generations are co-partner in the ancestoral property.
FORMS OF BUSINESS ENTERPRISES 39

The undivided family business (or property) is handled and controlled by the head of the family, who
is called as Karla. Other salient features are as follows:
(i) Membership is granted by birth of a child. In case of initakashara system, only male child gets
automatic membership after the birth.
(ii) Minors can become full-fledged members.
(iii) There is no limit on number of members. However, the lower limit is two members.
(iv) There is no need for the registration of the family business.
(v) The management of business is handled by Karta of the family.
(vi) Any member can ask for his share of account from the Karta.
(vii) The system is continuous or perpetual. It runs generation-after-generation.
(viii) The liability of Karta is unlimited, while the liability of other members is limited to the share
of their property.
(ix) Except in West Bengal, only male member can become member of the business.

4.6 JOINT STOCK COMPANY

It is that form of business activity, which is most suited for large-scale business. It does not suffer from
limitations of capital and management as in case of partnership firms. Sufficient number of skilled persons
and experts may be employed to run the business professionally.
Definition: "It is a voluntary association of individuals for profit, having a capital divided into
transferable shares, the ownership of which is the condition of membership." —Prof Haney
"... it is an association of many persons who contribute money or money's worth to a common
stock and employ it for common purpose. The common stock so contributed is denoted in money, and
is a capital of the company. The persons who contribute it or to whom it belongs are members. The
proportion of capital to which each member is entitled is his share. Shares are always transferable, although
the right to transfer them is more or less restricted. —Justice Lindley
"A person-artificial, invisible, intangible and existing only in the eyes of law. Being a mere creature
of law, it possesses only those properties which the charter of its creation confers upto it, either expressly
or as incidental to its very existence."
The company, therefore, has following features:
• A voluntary association of persons.
• Separate legal existence.
• Perpetual (on going) succession.
• Common seal.
• Registered body.
• Artificial person: Run by elected representatives, known as directors.
• Limited liability.
• Transferability of shares.
• Efficient management by experts.
• Public confidence and better goodwill.
• Social objectives not fully ignored and there should be sense of social responsibility.
• Ownership is wide and distributed.
• Collection of relatively large financial resources.
40 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Better stability of company.

• Growth and expansion-oriented mind-set of management.
• Economies of scale: Due to large capital and professional management, the company may go for
large-scale production, marketing, etc.
• Tax relief from government from time to time on certain items.

4.6.1 Limitations of a Company

1. Time-consuming legal formalities in formation.
2. Lack of motivation of share-holders.
3. Corrupt practices by board of directors by mis-utilizing capital of the share holders.
4. Red tapism and bureaucracy may cause delay in decision.
5. Scope for personal initiative is lesser and therefore lesser sense of responsibility may crop up.
6. Board of directors take all the major decisions on behalf of share holders, whose capital is hooked
in the business. Quite often, the director misleads the share holders and keeps control on business.
This causes rule by few or oligarchy. In oligarchy, the voice of many share holders fails to affect
the mis-utilisation of resources.
7. Despite much openness and globalisation during recent years, there is excessive government control
and regulations.
8. Many times, directors manipulate the book of account for personal gains and speculation in share-
market. Heavy speculations and share-market manipulations were seen few years back in Indian
industries. Many shareholders badly lose in this situation.

4.7 CLASSIFICATION OF COMPANY

The company may be classified as follows:

CONll'ANY

Basis : Incorporation Basis : Liability of members Basis : Ownership

--1 -7
Chartered LUnlimited Public
Statutory Limited Private
Registered Govt.

4.7.1 Chartered Company

It is established by the special sanction from the head of state or Royal charter. Exclusive powers and
privilege are granted to the chartered company. Since the Monarch regime is almost over in the world,
this type of companies are not seen in these days. Examples of chartered company are East India Company
(by Charter of Queen of England), Bank of England, etc.

4.7.2 Statutory Company

It is formed by a special but separate act of the central or state legislature. All the powers, objectives
and rules are specified in the special act of parliament/state legislation. Example of this type are Reserve
Bank of India (RBI), Unit Trust of India (UTI), Indtistrial Development Bank of India (IDBI), etc.
FORMS OF BUSINESS ENTERPRISES 41

4.7.3 Registered Company

It is formed by registering with the registrar of companies under companies act. It is governed by companies
act. Some of the most important companies of this type are TISCO, Reliance Industries Ltd., etc.
Based on the liability of the members, the registered companies are classified as:

4.7.4 Unlimited Company

In this company, the liability of the members are unlimited. Unlimited liability means that the personal
property of the members can be attached to meet the obligations of the creditors (who give loan). Such
companies are rare in Indian economy.

4.7.5 Limited Company

In this company, the liability of the members of the company is limited to the number of shares he
holds. The company is registered with a specific share capital being contributed by its members. The
liability of any member is limited to the proportion of share he holds.
There are few companies, which are limited by guarantee. In these companies, the liability of any
member (who is a guarantor) is limited to the amount he guarantees in case of the liquidation of the
company. The guaranteed amount is over and above the share capital but it can be called upon only
at the time of winding up of the company. Therefore, any such guarantee may be treated as a reserve
capital. Some companies, which promote sports, art, literature, etc., fall under this category.
Based on ownership, the companies are classified as follows:

4.7.6 Private Company

It is established by an Article of Association, which has the main features as follows:
1. Restriction on the right of the members in transferring the shares.
2. Decides the number of its members which can be between 2 to 50.
3. Restricts involvement of public, other than its member, to subscribe its shares or debentures.

4.7.7 Public Company

It is also established by an Article of Association, which has the main features as follows:
1. No restriction on the right of the members in transferring the shares.
2. Puts no upper limit on the number of members.
3. Keeps the company free to invite public to subscribe its shares or debentures.
4.7.8 Government Company
In this company, at least 51% of the share capital is held by state and/or central government. The company
in which the government holds the share is also called a joint sector company.
Examples
1. Private Sector: Tata Iron and Steel Company (TISCO), Tata Engineering and Locomotive Company
(TELCO), Grocery shop, scooter repair shop, etc.
2. Public Sector: Mainly central or state government-owned enterprises, such as: Railways, LIC, Mahanagar
Telephone Nigam Limited (MTNL), National Thermal Power Corporation (NTPC), Delhi Transport
Corporation DTC, etc.
3. Joint Sector: Cochin refineries, Praga Tools Corporation, Gujarat State Fertilizer Company, etc.

4.8 COMPARISON OF PUBLIC, PRIVATE AND JOINT SECTOR COMPANIES

The main characteristics of public, private and joint sector enterprises' are compared in Table 4.1.
42 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 4.1

Forms of Enterprises Private Sector Public Sector Joint Sector

Ownership Non-government private Government body Combination of private

Objective and Goal
Management
Professional Competence
and Productivity
Accountability
Future after globalization
and liberalization
(In India)
individual(s) entrepreneurs and
government
Profit . Social obligations Social obligations and
and profit ' profit
Generally private professionals Government nominees Mainly board of directors
or owner himself having representations
from both sides
Generally high Generally low Medium
Owner Public Private and public both
Very open, Liberal Limited to selected More opening-up in
permission in most sectors like Defence, air-lines, banking,
sectors Nuclear Power, insurance, housing,
Railways, etc. etc.

4.9 COOPERATIVE ORGANISATION

The basic aim of cooperative organisation is self-help and mutual cooperations. The members are more
concerned about their own interest and mutual help. The focus is voluntary association of members in
this organisation.
International Labor Organisation (ILO) defines it as "an association of persons, usi illy of limited
means, who have voluntarily joined together to achieve a common economic end through the formation
of a democratically controlled business organisation, making equitable contributions to the capital required
and accepting a fair share of risks and benefits of the undertakings."
Indian Cooperative Societies Act (1912, Section 4) says that it is a society, which has as its objectives
the promotion of economic interests of its members in accordance with cooperative principles.
Salient features of cooperative societies
1. Voluntary organization.
2. Suited for relatively economical weaker sections.
3. Objective is mutual help and service motive.
4. Common interest of members.
5. Open membership.
6. Democratic set-up: One person-one vote principle.
7. Separate legislative entity: Registration is required.
8. Disposal of surplus, interest or profits, among members in accordance with their share capital

4.9.1 Merits of Cooperative Organisations

1. Easy formation: It is easy to form the cooperative societies. Registration with the registrar of cooperative
societies is needed. There should be minimum 10 members to start it. However, there is no upper
limit for the membership.
FORMS OF BUSINESS ENTERPRISES 43

2. Open membership: Any member, irrespective of caste, creed, sex or religion, can become the member.
3. Voluntary association: Membership cannot be forced on any person. Therefore, it is a voluntary
association.
4. Autonomy: These organisations have autonomy to invest or to do business, which is legal and
beneficial to each member.
5. Stability and continuity: These organisations have separate legal entity. Therefore, their existence
is not affected by insolvency or death of its member.
6. Limited liability: The liability of any Member is limited to his contribution in capital. For any
debt of the society, members do not bear personal liability.
7. Democrative management: The election and functioning is democratic. Normally, one-member one-
vote principle is applicable.
8. Easy capital generation: Since the surplus and income are distributed among members, fund generation
is easy. Sometimes, out of the generated profits, additional shares may also be allotted to the
members.
9. Government control and patronage: As a measure of social welfare, government gives low interest
loan, special quota in land and housing, and other patronages to these societies.
10. No speculation: There is very limited risk to the members as these organisations are normally
not involved in speculative business.
11. Service inotive: The motive of these organisations is service to their members. Therefore, cooperative
societies are very suited to the weaker section of society.

4.9.2 Limitations of Cooperative Organisations

1. Limited capital: The capital generated in this form of business is through share of limited members
and the subscription of members. Therefore, the capital is limited. The business activity, therefore,
is relatively limited in size.
2. Lack of management competency:schese societies are run by few elected members, who are among
the subscribers. They may lack the management competency.
3. Lack of mutual interest: The members generally lack interest in the day-to-day running of the
society. Their commitment level is much less.
4. Lack of coordination: Cooperative society generally lacks the coordination among the members.
This is due to part-time activity and lack of interest among members and office-bearers.
5. Lack of motivation among -members: Due to low return on investment, most of the members are
not interested in its running. The annual general meeting and lunch/dinner on that day are the concern
for majority of the members.
6. Lack of secrecy: It is impossible to maintain the secrecy of the business activities as everything
in the society is exposed to each member.
7. Chances of corruption: Due to limited interest by majority of persons, and manipulation in accounts
and audits, there are major chances of corruption.
8. Chances of rift among members: The chances of rift among members are generally high. This
is due to lack of regular activities, lack of proper communication and clash of interest.
9. Non-transferability of shares: The shares are non-transferable in cooperative society. Hence, the
exit route for the member is to quit the organisation, which is sometimes difficult.
10. Undue government control: Each cooperative society should be registered with the government.
Despite lack of support from government, the control of government is sometimes unjustified.
44 INDUSTRIAL ENGINEERING AND MANAGEMENT

4.10 TYPES OF COOPERATIVE SOCIETIES

The purpose of the cooperative society is to provide services and profit to its members. Based on the
purpose, it may have following categories:
1. Consumers' Cooperative Society
2. Industrial Cooperative Society
3. Cooperative Marketing Society
4. Cooperative Credit Society
5. Cooperative Housing Society
6. Cooperative Farming Society.

4.10.1 Consumers' Cooperative Society

The purpose of consumers' cooperative society (or store) is to eliminate the middleman between consumers
and producers. Second purpose is to ensure a steady and regular supply of goods and services which
the consumers need. Any profit of the cooperative societies is to be shared among members in the form
of dividend.

4.10.2 Industrial Cooperative Society

It is formed to help small-scale producers or artisans to face competition and to increase productivity.
Raw materials, tools and equipments are generally supplied by these societies. In some of these societies,
goods are collectively produced and sold. Income is distributed among members on the basis of the
proportion of goods sold by each member to the society.

4.10.3 Cooperative Marketing Society

This society is formed for small producers and artisans. The purposes are as follows:
(a) Enables members to secure appropriate remunerative price for their sold goods.
(b) Improves bargaining power in the market.
(c) Places even the small producers in the competitive position.
(d) Common transportation, marketing, warehousing, grading, packaging, market research and market
support save the small producers from excessive financial and resource constraints.
(e) Eliminates middleman in marketing goods.
( f) Provides financial support to its members.

4.10.4 Cooperative Credit Society

The objective of this society is to promote the habit of saving among its members. It provides financial
assistance or credit to its members when they need. The advantage of credit society is to save the members
from the exploitation of money lenders.

4.10.5 Cooperative Housing Society

It is formed to provide residential accommodation to its members on ownership basis on a fair price.
The cooperative buys land from municipal authority and constructs flats for its members. Payment is
charged from members on instalments, which is very convenient.

4.10.6 Cooperative Farming Society

It is formed for the small farmers. It provides agricultural inputs like seeds, irrigation tools, fertilizers,
etc., to its members. Small farmers, who cannot afford scientific farming and mechanization, are greatly
helped by forming this society.
FORMS OF BUSINESS ENTERPRISES 45

4.11 COMPARISON OF DIFFERENT FORMS OF BUSINESS OWNERSHIP.

Factor Forms of Ownership

Sole Joint Hindu Partnership Private Limited Public Limited Cooperative
Ownership Family Company Company Society

I. Ownership Single Family In banking sector: 2 < members Members < 7 Member > 10
2 < members < 10 No upper limit No upper limit
in other business
2 < members < 20

2. Formation Easy; No Easy; No Moderately easy; Different; Major legal Moderate

legal formality major legal No major legal legal entity formalities legal formality
formality formality

3. Separate None None None Yes Yes Yes

Legal Status

4. Capital Very less Limited Limited Large Major Not

Required substantial

5. Management By owner By owner By owner(s) By hired Separate Few elected

and shared experts or from owner members
owner

6. Secrecy Complete Complete Shared among Shared among No No

partners members

7. Govt. No No Fairly low Fairly high Highly Moderate

Regulation regulative

8. Expertise Limited Limited Limited Failry high' Quite high Moderate.

needed
•
9. Owner's Unlimited Unlimited Unlimited Limited Limited Governed
Liability by-laws

10.Profit Complete by owner ' Shared among Proportionate to share being Based on
Sharing partners held volume of
business by
members

11.Governed No No Indian Parliament Companies Cooperative

by law Act, 1932 Act, 1956 Society Act
• 1912

12.Transfer of Any time After death Relatively difficult Very easy by Restricted
Ownership of father to transfer of
son f, sham.,
/ '
13.Tax Very less Heavy Exemption
. Structure t ,
o
14.Audit No No • No • Must Itlust Must /'
Contd...
46 INDUSTRIAL ENGINEERING AND MANAGEMENT

Factor Forms of Ownership

Sole Joint Hindu Partnership Private Limited Public Limited Cooperative
Ownership Family Company Company Society
15.Closure Any time As per Act

16.Documen- Not much Governed By consent Not much Very systema-

tation written papers by will of of all partners tic; Governed
.- owner by•Memoran-
dum of
Association

17.Suitability Small business, Dependent Medium business; Medium to Medium to Medium

on the expertise of owner depends on large business; large business; business;
capital, expertise depends upon depends upon depends upon
and market forces market forces Govt. priorities mutual bene-
fits of members

18.Stability Life of After the Depends upon Continuous Continuous Continuous

owner death of all partners'
owner will
passed to
son

REVIEW QUESTIONS

4.1 Explain briefly the various forms of the Business Enterprises.

4.2 What do you understand by Partnership?

4.3 Explain: (i) limited partnership, (ii) minor partner, (iii) sleeping partner.

4.4 What is a Joint Stock Company? Discuss its main features.

4.5 Explain the Cooperative Form of Organisation. What is the purpose of forming of
(i) Credit cooperative society, (ii) Cooperative housing society, and (iii) Cooperative marketing society?.

4.6 Compare Public, Private and Joint Sector.

REFERENCES

1. Bhkishan, Y.K., 1987, Fundamentals of Business Organisation and Mcnagement, Sultan Chand & Sons: New
Delhi.
2. Ramesh, M.S., 1985, Principles & Practice of Modern Business Organisation, Administration & Management,
Kalyani Publishers: New Delhi (Volume 1).
3. Singh B.P., and Chhabra TN., 1988. Business Organisation: and Management. Kitab Mahal: Allahabad.
 FORECASTING

5.1 INTRODUCTION
Forecasting is the first major activity in the planning. It involves careful study of past data and present
scenario. The main purpose of forecasting is to estimate the occurrence, timing, or magnitude of future
events. For example, the trend of past ten years in the demand of cars and corresponding pUrchasing
power of the consumers may form a basis of forecasting the demand of cars during next year. Once,
the reliable forecast for the demand is available, a good planning of activities is needed to meet the
future demand. Forecasting, thus, provides the input to the planning and scheduling process.
Precise forecasting of economic activities, such as product demand, is almost impossible because
of many interactive factors, which are difficult to model. Despite the fact that highly reliable forecast
is unrealistic, the approximate estimate forms the basis of planning process.

5.2 BENEFITS OF FORECASTING

Good forecast of material, labour and other resources for operation are essentially needed by the managers.
If good projection of future demand is available, the management may take suitable action regarding
inventory. Similarly, if production activities are accurately forecasted, then balanced work-load may be
planned. Good labour relations may be maintained as there would be lesser hiring and firing activities
by the management with better manpower planning. Therefore, forecasting is useful due to following
benefits:
1. Effective handling of uncertainty
2. Better labour relations
3. Balanced work-load
4. Minimisation in the fluctuations of production
5. Better use of production facilities
6. Better material management
7. Better customer service
8. Better utilisation of capital and resources
9. Better design of facilities and production system.
Efforts in forecasting activity involve two types of costs. While more effort in forecasting causes
increased cost due to data collection and analysis, lesser forecasting activity involves lost revenue, which may
48 INDUSTRIAL ENGINEERING AND MANAGEMENT

be due to unplanned labour, unplanned material or unplanned capital cost (Figure 5.1). Therefore, each
firm should maintain a balance in its forecasting effort and stick to a zone near to accuracy cost trade
off (Figure 5.2).
Opportunity cost and lost revenue Forecasting -iIncreased cost of forcasting
Less Effort More Effort

Figure 5.1 Effect of forecasting efforts

Cost of increased
Cost effort
(in Rs.)
O Data collection
O Reporting
O Analysis

Opportunity Cost
0 Unplanned labour
0 Unplanned material
o Unplanned capital, etc.

Forecasting Effort (or Accuracy of forecast) —.-

Figure 5.2 Balance of forecasting efforts

Difference between Forecasting and Prediction

Forecasting and prediction are two different things (Table 5.1). Forecasting is objective, scientific,
reproducple, free from individual bias and error analysis is possible in it. Prediction, on the other hand,
is subjective, mostly intuitive, non-reproducible and contains individual bias. Only limited error analysis
is possible in prediction.
Table 5.1 Difference between Forecasting and Prediction

Forecasting a Prediction

I. Forecasting involves the projection of the past
into the future.
2. Forecast involves estimating the level of demand for
a product on the basis of factors that generated the
demand in the past months.
3. Forecasting is more scientific.
4. It is relatively free from personal bias. _
5. It is more objective.
6. It is generally called as "Throw Ahead" technique.
7. Error analysis is possible.
8. Forecasting is reproducible, i.e., everytime same result
would be obtained by any particular technique.
I. Prediction involves judgement in management
after taking all available information into account.
2. Prediction involves the anticipated change into the
future. It may include even new factors that may
affect future d..mand.
3. Prediction is more intuitive.
4. It is more governed by personal bias and
preferences.
5. It is more subjective.
6. It is generally called as "Saying Beforehand"
technique.
7. Prediction does not contain error analysis.
8. It is non-producible.
FORECASTING 49

5.3 TYPES OF FORECASTING

The forecasting may be classified on the basis of time span or range of forecast. Three categories may
be identified as follows:
5.3.1 Long-Range Forecasting
Long-range forecasting consists of time period of more than 5 years.
Characteristics: Normally, it is difficult to model and foresee events for more than five years.
It is mainly due to economic uncertainty and variation in the behaviour of the interrelated processes.
For example, state of economy and technology may completely change in next five years and, therefore,
the trend of data during past few years may not be sufficient.
Applications: Long-range forecasting is useful in the following areas:
• Capital planning
• Plant location
• Plant layout or expansion
• New product planning
• Research and development planning
• Technology management, etc.
Method of Forecasting: Long-range planning is a difficult task. Generally, these forecasts are broad
in nature and general type in characteristic. Mostly, qualitative techniques are used. Studies, related to
technological break-through, economic studies, marketing survey, demographic projections, etc., are used
to make judgemental estimate of the future event.
5.3.2 Medium-Range Forecasting
The range for medium-range forecasting is generally 1 to 5 years.
Characteristics: As the range of forecast shortens from .5 to 1 year, the accuracy of forecast increases.
This is due to better understanding of future and relatively lesser uncertainty. For these forecasts, more
numerical estimates are needed. Estimate of reliability of forecast may be useful in medium-range forecast.
Applications: Medium range forecast is vary useful in following areas:
• Sales planning and sales force decisions
• Productions planning
• Capital and cash planning
• Inventory planning
• Enrollment of students in a college, etc.
Method of frecasting: Medium-range forecasting needs judgement as well as time series analysis.
Combination of collective opinion, regression analysis, correlation of different index and inflation, etc.,
may be useful in forecasting.
5.3.3 Short-Range Forecasting
The ange for short-range forecasting is typically less—from one hour to one year. In most cases, it
is for one season, a few months or a few weeks.
Characteristics: The short-range forecasting is needed at detailed level, such as demand of specific
items. This forecast may affect the purchasing activity. Specific value of forecast is needed. There is very
less sLope of judgement in short-range forecast and, therefore, past data are mainly projected into future.
Applications: Short-range forecasting is commonly used in immediate control of activities. Some
related applications are:
• Purchasing
50 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Overtime decisions
• Scheduling of job
• Machine maintenance, etc.
Methods of Forecasting: Short-range forecasting is based on past data. The trend of data is projected
or extrapolated into future. For this exponential smoothing, graphical projections, part explosion into
product family, etc., are used. For example, monthly forecast of sales may form the basis of production
planning activities.
5.4 COMMONLY OBSERVED DEMAND PATTERN
Forecasting demand of a product is generally associated with the pattern of its past demand. Different
products have different demands. With growing population, the demand for housing is likely to increase.
But the demand for some products, for examples raincoat or umbrellas also depends upon season. In
rainy season, their demand is quite high as compared to winter season. This is a seasonal demand pattern.
Various demand patterns are shown in Figure 5.3.

Constant Demand
Cs
E E E Linear
Demand

(Growth)
Ramp Demand
(New market)

Time Time ' Time

Seasonal
Pattern with
Growth
Cyclic Demand

Time Time

Transient
or 73
Cs Sudden
Impulse Sudden
E Fall in
Demand Rise in
A Demand
Demand
f

(Step Demand)

Time Time Time

Figure 5.3 General Demand Pattern

FORECASTING 51

Some demand patterns are abnormal for which forecasting is difficult. For example, transient impulse,
sudden rise or sudden fall in the pattern. These may occur due to some unforeseen reasons like war
or natural calamities.

5.5 QUALITATIVE METHODS OF FORECASTING

Qualitative methods are needed in forecasting when data, necessary to use time series or causal model,
are not available. For example, when a new product is to be launched in the market, its past demand
data are not available. Therefore, time series trend analysis is impractical. Qualitative techniques, which
incorporate human judgement, expert opinion, management intuition, market research, historical analogy
or grass root forecasting are useful in such cases. Some approaches are as follows:
5.5.1 Delphi Method
In this method, a panel of outside experts is identified. They are given a series of structured questionnaires.
The answers of each questionnaire are used as input for the design of the next questionnaire. The identity
of experts is not disclosed. This is for the purpose that nobody should influence the opinion of others.
The coordinator of the project prepares the statistical summary of responses. This, along with the support
for the responses, is provided to the experts in the next round. The participants are asked if they want to
modify their previous response. In this way, after few rounds of questionnaires, the final forecast is derived.
Delphi is used for long-range forecast. It is generally used for new product demand, technological
forecast for new technology, effect of scientific advances, changes in society, changes in competitive
environment etc. For example, the effect of intemet/intranet or information-highway in the educational
system of India in next 25 years may be forecasted through this approach.
Advantages of Delphi Method: The advantages of Delphi methd are:
• It is effective, when past data is absent.
• It does not require experts to meet in person.
• It is extremely useful for the forecast of new technology or new product.
Limitations of Delphi Method: The limitations of Delphi method are as follows:
• It is a time consuming process, which may be around one year. During this period, the experts may
change their perception. Sometimes, the very need of forecasting loses its significance due to the delay.
• As experts are not accountable, their response may be less meaningful.
• If the questionnaires are poorly designed, Delphi would be ineffective.
• Accuracy or reliability of forecast is relatively poor in Delphi method. Therefore, it should only
be used when past trend is absent and quantitative models are difficult to use.
5.5.2 Market Research
It is used to determine consumer liking in a product or service. A set of hypothesis is tested through
the data, which is generated in the survey.
5.5.3 Salesforce Forecast
Salesforce is a team that is closest to the customer. Their estimates are compiled to assess the future
demand. 1, pharmaceutical market, the estimates given by medical representatives of all territories are
oftenly us to determine the sales forecast of a particular medicine.
5.5.4 Historical Analogy
It is used when the new product or new technology is strongly similar to an established product whose
demand dat-1 is known. This. approach is effective for medium to long-range forecast and it is quite
cost effective.
52 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 5.2 Summary of Qualitative models of Forecasting

Qualitative Description Range of Relative Time to Application Accuracy

Model Forecast Cost Forecast

Delphi Experts panel respond to Long range Medium High • New product Fair to
a series of questionnaires. • New technology good
They have access to all
information.

Market Use of survey, question- Short or High High • New prdouct Excellent
Research naire for testing the medium • Preferences of in short
/
hypothesis regarding range consumers ranges. Fair
consumer behaviour • Pre-poll forecast in long range

Sales forecast Projection of estimates by Short range Low Quick • Estimate of Fair
Opinion, grass-root level people and medicine of to
Judgement or like sales force who frequent a particular poor
Grass root are close to consumers type
Forecast • Govt. contract
which may be
procured, etc.

Historical Life cycles of similar . Long Low Quick 7 New product Poor to
analogy products or services are range to • New services fair
compared. Demand pattern medium
for each stage of life
cycle is assumed to be
analogous for comparable
products/services.

5.6 ACCURACY OF FORECAST .

It is almost impossible to obtain an exactly right forecast every time. This is due to many factors, which
affect the trend in data. It is difficult to capture the exact interrelation of these influencing factors. Therefore,
some error in forecasted value and actual value is quite common.
Sometimes, it is important to know if the forecaster (a forecaiting technique) is unbiased or not.
An unbiased model should overestimate or underestimate the forecast in almost equal ratio.

5.6.1 Measures of Forecasting Error

1. Mean Absolute Deviation (MAD):' This is calculated as the average of absolute value of difference
between actual and forecasted value. The negative sign in this difference is ignored as overestimate
as well as underestimate are both off-target and thus undesirable.

E ID, —F,1
t=i
MAD =
n
where; D, = Actual value of demand for period t
F, = Forecasted demand for period t
N= number of periods considered for calculating the error.
2. Mean Sum of Square Error (MSE): The average of square of all errors in the forecast is termed
as MSE. Its interpretation is same as MAD.
FORECASTING 53

(D, — Ff )2
MSE = 1=1

3. Bias: Bias is measure of overestimation or underestimation. A positive bias indicates under-estimation

while a negative bias indicates overestimation.

E (D, — F,)
Bias = (=I

4. Tracking Signal (TS): It is used to identify those items, which do not keep pace with either positive
or negative bias or trend.

(D, — F,)
(BIAS)„
TS = 1=1
(MAD)„ (MAD)„
where, (MAD)„ = Mean absolute deviation till period n
(Bias)„ = Bias till period n.

5.7 QUANTITATIVE METHODS OF FORECASTING

5.7.1 Extrapolation
Extrapolation is one of the easiest ways to forecast. For example, based on the past few values of a
production capacity, next value may be extrapolated on a graph paper. This may be done by extending
the curve (or line) joining the already known values. For example, if the production capacity of a firm
has been 445, 545 and 645, then in the next year one may expect a production capacity requirement
of 745 units (Figure 5.4).

800

700
,o
Production
Capacity 600

500 Future Projection

by Extrapolation
• Past
400
Trend

I I I
1996 1997 1998 1999

Year

Figure 5.4 Forecasting of Production Capacity by Extrapolation

The limitation with the extrapolation method is its inability to deal with non-linear trend and swing
in the pattern of past data.
Time Series Analysis: There are some models in forecasting which involve analysis of past data
or happenings. These models are as follows.
54 INDUSTRIAL ENGINEERING AND MANAGEMENT

1. Simple moving average

2. Weighted moving average
3. Exponential smoothing
4. Double exponential smoothing.
5.7.2 Simple Moving Average (SMA)
Following approach is followed in simple moving average method:

Compute the mean of only a specified number of .consecutive data which are most recent
values in series. Call this Ft. This F would be the forecast for next period.

For example, a 5-month forecast of moving average should account for the last five values of demand
in the demand forecasting. In general, the forecast at the end of t periods, the n period, simple moving
average forecast for (t + 1)th period is given by
1
F fr 1 = E
Di
n i=t+t-n
where, D. is the actual demand for the 'th period
n is the number of periods included in each average.
Example 5.1 Forecast for 3-Month Simple Moving Average.

Week Demand for the week (units) Cumulative demand 3-week average demand
for the last 3-week
I- -1
10 105
1
11 I 110 — — — —
1
12 L 107_1
13 118 I— — --> 322 — —= 3— —X107.33
14 120 335 111.67
15 101 345 115
16 106 339 113
Example 5.2 Effect of period considered in SMA.
Let us consider 3-weeks 5-week and 9-week simple moving average forecast.
Week Demand 3-week SMA 5-week SMA 9-week SMA
10 105
11 110
12 107
13 118 107.33
14 120 111.67
15 101 115 112
16 106 113 111.2
17 114 109 110.4
18 118 107 111.8
FORECASTING 55

Week Demand 3-week SMA 5-week SMA 9-week SMA

19 121 112.(:7 111.4 I11
20 125 117.67 112 112.7
21 130 121.3 116.8 114.4
22 135 125.3 121.6 117
23 141 130 125.8 118.9
24 147 135.3 129.8 121.2
25 156 141 134.2 126.3
26 170 148 141.8 131.9
27 185 157.67 149.8 138.1
28 198 170.3 159.8 145.5
29 212 184.3 171.2 153.7
30 225 198.3 184.2 163.8

It may be observed in SMA approach:

1.The longer the moving-average period, the greater the random elements smoothening.
2. In case of trend (increasing/decreasing), the SMA has adverse trend. This is due to lagging trend.
3. The longer is the time span, the smoother is the forecast but with lagging trend.
4. Simple moving average method involves quite large data handling as we go fol. large period average
(Figure 5.5).
250

co,

200

150

100

50 1111111111111111 III I
10 II 12 13 14 15 16 17 18 18 20 21 22 23 24 25 26 27 28 29 30

Weeks
Demand -s- 3-week moving average

5-week moving average -x- 9-week moving average

Figure 5.5 Effect of period in simple moving average method of forecasting

56 INDUSTRIAL ENGINEERING AND MANAGEMENT

5.7.3 Weighted Moving Average

This approach is based on the principle that more weightago should be given to relatively newer data.
The forecast is the weighted • average of data. Thus:

F,1 = Iv; Di
1=14-1-n
where, wi is the relative weight of data for the ith period

and E =
i=t+l-n

Example 5.3 What is the forecast for the 4th period, according to data given below?

Period Actual Demand Weightage

I 105 0.1
2 108 0;3
3 112 0.6
Solution: The weighted moving average forecast for the 4th period
F4 = (0.1x105 + 0.3 x108 + 0.6 x112)
= 110.1 -(0
In case of simple moving average,
1
F4 = (105 +108 +112) = 108.33

In case that weightage is 0.6, 0.3 and 0.1 in the above problem,
F4 = (0.6 x105 + 0.3 x108 + 0.1x112)
= 106.6 ...(iii)
It may be noted that when more weight is given to the recent values, the forecast is nearer to
the likely trend. Weighted moving average is advantageous as compared to simple moving average as
it is able to give more importance to recent data.

5.7.4 Exponential Smoothing

In exponential smoothing method, the weightage of the data diminishes exponentially as the data become
older. In simple moving average, the only few past data are accounted. However, in exponential smoothing,
all past data are accounted. The weightage of every previous data decreases by (1 - a) times, where
a is called as exponential smoothing constant. For example, when a is equal to 0.3, the weightage of
last period data is 0.3 and weightage of last to last period data is 0.3 (1 - 0.3) or 0.21.

Period Demand Weight

1 101 0.147
a (I - a)2 =
2 105 a (1- a) = 0.21
3 110 a = 0.3
Let F1 = One period ahead forecast made at time t
Di = Actual demand for period t
a = Smoothing constant (0 a 1)
FORECASTING 57

Then, Ft = + (1— a) Ft _ I
Alternately Ff = 1)
Thus, forecast for next period is the algebric sum of forecast for the last period and a times error
in forecast for the last period.
Now, F, = a r _ I + (1— a) F,_,
Fr-1 = aDi _ 2 + (1— a) Fr-2
Putting this in the previous equation, we get
• = aDr + (1— a) [D,_2 + (1— a) F;_2 ]
1

= CCA-1 + a (1— a) Di _ 2 + (1— a)2 F_ 2

Similarly, expanding for Ff _2 we get
• = aDt _ i + a (1— a) Dt _ 2 + a (1— a)2 + (1— a)3 F,_3
Thus, F, = aDt _ i + a (1— a) /),_2 + a (1— a)2 Di_3 + a (1— a)3 Dt _ 4 ±...
Now, observe the above expression. We know that the value of a is between 0 and 1. Therefore,
weightage to the past data decreases as the data becomes older. For example, if a is 0.3 weightage
to the data, 3 period old is a (1 — a)2 or 0.147. Similarly, weightage to 4 period old data is
a (1 — a)3 = 0.1029. Thus, weightage to the past data declines exponentially.
A closer look at above equation reveals that higher value of a would give more weightage to
error (Dt_1 — F,_1) in the forecast period t. Therefore, such a choice would lead to more adjustment
for error in the next forecast. This case is similar to a situation that more value of past data is accounted
in a moving average forecast. A lower value of a (say 0.001) will not provide much adjustment for
error from its past forecast.

weightage of Past
Data . •

a(I — a)t-i

2 3 r-3 —2 r—I
Period

Figure 5.6 Weight of past data in exponential smoothing

58 INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 5.4 Comparison of Exponential Smoothing Forecast for Different Values of Smoothing
Constant.
Let us consider demand of an item for ten weeks, given in the following table. The forecast for
different value of a is also shown.

Week Demand Forecast

a = 0.1 a = 0.5 a = 0.9
1 1,000
2 350 1,000 1,000 1,000
3 950 935 675 415
4 975 937 813 897
5 2,100 940 894 967
6 750 1,056 1,497 1,987
7 550 1,026 1,123 874
8 300 978 837 582
9 1,200 910 568 328
10 1,770 939 884 1,113

Following observations pertain to the exponential smoothing constant (a):

• Smaller is the value of a, more is the smoothing effect in forecast.

• Higher value of a gives more robust forecast and response more quickly to changes.
• Higher value of a gives more weightage to past data as compared to smaller value
of a.

2500 --•— Demand —o— 0.1 —A— 0.5 —X-- 0.9

Dema n d/Forecast

2000

1500

1000
f ( itAk„
•At ._ ,p.- •
\ --gAir .
4?-- —'41111111'9IlWri%,
500

0
I I I I J I I I I

2 3 4 5 6 7 8 9 10

Week

Figure 5.7 Effect of smoothing constant on forecast

FORECASTING 59

Exponential Forecasts (F1 ) versus Actual Demands (D1)

Lagging Tenet

Flattening Effect
800 a= .55

a= .35

E
a = .15
400

F= + a (Di_ i — F,_1)
200

111[11 I I I I I I I I I II III II
Time

Figure 5.8 Effect of Exponential Forecasting on Forecast

Example 5.5 Problem of Exponential Forecasting.

Week Observed Exponential Smoothing Forecast Tracking

Demand Signal
a = 0.1
Forecast Error Absolute Squared E (D1 - F1)2 =E(D1- Ft )/MAD,
Error Error
(t) (Dt ) (F1) (D1 - F1) (D1 - F1 ) (Dt - F1) 2
1 1,000 — — — — —
2 350 1,000 -650 650 4,22,500 650 -1.00
3 950 935 15 15 _225 332.5 -1.911
4 975 937 38 38 1,444 234.3 -2.5
5 2,100 940 1,160 1,160 13,45,600 465.7 1.21
6 750 1,056 -306 306 93,636 433.8 0.591
7 550 1,026 -476 476 2,26,576 440.8 -0.49
8 ' 300 978 -678 678 4,59,684 474.7 -1.89
9 200 910 290 290 84,100 451.6 1.34
10 1,770 939 831 831 6,90,501 493.8 0.45
Total 224 4,444
Mean 24.9 493.8
60 INDUSTRIAL ENGINEERING AND MANAGEMENT

Sample calculation for 6th week forecast

F6 = F5 + a (D5 - F5 )
= 940 + 0.1 (2,100 - 940)
= 1,056
Error in forecast = D6 - F 6
= 750 - 1,056 = -306
Absolute error in forecast = 1 - 3,061 = 306
Squared error = (-306)2 = 93,636.
Example 5.6 Find relationship between exponential smoothing coefficient (a) and N so that responses
are same.
Solution: Average life of data
1 1 1 1
0*-+1*- +2*1+3*- +...+(N -1)*
NN N N
0 +1+2+3...+ N -1
or, Average life of data
1
- (N -1) (N -1+1) 1
.2
= (N -
AT
1
- (N-1)
=
2
Average life of data for exponential smoothing
S = 0*a +1*a (1- a) + 2*a (1-a)2 + + (N -1) a (1- a)N-1 +

= a (1- a) + 2a (1- a)2 + 3a (1- a)3 +

= a [(1- a) + 2 (1- a)2 + 3 (1- a)3 +...]
Now; multiplying (ii) by (1 - a) and subtracting from (ii) we get
S = a [(1 - cc) + 2 (1 - a)2 + 3 (1 - a)3 + 4 (1 - a)4 + ...]
(1 - a) S = a [... (1 - al2 +2 (1 - a)3 +3 (1 - a)4 +...]
S [1- (1- a)] = a [(1- a) + (1- a)2 + (1- a)3 + (1- a)4 + ...]
(1-a)
or S * a =a
1- (1- a)
a (1 - a)
=1-a
a
1-a
Or S =
a
From Equations (i) and (iii)
1-a N -1
a 2
2 - 2a = Na - a
FORECASTING 61

or N*a =-2a+2+a=—a+2=2—a
or Na + a = 2
or a (N +1) = 2
2
or cc=
N +1
5.8 STATISTICAL FORECASTING
Statistical forecasting is based on the past data. We evaluate the expected error for the statistical technique
of forecasting. Some common regression functions are as follows:
Let, Ft = Forecast for time period t
dt = Actual demand for period t
t = Time period
1. Linear Forecaster
Ft = a + bt
where, a and b are parameters.

dt

Linear Forecaster Cyclic Forecaster

Cyclic Forecaster with Growth Quadratic Forester

Figure 5.9 Some common forecasters

2. Cyclic Forecaster
2rc 2n
Ft = a + u cos — t + v sin — t
N N
where, a, u and v are parameters
N = Periodicity.
62 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Cyclic Forecaster with Crowth

27c 27c
= a +bt +u cos -- t + v sin — t
N N
where, a, b, u and v are parameters
N = Periodicity.

0 1 2 3 4 5 6 7

Figure 5.10 Curve Fitting using Least Squares

Linear Forecaster L'sing Least Squares Technique: We use least squares method for fitting a
function to the given set of past data. In case of linear forecaster, the curve to be fitted in the past
data is linear. Here,
F = a + bt
We would now minimize the squared sum of error (SSE)

(SSE) = E (d, - F,)2

(.1

E (d, - a - b,)2 •••(0

r=i
toy, to minimize (SSE) with respect to parameters a and b, we have to differentiate above equations
with respe%. to a and b and equate to zero. Thus,
a a
— (SSE) = 0 =— [± (d, — a — bt)2
as Oa ,

or - a - bt) = 0

or Ed, — — bEt = 0
or Ed, = na + bEt ...(ii)
a
Similarly, — (SSE) = 0 = Et (d, - a - bt)
ab
or Etd, -Eat -bEt 2 = 0
FORECASTING 63

or Etd, = Eat - bEt2

or Etd, = aEt - bEt2 ...(iii)
From Equations (ii) and (iii) the value of a and b is obtained as
Ed, Et2 - Et Etd,
a=
nEt2 - (E02
b =.. nEt d, -(Et) (Ed,)
nEt2 - (Et)2
As, t being 1 to n for n successive data
n (n +1)
Et =
2
n (n +1) (2n + 1)
Et'
6
2 (2n + 1) Ed, - 6Etd,
We get, a=
n (n -1) -
(12Etd,) - 6 (n +1) Ed,
b=
n (n2 -1)
Coefficient of Determination (r2): Coefficient of determination (r2) statistically determines the fact
how closely the two variables in the regression analysis/ (t and d,) are related. It is expressed as:
[nEtd, -Et Ed,:12
r2
[nEt 2 - (Et)2 ][nEd,2 - (Edi )2 ]
Example 5.7 Regression Analysis.
Linear Regression

S. No. t d, t2 (t * di) at (Forecasted) (d1 - at )2

1. -5 119 25 -995 196 9
2. -4 202 16 -808 199 9
3. -3 119 9 -597 202 9
4. -2 208 4 -416 205 9
5. -1 212 1 -212 208 16
6. 0 194 0 0 211 289
7. 1 214 1 214 214 0
8. 2 220 4 440 217 9
9. 3 219 9 657 220 1
10. 4 234 16 936 223 121
11. 5 219 25 1,095 226 49
12. 6 223 36 1,398 230 9
E Et = 6 - Ed, = 2,553 Zt2 = 146, Et* d, = 1,716 - 530
64 INDUSTRIAL ENGINEERING AND MANAGEMENT

For Linear regression of form.

Forecasted demand for period t,
= a + bt
(Ed,) Et 2 — (Et) (Ed,) 2553*146-6*1716
a=
nEt 2 — (Et)2 12*146— (6)2
= 211.2
(Etd,)— (Et/0 (Et) 12*1716— 2553*6
b=
nEt — (Et)2 12*146— (6)2
= 3.07
Hence, equation for forecasted demand of period t is
= 211.2 + 3 .07t.
Example 5.8 The demand for six consecutive periods for a product is as follows: 105, 108, 112,
116, 120, 130. Establish a linear forecaster. Determine the forecasted-demand in 1/ th period. Also calculate
the coefficient of determination and standard deviation for the line of best fit.
Solution: (a)
Period (t) Demand (cid t2 td,
0 105 • 0 0
1 I08 1 108
2 112 4 224
3 116 9 348
4 120 16 480
5 130 25 650
Sum 15 691 55 1810

Ed, Et 2 —Et Et d, 691x 55 —15 x 1810

a= = 103.4
nEt 2 — (Et)2 6 x 55 — (15)2
nEt dt — (Et) (Edt) 6 x1810 —15 x 691
b= = 4.71
nEt 2 —(Et)2 6 x 55 — (15)2
Thus, dt = 103.4 + 4.71t
Alternately: Six periods may also be adjusted with a middle value as zero and doing the forecast
as follows:

(t) (d,) t2 td,

—2 105 4 —210
—1 108 1 —I08
0 112 0 0
1 116 1 116
2 120 4 240
3 130 9 390
Sum 3 691 19 428
FORECASTING 65

Alternately: Using summation in first table.

Since;
di = a + bt td,= at bt2
Or, Ed, = Ea + bEt Etd, = Eat + Ebt 2
or Ed, = na + bEt Eult = aEt + bEt 2
or, 691 = 6a + b x 15 1810 = a x 15 + b x 55
or, 6a + 15b = 691 15a + 55b= 1810

(c)

(t) d1 Ft = a + bt (d1 - F1)2

0 105 103.4 2.56
1 108 108.11 0.012
2 112 112.82 0.672
3 116 117.53 2.34
4 120 122.24 5.02
5 130 126.95 9.30
n=6 19.90

I(d, -- F,)2
I(d, F,)2
Standard error of the estimate (Sidi) =
\ n -2
19.90
= _ - 2.23
6_2
Now, if let the demand be normally distributed around the regression line and we want 95.5%
of the demand values to fall within the prediction interval (I), then I = ±2S,d, = ±2 x 2.23 = ±4.46.
66 INDUSTRIAL ENGINEERING AND MANAGEMENT

Thus, for 95.5% confidence interval, the forecast for the 1 1 th period would be,
Prediction Interval for F11 = 150.5 ± 4.46
Or 154.96 Fn 146.04

95% Conlidenc
Limits

0 10 12

Figure 5.11 Confidence Interval of Forecast

REVIEW QUESTIONS

5.1 Explain the three basic time horizons for forecasts. What are the common methods forecasting?
5.2 When are qualitative forecasting techniques most useful as compared to quantitative ,one?
5.3 What is a time series analysis? Explain its advantages and limitations.
5.4 What are the commonly used qualitative forecasting techniques? Explain.
5.5 Explain the Delphi method.
5.6 Distinguish between moving average, exponential smoothing and trend projection methods of forecasting.
5.7 What are the effects of smoothing constant on the quality of forecast?
5.8 What are the common measures of forecast error? Explain.
5.9 What is a tracking signal in forecasting? Give example.
5.10 Calculate the 3-year simple moving average for year 2000, using the time series data in the following table:,
Time Series Data

Year Sales
1981 2000
1982 1350
1983 1945
1984 1975
1985 3100
1986 1751
1987 1550
1988 1300
Contd...
FORECASTING 67

Year Sidles
1989 2200
1990 2775
1991 2350
1992 2005
1993 1355
1994 1940
1995 1970
1996 3110
1997 1750
1998 1555
1999 1316

5.11 For the data in above table, calculate a 6-year weighted moving average for year 2000, using the following
weights: .1, .1, .1, .2, .2, and .3 from the oldest to the most recent years.
5.12 Using an a of 0.2, calculate the year 2000 forecast using the simple exponential smoothing model. Use the
data in table above and assume a 1999 forecast of Rs. 1,800.
5.13 Draw a scatter diagram for the time series data of above table.
5.14 Using the method of least squares, find the regression equation for the time series data in above table. Use
the regression equation to forecast sales for 2000. Write - computer program for the above problem.
5.15 A steel company faced the following demand for its products during past few months. Presently, the company
is using last year's corresponding monthly sales as this year forecast.

Month Forecasted-Demand Actual Demand

(in metric tons) (in metric ton)
July 21100 20000
August 23600 22000
September 22400 21000
October 27500 26500

Calculate MAD, Bias, MSE and tracking sign al and interpret them,
5.16 Forecast the production for next two years when the production quantity (in' 000 tons) for last ten years
is as follows:
200, 225, 235, 240, 255, 260, 265, 275, 270: 271
Use following methods and comment on results:
(a) Simple average
(b) Weighted moving average
(c) My ing average (3 years and 5 years)
(d) &donential smoothing (for a = 0.3, 0.5 and 0.7)
5.17 Hew is forecasting different from prediction?
68 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

1.Biegel, 1974. J.E., Production Control—A Quantitative Approach, Prentice Hall of India: Delhi.
2. Box, GEP and Jankins, GM, 1976, Time series analysis: Forecasting and control, Holden-Day; San Francisco.
3. Brown, R.G., 1963, Smoothing, Forecasting and Prediction of Discrete Time Series, Prentice Hall, Englewood-
cliffs.
4. Chambers, J.C., Mullick S.K. and Smith D.D., 1974. An Executive's Guide to Forecasting. John Wiley: New York.
5. Draper, N.R. and Smith N., 1966. Applied Regression Analysis, John Wiley: New York.
6. Firth, M., 1977. Forecasting Methods in Business and Management, Edward Arnold: London.
7. Hanke, 'J., 1989, "Forecasting in Business Schools: A followup survey", International Journal of Forecasting
(Netherlands), 5 (2), 259-62.
8. Jarrett, J., 1987. Business Forecasting Methods, Basil Blackwell: London.
9. Lee, T.S and Adam, E.E. (Jr.), 1986, "Forecasting error evaluation in MRP production inventory systems",
Management Science, 32 (9), (Sept. 1986), 1186-1205.
10.Makridakis, S. and Wheelwright S.C., 1978. Interactive Forecasting, Holden-Day: San Francisco
11.Makridakis, S., Wheelwright S.C. and McGee V.E., 1983. Forecasting: Methods and Applications, John Wiley:
New York.
12.Martino, J.P., 1972, Technological Forecasting for Decision-snaking, American Elsevier; New York.
13.Montgomery, D.C. and Johnson L.A., 1976. Forecasting and Time Series Analysis, McGraw Hill: New York.
14. Wheelwright, S.C. and Makridakis, S., 1985, Forecasting Methods for Management, 4th Ed. John Wiley and
Sons: New York.
 FACILITY LOCATION

6.1 INTRODUCTION
Location of facilities is a problem associated with the planning phase of a factory or even a service
sector. Small entrepreneur to big industrial houses, hospital to a fashion designer shop and school to
a five star hotel start the first planning activity with a questions: Where to locate the site so that no
change is needed for years to come? It is a very vital decision which has long-term implications. We
call this type of decision as a strategic decision. It is not very easy to answer a location problem. The
reasons are: (i) uncertainty in future, (ii) complexity and conflicting factors associated with the site selection
problem, and (iii) constraints and limitation of resources to produce a site, etc. Let us consider two
sites for location of a .new factory. Site A is nearer to market but far from the raw material source;
site .B is otherwise. Site A is a rural location with cheap availability of labour; site B is an urban location
with better availability of power. Similarly, we can list many factors: Some are better at site A, while
rest are better at site B. Which site to select? When site selection decision is needed, many options
are available with their relative strength and weaknesses. A careful consideration is needed on an integrated
framework before final site is selected.
6.2 FACTORS IN FACILITY LOCATION
The factors, which affect the facility location, may be grouped into many categories. Some are as follows:

Category Factors
Process input Raw material, personnel, transportation of raw material, workforce availability, availability
of water and power, road-rails, etc.
Process output Market nearness.
Process characteristics Environmental factors such as pollution, noise, etc., weather (in case of knitting industry),
Level of humidity and seasons, rainfall.
Personal Preference Preference of executives or entrepreneur.
Govt. Policy Tax exemption, legal requirement, incentives, availability of loan/land, etc.
Local conditions Community culture and attribute, past history of industry located in the area, incidence of
labour unrest in the area, political interference, etc.
Cost factors Cost of land, cost of transportation, wages of unskilled labour.
Competition Location of other industries in the area, market forces for competition etc.
Intangible factors International consideration, room for expansion and growth, school, churches, medical facilities,
recreational facilities, etc.
70 INDUSTRIAL ENGINEERING AND MANAGEMENT

6.3 CONSIDERATIONS IN PLANT LOCATION

No plant can be located at a place, which fulfills all the criteria of perfect location. Some factors compromised
to take advantage of the other factors. For example, if the raw material is quite bulky and difficult to
transport, then the plant may be located nearer to raw material source. Many iron and steel industries
are geographically located near the place where iron-ore are found. Refer Figures 6.1 and 6.2. Jamshedpur,

72° 80° 88°

METALLIC MINERALS

•32° 432°.

24°

o Manganese Ore
• Bauxite
A Copper Ore
• Zinc
O Leaci
• Gold
Saud
III Iron Ore

88°

Fig. 6.1 Location of Metallic Minerals in India

Bokaro and Rourkela are the places where iron-ore is found. To run the power plant. are, coal is needed.
Many NTPC power plants are located near the place where coal is found (Figure 6.1). Similar observations
are valid for oil-fields and location of refineries (Figure 6.3). However, some, other factors may have
to be compromised. In general, following considerations are needed in a plant location decision:-
1. Nearness to raw material source
2. Nearness to market or consumer
FACILITY LOCATION 71

72° 86. 88° ,_,. .

r•V'''''.%.
1. Calcutta —..., \.
:.,...-
2. Chiltaranjan ) METAL BASED INDUSTRIES
l ./
3. Durgapur r'
4. Ranchi i A Srinagar ...e
5.Bokaro i e
6. Jamshedpur '.4Jarrini-u.^ ' 32°
v., ' .N"...-1
7. Rourkela -
8. Rupnarainpur i"--41—
it , - 4%.
' Pinjora#,.%
.• t x..... rJ / 0 Haridwar>
.; .,_, --
d it ) ..,.: I,'
ss r,\ ., .....,-, •
li mn 1,•\) • r't. 1•••`"
..... ,,
-----
i
f° 4. .L.4-- -- Al .
'.. -•
1 :.?.
-7.'s 1 (
1.N7t
Allahabad i 's-..-
L ' I .VN I: „-.0' / ) .1
.1 " 1 C.• (

\ i *".-.) •- • 0- • — ••••,- , ,
r• / • 24°
... : .- '1/4.-. , 2 ? J •-•""

- -•-v-i '1qt ,../ -4s3 - . - - ..* rt. c•

4- \ %
1,
.
,..1-•
+-Bhopal 1, l iC --ii? t ,;...ti
Os
r I-"di,. IA " ' 0 VI'
. r ,.. . I' -,' ' 1
4 4. , ' ‘''' e f - .1
IN. ) i Bhilai (

•- -, ,.1 \ ,
Bombay t) ,I 1 r
e 44., i•• ,),...,r
Mazaghon Alk
-11F-Pune
. ./. I
e .1 A ,.., r
L1.--
,
rs.-.5
. r', Hyderabad Vishakhapatnam
,e,- i Ai
16° t- 4
t i•J —-
9_ Iron & Steel
e 1
TunghbhadraR .;) Ca Coaches and Wagons
• Bhadravati l
0 Shipbuilding Yard
angnlorei
V\--, - Madras
Perambur e Automobiles
%
;i7 I
..
..°6 .1 • '... Salem A Heavy Enginooring 0
. Tiruchchirappalli 44 Machine Tools
e 1 1,1
Cochin 4, I
ea Locomotives
Kalamassery rr +.e I
._------II
r--8'
CHeavy Electricals —
'CI

\
72 88°

Fig. 6.2 Location ofd Few. Metal-Based Industries in India

72 INDUSTRIAL ENGINEERING AND MANAGEMENT

80° Bo .
Coal Fields 72'
I. RanIganj
2. Jharla
3. Bokaro r.
4. Karanpura ‘1, MINERAL FUELS
5. Glrldh
6. Korba • Coal Fields
7. Shandol A 32°
— 8. Pench Valley Retirery
9. Kantapalli I
,o1
10. SIngarant Potential Oil Areas
•
11. Kamptee
Sed i rn: nta r y A rea
12. Neyvell
cont i n e n ial she ll
011: e Mathura Bongalgaon gbot
61 •••
Barauni
e ...SAbbagar
(151 r

Kalol
re 8

.%‘
)‘
Mumbal High
hakhapatnam

•
12. Singraull
13. Rampur
15, Himplr
16. Talcher

Fig. 6.3 Location of Coal and Mineral Fuel in India

3. Good transportation facility

4. Availability of labour, both unskilled and skilled at comparative wages
5. Availability of fuel and power
6. Availability of water
7. Cheap availability of land
8. Suitable climatic conditions
9. Availability of sub-contractor, industrial climate and organized industrial complexes
10.Community receptivity of business
11.Construction cost
12.Quality of life: housing, recreation, school, climate, etc.
FACILITY LOCATION 73

13. Taxes and Government regulations

14. Site for waste disposal and environmental regulations.
6.4 COMPARATIVE STUDY OF RURAL AND URBAN SITES
After the general territory for a site has been identified, specific site location is the major issue. The
alternative sites may have one of the following locations:
Table 6.1 Comparison of Different Locations

Factors Urban or Sub-urban Rural or

City Site Country Site
1. Availability of land Less Moderate Plenty
2. Cost of land High Moderate Low
3. Connected by rail/road etc. Well Moderate Poor
4. Availability of labour Less Moderate More
5. -Wages of labour More Moderate Less
6. Communication network, like internet, fax, Very good Moderate Poor
telephone, fax, postal etc.
7. Power and water availability Good Moderate Poor
8. Supporting industries and ancillaries' units Nearby Nearby Far
9. Quality of life, such as recreation, school, hospital, etc. Very good Moderate ' Poor
10. Market and consumer Nearby Moderate Far
11. Building for site May be rented Rented/ To be built
or built built
12. Availability and retaining potential for Better Moderate Poor
professionals like manager and engineers
13. Training of workers and foremen In local Either Not available
institutes outside
14. Security Better Moderate Less
15. Expansion of site Difficult Moderate Easy
16. Taxes More Moderate Less
17. Government support Less Moderate More
18. Union problem and industrial relations Poor Moderate Better
19. Pollution and environmental constraints More Moderate Less
20. Waste disposal Difficult Moderate. Easy
21. Location of sub-contractor, retailer, etc. Nearby Nearby Far
22. Incentives from financial institutions like Less Moderate More
banks, IDBI, IFCI, etc.

1. Urban or city locations like Lucknow, Kanpur, Hyderabad, Calcutta, Chennai, Patna, Nagpur, etc.
2. Sub-urban location like Faridabad, Gurgaon, etc.
3. Country or rural location.
Urban locations have major advantages as:
• Well connected by rail, road and communication network such as internet, fax, e-mail, telephone-
line, etc.
• It is easy to locate and retain professional manager and engineer.
• Power and water supply is available.
74 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Easy to rent a building rather than building a new one.

• Supporting industries and ancillaries may be nearby.
• Better quality of life.
• Market or consumers may be near-by.
Therefore, the urban site and the rural site have their own strengths and weaknesses. A compromise
could be the suburban site. These sites are located near the cities. For example, Faridabad, Gurgaon,
and Ghaziabad are located in close proximity of Delhi. Many industries have come up in these areas.
Maruti, BTL, etc., are located in Gurgaon, ABB, Escort, Goodyear, etc. are located in Faridabad. Similarly,
near Allahabad city, many industries are located in Nani.
6.5 CASE STUDY

Objective
Selection of site for a software company.
Case Details
Samir, a non-resident Indian working with a multinational company in USA is planning to come back
to India. He is a computer science graduate of IIT, Delhi and postgraduate in software side from a prestigious
US Institute. He has now worked for over ten years in this area. Before coming to India, he asked
his friend, Rakesh, to locate a proper site in India. Rakesh is working with a software industry in Bangalore.
akesh scam newspapers (during August to November 1998), and suggests for Bangalore. His recommendation
is based on statement of ten software companies based in Bangalore (Table 6.2).
Table 6.2 Ten major software companies. of India, located In Bangalore city of Karnataka
state, give reasons for selecting Bangalore as their site of operation (Period: Late 1998)

Company Year of Starting Major Criteria for
(or selecting Selecting Bangaloie as
site) their site
I. Novell (Fully) 1994 • Fast emerging Silicon
owned subsidiary valley of India
of US-based • Required software talents
Novell Inc.) available
• Easy to attract new talent
from any part of globe
2. Tata-IBM Early 90's • Bangalore is helpful in • Good decision as the
attracting top IT talent
to meet customer
satisfaction
• Government of Karnataka
has encouraging outlook
and supportive means
• Chances of joint ventures
and govt. support in
spreading IT message
How they feel Expectation
now about their
decision in site selection
• Since last four years
Novell Bangalore has .
established its
credibility as the quality
product organisation
• Planning to expand its
operation in Bangalore
—Vikram Shah (M.D.)
• Improved
company is continually infrastructure
growing above the • More direct
industry rate international
. connections
—Ravi N. Marwaha
(MD & CEO)

Contd...
FACILITY LOCATION
Company Year of Starting Major Criteria for
(or selecting Selecting Bangalore as
site) their site
3. Compaq India • Availability of vast pool
of IT skill
• No problem in attracting
as well as retaining
quality talent
• Availability of support
industries and services
at reasonable cost
4. Texas 1984 (after the • Best hi-tech climate
Instrument assessment of 9 • Presence of world class
potential educational institutes
locations) • Unique ability to attract
professional talent
- —Srini Rajam (MD)
5. Sun Microsystem 1995 • Bangalore had best IT
talent
• Cost of operations less
expensive as compared to
Mumbai and New Delhi
• Partners and customers
mostly located there
6. Wipro Early 1980's • Supporting role of Govt.
or Karnataka
• Easy land acquisition
• Quick approval of plans
• Incentive for software
(such as floor index of 2
in Electronic city)
• Sales tax exemption for
capital goods and diesel
• Lower power tariff
75
How they feel Expectation
now about their
decision in site selection
• Bangalore continues to
be the real IT city of
India
—Som Mittal (MD)
• Today it is the largest
R & D centre for IT in
Asia and among top
three R & D centres
outside Asia .
• Friendly Govt. support
• Worked closely with
Govt. & DOE (Dept. of
Electronics) in
formulating business
friendly Software
Technology Part (STP)
• Ability of talent and the
consumpolitan nature of
city will definitely
attract other IT
companies.
—Bhaskar Pramanik
(M.D.)
• Wipro has emerged as
Karnataka's largest
software exporter
(i.e., Rs. 400 crore in
.
1997-98).
• Shifted its corporate
office from Mumbai to
Bangalore.
• Investment is more than
300 crores.
• Generated 4500 employ-
ment of IT professionals
• Top ten R & D invertors
of India
Contd...
76 INDUSTRIAL ENGINEERING AND MANAGEMENT

Company Year of Starting Major Criteria for How they feel Expectation
(or selecting Selecting Bangalore as now about their
site) their site decision in site selection

• By year 2000, it plans

to hire another 1500 IT
professionals in
Bangalore
—Ashok Soota
(Group President)

7. Microland 1989 • It is centre of science • In the long run

and educational institutions
and electronics industry.
• State has the maximum
number of engineering
colleges.
infrastructure will be a
matter of concern. But
the climate is so good
that it will continue to
be here.

• Better place to live mainly

due to brillant weather
—Pradeep Kar
(Chairman and MD)

8. Sonata Software • Choice for single rather • No plan to have another

than geographically centre outside Bangalore
dispersed locations
• Better availability of
manpower
• Better quality of living
• Infrastructure
• State Govt. has IT policy.
• Better Govt. interfaces to
support.
—B. Ramaswamy
(President and MD)

9. Aditi • Wonderful climate

Technologies • Good people work
available locally
—Pradeep Singh (CEO)

10.Infosys 1983 • Excellent reservoir of

Technologies technical resources
• Network of educational
institutions
• Good climate
• Quality of life
• —Nandan Nilekani
(Deputy MD)

*Based on newspaper (Economic limes) report.

FACILITY LOCATION 77

Samir has his family links in Delhi. His personal preference for Delhi is also due to his past association
contacts, family-owned land available for use. He finds it disgusting that Bangalore does not have an
international airport, which Delhi has. He comes to know that IBM has moved to Delhi, and many other
companies (which are of course small one). He sends e-mail to Rakesh about his dilemma and asks
for more details. Rakesh sends details and recommends for Bangalore.

Questions

I. In your opinion, what problem is likely to come if Delhi is opted as site for the upcoming software company
of Samir?
2. Compile the major plus and minus points for software company's site in Delhi, and Bangalore. What problems
do you perceive if instead, a suburban site like Faridabad is opted?
3. Assume that land in Delhi is not available with Samir. For purchasing, the initial expenses are too high.
Do you recommend a rural, site as the cost of land is very cheap there?
6.6 CASE 2: SELECTION OF SITE FOR XYZ COMPANY
For XYZ company five alternative cities are selected for possible location of its plant. These are city 1,
city 2, ... and city 5. Management hired a consultant group to help on site selection.
The consultants prepared a list of factors that affected the location. They did this by asking the
managers and executives of the XYZ company. Nine major issues are identified (Table 6.3).

Table 6.3 Factors Identified for Site Selection

S. No. Fdctor Description
I. A Nearness to raw material source
2. B Transport facility and logistics support
3. C Availability of water and power
4. .D Adequacy in labour availability
5. E Quality of life, like market, school and recreation
6. - F Competition. in the local market
7. G Nearness of market
8. H Incentive from financial institution
9. J Cost of land
Then, the consultant made' a pairwise comparison of all nine alternatives. They give score of 1,
2, or 3 on every 36 comparisons (it is 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1). The scoring scheme for
comparison is done as follows (Table 6.4):
Table 6.4 Scoring Scheme in Pairwise Comparisons

Comparison Score
If the factor X scores a major factor as compared to factor Y X,
If the factor Y scores a major factor as compared to X
If X scores a medium as compared to Y X,
If Y scores a medium as compared to X Y2
If X scores a minor as compared to Y XI
If Y scores a minor as compared to X
Now, each factor is pairwise compared. For ea&&i pair, a weight is provided as per the scheme
of scoring. Table 6.5 for relative score for each factor is obtained. The score in the table is obtahed
78 INDUSTRIAL ENGINEERING AND MANAGEMENT

for all values of scores for factor in corresponding row. For example for factor F weights in column
F and row F is added as (F2 + F3 + + F3) + (Fi + F3 ) F (2 + 3 + 2 + 3 + 1 + 3) = F14.

Table 6.5 Scoring of Importance of each Factor through Pairwise Comparison

I Score Percentage

A /13 Al A3 A3 F, A, A, A3 17 0.218

C2 B1 B3 F3 GI H, 1
1 4 0.052

C2 C2 F, G2 H1 C, 8 0.102

D3 F3 G2 112 1 3 0.038

F2 G2 H2 /2 2 0.026

F3 11 14 0.179

G H2 I
I 7 0.090

11 H3 13 0.167
10 0.128
Total 78 1.00

The percentage in Table 6.5 is obtained by dividing the row score by total score (= 78). For example,
for factor F, it is 14/78 = 0.179.
All the five cities are given weight (au) on a scale of 0 to 100 for each factor A to I. This is
done on the basis of extensive field survey, questionnaire and interview of experts in the area. Following
observations are obtained (Table 6.6):
Table 6.6 Comparative Strength (ay ) of each City on dDifferent Factors

S. No. Candidate Factors Weighted

for Site A D F H I Score
B C E G
2W, au
0.218 0.052 0.102 0.038 0.026 0.179 0.09 0.167 0.128
I. City 1 70 75 80 65 25 65 90 90 80 75.445
2. City 2 40 80 80 60 20 90 80 70 80 65.48
3. City 3 100 90 80 70 30 85 60 90 90 85.24*
4. City 4 70 100 45 80 100 40 95 50 70 63.71
5. City 5 55 80 80 70 50 30 30 30 60 48.51

Looking at the last column of the above table, city 3 scores* highest, followed by city 1, city
2, city 4 and city 5. Therefore, city 3 becomes the obvious choice for the site of XYZ company.

REVIEW QUESTIONS

6.1 Why do we consider the facility location problem as a strategic decision? What are the major factors 'in
leciding the facility location problems?
FACILITY LOCATION 79

6.2 Consider ten industrial sectors in India (such as steel, software, hydropower plants, etc.). Identify the existing
locations of these industries on a map of India. Give separate reasons for the location of these industries
in a particular cluster of regions. (You may take the help of India Yearbook/Manorma Yearbook, or a class
XII book on Resource Geography).
6.3 List major considerations in a plant location decision.
6.4 Compare the advantages, limitations and suitability of rural, urban and semi-urban industrial sites.
6.5 Identify the states where software industries are preferring to get established. Compare Andhra Pradesh, Karnataka,
Delhi and Madhya Pradesh for locating a software industry. (You may consult newspaper and relevant websites).

REFERENCES
1. Aly, A.A. and Litwhiler, D.W. Jr., 1979, "Police briefing stations: A location problem, AIIE" Transactions.
11 (1), 12-22.
2. Banwet, D.K., 1981, Some studies in facilities location planning, unpublished Ph.D. Thesis, IIT Delhi.
3. Buffa, E.S. and Sarin, R.K., 1994, Modern Production/Operation Management, 8th ed., John Wiley, New
York.
4. Drezner, Z., 1995, Facility location: A survey of applications and methods, Springer, NY.
5. Francis, R.L. and White, JA, 1974, Facility layout and location, Prentice Hall, Englewood Cliffs, N.J.
6. Love, R.F. and Yerex, L., 1976, "An application of facility location model in prestressed concrete industry"
Interfaces, 6 (4), 45-49.
7. Schmenner, R.W., 1979, Look beyond the obvious in plant location, Harvard Business Review, 57 (1),
126-132.
8. Sule, D.R. 1994, Manufacturing Facilities: Location, Planning and Design, PWS Publishing Co., Boston.
9. Swamidass, P.M., 1990, "A comparison of the plant location strategies of foreign and domestic manufacturers
in the US", Journal of International Business Studies, 21 (2), 301-17.
10. Thompkins, J.A. and White, J.A., 1984, Facility planning, John Wiley & Sons, NY.
80 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 A. fi

FACILITY LAYOUT (PLANT LAYOUT)

7.1 INTRODUCTION
Plant layout problem is an area of arranging facilities such as equipment, depai inent, section, etc., inside
plant or work place. It is one of the most critical strategic decisions. This is because:
(i) Plant layout is generally a one time activity as it is very difficult to frequently rearrange the facilities.
(ii) It requires a long-term vision about factory so that minimal dislocations occur when the factory
' expands or goes through minor changes in process, production schedule or product mix.
(iii) Wrong arrangements of facilities lead to more travel time between procbesses. This causes more
through-put time, more work-in-process, more material handling, etc.

7.2 OBJECTIVE OF GOOD FACILITY LAYOUT

The objectives of good facility layout are as follows:

[A] Objectives Related to Material

(i) Less material handling and minimum transportation cost.
(ii) Less waiting time, for in-process inventory.
(iii) Fast travel of material inside the factory without congestion or bottleneck.

[B] Objectives Related to Workplace

(i) Suitable design of work-stations and their proper placement.
(ii) Maintaining the sequence of operations of parts by adjacently locating the succeeding facilities.
(iii) Safe working conditions from the point of ventilation, lighting, etc.
(iv) Minimum movement of workers.
(y) Least chances of accidents, fire, etc.
( vi) Proper space for machines, worker, tools, etc.
(vii) Utilization of vertical height available in the plant.

[C] Performance-related Objectives

(1) Simpler plant maintenance.
(ii) Increased productivity, better product quality, and reduced cost.
82 INDUSTRIAL ENGINEERING AND MANAGEMENT

(iii) Least set-up cost and minimal change-over.

(iv) Exploitation of buffer capacity, common workers for different machines, etc.

[D] Objectives Related to Flexibility

(i) Scope for future expansion.
(ii) Considerations for varied product mix.
(iii) Considerations for alternate routings.'

7.3 PRINCIPLES OF FACILITY (PLANT) LAYOUT

Facility layout problem is a multi-criteria problem. Numerous factors, such as location of work centres,
offices, computer centre, design and drawing section, tool-room, storage space, utilities, etc., are to be
considered. The principles of good facility layout involve:
1. Least material handing cost.
2. Worker effectiveness.
3. High productivity and effectiveness.
4. Group technology:

7.3.1 Principle of Least Material Handling

For less material handling, following approaches are adopted:
(i) Place facilities as per sequence of part operations.
(ii) Proper location of store and packaging area.
(iii) Smooth and continuous flow of material.
(iv) Utilization of vertical space (i.e., height) in material transport.

7.3.2 Principle of Worker Effectiveness

For better worker effectiveness, following approaches are adopted:
(i) Integration of similar facilities at same location. For example, all milling maching may be placed
at same location.
(ii) Sufficient space for worker movement.
(iii) Sufficient space for the movement of material between machines.
(iv) Safe working environment.

7.3.3 Principle of High ,Productivity

For high productivity and effectiveness following approaches are adopted:
(i) Flexibility to expand, re-routing, varied product mix, etc.
(ii) Scope to use multi-skilled worker.
(iii) Proper utilization (or over-utilization) of resources, etc.

7.3.4 Principle of Group Technology

For deriving the group technology benefits, following approaches are adopted:
(i) Group similar parts in one family.
(ii) For each part-family, design a machine-cell. Machine-cell is a combination of machines which caters
to all the processing requirements of corresponding part-family.
(iii) As far as possible, minimize intercell transfer of parts.
FACILITY LAYOUT (PLANT LAYOUT) 83

7.4 DIFFERENT TYPES OF COMMON LAYOUTS

Commonly, the layouts are of the following types:
(i) Product or line layout.
(ii) Process or functional layout.
(iii) Fixed position layout.
(iv) Cellular or group technology layout.

7.4.1 Product or Line Layout

In a product (or line) layout, various facilities, such as machine, equipment, work force, etc., are located
as per the sequence of operation on parts (Figure 7.1). Even if a facility (or machine) is needed again
after few other operations, we duplicate the facility at every required sequence. Product layout is preferred
when production is continuous, part variety is less, production volume is high and part demand is relatively
stable.

Product A

Product .13
-

Legend
L = Lathe I) = Drilling
M = Milling G = Grinding

Figure 7.1 Product Layout

Advantages of Product Layout

Advantages
1.Less work in process (WIP) inventory as the flow of material is continuous along a line.
2. Compared to process layout, it requires less space for same volume of production.
3. Conveyorised material handling or automation in the material handling is cost effective, as the flow
of material is well known.
4. The through-put time (or product cycle time) is less as compared to process layout. This is due
to less chances of congestion and less waiting time on machine.
5. Simple production planning and control and better coordination of different activities may be achieved.
6. The skill level of workers may be lesser, as a particular worker has to do a particular operation,
which seldomly changes due to standardised production line.
7. The flow of material is smooth and continuous.
Limitations of Product Layout
1. Change in product design is difficult to accommodate.
2. Product variety is very much limited.
3. Breakdown of a particular machine in line halts the production output.
4. Capital investment in machines may be higher as compared to process layout as duplication of
machines in line may be needed.
The flexibility to increase the production capacities is limited.
84 INDUSTRIAL ENGINEERING AND MANAGEMENT

Suitability pf Product Layout

1.Assembly line such as automobile factory.
2. Low variety, high-volute' production system.
3. For standardised products, which have quite stable demand in near future.

7.4.2 Process Layout

Process layout is also called as functional layout. Similar machines or similar operations are located at
one place as per the functions. For example, all milling operations are carried out at one place while all
lathes are kept at a separate location. Grinding or finishing operation is kept at a separate location. This
functional grouping of facilities is useful for job production and non-repetitive manufacturing environ-
ment (Figure 7.2).
Advantages of Process Layout
1.Initial investment in process layout is low.
2. Varied degree of machine utilization may be achieved in process layout as machine is not dedicated
to a single product.
3. Greater flexibility and scope of expansion exist in this layout.
4. Different product designs and different production volumes can be easily adopted. Therefore, high
product variety may be easily handled.
5. The overhead cost is low.
6. Maintenance of machine is easy. Breakdown of one machine may not result in total stoppage of
production.
7. Easy, effective and specialized supervision of each function area is easy to achieve.
8. There is low set-up and maintenance cost.
9. Due to different departments for different processes, better team work may be achieved in each
section.
Disadvantages of Process Layout
1. There is high-degree of material handling. Parts may have to backtrack in the same department.
2. Large work in-process inventory is common. This may lead to more storage area.
3. Workers are more skilled. This is because of variety in products and difference in design. Therefore,
labour cost is higher.
4. Total cycle time is high. This is due to waiting in different departments and longer material flow.
5. Inspection is more frequent which results in higher supervision cost.'
6. It is difficult to fix responsibility for a defect or quality problem. The work moves in different
departments in which the machine preference is not fixed: Therefore, which machine or which operator
was faulty during a quality lapse may be difficult to trace in some cases.
7. The production planning and control is relatively difficult.
Suitability of Process Layout
1. For non-standardised product.
2. For low-volume, high variety manufacturing environment.
3. For frequent cLange in product design.
FACILITY LAYOUT (PLANT LAYOUT) 85

Lathe Mining

Store for
Receiving and
Shipping

Figure 7.2 Process-type Layout

4. For job-shop manufacturing.

5. For very expensive machines like CNC milling, co-ordinate measuring machine, etc.

7.4.3 Fixed Position Layout

In fixed position layout, the main product being produced is fixed at a particular location. Resources,
such as equipment, labour and material are brought to that fixed location. This type of layout is useful
when the product being processed is very big, heavy or difficult to move. Some examples of fixed position
layout are shipbuilding, aircraft assembly, wagon building, etc. (Figure 7.3).
Advantages of Fixed Position Layout
1. Easy for products which are difficult to move.

R
Labour
E
S
0 Tools
Final Product
U (SHIP)
R Equipments
C
E Material Ship building yard

Figure 7.3 Fixed Position Layout

86 INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Flexibility for change in design, operation sequence, labour availability, etc., exists in this
layout.
3. This layout is very cost effective when many orders of similar type are existing in different stages
of progress.
4. Large project type of jobs such as construction are suited in this layout.
Limitation of Fixed Position Layout
1. High capital investment due to long duration to complete a product.
2. Space requirement for storage of material and equipment is large.
3. It requires careful project planning and focussed attention on critical activities otherwise confusion,
delay and conflict may arise.

7.4.4 Cellular or Group Layout*

Cellular layout is based on the group technology (GT) principle. Therefore, it is also called as group
layout. This layout is suitable for a manufacturing enviromnent in which large variety of products are
needed in small volumes (or batches). The group technology principle suggests that parts, which are
similar in design manufacturing operations, are grouped into one family, called part-family. For each
part-family a dedicated cluster of machines (called machine cell) are identified. Generally, all the processing
requirements of a particular part-family are completed in its corresponding machine cell. In other words,
the intercell transfer of part should ideally be zero (Figure 7.4).

Cell I Legend

M L = Lathe

_____________________ M = Milling,
Cell 2
D= Drilling
Store for M (.1
Receiving G = Grinding

A = Assembly
Store for
Shipping
Cella

Figure 7.4 Group Technology or Cellular Layout

The cellular layout is, thus, a combination of process and product layout. Therefore, it possesses
the features of both. Cellular manufacturing system (CMS) involves decomposition of manufacturing system
into subsystems of -similar parts/machines. CMS allows batch production to give economical advantages
similar to those of mass production with additional advantages of flexibility, normally associated with
job shop production systems.
Advantages of Cellular Manufacturing System (CMS)
The advantages of CMS are given in Table 7.1.

*Based on: Shankar, R. and Vrat, P., 1998, "Cellular Manufacturing system: An overview," In "Advanced Manufacturing Technology,
Ed. Deshmukh. F (1 and Rao" P.V., IIT Delhi, 7-19.
FACILITY LAYOUT (PLANT LAYOUT) 87

Table 7.1 Advantages of Cellular Manufacturing System

S.No. Feature Reason

1. Short throughput times

2. Low stock

3. Low stock holding cost Groups complete parts, and

4. Better customer service Machines are close together under one foreman in each group.

5. Better quality
•
6. Lower material handling cost

7. Better delegation and accountability All parts and machines of the group are close together and
under same supervision, which can be made responsible for
8. Reduced indirect labour cost
cost, quality and due-date.
9. More reliable production

10. Training for promotion Unlike process organization, which produces a specialist, CMS
gives experience in a much wider range of tests.

11. Stepping stone to automation CMS is the first evolutionary step in automation. In general, it
is the Flexible Manufacturing System (FMS) with some manual
operation.

12. Increased capacity Due to easier sequencing, and reduction in set-up times, some
buffer capacity is created.

13. Improved job-satisfaction (a) Team work,

(b) Processing of products in the cell,
(c) Better feedback .in the cell,
(d) Identification of quality and performance of job with the
cell workers.

14: Easy retrieval of parts Standardized product design and coding and classification.

15. Shorter lead time Due to low set-up and throughout times.

16. Efficient production planning and control Due to similarity of parts in each cell.

17. Flexibility to adopt to market fluctuation (a) Low stock,

(b) Easy switch over from one part to another inside a cell.

18. Reduced scrap and wastage Due to specific machines for each part family.

19. Easy plant Maintenance Due to decomposition of plant into smaller cells.

20. Simplified tooling and set-ups (a) Specific jigs and fixtures, designed for each' part-family,
(b) Machine tools, not requiring many change-overs for any
part-family, due to similarity.

21. Simplified estimation, accounting and (a) One supervision for each cell
work measurement (b) Decomposition of plant into smaller but independent cells.

22 Better utilization of manufacturing (a) Dedicated machines cell for each part-family.
resources and space (b) Less material handling, less WIP.

23. No fallout in human factor Due to team and'perso-nal involvement in cell.

88 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 7.2 Quantitative Estimate of some Reported Benefits of CMS

S. No. Feature Value

1. Reduction in new parts designs 52%
2. Reduction in number of drawinbs through standardization 10%
3. Reduction in new shop drawings 30%
4. Reduction in production floor space required 20%
5. Reduction in scrap and rework 15-75%
6. Reduction in production and quality control costs 80% .
7. Reduction in production lead time 20-88%
8. Reduce tooling 20-30%
9. Reduction in set-up time 20-69%
10. Reduction in throughput time 70%
11. Reduction in overdue orders 82%
12. Reduction in raw material inventory 42%
13. Reduction in WIP 88%
14. Reduction in finished goods inventory 60%
15. Reduction in labour 15-25%
16. Reduction in employee output per unit time 33%

Suitability of CMS
The implementation of CMS can significantly increase productivity, which is essential for the survival
in increasingly competitive industries. Many large and medium, size manufacturing firms have experienced
quality improvements after adopting CMS.
CMS and Batch Manufacturing
CMS has wide applicability, since it can be implemented in both job-shop and assembly lines.
However, CMS is most suited for organisations that have a degree or part standardization and moderate
batch size. The importance of CMS can be well realized, as according to a study more than 75% of
all manufacturing units are engaged in the production of a large variety of parts in batches.
CMS and JIT
Cell manufacturing is an important element in the successful implementation of Just in Time (JIT).
It reduces production-related wastes, such as inventory (WIP, finished goods or raw materials), production
set-up times, insufficient job scheduling and parts having long queues for a long time at various work
centers, Details of JIT are covered in Chapter 21.
CMS and FMS
Cellular Manufacturing System is the building block of Flexible Manufacturing System (FMS). It
is the first evolutionary step in automation. In general, it is the FMS with some manual operations: The
applicability of CMS concept in FMS may be justified on account of four reasons (Kusiak, 1986): (1)
It is easy to process large volume of information with the decomposed manufacturing system, such as
CMS, (2) Automated Guided Vehicle (AGV) and robot are the most common type of material-handling
carries in FMS. Oftenly, the services of these material-handling carriers are limited to few machines, (3)
it is easy to m...iage the operational facilities in CMS as compared to functional manufacturing. This is
due to limitation on cell size and (4) there may be technological compulsions for grouping some operations
like forging machines and treatment unit.
FACILITY LAYOUT (PLANT LAYOUT) 89

7.5 PART-MACHINE INCIDENCE MATRIX IN CMS DESIGN

A part-machine incidence matrix is used in CMS design problems to represent the processing requirements
of parts on individual machines or facilities. This is derived from the process plan of each part. In this,
a value of one indicates that the part of the corresponding column needs the facility of the row joining
it. A zero value indicates otherwise. Figure 7.5 represents a manufacturing system having six parts and
six machines. For example, part 1 needs machine 2 and machine 4 for completing its processing requirements.
Similarly, machine 2 caters to processing needs of parts 1 and 5.
PART
2 3 4 5 6

Machine 3 •I
4

5
6

Figure 7.5 Part machine Incidence Matrix

For a CMS design problem, the part-machine incidence matrix is a very important input information.
Numerous algorithms, heuristics and mathematical programming techniques have been used to rearrange
the rows and columns of this matrix so that a block diagonal structure of one is achieved. For example,
the rows and columns of the incidence matrix shown in Figure 7.5, can be rearranged into a block diagonal
structure (Figure 7.6). It is a cellular arrangement of three-cell structure. Machines 2, 4 and part 1, 5
are in cell 1, Machines 1, 5 and parts 4, 2 are in cell .2. Machines 3, 6 and parts 3, 6 are in cell 3.
PART
5 4 2 3 6

1 Cell 1

5 Cell 3

3 Cell 2

Figure 7.6 Perfect Clustering of Incidence Matrix shown in Figure 7.5,

after Rearranging its Rows and Columns
Limitations of CMS
1. Difficulty, faced during initial planning and implementation.
2. High ' cost in layout.
3. Difficult to bringing too many or too often changes. •
4. Difficult to produce new part or non-standardized part.
5. Too much dependence on GT curtails flexibility of the cellular manufacturing system.
90 INDUSTRIAL ENGINEERING AND MANAGEMENT

7.6 COMPARISON OF LAYOUTS

Four different layouts have been explained in Table 7.3, these layouts are compared:

Table 7.3 Comparison of Common Characteristics of Different Layouts

Types of Layout
Factors Fixed Position Product (Line) Cellular (GT) Process (Functional)
1. Type of Operation Ship building, Continuous and Small to medium Job or small batch
large scale project, repetitive batch
construction or
industrial project
2. Arrangement Facilities moves to a Placed along the Similar parts are grouped Grouped by
of facilities fixed product/project line of product in part-family. For each speciality
flow part-family, one machine
cells is formed which
contains all facilities
needed by corresponding
part-family.
3. Cost of layout Moderate to low Moderate to high Moderate to high Moderate to low
4. Material handling Moderate Less Less High
5. Material travel Variable path Fixed path Fixed path Variable path
6. Utilization of Moderate Very high High Low
facilities
7. Operating facilities General purpose Special purpose Special purpose General purpose
8. Employee skill Unskilled/skilled Unskilled Multi-skilled as one Skilled
. operator may handle
more than one operation
9. (Q/P) ratio: Q is Normally 1 as single Large (Q/P) Moderate (Q/P) Small (Q/P)
production Quantity product production
P is number of
products or variety

REVIEW QUESTIONS

7.1 What are the objectives of a good plant layout? Explain.

7.2 What a-2 the most common approaches for plant for layout? Compare.

7.3 Explain the advantages, limitations and suitability of following layouts;

(a) Product layout.
(b) Process layout.
(c) Fixed position layout.
(d) Cellular layout.

7.4 How do you justify the suitability of cellular layout for the followings?
(a) Batch manufacturing.
(b) Just-in-time manufacturing.
(c) Flexible manufacturing.
FACILITY LAYOUT (PLANT LAYOUT) 91

7.5 What are the purposes of part-machine incidence matrix? Why do we attempt to obtain clustering of "ones"
• (in a block-diagonal form) in the zero-one incidence matrix? Give an example.

REFERENCES
1. Apple, J.M., 1977. Plant Layout and Material Handling, John Wiley & Sons: New York.
2. Buffa, E.S. and Sarin, R.K., 1993. Modern Production/Operations Management, John Wiley & Sons:
New York.
3. Francis, R.L. and J.A. White, 1974. Facility Layout and Location—An Analytical Approach, Prentice-Hall
Inc.: Englewood-Cliffs.
4. Immer, J.R., 1950. Layout Planning Technique, McGraw Hill Book Company: New York.
5. Ireson, W.G., 1952. Factory Planning and Plant Layout, Prentice-Hall Inc.: Englewood-Cliffs.
6. Moore, J.M., 1970. Plant Layout and Design. The Macmillan Company: New York.
7. Muther, R., 1955. Practical. Plant Layout, McGraw-Hill Book Company Inc: New York.
8. Shankar, R. and Vrat, P., 1998. "Cellular Manufacturing system: An overview," In Advanced Manufacturing
• Technology, Ed. Deshmukh. S.G. and Rao, P.V., IIT Delhi, 7-19.
9. Shankar, R. and Vrat, P., 1999. "Some Design issues in Cellular Manufacturing using Fuzzy programming
approach", International Journal of Production Research, 37 (11), 2545-63.
10. Waghodekar, P.H. and S. Sahu, 1986. "A critique of Some Current Plant Layout Techniques", International
Journal of Operations and Production Management, Vol. 6 (No. 1), pp. 54-61.
92. INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

i·
 LINE BALANCING

8.1 INTRODUCTION
Assembly line is a sequence of progressive assembly stations linked by some material handling devices.
Assembly line is a special case of product layout in which the operations pertain to assembly of different
parts at few stations. Line (or, product) layout is useful for high volume, single product type of manufacturing
activity. In this, a moving conveyor may bring the work unit or sub-assemblies units near to the workers,
who carry them along the next station and do the required operations. At each station, one or more
workers perform the required operations.
8.2 OBJECTIVE IN LINE BALANCING PROBLEM
In an assembly line, the problem is to design the work station. Each work station is designed to complete
few processing and assembly tasks. The objective in the design is to assign processes and tasks to individual
stations so that the total time required at each work station is approximately same and nearer to the
desired cycle time or production rate.
In case, all the work elements which can be grouped at any station have same station time, then
this is a case of perfect line balancing. Production flow would be, smooth in this case. However, it is
difficult to achieve this in reality. When perfect line balancing is not achieved, the station time of slowest
station would determine the production rate or cycle time.
Example: Let us consider a five-station assembly system in which the station times are 12, 16,
13, II and 15 minutes respectively. The slowest station is station 2, which takes 16 min., while station
4 is fastest with 11 min. of station time. Work carrier enters•at station 1 and leaves at station 5. Now
Station Time
(min.)

Work 12 16 13 11 15

r
Finished
Carrier
Assembly

Assy Station Assy Station Station Assy Station Assy Station

1 2 3 4 5

Figure 8.1
94 INDUSTRIAL ENGINEERING AND MANAGEMENT

a work carrier at station I cannot leave station I after 12 minutes as station 2 is not free after 12
minutes of work on a previously arrived work carrier Only after 16 minutes it is free to pull work
carrier from station I. Therefore, station 1 will remain idle for (16— 12) = 4 min. Similarly, in each
cycle, station 3 and 5 would be idle for 3, 5 and 1 min (Figure 8.1).
Since, idle time at any station is the un-utilized resource, - the objective of line balancing is to
minimise this.

8.3 CONSTRAINTS IN LINE BALANCING PROBLEM

The operations in any line follow same precedence relation. For example, operation of super-finishing
cannot start unless earlier operations of turning, etc., are over. While designing the line balancing problem,
one has to satisfy the precedence constraint. This is also referred as technological constraint, which
is due to sequencing requirement in the entire job.
Another constraint in the balancing problem is zoning constraint. It may be either positive zoning
constraint or negative zoning constraint. Positive zoning constraint compels the designer to accommodate
specified work-elements to be grouped together at one station. For example, in an automobile assembly
line, workers are doing work at both sides of automobile. Therefore, at any station, a few operations have
to be combined. Many times, operation and inspection are grouped together due to positive zoning constraint.
In a negative zoning constraint few operations are separated from each other. For example, any
work station, which performs spray painting, may be separate from a station, which performs welding,
due to safety considerations.
Therefore, following constraints must be following in a line balancing problem:
1. Precedence relationship.
2. Zoning constraints (if any).
3. Restriction on number of work stations (n); which should lie between one and total number of
work elements (N). Thus:
1 <nN
4. Station time (Tsi) must lie between cycle time and maximum of all work element time (Max {TN}):
Max {T;N } 7's;

8.4 DEFINITION AND TERMINOLOGY IN ASSEMBLY LINE

1. Work Element (I),: The job is divided into its component tasks so that the work may be spread
along the line. Work element is a part of the total job content in the line. Let N be the maximum
number of work element, which is obtained by dividing the total work element into minimum rational
work element. Minimum rational work element is the smallest practical divisible task into which
a work can be divided. Thus, the work element number (i) is 1 i N.
The time in a work element, i say (Tot), is assumed as constant. Also, all 7'iN are additive in nature.
This means that we assume that if work elements, 4 and 5, are done at any one station, the station
time be (TIN + TSN); where, N is total number of work elements.
2. Work Stations (w): It is a location on the assembly line where a combination of few work elements
are performed. Since minimum number of work• stations (w) cannot be less than 1, we have
w> _1

3. Total Work Content (Twc): This is the algebric sum of time of all the work elements on the line. Thus,
N
Tyr = E
1=1 TIN
LINE BALANCING 95

4. Station Time (Ts.): It is the sum of all the work elements (i) on work station (s). Thus, if there
are n 1 to n2 work elements assigned at station s, then
"i
Tsi = 1TiN

5. Cycle Time (Td: Cycle time is the rate of production. This is the time between two successive
assemblies coming out of a line. Cycle time can be greater than or equal to the maximum of all
times, taken at any station; Necessary clarification is already given in the previous example.
max {Tsi}
If, Tc = max {Ti}, then there will be ideal time at all stations having station time less than the
cycle time.
6. Delay or Idle Time at Station (Tds): This is the difference between the cycle time of the line
and station time.
Tds = —Ti.
7. Precedence Diagram: This is a diagram in which the work elements are shown as per their sequence
relations. Any job cannot be performed unless its predecessor is completed. A graphical representation,
containing arrows from predecessor to successor work element, is shown in the precedence diagram
(see Figure 8.1). Every node in the diagram represents a work element.
8. Balance Delay or Balancing Less (d): This is a measure of line-inefficiency. Therefore, the effort
is done to minimise the balance delay. Due to imperfect allocation of work elements along various
stations, there is idle time at station. Therefore,
N
nT -E TN

Balance Delay nTe — Twe _ c

(d) =
nT, nTe
where, Tc = Total cycle time
TM" = Total work content and
n = Total number of stations.
9. Line Efficiency (LE): It is expressed as the ratio of the total station time to the cycle time, multiplied
by the number of stations (n):

Tsi
LE = i=1 x100%
(n) (Tr)
where, 7'si = Station time at station i,
n = Total number of stations, and
T, = Total cycle time.
10. Smoothness Index (SI): Smoothness index is a measure of relative smoothness of a line.

SI = [(Tsi)max Tsif
i=1
where, (Tsdniax = Maximum station time.
96 INDUSTRIAL ENGINEERING AND MANAGEMENT

8.5 METHODS OF LINE BALANCING

It is not possible (to date) to have an approach, which may guarantee an optimal solution for a line
balancing problem. Many heuristics exist in literature for this problem. The heuristic provides satisfactory
solution but does not guarantee the optimal one (or the best solution). We would discuss some of the
heuristics on a sample problem of line balancing, as given below:
Problem 8.1 Let us consider the precedence diagram of 13 work elements shown below. The
time each work element is at the top of each node (Figure 8.2).
6 3 8
3

Figure 8.2 Precedence Diagram for Problem 8.1

In a tabular form, this precedence diagram is represented as follows:

Work Element Duration (min) Immediate Precedence

1 8
2 3 1
3 3
4 3
5 6 2
6 7 4
7 5 3, 5, 6
8 3 7
9 2 7
10 5 7
II 8 8
12 5 10
13 10 9, 11, 12

Total 68

8.6 HEURISTIC: LARGEST CANDIDATE RULE

The following steps are followed:
Step 1: List all work elements (1) in descending order of their work elements (TIN) value.
Step 2: Decide cycle time (To).
LINE BALANCING 97

Step 3: Assign work element to the station. Start from the top of the list of unassigned elements.
Select only feasible elements as per the precedence and zoning constraints. Select till the station does
not exceed cycle time.
Step 4: Continue Step 3 for next station.
Step 5: Till all work elements are over, repeat Steps 3, 4.
Problem 8.2 Refer the problem shown in Figure 8.2. Decide cycle time.
Total work content = 68 min
Largest work element time = 10 min
Thus, cycle time (Te) must satisfy
T > 10 min
68
For minimum cycle time of 10 min.,., number of stations would be — = 6.8. Therefore, we must
take stations lesser than this. Let us select 5 stations design. For 5 stations the station time should be
68
nearly equal to — = 13.6 min.
5
List work elements in descending order of their work element.

Work Element TIN Immediate Precedence

13 10 9, 11, 12
1 8 —
11 8 8
6 7 4
5 6 2
7 5 3, 5, 6
10. 5 7
12 5 10
2 3 1
3 3 1
4 3 1
8 3 7
9 2 7

Step 3:

Station Element TN E TiN at Station

1 8
2 3
3 3 14
11 4. 3
6 7
5 6 16
Contd...
98 INDUSTRIAL ENGINEERING AND MANAGEMENT

Station Element TIN E TN at Station

III 7 5
10 5
8 3 13

IV 11 8
12 5
9 2 15

V 13 10 10

Here, final cycle time is maximum station time which is 16 min.

nT —ET N
Balance delay =
En T.
5 x 16 — 68
x100% = 15%
5 x 16
Let us consider a 4 station design:

Approximate cycle time ET,N

No. of Stations
68
= — = 17 min
4

Station Element TN E 7-,,,, at Station

1 8
2 3
3 3
4 3 17
II 6 7
5 6
7 5 18
III 10 5
8 3
11 8 16
IV 12 5
9 2
13 10 17

Since maximum station time is 18 min. (for station II), the cycle time would also be 18 min.
4 x 18 — 68
.Here, balance delay = x100% = 5.55%
4 x 18
As the balance delay is quite less in 4 station design, we may select 4 station design provided
the capacity of station II is at least 18 min (Figures 8.3 and 8.4).
LINE BALANCING 99

3 3 8

11

Station Station 11 Station III Station IV

Figure 8.3 Four stations line Design for Problem 8.1

Station III
8, 10, 11
(16 min.)

Figure 8.4 Physical Layout of 4 ct-' ^si c

8.7 KILBRIDGE-WESTER HEURISTIC FOR LINE EbALANCING

In this heuristic, work element is selected as per its position in precedence diagram.
Step 1: Construct precedence diagram. Make a column I, in which include all work elements, which
do not have a precedence work element. Make column II in which list all elements, which follow elements
in column I. Continue till all work elements are exhausted.

Step 2: Determine cycle time (Tc) by finding all combinations of the primes of E TN which is
i=i
the total elemental time. A feasible cycle time is selected. Number of stations would be:

E Tiw
= i=i
T.
100 INDUSTRIAL ENGINEERING AND MANAGEMENT

Step 3: Assign the work elements in the work station so that total station time is equal to or
slightly less than the cycle time.
Step 4: Repeat Step 4 for unassigned work elements (Figure 8.5).

III IV V VI VII

Figure 8.5 Seven Columns Initial Assignment

Now, selecting cycle time as equal to 18 seconds we follow these steps:

Column Work Element, i TN Column Sum Cumulative Sum

1 8 8 8
II 2 3
3 3
4 3 9 17
III 5 6
-6 7 13 30
IV 7 5 5 35
V 8 3
9 2
10 5 10 45
VI 11 8
12 5 13 58
VII 13 10 10 68
Omax)

Total elemental time is 68 minutes which is 2 x 2 x 17. The cycle time must lie between 68
(for one station) to 10 min. (which is max of all TEN):
10 7', 5 68
LINE BALANCING 101

The possible combinations of primes (17, 2 and 2) of work content time (68 min) are as follows:
Feasible Cycle Time Infeasible Cycle Time
17 2
17 x 2 = 34 2x2=4
17 x 2 x 2 = 68
Let us arbitrarily select 17 as the cycle t ime. Now, regroup elements in columns I and II till we
get 17 min. of station time. Thus, elements 1, 2, 3, 4 are selected at station I. We proceed in the same
way for remaining elements:

Station Element, i TIN Station Sum (Ts) (Tc — Ts) for T, = 17 min

1 8
2 3
3 3
4 3 17 0
II 5 6
6 7 13 4
III 7 5
8 3
9 2
IV 10 5 I5 2
11 8 .
12 5 13 4
V 13 10 10 7

Line Efficiency = 68x 100 = 80%

5x17
Smoothness Index = J02 + 42 + 22 +42 + 72 = /83 = 9.22
5x17 —68
Balance Delay = x 100 = 20%
5x17
Now, looking at the previous table, little readjustment in work element is possible if the cycle
time is extended to . 18 min. This is apparent when we consider the following grouping:

Column Work Element, i TIN Station Sum (Td — T5 ) for Tc = 18 min

1 1 8
2 3
3 3
11 4 3 17 1
5 6
6 7
7 5 18 0
Contd...
102 INDUSTRIAL ENGINEERING AND MANAGEMENT

❑1 8 3
9 2
10 5
11 8 18 0
IV 12 5
13 10 15 2
68
Line Efficiency = x 100 = 94.44%
4 x 18
Smoothness Index = V12 + 22 = = 2.24
4 x 18 — 68
Balance Delay = x 100 = 5.56%.
4 x 18

8.8 HEURISTIC: HELGESON-BIRNIE (RANKED POSITIONAL WEIGHT) METHOD

Following steps are followed:
Step 1: Draw the precedence diagram.
Step 2: For each work element, determine the positional weight. It is the total time on the longest
path from the beginning of the operation to the last operation of the network.
Step 3: Rank the work elements in descending order of ranked positional weight (RPW). Calculation
of RPW would be explained in the example to follow.
Step 4: Assign the work element to a station. Choose the highest RPW element. Then, select the
next one. Continue till cycle time is not violated. Follow the precedence constraints also.
Step 5: Repeat Step 5 till all operations are allotted to one station.
Example: Let us consider the previous example. The precedence diagram is shown in Figure 8.1.
Assume cycle time is 18 min.
Solution: Refer to Figure 8.1. RPW of any work element (i) is the sum of the time of work elements
on the longest path, starting from ith work element to the last work element. Therefore, for all activities,
first find longest path, starting from that element to the last work element. This is given below in last
column.
The ranked positional weight (RPW) of all work elements, i, is shown below:

Work Element, i Rank RPW Longest Path

1. I 44 1-4-6-7-8-11-13
2.. 3 35 2-5-7-8-11-13
3. 6 29 3-7-8-11-13
4. 2 36 4-6-7-8-11-13
5. 5 32 5-7-8-11-13
6. 4 33 6-7-8-11-13
7. 7 26 7-8-11-13
8. 8 21 8'11-13
9. 12 12 9-13
10. 9 20 10-12-13
11. 10 18 11-13
12. 11 15 12-13
13. 13 40 13
LINE BALANCING 103

Assignment of work station is done as follows:

Station Element, i Element time TIN Station Time, T„„ TG — Tin

1 8
4 3
6 7 18 0

II 2 3
3 3
5 6

III 7 5 17 1
8 3
9 2
10 5
11 8 18 0

IV 12 5
13 10 15 3

68
Line Efficiency x100 = 94.44%
18 x 4
Smoothness Index = V02 +12 + 02 + 32 =3.16
4 x 18 — 68
Balance Delay x 100 = 5.56%.
4x18
Problem 8.3 Design the work stations for an assembly line shown below. Use RPW method. Desired
time is 10 minutes.
2 3

N
Solution: Tut^ = E
i=i
TIN = Total work content
104 INDUSTRIAL ENGINEERING AND MANAGEMENT

= 2 + 4 + 1 + 2 + 2 + 3 + 3 + 2 + 1 + 5 + 3 + 2 + 1 + 3 = 34
Range of cycle time:

Max (TiN) < T, < E TN

i=1
or 5 < T, 34
Desired cycle time C = 10 min.
Minimum number of work stations
ETA, 34
= = = 3.4
T, 10
=4
Using Rank Position Weight (RPW) method:

Task RPW
1 (20)
3 (18)
2 (17)
4 (14)
5 (13)
9 (11)
6 (12)
7 (11)
10 (8)
8 (7)
11 (6)
12 (5)
14 (5)
13 (3)
Now, grouping on the basis of weight:

Work Station Work Station 1 Work Station 2 Work Station 3 Work Station 4

Job --> 1, 3, 2, 4 5, 6, 9, 7 10, 8, 11, 12, 13 14

Work Station Time -4 (10) (9) (10) (5)

S TN Total Ideal Time

(a) Balance Delay i=t
nT, Cycle Timex No. of Stations
34
x100=15% ,
4x10
LINE BALANCING 105

(b) Line Efficiency = [1 — Balance delay] x 100

= [1 — 0.15] x 100
= 85%

(c) Smoothness Index = roma>, — Ts; f

= V(10 —10)2 + (10 — 9)2 + (10 —10)2 + (10 — 5)2
=Ni0 +1+ 0 + 25
= 26 = 5.1.

REVIEW QUESTIONS

8.1 Explain the objectives in a line-balancing problem.

8.2 Define and explain the following terms:
(a) Work element, (b) Work stations, (c) Total work content, (d) Station time, (e) Cycle time, (f) Station
idle time, (g) Precedence diagram, (h) Balancing delay, (i) Line efficiency, and (j) Smoothness index.
8.3 The precedence relationship of an assembly line is as follows:
A—>B—>C-->D,E—>F—>G
The processing time in minutes for activities is given in the brackets:
A (0.61), B (0.39), C (0.27), D (0.14), E (0.56), F (0.35), G (0.28).
The line operates seven hour per day for a desirable output of 600 units per day. Calculate: (a) Cycle time,
(b) Theoretical minimum number of workers, (c) Work station configuration, and (d) Balance delay.
(Ans: (a) 0.7 min/unit, (b) 3.73 workers, (c) station 1: A; station 2: B, C; station 3: D, E; station 4:
F, G, (d) 93%).

REFERENCES
I. Arcus, AL, 1966, "COMSOL: A computer method for sequencing operations for assembly lines", International
Journal of Production Research, 4, (4).
2. Kilbridge, M.D. and Wester, L., "A heuristic method of assembly line balancing", Journal of Industrial Engg.,
12 (4).
3. Held, M.K. and Sharesian, 1963, "Assembly line balancing, Dynamic Programming with precedence constraints",
Operations Research, 11 (3).
4. Helgeson, MB and Birnie DP, 1961 "Assembly line balancing using RPW technique", Journal of Industrial
Engineering, 12 (3).
5. Hoffman, TR, 1963, "Assembly line balancing with precedence matrix", Management Science, 9 (4).
6. Vrat P., Wadhwa S., Shanker R, Deshmukh S.G, 1996, "A Two phase Heuristic for line balancing", In Mechno-
Vision: 2001, Ed. Sharma, Pv., et. al. (New Delhi: New Age International (P.) Ltd. Publishers), pp IV
55-61.
106 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 PRODUCT DESIGN, PLANNING
AND DEVELOPMENT

9.1 INTRODUCTION
New products haVe revolutionalised the life of one and all. Few years back, it was beyond our imagination
that computer could be so powerful learning aid for the school going children. Children can now read
a lot of material through computer-aided learning software and web-based internet sites. The advent of
internet has created a vast pool of information at our door-step. Look around at the table, chair, T.V.,
fan, watch, car, etc. You may notice variety. You may notice designs, vastly different compared to those
20 years back. All this is due to new product design. So, this is an area of tremendous potential in
years to come. Product development is also important because of following reasons:
1. Customers, have become very demanding. They seek variety before selecting an item of their choice.
In general, need and liking of one individual differ from others. This causes company to look for
new model or new product.
2. Competition in the market is stiff due to many companies dealing with same type Of product. This
causes companies to look for new product with different features, size, colour, or other attributes.
3. This is an age of advertising and media support. New product, launched by a company, attracts
the support from media.
4. Technology is fast changing. Focus of R&D and education institute is gradually changing towards
end-user. Therefore, new ideas are fast getting converted into deliverable products. Nobody is now
interested in a research, which confines in the lab only.
5. The purchasing power of common people has been considerably improved. This is due to dynamics
of economy and growth of nation. Therefore, new product development has a tremendous future.
6. New regime of patent and legal protection against copying the ideas, design or product has changed
the area of new product development. People are more concerned about developing first, getting
patent and copyright to use or sell. Therefore, there is a lot of money in this area.
7. There is a strong relationship among good product design and manufacturing, industrial-engineering
and management. Westinghouse•study (1984) shows that 80% of all costs during product life cycle
are fixed during design phase. Even the best of manufacturing techniques and management principles
cannot compensate for the cost of a pool- design.
108 INDUSTRIAL ENGINEERING AND MANAGEMENT

9.2 REQUIREMENTS OF A GOOD PRODUCT DESIGN

1. Should cater to the customer's need.
2. Should provide customer delight (in TQM, this means providing some good feature which the customer
did not expect).
3. Profitable to the firm's earnings.
4. Should provide all functional requirements.
5. Reliable.
6. High quality and conformance to international standard.
7. Environmental friendly: 'no environmental degradation while disposing.
8. Safe and no health hazard.
9. Proper packaging.
10. Durable and long lasting.
11. Easy to handle and simple controls.
12. Availability of spare parts.
13. Good-looking; pleasant features and colour.
14. Easy to store.
15. Compared to existing products, competitive price and better features.
16. Design for manufacturing (DFM): Easy to manufacture.
17. Design for assembly (DFA): Easy to assemble.
18. Availability in different range of price and performance for giving choice to customer.
19. Easily available peripherals, software, attachments, power supply, etc.
20. Possibility of add-on features.

9.3 PRODUCT DEVELOPMENT APPROACHES •

Product development is an area of tremendous creativity, skill, knowledge and experience. It requires
originality in approach. Recently, there is focus on using computer-assisted product development toc'.s.
Following approaches are followed in the area of product development:
(i) Imitation: This is an approach of using features, which some other product of similar or dissimilar
type already possesses.
Example:
(a) Computers are now available with features of remote control devices. Remote control device
is in use for home-TV sets. For computers, it is a new feature. This is an external imitation.
(b) Stereo is available with auto-reverse features for cassettes. Many companies of this product
have added this feature in their product. This is an internal imitation.
(;1) Adoption: This is area of developing a product for which the market is already existing.
Example:
(a) MTNL has introduced telephone directory on CD, which can be operationalized on a computer.
For telephone directory, the market is already existing, but integrating it with computer is
an adoption of technology for the same product. •
(b) Few years back, slide rules were replaced by electronic calculators for scientific calculation.
This is an example of product development through adoption.
PRODUCT DESIGN, PLANNING AND DEVELOPMENT 109

(iii) Invention: This is an area of innovation and doing something new which others have not done
so far.
Example: Few years back, telephone, electricity, bulb, AC, etc., were developed through invention.
It requires high R & D effort, and, therefore, these new product developments are quite few

9.4 PRODUCT DEVELOPMENT PROCESS

The process of product development involves few systematic steps. These are as follows:
1. Identification of the needs of customers.
2. Generation of ideas to fulfill needs.
3. Evaluate the fitness of ideas on customer acceptability,- market requirement, cost, productibility and
resources.
4. Drop unacceptable ideas and select the feasible idea.
5. Advanced Product Planning: Preliminary market analysis, creating alternative concepts in product
features, precise definition of operational features, supply-chain planning with detailed logistic planning,
sales planning, economic analysis, costing, profitability, market share analysis, etc.
6. Advanced Design: Analytical testing, experimentation, physical modelling, control and power supply
features, etc.
7. Make prototype.
8. Product Evaluation and Improvement: Launch the product in limited market (test market) for feedback,
customer response, improvement and last minute changes.
9. Product Support: Support the product with marketing strategy, advertising planning, after sales service,
warranty management and repair station planning.
A detailed, self-explained flow chart for product development is presented in Figure 9.1. This flow
chart clearly gives us an idea regarding various steps needed in the product-development efforts. It may
also be noted that product development is an iterative process, which goes through modifications at various
levels. Another important point in product development is the rejection of ideas, which may be quite
high due to filtering at many stages.

9.5 SOME CONCEPTS IN PRODUCT DEVELOPMENT

For product development, following concepts have been used:

9.5.1 Standardisation
Product standardisation is an important factor in product design and development. Standard product is
preferred in many situations. This is for the ease in replacement, ease in use and compatibility. Screws,
power supply, break-horse power of motor, etc., are standard for ease in adoption. Standardisation provides
following advantages:
(i) It saves duplication of effort in designing standard products for which some other design already
exists.
(ii) Reducing burden on product process, as standard parts are available at cheap rate due to mass
production by other firms.
(iii) Simplified material planning, attractive subcontracting.
(iv) Reduced drawing, specifications, time to design, mistakes, etc.
(v) Reduced production cycle, as standard part may be subcontracted at a time when it is just needed.
It, therefore, facilitates Speed-to-market.
110 INDUSTRIAL ENGINEERING AND MANAGEMENT

Input (Technology) Idea & innovation Input (Industry)

R&D Product: Similar & different

Input (External) Input (External)

• Customer
1 Product development • Capability of firm
• Supplier Profile
• Internal R & D
• Competitors .1
• Finance &
strength &
Study for the marketing effort
weaknesses
feasibility

Assessment of Assessment of
technology ,Cost-benefit
market
analysis

Is product No
technically Stop
feaible?

Yes

Is product No
economically Stop
feasible?

Yes
• Establish pereliminary design
• Make a prototype
• Circulate drawing to concerned expert

Yes

• Establish process plan

• Procure production system
• Machine, tools and other resources
1

Establish detailed production

planning & control

Analyse the process and system

Commecrialize the product

Figure 9.1 Development of new Product and Processes

PRODUCT DESIGN, PLANNING AND DEVELOPMENT

Some limitations of standardisation are as follows:

(i) Difficulty to undertake .charges.
(ii) Reduction in variety and limits on customized product.
(iii) Stagnation in innovation.
(iv) Chances that competitors may quickly develop similar product, if standardised.
9.5.2 Modular Design
Modulars are common components grouped together in one interchangeable sub-assembly. Concept of
modular design is very helpful in providing variety to the customers. Let us understand this by an example
of computer hardware market. Let two different types of colour monitors, one mono-monitor, two varieties
of keyboards, three varieties of printers, and three varieties of motherboards are available to the customer.
These are examples of modular design, if all are compatible. Now, with these modular items, total varieties
of final product will be [(2 + 1) * 2 * 3 * 3] or fifty four. Modular design offers following advantages:
(i) Stabilized design of modular item reduces development of final product.
(ii) Considerable range of product.
(iii) Very high speed-to-market.
(iv) Considerable flexibility in design.
(v) Easy service, diagnosis of fault and replacements.
(vi) Simplified material planning, less inventory due to easily available modular sub-assemblies.
(vii) Less paper work in record keeping as there is no need to maintain the records of parts used in
the modular sub-assemblies.
9.5.3 Simplification
It is the process of reducing variety of a product by limiting product range, design or type of material.
Simplification offers boost to standardisation. Let us understand it by an example. The technology for
colour TV is available to its manufacturers. They can manufacture TV set of any size from palm size
to big-screen. But normally, 14", 15", 16", 18", etc., are the fixed sizes. Why not to have 14.01", 14.02".
14.03" ..., as the variety to a customer. The answer is simplification in marketing, manufacturing and
planning. The marginal difference in size or specification does not offer real change in attributes, which
may be termed as variety. Therefore, simplification is needed in product development.
Simplification provides better customer service due to limited variety, better after-sales planning,
and reduced volume. It is also helpful in reducing inventory level and complex material planning. It
is helpful in focussing effort on limited parts and therefore lesser cost may be anticipated. It is also
helpful in better product quality due to concerted effort on limited product range.
Combination of simplification and standardisation leads to specialization. Limited but focussed product
variety is helpful for a company to specialize in a particular area.
9.5.4 Speed-to-Market
Speed-to-market is a term widely used these days. This means, introduce your product in the market
as fast as possible. The reason is stiff competition, globalisation and access of technology to all competitors.
The idea of new product gets very fast peculated in the market. Therefore, first company to hit the
market is likely to capitalize the virginity of market. Many software companies, automobile companies,
computer hardware firms, pharmaceutical companies, etc., are eager to first hit the market with their
innovative product. Let us look into some of the examples. During past few years, software firms were
112 INDUSTRIAL ENGINEERING AND MANAGEMENT

keen to launch a product to handle Y2K problem. This was a problem, which computer system has
faced due to change of year from year 1999 to year 2000. Most of the earlier versions were unable
to copeup with the problem arising due to non-recognition of year 2000 by computers. These computers
were designed to recognize a two digit slot (i.e., "99" for 1999, "00" for 2000 or 1000, both). Therefore,
the company to first launch a software, which could be helpful in distinguishing year 1000 and year
2000, is expected to hit and capitalize the market in big way. Similar examples are numerous in many
other sectors. In the pharmaceutical industry, the company, which will introduce an effective and affordable
drug for diseases like cancer or AIDS, is likely to derive the greatest profit from market. This aspect
calls for the industrial focus-on speed-to-market.

9.5.5 Concurrent Engineering

"Concurrent engineering", "simultaneous engineering" "integrated-product-development" are the few terms
for same meaning. It helps the companies to remain competitive by producing high-quality product and
services for the first time.
Concurrent Engineering is a systematic approach to the integrated, concurrent design of products
and their related processes, including manufacture and support. This approach is intended to cause
the developers, from the outset, to consider all elements of product life cycle from conception
through disposal, including quality, cost, schedule and user requirements.
• —Institute of Defense Analysis, US Report, R-338.
Four Elements of Concurrent Engineering
1. Voice of customer (customer focus).
2. Multidisciplinary teams (team work; focus on producibility and supportability).
3. Automated tools (automation, CAD/CAM integration; at product developments age, evolve "build-
to" technical data package).
4. Process management (Evolve process, plan it and stabilize it in parallel, while the product is being
developed).
Benefits of Concurrent Engineering
1. Lower cost
Customer

Conceptualization
F Detailed product design
sL1
Development of process

Common sequential design & development of product

Conceptualization

Detailed product design

Customer

Development of process I

Concurrent engineering product development

Time of I'roduct Development

Figure 9.2 Reduced-time of Product Development in Concurrent Engineering

PRODUCT DESIGN, PLANNING AND DEVELOPMENT 113

2. Speed-to-market due to reduced cycle time

3. Better understood user requirements
4. Quality design of producible items
5. Quicker development period
6. Team work
7. Customer satisfaction
8. Integration of design and manufacturing
9. Better chances of succeeding product in market
10. Low scrap and wastages.

9.5.6 Quality Function Deployment (QFD) and House of Quality (HOQ)

QFD was originally developed by Japanese professor, Yoji Akao, but it has become very popular in USA,
Europe and also in India. The QFD integrates two design inputs: (1) Customer desires and
(2) Marketing findings. These two inputs are translated into technical requirements and then these are
integrated with computer-aided design (CAD). This approach of concurrent engineering saves a lot of
lead time (around 60-80%) in product development.
The QFD is a discipline for product planning and development in which key customer wants
and needs are deployed throughout an organisation.

Quality: Customer need or expectation.

Function: Ways to satisfy customer needs/expectations.
Deployment: Making it happen throughout the organization.

The Quality Function Deplyment team uses all means to analyze the customer needs. For this, the
Kano model may be understand, how the customers view and evaluate quality in the product. Team uses
planning tool to product and process specifications (Figure 9.3):
Happy
customer
Spoken
requirement

Zone of Zone of
customer customer
requirement/ requirements/
Expectations— Expectations—
Not satisfied satisfied
Unspoken
expected

Hostile

Figuro 9.3 Kano Model regarding the Way Customer Evaluates Quality
114 INDUSTRIAL ENGINEERING AND MANAGEMENT

The framework for working a QFD program is called as House of Quality (HOQ). It is a matrix,
which displays the interrelationship between customer need and technical know-how.
The principle behind HOQ is that product should be developed to reflect customer needs, tastes,
desires or expectations. A multifunctional team of marketing people, design professionals and shop-floor
experts should work in tandem to form an initial idea regarding product features.
The process in QFD allows cascading through a chain of related-houses by linking the customer
requirements to engineering characteristics to manufacturing capabilities.
In the customer matrix (we call it house), customer needs are translated into engineering specifications.
This is cascaded in the next house into deployment of parts and assemblies. In the next house, this
is cascaded to process planning stages. At the end, the cascading is done for translating it into production
planning and scheduling (Figure 9.4).
Advantages of QFD
(i) Minimizes communication barrier in assessing customer needs.
(ii) Establishes link between product feature, customer need and process requirements.
(iii) Short product development cycle (30 to 50% less).
(iv) Firm design available without many iterations (30-50% lesser changes).
(v) Less chances of product failure due to focus on customer need.

Engineering
features
Production
milestone Production
needs

Figure 9.4 Cascading Matrices of HOQ in QFD

(vi) Less changes in personnel and strong team spirit.

(vii) Strengthens quality culture.
(viii) By evaluation and comparison with competitors, it provides an opportunity to improve through
benchmarking.
(ix) Multifunctional team provides synergy in product development. Thus, good ideas evolve quickly.
(x) Focus on gaining competitive edge over key areas of product, process and market-requirement.
(xi) Lower development-cost for a product results in lesser price to the customer. This may be a competitive
edge fdr the success of a new product (about 20-60% lesser start-up cost).
(xii) Due to customer focus, the developed product is likely to perform better and satisfy the customers
(about 20-50% lesser warranty claims).

9.5.7 Design for Manufacturing (DFM)

The DFM aims at designing products with a focus on its manufacturing. The design process is basically
a cost driven design (COD) approach. It is basically a structured approach to look into the cost competitiveness
PRODUCT DESIGN, PLANNING AND DEVELPPMENT 115

for a successful product. In DFM, many generic rules andl guidelines exist. For example, minimize the
total number of parts. Similarly, minimization rule applies to minimize the steps in a process and minimize
the number of suppliers.

9.5.8 Design for X (DFX)

The DFX is a focussed-DFM. In this, certain area (we call this X) is selected for attention. Improvement
in X is proposed after detailed analysis of the process. ,For e xample, in a refrigerator, failure of compressor
is identified by customer and marketing team as the area of iml )rovement. Therefore, a concurrent engineering,
team takes up a project: "Design for compressor reliabil ity". Following steps are needed in DFX:
(i) Identify X (focussed area).
(ii) Identify team of experts who are cross functional.
(iii) Establish performance measures, like mean-time between failure (MTBF), power consumption load
characteristics, etc.
(iv) Generate data for X in existing and competitors p•rodu cts.
(v) Identify process changes to improve the performance measure. Use research to identify improvements,
such as minimize parts; use standard components, etc.
(vi) Evaluate alternatives and physically test the design.
(vii) Generate analysis report and feedback for improvement in area X.

9.5.9 Rapid Prototyping (RP)

RP is the technology for converting design from computer representations (such as CAD model)
directly into solid objects without human intervention.

Rapid prototyping is a fast emerging area in product development. Computer-Aid-Design (CAD)

models are converted into manufacturing codes for metal processing. No human intervention is needed
at this stage. Therefore, RP reduces time between conceptualization to marketing of the product. Many
options of design may be evaluated on a computer screen with the help of CAD models. However, RP
is still in developing stage. Its full commercialized uses are very few.
Detailed discussion on rapid prototyping is available in the "o ptional reading material" at the end
of this chapter.
Approaches of Rapid Prototyping
(0 Stereo lithography: In this, solid or surfaced CAD data is used to convert data into sliced or cross-
sections plane. A laser which generates ultraviolet beam, is us ed to establish cross-section on the
work-material in a successive manner.
(10 Laminated Object Manufacturing (LOM): In this, solid or sur faced CAD data is gradually sliced
into many cross-sections. Section outline is cut in small thicl messes (0.002 to 0.020") by laser
beam. Successive layers are bonded on the previous one with h eat-seal adhesive coating on layers.
The process of trimming is continued till cutting and laminat ion give a 3-D multilayered solid
object.
WO Machined Prototypes: In this, many 3-D objects are cut from z i large variety of solid work-piece
by using CAD-data and multi-axis CNC machining centres.
Advantages of RP
(i) Very fast manufacturing.
(ii) Manufacturing is direct from CAD data file or drawings of a product.
116 INDUSTRIAL ENGINEERING AND MANAGEMENT

(iii) Easy to produce master-pieces for casting and plastic products.

(iv) Easy to detect flaws in drawing and design.
(v) Easy to evaluate manufacturability of design on a computer screen.

REVIEW QUESTIONS

9.1 Why is the area of product design so important in years to come? Explain.
9.2 What are the requirements of a good product design?
9.3 Explain the following approaches of the product development: (i) Imitation, (ii) Adoption and (iii) Invention.
9.4 Explain the product development process.
9.5 Explain the following in the context ofproduct development: (i) Standardisation, (ii) Modular design, (iii) Simplification
and (iv) Speed-to-market.
9.6 Explain the concept of concurrent engineering. What are its benefits?
9.7 Explain QFD and house of quality. What are the advantages of QFD?
9.8 Explain the process of rapid prototyping. What are its advantages?
9.9 Write short note on the following:
DFM, (ii) DFX and (iii) Kano model.

REFERENCES

1. Abell, D.F. and Hammond, J.S., 1979, Strategic Market Planning, Prentice Hall, N.J.
2. Bicheno, J. and Elliott B.R., 1997, An active learning approach: Operations Management, Blackwell Publishers
Ltd. U.K.
3. Dalela, S. and Shankar, R., 2000, A Textbook of Production Engineering, Galgotia Publications, New Delhi.
4. Hitomi K., 1996, Manufacturing System Engineering, 2nd Ed., Viva Books Pvt. Ltd.
5. Kotler, P., 1991, Marketing Management, 7th Ed., Prentice Hall N.Y.
6. Monks J.G, 1987, Operations Management: Theory and Problems, 3rd Edition, McGraw Hill Book Co.,
N.Y. •
7. Monks, J.Q, 1996, Operations Management: Schaum's outlines series, 2nd Edition, McGraw Hill Co., N.Y.
8. Porter, M.E., 1985, Competitive Advantages, Free Press, N.Y.
9. Roome, N., 1994, "Business Strategy, R & D, Management, and Environmental imperatives"; Research and
Development Management, January.
10. Turner, W.C., Mize, J.H., Case, K.E., and Nazemetz, 1993, Introduction to Industrial Systems Engineering,
Prentice Hall Inc. N.J.
PRODUCT DESIGN, PLANNING AND DEVELOPMENT 117

OPTIONAL STUDY MATERIAL* RAPID PROTOTYPING

INTRODUCTION
Rapid prototyping (RP) refers to a new class of processes, which generate physical prototypes material
addition. It covers technologies for converting design from computer representation of object into solid
object without human involvement in processing and planning. RP is, therefore, termed as solid-free-
from-fabrication, layered manufacturing, 3D printing, or computer automated fabrication. It has come
into fore\ront during late 1980's.
Definitions of RP: Rapid prototyping refers to a set of processes in which physical object
is obtained directly from its CAD (Computer-aided Design) model without explicitly going
through the various steps of manufacturing, which includes tooling and material removal.

Rapid prototyping starts with quick creation of manufacturing ready, CAD models; continues to
verify the design using CAE (Computer-aided Engineering) tools; moves on to the manufacturing of physical
representation and finally ends with a prototype in the correct material (Cater, 1994). RP uses technology)
so that the required object is printed in three dimensional (3D).
ADVANTAGES OF RP
Rapid prototyping offers many advantages to its users. These are:
(i) It offers direct manufacturing from CAD (Computer-aided Design) files and sketches.
(ii) It is a paperless manufacturing.
(iii) Very fast development of functional parts is possible. Therefore, it offers tremendous potential in
the area of new product development.
(iv) For conventional metal casting, master part is needed for moulds. The RP provides a quicker way
to manufacture these. For plastic parts also, RP is a useful process. In the investment casting, wax
may be used as material to be deposited in RP.
(v) RP may be used to test the suitability of a functional part during the early development of a product.
Initial defects in the design may be detected and rectified.
(vi) Before any product is commercialised, few pieces are tested for performance and customer's acceptability.
If this is done after procuring high cost dedicated machines, there are risks in the event of product
failure. Few pieces, made by RP, may be used for the test and specimens.
(vii) It is very useful and effective tool for the physical visualization of design.
(viii) RP can be used to test the assemblies for the intend6d functions and interface with related elements.
(ix) RP is used to develop parts (as prototypes), which may be used for initial testings, such as photoelastic
tests. Polymers, which are very common material, used in RP, are highly suited for the photoelastic
tests of material.
(x) RP parts can be used as a templet for copy-milling machine.
(xi) It reduces lead time to produce prototype component.
(xii) It offers greater capability to compute mass properties of components and assemblies.

This study material is for optional reading. It may be relevant for Mechanical/Production Engineering Students.
This text is adopted from the author's book: A Text Book of Production Engineering by S. Dalela and R.
Shankar, Galgotia Publications, 2000 (Chapter 42).
118 INDUSTRIAL ENGINEERING AND MANAGEMENT

LIMITATIONS OF RP
(i) It is still in developing stage. Only few proprietary plastic materials are being used in RP. However,
this technology is fast emerging for other materials, such as metals and alloys.
(ii) RP does not offer good surface finish and, therefore, dimensional accuracy is quite poor in RP.
(iii) Machines for RP are very costly and it is difficult for small and medium-size firms to afford. However,
with emerging technologies, the cost is expected to fall in near future.

PRINCIPLE OF RP
Rapid prototyping is unique in the sense that the prototype part is produced by adding materials rather
than removing materials, as in conventional machining process.
The RP directly generates physical object from a geometric model of the object. A 3D object
is represented as a 2D by cutting it into thin slices with the help of a computer software. Therefore,
2D layer manufacturing generates a 3D object in RP. The produced 2D slices are glued over one another
to set the desired 3D object (Figure 9.5-). The steps are as follows:
(i) Model the parts by a surface/solid modeller (geometric modeller).

/'
Figure 9.5 Slicing and Scanning of Object

(ii) Section the part (Slicing), mathematically, using software. Generate a series of such parallel cross-
sections. For each layer, generate appropriate command (process plan) for RP apparatus. This process
is quite analogous to numerical control (NC), tool path generation. In both cases, the planning
task involves generation of the tool path and associated commands, such as a rapid movement
of tool, etc.
(iii) Generate curing/binding path for these pieces.
(iv) Use RP machine for producing the prototype. Use curing/binding path, generated in the earlier
step, to decide the solidification or binding a thin sheet of material. Develop a new layer, either
by deposition of material or selective phase transformation of appropriate material.
(v) Generate a new layer using steps (iii) and (iv).
(vi) Repeat Step (v) till complete prototype is developed in a 3D form.

SYSTEM FOR RAPID PROTOTYPING

The technology for RP is fast growing. Some of the common RP systems are as follows:
1. Stereolithography Apparatus (SLA)
2. Selective Laser Sintering (SLS)
3. Fused-Deposit Modelling (FDM)
PRODUCT DESIGN, PLANNING AND DEVELOPMENT 119

4. Laminated-Object Manufacturing (LOM)

5. Photo Masking or Solid Ground Curring (SGC)
6. Ballistic Particle Manufacturing (BPM)
7. Three-Dimensional Printing (3D Printing).

Stereolithography Apparatus (SLA)

This process was developed and patented by a physicist, Charles W. Hall in 1986. In this process, a
solid-plastic part, out of a photosensitive liquid polymer, is fabricated with the help of a directed laser
beam. This would solidify the polymer. Laser light causes polymer to harden. Solid and surface CAD
data is presented as sliced into cross-sections with the help of software. A laser beam is used which
generates ultra-violet beam. Using computer-controlled scanning system, this beam is navigated across
the top of a photosensitive liquid polymer. Initially, the process of scanning is done for the base or
bottom layer of the part. Strike of laser beam over liquid polymer causes solidification of polymer. After
the first base layer solidifies, a second layer is scanned by laser beam using CAD data file. The layers
are approximately 0.005 to 0.020 inch or 0.13 to 0.50 mm thick. The deposited layers gradually move
down so that a fresh layer is scanned and deposited over the earlier ones. An elevator is used to lower
the solidified polymer so that a fresh layer or new layer is scanned and deposited over the earlier layer
(Figure 9.6).
X-Y positioning
system>.< y Moving
X laser ><xY
Plate- Part
Laser
form being
beam
Elevator built in
Part-base layer
Liquid
surface
Container
(Vat)

(a) Start of SLA Process (b) SLA process after several layers are added

Figure 9.6 Stereolithography Process for Rapid Prototyping

The thickness of each layer depends upon the required resolution. Better resolution, which allows
intricate parts to be fabricated, may be obtained by thinner layers. But this makes the process very slow.
For small parts, the time needed for SLP is around one hour while for complicated parts, it may be
even several hours. After the process is complete, excess polymer is washed out with the help of alcohol,
which dissolves polymer. Ultraviolet light is used to cure the parts.

Applications of SLA
SLA has been successfully used in the following areas:
(i) Industrial Design: To develop models to demonstrate a form/design into a real physical object.
(ii) Casting Industry: To develop moulds for foundary. It is useful in . direct investment casting.
(iii) Architectural Design: To translate a digital blue print into a model of the building; or a map
into site model for area planning.
120 INDUSTRIAL ENGINEERING AND MANAGEMENT

Product and Accuracy of SLA

Five different varieties of acrylate photo-polymers are commercially available for this process. Since these
are thermoset material, remelting is not possible for reuse or recycling process.
Due to limitation in the size of vat for holding the polymer, there is a limitation in the size of
prototype. Commercially available vats are:
(i) SLA 190 (7.9" x 7.9" x 9.8") with 16 milliwatt Helium-Cadmium laser with scan speed of
503 mm/s.
(ii) SLA 250 (10" x 10" x 10") with 16 milliwatt Helium-cadmium laser with scan speed of
503 mm/s. It provides interchangeable vats and diode laser levelling.
(iii) SLA 500 (20" x 20" x 24") with 200 milliwatt Argon-ion laser with scan speed of 2540 mm/s.
EDS, Unigraphics provides Orion imaging technology. Software-support by 3D systems Inc-of Valencia,
CA is available.

Selective Laser Sintering (SLS)

This technology was developed and supported by DTM Corp. of Austin TX. It was developed by Carl
and Deckard Joseph Beaman of Mechanical Engineering Department of. University of Texas at Austin.
It employs a high-energy laser to fuse or sinter powder into solid object. High energy carbon dioxide
laser is used to sinter successive layers of powder (instead of polymer liquid, as in case of SLA). A
thin layer of sinter powder is applied over the workpiece by a counter-rotating roller mechanism. It is
pre-heated to a temperature, little lesser than its melting temperature. This laser beam is applied to trace
the required cross-section of the powdered surface. By applying laser beam, the surface gets more heated
and reaches the sintering temperature. Thus, the powder, traced by laser, gets bonded. The unscanned
powder serves as the support for next layer of powder. Another layer of powder is again provided by
roller and next pass of layering is done in the similar manner. In a typical SLS set-up, each layer thickness
is between 0.003" and 0.02" (Figure 9.7).

><.Yx
X-Y positioning
system Scanning Optics Laser
mirror
Laser beam

Powder
Air
Leveling Drum

Figure 9.7 Selective Laser Sintering (DTM Corp.)

Material of SLS
SLS can handle. a wider variety of materials, which include, polycarbonate, PVC, Acrylonirile Butadine
Styrene (ABS), nylon, resin, polypropane, polyurethane, polyster, wax for investment casting, etc.
Product and Accuracy of SLS
The products of SLS sometimes suffer from distortion due to shrinkage and warpage, which may be
due to sintering and cooling. To reduce this, small-size powder particles, having high aspect ratio, are
PRODUCT DESIGN, PLANNING AND DEVELOPMENT 121

selected. In a typical SLS 125 model, 20 watt CO2 laser is used for a part of 12" dia and 15" length.
The accuracy is in the range of + 0.005" to ± 0.015".

Fused Deposition Modelling (FDM)

It is developed by Strategy's Inc. Eden Prairie, MN. In this, deposition of extruded thermoplastic wire
or wax is deposited just above the part location. It is heated to its melting point. Cross-section by cross-
section deposition is done with the help of software to generate NC-type code. The nozzle of the filament-
head extrudes molten filament by a precision pump. The process is quite fast and employs cheaper material
as compared to SLA (Figure 9.8).

Strata slice
to create NC
code Pattern
0-0-0-0-0

1-1igh-speed
3 axis system
Filament
z Y (Thermoplastic)
Heater
Nozzle

Plastic model

Filament
supply

Fixed work place

3D-Modeler

Figure 9.8 Fused Deposition Modelling

Product and Accuracy of FDM

Wax-filled plastic adhesive material, Nylon, thermoplastic investment casting wax, etc., may be used in
FDM. Model accuracy is ± 0.005". Wall thickness is in the range of 0.01" to 0.25" and 3D model of
12" x 12" x 12" may be obtained with FDM. Coloured parts of small to medium size may be produced
in just few hours.
The solution, offered by Stratasys Inc., accepts IGES file, which is 3D wire frame, surface or solid
model. It also accepts conventional STL (stereolithography) format as input file. Standard NC code may
also be used for direct control of the FDM machine.
FDM 150Q and FDM 1000 are economical units, but are small. Research is going on for metal
or ceramic deposition technique.
122 INDUSTRIAL ENGINEERING AND MANAGEMENT

Laminated-Object Manufacturing (LOM)

In this, parts are made by bonding sections that are cut from thin sheets of stock. The stock may be
plastic, paper, metal, or polyester composite sheet with heat seal adhesives. The LOM machine bonds
(glue or weld) the successive layers (0.002" to 0.020") of the sheet to a stack of already formed laminated
part. Excess material is suctioned by a vacuum pump or works as support for next layer. Then a laser
beam is used to trim the contour of the cross-section of the part. CAD-data file is used to trim to the
required shape. The process continues till all layers are cut and laminated. This creates a three-dimensional,
multilayered model.

Product and Accuracy of LOM

Any sheet material such as paper, metal, plastic, fibers, synthetic materials, glass, composite, etc., may
be used to produce layered part. The accuracy of the model is 0.005". The LOM has advantage that
it does not cause distortion due to shrinkage.
The LOM-1015 machine uses a 40 watt carbon dioxide laser beam. The size of a typical model
is 15" x 10" x 15". The machine is very fast (5 to 10 times) as compared to SLA technology.

Photo-masking or Solid Ground Curring (SGC)

This was developed by Cubital Ltd. of Raanana, Israel (Troy, MI). This uses a photo-masking technique
so that an entire layer of liquid photo-polymer is solidified at one time.

Operation of SAC
The operation of SAC is as follows:
A mask is generated in this process by electrostatically charged glass plate, which has a negative
print of the desired cross-section of the part. A thin layer of liquid photo-polymer is spread on the work-
plate surface. For a couple of seconds, the mask plate is placed over the thin polymer layer and exposed
with ultraviolet laser rays. The exposed area of polymer solidifies while area under mask remains liquid.
A vacuum suction is used to remove the liquid polymer. The gap, thus created, is filled by liquid wax,
so that after solidification, it acts as support for successive layers. At the end of each layering process,
the entire surface is ground (milled) so as to maintain a uniform layer thickness. For next layer, the
cycle is repeated. After the completion of the process, the wax-support is washed by hot water, microwave
energy or solvent.

Product and Accuracy of SGC

Material, same as SLA Process, is used in SGC system also. However, this process does not require post-
curing activity. 0.1% dimensional accuracy and around 0.005" layer-thickness may be achieved. Distortion
due to shrinkage and lack of support is quite less due to available wax-support of this method.
The typical Solider 5600 system of Cubital Ltd. produces 20" x 20" x 14" part in a cycle time
of about 90 seconds. This system is less noisy, more safe and has wide range of file conditioning capabilities.
Better machine utilization is possible in this process.

Ballistic Particle Manufacturing (PPM)

It is developed by Perception system. In this approach, a piezo-driven inkjet apparatus is used to shoot
droplets of molten material. Size of each droplet is around 50 IA and the rate of spray is 104 droplets
per second. This molten material strikes the previously deposited layer. When cooled, it gets welded
over the earlier laid surface.
PRODUCT DESIGN, PLANNING AND DEVELOPMENT 123

Product and- Accuracy of BPM

Thermoplastics, wax and aluminium products are developed through BPM technology. These
materials are easily melted and solidified. The accuracy for the product is around ± 0.004" and each
layer thickness is nearly 0.0035". The BPM technology is capable of, producing product upto the size
of 12" x 2" x 12".

Three-Dimensional Printing (3D Printing)

The three-dimensional printing, it was developed at the Mechanical Engineering Department of the
Massachusetts Institute on Technology (MIT) at USA.
The technology is quite similar to the seledtive laser sintering (SLS) process. The 3D model
of product is sliced into layers of 2D cross-sections. Ink-Jet type of computer printer is used in this
method (Figure 9.9).
x-y positioner
Powder sprayer
Printer
head

(a) Spray po vder

Loose powder Completed job
Piston

I Cylinder

(b) Print ayer

(c) Move piston downwards (Completed stage)

Figure 9.9 Working of 3D-Printing

For a given 2D cross-section, a layer of power is spread over a piston type of arrangement, which
moves downwards in the cylinder. An ink-jet printer, which is driven by a stepper motor and an xy
positioning device, is used here. This is controlled by a central computer. The printer injects binder-
material droplets over the powder bed (which is laid on the piston head). The droplets are injected only
over those portions where solidification is needed in the 2D-CAD-generated slice. After this, the piston
moves slightly down in the cylinder. Next layer of powder is spread over this. Again, the printer moves
in the predefined x-y path to spread binder (glue) material. The process is repeated till entire thickness
of job (i.e., Z-coordinate) is complete. Excess powder, which is not glued, is removed. The glued job,
which is bound, is further heat-treated for about two hours at 120°C (for ceramic powder) to improve
the layer-bonding.
124 INDUSTRIAL ENGINEERING AND MANAGEMENT

Product and Accuracy of 3D-Printing

The process has been used to develop product from aluminium oxide and is used to fabricate high temperature
resistant ceramic molds and ceramic composites. Layer thickness is upto 175µm; part size upto
12" x 12" x 24" has been developed so far. The speed of the process is about two seconds per layer
of about 1001.1m.
SUMMARY OF RP TECHNOLOGY
Rapid prototyping is a fast emerging technology in the area of product development. It offers fast development
of products at a lower cost than the conventional systems. Today, when market is customer-driven, and
there is a tremendous pressure to develop new products at fairly fast rate, the utility of RP technology
is really tremendous. With this, the prototype may be quickly developed from a 3D-CAD drawing. The
fabricated parts may be analyzed for features, colour, look, etc. At this point of time, RP does not provide
much options with material and size. But the technology is fast developing and holds tremendous potentials
in new product development.
 10
PRODUCTION PLANNING AND
CONTROL: AN INTRODUCTION

10.1 INTRODUCTION
Production planning and control (PPC) is one of the most important areas of industrial management.
It is aimed at achieving the efficient utilization of resources (material, men, facility, etc.) in any organisation
through planning, coordination and control of production activities that transform the raw material into
finished products. The PPC. department works with many industrial engineering techniques for issuing
directives to the production department for issues such as:
• What to produce?
• How much to produce?
• When to produce?
• What means (resources) are needed in production?
• How to coordinate different resources of the system?
• How to control the deviations from plan, such as • meeting a due date of production? etc.
Some functional domains of PPC are: forecasting, requirement planning, inventory control, production
planning, process planning, estimating, master schedule, machine loading and scheduling, quality control,
expediting, purchase, warehousing, dispatching, etc.
The main purpose of PPC is related to directing and regulating the orderly movement of goods
and services in the entire production cycle to meet the business objectives of customer service, high
productivity, on time delivery, efficient production system, etc.

10.2 OBJECTIVES OF PPC

1. It is used to establish target and check the deviations by comparing on some performance measures.
2. Decides the nature and magnitude of different input factors to produce the output.
3. Coordinates different resources of production system in the most effective and economic manner
and to coordinate among different departments.
4. Elimination of bottleneck.
5. Utilization of inventory in the optimal way.
6. Smooth flow of material.
 126 INDUSTRIAL ENGINEERING AND MANAGEMENT

7. Forecasting of demand.
8. To produce in right quantity and quality at right time.
9. Scheduling production activities to meet delivery schedule.
10. Expediting the system under production.
11.Quality management.
12.To ensure flexibility in production system to accommodate changes and uncertainty.
13. Optimises the use of resources for minimum overall production cost.
14.To ensure the production of right product at right time in right quantity with specification rightly
suited to customers.
15. Stable production system, with least chaos, confusion and undue hurry.

10.3 FUNCTIONS OF PPC

PPC acts like the brain behind all the production activity, as it acts like thought process in a human
body (Figure 10.1). Eilon defines it as "the direction and coordination of the firm's material and physical
resources towards the attainment of pre-specified production goal in the most effective available way."
In the words of G.B. Carson, it is defined as "a system of organisation and planning of the manufacturing
processes. Specifically, it consists of planning of routing, scheduling, dispatching and inspection, coordination
control of materials, methods, machines, tooling and operating times. The ultimate objective is the organization
of the supply and movement of material and labour, machine utilization and related activities, in order
to bring about the desired manufacturing results in terms of a quantity, time and place."

• Product development design and mix

• Process design
• Sales forecasting and estimating
• Work station design
•
• Factory layout and location
• Technology used
• Equipment policy
• Change in capacity
• Pre-planning production

Legend
—►Functional responsibility

- Feedback

overlap •

Preplanning Planning Control

(Mainly strategic) (Mainly tactical)

Figure 10.1 Functions of PPC Cycle (Modified from Eilon, 1985)

PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION 127

PPC involves three phases:

Preplanning, which is related to:
• Product development and design
• Process design
• Work-station design
• Sales forecasting and estimating
• Factory layout and location
• Equipment policy
• Pre-planning production.
Another phase is planning different resources, which include four Ms: material, method, machine
and men. In the changed scenario of information dominated enterprise, information is also included in
this list. Knowledge management is another area, which will dominate the planning phase in days to
come. Routing, estimating and scheduling are other activities, related to planning.
The Third phase is control, which includes dispatching, inspection, expediting and evaluation.

Definition: Production planning and control

It is the process of planning production in advance of operations, establishing the exact route
of each individual item, part or assembly, setting starting and finishing dates for each importing
item or assembly and the finished products, and releasing the necessary orders as well as
initiating the required follow-up to effectuate the smooth functioning of the enterprise.
—Spiegal WR and Lansburgh

10.4 PRODUCTION PLANNING

Production planning is associated with many decisions related to how much to produce, what materials,
parts and tools will be needed, and what are the steps needed to produce a product. The time-limit
for production and the quantities needed at different points of time are also decided in production planning.
The APICS Dictionary [1] defines sales and operations planning (previously called production
planning) as:

Production planning is the function of setting the overall level of manufacturing output (productiori
plan) and other activities to best satisfy the current planned levels of sales plan and/or forecasts,
while meeting general business objectives of profitability, productivity, competitive customer
lead times, etc., as expressed in the overall business plan. One of its primary purposes is
to establish production rates that will achieve management's objective of maintaining, raising,
or lowering inventories or backlogs, while usually attempting to keep the work-force relatively
stable. It must extend through a planning horizon, sufficient to plan the labour, equipment,
facilities, material, and finances required to accomplish the production plan. As this plan affects
many company functions, it is normally prepared with information from marketing, manufacturing,
engineering, finance, materials, etc.

Production planning is, thus, a pre-production activity, which involves arrangement of facilities design
of the production system. The, input to the production planning is sales commitments (or sales forecast)
in terms of quantity, delivery dates, price, quantity, quality and tolerances, etc. (Figure 10.2).
128 INDUSTRIAL ENGINEERING AND MANAGEMENT

Long-term demand forecast New product planning Current plant capacity

Long-term production planning

Determination of purchase and Profit plan

production, thundation anew process Financial plan

Long-term production capacity planning

Annual sales planning

Annual production planning

Purchase and production Profit plan

(countermeasure against loads) Financial plan
Monthly order •

Middle-term production capacity planning

Monthly orde-ri

Monthly production planning

Short-term production planning •

(Various preparations for production
Daily order

Production scheduling
(determination of delivery date)

Dispatching of individual order

Assembling vehicles II
F denotes instruction car-
ried by Kanban (For
Delivery instruction of I
Delivery instruction of large subassemblies Kanban refer chapter
purchase parts
on JIT)

Processing and assembling parts •

Delivery instruction of raw materials

Figure 10.2 Structure of Production Planning

Source: Y. Sugimori, K. Kusonoki, F. Cho, and S. Uckikawa, "Toyota Production System and Kanban System.
Materialization of Just-in-Time and Respect for Human System," International Journal of Production Research,
Vol. 15, no. 6, pp. 553-64, 1977
PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION 129

The production planning can be considered at two levels: strategic and tactical. Strategic planning
focusses on the design of the production system. Tactical planning focusses on running of the operating
system. Table 10.1 shows planning decisions that have to be taken in production on a relative frame
time horizon:
Table 10.1 Time-scale for Planning Decisions

Decision type Time-scales Examples

Strategic Long-term 2 years plus • Introduction of new products and processes
• Location of facilities for plant
• Technology to be used for operations
Medium-term 1 to 2 years • Products mix
• Capacity design and planning
Tactical Medium-term 1 year • Work-force decisions
• Subcontracting decisions
• Overtime decisions
• Stockholding policy
Short-term 3 months • Production scheduling decision
• Output targets decision

10.4.1 Strategic Level Decisions

At this level, decision will be required regarding product development and product design; process
design, facility location, technology used, product mix, etc.
The Product Development, Design and Mix: This is the most •important pre-planning decision,
which requires coordination with marketing. The production capabilities of the organization, together with
any limitations on production capacity, should be considered for this decision. Many issues, related to
product development/design, are discussed in Chapter 9. Proper consideration for the production implications
at the design stage substantially reduces the manufacturing costs and processing time.
Process Design: It concerns with the design of processes required to achieve production goals.
The choice for trade-off between capital cost, operating costs and performance requirements is needed.
The aim is to provide manufaZturing resources for achieving the production targets.
Plant Location: It is the decision related to the selection of place or site for the plant. Many
factors that determine this decision are listed in Chapter 6.
Plant Layout: It is a decision related to internal arrangement of facilities in the plant. For each
department, the location of machines, storage areas, and support facilities are designed to simplify the
handling of materials between operations and ease in material movement. A detailed analysis is presented
in Chapter 7.

10.4.2 Tactical Level Decisions

These decisions are mainly for medium to short-term, which is one year to 3 months. Some of these
decisions are as follows:
(a) Production Control: This is related to a scheduling of operations, machines allocation and monitoring
of actuals against planned production. The focus is to meet performance objectives in terms of
operating costs, timely production, flexibility, agility, set-up time reduction, etc.
130 INDUSTRIAL ENGINEERING AND MANAGEMENT

(b) Stock Control (Material): This pertains to planning decisions related to stocks of raw material
sub-assemblies or finished products. The decisions related to these came under inventory control.
This involves decision regarding replenishment quantity and replenishment timing of the stock.
A detailed analysis is available in Chapter 19.
(c) Method: This area is related to decision regarding how to perform a work in the best possible
way so that human effort and fatigue are minimum. Measurement and standardisation of these methods
are treated in the specialized domain of work-study or time and motion study. Work-measurement
and ergonomics are other two related areas.
(d) Machine: This involves planning related to acquisition of machine, make or buy decision related
to the product, arrangement for developing the capacity of the plant in terms of machine capacity,
maintenance planning as a long-term planning, etc.
(e) Men: This involves labour planning for cost effective utilisation of manpower. Work-contents for
each operator are decided at this stage.
( f) Information and Knowledge Management: Information and knowledge are the key resource these
days. In the classical text on PPC, both information and knowledge are ignored. However, with
the advent of tremendous leap in information technology (IT), such as: internet, e-commerce, enterprise
resource planning (ERP) associated with ever-falling price of hardware (PC, printers, etc.) have
changed the production scenario. Information and knowledge are the key resource. All the functions
of the enterprise need to be integrated (we call it now "seamless-integration") with two binding
elements: information and knowledge (Figure 10.3). For a detail of this integration, refer to
Chapter 24.
Exogenous
Information

Information + Knowledge domain

Physical domain of Production Decisional

Endogenous domain
Information In formation Infromation
mapper
Manpowe
Production
Planning
Machine Feedback and
Control
Material Correction System

Transform raw materials/Informa- Control physical sub-systems

tion into end Products/Services within constraints/targets

Figure 10.3 Representing Different Domains of Information and Knowledge in the Context of PPC
(adapted with modifications from: Enterprise Resource Planning by Shankar and Jaiswal,
Galgotia Publications, 1999)

10.5 STEPS IN PRODUCTION PLANNING AND CONTROL

It is the duty of the PPC department to ascertain if an order can be executed in the production department.
Once the capacity of the production system is sufficient to convert raw material into finished goods
PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION 131

as per the customer requirements, PPC department follows four-steps activities to accomplish production
on the shop floor. These activities are:
1. Routing
2. Scheduling
3. Dispatching, and
4. Follow-up or expediting.

10.5.1 Routing
It is a process of deciding the sequence of operations (or route) to be performed during the production
process. It determines:
(a) What work (operations) will be done on a product?
(b) Where (on which machine/dept.) these operations will be performed?
(c) How these operations will be performed?
(d) In which sequence the job (from raw material stage to finished goods stage) will move in the
plant?
Therefore, the main objective of routing is the selection of best and cheapest way to perform a
job. It depends upon:
(a) Type of available machines.
(b) Capacity of. each machine.
(c) Labour required for each machine.
(d) Availability of tools and other resources.
(e) Efficiency of employees.
(f) Types and quantities of the products to be manufactured.
(g) Department in which the production is to be carried out.
Procedure of Routing: Following steps are needed in routing:
(i) Conduct an analysis of the product to determine the part/components/sub-assemblies, required to
be produced.
(ii) Conduct an analysis to determine the material needed for the .product.
(iii) Determine the required manufacturing operation's and their sequence.
(iv) Determine the lot size (i.e., units of items to be manufactured in each lot of production or order)
to be produced (or purchased).
(v) Determine the scrap and rejections at each stage of production.
(vi) Estimate the cost of the product.
(vii) Prepare different forms for production control, such as: production order form, job-card, labour
card, inspection card, tool tickets, route sheet, move ticket, etc.
Route Sheets: It is a document with specific manufacturing sequence of operations. The precise
route, which must be followed, is given in the route sheet. A typical route sheet contains the following
information:
(a) Number and identification of work order.
(b) Symbol and/or identification of a part.
(c) Estimated number of pieces to be produced.
132 INDUSTRIAL ENGINEERING AND MANAGEMENT

(d) Number of parts in each lot.

(e) Qperations needed on the given part.
(f) Sequence in which these operations are performed.
(g) Machines or equipments to be used for each operation, and
(h) Estimates of set-up and run time per piece of production.
Different route sheets are needed for different parts. These may be used to determine the schedule
time for each production order. These serve as useful guiding document in the production process, as
the supervisor knows that after finishing a particular operation, the part will go to which department
and at what time. In essence, routing is the planning of what works are to be performed on the job,
and in what sequence these would be operational.
10.5.2 Scheduling and Loading
Scheduling involves fixing the priorities for different jobs and deciding the starting and finishing time
(or date) of each job. It also includes the scheduling of different materials, parts, machine, tools, equipments,
inspection, etc.
Main purpose of scheduling is to prepare a time-table indicating the time and rate of the production,
as indicated by starting and finishing time of each activity. The scheduling can be effective when it
utilizes the informational inputs, such as: existing work-load, lead time, manufacturing time, importance
of each job, due' date, priority rule to handle each part when there is a queue before an operational
facility. For example, some urgent works, which are called as rush orders, may have to be given priority
preference over already existing repeat orders. Scheduling must be in tune with the availability of machines
and facilities, material, labour, part drawing, process-sheet (or route sheet), etc. Scheduling is one of
the most important activities of the PPC as it determines the real activities on the shop-floor. A detailed
analysis of scheduling is presented in a separate chapter of this book. Scheduling activity involves the
following charts:
1. Master Production Schedule (MPS): It is the list of items indicating end products to be performed.
This contains item name (and code), quantities to be produced, and timing for the completion of
the production. It is based on the accurate estimations of product demand, which is normally available
from sales forecast for a given period. The MPS must consider the realistic assessment of the production
capacity, which determines whether the production of the demanded items is possible or not. Generally,
weekly or monthly breakdown of production is listed in MPS (Figure 10.4).
September '99 October '99

Week starting on 6 13 20 27 4 11 18

• Product # P6 70 100 350 10

Product # P8 40 80 10 50

Figure 10.4 MPS for Product P6 and P8 Showing Weekly Delivery Schedule in Number of•'Items
MPS is based on sales forecast, route sheet, loading chart, and promised delivery date of each product.
Operation Scheduling: It is designed to assign the time required to do operations on a given
machine or operational facility.
2. Machine Load Chart: It is a display of the available capacity, of a machine or work-station along
with information whether it is overloaded or underloaded in a particular time-period. This chart
is useful in efficient utilization of operational facilities.
PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION 133

3. Gantt Chart: It represents graphically on a time scale as to when certain operation would be
performed. It is also useful in recording the progress of the schedule. For example, a Gantt Chart
in Figure 10.5 shows the work already completed as on today (say on 4th October, 1999). Job
# P06 is complete, jobs # P07 and # P10 are partially over. Job # P08 has not yet started as
its starting date is 18th October, 1999.
T

Product Quantity Sept. '99 Oct. 99

6 13 20 27 4 II 18 25

# P06 5483

# P07 600 t'

# P08 6410

# PIO . 20

We are here today

Figure 10.5 A typical Gantt Chart Indicating Production 'Schedule for Different Products

10.5.3 Dispatching

Dispatching is "the selecting and sequencing of available jobs to be run at individual workstations I
and the assignment of those jobs to workers." A dispatch list is "a listing of manufacturing
orders in priority sequence. The dispatch list is usually communicated to the manufacturing
floor via hard copy or CRT display, and contains detailed information on priority, location,
quantity, and the capacity requirements of the manufacturing order by operation. Dispatch
lists are normally generated daily and oriented by work center." —APICS Dictionary

Dispatching starts with input as route sheet and schedule chart. It concerns itself with starting the
processes and operation of production. It triggers the starting of the production activity on the shop-
floor through the release of orders and instructions, that are based on pre-planned times and sequence
contained in route sheets and schedule charts.
Dispatching determines the person who will do the job. Work order and authorizations are issued
to perform the work according to a planned sequenCe, using prescribed tools and a time schedule. It
is the duty of the dispatching function to issue requisition for material and tools on a production order.
Dispatching is a process of translating production plan into output (action). This is because orders are
issued for the movement of material, parts, and tools to the work centers, and it also includes instructions
for the inspection and recording of the work.
Function of Dispatching
1. Collecting and issuing to work centre, all the concerned drawings, specifications, material list, job
tickets, route card requisition slip, tool card, etc.
2. Ensures that right material, tools, parts, jigs and fixtures, etc., are made available at right limp
and at right machines from operation to operation.
3. Issues authorization to start work in accordance with the predetermined date and time.
134 INDUSTRIAL ENGINEERING AND MANAGEMENT

4. Obtains inspection schedules and issues those to the inspection section.

5. Distributes machine loading and schedule charts, route sheets, identification tags, etc., to each produc-
tion and inspection stage.
6. Informing and updating progress report and keeping records for reference.
7. At the end of the production, ensures that all the drawings, tools, etc., reach at the proper place.
Common Forms used in Dispatching
1. Work Order Operation Ticket: It is the authorization to a department or employee to start work
on certain material. It serves as a record that production has been performed. It contains information
such as code number, description of parts, quantity, material, list of operation and allowed time
for these operators (Figure 10.6).
)
WORK ORDER
Job Number

Customer Name and Address Send to (if different)

i
i

L _1 L I
Date issued Customer's order No. and date Delivery date promised Carriage by

Items to be supplied

Quantity Drawing No. Description Unit price Total price

Special instructions Rs.

+Tax @%
Total

• Distribution

Catalogue items and specials

Stock Chief Chief Works Production •

Dispatch Accounts
control engineer inspector manager control

Figure 10.6 Works Order (a Specimen)

PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION 135

2. Time or Wage Payment Card: It is issued to record the report about the time used in performing
a work on the material by each operator. It contains information, which is needed in preparing
the wages of the operator.
3. Job Ticket or Move Ticket: It is the identification ticket, which moves with the job from operation
to operation. It acts like authorization for movement of material between operations.
4. Inspection Card: It is issued by inspection department for recording inspection report.
5. Tool, Gauges and Equipment Tickets: These are issued for the tool crib and gauge room so
that these equipments may be issued.
6. Store Receipt Note or Material Requisition Note: It is issued for receiving material from the
store. It works as an order to the store-keeper to issue the mentioned-material (Figure 10.7).

/ REQUISITION Drawing number Batch

Description Quantity

Operation Instructions

Quantity supplied: Storeman Rate Cost

Operator's number Time on Time off

/ JOB TICKET

Description
Drawing number Batch

Quantity

Operation Instructions, Jigs, Fixtures, etc. Inspection Work station

Quantity started: Quantity finished

STORES RECEIPT NOTE

Drawing number Batch
Description
Quantity
Inspection

Storeman

Quantity received: Date:

Figure 10.7 Requisition, Job Ticket and Stores Receipt Note

136 INDUSTRIAL ENGINEERING AND MANAGEMENT

ROUTE CARD Dra vimg //REQUISITION Drawing numbc Batch

nun ber Batch Description Quantity
Date Operation Instruction •
Description
ordered Quantity
Operation- Instructions, Jigs, Inspection Work station Quantity supplied: Storeman Rate Cod
Fixtures, etc.
00 Materials: •
Operator's number Time on Time off
00 Drawing number Batch
/10B TICKET
Description Qum City
Operation Instruction. Jig. Fixrurer. etc. ' Inspection Work station

Quantity started: Quantity finished

;

//STORES RECEIPT NOTE Drawing number Batch

Description Quantity
e Inspection

Storeman
Quantity received Date

Figure 10.8 Production Control Document Set.

10.5.4 Follow-up or Expediting or Progressing

It is the final stage of PPC. It is used for ensuring that the Work is carried out as per plans and
due-dates are met. The main objective is to arrest the deviations from the plan. The progress of the
production process is monitored. Another objective is to integrate different production activities to meet
the production target. Any deviation, disruption, or discrepancy from the plan is immediately attended,
for rectification.
Activities in Follow-up
1. Watching progress of production process.
2. Identification of delays, disruptions or discrepancies.
3. Physical control of work-in-progress through checking.
4. Expediting corrective measures.
5. Assistance in removing problems during deviations.
6. Coordination with other departments during operations for contingencies and maintenance, if
required.
7. Prepare list of material and tools, etc., which are in short supply.
8. Report any other production related problems, which need immediate attention by outside
agencies.

10.6 EFFECTIVENESS OF PPC

With the help of some indices, one can indirectly measure the effectiveness of PPC as to what way
the PPC is behaving. Table 10.2 contains some indirect measures.
PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION 137

Table 10.2 Some indices for Effectiveness of PPC

Aspect Index or Ratio Measure

Inventory Inventory Turnover Ratio Annual consumption/Annual inventory
(for raw material)

Inventory Turnover Ratio Annual sales/Average inventory

(for finished items) Average work-in-process/Total
production volume

Spare Parts Index Value of spare parts/Value of capital goods

Out of Stock Index Number of times stockout occurs/Number
of times requisitioned
Delivery Delivery Index . On schedule deliveries to customers/Total
number of deliveries
Machine Machine Utilization Ratio Total running time in hour/Total shift hours
of working

Maintenance Maintenance Cost Ratio Total maintenance cost/Total annual sales

Equipment Availability Equipment running time/Total available time
Manpower Manpower Efficiency Ratio Total man-hours spent on job/Total man-hours
allowed on the job

REVIEW QUESTIONS

10.1 Define PPC and identify its objectives.

10.2 What do you understand by production planning and control? Discuss its main elements or functions.
10.3 What are the four basic functions which constitute production planning and control?
10.4 State the activities involved in the production planning and control function under ten convenient points.
4.1

10.5 What do you mean by loading a production set-up? List five steps in carrying out loading over a sequence
of operations.
10.6 Write notes on the following:
(a) Route Card
(b) Loading Chart
(c) Routing
(d) Scheduling
(e) Dispatching
(f) Master Schedule
(g) Expediting
(h) Material Requisition.
10.7 Define routing and .scheduling. Discuss them for: (i) Continuous, (ii) Assembly, (iii) Job order industry.
10.8 You own a factory and make steel furniture as and when orders are received from customers. Describe the
procedure you would follow for planning and control of production in your factory.
10.9 Define some measures to judge the effectiveness of PPC.
138 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

1. APICS Dictionary, 7th ed., APICS Educational and Research Foundation, American Production and Inventory
Control Society. Inc., Falls Church, VA., 1992.
2. APICS Inventory Management Certification Review Course, American Production and Inventory Control Society.
Inc. Falls Church, VA., 1987.
3. APICS Systems and Technologies Certification Review Course, American Production and Inventory Control
Society. Inc., Falls Church, VA., 1987.
4. Batty, J., Industrial Administration and Management, McDonald & Evans, London, 1979.
5. Eilon, Samuel, Essentials of Production Planning and Control, Universal Book Corp., Bombay, 1985.
6. Eliyahu M. Goldratt and Jeff Cox, The Goal, North River Press Great Barrington, MA, 1984.
7. Fearon, Harold, E., Fundamentals of Production Operations Management; West Publishing Co., Cinnicati,
1983.
The Goal, 2nd ed., Gower, Aldershot, 1993.
8. Gikdratt E.M. and Cox, J.,
9. Goldratt and Robert E. Fox, The Race, North River Press, Croton-on-Hudson, New York, 1986.
10. Landy, Thomas, M., Productidn Planning and Control, McGraw Hill, New York, 1980.
11. National Productivity Council, Production Planning and Control.. A Supervisor's Guide, NPC, New Delhi,
1981.
12. The Oliver Wight ABCD Checklist for Operational Excellence, 4th ed. Oliver, Wight Publication. Inc., Essex
Junction VT, 1993. •
13. Thomas J. Peters and Robert H. Waterman, In Search of Excellence, Harper & Row, New York, 1982.
14. Vollmann, Berry and Whybark, Manufacturing Planning and Control Systems, 2nd ed., Business One Irwin,
Homewood, IL, 1988.
15. Walter E. Goddard, Just-in-Time, Surviving by Breaking Tradition, The Oliver Wight Companies, Essex Junction,
VT, 1986.
 11
LINEAR PROGRAMMING

11.1 INTRODUCTION
Linear programming (LP) is an optimization problem which is used for the following:
(i) It attempts to maximize or minimize a linear function of decision variables.
(ii) The values of the decision variables are selected in such a way that they satisfy a set of constraints.
Every constraint should be a linear function in the form of an equation or a linear inequality.
The function, which is maximized (or minimized), is termed as objective function. The restrictions,
which are in the form of equations or inequalities, are termed as constraints.
The objective functions and constraints are linear. For example, an objective function 5x1 x 3x2+ 105x3
is a linear function but 5x1 + 3x1 x2 +.1054 is not a linear function.
The constraints in the linear programming problems are expressed in the form of linear inequalities
or equations. Some examples are:
5x1 + 3x2 > 125
18x1. — x2 = 106
x1 _ 165
However, x1 x2 15 is not a linear inequality.

11.2 DEFINITION OF LINEAR PROGRAMMING

Linear programming is a technique based on mathematical theory for specifying the ways to use the
limited resources or constraints of a system to obtain a particular objective such as highest profit, least
cost, least lime, etc., when these resources have alternative uses.
This technique has following characteristics:
1. It provides the best course of action which the management should take under given condition.
2. It converts a physical system into a mathematical model. Effects of change in some parameters
may also be analyzed.
3. Sensitivity analysis regarding variation of system parameters on the optimal solution may also be
done.
4. The technique may be extended to multiple-objective-problem (in goal programming) or probabilistic
paranneter problems (in chance constrained programming).
140 INDUSTRIAL ENGINEERING AND MANAGEMENT

Before understanding the methods to solve the linear programming problem (LPP), these definitions
are needed:
Decision Variables: In a LPP model, the decision variable means the variable whose quantitative
values are required be found, so as to minimize (or maximize) the objective function.
Objective Function: The decision maker wants to maximize a function such as revenue/profit function,
or minimize a function such as cost function, under some restrictions. Function, which is maximized
or minimized is termed as objective function.
Constraint: The restrictions, which are expressed in the form of an equation or inequality (generally
assigned with sign < or are termed as constraints.
Feasible Solution: A set of values of decision variables, which satisfies the constraints set, contributes
to the feasible solution. There may be many feasible solutions for a LP problem and all obviously are
not the best solution.
Optimum Solution: An optimum solution of an LPP is that set of feasible solution, which satisfies
the maximization (or minimization) of the objective function. In case of maximization problem, the objective
function needs to be maximized. However, in case of minimization problem, objective function is minimized.

11.2.1 General Formulation of Linear Programming

Problem A LPP may be expressed as:
Optimize (i.e., minimize or maximize) objective function:
Z= ECj x; -co
Subject to the constraints:

E x j (` or `=' or b,: for all i; i = 1, 2, ... m ...(2)

/=I
0; j = 1, 2, ..., n (non-negativity constraints) ...(3)
Here, x. = jth decision variable about which the decision maker is interested.
C. = Unit contribution to the jth decision variable in the objective function.
au = Exchange coefficient of jth variable in the ith constraint set.
b. = Requirement or availability of ith constraints
i = Constraint number; i = 1, 2, ..., m.
j = Decision variable number; j = 1, 2, ..., n.
or `=' or > ') means that either of the three notations is required.
< is called as less than or equal to
> is called as greater than or equal to
= is called as equal to

11.2.2 How to Convert a Maximization Problem into a Minimization Problem?

The maximization objective function is equivalent to a minimization objective function except with chan-
ged sign.
Thus, Maximize Z = E c. x.J
LINEAR PROGRAMMING 141

is equivalent to Minimize Z= E
i=1
Similarly, a minimization problem may be transformed into a maximization problem by changing
the sign of the decision coefficients.
Thus, Minimize Zi = E c;
is equivalent to Maximize z, = E -c;
11.2.3 How to deal with equal to (=) sign?
The equal to (=) sign in a constraint may be handled by adopting two constraint sets with > and
signs.
For example: 5x1 + 3x2 = 24
Its equivalent is: 5x1 + 3x2 24
and 5x1 + 3x2 <- 24
The linear programming problem may be solved by two methods:
1. Graphical Method
2. Simplex Method.
The graphical method to solve LPP is useful when there are only two decision variables. This
is because more than two coordinates are difficult to be represented on a graph paper. Simplex technique
can handle any number of variables.
We will consider the graphical method and some aspects of simplex method in this Chapter.

11.3 GRAPHICAL METHOD

Following steps are adopted to solve a two variable LPP through graphical method:
Step 1: Formulate the problem in standard LPP form. It should have a linear objective function
of maximization (or minimization) type. There may be as many linear constraints but decision variables
should not exceed two.
Step 2: Treat each constraint as a line equation by assuming > or < signs as equal to sign, Plot
them on a graph paper.
Step 3: Based on the original sign or of the constraint, mark the feasible region in space.
Step 4: Identify the corner points (or intersection of constraints, represented by lines) of the feasible
region. Also include the two intersections on two axes by the feasible region. All these points constitute
a set of possible solution, as optimal solution always lies on the corner points.
Step 5: For the objective function, draw straight line, called as isoprofit/isocost line. This may
be done by equating the objective function to a very small profit figure or a high cost figure depending
upon the nature' of the objective function, i.e., maximization or minimization respectively.
Step 6: Draw parallel lines to the isoprofit line in maximization problem: moving away from the
origin. Stop only when there is only one point_ in the feasible region, which is also on the isoprofit
line.
For the minimization problem, draw parallel lines to the isocost line and move towards the origin.
Stop when there is only, one point in the feasible ,region which is also on the isocost line. ,
142 INDUSTRIAL ENGINEERING AND MANAGEMENT

Step This point represents optimal solution. From the optimal solution point, draw perpendicular
lines on both axes (X and Y axes). The point of intersection on the axis will give the values of two
variables which give optimal solution.

11.3.1 Characteristics of Corner Points

The corner points are points where lines representing constraints or axes intersect with each other. In
other words, lines joining corner points enclose the feasible region. Therefore, Step 5 and Step 6 may
also be undertaken as follows:
Step 5 (a): Calculate the value of objective function at each 'possible solution (i.e., corner point
of feasible region). Find that corner point, which satisfies the objective of maximization Or minimization
as the. case may be. This is, the optimum solution point.
Step 6 (a): Draw a line with slope, same as that of objective function, and passing through the
optimum solution point.
Go to Step 7.
Example 11.1 A company is manufacturing two different types of products, A and B. Each product
has to be processed in 3 different departmentscasting, machining and finally quality inspection. The
capacity of the departments is limited to 35 hrs., 32 hrs. and 24 hrs. per week respectively.. Product
A requires 7 hrs. in casting department, 8 hrs. in machining shop and 4 hrs. in inspection, whereas
product B requires 5 hrs.,' 4 hrs. and 6 hrs. respectively in each shop. The profit contribution for a
unit prod,uct of A and B is Rs. 40 and Rs. 30 respectiVely.
(i) Formulate the problem.
(ii)-Find the optimal quantities of product A and B.
(iii) What is total profit contribution?
Solution: Processing time by product and department:

Department Product Capacity

per week
A B

Casting 7 5 35
Machining 8 4 32
Inspection 4 6 24

'Profit contribution Rs. 40/- Rs. 30/-

per unit
Formulation of problem:
7x + 5y- 35 —(1)
8x + 4y 5 32 ...(2)
4x + 6y 24 —(3)
Also, x>0
y >0
and objective function, to be maximized:
Z = 40x + 30y
Refer to Figures 11.1 and 11.2, for the graphical solution. Optimal profit (maximum) is at point
N; when (x, y) is (3, 2). Hence, 3 units of A and 2 units of B should be manufactured for which the
profit is Rs. 180.
LINEAR PROGRAMMING 143

Shaded region represents Shaded region represents

constraint (1) constraint (2)
3, 7x + 5y <35 8x+4y<32
0 x,y0

6
X

10 —

y `, 9 —
S ‘5

lsocost lines, parallel to

7— each other and moving
away from origin
v
6— Q/, •

'‘ 5— 9t. s,
Shaded region represents
constraint (3) • `—vo
4—, 90
4x+ 6y<24
'3, • , jg,
x,yZ0
5 • .1-5
• 5
5
vo ‘5 ‘• 2 — ‘5 t) 5,
.1- • • 5 s,
•2 , • .k ,
0. , ' N '
.1 , 1
N
•. "

0
0 0s •\1 2 '53' 4 5 6 7 8
X •• •5
• •
x •

Figure 11.1 Representation of Constraints and Objective Function

11.4 MAXIMIZATION CASE (GRAPHICAL SOLUTION)

Let us understand this by an example.
Example 11.2 A company produces two products, A and B, and has a total production capacity
of 9 units per day, A and B requiring the same, production capacity. The company has a permanent
contract to supply 2 units of A and at least 3 units of B per day to another company. Each unit of
A requires 20 machine hours production time and each unit of B requires 50 machine hours of production
time. The daily maximum possible number of machine hours is 360. The company makes a profit of
Rs. 80 per unit of A and Rs. 120 per unit of B.
It is required to determine the production schedule for maximum profit.
Solution: Formulation in Standard LP Form
Maximize total profit: Z = 80x + 120y
Subject to: , x + y < 9 Production capacity constraint ,
144 INDUSTRIAL ENGINEERING AND MANAGEMENT

Points Objective function (z = 40x + 30)')

M(0, 4) 0 + 30 x 4 = 120

Objective function N(3, 2) 40 x 3 + 30 x 2 = 180

P (4, 0) 40 x 4+0=160
(3) 0(0,0) 0+0=0

Opitmal profit contribution at N

= 40x + 30j,
Combined
feasible region = 40 x 3 + 30 x 2 =180

IA*1
X

Figure 11.2 Composite Representation of Graphical Solution

x 2I
Supply constraint
y ?_ 3
20x + 50y 360 Machine hours constraint
x1, x2 0 Non-negativity constraints
Here, x = Number of units of product A
y = Number of units of product B.

x=

12 —

10 —

c
1‘13
v_c
ookes
e,.zs‘ A (3' 61
6
(Lb'

4—
1
y=3
2-

0 2 6 8 10 12 14 16 18 20

Figure 11.3 Solution of Example 11.2

LINEAR PROGRAMMING 145

The constraint sets are plotted in the above graph. The shaded portion represents the feasible region.
The corner points are: A, B, C and D. Their coordinates are: (3, 6), (6, 3), (2, 3) and (2, 6.4) respectively:
Value of objective function at the corner points would be:

Corner Point Objective Function (Z = 80x + 120y)

A (3, 6) 80 x 3 + 120 x 6 = 960 <-
B (6, 3) 80 x 6 + 120 x 3 = 840
C (2. 3) 80 x 2 + 120 x 3 = 520
D (2, 6.4) 80 x 2 + 120 x 6.4 = 928
Since point A gives maximum value of objective function, this is the optimum point. Thus, 3 units
of A (i.e., x variable) and 6 units of B (i.e., y variable) will give maximum profit, which is Rs. 960.
Problem 11.3 If the total cost of the production of component A is Rs. 250 per unit and component
B is Rs. 520 per unit, and the objective is to minimize total production cost in the above problem,
what product mix would you suggest?
Solution: Refer to Figure 11.3 in the previous problem. The feasible region is the same. The new
objective function is:
Minimize Z = 250x + 500y
Subject to x + y < 9 Production constraint
x>_2
y 3 Supply constraints

20x + 50y < 360 Machine hour constraint

x>_0
Non-negativity constraints
y 0j
The corner points of the feasible region give the following values of objective function:

Point (x, y) Objective Function (Z = 250x + 500y)

A (3, 6) 250 x 3 + 500 x 6 = 3750
B (6, 3) 250 x 6 + 500 x 3 = 3000
C (2, 3) 250 x 2 + 500 x 3 = 2000 <-
D (2, 6.4) 250 x 2 + 500 x 6.4 = 3700
Point C gives minimum value of the objective function which is Rs. 2,000. Therefore, produce
6 units of A and 3 units of B.

11.5 SENSITIVITY ANALYSIS IN GRAPHICAL SOLUTION

Sometimes we are interested in the sensitivity of optimum solution to a small change in the constraints
and other estimated values. It is also possible that the estimates in costs, profits, processing time or
machine capacity are not accurate. When we model an LP problem, these deterministic estimates are
used. Sensitivity analysis may be useful in analysing small change in these estimates.
Problem 11.4 Let us consider a problem of profit maximization subjected to two constraints of
machining capacity and manpower capacity:
Objective function (z) = x + y (Maximi;g1
146 INDUSTRIAL ENGINEERING AND MANAGEMENT

600
Subject to x + 2y < 400 (Machine capacity)
3x + y 600 (Manpower capacity)
x, y>_0. 400 i L•=.
+ y = 160 + 120
Solution: Expressing constraints as: = 280
x + 2y + M = 400
3x + y + N = 600 200 (x*, y* = 160, 120)

or, x = 400 — 2y — M
1
and, x=3 — (600 — y — N)= 200 — 0.33y — 0.33N
0 200 400 600 800
x
Hence, 400 — 2y — M = 200 — 0.33y — 0.33N
Figure 11.4
or, 400 — M — 200 + 0.33N = 2y — 0.33y

or, y= (200 — M + 0.33N)

1.67
=119.76 — 0.6M + 0.197N
Similarly, x = 400 — 2.(119.76 — 0.67M + 0.197N) — M
= 160.33 — 0.20M — 0.4N
Putting these values of x and y in the objective function, we get:
Z = 160.33 — 0.2M — 0.4A, +119.76 — 0.6M + 0.197N
= 280 — 0.04M — 0.20N
Let us analyse the above expression.

11.6 CONCEPT OF SLACK VARIABLE

In the above expression of profit, if there is one unit of machine capacity, which is unused, the profit
is affected by Rs. 0.04, which is the coefficient of M. Similarly, if one unit of manpower is unused,
the loss in profit margin is Rs. 0.20. These ideal capacity variables (M and N) are called as slack variables.

11.7 CONCEPT OF SHADOW PRICE

Consider the last expression for Z and analyse the coefficients of slack variables, M and N. If one unit
of extra machine capacity is available, the contribution to the profit margin would be Rs. 0.04, which
is coefficient of M. Similarly, one unit of extra manpower capacity has contribution of Rs. 0.20 units
on profit. These coefficients are termed as shadow price. As explained, shadow price of a constraint
provides marginal improvement or loss in the objective function by a marginal change in the constraint.
Shadow price could be important for the decision makers in many ways. We observe that many
times marginal increase or decrease in some estimate is not difficult in real life. For example, the budget
constraint for the model is Rs. 2 lakhs. For the management, it may not be difficult to increase it by
1%, i.e., Rs. 2,00Q. But before doing so, they may like to know how it may affect their profit. Shadow
price may provide answer to it. Similarly, machine capacity, plant capacity, supplier capacity, etc., may
be marginally altered with little effort by an industrial engineer or management. Shadow price may give
an insight into how it will get reflected in the objective function. As a rule, the effort should be to
increase the capacity (or exploit the flexibility) of those constraints, which have larger.shadow price.
Thus, management may take prioritized effort in increasing the profit (or decreasing the cost) by looking
into shadow price of constraints.
LINEAR PROGRAMMING 147

Many available softwares for LP problems such as, 'UNDO, LINGO, etc., provide shadow price
for each constraint. Larger problems, with many variables and constraints, may be handled effectively
by these softwares.
UNDO and LINGO package may be downloaded from the interne site: www.lindo.com. These softwares
are very popular for solving bigger problems having large number of variables and constraints.

11.8 MULTIPLE OPTIMUM SOLUTION

There may be situations when an LPP gives multiple solutions. Consider the following problem:
Problem 11.5 Maximize, Z = I.5x + y
Subject to 3x + 2y <18
x<5
y 6
x, Y > 0.
Solution: This problem is solved graphically in this Figure 11.5. It is noted that the objective function
line is parallel to AB on the feasible region, ODABCO. Therefore, any point on line segment AB will
provide the maximum value of objective function, which is 9. This is a case of multiple optimum solutions.
9
8
7 3.v + 2y < 18 '

Objective function Z = 1.5x +y

(Parallel to Ali) •
3 ...----
11

I<0
°441k x 5
0 I 2\ 5 9 10

Figure 11.5

11.9 INFEASIBLE SOLUTION

If there is an inconsistency between two constraints, an LPP gives no feasible solution. Let us consider
the following problem:
Problem 11.6 Maximize, Z = 1.5x + y
Subject to, 5x + 4y 20
3x + 2y 5_6
x, y 0.
Solution: In these problems, there is no common feasible region by two constraints. Therefore,
there can never be a feasible solution for such problems "(Figure 11.6).
148 INDUSTRIAL ENGINEERING AND MANAGEMENT

Figure 11.6

11.10 UNBOUNDED PROBLEM

Generally, a definite feasible region is provided by the set of constraints. It is a bounded problem as
there is always an upper (or lower) bound of the objective function. In some LPP, the feasible area
is, however, open-ended or unbounded. Let us consider the following problem:
Problem 11.7 Maximize, Z = 1.5x + y
Subject to, x 5_ 3
4x + 5y 20
x, y ?_ 0.
Solution:

Unbound feasible region

x <3

4x+5y>20

0 2'
x
Figure 11.7
LINEAR PROGRAMMING 149

Solution: The reason for an unbound problem is incorrect formulation of an LPP. There is no single
feasible solution for an unbound problem (Figure 11.7).

11.11 SIMPLEX METHOD TO SOLVE LPP

Linear programming problem (LPP) is solved by simplex method. When the decision variable's are more
than two, the graphical technique becomes inadequate. George Dantzig developed it in 1947 for an assignment
with US Air Force. Simplex method is based on a property that the optimal solution of an LPP, if it
exists, can always be obtained in one of the basic feasible solutions.
Before using the simplex method, the constraints need little modification so that we get a standard
form of) equity. Each constraint of the LPP is augmented with additional variable(s) to convert it into
an equation; i.e., > and < sign is to be replaced by a = sign.
Example Constraint 5x + 4y < 20
becomes 5x + 4y + S = 20.
Here, Si is an additional variable and we call it as Slack Variable. It is the difference by which
(5x + 4y) fall short of 50.
Example Constraint 20x + 30y > 600
becomes. 20x + 30y — S2 = 600.
Here, S2 is the Suiplus Variable, which is subtracted so that the excess of (20x + 3y) is consumed
over 600.
However, an extra variable, called as an artificial variable, must be added. Therefore, the constraints
of "greater than type", i.e., with > sign should be augmented with a surplus variable and an artificial
(slack) variable with equality sign. Therefore, the constraint 20x + 30y 600 would become
20x + 30y — 52 + A2 = 600
Why is the artificial variable added? The reason is that we do not want to violate the non-negativity
constraints. The simplex starts with an initial solution that all real variables are equal to zero. What
happens when we consider 20x + 30y — S2 = 600? Putting x and y as zero, we get, S2 = —600, which
violates non-negativity constraint.
Now, look at the augmented constraint 20x + 30y — S2 + A2 = 600. By putting x and y as zero;
S2 is zero and A2 is 600. Therefore, non-negativity requirement of variables may be maintained.

11.11.1 Augmentation of Objective Function (OF)

The objective function must contain all the variables, which appear in the constraints. Therefore, slack,
surplus and the artificial variables are added in the objective function as follows:

Constraint Type Add &towing

In the constraint In O.F.
+S 0.S.
—S + A Max OS — MA
Min OS — MA
+A Max —MA or Min + MA
Here, M is a very large number.
We will illustrate this with examples to follow.
150 INDUSTRIAL ENGINEERING AND MANAGEMENT

Simplex Table

Objective Replacement
Function . Ratio
Coefficient ->
C,. Cr C 2 — Cn 0 0 ... 0
•
Basic variable Quantity or Decision variable Slack variable
CSI (Program Resource •
variable) in RHS
bi xI X2 ... Xn S1 S 2 "• Sm

0 8 11+ I bt a ll a 12 — a In 1 0 0
0 85+2 b2 a 2I a 22 ". a2,, 0 1 0

,
' •

0
'CH+,n bm am I ani, ... am 0 0 ... 1

Opportunity Z1 = E Cs; au 0 0 0 ... 0 0 ... 0

cost row (Zi)

Simplex criteria
row (C. - Z)
I .1 CI C2 C„ 0 0 0
(Net Evaluation Row—NER) -4

Example 11.8 A company is manufacturing two different types of products, A and B. Each product
has to be processed in 3 different departments—casting, machining and finally inspection. The capacity
of 3 departments is limited to 35 hrs., 32 hrs. and 24 hrs. per week, respectively. Product A, requires
7 hrs. in casting department, 8 hrs. in machining shop and 4 hrs. in inspection whereas product B
requires 5 hrs, 4 his. and 6 hrs. in respective shops. The profit contributed for a unit product of A
and B is Rs. 30 and Rs. 40, respectively.
(i) Formulate the problem.
(ii) Find out the optimal quantities of product A and B.
Solution: Processing time by size and department as shown in table given below:
Processing time by Size and Department

Department Product Capacity per

A B week

Casting 7 5 35
Machining 8 4 32
Inspection 4 6 24
Profit contribution per unit Rs. 30/- Rs. 40/-
LINEAR PROGRAMMING 151

Formulation of problem
7x + 5y 35
8x + 4y < 32
•4x + 6y < 24
Also; x>0
y>0
and; Objective Function = 30x + lOy (To maximize)
Step 1: Removal of inequality sign
7x + 5y + Si = 35
'8x + 4y + S2 = 32
4x + 6y + S3 = 24
where, Si , S2 and S3 are slack variables, which are like imaginary production.
Step 2: Revise objective function
Revised O.F. = 30x + 40y + OS + 0S2 + 0S3
Subjected to:
7x+5y+151 +0S2 +053 = 35
8x + 4y + OS1 +152 +0S3 = 32
4x + 6y + 0S1 + 0S2 + 1S3 = 24
Step 3: Its description is given in Table 11.1.
Table 11.1

Coefficient_ 30 40 . 0 0 0 Replacement
Program OF Quantity Ratio

0 35 •7 5 35/5 = 7
S2 0 32 8 4 0 1 32/4 = 8
S3 0 24 24/6 = 4

Net Evaluation Row: 30 40 0

Key column Key number Key row

(incoming variable) (Outgoing variable)

11.11.2 Explanations and Rules in Simplex

(i) Calculation of NER: To get a number in the NER under any column, multiply the entries in that
column by the corresponding numbers in the objective function column and add the products. Then
subtract this sum from the number listed in the objective function row at the top of this column.
(a) For maximization problem: Any positive number in the NER is indicative of the presence
of positive opportunity cost and implies that a better program can be designed.
(b) For minimization problem: Any negative number in the NER is indicative of the presence
of a better solution.
152 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Identification of key column

For maximization problem: The column, which has the largest positive opportunity cost, forms
the key column.
For minimization problem: The column, which has the largest negative net-evaluation-row entry,
is the key column.
(iii) Identification of key row: Divide the entries under the "Quantity" column by the corresponding
non-negative entries of the key column, and compare these ratios (called- as Replacement Ratio).
The row in which the smallest replacement ratio falls is the key row.
(iv) Identification of key number: The number which lies at the intersection of the key row and the
key column of a given table is called as the key number.
(v) Transformation of key row in the second table: Divide all the numbers in the key row by the
key number.
(vi) Transformation of non-key row: Subtract from the old row number (in each column) the product
of the corresponding key-row number and the corresponding fixed-ratio formed by dividing the
old row number in the key column by the key number:
Corresponding Corresponding
New row number = Old row number -(number in x fixed
key row ratio
Old row number in key column
where, Fixed ratio =
Key number
Application of Simplex approach in Table 11.1: We will continue now from the end of Table 11.2.
Table 11.2

Program Profit Quantity 30 . 40 0 0 0

per unit x y S, S2 S3

SI 0 (35 - 24 xl (7 -4x 5) (5 -6x-

5) 0 -0) (0 _ 0) 0-1x-
5
6 6 6 6
4 4
S2 0 (32- 24 x-4-) (8- 4x 1 (4-6x-) (0 - 0) (1 - 0) 0-Ix-
6 6 6 6
4 1
y 40 4 1 0 0
-
6 -
6

In simplified form
Profit Quantity 30 40 0 0 0 Replacement
Program per unit x y Si S2 S3 Ratio
II -5 15 45
S1 0 15 0 0 —x3=—
—
3 6 11 11
16 -4 6
S2 0 16 0 0 1 I x3=3
3 6 16
4 I 4
y 40 4 1 0 0 -x 6 = 6
-6 -6 4
10 -20
Net evaluation row: 0 0 0
3
LINEAR PROGRAMMING 153

Table 11.3

Program Profit Quantity 30 40 0 0 0

per unit x y S1 S2 S3

rr 3 [1 1 16 1 1 3
S1 0 [15 -16 X 11 • 0-0 1 -0 1
0 -1.1- --5-+ 4 • 1 1
--
3 16] 3---3-..-i16] 16 6 6 10
[1 31 3 -4 3
X 30 [16 x 3 00 1x
16]
— 36 x 16,1 16 6 I6
i4 16 11 1 4.1 . 1
Y 40 (4 -16 x 4 x 3 1 [1 -0] [0 _ 0] 0-1x-
6 16) L6 - 3 8] - 8 6 6 i

In simplified form

Program Profit Quantity 30 40 0 0 0

per unit x S3

-11 -3
Si 0 4 0 0 1
16 8
3 -1
X 30 3 1 •0 0
16 8
-1 1
Y 40 2 0 1
8
-5 -25
Net evaluation row: 0 0 0
8 4
Since all NER are either zero or negative, we have reached at the optimal solution.
Hence, we have optimal solution:
X = 3 units
Y = 2 units
and, Total profit contribution:
Z = 10x + 40y
=30x3+40x 2
= 90 + 80
= Rs. 170
Thus, 3 units of product A and 2 units of product B will give the optimal allocation of resources.
For this, the minimum cost is Rs. 170.
MAXIMIZATION CASE
The maximization LPP for ii variables and in constraints is written as the following:
max Z = E cj xi
1=1

Subjected to xi
i=1
for i, i = 1, 2, ..., in
xi >_0; j= 1,2,..., n
154 INDUSTRIAL ENGINEERING AND MANAGEMENT

Using slack variable, we add in slack variables; one for each constraint. Thus, the revised form
of standard LPP is:
II In

max Z = E E OS,
J=1 1=1
Subject to E a1./ x• + S• = b.
i=1
for all i, i = 1, 2, ..., m
and, xj 0 for all j, j= 1, 2„ ..., in
0 for all i, = 1, 2, ...,
Example 11.8 Minimization Problem.
Minimize Z = 30x .+ 40y
Subject to 7x + Sy 35
8x + 4y > 32
4x -F 6y > 24
x, y 0
Solution: Step 1: Formulation: Already done above.
Step 2: Removal of inequality sign
7x+5y-1S1 +0S2 +0S3 +1A1 +0A2 +0A3 = 35
' 8x + 4y + OS, -1S2 + 053 +0A1 +1A2 + 0A3 = 32
4x 4.: 6y + OS, +052 -:1S3 +04 +0A2 +1A3 .= 24
Step 3: Revising objective function (OF)
Revised O.F. = 30x + 40y + OS, + 0S2 + 0S3 + MAI + MA2 + MA3
where, SI , S2, arid S3) are slack variables and A1, A2, and A3 are artificial slack variables.
The artificial slack variables are attached to an extremely large cost coefficient M. We do so, as
these variables can never enter into the optimal solution. Note that the column, which has largest negative
value of NER, is the key row (as this is a minimization problem).
Step 4: (Its detail is in Table 11.4).
Table 11.4

30 40 0 0 0 M M M
Program Coeff. O.F. Quantity x y S, S2 S3 A, A2 A3
A,
Al
35
7
5
—I
35
0 0 I 0 0 =5
7
32
A, M 32 8 4 0 —1 0 0 I 0 =4'i
8
24
Mr 24 4 6 0 0 —1 0 0 I —— 6
4
NER: (30-19M) (40— I5M) M M 0 0 0
LINEAR PROGRAMMING 155

30 40 0 0 0 M M M
Program Coeff. O.F. Quantity x y S, S2 S3 Ai A2 A3

3 7 . —7 7 14
A, 7 0 —1 0 1 0 —x 2 = --- = 4.661
2 8 8 3 3
1 —1 1 4
X 30 4 1 0 0 0 —x2=8
2 8 —
8 1
1 —1 8
A3 • M 8 0 4 0 —1 0 1 — = 24
2 2 4

19 •
NER: 0 (25 — M) Al (15 1 A4)114 0 (— M —15
—
2 —4 8 8

Table 11.5
(Revising of Second Program)

30 40 0 0 0 M M M
Program Cost per unit Quantity x y S1 S2 S3 Al A2 A3

11 +3 —11 —3 64
A 4 0 0 —1 1
16 8 16 8 11
—3 +1 3 —1
X 30 3 I 0 0 0 —164
16 8 16 8
—1 —1 1
Y 40 2 0 I 0 0 16
8 4 8 4

-11 —3 5) (27 _ 5) (1 1 25)

NER: 0 0 M M+ ) 8 M+ 2 0 M_
16 8
8 4 16 M 8) 8 4)

Table 11.6
(Revising of Third Program)

30 40 0 0 0 M M M
Program Cost Quantity x y Si • S2 S3 Al A2 A3
per unit

64 —16 6 16 —6
Si 0 0
I1 11 11 I I 11
45 —3 5 3 5
30 1 0 0 0
11 II 22 II 22
14 —7 —2 7
Y 40 0 1 0 0
11 II 22 11 22

90 80 —5x30+7 x 40 10 130
NER: 0 0 0 Al M M
11 11 22 II 22
10 130
.— =
11 22
156 INDUSTRIAL ENGINEERING AND MANAGEMENT

Since all NER are positive or zero (note that, as M is very high number, NER for A2 and A3 are
positive), the minimization problem is optimum now.
45 14
Hence, x = — ; and y = —
11 11
Objective function Z= 30x + 40y
45 14
= 30 x — + 40 x —
11 11
=173.64.

REVIEW QUESTIONS

11.1 What are the different types of problems that can be solved using linear programming approach? Give five
examples.
11.2 Define and explain the following terms used in a linear programming problem:
(i) Objective function, (ii) Constraint, (iii) Feasible solution, (iv) Optimal solution, and (v) Decision variables.
11.3 Find the values of decision variables, x and y that maximize:
Z= 4x + 1 Oy
Subject to the conditions:
0 s x S. 400
0 s y _s 300
x + y s 600
[Ans: x = y = 300].
11.4 Give a general mathematical formulation for a linear programming problem. Explain all terms.
11.5 Explain the steps involved in a graphical method to solve a linear programming problem. What are the limitations
of this approach?
11.6 Give examples of following problems:
Unbound problem, (ii) Infeasible problem, (iii) Problem with multiple solution.
11.7 Explain the concept of shadow price and slack variable in linear programming.
11.8 What do you understand by sensitivity analysis in a linear program? Give example and explain.
11.9 Solve following LP problem:
Maximize: Z = 20x + 10y
Subject to: 5x + 4y S 24
2x + 5y S 13
x, y 0
Use sensitivity analysis also.
11.10 Solve the following problem, using graphical method:
(a) Minimize Z = 12x + 9y
Subject to x < 10
3 5_ y .5. 8
2.5x + y > 10
4x + 3y > 18
x, y > 0
LINEAR PROGRAMMING 157

(b) Solve (a) above except objective function is: Z = 12x + 3y

(c) Solve (a) above, except in place of constraint: 4x + 3y 18; use 4x + 3y 5_ 18
(d) Solve (a) above, except in place of constraint: 3 5 y 5 8; use y 3.
(e) Solve (d) above, except in place of objective function: Minimize
Z = 12x + 9y; use, Maximize Z = 12x + 9y.

11.11 Maximize: z = 2x + 3y
ST x + y <1
3x + y <4
x, y>_0
[Ans: z = 3].

11.12 Maximize: z = —x + 2y
ST —x + 3y 5 10
x+y<6
x Y <2
x, y 0
[Ans: (0, 10/3), z = 20/3].
11.13 Minimize: + => 4x + 2y
ST x 22yz
3x + y 3
4x + 3y > 6
x, y 0
[Ans: (2.0), z = 8].
11.14 Maximize: z = 2x1 + x2
ST 3x1 2x., <12
x1 + 2r, < 6
2x1 + 3x, 5 12
x1 , x2 > 0
[Ans: (4, 0); z = 8].
11.15 Maximize: z=x+y
ST —2x1 + x2 <
2
x1 + x2 < 3
x1, x2 > 0
[Ans: z = 3].

11.16 Minimize: z = 2x1 + 3x2

ST x i + x2
10x1 + x2 5
x + lOr2 >
x1, x2 0
[Ans: (1, 0), z = 2].

11.17 Minimize: z = 3x + 2y
ST —2x + 3y < 9
158 INDUSTRIAL ENGINEERING AND MANAGEMENT

x - 5y 20
x, y > 0
[Ans: Infeasible].
11.18 Maximize: z = 4x + ty
ST x +y>
-2x + y <
x, y < 0
[Ans: Unbound].
11.19 Maximize: z = 5x + 7y
Subject to: x+y <4
3x + 8)' < 24
10x + 7y 5, 35
x, y 0
[Ans: z = 24.8 at (8/5, 12/5)].
11.20 Minimize: z = 3x + 5y
ST x + 3y 3
x +y>2
x, y 0
[Ans: (3/2, 1/2), z = 7].
11.21 Maximize: z = 3x + 4y
x - y 0
-x + 2y < 2
Y z2
[Ans: Unbound

REFERENCES
1. Budnick, F.S. Mc Leavey, D and Mojena R., 1996, Principles-of Operations Research for Management,
2nd Ed., Richard D. Irwin Inc., Illinois. •
2. Gupta, M.P. and Sharma J.K., 1995, Operations Research for Management, National Publishing House,
New Delhi,
3. Hiller, F.S. and Lieberman G.J., 1974, introduction to Operations Research, 2nd ed., Holden-Day, Inc.,
San Francisco.
4. Loomba N.P., 1964, Linear Programming, McGraw Hill, New York.
5. Ozan T., 1986, Applied Programming for Engineering and Production Management, Prentice-Hall, New Jersey.
6. Rao S.S., 1978, Optimization—Theory and Applications, Wiley Eastern, New Delhi.
7. Rao, K.V., 1986, Management Science, McGraw Hill, Singapore.
8. Sasieni, M.A., Yaspan A and Friedman L, 1959, Operations Research: Methods and Problems, John Wiley
& Sons, New York.
9. Shogan A.W., 1990, Management Science, Prentice Hall.
10. Taha, H.A., 1971, Operations Research: An Introduction, McMillan Publishing Co. Inc., New York.
11. Wagner, H.B., 1975, Principles of OR, Prentice-Hall, New Jersey.
 12
TRANSPORTATION MODEL

12.1 INTRODUCTION
Transportation problem is a special variety of classical linear-programming problem. In this model, shipments
of goods from few locations (or origins) to other locations (or destinations) are planned. Due to specific
characteristics of transportation problems, special approaches are available to solve them.
Let us understand the transportation problem through an example. A company has three bread
manufacturing units: located at Faridabad, Gurgaon and•Noida. Each unit has a limited capacity to produce.
Bread-cartons are transported to four warehouses located in South, West, East and North Delhi for supply
in different markets of Delhi. Each warehouse has a known maximum demand. Each manufacturing unit
can provide goods to any destination, but the cost of transportation would be different for each combination
of manufacturing unit and destination (Figure 12.1). The objective is to provide the following information
to the decision makers:
1. What quality should be transported from a manufacturing unit to all possible destinations?
2. What would be the cost for this allocation?
The objective is to mare the allocations in such a way that total cost of shipment is minimum.
Origins
Gurgaon Fiiridabad Noida
Plant Plant Plant

South Delhi North Delhi , East Delhi West Delhi

Destinations
Warehouse Warehouse Warehouse Warehouse

Figure 12.1 A Transportation Problem

160 INDUSTRIAL ENGINEERING AND MANAGEMENT

12.2 MATHEMATICAL FORMATION OF TRANSPORTATION PROBLEM

Let, i = Index for origin
j = Index for destination
Xii = Quantity shipped from origin '1' to destination `f
Cii = Unit cost of shipping one unit from origin `i' to destination `j'
S. = Total capacity of origin V'
d.= Total demand of destination j'
We have objective of minimizing the total shipping cost (Z).
From origin 1 to destination 1 the shipping cost is equal to the algebric product of unit shipping
cost (C11 ) and quantity to be shipped (X11 ). Similarly, from origin 1 to destination 2, it is (C12 X12).
Hence for 'in' origins and 'n' destinations, total shipping cost is to be minimized as:
Minimize Z= C11 X11 + C12 X12 + CD/ X 1,,
[Plant 1]
+ C21 X21 +•C22 X22 " C2n X2n [Plant 2]

▪ Cm1 X ml •Cm2 Xnt2 Cmngin [Plant in]

or, minimize: Z = E E c, Xlj ...(1)
j
There are constraints due to limited capacity of each origin and due to limited demand of each
destination.
For manufacturing unit 1, total shipment is the sum of shipment to each destination from 1 to
ii. Mathematically,
XII +X12 +X13 Xin = Si
Similarly, for second manufacturing unit:
X71 + X 2, + X23 +., ..+X2» = S2
Thus, in general for each origins:

E
i=1
Xii = Si for all i; where i = 1, 2, ..., in ...(2)

For each destination, we have similar set of constraints:

Ei=i X = d for all j; where, j = 1, 2, ..., n —(3)

Since all the supply for each source should be shipped to the destinations so that total demand
is met, we have,
n
E = E d; ...(4)
i=i
Since there can be only finite and positive number of units which may be shipped, we have non-
negativity constraints as follows:
X0. > 0 for all i = 1, 2, ..., in; j = 1, 2, ..., n —(5)
TRANSPORTATION MODEL 161

LP formulation of a Transportation Problem

n
Minimize Z = EE
1=1 J=1

Subjected to E Xti = di for all j;, where j = 1, 2, ..., n

i=i

E X1 = Si for all i; where i = 1, 2, ...,

.i=1
nt
E =Ed
i=i .i=1
?. 0 for all i; where i = 1, 2, ..., in;
for all j; where j = 1, 2, ..., n

12.3 HOW TO SOLVE THE TRANSPORTATION PROBLEM (TP)?

A typical TP is represented in standard matrix form. Each cell in the main body contains a small cell
at "top-right" corner. In this cell, we write the unit shipping cost (9. For a three origin and four destination
TP problem, the standard matrix representation is as follows (Figure 12.2):

Destinations )
Capacity of
Origins Origin
DI D, 1)3 D4

C'II C11 C'14

01 I C12
SI

C2I I C22 C23 C24

0, S2

C31 C33 C34

03 I C32 S
.

Demand of 3 4
Destination
dI d, d3 d4 Z Si = E di
i=I j= I .

Figure 12.2 Standard Representation of a Transportation Problem

For solving the TP, an initial feasible solution is obtained so that source and supply constraints
are satisfied. For this, some approaches are:
1. Least-cost method
2. North-West corner method
3. Vogel's approximation method.
The initial solution is further tested for optimality. The total cost is minimised through Modified
Distribution (or, MODI) method (Figure 12.3).
162 INDUSTRIAL ENGINEERING AND MANAGEMENT

Formulate the transportation matrix

I

Ed1 >5-S; No Es; > Yd./

Add a dummy des- Add a dummy origin

tination (or column) Yes from which all
for which all ship- shipping costs-are
ping costs are zero ES; = Edi zero and having
and have demand
capaCity = ES; - Ed/
= Ed; - ES;

Find
Optimal
• Total cost
• Shipping quantities
in each route

Not optimal

Revise Solution

Figure 12.3 The Transportation problem Solution Approach

Example 12.1 An organisation has four destinations and three sources for supply of goods. The
transportation cost per unit is given below. The entire availability is 700 units which exceeds the cumulative
demand of 600 units. Decide the optimal transportation scheme for this case (Figure 12.4).
Solution: Step 1: Check for balance of supply and demand
E Supply = 250 + 200 + 250 = 700 units
E Demand = 100 +150 + 250 +100 = 600 units
Decision Rule
(i) If Z Supply = E Demand, then go to next step.
(ii) Else, if E Supply > E Demand,
then, add a "dummy destination" with zero transportation cost.
TRANSPORTATION MODEL 163

Destination
Availability
D D2 D3 D4 (Supply)

1 13 1 16 19 17 250
S,

Source
200
17 19 16 15
S, 1

15 I 17 I 17 1 16 250
S3

00
Require- 100 150 250 100
600
ment
(Demand)

Figure 12.4 Sample Problem

(iii) Or else, If E Supply < E Demand

then, add a "dummy source" with zero transportation cost.
Since, in this problem
E Supply > E Demand
Hence, add a "dummy destination" (say D5) with zero transportation cost and balance demand which
is difference in supply and demand (= 100 units).
The initial transportation matrix is now formulated with transportation cost in the small boi of
each route (Figure 12.5). Note that each cell of the transportation matrix represents a potential route.
Destination

D D2 D3 D4 Supply

13 I 16 1 19 17 250
Si L I

Source
17 1 19 16 15 200
S2
1

1 17 17 1 16 0 250
S3 15 1

(Demand) 700
100 150 250 100 100
700

Figure 12.5 Introducing Dummy Column for Balancing the Supply and Demand

Step 2: (i) Decide the nature of problem: Minimization of transportation cost.

(ii) Make initial assignment.
164 INDUSTRIAL ENGINEERING AND MANAGEMENT

Initial assignment may be done by using any of the following approaches:

(i) Least-cost method
(ii) North-West corner method
(iii) Vogel's approximation method.
We would demonstrate all the three methods.
(i) Initial Solution by Least Cost method:
(a) Select the lowest transportation (or shipping) cost cell (or route) in the initial matrix. For
example, it is route S, D5, S2 D5 and S3 D5 in our problem with zero shipping cost.
(b) Allocate the minimum of remaining balance of supply (in last column) and demand (in last
row).
Let us select S, D5 route. One can also select other route (S2 D5 or S3 D5) in case of tie. For S, D5,
available supply is 250 and available demand is 100 units. The lower is 100 units. Hence, allocate 100 units
through this route (i.e., S, D5).
With this allocation, entire demand of route S1 D5 is consumed but supply of corresponding source,
S, is still (250 — 100) or 150 units left. This is marked in last column of supply. The entire demand
. of destination, D5, is consumed. We get the following matrix by crossing out the consumed destination
(D5) (Figure 12.6).
Destination

Di D2 03 04 05 Supply

13 19 1 17 20 150
S, 16

Source

S, I '7
I 19 I16 15
L 200

17 1 17 16 0 250
S3 1 '5

(Demand) 100 150 250 100 10o

Figure 12.6 With 100 Units Allocation in Route Si D5

,Now, we leave the consumed routes (i.e., column D5) and work for allocation of other routes.
Next, least cost route is S, D1, with 13 per unit of shipping cost. For this route, the demand is
100 units and remaining supply is 150 units. We allocate minimum of the two, i.e., 100 units in this
route. With this destination D1 is consumed but source S, is still left with (150 — 100) = 50 units of
supply. So, now leave the destination D1 and we get the following matrix (Figure 12.7).
Now, we work on remaining matrix, which excludes first column (D1 ) and last column (D5), Next
assignment is due in the least cost route, which is route S2 D4. For this route, we can allocate 100 units
which is lesser of the corresponding demand (100 units) and supply (200 units). By this allocation
in route S2 D4, the demand of destination D4 is consumed. So, this column is now crossed out
(Figure 12.8).
TRANSPORTATION MODEL 165

Di D2 Di D4 D5 Supply

16 1 17 2$0 1$0 50
S, I 19

1 17 I 19 I16 15 200
S,

15 1 17 I 17 I 16 I0 250
S,

(Demand) 100 150 250 100 100

Figure 12.7 Assignment for Destination Di and D5 Consumed

DI D, D3 D4 D5 Supply

I 16 19 17 2$0 1$0 50
s,

I 17 19 1 16 200 100
L
S2

15 17 1 17 1 16 250
S3

Demand ifrfo 150 250 100 100

Figure 12.8 Assignment with Destination Di , D4 and D5 Consumed

Now, we work on the remaining matrix which excludes, columns, Di, D4 and D5. Next assignment
is due in the least cost route of the remaining routes. Note that we have two potential routes: S1 D2
and S2 D3. Both have 16 units of transportation cost. In case of any tie (such as this), we select any
of the routes. Let us select route, Si D2, and allocate 50 units (minimum of demand of 150 and supply
of remaining 50 units). With this, all supply of source S, is consumed. Therefore, cross out row of
Si. We get the matrix as shown in Figure 12.9.
Now, remaining allocation is done in route S2 D3 (as 100 units). With this source, S2 is consumed.
Next allocation of 100 units is done in route S3D2 and 150 units in route S3 D3. Final initial assignment
is as follows (Figure 12.10):
Total cost in this assignment is (13 x 100 + 16 x 50' + 100 x 0 + 16 x 100 + 15 x 100 +
17 x 100 + 17 x 150) or Rs. 9,450.
Step 3: Count the number of filled (or allocated) routes.
Decision rule
(i) If filled route = m + n — 1, then go for optimality check (i.e., Step 5).
166 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) If filled route < in + n — 1, then the solution is degenerate. Hence, remove degeneracy and go
to . Step 4.

D2. D3 D4 D5 Supply

[19 17 2/0 1%0 $0'

s,

I 19 I 16 200 100
17
S,

15 17 1 17 ,1 16 12_ 250
5,

Demand 100 250 100 100

100
Figure 12.9 Destinations D1 , D4 and D5 Source S, are Consumed

D2 D3 D5 Supply

13 16 1 19 17 250
.
SI
50
200
S, 1 '7 19 0

I 15 17 1 16 0 250
S3

Demand 100 150 250 100 100

Figure 12.10 Initial Assignment by Least Cost Method

Here, »1 = number of destinations, including dummy column, if any

n = number of source, including dummy row, if any
For our problem (in + n — 1) = 5 + 3 — 1 = 7.
The number of filled route is equal to 7. Hence, problem is not degenerate. Therefore, proceed
to Step 5.
(ii) Initial Assignment by North-West Corner Method (an alternative to least cost method):
This approach is also for making initial assignment, as we have done in the least cost method. Therefore,
this approach should not be applied if initial assignment has already been made by any other method.
In the North-West Corner (NWC) method, we start with the top-left (corner-most) route, which is S1
Irrespective of cost, allocation is made in this route for the minimum of supply or demand. In our case,
demand for this route is 100,and supply is 250. Therefore, allocate 100 units in this route. With this,
column corresponding to D1 is consumed.
TRANSPORTATION MODEL 167

Now, work on the remaining matrix, which excludes column D1 . Again, select the top-left route.
Now, it is cell S1 D2. Allocate in the same way. Thus, 150 units are allocated in this route. Note that,
with this, both D2 and S, are consumed.
Remaining matrix excludes S1, D, and D2. Hence, allocation in the top-left cell is due in route
S2 D3. Here, 200 units may be allocated and S2 is now consumed.
Remaining allocations are done in S2 D3, S3 D4 and S3 D5 in sequential order. We get the initial
solution by north-west corner method as follows (Figure 12.11):

Di D2 D3 D4 D5 Supply

19 17 250
SI

200

52
1 17 1 19 1 15

5,
15 17 17
250

50

Demand 100 150 • 250 100 100

Figure 12.11 Initial Assignment by North-West Corner Method

For this assignment, the total cost is (13 x 100 + 16 x 150 + 16 x 200 + 17 X 50 + 16 x 100
+0 x 100) or Rs. 9,350.
Step 3: Check for degeneracy
(in + — 1) = 5 + 3 — 1 = 7
Number of filled cells = 6, which is one less than in + n — 1. Hence, go to Step 4 for removing
degeneracy.
Step 4: In case of degeneracy, allocate a very-very small quality, E (which is zero for all calculation
purposes), in the least cost of un-filled cells. In the above Figure 12.11 of North-West corner method
allocation, the least cost unfilled cells are S1 D5 and D2 D5. Let us select S1 D5 and allocate E in this.
We get the following allocation after removing degeneracy (Figure 12.12).
DI D, D3 D4 D5 Supply

SI
13
1 19 1 17
L 250

0
17 19 200
115
6.2

S3 1 15 1 17 [IL
250

0
Demand 100 150 250 100 100

Figure 12.12 Initial Assignment by North-West Corner Method after Removing Degeneracy
168 INDUSTRIAL ENGINEERING AND MANAGEMENT

(iii) Initial Assignment by Vogel's Approximation Method (VAM): This is the third alternative
method for doing initial assignment of a transportation problem.
In this method, we calculate the difference between the two least-cost routes for each row and
column. The difference is called 'as penalty cost for not using the least-cost route.
Once the penalty cost for all destinations and sources are calculated, select the maximum one.
Assign the maximum possible in this row or column, as the case may be. Assignment must be done
in the least-cost route of the selected row or column. We get the following first allocation (Figure 12.13).

Di D2 D3 D4 D5 Difference in least
cost cells (penalty)

SI
I 13 16 19 17 L_ 13 — 0 = 13

S2 I 19 16 ''
Lo_ 15 — 0 = 15

1 15 1 17 1 17 1 16 15 — 0 = 15
S3

Penalty Cos 15-13=2 17-16=1 17-16=1 16-15=1 0-0=0

Figure 12.13 First calculation of Penalty cost in VAM

Highest of all calculated penalty costs is for S3 (and S2). Therefore, allocation is to made in row
of source S3. The route (or cell), which one must select, should be the lowest cost of this row. This
route S3 D5. Hence, first allocation is as follows (Figure 12.14).

Di D2 D3 D4 D5 Supply

19 17 250
SI 13 1 16

0
S2
1 17 19
1 16
15
0 200

S3
1 15 1 17 1 17
I 16 2%0 150

Demand 100 150 250 100 100

Figure 12.14 First calculation in Vogel's method

Now, with the first allocation, destination D5 is consumed. We exclude this column and work on
the remaining matrix for calculating the penalty cost. We get the following matrix (Figure 12.15).
Now for this, source SI has highest penalty cost. For this row, the least cost route is S, DI . Hence,
next assignment is due in this route (Figure 12.16).
TRANSPORTATION MODEL 169

Di 1)2 D3 D4 Penalty Cost

1 13 16 1 19 17 16-13=3

I 19 [ 16 I15 16- 15= I

S, ''

1 15 17 1.16 16 - 15 = 1
S3 17

Penalty Cost 15-13=2 17-16=1 17-16=1 16--15=1

Figure 12.15 Second Calculation of Penalty Cost in VAM

Di D2 D3 1)4 Supply

1 19 1 17 250 ISO
S'i 1 16

1 17 19 16 15 200
S2

17 1 17 16 150
S3 I

Demand 100 150 250 100

Figure 12.16 Second Allocation in Vogel's Method

After second allocation, since destination Di is consumed, we leave this column and proceed for
calculation of next penalty cost. Allocation is done in route Si D2. Since there is tie between all routes
(Figure 12.17), we break the tie by arbitrarily selecting any route (S1 D2 in this case).

D2 1)3 D4 Penally Cost

I 16 1 19 1 17 17- 16= 1
SI

1 16 I 15 16 - 15 = 1
S.2

17 1 17 17 - 16 = 1
S3 1 16

Penalty cosi 17 - 16 - 1 17 - 16 = 1 16 15 = I

Figure 12.17- -Third Calculation of Penalty cost

170 INDUSTRIAL ENGINEERING AND MANAGEMENT

D2 D3 D4 Penalty Cost

19
Si 17

1 15 200
S2 '9 1 16

17 1 17 150
S3 16

Demand 250 100

Figure 12.18 Third allocation in Vogel's method

Similarly, next allocations are done as follows (Figures 12.19 and 12.20):

D3 D4 Penalty cost D3 D4 Supply

I 16 15 16 — 15 = 1 I 16 2110 100
S2 S2

1 17 16 17 — 16 = 1 1 17 16 150
53 S3

Penalty Cos 17 — 16 = 1 16 — 15 = 1 Demand 250

Figure 12.19 Fourth Calculation of penalty cost in VAM Figure 12.20 Fourth Allocation in Vogel's Method

With the fourth allocation (Figure 12.20), column D4 is consumed. In the only left column D3 ,
the allocations of 100 units and 150 units are done in routes S2 D3 and S3 D3 respectively. Thus, we
get the following allocations in the Vogel's approximation method (Figure 12.21).

D, D2 D3 D4 D5 Supply

19 17 250
SI

1 19 200
17
S;

IS 17 16 250
S3

Demand 100 150 250 100 100

Figure 12.21 Final Allocation through Vogel's Method

TRANSPORTATION MODEL 171

The initial cost for this allocation is (13 x 100 + 16 x 150 + 16 x 100 + 15 x 100 + 17 x 150
+ 0 x 100) or equal .to Rs. 9,350.
Step 3: Check for degeneracy
(til + n — 1) = 7
Number of filled cell = 6, which is one less than (m + n + 1). Hence, go to Step 4 for removing
the degeneracy.
Step 4: We allocate E in the least-cost unfilled cell. This cell is route Si D5 or S2 D5. Let us
select route S1 D5. Thus, we get following matrix after removing degeneracy (Figure 12.22).

Di D., D3 D4 D5 Supply

1 19 17 250
s,
O
1 17 1 19 16 0 200
S2

1 15 16 250
S3

Demand 100 150 250 100 100

Figure 12.22 Final Allocation after Removing Degeneracy in Vogel's Method

Optimization of Initial Assignment: The initial feasible assignment is done by using least-cost
method or North-West corner method or Vogel's approximation method. However, none of these methods
guarantees optimal solution. Hence, next step is to check the optimality of the initial solution.
Step 5: Check the optimality of the initial solution: For this, we have to calculate the opportunity
cost of un-occupied routes.
First, we start with any row (or column). Let us select row 1, i.e., source S1. For this row, let
us define row value, u1 = 0. Now consider all filled routes of this row. For these routes, calculate column
values v. using following equation:
ui + i= Cij (for any filled route)
where, ui = Row value
v. = Column value
= Unit cost of assigned route
Once first set of column values (v) is known, locate other routes of filled cells in these columns.
Calculate next of u1 (or values using above equation. In this way, for all rows and columns, u and
V. values are determined for a nondegenerate. initial solution.
Step 6: Check the optimality: Calculate the opportunity of non-allocated or unfilled routes. For
this, use the following equation:
Opportunity unassigned route
= ± — C.•1.1 •
where, Ili = Row value
172 INDUSTRIAL ENGINEERING AND MANAGEMENT

v. = Column value
= Unit cost of unassigned route
If the opportunity cost is negative for all unassigned routes, the initial solution is optimal. If in
case any of the opportunity costs is positive, then go to next step.
Step 7: Make a loop of horizontal and vertical lines which joins some filled routes with the unfilled
route, which has a positive opportunity cost. Note that all the corner points of the loop are either filled
cells or positive opportunity cost unassigned cells.
Now, transfer the minimal of all allocations at the filled cells to the positive opportunity cost cell.
For this, successive corner points from unfilled cell are subtracted with this value. Corresponding addition
is done at alternate cells. In this way, the row and column addition of demand and supply is maintained.
We show the algorithm with our previous problem.
Let us consider the initial allocation of least-cost method (Figure 12.23).
For this, we start with row, S1 and take u1 = 0. Now S, D1, Si D2, and S1 D5 are filled cells. Hence,
for filled cells; (vi = Cu —
v1 = 13 — 0 = 13
v2 = 16 — 0 = 16
vs = 0 — 0 = 0

DI D2 D3 D4 D5 Supply it;

13 1 16 19 1 1-7 • 10 250 0
s,

200 0
S2
17
'9 16 0

15 I 16
L 250 ' 1

Demand 100 150 250 100 100

13 16 16 15 0

Figure 12.23 Calculation for u. and v. in Least Cost Initial Assignment

Now cell S3 D2 is taken, as this has a v. value. For this cell u3 = 17 — 16 = 1.

Now, cell S3 D3 is selected, as this has a cis value. For this cell v3 = 17 — 1 = 16.
Now, cell S2 D3 is selected, as it has a vi value. For this cell u2 = 16 — 16 = 0.
Now, cell S2 D4 is selected, as it has a u1 value. For this cell v4 = 15 — 0 = 0.
Thus, all ui and vi values are known.
Step 6: Calculate opportunity cost of unassigned routes (Table 12.1).
Since route S3 D5 has positive opportunity cost, the solution is nonoptimal; hence, we go to next
step and make a loop as follows (Figure 12.24).
TRANSPORTATION MODEL 173

Table 12.1

Unassigned 'route Opportunity cost Or; + yj -

S, 0 + 16 — 19 = —3
Si D4 0 + 15 — 17 = —2
S2 D, 0 + 13 — 17 = —4
S2 D2 0+ 16 — 19 = —3
S2 D5 0+0—0=0
S3 D, 0 + 13 — 15 = —2
S3 D4 I + 15 — 16 = 0
S3 D3 1 + 0 — = +1

Di D2 D3 D4 D5 Supply

1 16 19 17 0 250
SI H 1

S2
1 19 16
L .200

S3 1 15 1 16
t-
250

(+)
(-)
150 250 100 100

Figure 12.24 Closed Loop for Cell S3 D5

The revised allocation involves 100 units transfer from cells S, D5 and S3 D2 to cells S3 D5 and S, D,.
Thus, revised allocation is as, follows (Figure 12.25).

D, D2 D3 1)4 D5 Supply Ui .

SI
19
1 17 0 250 0

0
17 19 16 1 15 12_ 200 —1
S2

S3
15
1 17
1 16
25(1 0

Demand 100 150 250 100 100

13 16 16 15 0

Figure 12.25 Revised Allocation in Least-cost Assignment

174 , INDUSTRIAL ENGINEERING AND MANAGEMENT

Since above solution is degenerated now, we allocate e to the least-cost unfilled cell S1 D5. Fresh
calculation of u1 and vi is also done in the similar way as explained in Step 5.
For this assignment, the opportunity cost of unassigned cells is as follows (Table 12.2).

Table 12.2 Opportunity Cost in Figure 12.25

Unassigned route Opportunity cost (ui + vi —Cu)

SI DS 0 + 17 — 19 = —2
,', D4 0 + 16 — 17 = —1
S2 D, —1 + 13 — 17 = —5
S2 D2 —I + 16 — 19 = —4
S2 Ds —1 + 0 — 0 = —1
S3 D, 0 + 13 — 15 = —0
S3 D2 0 + 16 — 17 = —1
S3 D, • 0 + 16 — 16 = 0

Now, since all unallocated routes have negative (or zero) opportunity cost, the present assignment
is the optimal one. Thus, optimal allocation of route is given in Table 12.3.

Table 12.3 Optimal Allocation in Different Routes

Route Unit Cost of this route
S , Di 100 13 x 100 = 1,300
S, D2 150 16 x 150 = 2,400
S, D3 100 16 x 100 = 1,600
S2 D4 100 15 x 100 = 1,500
S3 D3 150 17 x 150 = 2,550
S3 Ds 100 0 x 100 = 0

Total cost = Rs. 9,350

Note that total cost is less than the initial assignment cost of least-cost method (= Rs. 9,450).
Similarly, optimality of North-West corner method, solution is done (Figure 12.26).

Di D2 D3 D4 D5 Supply

19 17 0 250 0
SI
0
I 17 19 16 200 —1
S2 L

1 15 17 16 250 1

Demand 100 150 250 100 100

'V, 13 16 17 16 0
Figure 12.26 Calculation of u, and vifor N-W Corner Method's Initial Solutions
TRANSPORTATION MODEL 175

Opportunity cost of above assignment (Figure 12.26) is as follows.

Since all opportunity costs are negative or zero, the initial assignment is optimal one with total cost
of Rs. 9,350.
The optimal assignment of routes is 100 units in S1 D I, 150 units in Si D2, 200 units in S2 D3, 50
units in S3 D3, 100 units in S3 D4.
' Similarly, the optimality of Vogel's method's initial solution is (Figure 12.27) done.
Opportunity cost of above. N-W corner (Figure 12.26) assignment is as follows.
Table 12.4 Opportunity Cost in Figure 12.26

Unassigned route Opportunity cost (u, + vi — Cd

S1 D3 0+ 17 — 19 = —2
Si D4 0 + 16 — 17, = —1
S2 Di —1 + 13 — 17 = —5
S2D2 —1 1- 16 — 19 = —4
S2 D4 —1 + 16 — 15 = 0
S2 Ds —1 + 0 — 0 = —1
S3 Di . 0 + 13 — 15 = —2
S3 D, 0 + 16 — 17 = —1

D2 D3 1) 4 D5 Supply

19 17 0 250 0
S, it;
0
200 —1
S2
I 17 19
II)

S3 I 15 I 17 250 1

Demand 100 150 250. 100 100

13 16 17 16 0

Figure 12.27 Calculation of ui and vi for Vogel method's initial solutions

Opportunity cost of above assignment is—as follows:
Table 12.5 Opportunity Cost in Figure 12.27

Unassigned route Opportunity cost (u, + vi — Cd

S1 D3 0 + 17 — 19 = —2
Si D4 0 + 16 — 17 = —1
S2 /31 —1 + 13 — 17 = —5
S2 D2 —I + 16 — 19 = —4
S2 D, —1 + 0 — 0 = —1
S3 Di 0 + 13 — 15 = —2
• S3 D2 0 + 16 — 17 = —1
S, D4 0 + 16 — 16 = 0
176 INDUSTRIAL ENGINEERING AND MANAGEMENT

Since all opportunity costs are negative or zero, the initial assignment of Vogel's solution is optimal
with total cost of Rs. 9,350.
The optimal assignment of routes is 100 units in Si Di , 150 units in S1 D2, 100 units in S2 D3,
100 units in S2 D4, and 150 units in S3 D3. Note that this solution is different from North West corner
solution but total cost is same and minimum.

REVIEW QUESTIONS

12.1 Explain the nature of the transportation problem. Give its mathematical stimulation as an LP problem.

12.2 Explain the methods to find the initial feasible solution of a transportation problem.
12.3 Explain the MODI method to find the optimal solution of a transportation problem.
12.4 Find the optimal transportation plan for the following table of shipping cost, availability and requirements.

Plant

A Requirement

1 21 11 8 30
Market 2 16 20 12 25
3 10 7 18 35
4 12 8 9 40

Availability 40 50 70

12.5 Solve the above problem for the following matrix:

(i) Plant
A B C D Requirement
Market 3 3 2 1 50
2 .4 2 5 9 20
3 1 2 1 4 30

Capacity 20 40 30 10
(ii) Plant
A Requirement
Market 1 20 • 12 10 15 11
2 10 22 10 20 • 8
3 15 20 12 8 13
Capacity 5 11 8 8
(iii) Plant

A B C D E F Requirement
Market 1 6 5 9 11 3 11 2
2 6 8 11 2 2 10 9
3 7 3 7 7 5 5 6
4 9 12 9 6 9 10 5
Capacity 4 4 6 2 4 2
TRANSPORTATION MODEL 177

(iv) Market
AB C D Capacity
Plant 71 31 41 61 7
2 41 9 71 21 9
3 20 31 51 11, 18
Requirement 5 8 7 14

12.6 Solve Problem 12.4, when the entries in the main matrix are unit profit rather than unit cost.
[Hint: Use one of the following strategies: '
(1) Subtract the maximum value of the profit per unit (i.e., 21) from all the entries of the profit. Ignore negative
sign. Solve as usual. However, use original matrix for the calculation of the profit.
(ii) Make all the entries in the matrix with a negative sign. Solve as usual. However, for calculation of profit,
use original matrix].

REFERENCES
1. Budnick FS, Mc Leavey D and Mojena R, 1996, Principles of Operations. Research for Management,
2nd ed., Richard D. Irwin Inc., Illinois.
2. Gupta MP and Sharma JK, 1995, Operations Research for Management, National Publishing House,
New Delhi.
3. Hiller, .FS and Lieberman GJ, 1974, Introduction to Operations Research, 2nd ed., Holden-Day, Inc.,
San Francisco.
4. Loomba NP, 1964, Linear Programming, McGraw Hill, New York.
5. Ozan T, 1986, Applied programming for Engineering and Production Management, Prentice Hall, New Jersey.
6. Rao, SS, 1978; Optimization—Theory and Applications, Wiley Eastern, New Delhi.
• 7. Rao KV, 1986, Management Science, McGraw Hill, Singapore.
8. Sesieni, MA, Yaspan A and Friedman L, 1959, Operations Research: Methods and Problems. John Wiley
& Sons, New York.
9. Shogan AW, 1990, Management Science, Prentice. Hall.
10. Taha, HA, 1971, Operations Research: An introduction, McMillan Publications Co. New York.
11. Wagner, HB, 1975, Principles of OR, NJ, Prentice Hall.
178 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

)
 ASSIGNMENT MODEL

13.1 INTRODUCTION
Assignment problem pertains to problem of assigning n jobs to n different machines. This model can
be effectively used for any other problem in which n items' (or persons) are to be assigned to other
n items so that each one of the first group is assigned to one distinct item from the second group.
Assignment model can be solved by conventional linear programming approach or transportation
model approach. It is a square matrix, having equal number of rows and columns. The objective is to assign
one item from row to one item from column so that total cost of assignment is minimum (Figure 13.1).

4 Machines 4 Operators

Figure 13.1 Four Machines, Four Operators Assignment Problem

13.2 MATHEMATICAL FORMULATION OF ASSIGNMENT PROBLEM (FIGURE 13.2)

Let there be n jobs which are to be assigned to n operators so that one job is assigned to on operator.
i = Index for,job, i = 1, 2, ..., n
 180 INDUSTRIAL ENGINEERING AND MANAGEMENT

j= Index for operators, j = 1, 2, ..., n

Cu = Unit cost for assigning job `i' to operator `I'
1 If job i is assigned to operator j
X.. =
v {0 Otherwise
The objective is to minimize the total cost of assignment. If job 1 is assigned to operator 1, the
cost is (C11 X11). Similarly, for job 1, operator 2 the cost is (C12 X12). The objective function is:
n n
Miniinize Z = E E c.. X.. .41)
1=1 j=i
Since one job (i) can be assigned to any one of the operators, we have following constraint set:
11

E xi; = 1; for all j; j = 1, 2,. ..., n ...(2)

i=i
Similarly for each operator, there may be only one assignment of job. For this, the constraint set is:
E xu = i;• for all i; i = 1, 2, ..., n
j=I
The non-negativity constraint is:
X.. O ...(4)
n n
Minimize Z = z cox.
u
i=1 J=1

Subject to E I ; for all j; j = 1,

1=l

E 1; for all i; i = 1, 2, ...,

1=1
Xii 0 for all i and all j

Figure 13.2 Mathematical Formulation of Assignment Problem

13.3 SOLUTION METHODS FOR ASSIGNMENT PROBLEM

- The assignment problem is solved in the following manner (Figure 13.3):
Start

Formulate the Assignment Matrix

Generate Opportunity Cost Matrix

Find
Is the
Yes • Assignment of
solution
row with column
optimal?
of matrix
No • Total cost of
asignment

4 2evise the solution'''.

Figure 13.3 Solution Method of Assignment Problem

ASSIGNMENT MODEL 181

Example 13.1 Let us understand it with an example. Let there be four machines and four operators.
Operator 1 charges 6, 7, 7 and 8 units on machine I, II, III and IV respectively. Operator 2 charges
7, 8, 9 and 7 units, operator 3 charges 8, 6, 7 and 6 units and operator 4 charges 8, 7, 6 and
9 units respectively. The problem is to assign one operator on one machine so that over-all payment
is least.
Model: The assignment model in the form of operator-machine matrix is shown in Figure 13.4.
The entries in the matrix represent unit charge (in Rs.) per hour.
Machine
II III IV

6 7 7 8

2 7 8 9 7.

Operator
8 6 7 6

4 8 7 6 9

Figure 13.4 Representation of an Assignment Model

13.4 ALGORITHM TO SOLVE ASSIGNMENT MODEL

Opportunity Cost Approach: Opportunity cost is the cost of possible opportunity which is lost or surrendered.
The given problem is related to assigning operators on machine for it least cost objective.
Consider that if operator 2 is assigned on machine I, it will cost Rs. 7. With this, no other operators
can be assigned machine I as one-to-one assignment is required. However, if operator 1 is assigned on
machine it will cost Rs. 6. Therefore, a potential saving of Rs. 7 — Rs. 6 = Re. 1 is possible, if
instead of operator 2, operator 1 is assigned on machine 1. This is nothing but opportunity cost in case
we assign operator 2 on machine 1. Similar logic may be put for opportunity cost of not assigning the
least cost machine to an operator. So, to form a total opportunity cost matrix, we adopt a very simple
two-step method.

13.4.1 Method to Find the Total Opportunity Cost Matrix

Step 1: Select any column. Subtract the lowest entry of this column from all the entries of this
column and prepare a new column.
Repeat for all columns of the matrix. In this problem, it will be the "operator opportunity"
matrix.
Step 2: Select any row of the revised matrix obtained in Step 1. Subtract the lowest entry of
this row from all the entries of this row. Prepare a fresh row.
Repeat this for rows of the revised matrix (operator-opportunity matrix). This would be the total
opportunity cost matrix.
For example, in the problem of operator-machine assignment, we get the operator-opportunity matrix
as follows (Figure 13.5).
The total opportunity matrix is as follows (Figure 13.6).
182 INDUSTRIAL ENGINEERING AND MANAGEMENT

Machine
Iv

1 0 I 1 2

2 1 2 3 1

Operator
3 2 0 1 0

4 2 1 0 3

Figure 13.5 Operator-Opportunity Matrix

Machine
II III Iv

1 0 1 1 2

2 0 1 2 0

Operator
3 2 0 1 0

4 2 1 13— . 3

Figure 13 6 Total Opportunity Cost Matrix

13.4.2 Optimality Test of Total Opportunity Cost Matrix

Step 1: Draw minimum number of possible horizontal and/or vertical lines so that all the zeros of the
total opportunity cost matrix are covered.
If these lines are equal to the number of rows (or columns) then solution is optimal. Make assignment
as per scheme outlined in Step 3.
If number of vertical and horizontal lines are less than number of rows, go to Step 2, as the solution
may be non-optimal.
Step 2: From the uncovered entries of Step 1 (i.e., entries which are not struck by lines just drawn)
select the lowest entry. Subtract this entry from all the entries of uncovered position.
Add this entry at the junction points of line just drawn. By junction point we mean entries where
both horizontal and vertical lines meet.
Check for optimality as per Step 1. If optimal, go to Step 3; otherwise repeat Step 2.
Step 3: Optimal Assignment of the Matrix: Select row (or column), which has least number
of zeros (say, one zero). Note that all rows (or columns) will have at least one zero.
Make assignment of this row with corresponding column. Strike-off the already assigned row and
column.
Now, select row and column which have minimum number of zeros. Make next assignment. Repeat
the process till all rows are assigned to one column.
ASSIGNMENT MODEL 183

13.4.3 Illustration of Optimality Test and Assignment

Refer Figure 13.6. Apply Step 1 for the check of optimality. Draw minimum number of possible horizontal/
vertical lines to cover zeros. We can do it in no less than four lines. Hence, present assignment is optimal.
Nit:whine
t ii Ill IV
i
. ,
0 1 I 2

2 0 1 b
Operator
. .
3 -2 ----0 1 4

) I i)
-.
O
Figure 13.7 Four Lines Needed to Cover all Zeros
Therefore, the assignment for Figure 13.6 (which is optimal) may be done in this manner.
Column II has only one zero. Therefore, assign machine II to operator 3. Remove column II and
row 3.
From the remainder matrix, it may be noticed that column III has only one zero. Therefore, assign
machine III to operator 4. Remove row 4 and column III.
In the remainder matrix, only row 1 and 2 and column I and IV remain. In this, column IV will
have one zero at row 2. Therefore, assign machine IV to operator 2. The last assignment is the left-
over machine I to operator 1.
Thus, the final assignment is:
Operator Machine Cost

1
2 IV 7
3 II 6
4 III 6
Total cost Rs. 25
Example 13.2 Assign three jobs on three machines for following cost matrix: -

Jobs Machines
M1 M2 M3

JI Rs. 14 Rs. 12 Rs. 16

J2 Rs. 11 Rs. 17 Rs. 21
J3 Rs. 20 Rs. 8 Rs. 7
184 INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: Step 1: Subtract minimum entry in each column from all the entries on that column.
This is a job-opportunity cost matrix (Figure 13.8):
Machine
Ml M2 M3

11 ' 3 4 9

Jobs J2 0 9 14

J3 9 0 0

Figure 13.8 Job-opportunity Cost Matrix of Example 13.2

Step 2: Subtract minimum entry in each row of job-opportunity cost matrix from all the entries
of that row. This is a total opportunity cost matrix (Figure 13.9):
Machine
MI M2 M3

J1 0 6

Jobs J2 0 9 14

J3 9 0 0

Figure 13.9 Total Opportunity Cost Matrix of Example 13.2

Step 3: Check for Optimality: Draw minimum, number of horizontal and vertical lines to cover
all zeros. This can be done in 2 lines (Figure 13.10), which is one less than the number of rows (which
is 3). Thus, the solution is yet not final. Hence, go to Step 4.
Machines
Ml M2 M3

.11 6

Jobs J2 9 14

J3 0 -0

Figure 13.10 Check for Optimality

ASSIGNMENT MODEL 185

Step 4: From the uncovered entries, the minimum is 1. Thus, subtract 1 from all the entries, which
are uncovered. Add one at junction of lines. i.e., at J3-Ml. We get the following matrix now, as the
revised opportunity cost matrix (Figure 13.11).
Machine

MI M2 M3

.11 0 0 . 5

Jobs J2 0 8 13

J3 10 0 0

Figure 13.11 Revised Total Opportunity Cost Matrx

Now, go to Step 3 to check the optimality. We can cover all zeros of above matrix by atleast
three lines (which is also equal to number of rows). Hence, above solution may be used for optimal
assignment.
Step 5: Assignment Scheme: Refer revised total opportunity cost matrix (Figure 13.11). Row J2
has only one zero at M/ column. Hence, assign J2 to M/. Remove row J2 and column M/.
Column M3 of remainder matrix has one zero at J3 row. Assign J3 to M3. The last assignment
is remainder job JI to M2. Thus, the final assignment is:

Job Machine Cost

J1 M2 Rs. 12
J2 MI Rs. 11
J3 M3 Rs. 7

Total cost Rs. 30

REVIEW QUESTIONS

12.1 Explain the steps involved in solving an assignment problem.

12.2 Give a general LP formulation of the assignment problem.
12.3 In a big project work, there are four major jobs. For each job, one contractor will be given the work to
complete. Four contractors have submitted tender. The quoted amount (in lakhs of Rupees) is given in the
table below. Find the optimal award of contracts.

Jobs A

Contractor
I 16 22 28 12
II 9 26 34 16
III 10 24 30 15
IV 12 20 32 10

[Ans: (A 1I , B III, C I, D IV); or (A II, B I, C Ill, D IV); or (A II, B IV, C III, D 1); Cost = 71 unit].
186 INDUSTRIAL ENGINEERING AND MANAGEMENT

13.4 An organisation is having five salesmen and five sales divisions. There was a study to assess the capability
of the salesmen and the nature of each district. It is estimated that the sales per month (in lakhs of Rs.)
for each salesman in different divisions are as follows:
Salesman

1 2 3 4 5

A 32 40 41 22 29
B 38 24 27 38 33
Division C 40 28 ' 33 41 40
D 28 21 30 36 36
E 40 36 37 35 39

Use assignment method to allocate different divisions to each salesman to maximize sales.
[Hint: For the maximization problem, use one of the following strategies:
(i) Put negative sign with each entry of the matrix. Solve using same algorithm as used for minimization problem.
After assignment, calculate sales per month by taking values from original matrix.
(ii) Subtract the maximum entry of the above matrix (41 in this problem) from all the entries of the matrix.
Ignore negative signs.. Solve the problem as per .ihe algorithm of minimisation case. After assignment being
known, calculate sales per month [by taking values from original matrix].
(Ans: 1-B, 2-A, 3-E, 4-C, 5-D for maximum profit of 191 lakhs of rupees per month).

13.5 There are four depots having one car each. For four customers, these cars are to be deputed. The distance
from depot to the customer's place is as follows. Make assignment to minimise total distance covered.
Depot

A E

1 135 • 160 140 55 50

2 120 130 110 35 50
3 130 175 125 80 80
4 160 190 170 80 80
5 175 200 185 105 110

[Ans: 1-E, 2-B, 3-C, 4-D, 5-A; 560 km].

13.6 Four salesmen are to be assigned to four most suitable territories so that there would be nne salesman for
one territory. There are five territories where these salesman may be deployed. The profit in Rs. is given
below. Find the assignment to maximize profit. Which territory should be declined?

Territory

Salesman 1 2 3 4 5

A 6.2 7.8 5 10.1 8.2

B 8.7 9.2 11.1 7.1 8.1
C 7.1 8.4 6.1 7.3 5.9
D 4.8 6.4 8.7 7.7 8

[Hint: The problem is unbalanced. Use a dummy row having infinite profit. Solve as the maximization problem.
Hints are given in unsolved Problem 13.4 for this].
ASSIGNMENT MODEL 187

REFERENCES
1. Budnick FS, Mc Leavey D and Mojena R., 1996, Principles of Operations Research for Management,
2nd ed., Richard D. Irwin Inc., Illinois.
2. Gupta MP and Sharma JK, 1995, Operations Research for Management, National Publishing House,
New Delhi.
3. Hiller, FS and Lieberman GJ, 1974, Introduction to Operations Research, 2nd ed., Holden-My, Inc.,
San Francisco.
4. Loomba NP, 1964, Linear Programming, McGraw Hill, New York.
5. Ozan T., 1986, Applied Programming for Engineering and Production Management, Prentice-Hall, New Jersey.
6. Rao, SS, 1978, Optimization—Theory and Applications, Wiley Eastern, New Delhi.
7. Rao KV, 1986, Management Science, McGraw Hill, Singapore.
8. Siseni, MA, Yaspan A and Friedman L, 1959, Operations Research: Methods and Problems, John Wiley
& Sons, NY.
9. Shogan AW, 1990, Management Science, Prentice Hall.
10. Taha, HA, 1971, Operations Research: An Introduction, McMillan Publications Co. Inc., New York.
I I. Wagner, H.B., 1975, Principles of OR, NJ, Prentice Hall.
188'' INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 14
ENGINEERING ECONOMICS

This chapter is focussed on the economic aspects of Industrial Engineering. The chapter is also useful
for the financial management aspect of industrial system. We would first consider the time value of money.
Later, the use of this concept in project selection and evaluation would be explained in Chapter 17.

14.1 CONCEPT OF INTEREST

Let us assume that we go to a bank and deposit Rs. 1,000 in a term deposit account. Current rate of
interest is 10% per year for a deposit of one year. 11% per year for deposits of more than one year
but upto 2 years and 12% per year for any deposit of more than three years. Bank may give interest
at the end of the year or may give it quarterly (i.e., after every 3 months). Now, we are interested to
know the maturity value for each alternative.
Interest, which a deposit earns, is of two types:
1. Simple Interest, and
2. Compound Interest.

14.2 SIMPLE INTEREST

Simple interest is computed on the basis of the assumption that any interest does not itself earn interest.
Therefore, if we deposit Rs. 1,000 today, the interest at the end of year would be 100 if the simple
interest rah:. is 10%. Original deposit (i.e., Rs. 1,000) is called as principal. In case of simple interest,
the principle never changes.
Therefore, in the second year, the interest earned would be again Rs. 100, which is 10% of the
principal. At the end of second year, the total amount, which the depositor will get, is Rs. 1,000 +
Rs. 100 + Rs. 100 = Rs. 1,200. Let us generalise it:
Let, P = Principal amount (in Rs.)
i = Rate of simple interest per year in % of principal
n = Period of deposit (in years)
Then, the interest earned after n years is:
1= P • i • n o —(1)
The final amount, which the depositor will get after n years, is principal plus the interest earned.
Value of principal after n years = P + 1
 •

190 INDUSTRIAL ENGINEERING AND MANAGEMENT

= P + P.i• n
= P (1 + i • n). .(2)

14.3 COMPOUND INTEREST

Banks, generally, offer compound interest. Compound interest is calculated on the basis of total balance
in the account. This may be principal plus interest earned in the previous period.
Now, if the bank gives compound interest at the rate i per year, then
Value of principal after one year = P+P*i
Value of principal after two years = (P + P*i)+ (P + P*i) i
= P (1+0+ P (1+0i
= P (1+i) (1 + i)
P (1+ 02
Value of principal after three years: = Value of principal after two years + interest earned
in the third year on the value of interest at the
beginning of second year
=P(l+i)2 +P(l+i)2 *i
= P (1+ 02 (1+ i)
P (1+ 03
Similarly, value of principal after n years: = P (1 + i)" -(3)
Therefore, and investment of Rs. 1,000 would become 1,000 (1 + 0.1)2 = Rs. 1,21.0 after two
years, when rate of interest is 10% per year on compound basis. Note that it is Rs. 10 more than the
case when simple interest rate was used.

14.3.1 Interest with Multiple Frequency of Compounding

Many deposits earn compound interest, which may be semi-annual or quarterly. In all such cases, the
value of principal would be calculated at the end of the period, when the interest is due. For example,
at 10% rate of compound interest, when we calculate quarterly, the principal of Rs. 1,000 may increase
as follows:
Value of principal after 3 months 0 )
= 1,000 (1+ 2
4
4 )1 ( 0.1
Value of principal after 6 months = [1,000 (1+ 1+
4

° 2
1
=1,000 (1+2
4
0
Value of principal after 9 months = 1, 000 (1 + 1
4
Value of principal after 12 months (or one year)
0.1) 4
= 1,000 (1+ — = Rs. 1,025
4
When we generalize this approach, a principal of P, when earns a compound interest of i% after
every mth fraction of year, then:
ENGINEERING ECONOMICS 191

) m,,
Value of principal after n years = P (1 + —
m
Therefore, a principal of Rs. 1,000, when earns a compound interest of 10% every quarterly, then:
0 1 4s2
Value of principal after 2 years = 1,000 (1 +
4 )
= Rs. 1,050.62 •
It may be noted, this value is more than the value computed for simple interest or simple compounding.
Example 14.1 Compute the value of principal for Rs. 1,000, when 12% rate of interest is simple,
compounded annually, compounded semi-annually and quarterly and monthly. Compute it for next
5 years.
Solution: Given, Principal, P = Rs. 1,000
Rate of interest, i = 12% = 0.12
Number of years; n = 5 years
(a) When interest is simple:
Value of principal = P (1 + i • n)
= 1,000 (1 + 0.12 x = Rs. 1,600
(b) When interest is compounded annually:
Value of principal = P (1 +
= 1,000 (1 + 0.12)5 = Rs. 1,762
(c) When interest is compounded semi-annually:
. 1 2n
Value of principal = P(1+ —1

0.121
2'5
= 1,000 (1+ ---- = Rs. 1,791
2 J
(d) When interest is compounded quarterly:
. )4n
Value of principal = P(1+ —1
4
0 114.'5
= 1, 000 (1 + = Rs. 1,806
4
(e) When interest is compounded monthly:
)I2n
Value of principal = P(1+
12
0.12 )12.5
= 1,000 (1+ = Rs. 1,817
12
192 INDUSTRIAL ENGINEERING AND MANAGEMENT

11000 10892

10000 -
10641
9000 -

8000

7000 - 5996
Value of
Principal 6000 - 5892 3400

f 5000 - 010
2800

4000 - 3
o/c
3362
3000 -
00
2000 - 1806
600
1000
0 5 10 15 20

Year --

Figure 14.1 Value of Principal in Example 14.1

Table 14.1 Compounded Value of Principal

Principal Rs. 1,000; Interest 12%

Mode of Interest 5 years 10 years 15 years 20 years
Simple 1,600 2,200 2,800 3,400
Compounded:
(i) Annually • 1,762 3,106 5,474 9,646
(ii) Semi-annually 1,791 3,207 5,743 10,286
(iii) Quarterly 1,806 3,262 5,892 10,641
(iv) Monthly 1,817 3,300 5,996 10,892

14.3.2 Case of Continuous Compounding

When the interest is considered to be compounded continuously, we may assume that interest is compounded
for infinite number of times per year Table 14.2. For this case:
i Inn
)
Value of principal after n years = P lim ( 1 + —
m—>oo in

)lli in
= P hill [(1+ —1 i
In)..)
— in

in
in 1

i
=P [ lira(1 + — i
ni—>co ni

= P [e]in = Pei .
ENGINEERING ECONOMICS 193

Table 14.2 Effective annual interest rate for various compounding period

Frequency of Period of Effective annual interest Effective annual interest rate

Compounding Compounding per year rate 12% at nominal rate at nominal rate 20%
Annually 1 , 12% 20%
Semi-annually 2 12.36% 21%
Quarterly 4 12.5509% 21.55%
Monthly 12 12.6825% 21.939%
Weekly 52 12.7341% 22.093%
Daily 365 12.7475% 22.1336%
Continuously cc 12.7497% 22.1403%

14.4 PRESENT VALUE AND FUTURE VALUE

Present Value (or, worth): It is the value of a future payment if in case it is paid immediate.
Future Value (or, worth): It is a payment of a present amount which is made at some later date.
For example, let us assume that we have Rs. 1,000 and we deposit in bank at 12% interest. Let
us also assume that interest is compounded annually. What amount will we get after five years? We
have seen in Example 14.1, that it is Rs. 1,762. In the present context, the future worth of present worth
of Rs. 1,000 after 5 years from now is Rs. 1,762 at 12% interest.
Relationship between present worth and future worth
Let P = Present worth in Rs.
F = Future worth in Rs. at the end of nth year
n = Number of years
i = rate of interest compounded annually
FF P,,i n = Factor, which converts present worth (P) into future worth (F) at i% rate of interest
after n years
Fp F. " = Factor, which converts future worth (F) into present worth (P) at i% rate of interest
after n years
IF
P
0 1 2 3 4 (n-I ) it
Year
After one year: F = P + P = P (1+ 0
After two years, Value of P would be:
F = [P (1+ i)] (1 + i) = Pi (1+ 02.
Similarly, after n years: F = P (1 + i)" ...(4)
As defined earlier F =(FF,p,i,n) P
where, FF,P,i,n = (i i)"
From Equation (4) above, we have
1
P = F (- —(5)
1+ i
Here, factor which converts future worth into its present worth:
1
n = ...(6)
P.". (1+ On
194 INDUSTRIAL ENGINEERING AND MANAGEMENT

[Fp, Fd.„] is pronounced as "factor which converts future worth into present worth, when rate of
interest is i% for n years".
Table 14.3 FpF „ i.e., Present Value of Re. 1

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%

1 .990 .980 .971 .962 .952 .943 .935 .926 .917 .909 .900 .893
2 .980 .961 .943 .925 .907 .890 .873 .857 .842 .826 .812 797
3 .971 .942 .915 .889 .864 .840 .816 .794 .772 .751 .731 .712
4 .961 .924 .888 .855 .823 .792 .763 .735 .708 .683 .659 .635
5 .951 .906 .863 .822 .784 .747 .713 .681 .650 .621 .593 .567
6 .942 .888 .837 .790 .746 .705 .666 .630 .596 .564 .535 .507
7 .933 .871 .813 .760 .711 .655 .623 .583 .547 .513 .482 .452
8 .923 .853 .789 .731 .677 .627 .582 .540 .502 .467 .434 .404
9 .914 .837 .766 .703 .645 .592 .544 .500 .460 .424 .390 .361
10 .905 .820 .744 .676 .614 .558 .508 .463 .422 .386 , .352 .322

100
0 Percent
90
80
70 5 Percent
60
Present value

50
40
10 Percent
30
20
12 Percent
10
0
0 1 2 3 4 5 6 7 8 9 10
Year

Figure 14.2 Present value of Rs. 100 to be Received in Future and Discounted Back to Present Date

Table 14.4 FF p n i.e. Compounded Sum of Re. 1 after n Years at i% Rate of Interest

n 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12%

1 1.010 1.020 1.030 1.040 1.050 1.060 1.070 1.080 1.090 1.100 1.11 1.120
2 1.020 1.040 1.061 1.082 1.102 1.124 1.145 1.166 1.188 1.210 1.23 1.254
3 1.030 1.061 1.093 1.125 1.158 1.191 1.225 1.260 1.295 1.331 1368 1.405
4 1.041 1.082 1.126 1.170 1.216 1.262 1.311 1.360 1.412 1.464 1.518 1.573
5 1.051 1.104 1.159 1.217 1.276 1.338 1.403 1.469 1.539 1.611 1.685 1.762
6 1.062 1.126 1.194 1.265 1.340 1.419 1.501 1.587 1.677 1.772 1.870 1.974
7 1.072 1.149 1.230 1.316 1.407 1.504 1.606 1.714 1.828 1.949 2.076 2.211
8 1.083 1.172 1.267 1.369 1.477 1.594 1.718 1.851 1.993 2.144 2.304 2.476
9 1.094 1.195 1.305 1.423 1.551 1.689 1.838 1.999 2.172 2.358 2.558 2.773
10 1.105 1.219 1.344 1.480 1.629 1.791 1.967 2.159 2.367 2.594 2.839 3.106
ENGINEERING ECONOMICS 195

300 — 12 Percent

250 — 10 Percent

200 —
Future Value (Rs.)

150 — 5 Percent

100 0 Percent

50 —

0 I I I I I I I I I I
0 1 2 3 4 5 6 7 8 9 10
\'ear

Figure 14.3 Future Value of Rs. 100 Initially and Compounded at Different Interest Rates

14.5 RELATIONSHIP OF ANNUITY

Annuity (A) is equal payment at the end of each year. It is like constant amount, recurring deposit scheme.
In an industrial situation, such a series of cash flow is shown in Figure 14.4.
A A A A A A
0 2 3 4 . (n — 1) 1 n

Year

Figure 14.4 Annuity and an Equivalent Future Worth

The future worth of annuity may be calculated as follows:

Future worth of annuity paid at the end of 1st year = A [FF,p" 01_1] = A (1+ on-1 .
Future worth of annuity paid at the end of 2nd year = A [FF , p, i%,n-2]= A (1 + i)n-2 •
Similarly, Future worth of an annuity paid at the end of (n — 1)th year = A (1 + i)
Future worth of last year annuity = A (Figure 14.5).
A A A .4
0 1 2 . (n — 1)1 n

Year F
A
.v (1 + i) A (1 + i)

jp-2. , A ( 1 + On-2
X ( 1 -I-
A (1 +
X (I + 011-1

Figure 14.5 Transferring Annuity at the End of nth Year

Therefore, referring Figure 14.5 for more clarity:

F =A(1+0n-l +A(1+0"-2 +...+A(1+0+A
196 INDUSTRIAL ENGINEERING AND MANAGEMENT

Multiplying F by (1 + i) both sides in above equation, we have:

F (1 + i) = A (1 On + A (1 + On-1 + , + A (1 + i)2 + A (1 + i)
Subtracting Equation (7) from Equation (8), we get:
F (1 + = A (1+ On + A (1+ On-I + A (1 + 02 + A (1 + i)
F = A (1 + On-I + A (1 + On-2 + A (1 + 02 + A (1 + i) + A

F (1 + i) F = A (1 + On — A
or F (1 + i — 1) = A [(1 + i)" — 1]
F=A [(1+i)"-11
or —(9)

(1+ On — 1
Since multiplication of converts an annuity into the future worth, it is written as FF,A,in•

From Equation (9) A=F ...(10)

[(1 + )" —1]

is similarly termed as FA, F , 01.

(1 + On —1

14.5.1 Present Value of an Annuity

We have seen that P = F[ + ]

(1 on
(1+1)" —11
and, F =A
C
Putting the later equation in the first one, we get
[(1+i)"-11 [ 1
A
[(1 A- On ]

or, P=A r +i)" —11

i (1 + On
Also, from above equation:
[ i + On
A=P ...(12)
(1+i)" —1
(1+ i)" —1 i (1+ i)"
Here, is termed as Fp, A,i,„ and is termed as FA,P,i,n
i (1 + (1 + On —1

14.5.2 Sinking-Fund Factor

In the annuity or equal payment series, we have the relationship:
[ i
A=F
(1 + —1
ENGINEERING ECONOMICS 197

1
Here, of FA,F,i,„ is the factor which converts a future requirement of fund (say F)
(1+i)„ -1
into equal payment of annuity (say A). This factor is also called as sinking-fund factor.
Example 14.2 For a future requirement of Rs. 1,270, what equal payment is needed for five
years when rate of interest is 12% compounded annually?
Solution: Given: F = Rs. 1,270, i = 0.12, n = 5, A = ?
A = FA, F,0.12, 5
[ 0.12 1
A = Rs. 1,270
(1+ 0.12)5 -11
= Rs. 1,270 x (0..1574) = Rs 200.

14.5.3 Equal Payment Capital Recovery Factor

Let us assume that a person deposits P amount at an annual interest rate of i%. He is interested to
withdraw the principal and the interest earned in a series of equal withdrawals for n year. How much
should he withdraw each year so that at the end of nth year he withdraws the full amount?
1
0 . (n - I) f fn
14 2 14 3 14 1

Figure 14.6 Capital Recovery, Equal-payment Series

We have already derived that:

[ i (1+ i)"
A=P
(1+ i)n —1

i (1 A- ir
Here, FA,p",n is also called as capital recovery factor.
(1+ i)" -1 or
Example 14.3 An old lady deposits Rs. 1,00,000 at 12% interest compound annually. She invests
for 10 years and wants equal payment each year. How much will she get if the balance will be nil
at end of 10th year?
Solution: Given: P= Rs. 1,00,000, i = 0.12, n = 10, A = ?
[0.12 (1+ 0.12)10
A = Rs. 1,00,000 = Rs. 17,698.
(1+0.12)10 -1

Table 14.5 Summary of Relationship

S.No. To find Given Algebric relationship Relationship Name of factor Cash flow
by factor

L F P F=P0+W Compound-
interest factor iP
0 1 2 nIn
2. P F P = F/(1+ F=F Present value factor

Contd...
198 INDUSTRIAL ENGINEERING AND MANAGEMENT

S.No. To find Given Algebric Relationship Relationship Name of Factor Cash Flow
by factor

F= Equal Payment-
[(1+ -1]
3. F A F=A F = A (FA, P,, ,,) value factor
/ Ai Ai Al e
(FP, F,i,n) series future o_n n
0 1 2
A = FFA , F",„
A=F A = F (FF , „
Sinking
4. A F
[ 0 + oin fund factor
( FA,P,i,n)

[a + on — Unacost present-
5. P A P-A P = A (FF.4 ,1. „)
i (1+i)" value factor
A Ai Ai 1A

1 2 n-I n
e(1+ i)" Capital Recovery
6. A P A=P
[ (l +i)" -1
A = P (F4 , F ,1 „)
factor

Example 14.4 Consider the cash flow situation in which cash is received from first year to 8th
year as follows: Rs. 100, 200, 500, 800, 800, 800, 800 and 800 respectively. Assuming 20% rate of
return, find:
(i) Present value,
(ii) Future worth at 8 year, and
(iii) An equivalent annuity for this cash flow.
Solution: The cash flow is shown in Figure 14.7.
Rs. 100 200 500 800 800 800 800 800

Of 2 3 4 5 6 7 8
P0
Figure 14.7 Cash flow of Example 14.4
(i) Present value:
100 200 500 1 1 1
P= + + + 800 + + +
° (1+ 0 (1+ 02 (1+ [ (1 + (1 + (1 + +107
For i = .2
100 200 500 1 1 1 1 1
PA = + + +800 [ ., + + ,+ + 8
° (1.2) (1.2)2 (1.2)' (1.2r (1.2)' (1.2)6 (1.2)7 (1.2)
= 511.57 + 800 [1.73]
= Rs. 1,895.57
Alternately: Find equivalent present worth of all five annuities at t = 3 year and then bring back
at t = 0.
100 200 500
P=—+ + „ + 800 [Fp, A,i,5 *
° 1.2 (1.2)2 (1.2)"
ENGINEERING ECONOMICS 199

100 200 500 800 800 800 800 800

1 1
2

Po
800 * FpA,i.5
1
800 * (Fp 4, 5)* Fp , i,3

Figure 14.8

100 200 500 (1+ 0.2)5 —1 1

or, + +800
P° = 1.2 + 1.2 0.2 (1+ 0.2)5 (1+ 0.2)3
= 511.57 + 800*(2.99) (0.579)
= 511.57 +800*1.73
= Rs. 1,895.57.
(ii) Future worth after 8 years:
F8 = Po (FF,P,i,8) = PO (1 +
= 1,895.57 (1+ 0.2)8 = Rs. 8,150.60
Alternately, in the manner similar to part (i), all cash flow may be brought to year 8.
(iii) Equivalent annuity for this cash flow:
A = Po [FA, p,i 8]
r i 0 +08
= 1,895.57
[ (I +1)8 _
[0.2 (1.2)8
=1,895.57 — Rs. 494.
(1.2)8 —1

14.6 PROFITABILITY PROJECTIONS (OR ESTIMATES OF WORKING RESULTS)

Profitability projections are needed when you are starting a business or if already running a business,
the projection of profitability is very much essential. Given the estimates of sales revenue and cost of
production, the next step is to prepare the profitability projections. The estimates of working results may
be prepared along the following lines:
(a) Cost of production—Cost of materials, labour, utilities and factory overheads.
(b) Total administrative expenses—consists of administrative salaries, remuneration to directors, professional
fees, light, postage, telegram and telephones charges, insurance and taxes on office property and
miscellaneous items.
(c) Total sales expenses—commission payable to dealers, packing and forwarding charges, salary of
sales staff, advertising expenses and other miscellaneous expenses.
(d) Royalty and know how payable-rate is usually 2-5%of sales: it is payable often for a limited number
of years say 5-10.
(e) Total cost of Production (a + b + c + d).
200 INDUSTRIAL ENGINEERING AND MANAGEMENT

(f) Expected sales—figures of expected sales are drawn from the estimates of sales and production
prepared earlier in financial analysis and projection exercise.
(g) Gross profit before interest = Expected sales — Total cost of production.
(h) Total financial expense = Interest on term loans, on bank borrowings, commitment charges on term
loans and commission for bank guarantees.
[In estimating the interest on term loans (i) Interest on term loans is based on present rate of interest
charged by the term lending financial institutions and banks, (ii) Interest amount would decrease
according to the repayment schedule of term loan].
(i) Depreciation—This is important in capital intensive projects.
[In figuring out the depreciation charge, the following points should be borne in mind:
(i) Contingency margin and preoperative expenses provided in estimating the cost of project should
be added to the fixed assets proportionately to ascertain the value of fixed assets for determining
the depreciation charge.
(ii) Preliminary expenses in excess of 2.5% of project cost (excluding working capital margin)
should be added to fixed assets for determining the depreciation.
(iii) Income tax act specifies that the written down value method should be used for tax purposes.
(iv) For company law purpose the method of depreciation may be either the written down value
(WDV) method or the straight- line (SL) method].
(j) Operating profit = g— h — i.
(k) Other income—Income arising from transaction not part of the normal operations of the firm
disposal of scrap, sale of machinery.
(I) Write off of preliminary expenses—preliminary expenses up to 2.5% of the cost of project or capital
employed whichever is higher can be amortized in ten equal annual installments.
(m) Profit or loss before taxation = j + k — I.
(n) Provision for taxation—while calculating the taxable income a variety of incentives and concessions
has to be taken into account.
(o) Profit after tax • = m — n.
(p) Retained profit (also called ploughed back earnings) = Profit after. tax — Dividend payment.
(q) Net cash accrual = Retained profit + Depreciation + Write off of preliminary expenses
+ noncash charges.
14.7 PROJECTED CASH FLOW STATEMENT
The projected cash flow statement shows the movement of cash into and out of the firm and its net
impact on the cash balance within the firm. The format for preparing the cash flow statement which
is really a cash flow budget, as prescribed by Indian financial Institutions is given below. The format
calls for preparing the Cash flow statement on a half yearly basis for the construction period and on
an. annual basis for the operating period for ten years for managerial purposes, it may be helpful to
prepare it on a quarterly basis for a construction period and on a half yearly basis for the first 2 to
3 years of operating for managerial purposes. This would facilitate better financial planning, project evaluation
and fund control.
Cash flow statement: The cash flow statement is having two parts. The source of funds and the
disposition of funds. The source gives the idea of the various fund sources and how the fund is to be
disposed is given in the second part, which is enumerated as follows.
ENGINEERING ECONOMICS 201

Sources of funds
1. Share issue.
" 2. Profit before taxation with interest.
3. Depreciation provision for the year.
4. D.evelopment rebate resery
5. Increase in secured medium and long-term bon-owings for project.
6. Other
• medium and long-term loans.
7. Increase in unsecured loans and deposits.
8. Increase in bank borrowings.
9. Increase in liabilities for deferred payment (including interest) to machinery suppliers.
10. Sale of fixed assets.
11. Sale of investments.
12. Other income.
Total (A)
Disposition of funds
1.Capital expenditure for project.
2. Other normal capital expenditure.
3. Increase in working capital.
4. Decrease in secured medium and long-term borrowings.
5. Decrease in unsecured loans and deposits.
6. Decrease in bank borrowings for working capital.
7. Decrease in liabilities for deferred payments to machinery suppliers.
8. Increase in investments.
9. Interest on term loans.
10. Interest on bank borrowings.
11. Taxation.
12. Dividends.
13. Other expenditure.
Total (B)
— Opening balance of cash in hand and at bank
— Net surplus or deficit (A — B)
— Closing balance of cash in hand and at bank.
14.8 PROJECTED BALANCE SHEET
The projected balance sheet shows the balance in various asset and liability amounts reflects in financial
condition of the firm at a given point of time. Format of a balance sheet as prescribed by, the companies
act is given below:
Liabilities Assets
Share capital Fixed assets
Reserves and surplu's' Investments
Contd...
202 INDUSTRIAL ENGINEERING AND MANAGEMENT

Secured loans Current assets, loans and advances

Unsecured loans Miscellaneous expenditure & losses
Current liabilities & provisions
The liabilities side of the balance sheet shows the sources of finance employed the business.
• Share capital consists of paid up equity and preference capital.
• Reserves and surplus represent mainly the accumulated retained earnings. They are shown in different
accounts like the capital reserves, the investments allowance reserve and the general reserve.
• Secured loans represent the borrowings of the firm against which the security has been provided.
The important components of secured loans are debuntures, term loans from financial institutions
and loans from commercial banks.
• Unsecured loans represent borrowings against which no specific security has been provided. The
important constituents are fixed deposits from public and unsecured loans from promoters.
• Current liabilities are obligations which mature in the near future, usually a year. These obligations
arise mainly from items which enter the operating cycle; payable from acquiring materials and supplies
used in production and accruals of wages, salaries and rentals.
• Provisions—Tax provision, provision for provident fund, pension, gratuity and proposed dividends.
The assets side of balance sheet shows how funds have been used in the business. The major
asset components is listed below:
• Fixed assets are tangible long-lived resources used for producing goods and services.
• Investments are financial securitiqs owned by firm.
• Current assets, loans and advances—Cash, debtors, inventories of different kinds and loans and
advances made by the firm.
• Miscellaneous expenditures and losses—Outlays not covered by the previously described asset accounts
and accumulated losses.
For preparing the projected balance sheets at the end of the year n + 1 the following information
is needed:
1. Balance sheet at the end of year n.
2. Projected income statement and the distribution of earnings for year n + 1.
3. Sources of external financing proposed to be tapped in the year n + 1.
4. Proposed repayment of debt capital during the year n + 1.
5. Outlays and the disposal of fixed assets during the year n + 1.
6. Changes in the level of current assets during the year n + 1.
7. Changes in the other assets and certain outlays like preoperative and preliminary expenses during
the year n + 1.
8. Cash balance at the end of year n + 1.
Sample Problem: Balance sheet of ABC enterprises at the end of the year 2005 is as follows:

Liabilities Assets
Share capital 100 Fixed assets 180
Reserves and surplus 2Q Investments 0
Secured loans 80 Current assets 180
Contd...
ENGINEERING ECONOMICS 203

Liabilities Assets

Unsecured loans 50 Cash 20

Current liabilities 90 Receivables 80
Provisions 20 Inventories 80
360 360

Projected income statement and distribution of earnings for the year n + 1 is given below:
Sales 400 Profit before tax 60
Cost of goods sold 300 Tax 30
Depreciation 15 Profit after tax 30
Profit before interest and taxes 90 Dividends 10
Interest 20 Retained earnings 20

During the year n + 1 the firm plans to raise a secured term loan of 10, repay a previous term
loan to the extend of 5 and increase unsecured loans by 15. Current liabilities and provisions are expected
to remain unchanged. Further the firm plans to acquire fixed assets worth 30 and increase its inventories
by 5. Receivables are expected to increase by 15. Other assets would remain unchanged, excepting of
course cash. The firm plans to pay 10 by way of equity divided.
Solution: Projected Cash flow statement of ABC enterprises
Sources of funds:
1. Profit before taxation with interest 90
2. Depreciation provision 15
3. Increase in secured loans 05
4. Increase in unsecured loans 15
Total (A) 125
Disposition of funds:
1. Capital expenditure for project 30
2. Increase in working capital 25
3. Interest 20
4. Taxation 30
5. Dividends-equity 10
Total (B) 115
— Opening balance of cash in hand and at bank 20
— Net surplus or deficit (A — B) = 125 — 115 = 10
— Closing balance of cash in hand and at bank 30
Projected Balance Sheet

Account category Opening balance Changes during the year Closing balance

Liabilities
Share capital 100 100
Reserves surplus 20 (+20) Retained earnings 40
Secured loans 80 (+10) additional term loans (-5) 85
repayment

Contd...
204 INDUSTRIAL ENGINEERING AND MANAGEMENT

Account category Opening Balance Changes during the year Closing balance

Unsecured loans 50 (+15) proposed increase 65

Current liabilities 90 90
Provisions 20 20
405
Assets
Fixed assets 180 (+30) additional outlay (-15) 195
Depreciation
Investments
Current assets 180 215
Cash 20 30
Inventories 80 (+5) proposed increase 85
Receivables 80 (+15) expected increase 95
405

REVIEW QUESTIONS

14.1 Explain the concept of: (a) Simple interest and (b) Compound interest. Give examples.
14.2 Compute the value of the principal for Rs. 5,000 when 10% interest is charged as (a) Simple interest,
(b) Annually compound interest, (c) Semi-annual compound interest, (d) Quarterly compound interest, and
(e) Monthly compounded interest. Compute it for next 10 years.
14.3 Prove that the value of principal (P) after it years for continuous compounding at i% interest is P . ein.
14.4 Establish relationship between:
(a) Present value and future value
(b) Present value and annuity
(c) Future value and annuity.
14.5 Derive expression for:
(a) Sinking-fund factor
(b) Equal payment capital recovery factor
(c) Unacost present value factor.
14.6 Consider the cash flow in which cash is received from first year to sixth year as Rs. 100, 400, 500, 600,
600 and 600, respectively. For 10% rate of return, find: (a) Present value, (b) Future value at the end of
6th year, (c) Equivalent annuity for this cash flow.

REFERENCES

1. Brighton, EF and Pappas, JL, 1976, Managerial Economics, 2nd ed., The Dryden Press.
2. Canada, JR, and Sullivan WG, 1989, Economic and Multiattribute Evaluation of Advanced Manufacturing
System, Prentice Hall, New Jersey.
3. DeGarmo, EP, Canada, JR and Sullivan WG, 1979, Engineering Economy, 6th, ed., The MacMillian Co.,
New York.
ENGINEERING ECONOMICS 205

4. Jelen, FC, and Black, JH, Cost Optimization Engineering, McGraw Hill Book Co., New York.
5. Kolb, RW, and Rodriguez, R.V., 1992, Financial Management, DC Heath & Co., Lexington.
6. Park, WR. 1973, Cost ,Engineering Analysis,• John Wiley & Sons Inc., New York.
7. Petty JW, Keown AJ, Scott (Jr.) DF, and Martin JD 1993, Basic Financial Management, Prentice Hall,
• New Jersey.
8. Murthy, MRS, 1988, Cost Analysis for Management Decisions, Tata McGraw Hill, New Delhi.
9. Newmann, DG, 1980, Engineering Economics Analysis, Calif: Engineering Press.
10. Ostwald, PF, 1974, Cost Estimating for Engineering and Management, Prentice Hall Inc., New Jersey.
11. Riggs, JL, 1977, Engineering Economics, McGraw Hill Book Co., New York.
12. Taylor, GA, 1980, Managerial and Engineering Economy, 3rd ed., D. Van Nostrand Co. Inc., New York.
206 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 15
DEPRECIATION

15.1 WHAT IS DEPRECIATION

Depreciation is the way to avail tax benefits for a tangible property or intangible property, which loses
the value due to passage of time. Tangible property is such property, which can be seen or touched,
e.g., office car, furniture and machine. Intangible property is the property, which cannot be touched or
seen, e.g., copyright, licence, franchise, patent, etc. Generally, the value of a property becomes lesser
as time passes. This is because of following reasons:
1. Obsolescence or becoming out-of-date.
2. Depletion.
3. Wear and tear.
4. Rusting and corrosion.
5. Improper .repair.
6. Frequent breakdown and accidents.
7. Insufficient capacity to cope up with the changed demand situation.
8. High maintenance.
Example 15.1 A machine is purchased for Rs. 10 lakhs. If it is sold after five years, most likely
the price, which it will fetch would be substantially less than its purchase price. This may be due to
obsolescence in technology and high wean tear and maintenance. This loss is value in accounted for
tax-rebate purpose and the term is technically called as depreciation.
Example 15.2 A machine, which is purchased today, is based on current product demand. However,
after 5 years, the product demand and profile may change. This may necessitate to procure a high
capacity, versatile machine. In accounting, the provision to change the loss due to insufficient capacity,
obsolescence or depletion is called as depreciation.
Example 15.3 Although the depreciation is treated as expense in accounting (as this is a loss
in value of an asset), there is no physical flow of cash. Therefore, depreciation is a non-cash expense.
A major reason to consider depreciation is to lessen the taxable income by the amount of depreciatio4
charged during that financial yeas:
208 INDUSTRIAL ENGINEERING AND MANAGEMENT

15.1.1 Notations Used

As we charge depreciation, the value of asset decreases by the amount of depreciation. This remained
value of the asset (which is the difference between purchase price and total depreciation charged till
that period) is also called as book-value of the asset.
Let (BV)n = Book value at the end of nth year
d,,= Depreciation charged in the nth year
P = Purchase price (or the original cost) of the asset
N = Service life of the asset
S = Scrap value of the asset at the end of its life
D,: = Total depreciation charged till nth year
Thus, as defined earlier:

(BV),,= P —±d„
n=1

S = P —Ed„ =(BV)„„.N
n=1
and, total depreciation charged till the end of nth year:

DN = E d„
n=1
and (BV)„ = (BV)„_i —d„
We would like to clarify two common misconceptions in depreciation:
1. Depreciation is not charged for the purpose of procuring another asset as its life ends. Rather it
is for the purpose of accounting of the capital expenditure and tax calculation.
2. Book value is not to be confused with the resale price of the asset. In fact, resale price and book-
value are generally different in all cases.

15.1.2 Accounting Concept of Depreciation

Suppose an asset is purchased for Rs. 10,000. This cost is viewed as the pre-paid operating expense,
which will occur during the use of the asset. Therefore, it should be charged against profit during its
life-time. The scheme of charging this expense provides the real significance of depreciation.

15.1.3 Value Concept of Depreciation

The physical capital such as machine, building, etc., in real sense, does not get spent. But the accounting
considers this as an expense, spread over its life-time. Original price minus the retained value of the
asset (i.e., book value) is the total depreciation of the asset.

15.2 CLASSIFICATION OF DEPRECIATION (TABLE 15.1)

Depreciation is classified as:
1. Physical depredation
2. Functional depreciation
" 3. Accident.
DEPRECIATION 209

Table 15.1 Classification of Depreciation

Depreciation Description Example

Physical • Physical impairment of an asset
• Wear and tear
• Deterioration in the item
More vibration, shock, abrasion,
impact, noise
Functional • Due to change in demand, the service
of the asset becomes inadequate
• More efficient model of asset is
available (or obsolescence of existing
one)
Accident • Accidental failure or partial damage
1. Wearing of tyre
2. Rushing of pipes
3. Corrosion in metal
4. Chemical decomposition
5. Old car, etc.
1. An office has one good manual typewriter. Still,
it is profitable and desirable to dispose the manual
type-writer and purchase a computer-printcr for
DTP job.
2. A 386-computer with mono-screen is in good
conditon, yet it may be inadequate for current use,
and a pentium II computer with multimedia kit and
colour monitor is needed.
• Due to sudden voltage fluctuation, the TV burns
out

15.3 METHODS TO CHARGE DEPRECIATION

15.3.1 Straight Line Method (SLM)
In this, the value of the asset decreases uniformly through the life of the asset. Thus,
di = d, = d3 = dN = d (say)
Since depreciation is charged for N years during the life-time and total loss in value is the difference
between purchase price (P) and scrap value (S);
P—S
d„= d
N

D„=Id„ = d =nd E
n=i n=1
or, Total depreciation charged upto n years:
P—S
D11 = nd = n
N

Therefore, (BV)„ = P — D„ = P n[ P

Example 15.4 Let purchase price of an asset is Rs. 20,000 and scrap value is Rs. 2,000. The
life of asset is 10 year. Then total depreciation, which should be charged in the life-time, is:
DN = P — S = 20,000 — 2,000 = 18,000
N = 10 years
d = 18,000/10 = 1,800.
210 INDUSTRIAL ENGINEERING AND MANAGEMENT

End of year (n) Depreciation charged Book value at the end of

during year (n) = do year = (13V), = P - Edn

0 20,000 (= P)
1 1,800 18,200
2 1,800 16,400
3 1,800 14,600
4 1,800 12,800
5 1,800 11,000
6 1,800 9,200
7 1,800 7,400
8 1,800 5,600
9 1,800 3,800
10 1,800 2,000 (= S)

15.3.2 Declining Balance Method (DBM)

Here, we assume that the asset loses its value faster in early life period. A fixed percentage of book
value at the beginning of any year is taken as the depreciation charge for that year. Therefore, every
year the book value of the asset decreases by a fixed percentage. One of the weaknesses of DBM is
that asset never depreciates to zero.
If the book value declines by a per cent every year, then:
= a (BV),_,
(BV), = (BV),_1 - d, = (BV),_1 -a (BV),_1 = (1- a) (BV),_ 1
Example 15.5 For an asset worth 20,000, we will have the following depreciation charges at
20% declining balance method:

End of year (t) Depreciation charged Book value at the end of

during the year (d1) = 0.2 (BV),_, year = (BVt) = (BV),_1 d,

0 Rs. 20,000
1 (0.2) (20,000) = 4,000 20,000 - 4,000 = 16,000
2 (0.2) (16,000) = 3,200 16,000 - 3,200 = 12,800
3 (0.2) (12,800) = 2,560 12,800 - 2,560 = 10,240
4 (0.2) (10,240) = 2,048 10,240 - 2,048 = 8,192
(0.2) (8,192) = 1,638 8,192 - 1,628 = 6,554

15.3.3 Double Declining Balance Method (DDBM)

1
It is noticed that in straight line method (SLM) of depreciation, the rate of depreciation is - , where,
(P - V)
N is the asset useful life. This is because in SLM, d, --, and is constant. Now, if one takes
2 N
double of this rate, i.e.,( -I and applies the declining balance method, the method to charge depreciation

is called as double declining balance method. Therefore, DDBM is a special case of DBM where percentage
2
a is taken as - •
N
DEPRECIATION 211

2
Hence, in the previous example, if we use DDBM, the value for a would be — = 0.4 when the
5
asset life is 5 years. Method to calculate depreciation and book value remains same.
Example 15.6 Show that for the declining balance method the rate of depreciation:
S j iiN
a = / — (—
P
where, S and P are salvage values and purchase prices, and N is the asset life.
Solution: Depreciation during first year,
di = aP
Book value at the end of first year,
(BV)1 = P — di = P (1— a)
Similarly, d2 = a (BV), = a (1— a) P
(B112 = P (1—a) — a (1— a) P
=P(1— a)(1—a)= P(1— a)2
d3 = a (BV)2 = a (1 — a)2 P
(BV)3 = (BV)2 — d3 = (1— a)2 P — a (1— a)2 P
= (1— a)2 (1 — a) P (1— a)3 P
Therefore, at the end of asset life after N years:
(B V)N = (1— a)N p
The book value at the end of asset life is also the salvage value. Therefore,
S = (1— a)N P

or, (1— coN _ S

p
I/N
or, 1 — a = (p

1/Nc,
or, a=1—t ) •

15.3.4 Sum of Year Digits Method (SYD)

In this method, we assume that the value of the asset decreases with a decreasing rate as it becomes
older. Let us understand this through an example.
Example 15.7 Let P = Rs. 20,000, S = Rs. 2,000; N = 5 years. In sum of year digits method,
the first step is to sum all digits starting from .1 to N. We call it sum of year digit. Thus, for N =5,
this sum is I + 2 + 3 + 4 + 5 = 15.
Next step is to calculate depreciation and book value. The depreciation in the first year would
5
be — time purchase price minus salvage value. Here, numerator indicates the last year digit, i.e., 5.
15
The denominator indicates sum of year digit which we have calculated in Step 1. The book value at
the end of first year would be purchase price minus depreciation charged. In the second year, the depreciation
212 INDUSTRIAL ENGINEERING AND MANAGEMENT

4
charge would be — times, purchase price minus salvage value. Similarly, the depreciation charged in
15
3
third year is — times book value at the end of second year.
15
,Calculations: Now, the value of asset which would depreciate in 5 years
=P—S
= 20,000 — 2,000 = Rs. 18,000.

End of Year in reverse order Depreciation charged Book value at the end of
year (t) during the year di year (BV),

0 20,000
5 (5/15) (18,000) = 6,000 20,000 — 6,000 = 14,000
2 4 (4/15) ( I 8,000) = 4,800 14,000 — 4,800 = 9,200
3 3 (3/15) (18,000) = 3,600 9,200 — 3,600 = 5,600
4 2 (2/15) (18,000) = 2,400 5,600 — 2,400 = 3,200
5 1 (1/15) (18,000) = 1,200 3,200 — 1,200 = 2,000 (= S)
SUM = 15

2 (N - n + I)
Example 15.8 Show that for SYD method, depreciation during nth year is (P S
N (N + 1)
Solution: Let N = year of life for the asset.
Sum of digit from 1 to N
=1+ 2 + 3 + + N
N (N +1)
2
For nth year the reverse number of year is
(N — n + 1)
Hence, depreciation factor for the nth year
N - n +1 2 (N - n +1)
N (N +1) N (N +1)
2
Hence, depreciation in the nth year
2 (N - n +1)
tin = (P S)
N (N +1)
Hence, proved.
SYD method has following features:
1. It gives rapid depreciation in early years.
2. The asset depreciates to the salvage value at the end of life. This is not the case in DBM or
DDB method.

15.3.5 Sinking Fund Method (SFM)

We assume that a sinking fund is established and accumulated in this method. By sinking fund we mean that
each year depreciation is so charged that the future worth of all depreciation and salvage value becomes equal
to purchase price of the asset. Thus, if rate of interest is i, the cash flow diagram is given in Figure 15.1.
DEPRECIATION 213

0 1 2 N- 2 N- 1

Year —.-
Figure 15.1

P=S E
11=1
(Future worth of depreciation till Nth year)

=S+d+d(1+0+d(l+i)2 +...+d (1+0N-1

= S + d [1+0+0+0+02 +..+0—ON-1 ]
[(I + O N — 1 1 [(I + i)N —11
=S+d =S+d
(1 - 0 — 1 i

or,

Total depreciation t'll nth year s shown as D,, (Figure 15.2).

Figure 15.2
Putting the value of d from earlier derivation:
[ i [(1 + [(1 + On — I]
= (P — S) = (P S) + 0N-I
(1 + ON —1 ] i
(1+i)» -1
D,, = (P — S)
(1 + ON —1]
Also, =P—
Sinking fund method is generally not very common for accounting purpose. It gives a low depreciation
in early year (Figure 15.3).
100

Book value
as a percentage
of first cost
50

0 Age of Asset 10

Figure 15.3 Comparison of Different Methods of Depreciation

214 INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 15.9 A machine is purchased for Rs. 75,000 with an estimated age of 10 years. Its
scrap value is Rs. 5,000 at the 10th year What will be the depreciation for 6th year and book value
at the end of 6th year? Assume an interest rate of 5%.
Solution: Given; P = Rs. 75,000, S = Rs. 5,000, N = 10 years, n = 6 year.
(P — S) 75,000 — 5,000
Straight line method d= N = Rs. 7,000
10
In 6th year depreciation charged is Rs. 7,000
Total depreciation charged till 6th year
= 6 x 7,000
D6 = 42,000
Book value at the end of 6th year
= P — D6
= 75,000 — 42,000 = Rs. 33,000
Declining balance method
5,000 =
a = 1-10 0.237
75, 000
5

(BV)5 = 75,000 5,000 jto= 19,365

75,000
6
5,000 ) to
(BV)6 = 75,000 = 14,771
75,000
Therefore d6 = (BV)6 —(BV)5
= 19,365 — 14,771
= Rs. 4,594.
Double declining method
2 2
— = — = 0.2
a N 10
(BV)5 = 75,000 (1— 0.2)5 = 24,576
(BV)6 = 75,000 (1— 0.2)6 = 9,661
d6 = 24,576 —19,661 = Rs. 4,915
Sum of years digit method (SYD)
Sum of year =1+ 2 +3+...+10 = 55
5
depreciation factor for 6th year
55
5
= (75,000 — 5,000) — = Rs. 6,363.6
55
6
(BV)6 = 75, 000 — d„
DEPRECIATION • 215

10 9 8 7 6 51
= 75,000 - (75,000 -5,000) [— + — + — + — + — + —
55 55 55 55 55 55
= 75,000 - 70,000 x 0.818 = Rs. 17,727.27
Sinking fund method (SFM)
d = (75, 000 - 5, 000) [
(1+ ON-I
[ 0.05 1
= 70,000 , = Rs. 5,565.32
(1 + 0.05r-'

(1+ - 11 [0 .05)5 -11

d6 = 5,565.32 = 5,565.32
1 0.05
= 30,751.90
(1+ i)6 -1
(BV)6 = 75,000 - (75,000 - 5,000) + olo _ 1
[

= 75,000 - 70,000 C 13 4 = 75,000 - 70,000 x 0.54

0 63
= Rs. 37,145
Method of depreciation -> SLM DBM DDB SYD SFM
Depreciation in 6th year (Rs.) 7,000 4,594 4,915 6,363.64 30,751.90
Book value at the end of 6th year (Rs.) 33,000 14,771 19,661 17,727.27 37,145.00

15.4 SERVICE LIFE OF ASSET

The estimate of service life has important bearing on the calculation of depreciation. It depends upon
the experience of the industry. Some guidelines are as follows:
Asset Range for the life of asset in calculating depreciation
Furniture 8 - 12
Aircraft 5-7
Computer 5-7
Electric equipment 9 - 15
Motor Car 9 - 15
Construction 4-6

REVIEW QUESTIONS

15.1 Explain the term "depreciation". Why is this charged?

15.2 Explain the following terms with example:
(a) Book value, (b) Scrap value, (c) Service life, (d) Depreciation.
15.3 Explain and compare the following methods to charge depreciation:
(a) Straight line method
(b) Declining balance method
216 INDUSTRIAL ENGINEERING AND MANAGEMENT

(c) Double declining balance method

(d) Sum of years digits method
(e) Sinking fund method.

15.4 An asset is purchased for Rs. 5,50,000 with an estimated service life of 15 years. Its scrap value is estimated
as Rs. 50,000. What will be the depreciation charged in the 5th year and book-value at the end 5th year?
Assume a rate of return of 10% per year.

15.5 A computer system is purchased for Rs. 95,000. Its scrap value is estimated as Rs. 5,000 at the end of
five year of its service life. Plot the annual depreciation, total depreciation charged and book-value on a
time scale. Use all the methods you have learned. Make different plots for different methods.

REFERENCES

1. Brighton, EF, and Pappas, JL, 1976, Managerial Economics, 2nd ed., The Dryden Press.
2. Canada, JR, and Sullivan WG, 1989, Economic and Multiatiribute Evaluation of Advanced Manufacturing
System, Prentice Hall, New Jersey.
3. DeGarmo, EP, Canada, JR and Sullivan WG, 1979, Engineering Economy, 6th, ed., The MacMillian Co.,
New York.
4. Jelen, FC, and Black, JH,Cost Optimization Engineering, McGraw Hill Book Co., New York.
5. Kolb, RW, and Rodriguez, RJ, 1992, Financial Management, Lexington: DC Heath & Co.
6. Park, WR. 1973, Cost Engineering Analysis, John Wiley & Sons Inc.; New York.
7. Petty J.W., Keown AJ, Scott (Jr.) DF, and Martin JD 1993, Basic Financial Management, Prentice Hall,
New Jersey.
Cost Analysis for Management Decisions, Tata McGraw Hill, New Delhi.
8. Murthy, MRS, 1988,
9. Newmann, DG, 1980, Engineering Economics Analysis, Engineering Press, Calif.
10. Ostwald, PF, 1974, Cost Estimating for Engineering and Management, Prentice Hall Inc., New Jersey.
11. Riggs, JL, 1977, Engineering Economics, McGraw Hill Book Co., New York.
12. Taylor, GA., 1980, Managerial and Engineering Economy, 3ed ed., D. Van Nostrand Co. Inc., New York.
 BREAK-EVEN-ANALYSIS

16.1 INTRODUCTION
Break-even-analysis is a powerful analytical tool, which uses simple graphical technique to compare few
feasible alternatives. It is useful for analysing cost/revenue relationship with respect to production volume
(Figure 16.1). At what minimum level of production-volume, feasible production systems will give profit
can be determined by break-even-chart.
Let, F1 = Fixed cost for process 1
F2 = Fixed cost for process 2
Vt = Variable cost for process 1 (per unit item)
V2 = Variable cost fOr process 2 (per unit item)
QBEP = Break-even-quantity
TBEP = Total cost of manufacturing at break-even-quantity, 0BEP.

Cost (Rs.) Process I

Process 2

1
1
:BEP
(V2) (QBEP)

QBEP
Quality (Q)

Figure 16.1 Break-Even-An'alysis for Two Processes

218 INDUSTRIAL ENGINEERING AND MANAGEMENT

A chart is plotted, as shown in Figure 16.1, in which x-axis is for production-volume. On y-axis,
cost or revenue is plotted.

16.2 ASSUMPTIONS
It is assumed that all cost/revenue functions (such as fixed cost, variable cost, sales, etc.) are linear
with respect to production-volume. However, non-linear functions may also be considered in special cases.
Another assumption in break-even-analysis is related to cost-volume information. All informations
related to cost are assumed to be deterministic.
We also assume that the influence of a variety of non-volume factors on cost data is of no significance
in break-even-analysis.

Assumptions in BEA
1. Linearity of cost/revenue function with respect to production volume.
2. Deterministic cost/volume/revenue information.
3. Functions other than volume-dependent cost (or revenue cost) are ignored.
4. Single product firm.
5. Constant product mix.
6. Unconstrained conditions.

16.3 STEPS IN BREAK-EVEN-ANALYSIS (BEA)

' 1. Classify various elements of costs on the basis of their dependence on change in volume.
2. Select suitable measures of activity related to the variability of cost elements.
3. Decide range of activities for which the cost/revenue date are valid.
4. Collect and prepare empirical data for deciding the variability of cost elements.
5. Determine the rate of variability of each cost-element with the help of mathematical or statistical
tools.
6. Plot/calculate the break-even-chart or break-even volume.
7. Analyse.
It is important to understand the classification of cost into two elements: fixed cost and variable
cost.

16.4 FIXED COST

Fixed costs are those elements of costs, which remain unaffected by the change in volume or level of
activity. In a factory, suppose 100 items are manufactured in a month. For this production-volume, the
rent of building is Rs. 50,000. Now, suppose, in the next month, the production falls to 98 units. However,
the rent remains the same. So, this is a fixed cost. Other examples of fixed cost are: administrative
staff salary, overhead expenses related to plant, machinery, building, office car, etc. These overhead costs
may be in the form of depreciation, rent, insurance charges, etc. These overhead charges are on a regular
basis irrespective of the use or production-volume.
Fixed costs are also called as period costs because the variation of fixed costs is in direct proportion
to the passage of time. However, we presume that _BEA is for a given period of time in which fixed
cost remains fixed with respect to the production-volume.
BREAK-EVEN-ANALYSIS 219

Fixed cost per unit item or fractional utilization of the capacity is not fixed. A lower utilization
means higher fixed cost per unit item while a higher utilization means a low fixed cost per unit production.

16.5 VARIABLE COSTS

Variable costs are those elements of costs, which are proportional to the variation in the volume, activity
or utilization of resources. For example, direct material costs or direct labour costs are proportional to
the production and thus termed as variable costs.

16.6 PURPOSE OF BEA

1. BEA is useful in determining the critical level of operation over which the organisation makes
profits and below which there would be losses.
2. Level of profit or loss at a projected production-volume may be known.
3. Selection of process for a projected production-volume may be known. In Figure 16.1, process
1 is more profitable till break-even-quantity (QBEP) production level. However, above this production
level, process 2 becomes economical.
4. Implication of cost reduction policy on the profitability of the firm may be known.
5. Decision-related to make or buy or product may be taken.
6. Decision related to product mix may be taken.
7. Effect of increase in variable cost on the profitability of the firm may be known.
8. Effect of increased capacity of firm may be known.
Example 16.1 A company is producing certain type of circuit breakers. The fixed cost of land,
building, etc., is Rs. 40,000. The variable 'cost is Rs. 10 per unit production. If the sales' price of the
product is Rs. 20 per unit, what should be the minimum production level?
If the firm is operating at present so that production is 8000 units, what is the firm's profit and
margin of safety?
Solution: Given,
Fixed cost F = Rs. 40,000
Variable cost V = Rs. 10 per unit
Sales price S = Rs. 20 per unit
At break-even-point of production, there would be neither profit nor loss. Any production above
this level gives profit. The break-even-chart is as follows (Figure 16.2).
In this problem, at 4000 units of production, the total cost line crosses the revenue line. Total
cost line is drawn by adding fixed cost (F) and the product of variable-cost (V) and production quality.
i.e., Total cost = F + QV -W
The total revenue or sales line is drawn by the product of sales price (S) and production-
volume (Q).
i.e., Revenue = QS ...(ii)
At break-even-point (BEP), total cost is equal to total revenue, thus,
F + QV= QS

or ...(iii)
Q = S -V
220 INDUSTRIAL ENGINEERING AND MANAGEMENT

Margin of Safety = 4000 Units

1,60,000

Margin of Safety
= Rs. 80,000 Profit

Revenue Break-Even-
or Cost Point (4000
Units)
80,000
Total Cost Line : Angle of Incidence

Sales Revenue at BEP

Rs. 80,000
Variable Cost
1•

40,000 .

Loss
Revenue Fixed Cost
Line

2 3 4 5 8
Production-Volume (Q) (in '000)

Figure 16.2 Break-Even-Analysis for Problem 16.1

Here, S and V are expressed in Rs. per unit of production. For the given problem, at BEP,
40, 000
QBEP = = 4,000 units
20 — 10
Equation (iii) is multiplied by sales piice (S) both sides, then we get break-even-point in monetary
terms. For the given problem, at BEP the revenue or cost is:
FS 40,000 x 20
BEP = = Rs. 80,000
S—V 20 —10
Other Observations: At any production level above BEP, i.e., 4000 units, the firm will have profits
and below this there will be loss.

16.7 MARGIN OF SAFETY

It is the difference between the operating sales and break-even-sales.
Margin of Safety = Present sales — Break-even-sales
In ratio term, margin of safety (MIS) ratio is:
Margin of Safety
M/S Ratio =
Present Sales
Higher is this ratio, more sound is the economics of the firm. Therefore, higher margin of safety
means that in case of little fall in productitin, the firm will keep earning profit.
Thus, for a production of 8,000 units in the Example 16.1, margin of safety is:
M/S = Production Volume — BEP Production
= 8,000 — 4,000= 4,000 units
In Rs. terms, M/S = 4,000 x Sales Price
BREAK-EVEN-ANALYSIS 221

= 4,000 x 20 = Rs. 80,000

In ratio terms, MIS Ratio
Margin of Safety Rs. 80,000
= 0.5.
Present Sales Rs. 1,60,000

16.8 DETERMINING PRODUCTION-VOLUME FOR A GIVEN PROFIT

Let us assume that we want a profit of P. Then, looking at the region of profit, which is at the right
of break-even-point, we have:
Fixed Cost + Variable Cost = Sales — Profit
or, F + VQ = SQ— P
Q=F+P
or, in unit terms
S—V
QS = (F+P)S = F+P
Multiplying S both sides, in Rs. terms.
S—V 1— VIS
Example 16.2 For a profit of Rs. 10,000 what would be the production in the previous example?
F+P 40,000 + 10,000
Solution: Here, Q= = 5,000 units.
S—V 20 — 10

16.9 FORMULA FOR BREAK-EVEN-ANALYSIS (BEA)

Although the BEA is generally a graphical technique, following set formula is useful to verify the results:

BEP = in turnover or Rs. terms

1 — VIS

BEP = F in unit of production

S—V
Production quantity for P profit
F+P
units
1 — V/S
V
Profit = Sales Volume [1 — —] — F.

16.10 ANGLE OF INCIDENCE (8)

This is the angle between the lines of total cost and total revenue. Higher is the angle of incidence,
faster will be attainment of considerable profit for given increase in production over BEP. Thus, the
higher value of 0 makes system more sensitive to changes near break-even-point.
An indirect (numerical surrogate) measure of Q is profit volume ratio. This is defined as:
Sales — Variable cost
Profit Volume Ratio —
Sales
Higher is the profit volume ratio, greater will be angle of incidence and vice-versa.

16.11 PROFIT-VOLUME GRAPH (P/V GRAPH)

Profit-Volume graph is a plot similar to BEP analysis. It is useful for comparing different processes
or systems. The chart shows quantity on x-scale and profit on the y-scale. Therefore, at no producion
222 INDUSTRIAL ENGINEERING AND MANAGEMENT

level the y-coordinate is negative and equal to the fixed cost. The slope of the line starting with (zero
production; fixed cost) point is dependent on the profit-volume ratio.

Profit (or loss, if

negative) (Rs.) Profit

Loss Quantity

Fixed Cost

Figure 16.3

Example 16.3 The fixed cost of Rs. 24,000 and a break-even-quantity of 34,000 unit are esti-
mated for a productions. Draw profit graph and calculate the P/V ratio and profit at .a sales volume
of 50,000 units.
Fixed cost
Solution: (a) P/V Ratio
Break — even — quantity
24, 000 =
0.706.
34, 000

Profit 10
(or loss,
if negative)
(Rs.)
35 40 45 50 55

Figure 16.4

(b) At sales-volume of 50,000 units

Fixed cost + Profit
P/V Ratio =
BREAK-EVEN-ANALYSIS 223

24,000 + P
Or, 0.706 =
50,000
or, P = 50,000 x 0.706 — 24,000
= Rs. 11,295 Rs. 11,295 Ans.

REVIEW QUESTIONS

16.1 Explain the concepts in break-even-analysis with examples. What are the assumptions involved?
16.2 Explain the steps involved in break-even-analysis. What are the advantages and limitations of break-even-
analysis?

16.3 Differentiate between fixed cost and variable cost. How do they help in determining break-even-point?
16.4 Define and explain the followings in the context of break-even analysis:
(a) break-even-point.
(b) safety margin.
(c) angle of incidence.
16.5 What is a profit-volunie chart? Explain.

16.6 A manufacturing firm has three proposals for a product. Either it can be purchased from an outside vendor
at Rs, 4.00 per unit or it canbe manufactured in-plant. There are two alternatives for in-plant manufacturing.
Either, a fully automatic unit is procured, involving fixed cost of Rs. 30,000 and variable cost of Rs. 2.75
per unit. Alternatively, a semi-automatic unit would cost Rs. 20,000 as fixed, cost and Rs. 3.00 per unit
as variable cost.
Draw a break-even-chart for these alternatives. Suggest range of production-volume suited for these alternatives.

REFERENCES

I. Bierman, H. and Hyckman T.R., I976,. Managerial Cost Accounting, McMillan, New York.
2. Gallagher C.A. and Watson H.J., 1980, Quantitative Methods for Business Decisions, McGraw Hill,
New York.
3. Gordan, S., 1977, Managerial Cost Accounting, Home Wood, Ill: Irwin.
4. Horngren, C.T., 1978, Introduction to Management Accounting, Prentice-Hall, New Jersey.
5. Murthy, MRS, 1988, Cost Analysis for Management Decision, Tata McGraw Hill, New Delhi.
6. Rappaport, A. (edited); 1975, Information for Decision-Making—Quantitative and behavioral Dimensions,
Prentice-Hall, New Jersey.
224 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 REPLACEMENT AND SELECTION

17.1 INTRODUCTION
In a manufacturing or service system, we face many situations when we have to take decision for the
selection of a particula. r alternative. For example, for a particular operation on a part, various alternative
machines are available. It may be a conventional machine, semi-automatic, automatic or numerical control
machine. All have different production capacity, different cost and different life. Which amongst them
is economical? The decision regarding such a problem is called as selection problem.
Sometimes, we face situation of machine replacement. This may be due to following reasons:
1. Existing machine (or unit) has completed its effective life and it is not economical to run it any
more.
2. Existing machine (or unit) is damaged or destroyed due to some accident or breakdown.
3. Very high maintenance and repair cost of the machine.
4. Due to technological innovation, a new machine (or unit) is available in the market.
5. Unavailability of spare parts of the machine.
6. Change in product mix, product design, specification and quality standard, production volume, company
policy (say, for modernisation), government regulation (say, for pollution), etc.
Therefore, it is essential to evaluate various alternatives existing in the market and present unit.
Economic evaluation is an important part of this decision. Sometimes, it is essential to estimate the age
at which replacement is more essential as compared to continuing with the existing unit at an increased
operation and maintenance cost.

17.2 NATURE OF SELECTION PROBLEM

Selection problem is related to economic evaluation of alternative proposal. This requires following information:
(i) Initial cost of the unit.
(ii) Annual operating and maintenance cost.
(iii) Economic life of project.
(iv) Rate of return for money invested in the project.
We will discuss this with some illustrative problems. The guiding principle in the selection problem
is to bring all cash flow at one point of time. For this different approaches are:
(i) Present worth method,
226 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Future worth method,

(iii) Annuity method,
(iv) Internal rate of return. method, and
(v) Capitalized cost method.

17.3 NATURE OF REPLACEMENT PROBLEM

Replacement problem may be of following variety:
(i) Capital equipments, which deteriorate with time, for example, trucks of a transport agency, lathe
machine, etc.
(ii) Items, which fail completely. These are handled under group replacement policy, for example, electric
bulbs, electronic items, etc.
(iii) Mortality and staffing problem.
(iv) Other problems.

17.4 REPLACEMENT OF ITEMS WHICH DETERIORATE

Some capital items, such as truck, bus, machine tools, etc., are items, whose maintenance and operation
cost increases with time. By not purchasing a new unit we are doing two things:
(i) Saving in fresh capital expenditure, and
(ii) Losing due to extra operating cost.
At an age, when average monthly loss due to extra operating cost exceeds average monthly saving
due to fresh capital expenditure for replacement, one should go for replacement.
Let us assume that time is a continuous variable and operating cost (0,) is a function of time
(t). Let C be the capital cost and S be the salvage cost of the item. Then, total operation and maintenance
cost in period t,

0= J 0,dt

Total cost till time, 1:

TC = C + SO, dt — S

Average total cost till time t:

C—S 1
( TC)avg = + JO, dt
t to
Differentiating above expression with t and equating to zero for minimum of average-total cost,
we get:

(TC) (C - S) [1
+ {0} - 2 SOt dti= 0
dt av (
2
1 t 0

1 C - S TC
Thus, 0, = — 10, dt +
o t
Thus, for minimum total cost, the operating and maintenance cost at time t should be equal to
average cost in time t.
REPLACEMENT AND SELECTION 227.

Example 17.1 The cos (of an equipment is Rs. 7,.200 and the scrap value is Rs. 200. The maintenance
costs are as follows:
Year 1 2 3 4 5 6 7 8
Annual maintenance Cost /50 300 450 650 950 1,300 1,850 2,500
When should the equipment be replaced?
Solution: Given; C = Rs. 7,200, S = Rs. 200
Loss in Capital = C - S = 4,700

Replacement at Maintenance Total maintenance Loss in Capital Total Cost (TC) Average
the end of year (t) Cost (0) cost (M) (C-S) (C-S) + E01 Cost (TW/t)

1 150 150 •7,000 7,150 7,150

2 300 450 7,000 7,450 3,725
3 450 900 7,000 7,900 2,633
4 650 1,550 7,000 8,550 2,137
5 950 2,500 7,000 9,500 1,900
6 1,300 3,800 7,000 10,800 1, 800
7 1, 850 5,650 7,000 12,650 1,807
8 2,500 8,150 7,000 15,150 1,893

We observe that the maintenance cost in 7th year (Rs. 1,850) exceeds average total cost in 6th
year (Rs. 1,800), hence the equipment should be replaced at the end of 6th year.

17.5 REPLACEMENT OF MACHINES WHOSE OPERATING COST INCREASES WITH

TIME AND THE VALUE OF MONEY ALSO CHANGES WITH TIME
We have seen in Chapter 14 that money has got a time value. As time passes, value of money decreases.
Present value ot Rs. 100 will always be (1 + i)" times less than its future value after n years. Here i
is the rate of interest and n is the number of years under consideration. (1 + i)" is also called as discount
factor.
When we are considering the option of evaluating flow of money in a given project, it may be
important to consider the time value of money. The principle behind all such approaches is simple. All
the transactions at different points of time should be brought at one point of time and be added so
as to judge the superiority of one of the alternatives..
Example 17.2 A company has option to purchase either of the two machines. If money is worth
10% per year which machine would you recommend for the following data?

Year Cost at the.beginning of year (Rs.)

Machine I Machine II
1 3000 3500
2 2700 2200
3 2700 2800
4 3100 3000
Total 11,500 11,500
228 INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: At a discounting rate of 10% per year, the expenditure for machine I in the second

year would be worth[2700 (1 +10.1)] Similarly, the present worth of expenditure in the third year

for machine I is 2700 We get the following discounted cost table.

(1 +0.1)2
1 ]

Year Discounted cost @ 10% per year (Rs.)

Machine I Machine II
1 3000 3500
( 1
2 2700 — 2454 2200 = 2000
1+ 0.1) (1 +10.1)
2
1 1 2
3 2700 (— ) = 2231 2800 (—) = 2314
1.1 1.1
3 3
3100 = 2329 3000 = 2254
11 11
Total discount cost (Rs.): 10,014 10,068
Now, since total discounted outlay of machine I is lesser, it is more economical.
ite approach for the evaluation and selection may be extended for comparison by annual cost
method' or internal rate or return method. However, the principle is same:

Key Point
An alternative, which requires the minimum net capital outflow and will produce satisfactory
functional results, should be opted, unless these are definite reasons why an alternative requiring
a larger net outflow should be adopted.

Example 17.3 Consider four machines I, II, III and IV. The installation cost is Rs: 6,500, 8,500,
10,000 and 14,500 respectively. The total disbursements on maintenance, operation, electricity and labour
are Rs. 20,000, 18,000, 11,000 and 10,000. Each has an economic life of 5 years. Compare and select
the most economical machine. Assume money is worth 10% per year
Solution: Present Worth Method

Machine Machine
Cost /. ll Ill ;V
Installation cost 6500 8500 10000 14500
Present worth of annual disbursement (A)
A * (P/A, 10%, 5) 3.79 x 20000 3.79 X 18000 3.79 x 11000 3.79 x 10000
(1+ 0.1)5 —11
= A[ — 3.79 A = 75816 = 68234 = 41690 = 37908
0.1 (1+0.1)5
Total 82316 76734 51690 52408
REPLACEMENT AND SELECTION 229

Thus; machine III is the most economical machine as its equivalent present worth is least.
Comparison by Annual Cost Method

Machine Machine
Cost 1 11 111 IV
Equipment annuity of installation 6500 x 0.26 8500 x 0.26 10000 x 0.26 14500 x 0.26
cost (I) or capital recovery I (AIP, 10%, 5) = 1690 = 2210 = 2600 = 3826
[0.1 (1+ 0.1)5]
= 0.261
(I + 0.1)5 —1
Annual disbursements 20000 18000 11000 10000
Total 21,715 20,243 13,600 13,826

Thus, machine III is the most economical.

Comparison by Internal Rate of Return: We compare the two alternatives (say A and B) at
one time and see which is more economical. For this, we calculate the change in investment and annual
savings (from A to B). For each comparison, the rate of return, which equates the increment in investment
and annual saving, is termed as internal rate of return (IRR). If IRR is more than the rate of return
(for example, 10% in the example which we an considering), then the switch-over (from A to B) is
justified. •

Machine Machine
Cost IV
Investment 6500 8500 10000 14500
Annual disbursement 20000 . 18000 11000 10000
Life (Years) 5 5 5 5

Increment in cost I —+ II II --> III III —› IV

Increase in Investment (Ai) 2000. 1500 4500
Increase in disinvestment (SD) —2000 —7000 1000
(—ve sign indicates savings) IRR on A/ 95%* 480%** 3.5%
Is IRR justified? (Yes, when IRR > i%) Yes Yes No

*Sample Calculations
(i) *For I —> II comparison
II is justified if IRR (say i') is more than 10%.
Extra investment = present value of savings in disbursement
or, 2000 = 2000 (P/A, i'%, 5)
(pm, 5) 2000
or, =
2000
(1 + i')5 —1 1
Or,
i' (1 + i')5
By trial and error method,
= 0.95
230 INDUSTRIAL ENGINEERING AND MANAGEMENT

Since this is more than 10% (i.e., 0.1), IRR of 0.95 is sufficient to justify that machine II is superior
than machine I.
**Sample Calculations
(ii) **For II ---> III
(1 + 5 —1 1500
= = 0.214
i' (1 + 05 7000
By trial and error i' = 4.8 (or 480%). Hence machine III is justified as compared to machine II.
***Sample Calculations
(iii) ***For III —> IV
(1 + i')5—1 = 4500 =4.5
(1 + i')5 i' 1000
By trial and error, i' = 0.035 = 3.5%
Since < 10%, hence machine IV is not justified as compared to III. Therefore, machine III is
most economical.
Comparison by Future Worth Method

Machine Machine
Future worth of all costs IV
1. Future worth of installation cost (/)
= I (F/P, 10%, 5) 1.6 x 6500 1.6 x 8500 1.6 x 10000 1.6 x 14500
= / (1 + 0.1)5 = 1.6/ = 10468 = 13689 = 16000 = 23352
2. Future worth of annual disbursement (A)
= A (F/A, 10%, 5) 6.1 x 20,000 6.1 x 18000 6.1 x 11000 6.1 x 10000
(1+ 0.1)5 —1
=A = 6.1 A = 122000 = 109800 = 67100 = 6100
0.1
Total future worth 1,32,468 1,23,489 83,100 84,352
Thus, machine III is the most economical followed by IV, II and I.

17.6 CAPITALIZED WORTH METHOD

Capitalized worth method is very useful when the lives of the alternates are not equal. We will first
consider disbursements for over an infinitely long length of time. Let there be an annuity for an infinite
(cc) period at the rate of interest 1% per year. Its present worth is:

lim (PIA), 1%, 1‘1] * Al = — lim (1 + i)N 11 A

N—)4 1 (1 + i)

1
= lim 1 ,1A
N-400 (1 + 0"
A A [ 1
= lim — — — lim
N—") i i N —*oo (1. +

A I, A
=A— =
i
This is equal to the capitalized worth of the annuity A.
REPLACEMENT AND SELECTION 231

For applying the capitalized worth method in the selection problem, all disbursements, invest-
ments or receipts are expressed in terms of annuity. These are further converted into the capitalized
worth.

Example 17.4 Two alternative machines are under consideration. Their cost structure is given
below. Their economic life is different.

Machine A
Purchase Price 50,000 70,000
Salvage Value 0 30,000
Economic life 10 years 25 years
Annual maintenance and operation cost 15,000 17,000

Solution: When economic life of alternatives is different, capitalized worth method is useful. For
machine B, the total capitalized cost is lesser in the table below. Therefore, machine B is economical.

Machine A
1. Purchase Price (P) 50,000 70,000
1.1 Capitalized worth for replacement of machine A
0.1
= 50,000 [ ,n 31,373
0.0'" 1 0.1
1.2 Capital worth for replacement of machine B
0.1 •1
= (70, 000 — 30, 000) 7,118
[(I.1)" —i][o.i]
2. Annual disbursements
15,000
2.1 15,000
0.1
2.2 17,000
1,70,000
0.1

Total (1.1 + 2.1) or (1.2 + 2.2) 1,81,373 1,77,118

REVIEW QUESTIONS

17.1 What is the nature of a replacement problem? Show that for the optimal replacement of items, which deteriorate
with time, the operating and maintenance cost at the time of replacement is equal to the average cost of
the items till that time. •
17.2 A machine MI costs Rs. 9,010. Annual operating cost is Rs. 200 for the first year. It increases by Rs. 2,000
every year. Determine the best age at which one should replace the machine. For the optimal replacement
policy, determine the average yearly cost of owning and operating the machine.
Another machine M2 costs Rs. 10,000 with annual operating cost of Rs. 400 in the first year. This cost
increases by Rs. 800 every subsequent year. The company wishes to replace its MI , which is one year old
by M2. Is it justifiable? If yes, then when should they go for replacement?
17.3 A company wishes to purchase a machine for its maintenance shop. The initial costs and annual operating
costs are- given below for two options of machines. Which unit is economically justified?
232 INDUSTRIAL ENGINEERING. AND MANAGEMENT

Year Cost of machine/operating cost (Rs.)

Machine I Machine II

1 50,000 80,000
2 5,000 5,000
3 10,000 5,000
4 15,000 5,000.
5 20,000 10,000

17.4 Consider the option of selecting a machine out of four options whose initial installation costs are Rs. 10,000,
15,000, 20,000, and 25,000, respectively. The total annual disbursements for maintenance and labour are 25,000,
20,000, 15,000 and 10,000 respectively. Which machine should be procured? Use following approaches for
10% worth of money per year?
(a) Present worth method
(b) Equivalent annual cost method
(c) Future worth method
(d) Internal rate of return.
17.5 Explain the concept of capitalized worth. Prove that capitalized worth of an annuity, A is A/i, where i is
the worth of money per year.
17.6 Two alternative machines have the following cost structure. Which should be selected? Note that their economic
life is different.

Machine A
Purchase price (Rs.) 1,00,000 , 1,25,000
Salvage value (Rs.) 5,000 10,000
Economic Life (year) 10 12
Annual maintenance cost (Rs.) 10,000 8,000

REFERENCES

1. Brighton, EF, and Pappas, JL, 1976, Managerial Economics, 2nd ed., The Dryden Press.
2. Canada, JR, and Sullivan WG, 1989, Economic and Multiattribute Evaluation of Advanced Manufacturing
System, Prentice Hall, New Jersey.
3. DeGarmo, EP, Canada, JR and Sullivan WG, 1979, Engineering' Economy, 6th, ed., The MacMillian Co.,
New York.
4. Jelen, FC, and Black, JH, Cost Optimization Engineering, McGraw Hill Book Co., New York.
5. Kolb, RW, and Rodriguez, RJ, 1992, Financial Management, DC Heath & Co., Lexington.
6. Park, WR, 1973, Cost Engineering Analysis, John Wiley & Sons Inc., New York.
7. Petty JW, Keown AJ, Scott (Jr.) OF, and Martin JD, 1993, Basic Financial Management, Prentice Hall, New Jersey.
8. Murthy, MRS, 1988, Cost Analysis for Management Decisions, Tata McGraw Hill, New Delhi.
9. Newnan, DG, 1980, Engineering Economics Analysis, Engineerihg Press, Calif.
10.Ostwald, PF, 1974, Cost Estimating for Engineering and Management ; Prentice Hall Inc., New Jersey.
11. Riggs, JL, 1977, Engineering Economics, McGraw Hill Book Co., New York.
12. Taylor, GA, 1980, Managerial and Engineering Economy, 3rd ed., D. Van Nostrand, Co. Inc., New York.
 VALUE ENGINEERING

18.1 INTRODUCTION
Value engineering or value analysis has occupied very important position in industrial engineering and
operations management. It is a systematic, approach of continuously identifying unnecessary costs in products,
processes or systems. The cost of a product and expectation from the product to perform a particular
function are interlinked in value engineering.
18.2 DEFINITION
Value engineering is an organised creative technique directed at analyzing the functions of a product,
service or a system with the purpose of achieving the required functions at the lowest overall cost consistent
with all the requirements, which comprise its value, such as performance, reliability, maintainability,
appearance, etc.
Achieves

Matches
Analyses • Product with
Value
Engineering • Service
• System • Performance
• Reliability
• Appearance
• Maintainability
• Service Life
• Range of
Operation
• Safety
• Alternatives, etc.

Figure 18.1 What is Value Engineering?

18.3 OBJECTIVE OF VALUE ENGINEERING

Value engineering emerged into prominence after World War II. Basic ideas related to it were developed
by Lowrence D. Miles in 1947. The industrial situation during that period was so that there was overall
234 INDUSTRIAL ENGINEERING AND MANAGEMENT

recession. Material was in short supply. Trained and skill manpower was insufficient. Therefore, manufacturing
technologists were looking for alternative material, improved processing requirements, better designs, low
cost operation, and efficient system. Foundation of value engineering got its root during this period to
achieve some of these objectives. The major focus, however, was to cut-down cost while retaining the
desired function of the product.
The objective of value engineering is the systematic application of recognized techniques to identify
the function of a product or service; establish norms for the function; and provide the necessary function
related to these at lowest cost.
18.4 OTHER RELATED TERMS
Value engineering, value analysis, value management, value performance, value control, etc., are the many
terms used for same meaning. However, we would generally slick to the term-value engineering or VE.
18.5 CONCEPT TO VALUE ENGINEERING
Value engineering is focussed on identifying a series of step-by-step techniques to identify the unnecessary
costs and to eliminate them. To do so, it concentrates on their functions and their cost.
18.5.1 What is Value?
Value is the required or needed performance at minimum cost. Now, what is the needed performance?
Needed performance is what the customer expects. If it is less than the desired performance, one should
focus on eliminating the waste caused due to overdesign, such as costly material, high factor of safety
in design, etc. Value in general is the ratio of function and cost. Thus,
Function
Value
Cost
In the above expression, function is expressed as units of performance and cost is expressed as
a monetary unit (such, as Rs., $, etc.) related to expenditure of resources. Therefore, value is expressed
as a relationship of what a product (or service/system) accomplishes and at what Cost.
Example 18.1 Suppose, we want to travel between two cities. The distance between these cities
is 1,000 km. The air ticket costs Rs. 4,000, the train ticket costs Rs. 3,000 and the road-bus costs Rs. 2,000.
Then by air way, the value of air travel is 1000 kin or. 0.25 km/Re. Similarly, value of train travel
1000 Rs. 4,000
is or 0.33 km/Re and the value of road travel is 0.5 km/Re.
300
In this example, we have ignored any function other than distance travelled. If comfort, quality
of services or time to travel are also important then the numerator in value (i.e., function) is a combination
of the needed performance measure. However; it is important to note in the above example that value
gives a quantitative measure of what we are getting at every spent rupee.

18.6 TYPE OF VALUE

Value is categorized into following types:
18.6.1 Use Value
It is • defined as the qualities and properties needed to accomplish a service, product or work.
18.6.2 Esteem Value
It provides properties, features and attractiveness to a service, product or work, which make the ownership
desirable.
VALUE ENGINEERING 235

18.6.3 Scrap Value

It is the money, which can be recovered when the item is not needed. It is the scrap value.

18.6.4 Cost Value

It is the total cost of material, labour, overhead and services to produce an item (or to deliver a service).

18.6.5 Exchange Value

It is the property and qualities, which enable to exchange (or trade) a product (or service) for something
else, which is needed by the exchanger.
A customer purchases an item when the exchange value is less than the perceived (or guessed)
use and esteem value. The most important issue, which a customer generally looks into a product, is
a combination of use and esteem value. For example, new car models coming into market provide either
better service or (and) are good looking. Value is a relative concept. Normally, it increases when product
cost decreases.
Value can change with time and place. Sc, it has its own dynamics. It can be computed performance
wise. Value is a relationship between want and willingness to pay for it.

18.7 FUNCTION
Function is what makes an item useful. For every product. (or services), there must be reasons to justify
why it is of any use. This is answered by a verb. For example, pencil (which is product) makes a mark
(a function). Other examples are given in Table 18.1.
Table 18.1 Function and Value

Function

Category Item Verb Noun Value

Shaft Transmits Power Use

Product Pillers Hold Roof Use
Cloth Covers Body Use
Blanket Provides Warmth Use
Old stamp Exchange Money Exchange
Book Enriches Knowledge Use
Luxury Car Makes Proud Esteem
Services Consultant Consults , Client Use
Firebrigade Extinguishes Fire Use
System Organisation Facilitate Management Use

18.8 EFFECT OF FUNCTION AND COST ON VALUE

Value is affected by change in function and cost. It increases with increase in function while cost is
same and with decrease in cost while function is same. When increased function is associated with increased
cost, value would increase if improvement in function is more than increased cost. Similarly when cost
is less while some functions are compromised, value would increase if and only if cost reduction is
more than loss in function (Table 18.2).
236 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 8.2 How to increase value?

S. No. Cost (C) Function (F) Value (= F/C)

1. Same Same Same

> ÷ >
2. Fall \ Increase /
3. Same Increase /
>
4. Increase / /I Steeper Increase Increase value
5. Fall \ Same

6. \ Steeper Fall Fall \

18.9 COST AND WORTH

Cost is the amount that we actually pay for a product or services. Worth is what we should pay for
the functions, which we want. So, the reasonable cost of the functions we seek is the worth of product.
The objective of value engineering is to make cost close to worth:
If: Cost = Worth
Worth (i.e., intended function)
Value =
Cost
=1
The objective of cost worth analysis is, therefore, to select areas of higher cost worth ratio because
these areas are the potential areas of improvement through value analysis.
Worth is applicable for the function and not for the product, services or system.

Table 18.3 Cost Worth Example.

Function Worth for intended When compared

Cost Rs. Verb Noun funciion, Rs. with
Item
Suit 5000 . Covers Body 500 Cotton Shirt/Pant
Product Glass 50 Contains Water 0.50 Clay pot
Computer 30,000 Calculates Arithmatics 300 Scientific Calculator
Services Chartered
accountant 5000 Calculates Tax 200 Tax guide book
Advanced Automated 20 lakhs Transports Material I lakh Conveyor
Technology guided
vehicle

18.10 LIFE CYCLE OF A PRODUCT AND VALUE ENGINEERING

We have studied product life cycle in Chapter 2. Product life cycle involves various phases from idea
conceiving to birth of product, growth phase and maturity phase. Upto growth phase, value engineering
is not very relevant as compared to maturity phase. In the last phase, attempts are needed to reduce
cost while retaining the functions. In such cases, product life cycle becomes flater rather than declining'
in later phases (Figure 18.2). Value analysis is useful for products which are (i) imported, (ii) have long
VALUE ENGINEERING 237

design to market time, (iii) high cost item, (iv) critical parts, etc. One may think of indigenous substitute
for imported item. Shorter lead time and higher speed to market may be achieved through concurrent
engineering. Pareto-analysis (refer Chapter 33) or ABC analysis (refer Chapter 19) may be done to identify
high value items. For these 'items, cost reduction efforts may be focussed.

Value oriented
product
1
Resources
4
assigned

Performance
oriented product

Idea Growth
Maturity phase
conceiving phase

Time

Figure 18.2 Life Cycle of a Product and Effect of Value Oriented Product

18.11 STEPS IN VALUE ENGINEERING

The main focus in VE is to reduce cost and/or increase the functional property of an item. This may
be achieved by using alternative, cheaper material and/or processes. Many companies in India have adopted
simple rule of thumb to judge the potential area of improvements. They ask these questions and if answer
is yes then they go for them:
(i) How to reduce cost of operation?
(ii) How to reduce cost of material?
(iii) How to reduce time of operation/set-up of tools, jigs, etc.?
(iv) How to reduce manpower needed in the production?
(v) Is automation or advanced manufacturing system cost effective, if yes, then should it be adopted
now?
Similarly, there are many questions related to product performance starting with What, Why, When,
Where, What else, How, Does, Do, Is, If, etc. These questions give answer to the VE strategies. Some
examples are:
(i) What is the item?
(ii) How much is the cost?
(iii) What does it do?
(iv) What are its other uses?
(v) What is the cost of an alternative?
, (vi) What special skill ,is needed in the factory?
(vii) What special skill company does not have?
238 INDUSTRIAL ENGINEERING AND MANAGEMENT

(viii) What machines does the company have?

(ix) What are the surplus equipments which may be liquidated?
(x) Does the product need all features?
(xi) Is low cost alternative product available for consumer?
(xii) What is the strategy of competitors?
(xiii) Does the company possess surplus manpOwer?
(xiv) What does the vendors, subcontractors, or suppliers say about cost reduction?
(xv) Is the profit margin reasonable?
(xvi) What are the quality standard, specification, size, type, shape, weight packaging, etc.?

18.12 METHODOLOGY IN VALUE ENGINEERING

Value engineering starts with the identification and classification of the items. Then functions of the items
are identified. Each function is evaluated and compared. Alternative strategy for cost reduction or function
improvement is adopted. The methodology in VE is given in Figure 18.3.

Get all
available cost •

Avoid Identify and

generality overcome
road-blocks

Use information
from best source

Utilize the Pay for Identify key Use specialized

strength and vendor/ tolerance: knowledge
synergy of subcontractor not to he too
supply chain/ supplier light
value chain skills

Reduced cost in Supply Chain

Improved function of production

Figure 18.3 Methodology of Value Engineering

18.13 FAST DIAGRAM

FAST diagram is an effective graphical-cum-analytical tool in value engineering (Figure 18.4). FAST
stands for Function Analysis System Technique.
Objective: To validate the purpose of a part using questioning method to establish the function
that is served.
Steps in FAST Diagram
Step 1: Define scope of the analysis. It includes the need (or basic objective) of the part and
the interface, which is needed for the part. Interface may not serve the bask objective but may be necessary
to make the part functional.
VALUE ENGINEERING 239

- Scope of FAST Diagram

Critical path

Component I Component 2 Component 3

(Cost Rs. 10) (Cost Rs. 2) (Cost Rs. 600).

Upper Lower
bound bound
governed governed
by Product by Inter-
Functions face
of the
Product
Function 4
(a when query)

Component 4
(Cost Rs. 500)

Figure 18.4 FAST diagram showing components with their functions

Step 2: Explode part into smaller components.

Step 3: Create a well defined list of functions for each part, assembly, etc. Use noun-verb combination
as shown in Tables 18.1 and 18.3.
Step 4: Organise functions as per the sequence of questions which starts with how query, then
why query, and then when query.
Step 5: Create FAST diagram using the listed functions in Step 4. A high level function, which
is why query-type, is placed in the box near the left boundary. Next function is placed in the box which
is right of this box. A why query, if placed in second box, should be satisfied by the function in the
previous box. This process continues.
Step 6: Determine critical path of functions. Critical path is the connection of all the cross-referenced
functions in the FAST diagram.
Step 7: The functions in Step 3 which are not listed in the FAST diagram are the secondary functions.
Place them on FAST diagram by answering to a when query. Show these by dotted lines.
Step 8: All how, why and when query functions are now shown in FAST diagram. Remaining
functions are unnecessary or redundant functions. List these functions.
Sep 9: Place component near to the respective functions in FAST diagram.
Advantages of FAST Diagram
1. It creates a reference to validate the function of a component.
2. Graphically represents critical components and their function.
3. Alternate redrawing of FAST diagram would provide an analyst a list of minimum parts to serve
the function at lowest cost.
240 INDUSTRIAL ENGINEERING AND MANAGEMENT

18.14 MATRIX METHOD IN VALUE ENGINEERING

In matrix method the most suitable alternative is selected by using a numerical evaluation technique.
• Step 1: List all functions required to attain the desired objectives.
Step 2: Generate a relative importance matrix by comparing each factors among them. A 1 is filled
if function of a row is more or equally important than the function in column. For example, in Table 18.4,
F 1 is more important than F3 but less important than F4.
Table 18.4 A sample of relative importance matrix

Function Fl F2 F3 F4 F5 Sum of Importance

F1 1 0 1 0 0 2
F2 1 1 1 1 0 4
F3 0 0 1 1 0 2
F4 1 0 0 1 1 3
F5 1 1 I 0 1 4

Step 3: Sum all rows.

Step 4: Arrange functions in descending order of the sum in last column. This is the relative rank
of functions. For example, in Table 18.4, the relative rank is F2, F5, F4, Fl and F3.
Step 5: Create a weight factor (Wi) for each factor (F1). WW is determined on the basis of the impact
of Fi on the overall product.
Step 6: Evolve alternatives (Ai) to satisfy the overall objective of the product/service. List cost
(Ci) for each
Table 18.5 Sample of main evaluation matrix for Table 18.4. The values for fi an( in the matrix are
hypothetical

Ranked Function (Fi ) Cost Sum of Ratio

(C1) Product, G1 (G1/C1)
F2 F5 F4 Fl F3
Weight (Kt) 0.3 0.25 0.20 0.15 0.1 = E (Wi * fo)
Alternative (A1) Value of Evaluation factor (Fi)

Al 3 7 8 4 1 4.98 4.95 0.99

A2 2 6 5 1 4 5.1 3.65 0.71

A3 6 8 4 2 5 5.2 5.4 1.04

A4 5 9 2 3 9 8 f5.51 0.68

Step 7: Fill evaluation factor (4) for each combination of alternative (Ai). and function (F1) in
the main evaluation matrix. 4
is between 0 to 10 and depends upon the degree of attainment of the
function. For 4=0; the alternative is rejected.
For the illustration purpose, we have taken few hypothetical values off and C for four alternatives
in Table 18.5.
Step 8: Calculate the sum of product Wi and 4
for each alternative (Au). List it in last column
as G. For example, in Table 18.5, alternative Al has G. value as 3 x 0.3 + 7 x 0.25 + 8 x 0.2 +
4 x 0.15 + 1 x 0.1 =4.95.
VALUE ENGINEERING 241

Step 9: Select alternative on one of the following criteria given below:

S. No. Criteria Measure Example

1. Lowest cost alternative Lowest (Ci) A 1 in Table 18.5
2. Best product Highest (Gd) A4 in Table 18.5
3. Best product per unit cost Highest (G/Ci) A3 in Table 18.5

18.15 OTHER APPROACHES IN VALUE ENGINEERING

1. MISS: Modify, substitute or subdivide or exchange/eliminate to help change.

M od-

fy

J ubstitute
t_
'S ub-divide
Exchange/eliminate

2. DARSIRI: Data collection, analysis, record ideas, speculate, innovate, review and implement.

D ata collection

A nalysis

R ecord ideas

S peculate

nnovate

R eview

mplement

3. PROFIT: Product Return Opportunities by Function Investigation Techniques.

4. FIRST: Functional Ideas Regarding system Technique.
5. FACTS: Functional Analysis of Components of Total System.

REVIEW QUESTIONS

18.1 Explain the concept of Value Engineering. Why is it important in the area of Industrial Engineering? Give
examples.
18.2 Explain the following terms:
(i) Value, (ii) Function, (iii) Worth.
10.3 What are the different types of value? How are function and value related?
10.4 Explain the different steps in value engineering process. Explain the methodology.
10.5 Explain the FAST diagram in value engineering. What are its advantages?
242 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

1. Arthus, E. Mudge, 1971, Value Engineering—A Systematic Approach, McGraw-Hill Book Co., New York.
2. Crum L.W.; 1971, Value Engineering, Longman, London.
3. Dlugatch, 1., 1973, "Methodology for Value Engineering", IEEE Trans, on Reliability, U.S.A., Volume
R-22, No. 1, April 1973, pp. 20-23.
4. Edward, D. Heller, 1971, Value Management, Value Engineering and Cost Reduction, Addison-Wesley Publishing
Co., Massachusetts.
5. Falcon, William D, 1964, Value Analysis Value Engineering. American Management Association New York.
6. Fallon, Carlos, 1971, Value Analysis and Value Engineering, John Wiley and Sons, Inc., New York.
7. Gibson, John F.A., 1968, Value Analysis—The Rewarding Infection, Pergamon Press Ltd., Oxford.
8. Miles, L.D., 1955, "How to Gut Costs with Value Analysis", Harvard Business Review, Volume 33, No. 1,
January-February.
9. Miles, Lawrence, D, 1961, Technique of Value Analysis and Engineering, McGraw-Hill Book Co., New York.
10. Miller, S., 1955, "How to Get Most from Value Analysis", Harward Business Review. Volume 33, No. 1,
January-February.
 19
INVENTORY CONTROL

19.1 INVENTORY
Inventory may be defined as any resource that has certain value and which can be used at a later time,
when the demand for the item will arise. It is thus a stock of goods, which may be in the form of
raw material,. semi-finished goods (or, work-in-proces•!s, WIP), or finished product. Every such stock
involves blocked capital (or resource). It is, therefore, important to plan a proper level of inventory.
The nature of inventory depends upon the type of business activity of the firm. For example, a manufacturing
unit carries raw material, some purchased or sub-conti;acted parts, WIP, and finished goods. It may also
carry tools, spare parts, etc., for the next few weeks. 1\hese are called as inventory. Inventory is equally
relevant in non-manufacturing or service sectors. For example, a hospital keeps a reasonable stock of
medicines, life saving injections, operation and surgicai1 equipments, hospital ward including beds, etc.
Even house wives prefer to keep some stock of food-srck in reserve. This is nothing but inventory.
A major reason to maintain inventory is to keep the operations going without interruptions due to shortages
of material. In-process inventory acts as a buffer so that the intermediate processes do not stop. It acts
as the safeguard against ill-planning and scheduling of prc cesses and machines. Finished item inventory
is the item ready for consumption by the consumers. It is important to note that:
(i) Inventory serves as the buffer or safety against ill-planning, sudden demand, continuous production,
etc.
(ii) Any form of inventory is a sign of inefficiency. The tend today is to go for minimum inventory.
The level of inventory may be reduced by:
(a) Better planning
(b) Continuous monitoring of stock (on-line)
(c) Reliable vendors
(d) Use of Just-in-Time (JIT) concepts.
(For details, refpr Chapter 21 on Just-in-Time).
(iii) Reduced level of inventory is a direct saving in the oper ational cost of the plant. Less inventory
also occupies less storage space and less records of stock i,n the store. Lesser inventory is desirable
as this is an opportunity cost, which may be reduced by better planning and control. If inventory
is less, there would be less chances of theft and loss in store.
244 INDUSTRIAL ENGINEERING AND MANAGEMENT

19.2 FUNCTION OF INVENTORY

Despite being blocked capital, certain level of inventory is desirable in most of the situations. This is
for the following reasons:
1. Inventory is required to meet the anticipated demand. Customer generally does purchasing without
any pre-information to the seller or producer. Many times, he is undecided about the model, make
or quantity of the purchase. He would like to see the performance of all the available models.
After judging his need and expenditure, he would select one piece. It is almost impossible to know
how many pieces of a product would be needed each day. Therefore, inventory serves as a buffer
to the anticipated demand.
2. Inventory guards against stock-out situations. There could be many exogeneous factors due to which
the arrival of raw material may be delayed. Inventory works as the safety stock for such situations.
3. Inventory ensures smooth flow of production process. Satisfaction of customer is dependent on
the timely availability of finished goods and spare-parts. Inventory plays an important role in it.
4. Inventory management is a high priority area in industry or service sector. This is due to conflicting
role of inventory (Figure 19.1). For example, the Falesman wants high level of inventory to keep
the promises and quick delivery. On the other hani, warehousing people of the same industry will
prefer lower finished goods inventory so that l's storage space is needed.

Flow of
Inventor),
Customer
Suppler Plant Warehouse

Purchasing Deptt. wants iLroduction Deptt. wants Salesman wants high

more raw material to, ;large inventory for large inventory to keep promises
gain from discount on production run and few and quick delivery.
bulk purchase. set-ups.

'Finance Deptt. wants Control Deptt. wants less Warehousing demands for
less raw material to WIP for less breakage low inventory to save
deploy less investment. and less material handling. storage space.

Raw Material lnprocess tventory (WIP) Finished Goods

Figure 19.1 Conflic g goals in Inventory Management

19.3 INVENTORY COSTS

In an inventory models various cost elen nts are considered. Generally, these costs are dependent
upon the timing (i.e., when) and quantity ( ., how much) to order. The costs relevant to the inventory
models are:
19.3.1 Unit Cost of Inventory
Unit cost of inventory is the price, whichls paid to the supplier for procuring one unit of the inventory.
For parts manufactured in house, cost o f inventory is the direct manufacturing cost. The unit cost of
inventory may be independent of quant,iy of inventory produced. In this case, unit cost of inventory
INVENTORY CONTROL 245

is irrelevant for the inventory models. This is because .the decision regarding how much and when to
order is independent of the unit cost of inventory.
In some situations, the unit cost of inventory is dependent upon the quantity of inventory. For
example, on a bulk purchase, some quantity discount is offered. Quantity discount means that if inventory -
is purchased in bulk, it is available at a price lower than the normal unit price. In such cases, the cost
of inventory affects the decisions regarding when and how much to order. Therefore, in quantity discount
model, cost of inventory is considered in the inventory models.
19.3.2 Ordering Cost
This is the cost associated with the placement of an order for the acquisition of inventories. The expenses,
incurred in the purchase department, are its main constituents. Salary of purchase department, postages
bills, telephone, stationary and follow-up measure by the purchase department are clubbed together to
determine ordering cost.
If in case, a company is producing its own inventory rather than taking it from an outside
supplier, then the cost of set-up for making one batch of product is termed as set-up cost. Set-up cost
is used when inventory is made within the organisation. Similarly, in case of buy situation, we use
ordering cost.

19.3.3 Holding Cost or Carrying Cost

Holding costs are incurred due to maintaining an inventory level in the organisation. It is due to interest
on the held-up capital in inventory, insurance cost, rent, salaries of storage staff, obsolescence, deterioration
and pilferage/theft of material, depreciation of material handling equipment, etc. Generally, carrying cost
is expressed as a percentage of the inventory value.

19.3.4 Shortages Cost or Stock-out Cost

When there is a stock-out situation, the customer demand is not satisfied. In case of raw material/WIP
shortages, the production gets disrupted. This causes loss due to emergency purchase. Unsatisfied customer
results in loss of goodwill and lost-sale. The lost-sale may be due to two reasons: (i) the customer may
postpone or drop the idea to purchase, and (ii) the customer may go to another producer of similar
product/services.

19.4 VARIABLES IN INVENTORY MODEL

In the sections to follow, we will discuss some of the commonly used inventory models. For these models,
following notations are used:
Q= Quantity ordered each time
Q* = Optimum quantity of inventory ordered for minimum total cost
D= Annual demand of parts (in unit)
C = Cost of inventory per unit item
Cc = Carrying cost per unit of individual item, expressed as a percentage of unit cost
Co = Ordering, set-up or procurement cost per order
R= Reorder point
Tc = Total annual costs
TL = Lead time
Cs = Cost of shortages due to non-availability of inventory.
246 INDUSTRIAL ENGINEERING AND MANAGEMENT

19.5 DETERMINISTIC INVENTORY MODELS

19.5.1 Model 1: Uniform Demand Rate, Infinite Production Rate
This is one of the oldest developments in material management. Ford Harris developed it in 1915 and
later R.H. Wilson in 1943, popularized it among researchers and practitioners.
Assumption's of the Model 1
1. Demand for the inventory is deterministic, i.e., it is known with certainty.
2. Demand rate is constant and known beforehand.
3. All orders are placed in single lot.
4. No stock-out shortages or back orders are allowed.
5. No quantity discount is allowed. Thus, purchase cost per unit is fixed.
6. Lead time is constant and it is independent of demand.
7. Inventory is controlled from one point of the system, i.e., in a stockroom or in a warehouse.
Let us further assume that lead time is zero; which means that the inventory is delivered instantaneously
after the order is placed.
Total cost during the year is the sum of the inventory carrying cost during year and total ordering
cost.
Thus, TC = (Ordering Cost) (Number of Orders placed in a year)
+ (Carrying cost per unit) (Average inventory level during year) ...(i)
Number of orders to be placed in a year
Demand in a year
Quantity ordered each time Q
Average inventory carried during the year
Q+0Q
2 = 2
This is because the inventory level is uniformly decreasing from Q to zero (Figure 19.2).

Inventory Ordered (Q)

Quantity Average
Inventory
I (Q) Level (Q/2)

Q/2

Figure 19.2 EOQ model with uniform demand

INVENTORY CONTROL 247

Hence, from Equation (i):

TC = Co (—
D J+ C
Cc —
Q
2 ...(ii)

What level of inventory should be ordered (i.e., Q*), so that total cost will be minimum? To answer
this, Equation (ii) is differentiated with respect to Q and equated to zero. Second differential should
be positive for cost minimization:
d (Tc) d0 C c/Q
— C0 D _ 0 ...(iii)
dQ dQ 2 dQ =
For total cost minimization;
1 Cc
or Qz 2 =0

Cc DC0
or =
2 Q2

I 2DC0
or Q=
\ Cc
d2 2 2C D
dQ2 (TC) = C0 D( — , = (a positive quantity)
Q' Q0'
For total inventory cost minimization, we have defined Q as Q and we will call it as economic
order quantity (EOQ).
= I 2DCo
Q*

Minimum Total Cost, (TC)* will be obtained by putting Q* as Q in Equation (ii).

Cc + Cc 2DC0
Thus, (TC) = C0 D
2DC0 2 Cc

Co D2 Cc I q. 2DC0
2DC0 \ 4 Cc

I Co Cc D 1C0 Cc D = Cc D
.\ = 2c0 cc. D.
\ 2 2 2

19.5.2 Operating Policy of Inventory Control •

Delivery is instantaneous. Therefore, reordering should be done just at the time inventory stock is zero).
This policy has a presumption that lead time is zero. If in case, lead time is known and constant, the
order should be placed exactly ahead of lead time so that the instantaneous supply of Q* arrives when
the stock depletes to zero.

19.5.3 Sensitivity of EOQ Model

It is important to note that the total cost curve is quite flat near the EOQ zone (Figure 19.3). Slight
change in the value of Q is near the EOQ point (i.e., when Q Q ), the change in total cost is insignificant.
248 INDUSTRIAL ENGINEERING AND MANAGEMENT

Total Cost
(TC)

CoasrtrY(iC
11,g)
Lowest
Total Cost

Ordering
Cost (Co)
Cost

0 Q* (EOQ)
Quantity (Q)—.--

Figure 19.3 Economic Order Quantity

Mathematically, dividing Equation (ii) by Equation (iv):

D D
Cc Q
2 i [ 2C0 Q
(TC) C° co ,CQ
. + _ + 'Co
(TC)* \12C0 Cc D V 2C0 Co D 2 V 2C0 Co D V 2Co Q D

1 1 12Co D + I Co
= Q ,\
2 Q .\ Cc 2C0 D

1 [Q* Q ]
_ +
2 Q Q*
If we increase or decrease the EOQ by twice, the increase in total cost is only 25% (Figure 19.4). Thus,
total cost is not very sensitive in the vicinity of EOQ. The physical significance of this observation is quite
important. If there is a slight error in deciding the EOQ, the total inventory cost is insignificantly affected.

1.5

1.25

1
[ TC
(TC)*

0.5 1.0 1.5 2.0

(Q/Q*)

Figure 19.4 Sensitivity of EOQ model

INVENTORY CONTROL 249

Now, let us summarize the concept of EOQ. Economic Order Quantity (EOQ) is that size of order
which is able to minimize the total cost of carrying inventory and cost of ordering for a given period
under the assumption of known and certain demand.

19.6 OTHER OBSERVATIONS OF BASIC EOQ MODEL

19.6.1 High Cost Item Inventory
I 2DC0
As Q* =
Cc

Q* = 1 I 2DC0 DC6
or Average Inventory,
2 2 \ Cc 2Cc
1
or Average Inventory is proportional to
Cc=
Therefore, for high cost items (i.e., high value of Cc), the average inventory level should be low.

19.6.2 Optimum Ordering Interval (e)

EOQ = Demand rate x Optimum ordering interval
or Qs = Dts

Qs _ 1 2C0
Or
D D CCcc= DCc
2 x Setup Cost
Demand x Carrying Cost

19.6.3 Optimum Number of Orders (N*)

The optimum number of orders per year is obtained by dividing annual demand by economic order quantity.
N* = Ds .1 Cc _ . 1DCc
or D.
Q 2DC0 2C0 \
19.6.4 Optimum Number of Days Supply (d)
The optimum number of days for which an order is to be made is sometimes required. Since annual
365
demand (D) is for 365 days, therefore for each optimal order, the supply is for
( — days. Therefore,
N*
2C0
d* = 365 ,\1 days.
Cc
DC

19.6.5 Implication of Assumption that Demand is known with Certainty

The EOQ model assumes that demand of inventory is known with certainty. Someone may argue that
it is not a real life case as market fluctuation, inflation, etc., affect demand. How, EOQ level is affected
by slight deviation in demand. This is again an issue of model sensitivity and uncertain demand. Let
us examine their implications through an example.
250 INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 19.1 Let us assume that ordering cost per order is Rs. 10, carrying cost as a percentage
of purchase price is 10%. Purchase price per unit is Rs. 20.

2C0 D f 2 xl0D . ,---

Solution: Thus, EOQ = -‘/ 10D
Cc = (0.1) (20)

and total cost, (TC*) = V 2Cc. Co D = J2 x (0.1) (20) (10) D = 2 ../T-0—

D
and, Optimum number of orders (N*)
DCc. ID x (0.1) (20) iD
= 11 2C0 = I - 2 x 10 l10
=
Let us examine the implication of different demand levels on EOQ, minimum total cost and optimal
number of orders per year. We will use the equations derived for this example:

Annual Demand, (D) EOQ, (Q*) Total Cost, (TC*) Number of Order (N*)

1000 100 200 10

10,000 316.2 632.45 32
1,00,000 1,000 2,000 100
1,000,000 3,162 6.324.55 317
1,00,00,000 10,000 20,000 1,000

Therefore, as demand increases 10 times in each subsequent row, the EOQ increases by 3.162
times, which is VT). Similarly, total cost and number of order per year is proportional to square root
of demand. We, therefore, conclude that unless the demand is highly uncertain, the EOQ model gives
fairly satisfactory decision values. In other words, this model is quite robust near EOQ. This is one
of the most important reasons due to which the basic deterministic EOQ model is so useful.
Example 19.2 The annual demand for an item is 3200 parts. The unit cost is Rs. 6 and the
inventory carrying charges are estimated as 25% per annum. If the cost of one procurement is Rs. 150, find:
(i) Economic order quantity
(ii) Time between two consecutive orders
(iii) Number of orders per year
(iv) The optimal cost.
Solution: Given, D = 3200 units per year
Carrying cost, Cc = 25% of unit cost
= 0.25 x 6
Ordering cost Co = Rs. 150
Hence,

- I 2DC I 2 x 150 x 3200

(i) EOQ = 0 =.\ = 800 units.
\ Cc 6 x 0.25
(ii) Time between two consecutive orders
EOQ Q* 800 800 x 12
= — — 3200 years = 3200 months = 3 months
D D
INVENTORY CONTROL 251

D 3200
(iii) Number of orders per year =4.
Q* 800
(iv) Optimum cost = (Annual Demand) (Price of unit item) + V2DC0 Cc
= 6x3200+42x3200x150x6x0.25
= Rs. 20,400.

1%7 MODEL 2: GRADUAL REPLACEMENT MODEL

Sometimes, instantaneous supply of delivery may not be possible. Supplier continuously replenish items
at a rate, which is more than the consumption rate. The inventory level never reaches the level to which
it has been ordered. This is because for the time, inventory is supplied, the consumption also continues
(Figure 19.5).
(Q) = Inventory Ordered

p) Maximum inventory
Q(
1 -T = level reached in the
/ system

P>C

Onhand eot,
Inventory Average Inventory

_
2 cl

Time

Figure 19.5 EOQ model with uniform demand and uniform production

Let P = Production rate in unit per day

C = Consumption rate in unit per day
D = Demand rate in unit per year
Q = Size of lot ordered (or produced)
Tp = Procurement time
To = Depletion time.
All the assumptions of Model 1 are sa:ne.except that the supply is instantaneous. In the present
model, the supply is gradual for period Tp.
During the period Tp, the rate at which inventory builds up is (P - C) unit per unit time. After
time TP, inventory depletes at rate C (Figure 19.6).

TP - —
p •••(i)
Maximum on-hand inventory
= Tp (P - C)
252 INDUSTRIAL ENGINEERING AND MANAGEMENT

Supply Period

Q
Supply or
Production

P P
Inventory
onhand

TD Tp Time

Q
Consumption Period P>C

Q(1-

Average Inventory

—1——
= 2
Q( C
P
Inventory
onhand

Time

Figure 19.6 In the upper portion, inventory is building-up at rate P and in the lower portion of this figure,
Inventory building-up with consumption and production both

=--- (P — C)

Q 1 — —C )
P
C`
1——
T D =Q P ...(iii)
C I
Q Q Q
Tp + TD =Q + — — =
, PCP C
C
Average Inventory level
2 P
INVENTORY CONTROL 253

Thus, in the same way as used in Model I,

(TC) = Total ordering cost + Total carrying cost
D Q
= — Co + — (1- — c )cc.
Q 2 P
Differentiating (TC) with respect Q and equating it to zero, we get
d (TC) D 1 C
= Q2 Cn 2 (1
— —p JC, = 0
dQ

2DC0
or Qt EOQ formula.
C
— ) cc

19.7.1 Other Characteristics of the Model

1. Optimal number of production run per year:

(1— —
C )Q D
P
N* = D
Q 2C0
2. Length of each lot size production run:
. . Q* i T 2DCo
T .
P • P\t CciP (P — C)
3. Total minimum inventory cost: .
Q _C
(TC)* =1-)—
Q. Lo 1- 2 1 - Co p

pc0 •
2DC0
Cc 0
P + 1r
.-C ) , p) c \i 2Dcor
Cc
P
—C)

= , 2DCo Cc (1— C j•
\1
Example 19.3 An item has annual consumption of 10600 units per year The ordering cost is
Rs. 30 per order and unit cost of the items is Rs. 2. The inventory holding cost is estimated as 20%
of_average value of the inventory. The inventory consumption rate is 20 units per day while the arrival
of items is gradual, at a rate of 25 units' per day. Find the economic order quantity.
Solution: This problem pertains to gradual replacement model (model 2). For this,
2DC0
EOQ =
\(1- ce
where, D= 10,600 units
Co = Rs. 30
254 INDUSTRIAL ENGINEERING AND MANAGEMENT

C = 20% of Rs. 2 = 0.2 x 2 = 0.4

P = 25 units per day
C = 20 units per day
I 2 x 10, 600 x 30
Hence, EOQ =
\ (1 — 20/25) x 0.4
= 2,682 units.
Example 19.4 A company produces 4800 parts per day and sells them at approximately half
of that rate. The set-up cost is Rs. 1,000 and carrying cost is Rs. 5 per unit. The annual demand is
4,80,000 units. Find:
(a) Optimal lot size.
(b) Number of production run that should be scheduled ,per year
(c) Length of each production run.
Solution: Given, D = 4,80,000 units; C = Rs. 5 per unit
Co = Rs. 1,000 units
P = 4,800 units per day
C = 0.5 x 4,800 = 2,400 units per day
(a) Optimal lot size,
I 2 x 4, 80, 000 x 1, 000 x 4, 800
Q" = = 19,596 units
\ 5 (4,800 — 2,400)
(b) Optimal production runs per year
D 48, 000
= 26 runs per year (approximate)
Q — 19,596
(c) Length or each production run, tp
Q* 19, 596
— 3 days (approximate).
P 4, 800
19.8 MODEL 3
Inventory control model for deterministic demand, lead time zero, reordering allowed and shortages
allowed: In this model, following assumptions are made:
(i) Demand is deterministic and known
(ii) Shortages are allowed
(iii) Production rate is infinite
(iv) Lead time is zero
(v) Reordering is allowed.
Let Q = Total order size
S = Inventory remaining after backlog is satisfied
Co = Cost of ordering
C = Annual cost, of carrying one unit of inventory
CS = Penalty for the shortage of one unit per year
INVENTORY CONTROL 255

ti = Stock replenishment time for zero inventory

t2 = Backlog time
D = Demand rate.
In the Figure 19.7, the dotted area (ADBC) represents 'the failure to meet the demand and the
shady area (AAOB) shows the inventory.

Units of
inventory
and
shortage
t
Shortage t Time
(7)

Figure 19.7 EOQ model with shortages

D
Number of cycle per year =

In time t1, the carrying cost for one order cycle and average inventory of — for the cycle is:
2

2
=[-
2—S
In time t2, the shortage cost for the average shortage of and for one cycle is:
2
[2—S 1
...(iii)
2 t2 Cs
Hence, total cost for one cycle:
Q —S 1
ce i2 , cs co
= [z L 2 J
and, total cost per year:
s
TC =[— ti Ce + Q 5. t2 Cs +Co —D ...(iv)
2 2 Q
256 INDUSTRIAL ENGINEERING AND MANAGEMENT

D
as -- is the number of cycle per year; from AilOB and ACBD (which are similar):

+ t2 tl + t2
S Q-S S+(Q-S) Q
s
of t1 = —
Q (ti + t,) ...(v)

QS
and t2 = (ti +t2 )

Now, substituting the values of ti and t, from Equations (v) and (vi) into Equation (iv).we get,
D
TC (ti + t2 ))Ce +(Q S) (Q S) (ti + t2) + Cni—
Q
2 Q 2
(Q - S)2 1
=[-
s2tC+
, o—
+C D
2Q 2Q Q
where, t = t i + t2 (say).
Now, since we are considering for one year:

131 is the frequency per year

t = Q as —
D
— Q
s2 Q (Q - S) 2 Q
hence, TC =[- —D + +co l
2Q 2Q D Q
S2 Q D (Q - S)2 Q D
TC = y-- + Cs +Co
c1 2Q D Q Q

TC =
s'
Cs +
(Q — s)2
Cs +
D _ ...(vii)
2Q 0
Now, differentiating Equation (vii) w.r.t. 'S' and equating it to zero (for minimization of total cost)
we get:
a (TC) 2S C + 2 (Q - S)
= r ( 1) Cs + 0 = 0
as 2Q - 2Q
S Q S
or — Cc Cs = 0
Q Q
or SC, - QCs + SCs = 0
or S(C + Cs ) - QCs = 0
CS
or S =Q ...(viii)
+ Cs
Now, differentiating Equation (vii) w.r.t. `Q' and equating it to zero
(TC) S2 1 [ Q x 2 (Q - S)- (S - S)2 l Co D
c,+ c
aQ 2Q2 2 Q2 Q2 =°
INVENTORY CONTROL 257

or -S2 c. + [2Q (Q - S) - (Q - S)2 1 Cs - 2C0 D = 0

or -S2 2Q2 5 - 2QSC5 - Q2 Cs + 2QSC5 - S2 Cs - 2C0 D = 0
or -S2 (c. + Cs ) + Q2 = 2C0 D
Substituting from Equation (viii)
C5
C5 )2
(Cc +

Q2 Cs2 + Q2 Cs = 2C0 D
or
Co + Cs
Q2 [ Cs +CeCs+ Cs2 ] =
or 2Co D
Ce + Cs
Co cs 1
or ` = 2C0 D
Q, [ Ce + Cs
or Q2 = 2Co D + C5
Ce Cs

or 0 D ICe
1 2C +C s
Q=
‘ C. \ Cs
Now, when; shortage is not allowed, i.e.,
C +C
lim = lim +
Cs Cs c4.-)c. Cs
= ic
e +1
00

= 1
Hence, under the condition that shortage is not allowed:
.12Co D
Q—

This is also called as Wilson's formula for Economic order quantity (as derived in Model 1).

19.8.1 Other Characteristics of this Model

1. Maximum Inventory Level(s):
Optimum value of S = S*
2DCo
= Ce CoC1-3 Cs )
2. Time between receipt of order, Iihich also gives 'when to order:
Q* 12C0 (Cs + Ce )
D DC,
\ Cs )
258 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Optimal total inventory cost:

(TC* ) = 112DC0 C Cs
Cs + C.
4. Reorder Level, (R) = Q* — S
CS
=Q
(1 • C C)

Example 19.5 The demand of bearing, produced by a company, is uniform at 25 units per day.
It is estimated that each time a production is set, the company incurs Rs. 60 as fixed cost. Production
cost is Rs. 4 and carrying cost is Re. I per unit per day. If the shortage cost is Rs. 6 per bearing
per day, find the frequency of production run and the optimal production size.
Solution: Given: Daily requirement
D = 25 bearings
Carrying cost (c) = Re. 1 per bearing per day
Shortage cost (Cs) = Rs. 6 per bearing per day
Production cost = Rs. 4 per bearing
Set-up cost = Rs. 60 per set-up

2DCo S
C
(a) EOQ =
C J
12 x 25x 60 ( 6 +1)
or Q* = - 60 units (approximate)
1 1 6
(b) Optimal time during successive production runs
=
= 60/25 = 2.4 days.

19.9 MODEL 4: DETERMINISTIC EOQ MODEL WITH QUANTITY DISCOUNT

In many situations, suppliers give discount on bulk purchase. In such cases, the unit cost of inventory
is not constant as it is dependent on number of items procured. By price discount, we mean that the
suppliers provide inventory at price lower than the per unit price on single item purchase. Price discounting
may be an attractive strategy for both supplier and purchaser. For supplier, the price discount encourages
fast movement (or turnover) of inventory to next distribution channel. This, in turn, lowers the carrying
cost of supplier. Availing price discount on bulk purchase may be an attractive strategy for buyer, as
it offers lower unit price. However, the carrying cost increases with bulk purchase. Therefce, a prudent
strategy for buyer should be decided after proper evaluation regarding trade-off between higher carrying
cost and less unit price.

19.9.1 Case 1: Inventory Model with Single Discount

Let us assume that the supplier offers C1 unit price upto b quantity of purchase. Any quantity higher
than b is offered at unit cost C2, where C2 <
INVENTORY CONTROL 259

Thus,

Order .Quantity Unit Price (Rs.)

1 Q<b C,
b — d)C1
2C2=(l
where, b is called as break quantity and d is the discount rate.
19.9.2 Method to Deal with Single Discount Model
Step 1: Determine EOQ ( 6.)
and lowest (optimal) total cost at EOQ without considering discount (i.e.,
taking C1). Also calculate EOQ (6) and lowest total cost at Q; at discounted cost (i.e., taking C2).
I 2C D
Q2 = °
CC C2
\
where, Cc is expressed as percentage of C2.
Step 2: Compare Q; with b.
If Q; b; then place order for size Q; and avail discount, otherwise go to the next step.
Step 3: Compare TC at ( a)
and TC at b

TC at Qi* = DC1 + C°
°D+
Qy 2
CD
TC at b = DC, + b + C,• C, 2

If TC at Qys > TC at b, then place order of size b to avail discount. Otherwise, order for Qls
without discount.

19.9.3 Case 2: Inventory Model with Double Discount

Order Quantity Unit Price (Rs.)

(C,< C2 <C3!

1 Q, < b, C
l,
b, < Q2 < b2 C2

b, S Q, C3

Following steps are followed in double discount model:

Step 1: Calculate EOQ (i.e., Q;) for lowest price (or highest discount). Compare it with 62.
If Q; b2 then place the order for Q;
If 6 < b2 then go to the next step.
Step 2: Determine 6 and since 6
< b2 this implies that 6
is also less than b2. Therefore,
either Q2 < by ; or bi Q2 < b2.
Step 3: If b1 6< b2 then proceed as in the case of single discount model. For this, compare
TC at 6 and TC at b2 and determine the optimal purchase quantity.
If6 < b2 and bi; then go to next step.
260 INDUSTRIAL ENGINEERING AND MANAGEMENT

. . TC (Q )
, . • • •
• •• ............

Total Cost TC (G I )
(TC)

TC (b2)

Price 1 Pi ice 2 1 Price 3

Ordered quantity

Figure 19.8 Price discount model

Step 4: Calculate Qi* and compare TC at b1 and TC at b2 and TC at Qis to determine the optimum
purchase quantity.
Example 19.6 For a product the price discount is as follows:

Order Quantity Unit Price (Rs.)

ClQ<550 10

550 < Q < 700 9.20

700 < Q 8.70

Determine the economic order quantity. The monthly demand for the product is 225 units, canying
cost is 2% of unit cost and cost of ordering is Rs. 100.
Solution: Given,
Monthly demand, D = 225 units
Carrying cost, = 2% of unit cost
Ordering cost, Co = Rs. 100 per order
Unit price, C1 = Rs. 10, C2 = Rs. 9.20, C3 = Rs. 8.70
Step 1: Start with highest discount of Rs. 8.70
Q. = 12DCo = 12x 225 x100 =
509 units
\ CC C3 1 0.02 x 8.70
Since Co; < b3 (as 509 < 700), we go to Step 2 to find Q.
2DCo 12 x 225 x100
Step 2: g = =. 495 units
CC C2 0.02 x 9.20
Since, Q; < b2 and b1 (as 495 < 700 and 495 < 550); we go to Step 3.
„ I 2DC„ I 2 x 225 x100 =
Step 3: Yi = = 475 units.
\ c
C c
1 \ 0.02 x 10
INVENTORY CONTROL 261

Step 4: Calculation of total cost:

Q*
TC (Qc) = TC (at Qi* = 475) = DC1 + — Co + CC C1
Qi
475
=225x10+ - 2 25 x100+ —x 0.02 x10
475 2
= Rs. 2,344.87
D
TC (b1) = TC (at bi = 550) = DC3 + — Co + — C, C,
bi 2
225 550
= 225 x 9.2 +- x100 +- x 0.02 x 9.2
550 2
= Rs. 2,161.51
D b2 *
TC (b2) = TC (at b2 = 700) = DC3 + Co + — C3
b2 2
25 700
= 225 x 8.7 + x100 + x 0.02 x 8.7
700 2
= Rs. 2,050.54
Since the lowest total cost for inventory is at b2; hence optimal order quantity is at 700 units.
19.10 STRATEGIES FOR SELECTIVE INVENTORY CONTROL
In a common industry, large varieties of inventories are present. Each variety may have different cost
and volume. Some inventories are critical items while others may be non-critical ones. A prudent strategy
in inventory control would be to pay more attention on vital or costly items. This requires a classification
scheme for the inventory on the basis of their value or critical use. The purpose of selective control
of high value (or more critical) items is to:
(i) Evaluate the trade-off between cost of inventory and cost of control.
(ii) Take more precise decision regarding order frequency.
(iii) Reduce effort in getting precise demand forecast for trivial items.
(iv) Take decision regarding periodic time interval between successive reviews of inventory status and
demand.

19.10.1 ABC Analysis

ABC analysis is the widely used approach for classifying the inventories on the basis of cost and use.
This is a type of pareto analysis and sometimes also referred to as Always Better Control approach
(Figure 19.9).
The inventories are classified into three groups:
A-Type Inventory: These are high value, low volume type of inventories. This means that their'
annual consumption is very less but these are very costly items. Despite needed less in volume, their
annual monetary value is quite high, as these are very costly items. ABC-analysis recommends careful
control of A-Type inventory. More periodic review is needed. Involvement of higher level of management
is recommended in the review process. A small reduction in the safety stock and EOQ will cause substantial
saving for the organisation.
262 INDUSTRIAL ENGINEERING AND MANAGEMENT

It has been observed that only a small percentage of items (say 10 to 20%) accounts for major
percentage (say 70-85%) of total annual monetary consumption in inventories. These items are referred
to as A-Type items.
C-Type Inventory: Majority of the items (say 60-70%) constitute only a minor fraction of the
total annual monetary consumption (say 5 to 15%) in inventories. These items are C-Type items. The
control needed for these items may not be very stringent. Bulk-purchase decisions may be useful as
the item cost is less. Therefore, lesser number of orders may be placed. These items may be under the
supervision of lower level of management and only exceptional reports or monthly reports are needed
by top management.
B-Type Inventory: Items other than A and C type constitute 20-30% in terms of percentage of
items and 10 to 25% in terms of their annual consumption value. These are termed as B-type inventories.
Their control and supervision are moderate as compared to A or C type inventories.
100

90

80

70

60

Mid Value
50
Mid Volume
Total Class (B)
Percentage 40 Low Value, Low
of Annual Volume : Class (C)
Cost in
Inventory 30

20 High Value
Low Volume
Class (A)
I0

10 20 30 40 50 60 70 80 90 100

Total Percentage of Number of Items ---.-

Figure 19.9 ABC Analysis

The control strategy for the different items is as follows:

S. No. Items A-Type B-Type C-Type

Factors Inventory. Inventory Inventory
1. Percentage use 10-20% 20-30% 60-70%
2. Percentage value in (Rs.) 70-85% 10-25% 5-15%
3. Control Very close Moderate Low
4. Supervisor Top management Middle management User department
5. Safety stock Very-very low Low High
6. Ordering frequency Frequent Moderate Low
Contd...
INVENTORY CONTROL 263

S. No. Items A-Type B-Type C-Type

Factors Inventory Invengtory Inventory
7. Supplier Staggered but reliable Bulk suppliers
8. Follow-up report and review Regular (weekly) Moderately timed Infrequent (semi-
(monthly) annually)
9. Forecasting and material Accurate Moderate Low quality
planning (rough)
10. Value engineering effort More Moderate Less
and waste reduction emphasis
11. Types of records Complete and Complete and Simplifed
accurate accurate

19.10.2 Other Approaches

(i) VED (Vital, Essential, Desirable): It is based on the criticality of the items, which are classified
in three categories: vital, essential and desirable. Its main use is in stocking of spare parts.
(ii) HML (High, Medium, Low): It is based on unit price of material. It is mainly used to control
the inventories of purchased material.
(iii) XYZ: It is used for classifying material in storage. Its main use is in review of inventory.
(iv) FSN (Fast moving, Slow moving, Non-moving): It is based on consumption rate of the inventory.
It is helpful in controlling obsolescence.
(v) SDE (Scarce, Difficult, Easy to Obtain): It is based on the level of difficulty in the procurement
of inventory. It is useful in lead time analysis and decisions related to purchasing strategies.
(vi) SOS (Seasonal, Off-seasonal): It is based on the nature of the supplies, which may be seasonal
or off-seasonal. It is useful in deciding the strategies related to the procurement of seasonal items,
such as, agricultural products, horticulture products, etc.
(vii) GOLF (Government, Ordinary, Local, Foreign): It is based on the source of the inventory. It
is useful for decisions related to the procurement strategy.
(viii) Bar-Coding: Bar codes are a series of alternative vertical dark and light strips of spaces with
varying thickness. It is read by an optical scanner. For each code, some encoded information is
automatically generated by the decoder. Information such as price, item status, sales receipts, etc:,
may be generated by the computer (Figure 19.10).

Sales Receipt
\

Item
lnventroy Status
Price
(old inventory-current use)
111111111111111 Stock
Location

Exception Report
Optical Scanner II (purchase/procurement need)
1
Computer

Figure 19.10 Use of bar code in automatic identification of Inventory

264 INDUSTRIAL ENGINEERING AND MANAGEMENT

Bar codes are economical in keeping the track of inventory. It is now widely used in stores, super-
market, library, etc.

19.11 MULTI-ITEM INVENTORY SYSTEMS WITH CUNSTRAINTS

In practice most inventory systems accommodate more than one type of item. Under these situations,
the analysis of the inventory problem is approached by treating each item independently, and the economic
order quantities, optimal shortage and reorder points can be estimated using the modeling techniques
presented earlier.
The problem become complicated when budgetary, space and availability of item constraints are
imposed on the inventory system. These constraints will certainly affect the size of the order quantities
for each type of item.
The total annual cost of a multi-item inventory system is estimated as the sum of the total annual
cost of each item independently. We consider an n-item continuous review model for which shortages
are not allowed. The total annual cost of the inventory system for all items is
D. i
TC (Q1 , Q2, •••) Q,,) =IC./ Di + A' C' Q'.1 •••(0
i=l Q. 2
This model may be subject to constraints. For example, a budgetary constraint that requires that
at any point in time no more than a certain amount of money B can be invested in inventory. This
can be expressed as

E Ci Di G B ...(ii)
.1=1
Other can also be imposed on the inventory system.This problem is formulated as:
" A. D. i•C•Q•
Minimize: TC E ' ...[i (a)]
i=1 Qi 2

Subject to E B
.1=1
Q. 0
This non-linear programming problem has been dealt with by using two solution procedures: Lagrangian
procedure and the fixed-cycle (equal order interval) method. The lagrangian procedure assumes implicitly
that orders are received simultaneously and does not consider phasing orders for various items. The fixed
cycle method allows the phasing of orders for different items, but adds the constraint that all items have
the same cycle length.

19.12 LAGRANGIAN METHOD

Initially ignoring the constraint the optimal ordered quantities are obtained (assume if = i)
„ 12 A D
Qi = j = l, 2, ..., n ...(iii)
IC
Check: Substitute Q; into given constraint:
• If satisfies the optimal order quantities are those obtained above in Equation (iii).
• Otherwise the Lagrangian method is used.
INVENTORY CONTROL 265

The Lagrangian expression (LE) which is given by

" (A.D. i.C.Q. [n . •
LE (Qi, X) =1 -I - I - F i i 1+X EC/ Qi —B ...(iv)
j=1 Qi 2 i=I
where, X is the . lagrangian multiplier. Taking the derivatives of Equation (iv) with respect to Qi and then
equating to zero, we obtain
2Aj Dj
QL = ...(v)
C. (i + 2X* )
where, Q*L is the optimality quantity obtained by using the lagrangian method. The value of X.* is
given as
[
2 B
{EV. (2A.DJ J C)}1 2
Substituting into Equation (v) and rearranging gives
B
QL E vi ...(vii)

where Q*. s are obtained by Equation (iii) and

E = E C j Q; ...(viii)

Equation (vii) shows that, for this type of model and budgetary constraint there is no need to solve
the lagrangian problem. Instead each value of Q; obtained by Equation (iii) should be multiplied by
the factor B/E. This implies that the ordered quantities should be reduced by the same factor if there
is an excess demand for money over the budget.

19.13 FIXED CYCLE (EQUAL-ORDER-INTERVAL) METHOD

This method assumes a fixed cycle time for all items (that, is the orders for n items are phased within
the cycle). Let T be the cycle length; then Qi = TDJ.
Equation (i) a is reformulated to
" A. ("
TC (T) = E T
C.D. T
2
The optimal solution of Equation (ix) without budgetary constraints but imposing a fixed cycle
time constraint is
(2 E Aj )
T" =
i G. Ci Di ),
Let To be the maximum length of the cycle time allowed by the budgetary constraint. The problem
of finding the maximum cycle length To can be formulated as a simple linear programming model.

Maximize T0 = Et .
l=I
(i
subject to: E ai E tk Eai itk + E tk 5 B, given j = 1,"2, ...(xii)
i=j+1 k=j+1 1=1 k=1 k=j+I
266 INDUSTRIAL ENGINEERING AND MANAGEMENT

where, ai = C, L. The n budgetary constraints correspond to each of the ordering points that are peaks
in terms of budgetary usage

To = ...(xiii)
2B Ea,
the optimal solution is

As TC (T) is a convex function the optimal cycle time T** for the budgetary problem is
T. = min. (T", To) ...(xiv)
Example 19.7 Company XYZ produces electronic lamps. Three types of components are required
for the production. The management has an upper limit on the investment of Rs.16,000.00. The inventory
carrying cost rate for each item is 0.18 and shortages are not allowed. Data for each item are given
below. Determine the optimal lot size for each item and optimal cycle time.

Item Item 2 Item 3

Demand DJ 1500 1500 2500
Item Cost C. 60 30 80
Set up cost 60 60 .60
Solution: We start by ignoring constraints. After finding the optimal lot sizes we should then substitute
these values into constraints. If satisfied, no further work is needed. However, if the constraints are not
satisfied, the Lagrangian method or fixed cycle method should be utilized. The optimal lot sizes are
calculated by using Equation
* 12,4i Di
QJ =
1 iCi

= 4(2 x 60 x 1500/0.18 x 60) = 129 units

Q; = V(2 x 60 x 1500/0.18 x 30) =183 units

Q; = V(2 x 60 x 2500/0.18 x 80) =144 units

The inventory investment corresponding to,these lot sizes is 60 (129) + 30 (183) + 80 (144)
= 24,750 > 16,000.
Since the investment constraint is not satisfied we use Equation (vii) to find the optimal order
quantities that satisfy this constraint
B
E Qi

where, E =E Q;* = 24, 750

i=1
QL1 = (16000/24750) 129 = 83 units
COL = (16000/24750) 183 = 118 units
QL*3 = (16000/24750) 144 = 93 units
INVENTORY CONTROL 267

and Ts without budgetary constraint, but imposing a fixed cycle constraint, is obtained from Equa-
tion (x)

(2IAJ)
, [ i (E ci pji
(2 x 180)
'1{0.18 x (3, 35, 000)}
= 28 days
To under budgetary and fixed cycle time constraints is
To = (2 x16,000 x 3,35,000)/(1.6235 x 10") = 0.0660 year
or To = 24 days .
and Ts = min (24, 28} =.24 days
The optimal order quantities are Qi = 99, Q2 = 99 and Q3 = 165.
Therefore, under budgetary constraint and fixed cycle time policy, we should order quantities 99,
99 and 165 units for items 1, 2 and 3 respectively, at a fixed cycle time of 24 days.
Example 19.8 Find the optimal inventory policy for three types of products for which the pertinent
data are given. The inventory carrying cost is computed using i = 0.18 and shortages are not allowed.
The maximum investment at any point in the inventory is 10,000. Additionally, the warehouse has only
5000 m2 that can be allocated to these products. Also solve the same if the maximum allowable space
for these products is 2000 m2 instead of 5000 m2.

Product 1 Product 2 Product 3

Demand per year (units) 2000 2200 3800
Cost per item 8 6 10
Order cost 70 70 70
Floor space 1.0 1.5 3.0

Solution: We start by ignoring constraints. After finding the optimal lot sizes we should then substitute
these values into constraints. If satisfied, no further work is needed. However if the constraints are not
satisfied the Lagrangian method or fixed cycle method should be utilized. The optimal lot sizes are calculated
by using Equation (iii)

= I 2A1 D •
Qi .
ICi
\
• •= 4(2 x 70 x 2000/0.18 x 8) = 441 units

Q;•= J(2 x 70 x 2200/0.18 x 6) = 534 units

Q; = -4(2 x 70 x 3800/0.18 x 10) = 544 units
If these lot sizes were to be used the maximum investment in inventory would be
8 (441) + 6 (543) + 10 (544) = 12,226 > 10,000
268 INDUSTRIAL ENGINEERING AND MANAGEMENT

Therefore, the Lagrangian method should be used. These lot sizes, however, do not violate the
floor space constraint
1 (441) + 1.5 (534) + 3 (544) = 2874 < 5000
Therefore the only effective constraint is the budgetary constraint, which shouldnot exceed 10,000.
We now use Equation (vii) to find the optimal order quantities that satisfy this constraint
B
QL = E Q j

= (10000/12226) 441 = 361 units

QL.2 = (10000/12226) 534 = 437 units

QL* 3 = (10000/12226) 544 = 445 units
Since the floor constraint is tighter constraint (than the total investment constraint) we estimate
the optimal order quantities based on the floor space only.
B
QL = Qj
where, B = 2000 and E = 2874.
QL*1 = (2000/2874) 441 = 307 units

Q*I,2 = (2000/2874) 534 = 372 units

L3 = (2000/2874) 544 = 378 units
Q.
The total floor space is
307 + 1.5 (372) + 3 (378) = 1999 < 2000 and the total investment is Rs. 8,468 < Rs. 10,000.

REVIEW QUESTIONS

19.1 What do you understand by Inventory-Control? Explain the purpose of maintaining inventory in any produc-
tion unit.
19.2 Explain the following terms with examples:
(a) Inventory.
(b) Cost of inventory.
(c) Ordering cost.
(d) Holding cost.
(e) Stock-out cost.
19.3 Explain the different costs involved in inventory models. Derive the expression for economic order quantity
when the demand of the item is uniform, the production rate is infinite and no stock-outs are allowed. Explain
the assumption.
19.4 Using simple EOQ formula, show that the EOQ model is quite robust near the optimal point.

19.5 Explain the sensitivity of EOQ model.

19.6 (a) The ordering cost of an item is Rs. 50 per order, holding cost is 10% of the purchase price, which
is Rs. 110 per unit. Calculate the economic order quantity for an annual demand of 50,000 units.
INVENTORY CONTROL 269

(b) Calculate EOQ, total cost and number of orders for different value of annual demand (say, from 100
to 1,00,00,000). Plot them on a graph paper. Discuss the pattern of the plot.
(c) Calculate the time between two consecutive orders, number of orders per year and total optimal cost
for Problem 19.6 (a).

19.7 (a) Derive the expression for EOQ when production rate is different from (and higher than) the consumption
rate. Assume that no shortage is allowed.
(b) The consumption of bearings is estimated as 20 units per day while the arrival of the bearings
is 30 units per day. The annual consumption is 2500 units, holding cost is 20% of purchase
price, which is Rs. 2 per piece. The ordering cost is Rs. 30 per order. Calculate the economic order
quantity.
Also calculate the optimal production run per year and length of each production run.

19.8 In a manufacturing firm, the annual requirement is 24000 units, the supply is instantaneous and shortages
are allowed. Each ordering costs Rs. 350. The inventory holding cost is Re. 0.10 per unit per month and
the cost of shortages is Re. 0.20 per unit per month. Determine the economic order quantity and the total
cost of inventory for this quantity.

19.9 A food processing unit ships different items in excellent box packaging to its dealer. On an average, every
year, 4000 new packaging boxes are purchased to replace the broken and damaged ones. The carrying cost
of the boxes in inventory is 50% and cost of placing an order is Rs. 40. The supplier of the boxes quotes
the following discount prices:

Size of order Price per box (Rs.)

Below 500 0.75
501, to 1000 0.72
1001 to 2000 0.70
Over 2000 0.69

While the purchase department is attracted by gradual discount on bulk-purchase, what should be the optimal
• order quantity?

19.10 In a company, following options for quantity discount are available (also termed as price-break):

Quantity Unit price (Rs.)

500 10.00

500 5_ Q2 9.25

If the monthly demand is 200 units, the cost of holding is 2.2% of the cost of items, and ordering cost
is Rs. 350, then what should be the optimal size of the order?

19.11 Explain the significance of ABC analysis. How is it helpful in the inventory control?

REFERENCES
1. Ackoff R.L. and Sasieni, M.W., 1968, Fundamental of Operations Research, John Wiley & Sons, New York.
2. Buchan J. and Koenigsberg E., Scientific Inventory Management, Prentice-Hall of India, New Delhi.
3. Gupta, R. and Vrat P., 1985, "EOQ of a Perishable PrOduct with Quantity Discount", Udyogpragati, October-
December.
270 INDUSTRIAL ENGINEERING AND MANAGEMENT

4. Gupta M.P. and Sharma J.K., 1989, Operations Research for Management, National Publishing House,
New Delhi.
5. Hadley G. and Whitin, T.M., 1963, Analysis of Inventory Systems, Prentice-Hall, New Jersey.
6. Kanti Swarup, Gupta P.K. and Mohan M., 1977, Operations Research, Sultan Chand, New Delhi.
7. Lewis C.D., 1970, Scientific Inventory .Control, Butterworth & Co., London.
8. Love S., 1979, Inventory Control, McGraw Hill Book Co., New York.
9. Naddor, E., 1966, Inventory Systems, Wiley, New York.
10. 1.F.o K.V., 1986, Management Science, McGraw Hill, New York.
11. Sharma, S.D., 1999, Operations Research, Kedar Nath Ram Nath Co., Meerut.
 20
MATERIAL REQUIREMENT
PLANNING (MRP) AND MRP-II

20.1 INTRODUCTION
MRP stands for material requirement planning. It is a computer based system that takes master production
schedule (MPS) to explode it into required amount of raw materials, parts, sub-assemblies, and assemblies
needed in each of the planning horizon, and then reducing these material requirements to account for
materials that are in inventory or on order and finally developing a schedule of order for purchased
materials and produced parts over the planning horizon. In simple terms American Prbduction and Control
Society (APICS) defines it:

MRP constitutes a set of techniques that use bill of material, inventory data, and the master
production schedule to calculate requirements for materials. —APICS Dictionary

The core of MRP is its relationship with bill of materials and use of MRP records to calculate
the time-phased release of orders for manufacturing, planning and control (MPC) system. We will explain
the entire methodology of MRP through an example but before that we will understand some concepts.
20.2 TERMS USED IN MATERIAL REQUIREMENTS PLANNING
In MRP the following terms are used:
Bills of material file: It is a file containing the bills of material for all end items. It contains
listing of all raw materials, parts, sub-assemblies, and assemblies that go into an end item. The amount
of each component that is required to produce one end item is included.
Bucket: It is the principal unit of time measurement in MRP systems. It refers to a particular
period of time in the planning horizon.
Capacity requirements planning: It is the process of reconciling the master production schedule
to the labour and machine capacities of the (production departments over the planning horizon.
Dependent demand: It is the demand for a raw material, part, or other lower-level component
that is dependent on the demand for the end it6m into which the component goes. It is a major pre-
requisite of MRP system.
272 INDUSTRIAL ENGINEERING AND MANAGEMENT

End item: It is generally a product, service part, or any other output that has a demand from
customers, distributors, or other departments. It is independent of the demands for other components
or other end items.
Gross requirements: These are the total requirements for a particular material, without considering
any availability of the material in inventory or scheduled receipts.
Independent demand: It is the demand for a material that is independent of the demands for
other materials.
Inventory status file: It contains material on hand or on order, planned orders, planned order.
release, lot sizes, safety stock levels, lead times costs and supplies.
Lumpy demand: It is the demand for a material that appears as an irregular period-to-period pattern.
Master production schedule (MPS): It is the schedule, which shows the number and timing of
all end items to be produced over a planning horizon.
Net requirement: It is the material that must be added from production or purchasing. It is known
by subtracting material available from gross requirements.
Offsetting for lead time: It is the number of period between the requirement and the release in
the offset and is equal to the lead time.
On-hand inventory: It is the amount of a material actually present in inventory.
Planned order receipt: It is the quantity of material to be received in any time period of the
planning horizon.
Planned order release: It is the material to be ordered in each time period of the planning horizon.
Planning horizon: The number of period included in the MPS, MRP, and other production planning.
Safety stock: It means quantity of material held in inventory that is dedicated to be used in emergency
shortages, which may be due to uncertain demand or lead times.
Service parts: It is the materials demanded as end item when ordered by service centers for repairing
some end items.

20.3 DEPENDENT DEMAND

MRP is suitable when demand for items is dependent upon other items. It is explained below by comparison
with independent demand (Table 20.1):
Table 20.1 Independent vs Dependent Demand

Independent Demand Dependent Demand

Product demand, unrelated to demand for other items Product demand, related to demand for other items as item
is component of other product.
Example: End product, spare-parts Example: Raw material, sub-assembly work-in-process
inventory
Usually known by forecast Calculations, such as MRP is needed to know its value
Delivery schedule determined by customer requirement Delivery schedule is determined by its lead-lime plus due
(by order or forecast) date for end product

20.4 LUMPY DEMAND

MRP is useful for demands of items which show lumpy pattern (Figure 20.1). A difference between
lump and continuous demand is shown (Table 20.2).
MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-II ► 273

Constant demand

Demand

I umpy demand

Time
Figure 20.1 Constant and Lumpy Demand

Table 20.2 Continuous vs Lumpy Demand

Continuous Demand Lumpy Demand

Demand for an item is at continuous and Demand is sudden or in large quantity/increments so as to

gradual rate make a certain batch of final product.
Order point system (like EOQ, MRP calculations are useful way to handle lumpy demand
in conventional inventory management) situation.
is the useful way to handle.
Many mathematical models ore available Calculation based on simple MRP logic is sufficient
for different situation, such as: EOQ with
shortages, EOQ with discount, etc.

20.5 LEAD TIME

It is the time needed for completing the job from initial stage to final stage. This is of two types:
(a) Ordering Lead Tune: It is used for the time required from the start of purchasing process to
receipt of item from the supplier(s). This lead time is dependent upon the time needed by the
supplier to deliver items after the receipt of order.
(b) Manufacturing Lead Time: It is the time required to process the part through the sequence of
machines specified on the route sheet. This lead time is the sum of operations time on machines
and idle time such as tool set-up time, waiting time, machine loading/unloading time, travel time
during operations, etc.
20.5.1 How MRP Uses Lead Time Information?
Lead time information is used to order the items/raw material at a time which is ahead of its lead time.
Sub-assembly I
Start of Place Order for needed
Order raw Production sub-assembly I
material Final Product

I
0
i
I
I
2 3
►
4 5
i
6 7 10
r
II
Ready

Time --..- I I
(weeks) Offset of Lead
Time for raw Offset of Lead
material Time for Sub-
assembly 'I
Figure 20.2 Concept of off-setting order by lead-time
274 INDUSTRIAL ENGINEERING AND MANAGEMENT

For example, if raw material (RM) has a lead time of one week and sub-assembly 1 has a lead
time of two weeks, then their order must be placed one week and two weeks respectively ahead of
time when these are needed. This pre-p9nement of order is called as off-setting.

20.6 COMMON USE ITEMS

In many situations of a manufacturing the same basic raw material, component or sub-assembly is needed
more than once in the final product. Also, few raw materials/components/sub-assemblies may be needed for
more than one component type. We call these items as common use items. For example, in a scooter factory,
same tyres may be needed for different models of scooters and auto-rickshaws. Tyre is a common use item.

20.6.1 How MRP Uses Common use Items?

In MRP, we collect the common-use items from different end-products. The similar common-use item
is ordered collectively to derive the benefit of less number of orders (note that, each ordering incurs
ordering cost: refer Chapter 19 on Inventory Control).

20.7 INPUTS TO MRP

MRP uses master-production schedule (MPS) and converts it into a detailed schedule for raw material
and individual component/sub-assembly. Therefore, MPS is the starting input to MRP. We have discussed
MPS in the chapter of Production-Planning and Control. Yet for clarity, we would explain it here (in
Section 20.7.1) also. In addition to MPS, MRP also uses the product structure, which is derived from
bill-of-material file. Another input to MRP is the status record of inventory, which is derived from inventory
record file. This information pertains to quantity of inventory which is yet not consumed till the date
of o/ rdering (Figure 20.3).

Input to MRP

1. Master Production Schedule (MPS) and other order data not contained in MPS.
2. Bill of Material (BOM) file defining the product structure.
3. Inventory status file.

20.7.1 Master Production Schedule (MPS)

It is a list of items, indicating end products to be produced. This contains item name (and code), quantity
to be produced, and timings for completing the production. MPS is based on the accurate estimations
of product demand, which is available from sales forecast figure for the given period. Another input
to MPS is a realistic assessment of the production capacity, which determines whether the production
of the forecasted item is possible or not (Figure 20.4).
Table 20.3 Role of MPS for different items

Type of Product Features How MPS embodies this product

Firm customer order I. Firm due date known. • Constitutes minor portion of MPS.
for specific items 2. Needs special attentions
(Box 1 in Figure 20.3) to meet the due date.
Forecasted demand of 1. Based on statistical technique. • Constitutes major portion of MPS.
items (Box 2 in Figure 20.3) 2. Past trends are the main basis.
Demand for individual 1. Needed for spare parts and repair Excluded from the MPS as it does not
Components or parts 2. Stocked in the service department of Co. represent the demand for an end item
MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-ll 275

Sales
Forecast
Customer Service parts
Order Requirements
FT

Master roduction-
Schedule
Scl
. Inventory
Engineering Status File
Chat ges •

Bill of MRP
Material System

Inventory
Transaction
Data
Changes to
Planning
Planned Orders
Reports
Planned Order
Performance
Schedule
Reports

Primary Outputs Exception

Reports

Secondary Outputs

Figure 20.3 Structure of MRP System

September

Week I 2 3 4

Product P6 70 100

Product P7 40 80 60

Figure 20.4 MPS for products P6 and P7 showing weekly delivery schedule in number of items

20.7.2 Bill of Material (BOM) File

It provides a list of materials and their quantities required to produce the end item. It is also called
as product structure file or indented bill of material. It contains the list of finished products, material
276 INDUSTRIAL ENGINEERING AND MANAGEMENT

needed for, each finished product in units, assembly structure, sub-assemblies, parts, and material. BOM
file also provides relationship of each end product with sub-assemblies and raw material.
BOM file is revised every time there is a change in product design or specification.

Product # A

Sub-assembly # 1 Sub-assembly # 2 Sub-assembly # 3

Component X Component Y Component X Component Z 1

Component Y Component Z
Component Y

Figure 20.4 (a) A Typical BOM Structure

An example of BOM structure for product #A, which has three sub-assemblies: #1, #2 and #3,
is shown above. These three sub-assemblies are constituted from three components X, Y and Z. The BOM
structure, shown above indicates that each product #A needs two components A', three components Y
and two components Z [Figure 20.4 (a)].
20.7.3 Inventory Status File
It provides a computerized list of records of each material, physically held in the system. There will
be only one inventory status for individual material, even if it is used at different level of production
or in different end products. It indicates:
(i) material code
(ii) material name
(iii) inventory on-hand (physically available) •
(iv) material on-order (ordered but yet to arrive)
(v) customer order for the item.
The updating of inventory status file should be regular and frequent. This requires entering following
information for updating:
(i) Receipt of material (add)
(ii) Disbursement of inventory (subtract)
(iii) Scrap reported for the material (subtract)
(iv) Wastages, pilferage and theft, if any (subtract)
(v) Planned orders (add)
(vi) Order release (subtract).
This file also contains standing informations, such as:
(i) Lot size
(ii) Lead times
(iii) Safety stock level
(iv) Scrap-rate.
MATERIAL REQUIREMENT, PLANNING (MRP) AND MRP-II 277

Since the order for service department, or individual customer for a particular part (and not the
end product) for servicing is not entered in MPS, therefore, inventory status file is fed with this information
separately.
20.8 HOW MRP WORKS?
The logics under which MRP works are simple to understand. Following steps are included:
Step 1: Bucketing: With the information contained in MPS, it is known which end product is
needed: (a) at what point of time, and (b) in how much quantity. MRP starts with consolidating each
period, requirements for different end products. In MRP, we call different time periods as buckets.
Step 2: Add Service (Spare) Parts, which are not Included in MPS: We have already discussed
in Table 20.3 that there may be a need to produce few components, such as spare parts for service
department. These service parts don't find a place in MPS. But, since these parts are ultimately needed,
we have to produce them. Therefore, MPS adds the service parts demand to demands, mentioned in
MPS record.

Total Production Requirement for any component in any period

= Demand figure in MPS record + Service part requirement during that period

Step 3: Part Explosion: Each item in MPS and service inventory record are exploded into their
constituent material or basic component requirement. For example, a car needs four tyres. Now, for, a
demand of 10,000 cars may be exploded into 40,000 demands for tyres. Similarly, we explode the final
product for its constituent components/raw material.
The important point, which we must note, is the final figure after explosion comes from combining
MPS (which gives how much is needed during a given period) and BOM file (which gives product
structure, i.e., for each final product, how many sub-assemblies/components/raw material needed).
Step 4: Offsetting: Offsetting means displacing requirement by a period equal to the lead-
time of the product. We have illustrated this while discussing lead time in this chapter. The purpose
of offsetting is to bring the requirement to an actual date when order is to be placed for each component/
raw-materials.
Step 5: Aggregation: This involves finding the gross requirement for each component/raw materials.
This is done by adding the requirement for any component in a given slot of time period. For example,
if a component (say, tyre) is needed by two models of scooters A and B, the lead time for tyres (i.e.,
time between placing the order and receipt of tyre from its supplier) is 3 weeks. The demand for car
A is 100 and car B is 200 in 10th week. Each car needs four tyres. Let us examine the process of
aggregation.
Due to backward offsetting by lead time, the demand of tyres is 100 x 4 for car /4 and 200 x 4
for car B. Thus, total is equal to 1200 tyres. This has been aggregated. The offset demand is in 3 weeks
(lead time) ahead of 10th week, i.e., on 7th week (Figure 20.5).
Step 6: Netting: This involves the modification of aggregated (or gross) requirement by subtracting
the amount of same material in stock (on-hand inventory) and stock on-order during that period. On-
hand inventory during a period is available in inventory status file. On-order inventory is due to the
requirements by spare and service department. We remind our reader that on-hand inventory is not included
in MPS. Therefore production, over and above requirements derived from MPS, would be needed. To
accommodate the safety-stock (to meet contingency and uncertainty in forecasted demand), we also subtract
it from gross requirement. Thus,
278 INDUSTRIAL ENGINEERING AND MANAGEMENT

Net requirement = gross requirement — [Inventory on-hand — Safety stock — Inventory allocated
to other users]
Tyre for Car 6 : 4 x 200 — 800 units
— Tyre for Car A : 4 x 100 = 400 units
Total = 1200 units

Car B : 200 units

nCar A : 100 units
I I I

0 l 2 3 4 5 7 8 9 0 II 12
Time -WO

(weeks) Offsetting by Lead time

(3 weeks backwards)

Figure 20.5 Example of Aggregation and Offsetting

If in case net requirement is positive (i.e., greater than zero), 'order for material must be placed
in that time period.
Step 7: Procurement Schedule: The requirement is now advanced by a lead time for final assembly.
The process is same as offsetting, discussed earliest. This lead-time pertains to production process lead
time, while lead time in Step 4 was due to supplier lead time.
Step 8: Lot Sizing: This is used to consolidate the requirements in pre-specified lot sizes, so that
"economic order quantity" may be ordered. Economic order quantity (EOQ) concept is applied to MRP
output pertaining to the order-quantity for each bucket (time-period). To take advantage of consolidation
of order (which saves ordering cost and increased carrying cost), it is explored how many unit, of items
will lead to EOQ. This leads lot-sizing.

20.9 OUTPUTS OF MRP

MRP provides output in standard format. It dynamically (which is different for different time periods)
provides the schedule of material for future time-periods. The schedules for each future period indicate
material requirements to support the MPS. The schedule is generally of following types of primary outputs:
29.9.1 Primary Output
(1) Planned Order Schedule: This contains the quantity of each material to be ordered in each time
period. Suppliers may be given order for purchase as per this schedule. The production department
uses this schedule to order parts, sub-assemblies, or assemblies from upstream production department.

Key Point

Planned order schedule is used to determine the future production and supply at suppliers
end alongwith guide for in-house production schedule.

(ii) Changes in Planned Orders: This contains modifications in previously planned orders. Through
the updating process, the order quantities may be changed, cancelled, delayed, or advanced. Changes
may occur due to changes in MPS and changes in due date for open orders.
Primary MRP Outputs:
1. Order Release Note: To place order
2. Planned Order Schedule
MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-II 279

3. Rescheduling notice
4. Cancellation notice
5. Reports on inventory status.

20.9.2 Secondary MRP Outputs

(i) Exception Report: Exception reports are for orders, which require special attention of management.
This may be for reporting errors, late orders, shortages, or excess scrap and wastages, etc.
(ii) Performance Report: This provides information pertaining to performance of the system. Some
examples are: inventory turnover ratio, delivery promises kept in percentage, stock-out index, etc.
(iii) Planning Report: This is used for future planning of inventory. Some examples are: purchase commitment
reports, traces to demand sources (pegging), etc.
Example 20.1 Consider the requirement planning for two products, PI and P2. Product PI is
made of one unit of subassembly A and 4 units of sub-assembly B. Sub-assembly A is made of 4 units
of component X while subassembly B is made up of 2 units of X, one unit of Y and 3 units of Z.
Similarly, product P2 is made of 3 units of sub-assembly C and 2 units ofsub-assembly B. Subassembly
C is made up of 2 units of component X and 4 units of component Z. Sub-assembly B, in product
P2, is made up of same composition of components X, Y and Z as defined in case of PI.
The manufacturing lead time for P1, P2, A, B and C is I, 2, 1, 1, and 1 week respectively. The
procurement lead-time for components X, Y and Z is 4, 6 and I week.
The inventory on-hand status is 50, 20, 10, 20 and 10 units for A, B, C, X and Y. The master
production schedule is as follows:

Week 11 12 13 14 15
Product

P/ 5 2 — 6
P2 10 5 2 —

Use MRP approach to make" a procurement schedule.

Solution: We start with drawing the product structure (bill of material) for products P1 and P2
as. per question (Figure 20.6).
Level of end
PI
product (PI, P2)

Level of sub-assemblies
(A, B, C)
4
i
v y Level of components
X
(X, Y, Z,)

Figure 20.6 Product Structure for Example 20.1

The numeric value at the top of sub-assembly or component box indicates that so many units are
needed in the previous level of product structure. For example, 3 units of sub-assembly C are needed
in product P2. Similarly, 4. units of component Z are needed for sub-assembly C.
Now, we will draw a table for MRP calculation. To start with, the gross-requirements for the subassemblies
A, B and C are entered after off-setting (i.e., preponing on a time scale) with their lead time.
280 INDUSTRIAL ENGINEERING AND. MANAGEMENT

For example, A is offset by one week (its lead time). For each Pl, one unit of A is needed. MPS
tells us that 5, 2 and 6 units of P1 are needed in 12, 13 and 15th weeks. Therefore, after offsetting
by one week, one sub-assembly A for every P1 is entered in the first row.
Sub-assembly B is needed by P1 (4 for one P1) and P2 (2 for each P2). Therefore, multiply the
MPS value of P1 and P2 by respective numbers needed by corresponding products. Therefore, (5 x 4)
units of B are needed for 12th week demand. After offsetting by lead time for P1 (1 week), the gross
requirements of B for P1 are 20 units in 1 1 th week. Similarly, for Pl, (2 x 4 = 8) and, (6 x 4 = 24)
units would be gross requirements for B in weeks 11, 12 and 14.

Time (reeks)

Item Initial
Inventory 1 , 2 3 4 5 6 7 8 9 10 11 12 .13 14
(on-hand)

Gross A 50 5 2 — 6
requirement 20 8 24
B 20
0 0 0
020 10 4
C 10 30 15 6

Net A 37
requirement •
B 30 12 24

/
C 20 15 6
60 24 48
Gross X 20
0 0 0 @
requirement 40 10 1')
Y • 10 .- 30 12 12
30 24 24

Z —
0 eV d o 6 2
80 60 24
Net X 20 • 90 36 48
requirement
Y 20 12' 24

Z 80 150 60 72

Procurement .1 20 90 36 48
schedule
Y 20 12 24

Z 80 150 60 72

Figure 20.7 . MRP Sheet for Example 20.1

Now consider product P2, which needs 2 units of B with lead time of 2 weeks for P2. MPS for
P2 is multiplied by 2 and offset by two weeks. Therefore, gross requirements in 10th, 1 1 th and 12th
weeks are (10 x 2), (5 x 2) and (2 x 2), or 20, 10 and 4 units respectively.
MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-II 281

Now, in week 1 1 th, 20 units of B are needed for product P1 and 10 units for P2. The total is
30 units in 1 1 th week. Similarly, in week 12th, total gross requirements for B are (8 x 4) = 12 units.
Similarly, in week, 10th and 14th, the gross requirements for B are 20 aid 24 units.
Sub-assembly, C, is needed by P2 (3 units for each P2). Due to 2 weeks of lead time for P2,
the offsetting is for 2 weeks from the MPS dates. Thus, multiply P2 demands in MPS by 3 and offset
by 2 weeks. This would create the gross requirements for C in 10th, 1 1 th and 12th week as (10 x 3),
(5 x 3) and (2 x 3); or 30, 15 and 6, respectively.
Next step is to calculate net-requirement from the gross requirement and inventory on-hand. Now,
enter the inventory on-hand in its column for the gross requirement rows. For sub-assemblies; this is
50, 20 and. 10 units.
Since 50 units of A are available, the total requirements of A (5 + 2 + 6 = 13 units) may be
met with on hand inventory of A. Thus, there would be no net requirement for A. Rather, (50 — 13)
or 37 units of A will still remain. on-hand in the column of on-hand inventory.
Since there are only 20 units of B available on-hand, these can meet the requirement of 10th week
for B (i.e., 70 units needed). For the remaining period, the net-requirements for B would be same as
gross requirement. Similarly, the net-requirements of B in 12th and 14th. week are same as 12 and
24 units.
For sub-assembly C, with 10 units of on-hand inventory, the net-requirement in 10th week would
remain 20, which is the difference between gross-requirement minus inventory on-hand (i.e., 30-10). Once,
this on-hand inventory is consumed, the net-requirements in 1 1 th and 6th week remain unchanged as
compared to the gross requirement.
Now, next stage is to find gross requirements for components X, Y and Z, needed in the sub-assemblies.
To start with, how much X is needed for sub-assembly?
X for A: 4 units for each A, offset by lead time of 1 week; but there is no demand of A, hence
ignore this.
X for B: 2 units for each B, offset by lead time of 1 week. Thus, for 30, 12 and 24 units of
B, need in 11, 12 and 14 week is offset in 10, 11, and 13 weeks respectively. In these weeks, the gross
requirements of X are (2 x 30), (2 x 12) and (2 x 24); or 60, 24 and 48 units, respectively.
X for C: 2 units for each C, offset by lead time of 1 week. Thus, for 20, 15 and 6 units of
C, need in 10, 11 and 12 week is offset in 9, 10 and 11 weeks respectively. In these weeks, the gross
requirements of X are (2 x 20), (2 x 15) and (2 x 6); or. 40, 30 and 12 units respectively.
Now, aggregation in each week gives the gross requirement for X in 9, 10, 11 and 13th weeks
as 40, (60 + 30), (24 + 12) and 48 units respectively. This gives us 40, 90, 36 and 48 units in 9,
10, 11 and 13th weeks respectively.
Similarly, gross requirements for Y and Z are calculated.
The net-requirements for X, Y and Z are made after subtracting inventory on-hand for X, Y, and
Z. Since 20 units of X and 10 units of Y are on-hand inventory, the net-requirement for X in 9th week
is 20 less than the, gross requirement in 9th week (i.e., 40). But, once this on-hand inventory is consumed
in 9th week only, the net-requirement in subsequent weeks remains unchanged. Similarly, for Y, the net
• requitement in 10th week is (30 — 10) or 20. In subsequent weeks, net requirements are same as gross
requirement.
Now, we will make the procurement schedule by advancing net requirements of all components
by the procurement lead time for each component. Since the procurement lead time for components X,
282 INDUSTRIAL ENGINEERING AND MANAGEMENT

Y and Z is 4, 6 and 1 week, we need to offset their net requirements by procurement lead time in the
procurement schedule for each component.

20.10 BENEFITS OF MRP

The example, just explained, illustrates the potential benefits of MRP. Use of MRP is helpful to the
production control department to understand the effect of changes in future periods. When MRP is implemented,
the prime need is to establish correct BOM and a cycle-count process to guarantee reliable inventory
records. It triggers a process of self-study to improve BOM. Inventory tracking often leads to marking
of nonvalue added activities. Other benefits of MRP system are:
• Customer service is improved
• Reduction in lead time
• Reduction in work-in-process
• Reduction in past-due orders
• Elimination of annual inventory
• Reduction in finished good inventory, raw material, components and parts, and safety stock
• Increase in productivity
• Capacity constraints are better understood
• Inventory turn-over increases.
All the above benefits are due to correct tracking of inventory and accurate estimation of planned
order for each time horizon.

20.12 DRAWBACKS OF MRP

The greatest advantage of MRP is its straightforwardness and established procedure. However, the simplicity
in MRP calculations often leads to many problems in real life. Browne, et al. (1988), confirms the importance
of data accuracy as follows:
"Perhaps the greatest requirement of all for successful MRP installation and operation is discipline.
This includes the discipline to maintain accurate stock records, the discipline to report accurately and
in good time the completion of jobs and orders and to report to the system every event that MRP should
be aware of. Many successful MRP installations have padlock on the doors to the stockrooms."
However, free access to stockroom may cause poor recording of data. Browne, et. al. (1988) had
pointed that the main cause of MRP failure is inaccurate data, particularly BOM data and inventory
data.
(i) Incorrectness in Suppliers' Lead Time: MRP depends heavily on correctness of the lead-time
stored for each item. Correct estimate of lead-time depends upon goorelations with supplier, supplier's
familiarity with the product, vendor reliability, etc. In case this goes wrong, the component or raw
material will not reach in time, causing incorrectness in other calculations also. MRP calculations
are hierarchical in nature (means, dependent upon previous layer of BOM structure). This makes
correctness in data as a compulsory pre-requisite.
(ii) Incorrectness in Inventory Data: This causes incorrectness in the calculations of net requirements.
This may happen very frequently due to:
(a) miscounting
(b) scrap, not being accounted for
(c) items lost in transit.
MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-Il 283

(iii) Inaccuracy in Manufacturing Lead Time: The in-house production is often rescheduled or adjusted
due to:
(a) Change in customer's demand.
(b) Change in workload of factory, causing changes in lead time of manufacturing.
Busy factory causes more work-in-process and queue before operations, resulting in higher lead
times.
Lighter factory load may lead to quick processing on machine, i.e., shorter lead times. When this
lead time is incorrect, then the work orders are issued at incorrect time, resulting into parts being
completed late, or in the higher side of waiting time. This is a waste, which is certainly a cause
of great concern.
(iv) Inaccuracy in BOM Structure: This causes the inaccuracy in the estimates of gross requirements
to be calculated. This can happen when:
(a) there is a design change, and
(b) component substitution is implemented without prefer recording.
Some other problems of MRP are due to highly computational-intensive approach of MRP. This
causes over-dependence on MRP outputs. Any inaccuracy causes failure of MRP to a great extent.
20.12 ORDER POINT SYSTEM VS MRP
In the order point inventory system, the timing for replenishment order is triggered by an order-point-
rule. For this, the inventory level is continuously monitored and as the inventory level falls below a
certain level (called as reorder point), a replenishment order for a fixed quantity is issued (Figure 20.8).

Inventory
Order Quantity
Level
R

S
Safety Stock

Lead Time
Time —.-
Figure 20.8 An Order Point Model

The order point model is compared with MRP in Table 20.4.

Table 20.4 Comparison of Order Point and MRP Models

Feature MRP Order Point

Demand Dependent Independent
Order philosophy Requirements Replenishment
Objectives Meet manufacturing needs Meet customer need
Demand pattern Lumpy and predictive Random
Type of inventory Work-in-process and raw material Finished goods and spare parts
Forecast Based on MPS Based on past demand
Control concept Control all items ABC analysis
Lot sizing Discrete Economic Order Quantity (EOQ)
284 INDUSTRIAL ENGINEERING AND MANAGEMENT

20.13 CLOSED-LOOP MRP

The common MRP (open loop) discussed so far answers questions- like: what and when an item is to
be produced or ordered. It is well linked to MPS. However, this system is static in the sense that problems
with production machines, quality, labour, late delivery, etc., make the output of the MRP more or less
irrelevant. Manual updating is not only difficult and time consuming, it is error-prone also.
Closed-loop MRP is designed to handle this problem of updating. It is done by interfacing the
purchase and production activities control modules with MRP-module. Dynamic updating of order-status
is done by purchasing interface. This dynamically generates updated order-status from which new planned
order releases. In case of updates, new schedule is generated.
Shop-floor interface updates MRP .production status by collecting daily production and operator
timesheet data. These feedbacks to MRP constitute closed-loop MRP (Figure 20.9).

MPS, MRP and

capacity requirement
planning

Order review Production

and release process
Order control

Detailed and
priority scheduling

Detailed Manufacturing
production operation
planning and
manufacturing Yes
Production
monitoring and
data collection

• In
Production control
monitoring
and Feedback
Yes

Order
complete

Yes
. 1
Order Order
disposal disposition

Completed orders
Feedback for
evaluation Rework
Scrap

Figure 20.9 Closed-loop MRP

MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-II

20.14 MANUFACTURING RESOURCE PLANNING (MRP II) (FIGURE 20.10)

MRP and closed-loop MRP do not provide a link with other areas of business, such as finance and
marketing. For example, collection of payment from customers, billing of suppliers, pricing decision,
change of new product design, etc., are not directly included. Modular addition of these areas has been
tried. But this causes overload on the system; leading to inefficient system. An example in this regard
is as follows: Suppose the marketing informs the demand. This triggers purchase of material. MRP generates
date for placing orders depending upon various lead times and product structure (BOM). On a different
module, sales department generates its own output, ,informing this date on an urgent order list. Both
of these dates may be over-ridden in the system. Therefore, there are attempts in recent years to have
Business planning

Market
demand

Production
Manufacturing
plan

Adjust production
plan
Rough-cut
capacity planning

Yes

Adjust MPS Master Production

Schedule (MPS)

MRP

Adjust CRP Capacity Requirement

Planning (CRP)

Execute capacity
Requirement plans
schedules
Execute material plans 1

Figure 20.10 MRP II System

286 INDUSTRIAL ENGINEERING AND MANAGEMENT

an integrated system encompassing business functions other than manufacturing. MRP II and ERP (Enterprise
Resourne Planning) are attempts in this direction. MRP II includes linking of financial and marketing
functions to manufacturing function. It is represented in Figure 20.10. A detailed discussion of ERP,
which includes linking of marketing, financial, manufacturing and logistics, and human-resource development
is presented in Chapter 24.

20.14.1 Benefits and Limitations of MRP II

Based on some surveys by Oliver Wight in 1990, MRP II provided companies to achieve:
(i) Improved customer service (by 26%)
(ii) Improved productivity (by 20%)
(iii) Less purchase cost (by 13%)
(iv) Higher inventory turnover (by 30%)
Wight (1981) concluded that:
(a) MRP II contains "What if' capabilities.
(b) The operating and financial systems are one and same.
(c) MRP II encompasses every facets of the business, from planning to execution.
MRP is essentially a closed-loop MRP with linkages to business and financial planning, reporting
facilities and "What if' simulation capabilities (Higgins et. al., 1996). In an MRP II system, the three
levels of planning and control are shown in Figure '20.11.
Sales forecast (by product family)
Sales and operation
planning

Strategic
planning and control
---<1Long-term capacity policy

Master planning

Master Actual'and
forecasted demand Demand
produc-
manage-
tion
ment
schedu-
ling MPS
Tactical
planning
and
control

Master production schedule

MRP

Planned and open order

Exec ition
planning and control
Shop floor
/control

Figure 20.11 Different MRP II Levels

MATERIAL REQUIREMENT PLANNING (MRP) AND MRP-Il 287

MRP II suffers from some major weaknesses. MRP II uses predetermined lead time with backward
scheduling from established due dates. It does not consider the interaction of products competing for
same resources. MRP II has another drawback that it does not have a proper decision support; jt is
just a pure form of information system (Higgins, 1996). The MRP II problems are much more evident
when:
(a) Non-availability of basic and accurate data
(b) Complexity in manufacturing planning and control
(c) Lack in expertise needed to implement effective-manufacturing planning and control system
(d) Lack of top management support
(e) Chances of by-passing MRP II reports.

, REVIEW QUESTIONS

20.1 What types of demands are formally considered in MRP?

20.2 Distinguish between:
(a) Dependent and independent demand.
(b) Lumpy and continuous demand.
(c) MRP and EOQ model.
(d) MRP and MRP II.
(e) MRP and closed-loop MRP.
(f) MRP II and closed-loop MRP.
20.3 Explain the MRP system. Discuss different inputs and outputs of MRP.
20.4 What are the logics used in MRP? Explain its methodology.
20.5 Product A consists of three B type of sub-assemblies and one C type of sub-assembly. The B consists of
one D, one E sub-assembly, and one F. The sub-assembly C consists of a G and an F. The sub-assembly
E consists of a D and a K.
(a) Prepare a product tree
(b) Prepare the indented BOM
(c) 'Determine number of each sub-assembly/components required to produce fifty A.
20.6 Explain MRP II structure. Discuss its strength and weaknesses.
•
20.7 (a) Complete the MRP for item #568 below:

Week ip 1. 11 12 13 14 15 16 17 18 19 20
Gross requirement 200 50 40 80
On hand: 200
Net requirement
Planned order receipt
Planned order release
Lead time = 3 weeks

(b) If the company wants to maintain a safety stock of 50 number of #568, then complete the MRP of
above table in a fresh sheet.
288 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

1. Browne, J., Harhen, J., and Shivnan, J., 1988, Production Management System—A CIM Perspective, Addison-
Wesley, Wokingham.
2. Callerman, T. and Heyl, J. 1986, A Model for MRP Implementation, International Journal of Operations and
Production Management 6 (5). •
3. Chase, R., and Aquilano, N., 1981, Production and Operations Management, 3rd ed., Richard D. Irwin, Inc,
Homewood, III.
4. Childe, S.J., 1977, An Introduction to Computer-aided Production Management, Chapman & Hall, Weinheim.
5. Cox, JF, Blackstone JH and Spencr, MS, 1992, APICS Dictionary: 7th Edition, APICS Falls Church, V.A.
6. Groover, M.P., 1980, Automation, Production Systems, and Computer-Aided Manufacturing, Prentice-Hall,
Inc., Englewood Cliffs, New Jersey..
7. Halevi, G, 1980, The Role of Computers in Manufacturing Processes, John Wiley & Sons. Inc., New York.
8. Higgins P., Roy P.L. and Tierney L., 1996, Manufacturing Planning and Control Beyond MRP II, Chapman
& Hail, London.
9. "International Business Machines Corporation," 1974, Communications Oriented Production Information and
Control System, Publication G320.
10. Orlicky, J., 1975, Material Requirements Planning, McGraw-Hill Book Company, New York.
11. Peterson, R., and Silver, E.A., 1979, Decision Systems for Inventory Management and Production Planning,
John Wiley & Sons, Inc., New York.
12. Plossl, G.W., 1980, "MRP Yesterday, Today, and Tomorrow", Production and Inventory Management, Third.
Quarter, pp. 1-10.
13. Rehg J.A., 1994, Computer Integrated Manufacturing, Prentice Hall Career & Technolos, New Jersey.
14. Schaffer, G.H., 1981, "Implementing CIM," American Machinist, August 1, pp. 151-74.
15. Shankar, R. and Jaiswal S., 1999, Enterprise Resource Planning, Galgotia Publications, New Delhi.
16. Wight, 0.W., 1981, MRP II.• Unlocking America's Productivity Potential, Oliver Wight Limited Publications,
Inc., Williston, Vt.
17. Wight Co., 1990, Survey Results: MRP/MRP II/JIT, Essex Junction, Vt: The Oliver Wight Co.
18. Wight; 0.W., 1974, Production and Inventory Management in the Computer Age, Cahners Books Boston.
 21
JUST IN TIME (JIT) IN
PRODUCTION SYSTEM

21.1 INTRODUCTION
The growth and success of Japanese industries and its economy are due to several factors, which include:
• Government cooperation with and support for industry
• Japanese work culture
• Japanese management style
• Cultural and social structure of Japanese society
• Innovative manufacturing strategies, etc.
Recently, much focus is noticed on the Japanese production management techniques specially, Just-
in-Time (JIT). JIT and TQM are the most talked about strategies of the decade. JIT is a manufacturing
philosophy, which aims at having the right part at precise right time, and in the right quantity to go
into assembly (Ohno, 1982).

Purpose of JIT

The purpose of JIT is to produce and deliver finished goods just in time to be sold, sub-
assemblies just in time to be assembled into finished goods, fabricated parts just in time
to go into final assemblies, and purchased materials just in time to be transformed into fabricated
parts. —Schonberger (1982)

The ultimate aim of JIT is to concentrate on lotless, repetitive manufacturing, with only one unit
of Work-in-Process (WIP) and no stock of finished goods inventory.
Definition of JIT: JIT is defined at many places, but all have focussed on planned elimination
of waste of any type.

Definition of JIT
A philosophy of manufacturing based on planned elimination of all waste and continuous
improvement of productivity. It encompasses the successful execution of all manufacturing
290 INDUSTRIAL ENGINEERING AND MANAGEMENT

activities required to produce a final product, from engineering to delivery and including all
stages of conversion from raw material onward. The primary elements of zero inventories
(synonym for JIT) are to hate only the required inventory when needed; to improve quality
to zero defects; to reduce lead times by reducing setup times, queue lengths, and lot sizes;
to incrementally revise the operations themselves; and to accomplish these things at minimum
cost. In the broad sense it applies to all forms of manufacturing job shop and process as
well as repetitive. —American Production and Inventory Control Society (APICS)

JIT is a philosophy. It is also believed to be a path, which follows the route of continuous improvement.
With the pursuit of continuous improvement in the area of shorter lead time, better price and delivery
performance, reduction of waste and improvement in quality, a company can claim to be on the path
of JIT.
21.2 JIT PHILOSOPHY
JIT system was developed at the Toyota Motor Company in Japan in mid 1970's by Taiichi Ohno and
his several associates. The roots of JIT system can probably be traced to the Japanese environment wherein
lack of space, lack of natural resources were considered as waste of resources. Thus, Japanese have
developed an aversion to waste of any type, whatsoever it may be. Scrap and rework were also taken
as waste and thus Japanese strive for perfect quality. From their point of view, anything, which does
not contribute value to the product, is viewed as waste. Therefore, as a result of aversion to waste,
it was natural for the JIT philosophy to develop and nurture in Japan. Another major tenet in this philosophy
is utilising the full capability of the workforce, i.e., the workforce is made responsible for producing
quality products/parts just-in-time to support the next production process. If they fail in meeting the responsibility,
they are required to stop the production process (JIDOKA) and can call for help. Additional responsibility
is also given for improving the production process through participating in quality circles for process
of production improvements (Figure 21.1).

What is JIT? What does JIT do?

♦Elimination of all wastes
♦Pull system through plant
♦It is a Management Philosophy
♦ Attacks wastes (Time, Inventory,
Scrap. etc.)
♦ Exposes problems and bottlenecks
♦ Achieves Streamlined Production

Main Mantras of JIT

• Elimination of waste • Lot size reduction
♦ Pull-type system ♦ Zero defects

What is Required in JIT? What is Assumed in JIT?

♦Employee Participation ♦Stable Environment

♦ Small Lot Size
♦Total Quality Control
♦Basics of Industrial Engineering
♦Commitment to quality and reduction
of waste
♦Involvement at all levels of
organisation

Figure 21.1 Just in Time (JIT)

JUST IN TIME (JIT) IN PRODUCTION SYSTEM 291

Characteristics of JIT
• Ideal Lot Size in JIT is One Piece
• Aims at driving all Queues towards zero in order to:
—Minimize Inventory Investment
—Shorten Production Lead Times and Set-up Times
—React faster to Demand Change
• Focussed factory
• Cellular (GT) Manufacturing System
• Uncover any Quality Problem and its Control at Source
• Total Preventive Maintenance
• Cross-trained worker and Worker flexibility
• Uniform work Load
• Kanban Cards
• Decentralization
The objective of JIT system is to encourage workforce to participate in the programmes relevant
for work improvement; profits increase through cost reduction, inventory reductions and quality improvements.
Thus, waste should be eliminated. This philosophy is based upon two criteria:
(i) Just-in-Time (JIT) refers to production and supply of required number of parts when needed. So,
it is referred to as JIT production system. If work-in-process inventories including parts and products are
expected to decrease (even to zero), this system is called stockless (zero-inventory) production system.

Objective Ideas Techniques

Pull system with Kanbans

Single minute exchange of die (SMED)
Level (smoothing) production (Fixed
steady rate of production)
Cellular (tlow) manufacturing
Standard operations '
Multi-process (skill) handling
Multi-functional workers
Industrial engineering (1E)
Jidoka (autonomation)
Visual control
A cooperative spirit
Continuous improvement
Total productive maintenance (TPM)
Problem solving
Puka Yoka systems
Reliable vendors
Quality inspection
Small lot sizes
Total quality control (TQC)
Quick low cost set-ups

Figure 21.2 Framework of JIT Production Systems

292 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Another criterion is Jidoka (self-actuation), i.e., when unusual event happens in a production line,
the worker incharge stops the line and calls for help in removing the cause of trouble.
The JIT production system (Figure 21.2) employs the pull system rather than traditional push system
(production control focusses on the beginning of the production-line, the schedule pushing work through
operations from beginning to end). Pull system focusses on the end of the line and pulls work-through
from preceding operations. Workers perform the required operation on the material/work part, drawn from
preceding workstation at the necessary time with the use of a Kanban (instruction card). Thus, work-
in-process inventory is minimised, and over-production can be eliminated. In order to provide production
information, two kinds of Kanban are used: (a) withdrawal, and (b) production ordering information.
Thus, a process of multi-product, small batch production is achieved by smoothing the production
in the above manner.
21.3 PUSH SYSTEMS VS PULL SYSTEM
The most important change, which a JIT system advocates for the manufacturing, is to shift from conventional
push system to pull system. Both push and pull systems refer to as the approaches for the way material
moves in a system. Generally, all traditional manufacturing systems employ push system while JIT environment
demands for pull system.
Push System: Push system uses master schedules and output of MRP (material requirement planning)
for determining production schedules and the movement of material in the factory.
The conventional approach starts with sales forecast. This determines demand forecast for each
item to be manufactured: The difference in sales forecast and demand forecast is due to adjustments
on the basis of past history of company's sales and company's financial outlays for next few months.
This demand forecast is compared with the status of finished goods inventory. After proper adjustment
for the already available finished inventory, the production plan for manufacturing is decided. Each unit
of the system produces output irrespective of queue before the succeeding units. The overall system thus
has many queues of in-process/finished inventory. The approach is shown in Figure 21.3.

Market Sales Forecast

Demand Forecast
4
Master Production Schedule (MPS) II

Purchase Order
M RP Suppliers

Release of Work Order

Shipment of '
Material Processing and Factory Operation Material

Inventories of Finished Products

Figure 21.3 Material flow and building of schedule in a push system

JUST IN TIME (JIT) IN PRODUCTION SYSTEM 293

21.4 KANBAN AND PULL SYSTEM

Kanban means card in Japanese language. In JIT, Kanban cards are used to move material through the
production. Two common types of Kanban cards (Figure 21.4) are:
(a) Withdrawal Kanban, and
(b) Production Kanban.

Part Number Preceding process

Part Name

Box Box Issue Subsequent process

Capacity Type No.

(a) Withdrawal Kanban

Part Number Process

Part Name

Stock location at which to store :

Container Capacity

(b) Production Kanban

Figure 21.4 Types of Kanban Cards

The withdrawal Kanban is used to release material from previous output area or vendor. The production-
Kanban works as instruction to start production from a previous work centre. Thus, material is pulled
from a previous unit of material processing or material supplier.
The process of Kanban system follows these steps (Figure 21.5):
Step 1: The withdrawal Kanban reaches the output area of previous stage. The worker brings the
Kanban to the store location of the previous level.
Step 2: There could be a situation when enough material is available. After comparing and matching
the part required on the production Kanban with the withdrawn Kanban, the worker removes the production-
Kanban from the container and places the withdrawal Kanban. The removed production-Kanban is placed
on the production Kanban post.
Step 3: The production at the previous work-centre starts when the post for production-Kanban
contains specified number of production-Kanban.
Step 4: The material at the previous work-centre, which has just been tagged with withdrawal Kanban,
is transported to the next work-centre. It is placed in this work-centre till the required production starts
here. In case of material requisitioned from vendors, the work-centre releases withdrawal Kanban at the
time when material is just needed from vendors.
294 INDUSTRIAL ENGINEERING AND MANAGEMENT

Step 5: Once the material reaches at a work-centre, the worker checks the withdrawal Kanban,
removes it and places it in the withdrawal-Kanban-post. The material, however, is used for production
or shipment.

Input input
area area
•
Final
assem-
bly line

Input
area

Withdrawal Kanban WK Production Kanban ri Physical material flow

Figure 21.5 Complete Kanban System

Source: Robert W. Hall, Driving the Productivity Machine: Production Planning and Control in Japan, American
Production and Inventory Control Society, 1981.

Sales Forecast

Demand Forecast

Master Production Schedule (MPS)

Forecast Suppliers
Estimate
' of required
production Forecast •
rate Location of stock and Kanban
Material Release
Kanban Pull
Kanban pull

Material Processing and

Factory Operation

Inventories of Finished Products

Customers

Figure 21.6 Material flow and building of schedule in a pull system

JUST IN TIME (JIT) IN PRODUCTION SYSTEM 295

21.4.1 Calculation for Number of Kanban

Kanban system attempts at continual reduction of inventory. The number of Kanbans are calculated as
follows:
N = dL + S
C
where,
N : Number of Kanban (or containers)
d : Demanded units (average number over a given period of time)
L : Lead time (time to replenish an order, expressed in the same time unit as expressed in demand)
S : Safety stock (as a percentage of demand during lead time), based on service level and variance
of demand during lead time
C : Container size.
Container size should be kept much smaller (say 10 to 15%) than the average demand during the
lead time, as this will force a continuous improvement process.
Example 21.1 A production manager is working in a cellular manufacturing system for an automobile
parts. He has to process an average of 250 parts per hour in the cell. The capacity of each container
is 30 parts and one Kanban is attached to all the containers. The time to receive new parts from the
previous workstation is 25 minutes. Factory maintains a safety stock factor of 15%. Determine the Kanbans
needed for the plant.
Solution: Given: d = 250 parts per hour
L = 25 minutes = 25/60 hours = 0.4167 hour
S = 0.15 (250 x 0.4167) = 15.6
C = 30 parts
Now, since number of Kanban is
N = dL + S
C
(250 x 0.4167) + 15.6
= 3.993 Kanbans or container = 4 Kanbans or containers
30
21.5 MRP VS JIT SYSTEM
The operational philosophies of JIT system and MRP system are opposite in nature. At the core, JIT
is for minimization of inventory while MRP is for planned inventory. MRP is a push-system while JIT
is a pull-system. Push-system (or MRP system) produces inventory for future use. Pull-system (or JIT
system) demands material from a previous work-centre (or vendor) at a time when material is just needed.
Other contrasts are as follows Table 21.1:
Table 21.1 MRP Vs JIT System

JIT System MRP System

S.No. Factors Pull System Push System
1. Inventory 1. Treated as liability 1.Treated as asset
2. Efforts to minimize 2. Maintained to cover the market uncer-
tainty (safety stock)
3. Reduced inventory, exposes 3. Planned inventory keeps production
the production problem problem under inventory cover.
Contd...
296 INDUSTRIAL ENGINEERING AND MANAGEMENT

S.No. Factors JIT System MRP System

Pull System Push System

2. Information 1. Kanban cards: simple visual control 1. Computationally extensive processing

Processing of records.
3. Set-ups 1. Rapid change-over is needed for Set-ups reduction in a low priority area.
small lot size production.
2. Wide variety and high frequency of
changeover is possible through low
set-ups.

4. Lot sizes Requisitioned for immediate use. Requisitioned for a schedule, calculated
for each time-bucket. It should balance
set-up cost and holding cost.

5. System It is a reactive system. When a MRP plans for uncertainty. It is not a

problem arises, the line is shut reactive system. In case a problem
down. This, JIT reacts to uncertainty. develops, MRP is not so effective.

6. Demand variations Works well. Works poorly.

7. Vendors 1. Treated as co-worker. 1. Treated as adversaries.

2. Effort on developing one reliable 2. Effort on having multi-sources to take
vendor at a location nearest to plant. advantage of competitions.

8. Quality Efforts on zero-defect. Tolerant on scrap by building formula for

predicting it.

9. Machine Critical activity as no machine failure Not a critical issue as queues are admi-
maintenance is desirable' ssible.

10. Lead time Short lead time is desirable as this Long lead time is desirable as most
would simplify the job of marketing, supervisors and purchasing agents want
purchasing, and production. more lead time.

1I. Queues A sign of inefficiency, hence eliminate It permits smooth operation in case of
it. problems.

21.6 AN ANALOGY TO JIT

The benefits of reduced inventory (ideally, zero inventory) are as follows:
(i) Saving in space for warehouse and work.
(ii) No tie-up of money in idle inventory leads to saving in working capital outlay of the firm.
(iii) Ability to operate at low inventory level can happen only when the major productivity related problems
are eliminated. Once this is achieved, quick response to problems during operation is a must. Quick
identification of problems, immediate attention to problem solution, short-time span to solve problem
and prevention from disruption are necessary for smooth operation under JIT. Therefore, JIT imparts
many benefits, which are derived by virtue of mere adherence to the JIT framework.
(iv) Reduced inventory level, or for that matter other asset base is helpful in identifying other productivity
level problems, such as: scrap, WIP, quality, machine breakdown, etc. Inventory works as buffer
against these ills. Generally, clear picture of these problems often remains unfolded as excess inventory
JUST IN TIME (JIT) IN PRODUCTION SYSTEM 297

prevents the system from disruption. It may appear that inventory is good to arrest these disruptions.
But in real practice, it is not so, as many other issues remain hidden under inventory buffer.
As an analogy, the river and boat example is illustrated. The river is full of rocks (which is analogous
to productivity problem). As long as water level (analogous to inventory) is sufficiently over these rocks,
the sailing (i.e., production) is smooth. However, as water level (i.e., inventory) lowers, rocks (i.e., productivity
problem) surfaces and disrupt sailing (i.e., production). Now, once these rocks are apparent, the attempt
is to eliminate them by focussed attention on individual problems. By gradual identification of problem,
through reduced inventory, one can move towards JIT environment or an environment of stockless production.

Work in Process
(WIP) Queue

Excess
Productivity
Inventor
problems
Level
•_

Unconcerned Lack of
management team spirit

Figure 21.7 Large rocks are hidden problems due to excess level of inventory

Exposed
} problems due
to reduced
Work in Process Vendor
Scrap Late defective inventory —
(WIP) Queue delinquencies
deliveries

Machine Unstable Off

Rework
Reduced downtime demand standard
Level of Productivity
inventory IrAccurate Untrained Decision problems
Poor floor
quantities layou÷worker backlog
..._

Inspection En. design Change Order entry

backlog redundancy order backlog

Paper work Unconcerned Lack of

backlog management team spirit

Figure 21.8 Reduced level of inventory is able to expose productivity problems

298 INDUSTRIAL ENGINEERING AND MANAGEMENT

It is interesting to note that as more and more rocks (or problems) are removed, the need to have
more water level (i.e., inventory) for smooth sailing (i.e., operation) reduces and the approach is exactly
what we need in JIT (Figure 21.9).

High Asset (or Leads to 'Hides Real Causes Unresolved Issues

Inventory Level) Productivity Problems Related to Improvement

Low Asset
Level
Leads
to
Identify Real
Productivity
1 Better Capital Utilization1

Problem
More Space Utilization I

Better Manpower Utilization I

Less Inventory

Figure 21.9 Lower asset level leads to better utilization of resources

21.7 REQUIREMENTS FOR IMPLEMENTING JIT

Implementation of JIT is not a one day affair. It requires year to pursue the basic ingredients of JIT.
Some of the requirement are controllable by the management, while rest are uncontrollable (Figure 21.10).
These are as follows.
21.7.1 Training
Japanese view manpower as a vital asset of the firm. With investment in training and development, firm
upgrades the skill of workers. Since Japanese culture in industry is of "life-time-employment" type, such
investments in manpower are found to be helpful in developing a team of multi-skilled workers, who
have better problem solving temperaments. Therefore, better quality production is achieved through training.
Alongside, the productivity also improves. The awareness about wastes and improvement of productivity
and efficiency is always in focus in these trainings (Figure 21.10).

Mainly Uncontrollable Requirements for JIT Mainly Controllable Requirements for JIT

Training Management understanding and support of the system

Long term planning Management and labour responsibilities

J1T
Stockholders (owners) Production Cellular layout and work flow
System
Labour organisation Department functions
(Union)
Supplier management 1

1. ovemment support
H Reduced set-up time

Figure 21.10 Some requirements for implementing JIT

JUST IN TIME (JIT) IN PRODUCTION SYSTEM 299

21.7.2 Long-Term Planning

The implementation of JIT is a long-term process. This requires continuous improvements and trial and
error approach. However, it is important to note that the benefits of JIT start coming even at the early
stages of its implementation.

21.7.3 Stockholders
Stockholders are those, who invest in the company finance. In Japan, the earned profit is reinvested
in the firm by stockholders, who are "management worker". Similar attitude is difficult in our country
as major profit is distributed among stockholders as dividend. So, a changed mindset is needed which
should be focussed on long-term gains rather than annual dividend.

21.7.4 Labor and Union

Unlike situations in our industry, where there is a demand of specialist workers, JIT demands for multifunctional
workers with flexibility to switch over. Union must be enterprise-oriented rather than worker-focussed.

21.7.5 Government Support

Role of government in relaxing regulations related JIT industries is very important. Better "labor-union-
management-government" relation is a must for conducive JIT environment.

21.7.6 Management Support

Complete management support is needed in the implementation of JIT. For elimination of productivity-
related problems and reduction of asset/inventory level, the support of management is a must.

21.7.7 Management and Labour Responsibilities

Management has to be open in JIT environment, Healthy criticism should be encouraged and hidden
problems should be eliminated. Team decision-making and cooperative problem solving facilitates JIT
implementation.

21.7.8 Cellular Layout and Work Flow

The functional layout is no more useful in JIT environment. Group technology based cellular layout
is needed. The flow of material and arrangement of machines in the cell may preferably be of U-type.
This arrangement is useful for reduced inventory, multifunctional workers and elimination of other forms
of waste like set-up time, etc.

21.7.9 Department Function

There are major changes in the functions of depattments of JIT industries. Workers are better trained
to solve quality and engineering problems. In case of any problem, at any worker level, it is attended
by entire department even if total production remains disrupted for few minutes. This is called as Jidoka
in Japanese industries. Many traditional functions of departments get modified. For example, purchase
department works more or quality of raw material rather than dealing with level of inventory and when-
to-order.

21.7.10 Supplier Management

JIT advocates single but highly reliable vendor. Suppliers are treated as partner rather than competitors.
They are trained in qu!ility and production so that no defective should reach at the shop floor or assembly
line. Extreme care is needed in choosing and developing vendors in JIT environment.
300 INDUSTRIAL ENGINEERING AND MANAGEMENT

21.7.11 Reduction of Set-up Time

Reduction of set-up time is one of the most important ingredients of JIT. By set-up time, we mean that
non-value added time (that is waste in JIT terminology), which is required during process change-over,
or job change-over, or tool change-over, or operator change-over, or die change-over, etc. In general,
it is the time between making the last good part of nth run to first good part of (n + 1)st part. Walt
Goddard (1986) has out-lined some of the ways to reduce set-up time:
1. Standardize the external set-up actions; replace adjustable gauges with permanent ones.
2. Put all probe and blow-off hoses on one side of die.
3. Put a bench at side of press at the same level as the press opening, to hold the next die.
4. Colour-code all hose connections: air, hydraulic, water, etc.
5. Use parallel operations—deliver all components to support , die set-up (use a check-off sheet to
ensure all are present prior to set-up).
6. Design a quick locating system-positioning pins and holes, with quick fasteners. •
7. Standardize all die receptacles.
8. Add tonnage monitor on press to detect two pieces in die before damaging dies.
9. Involve tool-and-die designers in set-up reduction programs as all new designs incorporate quick
change-over concepts.
10. Use two-way radio between set-up man and lift-truck operator, who removes and delivers dies.
11. Photograph completed operation as a guide for set-up man: location of tables, wrenches, baskets,
etc.
12. Review material flow charts with reduced movements in mind.
13. Make as many' of the set-up activities internal to the run time. That is, do as much of the set-
up as possible without shutting down the machine.
14. Standardize all bolt sizes.
15. Code parts on dispatch list for major or minor set-ups to aid scheduling.
16. Standardization and use of common parts in the product will reduce the number of different parts
required. If design engineering does not design' a new part, no set-up is required for it.
The concept of single minute exchange of die (SMED) is becoming popular in the efforts to minimise
set-up times. This may be achieved through teamwork, extensive minute study of the production process,
proper tools, right attitude and learning by practice.
As far as Indian environment is concerned, Vrat, et. al. (1993) have concluded that it may take
some more years before JIT can be fully implemented here. This is due to differences in the operative
environment of Japanese and Indian industries.

21.8 PRELIMINARIES TO JIT PRODUCTION

In order to implement JIT production effectively, the following preliminaries should be achieved first:
(i) Standardise the individual operations through the help of work-study methodology by reducing the
non-value adding work-elements to minimum.
(ii) Provide U-shape layout so that each operator can handle more than one machine (work-centre),
thus reducing the labour cost.
(iii) Multiple-job work by each operator-job allotment to each individual operator changes frequently
(may be every week); so every operator is required to master multiple jobs. However, the implications
may include the lack of job enrichment and satisfaction.
JUST IN TIME (JIT) IN PRODUCTION SYSTEM 301

(iv) Reducing set-up times by adopting some degree of automation in the work-centre or using machining
centre of NC system. This would lead to the reduction of batch sizes and work-in-progress inventory.
(v) Production smoothing through stabilisation of a process for multiple product, small batch production.
(vi) Jidoka (self-actuation)—When unusual events happen in production-line, the work-in-charge should
stop the line and take help to remove the cause of trouble.

21.9 JIT PRODUCTION PROCESS

Master production plan is given for final stage of the whole production process. In running this system,
the workers perform the required work on the work-material provided by the preceding workstation at
the necessary time. That is why, it is call pull-through system. We need to use two kinds of Kanban
(instruction card) for the purpose of providing production information, i.e.,
(a) withdrawal information Kanban
(b) production ordering information Kanban.
The withdrawal Kanban indicates the parts (items) and their quantities to be brought from the previous
stage to the current workplace. Once this Kanban is issued, the parts and the quantities indicated on
-Kanban are withdrawn and brought to the current workplace together with the Kanban.
Later, production Kanban allows to withdraw parts from the store of previous stage so as to move
them to the next stage, i.e., according to the instructions indicated by production Kanban, the production
starts and continues until the quantities of the withdrawn parts have been completely replenished.
Final
Works Centres
assembly

Final
assembly

Stockrooms

Supplier 1 Supplier 2 —1 Supplier I Supplier 2

(a) Initial layout (b) JIT layout

Final
assembly

0 0
Supplier I Supplier 2

(c) JIT layout with CT

Figure 21.11 Structured production

302 INDUSTRIAL ENGINEERING AND MANAGEMENT

Figure 21.4 indicates the pull-through type JIT production system receives, the master production
schedule at the final stage. Necessary parts are brought from the, previous stage with the circulation
of Kanban, which plays a roIe of information flow. Figure 21.11 shows different layout configurations
for JIT production system. The initial layout in (a) is modified for JIT. environment in (b). It may be
noted that stockroom is eliminated in (b). Supplies provide material right on the shop-floor. In (c), a
cellular layout with JIT environment is shown. It may be noted that flow of material is in cells but
environment is for JIT.
21.10 BENEFITS OF JIT
The benefits of JIT are apparent since the early implementation stage. Main benefits of JIT are: better
quality, less work in process, less scrap, less blocked capital in inventory, improved team work,
less space requirement, elimination of store and warehousing problems, improved productivity and high
worker morale (Figure 21.12).

Kanban Increased flexibility

Reduced set-up time Less Scrap

Smaller lot size
Production smoothingli
Better quality
Less raw material
,..
Less work-in-process

Compo- Standardisation I Benefits

Fewer finished goods
nents of Just-In-Time of
JIT Production JIT
Uniform and invariable System Increased teamwork
output rate
Higher worker motivation
Multifunction workers
Increased worker and
equipment efficiency
Streamlined process design
Saved space

Flexibility and versatility Increased productivity

Figure 21.12 Components and Potential benefits of JIT

21.11 EVALUATION OF JIT PRODUCTION

JIT production is a method of coping with inefficient multi-product, small-batch production. It is now
getting worldwide recognition as Japanese style of manufacturing system with quality circle (QC) activities.
It is also. referred to as Toyota production system and has been acclaimed by many as the most significant
development in production systems. It is commonly believed that JIT production is very efficient, but
in due course of time, many demerits have been pointed out, such as:
(i) JIT production is effective only when the daily demands are fairly stable.
(ii) The minimum zero inventory can be theoretically achieved, however, stocks are maintained to assure
JIT delivery to customers.
JUST IN TIME (JIT) IN PRODUCTION SYSTEM 303

(iii) Only "first come first seried" principle is applied by manufacturing items in order of releasing
Kanbans.
(iv) Much needs to be done in connection with employer-employee cooperation, daily workstation rotation,
training of operators for different kinds of jobs, and systems adaptability to market fluctuation.
Such a labour environment leads to variety of serious issues.

REVIEW QUESTIONS

21.1 Explain the concept of JIT. How does it help the manufacturing system to improve productivity?
21.2 Explain the basic elements of JIT.
21.3 Differentiate between:
(i) Push Vs pull systems
(ii) JIT Vs Reorder point system
(iii) Production Kanban Vs withdrawal Kanban.
21.4 What are the advantages of JIT system? Explain the difficulties in JIT implementations.
21.5 Explain the philosophy involved in JIT system. What are the major requirements for a successful JIT implementation?
21.6 What do you understand by Kanban? Explain the method to calculate the number of Kanbans.
21.8 Based on your experience on Indian industries, list all majors that are needed for improving the performance
• through JIT implementation.

REFERENCES

1. Chu C and Shin W, 1992, "Simulation Studies in JIT Production", Int. J. of Production Research, Volume 30
(11), pp. 2573-86.
2. Hayes, R.H., 1981, "Why Japanese Factories Work", Harvard Business Review, Volume 59, No. 4,
July-August pp. 56-66.
3. Lu. D.J. (translator), 1986, Kanban Just-in-Time at Toyota, Edited by Japan Management Association, (Productivity
Press).
4. Mejabi, 0, and Wasserman GS., 1992, "Basic Concepts in JIT Modelling", Int. J. of Production Research,
Volume 30 (i), pp. 141-49.
5. Mejabi, 0, 0., Wasserman, G, 1990, "Simulation Contracts for JIT Modelling", Technical Report, Department
of Manufacturing and Industrial Engineering, Wayne State University, Detroit U.S.A.
6. Monden, Y, 1983, Toyota Production System: Practical Approach to Production Management, Industrial Engineering
and Management Press, Atlanta, Georgia.
7. Ohno, T., 1982, How the Toyota Production System was Created, Japanese Economic Studies, Vol. 10, No. 4,
Summer 1982, pp. 83-101.
8. Philipoom, P.R., Rees, L.P., Taylor, B.W. and Huang P.Y., 1987, "An investigation of the factors influencing
the number of Kanbans required in the implementation of the JIT technique with Kanbans". International
Journal of Production Research, 25 (3), 457-72.
9. Schonberger, R.J., 1982, Japanese Manufacturing Techniques Nine Hidden Lessons in Simplicity. The Free
Press, New York.
304 INDUSTRIAL ENGINEERING AND MANAGEMENT

10. Schonberger, R.J., 1982, "Some Observations on the Advantages and Implementation: Issues of Just-in-Time
Production System", Journal of Operations Management, Volume 3, No. 1, pp. 1-11.
11. Schonberger, R.J., 1986, World Class Manufacturing, The Free Press, New York.
12. Schonberger, R.J., 1983, Applicatirin of single-card and dual-card Kanban, Interfaces, 13, pp. 56-57.
13. Schroer, B.J., Black, J.T., and Zhang, S.X., 1985, "Just-in-time (JIT), with Kanban, Manufacturing System
Simulation on a Microcomputer", Simulation, August, 45: 2, pp. 62-70.
14. Sellerhan D.O., and Smith, L.F., 1982, Just-in-Time vs. Just-in-ease. Production/Inventory Systems: Concepts
Borrowed Back from Japan, Production and Inventory Management, Volume 23, No. 2nd Quarter, pp. 20.
15. Vrat, P., Mittal, S. and Tyagi, K., 1993, "Implementation of JIT in Indian Environment: A Delphi Study"
Productivity, Volume 34 (2), pp. 251-57.
16. Waters, G.R., 1984, "Why Everybody's Talking about Just-in-Time", Inc. Volume 6, No. 3, March
pp. 77-78.
 22
SUPPLY CHAIN MANAGEMENT

22.1 INTRODUCTION
Enterprise Resource Planning (ERP), Business Process Re-engineering (BPR) and Supply Chain Management
(SCM) are the three commonly heard buzzwords in recent years. All the three are related in same ways.
In this chapter, we will examine supply chain management and its context in ERP. A clear understanding
of SCM is necessary as many ERP vendors claim to have SCM solutions. Let us examine SCM first.
We will take up ERP in Chapter 24 and BPR in Chapter 36.
22.1.1 Definition ',
Supply Chain (SC) and Supply Chain Management (SCM) are defined at many places in literature. However,
all reveal the common theme of material, information and financial flows coordinating among supplier,
manufacturers, distributors and customers of product and services.

The supply chain is the network of autonomous and semi-autonomous business entities, which
are involved through upstream and downstream linkages in the different processes and activities
that produce value in the form of physical products and services in the hands of the ultimate
customers.

Supply chain consists of the network of organisations that connects supplier and end-users. It provides
the route through which raw material is 'converted into finished good/services into the hand of consumers.
Supply chain management, in turn, covers the "flow of goods from suppliers through manufacturing and
distribution chains to the end users" (Figure 22.1).
In the context of an ERP solution, many ERP vendors claim to have supply-chain management
(SCM) solution. In this context, SCM is defined as follows:

Supply Chain Management (SCM) is a part of ERP software solution, internal business practices,
and tightly managed trading partner relationships, that allow an enterprise to provide more
efficient services to the customers by better organising and coordinating internal and partner
activities.
IMMA t • 2= LZ,..2

The concept of supply chain management is important as it provides a framework for the integration
of information, material and finance of the enterprise, right from the suppliers to the customers. The
coordination elements of the supply chain includes:
306 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Procurement also known as Source

• Manufacturing' also known as Make
• Logistics also known as Move
• Warehousing also known as Store
• Market also known as Sell.

Strategic
Inventories
locations

Procurement Manufacturing Factory Distribution .Customer

Suppliers Customer
orders orders orders • orders order

Distribution and
Sourcing - Making Selling
Ware housing
Logistic (Move)

Figure 22.1 The scope of Supply Chain Management (Houlihan 1985)

Key Points
A supply chain produces value in form of physical products and services in the hand of ultimate
customers.
• A supply chain is a network of facilities and distribution options that:
• procures materials from supplieis.
• transforms these materials into products.
• distributes these finished products to customers.
• SCM is the integrated process of managing these value-chain activities.
• SCM systems perform the transactions and manage the data required to complete these activities.

Supply Chain Management encompasses management of all the elements and activities of the supply-
chain. This includes material suppliers, production facility, distribution, services' and customers; linked
together via the feed-forward flow of information and the feed-back flow of materials (Evans, 1995).
The "Supply Chain" term is being extended to International/Global-supply chain. This is common in
industries, which have global customer/supplier base; for example, textile, pharmaceuticals, automobile,
electronic etc. The inclusion of distribution as a key link of the supply-chain malces its scope quite wide
and extended (Figure 22.3). Distribution may incorporate many stages such as warehouse, C & F (Carry
and Forward) agents or third party freight-forwarders, wholesalers, retailers and servicing units. The involvement
of this link of the supply-chain with the end user (or customer) makes it extremely vital in the light
of present day focus on customer satisfaction/delight. Figure 22.4 represents a general generic structure
of the Supply Chain and Figure 22.5 is an illustration of internal complexity of the Supply Chain. The
multilayer abstraction is evident in Figure 22.5, since a supplier may still have its own Chain as depicted
by circle II.
SUPPLY CHAIN MANAGEMENT 307

Supply Chain Management Process

Manu-
fac unng

Inventory
Payments to
Vendors Accounts
Shipping
payable

Billing
Customers
General Fixed
6cr Assets

Payments
from Customers ACCOl nts
Receivable
Periodic
Statements

Figure 22.2 The process in a supply-chain

Upstream of Supply Chain

A hybrid
manufacturing/
distribution facility

Downstream of the supply chains

" Figure 22.3 The supply chain network diagram of a global unit
308 INDUSTRIAL ENGINEERING AND MANAGEMENT

Supplier Subcontractor Retailer

Distributor

Supplier Manufacturer Assembler Retailer

C&F Agent

Supplier Supplier Retailer

Legend : o Business Entity V Inventory Stockpille —.- Material Flow

Figure 22.4 A generic structure of a supply chain

Subcontractor

Manufacturer

ss
- ------------ -

- ---------- _ _ - -

Legend : o Business Entity V Inventory Stockpille Material Flow

Figure 22.5 The multiple layer abstraction of a supply ch4n

22.2 STEVANS MODEL OF SUPPLY CHAIN INTEGRATION

Stevans (1989) and Stevans et. al., (1995) have provided a simple model `to understand supply-chain
integration. It involves transforming enterprise from an inward looking (i.e., whatever the enterprise makes
is being sold) to a flexible outward looking (i.e., producing whatever the market wants it to sell) in
an overall efficient manner. The transformation can be performed in an effective manner through a series
of phased steps. These steps involve the recognition of technological, organisational and attitudinal attributes
(Figure 22.6). Integration of the Supply Chain is a four stage process involving:
SUPPLY. CHAIN MANAGEMENT 309

Stage I Base line Understanding of material flow from purchasing to distribution.

Stage II Functional Integration Understanding the functionality of material management, manufacturing
management and distribution.
Stage III Internal Integration Internal integration of material management, manufacturing management
and distribution.
Stage IV External Integration Integration of suppliers, internal supply chain and customers.,

Stage Base Line

Customer Service
Material Flow

Elevation
Principally
Technology
Stage II: Functional Integration Based

Material Flow Customer Service

Manufacturing
Managements

Elevation
'Principally
Organisation
Based

Stage III: Internal Integration

Customer Service
Material Flow

Materials Manufacturing
Distribution
Management Management
■
•
MIS • • •
• MI •
Elevation
Principally
Attitude
Based
Stage IV: External Integration •
Customer Service
Material Flow

Internal Supply
Suppliers CustomeiN,
Chain

Fig 22.6 Stevan's Model for Integration of Supply Chain

310 INDUSTRIAL ENGINEERING AND MANAGEMENT

There are two common approaches for evolving a supply-chain-management environment:

(a) Internal Integration
• Integrated system (e.g., ERP solutions such as SAP R/3)
• Link. functions such as, purchasing, manufacturing, inventory, finance, marketing, etc.
• Shared data and integrated processes.
(b) Intra-firm Integration
• Interorganizational information system, such as, extranet
• Link firm's systems with external entities-suppliers, distributors, retailers, etc.
• Shared data and integrated processes.
22.3 BENEFITS OF SUPPLY-CHAIN IMPROVEMENT
Improvement in supply-chain management is very significant in providing competitive advantages to the
companies going for this. A recent survey in USA was conducted with sixty-five closely-associated engineers,
project manager, director, and executives of firms dealing in supply-chain area (Savoie, 1998). Their
ranked-response regarding most important benefit of supply-chain improvement included: (i) reduce operating
costs, (ii) improve responsiveness and reduce cycle time, (iii) improve customer service, (iv) simplify
operations, (v) improve quality, (vi) support significant volume growth, (vii) reduce capital basis/improved
return on capital, (viii) effectively support a growing or diverse customer base, (ix) effe6tively offer a
greater variety of products, and (x) focus on core competencies.
The benefits of supply-chain improvement can be harnessed by better integration of supply-chain
in terms of information, material and money flows. Better coordination of different functions is possible
through ERP implementation/SCM solution.

22.4 PERFORMANCE OF SUPPLY CHAIN

It is important to judge the performance of supply-chain so as to judge how well •it is performing. This
is important for two purposes. One, it gives idea regarding the current position. Secondly, it is helpful
in identifying gaps for improvements. Beamon (1999) has identified three types of measures of performance:
resources, output and flexibility (Table 22.1). In this context, it is important to investigate the ways to improve
the performance of supply-chain. Considerations regarding potential of ERP implementation suggest that
these performance measures will improve considerably once ERP is operational across the supply chain.
Table 22:1 Types of performance measures (Beamon, 1999)

Performance Goal Purpose Example List

measure type
1. Resources High level of Efficient resource management • Total cost
efficiency is critical to profitability. • Distribution cost
• Manufacturing cost
• Inventory cost
• Return on investment (ROI)
2. Output High level of Without acceptable output, • Number of items produced
customer service customers will turn to other • Time required to produce a
supply-chains. particular item or a set of items
• Number of on-time deliveries
• Customer satisfaction
Contd...
SUPPLY CHAIN MANAGEMENT 311

Performance Goal Purpose Example List

measure type

• Product quality
• Total revenue (sales)
• Profit (total revenue less
expenses)
• Fill rate (proportion of order
filled immediately)
• On-time deliveries
• Back order (stockout)
• Customer response time
• Manufacturing read time (total
time required to produce a
'particular items or batch
• Shipment error
• Customer complaints
3. Flexibility Ability to respond In an uncertain environment, • Volume flexibility (ability to
to a changing supply-chains must be able change the output level of
environment to respond to change. products)
• Delivery flexibility (ability to
change planned delivery dates)
• Mix flexibility (ability to
change variety of products
produced)
• New product flexibility (ability
to introduce and produce new
products and ability to intro-
duce modification in existing
product)

22.5 AIMS OF SCM

Main aim of SCM is to optimize the overall performance of the entire network of the supply-chain.
The word "entire" is very important here. With experience in enterprise-research, we have realized that
despite each factory, distribution centre and other elements of supply-chain operating at the best levels,
the supply-chain as a whole may operate sub-optimally. It is just like a national cricket team whose
team members have great records and individually they are great but the team as a unit has poor winning
record (it is not difficult to recognise which national team we are referring to !). Let us examine this
issue.
All the constituents of supply-chain have their own short-term and long-term objectives. Their operating
decisions are based on these objectives. It is very common that the decisions of the constituents may
not be aligned to the overall strategic goal of the entire supply chain. For example, the optimal strategy
for the logistics may be bulk shipments, one-time order, selection of nearest vendor/supplier, etc. In many
situations, when entire chain performance is considered, these individual strategies fail to deliver the
best. It is, therefore, an integrated-holistic view of supply-chain which is essential. Many situations force
management to go for incurring more than the double cost in order to build up inventories to support
some increase in customers service.
312 INDUSTRIAL ENGINEERING AND MANAGEMENT

SCM Benefits
• Integrated view of enterprise resources & constraints
• Improved channel efficiency by sharing information between suppliers and customers
• Reduced inventory levels and production costs
• Extension of organizational control beyond firm boundaries
• Return on Investment (ROI): Typically 10 times the cost of developing and implementing the system.
SCM Risks

• Poor implementation due to enlargement of scope

• Information access and security
• Supply-chain interruptions
• Undirectional loss of bargaining power
• Training and change management
• System maintenance
• Challenge of developing trust and managing inter-organizational dependencies.

"Through our studies of firms in a variety of firms in US, Japan and Western Europe, we
have found that the traditional approach of seeking trade-off among the various conflicting
key functional objectives (purchasing, production, distribution and sales) along the supply chain
no longer worked very well. We needed a new perspective and following from that a new
approach supply dhain management." —Houlihan J.B. (1986)

According to Yankee Group site, "Leading companies operate with supply chain costs 36% lower
than the average company—resulting in a nearly 4% savings to the bottom line."
The IBM site (January 1999) says, "According to a recent study, companies that practice best-
in-class supply-chain-management techniques achieve a 40 to 65% advantage in cash-to-cash cycle time,
and a 7% cost advantage over average companies. They all typically hold 50 to 80% less inventory
than their competitors. In ERP perspective, supply chain management provides a completely different
solution as compared to classical material management and control of manufacturing system." Following
reasons provide the answer. to the hypothesis:
• SC is an integrated system. It is not like an interfaced system as commonly seen in conventional
enterprise.
• SCM is a focussed at and directed towards the end-supply to the. customer. It is a domain of strategic
decision-making rather than operational decision in conventional enterprise. All elements of the
chain share a common platform and have common objective of overall reduction in cost, increase
in market share, customer satisfaction, etc.
• SC negates the fragmented responsibility of each functional unit such as suppliers, manufacturing,
purchasing, distribution, and sales. It has been observed that the effectiveness of any element of
the supply-chain is greatly affected by the performance of the total chain. Sometimes back, the
Japanese car manufacturers went for the takeover of the distribution activities (Stalk and Hout,
1990). The reasons were the followings:
(a) More responsive to market demand.
SUPPLY CHAIN MANAGEMENT 313

(b) Enable manufacturer to smooth production by varying sales capacity using surplus upstream
labour.
(c) Obtain more reliable sales data on which manufacturing capacity can be decided.
It is easy to understand now why ERP solution for SCM is -so important. A common information
sharing platform, which ERP provides, solves most of the problems' faced in the above case.
• Inventory is closely linked with information or data-flow in the chain. Integration of enterprise
through networking and common information-access, facilitates prudent decision regarding inventory
management, logistics, purchasing, supply and customer service.
• Enterprise, these days, gets more involved in the operation and policies of its suppliers. Vendor
audit, open costing, vendor development/training, on-line monitoring of scheduling and delivery
of vendors, sharing technological capabilities, providing services of quality team to vendors/suppliers,
etc., are few measures which May not be cost-effective in short run. But, in long run, this union
is bound to prove beneficial, cost-effective and reliable.
• Several suppliers to a common unit (say, manufacturing) may collaborate in the logistic arrangements
for deriving the benefits of economy of scale. Subcontracting among themselves may also be beneficial
in many instances. However, all is effectively well with mutual trust, only when there exists a common
enterprise-wide integration of information along the simply-chains.
• Supplier is linked with the inputs from the end-user regarding specifications, timing and quality.
Integration facilitates quick response time. Secondly, their interaction improves cost reduction effort
through value engineering technique. Supplier input is upgraded through better manufacturability
of supplied items, quick response time and better preparedness.
• The era of multi-supplier-enterprise network is gradually phasing out. The new paradigm is "dependable,
mutually-developed, partner-type, single sourcing". The potential benefits in single sourcing are more
evident when integration, data-sharing, technology transfer and vendor development effort are accounted.
• Visibility of full supply-chain provides executives the ability to see problems before they arise.
The study of Supply Chain is critical due to its influence on the following:

• Timing • Flexibility
• Configuration • Performance'
• Location • Integration
• The environment • Use of information technology
• Technology • BPR and Benchmarkers
• Cost • Quality and Customer, etc.
The market is competitive. Therefore, the chain is expected to operate faster. The operative distance
between each link (which is different from physical distance) is shortening in most of cases. This is
due to increasing influence of communication and simulation technologies.

22.6 ERP VS SCM

A comparison of ERP and supply-chain management is given in the Table 22.2.

22.7 DISTORTION OF DEMAND: A CASE FOR ERP IMPLEMENTATION

"Distortion of demand" along the supply-chain is a common problem. Burbidge (1984), Houlihan (1987)
and Towill and del-Vecchio (1994) have explained this problem.
314 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 22.2 Comparison of Enterprise Resource Planning (ERP) and Supply Chain Management (SCM)

S. No. ERP SCM

I. Primary function of ERP is to generate data SCM provides capability to the enterprise so that it can
make sense out of data to help to make decisions.
2. ERP is the body of the enterprise SCM is tile brain of the enterprise.
3. ERP systems are linear and interactive SCM is constraint-based and optimised.
4. ERP generates data Data generated in ERP are used in the best possible
way by optimising the system in a SCM.
5. ERP excels in the transaction management SCM affords forecasting and the decision-support.
6. ERP links processes only within the organisation SCM goes beyond the conventional boundaries of the
organisation and spans in the entire supply chain.

While explaining the law of industrial dynamics, Burbidge (1984) postulated that the variation in
demand for product increases as it passes through a series of transfers in a supply-chain, and stock-
control ordering is used.
Houlihan (1987) and Towill and del Vecchio (1994) 'explained a "flywheel effect" in the supply-
chain. Uncertainly in economy, market being in-and-out of recession, tendency of management to over-
react to periodic economic swings, which are very common, and creating a safety-net in material planning
are few reasons for "amplification of demand" in a supply-chain (Figure 22.7). The effect of amplified
demand-distortion is evident in a factory (factor) E), which is a down-stream link of the chain. This
may be due to time-delays, planning distortions and inventory movements in the preceding links of
the chain.

Company C Company D Company E

180%
Company A
ilk (A level scheduling

100%
Capacity
required
VP
Company E
(Huge Fluctuations)
40%
1
2 3 4 5 6 7

Times in years

Figure 22.7 Amplification of demand as transmitted along a supply chain (Houlihan, 1987)
SUPPLY CHAIN MANAGEMENT 315

Internally also, this behaviour is seriously present all throughout the chain. The classic case is the
"marketing-manufacturing conflict". The demand forecast is inflated by marketing so as to obtain longer
allocation from the manufacturing units. This saves them from being caught in short-supply situation
under an upward market swing. Manufacturing and distribution are als.0 smart people. They make a second
guess apparently to nullify, it which creates further distortion in demand. Similar way, other elements
of the chain contribute to the inventory building measures. Decisions regarding required-capacity of
the enterprise lag behind the changes in demand. This causes further building-up of a safety net for
inventories or lost sales due to under-production. The amplification in perceived demand is shown in
Figure 22.8.

Capacity
Required Production
Flywheel Effect
Shortages
Real I Time Poor Information
Demand Processing

Localised
Over
Protection Effect
Perceived
Demand
Demand
Distribution
Ordering
}
•Inventory Overhang
Problem
Extended Market
Distance

Safety Stock Unreliable Production, distribution,

Increase Delivery marketing, attitude

Amplified "Forrester" Effect

Figure 22.8 Some general causes of demand amplification

The integration of supply-chain through SCM solution of an ERP package is a fit preposition to
reduce, if not completely eliminate, many of the, reasons for distortion in demand. If this is minimized,
the inventory build-up will go down. Using SCM solutions of ERP domain, single point data entry and
simultaneous-common sharing of information across the supply-chain facilitate the reduction in demand
distortion. SCM solution reduces the outwards complexities, which need to be handled at the exterior
of the supply chain. This saves excess capital investment in inventory and capacity (Houlihan,
1986). The vulnerability of the supply chain is further minimized by better management of functional
objectives and policies. Table 22.3 presents some of the SCM solutions available in the market
(1998 data). An assessment of Forrester Research Inc. regarding performance of few SCM solutions
is given in Table 22.4. However, Table 22.3 and Table 22.4 may be treated for only illustration purpose.
Due to regular updates coming into the market, most of these supply-chain solutions are under-
going through major changes. Capabilities of new vendors and recent updates must be considered before
adoption.
22.8 WHAT IS IN OFFER
Most of the leading ERP vendors provide SCM solutions. A partial list is listed in Table 22.3
316 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 22.3 Some available offer of Supply Chain solution

ERP-Vendors Supply Chain Solution/Function

SAP India Advanced planner and optimiser and SCOPE
BaaN India BaaN Supply Chain Solutions
i 2 Technologies Rhythm
Mastek Goldmine (for selling software)
Oracle India Oracle applications for Supply Chain Management
QAD On/q
People soft For Transactions (ERP)
J.D. Edwards For Transactions (ERP)
IBM global services Not branded
Siemens Infotech Not branded
Through Put Not penetrated Indian market
Geologistics LEP Yet to come to India
Red Pepper For resource planning, strategy
Manugistics For operational, tactial response
Paragon
Numetrix Transactions Support, ATP, CTP
(Source: Business World, 22nd November, 1998; Forrester Research Inc., 1999)

Table 22.4 ERP Vendor's Supply Chain Solutions (base 1999) Source: Forrester Research. Inc.

Vendor Quality Span of Single- Comments

of integration solution vendor
with ERP including
partners
Marcam G F F Component architecture. Basic, built-in constraint-based
planning.
PeopleSoft G F G Built from scratch on Red Pepper, Including supply,
demand.
BaaN F F F BaaN V rewritten using Berclain for supply, demand.
J.D. Edwards F F P Rewriting parts of planning. Component architecture.
Oracle F G F Broad partnering, including embedding of Manugistics for
CPG.
QAD F F P Major rewrites including supply, demand, logistics.
SAP P G F i2 embedded in R/3 4.0, but design will use R/3 MRP, MPS.
No components.
SSA P F P Few partners, still uses BPCS MRP, MPS. No compo-
nents.

Legend

G Good
F Fair
P Poor
SUPPLY CHAIN MANAGEMENT 317

22.9 THIRD PARTY LOGISTICS AND FOURTH PARTY LOGISTICS

Logistics Management is that part of Supply Chain Management that plans, implements, and controls
the efficient, effective, forward, and reverse flow and storage of goods, services, and related information
between the point of origin and the point of consumption in order to meet customers' requirements (Wikipedia,
the free encyclopedia). Distribution has been an important feature of industrial and economic life for many
years, but in recent past it—is considered as a major function. Both the academic and business world
has now accepted that there is a large need to have a global view on the different operations in distributions
of goods.
At the macro level, India spends nearly 13 per cent of its GDP on logistics, as compared to an
average of 10 per cent in developing economies. United States spends around 8 percent' of its GDP
on logistics. If a glance on the worldwide statistics on the logistics cost is considered, it has decreased
from 12.2 per cent in 1992 to 11.7 per cent as a result of better supply chain management. So a great
scope for improvement in India is there for reducing costs through a better supply chain design, inventory
management and operations. The advantage of reducing the logistics cost will be that the cost of the
product can be reduced further and can be made globally competitive.
This awareness has created the need for a improving the Logistics and Transportation solutions
for the industry, ranging from solutions for multimodal transport, freight forwarding, material handling,
warehousing, shipping, air cargo, packaging, inventory management and, more importantly, in integrating
logistics and supply chains, etc.
In the present world, business organizations across the world are struggling for 'competitiveness,
not only for growth but also for survival alone .because of more economies opening their market and
making their economies lil?eralized. The' impact of globalization makes customer dominant and demands
value for the money customer spends. This forces the corporate to outsource the non-core operations
and find more time to concentrate on core activities. This accepted trend in industry is 'hollowing out'
of industrial operations. Langley et al. (1999) gives the following definition of a third-party service provider
(TPSP) as a company that provides multiple logistics services for its customers, whereby the third-party
logistics provider is external.to the customer company and is compensated for its services. Sohail et
al., 2006 states that the present day firms needs to gain competitive advantage and often lack competence
to carry out the logistics operations, so depend on third party logistics providers. Hence, there is a trend
to outsource logistics activities.
There are many terms used for third patty logistics provider by various authors like logistics alliance,
contract logistics, contract distribution and third party logistics. Actually all are same in meaning, though
the terms differ. The various surveys conducted identified the following as significant outsourcing functions:
• Transportation
• Warehousing
• Freight consolidation and distribution
• Product marking, labeling, and packaging
• Inventory management
• Traffic management and fleet operations
• Freight payments and auditing
• Cross docking
• Product returns
• Order management
318 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Packaging
• Carrier selection
• Rate negotiation
• Logistics information systems.
Sahay and Mohan (2006) have conducted a study on the 3PL practices in an Indian perspective.
The study revealed that outbound and inbound transportation is preferred mostly by Indian companies
to be outsourced. The functions like marketing sales promotion, assembly or installation, selected manufacturing
and customer service or support are the activities least preferred.
In this highly competitive industrial scenario, there has been an unprecedented increase in the demand
of the customers and they dominate the market for better service and on-time deliveries at a reduced
cost. This makes those responsible for logistics and supply chain management under stress to meet their.
demands. Daily the customer expectations are continually increasing. This expectation and demand has
been further amplified by the interne revolution and the visual media growth. Traditionally, suppliers
and big corporations have been meeting the demand by increased inventory, speedier transportation solutions,
posting on-site service engineers and many times employing a third-party service provider. Today the
case is different; there is a need to meet the increased levels of services due to e-procurement, complete
supply visibility, virtual inventory management and requisite integrating technology. So the general trend
has been to outsource to the service providers-better known as third-party service providers.
So in view to build up the service provider's strength, collaborations between many third-party
service providers is a solution. The service providers collaborate mainly with consultancies and technology
providers. This new concept evolved in supply chain outsourcing is called Fourth-Party Logistics. The
4PL is a supply chain integrator. The 4PL assembles and manages the resource c; 'ital, technology and
capabilities of its own organization and organizations that provide complements services to design,
build, and implement a comprehensive supply chain solution.

22.10 VEHICLE ROUTING CONCEPT

Any organization involved in transport has to consider many types of problem. There are always operational
details to consider like the number of vehicles needed, type and size, special features required, routes
used, assignment of loads and customers to vehicles, schedules, maintenance schedules, measures of service
and quality, and so on. All these problems can be illustrated with some principles by looking at the
question of routing vehicles.
A basic routing problem looks for the best path for a delivery vehicle around a set of customers.
This problem can be considered as a basic 'travelling salesman problem'. Imagine a salesman who has
a number of customers to visit before returning home, and he or she wants to find the shortest journey
(Figure 22.9). This seems like a simple problem, until a huge number of possible routes that have to be
considered and compared. The number of possible routes is n x (n — i) x (n — 2) x (n — 3), ..., 3 x 2 x 1, where
n is the number of customers to visits. For a problem of any size, imagine the huge number of possible
routes.
The travelling salesman problem is the basic routing problem, and real problems are much more
complicated. They typically contain factors such as a fleet of different types of vehicles, multi-compartment
vehicles, incompatible products, different logistics facilities, time windows for deliveries, varying speeds
caused by traffic conditions, customers with different importance and conditions for deliveries, competing
aims, variable delivery times, special equipment needed for some deliveries, uncertain costs, separate
schedules for vehicles and drivers, and so on.
SUPPLY CHAIN MANAGEMENT 319

Figure 22.9 Traveling salesman problem

Many methods have, been suggested for tackling routing problems but, like location, there are two
general approaches. The first uses geographical arguments to look for the best routes, regardless of the
actual roads. The second looks at the road network and finds shortest routes through it. Because of
the increasing sophistication of electronic maps, the second of these is probably becoming more popular.
Some of the specific methods that have been proposed in solving TSP are given below:
1. Negotiations: The best approach is often to negotiate a solution. This may not give the best technical
answer, but it will have the support of the concerned.
2. Adjust previous plans: Many routing problems are fairly stable, like postmen delivering letters.
Then a useful approach has an experienced router reviewing present circumstances and updating
previous routes to allow for any changes. This is relatively easy and causing little disruption. It
also uses a well-understood procedure.
3. Intuitive methods: This makes use of the skills, knowledge and experience of routers, who typically
use a series of heuristic rules that have been successful in the past.
4. Maps: Schedulers often find it easier to work with some form of diagrams, and the most popular
are simple maps of key features. Draw routes and iteratively improve them. The graphical approaches
have the advantages that they are easy to use and understand, but they are really only one step
better than an intuitive method.
5. Spreadsheet calculations: Maps can show overall patterns, but they lose some of the details. To
overcome this problem is the spreadsheet calculations and look at the patterns in the numbers.
A common format for this lists the customers to be visited down the left-hand side avid the time
periods across the top.
6. Simulation: Simulation is one of the most flexible approaches to solving problems. It gives a dynamic
view by imitating the real life operations over a typical period.
7. Expert systems: Computers duplicate the thinking of a skilled scheduler. The basic skills, expertise,
decisions and rules used by experts are collected in a knowledge base. A router then passes a
320 INDUSTRIAL ENGINEERING AND MANAGEMENT

specific problem to an inference engine, which is the control mechanism. The problem is understood
and is related to the knowledge base and decides which rule to use for a solution.
8. Mathematical models: Mathematical approaches give optimal—or near optimal-solutions without
any human intervention. The most common mathematical approach used is linear programming,
which is rather complicated, so they are generally limited to small problems.

22.11 CHECKLIST FOR MAKE-BUY DECISION

Decision criteria—Make or Buy: Before one ventures into materials management control one has to
categorise what is going to be purchased what is going to be manufactured, to what extent, where, how,
how much, etc.
Criteria for Make/Manufacture Decision: Under the following circumstances one has to manufacture
or make the product in its own plant:
• The said component if manufactured inside the plant it will be much cheaper than outside purchase
price.
• High volume requirement.
• The component is of strategic importance, because of its patented design, etc. (e.g. Sony is making
the Trinitron CRT tubes for TVs, Computer monitors, etc. which is of specially patented design
of exclusive proprietary rights of SONY Corporation).
• The, part or component can be manufactured with existing facility or by only marginal addition
to the existing facility (Human resource, machine, others).
• Very few manufacturers are available for these parts and hence supply may become critical at times
which may affect the total production.
Criteria for Buy/Purchase Decision: Under the following circumstances one has to buy or purchase
the product from outside sources:
• The said component if manufactured inside the plant it will be much costlier than outside purchase
price.
• Low volume or one time or 'a few times requirement.
• The component may be important or ordinary type but not of strategic importance.
• The part or component can not be manufactured with existing facility since it needs considerable
amount of financial investment, specialised human resource skill, etc.
• Numerous manufacturers are available for these parts.
• Raw material needed specifically not easily available.
• Royalties are very high for technical know-how transfer.
• Patent or legal barriers are preventing one for making these parts.
From the managerial point of view, a procedure for making such decision should be adopted. Such
procedure should perform the following five functions:
1. The decision maker must be provided with adequate information.
2. The decision maker must halve the necessary background to recognize and evaluate relevant data.
3. Should provide a systematic way, so that proper investigations may be done.
4. Properly maintained records should be kept for future use.
5. A high powered audit for all important projects after taking decision must be established.
SUPPLY CHAIN MANAGEMENT 321

A checklist that helps the decision maker in deciding whether to go for purchasing the material
or making it in house is given below. The factors considered in taking a decision are basically engineering
factor, material factor, space and facility factor.

YES NO
Engineering Factors
1. If the product is adequately engineered?
2. Availability of following:
(a) Drawing
(b) Blue prints
(c) Specifications
(d) Bill of materials
(e) Sample, if required Labour Factors

Labour Factors
1. If additional manpower is needed?
2. If special training is needed?
3. If cost of tooling is considered?
4. If work standards are repaired?
5. If process required for manufacturing are written?

Material Factors
1. Level of confidence in material prices.
2. Whether delivery dates are firm?
3. Whether material handling has been considered?
4. Whether storage facilities have been considered?
5. Whether purchasing of raw material has been considered?
6. Whether scrap allowance has been considered?

Space and Facility Factors

1. If capital requirement has been considered?
2. If space availability has been considered?
3. Whether necessary utilities are available?

REVIEW QUESTIONS

22.1 Explain the concept of supply-chain. What is its scope? Explain the Stevan's model of supply-chain integration.
22.2 What are the benefits and risks in supply-chain integration?
22.3 How can the performance of supply-chain be measured?
22.4 Explain the Forrester effect in the supply-chain integration.
22.5 Make a research 'survey on internet for major ERP vendors. Enlist all the supply-chain solutions available.
Prepare a comparative statement.
322 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

I. Beaman B.M., 1999, "Measuring Supply-Chain Performance", International Journal of Operations and Production
Management, 19 (3), 275-92.
2. Behling, R.L., 1982, "Supply-chain Management with Capacity Constraints". Proceeding of 1982 APIGS Conference,
pp. 379-83.
3. Bhattacharjee, P., 1998, "Clearing, the Supply Bottleneck", Business world, November 22nd—December 6,
52-55.
4. Braithwaite, A., 1987, "Supply-chain Modelling". Production Engineer, October, 66, 27-28.
5. Burbidge, J.L., 1984, "Automated Production Control with a Simulation Capability". Proceedings IFIP Conference
WG5-7, Copenhagen, pp. 1-14.
6. Bowersox, D. J. and Daughtery, P. (1990), "Logistical Excellence: It's not Business as Usual", Digital Press,
Burlinton, MA.
7. Christopher, M., 1999, Logistics and Supply-Chain Management, Pitman Publishing, London.
8. Cooper, R.B. (1994), "The inertial impact of culture on IT implementation", Information & Management,
Volume 27, No. 1, pp. 17-31.
9. Dapiran, P., Lieb, R., Millen, R. and Sohal, A. (1996), "Third party logistics services usage by large Australian
organisations", International Journal of Physical Distribution & Logistics Management, Volume 26, No. 10,
pp. 36-45.
10. Evans, GN., Naim, M.M., and Towill, D.R., 1993, "Assessing the Impact of Information Systems on the
Dynamics of Supply-chain Performance", Logistics Information Management, 6, 15-25.
11. Evans, UN., Towill, D.R. and Naim M.M., 1995, "Business Process Reengineering and Supply-chain", Production
Planning and Control, 6, 227-37.
12. Fisher, M.L., 1994, "Making Supply meet Demand in an Uncertain World", Harvard Business Review,
May-June; 83-93.
13. Forrester Research Inc. (http://www.forrester.com).
14. Gattoma, J.L. and Walters D.W., Managing the Supply-Chain: A Strategic Perspective, MacMillan Press Ltd.,
London.
15. Houlihan, J.B., 1987, "International Supply-chain Management". International Journal of Physical Distribution
and Materials Management, 17 (2), 51-66.
16. Jones, C., and Clarke, J., 1990, "Effectiveness Framework for Supply-chain Management". Computer Integrated
Manufacturing Systems, 3 (4), 196-206.
17. Jones, T.C., and Riley, D.W., 1985, "Using Inventory for Competitive Advantage through Supply-chain
Management". International Journal of Physical Distribution and Materials Management, 19 (8), 3-8.
18. Langley, C.J. Jr, Newton, B.F. and Tyndall, GR. (1999),' "Has the Future of Third-party Logistics already
Arrived", Supply Chain Management Review, Op. 85-94, Autumn.
19. Lee, H.L. and Billington, c., 1993, "Material Management in Decentralized Supply-Chains", Operations Research,
Volume 41, No. 5, pp. 835-47.
20. Lee, H.L., and Billington, C., 1995, "The Evolution of Supply-Chain Management Models and Practice at
• Hewlett-Packard," Interfaces, Volume 25, No. 5 (September-October) pp. 42-63.
SUPPLY CHAIN MANAGEMENT 323

21. Lieb, R. and Randall, H. (1996), "A Comparison of the use of Third-party Logistics Services by Large American
Manufacturers", Journal of Business Logistics, Volume 17, No. 1, pp. 305-20.
22. Lin Fu-Ren and Shaw M.J., 1998, Re-engineering the Order Fulfillment Process in Supply-chain Network,
Internatibnal Journal of Flexible Manufacturing Systems, 10, 197-229.

23. Macbeth, D.K., and Ferguson, N., 1991, "Strategic Aspects of Supply-chain Management". Integrated Manufacturing
System, 2 (1), 8-12.

24. Rangaraj, N., 1996,"Supply-Chain Management", In: Proceedings of Second SERC School on Advanced Manufacturing
Technologies. IIT, Bombay, Ed. Subhas Babu, A. et. al., pp. 162-69.
25. Sahay, B.S. (Ed.), Supply Chain Management, MacMillan India, 1999.
26. Savoie B.J., 1998, "The Last Word on Supply-chain Improvement", IIE Solutions, (October), 29-32.
27. Shankar, R., and Jaiswal, S., 1999, Enterprise Resource Planning, Galgotia Publications, New Delhi.-
28. Sohail, M.S., Bhatnagar,,R. and Sohal, A.S. (2006), "A Comparative Study on the use of Third-party Logistics
Services by Singaporean and Malaysian firms" International Journal ofPhysical Distribution & Logistics Management,
Volume 36, No. 9, pp. 690-701.
29. Stalk, J.R., G.H. and Hout, TM., 1990, Competing Against Mite: How Based Competition is Reshaping Global
Markets (Free Press, New York).
30. Stevens, G., 1986, "Integrating the Supply-chain". International Journal of Physical Distribution and Materials
Management, 19 (8), 3-8.

31. Towill, D.R., 1991, "Supply-chain Dynamics". International Journal of Computer Integrated Manufacturing,
4, 197-208.
32. Towill, D.R. and del Vecchio, A., 1994, The Application of Fitter Theory to the Study of Supply Chain
Dynamics, Production Planning and Control, 5 (1), 82-96.
33. Wilson, P.R.S. and Fathers, S.J. (1989), "Distribution—the Contract Approach", International Journal of Physical
Distribution & Logistics Management, Volume 19, No. 6, pp. 26-30.

34. Wiggett, C., and Grake, B., 1989, "Woolworths;, Achieving Supply-chain Control". Logistics Today, 2 (2),
31-35.
35. Vinod, V.S. (2004), "Logistics Management: The Supply chain Imperative", Pearson Education (Singapore) Pte.
Ltd.
324 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

i
•
 MATERIAL HANDLING

23.1 INTRODUCTION
Material handling is a very important area of concern for industrial engineers. This is due to following
reasons:
1. More than 90% of the time in material spends on shop-floor is either in waiting or for being transported.
This is a non-value added activity. Nearly 20-30% of this non-value added time is consumed in
material handling. Therefore, efficient handling will save some of this non-value added time.
2. Safe handling of material is important in the plant. This reduces wastage, breakage, loss, scrapes,
etc.
3. Efficient material handling is needed for less congestion, timely delivery and reduced idle time
of machine due to non-availability of material.
4. Cost-efficient material handling is an important issue. Material movement usually accounts for 10
to 90% of total factory cost, whose average is, as per one estimate, about 25%. Therefore, a careful
study of alternative modes of material transportation is very important.
5. Better material handling is helpful in good house-keeping.
Material handling is needed in the entire supply-chain of the manufacturing system. From supplier
to the in-coming store of the plant, raw material or sub-assemblies are shipped. Sometimes subcontractors
supply semi-finished items. For this, road transport or rail-transport is needed. At the plant level, raw
material or semi-finished items are transported to the various machines. Movement of material is not
only along the floor, but it may be vertical (i.e., against/along gravity) also.

Material Handling

It is the art and science- involving movement, packaging and storing of materials in any form
by means of gravity, manual effort or power-activated machinery.
—American Materials Handling Society

23.2 PRINCIPLES OF MATERIAL HANDLING

There are some guiding principles of material handling. These are:
1. Reduce unnecessary movement: This calls for selecting shortest path to reach the destination.
326 INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Reduce congestion and bottlenecks: This calls for eliminating obstruction and congestions in the
material handling.
3. Scientific factory layout: This is to minimise the overall material movement, reduced number of
trips, and reduced costs associated with transportation.
4. Use of standard material handling equipments: This facilitates easy maintenance of material handling
equipmdnt, as spares are readily available,
5. Plan minimum number of loading/unloading: This reduces the chances of breakage. It also reduces
loading/unloading time and cost.
6. Use gravity to transport material.
7. Use mechanised material handling equipment: This reduces dependence on human labour.
8. Use specialized equipment, if needed.
9. Use flexible equipments, if the part variety is more or unstable.
10. Use simple and safe equipments for material handling. Operator safety should be of prime importance.
Blinkering light and bell/sound may be attached to material handling equipments to warn the persons,
working nearby.
11. To minimise the downtime of the equipments, use preventive maintenance of all equipments.
12. If labour is cheap and parts are lighter, human labour for transporting material in trolley may be
employed.
13. Loading on material handling equipment should not exceed its designed capacity.
14. Standard size of material should be transported to reduce time and increase efficiency.
15. Concept of unit size load should be employed. This is done by aggregating material into a longer
unit/container or pallet of standard size.
16. Efficient planning and control should be ensured for efficiency.
17. The material handling equipment should preferably be dispatched if it is full of its capacity. This
reduces number of trips.
18. The material handling equipment should not be very bulky. The ratio of its load carrying capacity
and its own dead weight should be high.
19. Concept of straight line flow should be employed as zig-jaw flow causes more congestion and
more time.
20. Load should preferably be carried both ways. This means while coming back some material may
be picked-up for delivery to an intermediate and originating point.
21. Part orierttation principle should be employed so that, while unloading, the material position should
be as per the need of the destination point. During transportation also, parts should be oriented
in such a way that maximum material is accommodated with least chances of damage.
22. System principle should be employed so that material handling system is integrated with other facilities,
such as inspection, receiving, storage, assembly, packaging, etc.
23. Backtracking of parts movement should be avoided.

23.3 MATERIAL HANDLING EQUIPMENT (FIGURE 23.1 TO 23.3)

Material handling equipments are classified under various headings: These may be:
1. Manual, or
2. Powered.
MATERIAL HANDLING 327

Another classification is based on the paths followed by material. These may be:
1. Fixed path equipments, such as: elevator, conveyors, chutes, wire-guided AGV, etc.
2. Variable path equipments, such as: trolley, trucks, free-ranging AGV, etc.
Fixed path material handling equipments allow material to follow along a line or fixed path. Variable
path equipments allow flexibility in the path of material flow.

23.3.1 Pallets
Pallet is the base over which the load of material is assembled. Pallets are specially designed plate forms,
which may be lifted by means of fork-lift operation.

23.3.2 Conveyor
Conveyors are used to transport material from one fixed point to another fixed point. These use gravity
or powered device to carry material. Some of the conveyor systems are portable which may be moved
from time to time, but generally these are fixed. These are more useful for the following situations:
• Moving homogeneous material
PAPER/FIBER BOARD BINDER
BETWEEN LAYERS

SPLIT BLOCK BRICK

PIN WHEEL SPLIT ROW

Figure 23.1 Example pallet-loading patterns

328 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Fixed route of movement

• Constant rate of material movement
• Mass production units. •

23.3.3 Industrial Trucks

These are manual or external powered vehicles, which can move on a variety of paths. These are particularly
useful for the following situations:
• Uneven (intermittent) supply of material
• Varying paths of movement
• Job-shop production units.

23.3.4 Cranes and Hoists

These are overhead lifting devices used for the movement of material in a fixed route and fixed area
of operation. These are particularly useful in the following situations:
• Movement of intermittent load
• Different loads are of varied size, shape and weight

Pallet
Load
Pallet

Shipping carton

Inside Pack

Individual
Piece

Figure 23.2 Unit Load Design

MATERIAL HANDLING 329

• Provision of ceiling support at roof of the building columns

• Relatively heavy loads.
• When horizontal movement of material is difficult due to congestion, obstacles or navigation problem
of vehicles.

1111111111111111111111

Bridge crane Gantry crane

Jib crane Chain hoist Electric hoist

Platform truck. Dolly 2-wheel hand truck

Figure 23.3 Different Material Handling Equipments. (Contd...)

330 INDUSTRIAL ENGINEERING AND MANAGEMENT

Platform truck (low-lift type) Walkie Hand-operated pallet truck

Skid platform Fork truck (counterbalance type)

Straddle carrier Industrial tractor

Figure 23.3 Different Material Handling Equipments (contd...)

MATERIAL HANDLING 331

Straddle Type Fork Truck Carton Clamp Attachn cot

Dectier Side shifter attachment

Figure 23.3 Different Material Handling Equipments (contd...)

23.3.5 Elevators and Lifts

These are used to raise or lower material in the vertical direction. These are different from cranes and
conveyors in the sense that lifting is done by elevators/lifts by placing the material on the elevators/
lifts just like human being-carried in lifts of a multi-storeyed building.
332 INDUSTRIAL ENGINEERING AND MANAGEMENT

Stand up • Movable mast reach truck Double treach fork truck

' Screw conveyor

Slat conveyor

Belt conveyor Pivoted bucket conveyor

Figure 23.3 Different Material Handling Equipments (contd...)
MATERIAL HANDLING 333

Wheel Pusher bar conveyor

Belt conveyor Roller Spiral chute

Apron conveyor Trolley conveyor Pneumatic conveyor

Figure 23.3 Different Material Handling Equipments

334 INDUSTRIAL ENGINEERING AND MANAGEMENT

23.3.6 Containers and Racks

For transporting bulk material, containers/racks are used. Bulk material is stored in them. The advantage
is the utilization of cubical space, ease in storage and ease in handling.
23.4 AS/RS
Automated storage and Retrieval system (AS/RS) is storage racks system in which each location and
its inventory status is maintained by a computer-controlled central unit. When certain item is needed,
computer, using its status file, locates the item on the shelf. A driverl, s device, such as crane, automatically
pick sup the item, This is the retrieval mechanism of the AS/RS. In case a new item comes, the computer
communicates the lifting device about the proper place in the rack where it is to be stored. Subsequently,
the inventory status is updated.
23.5 AUTOMATED GUIDED VEHICLE (AGV)*
AGV is the programmed vehicle, used to carry load from one location to another in an automated work
place. The most common type of such vehicles normally follow a predetermined path on embedded wires
into the ground. These vehicles are called as wire guided AGVs. Other variety of AGVs are free-ranging
AGVs, which offer more flexibility, as no pre-specified path is needed.
An AGV is, therefore, a driverless vehicle, which is able to select its own route or path to reach
the destination. No human intervention is' needed for the guidance, steering or control of the ✓ehicles.
An off-board controller is used to send dispatcher commands for the identification of the load, destination
of the load and, other instructions related to loading and unloading of the load.
23.5.1 Features of AGV
AGV systems have following important features:
1.AGV system can easily be interfaced with other modules of FMS, such as robots, automatic storage
and retrieval system (AS/RS), CNC machines, etc. It is an essential element of FMS system, without
which effective material handling is perhaps unachievable.
2. AGV system offers considerable flexibility, as it is adaptable to change in product as well as production.
3. AGV system offers great flexibility in the expansion of a manufacturing system. The number of
vehicles or area to be covered by the AGV may be easily modified as per the need.
4. AGV material handling system is very suited to computer integrated manufacturing system (CIMS).
This is due to on-board controller of the AGV. Through a host computer, the on-board controller
can be interfaced with other modules of CIMS. Information linkages of material handling system
with other manufacturing activities are easy to achieve.
5. The integrated material handling system facilitates the optimization in the efficiency of the manufacturing
systems and improved productivity.
6. AGV system offers elimination or reduction of labour and less transit damages.
7. AGV system has the ability to handle variability in the production rate or changes in product routing.
8. Compared to conventional material handling systems, it has the flexibility to adapt to changes in
machines layout and product design without major capital investment.
9: It has ability to transport low to medium volume unit load material to a reasonable large distance
in the factory without many problems.
10. Compared to dedicated conveying systems, AGV system offers fewer restrictions on planning the
factory layout. This is due to ease in the movement (backward/forward and left/right) of the AGV
on the guide path.
[Based on: Shankar and Vrat (1998)].
MATERIAL HANDLING 335

11. It is easy to maintain the AGV system. Individual breakdown of an AGV may be coped up with
the introduction of another AGV in the same route and removal of the down AGV into the parking
area for repair/maintenance.
12. There is low noise and disturbance level with AGV system.
13. Operational safety is more due to non-involvement of labour.
14. AGV system may facilitate the effective implementation of manufacturing information system.
AGV system generates relevant information related to inventory control, production, administration,
purchase and shipment. Integration of such information is needed in the manufacturing information
system.
15. Recently, there has been some emphasis on the research leading to the development of green production
system. The AGV may act as a supporting link to this system. AGV may carry the jobs to an
enclosed area for any operation, which may be environmentally unpleasant.
23.5.2 Types of AGV Systems
Following AGV systems may be identified on the basis of navigation system, which is the network of
guide paths followed by AGVs:
(a) Wire Guided AGVs: These AGVs follow an inductive guide-path. Floor-embedded wires carry
alternating current.
Path Layout in Guided AGV: The floor embedded wires are arranged to form closed loops. These
loops determine the guide-path of the AGV. Each closed loop carries current of different frequencies with
low voltage and low amperage. AC current, upto the range of 15 kHz, is used in each loop. Figure 23.4
shows path-layouts of AGV system. In any advanced manufacturing system, simulation study may
be needed to justify a path layout.
o •
=l an 0:13 ®ACM

Legend: ®•®: Pick-up/delivery (p/d) point

(35:1 : Additional p/d point

Figure 23.4 Path layout for wire-guided AGV: Based on Bozer and Srinivasan, (1989)
336 INDUSTRIAL ENGINEERING AND MANAGEMENT

Communication in Wire-Guided AGV System: Communication of the AGV with host-computer is

essential for the shop-floor control and coordination of AGV system. For this purpose, four main
elements interact:
1. On-board controller,
2. Floor embedded wire,
3. Reed sensors, and
4. Host (or off-board) computer.
An AGV continuously identifies its position and reports its status to the main host computer through
the communication cables. At different poias in the loop of the guide path, reed sensors (in the
embedded wire) locate AGVs and communicate their status through the wire. Control commands
from the host computer reach the on-board controller ofAGV via reed sensor on the AGV (Figure 23.5).

Central controller
/ -
Call pand
•• • • •
•• • lb •
Supervisory
console
—I 11 11 1M
Call memory

Printer Host•
r
computer

Route-display
panel

Data bases and

algorithams
Traffic control

(
Terminal

On-bOard
AGV
controller
Communication
control
Call knobs

AGV
_ _ — -:-";. , 1o0P
ulg7

Figure 23.5 AGV System Architecture

. MATERIAL HANDLING 337

Steering of Vehicle: The pi:inciple of steering of AGV on the guide-path is illustrated in Figure 23.6.
The frequency generator provides the frequency signal in the embedded wires. A magnetic field
is created around the IA Ares. Two coils mounted on the AGV sense this. The embedded wire is
mid-way between each 'coil on the AGV. If in case AGV tilts either way, the intensity of the induced
magnetic field becomes different in coils. This differential is sensed and then it is sent to on-board
controller of the AM Based on this feedback signal, the on-board controller sends signal to put
AGV on right' track,.
On-board controller

Comparator
for error signal
To AGV steering Amplifier
servo

Eaiaai59

AGV

0 0 QQ0 Q_Q

Steering c( .40 00QQ0Q99

on AGV Coil on AGV
4 Amplifier
15 to 20 mm
Ground
o to 10 mm
Embed( Jed wire Magnetic field
Synthetic resin
Con •ent 20-50 V,
I 00-500 mA
to 35 kHz

Figure 23.6 Steering Principle of Wire Guided AGV

(b) AGVs -laving Optical Chemical/Magnetic Guide-Path: These AGVs use a strip of optical/chemical/
magnetic material on their guide-path. It is detectable by a proximity sensor on the vehicle. For
exampl e, the chemical guide-path is excited when ultra-violet rays from the AGV fall on the path.
They, iin turn, re-emit waves in the visible range. Due to this, contrast-ratio of rays is improved.
Locatiwn of the guide-path and steering of the vehicle are done through the interpretation of the
contra st ratio.
(c) Dead Reckoning AGVs: These AGVs use memory in their on-board microcomputer for storing
distance table for stations, acceleration/deceleration information, speed and steering information.
It is based on the principle of odometry. Present position of the AGV with respect to the fixed
posit ions in the reference plane in surrounding is initially known. By measuring exact rotation and
velocity of each drive wheel, the next position of the vehicle is calculated.
On-b ioard systems are designed to provide instructions to AGV for movement about a known reference
point. No guide path is needed in this system.
(d) Free Ranging AGV: Unlike wire-guided AGV, the free ranging AGV does not follow any physical
guide;-path. The guidance of °the free ranging AGV may be based on the following techniques:
(i) Position Reference Beacons: In this systein, some beacons are fixed on the factory locations
known to the AGV controller. On-board devices measures exact distance and direction of
338 INDUSTRIAL ENGINEERING AND MANAGEMENT

AGV with respect to beacons. This information is used to measure the position of AGV
(Figure 23.7).
Collimated
light beam

W
dl AGV movement
d2

AGV

Photosensors

Figure 23.7 Free-Ranging AGV with photo-sensors.

(ii) Optical Imaging of Surrounding and Stereoscopic Vision: Stereoscopic vision system has also
been used for the 3-D imaging of the surrounding object. It requires two cameras, separated
at known distance (like two human eyes) on the AGV. The image, captured by each camera
at any point, is analyzed to locate an object in surrounding.. Much work is, however, needed
to integrate the sensor system with AGV system in a cost-effective way. It is an area of tremendous
research potential in an autonomous factory.

23.5.3 Comparison of AGV Systems

A comparison of different AGV systems is given in Table 23.1. The superiority of wire-guided AGV
is due to comparable performance and low system cost as compared to free ranging AGV. However,
as the technologies for sensor, control and steering improve in a cost effective way, the free ranging
AGV system is likely to dominate the application area (Figures 23.8 and 23.9).
Table 23.1 Comparison of different AGV Systems

Type of AGV Wire Guided Optical/ Chemical Dead Reckoning Free Ranging
Range G E P C
Accuracy G E A E
Flexibility M G E E
Reliability E M G M
Controllability E P P A
Vehicle Equipment Cost G M G P
Station Equipment Cost M E E G
Legend: E. Excellent, G: Good, M: Medium, A: Acceptable. P: Poor.
MATERIAL. HANDLING 339

Supervisory Computer

Off-Board Computer

On-Board Controller

111111011r11
4
Assembly/Manufacturing I;. Path 14-
L change
Area
e

Warehouse/Storage area

Receiving/Shipping
Area

.41

Figure 23.8 Integr'ation of free ranging AGVs in the manufacturing system

Free-Ranging AGV

I—

Wire-Guided AGV

Optical AGV
Performance

CD
Dead Reckoning AGV

System Cost

Figure 23.9 Comparison of cost effectiveness of different AGV Systems

340 INDUSTRIAL ENGINEERING AND MANAGEMENT

23.5.4 Safety Considerations for AGV

The AGV system requires full-proof safety measures. A route-controller normally controls the avoidance
of collision between vehicles. To achieve this, the off-board controller is provided with a zone-block
software. It segments the guide-path into small zones. At one time, only one vehicle is permitted in
one zone. This concept in also called as blocking.

r IDENTIFICATION OF FACILITIES
NEEDING AGV SUPPORT
DATA L
GENERATING
STAGE
INTER-DEPARTMENTAL FLOW
REQUIREMENTS

SELECT VEHICLE SPEED

DECIDE DEPARTMENTS AND

DESIGN TRACK LAYOUT
STAGE
IDENTIFY PICK-UP AND DROP-OFF
POINTS

DECIDE DEPARTMENT INTERFACE

AND CONTROL OF AFV SYSTEM

DELAY TIMES,
INTER-STATION FLOW INPUT
LOAD/UNLOAD TIME

• TRANSIT T ME BETWEEN
STATIONS

COMPUTER SIMULATION

CONTROL
SYSTEM BATTARY
DESCRIP CONCEPT
VEHICLE REQUIREMENTS,
DISPATCHING SEQUENCE, STATION, RESULT
STORAGE SPACE REQUIREMENTS,
ANALYSIS
BLOCKING AND LAYOUT COMMUNI-
STAGE
PLANNING CATION
SYSTEM
DESIGN
_r 1
AGV SYSTEM DESIGN

Figure 23.10 Steps in the design of AGV system (Based on: Shankar and Vrat, 1998)
MATERIAL HANDLING 341

Sensors for obstacle detection are widely used to locate unintentional obstacles, like human being
pallets, etc. It is based on optical, infrared or ultrasonic sensors. On-board receiver senses the reflection
of a beam thrown from the vehicle. The vehicle is programmed to slow down/stop, depending upon
the distance of the sensed object. In addition to this, following safety devices are also used:
— Emergency bumper in the front,
— Blinking or rotating lights for warning,
— Warning bell,
— Emergency stop, if the AGV deviates from its path beyond a safe limit,
— Emergency stop-button on the vehicle,
— Limit switch, proximity sensor or photocells.

23.5.5 Design of AGV System

Various steps in the design of AGV system are shown in Figure 23.10 (See Fig.). It is in three distinct phases:
(a) Data generating stage
(b) Design stage
(c) Analysis stage.
The details of each phase are shown is the Figure 23.10.

REVIEW QUESTIONS

23.1 Proper selection of material handling equipment is a must. Why?

23.2 Explain the different principles of selecting material handling equipment.
23.3 Enlist different material handling equipments in a factory. Draw neat sketches.
23.4 What is AS/RS? Explain.
23.5 What is AGV? Explain the main features of AGVs.
23.6 Explain the different types of AGVs. Compare their performance and cost.
23.7 Differentiate between the followings:
(i) Traditional vs Tandom path layout for wire-guided AGVs.
(ii) Wire guided AGV vs Free ranging AGVs.
23.8 Explain the various issues involved in the design of an AGV. What are its safety considerations?

REFERENCES

1. Besant, C.B. and Lui, C.W., 1988, "Computer-Aided Design and Manufacturing", Affiliated East-West Press
Pvt. Ltd., New Delhi.
2. Bozer, Y.A., and Srinivasan, M.M., 1989, "Tandem configuration for AGV system offers flexibility and simplicity",
Industrial Engineering, February, 23-27.
3. Egbelu, P.J., 1987, "Pull versus push strategies of AGV load movement in batch manufacturing system",
Journal of Manufacturing Systems, 6 (3), 209-21.
4. Grover, M.P., 1987, Automation, Production Systems and Computer Integrated Manufacturing, Prentice Hall
of India, New Delhi.
5. Hammond, GC., 1986, AGV at Work, IFS Publication Ltd., U.K.
342 INDUSTRIAL ENGINEERING AND MANAGEMENT

6. Hollier, R.H., 1987, Automated Guided Vehicle Systems, IFS Publication Ltd., U.K.
7. Jaikumar, R., and Solomon, M.M., 1990, Dynamic scheduling of AGV for certain class of systems, Journal
of Manufacturing Systems, 9 (4), 315-323.
8. Kim, C.W., and Tanchoco, J.M.A.,.1993, "Operational control of bi-directional AGV system", International
Journal of Production Research, 31 (9), 2123-38.
9. Lee, J.C, and Khaksar, M., 1990, "Evaluation ofAGV systems by simulation", Computers in Industrial Engineering,
19 (1-4), 318-21.
10.Mahadevan, B., and Narendran, T.T., 1990, "Design of an AGV-based material handling system for a FMS",
International Journal of Production Research, 28 (9), 1611-22.
11.Mahadevan, B., and Narendran, T.T., 1993, "Estimation of number of AGV for an FMS: an analytical tool",
International Journal of Production Research, 31 (7), 1655-70:
12.Malmborg, C.J., 1990, "A model for the design zone control AGV system", International Journal of Production
Research, 28 (10), 1741-58.
13. Maxwell, W.L., and Muckstandt, J.A., 1982, "Design of AGV", IIE Transactions, 14 (2), 114-24.
14.Ozden, M., 1988, "A simulation study of multiple load carrying AGV in FMS", International Journal of
Production Research, 36 (8), 1353-66.
15. Premi, S., and Besant, C., 1983, "A review of various guidance techniques that can be used by mobile robots
or AGVs", In: Proceedings of 2nd international Conference on AGVs, Stuttgart: IFS Publications, 195-98.
16. Rajotia, S., Shanker, K., and Batra, J.L., 1998, "A semi-dynamic time window constrained routing strategy.
in an AGV system", International Journal of Production Research 36 (1), 35-50.
17. Rajotia, S., Shanker, K., and Batra, J.L., 1998, "Determination of optimal AGV fleet size for FMS", International
Journal of Production Research, 36 (5), 1177-98.
18.Shankar, R., and Kumar, B., 1992, "Wire guided AGV in cellular manufacturing systems", In Proceedings
of 15th AIMTDR Conference, Coimbatore, Tata McGraw Hill Publication Company Ltd., New Delhi
294-99.
19.Shankar, R., and Shah, P., 1991, "Improved design of the wire guided AGV in automated manufacturing
environment", In: proceedings of All India Seminar on Automated Manufacturing Systems, The Institution
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Vision: 2001, Ed. Sharma, P.V., et. al., New Age International (P) Ltd. Publishers; New Delhi, II 35-39.
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Technology. Ed. Deshmukh and Rao, IIT Delhi, pp. 81-88.
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of Production Research, 31 (1), 43-57.
 24
ENTERPRISE RESOURCE
PLANNING (ERP)

24.1 WHAT IS ERP?

Enterprise Resource Planning (ERP) is one such area, which has completely revolutionized the business
environment. Many industries and business systems have re-engineered the processes and have gone for
adopting ERP. Organisations, which are yet to do so, are seriously working to prepare themselves for
adopting ERP.
Enterprise Resource Planning (ERP) is a software architecture that facilitates the flow off information
among different functions of an enterprise. It encompasses a broad set of activities supported by multi-
module application software that helps a manufacturing or other business firm to manage its business
activities, which include product planning, purchasing, maintaining inventories, vendor/customer service,
and tracking orders. Many application modules are common with the available ERP-vendors. Finance,
HRD, Logistics and Manufacturing, and Supply-Chain are some of the commonly available application
modules with most of the vendors. ERP uses a client/server environment, supported by modern GUI
(Graphic User Interface) technology. The core of the entire ERP system is integration of commonly designed
applications and consolidating all business operations into uniform system environment.
24.2 MAIN FEATURES OF ERP
1. A software architecture, which integrates all the functions of the business.
2. Integration is seamless, i.e., without apparent change in the decision and support system across
different modules (or function). This is achieved through:
(a) Common database
(b) Instant sharing of information which is common and simultaneous
(c) One time entry (at one place) being sufficient for the entire enterprise to get updated.
3. Extremely powerful, user-friendly "graphic-user-interface" (GUI) technology.
4. Supported by client server architecture for communication at different levels of the system.
5. Uniform system environment.
344 INDUSTRIAL ENGINEERING AND MANAGEMENT

24.3 PURPOSE OF MODELING AN ENTERPRISE

An ERP system is aimed at modeling and integrating the enterprise. Enterprise modeling is, therefore,
the most important pre-requisite before the selection/implementation of an ERP system. It encompasses
complete understanding and detailed mapping of the firm's business functions and decision-making process,
both independently and interactively. Enterprise integration leads to:
• More agile enterprise. -
• Helps in eliminating redundant or non-value added activities.
• More efficient system after being enabled by IT.
• Streamlines five important flows in the enterprise:
(a) Information
(b) Material
(c) Money
(d) Control, and
(e) Intangibles, such as customer satisfaction and quality improvement.
• Empowerment of employees to take action.
Based on Hansen (1991), there are five reasons which help in building the employees motivation
due to integration:
• When people understand the vision or larger task of an enterprise and are given the right information,
the resources, and the responsibility, "they will do the right thing".
• Empowered people-and with good leadership, empowered groups-will have not only the ability but
also the desire to participate in the decision process.
• The existence of a comprehensive and effective communications network must distribute knowledge
•and information widely, embracing the openness and trust that allow the individual to feel empowered
to affect the "real" problems.
• The democratisation and dissemination of information throughout the network in all directions, irrespective
of organisational position, ensures that the integrated enterprise is truly integrated.
• Information freely shared with empowered people, who are motivated to make decisions, will naturally
distribute the decision-making process throughout the entire organisation.
The integration of the enterprise helps in building an efficient and effective information network
across the enterprise. Hoffman (1992) identifies following reasons for integration:
•, Identification of the major functions to be included in a program management organization.
• Denning the scope and content of the information systems' architecture and related metrics as a
management guide.
• Providing guide and/or roadmap through the process of developing such an organisation to manage
• a large-scale integration program.

24.4 ITS ROLE IN ENTERPRISE MODELING

Advancement in information technology (IT) has transformed the business process in an extended-enterprise
system by enabling seamless integration at the interfaces of functions and hierarchies. Table 24.1 gives
the indication of shifting paradigms during recent years which have been triggered and supported by
integration of enterprise and support of IT.
ENTERPRISE RESOURCE PLANNING (ERP) 345

Table 24.1 Role of IT in Changing the Enterprise System

Old Rule Intervening Trend Emerging Paradigm

Role of information is Information system designs, compu- Seamless integration of enterprise
very limited. terization of major activities, automation through IT support

Manual analysis of data Computerisation and networking Integrated network of systems

MRP MRP II. Open loop MRP ERP

Information appears at Shared data bases, electronic mail, Simultaneously, one can access same
and accessed from only client server architecture information at any place and when-
one place, at one time. ever needed.

Only an expert can Expert systems, neutral computing Novices can perform complex work.
perform complex work

Business must be either Telecommunication and networks: Business can be both centralized
centralized or decentralized. client/server and decentralized.

Managers make all decisions. Decision support systems, enterprise Decision making is part of everyone's
expert systems support system. job.

Field personnel need office to Wireless communication and portable Field personnel can manage informa-
receive, send, store, and process computers, information highways, tion from any location.
information. electronic mail.

Personal contact is the best Interactive video disk desktop The best contact is the one that is most
contact with potential buyers. teleconferencing, electronic mail cost effective.

One has to locate items manually. Tracking technology, groupware, Items are located automatically.
workflow software, client/server

Overall plans get revised High-performance computing systems Plans get revised instantaneously
periodically. whenever needed.

All must come to one Groupware and group support People can work together while at
place to work together. systems, telecommunications, different locations.
electronic mail, client/server

Customized products and services CAD-CAM, CASE tools, on-line Customized products can be made
are expensive and take a systems for JIT decision making, fast and inexpensively (mass customi-
long time •to develop. expert systems sation).

A long period of time is spanned CAD-CAM, electronic data Time-to-market can be reduced by
between the inception of an idea interchange, groupware, imaging 90 per cent.
and its implementation (time- (document processing)
to-market).

Information-based organisations Artificial intelligence, expert systems Knowledge-based organisations and

and processes. and processes.

Move labour to countries where Robots, imaging technologies, Work can be done in countries with
labour is inexpensive (off-shore object oriented programming, high wages and salaries.
production). expert systems, geographical
information systems (GIS)

Source: Modified and compiled from Hammer and Champy; 1993 and Adopted from author's book on ERP, Galgotia
Publication, 1999.
346 INDUSTRIAL ENGINEERING AND MANAGEMENT

24.5 INFORMATION MAPPING

The flow of information is the key indicator of the way an enterprise can be modeled and integrated.
It requires careful analysis of what, when and how, in terms of information that every entity needs. If
this is done properly, half of the battle related to enterprise modeling is won. The capability of ERP/
IT and their organizational impact is shown below (in Table 24.2):
Table 24.2 ERP/IT Capabilities and their Organisational Impacts

Capability Organisational Impact/Benefit

Transactional IT/ERP can transform unstructured processes into reutilized transactions.
Geographical IT/ERP can transfer information with rapidity and ease across large distances, making processes
independent of geography.
Automational IT/ERP can replace or reduce human labour in a process.
Analytical IT/ERP can bring complex analytical methods to bear on a process.
Informational IT/ERP can bring vast amounts of detailed information into a process.
Sequential IT/ERP can enable changes in the sequences of tasks in a process, often allowing multiple tasks
to be worked on simultaneously.
Knowledge IT/ERP allows the capture and dissemination of knowledge and expertise to improve
management the process.
Tracking IT/ERP allows the detailed tracking of task status, inputs, and outputs.
Disintermediation IT/ERP can be used to connect two parties within a process that would otherwise communicated
through an intermediary (internal or external).

The information domain of the enterprise should be looked into two sub-domains: physical and
decisional. Physical domain is the information-linking of the enterprise entities. It is mostly influenced
by endogenous information. The decisional domain pertains to the planning and controls aspects of the
physical sub-system of the enterprise. Its representation is given in Figure 24.1. Shankar (1998) and Shankar
and Vrat (1999) have extensively identified reasons for considering vagueness in the information input
at the design stage of a system. The recognition of information domain, related characteristics of information,
and sharing of information without conflicts are the three key ingredients in an enterprise-modeling endeavour.
Endogenous
Information domain I In formation

Physical domain of
• Enterprise Endogenous
Information Decisional
Informationa domain
Mapper
Manpower
Planning
and
Machines control
system
Controller
Material

Transform raw materials

information into end products Control Physical Sub-Systems
Service within constraints targets

Figure 24.1 Representations of different domains of information

ENTERPRISE RESOURCE PLANNING (ERP) 347

24.6 ROLE OF COMMON/SHARED ENTERPRISE DATABASE

The integrated enterprise system is supported by a central database, which is also called as enterprise
databases. It works as the heart of the enterprise's model. Information is store, updated, retrieved and
managed in this portion. It draws data from and feed data into various enterprise applications, that support
different functions. Single database reduces information time-lag, reduce distortion in information, instant
updating, enhanced reliability and streamlined flow of information (Figure 24.2).

Managers and
Stockholders

Reporting Financial
applications applications

Sales and
delivery
applications 0 0
00
Sales force Manufacturing Administrators A A
AA Enterprise
Customers and customer applications and workers Vendors
database
service representivcs

Service 4'
applications Human
Inventory
resource
and suppls
management
application
applications

Employees

Figure 24.2 Anatomy of an enterprise system (Source: based on Davenpoit, 1998)

24.7 SCOPE OF ENTERPRISE SYSTEM

All common ERP systems are supported by different functions such as financial, operations & logistics,
human resources, sales and marketing, etc. For example, SAP's R/3 package is supported by different
modules, shown in Table 24.3.
Table 24.3 The Scope of Enterprise System

Financials Operations and Logistics

Accounts receivable and payable Inventory management

Asset accounting Material requirements planning
Cash management and forecasting Materials management
Cost-element and cost-center accounting Plant maintenance
Executive information system Production planning
Financial consolidation Project management
General ledger Purchasing
Product-cost accounting Quality management

(Contd..)
348 INDUSTRIAL ENGINEERING AND MANAGEMENT

Financials Operations and Logistics

Profitability analysis Routing management
Profit-center accounting Shipping
Standard and period-related costing Vendor evaluation

Human Resources Sales and Marketing

Human-resources time accounting Order management
Payroll Pricing
Personnel planning ,Sales management
Travel expenses Sales planning

24.8 GENERIC MODEL OF ERP SYSTEM

Design of an integrated enterprise model is a complex task as it involves mapping of all the functions,
information flow, material flow, decision process, and many other aspects, which govern the dynamic
process of the enterprise. Many approaches exist to do this. A generic model may compose two building
blocks: hierarchical IDEF model and cbject oriental model. Some other models adopt structural modeling
or system approach with support from object-oriented approach to analyse and design the software
(Ng. et at. 1999). A general understanding of ERP is as follows:

Enterprise Resource Planning (ERP) is a game plan for planning and monitoring all of the
resources of a manufacturing, company, including the functions of Manufacturing, marketing,
finance, and engineering. ERP is recognized as being an effective management system that
has an excellent planning and scheduling capability offering significant gains in productivity,
dramatic increases in customer service, much higher inventory turns, and greater reduction
in material costs. These technology innovations include the move to relational database management
systems (RDBMS), the use of a graphical user interface (GUI), open systems and client/server
architecture. —Robert (1996); Wight (1993)

The generic design of ERP involves development of a tree stmcture, representing different func-
tional nodes of the enterprise. A simplified generic model of ERP system is shown in Figure 24.3. All
the generic representations of this figure may further be exploded to develop the exploded generic
representation.
24.9 SELECTION OF ERP
Once it is decided that the enterprise needs an ERP package, the most crucial task would be to select
the most appropriate package. The market is flooded with large variety of ERP packages and it is often
very difficult to select the best suited product. The importance of this decision is mainly due to following
reasons:
(i) ERP procurement and successful implementation is a very costly affair. For example, Baan IV costs
Rs. 50 lakh to Rs. 8 crore SAP R/3 costs Rs. 2.5 lakh per licence, RADICAL, costs Rs. 25 lakh
to Rs, 1 crore, Scala ERP costs Rs. 20 lakh to Rs. 2 crore, BPCS client/server 6.0 costs Rs. 20 lakh
to Rs. 2 crore (Source: Computers Today, August 1999). Out of these, SAP's R/3 is most popular
with about 30% market share. QAD Inc. captures about 26%; BaaN, BPCS, and Ramco System
each captures around 8-10% market share in India. Considering the high onetime, cost in procurement
ERP, it is very essential to make the choice very, very carefully.
ENTERPRISE RESOURCE PLANNING (ERP) 349

[AO] Building a Generic ERP Model

— [A I] ERP system planning and scoping study
[A I I] Project scope and goal definition
[A I 2] Feasibility study
[Al 2] Final project plan
[A2] Process Re-engineering
— [A2 I] System analysis
— [A2 2] Process re-thtinking, retooling and re-designing
— [A2 3] Process Benchmarking
— [A2 4] Simulation and validation
[A3] ERP system design
— [A3 1] Analysis and identify requirements
— [A3 2] Analysis and review current system
— [A3 3] Initiate ERP design
—[A3 3 1] Design generic ER? functions
— [A3 3 I I] Design planning system
[A3 31 1 1] Master scheduling planning system

E [A3 3 I 1 2] Capacity requirement planning system

LLL [A3 3 I 1 3] Material requirement planning system
—[A3 3 1 2] Design engineering system
[A3 3 1.2 I] Product data control system

E [A3 3 12 2] Lot/serial number control system

[A3 3 1 2 3] Engineering change system
— [A3313 Design production system
— [A3 3 13 I] Job order control system
— [A3 3 1 3 2] Work order control system
— [A3 3 I 3 3] Manufacturing planning and control system (MPC)
— [A3 3 I 3 4] Purchasing/receiving system
— [A3 3 13 5] Quality control system
— [A3 3 1 3 6] Inventory management system
— [A3 3 I 3 7] Material management system
— [A3 3 1 3 8] Plant maintenance system
[A3 3 I 3 9] Project management system
— [A3 3 I 3 A] Vendor evaluation system
— ]A3 3 1 3 B] Shipping system
— [A3 3 14] Design marketing system
— [A3 3 I 4 1] Sales order/marketing system
— [A3 3 1 4 2] Sales order quotations system
— [A3 3 1 4 3] Product configuration system
— [A3 3 1 4 4] Pricing system
— [A3 3 14 5] Sales planning system
— [A3 3 15] Human resource system
— [A3 3 1 5 I] Human-resource time accounting system
— [A3 3 15 2] Payroll system
— [A3 3 15 3] Personnel planning system
— [A3 3 15 4] Travel expense system
—[A3 3 16] Design financial system
— [A3 3 16 I] General ledger system
— [A3 3 16 2] Accounts receivable system
— [A3 3 1 6 3] Accounts payable system
— [A3 3 1 6 4] Cost accounting system
— [A3 3 16 5] Fixed assets system
— [A3 3 16 6] Cash management system
— [A3 3 16 7] Cost-centre accounting system
— [A3 3 1 6 8] Executive intirmation system
— [A3 3 1 6 9] Finance consolidation system
— [A3 3 I 6 A] Profitability analysis system
— [A3 3 16 B] Standard and period related costing
— [A3 3 2] Design system database structure
— [A3 3 3] Design logical process
— [A34] Test and analyse new system
— [A4] System evaluation

Figure 24.3 Model of generic ERP system showing a few node trees (Modified from Ng, et. al., 1999)
350 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Implementation of ERP involves risks. Jokingly, some people have called this as Expensive Risky
Proposition. The risk is mainly due to changes, which may be needed in the process and procedure
•so as to fit into the scope and purview of selected ERP. Resistance to changes is another risk
factors. It has been observed that the benefit of ERP implementation is not immediately forth-
coming. Therefore, direct ROI (return-on-investment) or productivity measure may not be sufficient
to justify the ERP adoption. Moreover, if the selected ERP package is a total mismatch with the
present practices, there' are far greater risks of failure. Therefore, proper selection of ERP is very
important.
(iii) ERP selection is a strategic decision. It has far-reaching effect. It is also a long-term decision,
which is difficult to get reversed. Secondly, once the vendor is selected, it is not proper to go
for changes in near future.
Therefore, the decision regarding whether to go for ERP or not is very important as it is normally
a one-time activity, which is difficult to get reversed and is highly capital intensive.
24.10 DIFFICULTY IN SELECTING ERP
It has been observed that the selection of an appropriate ERP for the enterprise is difficult by the internal
people as most of them lack experience in an ERP project. It is, therefore, help of external consultants
which is needed: The biggest difficulty in selecting an ERP is due to many interacting and some conflicting
objectives which each available ERP provides. For example, an ERP package may be cheaper, but may
not fulfill the functional requirements. Some ERP packages take a lot of time in implementation. Some
companies have faced difficulties as they lack objective, validated information on the vendor products
and services. Due to this, they are forced to rely on what vendor says and the literature provides.
It is a common practice to form an ERP steering team or task-force for the initial selection and
implementation stage. Top executive or CEO has to play an important role in this. This would facilitate
the decision-making in the selection.
These days, there is a genuine shortage of really knowledgeable consultants. In this industry, one
can locate many self-imposed, ill-trained and poorly experienced consultants. Hiring such persons would
certainly ruin the very purpose of the entire project. Another difficulty in hiring a consultant is related
to his personal bias. A consultant, who has handled a particular vendor, would prefer the same vendor
due to his individual ease with the product. ERP is a complex product. One has to spend several years
on a product to understand its strength and weaknesses. Considerable knowledge about most of the products
in the market is not easily possible for any individual consultant.

24.11 APPROACH TO ERP SELECTION

Selection of appropriate ERP package should involve careful evaluation of existing ERP alternatives and
the needs/profile of the enterprise. Prosser and Canty (1998) have outlined an approach, Proof of Concept
(PO.C). We will look into this approach and the traditional approach, which is called as Request for
Proposal (RFP). We will also look into the advantages of POC approach over RFP approach:
24.12 THE "REQUEST FOR PROPOSAL" APPROACH
The following approaches are considered:
Stage 1: Analysis Stage: RFP approach begins with the preliminary analysis, which is meant to
prepare the organisation for the ERP selection project. This involves the followings:
(a) Launching and planning the ERP project.
(b) Collecting and reviewing related background material.
ENTERPRISE RESOURCE PLANNING (ERP) 351

(c) Understanding the interests, needs and expectations of all those, who are affected by ERP decision.
(d) Reviewing the ideas of stakeholders and prioritizing their preferences.
(e) Development of the RFP.
Output of Stage I:
(a) Detailed project plan for the activities related to the selection process.
(b) List of potential ERP-vendors.
Stage 2: Requirement Analysis: This stage involves:
(a) Conduct workshops on joint requirement planning.
(b) Analyse results of workshop.
(c) List the functional requirements.
(d) Document and confirm business requirements.
Output of Stage 2: Complete document of business and functional requirements.
Stage 3: Request for Information: This stage involves:
(a) Make a high level look at the situation.
(b) Gather general information on different ERP solutions, which may be available.
(c) Eliminate considering those ERP packages, which are totally irrelevant, inadequate, or inappropriate.
Follow-up of Stage 3:
(a) The request for proposal (RFP) is developed and released to the selected list of 3-4 vendors, whose
packages best support, the business requirements.
(b) Respond to the enquiries of the vendors after they receive RFP.
(c) Evaluate vendors' response on RFP.
Output of Stage 3:
(a) A short list (possibly 3-4) of ERP vendors to whom the RFP would be sent.
(b) RFP documents.
Stage 4: Selection of the System: This stage involves:
(a) Organise a demonstration model with each vendor, selected in Stage 3.
(b) Deliberate on selecting the one, best vendor. This is at the level of in-house ERP implementation
team, consultants, who are hired, expert-friends, and other industries already using these packages.
(c) Send the report to senior management.
(d) Evaluation and recommendation by top managers.
Output of Stage 4: Final Selection of ERP Package.

24.12.1 Limitations of RFP Approach

There are chances that many unrealistic requirements may get listed in the RFP. This is due to lavish
"wish-list", prepared by selection team for the desired features and capabilities of desired ERP solution.
Many members of the selection team may not have adequate exposure of ERP system. Due to this, their
list of requitements may be partly unrealistic. Sometime, the list of requirements may contain contradictory
functional requirements, such as infinite capacity scheduling and real, finite delivery day.
Another limitation of RFP approach lies in the inadequate real time experience in the implementation
arid adoption. RFP does not provide an opportunity to have a close long-term, detailed experience on
the proposed ERP before one decides for its adoption. Mostly, vendors give demonstration for a couple
of days or weeks. At this stage, there is no question of reconfiguring the business system with the ERP
352 INDUSTRIAL ENGINEERING AND MANAGEMENT

package. Hence, the decision related to selection of the ERP, which fits best with the business, is very
difficult.

24.13 PROOF OF CONCEPT (POC) APPROACH

Proof of Concept (POC)—approach is a much comprehensive and real-time selection approach for ERP
solution. In this approach, the organisation is provided with the ERP software (which may be a truckated
version also) for few months. The purpose is to get confidence on the software before a final selection
is made. Following stages are incorporated in the POC appr9aLli:
Stage 1: Preparation of Project and Constitution of ERP-Team: This stage involves following
activities:
(a) • Understand the project objectives.
• Confirm the objective's.
• Use review of documentation.
• Use opportunities to interview stakeholders.
(b) Identify persons for the ERP-team (also called as task-force). Define the role.
(c) Identify the organisational resources needed for the ERP implementation.
(d) Assess the risks involved in the project.
(e) Develop a plan to address the risk and capacity of the project.
(f) Launch the project through an effective internal communication campaign. Involve all.
Output of Stage 1: A plan, which would prepare the task-force in particular and organisation in
general, for the next stage of POC activity.
Stage 2: Analysis of Key (Business) Requirements: Unlike RFP-approach, where the functional
requirement analysis is done in the POC approach, analysis of key (business) requirements is done. This
is followed by the development of a process model for achieving the benefits of the ERP project. Following
activities are involved in this stage:
(a) Conduct seminars/workshops/presentation to plan the joint requirements.
(b) Develop a comprehensive process model. Test with sample transaction and pin-point areas of process-
improvements.
Output of Stage 2.
(a) List of biliness requirements
(b) A process model.
Stage 3: Selection of System: In this stage, the potential alternatives of the ERP-vendors are narrowed
down to one. Following activities are involved in this stage:
(a) Identify resource-persons, who are experienced in the software and are willing to advice. These
experts must have exposure of potential alternatives of ERP packages. The needs of the organisation
must be known to them; otherwise, it is the duty of the taskforce to fully acquaint them about
the organisational needs.
(b) Identify persons, who are involved in the implementation of different ERP project. Take their advice
on the choice.
(c) Deliberate on the outcomes of the expert advice and views of the task-force.
(d) Make a firm choice on the ERP solution. Inform the concerned vendor.
Output of Stage 3: freezing the choice for ERP vendor.
ENTERPRISE RESOURCE PLANNING (ERP) 353

Stage 4: Reaching Team Agreement on Product to Prototype: This is a product confirmation

stage. This stage may continue from a few weeks to a few months as per the mutual agreement with
the vendor. Following activities are intended in this stage:
(a) Arrange for the testing of the project. The purpose is to make a thorough analysis rather than
a demo by the vendor.
(b) Prepare the test system with a process model.
(c) Undertake a gap-analysis. Identify the items, which indicate major difference between software capability
and business need.
Output of Stage 4:
(a) Decision regarding whether to go for the project or not.
(b) Understanding of the business model, price and technology involved in the business and ERP
implementation.

24.14 APPLICATION OF POC-APPROACH

The decision regarding final choice of one ERP-solution is extremely difficult. Many of the available
alternatives would be capable of serving the requisite function. Therefore, a considerable level of confidence
is needed before going for trial or final stage of procurement. The confidence may be achieved by an
actual trial in the company's environment for a reasonable period of time, say, one or two months.
The use of POC-approach is illustrated in the Figure 24.4.

Implementation AS-IS Mapping

Expert of Enterprise

Task Force
Coordinates Helps I Implementation
and I stage
Deliberates
POC- Process Mapping of Pre-
Approach Enterprise software Planning
Linking Approach
to Reality
Implementation
stage
Consultant Advises Supports
TO-BE Mapping
of Enterprise
Vendor

Figure 24.4 Use of POC-approach in transforming business into 70-BE" situation

The POC approach and its implementation is supported by vendor, who should be willing to extend
his facilities. Consultants, if hired till this stage, advise regarding efforts needed for the change. Help
of some body, who has hands-on experience on previous implementation, is very useful. The role of
the taskforce is to coordinate and organise the business activities and make an in depth deliberation
on various issues.
Next aspect would be linking the approach to reality. For this, some pre-planning is needed. To
start with, the enterprise should prepare the present scenario in the minutest detail. This we call, "AS-
IS mapping of enterprise". Next thing that is needed is to visualise scenario, which may emerge after
the implementation. This we call, "TO-BE mapping of the Enterprise".
354 INDUSTRIAL ENGINEERING AND MANAGEMENT.

Now, the POC is applied to map the processes of the enterprise on the software. The objective
would be how to transform the enterprise from an "AS-IS" situation to "TO-BE" situation. At this level,
the help of implementation expert and support of vendor are very crucial.

24.15 COMPARISON OF RFP AND POC APPROACHES

(i) The time consumed in both approaches is nearly same (Prosser and Canty, 1998).
(ii) RFP and POC both involve understanding the functions of ERP 'product.
(iii) RFP provides only a general idea of how the new processes will affect the business. POC-approach
provides a much better understanding of the new processes and re-engineered business model.
Figure 24.5 shows the time-wise comparison of RFP and POC approaches.

Project and Fit System Product

Team Preparation Analysis Selection Implementation
Confirmation

(a) Proof of Concept (POC) Approach

Initial Requirement RFP System

Analysis Analysis Process Implementation
Selection

(b) Request lot' Proposal (RFP)-Approach

I 2 3 4 5 6 7 8 9 10 I 1 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Time (in weeks) --i--

Figure 24.5 Proven system selection alternatives

24.16 NARROWING ERP ALTERNATIVES

During selection or ERP, it is generally not very di fficult to narrow down the choices to three or four
options. Further, narrowing of choice to one single vendor is very difficult. This is due to following
reasons:
(a) ERP selection, being a multi-criteria decision making problem, is difficult to handle.
(b) Subjectivity in deciding the relative merit of each alternative ERP solution.
(c) Divergent criteria, on whose basis the decision is taken.
(d) Difference in opinion by different team members.
(e) Conflicting nature of few criteria for the selection of ERP.
(f) Inter-dependence of few criteria.
(g) Personal biasness of the consultant/team members.
(h) Lack of quantitative estimate regarding the performance of ERP solution on a real time situation.
To handle the multi-criteria decision making problem, such as the problem of ERP selection, Saaty
(1980) suggested Analytic Hierarchy Process (AHP). This approach has been extensively used in other
areas of selection of alternatives. For example, Shanker and Vrat (1997) have applied it for the selection
of a particular manufacturing system design.
ENTERPRISE RESOURCE PLANNING (ERP) 355

In the following section, an AHP framework is proposed for the multi-criteria ERP selection problem.
For illustration of the AHP framework, first a two-level hierarchy is presented. The calculations are detailed
and explained in the numerical illustration. The calculations are detailed and explained in the numerical
illustration. The six criteria, selected in this illustrative problem, are from Wadhwa and Rao (1998). However,
these are extended to the AHP-framework. Further, a'scheme for four-level AHP framework is also proposed.
AHP packages, such as expert choice, etc., facilitate solving a comprehensive problem. Hand calculation
may also be used to solve and this is illustrated in the subsequent sections.
24.17 ANALYTIC HIERARCHY PROCESS (AHP) APPROACH
Analytic Hierarchy Process (AHP) is a decision support methodology for dealing with complex, unstructured
and multiple attribute decisions. The approach decomposes a complex decision problem into one or more
levels of details where value assessment is provided through pairwise (ratio) comparison. AHP can be
used to reflect our judgements on subjectivity, feelings, ideas and emotions. This is based on structuring
the problem elements in terms of how the alternative solutions influence deciiion criteria, satisfaction
of Which helps to describe how a particular solution contributes to the accomplishment of the decision
problem's main goal (Saaty 1980). The output is a prioritized ranking, which indicates the overall performance
for each decision alternative. AHP has been used in past for a variety of applications. Since AHP evaluates
a finite number of discrete alternatives, it eminently suits the multi-criteria evaluation of ERP software.

24.17.1 Steps in AHP

Following steps are recommended in an AHP framework:
(i) Decide fo'cus or main goal .of the evaluation process (level-1).
(ii) Select criteria (level-2) and sub-Criteria, if any (level-3).
(iii) Select attributes of each sub-criterion (level-4).
(iv) Generate alternatives of different' ERP options (level-5).
(v) Make pairwise comparison at level-2, level-3 and level-4 on a scale of 1. to 9.
(vi) Compute priorities of each criterion and each alternative at different levels. (This will be explained
in the next section, with an example).
(vii) Compute the composite weight of each alternative design and
(viii) Select the ERP-solution with highest composite hierarchical weight. •
For a generalised problem of ERP selection, which involves Step (i) to Step (iv), refer Figure 24.6
(which is only for illustration purpose).. In case, level-3 and level-4 are not considered; Step (iii) may
be skipped.
For this truncated approach, refer Figure 24.7.
The AHP approach is based on the fact that these final composite weights capture the explicit
and implicit knowledge about each performance measure in terms of the satisfaction of the individual
criterion. This also captures the decision-makers' feelings towards the importance of these criteria in
achieving the ultimate goal of obtaining a preferred ERP solution.
24.18 APPLICATION OF AHP IN EVALUATION OF ERP
The hierarchical representation of the factors affecting a system is considered in the AHP. For ranking
the alternatives, pairwise comparisons among these factors are performed.
For illustration, four ERP solutions are selected which have passed through a critical selection process
and are economically feasible. The evaluation process is initially decomposed into a hierarchy of stated
 Level 1 : Focus (Goal) Preferred ERP Solution

Quantitative Semi-Judgemental Subjective

Level 2 : Criteria Criteria Criteria Criteria

Level 3 :
Sub-Criteria Management Worker
Financial Non-Financial ERP Feature Technology Vendor
Issue Issue

Level 4 :
• Cost of ERP • Flexibility • e-Commerce • Global Presence
Attributes
features • Local Presence
• Consultant fee • Implementation • Modularity
• Track Record
fee • Integration • Web
• Cost of BPR . Support in • Ease of • Resistance
within enablement implementation
• Documentation implementation to change
• Loss due to enterprise
mandays lost in ERP • Hardware . Post-Implementation
availability support • Alignment with • Motivation
implementation • Price to • Interenterprise corpOrate goals and
integration • Investment in R&D
performance satisfaction
• Cost of . Target market • Chances of
ratio
hardware . Commitments for • Team work
• Obsolescence failure
upgrades
. Availability of
support engineers

S.-A/S I VI /N.1

Alternative ERP
Solutions

Figure 24.6 A Four-Level AHP Hierarchy in the Evaluation of ERP Solutions

IN3N139VNVIAJ CINVONM331110N3 1VIa1SII0NI
 Level 1 : Focus (Goal ) Preferred ERP Solution
ENTERPRISE RESOURCE PLANNING (ERP)

Service and Executive Ability Vision of

Level 2 : Functionality Technical Cost
Support of Package Vendor
Criteria Architecture

Alternative ERP ERP#2 ERP#3 ERP # 4

ERP # I
Solutions —...-

Figure 24.7 AHP Hierarchy for the illustrative problem for the selection of ERP solution
358 INDUSTRIAL ENGINEERING AND MANAGEMENT

goals, criteria, sub-criteria, attributes and ERP alternatives while, for illustration, a simplified two-level
problem is selected (Figure 24.7). This problem contains six criteria at level two. However, in a general
situation, each criterion may be broken down further into sub-criteria (level 3). Each sub-criterion may
also be broken down into its attributes (level-4 in Figure 24.6).
As one goes down the hierarchy, the elements become more and more specific. At a particular
level of hierarchy the potency of influence for each factor on the next higher level of hierarchy is determined
through a pair-wise comparison. In the present illustrative problem, as shown in Figure 24..7, for the
evaluation of the ERP solution, the influences of six kinds of criteria; functionality, technical architecture,
service and support execution ability, and vision of vendor are determined. Similarly, pairwise comparison may
be preformed at each hierarchy for the sub-criteria and attributes, if they exist (as is the case in Figure 24.6).

24.18.1 Selection of Weights

For some criteria, the exact quantitative estimate may not be available at the selection stage. To overcome
this, the relative importance of each criterion is determined on a scale of 1 to 9 as follows (Saaty, 1980):

Importance Rating
Equally important
Moderately important 3
Strongly important 5
Very strongly important 7
Absolutely important 9
Reciprocals: If activity i has a specific numerical rating with
respect to activity j, then j has the reciprocal value when
compared to i.

The pairwise comparison gives an influence (also called as judgemental) matrix. This results in
providing the local priorities or weights for a group of criteria. Higher weight indicates a more important
factor.

24.19 ILLUSTRATIVE PROBLEM (REFER FIGURE 24.7)

The basic objective of this illustrative example is to demonstrate the efficacy of the AHP model in handling
some vague information, which may be from a set of subjective criteria. For this purpose, the AHP
exercise has been carried for illustration purpose. For a detailed analysis, hierarchical model like one
shown in Figure 24.6 may be adopted. The weights for pairwise comparison may be provided by task-
fore of the ERP team, consultants and experienced persons in ERP implementation.

24.19.1 Problem Statement

Select the preferred ERP-solution out of four feasible ERP-solutions; ERP #1, ERP #2, ERP #3, and
ERP #4. Six criteria have been identified for this selection prone. These are:
(a) Functionality of the ERP package.
(b) Technical architecture of the ERP package.
(c) Cost of ERP package and cost of implementing ERP.
(d) Service and support of vendor.
(e) Ability of the package for the smooth execution of the project.
(f) Vendor's vision regarding future of his product and its upgrades.
ENTERPRISE RESOURCE PLANNING (ERP) 359

24.19.2 Solving the Illustrative Problem

First of all, we compare each of the six criteria with one another. Table 24.4 is used for this purpose.
Relative weights of one criterion with any other five criteria are listed. For example, while comparing
functionality (SN1) vs Tech. Architecture (SN2), we have treated functionality three times more important
than the Tech. Architecture. It may be noted that, when Tech. Architecture (SN2) is compared with functionality,
the relative weight is reciprocal of 3, i.e. 1/3 (or, 0.33). In a similar manner, for example, cost is treated
as five times more important than the execution-ability (SN.5). Consequently, execution-ability is
(1/5 or 0.2) times more important than the cost (SN3). It may also be noted that any criterion Vs
same criteria carries a weight of one. For example, service and support (row no. 4) Vs service
and support (column. no. 4) is one. A value of one in the judgemental matrix, indicate, "equally
important".

Table 24.4 Judgemental matrix for the six evaluation criteria

Preferred ERP Solution (Level 1)

1 2 3. 4 5 6
'Ti - weight
total
(F) (T) (C) (S) (A) (V)

1. Functionally 1.00 3.00. 1.00 6.00 7.00 9.00 3.23 0.400

2.' Tech. Architecture (T) 0.33 1.00 0.33 3.00 4.00 2.00 1.17 0.146
3. Cost (C) 1.00 3.00 1.00 1.00 5.00 6.00 2.12 0.263
4. Service & Support (S) 0.17 0.33 1.00 1.00 1.00 2.00 0.69 0.086
5. Ability to Execute (A) 0.14 0.25 0.20 1.00 1.00 1.00 0.44 0.054
6. Vision (V) 0.11 0.50 0.17 0.50 1.00 1.00 0.41 0.051
Total = 8.06 1.00

Once, the relative weight of a judgemental matrix is fed, we calculate the composite weight. For
this, following scheme is helpful:

24.19.3 Calculation of Weights of Each Row

Step 1: Multiply each element of the row. For example, for the second row of Table 24.4, the multiplication
is (0.33 * 1 * 0.33 * 3 * 4 * 2 = 2.613). Let this multiplication be called as it for the ith row.
Step 2: Count the number of columns. Let this be n. Take nth root of it. This will give us the
geometric mean of the corresponding ith row. For example, for second row, there are six columns, Hence,
the geometric mean is 6th root of 2.613 (or, (2.613)1 /6 = 1.17).
Step 3: Repeat Step 1 and Step 2 for all rows of the judgemental matrix.
Step 4: Add the column of geometric mean. For example, this is 8.06 in Table 24.4.
Step 5: Divide elements of geometric mean by the total, found in Step 4. This gives us the relative
weight of each column. Last column of Table 24.4 contains these values. For example, for the second
row (i.e., Tech. Architecture) the relative weight is (1.17 ± 8.06 = 0.145).
As a check, we may note that the sum of the last weight column is one.
Similarly, on each criterion, all the four alternative ERP-solutions are compared and relative weights
are determined. These are contained in Table 24.5 to Table 24.10.
360 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 24.5 Judgemental matrix for Functionality

FUNCTIONALITY (level 2) of each alternative is compared

ERP #1 ERP #2 ERP #3 ERP #4 Weights

1. ERP #1 1 00 3.00 1.00 2.00 0.359
2. ERP #2 0.33 1.00 0.25 1.00 0.123
3. ERP #3 1.00 4.00 1.00 1.00 0.325
4. ERP #4 • 0.50 1.00 1.00 1.00 0.193

Priorities with respect to Functionality:

1. ERP #1 0.359
2. ERP #2 0.123
3. ERP #3 0.325
4. ERP #4 0.193
Table 24.6 Judgemental matrix for Technical Architecture
TECH. ARCHITECTURE (level 2) of each alternative is compared

ERP #1 ERP #2 ERP #3 ERP #4 Weights

1. ERP #1 1.00 0.11 0.33 1.00 0.078
2. ERP #2 9.00 1.00 1.00 5.00 0.459
3. ERP #3 3.00 1.00 1.00 8.00 0.392
4. ERP #4 1.00 0.20 0.13 1.00 0.071

with respect to Tech. Architecture:

Priorities
1. ERP #1 0.078
2. ERP #2 0.459
3. ERP #3 0.392
4. ERP #4 0.071
Table 24.7 Judgemental matrix for cost of procuring and implementing ERP solutions
COST (level 2) of each alternatives are compared

ERP #1 ERP #2 ERP #3 ERP #4 Weights

1. ERP #1 1.00 1.00 0.20 0.25 0.088
2. ERP #2 1.00 1.00 0.11 0.33 0.082
3. ERP #3 5.00 9.00 1.00 1.00 0.483
4. ERP #4 4.00 3.00 1.00 1.00 0.347

with respect to cost:

Priorities
1. ERP #1 0.088
2. ERP #2 0.082
3. ERP #3 0.483
4. ERP #4 0.347
ENTERPRISE RESOURCE PLANNING (ERP) 361

Table 24.8 Judgemental matrix for service and support by vendor

SERVICE & SUPPORT (level 2) of each alternative are compared

ERP #1 ERP #2 ERP #3 ERP #4 Weights

1. ERP #1 1.00 5.00 4.00 8.00 0.618
2. ERP #2 0.20' 1.00 3.00 4.00 0.216
3. ERP #3 0.25 0.33 1.00 1.00 0.093
4. ERP #4 0.13 0.25 1.00 1.00 0.073

Priorities with respect to Service & Support:

1. ERP #1 0.618
2. ERP #2 0.216
3. ERP #3 0.093
4. ERP #4 0.073
Table 24.9 Judgemental matrix for the ability of ERP solution
EXECUTION ABILITY (level 2) of each alternative is compared

ERP #1 ERP #2 ERP #3 ERP #4 Weights

1. ERP #1 1.00 3.00 1.00 1.00 0.318
2. ERP #2 0.33 1.00 0.50 1.00 0.154
3. ERP #3 • 1.00 2.00 1.00 1.00 0.287
4. ERP #4 1.00 1.00 I.00 1.00 0.241

Priorities with respect to Execution Ability:

1. ERP #1 0.318
2. ERP #2 0.154
3. ERP #3 0.287
4. ERP #4 0.241
Table 24.10 Judgemental matrix for the vision of the ERP vendors
VISION (level 2) of each alternative is compared

ERP #1 ERP #2 ERP #3 ERP #4 Weights

1. ERP #1 1.00 7.00 4.00 3.00 0.567
2. ERP #2 . 0.14 1.00 2.00 0.50 0.115
3. ERP #3 0.25 0.50 1.00 0.25 0.079
4. ERP #4 0.33 2.00 4.00 1.00 0.239

Priorities with respect to Execution Ability:

1. ERP #1 0.567
2. ERP #2 0:115
3. ERP #3 0.079
4. ERP #4 0.239
362 INDUSTRIAL ENGINEERING AND MANAGEMENT

24.19.4 Calculation of the Overall Ranking of each Alternative of ERP Solution

The results for weights found in each judgemental matrix (Tables 24.4 to 24.10) are used to calculate
the overall ranking of the ERP solutions. This is given in Table 24.11.
Table 24.11 Focus matrix on Preferred ERP Solution .

Tech Cost Service Ability Vision Composite

Criteria Functionality Architecture & to hierarchical
-> Support Execute priority (Pi)
E (P) (P')
Level 2
Priority (P) 0.400 0.146 0.263 0.086 0.054 0.051

Alternatives
(level 3)
Priority (P')

ERP #1 0.359 0.078 0.088 0.618 0.318 0.567 0.277*

ERP #2 0.123 0.459 0.082 0.216 0.154 0.115 0.171
ERP #3 0.325 0.392 0.483 0.093 0.287 0.079 0.342 (Best)
ERP #4 0.193 0.071 0.347 0.073 0.241 0.239 0.210

*Sample Calculation: For ERP #1, the composite hierarchical priority (PI ) is calculated as follows:
131 = 0.400 * 0.359 + 0.146 * 0.078 + 0.263 *0.088 + 0.086 *0.618 + 0.054 * 0.318 + 0.051 *0.567
= 0.277

24.19.5 Result of the Illustrative Problem

As evident from Table 24.11, ERP #3 scores highest. This is despite scoring very poorly on criteria
like service and support (0.093 against 0.618 for ERP #1), and vision (0.079). This has happened due
to its high scoring on Functionality, Technical Architecture and Cost. Since the ERP selection is a multi-
criteria evaluation problem, an integrated framework like AHP is very useful.

24.20 METHODOLOGY FOR ERP IMPLEMENTATION

The implementation of ERP is generally done in close association with the vendor, who supplies the
package. Many organisations go for hiring professionals/consultants to facilitate the implementation process.
Within the organisation, there is a need to fcrm an ERP-team. This team comprises of people with high
caliber and motivation. They are from different streams. Process engineer, industrial engineer, HRD personnel,
financial executive and works-manager are sure to find a place in this team. The role of the top management
is very crucial, as the commitment and required flow of finance are the two major ingredients without
which any effort whatsoever is futile.
A general methodology for the implementation of ERP is presented in Figure 24.8 as a flow chart.
The identification of the need for ERP should be developed through a feasibility-report. In this report,
the present enterprise should also be evaluated along with much needed future capabilities. Then comes
the stage of selection and evaluation of ERP. We have seen this aspect in the previous sections. If the
ERP solution is acceptable, then the strategy for business process re-engineering (BPR) is decided. We
will see the role of BPR in Chapter 36.
ENTERPRISE RESOURCE PLANNING (ERP) 363

Identify Need for ERP

Evaluate Present Enterprise

Assess Future Capabilities with ERP

Capability
of Features
Generate Alternative Scenario NN ith Different ERP Solution : Evaluate
of ERP in
Offer

Is an
ERP
Solution Terminate
acceptable
9

Yes

Decide the BPR strategy : Preceedtalong/succeed?

Install the hardware and go for networking

Finalise the support of ERP consultants

• Make organisation ready to adopt ERP

• Debottleneck resistance to change

Whole-heartedly go for the implementation of ERP

Make continuous review and extend top-management support

Stabilise ERP system in the enterprise

Figure 24.8 Methodology for ERP implementation

24.21 USA PRINCIPLE FOR THE IMPLEMENTATION

Some of the typical failures of ERP implementation have revealed that most of these companies have
started the ERP implementation process by first focusing on automation-effort. Studies have also revealed
that automation, in an enterprise for productivity improvement without understanding and simplifying
the process, is one of the major reasons for the failure of the ERP implementation. This leads to the
USA principle for the implementation of the ERP system.
USA stands for a sequential approach: Understand-Simplify-Automate. The USA approach calls
for dedicated effort towards understanding the business process. Without this, any effort for, implementation
364 INDUSTRIAL ENGINEERING AND MANAGEMENT

of ERP is likely to fail. Second step is to go for simplification of the process. And last is to go for
the automation of the procedure.

19)
Understand Simplify Automate
Existing Process by The
Process Eliminating Waste Process

METHODS II METHODS I METI IODS

—Diagramn ing — Rean angmg —Electronic Data Interface

—Storyboarding — Eliminating — Enterprise Resource Planning
— "Walking" the Process —Combining —Manufacturing Execution System
—Increasing

Figure 24.9 The USA (Understand-Simplify-Automate) Principle: Implementation Flow

24.22 FACTORS INVOLVED IN SUCCESSFUL IMPLEMENTATION

Setting the Priorities Right: The necessity of ERP project must be well established. It must start with
a well judged feasibility report. Many consultants often jump into conclusion without properly going
into the feasibility study. There is a great excitement about ERP throughout the world. In this situation,
it is easy to get caught into the euphoria and enthusiasm and rely too much because many of the world's
major'companies are using it. However, blind copy of trend may lead the organisation into an unpleasant
situation.
Business Process Re-engineering (BPR): The re-engineering of the business should be continuous
rather than a single re-engineering process. A detailed study of the re-engineering process will be presented
in Chapter 36.
Downsizing: On many occassions, trimming the workforce is essential. By reducing headcount,
one can streamline organisations and make systems more efficient.
Workforce reduction and intensive training to the remaining employees should go hand-in-hand.
An automation, at a later stage, would compensate the losses due to reduction.
Organisational Transformation: Organisational change is often a pre-requisite for the transformation.
A very good knowledge of software, organisation and your own business needs is necessary to be able
to predict what future organisation is going to come at the post-implementation stage. This would also
reduce resistance to change.
Integration Within: System integration is key to the success of enterprise planning. A well-integrated
enterprise would be a great aid in helping the company to-run efficiently. Modular nature of the software
has distinct advantages. One can purchase the modules to meet the present business requirements. With
add-on modules, new modules may be integrated with the existing modules at a later stage as per the
requirements.
Integration Outside: Software should have flexibility in terms of hardware, operating systems,
databases and graphical user interface (GUI). In this context, client server technology is reliable, efficient,
flexible and cost effective.
ENTERPRISE RESOURCE PLANNING (ERP) 365

Standardisation in Enterprise Operation: For improving the efficiency and for increasing
the flexibility of the system, it is necessary that enterprise should standardise its business operation.
Due to globalisation of enterprise activities, the importance of standardisation is much more rele-
vant.
High Capacity to Handle Large Volumes Data: The ability of the ERP systems to meet the
large volumes of data processing is an important consideration. This should be looked into from the
point of view of future expandability of the business.

24.23 SOME USEFUL GUIDELINES FOR ERP IMPLEMENTATION

Based on experiences from the successful ERP projects, following useful guidelines are available in
literature:
1. Understand the needs of the enterprise and feeling for corporate culture in the context of readiness
for change.
2. The message should come from the top regarding adoption of the project.
3. Continuous and frequent communication from top regarding usefulness and mindset for the project.
4. Initiate with a feasibility report.
5. Start with changes in the business processes in the early stages of the project. Make everybody
aware of this. Keep them informed. It will reduce resistance for change.
6. Decide phases of project implementation. Hold consultative meetings. Try for consensus.
7. Top executive should play the role of champion and set the project as the ultimate goal in all
efforts.
A total dedication and mission is needed at this stage.
8. Hire experienced consultants.
9. Visit sites of your vendors. See how the ERP solution is functioning. Extract •useful tips from the
already existing users.
10. Carefully study the documentation of the vendor.
11. Make a balanced implementation team, which should include IT, HRD, Works, Financial and top
executive. Other experienced functional managers should also be included.
12. Hold regular training and appraisal sessions in the organisation.
13. Ensure that the problems arising out of changes are handled carefully. Such problems are inevitable.
14. Ensure good feedback mechanism to evaluate the results due to implementation.
15. Decide whether to go for modular or complete ERP solution.
16. Look into the future capabilities of the enterprise when it is armed with ERP. Take radical decisions
for transformation, if need arises.

24.24 WHEN ERP IMPLEMENTATION FAILS?

The ERP implementation fails to succeed due to following reasons:
1. Absence of an executive sponsor: Since ERP crosses functions within a company, the implementation
needs someone with an authority to bring various functional executives together. There should be
people, directed and devoted towards the project.
366 INDUSTRIAL ENGINEERING AND MANAGEMENT

2. When the project is viewed as an IT effort or as an efforts towards automating finance/manufacturing/

supply-chain, etc.
3. When there is no full-lime project manager for ERP implementation.
4. When the IT people start taking decisions in ERP implementation due to dominant role in handling
hardware/software/communication, etc.: As a matter of fact, they generally lack understanding of
the function requirements.
5. Lack of documentation of implementation procedure.
6. Lack of internal communication by top executive regarding project implications.
7. Lack of vendor support and team work.
8. Lack of re-engineering effort and insistence on continuation of current practices.
9. Massive change and unmanageable transformation without proper grasping by employees.

24.25 SUMMARY
ERP is the software architecture that facilitates the flow of information among different functions of an
enterprise. This is achieved through common database information and enterprise linkages, powerful GUI,
client-server network of communication,' uniform system environment, etc. ERP implementation strategy
normally goes along with BPR efforts. Selection of an appropriate ERP package is a very challenging
task. The difficulties are due to comparison of different features of each alternative poses a multi-criteria
decision problem. Two approaches for initial weeding out of alternatives are: request for proposal (RFP)
and proof of concept (POC): When three-four potentially feasible ERP-Solutions have been identified,
a multi-criteria evaluation- framework, such as AHP, is useful. It is based on developing judgemental
matrix, which requires pairwise comparison of alternatives. For this comparative score, help of experts,
consultants and vendor information is needed. There are many standard AHP packages in the market
which can handle a quite comprehensive problem. Once an ERP-solution is selected and the choke is
free zed, the implementation of ERP and re-engineering of business-process begins.

REVIEW QUESTIONS

24.1 What do you understand by ERP? Explain it's main functions.

24.2 What is the purpose of modeling an enterprise? How does ERP fit in the enterprise modeling endeavour?
24.3 What are the role of information technology in enterprise modeling?
24.4 What are the common difficulties in selection an ERP solution? Explain the approaches to select ERP.
24.5 Distinguish between RFP and POC approaches for ERP selection.
24.6 Explain the AHP methodology in the selection of alternatives. What is its strength? Is it useful in the selection
of ERP? Explain.
24.7 Explain the methodology adopted in implementing ERP.
24.8 Explain USA approach in the selection of ERP.
24.9 What are the factors involved in ERP implementation? What should be done to avoid failure'in ERP,imple-
mentation?
ENTERPRISE RESOURCE PLANNING (ERP) 367

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International Journal of Production Economics, 55, 97-109.
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mentation", In: Globalisation, Flexibility and Competitiveness-Proceedings of International Conference on
Management of Technology, Ed. Sushil et. al., Dept. of Management Studies, IIT Delhi), New Delhi,
• pp. 464-76.
17. Shankar, R., and Vrat, P., 1997, "A Framework for the Evaluation of CMS Design", In: CAD, CAM, Automation,
Robotics and Factories of Future, Ed. Mubeen A. and Rizvi, S.A.H. (New Delhi: Narosa Publishing House),
pp. 117-24.
18. Shankar R, and Jaiswal, . S., 1999, "Enterprise Re-search Planning", Galgotia Publications, New Delhi.
19. Sims, 0., 1994, Business Objects: Developing Cooperative Objects for Client Server, McGraw-Hill, Maiden
Heads.
368 INDUSTRIAL ENGINEERING AND MANAGEMENT

20. Slater, D., 1999, "An ERP package for you and you", CIO Magazine, February 15, 1999.

21. Vernadat, F., 1996, Enterprise Modeling and Integrations: "Principals and Application" Chapman and Hall,
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22. Wadhwa S. and Rao JS, 1998, ERP need for a pragmatic approach, In: Advanced Manufacturing Technology,
Ed. Deshmukh so. and Rao PV, Mechanical Engg. Dept., IIT Delhi).

23. Weston, R.H., 1993, "Steps Towards Enterprise-wide Integration: A Definition of Need and First Generation
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24. Winograd, T., Newman, N., and Vim, P., 1991, "Including People in Computer Integrated Manufacturing
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pp. 145-48.

25. Yellin, B., 1992, "Expanding Systems Management to the Enterprise: Issue and Strategies" Datamation,
S2—S12.
 25
WORK STUDY

25.1 INTRODUCTION
Work study is an area of tremendous importance for productivity improvement on the shop-floor. It
provides us with a scientific approach to investigate into all forms of work (or work-elements). Work-
study provides us many tools and techniques to measure and improve the ways, which the workers
adopt for accomplishing a task.
Work study assumes that there is one best way to accomplish a task (or work). Scientific methods
(such as those used in work-study) may be used to identify the best way for doing this task. Once
the best way is identified, the time and methods in doing this task may be set as standard. The standard,
thus set, may be used to monitor the performance on the shop-floor.
We will define few terms used in this area. The British Standard Glossary (BSG) defines work-
study, method-study and work-measurement as follows:

Work Study is a generic term for those techniques, particularly method study and work measurement,
which are used in the examination of human work in all its contexts, and which lead systematically
to the investigation of all the factors which affect the efficiency and economy of the situation
being reviewed, in order to effect improvement.

Method study is the systematic recording and critical examination of existing and proposed
ways of doing work, as a means of developing and applying easier and more effective methods
and reducing costs.

Work Measurement is the application of techniques designed to establish the time for a qualified
worker to carry out a specified job at a defined level of performance.

25.2 OBJECTIVES OF WORK STUDY

1.It helps in the optimum use of plant, equipment, manpower and material.
2. It helps in establishing the standard of performance.
370 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. It helps in developing efficient work methods.

4. It helps in establishing the most efficient and effective utilisation of human effort.
5. It helps in synchronising various resources like men and machine.
6. It helps in the evaluation of human wcrk.
7. It helps in efforts towards productivity improvement.
8. It helps in the elimination of wasteful efforts, useless material handling, etc.
9. It helps in job-simplification and work standardisation.
10. It is helpful in developing plant safety schemes, equipment utilisation, plant layout, and conductive
work environment.
Work-study, as the name suggests, is the study of work. Study of work includes human work as
well as dignity of work. In general, it is not restricted to shop-floor; but it may be applicable anywhere:
for example, kitchen, writing desk, gardening, etc. Work-study is used to associate two sets of techniques:
(i) method study, and (ii) work measurement. These two are distinct approaches, yet they are interdependent
(Figure 25.1).
Method-study concerned with "the way in which work is done (i.e., method)". It is used to simplify
the way to accomplish a work and to improve the method of production. Method-study results in a
more effective use of material, plant, equipment and manpower. It employes a systematic approach involving:
Select-Record-Examine-Develop-Define-Install-Maintain. We will discuss this in more detail in a later
section.
Work-measurement is concerned with the value or work-content of the task itself (i.e., measurement).
It is used to determine how long it should take to carry out the job. It also provides a yardstick for
human effort. Work-measurement results in making possible an improved planning and control (manning),
and providing a basis for souncl incentive scheme. It employs a systematic approach involving: Select-
Define-Break jobs into elements-Measure-Establish work unit value.
The outcome of both, method-study and work-measurement, thus results in higher productivity.

25.3 STEPS IN WORK-STUDY

Work-study consists of an eight-step process. These are:
Step 1: Identify and select the job or process to be studied.
Step 2: Use direct observation for recording everything that happens, using the most effective recording
techniques. Ensure that the data are in the most convenient form for further analysis.
Step 3: Data and facts obtained in the previous step are to be examined and analysed. Critically
challenge everything that is done. Consider the purpose of the activity, place and sequence of the job
and persons and means to perform the job.
Step 4: Develop the most economical method under prevailing circumstances.
Step 5: Measure the quantity of work involved in the method defined by using appropriate methods
of measurement. Calculate standard time for doing it by adding rest allowance. Thus, determine the work
content.
Step 6: Define the best method and related time.
Step 7: Install the new method and train personnel so that it conforms to the agreed standard
practices.
Step 8: Maintain the standard practice by a proper control mechanism.
WORK STUDY 371

Work
study

Method study Work measurement

• to simplify the job • to determine how long it should take
• to improve methods of production • to provide a yard stick for human effort

Select Select
work to be studied. work to be measured.

Record
existing method limit of detail Define
economically justified using method to be used.
appropraite recording techniques.

Examine Break job down into elements

the facts critically considering in turn
PURPOSE, PLACE, SEQUENCE,
PERSON, MEANS.
Measure'
quantity of work involved in the method
defined by using appropriate methods of
Develop
best method under existing measurement. Add rest allowances and
circumstances. determine the total work content of the job.

Define
the new method, installation and Establish work unit value
training programme. include other justifiable allowances and
determine allowed time for the defined
method to achieve improved planning and
Install control, more efficient manning of plant,
the new method and train personnel. reliable indices for labour performance,
reliable basis for labour cost control,
Maintain sound incentive schemes.
that method to achieve improved
factory and workplace layout,
improved design of equipment, better
working environment, reduction of
fatigue, resulting in improved use Of
material plant and equipment
manpower

Resulting into more Making possible

effective use of improved planning and control;
material, plant, provides a sound basis for
equipment and manpower incentive scheme;

Higher Productivity

Figure 25.1 Relationship between method-study and work-measurement

372 INDUSTRIAL ENGINEERING AND MANAGEMENT

Out of above eight steps, Steps 1, 2 and 3 are common in every study. However, Step 4 is a
part of method-study practice and Step 5 is a part of work-measurement technique.

25.4 PURPOSE OF METHOD STUDY

It may be noted that method-study covers three broad areas:
(i) It is a diagnostic tool (location of faults)
(ii) It is a remedial tool (improvement of situation)
(iii) It is a constructive tool (sets standard for control)
The main purpose (objective) of method-study are as follows:
(i) Better utilisation of manpower and other tangible resources
(ii) Elimination of unnecessary work
(iii) Reduction in unnecessary fatigue
(iv) Identification of bottleneck activities and initiative steps to minimise them
(iv) Improvement of processes and procedures
(v) Improvement in layouts and methods of material handling
(vii) Improvement in working conditions
(viii) Improvement and simplification in design
(ix) Improvement and maintenance of quality
(x) Improvement in the flow of production and processes
(xi) Economy in human effort and reduction of fatigue in work
(xii) Establishing the standardisation in methods
(xiii) Improvement in safety standards
(xiv) Establishing a better physical working environment.
The objectives of method-study are achieved through:
(a) Collection of facts related to work, method, machine, operators, and process
(b) Critical examination of facts
(c) Exploration and search for alternatives
(d) Re-evaluation of alternatives
(e) Development and installation of the best alternate
(f) Maintenance and control of new method
Therefore, method-study involves creativity and novelty in systematic thinking. The method-study
should at least aim for effective evaluation of ideas and creative thinking.

25.5 PROCEDURE OF METHOD STUDY

Method-study is a well established approach for systematic recording and critical examination of existing
and proposed ways of. doing work, as a means of developing. and applying easier and more effective
methods and reducing cost. Still, the greatest thing about this approach is its flexibility with which it
may be used in different situations. Following sequence of phases are involved in it (Figure 25.2):
Phase 1: DEFINE (the problem)
WORK STUDY 373

Initial investigation of operations under consideration

u Finalise the appropriate level of analysis

Devise ways to overcome organisational resistances

• Talk to workers, supervisors
• Explain objective
• Communicate methodology and procedures

Study the present method (AS-IS). Use: (I) process chart (ii) flow
process.chart (man/material/equipment), (iii) Two hand chart,
(iv) SIMO chart, (v) PMTS chart, (vi) Multiple activity chart,
(vii) Flow diagram, (viii) String diagram, (ix) Models, (x) Cycle
graph, (xi) Chrono-cyclograph, (xii) Film analysis (xiii) Memo-
motion photography.

Describe, analyse, and examine the AS-IS methods

y•—
E
w
• Apply questioning attitude
• Use motion economy prinCiples
• Seek suggestions
• Devise alternatives
• Decide best course of action (TO-BE)
• Develop process charts and method for TO-BE

• Use time-study
• Compare: "AS-IS" VS "TO-BE'
• Take supervisor approval for change

Yes
E
• Implement new system (TO-BE)
• Train worker and supervisor
a. • Document modifications

ca
CT. 6
U-
Check periodically for expected saving

Figure 25.2 Procedure of Method-Study

374 INDUSTRIAL ENGINEERING AND MANAGEMENT

Phase 2: RECORD (all facts relevant to the problem).

Phase 3: EXAMINE (the facts critically but impartially).
Phase 4: CONSIDER (the alternative course of actions, and solutions and deliberate on which
way to follow).
Phase 5: IMPLEMENT (the solution).
Phase 6: FOLLOW UP (the implementation).
These six phases are adopted sequentially. The procedure used in a typical method-study involves
an approach called SREDIM. The letters in SREDIM stand for a six verb (or, activities, or steps) in
method-study. These steps are:
1. Select
2. Record
3. Examine
4. Develop and Define
5. Install
6. Maintain
We will examine each steps in SREDIM in greater details.
Step 1: Select the work (process) to be studied: The selection step involves the process of choosing
by systematic means a specific problem to be solved, or an area of work to be studied. Therefore, it
is a step for deciding the potential area offering maximum reward offer for this study. In this stage,
we can also prioritize our scope of work.
Three important factors, which govern the selection process, are:
(i) Economic considerations
(ii) Technical, considerations
(iii) Human reactions.

25.5.1 Economic Considerations

Economic considerations in method-study includes:
• Cost of study
• Time loss due to investigation
• Costs associated with the implementation of changes in the present methods.
The considerations for above three costs are important, as the method-study is primarily' based
on the principle of economic use of resources (such as human effort, machine utilization, material handling,
efforts, etc.). Some process, though poorly planned, may not fit into the economic viability of motion-
study. An example could be processes for a product, which is unlikely to have repeat order. On the
contrary, a process in an assembly line, which is likely to be repeated for next few years, would score
better on economic viability, despite offering marginal improvements. Table 25.1 gives some potential
features, warranting attention to undertake method-study.
WORK STUDY 375

Table 25.1 Features warranting need to undertake method-study

Item Feature Warranting Need to Undertake Method Study

Job 1. Production bottleneck

2. Poor design for assembly
3. High reject rate
4. High fatigue
5. Labour intensive job
Labor I. High labour turn-over
2. Excessive over-time needed
3. High relaxation allowance needed
4. Labour complaining about difficulty in handling job,
machines, etc.
Order 1. Repetitive, long-running
Quality 1. High variation in quality
2. Unsafe working conditions
Productivity 1. Inefficient use of resources (man, machine, material space,
etc.)
2. Long distance for material movement between processes
3. High work-in-process inventory
4. Lack of-balance in labour-intensive team-work jobs, like
'assembly line
System 1. Poor production planning and control
2. No previous method-stuck conducted
3. Recurrent dispute in indentive/wage schemes

si*
25.5.2 Technical Considerations
It is important to understand that requisite technical krow-how must be available to suggest improvements.
In this, we must consider two areas as show>7rin Table 25.2.

Table 25.2 Technical Consideration

Area Purpose Example

Skill, competence and
training of work-study
practitioners
Technical limitation
of process
To handle the
present assignment
1. Avoid landing at
unworkable alternates.
2. No need to invent
a new process/machine
3. Establishing the non-
availability of appropriate
technical expertise
The assembly line is running poorly
due to bad line-balancing. The work-
study experts must have the expertise in
individual work-element and line
balancing at the bottleneck station.
The machine tool is not cutting at
optimal condition of speed. There is a
need to devise new tools, but tool-
material is not available in market.
Hence, expert advice is needed, other
wise abandon this item from study.
376 INDUSTRIAL ENGINEERING AND MANAGEMENT

25.5.3 Human Reactions

A lot of emphasis is needed in the selection step on understanding the human reactions to the task undertaken.
Work-study can only be implemented with active cooperation with workers and supervisors. For this,
some understanding of human reactions to work-study is needed. One need is to handle mental and emotional
blocks in the mind of worker. Proper scheme to handle resistance-to-change is needed. For this, we need
to do the following:
(i) Consultation, meeting with workers and Union
(ii) Defining objectives, scope and needs
(iii) Proper written and oral communication with workers
(iv) Dispelling fears related to cut in- wages, firing of workers, more efforts in work, higher target,
etc.

25.6 STEP 2: RECORDING METHODS AND FACTS

Once the work is selected, it needs to be studied. For this, the most important thing is to accurately
record all relevant facts. Following types of records are commonly used:
I. Flow Type Diagram
(a) Flow diagram
(b) String diagram
(c) Travel chart.
.2. Multiple activity chart.
3. Process chart
(a) Outline process chart
(b) Flow process chart for worker
(c) Flow process chart for material
(d) Flow process chart for worker and material
(e) Flow process chart for equipment
( f) Two-handed (or operator) process chart.
4. SIMO (Simultaneous motion chart).
5. Memomotion.
6. Cyclegraphic
(a) Cyclegraph
(b) Chrono-cyclegraph.

25.6.1 Flow Type Diagrams

These diagrams are the pictorial representation of flow of material in the factory while different sequence
of operation, transportion, inspection, delay and storage takes place. There are three types of flow diagrams
that are common in use:
(i) Flow diagram: It shows the location and sequence of all the activities, which are carried by the
workers. It also shows the route, followed by material, components or sub-assemblies (Figure 25.3).
Definitions (as per BS 3138): It is a diagram of model substantially to scale which shows the
location of specific activities carried out and the routes followed by workers, materials or equipment
in their execution.
WORK STUDY 377

Amount of details: It shows location of each department and sequence of principal activities.
Applications: Mainly used in studying plant layout.
Entry
---t
l7 Lathe
Store Drilling
M/CS

Q I Milling M/C
O
Shaper Inspection Packaging
04*— (6)
Outgoing store
Rework Delay Finishing /
024 0 2V
Inspection Store

Figure 25.3 Flow Diagram

25.6.2 String Diagram

It is a scale diagram on which colour threads are wrapped around pins or pegs, which are used to indicate
the paths taken by either worker or material or equipment when processing is done on material from
start to finish (Figure 25.4).
Definition (as per BS 3138): A scale plan or model on which a thread is used to trace and measure
the paths of workers, materials or equipment during a specified sequence of events.
Amount of Details: Only the nature of movement within the work area.
Application:
1. For studying layout of the plant.
2. Indicates backtracking in material movement, congestion, bottleneck and over/Under utilization of
shop-floor.
3. The pattern of material movement, as indicated by the strings, is helpful in the modification in
plant and machinery.

Figure 25.4 String Diagram

378 INDUSTRIAL ENGINEERING AND MANAGEMENT

25.6.3 Travel Chart (also Called as Cross Chart) (Figure 25.5)

It isa more detailed type of movement chart in which the recorded details are like: (i) pattern of movement,
(ii) extent of movement or volume.
Definition (as per BS 3138): It is a tabular record for presenting quantitative data about the movement
of workers, materials or equipment between any number of places over any given period of time.
Amount of Details: Volumetric data during travel between work-area.
Application: For studying layout problem in deciding how to minimize total flow (of material)
°in the plant or work-place.

To Raw Finished
Insp. &
Material Dept # 1 Dept # 2 Dept # 3 QC Good
From Store , Store

Raw
Material 8000 2000 5000
Store

Dept # 1 4000 2000 1000 1000

Unit: kg per day

Dept # 2 3000 3000

Dept # 3 500 500 4000 5000

Insp.&
QC 1000
\

Finished
Goods
Store
'

Figure 25.5 Travel Chart

25.6.4 Multiple Activity Chart (Figure 25.6)

Synonyms: activity analysis; worker and machine charts
Definition (as per BS 3138): It is a chart, on which the activities of more than one subject (like
• worker, machine or equipment) are each recorded on a common time-scale to show their relationship.
Amount of Details: Limited to plot against a common scale.(of time) for few types of activities
like operation, idleness, delay, etc.
How to construct:
(i) Start with the preparation of flow process chart for elements like machine or operative involved
in the process.
(ii) Group activities to be recorded into convenient elements for time-study.
(iii) Take sufficient observations of time-study for determining accurate elemental time.
WORK STUDY 379

(iv) Draw in the form of bar-chart for each activity of the leading operative or machine. Take a common
scale such as time for each activity. •
(v) Use different colour codes for different sections within each 1:). r.
(vi) Calculate the amount of effective work per cycle in percentage of total time.
Application:
(i) For preliminary investiv 'on to study the extent of accuracy of particular activities.
(ii) Helps in balancing activities.
(iii) In a situation of one operative running one or several operatives.
(iv) In a situation of several operatives running one or several machines.
(v) A team of operatives or a bank of machines.
(vi) Helps in exploring the possibilities of elimination, change in work sequence, combination and simplification
of work elements.
Operation Hole punching Machine Punch # 18
Part name RT 16 Part no. RT 16
Date 19/9/99 Method Old 0 New ri
Authorized by WM Charterd by DO
Symbol Activity
Operator Time Machine Time
Pick up sheet and position in machine 3.00 •
I. Independent work
Waiting
Start machine 0.50 ' Idle 3.5 CI Combined work
Idle 0.85 Punch plate 0.85
Unload machine 0.65 Idle 0.65

(Repeat cycle) (Repeat cycle)

Summary (time n M nutes)

Operator Machine
Idle time 0.85 4.15

Operation time 4.15 0.85

Cycle time 5.00 5.00
Utilization (%) 4.15/5 = 83% 0.85/5 = 17%.

Figure 25.6 Multiple Activity Chart (Man-machine chart) for hole punching operation

25.6.5 Outline Process Chart (Figure 25.7)

In records principle operations and inspectitin of the processes.
Definition (as per BS 3138): A process chart giving an overall picture by recording, in sequence
only ,the main operations and inspections.
/ Amount of Details: It shows only two principal elements: (i) Operation, and (ii) Inspection.
Application:
• Used in the preliminary investigation.
• When operation activities are subject to frequent changes or a more detailed analysis.
380 INDUSTRIAL ENGINEERING AND MANAGEMENT

Jack up scooter
Activity : Repair of punctured
scooter tyre
Remove hub-cap of wheel
Chart begins : Scooter ready for
jacking up Loosen nut and place properly
Chart ends : Tube ready after repair
to mount on tyre
Remove wheel
Method : Present
Charted by : Mr. Author Remove outer cover

Remove the tube

Locate the puncture in tube

Mark the puncture

Summary Repair the puncture and remove

nails, if any
Activity Method (Present)
Operations 0 8 Recheck
Inspectionl= 2

Figure 25.7 Outline Process Chart for Repairing a Punctured Scooter

Some Conventions in Outline Process Chart: A few conventions in outlined process chart are
shown in Figure 25.8-25.10.

Entry of material —) Operation I

Operation 2

Numbering system

Repeat 3x 4-- The (n — 1) rule

Operation 6

Inspection 5

Combined symbol Combined inspection and operation

Figure 25.8 Activity 2 and inspection 1 occur four times, but the number used in repeat line is always one
less than the total as the first occasion is already plotted before the repeat break
(Hence the (n-1) rule)
WORK STUDY 381

Figure 25.9 Symbols showing duplicate Figure 25.10 Symbol showing dismantling
operation 2 and re-assembly

25.7 FLOW PROCESS CHART

It helps in setting out the sequence of the flow of a product or a procedure by recording all events
under review using appropriate process chart symbols. It covers symbols for operation, inspection, storage,
delay and transportation.
Types of Flow Process Charts
(i) Flow process chart for workers: Presents the process in terms of activities of the person.
Definition (as per BS 3138): A process chart is setting out the sequence of flow of a product
or a procedure by recording all events under review using appropriate process chart-symbols. This chart
gives a record of all events associated with the worker.
Amount of Details: Operation, inspection, movement and delay associated with the workers
Application:
• Generally used as a principal means of recording work methods.
• Helps to understand the overall nature of the system being studied.
• Helps to eliminate flow patterns that are not suitable.
• Helps to allow storage space adequate to support the production rate.
• Helps to eliminate costly errors by analyzing the material flow.
• Helps to allow adequate space to avoid safety problems.
• Helps to locate and size aisles appropriate for product handled.
• Helps to avoid backtracking of the material.
• Helps to identify the possibility of combining operations by grouping different machines or operations
to avoid handling, storage, and delays.
• Helps to decide whether product flow or process flow layout pf factory will be useful.
25.8 PROCESS CHART SYMBOL
Process charts use five common symbols for recording the nature of events. These were developed by
ASME (American Society of Mechanical Engineers) in 1947.
1. Operation 0: This indicates steps in a process, methods or procedure. It represents the modification
or change during an operation. Through each operation, the material, component, or service or assembly
move towards completion. Operation is thus a value added activity. Some examples are shown in
Figure 25.11.
382 INDUSTRIAL ENGINEERING AND MANAGEMENT

Operation
: fzi."-. ft"
----
.-------
---,
A large circle ' li II
indicates an
operation such as Drive nail Mix Type letter Drill hole

Transportation •

ri
An arrow indicates a Move material by truck Move material by Move material by Move material by
transportation such as conveyor carrying (messenger) hoist or elevator
Storage
.•
„,,. iiiiiiiiil
.- . ‘ ilLg m
-
0 IIII
.p
......,..
-i. .
0 miliallilm., I e -,-
1-•
/ N\--
A triangle indicates
1 _. C- 1 Bulk storage of raw
Finished stock stacked Protective tiling of
a storage, such as Material in materials
on pallets documents
Factory store

-'''''',
Delay
0 11 , *44
=40 151filliiiMI
1.011•••
-40100-
IrP il
IIIIW.
• • - -"'
rTh1.'"zm
A large capital D 111
Material in truck
or on floor at bench Papers waiting Finished product
indicates a delay, N.
to be filed waiting for packaging
such as Wait for elevator waiting to be processed

Inspection nrgh
A------ .AUW:00
• ••
‘1, '-
(

A square indicates Examine material for Read steam gage Examine printed from
an inspection such as quality or quantity on boiler for information

Figure 25.11 Process chart symbols and some examples

2. Inspection 0 : This indicates inspection, quality audit check for quality or examining an event.
Inspection is a non-value added activity, as it is only a verification process.
3. Transportation c=>: This indicates movement of material, workers, equipment or place of work.
This is also a non-value added activity.
4. Delay D: This indicates delay or temporary storage in-between a sequence of operations. This
is a non-value added activity like waiting.
5. Storage v : This indicates planned and controlled storage of material. Storage is different from
temporary storage (in delay category) in the sense that here proper record of receipt and • sue
is maintained or atleast some authorization is maintained for storage.
6. Combined Symbols 0 : This indicates that two operations (such as inspection and operation) are
performed simultaneously.
In different forms of process charts, the relevance and use of these symbols are given in-
Figure 25.12. No entry against any chart indicates that this symbol is not commonly used in that chart.
WORK STUDY 383

Process chart

Symbol Outline Flow process chart Two handed Predominant Result

(or operator)
Man type Material type

0 Operation Operation Operation Operation Produces, Accomplishes,

Furthers the process
c> Transportation Transportation Transportation Travels

Inspection Inspection Inspection — Verifies quantities and/Or quality

173
V — Storage Hold Holds, Keeps, Retains
D Delay Delay Delay Interferes or Delays
.

Figure 25.12 Flow Process and Process Chart Symbols

Flow Process Chart Analyst Page

Job: Requisition of ABC I to 2 Operation Movement Inspection Delay Storage Distance
Petty cash
Details of method
g> V
Requisition made out by department 0 D
head
0 i• • V
Put in "pick-up" flag

To accounting department 0 0 D 7 lo m

Account and signature verified 0 • D V

Amount approved by treasurer
c*. 0 D V
• => 0 D V
Amount counted by cashier

Amount recorded by bookkeeper • g> 0 D V

Petty cash sealed in envelope
=:::. 0 D 7 5m

Petty cash carried to department 0 0 D V

g>
•
Petty cash checked againse requisition 0 D V

Receipt signed g> 0 D V

Petty cash stored in a box 0 g> 0 D
f.> 0 V
Summary Distance 0 D
Operations 6 0 b. 0 D V

Inspections 2 0 g> o D V
Transport 2
15 m 0 g> o D V

Delays I
Total I1

Figure 25.13 Flow Process Chart

384 INDUSTRIAL ENGINEERING AND MANAGEMENT

25.9 STEP 3 OF METHOD STUDY: EXAMINE

In this stage, the focus is on the critical examination of all the recordings done in the previous step.
Various probing questions are addressed to the existing method. These questions start with 5 Ws and
1 H: Why?, What?, Where?, When?, Who?, and How (Table 25.3)?
Table 25.3 Examine Stage

Items Examined (few samples) Appredch to Answer the Questions

challenge "AS-IS" methods

• Why is the process needed?
• What purpose does the process serve?
• Where is the process undertaken and why?
• When is the process undertaken and why?
• Who are involved in the process and why?
• How is the process undertaken and why?
• Examine questions as these exist now. Do notget guided
by how they appear, how they should be, etc.
• Biasness and preconceived notions should be carefully
dispelled.
• Involve all (including workers) in the examination.
• Do not go for hasty conclusions,
• Challenge all "AS-IS" approaches. Examine records
in details. Do not accept answer, unless convinced.
• Gut-feeling intuition and hunches must be documented
and discussed.
• Examine all alternative-new methods.
• Focus on non-value added activity. Reduce or remove
delay storage and transport.

25.10 STEP 4 OF METHOD STUDY: DEVELOP AND DEFINE

After critical examination of records is complete, it is necessary to transform the learnings into the development
of new methods. Some approaches are:
(a) Eliminate unnecessary activities.
(b) Combine two or more activities. For example, if one uses a combination tool for two operations,
say, facing and drilling, the total set-3.1p time will reduce.
(c) Resequence activities so as to reduce time and effort.
process to reduce number of operations or reduce effort or reduce throughput, etc.
(d) Simplify process
(e) Attack on constraints, which are preventing the method to Perform better.

25.11 STEPS 5 AND 6 METHOD STUDY: INSTALL AND MAINTAIN

Installation of new process is a major step towards fulfilling the objective of the entire approach. This
involves evolving a time-frame for installing the new (TO-BE) system. Training of the personnel, rearrangement
of machine, arrangement of tools and reorientation of workplace are some efforts to install the new system.
In general, four-phased strategy is needed:
(i) Selling the proposal: Communication, approval and confidence of those, involved in, installation
and use.
(ii) Preparation for installation: Purchase of required machine and equipment, relay out of plant,
time-table for installation, planning, arranging and rehearsing.
(iii) Commencement of new method.
(iv) Initial monitoring of installation activities: After the installation of the new system, new method
is to be maintained. Periodic review is necessary for maintaining the new system.
WORK STUDY 385

25.12 MOTION ECONOMY

Motion economy provides a set of well-structured guidelines for analyzing and designing (or improving)
the jobs. It encompasses a wide set of guidelines for the scientific use of human body, tools and work
place arrangement to increase the efficiency of the man-machine system. It also covers the aspects for
reducing work-related fatigue. Table 25.4 presents the principle of motion economy. It is segmented into
three broad areas:
(i) Principles related to the use .of human body
(ii) Principles related to the arrangement of the work-place
(iii) Principles related to the design of tools and equipment.

Table 25.4 Principles of motion economy: Use of the worker's body and.
design of the workplace, tools and equipment

Use of the worker's body

1. Ensure to work with two hands rather than one, as it is easier and natural.
2. Ensure that the two hands should begin and complete their movements at the same time.
3. Ensure that the motion of the arms should be in opposite directions and should be made simultaneously
and symmetrically.
4. Ensure that hands and arms naturally move smoothly in arcs, and this is preferable to a straight-line movement.
5. Ensure that head, arm and body movements should be confined to the lowest classification with which it
is possible to perform the work satisfactorily, e.g., Gilbreth's classification of hand movements:
(a) fingers
(b) fingers and wrists
(c) fingers, wrists and forearms
(d) fingers, wrists, forearms and upper arms
(e) fingers, wrists, forearms, upper arms and shoulders.
6. Ensure that work should be arranged to permit natural and habitual movements.
7. Ensure that movements should be continuous and smooth with no 'lharp changes in direction or speed.
8. Ensure that the two hands should not, except, during rest periods, be idle at the same time.
9. Ensure that, whenever possible, momentum should be employed to assist the work and, minimized if it must
be overcome by the worker.
10. Ensure that ballistic movements are faster, easier and more accurate than controlled (fixation) movements.
11. Ensure that the need to fix and focus the eyes on an object should be minimized and, when this is necessary,
the occasions should occur as close together as possible.
Arrangement of the workplace
1. Ensure that there should be a definite and fixed position for all tools, equipment and materials.
2. Ensure that all tools, equipment and materials should be located as near as possible to the workplace.
3. Ensure that drop deliveries of materials (and even tools and equipment) should be , used whenever possible.
4. Ensure that tools, equipment and materials should be conveniently located in order to provide the best sequence
of operations.
5. Ensure that illumination levels and brightness ratios between objects and surroundings should be arranged
to avoid visual fatigue.
6. Ensure that the height of the workplace and the seating should enable comfortable sitting or standing during
work.
7. Ensure that seating should permit a good posture and adequate "coverage" of the work area.
(C6nId...)
386 INDUSTRIAL ENGINEERING AND MANAGEMENT

8. Ensure that the workplace should be clean and adequately ventilated and heated.
9. Ensure that noise and vibration, both local and general, should be minimized.
Design of tools and equipment
I. The hands should be relieved of all work that can be done more advantageously by a jig, a fixture, or a
foot-operated device.
2. Two or more tools should be combined wherever possible.
3. Tools and materials should be pre-positioned wherever possible.
4. Where each finger performs some specific movement, such as computer keyboard, the load should be distributed
in accordance with the inherent capacities of the fingers.
5. Handles should be designed to permit the surface of the hand to come in contact with the handle as possible.
This is particularly true when considerable force is exerted in using the handle, for light assembly work
(like, screwdriver handle) should be so-shaped that it is smaller at the bottom than at the top.
6. Levers, crossbars, and hand wheels should be located in such positions that the operator can manipulate them
with the minimum change in body position.

25.13 WORKING AREA

Use of motion economy rules calls for use of lowest possible (i.e., class 1 is lowest and class 5 is highest)
classified movement of human body (Refer rules 4 and 5 in Table 25.4). This classification is as shown
in Table 25.5.
Table 25.5 Classification of Movements

Class Pivot Body Member(s) Moved

I. Knuckle Finger
2. Wrist Hand and fingers
3. Elbow Forearm, hand and fingers
4. Shoulder Upper arm, forearm, hand and fingers
5. Trunk Torso, upper arm, forearm, hand and fingers.

Class 2 includes class 1 item, class 3 includes class 1 and 2 and so on. Figure 25.14 shows different
working area for these classes. Material, tool and workplace should be located in the working area. Preference
should be given to lower class body elements. Field of vision is important for seeing objects, control
panel, etc. For inspection, the field of vision is an important consideration in locating items.
Common working
area for both hands

Edge of bench

71/4"
21/r j
13"

Figure 25.14 (a) Normal working area using finger, wrist and elbow
WORK STUDY 387

Average Physical data for man

Weight: 69 kg Length of forearm: 18"

Height: 5 ft 8" Length of hand: 7"
Length of Arm: 30"

Common area for

both hands _....NIMIMIIMINmft, .
-411111MIIIMWW1111r101 vionsime
.IIIIIIMIINIP"
• -viiimommommr...
ii 1 "=.7 "evommimmiw vi.
v ilorl' vilmum
v IIIIMMIE
V Mb.
Mika.
MEMEL Illy \ WM= AMINE \
AMIIIIIIIII ,
Ir 1111.11.
A. 4 A .. • A. 9.111,
_ 223/4"
V; ,q. •
..ky
W♦ N•
I. t

, A. •
'MN/ wilMO
Left hand Normal , • • Normal Right hand
maximum working area working area maximum
working area working area
41, ,

Figure 25.14 (b) Maximum working area using shoulder movement

Motion-study involves two kinds of analysis for the improvement in method. On the basis of data
recorded on motion picture film or video, the approaches are:
1. Micromotion study (or detailed breakdown of motion).
2. Memomotion analysis (or breakdown of motion at the level of family of micromotions).
The detailed analysis of the recorded motion is done through seventeen categories of activities
called as therbligs. Therblig is the name given to the basic motion activities. Therblig is the reverse
order spelling (except for the letter "th") of Gilberth, who was a pioneering researcher in the area of
time and motion-study. Table 25.6 presents definition of therbligs. Table 25.7 presents symbol, color
and explanation of these therbligs. These are the most common basic human activities at work-place.
For each therblig-specific colour is also specified.
Table 25.6 Therblig Definitions
1. Grasp is taking hold of an object, closing the fingers around it preparatory to picking it up, holding it, or manipulating
it. Grasp begins when the hand or fingers first make contact with the object and ends when the hand has obtained
control of it.
2. Position is turning or locating an object in such a way that it will be properly oriented to fit into the location
for which it is intended. It is possible to position an object during the motion transport loaded. Position begins
when the hand begins to turn or locate the object and ends when the object has been placed in the desired position
or location.
3. Preposition is locating an object in a predetermined place or locating it in the correct position for some subsequent
motion. Preposition is the same as position except that the object is located in the approximate position that will
be needed later. Usually a holder, bucket, or special container of some kind is used for holding the object in
a way that permits it to be grasped easily in the position in which it will be used. Preposition is the abbreviated
term used for "preposition for the next operation."
(Conk!...)
388 INDUSTRIAL ENGINEERING AND MANAGEMENT

4. Use is manipulating a tool, device, or piece of apparatus for the purpose for which it was intended. Use may
refer to an almost infinite number of particular cases. It represents the. motion for which the preceding motions
have been more or less preparatory and for which the ones that follow are supplementary. Use begins when the
hand starts to manipulate the tool or device and ends when the hand ceases the application.
5. Assemble is placing one object into or on another object with which it becomes an integral part. Assemble begins
• as the hand starts to move the part into its place in the assembly and ends when the hand has completed the
assembly.
6. Disassemble is separating one object from another object of which it is an integral part. Disassemble begins when
the hand starts to remove one part from the assembly and ends when the hand has separated the part completely
from the remainder of the assembly.
7. Release load is letting go 'of the object. Release load begins when the object starts to leave the hand and ends
when the object has been completely separated from the hand or fingers.
8. Transport empty is moving the empty hand in reaching for an object. It is assumed that the hand moves without
resistance toward or away from the object. Transport empty begins when the hand begins to move without load
or resistance and ends when the hand stops moving.
9. Transport loaded is moving an object from one place to another. The object may be carried in the hands or
fingers, or it may be moved from one place to another by sliding, dragging, or pushing it along. Transport loaded
also refers to moving the empty, hand against resistance. Transport loaded begins when the hand begins to move
an object or encounter resistance and ends when the hand stops moving.
10. Select is the choice of one object from among several. In many cases it is difficult, if not impossible, to determine
where the boundaries lie between search and select. For this reason, it is often the practice to combine them,
referring to both as the one therblig, select. Using this broader definition select then refers to the hunting and
locating of one object from among several. Select begins when the eyes or hands begin to hunt for the object
and ends when the desired object has been located.
11. Select is that part of the cycle during which the eyes or the hands are hunting or groping for the object. Search
begins when the eyes or hands begin to hunt for the object and ends when the object has been found.
12. Hold is the retention of an object after it has been grasped, no movement of the object taking place. Hold begins
whefi the movement of the object stops and ends either the start of the next therblig.
13. Unavoidable delay is a delay beyond the control•of the operator. Unavoidable delay may result from either of
the following causes: (1) a failure or interruption in the process; (2) a delay caused by an arrangement bf the
operation that prevents one part of the body from working while other body members are busy. Unavoidable delay
begins when the hand stops its activity and ends when activity is resumed.
14. Avoidable delay is any delay of the operator for which he is responsible and over which he has control. It refers
to delays which the operator may avoid if he wishes. Avoidable delay begins when the prescribed sequence of
motions is interrupted and ends when the standard work method is resumed.
15. Rest for overcoming fatigue is a fatigue or delay factor or allowance provided to permit the worker to recover
from the fatigue incurred by his work. Rest begins when the operator stops working and ends when the work
is resumed.
16. Plan is a metal reaction which precedes the physical movement, that is, deciding how to proceed with the job.
Plan begins at the point where the operator begins to work out the next step of the operation and ends when
the procedure to be followed has been determined.
17. Inspect is examining an object to determine whether or not it complies with standard size, shape, colour, or other
qualities previously determined. The inspection may employ sight, hearing, touch, odor, or taste. Inspect is
predominantly a mental reaction and may occur simultaneously with other therbligs. Inspect begins when the eyes
•or other parts of the body begin to examine the object and ends when the examination has been completed.
WORK STUDY 389

Table 25.7 Therblig Definitions and Symbols

S.No. Therblig Symbol Colour Definition

1. Grasp Lake red Begins when hand or body member

nG
touches an object for holding.
Consists of gaining control of an
object.
Ends when control is gained.

2. Position / P Blue Begins when hand or body member

causes part to begin to line up or
located or orient
Consists of hand or body member
causing part to line up, orient; or
change position.
Ends when body member has part
lined up.

3. Preposition 8 PP Pale blue Same as position, except used when

line-up is previous to use of part
or tool in another place.

4. Use . Purple Begins when hand or body member

U U
actually begins to manipulate tool
or control. Consists of applying
tool or manipulating control.
Ends when hand or body member
ceases manipulating tool or control.

5. Assemble # A Dark violet Begins when the hand or body

member causes parts to begin to go
together.Consists- of actual
assembly of parts or putting
together. Ends when hand or body
member has caused parts to go
together.

6. Disassemble * DA Light violet Begins when body member causes

integral parts to separate.
Consists of taking objects apart.
Ends when body member has caused
complete separtion.
7. Release load iv— RL Carmine red Begins when body member begins to
relax control of object.
Consists of letting go of an object.
Ends when body member has lost
contact with object.

(Contd...)
390 INDUSTRIAL ENGINEERING AND MANAGEMENT

S.No. Therblig Symbol Colour Definition

8. Transport ......._., T E Olive green Begins when body member begins to
empty move without load.
• Consists of reaching for something.
Ends when body member touches
part or stops moving.
9. Transport -.....c,..- TL Grass green Begins when body member begins to
loaded move with an object.
Consists of body member's changing
location of an object.
Ends when body member carrying
object arrives at general destination
or movement ceases.
10. Search SH Black Begins when body member searches
for part.
Consists of attempting to find an
object.
Ends when body member has found
location of object.
11. Select —> ST Light gray Begins when body member touches
several objects.
• Consists of locating an individual
object from a group.
Ends when body member has located
an individual object.
12. Hold ri H Gold ochre Begins when movement of part of
object, which body member has
under control, ceases.
Consists of holding an object in a fixed
position and location.
Ends with any movement.

13. Unavoidable , UD Yellow ochre Begins when hand or body member is

delay idle.
Consists of a delay for other body
member or machine when delay is
part of method.
Ends when body member begins any
work.
14. Avoidable / 0 AD Lemon yellow Begins when body member deviates
delay from standard method.
Consists of some movement or
idleness.
Ends when body member returns to
standard position.
(Contd..)
WORK STUDY 391

S.No. Therblig Symbol Colour Definition

15. Rest for R Orange Begins when body member is idle.

overcoming • Consists of idleness necessary to
fatigue overcome fatigue from previous
work.
Ends when body member work again.

16. Plan PM Brown Begins when body members are idle

while worker decides on course of
action.
Consists of determining a course of
action.
Ends when course of action is
determined.

17. Inspect Burnt ochre Begins when body member begins to

0 I
feel or view an object.
Consists of determining a quality of an
object.
Ends when body member has stopped
to see an object.

REVIEW QUESTIONS
25.1 What is work-study? Discuss the different techniques of motion-study.
25.2 Discuss the nature and importance of motion study.
25.3 (a) Outline the basic procedure of methods study.
(b) How is standard time for a job arrived at?
25.4 What are the steps involved in a complete work-study exercise?
25.5 What is Time Study? How is it related to Motion-Study?
25.6 Write notes on the following:
(a) Method Engineering
(b) Flow Process Chart
(c) Multiple Activity Chart
(d) Therbligs
25.7 What is motion study? How does it help in the simplification and standardisation of manual work?
25.8 Discuss the role of motion and time-study in increasing productivity.
25.9 Describe the different types of charts used in motion-study and explain their uses.
25.10 (a) What do you understand by therbligs?
(b) What is a string diagram? Where is it used?
(c) What factors should be kept in mind while selecting the job for methods-study?
392 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

1. Barnes, R.M., 1968, Motion and fine Study (6th ed.), John Wiley, New York.
2. Batty, J., 1979, Industrial Administration and Managenient, Mc-Donald & Evans, London.
3. Curie, R.M., 1984, Work Study, BIM, London.
4. Davis, L., 1971, "The Coming Crisis for Productive Management: Technological Organization," International
Journal of Production Research, 1.
5. Davis, L., and Taylor J.C., eds., 1972, Design of jobs, Middlesex, Penguin, England.
6. Davis, L.E., Cherns A.B., et. al., 1975, The Quality of Working Life. Free Press, New York.
7. Dickman, R.A., 1971, Handbook for Supporting Staff, Job Analysis and Job Evaluation. Balti-more: Johns
Hopkins Press.
8. Fine, S., and Wiley W.W., 1973, Functional Job Analysis Scales, Kalamazoo, Mich.: W.E. Upjohn Institute
for Employment Research.
9. Fine, S., and Wiley W.W., 1971, An Introduction to Functional Job Analysis. Kalamazoo, Mich W.E. Upjohn
Institute for Employment Research.
10. Ford, R.N., 1978, "Job Enrichment Lessons from AT&T," Harvard Business Review; 51, January, pp. 96-
106.
11. George, Claude S., 1985, Management for business and industry, Prentice Hall of India, New Delhi.
12. Hackman, J.R., 1975, "Is Job Enrichment Just a Fad?" Harvard Business Review, 53, No. 5, September-
October, pp. 129-38.
13. Hackman, J.R. and Lawler E.E., 1971, "Employee Reactions to job Characteristics,"Journal ofApplied Psychology,
Monograph 55, pp. 259-86.
14. Haynes W. W. and Massie J.L., 1984, Management-Analyses, Concepts and Cases, Prentice Hall of India,
New Delhi.
15. Herzberg, F., 1975, "Job Enrichment Admits Disparity between. Promise and Reality," Industry Week, 187,
November 24, pp. 44-45.
16. I.L.O., 1979, Introduction to Work Study, International Labour Office, Geneva
17. Kilbridge, M., and Webster L., 1966, "An EconoMic Model for the Division of Labor Management Science,
12, No.6, February, pp. B255-69.
18. McCormick, E.J., 1970, Human Factors Engineering (3d ed.). McGraw-Hill; New York.
19. Niebel, B.W., 1976, Motion and Time Study (6th ed.). Homewood, Ill: Richard D. Irwin.
20. Reif, WE., and Luthans F., 1972, "Does Job Enrichment Really Pay Off?" California Management Review,
15, No. 1, Fall, pp. 30-37.
21. Scott, W.E., and Cummings L.L., 1973, Readings in Organizational Behavior and Human Performance (rev.
ed.). Homewood, III: Richard D. Irwin, pp. 126-233.
22. Steers, R.M. and Mowday R.T., 1977 "The Motivational Properties of Tasks," Academy of Management Review,
Volume 2, No. 4, October, pp. 645-58.
23. Tresko, J., 1975 "Myths and Realities of Job Enrichment," Industry Week, 187, November 24, pp. 39-43.
24. U.S. Department of Labor, 1972, Handbook for Analyzing Jobi. U.S. Government Printing Office, Washington,
D.C.
25. Walker, G.R. and Guest R.H., 1952, The Man on the Assembly Line. Harvard University Press, Cambridge,
Mass.
26. Yorks, L., 1974 "Determining Job Enrichment Feasibility," Personal, November-December, pp. 18-25.
 26
WORK MEASUREMENT

26.1 INTRODUCTION
Work measurement is used to determine the length of time a job should take for completion. This time
is important for the following reasons:
(i) It helps in manpower planning
(ii) It helps in estimating labour cost
(iii) It helps in scheduling activities
(iv) It helps in budgeting
(v) It helps in designing incentive scheme.

Definition of Work-Measurement
Work measurement is the application of techniques designed to establish the time for a qualified
worker to carry out a specific job at a defined level of performance.
—ILO (International Labor Organisation)

26.2 PURPOSE OF WORK MEASUREMENT .

Work measurement is necessary for the following reasons:
1. To evaluate labour performance
2. For planning the need of workforce
3. For determining available capacity
4. For comparing work methods
5. For facilitating operation-scheduling
6. For determining price or cost of a product or output, involving human labour
7. For establishing wage incentive schemes
8. For determining standard time •for various operations.
394 INDUSTRIAL ENGINEERING AND MANAGEMENT

Standard time is a useful information for determining machine capacity, production targets, manpower
planning, etc.
9. For determining idle or rest time of an operator.
The idle time is a useful information for planning "one operator-multiple machine" type of manufacturing
system. In JIT (Just-In-Time) and cellular manufacturing systems, the concept of "one-operator-
multiple machine" is very useful, as it reduces waste due to excess manpower. It helps in easy
planning of machine cells.
10. For generating necessary input information for decisions related to estimating, tendering, pricing,
etc.
11. For generating information related to line-balancing in assembly-line.

26.3 ORGANISATIONAL SUITABILITY

Work measurement procedure should be undertaken in only those organisations, where there are some
jobs, which are repetitive. ILO prescribes three criteria for measurable jobs (Figure 26.1):

Work Characteristics

(In terms of numbers (In ternis of accomplishing

of units a the job)
worker performs)

Volume Repetitive Job

Justifiable for Spending in

Work Measurement

Figure 26.1 Work Characteristics

Techniques of Work Measurement (Figure 26.2)

In work measurement, the main techniques are:
1. Work sampling.
2. Stop watch study.
3. Predetermined Time Standards (PTS).
WORK MEASUREMENT 395

Work Measurement

Select Examine Develop

Measure quantity 01 work performed

Work Sampling Stop Watch Predetermined time standard

To get To get
standard time To establish standard • standard
of operations data bank time of
with allowances Compile operation

Standard Data

Figure 26.2 Domain of Work Measurement

26.4 STOP WATCH TIME STUDY

In this, the actual times required to perform different activities are recorded in their elemental
form is.

Time study is defined as a work measurement technique for recording the times and rate
of working for the elements of a specified job, carried out under specified condition, and
for analysing the data so as to obtain the time necessary for carrying out the job at a defined
level of performance. —ILO

26.4.1 List of Time Study Equipment and Form (Figures 26.3 to 26.8)

Equipment and Type Remark

Stopwatch
• Fly-back _type Fly-back type with decimal minute type, having
• Non-fly back type smallest graduation equal to 1/100th of minute is
• Split hand stop watch the most common one.
Time study Board Used to hold time study sheet properly. Generally
made of plywood or plastic sheet
Time study Form For recording observations on a predesigned
printed or xeroxed form. '
396 INDUSTRIAL ENGINEERING AND MANAGEMENT

S : Slide for stopping

and starting the
movement

W : Winding knob: This

returns both watch
to zero, when being
pressed

Figure 26.3 Stop Watch

Figure 26.4 Time Stud}, board for general Figure 26.5 Time Study for
purpose form short cycle form
WORK MEASUREMENT 397

Time Study Top Sheet

Department: Study No.

Sheet No.: of

Operation: MS No.: Time off :

Time on :

Plant/Machine: No.: Elapsed time :

Tools and gauges: Operative :

Clock No.

Product/part: No.:

Studied by :

DWG No.: Material: Date :

Quality: Checked :

Note : Sketch the workplace layout/set-up/part on the reverse, or on a separate sheet and attach.

Element description R W It ST f3T Element description R WR ST 13T

Note : R = Rating Wit =-Watch reading ST = Subtracted time BT = Basic time

Figure 26.6 Time Study Top Sheet

398 INDUSTRIAL ENGINEERING AND MANAGEMENT

Study No. : Time study continuation sheet Sheet No. of

Element description R \VR ST BT Elemen description R \VR ST •BT

Note : Reverse side is similar, nit is without upper headin& line

Figure 26.7 Continuation Sheet for General Purpose Time Study (form)
WORK MEASUREMENT 399

•
Short Cycle Study Form

Department: • Study No.

Sheet No. : of
•
Operation: MS No.: Time off:

Time on :

Plant/Machine: No.: • -• Elapsed time :

Tools and gauges: Operative :

• Clock No.

Product/part: No.:
. .
Studied by :

DWG NO.: Material: •.. . Date :

Quality: Working Conditions: Checked .:

Note : Sketch the workplace overload

Observed Time (OT)
El. Element Total Average
No. description 1 2 3 4 5 " 6 7 .8 9 10 OT OT, R- BT

_.

• - .
•
•

Note : R = Rating OT = Observed time BT = Basic time

Figure 26.8 Short Cycle Study Form

400 INDUSTRIAL ENGINEERING AND MANAGEMENT

26.4.2 Steps in Time Study (Stop Watch Method)

The general step are:
• Select work for work measurement.

• Obtain and record all relevant information about job, operator and the
surrounding conditions.

• Record complete work description.

• Breakdown operation into elements.

• Examine the detail breakdown.

• Ensure the most effective method and motions being used.

• Determine sample size.

• Use time measuring device like stop-watch to measure and record the time taken
by the operator in performing the elements of the job.

• Assess the effective speed of working of the operator as compared to standard

rate in the perception of observer.

• Compile the basic cycle-time for operation or work cycle.

• Determine the standard time by adding relaxation and personal allowances in

base time.

• Define the total procedure of performing an activity along with time standards.

26.4.3 How to Determine the Sample Size?

In Step 4 or time study, we have seen that small sample of observations are recorded in the examination
phase. The sample size should be such that it should satisfy a predetermined confidence level and accuracy
margin.
Let:
n ., Number of cycles to be timed, i.e., preliminary readings first taken
n : Number of observation (or, sample size) required at a given confidence
. level
Ex : Sum of the preliminary set of individual observations (x)
Ex2 : Some of squares of preliminary observations (x)
For a confidence level of 95% and an accuracy level of ± 10%, it is statistically derived that
sample size:
i n (EX2 Z0 )2
n = 400
Ex
WORK MEASUREMENT 401

Example 26.1 For determining the sample size of stop-watch time study, five sets of observations
are taken. These are 8, 7, 8, 9, and 7 units of time (1 time unit = 0.01 minute). Find appropriate
sample size for a confidence level of 95% and ± 10% accuracy level.
Solution: Given:
I
n=5
a = 8 + 7 + 8 + 9 + 7 = 39
Ex2 = 64 + 49 + 64 + 81 + 49 = 307
Thus, sample size for 95% confidence level and + 10% accuracy level is:
i2
[ x 307 — 392
n = 400
39

= 3.87 11 4
Therefore, sample size of 4 is to be selected:

26.5 SOME DEFINITIONS (BASED ON ILO)

26.5.1 Work Content
The work content of a job or operation is defined as:
Basic time + Relaxation allowance + Any allowance for additional work
e.g., that part of contingency allowance which represents work.

26.5.2 Relaxation Allowance

Relaxation allowance is an addition to the basic time intended to provide the worker with the opportunity
to recover from the physiological and psychological effects of carrying out specified work under specified
conditions and to allow attention to personal needs. The amount of allowance will depend on the nature
of the job.

26.5.3 Contingency Allowance

A contingency allowance is a small allowance of time which may be included in a standard time to
meet legitimate and expected items of work or delays, the precise measurement of which is uneconomical
because of their infrequent or irregular occurrence.

26.5.4 Policy Allowances

A policy allowance is an increment, other than bonus increment, applied to standard time (or to some
constituent part of it, e.g., work content) to. provide a satisfactory level of earnings for a specified level
of performance under exceptional circumstances.

26.5.5 Special Allowance

Special allowance may be given for any activities, which are not normally part of the operation cycle
but which are essential to the satisfactory performance of the work.

26.5.5.1 Allowances in Work-Content

Work content allowances are shown in Figure 26.9.
402 INDUSTRIAL ENGINEERING AND MANAGEMENT

•
Personal needs

Contribute to
Basic I lurnan
Fatigue
Environmental
stress and strain
I
Variable allowances

Relaxation Contingency Polley Special

alkiwances , allowances allowances allm'vances

adds to •

Total allowances Basic Time .

Work Content

Figure 26.9 Different allowance in work content

26.6 PERFORMANCE RATING

In work 'measurement, it .is important to determine the performance rating of the worker, whose job is
measured.

Rating is the assessment of the worker's rate of working relative to the observer's concept
of the rate corresponding to the standard pace. —ILO

Therefore, the rating of the worker gives• the comparison of the rate of working observed with
respect to the standard level, which is the average rate of a qualified worker, when he uses concept
methods and 'when he is motivated to apply himself to the work.

Standard performance is the rate of output which qualified workers will naturally achieve
without over-exertion as an average over the working day or shift, provided that they know
and adhere to the specified method and provided that they are motivated to apply themselves
to their work. The standard performance'is denoted as 100 on the standard rating and performance
scales. —ILO
Rating is always compared with the standard rating, which may be taken as 100. Then,
Rating
Basic Time = Observed Time x
Standard Rating
WORK MEASUREMENT 403

For example, if an operator is judged to be working faster (rating 125) and the observed time
is 0.23 min., then,
125
Basic Time = 0.23 x — = 0.287 min •
100
26.7 STANDARD TIME
Standard time is the total time in which a job should be completed at standard performance. It is the
sum of the standard times for all the elements of which it is made up, and contingency allowance plus
considerations for the frequencies with which the elements recur (Figure 26.10 and 26.11).
Contingency
alloWance (CA)
-

Observed Time (0T) Rating Relaxation CA CA for

factor (RF) allowance for work unavoidable
(RA) delays

Base Time
Base

Work Element

Standard Time

Figure 26.10 Constituents of Standard Time: If observed time is performed at a

pace greater than Standard pace

Contingency
allowance (CA)

Observed Time (OT)

Rating •
factor (RF)
...'—
CA for
work CA for
Relaxation unavoidable
allowance dalays
(RA)

Base Time

Work Element

Standard Time

Figure 26.11 Constituents of Standard Time: If observed time is performed at a pace lesser than standard time
404 INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 26.2 In a time study for a job done by a worker whose rating is 90, the data are
as follows:
Observed time = 20 minutes
Personal needs allowance = 4% of Basic time
Fatigue allowance = 2.5% of Basic. time
Contingency work allowance = 2% of Basic time
Contingency delay allowance = I% of Basic time.
Find: (i) Basic time, (ii) work content, and (iii) Standard time.

Solution: (i) Basic Time = Observed time x Rating factor

Standard rating
90
= 15 x — 13.5 minutes
100
(ii) Allowances are:
4
(a) Personal needs allowance =100
— x 13.5 = 0.54 min .

.5
(b) Fatigue allowance = x 13.5 = 0.3375 mM .
100

(c) Contingency work allowance = 100 x 13.5 = 0.135 min.

Hence, Work content = Basic time + relaxation allowances + contingency work allowance
While, (a) and (b) above fall under the category of relaxation allowance;
Work content = 13.5 + (0.54 + 0.337) + 0.27 = 14.65 min,
Standard Time = Work 'content + Contingency delay allowance
= 14.65 + 0.135 = 14.78 min
= 14 min 0.78 x 60 sec = 14 min 47 sec.

26.8 WORK SAMPLING

In this approach, a large number of instantaneous observations are made over a randomly selected period
of time for a group of workers, machines or process. Each observation records what is happening at
that instant. The percentage of observations recorded for a particular activity or delay is a measure of
the percentage of time during which that activity or delay occurs. (BS 3138 definition).

Definition
Work sampling is a method of finding the percentage occurrence of a certain activity by
statistical sampling and random observations.

26.8.1 Procedure of Work Sampling

Stage 1: Preparing for work sampling
(i) Specify the main objective and make statement
(ii) Obtain approval. of the concerned department's supervisor
(iii) Identify quantitative measure of activity
WORK MEASUREMENT 405

(iv) Select and train personnel

(v) Plan for the procedure of observations.
Stage 2: Start work sampling
(i) Get all details of job(s) to be measured
(ii) Divide jobs into activity
(iii) Conduct pilot study to:
(a) determine number of observations
(b) check methods
(c) gain confidence
(iv) Describe and classify the elements to be studied
(v) Design observation sheets
(vi) Identify the number of days/shifts for the study
(vii) Identify scheme for properly randomized times of observations
(viii) Observe activity; record time and compile for each shift/day/week
(ix) Summarize data.
Stage 3: Evaluate and present results
(i) Evaluate and validate data
(ii) Analyze data
(iii) Calculate proportion of time for each activity
(iv) Planning for future studies.

26.8.2 Application of Work Sampling

Work sampling is useful for:
1. Intermittent work
2. Work with long cycle times
3. A starting point like preliminary investigation.

26.8.3 Sample Size for Work Sampling

Based on statistical theory, the sample size fOr the work sampling is determined.
Let, n = Sample size (to find): Number of observations required for the desired
confidence level and margin of error.
p = Percentage occurrence of the activity
s = Error (desired accuracy) in fraction
k = A factor depending upon the confidence level
k = 1 for confidence level of 68% \
k = 2 for confidence level of 95%
k = 3 for confidence level of 99.7%

k 2 p (1 — p)
ps = k\l[p (1— p)I n] or n=
(sp)2
406 INDUSTRIAL ENGINEERING AND MANAGEMENT

A trial observation is needed for the initial estimate of p. Value of p is subsequently revised as
more and more observations are taken.
Number of Observations of the activity (x)
P
Total number of Observations (N)
The value for number of observations in work sampling may be directly known from tables such
as Table 26.1 or graphs such as Figure 26.12.
Table 26.1 Required number of observations at 95/100 probability of not exceeding error indicated, for
values of p (percent of activity)

Values of N Values of N
Error Error
pin 5 1 • 1 5 pin 5 1 1 5
Per- Percent Percent Percent• Percent Per- Percent Percent Percent Percent
cent of Total of Total of p of p cant of Total of Total of p of P

1 16 396 3,960,000 158,400 26 308 7,696 113,846 4,554

2 32 784 1,960,000 78,400 27 316 7,884 108,148 4,326
3 47 1,164 1,293,000 51,720 28 323 8,064 102,857 4,114
4 • 62 1,536 Q60,000 38,400 29 330 8,236 97,930 3,917
5 76 1,900 760,000 30,400 30 337 8,400 93,333 3,733
6 92 2,255 626,667 25,067 31 343 8,556 89,032 3,561
7 102 2,605 531,429 21,257 32 349 8,704 85,000 3,400
8 118 2,944 460,000 18,400 33 354 8,844 81,212 3,249
9 131 3,276 404,444 16,178 34 360 8,976 77,647 3,106
10 144 3,600 360,000 14,400 35 365 9,100 74,286 2,971
11 157 3,916 323,636 12,945 . 36 369 9,216 71,110 2,844
12 169 4,224 293,333 11,733 37 373 9,324 68,108 2,724
13 181 4,524 267,692 10.708 38 377 9,424 65,263 2,611
14 193 4,816 245,714 " 9,829 39 381 9,516 62,564 2,503
15 205 5,100 226,667 9,067 40 384 9,600 60,000 2,400
16 216 5,376 210,000 8,400 41 3,87 9,676 57,560 2,302
17 226 5,644 195,294 7,812 42 390 9,744 55,238 2,210
18 236 5,904 182,222 7,289 43 392 9,804 53,023 2,121
19 246 6,156 170,526 6,821 44 395 9,856 50.909 2,036
20 256 6,400 160,000 6,400 45 397 9,900 48,889 1.956
fl 266 6,636 150,476 6,019 46 398 9,936 46,957 1,878
22 275 6,864 141,818 5,673 47 399 9,964 45,106 1,804
23 284 7,084 131,913 5,357 48 8400 9,984 43,333 1,733
24 292 7,296 126,667 5,067 49 400 9,996 41,633 1,665
25 300 7,500 120,000 4,800 50 400 10,000 40,000 1,600

(Contd..)
WORK MEASUREMENT 407

Values of N Values of N
Error Error
p in 5 1 1 5 pin 5 1 1 5
Per- Percent Percent Percent Percent Per- Percent Percent Percent Percent
cent of Total of Total of p of p cent of Total of Total of p of P

51 " 400 9,996 38,441 1,537 76 292 7,296 12,632 505

52 400 9,984 36.923 1,477 77 284 7,084 11,948 478
53 399 9,964 35,472 1,419 78 275 6,864 11,282 451
54 398 9,936 34,074 1,363 79 266 6,636 10,633 425

55 397 9,900 32,727 1,309 80 256 6,400 10,000 400

56 395 9,856 31,429 1,257 81 246 6,156 9,383 375

57 392 9,804 30,175 1,207 82 236 5,904 8,780 351

58 390 9,744 28,966 1,159 83 226 5,644 8,193 328

59 387 9,676 27,797 1,112 84 216 5,376 7,619 305

60 384 9,600 26,667 1,067 85 208 5,100 7,059 282

61 381 9,516 25,574 1,023 86 193 4,816 6,512 261

62 377 9,424 24,516 981 87 181 4,524 5,977 239

63 373 9,324 23,492 940 88 169 4,224 5,455 218

64 369 9,216 22,500 900 89 157 3,916 4,944 198

65 365 9,100 21,538 862 90 144 3,600 4,444 178

66 360 ' 8,976 20,606 824 91 131 3,276 3,956 158

67 354 8,844 19,701 788 92 118 2,944 3,478 139

68 349 8,704 18,824 753 93 102 2,604 3,011 120

69 343 • 8,556 17,971 719 94 92 2,256 2,553 102

70 337 8,400 17,143 686 95 76 1,900 2,105 84

71 330 8,236 16,338 654 96 62 1,536 1,667 67

72 323 8,064 15,556 622 97 47 1,164 1,237 50

73 316 7,884 14,795 592 98 32 784 8I6 33

74 308 7,696 14,054 562 99 16 396 404 16

75 300 7,500 13,333 533

Example 26.3 It is estimated that an operator in an assembly line has 20% of idle time. The
expected accuracy in work-sampling is ± 4%. For a 95% of confidence level, how many observations
are needed?
Solution: Given; k = 2 for 95% confidence
p = idle time estimate = 0.20
q = (1 - p) = 1 - 0.2 = 0.8
h = sp = half of the accuracy interval = 0.04
408 INDUSTRIAL ENGINEERING AND MANAGEMENT

10,000 -

9060-

Error + 1.0 Percentage Point

8000

7000

6000

0-

5000-
o
Tzi Error + 1.5 Percentage Point

° 4000-
0
..o
3000-
Error + 2.0 Percentage Point

2000-
Error + 2.5 Percentage Point

Error + 3.0 Percentage Point

1000-

Error + 3.5 Percentage Point

0 10 20 30 40 50 60
Percent Occurrence of Activity

Figure 26.12 Number of Observations Required to Maintain Precision within the Percentage Points Indicated
a 95% Confidence Level

k 2 p (1 — p) k 2 pq
Then, n=
(sp)2 h2
(2)2 (0.2 x 0.8)
= 384 observations.
(0.04)2

26.9 ANALYTICAL SAMPLING AND SYNTHETIC DATA

There are many work elements for which previously conducted time studies are available. These elements
are: loading, unloading, inspection, etc. For these elements, actual measurement of time may be skipped
WORK MEASUREMENT 409

and these may be adapted from predetermined studies. This study is called as synthetic data. Use of
standards is beneficial as it saves time and money involved in the actual measurements.

26.9.1 Predetermine Motion Time Standards (PMTS)

In this, time established for human motions is used to build up the time for a job at a defined level
of performance. In this system, the operations, under study, are divided into the basic motions (or therbligs).
Then, the timings for these basic motions are individually computed and added for getting the basic
operation time.

26.9.2 Method Time Measurement (MTM)

In this approach, every manual operation is defined into basic motions. These motions are assigned a
predetermined time standard, which is based on the type of motion and the condition under which the
motion is performed. The data for motion time are provided in MTM tables, in which the unit of time
is TMU (time-measurement-unit). One TMU is one hundred thousand of an hour (or 1 TMU = 0.0006
minute). The time (in TMU) is noted for all the basic motions and added to get the cycle time for
manual operation of an assigned work-cycle. MTM has following advantages:
(i) Data are based on extensive observation
(ii) Performance rating is not needed
(iii) No stoppage or disruption in the plant
(iv) Standards can be established even before a job is completed.
26.10 COMPARISON OF WORK MEASUREMENT TECHNIQUES
A comparison of different work-measurement techniques is presented in Table 26.2. And in Table 26.3,
the suitability of different work measurement techniques for different applications is listed. Some uses
of work measurement are:
1. Method analysis
2. Production scheduling
Table 26.2 Comparison of Work Measurement Techniques

Issues Stopwatch Time Study Predetermined Time Standard Work Sampling

Type of • Very,accurate for the • Extremely accurate for • Fairly accurate for
Standard repetitive task repetitive task both short and long
Produced cycle operations
• Tight Standard • Very Tight Standard • Loose Standard
' Main • Accurate • Accurate • Ease of application
Advantages • Speedy applicatiort,s • Speedy application • Employee's reaction
is favourable
• Generates detailed • Generates detailed • May be used for the
informations information long cycle operations.
Main • Chances of employee • Specialised training is • Lacks detailed
Disadvantages reaction needed information
• Not suited for • Not suited for long cycle • Needs long sample
long cycle or mental operation period
• Not suited for mental work • Difficult to explain and
and justify.
• Chances of subjective leveling
410 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Cost estimation
4. Wage and incentives schemes
5. Manpower planning
6. S6ndard costing and budgetary control
7. Line-balancing
8. Performance comparison
9. Distribution of work load, and
10. Scheduling of activities.

Table 26.3 Application of different work-measurement techniques

Work-measurement Technique
Application Issues Explanation Time Study PMTS Work Sampling

Manpower Basic Need to establish Very good Too detailed; Excellent

Requirement objective reasonably accurate but good
Planning relationship between
work volume and
required man-hour.
' Precision It should be accurate
needed but may needed not
be highly precise.
Cost Basic To allocate the cost Excellent Very good; Excellent
Planning objective in products and but Too
functions detailed
Precision Relative precision is
needed needed.
Wage or Basic To make provision Excellent Excellent Poor
incentive objective for payment on the
basic of output
Precision High precision is .
needed needed
Performance Basic For evaluating Excellent Good but Excellent
Comparison objective output according detailed
to standard.
Precision Fairly accurate but
needed not too high
Distribution of Basic • Time table for Very Good but Very good
workload and objective different tasks good detailed
Scheduling • Define priority.
of activities • Proper distribution
of work among
employees
Precision Accurate for production
needed line but needed modera-
tely accurate for
distribution.
WORK MEASUREMENT 411

26.11 SUMMARY
Work measurement is the application of different techniques that are designed to establish the time for
a qualified worker to carry out a specific job at a defined level of performance. Different approaches
of work measurement are: time study, work sampling and predetermined time standards.

REVIEW QUESTIONS
26.1 What is the purpose of work measurement? Explain the different application.
26.2 Define work measurement. What are the different techniques of work measurement? Explain
them.
26.3 What are the different equipments and forms uped in time study? Explain the steps in time
study.
26.4 Using example, explain the method to determine the sample observations in time study.
26.5 Explain the different allowances in time study. How is standard time determined?
26.6 Explain • the process of work sampling. How is the sample, size known in work sampling? Give
example.

REFERENCES
I. Adam, E. E. and Ebert, R.J., 1994, Production and Operations Management, Prentice, Hall of India New
Delhi.
2. Barnes, R.M., 1980, Motion and Time Study: Design and Measurement of Work, John Wiley and Sons,
New Jersey.
3. Buffa, E.S. and Sareen, R.K., 1987, Modern Production/Operations Management, John Wiley, New Jersey.
4. Chary, S.N., '1995, Them and Problems in Production and Operations Management, Tata McGraw Hill,
New Delhi.
5. Adler, P.S., 1993, "Time and Motion Regained", Harvard Business Revieiv, Jan-Feb, 97-108.
6. Currie, R.M., 1971, Financial Incentives Based on Work Measurement, Management Publications London.
7. International Labor Office, '1974, Introduction to Work Study, Geneva.
8. Ireson, W.G. and Grant, E.L., 1971, Handbook of Industrial Engineering and Management, Prentice Hall
of India, New Delhi. .
9. Kohn, A., 1993, "Why incentive Plan cannot Work", Harvard Business Review, Sept.-Oct., 54-63.
10. Maybard, H.B. 1971, Industrial Engineering Handbook, McGraw-Hill, New York.
11. Mundel, M.E., 1978, Motion and Time Study, Prentice-Hall, New Jersey.
12. Muthukrishnan, AV ancj Sethuraman; 1986, "Financial Incentives: A Managerial Tool", Productivity, 27 (1),
61-69.
13. Niebel, WW., 1988, Motion and Time. Study, Irwin: Homewood.
14. Polk, E.J., 1984, Methods Analysis and Work Measurement, McGraw Hill, New York.
412 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 27
JOB EVALUATION AND MERIT RATING

27.1 INTRODUCTION
Industrial organizations face the challenging problem of adequately compensating their workers according
to the nature of job they perform. Talented persons will join an organisation only when they get enough
wages and incentives. The financial compensations to a worker are dependent on many factors. These
factors are: complexity of job, risk and hazard involved in the job, working condition, skill or expertise
needed to perform the job, number of subordinates or helpers available to handle the job, etc. Job evaluation
is a systematic technique for determining the wage-rate or relative importance of the job by considering
various aspects of jobs. It is helpful in determining the wage-rates and incentives.
27.2 JOB EVALUATION
Job evaluation is a technique to rate a job (but not a worker). Therefore, after the job is evaluated,
it becomes the starting point to fix the base-wage for a worker so that the wage is fair and equitable.
Job evaluation is the criterion for relative differentiation of base-wage rates by establishing the relative
worth of various jobs in an organisation. The bases for semi-skilled or unskilled worker's job evaluation
are factors related to job, such as: skill, effort, responsibility, job risk, hazard, job conditions, etc. For
skilled jobs, factors related to qualification, experience, dynamics of responsibility and complexity in
decision-making, leadership quality, accountability, etc., are major factors in job evaluation.

Job evaluation is an attempt to determine and compare the demands which the normal performance
of particular jobs makes on average workers, without taking into account the individual abilities
or performance of the workers concerned. —International Labor Organisation (ILO)

Job evaluation is used to analyse and assess the job for ascertaining its relative worth
by objective assessment and comparison for determining the basis for a rational wage.
structure.

For an effective job evaluation, proper description and specification of the job are needed. The
main purpose of job evaluation is to decide the basic for wage-payment for different categories of
jobs (Figure 27.1).
414 INDUSTRIAL E�GINEERING AND MANAGEMENT

Job
Description
Wage payment
Job .lob Wage • Salary
Analysis Evaluation Survey
• Incentive
Job
Specification

Figure 27.1 Purpose of job-evaluation

27.2.1 Objective of Job Evaluation

The main obj_ectives of job-evaluation are as follows:
1. Job evaluation is used to determine the relative worth of every job. Relative wages may be fixed·
on the basis of an objective evaluation and comparison.
2 . It establishes the general wage level, which would be comparable with factories nearby.
3. It proyides a basis for ranking different jobs.
4. The relative worth and wage-structure of a new job may be easily established in comparison with
the established jobs.
5. It helps in establishing line of authority, responsibility and accountability.
6. It provides a sound basis for wage negotiation. It reduces grievances of workers due to improper
wages. It eliminates wage inequality within the organisation.
7. Job evaluation is useful in the selection and recruitment process, as skill match with job profile
may be achieved.
8. It is helpful in achieving cordial relations between management and union.
9. H provides a base for on-job training �nd orientation programs.
27.2.2 Pre-Requisite of Job Evaluation
1. Facts related to job content which are termed as: (a) job description, and (b) job-specification.
2. Top management support and commitment.
3. Cooperation of union and individual workers.
4. Comparison of jobs.
5. Involvement of expert in job-evaluation techniques.
27.3 BENEFITS OF JOB EVALUATION ·
I. It helps the management in establishing an· objective rationale for acceptable wage-structure.
2. It takes into account many factors other than the skill difference.
3. It helps in skill match with job. It is helpful in the selection, training and promotion of workers.
4. It estabiishes cordial labour relationship.
5. It helps in determining the rate of a new job.
27.4, LIMITATIONS OF JOB EVALUATION
1. Exactness or precision is missing in the job-evaluation. There is no standard table for all the activities.
All. jobs cannot be measured and compared accurately.
2. It does not account for many inter-rela.ted economic factors. For example, the law of demand and
supply of labour is a prime factor in determining wage rate in industry. Due tO' high demand of
JOB EVALUATION AND MERIT RATING 415

software engineers in handling special problems (say, Y2K problem), the temporary wage structure
was quite high. This remains unattended to in a generalised approach of job-evaluation.
3. No special attention is paid for exceptional merit, needed in the performance of the job. Many
a times, workers feel frustrated due to this. For example, many highly talented scientists and professors
feel frustrated in R & D activities, as their counterparts in field and civil services are better compensated
in terms of promotion, power, perks and salary.
4. The basic assumption in job-evaluation is that a work of equal worth should be equally paid as
these are both equally attractive and equally demanding. In real life, this contention is challengeable.
In real life, there are numerous examples when the job of same worth (say, a lecturer and an I.A.S.)
are not equally attractive to the job seekers.
5. The change in production technology (for example, conventional lathe to CNC lathe), information
system, subordination, etc., severely affect the job content. Therefore, a job-evaluation conducted
few days back may not be valid today: The job content of an operation is a dynamic process and
so should be the job-evaluation also. However, generall job-evaluation is not a regular affair in
industry. Therefore, the wage-structure on the basis of obsolete job-evaluation is a source of great
irritant in industrial relation.
27.5 METHODS OF JOB EVALUATION
There are four general methods for job-evaluation.
1. Simple Ranking System: This is the simplest and most inexpensive way to do job-evaluation.
This method is suited for small organisations where the evaluators have an intimate knowledge
of all the jobs.
A committee of experts is constituted for the evaluation of the jobs. Each member should have
a complete knowledge of the job-content because job-content forms the basis for the evaluation.
The experts evaluate the job-content and job description and then they rank the jobs in hierarchical
(either ascending or descending) order on the basis of the relative importance of the job. The decision
is on a cumulative perception of the job-content and no specific factor is deeply analysed. All
the rankings of each committee member are averaged to find a final score in terms of relative
ranking of each job.
Advantages:
(i) It is the simplest method.
(ii) Easy to understand and easy to adopt.
(iii) Inexpensive, as it involves no major cost or time.
(iv) it takes less time than any of the other methods.
Disadvantages:
(i) In this method, no rating is used. Only a simple listing of order is generated. Hence, there
is no distinction between each.
(ii) The method is subjected to chances of high error and therefore it is less accurate.
(iii) No commonly acceptable base is available for dealing with ranks.
(iv) The method is not suited for large companies.
2. Classification or Grade Description Method: This is a non-quantitative method and suited for
organisations that have a large number of activities.
This method is an improvement over the ranking method, as a predetermined scale of values is
used.
416 INDUSTRIAL ENGINEERING AND MANAGEMENT

The job-evaluation is done by establishing job classes or grade description. An evaluation team
is assigned the job of looking into each job description and gives weight to it in the light of relevant
factors such as, skill experience, education, etc. Each job is assigned to a particular grade or class.
For each grade, different monetary compensation or wage is decided.
Advantages:
(i) A large number of jobs can be handled easily after the grade descriptions are documented.
(ii) It is relatively simple and inexpensive.
(iii) It is easy for people to understand in terms of grades or classification.
Disadvantages:
(i) Compared to simple ranking system, it takes more time and thus costs more.
(ii) Compared to point-rating method, it is less accurate.
(iii) It does not use a detailed job analysis.
3. Factor Comparison Method: This is a quantitative approach for job-evaluation. It resembles the
classification method as levels or grades are used in both. Five key-factor scales are used for analysis
and evaluating jobs. These factors are: (i) skill, (ii) mental effort, (iii) physical effort, (iv) responsibility,
and (v) working conditions. A composite score is obtained for all factors. Following steps are followed
in this method:
Step 1: Select a number of "key" jobs (generally 15 to 25). Record wages of "key jobs". Key-
jobs are selected in such a way that these/are is fairly paid.
Step 2: Analyse each "key job" for the five critical-factors, namely: (i) mental require-
ment, (ii) physical requirements, (iii) skill requirements, (iv) working conditions, and (v) responsi-
bility.
Step 3: Rank each of the key-jobs within each factor. The rank may vary between factors.
Step 4: Assign wages according to each factor. It should be in proportion to the requirement of
each factor in the job.
Step 5: Calculate total wage-rate for a job by adding the wage-rate for each factor. This provides
a job comparison scale. Insert key-jobs in it.
Step 6: Evaluate the job under consideration using factor-by-factor in relation to the key jobs on
job comparison scale. Then evaluate and compare each job with other jobs in terms of each factor.
Step 7: Design, adjust and operate the wage-structure.
Advantages:
(i) It uses wages of the existing key jobs, which provide standard against which all other jobs
are compared.
(ii) Direct comparison is used for determining wages.
(iii) A scale for comparing factor of new jobs is available in this method. This speeds up the
evaluation for non-key or new jobs.
(iv) It is quantitative, yet relatively easy to apply once the factor and levels have been decided.
Disadvantages:
(i) It is costly and time-consuming to setup initially.
(ii) The initial set-up is to be changed every time the wage-structure changes.
(iii) If unfairly paid jobs are selected as key-jobs, then the entire scaling of factors gives wrong
results.
JOB EVALUATION AND MERIT RATING 417

(iv) Subjectivity in the grading is often challengeable. Different evaluator may give different wages
for one factor.
4. Point Method: It is a detailed, quantitative technique, which uses analytical approach to measure
the worth of a job. Merill Lott (1925) deVeloped this method.
Each job is broken into different component factors. For each factor, a point or weight is assigned
as per its relative importance. Total point value is the summation of all such points. Following
steps are adopted:
Step 1: Select the jobs to be evaluated.
Step 2: Determine the factors for consideration. These factors may be: (a) skill, (b) effort,
(c) initiative, (d) physical requirement, (e) Responsibility, etc. Clearly define each factor.
Step 3: For each factor, determine the number of degrees to be allocated.
Step 4: Assign points for each degree of all factors.
Step 5: Choose few (say, 5 to 10) key-jobs and evaluate each by applying Step 1 to Step 5.
Example 27.1 In a job-evaluation on scheme, three job factors are needed. Tables 27,2-27.4
give point value for each degree of these factors. A particular job of office-staff needed 3 degrees of
mental demand, 5 degrees of experience and training and 2 degrees of personal contact.
(a) Determine the cumulative points for this.
(b) Plot a linear curve of wage-rate vs point when 3 key-jobs with cumulative point of 100, 150 and
225 have wages as Rs. 2,000, Rs. 5,225 and Rs. 10,000 respectively.
(c) Determine a suitable base for the office-staff under consideration in (a):
Table 27.1 Job factors of office staff job

Job factor Degree

1. Mental demand 3
2. Experience and training 5
3. Personal contact 2
Table 27.2 Mental demand for office job

Degree Factor Point Value

1 Independent judgement 200
2 judgement under general guidance 150
3 Judgement under special guidance 125
4 Limited judgement 100
Table 27.3 Experience and training for office job

Degree Factor Point Value

1 Above 10 year 100
2 7 to 10 year 75
3 5 to 7 year 50
4 3 to 5 year 35
5 2 to 3 year 25
6 I to 2 year 10
7 Below 1 year 5
418 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 27.4 Personal contact in office job

Degree Factor Point Value

1 Contact within organization and

outside organization at all positions 50
2 Contact within the organization at all levels 25
3 Contact within the organization at specific level 10

Solution: (a) In this hypothetical job, an office -staff has relative ranking of three factors as follows:

S. No. Factor Total point (Weight) Percent

200
1. Mental demand 200 x 100 = 57.14
350
100
2. Experience and training 100 x 100 = 28.57
350

3. Personal contact 50 50 x 100 = 14.29

350

Total 350 100%

Total point of each factor in above table is the maximum point value in Tables 27.2-27.4.
Now, for the given job, the degrees for three factors are 3, 5 and 2 respectively. From Table 27.2,
mental demand of 3 degrees has a point value of 125. From Table 27.3, 5 degrees of experience, and
training has 25 point value in Table 27.4, 2 degrees of personal contact have point value equal to 25.
Thus, we get the following total points for this job:

Factor Degree Points

Mental demand Judgement under special guidance 3 125

Experience and training 2 to 3 years 5 25
Personal contact Within organization at all levels 2 25

Total points 175

Thus, cumulative point for this job is 175.

(b) For three key-jobs, cumulative points vs wages are as follows:
Key Job Points Wages (Rs.)

1 100 2,000
2 150 5,225
3 225 10,000

Its plot is given in Figure 27.2.

(c) For the given office job, the total points are 175. In Figure 27.2, we see that for this point the
wages are Rs. 6,800.
Advantages of Point Method
(i) Most reliable and accurate due to detailed analysis.
(ii) Less chance of subjectivity and judgement after initial grade tables are established.
(iii) Most widely used.
JOB EVALUATION AND MERIT RATING 419

10,000

6,/i00

wages (Rs.) 6.000

2,000

0 75 100 150 l75 225 300

Points

Figure 27.2 Points vs wages for key-jobs

Limitations of Point Method

(i) Analysis involves experienced persons.
(ii) Time-consuming in establishing initial grade tables.
(iii) Subjectivity in initial grade table cannot be totally eliminated.
Table 27.5 Comparison of Different Job Evaluation Methods

Factors Simple Ranking Job Grading Factor Comparison Point System

1. Nature Non-quantitative Non-quantitative Quantitative Quantitative
2. Type of Job to Job Job to category Job to Job Job to Category
comparison definition
3. Factors evaluated No No 3 to 7 Around 10
4. Technique Ranking of jobs Comparing job to Multiple scaler of Multiple scale of
in order of arbitrarily defined point and key-job points and
difficulty grade titles definitions of factor
degrees
5. Adoption Least Medium Medium Most popular
6. Comparative Easy, simple Easy, simple Modification over Modification over
stage and crude. and crude simple ranking job-grading
7. Advantage Simple Simple Practical Practical

27.6 MERIT RATING

Introduction: Merit-rating is associated with performance appraisal of an employee. This is a systematic
approach for evaluating the performance of an employee on the job, which lie performs. This is also
called as performance appraisal, personnel rating and employee evaluation.
Merit-rating is a formal, objective procedure for evaluating personality, contributions and potentials
of employees in a working o►ganisation.
Job Evaluation vs Merit Rating: Job-evaluation and merit-rating are compared in the following
ways (Table 27.6).
420 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 27.6 Job Evaluation vs Merit Rating

Job Evaluation Merit Rating

I. It evaluates a job or work. I. It evaluates a worker.

2. It is for the purpose of fixing a base-wage for
a job.
3. It is independent of operator or worker. It is
impersonal in nature.
4. Useful for decision regarding wage and salary
administration, skill match, etc.
5. It considers requirement of job.
2. It is for the purpose of deciding reward
for exceptional merit of worker.
3. It is independent of job. It is impersonal in nature.
4. Useful for decision regarding training, placement,
promotion, counselling, etc.
5. It considers ability and performance of individual.

27.6.1 Objectives of Merit Rating

1. Helps in executive decisions related to human resource department (HRD).
2. Appraisal of workers.
3. Continuous record for the worth of a worker.
4. Tool for decisions related to training, placement, promotions, confirmation, increment, transfer and
counselling of workers.
5. Useful for understanding areas of improvement in a worker.
6. Helps in discovering special talent in a worker.
7. Useful in personal research, validation of training objectives and training methodology.

Performance appraisal (or merit-rating) is the process of evaluating the employees' performance
on the job in terms of requirements of the job. —Scott, Clothier and Spriegel

Merit-rating refers to all formal procedures used in working organisations to evaluate personalities
and contributions and potential of group member. —Yoder

27.6.2 Advantages of Merit Rating

Merit-rating plays very important role in the human resource administration of a firm. Its advantages
are:
1. Systematic evaluation of employees
2. Facilitates matching of job with individual.
3. Facilitates promotion related decisions.
4. Facilitates training related decisions.
6. Helpful in identifying weaknesses of the employees which may systematically be removed.
7. Provides base for guidance and counselling for the employees.
8. Develops healthy competition among workers to improve performance.
9. Serves as motivational tool for employees.
10. Provides objective basis for bonus, incentive wage, and salary related decisions.
11. Improves employee-employer relationship due to increased trust and confidence.
12. Sound base for negotiation with trade union.
JOB EVALUATION AND MERIT RATING 421

27.6.3 Limitations of Merit Rating

1. Bias of rater may under-rate or over-rate an employee.
2. Due to Halo Effect (which is the tendency of a rater to rate consistently under or above the average),
the ratings may not be accurate.
3. Assessment of irrelevant factors may result in deceptive rating.
4. Due to improper weighted of factors, the ratings may be improper.
5. Due to fear, negligence, insufficient time, insufficient information or temperdment, the rater may
play safe and give average rating to an otherwise good or unsatisfactory employee.
6. Reward for employee may not follow immediately after a good rating due to organisational constraints.
This may lead to dissatisfaction.
7. Many rating factors are very subjective. Due to this, exact rating may not be forthcoming. For
example, innovativeness, drive, organisational loyality, etc., are difficult to be quantified in exact
terms.

27.7 METHODS FOR MERIT RATING

Employees are rated on the basis of many factors related to personal attributes, leadership quality, on
job performance, interpersonal quality, loyality, attendance, etc. Some of these factors are:
1. Quality of work
1.1 Accuracy
1.2 Rejections and scrap
1.3 Thoroughness
1.4 Economy of time
1.5 House keeping
1.6 Contribution in quality circle team
1.7 Contribution in other TQM effort.
2. Quantity of work
2.1 Output
2.2 Approach in meeting over-demand.
3. Personal Qualities
3.1 Team spirit
3.2 Attitude for work
3.3 Loyalty
3.4 Leadership
3.5 Relations with superior
3.6 Relations with subordinates
3.7 Integrity
3.8 Judgement.
4. Others
4.1 Attendance
4.2 Ability to follow instructions
4.3 Safety habits
422 INDUSTRIAL ENGINEERING AND MANAGEMENT

4.4 Interest in training and learning

4.5 Interest 'in corporate culture, etc.
Generally, a rater gives grade on a scale of one to five or remarks such as: exceptional good,
fair, satisfactory and unsatisfactory. All such ratings are added to find the total performance. There are
other ways to express in qualitative terms, such as exceptional, good, fair and poor. On the basis of
cumulative performance, the overall rating is given which may be above-standard, standard or below standard.
Some specific approaches of merit rating are as follows:
1. Ranking Method: This is the simplest method in which all the employees are compared with one
another. They are ranked in descending order from best to worst. This method has a serious limitation
that it is not diagnostic to point the specific areas of weakness and strength of a worker. The
method is highly subjective. The difference in' rank does not provide the exact nature or quantum
of merit-differential. There are chances of personal bias of the rater.
2. Paired Comparison Method: In this method, each member of the group is compared with remaining
other members of the group. Each judgement is recorded in terms of score. These scores are added
up to find the final ranking of each person.
This method is an improvement over ranking method. It is a more rational and comprehensive
method. The bias of the rater is minimized, yet it may not be over. The method involves large
number of comparisons. For example, for a group of n persons, total number of comparisons are
factorial (n — 1)! Therefore, for a group of 10 persons, the trained comparisons would be 362880
and for 50 persons, it is 6.08 x 1062. Therefore, this method is quite time consuming when number
of employees are more.
3. Checklist Method: In this method, the rater is given a set of statements related to the employee's
performance, attitude, behaviour and shortcomings. The rater is asked to tick-mark either yes or
no. Each yes/no carries certain points, which when added up, give final rating of the employee.
Specimen Checklist

XYZ Pvt. Ltd. New Delhi

Employee : Bhim Department : SQC
Employee Code : QC-387 Date of Rating : 27-06-2000
Position Rater Code : R-18
Tickmark ('I) The most appropriate box.
Statement True False
1. Understands work
2. Assumes responsibility
3. Makes no mistakes
4. Innovative in approach
5. Keeps work area clean
6. Does not need close supervision
Very regular on work
Total 4 3
Signature of rater
JOB EVALUATION AND MERIT RATING 423

4. Graphic Rating Scale: In this method, the rater marks the rating on a graphic rating scale, the
scale containing different degrees of performance in terms of phrases, such as: outstanding, excellent,
good, average and poor. For each degree, few numbers are allotted. Different performance measures
are rated on this scale:
Specimen Graphic Rating Scale

Degree of Scale
Performance measure Outstanding Excellent Good Average Poor •
10 98 76 543 2100
Knowledge of work
Leadership
Housekeeping
Regularity

5. Rating by Result: In this method, the rating is done on the basis of achievement of set objectives.
Therefore, performance standards are set in advance. It is known to both rater and employee. Under
achievement or over achievement is noticed by the rater. Therefore, this method eliminates the
personal bias of the rater. Another advantage of this method is transparency in rating. Thirdly,
continuous review of rating is possible by both employee and his supervisor. Possibility for improvement
maybe explored at regular intervals. Since approach is participative, it instills confidence in employees.
The method is more suited for executives and managers as it requires proper education and training
on the part of employees.

27.8 REQUIREMENTS FOR SUCCESS OF MERIT RATING SYSTEM

A successful merit rating system should be objective. Standard for outputs should be set against which
performance should be measured (Figure 27.3):
Output
Input Actual Performance * Compare performance
Objective and of an Employee
against standard
goals which are
o Comprehensive annual
verifiable
review : Formal
• Periodic or progress review :
monthly or quarterly for
milestone
o Continuous review on daily
basis for self-control

Review and
corrective action
for un-acceptable
deviations from
standard

Figure 27.3 The Merit Rating/Performance Appraisal Process

For a merit rating system, these requirements are of prime importance:

1. Commitment and support of top management
424 INDUSTRIAE ENGINEERING AND MANAGEMENT

2. Approval of employees and union

3. Knowledgeable rater,
4. Education and training of employee to understand the rating system
5. Continuous rating system and periodic review
6. Grievance redressal system
7. Administrative support for generating and retrieving necessary information
8. Sufficient time, fund and formats for the rating.

REVIEW QUESTIONS

27.1 What do you understand by job-evaluation? Explain the different objectives of job-evaluation.
27.2 What are the main benefits and limitations of job-evaluation?
27.3 Using examples, explain the following methods of job-evaluation:
(i) Simple Ranking System
(ii) Grade description method
(iii) Factor comparison method
(iv) Point method.
27.4 Compare the different approaches of job-evaluation.
27.5 Differentiate between job-evaluation and merit rating.
27.6 What do you understand by merit rating? Explain its advantages and limitations.
27.7 Explain the different methods of job-evaluation.
27.8 Explain the objectives and main requirements of merit rating.

REFERENCES

1. Adam, E.E. and Ebert, R.J., 1994, Production and Operations Management, Prentice Hall of India, New Delhi.
2. Barnes, R.M., 1980, Motion and Time Study: Design and Measurement of Work, John Wiley and Sons, New Jersey.
3. Buffa, E.S. and Sareen, R.K., 1987, Modern Production/Operations Management, John Wiley, New Jersey.
4. Chary, -S.N., 1995, Theory and Problems in Production and Operations Management, Tata McGraw Hill,
New Delhi.
5. Adler, P.S., 1993, "Time and Motion Regained", Harvard Business Review, Jan-Feb, 97-108.
6. Currie, R.M., 1971, Financial Incentives Based on Work Measurement, Management Publications, London.
7. International Labor Office, 1974, Introduction to Work Study, Geneva.
8. Ireson, W.G. and Grant, E.L., 1971, Handbook of Industrial Engineering and Management, Prentice Hall
of India, New Delhi.
9. Kohn, A., 1993, Why incentive Plan cannot Work, Harvard Business Review, Sept.-Oct., 54-63.
10. Maybard, H.B., 1971, Industrial Engineering Handbook, McGraw-Hili, New York.
11. Mundel, M.E., 1978, Motion and Time Study, Prentice-Hall, New Jersey.
12. Muthukrishnan, A V and Sethuraman, 1986, "Financial Incentives: A Managerial Tool", Productivity, 27 (1),
61-69.
13. Niebel, B.W., 1988, Motion and Time Study, Irwin: Homewood.
14. Polk, EJ., 1984, Methods Analysis and Work Measurement, McGraw Hill, New York.
 WAGE-INCENTIVE PAYMENT PLANS

28.1 INTRODUCTION
What is a one line answer to a question: "Why people work?" The first thing which comes to our mind
is money or payment for work. Since money comes in the form of wages and incentives for an employee,
its planning and administration is a crucial issue. Next thing, which needs to be answered is:-"Should
the wage be fixed or be proportional to the output?" Now, this is a ticklish issue and no straightforward
answer is forthcoming. We address this issue in this chapter. For this, following definitions are
needed:

Wages
It is the payment for the use of effort, which may be physical or manual. It includes both
financial and non-financial payments.

Fair Wages
It is the wages which are fair to the efforts (or labour) and work-accomplishment of an employee.
These should be sufficient to fulfill the basic needs of life.

Fringe-Benefits
Non-financial part of wages is called as fringe-benefits. Examples axe: free official car, free
house, attendant for house-hold work, etc.

Incentive
It is a reward or encouragement or inducement to an employee for the hard work and effi-
ciency at job, assigned by the organisation. It is for motivating employees to do better and
harder.
426 INDUSTRIAL ENGINEERING AND MANAGEMENT

There is no real difference between wages and salaries. However, some texts refer wages as a
payment for hourly payment to a physical labour while salary as payment other than hourly-basic (say
monthly or meekly) to an office staff, foremen, managers, technical staff and executives. Wages provide
a reason to work for an organisation. These serve as the financial bond between organisation and
employee.
Incentives may be direct or indirect. Direct incentives are given to an employee while indirect
incentives are given to a group. Direct or indirect monetary payment is termed as financial incentives,
such as: bonus, profit sharing, etc. Non-monetary payment of this type is non-financial incentives, such
as: social benefits, recognition, appreciation, good work condition, job satisfaction, chances of promotion,
job security, training, etc. Some incentives are semi-financial, such as: subsidised ration, subsidised medical
facility, subsidised education for children, pension, etc.

28.2 OBJECTIVES OF A GOOD WAGE-INCENTIVE PLAN

1. Good employee-employer relationship.
2. Helps in increasing productivity.
3. Boosts morale of employee.
4. Motivates employee to perform better.
5. Controls absentism and labour turn-over.
6. Basis for cost control.
7. Sufficient to overcome minimum wage limit in "minimum wage-act".
8. Improves quality of life.
9. Helps organisations to better utilise the labour, machine, equipment and other resources.
10. Improves the image of the organization. 6
11. Flexible to meet the changing conditions of the enterprise.

28.3 BASIS OF A GOOD WAGE-INCENTIVE PLAN

1. Simple to understand, simple to use and administer.
2. Incentive as per accomplishment and should be paid -without much delay.
3. Standards: fair, and comparable with other industries of similar type.
4. Agreement of both employee and employer.
5. Encourages workers, to perform more and better.
6. Based on time-study information.
7. No undue loss to workers due to uncontrollable reasons such as power-failure, machine breakdown,
etc.

28.4 TYPES OF WAGES INCENTIVE PLANS

The compensation to an employee may be in three forms (Figure 28.1):
(i) Based on time spent on work, i.e., time tate system.
(ii) Based on production in quantity terms, i.e., piece-rate system.
(iii) Combination of (i) and (ii) both, i.e., wage-incentive system.
1. Time Rate Method: The payment under this plan is made in accordance with the time spent on
the job. The time may be on hourly, daily, weekly, fortnightly or monthly basis.
WAGE-INCENTIVE PAYMENT PLANS 427

L Wagc Payment Plan

Time Rate System Piece Rate System Wage-Incentive Systenj

time-based Approach
Productivity-based
Approach

Halsey Plan Bedeax Plan

Straight Piece Rate Straight Piecc Rate with

minimum guarantee

Figure 28.1
I
Methods of Wage Payment
Differential Piece Rate

Example 28.1 If the worker is paid at the rate of Rs. 20 per hour and he spends 50 hours
during a week, the weekly payment is:
Weekly wages = (Number of hours worked during the week) x (Rate per hours)
= 50 x 20 = Rs. 1000 per week.
Advantages of Time Rate Method
1. Simple to calculate.
2. Focus on punctuality, regularity and work
3. Less wastages, as worker is not unnecessarily worried about very high production rate.
4. Better quality of work due to above reason
5. Advance knowledge about wage
6. Easy to operate in different situation
7. Consistency in calculation and approach
8. Preferred by trade unions
9. Workers feel assured of wages irrespective of machine failure, breakdown, etc.
Disadvantages
1. Lack of motivation to do exceptional
2. Requires close supervision as worker may waste production time
3. Encourages inefficiency in workers.
428 INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Straight Piece Rate System: Wages are paid in this system in accordance with the output of production.
This is independent of time spent on the job.
Example 28.2 a worker produces 325 pieces per day and he is paid at the rate of Rs. 0.20
per piece, the daily wage is 325 x 0.20 = Rs 65.

Advantages Disadvantages
Simple Discourages quality focus
Easy to understand focus on productivity No job security
No compensation for breakdown
Efficient and fast worker feels better No compensation for sickness
No guarantee of minimum wage
Easy to satisfy worker Discourages group effort.
Suitability
1. Repetitive jobs having no innovation
2. lobs where individual contribution may be measured
3. Skilled workers in small firms
4. When the production or output is the focus

3. Straight Piece Rate with a Minimum Guaranteed Base Wage: In this method, in addition to
the payment in accordance with an individual's output, a fixed guaranteed base-wage is also provided.
However, for a production upto a certain level there is no incentive (Figure 28.2).
Example 28.3 The standard output in a hypothetical welding shop is 110 pieces per day. For
a production less than or upto the standard output, the minimu►n guaranteed daily wage is Rs. 70.
Over the standard output an incentive at the rate of Rs. 0.25 per piece is given. This is an example
of minimum guaranteed base-wage system:

Input : Base wage (B) output (0) standard

production (P) wage rate (R)
I
Wage = B

Wages = B + (0 P) R

Pay wage to the worker

7

Figure 28.2 Approach of straight piece rate with minimum guaranted base-wage

4. Differential Piece Rate System (or Taylor's Plan): In this scheme, upto a certain production
level, which may be standard output, a piece rate (say R-I) is given. For anybody, who achieves
more than this output, will get, the payment for over achievement at a higher rate (Figure 28.3).
WAGE-INCENTIVE PAYMENT PLANS 429

However, it does not guarantee minimum base wage. Standard output may be decided by careful
time and unction study procedure.
Advantages
1. Provides incentives to efficient worker
2. Penalises inefficient worker
3. Focusses on high production rate
4. Simple and easy to implement.
Disadvantages
1.Minimum wage is not assured.
2. No considerations for the machine failure, power failure, etc.
3. Over emphasis on high production rate.
4. There are chances that quality of work may suffer.

Input : Differential wage rate (R 1, R2)

Standard Production (P) Output (0)

Wage = R I * 0

Wages = RI*P + (0 — P) R2

Pay wage to the worker

Figure 28.3 Approach of Taylor's Plan of differential piece-rate system

All thL three approaches of piece-rate system are compared in the Figure 28.4.

Taylor's differential Piece rate

" Straight Piece rate

Wage during
Period Guaranteed base-wage
,or
Straight Piece rate with
minimum guaranteed wage

Standard output

Output in pieces produced

' Figure 28.4 Comparison of three piece rate systems

'430 INDUSTRIAL ENGINEERING AND MANAGEMENT

5. Halsey Premium Plan: In this plan incentive is given to a worker, who is fast and completes
work before the standard time to complete a job, However, a minimum base-wage is guaranteed
to a worker, who completes the job upto the standard time, fixed for this job.
Example 28.4
Let, Standard time : S hours
Time taken by worker T hours
Wage rate : Rs. R per hour
Incentive or premium : Wages for I percentage of time saved at a rate of R per hour
Wages to be Paid to a Worker (W)
(i) When T> S
1
W = TR +--R(S —T)
100
(ii) When T<S
W = SR.
Advantages
(i) Simple.
(ii) Beneficial to efficient worker.
(iii) Causes no harm to new worker, trainee, or slow worker.
(iv) Management shares benefits of over-achievement by workers.
(v) Minimum base-wage is guaranteed.
Disadvantages
(i) Workers get only a percentage of return on their over-achievement (for example: 1% in above
example).
(ii) Due to undue importance on over-achievement quality suffers.
(iii) Management gets wrong picture of worker's ability.
6. Rowan Plan: It is quite similar to Halsey plan except that incentive for completing the job in
time lesser than standard time is paid to the worker. The incentive is paid on the basis of a ratio,
which is time saved over standard time per unit standard time.
Thus, following notations used in Halsey plan wages to be paid to a worker (w):
(i) When T> S
(S —T)
W = SR + R
S
(ii) When T<S
W = SR

(S —T))
Implication of terni in Rowan Plan
S
As time saved (S — T) increases, time taken by the worker (ST) decreases, as standard time (s)
is constant. Thus, as the incentive term increases, the base-wage term (TR) decreases. Therefore,
the cumulative effect would be such that bonus rate decreases as output keeps on increasing over
standard output. This prevents unnecessary over speeding by a worker, which may be counter-productive
to quality or group behaviour.
WAGE-INCENTIVE PAYMENT PLANS 431

Advantages
(i) Checks over-speeding, overstrain by worker.
(ii) Assured minimum base-wage.
(iii) Efficiency is rewarded.
Some Comparisons: The piece-rate with minimum guaranteed wage, Rowan plan and Halsey plan
are compared below (Figure 28.5). All plans guarantee an assured minimum wage. For over-achievers,
i.e., those, who perform more than standard output, will get different wages in these plans. The
cost per piece which the factory incurs in wage payment differs substantially in these plans. While
piece-rate and Halsey plan are taxing on the factory for under-achievers, Rowan plan is better from
the costing point of view. For over-achievers, the Rowan and Halsey plans are superior as compared
to piece-rate plan from the costing angle (Figure 28.6). This is because in these two plans, the
management shares the benefit of over-achievement with the workers.

Piece rate with

minimum guaranteed

Halsey Plan

Wage Minimum guaranteed

wage --,— Rowan Plan

Standard output

Output

Figure . 28.5 Comparison of piece rate, Halsey and Rowan plan

Piece rale
Halsey \
' \

Cost per
piece
Guaranteed rate per piece I'iece rate plan

Rowan
Ilalscy plan
Standard output
Rowan plan

Output—

Figure 28.6 Effect of three plans on cost per piece

432 INDUSTRIAL ENGINEERING AND MANAGEMENT

Disadvantages
(i) Discourages workers to over-achieve.
(ii) Difficulty in ascertaining wages as it requires large data processing.
(iii) Sharing of profit for over-achievement may not be liked by workers.
7. Emerson Efficiency Plan: In this, a minimum time wage is guaranteed. Working condition and
standard output are fixed on the basis of time-study. Bonus scheme is as follows:
(i) upto 66.67% of standard output (SO): No incentive but only minimum guaranteed wage (GW).
(ii) 66.67% to 80% of (SO): (GW) + 4%' of output.
(iii) 80% to 90% of (SO) : (GW) + 10% of output.
(iv) 90% to 100% of (SO) : (GW) + 20% of output.
(v) above 100% of (SO) : (GW) + 20% of (SO) + 10% of output above (SO).
Advantages
(i) Guarantees minimum wage till 66.67% of standard output.
(ii) Efficient worker is rewarded handsomely.
Disadvantages
(i) Improportionate rate of bonus below standard output
(ii) Chances of over-speeding and compromise of quality
8. Bedeaux Point Plan! In this plan also, a minimum base-wage is guaranteed. In this plan, the calculation
of wage is based on a term, Bedeaux point (B). One B is defined as a sum of fraction of a minute
of effort and a fraction of a compensation for rest, aggregating to one. Standard time is also expressed
in terms of Bs. A Worker,' who earns 1 B in one minute or 60 Bs in 1 hour, is 100% efficient.
In this, incentive is paid for 75% of number of Bs exceeding 60 B per hour. The wage payment
scheme is as follows:
(i) When actual Bs earned by worker (Bw) > Bs for standard time
(Bw) — (Bs)
Wage = RS -1: [ * 0.75R
60
(ii) When Bs caused by worker (Bw) < Bs for standard time
Wage = RS
Here, R is wage rate per hour and S is standard time.
Example 28.5 Standard time (including rest allowance) = 60 hour + 360 Bs
Actual time (including rest) = 5 hour = 300 Bs
Wage rate = Rs. 20 per hour
As Bs earned by worker is less than standard Bs to complete the job,
[360 — 3001
Wages = 20 x 6 * 0.75 * 20
60 ]
= Rs. 135
Advantages
(1) Minimum base wage is' guaranteed.
(ii) For time saved as compared to standard time, 75% of the compensation is given to worker. Rest
25% may be given to his supervisor.
WAGE-INCENTIVE PAYMENT PLANS 433

(iii) Bedeaux point may be added up for a worker even if his job requires different assignments in
a day.
9. Merrick Multiple Piece Rate Plan: This is a modification over Taylor's plan. In this, a minimum
base wage is not guaranteed. A worker's wage is calculated as follows:
(i) When output (0) is less than 83% of standard output (SO), scheme for wage (W) is equal to
piece-rate scheme.
(ii) When 83% of (S) < 0 < 100% of (SO); W = 110% of piece-rate
(iii) When 0 > 100% of (SO); W = 120% of piece rate.
Advantage
Efficient workers are rewarded handsomely.
Disadvantages.
(i) Wide gap in slabs of differential wage rate
(ii) Over emphasis in high production rate.
10. Gantt Task and Bonus Wage Plan: In this, a minimum wage is guaranteed. Minimum wage is
given to anybody, who completes the job in standard time. If the job is completed in less time,
then there is a hike in wage-rate. This hike varies between 25% to 50% of the standard rate.
Example 28.6
Standard time = S hour
Actual time = T hour (T < S)
Time rate for wages = Rs. R per hour
Bonus rate = P% of hourly rate
= Rs. (PR) per hour
Thus wage = (RS + PRS) in T hour
RS + PRS
per hour
T
Thus, actual time (T) is lesser, hourly wage-rate would be more.
Advantages
(i) Minimum wage in guaranteed.
(ii) Suited to efficient workers.
Disadvantages: Emphasis on over-speed or high production rate.

REVIEW QUESTIONS

28.1 Define: Wage, Fairwage, Fringe-benefits and incentives. Explain these.

28.2 What are the objectives of a good wage-incentive plan? Explain the basis for designing a wage-incentive
plan.
28.3 Explain the different methods of wage-incentive plan. Compare them.
28.4 Use an example to illustrate the different schemes of wage-incentive plan.
28.5 Compare the following wage-incentive plan, and differentiate between them:
(a) Taylor's differential piece-plan and straight piece-rate method.
434 INDUSTRIAL ENGINEERING AND MANAGEMENT

(b) Rowan plan and Halsey plan.

(c) Emerson and Bedeaux plan.

REFERENCES •

I. Adam, E.E. and Ebert, R.J., 1994, Production and Operations Management, Prentice Hall of India,
New Delhi.
2. Barnes, R.M., 1980, Motion and Time Study: Design and Measurement of Work, John Wiley and Sons,
New Jersey.
3. Buffa, E.S. and Sareen, R.K., 1987, Modern Production/Operations Management, John Wiley, New Jersey.
4. Chary, S.N., 1995, Theory and Problems in Production and Operations Management, Tata McGraw Hill,
New Delhi.
5. Adler, P.S., 1993, "Time and Motion Regained", Harvard Business Review, Jan.-Feb., 97-108.
6. Currie, R.M., 1971, Financial Incentives Based on Work Measurement, Management Publications, London.
7. International Labor Office, 1974, Thtroduction to Work Study, Geneva.
8. Ireson, W.G. and Grant, E.L., 1971, Handbook of Industrial Engineering and Management, Prentice Hall
of India, New Delhi.
9. Kohn, A.,1993, "Why Incentive Plan Cannot Work", Harvard Business Review, Sept.-Oct., 54-63.
10, Maybard, H.B., 1971, Industrial Engineering Handbook, McGraw-Hill, New York.
II. Mundel, M.E., 1978, Motion and Time Study, Prentice-Hall, New Jersey.
12. Muthukrishnan, AV and Sethuraman, 1986, "Financial Incentives: A Managerial Tool", Productivity, 27 (1),
61-9.
13. Niebel, B.W., 1988, Motion and Time Study, Irwin: Homewood.
14. Polk, E.J., 1984, Methods Analysis and Work Measurement, McGraw Hill, New York.
 29
GOLDRATT'S. THEORY OF CONSTRAINTS

29.1 INTRODUCTION •
Eliyahu M. Goldratt introduced the principle of theory of constraints (TOC). In his book, The Goal,
he (along with his co-author Jeff Cox, 1984) presented it in the form of a novel, which is written
in a setting of manufacturing environment. The main character of the novel (The Goal) uses the principle
outlined as "Theory of Constraints" (or, TO,C) to make a turn-around for his failing industrial plant.
The principle of TOC is structured as an embodied approach called as, 'Optimized Production Technology
(or, OPT). The manufacturing system, which incorporates TOC/OPT, is referred to as synchronous
manufacturing. Thus, TOC, OPT and synchronous manufacturing are related in some ways. Goldratt
has used many commonly used terms that carry special meanings in the context of TOC. Terms commonly
used in this context are: through-put, inventory, operating expenses, drum-buffer-rope system, constraints,
goal, etc. We will discuss them in subsequent sections.
29.2 SOME CONCEPTS USED BY GOLDRATT
The Goal, despite being written in a novel form, gives many messages for planning, scheduling and
control of the manufacturing firm. Some are as follows:

Key point
The success of the manufacturing business comes from determining the aim of the business
and then dealing with the constraints, which make the goal more difficult to achieve.
— Chapter 2 of The Goal

What is Goal?
The goal of a manufacturing company is to make money, ...and everything else we do is
a mems to achieve the goal. —Goldratt in The Goal (1993)
1•••211MinSiii=lii

Two plints are important here:

1. The goal (i.e., to make money) may be achieved in short-term but it can he counter-productive
in long-term. A simple example is: generate money by selling plant or equipment. But, this would
436 INDUSTRIAL ENGINEERING AND MANAGEMENT

be detrimental in long run. Therefore, the emphasis should be on the goal of "making money now
as well as in the future".
2. To achieve The Goal, i.e., to make more and more money, one must try to:
(a) increase throughput,
(b) minimize operating expenses, and
(c) minimize inventory.
What can we do about above three paths? We can reduce operating expenses and inventory to
a certain extent. In any case, these cannot be less than zero (which is the ideal case). Since we cannot endlessly
reduce the inventory or operating expenses, the focus shifts on looking at the possibility of increasing
the throughputs (Table 29.1). The elements that restrict the expansion of throughput are termed as constraints
in TOC.
Table 29.1 Three Common Terms in The Goal

Term Definition

Throughput The rate at which the system achieves the Goal. i.e., to make money through sales
Inventory It contains all the money that the system in TOC invests in purchasing things,
which system intends to sell.
Operating It contains all the money that the system in TOC spends in turning the inventory
Expenses into throughput.

29.2.1 Why to Manage Inventory and Operating Expenses?

Synchronous manufacturing calls for:
(a) Increased throughput requirements
(b) Manage inventory and production expenses.

. Establish balance between reduced

inventory and operating expenses -

Figure 29.1 Three elements of The Goal

Increased throughput means better (fast and smooth) flow of material. But, inventory and production
expenses are inversely related. When inventory increases, the operational, expenses may reduce (Figure 29.1).
For example, to reduce the operational expenses, we may decide to so for large batch-size and fewer
GOLDRATT'S THEORY OF CONSTRAINTS 437

set-ups. But what will be the effect on inventory? The work in process inventory will start building
up. (Note that in JIT, we go for smaller batch-size and more set-ups). Conversely, low inventory causes
higher operational expenses. Now, the next question is: what can be the lowest limit of batch-size? It
is one item per batch (like, ideal MT system), in which the inventory is minimum. But, this system of
one item per batch will have highest possible batch-processing and thus will lead to very high operating
expenses. Therefore, there is a need to manage the inventory and operating expenses so that their cumulative
effect is minimum at a high throughput.

29.3 CONSTRAINT
The throughput of a manufacturing system will naturally increase until it is limited by some constraint
or bottleneck. Typically, a bottle is narrowest at its neck and thus the flow through the bottle is restricted
by the size of its neck. Resource, which is bottleneck (also, termed as constraint), is the main cause
Of low flow of material through all the processes (or, throughput). Goldratt, in his initial work, used
the term "bottleneck" to describe a limiting-machine. Later, he realised the fact that in a complex system,
many things are related. These-are: resources, both manufacturing and non-manufacturing, schedules, capacities,
etc. In these systems, the identificatiOn of real bottleneck is difficult. He used the term constraint to
describe limitation that restricts throughput and goal (Figure 29.2).

Queues or Bottleneck Downstream

upstream to restricts Starved of
he serviced the flow Full Flow

Upstream Bottleneck Downstream

(Constraint)

Figure 29.2 Effect of constraint on the flow (or throughput)

Bottleneck
... a point or storage in the manufacturing process that holds down the amount of product
that a factory can produce. It is where the flow of material, being worked on, narrows to
a thin stream. —Bylinsky (1983)

A machine, which is always busy will limit the throughput of the entire plant. A highly skilled
or specialised operator or a very costly tool may be the bottleneck.

29.3.1 An Example from Industry (A Case-Study)

A leading scooter factory of northern India had an assembly line, in which there was a special purpose
machine (SPM). It had four workstations. Station 1 was for loading/unloading of the parts (which is
a crank shaft).
438 INDUSTRIAL ENGINEERING AND MANAGEMENT

The second, third and fourth workstations were for various operations in a sequential order. These
operations were drilling, spot-facing, chamfering, boring and counter boring. The company hired a consultant-
team. The consultants observed the entire assembly line. SPM was found to be heavily loaded. The cost
of duplicating SPM was too high. The company wished to increase the production capacity of the plant
(which was around 30,000 two-wheelers). The cycle-tin ^ on SPM was about 71 seconds per part. It
was lesser elsewhere in the assembly line. Thus, SPM was identified as the bottleneck. The consultants
deliberated on the working of SPM and designed a combination tool, which was sufficient for all the
operations, earlier performed on the three stations (Stations 2, 3 and 4) (Figure 29.3).
Station 3
(Operation 2)
(1
Station 2 I Station 4
(Operation I Operation 3)
SPM

Station I (Loading/
L WIP-out
Unloading)

(a) Present SPM is the Bottleneck

3
(Loading,
50%
Unloading)

Combination
tool
Combination
tool SPM

WIP-out 100%
Station 2 (Ope- Station 4 (Operation
ration I, 2, 3) 1, 2, 3)
7""
Station I 50%
(Loading,
Unloading)
(b) Proposed change in SPM : Handling of Bottleneck
Machine by introducing two combination-tools at station 2 and 4

Figure 29.3 Industrial example of TOC-application

This improvement in SPM, by introducing two combination tools (of same type) at stations 2 and
4 and two loading/unloading stations at stations 1 and 3, virtually increased the throughput. by nearly
seventy percent (Ideally, it should have been little more due to increase capacity of the SPM). One of
the important lessons of this case-example is: reduced set-up time increases the throughput. By combining
three operations, which were easier performed on three stations, there is a substantial saving in non-
value-added time. of production. The bottleneck capacity increases dramatically due to more time available
for value-added operations. Incidentally, once this SPM ceased to be the bottleneck, another process. in
the assembly line wouln become the constraint. The company may now wish to attack the emerging
bottleneck machine/operation for increasing the throughput to a still higher level.
GOLDRATT'S THEORY OF CONSTRAINTS 439

The manufacturing system may be considered, to be analogous to the chain having different links.
The chain is as strong as its weakest link. It is important to improve the strength of the weakest link
for improving the strength of chain. Same is true for any system. In the context of a manufacturing
system, the concept of constraint, and the analogy of chain provides following insights:
• Throughput of system is limited by the critical (or, weakest) link in the system, which is the constraint
of the system.
• It is of no great significance where the weakest link or constraint is located. As soon as this link
fails, the entire system will fail.
• Manufacturing system, like the chain, should be considered as a whole.
• Due to bottleneck (or, constraint):
1. Production upstream will produce excess inventory and generate queues. Any queue is a sign
of inefficiency, which must be removed.
2. Production (or, operation) downstream will remain starved. This will cause the underutilization
of manufacturing/human resources. The under-utilization is again a sign of inefficiency, which
must be removed.
• Due to above reasons, the thrust should be on continuous identification and removal of constraints.
This gives rise to the Theory of Constraints.
29.4 THEORY OF CONSTRAINTS (TOC)
Theory of constraints (TOC) has evolved through different works of Eli Goldratt. The base of TOC
is a combination of cause and effect and thinking process (Figure 29.4).

Identify the
constraints or the system

2
Decide how to exploit the
constraints or the system

3
Subordinate everything
else to the above decision

4
Elevate the system's
constraints of the system

5
Does a new
Yes
constraint limit
throughput?

No
6
Do not allow inertia to
cause a system constraint

Figure 29.4 Focussing Steps in TOC

440 INDUSTRIAL ENGINEERING AND MANAGEMENT

To Understand TOC, Dr. Goldratt gives a simple example. Corporate may be analogous to a chain.
Different links are connected one after another to form the chain. Various divisions, departments, products
or rules are analogous to link. The strength of the chain is the strength of its weakest link. The weakest
link restricts the chain's capability in transmitting a greater force. Similar is the case for corporate. Every
system contains at least one constraint, which prevents the system from attaining very high level of performance.
Therefore, TOC emphasises the need to identify constraints that prevent the system from achieving infinite
profits, which is the goal of the co►porate.

Constraint
• Anything that limits a system from achieving highest performance verses its goal is the constraint.

TOC
1. Every system must have at least one constraint, limiting its output.
2. The more complex the system, the less independent process paths exist, so the lower the number
of constraints. Generally, complex systems have only one constraint at a given time.
3. Identify the system constraints. Constraints of weakest link are the critical link. Unless weakest
link is strengthened by removing the constraints, no improvement is possible.
4. Exploit the system constraints. A system of optimum processes cannot be an optimum system.
5. Subordinate everything else to that decision by aligning every other part of the system to support
the constraints. This may sometimes reduce the efficiency of non-constraint resources.
6. Elevate the system constraints. For inadequate output, acquire more resource so that it is not a
constraint now.
7. A void inertia to become the system constraint. If the constraint has already been resolved, go
to Step 1. For continuous improvement, identify constraints, break them, and repeat the process
again and again.
8. An optimum system runs the constraint (or bottleneck) at optimum capacity (focused on the goal
of the system), and all other process steps must have excess capacity.

29.5 RULES FOR BOTTLENECK SCHEDULING IN TOC

A proprietary scheduling system for TOC by Goldratt initiated aggressive marketing of software, Optimized
Production Technology (OPT). The principles involved in OPT are helpful in handling bottlenecks in
the scheduling of the production systems. These rules are as follows:
29.5.1 Rule 1

Rule 1: Balance Flow, not Capacity

Line balancing, which is an example of tradition system, attempts to balance the capacity of each
workstation. Work-stations are so designed that their capacity is nearly same and, hence, there is a high
utilization factor. OPT, using TOC on the other hand, focusses on balancing the flow within the plant
(rather than resources as in line-balancing). This will ensure the identification of bottleneck (on constraint).
Once the bottleneck is handled for improvement, the throughput of the system increases.

29.5.2 Rule 2

Rule 2: The level of utilization of a non-bottleneck resource is determined not by its own
potential but by some other constraint in the system.
GOLDRATT'S THEORY OF CONSTRAINTS 441

To understand this rule, let us consider the four classic relationships of bottleneck and non-bottleneck
resources:
(i) Type I Relationship: In this relationship, a bottleneck resource (B) feeds work-in process material
(WIP) to a non-bottleneck (N) resource. Let us presume that both resources (B and N) are placed
in the middle of an assembly line. Thus, these are followed and preceded by few other resources,
which are non-bottleneck (N). Figure 29.5 depicts this relationship:
Material is Material is Material -flow
consumed at a t supplied at a N(throughput) is
rate B rate B limited by B

Legend

F131 Bottleneck resource, having slower processing rate, B

FN1 Non-bottleneck resource having faster processing
rate; N (note, B < N)
Material flow

Figure 29.5 Type I relationship

For this relationship, despite non-bottleneck resource being faster, cannot deliver faster than the
output rate of bottleneck resource, which is B. Thus, the non-bottleneck resource is a starving resource,
which is under-utilized. This is also illustrated in Figure 29.2.
(ii) Type H Relationship: In this relationship, a non-bottleneck resource (IV) feeds work-in-process material
(WIP) to a bottleneck (B) resource (Figure 29.6).

Building-up of
inventory at a
rate (N-B)
Material can be Material can rnl Material-flow
1
consumed at be supplied at 1 1 (throughput) is
N
rate N rate N Material limited by B
consumed at
rate B

Legend

I BI Bottleneck resource, having slower processing rate, B

N Non-bottleneck resource having faster processing

rate; N (note, B < N)
Material flow

Figure 29.6 Type, II relationship

For this relationship, the difference between the supply rate of non-bottleneck (N) and bottleneck
(B) is the inventory pile-up rate between the non-bottleneck and bottleneck resources (see Figure 29.6).
The throughput is still limited by the capacity of the bottleneck.
442 INDUSTRIAL ENGINEERING AND MANAGEMENT

(iii) Type III Relationship: In this relationship, a bottleneck and other non-bottleneck resources feed
parts to an assembly operation (which is a non-bottleneck).

Material is Material is
consumed at supplied at
rate B rate B
B Material flow
(throughput) is
limited by B
Material can Material can
N
be consumed be supplied at
at rate B rate N \ Material going at a rate
B to the next assembly
station
Inventory
I I I pilling up at
I I I rate (N-B)

Legend

C B I Bottleneck resource, having slower processing rate, B

Ei Non-bottleneck resource having fastei processing

rate; N (note, B < N)
Material flow

Figure 29.7 Type Ill relationship

For this relationship (Figure 29.7), the difference between non-bottleneck and bottleneck resource
is the inventory pile-up rate. The assembly resource (A) is also• under-utilized, m its capacity is
faster than that of bottleneck resource.
(iv) Type IV Relationship: In this relationship, both non-bottleneck and the bottleneck resources directly
supply in the market (Figure 29.8):
Material Material
consumed at supplied at
rate B rate B
B

Material could Material could

be consumed be supplied at
at rate N rate N
B

Figure 29.8 Type 'IV relationship

The bottleneck resource, whose rate is lesser than the market demand, is utilized at its 100% capacity.
The non-bottleneck resource can be utilized at 100% only when the market demand increases, otherwise
it will remain under-utilized.
GOLDRATT'S THEORY OF CONSTRAINTS 443

Through all the four relationships just discussed, following guidelines emerge:
(a) Utilize bottleneck at 100% capacity.
(b) Under-utilize non-bottleneck to eliminate the inventory pile-up.
(c) The level of utilization of non-bottleneck is determined by the capacity of bottleneck and
not by its own capacity. In the last (IV) relationship, it is driven by market demand.
(d) Enforcing idle time on non-bottleneck and tolerating a certain level of inventory pile-up should
have an optimal trade-Off.
(e) Throughput of the plant is limited by the capacity put of the bottleneck resource (which is
the constraint).
Therefore, these rules suggest that the non-bottleneck should not produce more than the absorption-
capacity of bottleneck resources, otherwise there will be an increase in inventory pile-up and the operating
expenses. Thus, under-utilization of non-bottleneck is the only prudent strategy.
29.5.3 Rule 3

Rule 3: Utilization and activation of a resource are not synonymous or the same thing.

Traditionally, activation of resource and utilization of resource are treated as same thing. Goldratt,
in his TOC, treats these two issues separately. First, let us understand: what is the difference between
utilization and activation?
Activation: "What we should do" is activation. It is the indication or doing the required work.
Activation is directed towards effectiveness. It is system's measure of performance or holistic approach.
A non-bottleneck machine may be active (producing 100%), yet not doing anything useful beyond the
capacity of bottleneck.
Utilization: "What we can do" is utilization. It also includes performing work not needed at a
particular time. Utilization is directed towards efficiency. It is a reductionist measure of performance
or mechanistic approach.
Example 29.1
100 parts 60 parts 60 parts
Non-bottleneck coming out going in Bottleneck
coming out
(capacity : 100 (capacity :
per day) 60 per day)

At 100% efficiency of 100% efficiency

non- bottleneck of bottleneck

ral
Inven ory building up I I
at 40 part per day 1 l 1

Figure 29.9 Both non-bottleneck and bottleneck operating at 100% efficiency

Let us assume that a non-bottleneck has a capacity of 100 parts per day while a subsequent bottleneck
has capacity of 60 parts per day (Figure 29.9). When both resources work at 100% efficiency, the inventory
building-up is (100-60) or 40 parts per day. However, at a global or holistic level, the system (combined)
is operating at only 60% efficiency level as throughput is 60 parts per day. Thus, the utilization of non-
bottleneck (i.e., 100%) is not same as its activation (i.e., 60%) as it is effective for only 60% of its
capacity.
444 INDUSTRIAL ENGINEERING AND MANAGEMENT

Traditionally, activation and utilization have been considered as same: TOC/OPT/Synchronous

manufacturing treats these separately.
Therefore, the scheduling of all non-bottleneck resources of the manufacturing system should be
done on 6e basis of the constraints of the system (i.e., bottleneck resources). A non-bottleneck should
be scheduled so that it is always available, when needed, to support the· non-bottleneck resource. However,
it cannot remain busy all the time.
Scheduling Rul.es in TOC (Goldratt):
1. Balance the flow, not capacity
2. The level of utilization of a non-bottleneck resource is determined not by its own potential but
by some other constraint in the system.
3. Utilization and activation of a resource are not synonymous or the same thing.
4. An hour lost at a bottleneck is an hour lost for the entire system.
5. An hour saved at a non-bottleneck is just a mirage.
6. Bottlenecks govern both throughput and inventory in the system.
7. Transfer ·batch may not and many times should not be equal to the process batch.
8. A process batch should be variable both along its route and in time.
9. Set the schedule by examining capacity and priority simultaneously arid sequentially. Lead times
are the result of a schedule and cannot be predetermined.
29.5.4 Rule 4

Rule 4: An hour lost at a bottleneck is an hour lost for the entire system.

Let us presume that there is sufficient demand for parts in the market. Now, if the bottleneck of .
the previous example· (in, Rule 3), is running at 100% capacity and, by chance, it stops for an hour,
say, for repair and maintenance. An hour lost on this. bottleneck will directly reduce the overall production
rate (throughput) by one hou:r. This will be the case, even if there is enough inventory pile-up before
the bottleneck. An hour lost on bottleneck can never be recovered because this machine will never have
time to process parts, which would otherwise been made in the lost time. This is due to non-availability
of buffer capacity for bottleneck. · Therefore, an hour lost on bottleneck is an hour lost for the entire
factory. In short, if the bottleneck has lost one hour, the overall impact is: '.'the factory has stopped
for one hour."
29.5.5 Rule 5

Rule 5: An hour saved at a non-_bottleneck is just a mirage:

For a non-bottleneck resource, there is some idle time, during which either this res·ource is unutilized
or producing inventory pile-up. Even in case 'lhe working or processing time of this resource is crashed,
the overall impact on, the system will be zero as far as throughput is concerned. This is b�cause throughput
is dictated by the bottleneck resource. Therefore, TOC advocates attack on bottleneck for increasing its
efficiency.
Let us look at the set-up time, which is needed for setting the tool/machines, etc., for each batch
of part�processing. Traditional system treats set-up time for bottleneck and non-bottleneck resource equaUy.
TOC advocates different approaches.
GOLDRATT'S THEORY OF CONSTRAINTS 445

In Table 29.2, an example is presented. In this, the bottleneck resource processes one batch of
part in 14 time units (hour), while non-bottleneck does it in 12 time units (thus, has 2 units of idle
time per batch). Read this table column-wise. The processing of batch of this part first goes to bottleneck,
followed by on the non-bottleneck. Originally, due to lesser processing time (PT) on the non-bottleneck,
there is an idle time (IT) of 2 hours on non-bottleneck. When, the set-up of bottleneck is squeezed
by one hour, the idle time of non-bottleneck reduces by one hour and the system throughput increases
due to faster disposal at bottleneck. However, when the set-up of non-bottleneck is squeezed by one
hour, its idle time increases by one hour due to no change at bottleneck resource. Throughput remains
same:
Table 29.2 Effect of an hour saved on bottleneck or non-bottleneck

Resource Schedule Chart ' When an hour is saved When an hour is saved on
(Original) on set-up of bottleneck set-up of nonbottle-neck
(Rule : 4) (Rule: 5)

Set-up Set-up Set-up

' Processing time Processing time Processing time
time time time
(PT ) (pT) (PT)
Bottleneck (ST) (ST) (ST)
Resource I 1 i I I I . I i I i I ill i ) i i I i i
--3 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14

Time (hour) —) 'l'ime (hour) —3 Time (hour) --4

Set-up . • Set-up Set-up

Processing time I Processing
Non-bottleneck time Processing time IT time time IT
(PT) (PT) T time (PT)•
Resource (ST) (ST) (ST)
I I I t
I' I I I i / 1 ! 1 I I I I I I 1
0 2 4 6 8 10 12 14 0 2 4 6 8 /40 12 14 0 2 4 6 8 10 12 14'
Time (hour) —3 'lime (hour) --4 Time (hour) --
Original:
Observation For bottleneck: ST = 4; PT = lo When an hour of set-up is saved When an hour is saved on
For non-bottleneck: ST = 4; PT = 8 on bottleneck: set-up of non-bottleneck
IT = 14 — L2 = 2 For bottleneck: ST = 3; PT = 10 For bottleneck: ST = 4; PT = 10;
For non-bottleneck ST = 4; PT = 8 For bottleneck: ST = 3; PT = 8;
IT= 13 —12 = 1 11=14-11=3
—3 Processing rate = One batch Processing rate = One batch per Processing rate = One batch per
4
per 14 time 13 time units 14 time units
units
Thus. throughput Thus, throughput is same
increases (Refer: Rule 4) as original one (Refer: Rule 5)

Thus, an hour saved on non-bottleneck has no impact on the system performance (which is the
throughput in this case).
Looking at the condition of lower set-up time of non-bottleneck, we find an important observation.'
Lower set-up time of non-bottleneck can facilitate more numbers of set-ups and, thus, batch-size can
be reduced in part processing. The effect of lower batch size means:
(a) Lower build-up inventory
(b) Lower operating expenses
(c) No effect on throughput.
446 INDUSTRIAL ENGINEERING AND MANAGEMENT

29.5.6 Rule 6

Rule 6: Bottlenecks govern both throughput and inventory in the system.

One of the most important reasons to maintain in-process inventory is to keep bottleneck machine
busy. There must b;° no time loss on it. WIP is to ensure continuous feed to bottleneck. Throughput
of the system is governed by the bottleneck and an hour lol/saved on it will reduce/increase the system
throughout. This feature is already explained in the previooJ c. Ample.

29.5.7 Rule 7

Rule 7: Transfer batch may not and many times should not be equal to the process batch.

Lot size is an important variable, which plays vital role in inventory build-up and throughput. OPT
advocates two lot sizes (rather than one, as in traditional system). These are transfer-batch and process-
batch (Figure 29.10). From part point of view, lot size is the transfer batch size. However, from resource
point of view, lot size is process batch size.. Let us look at . the example to follow:
Example 29.2 Let us consider an example. Suppose a part requires three operations: milling,
drilling and inspection. The processing time for individual part and for one process-batch of 100 parts
is as follows:

Operation Processing Time Processing Time for

for one part one batch of 100 pails
Milling 0.45 hour 45 hours
Drilling 0.35 hour 35 hours
Inspection 0.20 hour 20 hours
Total 1.00 hour 100 hours
When process-batch is same as transfer-batch, the situation is same as in Figure 29.10. Thus, when
milling of 100 items is complete, they are transferred to drilling and so on. The total time is 100 hours.
If the transfer-batch is smaller than process-batch (which is 100), a smaller batch (say 44 parts, after
getting processed on milling, transferred from milling to drilling after every 20 hours; and 57 parts,
after getting processed on drilling, transferred to inspection after every 20 hours of drilling for this batch)
•may be transferred to next operation on the process-sheet. The situation may be one like shown in Figure 29.11.
In the modified scenario, there will be a substantial reduction in total busy time of machines and overall
increase in the throughput-time. In addition, there will be marked reduction in inventory pile-up and

Inspection

Drilling
Operation

Milling

0 20 ,40 60 80 100
Time (hour)

Figure 291.0 Process batch and transfer batch are equal

GOLDRATT'S THEORY OF CONSTRAINTS 447

Inspection

' Drilling
Operation
• I
Milling

0 20 40 60 80 100
Time (hour)

Figure 29.11 Process batch is. greater than transfer batch

operating expenses. Thus, one process-batch (which is 100 in above example) needs one set-up on machines.
However, in each process-batch, there may be more than one transfer to next machines. As shown above,
the smaller transfer-batch (than process-batch) increases the throughput, reduces inventory pile-up, operating
expenses and the total busy time of the resources.
29.5.8 Rule 8

Rule 8: A process-batch should be variable both along its own route and in time.

The process-batch at different levels of manufacturing: both route2wise and time-wise, should be
different. Traditionally, we follow a fixed batch-size unless exceptional situation occurs. OPT argues against
it. In OPT, lot size is a dynamic decision, which should change as per time and situation. It should
be decided upon issues such as inventory level, set-up time/cost, material handling, flexibility and agility
of the system, uncertainty on the shop-floor as well as in market, etc. It the resource is non-bottleneck,
we can afford to have smaller process-batch; but if the resource is bottleneck, we should gd for larger
process-batch.

29.5.9 Rule 9

Rule 9: Set the schedule by examining capacity and priority simultaneously, not sequentially.
Lead times are the result of a schedule and cannot be predetermined.
-
In a tradition system (such as, MRP), the lead time is fixed and predetermined. However, OPT
advocates that scheduling must recognize that lead time is not necessarily a fixed quantity. It may vary
Jos efunciion of schedule. The schedule should be set by examining the capacity and priority simultaneously.

29.6 SYNCHRONOUS MANUFACTURING

Synchronous manufacturing is a relatively newer approach, which uses forward scheduling to manage
the production/manufacturing system. Just-in-time (JIT)-based system of kanban-approach and Drum-buffer-
rope (DBR)-based system of TOC-approach are the two• common types of forward scheduling approaches
(Table 29.3). MRP, on the other hand, is a backward scheduling approach. We have already covered
MRP in Chapter 20 and JIT in Chapter 21.
Synchronous manufacturing uses TOC as a way to incorporate forward scheduling. It focusses on
critical resources so that time-wise forward scheduling is do. Non-bottleneck or non-critical resources
are used to resolve critical constraint. Process-batch size and t1ansfer-batch size are charged in-synchronous
448 INDUSTRIAL ENGINEERING AND MANAGEMENT

manufacturing to reduce lead time and WIP. A backward scheduling technique, such as MRP, cannot
perform this task.
Table 29.3 Forward Scheduling Technique

Forward Scheduling Approach

Approach Philosophy Involved Implementation during uncertainty
and disturbances of system
Just-in-time (JIT) Kanban In case of high uncertainty and/or disturbances
(Just-in-time) in the production system, JIT tends
to be a failure in delivering the real benefits. In
case of non-repetitive manufacturing, non-stable
production level, inflexibility in the product
produced, far off located vendors, etc., JIT system
is in-effective.
Drum-buffer-rope (DBR) Theory of Effective implementation is possible in these
Constraints (TOC) conditions.

Definition of Synchronous Manufacturing

Synchronous manufacturing is a manufacturing management philosophy that includes a consistent
set of principles, procedures, and techniques, where every action is evaluated in term of the
global goal of the system. —A PICS Dictionary

The traditional and synchronous manufacturing are differ as follows (Table 29.4):
• Table 29.4 Traditional vs. Synchronous Manufacturing System

Traditional approach Synchronous Manufacturing approach

1. Focus on reducing the production cost as a 1. Focus on fast yet smooth flow in the shop
means to establish the best process and
practice of manufacturing
2. Efficiency of system is more important 2. Smooth and efficient product/material flow
than product flow. is more important.
3. The reduced product cost requires: 3. Rules of game
(a) Large batch-size (a) Smaller batch-size
(b) Fewer set-ups (b) More set-ups
4. Reduced cost at individual product and 4. Enterprise-level broad view with global goals of
level will reduce the total enterprise cost the system will make the enterprise most
due to their cumulative effect. effective.
5. Measure of performance: 5. Measure of performance
— Low cost — Throughput
— Inventory
— Operating expenses
6. Philosophy: conventional cost optimi- 6. Philosophy: JIT or. TOC
zation approach
7. Approach: Reduce cost, increase profit, value 7. Approach: Meet throughput, and efficiently
engineering manage inventory and operating expenses.
GOLORATT'S THEORY OF CONSTRAINTS 449

29.7 SUMMARY
Goldratt's theory of constraint has attracted the attention of many practioners in the industry. His concept
of goal, constraint, throughput, thinking process, critical chain and scheduling through OPT have helped
many industries to improve their performance. Nine rules of OPT are helpful in developing the framework
for TOC.

REVIEW QUESTIONS

29.1 What is the concept of goal? Explain the terms: constraint, bottleneck, non-bottleneck and throughput.
29.2 How does bottleneck affect the throughput?
29.3 Why is it important to manage inventory and operating expenses?
29.4 Explain the concepts involved in TOC. What are the different steps involved in TOC?
29.5 Explain the nine rules for bottleneck-scheduling in TOC.
29.6 Explain the synchronous manufacturing. How is TOC related to it?

REFERENCES
1. Bauer, Bowden and Browne J, 1991, Shop Floor Control Systems, Chapman and Hall.
2. Browne, J., Harhen, J. and Shivnan, J., 1988, Production Management Systems: A CIM perspective, Addisen-
Wesley Publishing Company.
3. Chase R.B., Aquilano, N.J. and Jacob F.R., 1998, Production and Operations Management, Irwin McGraw
Hill, Boston.
4. Childe S.J., 1977, An introduction to Computer-aided Production Management, Chapman and Hall, London.
5. Goldratt, E., 1980 "Optimized production time tables: a revolutionary program for industry", In the proceedings
of the 23rd APICS Conference, Los Angeles, Oct. 1980, pp 172-76.
6. Goldratt, E., 1990 a, Theory of Constraints, North River Press, New York.
7. Goldratt E., 1990 b, The Haystack Syndrome; North River Press, New York.
8. Goldratt. E., 1994, It's not Luck, Gower, Aldershot.
9. Goldratt, E. and Cox, J., 1993, The Goal Gower, Alder Shot.
10. Shucavage D., 1995, Crazy about constraints (http://www.bn.com/--dshu/toc/cac.htin1).
450 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 30
ENTREPRENEURSHIP

30.1 INTRODUCTION
Peter F. Drunker; a leading management expert defines entrepreneur as follows:

An entrepreneur is one who always searches for change, responds to it, and exploit it as
an opportunity.

Entrepreneurship is the trait or characteristic which an entrepreneur possesses. It is the prime-mover

of industrial development. A spirit of enterprise makes a person an entrepreneur. Entrepreneur is thus
an innovator, who carries out new combinations in ever-changing environment, to initiate and accelerate
the process of economic, social and technological development.
Initiates .
Organises
Manages
Controls
Business
Carries Risks
Enterprise
• Agriculture Innovates
• Industry & Trade to-
Individual Brings Resources
• Service Sector
• Profession ....

Figure 30.1 A Model of Entrepreneurship

In Figure 30.1, entrepreneur is explained as an individual, who interacts with a business environment
of agriculture, industry, service or profession. His main trait includes initiative, organisation, management,
controller, risk-taker and innovator.
Cantillon, whO was a French banker, first used the term entrepreneur. In the context of food-processor
and a seller-agent, he used this term as one, who carries risk due to uncertainty in farming and for
a price to be paid by city dwellers. Further developments in this area established entrepreneurship as
an established discipline of knowledge and research. It is the key element in the industrial development
452 INDUSTRIAL ENGINEERING AND MANAGEMENT

of any nation. There is a great interest in this discipline due to the economic link of entrepreneurship
in 'nation building.
A relatively recent term in this context is Intrapreneuring. Gifford Pinchot III in 1985 wrote a
book on this. He refers this term to a person, who as a manager in a company functions like an entrepreneur.
Independent business units or profits-centres are devised within an organisation. Each is headed by a
chief executive, who carries all the qualities of an entrepreneur. Many multinational companies are
now working on this idea. The difference in entrepreneur and intrapreneur is related to the bigger
organisational network in case of intrapreneur which covers risks and helps in raising capital for an
intrapreneur.

30.2 ROLE OF ENTREPRENEURSHIP IN ECONOMY

Entrepreneurship is basically a process of "creative destructions". Joseph Schumpeter (1911-1950) explains
this. Established ways of doing things are destroyed by creative, new and better ways of doing things.
Entrepreneurship therefore challenges the order of society through creative changes.

Entrepreneurship is the process and entrepreneurs are innovators who use the process to shatter
the status quo through new combinations of resources and new methods of commerce.
—Joseph Schumpeter

Entrepreneur has to redirect resources from areas of low or diminishing results to areas of
high or increasing results. He has to slough off yesterday and to render obsolete what already
exists and is already known. He has to create tomorrow. —Peter Ducker (1974)

Entrepreneurship is the process of creating wealth by bringing together resources in new ways
to start a venture that benefits customers and rewards its founders for their innovation.
—David H. Holt (1993)

Resources to produce results must be allocated to opportunities rather than to problems....

Maximization of opportunities is a meaningful, indeed a precise definition of the entrepreneurial
job. It implies that effectiveness rather than efficiency is essential in business.
—Peter Drucker (1964)

Entrepreneurship plays an important role in the development of economy. Every developed nation
have benefited from their entrepreneurs in building the economy. Bill Gate in USA is one such entrepre-
neur, who steered the software industry to new heights through his Microsoft Company. In India,
numerous examples exist for successful entrepreneurs, who successively built empire of their corporate
structure. Dhirubhai Ambani grew to a phenomenal height through Reliance industries. Jamshedjee Tata,
in Steel Industry, Pawar in computer education are few other examples of successful entrepreneurs in
recent times.
Government is also keen to develop the entrepreneurship skill' in emerging technocrats. For this,
elective courses are available in many engineering disciplines: Concept of industrial estate has emerged
during recent years. Many big industries and engineering institutions have industrial estates in near vicinity.
For example, near Regional Engineering Colleges at Allahabad and Jamshedpur industrial estates have
been established for giving entrepreneurial opportunities to up-coming technocrates.
ENTREPRENEURSHIP 453

30.3 QUALITIES OF GOOD ENTREPRENEUR

Entrepreneurs are business leaders. They are persons with vision. They have drive and talent. They spot
out the opportunities and promptly seize them for exploiting to economic gains. Entrepreneurs should
have the following qualities (Table 30.1):
Table 30.1 Qualities of Good Entrepreneur

An entrepreneur should be:

• Creative • Good Manager
• Innovative • Self-confidence
• Risk Taker • Flexible to Changes
• Capital Generator • Dynamic
• Leader • Profit Oriented
• Motivator • Optimist
• Adaptive to Suggestions • Versatile
• Energetic • Knowledgeable in Technology
• Committed • Intuitive
• High Perseverance Person • Achiever
• Able to Assume Responsibility • Resourceful
• Able to Deal with Failure • Goal Directed
• Tolerant for Ambiguity • Problem Solver
• Peripheral (Related) Area Aware
• Low Need for Status and Power

An entrepreneur should have qualities of many individuals in one. He should be resourceful to

bring capital and management. He should have a vision for future. He should be an example setter and
a good leader. He should be energetic, yet flexible to environmental changes. A good entrepreneur should
have good knowledge of product and technology. He should have a quest for success and achievement.
He should have capability to build an organisation culture.
According to Peter Kilby, an entrepreneur should have the following functions:
• Purchasing inputs
• Dealing with bureaucrats
• Perceiving market opportunities
• Gaining command over market
• Managing human resources of the firm
• Managing customer and supplier relations
• Managing finance
• Managing production
• Industrial engineering
• Upgrading process and product quality
454 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Introduction of new production techniques and products

• Marketing the products

Growth

Later Growth Stage •

Pre-stag-up Stage
J

0 Stages in Business Venture

Planning of Position the Bring major changes Consolidation of growth

venture and venture into in market, finance, and image building. Need
preliminary market and resource utilization, to involve professional
work to bring make necessary technology adoption, management into venture,
resources and changes Ibr corporate building, brand establishment,
start-up for survival and diversification, total diversification, acquisition,
organisation. growth. quality and continuous and business process
improvement strategy. re-engineering strategy.

Role of Entrepreneurship
11

Figure 30.2 Role of Entrepreneur in Different Phases of Venture

30.4 SOME MYTH AND REALITY ABOUT ENTREPRENEURSHIP

There are many myths about entrepreneurship in literature. In fact, unlike popular belief, entrepreneurship
is a trait, which needs to be taught rather than being a trait, which is natural. Myths and realities are shown
in Table 30.2.
ENTREPRENEURSHIP 455

Table 30.2 Myth and Reality about Entrepreneurship

Myth Reality
1, Entrepreneurs are born; not made. ,'Entrepreneur traits and characteristics may be acquired
through structured learning,
2. Entrepreneurs are doers; not thinkers. Frequent thinking in planning, innovation, creativity
and risk behaviour are needed.
3. All that is needed in entrepreneurship is Generally, it is observed that excessive and surplus
money capital reduces the risk of taking behaviour, care for
scarce resources and grasp for opportunities.
4. All that is needed is luck. Successful entrepreneurs assume responsibility for
success and failure. They downplay the role of luck
in the success and failure.
5. Entrepreneurship is a profile of traits Entrepreneurship is a combination of situational
and characteristics. issues.
6. Business schools have no place in Entrepreneurship has emerged a, a well-developed
entrepreneurship. discipline in business school and engineering courses.

30.5 ROLE OF MOTIVATION IN ENTREPRENEURSHIP

Motivation is central to the way an entrepreneur behaves in a business environment. Motivation is dependent
upon the potencies of needs. Moslow identified a hierarchy of needs, which govern the pattern of motivation.
These needs are physiological, safety, social, esteem and self-actualization. Porter and Lawler (1968)
proposed need-expectancy theory for explaining the effort needed to fulfill an unfulfilled need.
A modified motivation model for entrepreneurship is shown in Figure 30.3. The strength of an
unfilled need of an entrepreneur and expectation of beneficial-outcomes motivate an entrepreneur for
efforts in venture. Combined with these, the individual capabilities of the entrepreneur govern his performance.
The opportunities in business environment and risk due to future uncertainty affect the rewards, which.
are intrinsic and extrinsic both. Intrinsic rewards are related to factors internal to the entrepreneur, such
as self-satisfaction, pride, etc. Extrinsic rewards are more towards material, wealth and growth.

Environment
Strength
of need
Efforts of Entrepreneurship

Rewards
Expectation • Performance of
or outcome Industrial Capabilities
Entrepreneur

Satisfactions Rewards Uncertainty & Risk

Generated • Intrinsic
• Extrinsic

Figure 30.3 Modified Porter and Lawler (1968) model for Entrepreneurship

30.6 FUNCTIONS AND NEED FOR DEVELOPING ENTREPRENEURSHIP

An entrepreneur plays important role in developing nation's economy. Following functions may be listed:
(i) Prime-mover of economy
456 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Management of business venture

(iii) Decision making
(iv) Location of plant site and decisions regarding product and production
(v) Organisation of business
(vi) Management of supply-chain, which includes customer and supplier-relations.
(vii) Innovations in business strategy.
(viii) Bringing finance into business and arrangement of material, machinery and man-power
(ix) Personnel decisions
(x) Dealing with Government bureaucracy, tax department, electricity and other personal-relation activities
(xi) Pricing decision making
(xii) Overall coordination of a business venture.

30.7 ENTREPRENEURIAL FAILURE AND REMEDIAL MEASURES

There are many causes of failure in an entrepreneurial venture. Some of the important reasons and their
possible remedial measures are listed in Table 30.3.

Table 30.3 Reasons for Entrepreneurial Failure and Remedial Measures

Reasons for Entrepreneurial Failure Remedial Measures

1. Management related problems • Training
• Inexperience • On-job experience
• Incompetencies
• Inefficient
• Lack of support
2. Individual problem • Behavioural therapy
• Arrogance • Behavioural training for modification
• Lack of faith
• Behavioural problem
3. Production problems • Hiring professional plant engineers and
• Insufficient technological know-how industrial engineers
• Power and water problem • Hiring professional management
• Product related problem • Hiring consultants
• Machinery related problem
• Worker related problem
4. Financial problem • Seeking supports of financial institutions like
• Capital problem . SIDBI, NABARD, IFCI, IDBI, etc.
• Working capital problem
5. Tax problem • Hiring tax consultants
6. Marketing problem • Hiring good sales force
7. Indulgence in fraud and cheating • Non-indulgence in these activities
8. Natural calamities • Insurance and precautions
9. Negligence of entrepreneur • Precaution and partnership
10. Governme-t policies • Devising alternatives
1 I. Market competition • Devising market research and planning.
ENTREPRENEURSHIP 457

REVIEW QUESTIONS

30.1 Define and explain entrepreneurship. Explain the role of entrepreneurship in the nation's economy.
30.2 What are the qualities of a good entrepreneur?
.
30.3 Explain the role of an entrepreneur during different phases of the venture which he undertakes.
30.4 What do you understand by motivation? Explain the role of motivation in building entrepreneurship.
30.5 What are the needs for developing entrepreneurship?
30.6 Why does entrepreneur fail in his/her venture? What can be done to avoid this?

RE1ERENCES
1. Burch, J.G., 1986, Entrepreneurship, John Wiley & Sons, New York.
2. Gupta, C.B. and Srinivasan, 1994, Entrepreneurial Development, Sultan Chand & Sons: New Delhi.
3. Pareek, U. and Rao, T.V., 1978, Developing Entrepreneurship, Learning Systems: New Delhi.
4. Sharma, R.A., 1985, Entrepreneurial Performance in Indian Industry, Inter-India Publication: New Delhi.
5. Sharma, R.A., 1980, Entrepreneurial Changes in Indian Industry, Sterling: New Delhi.
458 INDUSTRIAL ENGIN'EERING AND MANAGEMENT

IMPORTANT NOTES
 31
LEADERSHIP

31.1 INTRODUCTION
Leadership is the art (or process) of influencing people for willingly and enthusiastically striving for
the achievement of group goals (Figure 31.1). Leadership, thus involves the following ingredients:
1. Ability to influence and persuade others
2. Seeking same defined group-goal or objectives

E Organisation'al goals
N Higher productivity
V ti
1 Role/Behaviour Better management 11
R
N Management Activities
M
E
N Influenced/
Motivated subordinates
—1=1

Figure 31.1 Basic Process in Leadership

3. Enthuse people for willing acceptance of responsibility (or role)

4. Involvement of a group of people
5. Human factor to bind and motivate the group
6. Important in achieving the management goal of planning, organising, staffing, controlling, supervision,
coordination and decision-making
7. Focus on human or people aspect of management
8. Managerial activity, which influences people to maximize productivity, stimulates creativity for problem
solving, promotes morale and satisfaction, and enthuses to achieve organisational objectives.
9. A good working inter-personal relationship between leader and followers
10. Situation specific
460 INDUSTRIAL ENGINEERING AND MANAGEMENT

11. Generally emerges through a power relationship between leader and followers
12. COntinuous, dynamic process which changes with time.

31.2 LEADERSHIP AND MANAGEMENT

Leadership and management are often confused to be same. These have many similarities such
as:
(i) Both aim at achieving goals.
(ii) Both mobilise and utilizes resource.
(iii) Both serve as a link between top management (or board) and subordinates (or followers).
(iv) Both depend upon subordinates (or followers) and hence try to motivate them.
However, there are some differences, as follows:
(i) Management is a term used in the organisational context. Leadership is wider in that sense as it
may also be outside a defined organisation.
• A mob, a procession, a movement, and a rally may also have a leader but no manager.
• Management is possible in formal organisation while leadership may be present in both formal
and informal organisations.
(ii) Subordinates of a manager are always junior to him. Followers of a leader may not be always
junior to him. They may be contemporary or even seniors.
(iii) Manager is always appointee. He derives power by virtue of his post. Leader may not always be
appointed. He derives power by virtue of influencing his followers.
(iv) Manager get subordinates by virtue of his behaviour position. Subordinates follow the manager
as it is their defined duty and role.
Leader does not get followers by virtue of any position. It is his art of influencing others which
determines his followers. profile. Followers are not duty-bound to follow the leader.
(v) Manager is accountable for his behaviour and the behaviour of his subordinates. His expected performance
is well defined.
Leader is not questionable for the behaviour of the followers in a strict sense. He is more concerned
about common goal of the group, rather than achieving organisational objectives.
(vi) Manager has derived power to write the annual report on the performance of fthe subordinates.
He is instrumental in promotion, reward or punishment. Leader, on the other hand, does not have
such direct powers.
(vii) Leadership is for directing and guiding the followers. Managers have to direct, guide, organise,
coordinate, plan and control.
Thus, all managers must have the qualities of a good leader but all leaders need not perform all
the functions of managers.

31.3 QUALITIES OF GOOD LEADERSHIP

Good leaders are those, who are achievers. They have to demonstrate their capabilities to motivate people
to achieve the organisational goal in an enthusiastic manner. Important leadership traits may be clubbed
as qualities of good leadership. Some important qualities are as follows:
1. Desire for occupational. success and responsibility
2. Feeling of competency in problem solving situation
3. Intelligence, reasoning skill and creative ability
LEADERSHIP 461

4. Decisiveness
5. Supervisory skill in management task of planning, organising, staffing, directing and control
6. Vision for future foresight and a sense of mission
7. Well-educated and trained in skill
8. Administrative ability
9. Mature behaviour
10. Energetic
11. Innovative in approach
12. Positive attitude
13. Constructive nature
14. Dependable
15. Open-minded
16. Pleasant personality
17. Social
40-
18. Good communication ability
19. Approachable for subordinates
20. Example setter
21. Flexible to changes
22. Good character
23. High character and respect by subordinates
24. Sound physique, vigour and hard work.
25. Representative of the group
26. Facilitator to change.

31.4 LEADERSHIP STYLE

Leadership style is the behaviour pattern of leader while influencing the actions of the followers. It is
generally a natural outcome of training, culture and background of the leader. There is no "the best-
style" to ler.d. It is situation specific and, therefore, dynamic in nature.
The leaders may be classified into a two-dimensional matrix, whose coordination is concern
for people and concern for task. Four patterns of leaders emerge with this grouping (Figure 31.2). These
patterns are supportive leaders, participative leaders, abdicative leaders and directive leaders. The
participative leaders are the best and abdicative as least desirable. All other leaders must try to reach
in top-right corner (i.e., participate) of the matrix in Figure 31.2. Different styles of leadership are as
follows (Figure 31.3).

34.4.1 Autocratic or Authoritarian Leadership ,

This style leads to complete control of the leader over the subordinates. Salient features are:
• Centralised power-base at leader
• All decisions by leader without mutual consultance among subordinates
• Complete dominance, command and drive through coercion actions
• No delegation of authority.
462 INDUSTRIAL ENGINEERING AND MANAGEMENT

Snp,iortive Participative
High
Concern for people : High Concern for people : High
Concern for Task : Low Concern for Task : High

Concern fcr
people
Abdicative rective
Concern for people : Low lbr people : Low
. 011Call
Concern for Task : Low Concern for Task : High
Low

Low High
Concern for Task

Figure 31.2 Two Dimensional Leadership Model

O, I

Autocratic Democratic Laissez-Faire

Figure 31.3 Leadership Styles

Therefore, autocratic leadership is a directive style in which power is centered in leader or a core-
group of individuals. It focusses on task, centralized personal power, and, therefore, has extremely low
concern for people.
Advantages
(i) Permits quick decisions.
(ii) In case of less competent subordinate, it is effective.
(iii) Facilitates speedy implementation of plans.
(iv) Highly satisfied leader.
(v) In case of extreme crisis, this style may be the only solution.
Limitations
(i) In-built frustration in employees.
(ii) Low morale of work-force.
(iii) Ill-motivated subordinates escape the responsibility and initiative.
(iv) Creativity of subordinates remains untapped.
(v) No positive development in the profile of subordinates.
(vi) High turn-over of subordinates due to frustration.
Suitability
(i) When there is unskilled, submissive, untrained workforce.
(ii) When there is inexperienced workforce.
LEADERSHIP 463

(iii) When there is very poor discipline in the organisation.

(iv) When there is very-very competent, prolific and dominant leader, who is fully sure of results and
productivity.
Autocratic style is not preferred these days as the workforce is more educated, trained and organised.
Level of technology is high and expertise of leaders is also in narrower area. All this calls for a more
participative leadership style.

31.4.2 Participative, Consultative or Democratic Leadership

Leaders of this type take decision in consultation with the followers. Their authority is decentralized and
delegated down below to the subordinates. Majority opinion is honoured in the group. There is a freedom of
expression and ideas.
Advantages
(i) High job satisfaction and morale among the followers
(ii) Positive participation by followers
(iii) Chances of good decisions are more due to involvement of followers
(iv) Joint responsibility for the successful implementation of decisions
(v) Decision making ability in subordinates is cultivated. This facilitates developing a second line of
leadership.
Disadvantages
(i) Time consuming process of decision-making.
(ii) In case of uneducated/unskilled worker, it is not very effective.
(iii) Evasive employees, who prefer not to be involved, may create problems.
(iv) Passing the buck for failure may be common.
(v) Due to lack of communication-skill, some important suggestions may get unheard.
Suitability
General industrial-scenario, R and D organisations, project work, consultancy firms, software industry,
quality circle, etc. ,
31.4.3 Laissez-Faire or Free-Rein Leadership
In this situation, the leader delegates his authority in totality. He avoids his authority and does not exercise
the power to go‘Tern. Leader is like any other member of the team and generally works as the contact
person in the group.
Advantages
(i) Effective, if subordinates are extremely responsible
(ii) High job satisfaction and morale
(iii) Scope of development for followers
(iv) No negative feelings in the group.
Limitations
(i) Chances of misdirected followers, doing unwanted activities
(ii) Lack of guidance and support
(iii) Chances of confusion and chaos
(iv) Leader may feel ignored and sidelined.
464 INDUSTRIAL ENGINEERING AND MANAGEMENT

Suitability
R and D organisation, highly talented and responsible group
35.4.4 Comparison of Leadership Styles .•
Different leadership styles are compared in the Table 31.1.
Table 31.1 Comparison of Leadership Styles

Factor Leadership Style

Autocratic Participative Laissez-Faire

1. Motivational approach Punishment, fear Involvement and reward Self-control, self-
(negative) (positive) discipline
2. Decision maker Leader only Leader in consultance Subordinates
with followers independently
3. Communication Downwards and Two-way Free flow
one way
4. Discipline Compulsively obey Exchange ideas Self-imposed
the leader
5. Deligation of authority Rare Fairly good Complete
6. Responsibility Leader Leader and followers Individual
7. Hierarchy of need Physiological and Ego Self-actualization
safety
8. Focus Task • People People
9. Initiative By Leader By team By individual
10. Followers Subdued Active Full scope of
showing talent .

31.5 LEADERSHIP GRID

Five different styles of leadership are described by a leadership (or managerial) grid. The two-dimensional
managerial grid had dimensions of concern for people and concern for production (task) (Figure 31.4).
Robert R. Blake and Jane S. Monton have classified the five leadership styles as follows:
31.5.1 Improvised Leadership
These leders exert minimum effort to get the required accomplishment of task. This is the bottom-left
corner of the grid '(1, 1). It is only appropriate to sustain organisational membership. Such leaders have
little regard for work or people. The leadership style is of Laissez-faire type, which is unconcerned even
if situation for work or people deteriorates.
31.5.2 Authority Compliance
The (9, 1) or bottom-right corner of leadership style is for a high regard for efficiency. Such leaders
maximize production by exercising pow:r and authority on their own. These leaders are production-oriented,
authoritarian, use threat and coercion, exercise close-supervision, and are very frustrating for subordinates.
No involvement of subordinates is sought in decision-making.
31.5.3 • Country Club Management
The (1, 9) or extreme top-left corner of leadership grid relates leadership style in which there is high
regard for people but least concern for production. Such leaders are more worried in keeping their subordinates
LEADERSHIP 465

happy and friendly. They presume that happy subordinates will do the work automatically. On their own
part, the leaders of such type ignore production related issues.

(1, 9) Country Club Management Team Management (9, 9)

High
Thoughtful attention to the needs of.
people to satisfy relationships leads
to a comfortable,friendly
_ organisational atmosphere and
work tempo
Work accomplishment is form
committed people; intcredependcncc
through a common stoke in
organisation purpose leads to
relationships of trust and respect

Concern for
I I I
people
Middle of the Road management
(5, 5)

Adequate organisation performance is possible through

balancing the necessity to get out work with maintaining
morale of people at a satisfactory level

(I, I) Improvised (9, 1) Authoelty-Compliance

_ Management Management
Exertion of minimum effort
Efficiency in operations results
to get required work done is
from arranging conditions of work
— appropriate to sustain
in such a way that human elements
organisation membership
interfere to a minimum degree

Low —I • I
1 2 3 6 7 8 9

Low I ligh
Concern for Production --I-- ,

Figure 31.4 Leadership (or, Managerial) Grid

31.5.4 Middle of the Road Management ..

The (5, 5) or mid of the leadership grid represents a balanced (but not maximum) approach towards
concern for people and concern for task. Limited authority is exercised by such leaders so that task
is accomplished smoothly. It is least risk and noncontroversial style of leadership. Such leaders involve-
stibordinate in decision making to some extent but the results are not optimum.
31.5.5 Team Management
The (9, 9) or top-right corner of the leadership grid is one of the best ways to lead and manage. Team
approach is the key to accomplish task so that operational results are maximized. Conducive environment
for satisfaction of the needs of employee is provided. The authority is exerted by leader after taking
tea in into confidence. The productivity is maximized with a committed, team-oriented set of subordinates
and leader. Blake and Mouton suggest that this is the best possible style to achieve results.

REVIEW QUESTIONS

31.1 What is meant by leadership? Is it correct to say that managing is same as leadership?

31.2 Classify business leaders and point out some important qualities that make for successful leadership.
466 INDUSTRIAL,. ENGINEERING AND MANAGEMENT

31.3. Explain the concept of managerial grid. Do yo.u think that the most desirable leader is of (9,. 9) :type in
all circumstances?
31.4. Explain the desirable qualities of a good leader.
,
31.5. Explain the following types of leadership:
(i) Participative leadership.
(ii) Autocratic leadership.
(iii) Laissez-faire leadership.
Compare these styles for different managerial issues.
31.6. Wh,at are the different patterns of leadership style? Give their advantages, limit11tions and suitability.

REFERENCES
I. Bennis, W.G, 1975, The unconcious conspiracy: Why _leaders. cannol lead. AMACOM: New York.
2. Bennis W.G. and Nane B, 1985, Leaders: The stratrgy for taking charge. Harper & Row: New York.
3. �einard, C.I., 1938, The functions of the executive, Harvard University Press: Cambridge.
4. Blake, R.P. and Monfon, J.S., 1954, The mailagerial grid, Gulf Publishing.
5. Fielder F.E.; 1957, A Theory of leadership effectiveness: McGraw Hill Book Co., New York.
6. Holt, D.H., 1993, Management: Principle and Practice. Prentice Hall: New Jersey.
7. Likert R., I951, /few pattern of management. McGraw Hill Book Co., New York:
8. McGregor, J.B., 1978, Leadership, Harper & Row: New York.
9. Reddin, W .J., 1970, Managerial eflectiyeness, McGraw Hill Book Co., New York.
I0. Selznick, P.; •t 957, Leadership· in administration, Row Peterson: Evanston.
11. Vroom V.H. and Gago AG, 1988, The new leadership: m·anaging participation in organisation, Prentice Hall:
New Jersey.

•
 32
TOTAL QUALITY MANAGEMENT (TQM)
AND CONTINUOUS IMPROVEMENT

32.1 INTRODUCTION
Total Quality Management (TQM) is a very popular term which goes with the culture of many manufacturing
and service sectors. Since, many organisations are trying to adopt TQM as a way of life, a careful
understanding about the basic philosophy, core issues, implementation aspects and pitfalls is needed.
There are many myths about TQM which are quite different from reality. A company which gets an
ISO 9000 certification will achieve TQM goal. Is it really true? No; this is a common myth, as total
quality cannot be ensured through mere obtainment of ISO 9000 certification: Then, what is the need
of getting ISO certification! We must understand it clearly. To start with, let us understand: what is
"total" and "quality" in TQM?
32.2 WHAT IS TOTAL IN TQM?
In TQM, total means involvement of all aspects of the organisation in satisfying the customer. It aims
at a goal that can only be accomplished if the usefulness is recognized by having a partnership environment
at each stage of the business process, both within and outside the organisation. "Within the business
process" means functions under organisational boundary. By outside, we mean a successful customer-
supplier relationship. This involves:
(i) Customer-supplier relationship based on mutual trust and respects. There must be a win-win strategy
for both.
(ii) Organisation's in-house requirements by the customers.
(iii) Customer's needs are well understood by supplier.
(iv) Suppliers are partners in achieving zero-deled situation.
(v) Regular monitoring of supplier's processes and products by the customer.

32.3 WHAT IS QUALITY?

Quality is what customer wants. It is the customer's perception about the degree to which the product
or service meets his/her expectations. Therefore, quality is defined by customer needs and expectation.
Like beauty, quality lies in the eyes of the beholder.
468 INDUSTRIAL ENGINEERING AND MANAGEMENT

Quality is the totality of features and characteristics of a product or service that bear on
its ability to satisfy a given need.
—as defined in American Society of Quality Control, Standard A3-1987: Glossary and Tables
for SQC.

Another definition of quality is given by Badiru and Ayeni (1993):

Quality refers to an equilibrium level of functionality possessed by a product or service based

on the producer's capability and customer's need.

32)3.1 Dimensions of Quality

Quality symbolises many aspects of what customer wants. Some dimensions of quality are given in
Table 32.1.

Table 32.1 Dimensions of Quality

Dimension Description
I. Performance It is the primary operating characteristics, which determines how well the
product or service performs the intended function.'
Example: Durability of batteries, fuel economy of ears, BHP of an engine,
etc.
2. Features These are special features (secnedary) which appeal to customers
Example: Design of seats in a car look and color of a refrigerator, etc.
3. Durability It is the time duration or amount of use before being replaced or repaired.
4. Reliability Likelihood of breakdown, repair or expected time of fault-free operation.
5. Serviceability Convenience and cost of repair and maintenance and is related to case in
resolving the customer complaints.
6. Appearance Look, taste, smell, sound or any other effect which is felt by human senses
Example: Noise of a refrigerator
7. Uniformity Limited variations among different products of same type.
8. Consistency and Conformance with standard, matching with documentation, being
Conformance on-time, etc.
9. Safety Harmless from health and environment point of V:JW
10. Time Waiting time, Completion time for a service
I I. Customer Service After sales service, treatment received during or before sales
12, Compatibility Compatibility of the product/services with existing or standard
interfaces, peripherals or other attachments, power source, etc.

A system-oriented definition of quality is as follows:

Quality refers to an equilibrium level of functionality possessed by a product or service based

and the producer's capability and customer needs.

Quality is descriptively simple but endlessly complicated when it is to be defined precisely. "Quality
is equal to people plus right attitude to achieve excellence; producing error-free products and services
, to the customers on time; and satisfying the requirements and expectations of customers." Quality means
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 469

providing both external and internal (within organisation) customers with innovative goods and services
that meet their needs effectively.
Quality generally signifies "excellence" of a product or service. Example of product is the item
which a customer use, such as car, house, book, etc. Services are like hospital, bank, post-office etc.
We have just mentioned about customer. In the context of TQM, customer are of two types:
(i) Internal customer
(ii) External customer.
Inside the business system, one employee uses the output of another employee. In assembly line,
as assembly moves, it changes hands. In this context, the successive person is the internal-customer of
the previous person. In general, one department may also be internal customer of another. For example,
packaging dept is internal customer to production dept.; while marketing dept is the internal customer
to the packaging dept. By external-customer, we mean end-user of the product or services, who is external
to the organisation.
The linkages of internal and external customers form the quality chain (Figure 32.1). This may
be broken at any time when one person, piece of product or services fail to meet the requirements of
internal/external customer.
► OUTSIDE ORGANIZATION

OUTSIDE ORGANIZATION

Figure 32.1 Oakland Model of the Quality Chains

If this chain breaks any where due to non-fulfillment of customer expectations, the effects display
a multiplying characteristics, which means, poor quality is reflected elsewhere also. Therefore, the action-
plan is to continuously examine the requirements and meet them with continuous improvements. Different
authors have identified quality in different ways:
• Fitness for purpose or use. —Juran.
470 INDUSTRIAL ENGINEERING AND MANAGEMENT

• The totality of features and characteristics of a product or service that bear on its ability to satisfy
stated or implied needs'. —BS 4778, 1987 (ISO 8402, 1986) Quality Vocabulary: Part 1 International
Terms.
• 'Quality should be aimed at the needs of the consumer, present and future' —Deming.
• 'The total composite product and service characteristics of marketing, engineering, manufacture and
maintenance through which the product and service in use will meet the expectation by the customer.'
—Feigenbaum.
• 'Conformance to requirements.' —Crosby.
A customer-related look at quality is:
Quality is achieving arid exceeding customer expectations and needs in order to produce business
for future. The goal is to achieve a continuous quality improvement effort that permeates every process,
all products and every service in the organisation. Business exist to deliver quality. Customers are buyers
and users of products and services. They can be internal or external. Thus, quality is the key attribute
that customer use to evaluate product or services. Quality is driven by market-place, by the competition,
and especially by the customer.

Key point
It is not the producers but the customers who determine whether or not quality has been
achieved.

Quality is the capability of a product or service to satisfy. "knowingly" those preconceived composite
wants of the user(s) that are intelligibly related to characteristics of performance or appearance, and do
not cause major overt or covert reactions or actions by other people.

Customers
Requirements

Feedback J Inputs

Quality Feedback

Figure 32.2 Customers determine quality in two ways: Requirement and Assessment

If we consistently meet the customer requirements, we can move to a different plane of satisfaction—
which is "delighting the customer". Many world-class companies have so well fulfilled their capabilities
to meet their customer' requirements On a continual basis, that this has created a reputation for excellence;
we can identify quality with this "reputation for excellence".
Quality is a complex value for money, expectation of performance, expectation of appearance, service
(pre-sale and after-sale), warranty, etc. Quality is a moving target. "Market-Driven Quality starts with
making customers' satisfaction an obsession and empowering our people to use their creative energy
to satisfy and delight their customer. It means our quality goals and objectives must be deployed throughout
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 471

the company so that each person knows what their responsibility is, and also knows that they will be
measured accordingly." J.F. Akers, CEO of IBM.
Meeting Customer's expectation
Legend
Traditional TQM route
Modem TQM route

Customers

•
Satisfaction Profit

Profit with
Delight growth

Better
Product

Better Product
More-patronage
Unexpected Product
Characteristic which Support
delights customers

Figure 32.3 Business-Customer Integration Loop

CUSTOMER FOCUS: THE ULTIMATE GOAL

CUSTOMER FOCUS: Ultimate goal to reach at

Exceeds customer's expectations
— Understanding customers business
—Consulting and training
—Organizational alignment
CUSTOMER FIT: Works as binder
—On-time delivery
— Quality
— Price
PRODUCT/SERVICE FIT: Core issue to start with
—Functionality
— Performance
—Reliablity

Figure 32.4 Ultimate Goal in TQM

For the survival of manufacturing and service industries in a hostile environment, customers complete
satisfaction is a must. Quality includes:
(i) meets the customers' needs in every respect,
(ii) available when required,
(iii) at a price the customer is prepared to pay.
As customers' needs are ever changing there is no such thing as absolute quality. However fitness-
for-purpose and value-for-money are the two things that will bring back the customer again and again
472 INDUSTRIAL ENGINEERING AND MANAGEMENT

to the organisation. As quality level changes, the profit margin also changes due to increase in the production
related cost for maintaining quality. Extreme cases of very poor quality or very high quality also renders
loss to the organisation, (Figure 32.5). Therefore, a proper level of quality standards are needed for
retaining profits.

Definition; Quality Assurance

'All activities and functions concerned with the attainment of quality'.

--13S 4773

Definition: Quality Control

`The operational techniques and activities that sustain the product or service quality to specified
requirements. It is also the use of such techniques and activities'.

Cost of quality
13reakeven (production costs)
Customer's Valuation
Profit
--(related to sales)

A C.
Poor Fair Good High

Quality level

Figure 32.5 Cost and Returns of Quality

32.4 TOTAL QUALITY MANAGEMENT (TQM)

TQM is a system approach to quality management. It refers to complete commitment to quality in all
spheres of the organisation. A plan for quality system is shown in Figure 32.6. Total in TQM stands
for an overall integrated approach to all aspects of quality, all domains of system, including, organization,
people, resources, time, hardware/software and even management commitments. TQM is a management
approach of organisation, centered on quality, based on the participation of all its members and aiming
at long-term success through customer satisfaction and benefits to the members of organisation and society
(ISO 8402/IS 13999). As defined by MacDonald, "TQM can be seen as a process, used to manage
the change in e.ivironment that will ensure that company reaches the goal, of total continuous improvement
(TCI). TQM sustains on four pillars: Systems, Top management commitment, Team work and SPC (statistical
process control) tools. The links to these pillars are culture, communication, commitment and customer
focus (Figure 32.7).
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 473

Establish a quality policy Written quality policy issued by the chief executive

Define TQM objectives Total quality management should be detailed

Define responsibilities Quality is the direct operational responsibility of the management

Prepare job descriptions towards TQM

Establish quality system The requirements of the customer and of the company must be met and
the system, in the terms of specific produres, methods and instructions,
profitability, and growth profile clearly defined, widely disseminated,
understood and enjoyed by all.

Identify problem areas Regular audits of the operations areas by self-assessment and
team work will lead to continual updating of solution to potential problems.

Prepare quality
Programme designed to achieve established objectives must start
Improvement programme

Implement programme Implementation must involve the commitment and involvement of all
employees

Monitor progress Qaulity improvement programme must defend the agreed time table.

Audit and review Practical implementation and usefullness of the quality system
overall effectiveness should be continually compared with the objectives. A method for
changes in the plan shuld be identified and documented.

Figure 32.6 Plan for a Quality System (Modified from Oakland, 1994)

TQM is an organization-wide quality focused culture. It is a journey to achieve excellence in

all aspects of the organization's activity. It involves all members of the organization at all levels of
operation.

Top
Management
Commitment 06
CO • 1% 0-4°
C.2`‘I°
. 400)5
Vendor Customer
Development delight

C Suppliers

Reliable Vendor
Systems Processe,s SPC
Tools
Quality
Customers

Culture
' Team
• Work

Figure 32.7 Model on Total Quality Management

474 INDUSTRIAL ENGINEERING AND MANAGEMENT

TQM is a management philosophy rather than a quality-technology. Ironically, TQM began in Japan
based on the quality philosophy of Dr. W. Edwards' Deming who is an American.
Three major phases of TQM are: statistical-quality-control, total-quality-control and total-quality-
management.

32.5 QUALITY GURUS

During recent years few quality experts or Gurus have contributed a lot in popularising the quality culture
in organisation. They have mainly focused on the ways to manage the quality. We look into the approaches
outlined by some of them, like Philip B. Crosby, W. Edwards Deming, and Joseph M. Juran.

32.5.1 Philip B. Crosby

Crosby proposed four absolutes of quality:
1. Definition—Quality is conformance to requirements; and not goodness.
2. System—Prevention, not appraisal.
3. Performance standard—Zero defects; and not 'that's close enough."
4. Measurement—Price of non-conformance to requirements (cost of quality); and not quality indices.
Crosby proposed management fourteen steps to improvement:
1. Make it clear that management is committed to quality. [Key: Management Commitment].
2. Form quality improvement teams with representatives from each department. [Key: Quality
Improvement].
3. Determine where current and potential quality problems lie. [Key: Quality Measurement].
4. Evaluate the cost of quality and explain its use as a management tool. [Key: Cost of Quality].
5. Raise the quality awareness and personal concern of all employees. [Key: Quality Awareness].
6. Take actions to correct problems identified through previous steps. [Key: Corrective Action].
7. Establish a committee for the zero defects programme. [Key: Zero Defect Planning].
8. Train supervisors to actively carry our their part of the quality improvement programme. [Key:
Supervisor training].
9. Hold a 'zero defects day to let all employees realize that there has been a change. [Key: ZD day].
10. Encourage individuals to establish improvement goals for themselves and their groups. [Key: Goal
setting].
11. Encourage employees to communicate to management the obstacles they face in attaining their
improvement goals. [Key: Error-Cause removal].
12. Recognize and appreciate those who participate. [Key: Recognition].
13. Establish quality councils to communicate on a regular basis. [Key: Quality Councils].
14. Do it all over again to emphasize that the quality improvement programme never ends. [Key: Do-
it-over-aga14:

32.5.2 Deming's Approach to TQM

Deming is among the pioneers of the TQM concept. His views on improving quality contains fourteen
point approaches as follows:
1. Aim at creating consistency of purpose for improving services and products
2. Aim at adopting the new philosophy for making the accepted levels of defects, delays, or mistakes
unwanted.
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 475

3. Aim to stop reliance on mass inspection as it neither improves nor guarantees quality. Remember
that teamwork between the firm and its suppliers is the way for the process of improvement.
4. Try to stop awarding business with respect to the price.
5. Aim to discover problems. Management must work continually to improve the system.
6. Aim to take advantage of modern methods used for training. In developing a training program,
take into consideration sue- items as
• Aim at identification of company objectives
• Aim at identification of the training goals
• Airn at understanding of goals by everyone involved
• Aim at orientation of new employees
• Focus on training of supervisors in statistical thinking
• Plan on team-building
• Aim at analysis of the teaching need.
7. Aim to institute modem supervision approaches.'
8. Aim to eradicate fear .so that everyone involved may work to his or her full capacity.
9. Aim to tear down department barriers so that everyone can work as a team member.
10. Try to eliminate items such as goals, posters, and slogans that call for new productivity levels
without the improvement of methods.
11.Aim to make your organization free of work standards prescribing numeric quotas.
12. Aim to eliminate factors that inhibit employee workmanship pride.
13. Aim to establish an effective education and training program.
14. Establish ways to develop a program that will push the above 13 points every day for never-ending
improvement.
The Quality system Drives' \ow CVNt v, ffect
the deming cycle
PLAN CatISC ecoe tue lobke
Dent,
Implement Process
ACT I PLAN I
Recommen- Define
dation Problems
ACT DO !CHECK I I DOI
Group and Collect Data
value

7+ Pareto diagrams
4 Histograms
Check
4 Scatter Diagrams
Both internally and externally 4 Run Charts
with suppliers and customers 4 Control Charts

Figure 32.8 Deming Cycle (PDCA) Figure 32.9 Elements of Deming Cycle

32.5.3 Joseph M. Juran

Juran's advocated ten steps to quality improvement:

1.Start with building awareness of the need and opportunity for improvement
2. Set realistic goals for improvement
476 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Organize to reach the goals (by methods to establish a quality council, identify problems, select
projects, appoint teams, designate facilitators)
4. Emphasis on training
5. Solve problems by carrying out projects'
6. Progress must be reported
7. Give recognition to any body who achieves
8. Communicate results with all concerned
9. Keep score by being quantitative
10. Maintain a regular momentum by making annual improvement part of the systems and processes
of the company.
32.6 PRINCIPAL OBJECTIVES OF TQM
A Total Quality oriented organization must have at least following principal objective. Organisation should
have many more additional specific objectives.
1. Customer focus, customer delight/satisfaction.
2. Continuous improvement as a culture of the organisation, which must be the way of life.
3. Focused, continuous and relentless cost reduction.
4. Focused, continuous and relentless quality improvement.
5. To create an organisation whereby evervone is working towards making their organization the best
in its business, and to capitalise on the sense of achievement and working in a world-class organisation.
To achieve these objectives, TQM must include a ten dimensional-framework (Figure 32.10)

Figure 32.10 An Integrated TQM Model

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 477

32.7 MANAGEMENT IN TQM

The key ingredient in TQM is meeting customers' requirements with continual improvements in product
as well services. An integrated model for managing quality and services in TQM environment is shown
in Figure 32.11. The important elements of TQM are integrated in this model.

• Quality
• Strategy

Develop the quality theme into an

• operations objective
• Product (service) design issues
• Conformation to design issues

Factors atlecting quality Understanding .elationships Analysis: The basis for

• Management among factors affecting quality continual improvement,
• Employees and pertormance quality assurance, and control
• Product (Service) design • Customer perceptions • Management directed
• Facilities, processes and • Expected quality outcomes diagnosis: Cost of quality
equipment. • Factors affecting quality loss studies, measurement,
• Materials tishbone diagrams, and
• Vendors etc. Pareto analysis,
• Statistical analysis: Inspection,
sampling and control sharts.

Top management commitment • Action to imp ow and assure

conformance to objectives
Customer Involvement • Management initiated
approaches
Supplier partnership • Behavior and quality
Benchmark al d continuous
improvement
• Design product for quality
• Disign and control of
production process for
quality
• Customer service distribution
and installation.
• Build team of empowered
employees.

Results: Consistent quality in all

products and services in conformance
with the strategic position desired

Figure 32.11 Managing for quality products and services (Modified from Adam and Evertt, 1998)

32.8 QUALITY IMPROVEMENT

Improvement is a continual process in TQM. It starts with a mission statement stating quality objectives.
A survey of customer needs follows then after. An analysis of organization capabilities and development
of overall corporate strategy follows. By integrating functional strategies with the evaluation of self, customer and
vendor, the overall improvement strategy should evolve. Figure 32.12 shows quality improvement in TQM.
478 INDUSTRIAL ENGINEERING AND MANAGEMENT

Mission and Quality Objectives

Surs'ey of Customer Needs

Analysis of Organizational
• Capabilities

Overall Corporate Strategy

• Engineering Manufacturing Marketing Business

Strategy Strategy Strategy Strategy

Communication Cooperation Coordination

Self-Evaluation Customer Evaluation

Vei dor
Evaluation
I
Figure 32.12 Quality Improvement in TQM

Sometimes, as an important strategy to arrive at improvements, benchmarking should be adopted

on case4o-case basis. For the details of benchmarking, refer the chapter dedicated on tLis topic. The
strategy for quality improvement is shown in Figure 31.13. Various aspects of this diagram will be explained
in sections to follow. The process starts with top-management commitment and aims at continuous improvement.
The quality system is maintained by proper and detailed documentation in the quality manual. Various
quality control (QC) tools such as pareto analysis, control charts, etc. are used to ensure quality level.
5S and 3 Mu help in improving the system performance. The 5S stand for Seiri (straighten-up), Seiton
(put things to order) Seiso (clean-up), Seiketsu (personal cleanliness), and Seitsuke (discipline). The 3 Mu
stand for Muda (waste), Muri (strain), and Mura (discrepancy). These 5S help in improving the workplace
while removal of 3 Mu helps in reducing waste and losses. All these terms are Japanese words, whose
English meanings and other implications are further explained in Section 32.10.
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 479

Ensure top
Start
Management
Commitment

Repea with
Is flume a new process
known problem
area?

Yes

Is Collect data/
Select a process In formation on No information on
for improvement process
process—Check
pareto-analysis available
sheets, etc.

No Does a flow
chart
exit?

Draw flowchart Yes

Examine process
flowchart

Collect more information/

Apply 5S data on process as required
• Seiri
• Sefton
1
• Seiso
Present data effectively
• Seiketsu
• Sellsoke • Histograms
• Scatter diagrams
Remove 3 Mu • Pareto-analysis, etc,
• khan 1 i
• Mori •
• Mura
Analyses for causes of.
problems or waste
• Pareto-analysis
• Cause and effect
• Brainstorming
• Imaginecring
• Control charts, etc.

Replan process

Build and maintain

Quality manual
Implement and maintain
new process

Figure 32.13 Strategy for process improvement

480 INDUSTRIAL ENGINEERING AND MANAGEMENT

32.9 QUALITY COST

It is the cost in ensuring and assuring quality as well as loss incurred when quality is not achieved.
Various components of cost of quality assurance may be classified into four categories of prevention
cost, appraisal cost, internal failure cost and external failure cost (Table 32.2).
Table 32.2 Costs of quality assurance (Compiled from Cavett 1968, Adam and Evertt-1998)

Prevention Costs Appraisal Costs Internal Failure Cost External Failure Costs
• Quality planning • Incoming Inspection Rejections • Recall
• QC administration and • Testing • Scrap at full shop cost • Complaint handling
systems planning • Inspection in process • Rework at full shop • Goodwill loss
• Quality related training • Quality audits cost • Warranty costs
• Inspection of incoming, • Incoming test and • Failures analysis • Bad publicity
inprocess laboratory tests • Scrap and rework, • Field maintenance
and final product fault of vendor and product service
• Processes • Checking labor
planning • Laboratory or other • Material procurement • Returned material
• Design review measurement service • Factory contact processing and repair
• Quality data analysis • Setup for test and engineering . • Fall in market share
• Procurement planning inspection • Machine down • Replacement
• Market research • Test and inspection • QC investigations of inventories.
• Vendor surveys material failures • Low employee morale
• Reliability studies • Outside endorsements • Material review activity • Strained distributor
for certification
• Maintenance and • Repair and relations
• System development calibration work trouble shooting
• Quality measurement • Product engineering • Excess inventory
and control equipment review and shipping
• Product qualification release
• Qualification of • Field testing
material • Field testing

l'ilanagement of quality-cost is useful in improving the performance of a TQM system (Figure 32.14)
This is achieved by planned effort to eliminate these costs. The Figures 32.15 to 32.17 show the variation
of prevention cost, appraisal cost and failure cost at different levels of targeted quality. Wnen these costs
are combined in a system, the pattern of total cost of quality at different quality level is U-shaped
(Figure 32.18). It is important to note that a particular level of quality gives minimum total cost for
quality. Around the optimal quality level, the total quality curve is flatter. (Recall, the EOQ curve in
the Chapter of Inventory Control). Therefore, it is not necessary to find-out the exact level of quality
for minimum total cost. Through, experience and iterations, the shop-floor may determine this level and
operate around this level. Exact quantitative estimate of different quality costs are practically difficult
to obtain. This is due to many subjective components of cost (refer Table 32.2). Industry, therefore learns
to operate at the desired level of quality through experience only. Figure 32.19 shows a cost and value
curve with respect to different levels of quality. As quality target is improved, the cost to produce increases.
Value of product for customer also increases. These two curves cross each other at two points. The
quality level, at which the margin between value and cost is maximum, is the desired level of quality
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 481

target. Same as Figure 32.18, around this target, the margin is quite stabilized. Hence exact estimate of
quality level is not very nnportant. Intuitive or guess, which is based on experience works well in many real
life situations. Through gradual modifications during practice, industries can arrive at the target quality level.

Organisation's Identify
Plan to Plan for Build
all
present cost reduce achievements. system to
elements of
structure and quality Provide monitor
quality
profitability costs funds for it achievements
costs

In
marketing • Increase
By using Devices
design productivity Design the
Return on and establish
specification, system for a
funds employed • Reduce costs methods
production, accountability
or similar ratios • Better processes
planning, by all '
deliveries technolbgy
purchasing employees
and testing

Figure 32.14 Improving performance through quality costs

Prevention Costs

Low High
Quality level

Figure 32.15 Prevention Cost

Appraisal Costs

Low High
Quality level

Figure 32.16 Appraisal Costs

482 INDUSTRIAL ENGINEERING AND MANAGEMENT

Failure Costs

Low I ligh
Low High
Quality level Quality level

Figure 32.17 Failure Costs Figure 32.18 Total Quality Costs

Best value
for mon

Low High
Quality level

Figure 32.19 Costs and Values of Qualities

32.10 ELEMENTS OF TQM

(i) Customer Satisfaction: It is the ultimate goal in TOM and thus forms the focal element in TOM
journey. The term, "customers" in TOM includes chain of customers right from the supplier to
the external customer. Each process and each element in quality chain must ensure that it leads
to customer satisfaction. Figure 32.20 shows some elements of quality, that help in the measurement
of customer satisfaction in a TQM movement.
Customer satisfaction has several dimensions, for example:
• fitness for use
• reliability-which governs the life aspect of quality
• value for money spend by customer
• after-sales service and support to the customer
• good packaging
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 483

Reliability
a Quality of Communications
Performance Quality of consulting
Fucntionality Quality of Offering
Product Range Flexibility

i ►

O O
Availability Reaction Time
Quality of Delivery Service Reparing Quality
Quality of Order handling Diagnosis
Contractual Terms Information, support

Figure 32.20 Customer SatisfactionvEvaluation

• customer right to correct information and training
• maintainability of the product/services
• variety in product/services
• speed of service (quick response time)
• civility of service at all levels
• good image of the company and customer confidence in the organization based on past performance.
(ii) Right first time: TQM adopts the policy of zero defect or no error. This requires a culture of
"right first time"—type. There is no scope of rework and rejections. The effort is to make a rigorous
application EPDCA—helix which means: Evaluate -4 Plan —> DO ---> Check —> Act.
(iii) Corporate Culture: It must be people-based rather than equipment based.
(iv) Education: Education means formal instructions which encourage teamwork and urge for improvement
and commitment towards quality.
(v) Continuous Improvement (Kaizen): TQM strives for ever-better quality. It never accepts the status
quo. By comparing with • world-class organisation and by identifying customer's need, a basis for
long-term continuous improvement evolves. This is achieved by bridging the gap between "AS-
IS" situation to a "TO-BE" situation.
Kaizen means improvement (ongoing improvement) involving everyone-top management, managers
and workers. Kaizen is everybody's business. Kaizen is the Japanese way of life. So, it is no surprise
that TQM has succeeded in Japan via Kaizen-inputs.
The most important difference between Japanese and Western Management concepts is that Japanese
Kaizen and its process-oriented way of thinking verses the West's innovation and result-oriented
thinking. Kaizen involves removal of 3Mus at different check points. These Japanese-Mus are: Muda
(means, waste), Muri (means, strain) and Mura (means, discrepancy). These Mus should gradually
be removed at different levels of man-power, technique, method, time, facilities, jigs and tools,
material, production volume, inventory, place and way of thinking.
Kaizen also involves the application of 5S for improvement. These are: Seiri (means, straighten-
up), Seiton (means, put things in order), Seiso (means, clean-up), Seiketsu (means, personal cleanliness)
and Seitsuke (means, discipline). Seiri is applicable for WIP, tools, unused machines, defective products,
etc. Seiton and Seiso is for place of work, Sieketsu is for personal habit, and Seitsuke is for cultural
discipline (Figures 32.21 and 32.22).
484 INDUSTRIAL ENGINEERING AND MANAGEMENT

KAIZEN CKECK POINT (REMOVE 3 MU) KAIZEN-5S MOVEMENT

APPLY 5S without fail for improvement
• Muth:

• Mari Seiri means:

• Work-in-process
• Mura Straighten up • Unnetesary date
[11ca l !e di ection
Unused machinery
Remove 3 MU in • Unused skill
• pefective products
• Man-power • System flows
• Papers and documents
• Technique Differentiate between the necessary and the
unnecessary: Discard the unnecessary
• Method • Aluda
• Time (Waste)

• Facilities Aluri Seim.. means:

• A place for everything
(Strain) Put Things
• Jigs and tools • Put every things in its place
In order
Mara • Proper documentation and entry
• Materials • Avoid searching things
(Deserepaney)
• Production Volume

• Inventory Seiso means: • Keep the work-place clean

Clean up • Green and cosy look of work-place
• Place
711
• Way of thinking
• Make it a habit to be clean
Seiketsu means
Personal and tidy : starting with
Cleanliness
your own personal appearance
1

Sesitsuke means:
• Follow procedures
Descipline in the system

Figure 32.21 KAIZEN

(vi) Benchmarking: rt is an effort to find the best performer in a specific area and to identify gaps
in the present situation by comparing with the benchmark performer.
(vii) Top Management Commitment and Involvement: It is necessary that the top management commits
and stays involved in product quality. It is weapon to capture market share and achieving product quality.
(viii) Customer Involvement: Customer expectations drive the TQM system. The product quality which
the customer expects, must be deployed in the product design and product performance.
(ix) Design Products for Quality: Customer expectation decides the basic• attributes of product. Quality
is what customer wants. This can happen through good performance, reliability, and service features.
(x) Design Processes for Quality: All the processes and workers form a system of production. These
should be designed for a quality that customers want.
(xi) Control Processes for Quality: The production processes should .be controlled to ensure quality
in items that are produced.
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 485

.Voice of the Voice of the

Customers Process

People Materials Environment

Equip meat Me hods Finance

The way we work/Blending of Resources

Knowledge

>, Innovation
`;' (-1
Deming
O Internal
Cycle E
Customer Statistical
Kaizen
cf, a. Methods and
E QC-tools

Products
or
O Services

Identifying changing
Customers
Needs and Expectations
-r

Figure 32.22 Continuous improvement model

(xii) Building Teams of Empowered Employees: Employees must be empowered to produce and service
for perfect quality. They drive the TQM movement.
(xiii) Goals and Performance Measurement: TQM advocates measurement and celebration of achievement.
It calls for the elimination of arbitrary goals without method. Employees must be encouraged to
measure their performance, and should look at the benchmark and improve.
(xiv) Develop Experts: TQM focuses on constant training and education. This leads to a culture of
developing experts in areas. Through education, training, encouragement and involvement, experts
are the catalyst to trigger improvements on a continual basis.
(xv) Systematic Approach: TQM can succeed only with a systematic approach to manage the TQM
movement. TQM requires a carefully planned and fully integrated strategy, which is driven from
the mission. Regular planning proper leadership and motivation, demonstrative top-management
commitment and involvement, team work, kaizen, quality circle, etc. are to be implemented more
systematically to achieve TQM goal of continuous improvement and customer delight.
(xvi) Customer-supplier Relationships: TQM demands for training the people to understand the customer-
supplier relationships. The commitment to customer needs should start from the top of the organisation.
The concept of internal customers and suppliers should be appreciated and used. The organisation
should work in a mode which is conducive for customer satisfaction.
(xvii) Total Cost Consideration: TQM must focus of total cost and not on the price of products or
services. Continuous improvement will bring improvements in product, servicF and performance.
Continuously improvements bring down the total cost of doing business.
486 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Top
Vision management
Environment
commitment
and Benchmarking
• Effective
leadership
Mission
Marketing
statement • Policy
deployment

• QC tools
• Quality team
• Process team
Customer
Satisfaction

• Implementation of
Needs/ quality plan
Expectations of
• ISO-Certification
users
• Quality audit

Process-Control
Continuous and System
Improvement Quality Assurance Evaluation
‘Kaizen (with corrective actions) QC Tools

Figure 32.23 System Transformation Process in TQM

(xviii)Supervision and Training: TQM advocates for adoption of modem methods of supervision and
training. The focus is not to criticize mistakes. Praise efforts and achievements. Recognize achievements
of all. We should provide the right environment to excel.
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 487

(xix) Better Communications and Quality Circle: TQM advocates for elimination of barriers between
departments by improving communications. This would improve integration of the process. It will help
in building team-work, without which TQM is certain to collapse. Better communication and openness
is needed for inviting suggestions for undergoing improvement. Quality circle, in which workers participate
to find solution to their work-related problems, is effective in identifying and solving problems:

32.11 SEVEN QC TOOLS FOR IMPROVEMENT

There are seven tools that are used in the quality improvement process (Figure 32.24). These tools are
useful in the identification of problem and establishment of measures for the improvements. These tools are:
1. Scatter diagram
2. Check sheets
3. Graph and charts
4. Histrograms
5. Pareto-diagram
6. Cause-effect Diagram, and
7. Control chart.
We will briefly discuss these tools.

Process Identification Process Analysis

Pareto-chart
Cause and effect
Histogram
diagram
Scatterniagram
Control Chart
Run chart and
Graph

Figure 32.24 Tools for continuous improvement

1. Scatter Diagram: It is prepared by plotting paired set of data such as temperature •,nd elongation,
Porosity and insulation, etc against each other on a X and Y axes (Figure 32.25).
Method of Use: It is used to collect paired set of data on causes and 'effects, and use scatter
diagrams to check the correlation between the set of data. It must be used for a sufficiently large
data set, say 40 or more.
2. Check Sheets: These ate forms specially prepared to enable data to be collected simply by making
checkmarks (Figure 32.26).
Method of Use: It is used for tallying the occurances of the defects or causes being addressed
and graphing or charting directly. Check-sheets are to be designed only after a full clarity about
the objective is known.
488 INDUSTRIAL ENGINEERING AND MANAGEMENT

Rel iability o f product

NM.

Temperature

Figure 32.25 Scatter diagram showing a negative correlation between two variables

A Nif A-Itf III

13 -1-111 II
jtif 4411 Thr
D -1-tti Ali I
E Nil Ntf ,ifif W III

• Simplifies data collection or analysis.

• Helpful in spoting problem areas by frequency, location, type of cause

Figure 32.26 Example of check-sheet

3. Graphs and Charts: These are the diagrams for plotting data and showing statistical breakdowns
with relationship between different quantities (Figure 32.27).
Method, of Use: These are used for organised set of observations. Line-graph may be used to
know trend, bar and pie charts for comparing quanties and showing relative proportions.

nn Bar grapl Broken line graph Triang c graph

• A
•'
• • 13 111
• • •
• •
III

Dot graph Pictorial graph, Area graph

Figure 32.27 Different types of graphs

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 489

4. Histogram: It is prepared by dividing the data-range into sub-groups and counting the number
of (Points in each sub-groups. The number of points (which is also called as frequency) are then
plotted as a height on the diagram (Figure 32.28).

100

90

80

70

60

s) 50

40

30

20

I0

0 I - --
5 10 15 20 25 30 35 40 45 50 55 60 65 70
—>

Figure 32.28 Frequency distribution histogram for breakdown times

Method of Use: For different resources such as machine, men, material etc. separate but stratified
histogram may be prepared. These may be examined to understand the relationship between shapes
of distribution and the specifications. This requires reasonably large data-set for plotting.
5. Pareto-Diagram: It is a diagram on which undesirable events or costs associated with items such
as quality, productivity, cost, safety, etc. are stratified according to their causes or manifestations.
It is then plotted in order of importance (Figure 32.29).
Method of Use: This illustrates the most serious causes of quality-failure among large number
of causes. Relative proportion of these causes is also known.
6. Cause-effect Diagram (Ishikawa Diagram): It is also called as Fish-Bone-diagram, as it is shaped
like the bones of a fish. It systematically summarizes the relationships between quality characteristics,
defects, etc and their causes (Figure 32.30).
Method of Use: It is very useful for identifying the factors that affect the characteristics, sorting
out the relationships between these causes and the results, and depicting these systematically. It
must be prepared after through brain-storming, and gathering the opinion of as many people as
possible in order to identify all the relevant factors (or causes).
 90
Cumulative
percentage
110
(40%. 80%)
c
70
V%)
°,3')
c.)2 60
e)

50
N
E
.7D c 40
o
6"c,
as
0
30
co
t%

20 V
a. V ul

e) (.1 C)
10
R

0 10 20 30 40 50 60 70 80 90 100

Figure 32.29 Pareto-diagram

Distribution in Inventory Delivery in

Stockholding
Supply-chain managements Supply-Chain

Third party? Quantity Stria Turns Improved Delivery Method

Who Picks? What stage of stock Stock Locations Reduced Packaging
Who Picks? Global Locations? Safety Stocks Speed of Delivery
Who Distributes? Stock Classification Accuracy of Forecasting Reliability of Delivery
Damage Free Shipments Price and product range Timeliness
Customer
Expecta-
tions
and
Needs Improved Customer Speed of dealing with
Service Levels Emergency order Reputation
Reduced Number of echelons Quality of Information Sisteni Delivery Time Response to Enquiries
Reduced Lead Times Ease of Placing Orders Flexibility Prompt Handling of Complaints
Strong Supplier Links Catalogue Format Reliability Confidence in Promises
Reduced in transit times Order Receiving Places Availability Prices

After market in
Entire Supply chain Orders Customer Service
Supply-Chain

Figure 32.30 An Ishikawa diagram highlighting aftermarket supply-chain measures of performance

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 491

7. Control Charts: It is a plot of a characteristic value against time. These characteristics may be variables
like length diameter, etc. or attributes such as number of defects on sheets, porosity, blow-holes, etc.
•(Figure 32.31).

Upper control limit

Central
I.ine (average)

Lower control limit

Period —>
• Helps in reducing the process variability
• Performance monitoring over time
• Out-of-control and a particular trend is immediately known
• Helps in deciding the quality of outcoming samples of a lot

Figure 32.31 A typical control chart

Method of Use: It is used to check variation, occurrence of defects, process-deviation form plans,
undesirable trends or cycles. It is also useful in identifying if the process is in control. For variables
X and R charts are used while for attributes p and c charts are used.

32.12 IMPLEMENTATION OF TQM

The implementation of TQM must involve the followings:
1. Involvement of all, from worker to top executive.
2. Management commitment must be evidently demonstrative.
3. Document what you do (quality manual); then do what you had documented (follow the quality
manual).
4. Effective strategic planning and information management must be introduced.
5. Mission and vision statement must be written and displayed every-where. These must be the guiding
rules to all employees.
6. People satisfaction should be the first priority. A satisfied person is motivated to do work in a
better way.
7. Identification of problem should be the way of life so that problem-solving may be undertaken
as a route of continuous improvement. Use lshikawa diagram, quality circle, brain-storming, suggestion-
box scheme, etc. to identify and solve problems.
8. Long-term needs, rather than short-term needs must be given more emphasis to derive major benefits.
9. All employees should be committed to adhere to systems and procedures so that a quality culture
is a regular affair.
10. Motivational scheme, regular training and educational scheme should be a regular affair to sustain
interest in TQM endeavour.

32.13 ISO 9000

ISO is the International Organisation for Standardization, which is headquartered in Geneva, Switzerland
ISO 9000 is a set of written standards, laying down a quality system. The basic elements of system is
492 INDUSTRIAL ENGINEERING AND MANAGEMENT

defined through ISO-documentation. ISO ensures a uniform system, which is universally recognized. Through
a disciplined documentation of process, which ISO offers, a customer focused quality system can be
maintained. ISO 9001 is for quality assurance in de, Ignidevelopment, production, installation and service.
ISO is a popular term, which has been linked with organisations looking for excellence in quality.
ISO 9000 is a set of international standards for quality management systems. Companies that meet these
standards can receive ISO 9000 registration from approved accredited registrars. Many customers are
demanding to their suppliers to achieve ISO 9000 certification. ISO 9002 is for production, installation,
and servicing. ISO 9001 includes all the elements of ISO 9001, and adds product design as additional component.
ISO 9000 consists of a series of five international standards for "quality management" (Table 32.3).
This is not specific to anyone industry. .
Table 32.3 ISO Description

ISO Series Description

ISO 9000 It is considered as a road map for use of the other standards in the series.
It defines the five key quality terms in the ISO terminology.
ISO 9001 • It specifies a model when two parties require the demonstration of a
supplier's capability to design, produce, install, and service a product.
ISO 9002 It specifies a model for quality assurance in production and installation.
ISO 9003 It is a model for quality assurance in final inspection and testing.
ISO 9004 It provides quality management guidelines for developing and implementing
a quality system and in determining the extent to which every element is
applicable.

32.13.1 ISO 9000 vs TQM

ISO-9000 is a set of standards and focuses on documents. It ignores human element. On the contrary,
TQM focuses on developing human elements (Table 32.4).
Table 32.4 ISO 9000 vs TQM

ISO 9000 TOM

Focus On: Focus On:

• Certification • Customer delight and satisfaction
• Product conforms to specification • Total organisation including 'invisible' and
• Audits and checks `visible' resources
• Key processes • Total Quality Management
• Quality system • Internal and external trust
• External trust • Leadership
• Visibility of capability prior to • Internal customer
delivery • Human factor
• Maintenance of what is documented • Flexibility and change management
• An asst,iince to external customers • Top management commitment
that a quality system is being pursued • Continuous improvement

For an ISO certified company, it is not necessary that it is following the essentials of TQM. ISO
only certifies that whatever is followed is being documented. The certification body does not share responsibility
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 493

that processes are perfectly ordered and everything is OK. In fact, it is wrong to say that an ISO company
is a TQM company. As a matter of fact, TQM is not a specific state (or stage) which can be achieved
by obtaining ISO. TQM is a continuous journey towards excellence (Figure 32.32). It means that ISO-
9000 does not transfer the onus of ensuring quality to the certifier. This is because ISO certification
makes no assurance about the quality of the final product.

Strategic weapon Self-Assessment

(Premium value)
Business
Be,:ft
Market driven Continuous
(Beat the competitor) Improvement •
(measurements)

Customer Driven Participation,

(Delight the customer) Tools and "Fechniques

Phase
Conformance to (maul.), ISO ONO edification
(Do it right first time)

Time -->

Figure 32.32 Role of ISO in TQM Journey

It is important to note that TQM and ISO 9000 Standard are not in opposition. One is supporting
Ale other. The ISO-9000 standard establishes the principles for a management system which will improve
a company's performance. It provides basic building block for moving towards TQM. TQM is a much
bigger concept than ISO. It is a way of life or an approach, which is percolated so that a company
is better managed. A quality system such vs ISO can do the followings:
1. Discover what is being done '
2. 'Write down what is being done
3. Justify what is being done
4. Do why t have been written
5. Record what is the consistency between things that are written and followed
6. Review what is being done (problem identification)
7. Revise (if necessary), all problem/improvement areas
8. Start• all over again and incorporate improvements again and again.

32.13.2 Basic Steps in Gaining ISO 9001 Registration

One can start by deciding if registration pertains to one of the ISO 9000 standards (ISO 9001, ISO
9002 or ISO 9003). To determine this, we have to consider:
• The-need for registration in market and industry segment.
• Benefits that organization gain by having a formal quaJity system.
• Registration being asked by an important customer or the parent company.
494 INDUSTRIAL ENGINEERING AND MANAGEMENT

• The amount of effort required to comply will require assessing the maturity of the quality system.
• The organization readiness in using detailed procedure documents.
• Executive management regular reviews reports of defects and customer complaints.
• The • training needs known for each job position.
• If quality system is absent or immature, it will require much more effort to become compliant.
The design and implementation of the quality system to comply with the requirements of ISO 9001
will typically require the following activities:
• systematically documenting what you do and how you do, which incorporate writing the quality
manual, describing the present quality system at every level,
• describe how most work in the organization gets carried out by writing the procedure document,
• creating a system to control distribution and re-issue of documents,
• as a first, quality measure in TQM, design and implement a corrective and preventive action system
to prevent problems from recurring,
• as a growth strategy, identify training needs for most 'positions in the organization,
• as a measure to establish standards, calibrate measurement and test equipment for standardisation,
• as a measure to educate people, train the people in the organization on the operation of the quality system,
• as a measure to ensure quality, plan and conduct internal quality audits,
• as a measure to march a head in TQM, attend to the other requirements of the standard that the
organization does not now comply with.
ISO 9000 focuses on a principle: "document what you do, and do what you document." It also,
relies on audits to provide assurance that the' system is meeting the standard. An audit involves inspection
of the documents that make quality system. The organization must carry out scheduled and planned internal
audits of the quality system. Internal audit is to ensure that quality system is being pursued and organisation
is committed to procedures and documents.
In ISO 9000 certification, a "thi►d party registration agency" is accredited to issue a certificate
for ISO 9000 standard.
Registration requirement includes a "pre-assessment" which is then followed by a "registration audit"
At both the preassessment and the registration audit, are comprehensive audit of the organization is performed.
This certificate typically expires after sometimes say three years. Surveillance audits at six months intervals
are needed to maintain the continuity the certificate. ISO certification is not a one time activity. It requires
continuous pursuation and adherence to the procedures (Figure 32.33).

32.13.3 ISO 14000 Standard .

The ISO 14000 standard is related to the quality system with environment concerns. ISO 14001 is standard
entitled "Environmental Management Systems-Specification": There is no formal relationship with the
ISO 9000 family of documents. A central element of the ISO 14001 standard is the "Environmental
Policy" which is defined by top management. The environmental policy is carried out by the organization
to ensure the "environmental protection and related policy".

32.13.4 Copies of an ISO Standard may be Obtained from the Following Addresses
American National Standards Institute
11 . East 42nd St.
New York, NY 10036 (USA)
Phone: 1-212-64274900, Fax: 1-212-302-1286
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 495

O
Road Map to ISO 9000 Registration : • Registration
In 18 Months O
Registration Coatinous
assessment itnprovement,
Practices
Correct Continued
documented 1 re-assessment Internal
and deficiencies
Correct audits
• implemented
deficiencies corrective
70-80%
Choose registrar management actions
for cutilication Revise management
review
O • quality reviews and
Constitute Practices
Begin Intial visity manual surveillance
and train: Documented
documentatio • Continue audits.
management Get feed- and
Analyze bock from audits by implemented
represcnta- Internal audits
processes registror internal
tives, Steering team
O First round of
groups Document Circulate
Top management internal audits Corrective
decision and upgrade fedback in actions
Communicate
commitment process the depts.
to mire Define area Management
Demonstrate workfore for upgrade Create initial Get the review
commitment and draft of internal
Define and
+ Develop improvement quality feedback
traits audit
Strategic plan manual by your
teams
Setup employees
Involve all documentation Implement
employees teams in procedures
in sharing each areas and
this instructions
vision
Continue
internal
audits and
corrective
actions

ISO 9000 Consulting doeventation working sess on

Standard overview training

,How to prepare a quality mat ual for ISO 9002 irdninng

Consulting strategic plan 111

,rievqlopt sent . Consulting review documentatiOn

Consulting quality audits

Implementing Ilse ISO 9000 standards training

Quality systeirt auditor ra ring

Quality system lead assessor training

3 7 10 13 16 18
Time (in Months)

Figure 32.33 Roadmap to ISO 9000 (Based on: 'NWW.iS0 easy.org; Rothery, 1993:) Mazumdar, 1996;
496 INDUSTRIAL ENGINEERING AND MANAGEME_NT

Man):' of the documents related to standards in the ISO 9000 family can be obtained from:
American Society for Quality
ASQC Quality Press
611 East Wisconsin Avenue
PO Box 3005
Milwaukee, Wl 53201-3005 (USA)
Ernail: asqc.01g

32:13.5 Standards Make up of the ISO 9000 Family

There are many standards which make up the ISO 9000 family. These standards are constantly being
added and revised. Some standards are:
ISO 9000-1: 1_944 Quality management and quality assurance standards-Fart 1: Guidelines for
selection and use.
ISO 9000-2: 1993 Quality management and quality assurance standards-Part 2: Generic guidelines
· fur the application of ISO 900/, ISO 9002 and ISO 9003.
ISO 9000-3:.1991 Quality maitagement and quality assurance standards-Part 3: Guidelines for
the application of ISO 900 I lo the development, supply and maintenance of software.
ISO 9000-4: 1993 Quality management and quality, assurance standards-Part 4: <Juide to dependability·
program management.
ISO 9001: 1994 Quality system-model for quality assurance in design, development, production,
i11stallatio11 and servicing.
ISO 9002: 994 Quality system-model for quality' assurance in production, installation and se1 icing
ISO 9003: 1993 Quality system-model far quality assurance in final inspection and test.
�SO 10011-1: 1990 Guidelines for auditing quality system Part 1: Auditing.
ISO 10011-2: 1991 Guidelines for auditing quality s)lstem. Part 2: Qualification criteria for quality
:.ystems auditors.
ISO 10011-3: 1991 Guidelines for _auditing quality system. Part 3: Management of audit programs.
ISO 10012-1: 1992 Quality assuranc� requirements for measuring equipment-Par I: Metrq/ogical
confirmati0n :.ystem for measuring equipment.
�SO 10013 Guidelines for developing quality manuals.
ISO/TR 13425 Guidelines for Selection of statistical methods in standardization and :,pecification.
ISO 8402: 1994 Quality management and quality assurance-Vocabulmy.
32.13.6 Comparison of ISO 9001, ISO 9002 and ISO 9003 •
ISO 900. l and ISO 9002 are quite similar. ISO 9001 is selected when the organization carries out the _
· innovative design of products or services, otherwise, ISO 9002 is opted. The only difference in the standards'
requirements are in section 4.4: "Design Control." While ISO 9000 has 20 elements, ISO 9001 has 19
and ISO 9003 only 16: Four elements, viz., design control, purchasing process control and servicing
are covered by ISO 9003. All descriptions of ISO 9001 are valid with ISO 9002 except Section 4.4,
which is only applicable for ISO 9001 for "design-control". ·
ISO 900/ is applicable for quality assurance in design/development, production installation and
servicing. Thereforl:, it is useful:
(a) For the user organisation when design is required and the product requirements are stated mainly
in performance terms, or they need to be established,- and
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 491

(b) When there is a need to establish confidence in product conformance which may be attained by adequate
demonstration of a supplier's capabilities in design, development, production, installation and servicing.
ISO 9002 applicable for quality assurance in production, installation and servicing. Therefore, it is useful:
(a) For the user requirement when is focused at the specified requirements for product which may
be stated in terms of an-established design or specification, and
(b) When there is a need to establish the confidence in product conformance which may be attained
by adequate demonstration of a supplier's capabilities in production, installation and servicing.
ISO 9003 applies in situations when the specified requirement for organisations are stated in teAns
of quality assurance in final inspection and test:
ISO 9004 is applicable for quality management and quality elements guidelines.

ISO 9001
(ISO 9002D
-0- ISO 9003 -0

Design and Procurement Production Installation Servicing

Development

Table 32.5 Cross-reference list of quality system elements

(This table does not form an integral part of the standard)

Clause (or sub- Title Corresponding clause (or

clause) No. in sub-clasue) Nos. in
ISO 9004 ISO 9001 ISO 9002 ISO 9003

4 Management responsibility 4.1 * 4.1 *+ 4.1 @

5 Quality system principles 4.2 * 4.2 * 4.2 +
5.4 Auditing the quality system (internal) 4.17 * 4:16 + •
6 Economics-Quality-related cost
considerations
7 Quality in marketing (Contract review) 4.3 * 4.3 *
8 Quality in specification and design 4.4 *
(Design control)
9 Quality in procurement (Purchasing) 4.6 * 4.5 *
10 Quality in production. (Process control) 4.9 * 4.8 *
11 Control of production 4.9 * 4.8 *
11.2 Material control and traceability (Product) 4.8 * 4.7 * 4.4 +
identification and traceability)
11.7 Control of verification status 4.12 * 4.11 * 4.7 +
(inspection and test status)

(Contd..)
 498 INDUSTRIAL ENGINEERING AND MANAGEMENT

Clause (or sub- Title Corresponding clause (or

clause) No. in sub-clasue) Nos. in
ISO 9004 ISO 9001 ISO 9002 ISO 9003

12 Product .verification (Inspection and testing) 4.10 * 4.9 * 4.5 +

13 Control of measuring and test 4.11 * 4.10 * 4.6 +

equipment (Inspection measuring
and test equipment)
14 Nonconformity (Control of non- 4.13 * 4.12 * 4.8 +
conforming product)
15 Corrective action 4.14 * 4.13 * -
16 Handling and post-production 4.15 * 4.14 * 4.9 +
functions (Handling storage
packaging and delivery)
16.2 After-sales servicing . 4.19 * - -
17 Quality documentation and records 4.5 * 4.4 * 4.3 +
(Document control)
17.3 Quality records 4.5 * 4.15 * 4.10 +

18 Personnel (Training) 4.18 * 4.17 * 4.11 @

• 19 Product safety mid liability -

20 Use of statistical methods 4.20 * 4.18 * 4.12 +
(Statistical techniques) 4.7 * 4.6 * -
Purchaser supplied product

Key
* Full requitement
+ Less stringent than ISO 9001
@ Less stringent than ISO 9002
- Element no present

Table 32.6 List of certification bodies

S.No. Name & Address Fax Telephone No. of Companies*

Certified

1. Bureau Verities Quality International 2023907 2021279

C/o Bureau Verities Industrial Services 2043559
(India) Pvt. Ltd. 44-Arcadia NCPA Marg 2021466
Nariman Point, Bombay 400 021.
2. TUV India Pvt. Ltd. 2850662 241641
Fiji House,
Damodardas Sukhadwala Marg,
Bombay 400 001.
3. Bureau of India Standards 3110131
Manak Bhawan 8,
Bahadur Shah Zafar Marg,
Ncw Delhi 110 002.
(Contd..)
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 499

S.No. Name & Address Fax Telephone No. of Companies*

Certified

4. Indian Register Quality Systems 2181241 2186376

(A Deptt. of Indian Register of
Shipping)
72, Maker Towers 'F'
(7th floor) Cuffe Parade,
Bombay 400 005.
5. Det Norske Veritas 96/98, 2180271. 2185614
9th Floor, Maker Tower IF', 2181080
Cuffe Parade, Bombay .400 005 2187107'
6. NQA Quality Systems Register 6467487
720, International Trade Power, 644207
Nehru Place, New Delhi 100 019.
7. Department of Electronics 4363083. 4360219
Standardisation, Testing & Quality
Control Directorate Electronics Niketan
6, CGO Complex, Lodi Road,
New Delhi 110 003.
8. SGS India Limited 2027657 2025253
SGS Houe Naoroji Furdoomji Road, 2025183
Colaba, Bombay 400 039.
9. British Standaids Institution (BSI); UK
10. Australian Standards Association (ASA);
Australia.
Note: BSI and ASA are not having offices operating in India. However few companies have got certificates
from them directly.
Key: (H: High, M: .Moderate; F: Few)
Source: Assocham Bulletin, Oct. 1993, p.25.

32.14 QUALITY AWARDS

The Union of Japanese Scientists and Engineers (UJSE) had instituted Deming Prize in 1951 which remained
the only quality prize till 1980s. When Japanese goods' quality started dr,minating the world market in
1970's and 1980's, many of the TQM concepts, started coming into acceptance in other parts of the
globe. On 20th August 1987, USA instituted Malcolm Baldrige National Quality Award (MBNQA) for
the recognition of American industry in total quality management. In 1988 the first MBNQA was awarded
to Motorola, Ino. in manufacturing sector and Globe Metallurgical, Inc. in small business categories.
Xerox got this in 1989, IBM Rochete in 1990, Solectron in 1991, and so on. The first award in service sector
went to Federal Express. in 1990. •
1h ith time, the weightage for different items on Which points are scored have changed. Despite
this; 7. to importance of "customer focus and satisfaction" (250 points) and "Business results" (250 points)
remained the maximum. till 1996. In 1997, the \ 'eightage of business results (450) increased dramatically,
while customer and market focus slided down to 80 points.
Similar to MBNQA (in USA), European Quality Award is given to European industries. Australian Quality
Award ,Since 1994) in Australian industries and Rajiv Gandhi National Quality Award in Indian industries.
The structural models of Rajiv Gandhi National Quality Award and European Quali ly Award are quite similar.
500 INDUSTRIAL ENGINEERING AND MANAGEMENT

32.14.1 Comparison of Malcolm Baldrige Award Criteria 1994, 1996,1997—A Shift in Focus
As mentioned earlier, the quality awards serve the dual purpose. On one hand, these are an useful recognition
for organisations pursuing quality. These awards are also' a role-model, and world class benchmark for
improvement. Other companies may adopt these for self-assessment on a regular basis. The way a particular
company is moving on different aspects of quality award may be-easily gauged. The award models have
also undergone changes with time. This is due to their changing focus (Table 32.7 to 32.9).

Table 32.7 Malcolm Baldrige Award in 1994

Examination Categories/Items 1994 Point Value

1. Leadership 95
1.1 Senior Executive Leadership 45
1.2 Management for Quality • 25
1.3 Public Responsibility and Corporate Citizenship 25
2. Information and Analysis 75
2.1 Scope and Management of Quality and
Performance. Data and Information 15
2.2 Competitive Comparisons and Benchmarking 20
2.3 Analysis and Uses of Company-Level Data 40
3. Strategic Quality Planning 60
3.1 Strategic Quality and Company
Performance Planning Process • 35
3.2 Quality and Performance Plans 25
4. Human Resource Development and Management 150
4.1 Human Resource Planning and Management 20
4.2 Employee Involvement 40
4.3 Employee Education and Training 40
4.4 Employee Performance and Recognition 25
4.5 Employee Well-Being and Satisfaction 25
5. Management of Process Quality 140
5.1 Design and Introduction of Quality
Products and Services 40
5.2 Process Management: Product and Service
Production and Delivery Processes 35
5.3 Process Management: Business and
Support Service Processes 30
5,.4 Supplier Quality 20
5.5 Quality Assessment 15
6. Quality and Operation Results 180
6.1 Product and Service Quality Result 79
6.2 Company Operational Result, 50
6.3 Business and Support Service Results 25
6.4 Supplier Quality Results 35
(Contd.-)
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 501

Examination Categories/Items 1994 Point Value

7. Customer Focus and Satisfaction 300

7.1 Customer Expectations: Current and Future 35
7.2 Customer Relationship Management 65
7.3 Commitment to Customers 15
7.4 Customer Satisfaction Determination 30
7.5 Customer Satisfaction Results 85
7.6 Customer Satisfaction Comparison 70
Total Points 1000

Table 32.8 Malcolm Baldrige Award in 1996

Examination Categories/Items 1996 Point Value

1.0 Leadership 90
1.1 Senior Executive Leadership 45
1.2 Leadership System and Organization 25
1.3 Public Responsibility and Corporate Citizenship 20
2.0 Information and Analysis 75
2.1 Management of Information and Data 20
2.2 Competitive Comparisons and Benchmarking 15
2.3 Analysis and Use of Company-Level Data 40
3.0 Strategic Planning 55
3.1 Strategy Development 35
3.2 Strategy Deployment 20
4.0 Human Resource Development and Management 140
4.1 Human Resource Planning and Evaluation 20
4.2 High Performance Work Systems 45
4.3 Employee Education, Training, and Development 50
4.4 Employee Well-Being and Satisfaction 25
5.0 Process Management 140
5.1 Design and Introduction of Products and Services 40
5.2 Process Management: Product and Service 40
Production and Delivery
5.3 Process Management: Support-Services 30
5.4 Management of Supplier Performance 30
6.0 Business Results 250
6.1 Product and Service Quality Results 75
6.2 Company Operational and Financial Results 110
6.3 Human Resource Results 35
6.4 Supplier Performance Results 30
(Contd..)
502 INDUSTRIAL ENGINEERING AND MANAGEMENT

Examination Categories/Items 1996 Point Value

7.0 Customer Focus and Satisfaction 250

7.1 Customer and Market Knowledge 30

7.2 Customer Relationship Management 30

7.3 Customer Satisfaction Determination 30

7.4 Customer Satisfaction Results 160

Total Point 1,000

Table 32.9 Malcolm Baldrige Award in 1997

Examination Categories/Items 1997 Point Value

1. Leadership 110
1.1 Leadership System 80
1.2 Company Responsibility and Citizenship 30
2. Strategic Planning 80
2.1 Strategy Development Process 40
2.2 Company Strategy 40
3. Customer and Market Focus 80
3.1 Customer and Market knowledge 40
3.2 Customer Satisfaction and Relationship Enhancement 40
4. Information and Analysis 80
4.1 Selection and Use of Information and Data 25
4.2 Selection and Use of Comparative Information and Data 15
4.3 Analysis and Review of Company Performance 40
5. Human Resource Development and Management 100
5.1 Work Systems 40
5.2 Employee Education, Training, and Development 30
5.3 Employee Well-Being and Satisfaction 30
6. Process Management 100
6.1 Management of Product and Service Process 60
6.2 Management of Support Process 20
6.3 Management of Supplier and Partnering Process 20
7. Business Results 450
7.1 Customer Satisfaction Results 130
7.2 Financial and Market Results 130
7.3 Human Resource Results 35
7.4 Supplier and Partner Results 25
7.5 Con-„any Specific Results 130
Total Points 1000
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 503

SYSTEIV.'N

Yuman
Resource
and managment

Senior
Executive
Leadership

(95 Points) SU ategic

Quality
Planning Quali y and
Operational
(60 Points) Results

(180 Points)
Infomation
and
Analysis's

(75 Points)

Figure 32.34 Malcolm Baldrige National Quality Award (1994)

32.14.2 Guidelines for Rajiv Gandhi National Quality Award

There are nine items under which this award is judged. Out of these, customer satisfaction (200 points),
business results (150 points), and processes (140 points) score, higher weightages.
1. Leadership (100 points), This incorporates top Management's behaviour and personal involvement
in leader's quality management function and efforts in driving the company towards total quality.
2. Policies and, Strategies (80 points): This incorporates the company's mission, values, vision and
strategies related to total quality and customer focus.
3. Human Resource Management (90 points): This incorporates the management of the company's
employees with a view to develop and realize their full potential to continuously improve organizational
development.
4. Resources (90 points): This incorporates the management's utilization and preservation of resources
(financial, information, material) and application of technology towards continuous business improvement.
5. Process (140 points): This incorporates the management of all the value adding activities within
the company including identification, review and revision to .ensure continuous improvement.
6. Customer Satisfaction (200 points): This incorporates the company's achievements and projections
in terms of customer satisfaction.
7. Employees Satisfaction (90 points): This incorporates company's success in satisfying the needs
and expectations of its employees.
504 INDUSTRIAL ENGINEERING AND MANAGEMENT

8. Impact on Society (60 points): This incorporates company's success in satisfying the needs and
expectations of the community at large, e.g., Company's approach to:
(i) quality of life;
(ii) the environment; and
(iii) the preservation of resources.
9. Business Results (150 points): This incorporates company's success in achieving its planned business
performance and in satisfying the needs and expectations of its stakeholders.

Table 32.10 Comparison of Different Quality Awards

Topic Deming Prize (1951) Baldrige Award (1987) European Quality Award Rajiv Gandhi
(DP) (MBNQA) (1992) (EQA) National Quality
Award

Primary Statistical Quality Customer Satisfaction Customer, people and Same as EQA
Focus Control (Confor- and quality (Custo- consumer perception
mance to specifi- mer driven quality)
cations)
Grading Policy and Objec- Leadership Infor- Leadership Same as EQA
Criteria tives Organisation mation and Analysis Policies and Strategies
and'Operation Edu- Strategic quality Human Resource Mana-
cation and Exten- Planning, Human. Re- gement Resource, Process
sion Data Gathering/ source Utilisation Customer Satisfaction
Reporting Analysis Quality Assurance Employees Satisfaction
Standardisation Quality Results Impact or Society Busi-
Control Quality Customer Satisfaction ness Results
Assurance Effects
Future Plans

Instituting Japan USA Western European India

Country Countries

Importance Management of Quality of Quality of corporate Same as EQA

Quality Management leadership

Winner All Firms Meeting Maximum of two

Standard per Category

Organisation Essentially Manu- Manufacturing Essentially large Same as EQA

facturing (private/ Service and Small Manufacturing firms
Public) Business (private/public)

Purpose Disseminating Customer Satisfac- Customer Satisfaction Same as EQA

Company wide tion, Benchmarking Relations with
Quality Control and or Competitive Community Empjoyee
Total Quality Cont- Comparison Self- Satisfaction
rol, Continuous Im- Appraised
provement, Rela-
tions with Suppliers

Grading time One Year Six Months One Year One Year
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 505

Enabler Results

Peopk People/
Manage- employee
mein Satisfaction
(90) (90)

Policy Business
Leadership Processes • Customer
-and Results
(100) (140) Satisfaction
Strategy (150)
(200)
(80)

Impact on
Resources
Society
(90)
(00)

1111MINIIIMMIL 111111111=11111&
Figure 32.35 Model for Rajiv Gandhi National Quality Award (Similar to European Quality Award)

Customer Focus

Policy and
Planning
Quality of
Information an 1 Organisational
Process product
analysis Performance
and service

People

Leadership

Figure 32.36 The Australian Quality Award Model for Total Quality Management.
J
(Source: Australian Quality Awards 1994: Assessment Criteria and Application Guidelines. Australian Quality
Awards Foundation. St. Leonards NSW, 1994. p. 7).
506 INDUSTRIAL ENGINEERING AND MANAGEMENT

Systems

Information
and
Analysis

Strategic Measurement
Driver Quality Manning of Progress Goal

Leadership Quality Customer

Results Satisfaction
Human Resource
Utillization

Quality
Assurance
systems

Figure 32.37 Minnesota Quality Award Model.

REVIEW QUESTIONS

32.1 Explain the concept of quality. How does this concept changed during recent years?

32.2 Explain the main elements of TQM. Why is customer focuses so important in TQM?

32.3 What do we mean by Kaizen? Explain the approach to implement it.

32.4 Summarize the status of the quality of products and services in India as compared to that of foreign competitors.

32.5 State and briefly describe the dimensions of quality.

32.6 What are the costs of quality? Explain each component of cost of quality.

32.7 Define quality. Why has the emphasis on quality changed from the producer to the customer?

32.8 Why does reduced quality often result in decreasing market share and productivity?

32.9 Identify your "customers" and your "suppliers" on your college campus. Are some customers also suppliers?
Explain tire concept of internal customer.

32.10 WI:at is the difference between quality planning, quality control, and quality improvement?

32.11 Summarize the contributions of these people to quality management:

(a) W. Edwards Deming,
(b) Phillip B. Crosby,
(c) Joseph M. Juran.

32.12 Define, describe, and explain the use of fishbone diagrams and pareto-chart.

32.13 For the Malcolm Baldrige National Quality Award:

(a) Which companies are eligible? (b) Name the criteria for evaluation.
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 507

32.14 Explain the framework for the award of "Rajiv Gandhi National Quality Award". How does quality award
he effective in benchmarking process?
•
32.15 Explain the 7-QC Tools and their importance in TQM.
32.16 What are ISO 9000 standards? Explain their significance. How does TQM and ISO certification related and
different?
32.17 "An ISO certified company is a TQM company". Comment.
32.18 Explain the process and approach of continuous improvement.
32.19 How does Deming Prize differ from other quality awards?
32.20 Explain the followings:
(a) 5S movement
(b) 3 Mu
(c) 7 QC tools
(d) Deming's wheel
32.21. Develop a flow chart of your enrollment process in college. Clearly show on it any areas of needed improvement.
32.22. Develop a cause-and-effect diagram for why your hostel mess/institute canteen not working satisfactorily?

REFERENCES

1. Adam and Evert, 1988, Operations Management, Prentice Hall of India, New Delhi.
2. Bank, J., 1992, The Essence of Total Quality Management, Prentice Hall, Hemel Hempstead.
3. Carlzon, J., 1987, Moments of Truth, Ballinger, Cambridge, MA.
4. Caulcutt R., 1989, Data Analysis in the Chemical Industry, Vol. I: Basic Techniques. Ellis Norwood Chichester.
5. Caulcutt, R., 1991, Statistics is Research and Development, 2nd edn., Chapman and Hall, London.
6. Crosby, P.B., 1979, Quality is Free, McGraw-Hill, New York.
7. Crosby, P.B., 1984, Quality Without Tears, McGraw-Hill, New York.
8. Dale, B.G. and Plunkett, U. (eds), 1990, Mangine Quality, Philip Alan, Hemel Hempstead.
9. Deming, W.E., 1982, Out of the Crisis, MIT, Cambridge, MA.
10. Deming, W.E., 1993, The New Economies, MIT, Cambridge, MA.
11. Danforth, Douglas. 1992, "The quality Imperative". Quality Progress (February 1987): 17-19.
12. Deming, W. Edwards. 1986, Out of crisis. Cambridge, MA: center for advanced Engineering study.
13. DeSouza, Glenn. 1989, "Now Service Businesses must Manage Quality. "Journal of business strategy (May-
June 1989): 21-25. .
•I4. Ealey, Lance. 1988, "Taguchi Basics." Quality (November 1988): 30-32.
15. Feigenbaum, Armand V., 1986, Total Quality Control, 3rd ed. New York: McGraw-Hill.
16. European FOundation For Quality Management (EFQM), The European Model for• Business Excellence: A
Guide to Self-Assessment, EFQM, Brussels.
17. Feigenbaum, A.V., 1991, Total Quality Control (3rd edn., revised), McGraw-Hill, New York.
508 INDUSTRIACENGINEERING AND MANAGEMENT

18. Garvin, D.A., 1988, Managing Quality: The Strategic Competitive Edge, the Free Press (Macmillan),
New York.

19. Garvin David A, "Quality on the line." Harvard Business (September-October 1983): 63-71.

20. Managing Quality. New York: Free Press, 1988.

21. "How the Baldrige Award Really Works," Harvard Business Review (November-December 1991):
80-93.

22. Gitlow, H.S. and S. Gitlow., 1987, The Deming Guide to achieving Quality and competitive position. Englewood
Cliffs, NJ: Prentice-Hall.

23. Gitlow, H.S., and P.T. Hertz., 1983 "Product Defects Productivity". Harvard Business Review 61. No.5 (September-
October 1983): 131-41.

24. Gupta V.K., and R. Sagar., 1993, "Total quality control using PCs in an Engineering company." International
journal of production Research 31, No. I (January 1993): 161-72.
25. Gavett J.W., 1968, Production and Operations Management (New York: Harcourt Brace Jovanorich),
401-402.

26. Handfield, Robart. "Quality Management in Japan Versus the United States." Production and Inventor) Management.
(Second quarter 1989): 79-84.

27. Hauser, John R., and Don Clausing. 1988, "The House of qUality." Harvard Business Review 66, No. 3
(May-June 1988): 63-70.

28. Heskett, James L., W. Earl Sasser, and Christopher W.L. Hart. 1990, Service Breakthrough: Changing the
Rule of Game. New York: Free Press.
29. Hakes, C. (ed), 1991, Total Quality Improvement: The key to business improvement, Chapman & Hall, London.

30. Hutchins, D., 1990, In Pursuit of Quality, Pitman; London.

31. Hutchins, D., 1992 Achieve Total Quality, Director Books, Cambridge, U.K.

32. Ishikawa, Kaoru. 1985, What is Total Quality Control? Translated by David J.Lu. Englewood Cliffs, NJ:
Prentice-Hall.

33. Juran, Joseph M., 1988 Juran on Planning for Quality. New York: Free Press.

34. Joiner, B., 1994, Fourth Generation Management, McGraw-Hill Maidenhead.

35. Kackar, Raghu N. "Taguchi's Quality Philosophy: Analysis and Commentary. "Quality Progress (April 1986):
18-23.

36. Kane, Victor E., 1986, "Process Capability Indices." Journal of Quality Technology (January 1986): 41-52.

37. Lewis, J.C. and Naim, M.M., '1993, Benchmarking of aftermarket supply chain, Production Planning and
Control, 6 (3), 258-69.

38. Lock, D., (.z.d), 1994, The Gower Handbook of Quality Management, 2nd edn., Gower Aldershot.

39. Macdonald, J. and Piggot, J., 1990, Global Quality: the new management culture, Mercury Books, London.

40. Murphy J.A., 1986, Quality in practice, Gill and MacMillan, Dublin, 1986.

41. Mazumdar, S.K., 1996, ISO 9000 Quality assurance system, In: Proceedings of Advanced Manufacturing Technology,
Jadavpur.

42. Mazumdar, S.K., 1996, Kaize, In: Proceedings of Advanced Manufacturing Technology, Jadavpur.
TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT 509

43. Noori Hamid, 1989 "The Taguchi Methods: Achieving Design and Output Quality". The Executive 3 (Fourth
Quarter 1989): 322-26.

44. Neave, H., 1990, The Deming Dimension, SPC Press, Knoxville, TN.

45. Oakland, J.S., 1996, Statistical Process Control;•a Practical Guide, 3rd edn., Butterworth-Heinemann, Oxford.

46. Oakland, J.S., 1996, Statistical Process Control, 3rd edn., Butterworth-Heinemann, Oxford.

47. Oakland, J.S., 1994, Total Quality Management, 2nd edn., Butterworth-Heinemann, Oxford.

48. Oakland, J.S., 1995; Total Quality Management: Text with cases, Butterworth-Heinemann, Oxford.

49. Oakland, J.S., 1997, Total Quality Management: A Pictorial Guide for Managers: Butterworth Heinemann,
Oxford.

50. Oakland, J.S. 1998, Quality assurance, control, and implementation, In: Handbook of Management, Ed. Lock,
D. 9 (Gower: Hampshire), 681-708.

51. Oakland, J.S. 1998, Total quality management, In: Handbook-of Management, Ed. Lock, D., (Gower: Hampshire),
160-181.

52. Powell T.C., 1995, TQM as competitive advantage. A review and empirical study, Strategic Management
Journal, Volume 16, 15-37.

53. Price, F., 1984, Right First Time, Gower, Aldershot.

54. Price, F., 1990, Right Every Time, Gower, Aldershot.

55. Price, F., 1995, Loving Work, Aldershot.

56. Popplewell, B. and Wildsmith, A., 1988, Becoming the Best, Gower, Aldershot;

57. 1992, "Quality: The Key to Growth for Small Companies and for America" Business Week, November
30, 1992.

58. Rothery, B., 1993, ISO 9000, 2nd edn., Gower; Aldershot.

59. Ryuka Fukuda, 1990, CEDAC-a tool for continuous systematic Improvement. Productivity Press, Cambridge,
MA.

60. Saniga E.M. and Shirland L-E., 1977, Quality control in Practice—A Survey, Quality Progress 10 (5),
30-33.

61. Scanlon Frank, and John T. Hogan, 1983, "Service Industry Quality Management-Part II", Quality Progress
60, No. 6 (June 1983): 30-35.

62. Schonberger, R.J., 1986, World Class Manufacturing. New York; Free Press 1986.

63. Shetty, V.K., 1987, "Product Quality and Competitive Strategy. Business Horizons (May-June 1987): 46-52.

64. Sary Singh Soin, 1992, Total Quality Control Essentials-key elements method-blogies and managing for success,
McGraw-Hill, New York.
65. Bhote K.R., 1991, World Class Quality-using design of experiments to make it happen, AMACOM,
New York.

66. Sullivan, L.P., 1986, "The Seven Stages in Company Wide Quality Control". Quality Progress (May 1986):
50-52.
•
67. Suzaki, Kiyoshi. 1987, The New Manufacturing Challenge: Techniques for Continuous Improvement. New York:
Free Press, Macmillan.
510 INDUSTRIAL ENGINEERING AND MANAGEMENT

68. Townsend, Patrick L. 1986 Commit to Quality: New York: Wiley.

69. Tribus, Myron, and Geza Szonyi. 1989, "An Alternative View of the Taguchi Approach." Quality Progress
(May 1989): 46-52.

70. Wheeler, D., 1992, Understanding SPC. Press, Knoxville, TN.

71. Wheeler, D., 1993, Understanding Variation, SPC Press, Knoxville, TN.

72. Zeithaml, Valarie A., A. Parasuraman, and Leonard L. Berry 1990, Delivering Quality Service: Balancing
Customer Perceptions and Expectations. New York: Free Press.
 33
STATISTICAL QUALITY CONTROL

33.1 INTRODUCTION
We have studied the definition and meaning of quality in the earlier chapter on TQM. Quality is mainly
what customer wants. By quality, an industrial engineer and an operations manager mean meeting
the customer requirements, both in product and services. The area of quality control is very old in our
literature. Statistical quality control methods were introduced by Walter Shewhart in a Bell Laboratory
memorandum in 1924. The enlarged and refined concepts of quality control and quality assurance got
the acceptance in industry very quickly. VlIe have also seen in the previous chapter that statistical-quality-
control charts are one of . the seven QC tools in the implementation of TQM. Let us discuss process
control charts (for quality) in more details. Then, we will• discuss the quality assurance and operating
characteristics curves.

33.2 PROCESS CONTROL

When we consider products or services, certain amount of variations are commonly present in the quality
characteristics which customer wants. These variations are due to two reasons:
(i) Chance variations.
(ii) Variations due to assignable causes.
Chance variations occur in random manner and there is very little that we can do about them to
control. These are natural to the process. It is due to aggregation of many relatively small factors present
in small degree. Few examples of chance variations are: quality of raw materials, performance of operator,
minor changes in weather conditions like temperature, etc. These variations are essentially uncontrollable,
inherent, random, chance-governed and commonly present. If the process shows only such variations,
it is said to be in-control (i.e., statistically controlled).
A different type of variations are due to some assignable cause. These variations are not random
and are relatively larger. It is generally caused by only one factor and occasionally by a few factors.
Some examples are: poor quality raw material from a new supplier, poor surface finish due to worn-
out tool, variation in the length of work-piece due to poor setting of machine, etc. These variations
are sporadic, uncontrollable, assignable and specific. Once, these variations are present, process is called
out-of-control.
512 INDUSTRIAL ENGINEERING AND MANAGEMENT

Chance variations cause about 85% of the problems in process, while assignable variations account
for only 15% of the problems. Chance variations may be reduced by changing the process and this can
be done through management efforts. Therefore, it is the management responsibility to control the chance
variations. To do so, there may be more efforts needed in better machine procurement, better training,
better environment and temperature control, etc. Assignable variations may be reduced by controlling
the process with proper identification and rectification of causes. Workers, who are closer to machines
(as compared to managers), can understand the causes and rectification of assignable variations. Hence,
it is workers' responsibility to control the assignable causes. This can be achieved by first identifying
the variations in the product/service parameters, relating them to the causes in the process variation or
process inputs and finally solving them by proper rectification measures. For the identification of assignable
variations, we use control charts.
33.3 CONTROL CHARTS
Control charts are the plots used to monitor outputs or inputs of a process, which produces a product
or service for meeting the customer's requirements. When we use control charts to monitor the processes,
it is called as statistical process control (SPC).
Two types of control charts are commonly used. These are shown in Figure 33.1.

[ Control Charts
...w.

ControlI
Charts Control Charts
for Variables for Attributes

R a or S
Chart Chart Chart

Figure 33.1 Classification of Control Charts

Variable data are the measured value of a product (or service) characteristics, such as length, weight,
diameter, temperature, hardness, etc. Attributes data are mainly of Go-No-Go type, proportion or fraction
of defective (or deviation) type. In this category, P-chart uses fraction defective of good/bad type,
C-chart uses number of defectives per unit (when a single defective may not be of greater significance
but a large number of defectives 'would add up to a defective item). A detail consideration for all the
charts are given in Table 33.1 and Table 33.4. In these tables, the formula for control limits of the
chart is also given. The values of constants in the formula (for example, A2 in X chart, D4 and D3 in
R chart, A3, B4 and B3 in X and S chart) are given in Table 33.3, for, different Values of sample size
(n).
STATISTICAL QUALITY CONTROL 513

Table 33.1 Comparison of Variable and Attribute Charts

Features Variable Charts Attribute Charts

Data required Variables such as measurable length,
width, diameter, time, temperature, •
etc.
Types of Charts R and S (or, a) charts
Advantages (i) Utilizes information from the
inspection records.
(ii) Process average and variations
are indicated.
(iii)
Limitations (i) Proper training is needed to
. follow the charts.
(ii) Control limits and specification
limits are often mixed, which may
cause confusion
(iii) Inspection, using gauges of Go-
No-Go or counting of defects per
unit, does not fit in these charts.
Applications For the process control to check
variations in the individual
characteristics of output or input
of the process
Attributes such as number of misprints
per page, number of defects per sample
etc.
P, NP, C and U charts
(i) Utilizes information ftom inspection
record.
(ii) Simpler than X and R Charts
Provides overall picture of quality.
(i) Oetailed information for controlling
a specific characteristic is lacking.
(ii) Charts fail to recognize different types
of defects in one measurement or
counting.
For the process contral to check
variations in proportion of defectiveg
or number of defects per unit

Table 33.2 Variable Control Chart

Features X and R Chart X and S Chart

Purpose X-Chart: To control central tendencies X-Chart: To control central tendencies
R-Chart: To control process variability S Chart: To control process variability
Control Limits X Chart X-Chart
UCL, =x + A2 R UCL,. = )7+4 g
LCL, = + A2 I? LCL, =x + A3 S
R-Chart S-Chart
UCLR = D4 k UCLS = B4 S
LCLE, = D3 R LCLS = B3 S
Sample Size R-Chart for
._
small ,sub-group. Sample (< 8) S-Chart for large sample size.
Central Line Mean of X and R Mean of X and. S

X= Viz: for n samples of mean X1 X = Ekiht: for II samples of mean X1

R= ER/. for e samples of range R. S = E S,/n: for e samples of standard

deviation S,
Use Measurement of quality characteristics Measurement of quality characteristics
which are variable like diameter, length, which are variable like diameter, length,
weight, etc. weight, etc.
514 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 33.3 Factors for Computing 3u Control Limits

Number Chart for Averages Chart for Standard Deviation Chart for Ranges
of obser- Factors for Control Limits
Factors for Factors Factors for Factors
vations Control Limits for Control Limits for
in Sample Central Central
Line Line

(n) A A, A2 c2 8, B2 83 84 d2 03 Di D2 D3 D4

2 2.121 3.760 1.880 0.5642 0 1.843 0 . 3.267 1.128 0.853 0 3.686 0 3.267
3 1.732 2.394 1.023 0.7230 0 1.858 0 2.256 1.693 0.888 0 4.358 0 2.575
4 1.500 1.880 0.729 0.7979 0 1.808 1) 2.266 2.059 0.880 0 4.698 0 2.282
5 1.342 1.596 0.577 0.8407 0 1.756 0 2.089 2.236 0.864 0 4.698 0 2.115
6 1.225 1.411) 0.483 0.8686 0.026 1.711 0.030 1.970 2.234 0.848 0 5.018 0 2.004
7 1.134 1.277 0.419 0.8882 0.105 1.672 0.118 1.882 2.704 0.833 0.205 5.203 0.076 1.924
8 1.061 1.175 0.337 0.9073 0.167 1.638 0.185 1.815 2.847 0.820 0.387 5.307 0.136 1.864
9 1.000 1.094 0.337 0.9139 0.219 1.609 0.239 1.761 2.970 0.808 0.546 5.394 0.184 1.816
10 0.949 1.028 0.308 0.9227 0.262 1.584 0.284 1.716 3.078 0.797 0.687 5.469 0.223 1.777
11 0.905 0.973 0.285 0.9300 0.299 1.561 0.321 1.679 3.173 0.787 0.812 5.534 0.256 1.744
12 0.866 0.925 0.266 0.9359 0.331 1.541 0.354 1.646 3.258 0.778 0.924 5.592 0.284 1.716
13 0.832 0.884 0.249 0.9410 0.359 1.523 0.382 1.618 3.336 0.770 1.026 5.646 0.308 1.692
14 8.802 0.848 0.235 0.9453 0.384 1.507 0.406 1.594 3.407 0.762 1.121 5.693 0.329 1.671
15 0.775 0.816 0.223 0.9490 0.406 1.492 0.428 1.572 3.472 0.755 1.207 5.737 0.348 1.652
16 0.750 0.788 0.212 0.9523 0.427 1.478 0.448 1.552 3.532 0.749 1.285 5.779 0.364 1.636
17 0.728 0.762 0.203 0.9551 0.445 1.465 0.466 1.534 3.588 0.743 1.359 5.817 0.379 1.621
18 0.707 0.738 0.194 0.9576 0.461 1.454 0.482 1.518 3.640 0.734 1.426 5.854 0.392 1.608
19 0.688 0.717 0.187 0.9599 0.477 1.443 0.497 1.503 3.689 0.733 1.490 5.888 0.404 1.596
20 0.671 0.697 0.180 0.9619 0.491 1.433 0.510 1.490 3.735 0.729 1.548 5.922 0.414 1.589
21 0.655 0.679 0.173 0.9638 0.504 1.424 0.523 1.477 3.778 0.724 1.606 5.950 0.425 1.575
22 0.640 0.662 0.167 0.9655 0.516 1.415 0.534 1.466 3.819 0.720 1.659 5.979 0.434 1.566
23 0.626 0.647 0.162 0.9670 0.527 1.407 0.545 1.455 3.858 0.716 1.710 5.006 0.443 1.557
24 0.612 0.632 0.157 0.9684 0.538 1.399 0.555 1.445 3.895 0.712 0.759 5.031 0.452 1.548
25 0.600 0.619 0.153 0.9696 0.548 1.392 0.565 1.435 3.895 0.709 1.804 5.058 0.459 1.541

Example 33.1 In a process to manufacture shafts, five observations of shaft diameter of

10 samples are taken on an hourly basis. The recorded observations are given below. Draw X and
1? chart.

Sample No. Sample Value ii (mean) R (Range)

1 8.010.. 8.012 8.011 8.0105 8.0125 8:01i2 0.0025
2 8.000 8.065 8.005 8.002 8.010 8.0164 0.065
3 8.105 8.015 8.008 8.01 8.02 8.0316 0.097
4 8.05 8.06 8.06 8.07 8.00 8.048 0.07
5 8.012 8.015 8.06 8.065 8.012 8.0328 0.053
6 8.015 8.06 8.07 8.07 8.08 8.059 0.065
7 8.06 8.065 8.065 8.105 8.06 8.071 0.045
8 8.03 8.06 8.04 8.06 8.02 8.042 0.04
9 8.04 8.07 8.03 8.04 8.01 8.038 0.06
10 8.06 8.00 8.12 8.04 8.01 8.046 0.12

X = 8.0342 i? = 0.0618
STATISTICAL QUALITY CONTROL 515

The mean of each sample (i.e., T) is calculated by adding all sample value of a row and dividing
by 5 (i.e., number of values in each sample).
The mean of sample mean is calculated by adding the second-last column of and dividing by
10 (i.e., number of times samples are taken).
Range of each sample is calculated in the last column by subtracting the highest value of a sample
from its lowest value. For example: in sample 1, the highest observation is 8.0125 and the least. is 8.01.
Therefore, the range for this sample is (8.0125-8.01) or, 0.0025.
Average-of-range (R) is calculated by adding the last column and dividing by 10.
Calculation of Control Limit: For n = 5; D4 = 2.115, D3 = 0, A, = 0.577 (refer Table 33.3).
For x chart
Upper Control Limit (UCL) = :f: + A, T? = 8.0342 + 0.577x 0.0618 = 8.0698
Lower Control Limit (UCL) = x - A2 T? = 8.0342 - 0.577 x 0.618 = 7.9985
For R Chart
UCL = D4 R = 2.115 x'0.0618 = 0.1307
LCL = D3 R = 0
How to plot .)7 and R chart?
On a graph paper draw UCL, LCL and r lines as shown in the first Figure 33.2, for 7-chart.
Similarly, just below the 7-chart, draw R chart. For this, first draw lines for R , UCL and LCL.
For each sample, plot the values of x on the a -chart and R value on R chart.

8.0742 - 11( .1. = 8.0698

8.0642 -
8.0542 -
8.0442 -
8.0342
8.0242 - = 8.0342

8.0142 -
8.0042 -
7.9942 - = 7.9985

I 2 3 4 5 6 7 9 I0
Sample Number
0.14 - UCI.= 0.1307 .
r i
0.12 -
0.1 -
0.08 -
R =0.6.18
0.06
0.04 -
0.02 -
0 IX' . 0
2 3 4 5 6 7 8 9 10
Sample Number
Figure 33.2 k and R Charts for given Example 33.1
516 INDUSTRIAL ENGINEERING AND MANAGEMENT

Some Preliminary Observations regarding Process

1. The process is out-of-control for 7th sample as the value (8.071) goes beyond VCL. This means
that some preventive action might have been taken at this stage to bring the process in
control.
2. In the beginning of the .7 chart, process is below x line but later, i.e., after 3rd sample, its tendency
is to be above x line. This requires attention of the operator.
3. Range chart behaviour is normal except the, last sample. Since the tendency is to go up, there
is a need to look into the process so that variability in the process is reduced.

Table 33.4 Attribute Control Chart •

Features p-chart np-chart C-chart U-Chart

Purpose For proportion Number of units Number of non- Number of non-
of units non- non-conforming conformities or conformities per
conforming (from (from. sample of defects per unit unit (for samples
sample not constant size) (for sample of not necessarily of
necessarily of constant size) constant size)
constant size)

UCL - 34/5(I - f/) E+

3,fc
": 3 it
P rf +
rr 11

Control Limit

- 3 41
3 0 -13) 3
LCL-4 P +
,4; qn

Central Line p = E p,/n nT, = npilit E= =

Use Result of accept/ Number of For total count When the oppor-
reject type of rejected items of non-conformities tunities for occurrence
inspection in sub-group of in an article (follows of non-conformity
constant size Poisson's distribution) change from subgroup
to subgroup

Example 33.2 Data for the test results of 17 samples of 300 items 'are shown below Draw
p-chart.
Sample number I 2 3 4 5 6 7 8 9 /0 II 12 /3 14 15 16 17
Number of 30 36 33 27 33 39 24 24 12 39 /8 27 24 33 ?I 30 6
defectives
Solution: For each sample, the fraction defective is calculated by dividing the corresponding number
of defectives by total number of items in each run (which is equal to 300).
3VT, (1- 15)
The control limit = P±
4T,
Here, =
EnP 456
= 0.089
n 17 x 300
STATISTICAL QUALITY CONTROL 517

Sample number Number of defectives Proportion fraction defective

I 30 0.10
2 36 0.12
3 33 0.11
4 27 0.09
5 33 0.11
6 39 0.13
7 24 0.08
8 24 0.08
9 12 0.04
10 39 0.13
11 18 0.06
12 27 0.09
13 24 0.08
14 33 0.11
15 21 0.07
16 30 0.1
17 6 0.02
Total 456 11.52

Note that a
means here as: total number inspected during the period.
(1 - 0.089)
UCL = 0.089 + 3.10.089 7 = 0.089 + 0.207 = 0.296
1
\I0.089 (1- 0.089)
LCL = 0.089 + 3 = 0.089 - 0.207 = -0.118 = 0
7
Lower control limit has come out as negative, which is unacceptable; hence it is taken as zero.
ExOmple 33.3 Draw np chart for the data of defectives in Example 33.2.

Solution:
E np
=
k
where, k = number of sample
E np = total number of defectives in k samples
46
np = 26.8
1'7
Control Limits for yip chart
UCL = np + (1 - 75)
LCL = np - 3.\k, (1 -
2
Here, p = - =- 6.8=0.089
n 300
Thus, UCL = 26.8 + 3V26.8 (1- 0.089) = 41.6
LCL = 26.8 - 3V26.8 (1- 0.089) = 11.97
518 INDUSTRIAL ENGINEERING AND MANAGEMENT

-n
UCL, =O.29(

ro
o z
UU
U
IC rE

-I- 00

— N-

-'0

_ r

0
.f) fl .41
O Cl 6 0 0
6 6 O • SOA9▪ 3313(1 JO
S3A!133,10a U0!1.1d0.1(1

Figure 33.3 p and np Chart for Examples 33.2 and 33.3

STATISTICAL QUALITY CONTROL 519

Upper Control Limit

Central Line

Lower Control Limit

Normal Behavior One plot out above. One plot out below. Invest-
Investigate for cause of igate for cause of
poor performance improvement.
Upper Control Limit

Central Line

Lower Control Limit

Two plot near upper control. Two plot near lower control. Run of 5 above central line
Investigate for cause of poor Investigate for cause of poor Investigate l'or cause of
perlbrmance. • improvement. sustained poor performance.
Upper Control Limit

Central Line

Lower Control Limit

Run of 5 below central line. Trened in either direction 5 Erratiee behaviour.
Investigate for cause of plots. Investigate for cause Investigate.
sustained improvement. of progressive change.
Upper Control Limit

Central Line

Lower Control Limit

Sudden change in level.
Investigate for cause.

Time "lime I I- Time

Figure 33.4 Control Chart Evidences f6r Investigation

33.4 ACCEPTANCE 'PLAN

Acceptance plan or acceptance sampling is related to the aspect of quality assurance through inspection.
The basic aim in TQM is to derive customer satisfaction through goad quality product and services.
To check the quality, it is not economical to inspect all the products, coming out of the processes. Therefore,
out of a bigger lot, a small sample is checked for defectives, and sampling plan is designed to achieve
certain degree of quality assurance. •

Acceptance plan is the overall scheme for the acceptance or rejection of a lot based on information
gained from the sample. It is used to identify both the size and type of sample and the criteria
to be used to either accept or reject the lot.
 520 INDUSTRIAL ENGINEERING AND MANAGEMENT

The sampling in the acceptance plan may be single, double or sequential. Based on these, different
acceptance plans are designed:

33.4.1 Advantages of Acceptance Plan

• It is an economical way to ensure good quality production. In general, 100 percent inspection is
too costly. For high volume transfer-line and continuous production process, it is practically impossible
to have 100% inspection.

• • Easy to understand and conduct the plan for quality assurance.

• Sampling is effective in reduced fatigue and cost associated with inspection.
• Easy to train the personnel involved in inspection due to repetitive job.
• Well-documented literature is available for using different plans and strategies related to quality
assurance.
• Easy computation.
• Smaller inspection staff is needed.
• Lesser damage of products is likely due to fewer items being subjected to handling during inspection.

33.4.2 Disadvantages of Acceptance Plan

• The approach is based on sampling; hence no definite statement regarding outgoing quality is possible.
The decision related to acceptance/rejection of the lot is dependent on sampling, which gives only
a probabilistic estimate whether an outgoing lot is defective or not.

33.4.3 Suitability
• For mass production unit, where repetitive jobs of same type come out.
• Where testing is done after breaking or destroying the. work-piece.
This testing is also called as destructive testing such as one used in stress testing, fatigue testing,
etc.
• When inspection cost is very high, as sampling would save number of jobs to be inspected.

33.5 ACCEPTANCE SAMPLING

Inspection is an important way to assure quality. It is generally convenient to inspect items in batches.
Acceptance sampling provides an established way to use statistics in inspection for ensuring quality. It
involves the application of statistical sampling plans, which prescribe the methodology for selecting sample
from a finished output and analysing the information of the sampling plan in maintaining a desired level
of quality.

Use of Acceptance Sampling

• Monitor the quality of incoming material or parts at a desired level.
• Monitor an inspection plan, which involves taking an accept/reject decision about the quality
of big batch of items.
• Monitor the after-effect of the process, i.e., only after the production ends (rather than
process capabilities tests like 7 , R charts) which are process-control techniques.
STATISTICAL QUALITY CONTROL 521

Let us define the following symbols:

N: Number of items in the batch
n: Number of items selected as sample in the N
C: Acceptance number, i.e., in a sample of n, if more than C defectives are found after inspection,
the entire lot is rejected.
AQL: Acceptable Quality L :1
LTPT: Lot Tolerance Percent Defective
a : Producer's risk
{3 Consumer's risk
We will explain these terms in a single sampling plan. Single sampling plan is always defined
by two terms: sample size (n) and acceptance number (c). Thus, if the inspection of n items (out of
a lot of size N) results in more than c defectives, the entire lot is rejected.
How to determine the sample size and acceptance number? To answer this, let us understand the
process and objectives of sampling.

33.5.1 Nomenclature and Symbols used in Sampling Plan

We define the following nomenclatures in a sampling plan:
N: Number of items in a batch (also called as lot size)
N: Number of items selected as a sample in a bigger lot of size N (also called as sample size)
C: Acceptance number, i.e., in a sample of it if more than c defectives are found after inspection,
the entire lot is rejected.
M: Number of defective pieces in a given sample of size it.
M: Number of defective pieces in a given lot of size N.
p: Fraction defective:
In a sample; p =
In a lot; p = MIN.
: Actual process average fraction defective of a product due for inspection
P: Average fraction defectives in a sample
pa: Probability of acceptance of a lot
a : Producer's risk, defined as: probability of a batch being good or even better than AQL (Acceptable
Quality Level) but yielding a bad sample and thus getting rejected. Thus, it is the probability of
rejecting a good lot, which otherwise would have been accepted. •
: Consumer's risk, defined as: probability of a lot being bad or even worse than the limiting quality
but yielding a good sample and thus getting accepted. Thus, it is the probability of a defective
batch being accepted which otherwise would have been rejected.
AQL: Acceptable quality level, defined as the proportion of had components in a lot such that the
lots having less than this proportion have high probability of getting accepted.
LTPD: Lot Tolerance Percentage Defectivs, defined as the proportion of bad components (somewhat
larger than AQL) in a lot such that the lot having more than this proportion of defective components
have a small probability of getting accepted.
In the context of sampling plan, the ideal objective of passing a good lot (with, percentage defectives
less than acceptable quality level) and rejecting a bad lot (with percentage defectives more than
522 INDUSTRIAL ENGINEERING AND MANAGEMENT

AQL) may not be achieved. This is due to two types of sampling errors: type I error and type
II error.
Type I Error: A good lot is rejected due to excess capturing of defectives in the sample. This error
is due to chance factor associated in sampling. However, if this happens, the producer is at a loss
or risk. Hence, type I error is measured by producer's risk.
Type II Error: A bad lot is accepted due to less capturing of defective in the sample. This error is
due to chance factor associated in sampling. However, if this happens, the consumer is at risk
or loss. Hence, type II error is measured by consumer 's risk.

33.6 SINGLE SAMPLING PLAN (SSP)

In this, the decision regarding the acceptance or rejection is made after drawing a sample from a bigger
lot. Inspection is done and if the defectives exceed a certain number the lot is rejected. Otherwise, the
lot is accepted when the number of defectives are less than the acceptance number. A flow chart for
SSP is presented below in Figure 33.5.

Select a Lot of N
Items

Select Random
----'
Remaining (N—n) Items
Sample of
n Items

Defectives found Remove defectives

in sample = C
Inspect all
n Items
If
C<C Replace defectives

Reject
Lot

n non-defective parts

Accept the lot

Figure 33.5 Flow Chart for Single Sampling Plan

33.7 DOUBLE SAMPLING PLAN (DSP)

In this, a small sample is first drawn. If the number of Ifectives is less than or equal to an acceptance
l
number (C1 ), the lot is accepted. If the number of defectives is more than another acceptance number
(C2), which is higher than CI' then the lot is rejected. If in case, the number of defectives in the inspection
STATISTICAL QUALITY CONTROL 523

lies between C2 and C1 , then a second sample is drawn. The entire lot is accepted or rejected on the
basis of outcome of second inspection.
A flow chart of DSP is given in Figure 33.6.

Select a Lot of N Items Select Random

Sample of
Items}
./

Remaining (N-n) Items

C1' Defective
found in this sample Replace defectives
n t Non-defectives
Accept
Lot

(N — n1) Items
Random Sample
()In, Items

Reject
Lot
Inspect
C; Defectives Replace defectives
Found in this sample
112 non-defectives

Figure 33.6 Flow Chart of Double Sampling Plan

33.8 SEQUENTIAL SAMPLING PLAN

In this, items are selected randomly from the lot (N) and tested one-by-one. After each individual testing,
these possible decisions exist: (i) accept, (ii) reject or, (iii) continue sampling. The continue sampling
case is continued till the lot is either accepted or rejected.
For example, in Figure 33.7, in case I, the lot gets one defective after . 15th sample, second defective
after 25th sample, third defective after 30th sample. Till then it is in the continue sample zone, and
thus no decision regarding acceptance/rejection is taken. The fourth defective occurs at 40th sample,
524 INDUSTRIAL ENGINEERING AND MANAGEMENT

and this brings to a decision for the rejection of the lot. In case 2, till 100th sample, only 3 defectives
occurred in the continue zone of sampling. After this, the plan states that accept the lot (and stop
the sampling). Thus, decision regarding acceptance/rejection of the lot is taken on sequential
basis.
Number of Defectives

20 30 40 50 60 70 80 90 100 110 120 130 140 150

Units Sampled (n)

Figure 33.7 Sequential-Sampling Plans

33.9 THE OPERATING CHARACTERISTICS CURVE

The operating characteristics curve (0C-curve) for a quality attribute sampling plan is a graphical
representation of fraction defectives in a lot against the probability of acceptance. It allows us to compare
sampling plans so as to understand the behaviour of different lots with unknown, varying fraction
defectives.

The purpose of 0C-curve is to understand how well a particular sampling plan is effective
in discriminating between a good lot and a bad lot.

What should be the ideal sampling plan? The answer is: an ideal sampling plan should accept
(or pass) a sample, which is drawn from a lot with no defectives, otherwise (i.e., if there is any defective)
the plan should reject the sample. This means that at and above the acceptable quality level, AQL, the
acceptance of lot should be 100 percent of the time. Similarly, with a quality level worse than AQL,
STATISTICAL QUALITY CONTROL 525

•
there should be zero percent chance of accepting the lot. How can this happen? This can happen when
there is 100% inspection. Theoretically, this is no sampling. Hence, we call it an ideal situation and
the OC curve for this case is called as ideal OC-curve. However, the sampling plan should be such
that it should resemble more like ideal 0C-curve, which is very-very steep (in fact, ideal 0C-curve is
vertical at AQL), as shown by dashed lines in Figure 33.8.

Probability of
Accepting Lots
(Percent)

I
100
Producer's Risk (a)

90

.1
80 -

70 -

60 -

pa 50 -
T I
so
40 - n=N

(Ideal OC-Curve)
30

Actual 0C-Curve
20

Objectionable quality region

10
Indifferent Quality region li
r
2 3 4 5 6 7 8 9 10 11 * 12

1' Percent Defective in Lot

(AQL) (UPD)

Figure 33.8 OC Curve for Different Sample Sizes

33.9.1 How to Draw the OC-Curve?

The result of inspection of all the items in a single sampling follows the bionomial distribution as the
outcome of the inspection is binary: either accept or reject the lot. The probability of accepting a lot
(of size N) is equal to the probability of taking a sample of size n with proportion defectives p, and
finding c or fewer defectives items after inspecting the sample. Practically, if sample size (n) is more
than 20 and proportion defective (p) lesser than 0.05, Poisson's distribution may be approximated for
bionomial distribution. Therefore, for such situations, we use Poisson's table (Appendix 33.A) for drawing
OC curves.
526 INDUSTRIAL ENGINEERING AND MANAGEMENT

33.9.2 Procedure of Drawing OC-Curve

Step 1: Find N, n and c.
Step 2: Find the probability of accepting the lot for different values of proportion defectives (i.e.,
p). For this, do the followings:
(a) multiply sample size and proportion defectives, i.e., calculate (np) for each value
of p.
(b) Use Poisson's Table (Appendix 33.A). For each value of np find the column for C.
(c) Note down the value of probability of acceptance (Pa ) for each set of p.
Step 3: Plot Pa on Y axis and p on - X axis.
Step 4: Find a and 13 at AQL and LTPD
at p = AQL; a (producer's risk) is (1 — Pa )
at p = LTPD; p (consumer's risk) is Pa.
Example 33.4 For a lot of 4000 items, a sample of size 80 is drawn each time. The acceptance
number is MO for a single-sampling plan. Draw 0C-curve.
Find producer's risk and consumer's risk at an AQL and LTPD I and 6 percentage defectives
per lot respectively.
Solution: Given:
N: Lot size = 4000
in Sample size = 80
C: Acceptance number
=2
AQL: Acceptable Quality Level
• = 1%
LTPD: Lot Tolerance percentage defectives
= 6%
Calculation of Probability of acceptance (Pa)

Percentage Proportion np Pa = [P (x < 2)] Remark

defectives defectives (p) = 80p Probability of accepting
defectives less than 2 (with
reference to table of Poisson's
distribution: Appendix 33.A)

1 (AQL) 0.01 0.8 0.953 a = 1 — 0.953 = 047

2 0.02 1.6 0.783
3 0.03 2.4 0.570
4 0.04 3.2 0.380
5 0.05 4.0 0.238
6 (LTPD) 0.06 4.8 0.143 = 0.143
7 0.07 5.6 0.082
8 0.08 6.4 0.046
STATISTICAL QUALITY CONTROL 527

Probability of
Accepting lot (P.)

1.00 i Producer's Risk (a) = I 0.953 = 0.047

0.953

.80 N = 4.000 LTPD = 6%

n = 80 AQL= I%
c=2
ar .60

1
.40

.20

0.046
.00
2 .3 4 5 6 7 8
Percentage defective in Lot

Figure 33.9 OC-Curve for example 33.4

33.9.3 Different Conditions in the DC-Curve

Management is always concerned about the selection of sample size (n) and acceptance number (c).
This worry is mainly for:
• Select an 0C-curve, which can better discriminate between a good lot and a bad lot.
For this, the aim of an 0C-curve is:
• To select a plan, which reduces the probability of rejecting good lot and accepting a bad lot. In
other words, it is fair to both producer (as being able to say that a good produced lot is really
termed as good after accepting it) and consumer (as being able to say that a bad lot is really
termed as bad lot after rejecting it).
Effect of Sample Size on 0C-curve: For a given acceptance number (c), us the sample size increases,
the 0C-curve becomes steeper, i.e., more like a vertical line. This increase in n causes increased value
of producer's risk and reduced value of consumer's risk.
For example, in Example 33.4, at AQL (= 1%) and LTPD (= 6%), the value of a and 13 at different
value of n are:

AQL = 1%; LTPD = 6%; C = 2

n a = ( 1—Pa) at AQL 13 = P. at LTPD

80 I — 0.953 = 0.047 0.143

100 I — 0.920 = 0.080 0.062
120 1 — 0.879 = 0.121 0.025
. It is clear that the producer's risk increases and consumer's risk decreases as sample size increases
at a particular value of c. This does what? The higher sample size makes the acceptance of consumer
tougher. Why? In the above table, as lot size increases from 80 to 120, the probability of having two
528 INDUSTRIAL ENGINEERING AND MANAGEMENT

or more defectives (as, c = 2) is more and, thus, likelihood of finding two or more defectives is more.
This means consumers are at lesser risk to receive a bad lot. Similarly, more chances of finding defectives,
"equal to or more than c" with increasing value of n, causes producer a risk due to higher chances
of getting the lot rejected.
The effect of increasing value of n (from 60 to 120) at a constant level of acceptance number
(c = 1) is demonstrated in Figure 33.10. The 0C-curve becomes steeper; hence more discriminating
with increase in n.

1.0
Probability ofAccepting Lots (Percent)

0.9

0.8 n 60, c = 1

0.7 Acceptance Numbers = 1

n = 80, c.= 1 = Constant
0.6

0.5
0.4 n = I 00, r = 1

0.3

0.2 n = 120, c = 1

0.1
0.0
I 2 3 4 5 6 7 8 9 10
(AQ1.) (1.TPD)
Proportion defective (percentage)

Figure 33.10 Effect of Increase in Sample Size (n) on 0C-curve

Effect of Acceptance Level on 0C-curve: As acceptance number (c) increases, 0C-curve becomes
flatter at a particular value of n. This makes the curve less discriminatory. Let us examine the
Example 33.4 at different value of c:

AOL = 1%; LTPD = 6%; n = 80

np at AQL = 0_01 x 80 = 0.8; np at LTPD = 0.06 x 80 = 4.8

C Producer's Risk a Consumer's Risk p

= (1—Pa) at np = 0.8 =Pa at np = 4.8

1 1 — 0.809 = 0.191 0.048

2 I — 0.953 = 0.047 0.143
3 1 — 0.991 = 0.009 0.294
4 I — 0.999 = 0.001 0.476

Thus, -the value of producer's risk decreases and consumer's risk increases. This means a non-
discriminatory sample plan with increasing value of c.
The effect of increasing value of acceptance number, c (from 1 to 4), at a constant level of sainpk
size (n = 60) is demonstrated in Figure 33.11. The 0C-curve becomes flatter; hence less discriminating
with increase in acceptance number.
STATISTICAL QUALITY CONTROL 529

Sample Size = 60
1.0 = constant
\ n=60,c=1
0.9 = 60, c = 2
41 ii= 60,c=3
Probability of Accepta nce

0.8
0.7 4 n = 60, c = 4

0.6
110por
0.5
0.4
0.3
0.2
0.1

I 2 3 4 5 6 7 8 9 10 •
AQL (LTPD)
Proportion Defective (Percentage)

Figure 33.11 Effect of Change in Acceptance Number (c)

on 0C-curve

33.10 AVERAGE OUTGOING QUALITY (AOQ)

In a single sampling plan, the samples are inspected for quality. If a defective is found, it is replaced
with good items. If the total number of defectives exceeds the acceptance number, the lot is rejected
and 100% inspection is done to weed out the defectives. This approach is also termed as rectified inspection.
The acceptance sampling automatically adjusts the level of inspection to the quality of lots being inspected,
as rejected lots are subjected to 100% inspection. To check the performance of the plan, we would like
to check the plan's average outgoing quality (AOQ):

P(P )(N — n)
AOQ
N

where, p = Fraction defectives .

Pa = Probability of acceptance
N = Lot size •
n = Sample size.
We will plot the curve for Example 33.4.
Example 33.5 Plot the curve for average outgoing quality for Example 33.4, when N = 4000,
n = 80, C = 2, LTPD = 6%, AQL = 1%.
Solution: We have already calculated pa for each value of p. Now, using formula for AOQ:
N —n 4000 — 80
AOQ = (Pa )(P) =(13,)(11)
N 4000
= (pa )(p)
530 INDUSTRIAL ENGINEERING AND MANAGEMENT

Incoming defective p = f/100 Pa from AOQ = pp, AOQ in %

fraction (f) in % Example 33.4

1 0.01 0.953 0.0095 0.95

2 0.02 0.783 0.0156 1.56
3 0.03 0.570 0.0171 1.71
4 0.04 0.380 0.0152 1.52
5 0.05 0.238 0.0119 1.19
6 0.06 0.143 0.00858 0.858
7 0.07 0.082 0.00574 0.574
8 0.08 0.046 0.00368 0.368

We plot p and AOQ in Figure 33,12. It shows the performance of plan over a range of possible
proportion of defectives in order to judge whether the plan provides an acceptable degree of protection.
The peak of AOQ curve gives Average Outgoing Quality Limit (AOQL).

1.8

1.6

1 1.4

1.2

1.0

0 V 0.8

(4. ,E,d5
c = 0.6
1
gP
0.4

0.2

0 2 3 4 5 6 7 8

Incoming Fraction Defective (1)

Figure 33.12 AOQ Curve

33.10.1 A Special Feature of AOQ Curve

As fraction defective increases from zero onwards,.there comes a point at which the outgoing fraction
defective (i.e., AOQ) starts beginning to improve. This is due to the fact that sampling plan rejects most
bad lots and they are rectified (i.e., defectives replaced by good items) through 100% inspection. Thus,
STATISTICAL QUALITY CONTROL 531

the level of inspection automatically adjusts to the quality of lots being inspected, assuming rejected
lots are subjected to 100% inspection.
Secondly, AOQL gives an indication that no matter what the incoming fraction defectives are present
in lot, the long-rim average of outgoing fraction defectives will never be worse than AOQL.
AOQL can also be Computed by the formula and table below: •

where; Y = AOQL factor;

n = Sample Size
N = Lot size.

Acceptance 0. 1 2 3 4 5 6 7 8 9 10
Number (C)
AOQL 0.3679 0.84 1.3711 1.9424 2.5435 3.1682 3.812 4.472 5.1457 5.8314 6.5277
Factor (Y)
For, example, in the previous problem, when c = 2, n = 80, N = 4000;
y is 1.3711 (for c = 2 in above table)
Thus, AOQL = 1.3711 (1/80 — 1/4000) = 0.017

The X-bar and s-charts

The main advantage of using the range as a measure of within sample variability is the fact that it
is very easy to calculate. However, assuming the existence of some computing capability, the use of
standard deviation is a preferable alternative. The procedure is exactly the same as for the case of
the X-bar and R-chart except that different coefficients are used for the calculation of the control limits
(Table 33:5).

'rible 33.5 Coefficients for variables charts (X- „and s-charts)

Sample Control Limit Coefficients Divisors for

size Average chart s-chart estimation of a
n A3 C4
83 B4
2 2.659 0 3.267 0.7979
3 L954 . 0 2.568 ,0.8862
4 1.628 0 2.266 0.9213
5 1.427 0 2.089 0.9400
6 1.287 0.030 1.970 0.9515
7 1.182 0.118 1.882 0.9594
8 1.099 0.185 1.815 0.9650
9 1.032 0.239 1.761 0.9693
10 0.975 0.284 1.71-6 0.9727
(Contd..)
532 INDUSTRIAL ENGINEERING AND MANAGEMENT

Sample Control Limit Coefficients Divisors for

size Average chart s-chart estimation of a
n A3 C4
B3 B4

1I 0.927 0.321 1.679 0.9754

12 0.886 0.354 1.646 0.9776
13 0.850 0.382 1.618 0.9794
14 0.817 0.406 1.594 0.9810
15 0.789 0.428 1.572 0.9823
16 0.763 0.448 1.552 0.9835
17 0.739 0.466 1.534 0.9845
18 0.718 0.482 1.518 0.9854
19 0.698 0.497 1.503 0.9862
20 0.680 0.510 1.490 0.9869
21 0.663 0.523 1.477 0.9876
22 0.647 0.534 1.466 0.9882
23 0.633 0.545 1.455 0.9887
24 0.619 0.555 1.445 0.9892
25 0.606 0.565 1.435 0.9896
We calculate the deviation using the formula given below:

(X - X)2
s=
n -.1
As in the case of R, a central value for s is needed. This is obtained by the following formula:

=
Es
k
where, k is the number of samples.
The control limits for the X-chart are given by:
UCL (I) = X + A3T
LCL = X; - A3T
whereas the control limits for the s-chart are given by:
UCL(s) = B4 T
LCL(s) = B3
where, the coefficients A3, B3 and B4 depend on the sample size n and can be found in Table 33.3. For
example, if the sample size is 5, the values are A3 = 1.427, B3 = 0, B4 = 2.089.
u-chart: The u-chart is another kind of attribute chart and is used for process control for defects
when it is not possible to take a sample of constant sample size. As in the case of the p-chart, the
data values plotted on the chart are the proportions of faults per sample, now symbolized by u.
STATISTICAL QUALITY CONTROL 533

Note that it is the number of non-conformities per item within the sample that is being monitored,
and not the number of items per sample which have been rejected; a p-chart would have been appropriate
if the number of items per sample which have been rejected is monitored.
The control limits are given by:
117—
/7 + 3

where ii is the average of all sample sizes and i i is calculated as:

Total number of defects
=
Total number of items inspected
c-chart: The c-chart is used for process control of defects when it is possible to take samples
at a constant sample size. The data plotted on the chart are the number of defects c in each sample.
The control limits are given by:
±
where, E is the average number of defects calculated by:
_ Total number of defects
c =
total of samples tested
A control chart tells us whether or not a process is in statistical control, or whether or not more
than common causes of variation are present in the process. It informs us to determine and eliminate
any special causes of variation present. The chart characteristics of a process operating with only common
causes of variation are:
1. All points fall within the control limits.
2. An approximately equal number of points on either side of the central line.
3. There is no specific pattern apparent.
4. Most points are near the centre (the middle third region) although a few (about one-third) approach
the control lines.
The chart not satisfying the above characteristic is pinpointing the presence of special causes of
variation, which needs investigation and, if required, elimination of such causes. We can therefore define.
certain action rules applicable to all control charts in general; these rules determine the circumstances
when action should be taken.
An action does not mean an action for elimination (of the special cause); it means an action for
investigation for the cause. For example, a point falls below the lower control limit of an attribute chart
for defects or of. a range chart for variables (if such a limit exists that is positive), should prompt an
investigation of the circumstances for such a situation, so that it can be repeated again in the
future.
Some of the basic action rules are given below:
Rule 1: Action should be taken when at least one of the plotted points lies outside the (3o) control
limits. If the motive for the special cause is understood and permanently taken care of, the out of control
reading can be removed and the new control limits are calculated. If the reason is not found, then it
must be accepted that the sample value is part of the system which generated the limits.
Rule 2: (rule of seven). This calls for action if there are seven consecutive points, either all on
one side of the mean, or all increasing, or all decreasing. Since the probability of any of these alternatives
occurring by chance is very small, a special cause in need of investigation might be present.
534 INDUSTRIAL ENGINEERING AND MANAGEMENT

Rule 3: Action should be taken when non-random patterns are clearly shown in the chart. A cyclic
pattern might indicate that the material from a specific supplier, or the circumstances of a specific time
period, might regularly have an undesired (or beneficial) effect.
Rule 4: (Middle third rule). Action should be taken when the number of plotted points in the
middle third of the total range between the control lines is much less than two-thirds of the total number
of points. Care should be taken when applying this rule in situations when the distribution of the readings
is skewed, as in the range chart.
Limits of warning: Most of the SPC practitioners prefer the use ofthe warning limits; these are
lines drawn at ± 2a from the mean, in addition to the control lines. (at ± 3a from the mean) which
are now called action limits. The warning lines can easily be drawn at two-thirds of the distance (outwards)
between the central line and each control limit. Care should be .taken in the case of non-symmetrical
distributions, as in the range charts.
SPC in Service Sector
The service sector is growing in a big way now-a-days. The Statistical Process Control is applicable
. to both manufacturing and service areas. There is a need to establish an appropriate characteristic which
is tangible. Obviously, this is much easier for the manufacturing sector, where the production process
is much more clearly quantifiable. However, 80 per cent of activities in manufacturing sector is service
like personnel, administration, procurement, materials handling, design etc. It is important, therefore, to
be able to define measurable characteristics, appropriate to the service area which, at the end of the
day, is equally applicable to the manufacturing area.
Administration
• Average number of typing errors per document.
• Typing throughput time
• Proportion of reports delivered to schedule.
• Customer complaint rate.
• Number of debtors or creditors outstanding.
• Number of projects/customer orders completed 'to schedule.'
• Number of telephone rings before answering.
• Improperly directed calls to switchboard.
• Number of customers waiting on line.
• Processing errors.
• Downtime in processing equipment.
• Time spent to locate documents.
• Timelines of courier deliveries.
• Payment errors.
Personnel
• Recruitment rate.
• Turnover rate.
• Cost per recruitment.
• Time taken to fill the vacancies.
• Number of resignations.
• Unfulfilled planned training.
STATISTICAL QUALITY CONTROL 535

• Attrition rate
• Absenteeism.
Procurement
• Proportion of purchasing orders completed on time.
• Average order throughput time.
• Average time spent chasing orders.
• Supplier quality performance.
• Number of return to supplier items.
• Number of purchasing errors due to the purchaser.
Materials handling
• Average time of out of stock periods.
• Ratio of stock-out to demand.
• Material throughput time.
• Proportion of internal orders concluded on time.
• Number of stock items not used as planned.
• Response time to customer requests.
Design
• Number of drawing errors.
• Number of checking mistakes.
• Number of void designs.
• Proportion of. drawings not completed on schedule.
• Timeliness of design-error resolution.
• Missing or illegible drawings.
536 INDUSTRIAL ENGINEERING AND MANAGEMENT

APPENDIX

Table 33-A Cumulative Poisson Probabilities

x=c
p(x c) -E
x=c x!

it/X 0 1 2 3 4 5 6 7 8 9

0.05 951 .999 1.000

0.10 .905 .995 1.000
0.15 .861 .990 .999 1.000
0.20 .819 .982 .999 1.000

0.25 .779 .974 .998 1.000

0.30 ..... .741 .963 .996 1.000
0.35 .705 .951 .994 1.000
0.40 .670 .938 .992 .999 1.000
0.45 ..... .638 .925 .989 .999 1.000

0.50 .607 .910 .986 .998 1.000

0.55 .577 .894 .982 .998 1.000
0.60 ..... .549 .878 .977 .997 1.000
0.65 522 .861 .972 .996 .999 1.000 .
0.70 .497 .844 .966 .994 .999 1.000

0.75 .472 .827 .960 .993 .999 1.000

0.80 449 .809 .953 .991 .999 1.000
0.85 427 .791 .945 .989 .998 1.000
0.90 .407 .772 .937 .987 .998 1.000
0.95 .387 .754 .929 .984 .997 1.000

1.0 .368 .736 .920 .981 .996 .999 Loop

.333 .699 .900 .974 .995 .999 1,000
.301 .663 .880 .966 .992 .998 1.000
1.3 .273 .627 .857 .957 .989 .998 1.000
1.4 .247 .592 .833 .946 .986 .997 .999 J .000

1.5 .223 .558 .809 .934 .981 .996 .999 1.000

1.6 .202 .525 .783 .921 .976 .994 .999 1.000
1.7 .183 .493 .757 .907 .970 .992 .998 1.000
1.8 .165 .463 .731 .891 .964 .990 :997 .999 1.000

(Contd..)
STATISTICAL QUALITY CONTROL 537

.150 .434 .704 .875 .956 .987 .997 .999 1.000

2.0 .135 .406 .677 .857 .947 .983 .995 .999 1.000

.111 .355 .623 .819 .928 .975 .993 .998 1.000

.091 .308 .570 .779 .904 .964 .988 .997 .999 1.000

.074 .267 .SIR .736 .877 .951 .983 .995 .999 1.000

.061 .231 .4 U .692 .848 .935 .976 .992 .998 .999

Table 33-A (Concluded)

pix 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
3.0 0.50 .199 .423 .647 .815 .916 .966 .988 .996 .999 1.000
3.2. 041 .171 .380 .603 .781 .895 .955 .983 .994 .998 1.000
3.4 .033 .147 .340 .558 .744 .871 .942 .977 .992 .997 .999 1.000
3.6 .027 .126 .303 .515 .706 .844 .927 .969 .988 .996 .999 1.000
3.8 .022 .107 .269 .474 .668 .816 .909 .960 .984 .994 .998 .999 1.000

4.0 .018 .092 .238 .433 .629 .785 .889 .949 .979 .992 .997 .999 1.000
4.2 .015 .078 .210 .395 .590 .753 .868 .936 .972 .989 .996 .999 1.000
4.4 .012 .066 .185 .359 .551 .720 .844 .921 .964 .985 .994 .998 .999 1.000
4.6 .010 .056 .163 .326 .513 .686 .818 .905 .955 .980 .992 .997 .999 1.000
4.8 .008 .048 .143 .294 .476 .651 .791 .887 .944 .975 .990 .996 .999 1.000

5.0 .007 .040 .125 .265 .441 .616 .762 .867 .932 .968 .986 .995 .998 .999 1.000
5.2 .006 .034 .109 .238 .406 .581 .732 .845 .918 .960 .982 .993 .997 .999 1.000
5.4 .005 .029 .095 .213 .373 .546 .702 .822 .903 .951 .978 .990 .996 .999 1.000
5.6 .004 .024 .082 .191 .342 .512 .670 .797 .886 .941 .972 .988 .995 .998 .999 1.000
5.8 .003 .021 .072 .170 .313 .478 .638 .771 .867 .929 .965 .984 .993 .997 .999 1.000
6.0 .003 .017 .062 .151 .285 .446 .606 .744 .847 .916 .957 .980 .991 .996 .999 .999 1.000
6.2 .002 .015 .054 .134 .259 .414 .574 .716 .826 .902 .949 .975 .989 .995 .998 .999 1.000
6.4 .002 .012 .046 .119 .235 .384 .542 .687 .803 .886 .939 .969 1.986 .994 .997 .999 1000
6.6 .001 .010 .040 .105 .213 .355 .511 .658 .780 .869 .927 .963 .982 .992 .997 .999 .999 1.000
6.8 .001 .007 .030 .082 .173 .301 .450 .599 .729 .830 .915 .955 .978 .990 .996 .998 .999 1.000

7.0 .001 .007 .030 .082 .173 .301 .450 .599 .729 .830 .901 .947 .973 .987 .994 998 .999 1.000
7.2 .001 .006 .025 .072 .156 .276 .420 .569 .703 .810 .887 .937 .967 .984 .993 .997 .999 .999 1.000
7.4 .001 .005 .022 .063 .140 .253 .392 .539 .676 .788 .871 .926 .961 .980 .991 .996 .998 .999 1.000
7.6 .001 .004 .019 .055 .125 .231 .365 .510 .648 .765 .854 .915 .954 .976 .989 .995 .998 .999 1.000
7.8 .000 .004 .016 .048 .112 .210 .338 .481 .620 .741 .835 .902 .945 .971 .986 .993 .997 .999 1.000

8.0 .000 .003 .014 .042 .100 .191 .313 .453 .593 .717 .816 .888 .936 .966 .983 .992 .996 .998 .999 1.000
8.2 .000 .003 .012 .037 .089 .174 .290 .425 .566 .692 .796 .873 .926 .960 .979 .990 .995 .998 .999 1.000
8.4 .000 .002 .010 .032 .079 .157 .267 .400 .537 .666 .774 .857 .915 .952 .975 .987 .994 .997 .999 1.000
8.6 .000 .002 .009 .030 .074 .150 .256 .386 .523 .653 .763 .849 .909 .949 .973 .986 .993 .997 .999 1.000
8.8 .000 .002 .007 .024 .062 .128 .226 .348 .482 .614 .729 .822 .889 .935 .964 .981 .990 .995 .998 .999 1.000

9.0 .000 .001 .006 .021 .055 .116 .207 .324 .456 .587 .706 .803 .876 .926 .959 .978 .989 .995 .998 .999 1.000
9.5 .000 .001 .004 .015 .040 .089 .165 .269 .392 .522 .645 .752 .836 .898 .940 .967 .982 .991 .996 .998 .999
538 INDUSTRIAL ENGINEERING AND MANAGEMENT

REVIEW- QUESTIONS

33.1 What are the fundamental differences between the use of acceptance sampling plans and process control charts?
33.2 Why are averages of samples used in control charts rather than individual readings?
33.3 Explain the relationship between tota► quality management (TQM) and quality control (QC).
33.4 Define these terms:
(a) Attribute,
(b) Single sample,
(c) Double sample,
(d) Sequential sample.
33.5 What is the purpose of control charts? Explain how this purpose is achieved?
33.6 Explain why .7 and R charts are used together?
33.7 What is an OC curve? Explain its purpose.
33.8 What does an AOQ curve indicate to users?
33.9 Define terms:
(a) AQL,
(b) AOQ,
(c) AOQL,
(d) LTPD,
(e) a
(f)

REFERENCES

1. Braverman, J.D., 1981, Fundamentals of Statistical Quality Control, Reston Publishing Company, Reston, Va.
2. Dodge, H.F. and H.G. Romig, 1959, Sampling Inspection Tables: Single and Double Sampling, John Wiley:
London.
3. Duncan, A.J., 1965, Quality Control and Industrial Statistics, 3rd ed., Richard D. Irwin, Homewood, III.
4. Feigenbaum, A.V., 1983, Total Quality Control, III Ed. McGraw Hill: Delhi.
5. Grant, E.L., and Leavenworth R.S., 1980, Statistical Quality Control, 5th ed., McGraw-Hill, New York.
6. Ingle, S. and Ingle N., 1983, Quality Circles in Service Industries, Prentice Hall: Englewood-Cliffs.
7. Juran, J.M. and Gryna F.M., 1980, Quality Planning and Analysis, McGraw Hill (Indian Reprint-TMH), Delhi.
8. Juran, J.M., 1978, "Japanese and Western Quality—A Contrast, "Quality Progress, December.
9. Kirkpatrick, E.G., 1970, Quality Control for Managers and Engineers, John Wiley, New York.
10. McClain, J.0., and Thomas L.J., 1985. Operations Management, II Ed. Prentice Hall: Englewood-Cliffs.
11. Shore, B., 1973, Operations Managements, McGraw Hill (Indian Reprint-TMH), Delhi.
 34
RELIABILITY

34.1 INTRODUCTION
Reliability is a term which is associated with how well the system performs during a period of time.
It is a study of random occurrences of failure or undesirable events during the life period of a physical
system, which may be: machine, assembly, car, tool, etc.

Reliability

Reliability is the probability that a system will perform 'a required function when operating
under stable conditions for a stated period of time.

Following three observations pertain to the above definition:

1. Reliability is a condition related to chance or probability.
2. Reliability depends upon the operating conditions.
3. Reliability depends upon the interval for which the system operates.
Few more useful definitions are as follows:

Maintainability
The probability that a failed item will be restored to operational effectiveness within a given
period of time,, when the repair-action is performed in accordance with the prescribed procedure.

Mean Time Between Failure (MTBF)

In the stated period in the operation of a system, the mean value for the length of time between
two consecutive failures, computed as the ratio of total cumulative observed time to.the total
number of failures.

Suppose a system is intermittently down due to failure as shown in Figure 34.1.

540 INDUSTRIAL ENGINEERING AND MANAGEMENT

System is --•-• /2 -
UP (working)

Down (System
not working)

Figure 34.1 System in Operation/Breakdown

Total time of observation = t.

r-i
where, ti is time of trouble free operation during (i — 1) and (i + 1) st failures (i.e., system down-
time):
Total number of failures = K (say)

ti
Thus, MTBF = ...(34.1)
K
Now, number of failures per unit time is the failure rate (X),
1
Hence, failure rate,
MTBF
L i/

or, MTBF = 1 ...(34.2)

x
where; A. is the failure rate.

34.2 RELATIONSHIP BETWEEN RELIABILITY, FAILURE RATE AND MTBF

Let, f (1) : Failure probability density function during time t
k(t) : Failure rate during time r
0 :MTBF
R (t) : Reliability function (probability of survival to time t)
Let a system is observed for time T. During this period, for
F(/) — J J(t) dt
small time t to (t + dt), the probability that the system will fail (given f (t)
that it has survived till time t) is: (area under curve for
t = 0 to 1= 0
P (t > t + dt)= X (t) dt
R(t)= - F(t)]
Probability of failure in interval t to + dt is
= f (t) dt
Using law of conditional probability: 0 di time

f (t) dt
X(t)dt = Figure 34.2 Failure function
R (t)

f (t)
Or, k(t) = :434.3)
R(t)
RELIABILITY 541

Since cumulative probability of failure is (1 - R (t)], we have,

R (t) = 1- F(t) = 1- f f (t)dt

0

f f (t)dt = 1- R(t)

Differentiation of above expression, both sides give:

f (t) = --
d(t) R")
Putting this value in equation (34.3):

X(t) = - R (t)
d(o R (t)
1
or, -X(t) dt = - dR (t)
R(t)
Integrating both sides:
R(i)
- JX (t)dt = —
R(t) dR (t)
0
I

Or, - Sk(t) dt = loge R (t) - log, 1 = loge R (t)

Assuming failure rate to be constant, i.e., X(t) = A.

dt = loge R(t)

or, At = loge R(t)

or, R (t)= e-x1

Suppose there are N components out of which k are failed till time t. Hence, surviving component
in 'time (t): N (t) is (N - K).
When this time of observation is infinite:
N (t) dt 1
MTBF = s = R (t)dt

or MTBF or 0= J R(t)dt ,_(34.4)

G-For exponential distribution of reliability function (a special case):

R (t) = C A'

0 = fe-4I dt = 1
—

•
542 INDUSTRIAL ENGINEERING AND MANAGEMENT

e= —1 ...(34.5)

N„: No. of components at time. I = 0

= No. of surviving
Unreliability Q
components
Q = I - e-)-1
Failure curve
N„ (I - e->.i)

Reliability
Survival curve
X = e- Xl
= N,e-xt

Time Time

Figure 34.3 Reliability and Unreliability Curves Figure 34.4 Failure and Survival Curve

The unreliability function, Q, is the one minus reliability function (Figure 34.3). If No is initial
number of components, the failure curve is No (1 - ex` ) and components, which survive after time t
are (Figure 34.4): NS = No e-xf . Note that sum of these two curves at any point of time is N0, i.e.,
initial number of components. Similarly, the sum of reliability and unreliability functions at any time
is unity.
34.3 BATH TUB CURVE

Bath tub curve describes the variation of failure rate of components during their life-time. It is also
called as: life-characteristic curve, or lambda characteristic curve.
The life cycle of the component is dividend into three zones. In each zone, the failure mode is
generally different (Table 34.1). In the initial phase, failure rate decreases sharply. This is a phase of
infant mortality phase. Region (to to ti) in the Figure 34.5 represents this phase. This is a phase when
failure occurs because of initial product defect due to poor quality, inherent defects, manufacturing defects,
etc. This period is normally the warranty period to the customers, when due to defect in product (or,
raw material, etc.) the failure takes place.
Second phase (ti to t2) is the phase of useful life. The failure pattern exhibits a constant failure
rate, which is generally random. This zone consists of failure due to random changes in operating conditions.
Failure of tube light, failure of shock-absorber of scooter due to sudden bump on a road, etc., are the
cases of random failures, which occur just by chance during their operation. It is not due to material
defect or due to overage reasons.
Third phase (12 to 13) is the phase of wear-out failure. In this phase, the rate of failure increases,
sharply over a period of time. This region is due to wear and tear, fatigue and creep or overage of
the product. It is advantageous to use preventive maintenance in this phase, as the cause of failure is
not random but age.
In the phase of useful life (ti to /2), it is important to note that failure is due to unforeseen reasons
or random causes. Many industries in this phase go for replacement maintenance. When the component
fails, then the replacement is advisable for products, which are not very critical to human life and/or
production system.
RELIABILITY 543

Decreasing
failure
Failure curve Increasing
rate
failure
rate

Initial
failure Constant failure rate

Early
Life Random failure (Useful Life) -•- Wearout failure

(2 13

Figure 34.5 Bath-Tub Curve

Table 34.1 Phases in Bath-Tub Curve

Phase Other names Causes

Decreasing Infant mortality, Normally related to manufacturing defects and
failure rate Ourn-in, Early failure quality assurance problems. Incorrect assembly,
imperfect alignment, defects in weld or joint or
connection or wiring, dirt, impurities, crack, coating
may be reason. This may be due to some substandard
items containing microscopic flaws that have been
passed through the final inspection of the product.
Constant Random failures, Generally, this is due to repeated use of the item.
failure rate Useful life, Stress- Sometimes, it is due to overloading or over-stress
related failures ;during use. It may be due to random causes, which
may be stochastic. However, the failure-rate is almost
I constant.

Increasing Wear-out failure Generally, to over-use corrosion, wear, breakdown

failure rate breakdown of insulation, shrinkages, fatigues, creep,
etc.

34.4 THE EXPECTED LIFE OF A SYSTEM

Let t is the random variable for the time a failure takes place. This has a continuous density function.
The expected life of the system is:

E (t) = f t f (t)dt ...(34.6)

Since cumulative failure functions:

F (t) = f f (t) dt

differentiating both sides:

—
dt F (t) = f (t)

t.
544 INDUSTRIAL ENGINEERING AND MANAGEMENT

d -d
or, f (t) —t [1 — R(t)] = -R(t)
d dt

i.e., (r) — — R(t) ...(34.7)

dt
0,
I d
Thus, E (t) = t[— — R (t)idt
' o dt

=— ft d [R (0]
o
Integrating RHS in parts by using rule; iudv = uv — Svdu

E (t) = —{[t R(t)]o — .1 R (t)dt

o
When t —> co; R (1) = 0; due to finite life of the system:
[t R (or = 0
Thus, expected life of a system:

E(t)= f R (t)dt ...(34.8)

This is also called as mean-life of the system.

34,5 FAILURE RATE AND HAZARD FUNCTION

Let us analyse the failure of a system in a given time interval,
which is between times ti and 12. For the interval [ti , t2] the f (e)

probability of failure is expressed by an unreliability function

as (Figure 34.6):
12 (2
J f(t)dt = f f (t)dt — ff . (t) dt
rl 0 0
where, f (t) is the failure function. Ti me (1) —f—
In terms of reliability function, it is expressed as:
Figure 34.6 Failure function
(2
f (t) dt = F (t2 ) — F (11 )
r,
= [1 — R (t,)] — [1 — R (ti )]
= R (t1 ) — R (t,) ...(34.9)
Here, F (t) is unreliability function and is the integration of failure density function. Relia-
bility function is complementary to unreliability function and thus equal to one minus the unreliability
function.
The rate at which failure will occur in a certain interval of time [t i , t2] is known as failure rate
for that period. In other words:
RELIABILITY 545

Failure rate
It is the probability that a failure .per unit time occurs in the interval given ,that a failure
has not occurred prior to the beginning of this interval.

R(ti )- R 02 )
Failure rate =
(t 2 - ti ) R (ti )

If, t., is (t + At); and ti = 1, then

R (I) - R (t + At)
Failure rate = ...(34.10)
At R(t)

In the above expression, the rate is expressed as failure per unit time. However, in real situations,
this may also be expressed in kilometers, revolutions, etc.

Hazard Function: h(t)

It is the limiting value of failure rate as the interval approaches zero.

R (t) - R (t + At)
Thus, h (t) = lim
Lit-o At . R (1)

1 R (t) - R (t + At)
lim
R (t) et-w At

1 [ d R(t) ]
...(34.11)
R(t) dt
Since; F (t)= 1 - R (t)
Differentiating both sides gives;
d ./0)
-7 F(t) = - — R (t)
dt dt

d
or f (t) = - — R(t)
dt
Using Equation (34.11)
t+At, —

h (t) = R [f (t)] Figure 34.7 Failure Function

fit)

f (t)
Or, h(t)= ...(34.12)
R (t)

Thus, hazard rate is the ratio of failure rate and reliability.

The product of h (t) and At represents the probability that a device, which has survived till an
age of '1', will fail in the small interval [t, t + At ] (Figure 38.8). •
546 INDUSTRIAL ENGINEERING AND MANAGEMENT

t+Ai
'rime (I) —

Figure 34.8 Hazard Function

34.6 COMPONENT RELIABILITY FROM TEST DATA

Let us consider a population of it identical-items whose failure distribution function is F (t). Consider
Ns (t) as a random variable, which represents the number of surviving items at time '1'. Since a component
may fail or survive (i.e., there are only two possibilities), Ns (t) will have a bionomical distribution such
as:

P[Ns (t) = N] = [R (IA" [1- R (IAN'

n!(N-n)!
where, n = 0, 1, 2, 3, ....N.
We can find the expected value of Ns (t) as E [Ns (t)]
= N. R (t) = (t)
where, N (t) = average number of serving items.

Thus, R (t) = Nor) ...(34.13)

Therefore, the reliability of the system at any time t is the average fraction of successfully serving
units at time t.
Now, since F (t) = 1 - R (t)
N (t) N - A 7(t)
=1

Al ( 1)]
Also, f (I) F(t) =
1 N

= - N- N(t)
dt
+ Fl(t)
=- lira
N At
+ At)
= lim 1V°-
Ai-40 N(At)
Failure density function is normalised in the above expressing in terms of the size of the initial
population (N) of the working items. Sometimes, it is desirable to normalise it with respect to the average
RELIABILITY 547

number of successfully functioning items, i.e., items. which are surviving at time 't'. In the previous
expression, replacing N with N(t), which is the number of surviving items at time I; we get,
N(t) - + At)
h (t) = lim
N(At) At
Multiplying and dividing by N:
N [N (t)- N (t + At)
(t) = of m
At -)0 NN (t) (At)
N + At)
= lim
N(t) or-->o N (At)

• f(t)
• N(t)

= f(t)
R (t)

f (t)
Thus; (t) = ...(34.14)
R(t)
This is same as Expression (34.12), which was derived earlier.
Example 34.1 A car manufacturer conducts fifty reliability tests for the drive shaft-failure of his
car. The failure is defined when the drives-shaft started producing excessive noise. The test results are
as follows:
Interval (Km) 0-20,000 20,000-40,000 40,000-60,000 60,000-80,000 80,00-1,00,000
Number of failures 20 12 8 6 4
Estimate the hazard function, failure density function and reliability function.
Solution

Interval (km) Number of failures Component Surviving N (t)

0 to 20,000 20 50 — 20 = 30
20,000 to 40,000 12 30 — 12 = 18
40,000 to 60,000 8 18 — 8 = 10
60,000 to 80,000 6 10 — 6 = 4
80,000 to 1,00,000 4 4—4= 0
In this example, each data is grouped in a class-interval of 20,000 km.
Let, N (t) = Number of surviving units at time t.
N = Total number of original units = 50.
t = Time or its equivalent unit, which in this case is 20,000 km.
Hence, for the first interval,
t = 20,000 km.
N(t)
R (t) = R (20, 000) = = 30
= 0.6
N 50
548 INDUSTRIAL ENGINEERING AND MANAGEMENT

R(t)- R(t - At) A7(0) - R(20,000) 50 - 30

h = R(t) At - (0)(20, 000) 50 (20, 000)
= 0.2 x 10-4
f (t) = h (t) R(t) = 0.6 x 0.2 x 10-4 = 0.12 x 10 4
For the second interval,
18 30 -18
R (t) = = 0.36; h (t)= 0.2 x 10-4
50 30(20,000) =
Similarly, other values are calculated and presented below:
N (t) R (t) h (t) x 10-4 f (t) x 10-4
20,000 30 0.6 0.20 0.12
40,000 18 0.36 0.20 0.072
60,000 10 0.2 0.22 0.044
80,000 4 0.08 0.30 0.024
1,00,000 0 0 0.50 0

34.7 CONSTANT HAZARD MODEL

Let us consider an exponential probability distribution and constant failure rate;
Failure rate; f (t) = Xe-x'

Reliability function, R (t) = e ° =

f (t) ke-xl
then, hazard function, (t) = — , =
,R(t)
Thus, for a constant failure rate, hazard rate is also constant and is equal to the failure rate.
34.7.1 Mean Time to Failure (MTTF)
Mean time to failure (MTTF) is:

MTTF = ft f (t) dt
0

= ft (Xe-xl ) dt =
[ -te-A' {
IT
0
1
...(34.15)

Thus, MTTF is the reciprocal of constant hazard rate. It is generally used for non-repairable items,
like bulb, fuse, etc.

34.7.2 Mean Time Between Failure (MTBF)

It is the average time of satisfactory operation of the system, which is also the ratio of test time and
number of failures:
1 Total test time
MTBF = =
A, Number of failures during test
MTBF is used when items are repairable. Higher the MTBF, higher would be system reliability.
RELIABILITY 549

Example 34.2 The failure rate of a mechanical watch is 0.0005 failures per hour Calculate in
MTTF. •
Solution: Reliability function
=e
where, = failure rate = 0.0005 per hour
1
MTTF = 1 = = 2000 hour Ans.
X. 0.0005
34.8 RELIABILITY OF A SERIES SYSTEM
In a series system, items are in series from a reliability
point of view (Figure 34.9). This means that failure of any 0____ -8- -8- 43

item will result in the system failure:

Figure 34.9 Series System
Let, Reliability of nth component in series =
n = Number of components in series.
Then, system reliability is the product of individual item's reliability. Thus, system reliability is:
Rs = R I R, R3 ...
For an exponential time-to-failure density:
I1
RS =
I=I
[J ...(34.16)

For an exponential time-to-failure density:

R. (t) = e-xis

n ex,
Rs (t) =
(=,

= I

Since, R, (t) = R1 (t) R2 (f)...

Taking loge each sides, we get;
In RS (t) = In R I (t) + In R2 (t) +

= In I?, (t)
i=1
Differentiating both sides, we get:
d " d
— In Rs (t) =
dt i=i dt
-
In It; (t) ...(34.17)

Also, we know:
J /,(x)dx
R (t) e°
Taking loge both sides:

In R (t) — Jh (x) dx
550 INDUSTRIAL ENGINEERING AND MANAGEMENT

Differentiating both sides

d
— [ln R (0] = -h (t)
dt
d
h (t) = ln R (t) ...(34.18)
dt
From Equations (34.17) and (34.18), we have:

• - hs (t) = (t),

or, 1, (t) =E -hi (t) ...(34.19)

1=1

Therefore, system hazard function 's the sum of component's hazard functions under the assumption
of interdependence (i.e., series system), 'flespective of individual item's probability distribution function.
Example 34.3 Find MTBF for a series system.

Solution: Since; /15 (1) = E-h1 (t)

i =1
For independence assumption:
hi (t) = ki

hs (t) = X,i= Constant

i=i

System reliability: Rs (t) = e "

MTBF = SR, (t)dt

= fe-1141 dt

- CI) 1- 0
— EX; — EX; = — E X;
1

xi
1=1

34.9 RELIABILITY OF A PARALLEL SYSTEM

Parallel system constitutes independent parallel sub-systems, which may act as parallel, redundant or standby
sub-systems (Figure 34.10).
The requirement of a parallel system is such that at least one component should survive for the
survival of the system. The parallel redundancy is used to increase the system reliability.
RELIABILITY 551

O t.

Figure 34.10 Parallel System

The,probability that all components will fail would be the product of individual. components reliabilities..
Let, Qt = Unreliability of ith component
Qs = Unreliability of the system

Qs = 2Q2•••Q„=FIQ;
is

n
1 -RS = [T

1 (1- Ri )
R, =1-11
or, ...(34.20)
1=1

For a time dependent situation:

RS (t) _
i.1
as, R, (t) =1- e - X, 1; where ? i is the failure rate of the ith component.
34.9.1 Mean-Time Between-Failure (MTBF)
Let us consider a two component parallel system. For this,
Rs (t)= [1- Ri (t)] [1- R,(t)]'
= R1 (t) + R2 (t) - R1(t) R,(t)
= exo + e-x2' - e-Ao e x2'
= CAI'
+ - e ()•1+x2)`
co
MTBF = fRs (t)dt
o ,
CO CO

+A2)'
= erxi` dt + fe-x't dt - (x1 dt
0 0 0
[.e xo ' -x -a
e -
'
C
oLI-Fx2y

X.2' )1:
1 1 1

xi x2 xl + x2
552 INDUSTRIAL ENGINEERING AND MANAGEMENT

when, X1 =12 = X (identical cases)

1
MTBF = - + -+ — 1=- -1=3 -
X X 2k X 2X 2k - 1.5IX
Thus, MTBF of a redundant system is 1.5 times MTBF of two individual parallel components.

34.9.2 A Three Unit Parallel System

RS (t) = + e-x2' + e-x`i -e-(xi +).2)1 - C(Xi ±X3)1 - e--(X'+X1)1 + e-(x1+A.2+x3)`

1 1 1 1 1 1
MTBF = 5 R (t) —+ —+ 1
o X1 X2 X3 (Xi +X2) (Xi +X3) (X., +X3) (XI +X2 + l3 )
If XI =X2 =A'2 =X
Similarly, the derivation may be extended for n parallel units:
1 " 1
MTBF = - y • _ ...(34.21)
i=i
1[ 1 1 1
or, MTBF = - 1 + - + - + + -
k 2 3
Example 34.4 Find the system reliability of the following system:

0 B 0

If reliability of each unit is 0.4, find the system reliability.

Solution: Reliability of three parallel units A, B and C is:
R1 --- [1 - (1 - RA )(1- RB )(1- Rc )]
Reliability of two parallel units 0 and E is:
R2 = [1 - (1 -RD) (1 - RE)]
Reliability of two parallel units G and H is:
R3 = [1 - (1 - (1 - RH)]
Therefore, system reliability is the series system consisting of R I , R2, RF and R3, which is:
Rs = [1 - (1 - RA) (1 - RB) (1 - Re)] [1-(1 -RD) (1 - RE)]1?E* [1- (R) (1 - RH)]
If reliability of each individual item is 0.4, i.e., R1 = 0.4
RS = [ 1 - (0.6) (0.6) (0.6)] [1 - (0.6) (0.6)] 0.4 [1 - (0.6) (0.6)]
= 0.128.
34.10 SOFTWARE RELIABILITY
Some of the most complex systems Man has built are in software. In recent years many hardware functions
have been replaced by software and thus software has become a critical part of many systems. Starting
from fighter aircraft to household electronic items software plays a major role.
Typical examples from the most common applications include the software controlled fuel injection
system of the automobile [whose performance is vastly superior to the best carburetor] and the automobile
RELIABILITY 553

braking system incorporating anti-skid and traction control functions. Software is the core element of
today's automobile and medical industries.. A growing proportion of the systems operate in real time.
The operational effects of failure are large and critical. For example a breakdown of airline reservations,
train reservations, banking and many other services can bring the day to day activities to a stand still.
The failure of a software controlled braking system in an automobile can -be disastrous. For systems
such as air traffic control, space shuttle, fighter aircraft and automated missiles, the software makes a
very crucial contribution to the success of the mission. Software cannot be seen or touched, but it is
essential to applicationk such as those described above. It is necessary that the reliability of software
be measured and evaluated, as it is in hardware.
There are fundamental differences between the methods used for the reliability analysis of software
and hardware. The design fault in software is the main cause of its failure whereas physical deterioration
causes hardware failure. Software generally becomes more reliable over time because of successive changes
made with experience (however it might become obsolete as the technology changes). Failure of software
is a departure of its results from the requirement. A failure occurs when the user perceives that the
program ceases to deliver the expected service. The terms errors, faults and failures are often used
interchangeably, but do have different meanings. In software, an error is usually a programmer action
or omission that results in a fault. A fault, also referred to as bug, is a software defect that causes a
failure, and a failure is the unacceptable departure of a program operation from the program requirements.
When measuring reliability, we are usually measuring only defects found and defects fixed. If the objective
is to fully measure reliability, we need to address prevention as well as investigate the development,
starting from the requirements phase to the finally developed programs.
Errors in the software are introduced during various stages, mainly during:
• Requirements definition
• Design
• Program development
• Operation/maintenance.
Thus, any measure of software reliability must start with the core of the issue, operational software
error counts and the rate at which they occur; that is the software failure rate. (Koss 1998). Software
failures are not caused by physical environmental wear. The failures occur without any warning. The
main source of software failure comes from requirement and specification error rather than from machine
code error or design error. Unlike hardware reliability software reliability cannot be improved by redundancy
(i.e. producing identical code). However, it is possible to provide redundancy by producing independent
versions of software to improve the reliability, which is the basis for many fault tolerant architectures.
The software reliability is defined with respect to time and it is generally with respect to execution time.
The execution time for _a software system is the CPU time that is actually spent by the computer in
executing the software.
34.11 SOFTWARE RELIABILITY METRICS
In order to build reliable software the focus must be on comprehensive requirements and a comprehensive
testing plan, ensuring all requirements are tested. Importance also should be given for the maintenance
of software since there will be a "useful life" phase where sustaining the engineering effort will be needed.
Therefore to prevent the errors in the software we must: Start with the requirements; ensure that
the software is developed in accordance with the requirement specifications. Ensure that the code developed
can easily support the engineering efforts without infusing additional errors. Plan a good comprehensive
test program to verify all functionalities stated in the requirement specifications.
554 INDUSTRIAL ENGINEERING AND MANAGEMENT

34.11.1 Requirement Reliability Metrics

Requirements form the basis for software design, code development and test program. It is critical that
the requirements are written such that they are clear and there is no misinterpretation between the developer
and the client. For high reliability software, the requirements must be structured, complete and easy to
apply. There are standards like IEEE, DOD and NASA, which give some guidelines for writing the requirements
in a structured way. There are several aids to evaluate the quality of the written requirement docunient.
These automated requirement measurements scan the text through the lines and phrases and look for
specific words and phrases. For example, the weak phrases like 'shall', 'may' which lead to ambiguity
will be identified for their frecikiency of occurrences. More of such terms lead to more choices for the
developer to use his discretion.
The Automated Requirements Measurement (ARM) software developed by SATC (Software Assurance
Technology Centre), NASA is one such aid for evaluating the quality of the requirement document. Seven
measures are taken for determining the quality of the requirement specification document. They are:
1.Lines of text measure the size of the document.
2. Imperatives-words and phrases that ascertain the requirements. The number of imperatives is used
as a base requirements count.
3. Continuances-phrases that follow an imperative and introduce the specifications or requirements
at a lower level, for a supplemental requirement count.
4. Directives-requirements supported in terms of figures, tables and notes.
5. Weak phrases- words and phrases which are bound to cause uncertainty and leave room for multiple
interpretation measure of ambiguity.
6. Incomplete statements- statements that have TBD (to be defined) or TBS (to be supplied).
7. Options-words that give the developer latitude in satisfying the specifications but can be
ambiguous.
A tool alone cannot certainly assess the correctness of the requirements specified in the document.
However, it can assess how well the document is written. For example, the count on 5, 6 and 7 clearly
would tell how much the developed software can deviate from the requirements the customer bears in
his mind as the need. Obviously the acceptance test plan and test will be based on what is contained
in the requirement document. The tool is described as an aid to evaluate the document. However, one
can read the document and have several reviews with the customer so that the ambiguity is brought
to zero.
34.11.2 Design and Code Reliability Metrics
The code can be analysed for the structure and architecture to identify possible error-prone modules
based on complexity, size and modularity. In general more complex modules are-more difficult to understand
and have higher probability of defects than less complex modules. Thus, The complexity has a direct
impact on overall quality and specifically on maintainability. Hence there should be a way to measure
the complexity. One way to compute the complexity is to count the number of linearly independent test
paths. The size of the software is the count on the number of executable lines of code as defined by
a' language dependent delimiter. The combination of size and complexity can be used to evaluate the
design and code reliability. Obviously the modules with higher size and complexity are prone to be less
reliable. Modules with small size and high complexity are also at a reliability risk because they tend
to be very short code that is difficult to change or modify. Although these metrics can be applied to
object oriented code, additional metrics are used by SATC (Rosenberg et. al. 2005).
RELIABILITY 555

34.11.3 Testing Reliability Metrics

Testing of reliability metrics can be divided into two parts. The first part is to evaluate the test plan.
Testing is the main factor which determines the software reliability. The test simulation for various real
world application environments should be planned. Thus it is essential that we evaluate the test plan
so that it caters to the testing of all the functionalities specified in the requirements. We have to ensure
that each requirement is tested at least once. This should really reduce the number of errors due to
lack of expected functionality.
The second part is the evaluation of number of errors and the rate at which they occur. Application
of estimation techniques discussed in the next section can be applied. The time to failure data collected
can be used to evaluate the reliability of the software. The testing and fixing should be repeated till
we attain a satisfactory reliability. In the process one may have to modify the test plans also. Thus the
two parts go hand in hand iteratively. The reliability calculated after every corrective action can be used
to measure the reliability growth of the software which ultimately tells us the level of maturity of the
software development.

REVIEW QUESTIONS

34.1 What do you understand by reliability? Why is it important to analyze the reliability of the manufacturing
system?
34.2 Define the following terms and give example to explain them:
(a) Reliability. (b) Maintainability.
(c) MTBF. (d) MTTF.
(e) Failure rate. (f) Hazard function.
34.3 Establish a relationship among reliability, failure rate and MTBF.
34.4 What is a bath-tub-curve? Explain the reasons for its particular shape.
34.5 Show that the expected life of a system is the integration of its reliability function.
34.6 Show that the hazard function is the ratio of failure rate and reliability function of the system.
34.7 A particular automobile component is tested for its reliability. For this, hundred failure tests are conducted.
Estimate and plot the hazard function, reliability function and failure density function for the following test
results:

Failure Interval 0-15,000 15,000-30,0001 30,000-45,000 45,000-60,000 60,000-75,00.0 75,000-85,000 85,000-100,000

(in km of runs)
Number of failures 30 18 12 10 10 18 12
34.8 Show that the MTTF is reciprocal of a constant hazard rate for an exponential probability distribution for
failure rate.
34.9 How is reliability of, many components attached in series/parallel related? Explain with examples.

REFERENCES

I. Abbott, W.R., 1968, "Repair versus Replacement of Failed Components". Journal of Industrial Engineering
19 (January 1968) 21-23.
2. Catun, V.M. and Mihalache, A.N., 1989, Reliability Fundathentals, Amsterdam, Elseyier.
556 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Dhillon, B.S., 1981, Reliability Engineering, Wiley, New York.

4. General Electric Company. Users' Guide to Preventive Maintenance Planning and Scheduling (FAME-Facilities
Maintenance Engineering). New York: General Electric Company, 1973.

5. Govil, A.K., 1983, Reliability Engineering, Tata McGraw Hill, New Delhi.

6. Green, A.E, 1972, Reliability Technology, Wiley International, London..

7. Hardy, S.T., and Krajewski L.S., 1975, "A Simulation of Interactive Maintenance Decision." Decision Science
6 (January) 92-105.

8. Higgins; Lindley R, 1977 Maintenance Engineering Handbook, 3rd ed. New York: McGraw-Hill.

9. IBM, General Information Manual: Preventive Maintenance and Cost Control. Poughkeepsie, NY: IBM

10. IBM, Plant Maintenance Management System. IBM Publication No. E20-0124-0. White Plains. NY: IBM.
Data Processing Division.

11. Ireson, W.G., 1970, Reliability Handbook Holt Rinehart and Winston, New York.

12. Kapur, K.C. and Lamberson, L.R., 1977, Reliability in Engineering Design, John Wiley, New York.

13. Lewise, R, 1970, In Introduction to Reliability Engineering, McGraw Hill, London.

14. Locks, M.O.; 1973, Reliability, Maintainability, Availability Assessment, Hayden, Rochelle Park, New Jersey.

15. Mann, Lawrence, Jr. 1983, Maintenance Management, rev. ed. Lexington. MA: Lexington Books.

;6. Mann, N.R., 1974, Methods for Statistical Analysis of Reliability and Life Data, Wiley, New York.

17. Misra, K.B., 1993, New Trends in System Reliability Evaluation, Elsevier Science Publisher, Amsterdam.

18. Nixon, F., 1971, Managing to Achieve Quality and Reliability, McGraw Hill, London. '

19. O'Connor, P.D.T., 1991, Practical Reliability Engineering, John Wiley & Sons, Inc., New York.

20. Peebles, P.Z., 1980, Probability Random Variables and Random Variable Principles, ISE McGraw Hill.

21. Pieruschka, E., 1963, Principles of Reliability Prentice Hall, New Jersey. '

22. Polovko, A.M., 1968, Fundamental of Reliability Theory, Academic Press, New York.

23. Roberts, N., 1964, Mathematical Methods in Reliability Engineering: McGraw Hill, New York.

24. Sherwin, D.J. 1990, "Inspect or Monitor". Engineering Costs and Production Economics, 18 (January)
223-31.

25. Shooman, M.L., 1968, Probabilistic Reliability, McGraw Hill, New York.

26. Smith, D.J., 1973, Maintainability Engineering, Wiley, New Jersey.

27. Tillman, F.A., 1980, Optimization of Systems Reliability, Marecl Dekker, New York.

28. Tobias, P.A. and Trindake, D.C., 1986, Applied Reliability, Von Noster and Reinhold, New York.

29. Tombari, H. 1982, "Designing a Maintenance Management System." Production and Inventory Management,
23, No. 4 (Fourth Quarter) 139-47.

30. Turban, Efraim. 1969, "The Complete Computerized Maintenance System."Journal of Industrial Engineering,
1 (March), 20-27.

31. Usher, J.S., 1993, "Case Study: Reliability models and Misconceptions", Quality Engineering, 6 (2).

32. Wilkinson, John J., 1968, "How to Manage Maintenance." Harvard Business Review, 46 (March-April),
• 191-205.

33. Wireman, Terry, 1984, Preventive Maintenance. Englewood Cliffs. NJ: eRston Publishing.
 5
BENCHMARKING

35.1 INTRODUCTION
Nature has given us the ability to learn by observing others. Children do it naturally. They learn to
walk, speak and respond to situations by observing others. In business, learning develops through many
routes. One of those is benchmarking.
What is benchmarking? Why is this buzzword so much in circulation? And, how does benchmarking
affect the process of improvement in the system? We will look into these aspects in this Chapter. First
let us understand, what is benchmarking?
Benchmarking is finding and implementing best practices that lead to superior performances of
an organisation (Camp 1995). The first book on benchmarking is by Camp (1989): Benchmarking:
The Search for indust►y best practices, that leads to superior pe► formance. This work is based for a
project by Dr. Robert Camp at Xerox in 1983, which transformed Xerox from a virtual dead entity to
market leader. Since then benchmarking has captured the attention of many industries, researchers and
consultants.
Benchmarking philosophy has roots in Japan, where it is called as dantotsu, which means: striving
to be the best. Dantotsu was used in Japan since World War II (Taiichi, 1990). Western world adopted
it through the experiences of Xerox, which benchmarked (compared) its practices with Japanese firm,
Fuji-Xerox, and other Japanese competitors in 1979. Xerox (in USA) was making photocopier at a cost
which was more than the selling price (cost + profit + market expenses) of its Japanese counterparts.
Through a series of benchmarking efforts, Xerox could reduce its production cost and become market-
leader.
Now, benchmarking has evolved as a search for the industry's best practices which leads to superior
performance. A more comprehensive definition is:

Benchmarking is a systematic and continuous measurement process; a process of continuously

measuring and comparing an organisation's business process against business leaders anywhere
in the world to gain information which will help the organisation to take action to improve
its performance. —Pla►using (1992)
558 INDUSTRIAL ENGINEERING AND MANAGEMENT

35.2 TERMS USED IN BENCHMARKING

During the course of the development of benchmarking as a formal management tool, many associated
terminologies have emerged. Some common terminologies and their definitions are as follows:
1. Activity: Benchmarking activity involves a series of transactions that translate inputs into outputs
using resources in response to abusiness requirement. Thus, sequences of activities in logical combinations
form processes. .
2. Benchmark: Benchmark is the measured, "best-in-clas achievement; a reference or measurement
standard for comparison; denotes the performance level, recognized as the standard of excellence
for a specific business practice.
3. Benchmarking: Benchmarking is the process of identifying,.leaming, and adapting outstanding practices
and processes from any organization, anywhere in the world, to help an organization improve its
performance. Benchmarking gathers the tacit knowledge—the know-how, judgments, and enablers-
that explicit knowledge often misses. —APQC definition.
4. Benchmarking gap: It is the measurable difference in performance identified through comparison
between the benchmark for a particular activity and other companies. It provides in the comparison
the measured leadership advantage of the benchmark organization over other organizations. Gap-
analysis is an approach to know what needs to be done.
5. Best-in-class: It is the outstanding process performance within an industry. This is used as synonyms
to best practice and best-of-breed.
6. Best practice: It indicates superior performance within an activity, regardless of industry, leadership,
management or operation approaches, or methods that lead to exceptional performance; a relative
term usually indicating innovative or interesting business practices that have been identified during
a particular benchmarking study as contributing to improved performance at the leading organization.
There is no single best practice because one best is not best for everyone. Every organization
is different in some way—they have different missions, ,culture, environments, and technologies.
What is meant by best are those practices that have been shown to produce superior results: selected
by a systematic process; and judged as exemplary, good, or successfully rated. Best practices are
then adapted to• fit a particular organization.
7. Capability mapping: It is needed to know what is possible. It provides an analysis of the business
infrastructure of an organization to determine unique abilities and potential. Its assessment is useful
at the planning stage of benchmarking.
8. Core competencies: These are strategic business capabilities that provide a company with a marketplace
advantage. Organisations try to build up on their core-competencies.
9. Critical success factors: These are quantitative measures for effectiveness, economy, and efficiency.
They indicate those few areas where satisfactory performance is essential for a business to succeed.
Thus, these are characteristics, conditions, or variables that have a direct influence on a customer's
satisfaction with a specific business process. They provide the set of things that must be done
right if a vision is to be achieved. It is very useful for understanding the business.
10. Enabler: Enablers are the processes, practices or method that facilitate the implementation of a
best practice and help to meet a critical success factor. The enablers help to understand and analyse
the reasons behind the performance indicated by a benchmark.
11. Functional benchmarking: It is the proces1 benchmarking that compares a particular business
benchmarking function at two or more companies. It may be used to identify better processes elsewhere;
but in related industries.
BENCHMARKING 559

12. Generic benchmarking: It is a benchmarking that compares a particular business function or process
at two or more companies independent of their industries. It may be used to identify better practices
elsewhere, but in unrelated organisations.
13. Global benchmarking: It is used to define the benchmarking in a global perspective.
14. Goals: Goals are the numerical target value or observed performance that indicates the strategic
direction of an organization. These provide a route to achieve better performance.
15. Internal benchmarking: It is a benchmarking that is performed within an organization by comparing
similar business units or business process. It may be used to identify better practices within the
organisation.
16. Milestone: Milestone is the planned and achievable performance level of the system. It is used
to mark a significant point in development of the improvement or change.
17. Process benchmarking: It is intended to focus on the measurement of some, selected discrete
processes, and their performance and functionality against a map of those organizations that are
excellent in these processes.
18. Process owners: They are the individuals, who exercise the management, leadership plus possession
or control over a process.
19. Project sponsor: He is the individual, who provides the main financial support for a benchmarking
project. He is needed to an individual, who plans and carries out a project or activity. He assuines
the responsibility for a project till it ends.
20. Recalibration: It is the process of readjusting the calibration of a measure of performance. It is
used to standardize by determining the deviation from a measure against a standard.
21. Reengineering: Refer Chapter 36 for details. It is the radical redesign of business processes, organizational
structures, management system, and values of an organization to achieve breakthroughs in business
performance. It is also a change mechanism in a business system which assumes "clean-slate" approach.
22. Reverse engineering: It provides a way for the comparison of the product characteristics, functionality,
and performance with similar products made by competitors.
23. Strategic alliance: It is aimed at the strategic bond or connection between organization with common
interests. It provides an association to further the common interests of its participants. Generally
used to improve the performance through synergy.
24. Strategic benchmarking: It is a type of benchmarking between strategic partners of the
business. It provides the route of the systematic business process evaluation of different alternatives,
implementing strategies, and improving performance by understanding and adapting successful strategies.
It focuses on external partners, who participate in an ongoing strategic alliance and change process.
25. Strategic planning: It provides the road map to gain competitive advantage by achieving goals
that define business objectives for achieving critical success factors. Its focus is long-term and aligned
to vision of the business.
26. Total quality: This is also a change process through gradual and continuous improvement. Refer
Chapter 32 for detail. It is a customer-focused management philosophy that seeks continuous improvement
in business processes using leadership, commitment, process improvement, analytical tools and teamwork
that encompasses the participation of all employees.
27. Vision: It is the achievable dream of what an organization wants to do and where it wants to
go. Vision-staternent provides the mind-set, through which orgainsation must bend all the efforts,
planning and achievements.
560 INDUSTRIAL ENGINEERING AND MANAGEMENT

28. World-class: Leading pe'rformance on a process, independent of industry, function or geographical

location, as recognized using process benchmarking for comparison to other world contenders.

35.3 PROCESS OF BENCHMARKING

The definition of benchmarking by Planning (1992), quoted earlier, is developed by the International
Benchmarking Clearing House (IBC) Design committee (US). It is based on a consensus of 100 companies
and answers questions like, how to perform benchmarking, with whom comparison is to be made, etc.
Benchmarking is different from traditional competitive analysis. While competitive analysis focuses
on output, benchmarking focuses on-key processes within a business. Benchmarking attempts to determine
few critical success factors of the business. After analysing these processes, gaps are identified with respect
to the benchmarked business. This helps in recognising the improvements and innovations, which are
followed in the best practice organisations. Thereafter, strategically a series of activities will follow that
will transform the organisation (or process) from an "AS-IS" situation (i.e., the way the system exists
now) into a "TO-BE" situation (i.e., the way the system should be in future). The complete process
of benclunarking is illustrated in Figure 35.1. The comparison of AS-IS scenario and TO-BE (or, world-
class practices) scenario will be helpful in identifying the gaps that need to be bridged for superior performances.
The performance or improvement must be measured on a regular basis to establish the success of benchmarking
endeavour.
I. Establish the need for Benchmarking.

Develop "AS-IS"
2. Identify the function(s) to be benchmarked.
Model.

3. Select the superior perfonner(s)

(Competitive/non-competitive).

Compare
AS-IS and
TO-BE.
4. Collect data and analyse for pinpointing Dips
in perfon0aned, process and practices.

5. Set performance goals for improving and

surpassing the best in class.

0. Identify the gaps

and Devise way to 7. Implement plan to bridge the gaps and
bridge it. monitor results.

Figure 35.1 Process of Benchmarking

35.4 TYPES OF BENCHMARKING

Benchmarking is classified on the basis of the type of partner selected for the benchmarking. The partnering
team (or organization/group/system/process) may be from the same company or from different organisation.
Based on the approaches, benchmarking is classified as (Figure 35.2).
(i) Internal Benchmarking,
BENCHMARKING 561

, (ii) Competitive Benchmarking,

(iii) Functional Benchmarking,
(iv) Generic or Best Practice Benchmarking,
(v) Reverse Engineering.

Benchmarking

Internal Competitive Rine ional Generic (Best Practice)

Benckmarking Benckmarking 13eneki larking Benckmarking
•
Performance Product-oriented Comparison of Comparison of
comparison of comparison particular allbfunctions
units or departments with business functions business functions
within one processes at two or more operations with
organisation involved organisations those of best in class
—Camp (1989) —Watson ('I993) —Watson (1993) —Zairi (1993)

-11111•1111111111111111M111111111191M —11111=111•1111101•11•111MIIMa —11MMINIMI111111111.•

Figure 35.2 Classification of Benchmarking

35.4.1 Internal Benchmarking

It is performed within one organisation by comparing the practiCes and performance of similar business
units or business processes located at same or different places. This approach is the most accessible
one as the comparison is conducted between similar operations in other parts of the same company.
Camp (1989), Zairi (1992) and Watson (1993) defined it as "performance comparison of units or departments
within one organization". In the internal benchmarking, there is no problem of confidentiality and, therefore,
it should be attempted first before embarking on any other' type of benchmarking.
Advantages
1. It uses similar language, mechanism, system, culture, mind-set and top-management support.
2. There is considerable ease in the access to data.
3. There are no problems in establishing communication between units.
4. The process does not involve confidentiality problem in accessing data.
5. The returns of benchmarking efforts are relatively quick. .
6. The approach is relatively silent, low profile, and a low threat affair.
7. It provides a test bed for quicker improvement.
8. Along with transfer of data, expert services from the benchmarked unit are easily available.
Disadvantages
1. It lacks external focus and may foster complacency and lack of seriousness.
2. Internal weaknesses, such as cultural problem, leadership problem, etc., tend to remain unaltered.
3. The results are generally marginal or just adequate improvements are visible.
35.4.2 Competitive Benchmarking
This involves the investigation of competitors services, processes, practices, styles, and products. Reverse
engineering, which involves unfolding processes from end product to raw material (reverse of production
562 INDUSTRIAL ENGINEERING AND MANAGEMENT

process), may be one way to involve into competitive benchmarking. Camp (1989) defines it as direct
product competitor benchmarking looking at processes and products. Zairi (1992) defines it as comparing
specific models or functions with competitors. Watson (1993) defines it as product-oriented comparison
with processes involved.
The return from this approach may be substantial but it may be quite difficult to collect data for
this.
Advantages
1. It provides similar structure and constraints in the benchmarked company.
2. Accessibility of data is more difficult as compared to internal benchmarking but easier than the
best practice benclunarking.
3. Threats are relatively less.
4. Confidence in the decision makers mind due to similarity with competitors.
5. The disadvantage in internal benchmarking is the chance of complacency and arrogance. This is
overcome in this approach.
Disadvantages
1. It is difficult to convince the competitors for sharing data.
2. Many constraints, such as legal, ethical and trade secrets prevent the success.
3. It restricts the, creativity in the process of improvement.

35.4.3 Functional Benchmarking

It is the application of process benchmarking that compares a particular business function in two or
more organisations (Lerna and Price, 1995). Camp (1989) defines it as specific function comparison with best
practice while Zairi (1992) defines it as comparison of specific function with best in industry and best
in class. Watson (1993) defines it as a comparison of particular business functions at two or more organisations.
Advantages
1. Higher chances, of breakthrough as the functions are similar and comparison is with best in class.
2. Moderately sensitive to ethical/political reservation due to similar functions.
3. Widens the perspective of the corporate.
4. There are very high chances of stimulating changes.
5. Similar functions provide opportunity to map the world class on a much easier way.
Disadvantages
1. Due to similar functions sometimes data accessibility is less.
2. Activity becomes high profile due to involvement of best in class.
3. There is greater ramification for change.
4. Expectations are far more.

35.4.4 Best Practice Benchmarking

In this, We consider the practices of identified leaders, irrespective of the business sector, where benchmarking
is performed against very specific activities. This approach initiates great opportunities for companies
to collaborate and exchange information as it can only be advantageous to both parties.
BENCHMARKING 563

Key feature of Benchmark Company (Best practice)

• Any organisation, regardless of sector, location or activity
• Must be the best practice company in own.

Advantages
1. The possibility of• breakthrough achievements are tremendous.
2. It is less sensitise to either ethical or political reservations.
3. It may widen the perspective of the company.
4. It is more useful for stimulating change.
5. Due to lack of competitor among the two companies, easy to exchange information as compared
to external benchmarking in similar sector.
Disadvantages
1. There is greater ramification for change.
2. As compared to internal benchmarking, the access of information is difficult.
3. It is a high profile activity due to involvement of world class (best practice) corporate.
4. High expectation for change.

35.5 PROCESS OF BENCHMARKING

The process of benchmarking is not standardised. The Deming cycle of "Plan -+ Do —> Check Act
(PDCA) has been used by Watson (1993) to model benchmarking (Figure 35.3). Xerox has adopted a
model shown in Figure 35.4. It is a ten-step procedure, which incorporates all the four stages of Deming
cycle.

Adapting Planning the

improving study
and
implementing

Analysing the Conduct the

data research •

Figure 35.3 Benchmarking Process Compared to Deming Cycle (according to Watson 1993)

The role of qliality awards, such as Malcolm Baldrige Award (USA) and European Quality Awards
are far more effective in evolving benchmark partners. All prize winners have to undertake to share their
knowledge with other companies of that nation. Therefore, quality award winning companies provide
a framework against which progress and/or achievements catibe mapped. The gaps may also be identified.
For example, European Quality Award model provides a 50%-50% weightage to both enabler features
and result features (Figure 35.5).
The role of different elements of the TQM in the process of benchmarking has been 'identified
by many authors. Chandra (1993) has presented a model for TQM (Figure 35.6). In this, customer focus,
employee involvement, continuous improvement, and innovative leadership are the key ekments. When
564 INDUSTRIAL ENGINEERING AND MANAGEMENT

these elements of the benchmarking companies are compared, the organizations can identify gaps in the
process/system. This will result into action phase to bridge the gaps. Table 35.1 gives the focal issues
in identifying gaps in benchmarking.

F. Identify benchmarking subject.

Planning 2. Identify henehmarking partners.

3a. Determine data collection methodology.

3h. Collect data.

4. Determine current competitive gap.

Analysis
5. Project future performance.

6. Communicate findings and gain acceptance.

Integration
7. Establish functional goals.

8. Develop action plans.

Action 9 Implement plans and monitor progress.

10. Recalibrate benckmark.

Maturity attained, Ledership

position attained, Practice fully
integrated into Process

Figure 35.4 Xerox Benchmarking Model (according to Karsnia 1991, Camp 1989)

PeOple management 9% People satisfaction 9%

Leadership Policy and strategy 8% Processes Customer satisfaction 20%, Business

10% 14% --t results
15%

Resources 9% Impact on society 6%

Enablers 50% Results 50%

Figure 35.5 European Quality Award Model (1993)

BEN CHMARK ING 565

Reliability Index °Coverall

enhnaced satisfaction higher
Product and Customers , rm,
On-time delivery Customers
service quality satisfaction
increased achieved increased retained
Errors or defects Complaints
minimised reduced

Leadership for Market

continuous Competitiveness share improved
impro ,ernent increased
Pi Mils increase

Costs reduced

Cycle time shorter

Employee
Quality Systems turnover reduced
Organisation
and employee Employee
benefits
inyolvement satisfaction higher
increase
Sa let), and health .
improved

Productivity
increased

Figure 35.6 Total-Quality-Management Model (according to Chandra, 1993)

Table 35,1 Focal Issues in Identifying Gaps.

Issue Explanation Example

Core Competencies Strategic business capabilities which Fast-track product development,

Key business Process
Critical Success factors
provide market place advantage
Influencing process for external
custmor's perception of business
Quantitative measurement for
effectiveness, economy and
efficiency of business
giving rapid time from the design to
production
• Quality of product development
• Effective availability of customer
service
• Mean time between failure (MTBF),
• Inventory turnover ratio

35.5.1 Different Phases in Benchmarking Process

As identified by Karsnia, (1991), Camp (1989), and Lewis and Naim (1995), different phases of benchmarking
process are as follows:
Phase 1: Planning Phase
1 What should be benchmarked: The company has to decide what is to be benchmarked. Any activity
that can bt measured can also be benchmarked. For this, we should identify areas that could make
significant improvement to customer service since customer satisfaction is vital to the success of
any company. Each benchmark has to be aimed at contributing to customer satisfaction or profit
through improved performance. Therefore, anything: process or performance, enabler or result, service
or production can be benchmarked provided it can be measured.
566 INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Whom to benchmark against: It is necessary to decide which companies have some world class
practices. However, problem is actually in the identification of these companies, i.e., who is the
best? For this, identify competitors of your processes or operations, followed by a search for similar
practice in dissimilar industries. Asa rule; customers can provide useful information as to who
they think have the best practice. As an alternate, many consultancy associations have up-to-date
surveys on the best practices. Therefore, the best-in-class against which the benchmarking is done
may be either in same type of industry or it may be a totally different type of industry.
3. Data collection methods: It is a crucial step in benchmarking. Information may be available through
many sources. For identifying best practice companies, bench measures should be used before deciding
on benchmarking. The bench measitring process should be seen as a prerequisite towards best practice
benchmarking as it involves measuring success against a number of companies in order to identify
"who" is the best practice (Lewis & Naim, 1993). Therefore, proper methodology for exact data
collection is a prerequisite to a successful benchmarking process.
Phase 2: Analysis Phase
1. Determine current performance levels: A successful•benchmarking process should pin-point the levels
that can be achieved. It is essential to have a clear understanding of company's present performance
in order to be in a position to identify any gaps. This may be done on evaluating some performance
measures.
2. Project future performance levels: The future performance level depends on the gaps. The performance
levels of the "best practice" companies should be quantified and compared with current performance.
The gap should be positive if we are interested in benchmarking. This means, we should be lacking
in some aspects for being suitable for undertaking a benchmarking project. The area in, which
the gap is largest, identifies the area requiring the most improvements in order to achieve a leading
edge. As an additional use, benchmarking is useful in measuring and monitoring the process over
a ,period of time. This means, benchmarking can be an improvement tool, which may be dynamic
in nature.
Phase 3: Integration phase
1. Communicate benchmark findings: Proper communication is very essential in benchmarking. The
findings should be reported to all employees within the company in order to gain acceptance. This
is to gain confidence about new ideas. The change is most likely to be accepted, if the benefits
are explained to the employees. A vision of the future state of the company must be circulated.
2. Establish functional goals: Most of the previous goals should be revised during benchmarking so
as to set new standards for excepted performance. This is based on best practice performance.
The Ta-be position of the company should determine new goals.
Phase 4: Action Phase
1. Develop action plans: New action-plans are needed in benchmarking. Carefully design all the specific
plans for implementation and continuous assessment of any achievements.
2. Implement actions: New action plans should be put into action. Put all modifications of the actions
into practice. Ensure they reach the new standards by monitoring the progress. It requires firm
commitment from top management.
3. Recalibrate benchmarks: For future use, we should continue to benchmark, so that company can
keep up with improvements and make the change. It should be proactive rather than reactive. Benchmarking
is successful, if it is pursued over a period of time. Recalibration is needed till the level of desired
performance is achieved.
BENCHMARKING 567

Phase 5: Maturity Phase

Maturity is achieved when all best practices are implemented and benchmarking is adopted as a
way of life. This stage is the turn-around stage, when the status of the best practice is achieved.

35.6 BENEFITS OF BENCHMARKING

Benchmarking offers a pathway to change. Many success stories have been reported. For example, Xerox
had following achievements (Bendel!, et. al. 1993):
• Reduction in inventory by two-thirds
• Increase in engineering drawing per person by double
• Improved marketing productivity by one-third
• Reduced service labour cost by 30%
• Improve distribution productivity by 8-10%.
A report by Massachusetts Institute of Technology has emphasised that most successful firms in
US shared an emphasis on competitive benchmarking (First, 1991). Many multinationals, such as AT & T,
Ford, IBM, Kodak, Motorola, Xerox, Du Pont, etc., have reported major improvements throughbenchmarking.
Lewis & Naim (1995) have presented an input-output diagram, highlighting some of the potential benefits
attainable from benchmarking (Figure 35.7).

Input

Dissatisfaction with business as usual Better understanding of competitors

New competition Fewer complaints and more satisfied customers
B Strong reputation within market
Customer demands
E Increased profits and sales turnover
Political change N
C Cost savings
New leadership _r H Leading edge' status
M Credibility
Understand your key processes
A
Proactive
Identify best practice companies R
K Awareness of competitors
Identify gaps in performance Closed performance gaps
N
Objective comparisons Set new goals, ahead of competition
New insights • Continuous improvement
Motivation
Critical performance measure
Increased competitiveness

Figure 35.7 An input-output diagram highlighting some of the potential benefits of benchmarking
(Modified from Lewis and Naim, 1993)

Any organization can benefit from benchmarking because it provides many leverages:
• It prevents reinventing the wheel (Why invest the time and costs when someone else may have
done it already—and often better, cheaper, and faster?). A lot of money is saved in devising ways
to improve.
• It accelerates change and restructuring by:
• Using tested and proven practices, as best-in-class will be using proven practices.
568 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Convincing top management and others who can see that it works, and
• Overcoming inertia and compliancy and creating a sense of urgency when gaps are revealed.
• It leads to ideas from situations outside the organisation, by looking for ways to improve outside
industry. It is an approach of looking beyond.
• It forces organizations to look into, analyze and adopt the present process, which often leads to
improvement in and of itself.
• It makes implementation more acceptable with commitment because of involvement of process owners.
Despite reported benefits from benchmarking, two factors which must be considered by a company
in adopting this are:
(i) Cost of benchmarking study: Normally it should not be high.
(ii) Time Scale involved: Normally it should be 6 to 10 months.

REVIEW QUESTIONS

35.1 What do you understand by benchmarking?

35.2 Explain the process of benchmarking. Is it effective in bringing organisational changes?
35.3 What are the different types of benchmarking?
35.4 How does the TQM award model help in the process of benchmarking? Explain.
35.5 Explain the.different phases of benchmarking. How are gaps identified and used in the process of benchmarking?
35.6 Explain the benefits of benchmarking.
35.7 Make a web search on internet and locate the benchmarking case-studies of IBM/Xerox/Motorola/DuPont/
Kodak or other industries. Explain the lessons learnt through these studies.

REFERENCES

1. Bendell, T., Kelly, J., Merry, T., and Sims, F., 1993. Quality: Measuring and Monitoring, Century Business.
2. Burati, J.L., Matthews, M.F., and Kalidindi, S.N., 1992, "Quality management organizations and techniques."
J. Constr. Engrg. and Mgmt., ASCE, 118 (1), 113-28.
3. Camp, Robert C., 1989, Benchmarking: The search for Industry Best Practices That Lead to Superior Performance,
ASQC Quality Press, Wis?onsin, Codling, Sylvia, 1995. Best Practice Benchmarking, Gower, Aldershot.
4. Chandra, M., 1993, "Total quality management in management development." J. Mgmt. Develop., Bradford,
U.K., 12 (7), 19-31.
5. Costanzo, L., 1993, "Benchmarking: Top of the class? Engineering, 233 (8)." 27.
6. "First find your bench." 1991. The Economist, 319 (7706), 72.
7. International standard: Quality assurance standards, guidelines for selection and use 1987, Int. Organization
for standardization, Geneva, Switzerland.
8. Karlof, B., and Ostblom. S., 1993, Benchmarking.• A signpost to excellence in quality and productivity. John
Wiley & Sons.
9. Karsnia, A.L., 1991, "Towards world class development: Benchmarking to improve project management practices."
Seminar Proc., Project Management Institute, Dallas. Tex., 1-9.
BENCH MARKING 569

10.Lake, G.D., and Ulrich, D., 1992, "Introduction to exemplary practices." Human Resource Mgmt.,
31 (1/2), 1-7.
11.Lemas, N.M., and Price. A.D.F., 1995, Benchmarking: Performance improvement towards competitive advantage,
Journal of Management in Engineering, II (I), 28-37.
12.Lewis, J.C. and Nairn, M.M., 1995. Bencluilarking of aftermqrket supply chain, Production Planning and
Control, 6 (3), 258-269.
13.Macdonald, J., 1993, TQM: Does it always work? Technical Communications, Letchworth. U.K.
14.Main, M., 1992, "How to steal the best ideas around." Fortune Int., 126 (8), 86-89.
15."Now for quality Comparisons." 1992, Mgmt. Today, London, U.K. Aug., 80.
16.Pengelly, R., 1993, "Quality and the consultant—Who needs BS5750?" Prof. Engrg., Feb., 10-11.
17.Pender, R., 1993, "Partnering for profit." Total quality Magazine, Bradford. U.K., Oct., 13-16.
18. Planning, organizing and managing Benchmarking activities: User's guide. 1992, Am. Productivity and quality
Ctr., Houseton., Tex.
19.Prahalad, C.K. and Hamel, G, 1990, "The Core Competence of the Corporation", Harvard Business Review,
May/June 1990.
20. Shetty, Y.K., 1993, "Aiming high: Competitive benchmarking for superior performance." Long Range Ping.,
Oxford, U.K., 26 (1), 39-44.
21. Singh, K.D., and Evans, R.P., 1993, "Effective Benchmarking: Taking the effect approach", Industrial Engg.,
25 (2), 22/65-66.
22. A survey of customers needs. 1993, Int. Benchmarking Ctr., U.K. Taiichi, 0..(1990). Toyota production system:
Beyond large scale production: Productivity Press; Cambridge, Mass.
23. SWeeney, M.J., 1992, Benchniarking for Startegic manufacturing management, working Paper No. SWP
43/92, Cranfield School of Management, Cranfield, Bedfordshire.
24. Walleck, Steven A., O'Halloran, J. David and Leader, Charles A., "Benchmarking World clasi Performance",
The McKinsey Quarterly, No. 1991 pp. 3-23.
25. Watson, G, 1993, Strategic Benchmarking, Wiele, Chichester.
26. Watson, GH., 1993, Strategies Benchmarking. How to rule your company's performance against the world's
best. John Wiley and Sons, Inc., London, England.
27. Zairi, M. 1992, "Competitive benchmarking: An executive guide for technical Communications Ltd., Letchworh. U.K.
570 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 36
BUSINESS REENGINEERING

36.1 INTRODUCTION
Business reengineering, process redesign, organisation restructuring, or business process reengineering
(BPR), are some of the commonly used terms for same connotation in recent years. For our purpose,
we will treat these terms as synonyms. Business Process Reengineering (BPR) is closely associated
with the implementation of ERP and for that matter in the use of information technology (IT) in the
enterprise. Now, let us understand the following:
• What is BPR?
• How is BPR different from other related approaches for change, such as continuous improvement
and 'bench marking?
• What are reengineering approaches?
• How to model a reengineering project?
• What is the relation between ERP/IT and BP?
• Why does BPR project fail and what can • be done about it?

36.1.1 Definition of Reengineering

Hammer (1990) published an article in Harvard Business Review as: Reengineering work: Don't
Automate, Obliterate and later Hammer and Champy (1993) published the famous book Reengineering
the Corporation: A Manifesto for Business Revolution. These publications formed the starting point
of one of the most popular and talked about management intervention of late 1990s. BPR is defined
as follows:

Reengineering is the fundamental rethinking and radical redesign of business processes to

achieve dramatic improvements in critical measures of performance, such as cost, quality,
service and speed. —Hammer and Champ (1993)

The important key terms to be tidied in this definition are radical, redesign, fundamental, process,
dramatic, and rethinking. Let us understand what these terms mean.

(Adopted from author's book on: Enterprise Resource Planning, Galgotia Publications, New Delhi).
572 INDUSTRIAL ENGINEERING AND MANAGEMENT

36.1.2 Radical
Hammer and Champy (1993) have explained this in their approach for BPR BR, as it advocates about
reinvention, while disregarding all existing structures and procedures, and inventing completely new ways
of accomplishing work. Therefore, BPR is not a process, which incorporates continuous improvement
(as advocated in Total Quality Management—TQM). There must be something quite different and new
in an approach for BPR.
36.1.3 Redesign
The enterprise needs to be rebuilt through new rules, new methods and new relationships. For example,
use of information technology (IT) or the integration' of enterprise through ERP calls for new design
of enterprise procedures, reporting system, hierarchy and control, organisational role, accessibility and
use of information and ultimately the decision making process. Hammer (1990) says, "Reengineering"
triggers changes of many kinds, not just of the business process itself, job designs, organizational structures,
management system-anything associated with the process-must be refashioned in an integrated way. In
other words, reengineering is a tremendous effort that mandates changes in many areas of the organization."
36.1.4 Fundamental
In BPR, we start with a question which challenges every assumption, every reason, every logics and
every activity. We pose a straightforward question; why do we do: what we do? And why it should
be continued the way it is being followed today? For example, the economic order quantity for the
requisition of an assembly is 450 parts per order from supplier X. Then BPR approach could be: "Why
can't we go for Just-In-Time (JIT) supply? What prevents us from doing so and how to overcome?"
The crux of the whole approach is that nothing is for granted and therefore should not be accepted
as sacred. Time, competition customer need, enterprise outlook, introduction of new technology and information
framework (such as ERP), etc., are some of the valid reasons for which old practices become obsolete.
For bringing changes, something fundamentally different may be looked for.
36.1.5 Process
Process is defined as a collection of activities that take one or more kinds of input and create an output
that is of value•to the customer. Due to considerable success of the division of labour in an organisation,
people become more concentrated on the tasks performed around them. Clear understanding of each and
every process, its implications and interaction with other processes, and effectiveness of IT on the performance
of each of the processes are prerequisites to the successful implementation of BPR in any enterprise.
36.1.6 Dramatic
Dramatic means: not a marginal one. In BPR, we need to have higher magnitude of improvement and,
not a slight turn of events. Therefore, BPR is fJcused on completely different approach, which can bring
about higher magnitude of -improvement in the performance of the enterprise. In the context of ERP,
where cost of implementing an ERP system is very high, the improvements have to be very substantial*
to cope up with the investment burdens. If in case, the goal is limited to marginal Improvement in the
performance,..:hen instead, the route of TQM or continuous improvement is recomrr.ended. Hammer and
Champy (1992) have pointed, "Reengineering isn't about making marginal or incremental improvements,
but about achieving quantum leap in performance."
36.1.7 Rethinking
There are traditions, continuity and precedences' in the enterprise. Major deviations are absent in day-
to-day activities. However, BPR stresses the need to explore the alternatives. It asks for rethinking and
not sticking to the old and conventional approaches. Rethinking is aimed at changing guards, changing
for something quite different and dramatic in results.
Now, we will look into BPR with some other angles.
BUSINESS REENGINEERING 573

36.2. OTHER WAYS TO LOOK AT BPR

Besides Hammer and Champy (1993), many have approached to the concept of BPR in slightly different
ways. Despite this, the core concept of BPR is same everywhere.
We propose seven Rs: realisation (of change), requirement (of change), rethink (about processes),
redesign (old ways), retool (for new ways to perform), reorchestrate (the system to gear up for change),
and reevaluate (everything, that has been changed). These seven Rs. are useful in bringing transformational
changes in the system (Figure 36.1). Manganelli and Klein (1994) define BPR as the rapid and radical
redesign of strategic, value-added business processes, and the systems, policies, and organizational structures
that support them-to optimize the work-flows and productivity in an organization. They offer a definition
that focuses on optimizing work-flow and productivity in an organization. Other ways of looking at BPR
are as follows.

Technical system Management System

• Work Processes • Systems

• Job Design • Mission and Vision
• Production Planning • Leadership
• Tools and Techniques • Motivation and morale
• Decision Making • Value
• Control of Processes • Policies
• Procedure and rule
• Role and Organisation

Ree igincering plans and Transformation

• New Approaches
• Deployment of innovations
• Radical changes and paradigm shill
• Dramatic-fast change mechanism

Social System Behavioural System 0 her System

• Team • Attitude • Legal

• Values • Perceptions • Governments
• Creativity , • Behavior • Globalisation
• Partnership • Habits • Liberalisation
• Reward • Traditions • Privatisation
• Structure • Religion • Environmental
• Peer group

Figure 36.1 Transformation Map of Reengineering

574 INDUSTRIAL ENGINEERING AND MANAGEMENT

It is the•analysis and design of work flows and processes within and between organizations.
—Davenport and Short (1990)

The job of BPR is to rip the guts out of an organisation and reassemble them in the context
of today's changing business world. —Hammer (1990)

BPR is the critical analysis and radical redesign of existing business processes to achieve
breakthrough improvements in performance measures.
—Teng, et. al. (1994)

Reengineering is the radical redesign of the business policies and practices within an organization
in order to streamline an operation and adapt it to existing market realities.
—Bob smith (1994)

As a prescription to the management looking for BPR, Hammer and Champy (1992) point out,
"To reinvent their companies, managers must throw out their own notions about how business should
be organized and run. They must abandon the organisational and operational principles and procedures
they are now using and create entirely new ones."
Twenty Enterprise Redesign Principles
• Integrate processes in the supply-chain and the enterprise.

• Organise work around the outcomes, not tasks.

• Explore and harness technology.
• Extensive use of Information Technology (IT).
• Give direct access to customer.
• Control through feedback, policies and practices.
• Enable interdependent arid simultaneous work.
• Ensure decision-making power to workers at places where the work is performed and build control into the process.
• Redesign and rebuild feedback channel.
• Have those, who use the output of the process to perform the process.
• Subsume information processing work into the real work that produces the information.
.• Treat geographically-dispersed resources as though they were centralised (IT has 2 key role here)
• Link parallel activities instead of integrating their results.
• Capture information once and at source (ERP has a key role here).
• Combine several jobs into one.
• Perform steps in processes in a natural order, and attempt doing several jobs simultaneously.
• Perform work where it makes most sense, including at the customers' sites. Work may be shifted across organisational
boundary.
• Control and checks, and non-value-added work are minimal.
• Use hybrid centralized/decentralized operations.

• Create business alliances, if needed.

Figure 36.2 Enterprise Redesign Principles [Andrews and Stalick (1994): Hammer (1990); Hammer and
Champy (1993) Shankar and Jaiswal (1999)]

kr
BUSINESS REENGINEERING 575

36.3 COMMON MYTHS ABOUT BPR (TABLE 36.1)

BPR is with us as a management concept since early 1990s. It is still a reasonably misunderstood
concept in our corporate world. Sometimes, it is equated with downsizing, Client/Serves computing, ERP,
ABC, etc., and all have added confusion to it. We will first try to dispel some, of the common myths
identified by CSC Index, Inc. on the basis of a survey of 600 large North American and European firms
in 1994 and findings of Devenport and Stoddar (1994) with 200 companies and 35 reengineering initiatives.

Table 36.1 Common Myths and Reality about BPR

Myth Reality

I. Reengineering is nothing but
downsizing.
2. The ambitious goals set in BPR
are not safe, therefore, modest
goals should be set.
3. Most BPR efforts fail to deliver
goods.
4. Reengineering is a fad. It is on
the way out.
5. Reengineering is reorganizing,
delaying, or flattening an
organisation
6. Reengineering is a process achieved
through software reengineering.
7. ERP is a reengineering process.
8. Reengineering is an improvement
program like TQM and
benchmarking.
Reduction of labour or downsizing has been a minor outcome of
reengineering. Restructuring and redesign are the focus in BPR.
Involvement of integration through information technology is one of the
reasons for layoffs and job reduction.
Modest or lower goals are not safe strategies in BPR. Based on the surveys,
those who aimed higher have a better record of attaining BPR objectives.
Based on surveys, few BPR efforts have failed. But three-fourth of those
aiming for cycle-time reduction and most of those aiming for cost-
reduction have succeeded in their BPR effort. Many ERP implementations
have succeeded when BPR is adopted to reengineer the enterprise. It
is rare to find full scale, successful ERP implementation without BPR
inputs.
On the contrary, BPR is gaining popularity in recent years. Alongwith
industrialised nations, developing nations like ours are fast adopting to
the changed norms and BPR. The trend is likely to continue.
When we go for reengineering, the focus is not the structure, but the
processes and their organisation linkages in the enterprise. Flatter
organisation after many reengineering efforts is due to associated IT inputs
during BPR: It lessens the need to delegate in the organisation.
Software reengineering focusses efforts at using modern technologies
to restructure obsolete information system. BPR, however, is concerned
with many disciplines other than software for similar purposes.
Reengineering is a planned effort, which may follow, proceed or go along
with ERP implementation. The reengineering is needed so as to match
with ERP package and/or to utilise this opportunity for redesigning the
enterprise.
Reengineering is fundamentally different from Total Quality Management
(TQM) and bench-marking. While, TQM focusses on marginal but
continuous improvements, bench-marking is an improvement through
imitation and inspiration of best practices in the other or same enterprise.
Reengineering, however, is a process of radical and Ac fundamental
change. According to Hammer and Champ (1993), " reengineering seeks
breakthroughs, not by enhancing existing processes, but by discarding
them and replacing them with entirely new ones."

36.3.1 Process Improvement vs Process Innovation

Total Quality Management (TQM) is the process, which demands for continuous, incremental improvement
in the process and practices of the enterprise. Business Process Reengineering (BPR), on the other hand,
576 INDUSTRIAL ENGINEERING AND MANAGEMENT

calls for radical, periodic and break-through in changes, which are fundamentally different than existing
processes and practices of the enterprise. The detailed differentiation is given in Table 36.2.

Table 36.2 Process Improvement (TQM) versus Process Innovation (BPR)

Factors Improvement (TQM) Innovation (BPR)

I. Level of Change & Objective Incremental, Continual, Radical, Break through, Periodic,
Gradual Abrupt, Volatile
2. Starting Point Existing Process Clean Slate
3. Frequency of Change One-time/Continuous One-time
4. Time Required Short Long
5. Participation/Orientation Bottom-Up Top-Down
6. Typical Scope Narrow, within functions, Wider
Broad, cross-functional
7. Risk Moderate High
8. Primary Enabler Statistical Control Information Technology
9. Type of Changes Cultural Cultural/Structural
10. Customer Focus Very Good Essential
11. Continuous Improvement Essential None
(Kaizen)
12. Training Universal Significant
13. Use of Teams Frequent Marginal
14. Integration of overall process Marginal Central and Significant.
IS. Expected Improvement Medium Very high
16. Sources of Leadership Managers or associates Often managed by outsiders
close to the business
17. Case for action Assumed to be necessary Compelling
18. Senior Management Important up front Intensive throughout
involvement
19. Role of Information Incidental Cornerstone
Technology
20. Involvement From Few to Everyone A few champions
21. Orientation People Technology, Information
22. Focus Processes Profit
23. Investment Low initially, high to High initially, less later
-sustain

Source: Compiled from: Gulden and Ewers (1991), Devenport (1993), Mohanty (.1997), Turban, et.al. (1996)
Shankar and Jaiswal (1999).

36.4 THE 7 RS. OF REENGINEERING

Reengineering requires efforts for dramatic improvement in the performance of the enterprise, which is
through radical changes in the system. Reengineering may be brought by discontinuous thinking, breaking
from conventions and routine framework. Therefore, a new paradigm shift in the approach to, run the
. BUSINESS REENGINEERINO 577

enterprise is needed which may be brought through re-architecturing of the enterprise. Reengineering
is not downsizing or only automation. It involves "redefining and rethinking everything". To incorporate
reengineering, six peripheral and one central Rs, are needed. (Figure 36.3) These are:
(I) Reorchestrate as the central theme for all activities, and
(II) Realization, Requirement, Rethink, Redesign, Retool, and Revaluate as the six peripheral themes.

0040114 PP, It I NO wileo

Rethink
*Technologies
•System
*Structure
*Procedures
*Rules .
Requirements •Processes Weldon
*C'tistomers *Conventions
• Suppliers *Optimize Process
•Product *Total Process
•Services *Total System
• Process ()wilier Redesign IEliminate Waste

*Training •Leadership
• Relics and Values
• Culture
• Accountancy
•Communication
Realization •Incentives Retool
*Celebrations
•Strength *Technologies and
• Weakness Success
System
I Threat *Delivery System
•Opportunity *Transformation
\ I Need • Methods
•Choi lunges Reevaluate *Planning and
4116, •Performance (Intro'
• Results
*Mai
• ShorVi-ong.term
aelneVeMenbi
•Morale
cadurship

C=RS AT PUMP! IBRY

Idt AT Tnn TUB

Figur. 30,3 lio@nglmerIng Wheel

36,4.1 Noorchestrate
Reorcheetration forms the central theme or hub of the reengineering effort. Its purpose is to bring about
organisational change necessary for reengineering, This can be, achieved through:
(a) Transforming organisation fl.om traditional hierarchical organisation to network.based organization
(b) Reengineering of few (one or two) cross.ilmetional organisational.prOcesses
578 INDUSTRIAL ENGINEERING AND MANAGEMENT

Key Principles of Reorchestration

1. Develop proactive, visible and passionate leadership.
2. Change accountability to support new process.
3. Reengineering effort should be in line with new or retained beliefs and values of the organisation.
4. Develop incentives for reengineering effort.
5. Ensure job security and redeployment of work-force after reengineering.
6. Plan training to sustain post-reengineering scenario.
7. Reengineering effort should be treated with zeal and a mission.
8. Involve everybody and especially top management to ensure full commitment.
9. Reengineering process should heavily be clubbed with open communication among top management,
other employees and consultants for reducing chances of mistrust, confusion and passiveness.
10. During reengineering process, many things are fluid, ambiguous or tentative. Everybody must be
trained to accept this transition.
11. New rules for employee's empowerment have to be derived. Any obstacle in the path of reengineering
has to be removed by total commitment for change and innovation.
12. Celebrate any success in the path of the reengineering effort. It is important because reengineering
effort is always associated with some failures and fine tunings.

36.4.2 Realization
Realization is the first step of reengineering. It involves probing questions like, "Why do we do this
the way we are doing it now?" "Why do we do what we do now?" "What can be done to change
this situation?" etc. Probing into present may result in the realization that radical and dramatic improvement
is needed. This realization is the trigger-point for reengineering process. Realization starts with a careful
SWOT analysis:
Table 36.3 SWOT analysis for Realization Phase

SWOT Analysis for Realization

S Strength Analyse the internal Strengths of the enterprise.
W Weakness Analyse the internal Weaknesses of the enterprise.
0 Opportunity Analyse the Opportunity in the emerging areas of
Market/technology/1T or adoption of ERP; and/or
BPR measures.
T Threat Analyse the external Threat by environment/
competitors/emerging technologies.
Realization is the attainment of the glimpse for a new visions related to the need for transformation.
It is the start of a challenging journey of reengineering.

36.4.3 Requirements
Requirement analysis is the second phase of the reengineering process. It involves aligning the mission,
vision, values and key requirements of the enterprise to satisfy and exceed the customer's expectation.
Unlike common in traditional enterprises, this phase should be proactive to satisfy and exceed the customer's
requirements. Reengineering efforts must not start without the requirement analysis for customers, products,
services, process owners, and suppliers.
BUSINESS REENGINEERING 579

36.4.4 Rethink
Rethinking is the critical examination of all the current and existing conditions of the enterprise. It has
a special focus on the process weaknesses and variations. The critical analysis of the outdated procedure
policies, structures, technologies, methods and work-habits has to be done at this stage. This would form
the basis for the transformation process in reengineering.
36.4.5 Redesign
For any reengineering effort, redesign of the enterprise has to be meticulously planned. The effort in
reengineering is focussed on cross-functional activities of ambitious nature. The redesign should involve
on breaking conventional rules and breakthrough thinking. Redesign should be shaped around visionary
goals for the enterprise. It can be effective with supports from information technology. ERP, as one of
the strategies, related to IT, facilitates in deciding the framework for redesign.
Turban, et. al. (1996) have identified twelve "—ing" -words that help in deciding the move towards
changes in basics of enterprise, (Table 36.4).
Table 36.4 Twelve Moves (—ing-words) in Redesign

S. No. Moves in Explanation Example

Redesign
1. Challenging • Hold nothing scared For example, challenge the warehousing
• Scrutinize current practice. practice by material planning through
JIT.
2. Eliminating Eliminate unnecessary Develop single vendor, who is highly
processes. reliable in quality and, thus, eliminate
• Eliminate unnecessary inspection of subassemblies from
control. vendor.
3. Flattening • Eliminate hierarchy in the More responsive with better teamwork
management. flattens organisation.
4. Simplifying • Simplify the customer The supply-chain is more effectively
relationship. managed once the simplification and
• Simplify the vendor ease in information-flow is incorporated
relationship. in its different links.
• Simplify processing and
information flow in supply
chain.
5. Empowering • Empower "intelligent" nodes One point processing of customer
in the supply-chain of the complaint (single window-type) and
enterprise. immediate action for redressal may be
• Use IT to achieve inbuilt through compete IT support.
empowerment.
6. Standardizing • Build uniformity in dealing For each vendor, one single account
with similar problems such as number and standardised procedure for
customer service. payment of shipment may improve the
performance of the value chain.

(Contd....)
580 INDUSTRIAL ENGINEERING AND MANAGEMENT

S. No. Moves In Explanation Example

Redesign
Paralleling • Information, fed at any point
of the system, is processed in
parallel at many locations for
different purposes.
8. Partnering • Form strategic alliances with
different supply chains,
9. Informing • Share information film a
common source ' solutions is the seamless integration of
• Build strong information
links.
• Information itself is the link
in the seamless integration of
the enterprise.
10. Monitoring • Continuous tracking of
performance measures
• Use feedback extensively
and make it available at
all points of the enterprise
I I. Outsourcing • Use different en►erprises to
perform few specific function
of your organization
• Select specialist enterprise for
function which is outsourced,
12. Pre-scheduling • Schedule activities In
advance and let It be
known to all concerned.
With every sale, the customer da►a are
used by market research, distributor,
product development and planning for
different purposes.
Credit Card Company, bank (finance)
and car dealer form strategic alliance for
the sale and loan of car. For dealer as
well as financer, it is a win-win strategy.
The most attractive feature of all ERP
enterprise with instant sharing of infor-
mation among.
Dealer of the car monitors the customer
preference regarding model and colour
of the car, This information may be fed
to all employees in the enterprise for
better preparedness.
Maruti company is outstanding many
parts, such us steering, tyres. etc., to other
specialist firms.
A refrigerator company planned to
devote more time in product-develop-
ment during lean period of production.
It is conveyed to the operations•munuger,
so that he can contribute substantially
when time comes.

38.4.6 Retool
The purpose of retooling is to ensure that the evolving enterprise would become more responsive to
the reengineering effort, This is necessary to minimize the inflexibility after the BPR point, Retooling
needs a clear understanding of the current practices of information processing and handling of all databases.
An assessment of app►nprfritw, Support and appropriate network of hardware, technology and procedure
is the prime objective of retooling.
The retool phase involves the evaluation and adaptation of more competitive systems, such
as technologies, required to improve production or service work processes, in order for the
retooling effort to be adequate. ---Rdosomwan, J.A. (1996)
Retooling is not a casual or quick-fix process. It involves cared marketing and documenting (Table 36.5)
the characteristics of the process for new tools (such as RP), technologies, programs and services (Shandler,
D,, 1996),
BUSINESS REENOINEERINO 581

Table 36.5 Retooling of Enterprise

Traditional Enterprise Perspective In RETOOLING Reengineering Enterprise Effort In RETOOLING

• It is a piecemeal effort.
• It is an on-demand process.
• The concern for creating ideal process
and systems is.less.
• It is a comprehensive effort.
• The focus Is on the evaluation and adaptation ofa more
competitive system, and set of procedure.
• The concern for creative ideal processes and systems
is more.

38.4.7 Reevaluate
Re-evaluation is the final phase of reengineering. It involves the reevaluation of the entire process to
ensure that once the redesign and retooling efforts are over, the evolved process has attained the requisitioned
objectives. Re-evaluation of results should be on the basis of same performance indicators, These performance
indicators must specify the improvements in the core-competencies of the enterprise,

Reutigineuring Thant
Process Map
Process OWflerh
i

piugnosIs Redesign Retool

Reoreheatrate

AS=IS Process Understanding Process Design Breakthroughs

Weukneai In Current Design Detailed Process Designs
Targets nu New Design Identification or Bust Design

Revaluate

Transition

Transition Strategy
Pilot Implementation
Rollout and Institutionalise

Nur@ 30,4 Sketch of Concurrent fieengineerIng Approach

(Modified form Bheekeren end Leung, 1NY: Shenker end Jelowel, 1000)
582 INDUSTRIAL ENGINEERING AND MANAGEMENT

Key Point
"When you start to re-engineer processes, better have customers and suppliers on the team,
because without them you will have a very small scope for BPR, which offers no strategic
value." —Prof Michael Earl, London Business School

In the revaluation stage, the focus should be on the entire process and, thus, enterprise as a whole.
A sketch of concurrent reengineering approach is presented in Figure 36.4 (modified from Bhaskaran
and Leung, 1997), which represents all the aspects of a reengineering process. The seven Rs of reengineering
help the reengineering process in many ways. Once realization is sensed, the requirement and rethinking
process start for the mobilization of reengineering team, process-mapping and process-owners. Efforts
for reorchestration, redesign, retooling and diagnosis of the current practices (AS-IS) concurrently start.
This gives rise to new breakthrough or TO-BE enterprise with major transformations. The changes, thus
brought about, are implemented after detailed designs of new processes. During the transition-phase of
major changes, the system is revaluated on different performance measures. Once, benefits are established
at this level, transition strategy is freezed by top management Pilot implementations are undertaken. Concurrently,
whole changes are made known and implemented. New methods are formalised and efforts are made
for the acceptability.
36.5 HOW TO MINIMIZE FAILURE OF BPR PROJECTS?
There are large number of cases where BPR projects have failed. The main reasons for failure and the
ways to minimize failure are given in the Table 36.6 below (Bashein et. al, 1994; King, 1994).
Table 36.6 Failure of BPR Efforts

Reasons for Failure of BPR How to Minimize BPR Failures

• Lack of sustained management commitment • Senior management commitment and sponsorship
• Lack of focussed leadership • Realistic expectations
• Unrealistic scope and expectations • Empowerment
• Resistance to change • Collaborative workers and team work
• Unprepardness of the enterprise • Strategic context of growth and expansion
• A Do-It-to-Me attitude • Shared vision
• Cost-cutting focus • Sound management practices
• Narrow technical focus • Effective communication, regular briefings, and
• Lack of IT/ERP support meetings for the removal of mental blocks through
discussions
• Unsound financial conditions • 'Sufficient budget
• Too many project, under way • Do something smaller first.
• Fear and Lack of optimism • Conduct transformation session of HRD to evaluate
• Animosity towards IT/ERP specialists resistance to change.
• Overemphasis as tactical aspects and • Get HRD and IT people involved.
strategic issues being compromised • Celebrate even a smaller success or achievement.
• Identify trade-off between processes.
• Identify new market and opportunities.
• Redefine process structure and assumptions.
BUSINESS REENGINEERING 583

36.6 BPR AND IT

Business process reengineering and information technology (IT) are closely related. Hammer (1990) considers
IT as the key enabler of BPR which he perceives as "radical change". IT helps in challenging the assumptions
inherent in the enterprise and its work processes that have existed since long. Hammer (1993) stated,
"A company that cannot change the way it thinks about IT cannot reengineer." Manganetti and Klein
(1994) observed that the appropriate methodologies of reengineering should feature both empowerment
of human resources and the use of IT as the prime enabler of radical changes. Figure 36.5 gives a flow-
chart of process redesign and role of IT in this. The heart of reengineering is the focus on discontinuous
thinking and breaking away from old rules and fundamental assumptions regarding processes. Most of
these rules and presumptions are based on existing technologies, people organisational goals, information
attributes, such as: availability, timeliness, clarity, preciseness, absence of vagueness updating and retrieval
potentials. Therefore, IT, in a client/server environment, could play important role in the redesign of
all that is existing now. Mostly, all ERP systems are based on the network model of client/server architecture.
Davenport and Short (1990) have contended that BPR requires taking a broader view of both IT and
business activity, and of the relationship between them., IT should be viewed as more than an automating
or mechanising force to fundamentally reshape the way business is done.
. I
Develop Business Vision and Process Objectives
• Prioritize Objectives and Set Stretch Targets such as: Cost reduction, Time
reduction, Output quality improvement, Quality of work life, Empowerment, etc.
-.

I
Identify Processes to be Redesigned
• Identify Critical or Bottleneck I rocess, which are in conflict with
business vision, and prioritize them in order of agency for the redesign.

I
Understand and Measure Existing Processes
• Identify Current Problems and Set Baseline for avoiding
the repetition of old mistakes and for incorporating improvements.

i
I
Identify ERP/IT/e-business Levers
• Brainstorm New Process Approaches and capabilities of ERP/IT/e-buiness

Design and Build a Prototype of the Process

• Implement Organizational and Technical Aspects for interactive refinements,
quick delivery of results and thC involvement and satisfaction of customers.

Figure 36.5 Five Steps in Process Redesign (based on Davenport and Short, 1990)

36.7 RECURSIVE RELATIONSHIP OR ERP/IT/E-BUSINESS AND BPR

IT/ERP/e-business has tremendous role to play in BPR. BPR requires taking a broader view of both
IT and business activity and relationships between them (Figure 36.6). ERP/IT/e-business has to be viewed
584 INDUSTRIAL ENGINEERING AND MANAGEMENT

as more-than one automating or mechanising force: to fundamentally reshape the way business is done
(Davenport and Short, 1990), Both BPR and ERP/IT/e-business have a unique relationship, which is
recursive (Malhotra, 1998), When we adopt ERP/IT/e-business, its capabilities should support processes
of the enterprise.

How can ERP/IT/e-business Support Business Processes?

ERP/IT/e.business Nimbililies Business process

Reengineuring

How can Business Processes heThinsibrmed

Using ERP/IT/e.businves?

Figure 35,6 The Recursive Relationship between ERP/IT/e-buelness Capabilities and Business Process
Redesign Reengineering
In a same way, the capabilities and outcome of the processes of the enterprise should be in terms of
the capabilities ERP/IT/e-business can provide, This is termed as broadened recursive view of ERP/1T/
e-business and BPR, This view heralds en era of new industrial engineering (Davenport and Short, 1990),

REVIEW QUESTIONS
36.1 What Is business process reengineering? How is BPR different from other related approaches such as continuous
Improvement and benchmarking?
36,2 What are the seven Re of reengineering7 explain them,
36,3 Explain the transformation aspects of reengineering,
36.4 Mot and explain the different redesign principles of an enterprise,
36.5 Comment on the following statements:
(I) Reengineering is nothing but downsizing.
(ii) Reengineering is a W. It is on the way.out.
OM Most BPR efforts fall to deliver goods.
(iv)BPR is a risky venture.
(v) BRP. and e-buminess are the reengineering processes.
(vi)The ambitious Seals set In BPR are not saib,
(vii)Reengineering is like TQM and benchmarking.
(viii)IT is an enabler to reengineering.
BUSINESS REENGINEERING 585

36.6 Differentiate between TQM and reengineering.

36.7 What are twelve moves in redesign? Explain.
36.8 Explain the concurrent approaches of reengineering.
36.9 What are the main reasons of failure of BPR projects? How can such failures be minimized?
36.10 What' is the role of IT in rcci ring? Explain the recursive relationship between IT and BPR.

REFERENCES

I. Bashein, B.J., Markus, M.L., and Riley, P., 1994 Spring, "Pre-conditions for BPR Success; And How to
prevent Failures," Information System Management, 11 (2), pp. 7-13.

2. Bhaskaran, K. and Leung, Y.T., 1997, "Manufacturing Supply Chain modeling and reengineering", Sadhana,
22(2), April, 165-87.

3. Davenport, T.H. and Short, J.E., 1990, Summer, "The New Industrial Engineering: Information Technology .
and Business Process Redesign," Sloan Management Review, pp. 11-27.

4. Davenport T.H., 1993, Process Innovation, Harvard Business School Press, Boston, M.A.

5. Davenport, T.1-1., 1994, "Reengineering: Business Change of Mythic Proportions?" MIS Quarterly, July,
PP. 121-27.

6. Davenport T.H. and Beers, M.C., 1995, "Managing InformatiOn About Processes," Journal of Management
Information Systems, 12 (1), pp. 57-80.

7. David, K.C. and Henry, J.J., 1995, Best Practices in Reengineering: What Works and What Doesn't in the
Reengineering Process, McGraw-Hill, New York, pp. 3-6.

8. Earl, M.J., Sampler, J.L. and Short, J.E., 1995, "Strategies for Business Process Reengineering: Evidence
from field Studies," Journal of Management Information Systems, 12 (4), pp. 31-56.

9. Edosomwan, J.A., 1996, Organisational transformation and process reengineering, Delray Beach, FL: St. Lucie
Press.

10. Grover, V., Jeong, S.R., Kettinger, W.L. and Teng, J.T.C., 1995, "The .Implementation of Business ProcesS
Reengineering," Journal of Management Information Systems, 12(1), pp. 109-144.

11. Hammer, M., 1990, "Reengineering Work: Don't Automate, Obliterate," Harvard Business Review, July-August,
pp. 104-12.

12. Hammer, M. and Champy, J., 1993,• Reengineering the Corporation: A Manifesto for Business Evolution,
Nicholas Brealcy, London.

13. Kettinger, W.J. and Grover, V., 1995, "Special Section: Toward a Theory of Business Process Change Management,"
Journal of Management Information Systems, 12 (1 ), pp. 9-30.

14. King, W.R., 1994 Spring, "Process Reengineering: The Strategic Dimensions," Information System Management;
11 (2), pp. 71-73.

15. Manganelli, R.L. and Klein, M.M., 1994, The . Reengineering Handbook: A Step-by-step Guide-to Business
Transformation, Amacomi New York, pp. 7-8.

16. Malhotra, Y., 1998, "Business Process Redesign" IEEE Engineering Management Review, 27-30.

17. Mohanty, R.P., 1997, "What do we need to know about BPR" IE Journal, December, Volume XXVI (12).,
20-29.
586 INDUSTRIAL ENGINEERING AND MANAGEMENT

18. Ng, JKC, Ip, W, and Tee, TC, 1999, "A paradigm for ERP and BPR integration," International Journal
of Production Research, 37 (9), 2093-2108.
19. Robert, G, 1996, Beyond ERP and MRP II. IIE Solution, September, 32-35.
20. Stoddard, D.B. and Jarvenpaa S.L., 1995, "Business Process Redesign: Tactics for Managing Radical Change,"
Journal of Management Information System, 12 (I), pp. 81-107.
21. Schonberger, R., 1986, World Class Manufacturing. The Free Press, London.
22. Smith, Bob, 1994, January, "Business Process Reengineering, More than a Buzzword," HR Focus.
23. Shandler, D., 1996, Reengineering the training function, Delray Beach. FL: St. Lucie Press.
24. Shankar, R. and Jaiswal, S., 1999, Enterprise Resource Planning, Galgotia Publications: New Delhi.
25. Tapscott, D. and Caston, A., 1993, Paradigm Shift: The New Promise of Information Technology, McGraw-
Hill, New York.
26. Turban, E., McLean E. and Wetherbl, L., 1996, Information Technology for Management, John Wiley &
Sons, Inc., New York.
27. Venkatraman, N., 1994, "IT-enabled business transformation: from automation to business scope redefinition".
Sloan Management Review, Winter, 73-87.
28. Wight, 0., 1993, The Executive's Guide to Successful MRPII, revised edn, Oliver Wight Publications, Vermont,
p. 1 .
29. William, 0.T., Jacques B., IAN G.M. and Colette, R., 1991, Information Systems Methodology—A Framework
for Understanding, Addison-Wesley, Nottingham, U.K., Chapter 8, p. 181.
30. Zhang, H.C. and Alting, L., 1991, "Trends in integrated manufacturing". Manufacturing Review, 4,
173-81.
 37
PRINCIPLES OF MANAGEMENT

37.1 INTRODUCTION
Management is an area of extensive research and application. Koontz defines it as an area that consists
of getting things done with and through others. A manager is one, who accomplishes the group objectives
by directing the efforts of others.

Management is guiding human and physical resources into a dynamic, hard-hitting organisation
until that attains its objectives to the satisfaction of those served, and with a high degree
of morale and sense of attainment on the part of those rendering the service.
—Lawrence A. Appley

Urwick defines management as the art of directing human activities. Management is treated as the
art and science of making decisions. It is the process of relating resources to goal accomplishment. Many
other views on management exist in literature. Some are:
• It is the process of getting things done well-performance, productivity and profitabilitywise.
• It is the art of coordinating resources: men, machine, material, money, market, information and
even knowledge.
• It is the process of planning organising, staffing, leading and influencing people, and controlling
(Figure 37.1).
• It is the art and science of organising and directing human efforts applied to control forces and
utilise the material of nature for the benefits of mankind. (—ASME)
• Management is the complex of continuously coordinated activity by means of which any undertaking
or any administration or any other service, public or private, conducts its business.
(—I.L.O.)
• Management is the process or form of work that involves the guidance or direction of a group
of people toward organisational goals or objectives. (—Rue & Byars)
Thus, there is no single definition of management. In general, management is the process of effective
accomplishment of tasks through others.
 cn
02
CO

Boundary of Organisation

Managerial Transformation Process

Input Output

Controlling • High performance

Planning the Organizing Leading and
• Employees Organizational
Enterprise and Staffing Influencing the - Better productivity
Operations and
Direction the Structure Personnel
• Management Resources • High profitability
• Final products of
• Government quality

• Customers • Type of planning • Manpower • Understanding • Control process and • Services

and plans human behaviour techniques • Survival of firm
• Recruitment
• Economy • Information
• Enterprise Vission .Training and • Understanding needs • Growth
Mission and motivation technology (IT)
• Information development • Employee
• Strategic planning .Job and person • Group dynamics and • ERP satisfaction
• Technology behaviour
• Portfolio matching • Operations • Customer
management • Leadership and management satisfaction
• Knowledge • Retaining the
motivation
• Decision-making employees • Resolving conflicts • Knowledge-base
• Suppliers process • Communication creation
• Departmentalization • Management of
• Long term and • Reward and change • Increase in core
• Markel • Span of control
medium term recognition competencies
• Organizational
forecasting • Delegation and
• Other variables in development • Continuous
decentralization
the environment • Technology adoption improvement

Boundary of Organisation

Figure 37.1 Management viewed as a Transformation Process of the Enterprise Deviations as

Feedback into the System
/N31130VNVAI ONVONIN33NION3 1VIN/8fI0NI
PRINCIPLES OF MANAGEMENT 589

37.2 PRINCIPLES OF MANAGEMENT

Management has evolved through experience and research during last many years. Different regions on
the globe evolved different approaches to handle situations. Some early practices of management are
given in Table 37.1.
Table 37.1 Early Management Practices

Period Regions Management approach

3000-2400 BC Sumerians Development of written records; one of the'oldest

written law by Akkadian ruler, Ur-Nammu
3000-1000 BC Egyptians Pioneered in national government, full civilization,
building and roads and other infrastructure:
Full planning involved
2700-500 BC Babylonian , Oldest and complete set of rules by Hammurabi,
an Amorite ruler
1000-200 pc Greeks Functional local government, democracy and
government
800 BC-500 AD Roman Roman Republic with Senate and councils
1500 Bc-1300 AD Chinese Good government, cultural empowerment, flou-
rishing science and arts
450-1500 AD Venetians Laws related to commerce, highly dominant
commerce through sea

During recent times, many modern and systematic approaches have evolved for the management.
Some are given in Table 37.2.
Table 37.2 Recent Perspective on Management

Period began Perspective on Focus on Developed by

(about) Theory
1890 Classical (or, scientific) Internal, Rational, Taylor, Gilbreths,
management Job content Gantt, Barnes
1930 Human relation Internal, Elton Mayo, Robert
approach Humanistic Blake, Hezberg, McGrager
1940 Quantitative, Decision Internal, Rational, Feller, Dantzis,
science approach Modeling Ackoff
1920 Behavioural Humanistic, Maslow, Lickert
approach Team Aggyris
1940 Universal Structure, Rules Foyol, Holder,
management Urwick, Koontz, Drucker
1950 Systems theory Internal, External, Fiedler,
1970 Contingency theory Huministic, Forester
1980 Japanese management Rational

37.3 APPROACHES OF MANAGEMENT THOUGHTS

Management has evolved through many research and experimental evidences.
Some approaches of management principles are as follows.
590 INDUSTRIAL ENGINEERING AND MANAGEMENT

37.3.1 Scientific Management

F.W. Taylor (1856-1915)
At Midvale steel Co., Taylor was involved with developing One best way of doing work. His focus
was on maximisation of worker productivity. His approach includes:
• Develop one best way of doing things.
• Standardise the method.
• Select the worker, best suited to perform the task.
• Train them in most efficient way for performing the task.
Taylor defined four principles of management:
1. Develop a science for each element of an individual work, thus replacing rule-of-thumb method.
2. Scientifically select, train, teach and develop a worker.
3. Cooperate with workers to ensure work in accordance with management principles.
4. Divide responsibility between management and labour: Management plans, organises and controls.
Management takes over all work for which it is better fitted than workers.
Taylor's principle has some offshoots:
1. Enforced worker discipline gives more output.
2. Management should not expect extraordinary work with ordinary days wages (Wage incentives were
Taylor's idea).
Taylor's work was followed by many others—Henray Gantt, Gilberth, etc. Many subfields like:
time study, motion study, work study, operations research, industrial engineering, etc., evolved.
Criticisim to Scientific Management
1. Fails to appreciate the social context of work and higher needs of workers.
2. Managers called it unwarranted interference in managerial prerogatives.
3. Workers resisted it. In Taylor's testimony in 1912, he said that unions are really not needed.
4. Fails to acknowledge the variance among individuals.
5. Fails to recognize the ideas and suggestions of workers.
37.3.2 Fayol's Principles
Fayol suggested fourteen principles of management. These are listed in Table 37.3 below.
Table 37.3 Fayol's Fourteen General Principles of Management

1. Division of work: Division of work aims at producing more and better work with the same effort.
It is accomplished through reduction in the number of tasks to which attention and effort must be
directed.
2. Authority and responsibility: Authority means the right to give orders. Responsibility is associated
with authority. Whenever authority is exercised, responsibility arises simultaneously.
3. Discipline: Discipline means following rules, obedience and respect for the agreements between the
firm and its employees. Discipline also involves sanctions judiciously applied in the organisation.
4. Unity of command: Employee should receive orders from one superior only.
5. Unity of direction: Each group of activities should have one objective and should be unified by having
one plan and one head.
6. Subordination of individual interest to general interest: The interest of one employee or group of
employees should not take precedence over that of the company or broader organization.
(Contd...)
PRINCIPLES OF MANAGEMENT 591

7. Remuneration: To maintain the loyalty and support of workers, all employees must receive a fair wage
for services rendered in the organisation.
,8. Scalar chain: The scalar chain is the chain from top management ranging from the ultimate authority
to the lowest ranks. Communication follows this chain.
9. Order: Everything should be in right place at right time.
10. Stability of tenure of personnel: High turnover increases inefficiency. A manager who stays for long
is always preferred.
11. Centralization: Centralization is the degree to which subordinates are involved in the decision-making.
It belongs to the natural order of things. Proper proportion of centralization is needed for each situation.
12. Equity: It is the kindness and fairness to subordinates.
13. Initiative: This means allowing to originate and carry out plans to ensure its success.
14.Esprit de corps: This means team spirit, harmony and unity within the organisation.

Based on: Fayol, H., 1949, General and Industrial Administration (NY: Pitman), pp 20-41.

37.3.3. Human Relations Approach

The Hawthrone plant of Western Electric in Cicero, Illinois, US was studied in 1924. Issues related
to physical illumination and worker efficiency were the focus. Elton Mayo from Harvard University analyzed
and reviewed the observation. Behavioural science and human relation thinking started the new management
movement.' Psychological factors and human needs were considered as the issues that determined why
people worked. The issues related to social factors and informal group were given due importance in
management.
Some results were:
1. Whenevet changes in working conditions were made, both good and bad, output increased.
2. In every department, the supervisor played a different role.
3. A number of employees expressed a dislike for close, coordinated supervision.
Maslow proposed a hierarchy of five types of needs that determine the motivation to work. These
needs are:
1. Physiological needs: Such as hunger, thirst, etc.
2. Safety and security needs
3. Social needs: Such as belongings, group recognition, etc.
4. Esteem needs
5. Self-actualization needs.
Human beings work to satisfy their unfulfilled needs that are highest in the need hierarchy.
37.3.4 Management Science and Quantitative Approach
Since the World War II, Operations Research and quantitative techniques overshadowed the management
scene. Optimization of resources was the key word since then. New technological tools, transportation
and communication, modeling, analysis and mathematical techniques were used to solve managerial problems.
Some shift towards optimum production/operations management and information system (MIS) were observed
in later phase.
37.3.5. Systems Theory
It is a collective association of interrelated and interdependent parts. Organisations are treated as systems
of divisions, departments, and specialized activity. Decisions are taken with a considefation of entire
organisation.
592 INDUSTRIAL ENGINEERING AND MANAGEMENT

37.3.6 Contingency Management

The contingency approach advocates a leadership behaviour that should be adaptive to accommodate
different situations. There is no one best of doing a particular task, as advocated by Taylor in scientific
management. Leaders should be assigned to situations that best fit their leadership style. The contingency
theory is based on situation analysis.
37.4 ROLE OF MANAGEMENT
Managers' role is to get things done. Based on Mintzberg (1973), one can identify three roles for managers
(Figure 97.2).
Formal Authority
and Status Interpersonal
Role
• Monitor
•Disseminator Change handler
Interpersonal Decisional
• Spokesman Role
Role Role
• Entrepreneur •Continuous
• Figurehead
• Disturbance Improvement
• Leader Knowledge leadership
Ilandler Support
• Liaison Role
• Resource • Benchmarking
• Knowledge Allocator leader
learn builder •Negotiator • Reengincering
Sustaining and leader
maintaing
knowledge

Figure 37.2 Roles of Manager modified and enlarged in scope from: Henry Mintzber, 1973, The Nature of
Managerial work, Harper & Row Pub., NY, pp. 93-94]

37.4.1 Interpersonal Role

(a) Figurehead: It means symbolic-head. His activities include ceremony, status requests and solicitations.
(b) Leader: It means, responsible for motivating and activating the subordinates. His activities include
responsibility for staffing, training, subordinate's team building, etc.
(c) Liaison: It means, maintaining a self-developed network of outside contacts and information. His
activities include interactions with outsiders, responding to mails, external board work, etc.
37.4.2 Informational Roles
(a) Monitor: This means, seeking and receiving a wide variety of special information to develop a
thorough understanding of organisation and environment. He acts as the nerve centre of internal
and external information. His activities include receiving information and creating a knowledgebase.
(b) Disseminator: This means, transmission of outside information to his subordinates. His role includes
filtering, clarifying, interpreting and integrating different information so that value-added knowledge
emerges for organisational use. His activities also support verbal communication with subordinates'
review meeting, etc.
(c) Spokesperson: This means transmitting information to outsiders on the behalf of the organisation
,or department that he heads. He serves as an expert to clarify the organisational plan, policies,
actions and results. His activities include handling mails and contacts with outsiders.
37.4.3 Decisional Roles
(a) Entrepreneur: This means, searching the organisation and its environment for opportunities and
initiating the "improvement (or change) process" to bring about transformation. This involves designing
PRINCIPLES OF MANAGEMENT 593

and completing projects for changes, leading to improvements. His actions involve strategy formulation,
change-management, team-building and project handling.
(b) Disturbance Handler: This means responsibility related to corrective actions when organisation faces
sudden, unexpected disturbances. His actions include review .and rectification of the crisis.
(c) Resource Allocator: This means responsibility related to the allocation of resources of the organisation
among all concerned people or departments. His actions involve scheduling, budgeting, allocation
of duties to subordinates, authorization, etc.
(d) Negotiator: This means representing the organisation at major negotiations. His actions include bringing
advantage to the organisation during the process of negotiation.
During recent years, the organisations are undergoing major changes. Managers' roles have also
widened due to the advent of IT and its impact on the way things are managed. We observe that the
managers have additional role as Knowledge Leader. Thus, in our opinion, the fourth role is.
37.4.4 Knowledge Leadership Role
(a) Knowledge Team Builder: This means that the managers should create teams that have expertise
in certain areas. This is done through regular updating of knowledge through seminar, journal, internet-
search and adoption of technology. His activities include finding right people, who can share same
expertise in building knowledge-base.
(b) Sustaining and Maintaining Knowledge: This is related to knowledge management. His activities
include documenting and sharing the expertise among group members. If an individual leaves the
organisation, the knowledge should stay with other members of the group.
Managers' role has also diversified to the area of change-management.' Change meant for improvement
is the key-mantra these days. There are three modes of change in the organisation: continuous
improvement, benchmarking and reengineering. This we have identified as • the fifth role for the
contemporary managers.
37.4.5 Change Handler
(a) Continuous Improvement Supporter: This means the route of marginal or gradual improvement.
It is the path which TQM also advocates. Managers' role is to develop a quality culture and teambuilding.
Problems are identified and solved for small but gradual improvement. The role of the manager
is to tell everybody that there exists a better way of doing the thing which we are doing now.
(b) Benchmarking Leader: Benchmarking involves identifying "best-practices" or world-class performers
in your area and identification of gap between world-class and your organisation. This gap is bridged
through systematic planning and leadership. Manager's actions involve identification of benchmark,
building teams to make changes and evaluation of performance during the change.
(c) Reengineering Leader: Reengineering is the total, radical redesign of the system. Managers have
a great role to play as they have to prepare resources (including subordinates) for a total transformation.
Unlike continuous improvement, which is gradual, and benchmarking, which is moderate, reengineering
is dramatic transformation and thus requires careful handling of situation and resources. The risks
are higher in reengineering. Therefore, its management is more difficult as compared to other two
change processes.

37.5 FUNCTIONS OF MANAGEMENT

Management is the form of work that managers perform. Their main functions are: planning, organising,
motivating and controlling.
594 INDUSTRIAL ENGINEERING AND MANAGEMENT

37.5.1 PLANNING
This involves advance decisions related to what, when, why, how and who—types of questions. It involves:
• Self-audit as a means to determine the present status
• Survey of environment around organization
• Specification of goals and objectives and means to achieve the goals and objectives
• Deciding policies, procedures, standards and anticipated course of future actions
• Forecasting the future
• Deciding resources to achieve the forecast
• Revision of plans and adjustments in case of changes in situations
• Coordination of processes involving planning.
Thus, we can summarize planning as:

Planning function of a manager includes those activities that lead to the definition of ends
and the determination of appropriate means to achieve the defined end.
—Gibson et. al. (1976)

37.5.2 Organising
Organising is related to grouping activities, assigning activities, staffing, delegating authority, etc., to carry
out activities and determining the bases and criteria to group and measure the job and its related performance.

Organising involves those activities of the management that are performed to translate the
required activities of plans into a structure of task, authority and responsibility.

Organising is therefore focussed on a structure or activities of framework that relate people, task,
resources, and performance with the organisational goals. The sub-functions of organising include:
• Defining the nature and content of each job in the organization
• Determining the bases for grouping the jobs together
• Deciding the size of groups
• Delegating authority to wiped managers.

37.5.3 Motivating and Directing

This pertains to directing or channeling the behaviour of subordinates towards the goal. It is for stimulating
the organisation to undertake actions along the plan. The major ingredients for directing are leading,
coordination, communication, influencing and team work.

Motivating and directing are channeling the organisational behaviour towards attainment of
corporate goals.

It involves:
• Communication and explanation of objectives to the subordinates
• Assigning the ,performance standards
• Helping the subordinates through proper guidance and personal touch to meet the standard of performance
• Reward for superior performance: both financially and none-financially (like appreciation letter, etc.)
• Fair play in praise and censuring the employees
PRINCIPLES OF MANAGEMENT 595 ,

• Management of change through proper communication and building confidence among different
layers of management and workerg.
• Coordination throughout directing and motivating process.

37.5.4 Controlling
Controlling is related to measuring the performance against goal, determining the causes of deviations
from goals, and taking corrective actions for the improvement in situations. It is for assuring performance
as per plan with minimum deviations during the accomplishment of the target of performance.

Controlling is the management function that includes activities which managers undertake to
assure ,that the actual outcomes are consistent with the planned outcomes.
—Gibson et. al. (1976)

Controlling involves three things:

(a) Standard of, performance
(b) Information related to gaps in standard and attained performance
(c) Corrective actions to bridge the .identified gaps.
Therefore, during the control function, a manager does the followings:
• Monitoring of results and comparing with the standards that are set during planning phase.
• Decide on the causes of deviations
• Corrective action to arrest deviations
• Revis0 and adjustments of control methods in the situations of changes
• Coordination of control processes.
In the Figure 37.3, the four managerial functions are shown as an integrated link of management
process. Control function is useful for:
(a) short-range corrections through better directing,
(b) moderate corrections through reengineering or benchmarking, and
(c) long-term corrections through redefinition of goals and new planning endeavour.
Planning Directing Controlling

Setting goals and objet- Designing jobs, Leading and Monitoring the deviations
tives, and identifying all roles, structure motivating people from plan and ths'evalu-
ways and methods to and system to for the attainment ating the levels of attain-
achieve the goals achieve the goals olgoals ment of goals

Use Training and

Development, Team
Building (Immediate-on
going correction)

Modify jobs, Reengineer Organisation, Benchmark

Processes (Modarate Correction)

Redefine goals with new planning endeavour (Long-Term Correction)

Figure 37.3 The Management Process as an integration of Manager's Functions

596 INDUSTRIAL ENGINEERING AND MANAGEMENT

37.6 LEVELS OF MANAGEMENT

In an organisation, the management is clearly segmented into three distinct layers. These layers are: top
management, middle management and lower (operating) management. Under the operating managers, different
workers are attached for, the attainment of goals. Management layers are shown in Figure 37.4.

Chairman, President,
Top Vice President
Management

I lead of Departments,
Middle
Divisional I-leads
Management

First Line Supervisor,

Lower Foreman
Management

Operating Personnel
Workers
Span

Figure 37.4 Management Levels in an Organisation

The activities of different levels of management are different in proportions. For example, top management
is more focussed on planning strategic issues but less involved in directing function. On the contrary,
lower management is more focussed on directing and less on planning (Figure 37.5). The skill needed
for different levels of management is also different (Figure 37.6). While less technical and personnel
skill is needed at top, more of these skills are needed for lower management. On the contrary, more
conceptual and decision-making skills are needed at top as compared to lower management. For TQM
efforts more commitment is needed at top level while more effort in team-building is needed by lower
management. Middle management should facilitate the continuous improvement (Figure 37.7).

Planning
Top
Management
/ /• t
/
./ / I
/
// It Controlling
Middle / Level of
I
Management // Organising , I Management
i 1 I
1 1 I
I 1 1
1 I Motivating 1
Lower I & 1
Management I ‘ Directing 1
‘ \ t
0 50% 100%
Percentage of time spent in
particular function of management

Figure 37.5 Percentage of Time Spent by each level of Management

PRINCIPLES OF MANAGEMENT 597

Top
Management

Middle
Management
Level of
Management

Lower
Management

0 50% 100%
Percentage of time spent -4

Figure 37.6 Skill needed at various management levels

Support and
Commitment
Top
Management

Suggestions;
Motivator. TQM mindset
Middle Reviewer • Implementation and Level of
Management Management
and Trainer Team Building

Lower
Management
11111111
0 5(1% 100%
Percentage of time spent —>

Figure 37.7 TQM effort needed at each levels of Management

37.7 MANAGEMENT: SCIENCE OR ARTS

Management is both science and arts. Though it is not a perfect art as music or painting. Similarly,
it is not a perfect science as physical or chemical science.
Art is bringing about of desired result through application of skill. The management evolves for
the application to a specific situation. Intuition and creativity are often the key ingredients of successful
managers.
Science, on the other hand, is a systematic body of knowledge acquired by mankind through observation,
experiments and intelligence, which may be verified by researchers. Many theories of management have
evolved through experimentation and the results are well structured. Examples are leadership and motivation
theory. Many areas of Operations Management such as forecasting, production planning and control, inventory
management, etc., are more towards science. Thus, management is both science and arts. Generally, it
is the situation which determines the orientation towards science or art.
598 INDUSTRIAL ENGINEERING AND MANAGEMENT

REVIEW QUESTIONS

37.1 Define and explain the term, management.' Write a brief note on the evolution of management thought.
37.2 Discuss the contribution of Taylor and examine its relevance in the present day business.
37.3 Discuss the Henri Fayol's principle of management.
37.4 Explain the roles of management.
37.5 Explain the different functions of management.

REFERENCES

1. Albers, Henri H., 1974, Piinciples'of Management: A Modern Approach, John Wiley & Sons, Inc., New
York.
2. Bass, B., 1960, Leadership, Psychology and Organisational Behaviour, Harper, New York.
3. Beer, S., 1972, Brain of the Firm, Allen Lane, The Penguin Press, London.
•4. Burns, T. and Stalker, G.M., 1961, The Management of Innovation, Tavistock, London.
5. Diebold, J., 1965, Focus on Automation, British Institute of Management, London.
6. Drucker, P., 1971, Drucker on Management, Management Publications Ltd, for the British Institute of Management,
London.
7. Fayol, H., 1949, General and Industrial Administration, Pitman, London.
8. Fiedler, F., 1971, Leadership, General Learning Press, New York.
9. Follett, Mary P., 1949, Freedom and Coordination, Management Publications Trust, London.
10. George, C.S., 1968, The History of Management Thought, Prentice Hall, Englewood Cliffs, New Jersey.
11. Gouldner, A.W., 1954, Patterns of Industrial Bureaucracy, The Free Press, Glencoe, Ill.
12. Herzberg, F.J., 1959, The Motivation to Work, Wiley, New York.
13. Jay, A., 1967, Management' and Machiavelli, Hodder & Stoughton, London.
14. Kotler, P., 1976, Marketing Management, Prentice Hall, Englewood Cliffs, New Jersey.
15. Lawrence, P.R. and Lorsch, J.W., 1976, Organisation and Environment, Harvard Business School, Cambridge,
MA.
16. Levitt, T., 1969, The Marketing Mode, McGraw-Hill, New York.
17. Liked, R., 1969, New Patterns of Management, McGraw-Hill, New York.
18. Lupton, T., 1963, On the Shop Floor, Pergamon• Press, Oxford.
19. McClelland, D.C. and Winter, D.G, 1969, Motivating Economic Achievement, Free Press, New York.
20. March, J.G. and Simon, H.A., 1958, Organisations, Wiley, New York.
21. Maslow, A., 1954, Motivation and Personality, Harper & Row, New York.
22. Massie, Joseph L., 1963, Essentials of Management, Prentice Hall of India Pvt. Ltd., New Delhi.
23. Mayo, GE., 1933, The Human Problems of an Industrial Civilization, Harvard Business School, Boston,
MA.
24. McGregor, Douglas, 1960, The Human Side of Enterprise, McGraw-Hill Book Company, New York.
PRINCIPLES OF MANAGEMENT 599

25. Mintzberg. H., 1973, The Nature of Managerial Work, Harper & Row, New York.
26. Parkinson, C., 1957, Northcote, Parkinson's Law, John Murray, London.
27. Pigors, P. and Myers, C.A., 1969, Personnel Administration, McGraw-Hill, New York.
28. Pollard, Harold R., 1974, Development in Management Thought, Heineman, London.
29. Rice, A.K., 1963, The Enterprise and its Environment, Tavistock, London.
30. Rue L.W. and Byars, L.L., 1977, Management, Theory and' Application. (Illinois, Richard D. Irwin, Inc).
31. Robert B., 1977, The Management of Business and Public Organizations, McGraw-Hill Book Co., New York.
32. Scanlon, Burt K., 1973, Principles of Management and Organisation Behaviour, John Wiley & Sons, Inc.,
New York.
33. Stewart, R., 1985, The Reality of Management, Heinemann, London.
34. Stoner J., Freeman R.E., and Gilbert D.R. (Jr.), 1998, Management, Prentice Halt of India, New Delhi.
35. Taylor, F.W., 1911, Principles of Scientific Management, Harper and Brothers, New York.
36. Townsend, R., 1970, Up The Organisation, Michael Joseph, London.
37. Trist, E.L., Higgin, G.W., 1963, Murray, H. and Pollock, A.B., Organisational Choice, Tavistock, London.
38. Urwick, L., 1944, The Elements of Administration, Harper and Brothers, New York.
39. Walker, C.R. and Guest, R.H., 1952, The Man on The Assembly Line, Harvard University Press, Cambridge,
MA.
40. Weiner, N., 1948, Cybernetics, Wiley, New York.
41. Woodward, J., 1965, Industrial Organisation, Theory and Practice, Oxford University Press, Oxford.
600 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 38
ORGANISATION

38.1 INTRODUCTION
Let us first define the organisation.
Definitions
1. Organisation is a rational coordination of the activities of a number of people to achieve some
common, explicit goal through division of labour and function and through hierarchy of authority
and responsibility.
2. It is the grouping of activities necessary to attain enterprise objectives and assignment of each
grouping to a manager with authority necessary to supervise it. —Koontz and O'Donnell
3. Organisation is the process of identifying and grouping work to be performed, defining and delegating
responsibility and authority, and establishing relationships for the purpose of enabling people to
work most effectively together in accomplishing objectives —Allen
4. Organisation is a system, having an established structure and conscious planning, in which people
work and deal with one another in a coordinated and cooperative manner for the accomplishment
of recognized goals.
Organisation is thus:
(i) a system
(ii) established structure
(iii) people work and deal with each other in coordinated and cooperative way.
(iv) grouping of work
(v) established relationship for authority and delegation
(vi) attainment of common goal of the enterprise
(vii) internal structure for performance
(viii) definition of functional role of each personnel and outline of his responsibility for business performance
(ix) a constituent of:
(a) division of labour,
(b) identification of the source of authority, and
(c) establishment of enterprise relationship.
61)2 INDUSTRIAL ENGINEERING AND MANAGEMENT

38.2 PRINCIPLES OF SOUND ORGANISATION

There are some general guiding principles, including their influence, which help to form a good organisation
(Figure 38.1). These principles are:
1. Principle of Organisational Objective: It should be same, consistent, defined and clear. It should
aim at achieving high production with customer focus, growth and survival. At the core, there should
be unity of objective.

Division of
labour and
specialization

Leads to Leads to

Hierarchy

Span of
control

Influences Leads to Leads to

Delegation Decentrali-
are related
of Authority sation.

Influences
Unity of
Departmentation
command
• Jobs
• Area
Influences
• Section
• Department
• Division

Figure 38.1 Influence of Different Principles of Organisation

2. Principle of Division of Work and Specialization: Every unit or person of an organisation is

assigned to a specif►c task and accomplishment. For this, there is a need to focus on specialization
and assignment of specific work to individuals.
3. Principle of Parity of Respo►tsibility and Authority: Responsibility is the obligation on the part
of a person towards the boss for completing the assigned task. It is also called as accountability,
A person at a higher position in the organisation exercises authority or power over his subordinates
for getting the task done. Authority is vested in the superior of the organisation so as to extract
work from subordinates. Therefore, authority is always associated with responsibility to get things
done. There should be a balance between authority and responsibility.
ORGANISATION 603

4. Principle of Functional Definition: Each employee must be assigned specific task, role, relationship
and job-related activities. What is expected of him, must be defined in the organisation.
5. Principle of Scalar Chain: Scalar chain, chain of command or line of authority, means that there
should be a continuous line of authority (or scalar chain) from top of the organisational pyramid
to the lower levels. The chain provides a superior-subordinate relationship. Levels above in the
chain are superiors while lower levels in the scalar chain are subordinates. Scalar ch is useful
in the delegation of authority down the chain. It is also useful in maintaining effective communication
between different layers of the organisation.
6. Principle of Unity of Command: Unity of command means that there should be only one source
of authority for each subordinate. This also means: one subordinate-one boss. The principle of
unity of command is important for maintaining discipline and for fixing responsibility for the result.
7. Principle of Balance: All the techniques and values of the organisation must be effectively balanced.
Many issues have divergent focus in organisation. These are: line vs. staff; centralisation vs.
decentralisation, unity of command vs. specialization, vertical hierarchy vs. span of control, etc.
Proper balance between these issues must be maintained.
8. Principle of Flexibility: Flexibility means adaptability to change. This is needed due to uncertainty,
scope for diversification and growth, new opportunity, and competitive forces in the environment.
Organisation-design should have some in-built flexibility to withstand the red-tapisrn, excessive control,
complicated procedure, etc.
9. Principle of Delegation: Authority need to be delegated in the organisation. Delegation is for empowering
the subordinates to achieve results.
10. Principle of Efficiency: Organisation structure should be useful in achieving the optimum utilisation
of resources at least cost and least effort. Considering system view of the organisation (which is
input-processing-output framework), the maximization of output and minimization of inputs will
improve the efficiency.
11. Principle of Continuity: Continuity means survival and existence despite turbulence in market forces.
Therefore, the organisation must look at long-term goals rather than mere profit-making and short-
terms goals.
12. Principle of Cooperation: Cooperation means involvement as a team and solving the functional
goal of the organisation as one unit. This can be achieved by evolving a proper, code of conduct,
rule of business, conflict resolution mechanism and cooperation.
13. Principle of Coordination: There are many functions, such as marketing, finance, HRD, etc., in
an organisation. Different groups have different priorities and local level objectives. Proper coordination
is needed to work in one direction and for achieving the overall (global) corporate goals. Proper
communication, meetings, news-letters, etc., are helpful to achieve this.
14. Principle of Span of Control: Any superior can handle only limited numbers of subordinates.
Narrow span of control is useful for complex jobs while wider span of control is useful for routine
\
type of jobs. By span of control, we mean how many subordinates a manager (or, superior) can handle.
The span of control may be determined on the basis of many criteria, such as:
• Capacity and the ability of superior
• Capability and the skill of subordinate
• Nature and importance of work to be supervised
604 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Clarity of plans and responsibility

• Level of decentralisation, etc.
Graicunas defined three types of relationships between superior and subordinates:
(i) direct single relationship among all the subordinates
(ii) direct group relationship
(iii) cross-relationship.
These relationships increase dramatically as the number of subordinates increases. With 5 subordinates,
it is 100; while with 6, it is 222. With 10 subordinates, the total relationships are 5210, which are difficult
to handle effectively (Table 38.1). Therefore, not more than six subordinates are recommended for a
common type of organisation.
Table 38.1 Potential relationship in span of control (Grauciunas formula)

No. of Subordinates (n) No. of relationships n(-21 + n —1

2

I 1
2 6
3 18
4 44
5 100
6 222
7 490
8 1080
9 2376
10 5210
11 11,374
12 24,708
13 53,404
14 1,14,872
15 2,45,974
16 5,24,534
17 11,14,329
18 23,59,612
19 49,81,090
20 1,04,86,154 (More than one crore)

38.3 ORGANISATION STRUCTURE

Organisation structure is the system of job-positioning, role-assignments, authority-definition and superior-
subordinate relationship. It is the network of jobs, roles and organisational relationships for achieving
the goals of the organisation. The structure is generally a pyramid structure in which there are fewer
positions as we move up in the hierarchy.
 ORGANISATION 605

Organisation structure is so designed that at horizontal levels, different specializations of tasks are
separated. Vertical hierarchy is due to structure for control and maintenance of authority. It also facilitates
superior-subordinate relationship. The lateral relationship is for better coordination among different functional
groups (Figure 38.2).

(a) Divide Tasks as

per Specialization
Leads to Division or
Organisational • Departmentalization
Task

(b) Vertical structure

for control

(c) Lateral and Hybrid

Relatiosnhips for coordination
Leads to hierarchy and
(Leads to formal structure)
positions (superior-subordinate
relationship)

r
(±1
Figure 38.2 Why Organisation Structure?

38.4 ORGANISATION DESIGN

The organisation's structure has basically two main objectives: Firstly, it facilitates the flow of information
within the organisation so as to reduce uncertainty in decision making. Therefore, the first purpose of
the organisation design would be to facilitate the collection of information that managers need for decision
making. Second objective of organisation design is to achieve effective coordination in an integrated
way. The structure should integrate organisational behaviour across the different parts of the organisation
so that it is effectively coordinated. Organisational design is, thus, the allocation of resources and people
to a specified mission or purpose and the structuring of these resources to achieve the mission. It should
fit in its environment and should provide the information and coordination needed for the management
of resources.

38.4.1 Functional Approach

In this approach, different people are organised in such a way that they work together in grOups to form
departments. The focus is common skill and synchronised work activities, such as marketing, engineering
maintenance, accounting, etc. This is the most commonly adopted form of organisation structure. In same
aspects, it exists in most organisations. A key characteristic of functional organisation is specialization
by functional area (Figure 38.3).
606 INDUSTRIAL ENGINEERING AND MANAGEMENT

President

Administrative
Assistant

Executive Vice Director of

president engineering

Vice-president
Controller

Accounting
Vice-president
Manufacturing

— Fabrication*
r ‘ice-president
01 Sales

— Sales*
Director of
Research
• Engineering
Service Directory

— Design* — Production Engg.

[ Purchasing — Assembly
— Marketing

— Service
— Electrochemical —Quality control
Toolmaking Research
—Automation
— Advertising
— Maintenance — Testing —Engg. Admn.
— Electrical
— R and D —Product Development*
— Testing Sales

* Member of task-fare

Figure 38.3 Functional Organisation with Task-force Marked as asterik

Characteristics of Functional Organisation:

Organisational Function Accomplished in Functional Organisation

1. Goal Functional subgoal emphasized
2. Influence Functional head
3. Promotion By special function
4. Budgeting By department or function
5. Reward For special capability
Strengths of Functional Organisation
1. Best in stable environment
2. Colleagueship for technical specialists
3. Supports in-depth skill development
4. Specialists free from administrative work
5. Simple decision network
6. Enforces efficient use of resources leading to economies of scale
7. Foster in-depth skill specialization and development
8. Better career progress within functional departments
9. The coordination • within functions is improved
10. Technical problem solving is of better quality
ORGANISATION 607

Weaknesses of Functional Organisation

1. Slow response time
2. Bottleneck caused by sequential tasks
3. Decisions pile at top
4. If multiproduct organisation, chances of product priority conflict
5. Poor inter-unit coordination
6. Stability paid for in less innovations
7. Restricted view of whole
8. Relatively poor communication across functional departments
9. Generally slow response to external changes, lagging innovation
10. Delays due to decisions concentrated at top of hierarchy
11.Difficult to pinpoint responsibility for problems
12. Generally very limited, general management—training for employees.

38.4,2 Functional Approach with Lateral Relationship

By lateral relationship, we mean overlay or overlap of teams, task-force, managers, liaison personnel,
specialists or staff across a formally designed structure, which is basically functional in which employees
are grouped together by common skills. This approach is useful to exploit the potential of high quality
coordination group across different functions of the organisation (Figure 38.4).

I
HRD Operations Accounts

: Formal structure (Functional)

: Lateral Relationship

Figure 38.4 Functional Structure with Lateral Relationship

Strengths of Functional Organisation with Lateral Relationship

1. It possesses major strengths of functional organization
2. Relatively open and reduced barrier among different departments
3. Quick response system fosters quick decisions
608 INDUSTRIAL ENGINEERING AND MANAGEMENT

4. High enthusiasm, employee participation and greater morale

5. Team work helps quality movements.
Limitations of Functional Organisation with Lateral Relationship
1.Conflicts due to dual loyalties
2. Too much of meetings
3. Decentralisation is unplanned.
38.4.3 Divisional Approach of Organisation Structure
This approach is focused on grouping the activities together into few separate, but self-contained, divisions,
that are based on common product, geographigical regions, program, demography, etc. For example, same
food-processing company may have three separate divisions for biscuits, bread and milk products, respectively.
Departmentalisation encourages specialization and focused skill-building (Figure 38.5).

11112"111 —
Produc (Biscuit) Prod let (Bread) l'roduct (Milk-product)
Di% ison I Division 2 division 3

Marketing Marketing A/c HRD Marketing

Figure 38.5 Divisional Approach (Productwise)

Characteristics of Divisional Organization

Organisational Functions Accomplishment in Decentralised Organisation

I. Goal Special product, territory, sex, etc.

2. Influence Product project head
3. Promotion By product/territory, etc., management
4. Budgeting By division' and programme
5. Reward For integrative capability
Strength of Divisional Organisation
1. Development of general management skills
2. Suited to fast change and flexibility
3. High product, project or programme visibility
4. Full time task orientation (i.e., Rs. Schedule, Profit)
5. Task responsibility, and contact points clear to customers or clients; foster concern for customer
needs.
6. Processes multiple task in parallel, easy to cross functional line; better coordination in function.
ORGANISATION 60E'

Weaknesses of Divisional Organisation

1. Innovation/growth restricted to existing project areas
2 Tough to allocate pooled resources (i.e., computer lab., etc.), thus duplication of resources
3. Shared functions hard to coordinate
4: Deterioration of in depth competence: hard to attract technical specialists
5. Possible internal task conflicts or priority conflicts may neglect high level of integration required
in organization
6. Less top management control
7. Competition for corporate resources.
38.4.4 Hybrid Approach of Organisation Structure
Hybrid approach is a combination of functional and divisional structure of the organisation. For certain
tasks, all the employees with identical skills are grouped together into a single department for remaining
tasks, the divisional structure is maintained so as to exploit the potential of diversified special skills
for producing different products, projects or demography, etc. (Figure 38.6).

I IRD

Division I Division 2

Operation Accounts Marketing Operation Accounts I I Marketing

I

Figure 38.6 Hybrid Structure of Organisation

Strengths of Hybrid Organisation

1.Strengths of both functional and division structure are exploited
2. Coordination among different divisions is easy
3. Proper alignment of corporate as well as division goal is possible
4. Better efficiency, inter-division migration and cross-culture learning
5. More flexible structure compared to functional or divisional structures.
Weaknesses of Hybrid Structure
1. There is excessive overload on the administration
2. Corporate staff size is big and centralised
610 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Without proper MIS (management information system), the system . is not very effective
4. Chances of conflict between division and headquarters.
38.4.5 Matrix Approach of Organisation Structure
In this approach, both the functional and divisional chain of command are implemented simultaneously
so that both of these overlay each other in different departments. Each reports to two bosses, which
means that there are two chains of command (Figure 38.7).

Aerospace Group
Manager

(Matrix Groups) ,

Production IEngineering
I Material Accounting

Ain)lanc "A" Production Engineering Material Accounting

project manager Personnel Personnel Personnel Personnel -
I
F T

Missile "Z" Production Engineering Material Accounting

project manager Personnel Personnel Personnel • Personnel
J

Figure 38.7 Functional Organisation with Matrix Structure

The matrix structure is particularly useful when organisation wants to focus resources on producing
one or two or few particular products or projects.
Characteristics of matrix Organisation

Organisational Functions Accomplishment

1. Goal • Emphasis in product/market

2. Influence • Matrix manager and functional head
3. Promotion • By function or into matrix managers
4. Budgeting • By matrix organisation project
5. Reward • By special functional skill and performance
Strengths of Matrix Organisation
1. Full time focus of personnel on project of matrix.
2. Matrix manager is coordinator of functions for single project.
3. Reduces information requirements, as focus is a single product/market.
4. Specialized technical skills to the product/market.
5. Fleitible structure, development of functional and general skills.
6. Helps in the development of both general and functional skills.
7. Enlarged tasks are available for every body.
8. Helps in promoting interdisciplinary co-operations and sharing of expertise.
ORGANISATION 611

Weaknesses of Matrix Organisation

1. Costly to maintain personnel pool of staff matrix.
2. Participants experience dual authority of matrix manager and functional area manager.
3. Little interchange with functional groups outside the matrix; so there may be duplication of
efforts.
4. Participants of matrix need to have good interpersonal skill in order for it to work.
5. Frusturation and confusion due to dual chain of command
6. Too much. of meetings and discussions
7. Power is generally dominated by .one side of the matrix.
The strategic objectives of the organisation play an important role in deciding the structure. The
strategic objectives such as: efficiency stability and retrenchment are better served in functional structure.
Divisional structure, on the other extreme, scores better on strategic objectives such as innovation, flexibility
and responsiveness (Figure 38.8).

// Z.
1..7
Objectives
Strategic • Innovation Z
Objectives • Responsiveness 7
• Flexibility
1'
Objectives
• Stability
• Efficiency
• Retrenchment d
,

,
N
Organisation Functional . Functional Hybrid Matrix Divisional
Structure with Lateral
-4 Relations

Figure 38.8 Suitability of Different Organisational Structure with Varying Levels of Objectives

38.5 TYPE OF ORGANISATIONAL STRUCTURE AND RELATIONSHIP

The relationship in the organisation structure is as follows:
(i) Line structure.
(ii) Line and staff structure.
(iii) Functional structure.

38.5.1 Line Structure

This is the oldest and most conventional type of relationship, which is also called as scalar or military
type. This is simple and represents a military organisation, wheie relationships are based on relative
rank, authority and responsibility rather than the activity or operations that an individual performs. Immediate
supervisor is the, boss. Authority flows downwards while responsibility flows upwards. The relationships
are more at vertical levels. NO service or support units are possible in an ideal line-type structure. The
principle of unity of command is strictly followed (Figure 38.9).
612 INDUSTRIAL ENGINEERING AND MANAGEMENT

Board of Director

President

Vice-president
Vice-president Vice-president Vice president HRD
Marketig Operations Finance

Manager
shop-Boor Flow of
Flow of
Resposibility Authority
(Up the line) (Down the line)
Deputy manager

Assistant Manager

Supervisor

Worker Worker Worker

Figure 38.9 Line Structure

Advantages of Line Organisation

1. It is simple: easy to understand and implement, and less complicated.
2. It is flexible: easy to expand or easy to prune.
3. Clear division of authority and responsibility.
4. Clear channel of communication.
5. Speedy action and fast decision making.
6. Better discipline possible due to unity of command.
7. Better in-house training and development.
8. Low operational cost.
9. Useful in executive developments at top levels.
10. Less confusion as One boss for one subordinate rule.
Limitations of Line Structure
1. It neglects specialization.
2. Key executives are overburdened.
3. Encourages dictatorial leadership and less group efforts.
4. Line managers lack expertise in all areas such as HRD, accounts, industrial engineering, MIS, etc.
Thus, they are not very effective.
5. Lot of public grievances.
ORGANISATION 613

6. Less motivated work-force.

7. No cross-functional training and migration is often frustrating.
8. Routine jobs are often boring.
9. Ignores human values, personal needs and group dynamics.
10. Due to lack of specialists, wastages are more. Quality movement also suffers.
Suitability of Line Structure
• Small organisations, engaged in simple business
• Automated and continuous production industries like textile, pharma, paper, chemical, etc.
• Military or places where very high discipline is needed.

38.5.2 Line and Staff Structure

Staff authority is used to support the line authority. Line authorities are more involved .in the core activities
of the business. They have little time to analyze all information for many decisions. They do not have
expertise in all technical areas. Staffs are specialists, who help line authority in discharging their duties.
For example, a production manager (a line authority) does not have enough time and experience to handle
labour relation problems. Staffs (who are specialists) help them in doing so.
Line and staff organisations have both line and staff executives. Line executives are assisted by
staff specialists in R and D, planning, distribution, quality, legal, audit, public relations, etc. The job
of staff is mainly advisory and guidance. Line executives maintain the supervisory power and control
over the execution of work (Figure 38.10).

Board of Director

President

Vice-president Vice-president Vice-President Vice-president

Marketing Operations Finance H RD Recruit-
ment

Manager
Manager Manager —
Finance -11 Training
Marketing Operations
Accouniting

Market
Research
Audit

Sales Product Credit and

Promotion Development — collection

Deputy IDeputy Manager

Manager Operation
Marketing

Legend : — Line Authority

— — • Staff Relationship

Figure 38.10 Line and Staff Organisations

614 INDUSTRIAL ENGINEERING AND MANAGEMENT

Advantages of Line and Staff Structure

1.Line managers are assisted with expert advice of staff personnel.
2. Line executives are relieved of work over-load.
3. Better quality of decision making due to expert advice from staff.
4. Less wastages and higher productivity.
5. Professional work culture.
6. Efficiency and knowledge-base of line managers.
7. R and D and other developments are encouraged.
Limitations of Line and Staff Structure
1. Organisation structure and relationships are more complicated.
2. Organisation may suffer due to poor coordination.
3. Increased cost due to experts being hired as staff.
4. Staffs do not enjoy functional authority so they do not assume responsibility for performance.
5. Chances of conflicts between line and staff as staff being specialist and expert may ignore the
organisational authority of line managers.
6. Different perceptions of line and staff may complicate decisions.
Suitability
• Medium and large companies
• Professionally managed company.

38.5.3 Functional Organisation

In this, line executives receive orders from immediate line superior (boss) and from one or more specialists,
such as personnel manager, marketing head, financial controller, etc. Specialists or staff, though in limited
way, aid and direct the line executives. At the top level of the organisation, functional divisions of the
organisation in HRD, finance, production, marketing, etc., are very common. The issues related to wages,
promotion, etc., for any employee of the organisation are handled by HRD. Taylor recommended functional
organisation at the lower level of the organisation also. His approach.of functional organisation consists
of number of specialists to assist a worker in the discharge of duty. Taylor experimented this at the
Bethlehem Steel Company where he was working. In functional organisation, activities are grouped into
different departments (divisions) on the basis of each functional area. Functional head is free to exercise
the final authority in the matter related to his area. Thus, unity of command is over-ruled, as more than
one superior may pass orders to an employee (Figure 38.11).
Advantages of Functional Organisation
1. Use of specialist makes the organisation a more professionally managed system.
2. Line executives relieved from specialised decisions.
3. Decision-making is faster, as functional role is vested in the functional head of department and
not in the immediate superior.
4. Better consistency in all 'activities due to specialised activity of functional groups. .
5. More R & D, less wastages, less accident, less breakdown, better TQM efforts, more effective
quality circles, etc., due to functional staff.
6. Economy of scale, due to dedicated functional groups.
ORGANISATION 615

Board of Director

President

Vice-president: Vice-president Vice-president Vice president

Operations marketing IIKD Finance

Manager

Supervisor

I III •I I I

Figure 38.11 Functional Organisation

Limitations of Functional Organisation
1. Complexity in relationships, due to multiplicity of commands.
2. Difficult to maintain discipline, due to more than one supervisors.
3. Conflicts, due to divided loyalities.
4. Difficulties in coordination of all units by a functional head.
5. If functional head exceeds the limits of his role, it may lead to problems for every supervisor
to control the activities of subordinates.
6. Sometimes, it is difficult to fix the responsibility for any mistake.
7. Sometimes, confusion arises among workers due to dual commands.
Suitability: Functional organisation, in its form as proposed by Taylor, has been criticised by many
authors. This is due to violation in unity of command. Secondly, the conflicts and priority-gap between
functional head and department boss result in poor achievements of the organisational goals. In the modified
form, the functional organisation is used but the original concept of Taylor's system is obsolete.

REVIEW QUESTIONS

38.1 Differentiate among the following structures of the organisation:

(a) Line type organisation
(b) Line and staff organisation
(c) Functional organisation.
38.2 Discuss ,the advantages, limitations and suitability of line and line-staff organisations.
38.3 Why is purely functional organisation rarely used? Discuss.
38.4 Define organisation. How is organisation chart useful in management?
38.5 Explain the following:
(a) Unity of command
(b) Span of control
(c) Scalar chain.
38.6 Differentiate between authority and responsibility. How are they related to each other?
616 INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES

1. Brinckloe W., Coughlin M.T., 1979, Managing Organisation, Glencoe Press, London.
2. Jackson J.M., Morgan C.P., Paolillo JGP, 1986, Organisation Theory, Prentice Hall Inc.
3. Jarillo J.C., 1994, Strategic networks: Creating the Boarderless Organisation, Butter worth, Heineman, Oxford.
4. Mainiero L.A., Tromley C.L., 1994, Developing Managerial Skill in Organisational Behaviour, Prentice Hall,
Inc.
5. Peter F. Drucker, 1988, "The coming of new organization". Harvard Business Review, Jan.—Feb. 1988 pp.
45-6.
6. Puckey V)., 1970, Organisation in Business Management, Hutchins, London.
7. Robert Duncan, 1979, "What is the right organisation structure"? Organisational Dynamics, American Management
Association, New York.
8. Ralph D. Stacey, 1990, Strategic Management for 1990's, Kogan Pages, London.
9. Sherlekar S.A. and Patil S.G., 1991, Industrial Management, Himalaya Pub. House, Bombay.
10. Saraf V.K., 1991, Trends in Management, Anmol Pub., Delhi.
11. Woodwards J., 1965 hidustrial Organisation—Theory & Practice, Oxford Univ. Press, New York.
 39
PROJECT MANAGEMENT AND CPM/PERT

39.1 INTRODUCTION
There are many ways to translate the corporate objectives into plans for achieving these objectives. The
routine approach, which most organisations follow, is to translate the corporate objectives into primary,
routine responsibilities of the functional managers. An alternate way is—to undertake projects within the
scope of the business. In this approach, people from different functions, different locations, etc., of the
organisation are involved for achieving results that are difficult for one department. For example, a temporary
construction work may call for a project team in which members of divergent skills from different departments
are associated. Such specialists associate themselves to form a project team. Project is thus a temporary
assignment, special in nature and outside the, purview of normal activities.

Key Point
Project: Project is a collection of some linked activities that are performed in an organised
manner with well-known start and finish points, to achieve some specific results that fulfill
the needs of an organisation as derived from the existing business plan and opportunity for
achieving synergy of diversified functional expertise of the organisation.

Project Management Institute (PMI) has defined project as "A temporary endeavour undertaken
to create a unique product or service." Thus, project is a combination of interrelated activities that must
be executed in a defined order for completing the entire task. We have studied Gantt Chart earlier. Gantt
Chart is one of the first scientific techniques for project planning and scheduling. Later Critical Path
Method (CPM) and Program Evaluation and Review Technique (PERT) evolved for the same purpose.
Project management is the domain that deals with planning, organising, staffing, controlling and directing
a project for its effective execution. Our discussion in this chapter is however limited to techniques such
as CPM and PERT for project management.

39.2 CRITICAL PATH METHOD (CPM)

Kelley and Walker (1959) developed CPM for project planning and scheduling. Later, it was applied
to a variety of applications such as, construction of building dam, factory, missile, rockets, etc.
618 INDUSTRIAL ENGINEERING AND MANAGEMENT

39.2.1 Assumptions in CPM

1. All time estimates are assumed to be deterministically known for every activity of the project.
2. The precedence relationship is known for all the activities.
3. CPM can be represented as directed graph in which the time (or cost) estimates are deterministic
and the longest path of the network is the 'indicator of project duration (also called as critical
path).

39.2.2. Principles Involved in CPM

Any activity of a project can be completed within a particular time with incurrence of some cost. If
we want to do it in lesser time, generally more cost is involved. For example, suppose building a house
takes six months' time and the cost for construction is Rs. 10 lakh. If we want to do it in three months'
time, different cost (may be more than 10 lakh) would be needed. In CPM, we consider an estimate
for all the activities over a range of cost levels. A range of project duration may be determined for
corresponding range of project cost. CPM may also be used for establishing a minimum cost project
planning.

39.3 METHODOLOGY OF CRITICAL PATH ANALYSIS (CPA)

Critical path is the path on the network of project activities which takes longest time from start to finish.
The way by which we construct and analyse CPM or PERT network, the analysis is called -as critical
path analysis (CPA). A general methodology for CPA is as follows:
Step 1: Break the project in terms of specific activities and/or events. Find the time of each activity.
In CPM, it is a deterministic estimate, while in PERT it is a probabilistic, three time estimate.
Step 2: Establish the interdependence and sequence of specific activities (also called as precedence
relationship).
Step 3: Prepare the network of activities and/or events.
Step 4: 'Assign time-estimates and/or cost-estimates to all the activities of the network.
Step 5: Identify longest path (timewise) on the network. It is the critical path of the network.
The project completion takes time equal to critical path time..
Step 6: Determine slack (or float) for, each activity, not contained on the critical path.
Step 7: Use regular monitoring, evaluation and control of the progress of the project by replanning,
rescheduling and relocation of resources (such as money, manpower, etc.).
We have seen in Step 5 that the critical path determines the project completion time. If the project
time needs to be compressed, we have to focus on activities on critical path. Similarly, if any activity
of the critical path gets delayed by tx time, then the total project will be delayed by tx time. Same is
not true for activities, not lying on critical path. This is due to slack (or float) associated with them.
This offers flexibility in scheduling the resources. From time to time, some resources from non-critical
activities may be diverted to the critical activity.

39.3.1 Advantages of Critical Path Analysis (CPM and PERT)

1. Gives comprehensive view of the project on the network of activities (and events).
2. Time scheduling is effective due to the precedence (sequential and concurrent) relationship of different
activities.
3. Critical path determines the focal activities for which no tolerance in terms of delays is desirable.
4. Better and closer control of the project due to breaking down of activities.
PROJECT MANAGEMENT AND CPM/PERT 619

5. The approach is helpful in identifying activities from which some resources may be diverted to
critical activities for the expedition of the project.
6. The analysis adopts the principle of management of exception, which means that corrective actions
are rarely needed (in exceptional cases). Otherwise, the performance is maintained as per plans.
7. The analysis requires regular review of the situations. A delay may need relocation of resources
or sometimes, crashing ( i-expedition) of the network is needed.

39.4 TERMINOLOGY IN PROJECT MANAGEMENT

1. Activity: Distinct part of a project, involving some work, whose completion requires some amount
of time. Examples of activity are: drilling a hole, starting a bus, issuing the work order, floating
a tender, etc.
2. Activity Duration: It is the physical time required to complete an activity. In CPM, it is the best
estimate of the time to complete an activity. In PERT, it is the expected' time or average time
to complete an activity.
3. Critical Activity: This activity has no room for schedule deviation. In case of deviation or slips,
the entire project completion will slip. An activity with zero slack is also same.
4. Critical Path: The sequence or chain of critical activities for the project constitutes critical path.
It is the longest duration path through the network.
5. CPM: Project management technique that is used when activity times are deterministic (Critical
Path Method).
6. Crashing: The process of reducing an activity time by adding fresh resources and hence usually
increasing cost. Crashing is needed for finishing the task before estimated time.
7. Crash Cost: Cost associated with an activity when it is completed in the possible time (crash
time), which 'is lesser than the expected or normal time.
8. Dummy Activity: An activity that consumes no time but shows precedence among activities. It
is useful for proper representation in the network.
9. Earliest Finish (EF) Time: The earliest time that an activity can finish, from the beginning of
the project.
10. Earliest Start (ES) Time: The earliest time that an activity can start, from the beginning of the
project.
11. Event: It is the beginning, completion -point, or milestone accomplishment within the project. An
activity begins and ends with events. An event triggers an activity of the project.
12. Expected Activity Time: The average activity time that is used in the project scheduling.
13. Free Slack (float): The length of time up to which an activity can be delayed for channeling resources
or readjustments, without affecting the starts of the succeeding activities.
14. Immediate Predecessor: An activity, which should immediately precede the activity under consideration.
15. Latest Finish (LF) Time: It is the latest time that an activity can finish, from the beginning of
the project, without causing a delay in the completion of the project.
16. Latest Start (LS) Time: It is the lateSt time that an activity can start, from the beginning of the'
project, without causing a delay in the completion of the project.
17. Most Likely Time (c): It is the time for completing an activity that is the best estimate; under
the given conditions (used in PERT).
620 INDUSTRIAL ENGINEERING AND MANAGEMENT

18. Normal Cost: Cost associated with an activity when it is completed in normal time.
19. Optimistic Time (to): It is the time for completing an activity if everything in the project goes
well (used in PERT).
20. Pessimistic Time (tp): It is the time for completing an activity if everything in the project goes
wrong (used in PERT).
21. Predecessor Activity: An activity that must occur before another activity in the project which is
decided on precedence relationship.
22. Project: Set of activities which are interrelated with each other and are to be organised for a common
goal or objective during a specified timeframe.
23. Project Network: A visual representation of the interdependence between different activities of
a project which are normally associated with a time-wise sequencing.
24. PERT: It is the project management technique used when activity times are probabilistic. (Program
Evaluation and Review Technique).
25. Resource Allocation Methods: Allocation of resources to the activities so that project completion
• time is as small as possible and resources are well utilized.
26. Slack: It is the amount of time that an activity or a group of activities can delay in getting completed
without causing a delay in the completion of the project. An activity having slack cannot be critical
activity.
27. Successor Activity: It is the activity that must occur after another activity (which is predecessor).
28. Total Slack (Float): The time up to which an activity can be delayed without affecting the start
of the succeeding activities.
29. Updating: It involves some revision of the project schedule after partial completion with revised
information.
30. Variance: It is the measure of the deviation of the time distribution for an activity.

39.5 SYMBOLS USED IN NETWORK PLANNING

(i) Activity by -+ (arrow): There is no restriction on the size and slope of the arrow. Time of the
activity starts from tail and ends at the head of the arrow. Each activity takes some time and/
or other resource.
(ii) Dummy activity - - —> (broken arrow): Dummy activity is not a normal activity. It is used for
satisfying some logic pertaining to the start of next activity and satisfying the relationship and dependencies
of the activities. Dummy activity consumes no time. We will see it in far greater detail in Section 39.7
later.
(iii) Event 0 (circle or node): Events are represented by nodes. Event takes no time but it connects
two or more activities.
(iv) Subdivision of Event

or or or
E

.1
The node of each event is subdivided into three units: N, E and L as shown above. Here:
N: Event/node number
E: Earliest start time for the next activity
PROJECT MANAGEMENT AND CPM/PERT 621

L: Latest start time for the next activity if the overall project completion is to be achieved in the
scheduled time.
39.6 COMMON FLAWS IN NETWORK
There are some logical errors in the network construction. These must be avoided. These traps are: looping,
dangling, and duplication.
(a) Looping: Avoid by keeping the time-flow from left to right. ,

L4oping of activities n, p and q

(b) Dangling: Avoid this by ensuring all events, except the first and last, to have at least one precedence
and one successive activity.
11

Dangling or activities p

(c) Duplicate activities: Avoid duplicate activities.

ni

Eliminate either ,/ or

This happens when two activities (say n and o) have same head-node (say, node 2) and same tail
node (say, node 1). As a remedial measure, one can use dummy activity or, the two duplicate activities
may be combined.
39.7 USE OF DUMMY ACTIVITIES AND/OR DUMMY NODES
Dummy activities are those activities, which consume no time. However, these are added in the network
to satisfy the precedence relationships. Similar is the case for dummy nodes.
Example 39.1
Task A B C D E
Precedence Task A B C, D
622 INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: The network is drawn below. The activity A is followed by C, while activity B is followed
by D. The problem comes for activity E as its precedence activity is both C and D. This situation
can be handled as follows:
(a) Use dummy activity (4-5), which takes no time to complete

A 0 ('
0 Dummy activity

(b) Alternatively, (combine nodes)

(c) Alternatively, (use dummy node)

Dummy node (5)

Example 39.2
Solution: The network is not correct in (a) and (b) below. However, in (c) below, the network
is correctly drawn:
Task A B C D E
Precedence Task A B A, B

(a) Incorrect as violates (b) Incorrect as causes looping

precedence of D as well as violates the
precedence of C and D
PROJECT MANAGEMENT AND CPM/PERT 623
dIP

Use of two dummy activities and one dummy node 5 is shown in Figure (c) above. It satisfies
the precedence relation.

Example 39.3
Task A
Precedence Task B A, C A,
Solution: The activities A and B are the starting activities as these have no precedence activity.
E is after activity A. Since activity D is after two activities A and C, hence it can start only after A
and C are over. To ensure this, head of activities A and C are joined by a dummy activity (2-4). Now,
activity D is easily marked. Activity F follows D and E:

39.8 RULES FOR CONSTRUCTING NETWORK DIAGRAM (FIGURE 39.1)

1. Prepare a list of all activities required to complete the project. Decide their time relationship. Represent
each activity by only one arrow. Length of the arrow is insignificant.
2. Determine the precedence relationship (logical order) of all activities. Fot this, use these three questions
for each activity:
(i) Which activity precedes this activity?
The answer would give a list of activities, which must be completed before the start of activity
under consideration.
(ii) Which activity follows this activity?
The answer would give a list of activities, which cannot start before completion of the activity
under consideration.
(iii) Which activity should take place simultaneously with this activity?
The answer would give a list of activities, 'Which should be worked on the same time, while
the activity under consideration is being performed. Decide about dummy activities, if any
(for this, refer section on dummy activity).
3. Draw the arrow diagram foi the network on the basis of precedence relationship. Encircle the starting
and finishing of the activities. Call this event or node.
4. Number each node as' per Fulkerson rule (for this, refer Section 39.9 on "numbering of nodes")
5. Check the correctness of the number, using following guidelines:
(i) Number at the head of any arrow is always greater than the node number at its tail.
(ii) No node is numbered until its all preceding events are numbered.
(iii) There is only one starting and one finishing node.
324 INDUSTRIAL ENGINEERING AND MANAGEMENT

(iv) All activities are uniquely represented by one starting and one finishing event.
(v) There is no duplicate number for a number.

Network
Interpretation of the Network Representatation
Representation

Activity in must he corn; activity n can begin (in precedes n).

Activities n and p should occur concurrently. Activity in must be completed

before either activity n or p can begin.(n and p are the successors of in).

3. Activities in and n can occur concurrently. Activity p cannot begin until both in
and n are completed (p is succesor of both in and n).

Activities m and n, p and q can occur concurrently, as well as activities in and n,

both, must he completed before either activity p or q

Activity in must be completed before activity n can begin activity, p must be

completed before activity q can begin. I however, activity sequence path ni-n
is independent of path p-q.

Activity m must he completed before either activity n or p can being. Activities

G.
n and p must both be convicted before activity q can begin. The broken arrow
is dummy activity. Dummy activity has zero duration. It covers precedence
relationships only.

Activities in and n, p and q can occur concurrently. Activities in and n must be

ni
completed before activity p can begin. Activity n must he completed before
activity q can begin. The broken arrow is a dummy activity. Dummy activities
have zero time duration. These cover precedence relationships only.

Figure 39.1 Network Representations with elaboration.

39.9 NUMBERING OF .EVENTS IN NETWORK '(FULKERSON RULE)

For numbering the events on a network, D.R. Fulkerson provided the following scheme (Figure 39.2):
(i) Start with the initial-event, which has arrow(s) coming out of it and none entering it. Number it
"1". In any network, there would be only one initial event.
(ii) Delete all arrows coming out (emerging) of the event already numbered. This will create at least
one more initial-event.
(iii) Number these new events as "2, 3 ..:".
(iv) Repeat step (ii) till no arrow emerging from an event is obtained. •
PROJECT MANAGEMENT AND CPM/PERT 625

- Select initial-event
(having no entering arrow)

Count: a=1
Number initial-event as I

Delete all arr ms coming out

of already numbered events

Identify new initial-event(s)

Advance Count n = n +

Number initial-event as (n + I

No
Are all initialevcnts
exhausted

Yes

No

Yes

Stop

Figure 39.2 Flow chart for Numbering Events in a Network Using Fulkerson Rule

39.10 AON VS AOA APPROACHES FOR DIAGRAMMING

The precedence relationship of a project is diagrammed by using any of these two approaches (Figure 39.3):
AOA: Activity on Arc (or, arrow) approach
AON: Activity on Node approach
The AOA approach uses arc to represent the activities of the project, and the nodes of the network
to represent events.
Event consumes no time or resource. At any event, one or more activities are completed and/or
one or more activities are started. Therefore, it is the state of transition between activities. We will be
following AOA approach in this Chapter.
626 INDUSTRIAL ENGINEERING AND MANAGEMENT

The AON approach uses the concept that nodes represent activities, while arc (or arrow) represents
the precedence relationship between different activities:

AOA (Event Oriented) AON (Activity oriented) Activity Relationships

0 i 0 B 0 C 0 0 —0 .4 precedes B. Activity B precedes C.

(a)

0 ' 0
0 A and B must be completed
Apw B lb . belbre C can start
(b) TO 0

B 3 B
A B and C cannot begin until A has
. A • been completed.
(c)

A C
C and D cannot begin until both A
and /3 have been completed.
B D
(d)

C
0 A 0 0
Dummy activity C cannot begin until both A and B.
B have been completed. D cannot
(e) 2 4 D G 0 0 begin until B is completed.

0A 2 q D 5 0 0 0 B and C cannot begin until A is

completed. D cannot begin until both
Dummy • a and C have been completed.
activity

Figure 39.3 AOA and AON Approaches to Activity Relationship

Example 39.4 Consider the project of starting a new branch office of.a company. The company
wants to sell a new product through this branch. Various activities are listed below. Draw the network
and decide the critical path.

Activity Description Predecessor activity Time (week)

A Decide site and organise office. — 5
B Hire personnel. A 4
C Train personnel. B 7
D Explore advertising agents. A ' 2
E Plan advertisers meeting and decide product features. D 4

(Contd..)
PROJECT MANAGEMENT AND CPM/PERT 627

Activity Description Predecessor activity lime (week)

F Conduct advertising, campaign. D 10

G Finalize product and packaging. G 2
H Setup plant and packaging unit. G 10
Produce initial product (Test). H, J 6
J Order stock from vendors. 13
K Finalize deals. A 9
L Finalise sale to dealers. C, K 3
M Transport stock to dealers. F,L 5

Solution: Using precedence relationship the network is drawn in Figure 39.4.

E = 11

L = 19

Notations :
H(10) Activity code
E=2 E = 13 • Activity time
L=3 L=13 E(4)

• E : Earliest starting time

L : Latest completion time

® Event # 8
—11.- Critical path
==ic Alternative critical path

Figure 39.4 Network of Example 39.4

Deciding Critical Path of the Network: When the time estimate of each activity is known and
network is constructed, it is necessary to calculate the project duration and the critical path. We need
to know the earliest expected time (of an event) as a measure from the start of the project, and latest
allowable completion time (of an event) as a measure from end of the project.
Calculation of Earliest Expected Time of an Event: Start from the starting event. Earliest expected
(EE) time for the first event (i.e., node 1) is zero, as the starting time is zero. For the next events,
the activity times are the summation for each possible path, leading from the starting event to the given
event. The largest sum is the earliest expected time for that event. For example, the earliest expected
completion time for event 2 is 5 weeks. This is the sum of EE time for event 1 plus activity time for
activity A. Similarly EE time for events 2, 8, 9, 5 and 3 are calculated.
Now, there are conflicts at events 4, 6 and 10. This is because of two or more activities, coming
into the nodes (events) 4, 6 and 10 respectively. To resolve this, the earliest expected time for node
joining activities, i and j, is calculated as:
628 INDUSTRIAL ENGINEERING AND MANAGEMENT

EE1 = Max {EE, +

where; EE = Earliest expected time for activity i (predecessor)
i,. = Expected completion time for activity i, j
For example,
For Node 4 : EE4 = Max {(EE2 + 9), (EE3 + 7)}
= Max {(5 + 9), (9 + 7)) = max {14, 16)
= 16
For Node 6 : EE6 = Max {(E1 + 13), (EE5 + 10)1
= Max 1(0 + 13), (2 + 10)) = 13
For Node 7 : EE7 = Max {(EE4 + 3), (EE6 + 6)}
= Max {(16 + 3), (13 + 6)) = 19
For Node 10 : EE10 = Max {(EE + 10), (EE7 + 5))
= Max {(11 + 10), (19 +. 5)) = 24.
Calculation of Latest Allowable Completion Time (L) of an Event: This is the time at which an event
can occur without delaying the scheduled completion date of the project, if all succeeding events are
completed as per plan. We use backward pass or backward calculation from the finishing point of the
network.
For the last event, take the latest allowable time (L) same as earliest expected completion
time (E). For the event prior to the last event, the latest completion time is calculated by subtracting
the last activity time from the latest completion time of the last event, i.e., (24 — 0) = 24. In a similar
way, the L for events 9, 8; 7, 4, 3; 6 and 5 are calculated by subtracting the activity time from the
latest completion time of the previous node (in backward pass).
However, there are conflicts at nodes 2 (as there are three simultaneously occurring previous nodes
8, 4 and 3) and node 1 (as three previous nodes 2, 6 and 5). To resolve this, use the following relationship:
L.= Min {LJ — L.}Y
where; L.= Latest allowable event completion time for the successor event j
tii = Expected completion time of activity (i,
For example (Refer to Figure 39.4 of the network):
For Node 2: L2 = Min {(L8 — 2); (L4 — 9); (L3 — 4)1
= Min {(10 — 2); (16 — 9); (9 — 4))
= Min {(8, 7, 5) = 5
For Node 1: L i = Min {(L2 — 5); (L6 — 13); (L5 — 2)1
= Min {(5 — 5); (13 — 13); (3 — 2))
=0
Identification of the Critical Path
We use, following rules to find the critical path:
(i) On critical path; for each activity (i, j) the E and L are same at the head and tail of the activity,
i.e., E. = Li and Ei = L
(ii) (E.) — E.) = (L — Li) =
(iii) (L — Ej) = (Li — = constant
PROJECT MANAGEMENT AND CPM/PERT 629

Thus, critical path is: start —> A -+ C —> L —› Al End

An alternative critical path also exists:
start — J —› I —> M —› End
General Methodology in CPM
For a detailed analysis, we use the following time estimates • for each activity (1, j):
ESo = Earliest starting time for activity (i, j)
LSI, = Latest starting time for activity (i, j)
EFI, = Earliest finishing time for activity (i, j)
LF„, = Latest finishing time for activity (i, j)
t,. = Duration of the activity (i, j)
Methodology
Use Forward pass (i.e., Start from the beginning activity)
(i) Set the ES for the initial activity equal to the start time of the project (set it eqi.ti to zero).
(ii) For each subsequent activity:
= Max {EF for all immediate predecessor of (i, j)}
EFL = ESI, + tu
Now, use backward pass (i.e., start from the end activity):
(iii) Set the latest finish time for all the terminal (last) activities equal to the scheduled completion time
of the project.
The scheduled completion time (T) of the project is the earliest occurrence time for the last or completion
event, i.e.,
T = Max {EF for all terminal activity}
(iv) LFu = Min {LS for all immediate successors of (i, j)}
Since, LS1 = LFu —
TF„, = MM (LF — td.
Example 39.5 For an activity 2-3, the activity time is 5 days. The event 2 can start at the earliest
on the 9th day while event 3 can earliest start on 17th day; If event 3 has latest finish time of 24th
day, what is the lotest start time of event 2?
Solution: LS23 = MM {LF23 — /23} = MM {24 — 5}
Es23= 9 EF23 = 17
LS-,3 = 19 LF23 = 24

123 = 5

39.11 FLOAT OR SLACK

Float or slack is defined as the amount of time an activity can be delayed without affecting the duration
of the project. On a critical path, the float is zero.
Before we learn how to calculate float, let us define the four varieties of times for an activity:
Earliest Start Time (E A: This is the earliest occurrence time for the event from which the activity-
arrow originates. We call it (ES), for node i of activity i — j.
630 INDUSTRIAL ENGINEERING AND MANAGEMENT

1111 Earliest Finish Time (EF).: This is the earliest start time for the event from which the activity
arrow originates [(ES);] plus the duration for the activity:
(EF)i= (ES); +
Latest Finishing Time (LF)i: This is the latest occurrence time for the node at which the activity
arrow terminates.
Latest Start Time (LS)i : This is the latest finish time for the node at which the activity arrow
terminates [(LF)J] minus the duration for the activity:
(LS)i = (LF)i —
There are three measures of float:
(i) Total float
(ii) Free float, and
(iii) Independent float.
(i) Total Float: It is the maximum time, which is available to complete an activity minus the actual
time which the activity takes:
Total Float = [(LF)i — (ES)i] —
= [(LF)i — tu] — (ES);
= (LS); — (ES)i
The above expression gives us a very simple approach to find total float. At any node (event),
subtract the two values already mentioned. The value of total float helps the managers to decide
as to when the non-critical activity is undertaken. To meet the contingencies like machine breakdown,
labour absentism, etc., total float works as buffer time for managers.
Example 39.6
ES; = 9 (EF); = 20
(LS); = 14 (/./)1 = 24

126 =10
Total float for this activity 2 — 6 is (14 — 9) = 5.
(ii) Free Float: This is based on the possibility that all events occur at their earliest time. It is a
situation when the project is organised on earliest time to give the best possible chances of completion
on time.
Free Float = (Earliest = Finish time — Earliest Starting time — Activity duration)
= REF)i — (ES)i] —
= (EF)/ — (CES)i + tu]
= (EF), — Earliest finish time for i = j.

Example 39.7 For the example given under total float example, the free float for activity
2 = 6 is = (20 — 9) — 10 = 1.
(iii) Independent Float: It is important when the network of the project runs on earliest time. If an
activity reaches the next stage at the latest time, independent float will indicate if the considered
activity (which is just next) will reach at the next stage so as to allow the following activity to
begin at the earliest time:
Independent Float = '(EF)J — (LS); tu.
PROJECT MANAGEMENT AND CPM/PERT 631

Example 39.8 For the example given under total float example, the independent float for activity
2 — 6 is
= (20 — 14) — 10 = —4 which is taken as zero as negative float is unacceptable.

39.12 ILLUSTRATION OF FLOATS (FIGURE 39.5)

E = 21
6
L= 26

31
0
0

12

Event (2) Float for activity 2-5 Event (5)

1 1
f rzs = 8
Earliest Latest Earliest Latest
Time 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Scale I I I I I I I I
125 = 8 I Total Float = 12
/,5=8 Free Float = 7

/25 8 1
Independent Float = 2

Figure 39.5 Concept of Floats

In the above network, earliest start and latest start for all the activities are mentioned at the top
of each event in the circle. For the calculation of floats, let us take activity 2 — 5 as an illustration.
Event 2 has earliest start time equal to 6. When activity (2 — 5) time of 8 days is added to it, we
reach to (6 + 8) or 14 day. From the latest time of event 5 (26 day), it is (26 — 14) = 12 days short.
Thus, total float is 12 days. Therefore, if event 2 starts at its earliest time and event 5 finishes at its
latest time, then the time remaining as buffer (after subtracting the activity time of activity 2 — 5) is
the total float of activity 2 — 5.
If event 2 starts at the earliest time (equal to 6 day) and event 5 starts at the earliest time (equal
to 21 day), then the buffer time obtained by subtracting the activity time is (21 — 6 — 8) or, 7 days.
This is the free-float of the activity 2 — 5.
When, event 2 starts at its latest time and event 5 starts at its earliest time, then the buffer-time
is (21 — 11 — 8) or, 2 days. This is the independent float of activity 2 — 5.
Example 39.9 (CPM).
The precedence relationship for nine activities is given below. Find critical path and different
floats/ slack:
Activity A B C D E F G H 1
Duration 9 9 10 4 7 3 8 7 0
Precedence A B C D, E, F C G, H
632 INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: The network is drawn as follows:

Activity Duration Start Time Finish Time Total Float Slack of. Free Float Slack Independeht
Float '
i —) t ij ES LS EF LF (LFi — ES, — Head Event (TF — Si) • Tail Event (FF — Si)
(LFi (ES, tii) = TF Si = FF Si = IF
—5) +y
1—2 , 9 0 3 9 12 3 3 0 0 0
1—3 9 0 0 9 9 0 0 0 0 0
1—4 10 0 3 10 13 3 3 0 0 0
2— 5 4 9 12 13 16 3 0 3 0 0
3— 5 7 9 9 16 16 0 0 0 0 0
4— 5 3 10 13 13 16 3 0 3 3 0
5— 6 7 16 16 23 23 0 0 0 0 0
4—6 6 10 17 16 23 7 0 7 3 4
6— 8 0 23 23 23 23 0 0 0 0 0
The critical path (i.e., path which takes longest time of 23 days) is 1 — 3 — 5 — 6 — 8.

39.13 PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT)

PERT appeared around same time when CPM evolved. In 1959, Booz, Allen and Hamilton, and U.S. Navy's
Special project office presented PERT for the Polaris Missile project. An immediate impact
of PERT was due to the fact that this project got completed in about two years ahead of the original
schedule.
PERT incorporates probabilistic time-estimates for each activity. It employs Beta-distribution for
the time-estimates. The procedure for making the network and determining the critical path is same as
CPM (and it is outlined in Section 39.3 under the heading of critical path analysis). However, there
is a specific calculation approach for finding the most expected time for every activity and for finding
the measure of certainty in meeting this estimate.

39.13.1 Time Estimate in PERT

PERT allows uncertainty in the estimates for time of each activity. There are three time estimates in PERT.
These are:
• Optimistic time (t.)
• Pessimistic time (tn)
• Most likely time (tni).
Optimistic time for an activity is that estimate for the completion of the activity which happens
when every best thing happens to facilitate the execution. Thus, when everything goes well, the estimate
PROJECT MANAGEMENT AND CPM/PERT 633

is optimistic time. On the other extreme, when every thing goes worst, the duration of time-estimate is
the pessimistic time. Most likely time is in between the optimistic and pessimistic times. Under normal
circumstances, this is the probable time in which an activity is completed.
In PERT, it is assumed that the three time estimates are random variables, distributed as Beta-distribution.
The probability of most likely time is four times that of either of the remaining two. Mathematically, the
expected time (to) for an actiN is related with the three time estimates as follows:

to + 4tio + to
le =
6

Once, expected time (to) is known from the three time estimates, the algorithm for network calculations
is similar to CPM approach.
The variance ( Vie) and standard deviation (ate) for the activity are:

to — to
Vte
6
t p — to
6

As the range of estimate in optimistic and pessimistic time increases, the variation in the estimate
also increases.
Example 39.10 For an activity, the estimates for optimistic, pessimistic and most likely times are
2, 12 and 5 days respectively Calculate the expected time and variance of this activity.
Solution: Assuming Beta-distribution for the time estimates, the expected time (to) and variance
for this activity ( Vie) are:
2 + 4 x 5+12
= 5.67 days
6
2
(12 — 2)
= 2.7
6
Exampli39.11 PERT.
Consider a project for which the time estimates are given in the table below. Construct the
PERT network. What is the critical path? Find the probability of completing the project before
23 days.

Activity Estimated times (days)

Most Optimistic Most Likely Most Pessimistic
(to) (to) (to)

I—2 2 5 8
1—3 1 4 7
2—3 0 0 0
2—4 2 4 6
2—6 5 7 12
(Contd.-)
634 INDUSTRIAL ENGINEERING AND MANAGEMENT

Activity Estimated times (days)

Most Optimistic Most Likely Most Pessimistic
(to) (to,) (ta)
3—4 3 5 10
3—5 3 6 9
4—5 4 6 10
4—6 2 5 8
5—6 2 6 6

Solution: Let us first calculate the estimated average expected time and variance of each activity
Activity Estimated Time (days) Expected Time (te) Variance
(t,) (t to +4tm +t p p —to )2
(to) ,
6 6

1—2 2 5 8 5 1
1—3 1 4 7 4 I
2—3 0 0 0 0 0
16
2— 4 2 4 6 4
36
49
2—6 5 7 12 7.5
36
49
3—4 3 5 10 5.5
36
3—5 3 6 9 6 1
4 —,5 4' 6 10 6.33 1
4—6 2 5 8 5 1
5—6 •2 16
6 6 4
36
The network is drawn below. The critical path is shown by thick line arrow:
5
16.83
5 6
16.83

5 Critical path 1-2-3-4-5-6 20.83

20.83

Critical path 1-2-3-4-5-6

Total expected project completion time = 20.83 days.
PROJECT MANAGEMENT AND CPM/PERT 635

Total variance along critical path

49 16
v7.2 1 + 0 + — + 1 + — =3.8
36 36
Probability that the project will be over by 23 days:
< T —7 < 23 —
p (T 23)
VT . VT
T T < 23 — 20.83]
p [ VT NiTi

=T —Te <1.111= 0.8665

P[ VT
How do we get the right hand number of 0.8665? To find the value of probability in right hand
side of above expression, refer the normal distribution table in Appendix-1. For Z = 1.11, the area under
normal curve is 0.8665:

Prob (T< 23) = 0.8665

20.83 days 20.8.3 23 —•-

Expected Completion Time Expected Completion Time

-CO 0 co

Standard normal Distribution

39.14 DIFFERENCE BETWEEN CPM AND PERT

PERT and CPM originated nearly during same period but in different context. CPM originated from construction
project while PERT evolved through R&D projects. Both CPM and PERT share same basic approach for
constructing the project network and for determining the critical path of the network.
There are some differences in PERT and CPM. PERT is associated with uncertainty in the time estimates
for activity, while in CPM, these estimates are treated as fairly deterministic. CPM is also extended to
cost-time trade-off decisions. As the project completion time is squeezed, the time for the lowest project
cost is the optimal decision for project planning. PERT is considered as event-oriented while CPM is mainly
activity-oriented (Table 39.1).
636 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 39.1 Difference between' PERT and CPM

S. No. PERT . CPM

1. Time estimates are probabilistic Time estimate deterministic
2. Event oriented Activity oriented
3. Focussed on time Focussed on time-cost trade-off
4. More suitable for new projects More suited for repetitive projects

REVIEW QUESTIONS

39.1 What are the circumstances when you would use PERT as opposed to CPM in project management? Give
some examples of projects where each would be more applicable than the other.
39.2 What is slack? Construct an example and show how you can use the knowledge of slacks for better project
management.
39.3 Draw the CPM network according to the following table:

Activity Starts Event End at Event

1—2 1 2
1—3 1 3
1—4 1 4
2—3 2 3
2—4 2 4
3—4 3 4

39.4 Draw the following logics for forming the network:

Activities C and D both follow activity A
Activity E follows activity C
Activity F follows activity D
E and F precede activity B.
39.5 In running a program on computer, Certain steps need to be taken. These jobs can be described as follows:

Job Time Immediate Description

(minutes) predecessors

A 180 Design Flow chart and write C++ statements

B 30 A Discuss program
C 20 A Debug program
D 60 A Modify program
E 10 B, C, D Run program
F 20 B, C, D Test result
G 10 E, F Get print out

(a) Draw a critical path scheduling diagram and indicate the critical path. What is the minimum time of
completion?
(6) What is the free slack of job C?
(c) Assuming the table accurately represents the jobs to be done and their times, if you were performing
this project, would the minimum time to completion obtained above be the .minimum time for you
PROJECT MANAGEMENT AND CPMIPERT 637

to complete the project. If yes, what conditions would change your answer? If no, why not, and what
would the correct time be?

Activity Code Code of Immediate Time Required Men Required

Predecessor (days) per day
A 10 3
B — 8 4
C — 5 7
D A 6 5
E B 4 2
F C 10 4
G F 4 3
H F 8 3
I D, E, G 7 3

(a) Use this information to develop a network diagram.

(b) Determine the earliest start (ES), earliest finish (EF), latest start (LS), and latest finish (LF) times for
each activity.
(c) List the activities on the critical path.
(d) What is the earliest finish time of the project without resource constraints (assuming that we have
an unlimited number of men)?
(e) Assume that we have only 11 men available but that each man is completely interchangeable. That
is, any man can do any task. Also assume that the activities much use exactly the number of men
and days specified. For example, you cannot use twice the manpower and complete the activity in
one--half the time. Now determine, (if possible) a schedule of activity starting times that will allow
these 11 men to complete the project by the earliest finish date. If this is not possible, show a schedule
that will finish the project as soon as possible with 11 men. (Start with day 1, not day 0).

REFERENCES

1. Bhatnagar, S.K., 1986, Network Analysis Technique, Wiley Eastern Limited, New Delhi.

2. Gaither, N., 1975, "The Adoption of Operation Research Techniques by Manufacturing Organizations," Journal
of Decision. Sciences, 6, No. 4.

3. Harris, R.G, 1978, Precedence and Arrow Network Techniques for Construction, John Wiley & Sons, Inc.,
New York.

4. Horowitz, J., 1967, Critical Path Scheduling, The Ronald Press Company, New York.

5. Kelley, J.E. Jr., and M.R. Walker, 1959, "Critical Path Planning and Scheduling." Proceedings of Eastern
Joint computer Conference, Boston.

6. Krakowski, M., 1974, "PERT and Parkinsin's Law," Interfaces, 5, No. 1.

7. Levin, R.I., and C.A. Kirkpatrick, 1966, Planning and Control with PERT-CPM, McGraw-Hill Book Company,
New York.

8. Lofts, N.R., 1974, "Multiple Allocation of Resources in a Network—An Optimal Scheduling Algorithm,"
Information, I, No. 12.

9. MacCrimmon, Kenneth R., and Charles A. R, 1964, "Analytical Studies of the PERT Assumptions," Operations
Research 12, No. 1 (January-February 1964).
638 INDUSTRIAL ENGINEERING AND MANAGEMENT

10. Meredith J.R., and Mantel, S.J., 2000, Project Management, 4th Ed, John Wiley and Sons, New York.
11. Young T.L., 1999, The Handbook of Project Management, Kogan Page, New Delhi.
12. Miller, L.C., 1962, Successful Management for Contractors, McGraw-Hill Book Company, New York.
13. Moder, J.J., Phillips C.R., and Davis E.W., 1983, Project Management will; CPM and PERT, 3rd Ed.
Van Nostrand Reinhold: New York.

14. Moore, L.J., and Edward R., 1976, GERT Modelling and Simulation: Fundamentals and Applications, Petrocelli-
Charter, New York.

15. Paige, H.W., 1963, "How PERT Cost Helps the General Manager," Harvard Business Review.
16. Petrovic, R., 1968, "Optimization of Resource Allocation in Project Planning Operations Research 3.
No. 16.
17. Srinath L.S., 1975, PERT/CPM, Affiliated Eat West Press, New Delhi.
18. Wiest, J.D. and Levy F.K., 1978, Management Guide to PERT/CPM with GERT/PDM/DCPM and other Networks.
Prentice Hall of India, New Delhi.
 40
SCHEDULING

40.1 INTRODUCTION
Scheduling is used to allocate resources over time to accomplish specific tasks. It should take account
of technical requirement of task, available capacity and forecasted demand (Figure 40.1). Forecasted demand
determines plan for the output, which tells us when products are needed. The output-plan should be

Forecasted Business
Demand Plan

Output Manning

Aggregate Output Master Production

Planning Schedule

Aggregate Capacity Rough Cut Detailed Capacity

Planning Capacity Planning Planning

Capacity Planning

Loading Sequencing Detailed Scheduling Expediting or

Follow-up

Shop-Floor Control

Short-term Capacity
Control

Figure 40.1 The Planning and Scheduling Function

640 INDUSTRIAL ENGINEERING AND MANAGEMENT

translated into operations, timing and schedule on the shop-floor. This involves loading, sequencing, detailed
scheduling, expediting and input/output control.
40.1.1 Loading
The customer order for each job has certain job contents, which need to be performed on various work
centres or facilities. During each planning period, jobs orders are assigned on facilities. This ultimately
determines the work-load or jobs to be performed in a planned period.

The assignment of specific jobs to each operational facility during a planning period is known
as loading.

40.1.2 Sequencing
When number of jobs are waiting in queue before an operational facility (such as, a milling machine),
there is a need to decide the sequence of processing all the waiting jobs. Sequencing is basically an
order in which the jobs, waiting before a operational facility, are processed. For this, priority rule, processing
time, etc., are needed.

The decision regarding order in which jobs-in-waiting are processed on an operational facility
or work-centre is called as sequencing.

40.1.3 Detailed Scheduling

Once the priority rule of job sequencing is known, we can sequence the jobs in a particular order. This
order would determine which job is done first, then which is the next one and so on. However, sequencing
does not tell us the day and time at which a particular job is to be done. This aspect is covered in
detailed scheduling. In this, estimates are prepared regarding setup and processing time at which a job
is due to start and finish. Detailed schedule is, therefore, useful to organize job, worker, machine, tools,
material, etc, at the specified time.

Detailed Scheduling encompasses the formation of starting and finishing time of all jobs
at each operational facility.

40.1.4 Expediting
Once the detailed schedule is operationalized, we need to keep a watch over the progress in the shop-
floor. This is necessary to avoid a deviation from the schedule. In case of deviation from the schedule,
the causes of deviation are immediately attended to. For example, machine breakdown, non-availability
of a tool, etc., cause disruption in 'schedule. Therefore, continuous follow up or expediting is needed
to overcome the deviations from schedule.

Expediting or follow-up involves continuous tracking of the job's progress and taking specific
action if there is a deviation from the detailed schedule. The objective of expediting is to
complete the jobs as per the detailed schedule and overcome any special case causing delay,
failure, break-down, non-availability of material and disruption of detailed schedule.

40.1.5 Short-term Capacity (Input-output) Control

Schedules are made so that jobs are completed at a specific time on every facility. For this, each facility
has certain capacity to perform. In real situation, the utilization of the capacity of each facility may
SCHEDULING 641

be different from the planned one. This difference should be monitored carefully because under-utilization
of capacity means waste resource and over-utilization may cause disruption, failure, delays, or even breakdown.'
Therefore, in case of discrepancy in input and output of the capacities, some adjustments in schedule
are needed.

Short-term capacity control involves monitoring of deviation between actual and planned utilization
of the capacity of an operational facility.

40.2 SCHEDULING RULES

When many jobs are waiting before an operational facility, we must have some heuristic or rule to decide
the priority while sequencing. We will understand these rules through an example.
Example 40.1 Scheduling of n jobs on one machine (n/ I scheduling).
There are five jobs in waiting for getting processed on a machine. Their sequence of arrival, processing
time and due-date are given in the table below., Schedule the jobs using FCFS, SPT, D Date, LCFS,
Random, and STR rules. Compare the results.

Job Processing Due Date

(In Sequence of Arrival) Time (Days) (i.e., Days From Now)
.1! 4 6
J2 5 7
J3 3 8
J4 7 10
J5 2 3
Solution: (i) First-come-first-serve (FCFS) Rule: In this, the job, which arrives first, is scheduled
first. Then the next arrived job is scheduled, and so on.

Job Arrival Processing Due Date (Days Flow Time Lateness of Job
(In Sequence) Time (Days) From Today) (Days) = (F, - di ); if F. >
(i) (p,) (di) F, = + p.) Otherwise Zero

.11 4 6 0 +4 =4 0
J2 5 7 4 + 5 =9 . 2
J3 3 8 9 + 3 = 12 4
J4 7 10 12 + 7 = 19 9
J5 2 3 19 + 2 = 21 18
Total flow time = 4 + 9 + 12 + 19 + 21 = 65 days
Total flow time 65
Mean flow time = = = 13 days
Number of jobs 5
Total lateness of job = 0 + 2 + 4 + 9 + 18 = 33 days
33
Average lateness of job = — = 6.6 days
5
(ii) Shortest Processing Time (SPT) Rule or Shortest Operation Time (SOT) Rule: This rule gives
. highest priority to that job, which has shortest processing time. This approach gives following sequence
of jobs for the given problem:
642 INDUSTRIAL ENGINEERING AND MANAGEMENT

Job Processing Due-date (Days Flow Time Lateness of Job

Sequence Time (Days) From Hence) (Days) Li = (Fi — di ) if Fi > dj
(i) (Pj) (di ) Fr = (F,_, + pi ) Otherwise Zero

J5 2 3 . 0 +2 =2 0
J3 3 8 2+3=5 0
J1 4 6 5 +4 =9 9-6=3
J2 5 7 9+5=14 14-7=7
J4 7 10 14+7=21 21 — 10 = 11
Total• flow time = 2 + 5 + 9 -I- 14 + 21 = 51 days
51
Mean flow time = — = 10.2 days
5
Total lateness of jobs = 3 + 7 + 11 = 21 days
21
Average lateness of jobs = — = 4.2 days.
5
(iii) Earliest D Date (Due-date) Rule: This rule gives highest priority to the job having earliest
due-date:
Job Processing Due-date (Days Flow Time Lateness of Job
Sequence 'lime (Days) From Hence) (Days) Li = (Fi — di ) if Fi > dj
(i) (Ps ) (di ) = (Fi_, + pi ) Otherwise Equal to Zero
J5 2 3 0+2=2 0
J1 4 6 2+4=6 0
J2 5 7 6+5=11 11-7=4
J3 3 8 11 + 3 = 14 14-8=6
J4 7 10 14+7=21 21 — 10 = 11
Total flow time = 2 + 6 + 11 + 14 + 21 = 54 days
54
Mean flow time = = 10.8 days
5
1 Total lateness of job = 0 + 0 + 4 + 6 + 11 = 21 days
21
Average lateness of job = — = 4.2 days.
5
(iv) Last-come-first-serve (LCFS) Rule: This rule gives highest priority to that job, which has arrived
most recently. Most recent job is the last arrived job. The scheduling of jobs on this rule is explained
through the earlier example.
Job Processing Due-date (Days Flow Time Lateness of Job
Sequence Time (Days) From Hence) (Days) Li = (Fi — di ) if Fi > dj
(Pi) (di ) Fj = + pi ) Otherwise Equal to Zero
J5 2 3 0+2=2 0
J4 7 10 2+7=9 0
J3 3 8 9+3=12 12-8=4
J2 5 7 12+5=17 17-7=10
J1 '4 6 17+4=21 21 — 6 = 15
SCHEDULING 643

Total flow time = 2 + 9 + 12 + 17 + 21 = 61 days

6
Mean flow time = 51 = 12.2 days

Total lateness of job = 4 + 10 + 15 = 29 days

29
Average lateness of job = — = 5.8 days.
5
(v) Random Schedule Rule: Take any job randomly. The rule, gives priority of jobs in a random
order. Let the random selection of job be: J4 -4 J3 -3 J1 J5 J2.

Job Processing Due-date (Days Flow Time Lateness of •Job

Sequence Time (Days) From Hence) (Days) Li = (F, — d,) if Fi > d,
(0 (p,) (d,) F, = (Fil + pi ) Otherwise Equal to Zero

J4 7 10 0+7=7 0
J3 3 8 7 + 3 = 10 10 - 8 = 2
J1 4 6 10 +4=14 14 - 6 = 8
J5 2 3 14+2=16 16 - 3 = 13
J2 5 7 16+5=21 21 - 7 = 14
Total flow time = 7 + 10 + 14 + 16 + 21 = 68 days
8
Mean flow time = 6 = 13.6 days
5
Total lateness of job = 2 + 8 + 13 + 14 = 37 days
— = 7.4 days.
Average lateness of job = 37
5
(vt) Slack Time Remaining (STR) Rule: STR is calculated as the difference between the times remaining
before the due-date minus remaining processing time.

Job Processing Due-date (Days Flow Time Lateness of Job

Sequence Time (Days) From Hence) (Days) L, = (F, d,) if Fi > d,
(0 (Pt ) (d,) F, = (Ft r + p,) Otherwise Equal to Zero

J5 2 3 0+2=2 0
J1 4 6 2+4=6 0
J2 5 7 6+5=11 11 - 7 = 4
J4 7 10 11 + 7 = 18 18 - 10 = 8
J3 2 8 18+2=20 20 - 8 = 12
Total flow time = 2 + 6 + 11 + 18 + 20 = 57 days
57
Mean flow time = — = 11.4 days
5
Total lateness of job = 4 + 8 + 12 = 24 days
24
Average lateness of job = — = 4.8 days.
5
644 INDUSTRIAL ENGINEERING AND MANAGEMENT

Comparison of Sequencing Rules (For the Given Problem)

Rule Total Flow Time to Average Time to Average

Complete Jobs (Days) Complete Jobs (Days) Lateness

FCFS 65 13 6.6
SPT 51 10.2 4.2
D-Date 54 10.8 42
LCFS 61 12.2 5.8
Random 68 13.6 7.4
STR 57 11.4 4.8

It is observed that SPT sequencing rule (for single machine and many jobs) performs better than
other rules in minimizing total flow time, average flow time, and average lateness of jobs. It may be
noted that this observation is valid for any "n job-one machine" (nil) scheduling problem.

40.3 GANTT CHART

The Gantt Chart is a very useful graphical tool for representing a production schedule. A common production
schedule involves a large number of jobs that have to be processed on a number of production facilities,
such as machine testing, etc. Gantt Chart contains time On its one axis. The status and scheduling
of jobs on a time scale is schematically represented. This gives a clear pictorial representation of relation-
ship among different production-related activities of a firm on a time horizon. Gantt Chart is
equally suited for any other non-production activity, where the work is similar to a project involving
many activities.

40.3.1 How to Prepare a Gantt Chart?

The Gantt Chart consists of two axes. On X-axis, generally, time is represented. This may be in the
units of years, months, weeks, days, hours or minutes. On Y-axis, various activities or tasks, machine-
centres or facilities are represented.

Example 40.2 Let us consider two machines and six jobs. The processing time (in hour) for
each job is given below. Assume that process-sequence such that machine A I is need before M2. We
have to draw a Gantt Charted:

Job J1 J2 J3 J4 J5 J6
Machine A4, 3 5 4 7 1 3
Machine M, 2 6 2 I 4 6

The Gantt Chart is as shown in Figure 40.2.

The project, consisting of six jobs on two machines, is scheduled in such a way that processing
on the first machine should be over before processing on the second machine is undertaken. This is
due to sequence-of-operations requirements. For the sequencing rule of FCFS, the Gantt Chart is shown
in Figure 40.2. For the SPT rule, the Gantt Chart is shown in Figure 40.3. The methodology is quite
simple and already explained in Chapter 10.
SCHEDULING 645

Project Completion Time = 30 Days

Legend
J5 Processing

Machine M I JI J2 J3 J4 Jo Idle Time

12 20 23

Machine M2 J2 .13 J4 J5 J6

5 14 16 17 20 24 30

I I 1 I 1 1 I 1 I I I I
6 9 12 15 18 21 24 27 30 33 36 39

Time

Figure 40.2 Gantt Chart on First-come-first served Basis

In Figure 40.2 the sequencing rule is first-coin-first-served. Therefore, the jobs are sequenced as
J1 —> J2 —> J3 -4 J4 —> J5 —> J6. Till job J1 is processed on machine M1, the other machine M2
is idle. It cannot process other jobs in this period due to sequence-of-operation constraint. As soon as
J1 is released from Ml, it goes on M2. Now, processing of J1 on M2 is over at 5th hour. But, J2
will be free from machine M1 after processing at 8th hour. Hence, machine M2 will remain idle from,
the time when J1 is over on M2 (i.e., 5th hour) to the earliest possible loading time (i.e., 8th hour)
on M2. Similarly, all other jobs are scheduled on Gantt Chart.
In Figure 40.3, the sequencing rule is SPT. Therefore, the jobs are sequenced as: J5 ---> J1
J6 -4 J3 -4 J2 ---> J4. Idle and processing time on 1 and 2 are shown on the Gantt Charts.

Project Completion
Time 24 Days
Legend
J5 n Processing

Machine M1 J1 J6 J3 J2 J4 Idle Time

1 4 7 11 16 23

Machine M2 J5 JI J6 J3 J2 J4

1 5 7 13 15 16 22 23 24

I I I I I I I I I 1
3 6 9 12 15 18 21 24 27 30

Time (in hour)

Figure 40.3 Gantt Chart on Shortest Processing Time (SPT) Sequence on Machine M,

40.4 JOHNSON'S RULE FOR OPTIMAL SEQUENCE OF N JOBS 'ON 2 MACHINE

Johnson's rule gives us the unique methodology to determine the optimal sequence of n jobs on 2 machines
(n/2 sequencing problem). As far as Gantt Chart is concerned, one can notice that it gives a relationship
646 INDUSTRIAL ENGINEERING AND MANAGEMENT

among different activities in a production process in terms of their completion time. However, Gantt
Chart does not provide an optimal sequence of jobs.
The principle behind Johnson's rule of n/2 sequencing problem is minimization of total elapsed
time by the n jobs. Following steps are followed:
Problem Content: We have n jobs that are to be processed on a 2 parallel machines. The processing
time of all jobi (ti,) is known. Here, i denotes jobs and j denotes machines. For n/2 problem, i = 1,
2, ..., n, and j = 1, 2. The problem is to sequence the jobs on both the machines so that the total
elapsed time (T) is minimized.
Solution: Steps (Johnson's. Rule)
Step 1: Select the minimum processing time, tip among all the available values of processing times.
In case, two operations contain least processing time, break the tie arbitrarily and select anyone
of them.
Step 2: Look at the following five situations and take the decision accordingly (Table 40.1).

Table 40.1 Five situations and Related Decisions In Johnson's Rule

Situation Decision in Johnson's Rule

1. Minimum processing time is on first machine
(say, M1 ) for the pth job
2. Minimum processing time is on second machine
(say, M2) for the gth job
3. Processing time of two jobs, one on machine A41
and other on machine M2, is equal and both are
minimum, i.e., tpl =
4. Two jobs are having least processing time on
machine 1, i.e., there is a tie on Mi .
5. "I'wo jobs are having least processing time on
machine 2; i.e., there is a tie on M2.
Place pth job in the beginning of the sequence.
Place gth job at the end of the sequence.
Place pth job at the beginning of the sequence and gth
job at the end of the sequence
Sequence any of the two jobs in tie as first and
place it at the beginning of sequence. Second job of
the tie is to be placed next.
Sequence any of the two jobs in tie as the last and
place it at the end of the sequence. Second job of the
tie is to be placed before the first one.

Step 3: Remove the jobs, already sequenced in Step 2, and proceed with the remaining jobs. Repeat
Step 1 and 2 till all jobs are sequenced.
The entire algorithm is presented in a flow-chart in Figure 40.4. Example 40.3 illustrates the application
of Johnson's Rule.
Example 40.3 Processing time (in minute) of six jobs on two machines are given below. Use
Johnson's rule to schedule these jobs.

Job J1 J2 J3 J4 J5 J6
Machine MI 4 6 7 8 9 1
Machine M, 5 8 I 3 6 10

Solution: Minimum processing time of 1 mM is for J3 on M2 and J6 on. M1.

Place J6 at the first and J3 at the end of the sequence.
SCHEDULING 647

Input:
Processing time for each job i on machine 1 : ti I
Processing time for cac fjob i on machine 2 :

• Arrange in in descending order.

• Arrange in descending order.

• Select smallest of 'in ;and ph).

• In case of tie, select any one arbitrarily.

smallest
from Machine I,
i.e. til
list

Place concerned job,-i. in the beginning or as

close to the beginning of job sequence as possible

Place concerned job, i, at the end or as close

to the end of the job sequence as possible

Delete the jobs, i, already

placed in the sequence

Figure 40.4 Flow Chart of Johnson's Algorithm

J6 J3

Now, remove J3 and J6 from the consideration. We have the following jobs:
Job J1 J2 J4 J5

Machine M1 4 6 8 9
Machine M2 5 8 3 6

Out of all the remaining processing times, J4 on M2 is least and equal to 3 minutes. So, place
it at the last of the sequence. It is in the last because of being least processing time on M2 and not
on Mi.
648 INDUSTRIAL ENGINEERING AND MANAGEMENT

After eliminating J4 from the above list, we have J1, J2 and J5. Out of all remaining processing
times, J1 on M1 is least and is equal to 4 min. Therefore, place this job at the beginning of the list.
After placing J4 at the end and J1 in the beginning we have the following sequence:

J6 J1 J4 J3
Now, the remaining jobs are J2 and J5. Looking at their processing times, it is observed that the
least time is 6 min. for J2 on M1 and J5 on M,. Therefore, place J2 at the beginning of left-most slot
of sequence and J5 at the right-most slot of the sequence. The optimal sequence is J6, J1, J2, J5, J4
and J3:

J6 J1 J2 J5 J4 J3
Analysis of Result: The present sequence is analyzed for time on machines as follows:

Job Machine 1 Machine 2

Time in Time out •Time in Time out

J6 0 1 I* II

J1 1 5 II 16

J2 5 II 16 24

J5 I I -a-. . 20 24 30

J4 20.-- 28 30 33

J3 28.•••'•• 35 35** 36

* Processing time for J6 on M2 is I min and its processing on M, is over only after 1 min. Therefore, only
after I min, next job J1 will start on A41 and J6 will go on M2.
** Job J3 will start on M, only after 35 min as its out-time on M, is 35 min. In all other cases, the jobs
are waiting to be loaded on M2 (except J6 and J3).
(a) Idle time for machine 1 = (Total elapsed time) — (Total busy time for machine 1)
6
= T —Etil = 36 — 35 = 1 min.
i=1
7
.0
J6 JI J2 .15 J4 J3 MI
r/

_ .

v
;7
aJ3
4 J6 J1 J2 J5 J4 M2

I I i I I I I i i 1
0 3 6 9 12 15 18 21 24 27 30 33 36

Time ->

Figure 40.5 Scheduling of Six Jobs on 2 Machines (Example 40.3)

SCHEDULING 649

(b) Idle time for machine 2

6
= - Eta = 36 - (5 + 8 + 1 + 3 + 6 + 10)
i=i
= 36 — 33 = 3 min.

40.5 PROCESS n JOBS ON \CHINES (n/3 PROBLEM) AND JACKSON ALGORITHM

For a special n jobs and 3 machines problem, Jackson provided an extension of Johnson's
algorithm. For this, let tii be the processing time of job i on machine j. Here, i = 1, 2, ... ti, and
j = 1, 2, 3.
At least one of the following conditions must be satisfied before we can use this algorithm:
(i) Minimum {t11} > Maximum {t12}.
(ii) Minimum {ti3} > Maximum {tie}.
Step 1: Take two hypothetical machines R and S. The processing time on R and S is calculated
as follows:
tiR — tii + ti2
tis = ti2 +
Step 2: Use Johnson's algorithm to schedule jobs on machines R and S with tiR and tis.
Example 40.4 Six jobs are to be processed on three machines. The processing time is as follows.
Find the optimal schedule so that the total elapsed time is minimized.

Job J1 J2 J3 J4 J5 J6
MI 10 3 5 4 2 I
M, 2 4 6 3 1 2
M3 8 6 7 9 7 7

Solution: Check for necessary conditions:

Min =1
Max {tie} = 6
Min {ti3} = 6.
Now, since Min {ti3) > Max {to); and, Min {tii} > Max {tie ) are satisfied, the Jackson's algorithm
may be used.
Now, let us frame two hypothetical machines R and S on which the processing times are:

Job J1 J2 J3 J4 J5 J6
tiR =1/1 la 12 7 11 7 ' 3 3
l iS = 1i3 10 10 11 12 8 9

Using Johnson's algorithm the optimum sequence for two machines R and S and six jobs
is:
J5 J6 J2 J4 J3 J1
650 INDUSTRIAL ENGINEERING AND MANAGEMENT

The time calculations are as follows:

Job M1 M2
Time in Time out Time in Time out Time in Time out

J5 0 2 2 3 3 10
J6 2 3 3 5 10 17
J2 3 6 6 10 17 23
J4 6 10 10 13 23 32
J3 10 15 15 21 32 39
J1 15 25 25 27 39 47

J6 Idle Time

J5 J2 J4 J3 J1 MI

23 6 10 15 21 25
Idle Time

J5 J6 J2 J4 J3 M2

23 56 10 13 15 21 25 27

J6 J2 J4 J3 J1 I M3

3 10 17 23 32 39
Idle time
I I

0 5 10 15 20 25 30 35 40 45 47 50

Time (in minutes)

Figure 40.6 Gantt Chart for n13 Problems of Examples 40.4

Calculation of Machine Idle Time:

Idle time for machine 1 (M1)
= 47 — 25 = 22 min.
Idle time for machine 2 (M2)
= (2 — 0) + (6 — 5) + (15 — 13) + (25 — 21) + (47 — 27)
= 2 + 1 + 2 + 4 + 20 = 29 min.
Idle time for machine 3 (M3)
= (3 — 0) = 3 min.
40.6 PROCESSING OF 2 JOBS ON M MACHINE (21M) PROBLEM
Let there be two jobs: J1 and J2. Each job is to be processed on tn machines: M I , M2, ..., Mm. There
are two different sequences, one each for each job. It is not permissible to have alternative sequences.
Only one job can be performed at a time on the two machines. The processing time is known and is
deterministic. The problem is to find the sequence of processing so as to minimize the total elapsed
time in the system.
Technique: Graphical method is used to solve this problem. It can be illustrated with an example.
SCHEDULING 651

Example 40.5 Two jobs J1 and J2 are to be processed on five machines MI, M2, ..., M5. The
processing time and job sequences are as follows:
Job 1:

Machine Sequence M, Mj M4 MS
Processing Time 2 5 6 6 7
Job 2:

Machine Sequence kr, M, Ma M5 M,

Processing Time 5 6 4 3 7

Find the total minimum elapsed time using graphical approach.

Solution: Step 1: On a graph paper, represent processing times of jobs J1 and J2 on X- and
Y-axes, respectively.
Step 2: For every point of new machine on X- and Y-axes, draw vertical/horizontd1 lines.
Step 3: Shade the common area for each machines (Figure 40.7).
Idle Time for J2 (= 3 min)
4,
25

1
M2

20

M5

15
Idle
Time
M4
for J1
( = 14 min)
_1_ 10
L -
Idle Y i
MI Time I
for J2
( = 14 min) !

t
M3

ill
5 10 15 20 25 30
1...L114... M2 I M3 M4 M5 H

Job I
Figure 40.7 Graphical Solution of (2/5) Problem for Example 40.5

Step 4: Start from origin. Draw a line in phases of diagonally (at 45°), horizontally and vertically.
The only condition to be avoided is to cross a shaded area by the diagonal line.
The line moving horizontally (i.e., along jobl) means that J1 is processed and J2 is idle; while
line moving vertically means that J2 is processed and JI is idle. A diagonal line means that both Jland
J2 are processed.
652 INDUSTRIAL ENGINEERING AND MANAGEMENT

The shaded portion is avoided to be crossed by diagonal line, because at any time both J1 and
J2 cannot be processed on the same machine.
Step 5: Note the idle time for each job from graph.
Calculation of Elapsed Time
Elapsed time Processing time + Idle Time
For Job 1: Elapsed time = (2 + 5 + 6 + 6 + 7) + (5) = 26 + 5 = 31 min.
For Job 2: Elapsed time = (5 + 6 + 4 + 3 + 7) + (3 + 3) = 25 + 6 = 31 min.
Example 40.6 Use Hodgen's algorithm to schedule five jobs for which the processing time (ti)
and due-date (di) are as follows:
Task . (i) 1 2 3 4 5
ti 5 3 6 2
d. 5 8 /0 12 15

Solution:' Using EDD Rule

Task (i) 1 4 5

ti (Given) 5 3 1 6 Processing time of ith job

Ci (0 + 5) = 5 (5 + 3) = 8 (8+ 1) = 9 (9 +6)= 15 (15 + 2)= 17 Completion time of ith job

di (Given) 5 8 10 12 15 Due date of ith job

Li= (C—d1), if 0 0 0 (as (15 — 12)=3 (17 — 15)= 2 Lateness of ith job
positive, or = 0; negative is
if negative unacceptable

Steps: Hodgen Algorithm (step explained below).

Step 1: Identify first job which is late = 4th job.
Step 2: Form a string of jobs upto first late job.

3 4 String of job

5 3 1 Processing time

Step 3: Identify in this string the job of maximum processing time = Job 4 with maximum Processing
time = job 4.
Step 4: Remove this job from string of jobs and put in the new late job in the string and repeat
Steps 1 to 4.
1 2 3 5
ti (Given) 5 3 1 2
C, 5 8 9 11
d. (Given) 5 8 10 15
L, = (C, — di ), if 0 0 0 0
positive, or = 0;
if negative
SCHEDULING 653

Step 5: Since at this stage there is no late job, we will stop.

Hence solution is:
Task (i) 1 2 3 5 4
ti 5 3 1 2 6
Ci 5 i 8 9 II 17
di 5 8• 10 15 12
Li 0 0 0 0 (17 — 12) = 5

Example 40.7 Use Johnson's algorithm to schedule six jobs and two machines:

Task Time on Machine A Time on Machine B

1 10 14
2 12 6
3 6 2
4 2 9
5 4 3
,6 1 4
Solution: Using Johnson's rule:
1. Select task with least processing time in the string of the given jobs. If it is on machine A, place
at the left-end otherwise on right-end.
# Job/Task —> 6 4 1 2 5 3
Gantt Chart

M/C 2 Idle
A
I3 25 29 35 39

Idle

M/C
5 3
14 28 34 37 39
'rime (Days)

2. Remove that task from string and apply rule again.

3. Repeat steps 1 — 2 till all jobs are over. Sequencing is as follows as per Johnson's rule.
Example 40.8 Use Jackson's extension of Johnson's rule to schedule five jobs on three machines.

Processing Time
Job M/C A M/C B M/C A
1 6 2 4
2 9 3 2
3 10 5 1
4 12 6 3
5 8 2 2
654 INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: Since machine B is dominated by machine A: as maximum processing time of machine

B (= 6) is less than or equal to the minimum processing time on machine A (= 6).
Hence, above problem is converted to fit into 2 machine n job as follows:

Processing Time
Job MX I (A + B) M/C II (B + C)
1 8 6
2 12 5
3 15 6
4 l8 ,9
5 10 4
Using Johnson's rule the optimal sequence is:

# Job/Task 4 1 3 2 5

Gantt Chart

M/C 1 3 2 5
4
A 1
0 5 10 12 15 18 20 25 28 30 35 37 40 45
1
Time • 1

M/C 3 2 5
0 12 18 20 28 30 33 35 37 40 47
1 Time —>
1 1

M/C
4 1 2 5
0 18 21 25 33 34 40 42 47 49

Time

Make Span in 49 unit of Time

REVIEW QUESTIONS

40.1. Why is scheduling important on the shop-floor?

40.2. What are the different priority rules in scheduling? What priority rule will you use in your study time for
the major examination? Consider that you have five exams, to cover, how many alternative schedules exist?
40.3. Consider seven jobs that are processed on two operations: X and Y. The job is processed in sequence so
that Y should follow X. Determine the optimal order in which the jobs should be sequenced. Also draw
the Gantt Chart.
Job I 2 3 4 5 6 7
Processing Time on X 4 2 1 6 7 8 9
Processing T il ne on Y 7 6 2 3 7 5 6
SCHEDULING 655

40.4. Five jobs arrive at a processing station one-after-another. The processing time and due-date are as follows.
Use different sequencing rules to find:
(a) total flow time,
(b) mean flow time and
(c) lateness of job.

Job in the sequence of arrival J1 J2 J3 J4 J5

Processing Time (days) 3 4 2 6 1
Due Date (days hence) 5 6 7 9 2

REFERENCES

1. Baker, K.R., 1974, introduction to Sequencing and Scheduling, John Wiley, New York.
2. Baker, K.R., 1984, "The Effects of Input Control in a Simple Scheduling Model," Journal of Operation
Management 4, No. 2, 99-112.
3. Bedworth, D.D. and Bailey J.E., 1982, Integrated Production Control Systems, John Wiley, New York.
4. Blackstone, J.H.,• Phillips D.T. and Hogg GL., 1982. "A State of the Art Survey of Dispatching Rules for ,
Manufacturing Job Shop Operations", International Journal of Production Research,
Vol. 20, No. 1.
5. Campbell, H.G, Dudek R.A., and Smith M.L., 1970, "Scheduling A Heuristic Algorithm for the n Job, m
Machine Sequencing Problem", Management Science, Vol. 16, No. 11 (pp. 630-37).
6. Clark, Wallace., 1992, The Gantt Chart:• A Working Tool of Management, Ronald Press, New York.
7. Conwey, R.W., Maxwell W.L., and Miller L.W., 1967, Theory of Scheduling, Addison-Wesley, Reading, Mass.
8. Day, James, E., and Michael P. Hottenstein, 1970, "Review of Sequencing Research", Naval Research Logistics
Quarterly 27, 11-39.
9. Elsayed, E.A., and Boucher TO., 1985, Analysis and Control of Production Systems, Prentice Hall, Englewood-
Cliffs.
10. Fox, R.E., 1982, "OPT—An Answer for America—Part IV," Inventories & Production 3, No. 2.
II. Hershauer, James C., and Ronals J. Ebert, 1975, "Search and Simulation Selection of a Job-Shop Sequencing
Rule," Management Science 21, 833-843.
12. Jocobs, R., 1983, "The OPT Scheduling System: A Review of a New Production Scheduling System," Production
and Inventory Management, 24, 47-5 I.
13. Jacobs, F.R., 1984, "OPT Uncovered: Many Production Planning and Scheduling Concepts can be Applied
With or Without the Software," Industrial Engineering, 32-41.
14. Johnson, S.M., 1954, "Optimal Two-and Three-stage Production ScheUules with Setup Times Included," Naval
Research Logistics Quarterly, .Vol. I No. I, (pp. 61-68).
15. Mcleavy, D.W., and Narasimhan S.L., 1985, Production Planning and Inventory Control. Boston: Allyn &
Bacon.
16. Moore, J.M., 1968, "Sequencing n jobs on One Machine to Minimise the Number of Tardy Jobs," Management
Science, Vol. 17, No. 1.
17.. Muhlemann, A.P., Lockett A.G. and Farn C.K., 1982, "Job Shop Scheduling Heuristics and Frequency of
Scheduling", International Journal of Production Research. Vol. 20.
656 INDUSTRIAL ENGINEERING AND MANAGEMENT

18. Muth, J.F. and Thompson G.L. (ed.), 1963, Industrial Scheduling, Prentice Hall Englewood-Cliffs.
19. Stinson J.P. and Smith A.W., 1982, "A Heuristic Programming Procedure for Sequencing the Static Flow
Shop", International Journal of Production Research Vol. 20, No. 6.
20. Vollmann, T.E., Berry W.L., and Whybark D.C., 1988, Manufacturing Planning and Control Systems, 2nd
ed. Homewood, Richard D. Irwin.
21. Weeks, J.K., and Fryer, J.S. 1977, "A Methodology for Assigning Minimum Cost Due-Dates," Management
Science 23, No.8, 872-81.
22. Wilkerson, L.J. and Irwin J.D., 1971, "An Improved Method of Scheduling Independent Tasks", AIM Transactions,
Vol. 3, No. 3.
 WAITING LINES: QUEUING MODELS

41.1 INTRODUCTION
Waiting lines are the most common phenomenon in our daily life. It affects people, who need service
at a number of places. These places, where one has to wait in queue are: doctor's clinic, bank counters,
railway reservation counter, telephone booth, etc. In manufacturing industry, queue or waiting line is common
in situations when machines have to wait for repair; semi-finished item waiting in batches to be loaded
on a machine; machine waiting for operator or tool, etc. At airport, many times aeroplanes have to wait
for permission for take-off till a runway becomes free. Some applications of waiting line problem are
given in Table 41.1.

41.2 ISSUES INVOLVED IN WAITING LINE

The most important issue in waiting line problem is to decide the best level of service that the organisation
should provide. For example, to cope up with the railway reservation queue, how many counters must
be opened? If the counters are too less, there will be very long queue, resulting in long waiting time.
This results in dissatisfaction among the customers. However, if the service counters are too many the
counters may remain unoccupied for quite some time. This would result in loss to the service organisation.
An important issue to understand in queuing problem is about arrival pattern. Generally, the arrival of
customers is random, which may be governed by a probability distribution. Besides this, the arrival may
also be governed by hours of a day, season, days of month, etc. For example, the arrival at-railway
reservation booth is more at morning hours as compared to afternoon. Similarly, longer queues may be
observed at rail reservation counters when summer vacation are or puja vacation are due. The management
may open more or less service counters, depending upon the arrival; but each extra counter means additional
cost in running this service. Use of computers in processing data and updating files at the service counter
is now very common. The reason is simple. Computer is very fast, accurate, programmable, good in
storage and retrieval features for data, and consistent. A reduced and dependable service time is what
customer and management want.
The key issue in waiting line is to provide a compromise between good' service (by less service
time) and less cost in running the service points. Figure 41.1 illustrates that the total expected cost of
service, which is the sum of providing service and cost of waiting time, is minimum at certain service
level. This service level should be optional service level.
658 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 41.1 Some Applications of Waiting Line Problem

S. No. Application Area Arrival Waiting Line Service Facility

1. Factory Material/tools In-process inventory (WIP) Work stations

2. Assembly line Sub-assemblies WIP Employees currently
processing the WIP
3. Machine Repair tools & Machines needing repair Maintenance crew
maintenance equipment
4. Airport Plane Planes ready to fly Runway
5. Bank Customer Deposit/withdrawal Bank employee &
computer
6. Walk-in interview Job seekers Applicants Interviewers
7. Phone exchange Dialed number Caller Switchboard
8. Govt. office Files Backlog files Clerks
9. Post office Letters Mailbox Postal employees
10. Executive note Dictation note Letters to be typed Secretary
11. Grocery shop Customers Customer on the counter Checkout clerks and
bag packers
12. Traffic light Vehicles Vehicles in line Traffic signals crossing
13. Car service station Cars Unserviced cars Service facilities
14. Railways Passengers Waiting passengers on Trains
platform/waiting room
15. Tool crib Mechanics Waiting mechanics Store keeper
16. Hospital Patients Sick people Doctor & operation
facility

•
Total
expected cost ,
~
\
S.
Cost of service facility
Cost of using
service facility
Cost of waiting time

Level of service capacity

Figure 41.1 Waiting line cost and service levels

41.3 CHARACTERISTICS OF A QUEUING MODEL

A queuing model may be looked for four basic characteristics:
(i) Arrival characteristics (or input source or calling population)
(ii) Queue or the waiting line itself
(iii) Service facility (or service machanism), and
(iv) Customer behaviour.
WAITING LINES: QUEUING MODELS 659

A schematic framework of queuing system is shown in Figure 41.2.

Served
Queue Service system customer

Input source Queuing discipline

(Calling population) L

Queuing system

Customer deciding to
enter into the system

Figure 41.2 Queue Representation

41.3.1 Arrival Characteristics

The calling population or input source of a queuing system has three major features. These are: (i) size
of input source, (ii) arrival pattern for joining the queue and (iii) the behaviour of arrivals (Figure 41.3).
(i) Size of Input Source: The size of input source may be considered either limited (finite) or unlimited
(infinite). When the arrival to a system at any given time is only a very small fraction of potential
arrivals, the input calling population is considered infinite. Otherwise, when the arrivals at
any time are not considerably small proportion of potential arrivals, the calling population is
termed as finite population. The railway reservation system, the airlines reservation system, tax/
toll booth on highways, supermarket counters, telephone booth, etc., are examples of infinite queue.
(ii) Arrival Pattern at the System: Arrival at a service counter may be scheduled; else it would he
random. A professor gives appointment to his students to come at the interval of half-an hour for

Potential Customers or Populations

Patient Impatient

Finite Single Batch Controllable Uncontrol-

lable Uniform Random

Poisson Exponential Other

Figure 41.3 Characteristic of population

660 INDUSTRIAL ENGINEERING AND MANAGEMENT

guidance in the subject. This is a scheduled arrival. But, in common, most arrivals in a service
system are random. This is when each arrival is independent of its previous arrivals. The exact
prediction of any arrival in random system is not possible. It may be governed by a probability
distribution. Mostly, the number of arrivals per unit time (rate of arrival) is estimated by. Poisson
distribution. The probability distribution of the inter-arrival times, which is the time between two
consecutive arrivals, may also be governed by a probability distribution.
For a given arrival rate ( ), a discrete Poisson distribution is given by:
kx
P (x) = for x = 0, 1, 2, 3,...
x!
where, P (x): Probability of x arrival
x : Number arrivals per unit time
A, : Average arrival rate
1/X : Mean time between arrivals or inter-arrival time.
It can be shown mathematically that the probability distribution of inter-arri-val time is governed by
the exponential distribution when the probability distribution of number of arrivals is Poisson distribution
(Figure 41.4 and 41.5). The corresponding exponential distribution for inter-arrival time is given by:
P (t) = Xe—XI
0.30-

0.25-

0.20—

Probability 0.15—
T
0.10

0.05

771
0 I 2 7 8 9

Figure 41.4 Poisson distribution for arrival time

Probability of service taking

longer than 1 minutes

P(I)=eUt for i
= Average service rate (per minute)
= Service time

Figure 41.5 Exponential distribution for service times

WAITING LINES: QUEUING MODELS 661

(iii) Customer attitude, which may be patient or impatient

(iv) Number of waiting lines that are allowed.
41.4 QUEUE CHARACTERISTICS
The queue may be considered to be limited when its length cannot exceed a certain number. It may be
unlimited or infinite otherwise.
Another characteristic of a queue is its discipline. Queue discipline is the rule by which customers
waiting in queue would receive service. These rules may be:
FIFO: First-In-First-Out
LIFO: Last-In-First-Out
SIRO : Service-In-Random-Order, etc.
For example, in a railway reservation counter, the customer, who enters first in queue, will receive
service prior to other customers joining this queue later. This is a FIFO system.
41.5 SERVICE CHARACTERISTICS
Service system may vary depending upon the number of service channels, number of servers, number
.of phases, etc. A single channel server has one server. A three-phase service means that once an arrival
enters the service, it is served at three stations (or phases) (Figures 41.6 to 41.9).
System

Arrival Queue Lt Departure

Service
after
Facility
service
onm

Figure 41.6 Single channel, single phase system

System
Arrival Queue Departure
after
service

Figure 41.7 Single channel, multiphase (3-phase) system

r

Arrival
Departure
after Service

Figure 41.8 Multichannel, single phase system

662 INDUSTRIAL ENGINEERING AND MANAGEMENT

Service Service
Facility (S1 ) facility (S3) Departure
after
Arrival service

Service SerVice
Facility (Si) Facility (S4)

Figure 41.9 Multichannel, multiphase System

41.6 CUSTOMER BEHAVIOUR

In a queuing model, the behaviour of customer is an important feature. Following three situations may arise:
(i) Balking of Queue: Some customers decide not to join the queue due to their observation related
to the long length of queue, insufficient waiting space or improper care while customers are in
queue. This is balking. Balking, thus, pertains to the discouragement of customer for not joining
an improper or inconvenient queue.
(ii) Reneging of Queue: Reneging pertains to impatient customers. After being in queue for some
time, few customers become impatient and may leave the queue. This phenomenon is called as
reneging of queue.
(iii) Jockeying of Queue: Jockeying is a phenomenon, in which customers move from one queue to
another queue with a hope that they will receive quicker service in the new position.,
Attitude or behaviour of customers is important as balking and reneging represent less of customer.
In many service queues, the management may provide some entertainment, like TV/Video, music, etc.,
so that once a potential customer is around, he may not opt to leave the queue.
44.7 KENDALL NOTATIONS
Kendall (1951) proposed a set of notations for queuing models. This is widely used in literature. The
common pattern of notations of a queuing model is given by:
(alb1c):(dle)
where, a: Probability distribution of the inter-arrival time
b : Probability distribution of the service time
c: Number of servers in the queuing model
d: Maximum allowed customers in the system
e: Queue discipline.
In a queuing model notation, M is traditionally indicative of exponential distribution. Therefore,
(M/M/1): (co/FIFO) indicates a queuing model when the inter-arrival time and service time are distributed
exponential with distribution (equivalent to this: M stands for Poisson arrivals and departures). There
is one server, the permissible number of customers in the system are infinite and the service discipline
is first-in-first-out (FIFO).
41.8 SINGLE-LINE-SINGLE-SERVER MODEL
Queuing models may be formulated on the basis of some fundamental assumptions related to following
five features:
• Arrival process,
WAITING LINES: QUEUING MODELS 663

• Queue configuration,
• Queue discipline,
• Service discipline, and
• Service facility.
Let us understand the M/111/1 model first. Following set of assumptions is needed:
1. Arrival Process: The arrival is through infinite population with no control or restriction. Arrivals
are random, independent and follow Poisson distribution. The arrival process is stationary and in
single unit (rather than batches).
2. Queue Configuration: The queue length is unrestricted and there is a single queue.
3.' Queue Discipline: Customers are patient.
4. Service Discipline: First-Come-First-Serve (FCFS).
5. Service Facility: There is one server, whose service times are distributed as per exponential distribution.
Service is continuously provided without any prejudice or breakdown, and all service parameters
are state independent.
Relevance of This Model: Despite being simple, this model provides the basis for many other
complicated situations. It provides insight and helps in planning process. Waiting line for ticket window
for a movie, line near the tool crib for checking out tools, railway reservation window, etc., are some
dir6ct applications of this model.
Operating Characteristics: It is the measure of performance of a waiting line application. How
well the model performs, may be known by evaluating the operating characteristics of the queue. We
analyze the steady state of the queue, when the queue has stabilized after initial transient stage. Similarly,
we do not consider the last or shutting down stage of the service.
There are two major parameters in waiting line: Arrival rate (X) and service rate (.1.). They follow
Poisson and exponential probability distribution, respectively. When arrival rate (X) is less than service

rate (u.), i.e., traffic density ( p =

— --
X is less than one, we may have a real waiting line situation,
µ
because otherwise there would be an infinitely long queue and steady state would never be achieved.
Following are the lists of parameters:
X a Mean arrival rate in units per period
IA -=-: Mean service rate in units per period
X
p _--7.. — —.. Traffic intensity
11
n .-. Number of units in the system
w = Random variate for time spent in the system.
Following are the lists of operating characteristics, which may be derived for steady state situation
and for p < 1:
Queue Related Operating Characteristics
I. Average line length or expected number of units in queue,
xz
L = = PX ...(41.1)
q
1-1 (P. — X) (II — A.)
664 INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Average waiting time or expected time in queue,

Rig LeP ...(41.2)
X p. — X
System Related Operating Characteristics
1. Average line length or expected number of units in the system,
L5 = Lq + units being served
2
X pX.
X
+ = ...(41.3)
P(µ — X) • P 1-t —
2. Average waiting time or expected time in the system,
Ls 1
WS = = ...(41.4)
X X
3. Utilization of service facility,

U =p ...(41.5)

4. Expected number of units in queue for busy system,

Lb = =n ...(41.6)
—
5. Expected time in queue for busy system,
1
Wb — .441.7)

Probabilities Related Operating Characteristics

1. Probability of no unit in the system (i.e., system is idle),
Po = 1 — p ...(41.8)
2. Probability of system being occupied or busy,
P(n > 0)= 1 — Po = p ...(41.9)
3. Probability of n units in the system,
Pn = Po p" (Geometric distribution) ...(41.10)
4. Probability density function for time spent in the system,
f (w)= (µ — X) e-(1")"' w > 0 ...(41.11)
5. Variance of number of units in the system,

V1, ...(41.12)
(P 202
6. Variance of time in the system,
V= 1 ...(41.13)
s ([1— V
Example 41.1 Arrival of machinists at a tool crib are considered to be distributed as Poisson
distribution with an' average rate of 7 per how: The service time at the tool crib is exponentially distributed
with mean of 4 minutes.
(a) What is the probability that a machinist arriving at the tool crib will have to wait?
WAITING LINES: QUEUING MODELS 665

(b) What is the average number of machinists at the tool crib?

(c) The company made a policy decision that it will install a second crib if a machinist has to wait
at least five minutes before being served. What should be additional flow of machinist to the tool
crib to justify a second tool crib?

Solution: Given X = 7 per hour = 2— = 0.117 machinist per minute

60
1
= — per min = 0.25 machinist per minute
4
0. 117
p=X- = 0.467
1.1 0.25
(a) Probability of no machinists in the queue,
Po = 0.533

Hence, probability of at least one machinist in queue = 1 — Po = 1 — 0.533 = 0.467.

The probability that a machinist has to wait would be the case when there is at least one machinist
already present in the queue, which is 0.467.
X, 0.117
(b) = = 0.875 Machinist.
— 0.25 — 0.117
(c) Let the new arrival rate is XI when the average waiting time is 5 minutes, Since

0.25 (0.25 — XI )
or, 0.3125 — 1.25 = XI
0.3125
or, = = 0.1389 per minute
2.25
= 0.1389 x . 60 = 8.33 machinists per hour.
Example 41.2 At a telephone booth, arrivals are assumed to follow Poisson distribution with
average time of 10 minutes between two calls. The average length of a telephone call is 4 minutes
and it is assumed to be exponentially distributed. Find:
(a) Average number of calls (customers) in the system.
(b) Average number of calls waiting to be served.
(c) Average time a call spends: in the system.
(d) Average waiting time of a call before being served.
(e) Fraction of time .during which booth is empty.
(f) Probability of at least one customer in the booth.
(g) Probability of more than three calls in the system.

Solution: Given: X = 10 = 0.1

666 INDUSTRIAL ENGINEERING AND MANAGEMENT

1
= — = 0.25
4
4
Traffic intensity, p=X— = — = 0.4
1.t 10
X. 0.1
(a) Ls = = 0.667
1.1— X 0.25 — 0.1 =
(0.1)2
(b) LW= = 0.267
0.1 — X) 0.25 (0.25 — 0.1)
1 1
(c) Ws — — X — 0.25 — 0.1 = 6.67
0.4
(10 Wq = 11. — X = 0.25 — 0.1 = 2.67

(e) P0 =1—p=1-0.4 = 0.6

(f) Pn (n > 0) =1—P0 =1— 0.6 = 0.4
(g) Pn (n > 3) = 1 — (Po + + P2 ) = 1 — ( Po + Po p + p2 )
=1—P0 (1+ p + p2 )=1— 0.6 (1+ 0.4 + 0.16)
= 0.064.
Example 41.3 A repair shop is manned by a single worker Customers arrive at the rate of 30
per hour lime required to provide service is exponentially distributed with mean of 100 seconds.
Find the mean waiting time of a customem; needing repair facility in the queue.
Solution: Given; X = 30 per hour
60 x 60
= = 36 customer per hour.
100
Mean waiting time of a customer in the queue,
30
W= = = 0.139 hour
(p. — X) 36 (36 — 30)
= 8.33 minutes.
41.9 MODEL II (M/M/1: N/FIFO)
In this model, the capacity of the queue is limited to N rather than infinity as in earlier model. For
this model,
1—p forX#µ
P0 = 1 p" ...(41.14)
1
for =
N +1
P (n > 0) = 1 — P0 ...(41.15)
= P0 pn for ti N ...(41.16)
WAITING LINES: QUEUING MODELS 667

(N + 1) p"
for X. #
1-p 1— pN+1 ...(41.17)
for A. = p.
N

Lq = L5 — (1 ...(41.18)
L
Lb = q ....(41.19)
— Po
L 1
W= + ...(41.20)
2L(1— PN )

Wq =W5 - 1 ...(41.21)

Wb = ...(41.22)
1— po
When N is co, i.e., the queue length may be infinite, the simplified relations are given in the earlier
model.
41.10 MODEL II (M/11/1/C: oo /FIFO)
41.10.1 Multiple Channel Queuing Model
In this model, more than one server is assumed to provide service. Each service station is assumed to
provide same type of service and is equipped with similar facility for service. The waiting line breaks
into shorter lines, one each for each service station (Figure 41.10).

Service t
Ouu

In

Figure 41.10 Multiple channel queue

There may be two situations:

(a) Number of parallel service stations (C) is greater than or equal to number of customers in the
system (n):
i.e., C>n
For this situation, there will be no queue and thus the mean service rate will be equal to (n µ).
(b) Case when C < n, queue will be formed. For this situation, the utilization factor is given by the
probability that a service channel is being used (pr ). This is the ratio of average arrival rate (A.)
and maximum service rate of all the C channels, which is C times pt. Thus,

(i) =— . 441.23)
1.1C
668 INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Probability of n units in the multichannel system (for n < C),

P Po 0.Sn5_(C —1) ...(41.24)

n!
Probability of n units in the multichannel system (for n> C),

(
Pn= p ...(41.25)
C!C("-`)
(iii) Probability that a service station is idle or waiting for customer = Probability that at least
C customers are present in the system,
xy
IA(
IA
P (n C) = x po ...(41.26)
(c — 1)! (pc — x,)
(iv) Probability of no customer in the system,
1
Po = ...(41.27)
V 1 ( 1 ( XI c [IC
4.
n! µ)1 [C [IC — XI

(v)
x ...(41.28)

L = ...(41.29)
I (C — 1) (1.1C — 202 PO

Ls
ws ...(41.30)

(viii) w 1 ...(41.31)
q x
Example 41.4 A commercial bank has three tellers counter for its customers. The services at
these tellers are exponentially distributed with mean of 5 minutes per_customer. The arrival of customers
is Poisson distributed with mean arrival rate of 36 per how: Analyse the system.
Solution: Given: k = 36 per hour
60
= — = 12 per hour
5

=X_ 36 = j
IA 12
C = 4 tellers
WAITING LINES: QUEUING MODELS 669

1
Po =
ix
14- [C! i) µC —X]

...(41.27)
14. (X) 4. 1(X)2 + 1M3 4. 1 (XII µC
20.1) 601) [4!U.1) µC — ?
[
1
[i 4. 3 + 1 (3)2 _ 1 (3)3 ] 1 0)4 ( 12 X 4 )]
.4
2 6 L 24 12x 4 —36
1
= 0.0377.
1+ 3 + 4.5 + 4.5 + 4.5 + 13.5
(ii) Average number of customers in the queue,
X
X1.1(—
L= Po
q (C —1)! (µC — X)2
36
(36) (12) ( — )4
12
x 0.0377
(4 —1)![(12)4 — 36)12
=1.53
(iii) Average number of customers in the system,

Ls = Lq + = 1.530 + 3 = 4.53
IA
(iv) Average time, which a customer waits in queue,
jc
X
14—
W = 1-1
Po
(C —1)!(µC — X)2
12 (3)4
0.0377
(4 —1)!(12 x 4 — 36)2
= 0.0424 hour = 2.54 minutes.
(v) Average time a customer spends in system,

= + —1
1-t
1
= 0.0424 + — = 0.1257 hour = 7.54 minutes.
12
(vi) Number of hours the tellers' are busy during the 6-day week,

Utilizaton factor, pc = = 36 = 0.75

!AC 12 x 4
670 INDUSTRIAL ENGINEERING AND MANAGEMENT

Hence, if the bank works for 6 days on 6 hours daily basis, the teller is busy for 75% of time;
i.e., 0.75 x 6 x 6 = 27 hours per week.
(vii) Expected number of tellers idle at any p.oint of time.
For this, let us find the probability of no customer (P0), probability of one customer (Pi ), probability
of two customers (P2) and probability of three customers (P3):
Po = 0.0377 (already found earlier)
j,
as PII =
n!

= 77
1 (-
36 )0..0377 = 0.1131
PI 1! 12

= (36 2 0.0377 = 0.1696

2! 12
P = 1 (36
3 0.0377 = 0.1696.
3 —3-1
. 12
Now, when there is no customer, all the four tellers are idle. When there is one customer,, one
teller is occupied while three are idle. Similarly, for two customers, two tellers are idle and for
three customers, one teller is idle.
Thus, expected number of idle tellers
= Po (4) + P1 (3) + P2 (2) + P3 (1)
= 0.0377 x 4 + 0.1131 x 3 + 0.1696 x 2 + 0.1696
= 0.9989.
Thus, on the average 0.9989 or one teller will remain idle at any point of time.

REVIEW QUESTIONS

41.1 Why is the waiting line model important in industrial engineering? Give some examples of waiting line applications.
41.2 Explain the different characteristics of queuing model. How does the customer behaviour effect a queue?
41.3 Explain the Kendall notations for a queuing model.
41.4 (a) For a railway marshalling yard, it is observed that the goods train arrives at a rate of 30 trains per
day and the service time for the train is 36 minutes. Assume that the inter-arrival time follows exponential
distribution and service time is distributed as exponential distribution. Find:
(i) Expected queue size
(ii) Probability that the queue size exceeds 10.
(b) What will happen, if due to rush season, the arrival of trains increases to 33 per day?
[Ans: (a) 3 trains, 0.06; (b) 5 twins, 0.2].
41.5 For a single server queue with Poission's arrival exponential service, the mean arrival rate is 3 calling units
per hour and expected service time is 0.25 hour. The maximum permissible number of calling units in the
systems is two. Find the steady-state probability distribution of the number of calling units in the system.
Also find expected number in the system.
[Ans: pn = 0.43 (0.75)"; Po = 0.431, LS = 0.81].
WAITING LINES: QUEUING MODELS 671

41.6 Two girls are deputed on a sales counter of a super market. Service time for each customer is exponential
with mean of 4 minutes and arrival of customer is a Poisson function with mean of 10 per hour. Calculate:
(a) Probability of having to wait for service
(b) Expected ideal time for a sales girl
(c) Expected length of waiting time.
[Ans: 0.17; 67%; 4.5 minutes].
41.7 A factory has a tool crib where mechanics come to check out special tools needed for the completion of
a particular task' assignment to them. A study is made of the time between arrivals and of the time required
for service. Both distributors are found to be adequately described by the negative exponential. The average
time between arrivals was found to be 50 seconds. Determine the waiting line length, waiting time and the
percent of the' idle time of the attendant. If the attendant is paid Rs. 2/- per hour and the mechanics are
paid Rs. 4/- per hour, what policy or service should be established? What cost function should be minimised?
When will a multi-channel single phase situation arise? [IAS Mains. Exam; 1995]

REFERENCES

1. Budnick,•F.S., Mc Leavey, D. and Mojena, R., 1996, Principles of Operations Research for Management
and Ed., Richard D. Irwin Inc. Illinois.
2. Cooper, R.B., 1980, Introduction to Queuing Theory, 2nd Edn., Elsevier-North Hulland New York.
3. Gupta, M.P. and Sharma, J.K., 1995, Operations Research for Management. National Publishing House,
New Delhi.
4. Hiller, F.S. and Lieberman GJ., 1974, Introduction to Operations Research, 2nd Ed., San Francisco, Holden-
Day, Inc.
5. Levin, R., and Kirkpatrick, 1975, Quantitative Approaches to Management, McGraw Hill. New York.
6. Moore, P.M., 1958, Queue. Inventories and Maintenance, John Wiley & Sons, New York.
7. Ozan T., 1986, Applied Programming for Engineering and Production Management. Prentice Hall, New Jersey.
8. Rao, S.S., 1978, Optimization—Theory and Applications, Wiley Eastern, New Delhi.
•
9. Rao, K.V., 1986, Management Science. McGraw Hill, Singapore.
10. Saaty, T.L., 1961, Elements of Queuing Theory with Applications, McGraw Hill, New York.
I1. Seisaini, M.A., Yaspan, A. and Friedman, L., 1959, Operations Research: Methods and Problems, New York.
12. Shogan A.W., 1990, Management Science. Prentice Hall.
13. Taha, H.A., 1971, Operations Research: An introduction. McMillian Publications Co. Inc., New York.
14. Wagner, H.B., 1975, Principles of OR, NJ, Prentice Hall.
672 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 SIMULATION

42.1 INTRODUCTION
Simulation is a widely used quantitative procedure in which a process is described by a model of reality
and then a series of organized experiments are conducted to predict the behaviour of the model over
a period of time. Simulation is, thus, the laboratory experimentation of reality for determining the effect
of a number of alternative policies without disturbing the real system. A laboratory imitation of the reality
is at the core of the simulation process.

Simulation is the use of quantitative system model that has the designed characteristics of
reality in order to produce the essence of actual operation by developing a series of organized
experiments to predict the behaviours of the process over a period of time.
.1•11•Iri CISE El

To understand the process of simulation, let us understand the process of testing the design of
an aeroplane. The aerodynamics of aircraft movement in air is not only very complex but it is critical
to human life. For testing, a common practice is to use a wind-tunnel. High speed wind is flown through
a wind-tunnel and a model aircraft is kept in front of tunnel. The effect of various forces, like drag
and lift, are measured to ascertain the type of physical simulation. In mathematical simulation, quantitative
models are designed to perform a series of large number of experiments.

42.1.1 Purpose of Simulation

1. Many situations are difficult to be modeled into conventional mathematical models such as linear
programming, integer programming, etc. Sometimes, the approximation of real life parameters may
not be desirable. In these cases, simulation is an effective way to model and analyse the situations.
2. Simulation may 13:'; cost effective as compared to real experimentation.
3. Sometimes, the observation of real system is impossible, as it is not yet implemented. The analysis
of a manufacturing-system design through simulation is widely used before implementing the actual
system.
4. Simulation provides modeling flexibility. Various parameters may be changed and various combinations
of parameters may be evaluated.
5. Simulation provides the ease in modeling the system.
674 INDUSTRIAL ENGINEERING AND MANAGEMENT

6. Simulation provides a faster mode of evaluating the system. Many computer-based simulation models
can evaluate the performance of the system in few hours. For the real life observations, many years
are needed.
7. Simulation may be designed to have the graphic capability and on-screen display potential. For
example, in few simulation packages of manufacturing system such as QUEST, WITNESS, etc.,
the colour of a machine changes as soon as there is a failure of machines. This gives an immediate
indication to the observer regarding the status of the system.
8. Simulation is normally associated with large observations over a period of time. Many inputs to
the system may contain a statistical distribution. For example, arrival of parts to a machine may
be treated as coming from a normal distribution.
Simulation may have the capability to analyse the results in the statistical terms.
9. Simulation is a useful way to draw customer attention about the system performance. It also provides
customer support.
10. Sometimes, the operation and observation of the system in a particular situation may be too dangerous
or disruptive. In these cases, simulation is a good way to analyse the system's behaviour.
11. Many times, simulation may be the only way to. solve. In such situations, use of mathematical
model or real life system is just impossible.
12. Simulation is useful to judge the system's behaviour in a controlled environment. This, is important
when effect of changes in few parameters needs to be observed.
13. Simulation provides a better understanding of the system.
14. Simulation is a useful teaching ,tool when there is a time limitation for working on a real system
for many years and cost of procuring and handling the real system is too high.
15. Simulation is helpful in giving new insights of a complex system with facility to undertake
wide experimentation in relatively lesser time. Wide experience may be developed in lab setting.

42.1.2 Limitations of Simulation

1. Generally simulation models are not precise and exact replication of reality. It is, therefore, not
an optimizing tool. It is a descriptive tool.
2. Simulation requires large number of experimentations or runs under a given set of conditions. Any
deviation in these conditions may not justify the simulation results. Therefore, each simulation model
provides a unique solution.
3. With increase in parameters, simulation becomes very complex to the model.
4. An effective simulation model is very expensive to develop. For example, if we develop a corporate
planning model or selection of an FMS system, it may take years to develop a reasonable model.
5. Management has to generate all the options, constraints and conditions, which are necessary to
evaluation. Simulation does not generate any condition on itsown. For example, different sequencing
rules for a job-shop scheduling, such as earliest due-date, shortest processing time etc. have to
be specified by the management in selecting the best option. This also requires the logic behind
these rules and their implications on the system-model.

42.2 MONTE CARLO SIMULATION

Monte Carlo simulation is useful when same elements of a , stein, such as arrival of parts to a machine,
etc., exhibit a chance factor in their behavior. Experimentation on probability distribution for these elements
is done through random sampling. Following five steps are followed in the Monte Carlo simulation:
SIMULATION 675

Procedure of Monte Carlo Simulation

1. Decide the probability distribution of important variables for the stochastic process.
2. Calculate the cumulative probability distributing for each variable in Step 1.
3. Decide an interval of random numbers for each variable.
4. Generate random numbers.
5. Simulate a series of trials and determine simulated value of the actual random variables

42.3 STEPS IN SIMULATION

The general steps in a simulation process are:
1. Define the system and identify the problem, which is intended for simulation.
2. Formulate the model for this system/problem.
3. Test the model; compare the behaviour of the model with the actual problem and its environment.
4. Identify and collect the data needed to test the model. If needed, decide the randonmess of the
input parameter. Also select the random number generator, if needed. Decide number of experiments,
period of run and methodology.
5. Run the simulation. Repeat for a nunter of experiments or, for a period of time.
6. Analyse the simulation results, obtained in the simulation runs.
• If required, modify the simulation model and repeat the runs. This may be needed, if same
inconsistency is observed.
7. Validate the simulation. This is needed for increasing the chances that the inferences and conclusions
drawn about the real system are closer to reality and are also valid.
Table 42.1 Random Number Table

1581922396 2068577984 8262130892 8374856049 4637567488

0928105582 7295088579 9586111652 7055508767 6472382934
4112077556 3440672486 1882412963 0684012006 0933147914
7457477468 5435810788 9670852913 1291265730 4890031305
0099520858 3090908872 2039593181 5973470495 9776135501
7245174840 2275698645 8416549348 4676463101 2229367983
6749420382 4832630032 5670984959 5432114610 2966095680
5503161011 7413686599 1198656795 0414294470 0140121598
7164238934 7666127259 5263097712 5133648980 4011966963
3593969525 0272759769 0385998136 9999089966 7544056852
4192054466 0700014629 5169439659 8408705169 1074373131
9697426117 6488888550 4031652526 8123543276 0927534537
2007950579 9564268448 3457416988 1531027886 7016633739
4584768758 2389278610 3859431781 3643768456 4141314518
3840145867 9120831830 7228561652 1267173884 4020651657
0190453442 4800088084 1165628559 5407921254 3768932478

(Cont d...)
676 INDUSTRIAL ENGINEERING AND MANAGEMENT

6766554338 5585265145 5089052204 9780623691 •2194448096

6315116284 9172824179 5544814339 0016943666 3828538786
3908771938 4035554324 0840126299 4942059208 1475623997
5570024586 9324732596 1186563397 . 4425143189 3216653251
2999997185 0135968938 7678931194 1351031403 6002561840
7864375912 8383237368 1892857070 2323673751 3188881718
7065492027 6349104233 3382569662 4579426926 1513082455
0654683246 4765104877 8149224168 5468631609 6474393896
7830555058 5255147182 3519287786 2481675649 8907598697
7626984369 4725370390 9641916289 5049082870 7463807244
4785048453 3646121751 8436077768 2928794356 9956043516
4627791048 5765558107 8762592043 6185670830 6363845920
9376470693 0441608934 8749472723 2202271078 5897002653
1227991661 7936797054 9527542791 4711871173 8300978148
5582095589 5535798279 4764439855 6279247618 4446895088
4959397698 1056981450 8416606706 8234013222 6426813469
1824779358 1333750468 9434074212 5273692238 5902177065
7041092295 5726289716 3420847871 1820481234 0318831723
3555104281 0903099163 6827824899 6383872737 5901682626
9717595534 1634107293 8521057472 1471300754 3044151557
5571564123 7344613447 1129117244 3208461091 1699403490
4674262892 2809456764 5806554509 8224980942 5738031833
8461228715 0746980892 9285305274 6331989646 8764467686
1838538678 3049068967 6955157269 5482964330 2161984904
1834182305 6203476893 5932802079 3445280195 3694915658
1884227732 2923727501 8044389132 4611203081 6072112445
6791857341 6696243386 2219599137 3193884236 8224729718
3007929946 4031562749 5570757297 6273785046 1455329704
6085440624 2875556938 5496629750 4841817356 1443167141
7005051056 3496332071 5054070890 7303867953 6255811190
9846413446 8306646692 0661684251 8875127201 6251533454
0625457703 4229164694 7321363715 7051128285 1108568072
5457593922 9751499574 1799906380 1989141062 5594364247
4076486653 8950826528 4934582002 4071187742 1456207629

Example 42.1' (Simulation of a Waiting Line or Queuing System).

A service station has one service channel. Based on the observations, following information is
derived:
Mean arrival rate = 6.2 min.
. Mean service time = 5.5 min.
SIMULATION 677

Probability distributions of arrival and service times are:

Arrival (min) Probability Service Time (min) Probability

3 0.4
4 0.2/
5 0.35
6 0.25
7 0.11
8 0.04
3 0.1
4 0.2
5 0.4
6 0.25.
7 0.05

Simulate the queuing system.

Solution: Probability distributions for arrival and service times are as follows:
Inter-arrival Probability Cumdlative Probability,
r=1
Time t (min) (Pi ) E( Pt)
1=1
0.04 0.4
4 0.21 0.25
5 0.35 0.60
6 0.25 0.85
7 0.11 0.96
8 0.04 1.00

Service Time Probability Cumulative Probability

t (min) (P1 ) .E(Pt)
1=1
3 0.1 0.1
4 0.2 0.3
5 0.4 0.7
6 0.25 0.95
7 0.05 1.0

1.0

0.8

Cumulative 0.6
Probability
of inter-arrival time
(min) 0.5

0.2

3 4 5 6 7 8
Inter-arrival Time (min)

Figure 42.1 Cumulative Probability Distribution of Inter-arrival Time

678 INDUSTRIAL ENGINEERING AND MANAGEMENT

1.0

0.8

0.6
Cumulative
Probability
of Service
0.5
Time

0.2

3 6 7

Service Time (min)

Figure 42.2 Cumulative Probability Distribution of Service Time

Next step is to assign a tag to the random numbers.

(a) Assigning random numbers to inter-arrival time:

Cumulative Probability Assigned Random Inter-arrival time

• Value for Inter-arrival Time Number (min)

0.04 00 to 03 3
0.25 04 to 24 4
0.60 25 to 59` 5
0.85 60 to 84 6
0.96 85 to 95 7
1.00 95 to 99 8.

(b) Assigning random numbers to Service time:

Cumulative Probability Assigned Random Service time

Value for Service Time Number (min)

0.1 00 to 09 3
0.3 10 to 29 4
0.7 30 to 69 5
0.95 70 to 94 6
1.0 95 to 99 7

Let us assume now that the waiting time problem starts at 8 AM and continues for 20 arrivals.
An arrival is served immediately if the server is free; otherwise, it waits in a queue. The queue discipline
is: first-come-first-served basis.
Now, we have to select a series of random numbers. For this Table 42.1 may be referred. Any
two digits in a row are selected. Two digits, just below this row, are selected (i.e., in the same column).
SIMULATION 679

These are the first two random numbers. The process is repeated till total number of observations are
exhausted. Since both inter-arrival time and service time are determined by random numbers, we select
two series of random numbers.

Schedule the
Select two Schedule the Schedule the Start
t_..... Completion of First
Random Numbers First Arrival of Service
Service

Advance C'lock to
Next Event

Arrival

Record Service
Select R. No. Completion
time

Schedule
Next Arrival
_Yes

No Yes Print

Stop
Record Select R.No.
Arrival Time
in Waiting
Line Select R. No.
Schedule
Service
Schedule
Service Start
Time

Record Service
completion
Time

Figure 42.3 Flow Chart of a Waiting Line Simulation

680 INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 42.2 Worksheet for Simulation of the Queuing Problem

Arrival Random Inter-arrival Arrival Service Random Service Service Waiting Time Queue
Number Number Time (min) Time Starts at Number Time (min) Ends Length
at (min) For For
Sever Customer
1 05 4 8.04 8.04 20 4 8.08 0.04
2 09 4 8.08 8.08 72 6 8.14
3 41 ' 5 8.13 8.14 34 5 8.19 0.01 1
4 74 6 8.19 8.19 54 5 8.24 -
5 00 3 8.22 8.24 30 5 8.29 0.02 1
6 72 6 8.28 8.29 22 4 8.33 0.02 1
7 67 6 8.34 8.34 48 5 8.39 0.01 -
8 55 5 8.39 8.39 74 6 8.45 -
9 71 7 8.46 8.46 76 6 8.52 0.01
10 35 5 8.51 8.52 02 3 8.54 - 0.01 1
11 41 5 8.56 8.56 07 3 8.59 0.02
12 96 8 9.04 9.04 64 .5 9.09 0.05
13 20 4 9.08 9.09 95 7 9.16 - 0.01 1
14 45 5 9.13 9.16 23 4 9.20 0.03 I
15 38 5 9.18 9.20 91 6 9.26 0.02 I
16 01 3 9.21• 9.26 48 5 9.31 0.05 1
17 67 6 9.27 9.31 55 5 9.36 0.05 1
18 63 6 9.33 9.36 91 6 9.42 0.03 1
19 39 5 9.38 9.42 40 .5 9.47 0.04 1
20 55 5 9.43 9.47 93 6 9.53 0.04 I

Total 101 0.13 0.33 12

Average waiting time of customer before service

Customer waiting time
Number of arrivals
0.33
= = 0.0165 min = lsecond
20
Average length of waiting line
Number of customers in queue
Number of arrivals
12
= - = 0.6
20
Total service time 01
Average service time = = .1- 5.05 min .
Number of arrivals 20
SIMULATION 681

Average idle time for the server

Total waiting time of server
Number of arrivals
0.13
= x 60 = 0.39 second
20
Average time, a customer spends in the system
= Average service time + Average waiting time
= 5.05 + 0.0165 = -5.0665 min.

42.4 SUMMARY
Simulation is a very effective approach for the design or analysis of industrial system or plant and processes
or services. It is more effective for situations that do not support modeling through optimization or other
conventional tools for analysis. Many softwares are available in market for simulation of a large-size system.

42.5 GENERAL PURPOSE SIMULATION SYSTEM (GPSS)

GPSS is a simulation language which stands for General Purpose Simulation System. It mainly deals
with non-standard queueing system. In reality, one may come across many sub-systems of business organizations
or public systems, which can be modeled as queueing systems. But the difficulty of using high-level
languages is that they take longer development time for many real-life systems. GPSS simulation language
is aimed at providing subroutines for each and every module of any queueing system. These subroutines
are called as blocks in GPSS (Table 42.3). The generalized sequence of items in each block is as represented
below.
<Block number> <Location> <Operation> <Operands (4, B, C, D, E)>
Table 42.3 Basic Set of GPSS Blocks

Name of the Block Purpose

Generate It introduces customers (transactions) into the system (i.e., computation
of CAT).
Queue and Depart The Queue block adds customers into the queue and depart block
removes customers from the queue, and the usage of these two Blocks
updates the following: CTU, TLCQ and QL.
Seize and Release These two blocks pertain to single-server model. The Seize block checks
the status of the server and if the server is free, the incoming customer
of the first customer in the queue or the customer with higher priority
is selected for service. The release block makes the server free as soon
as the service on the present customer is over. These two blocks jointly
update the following: ST, SCT and CST.
Storage, Enter and Leave These three blocks are jointly used under parallel servers situation. The
Storage block defines the number of servers (C). The Enter block
is equivalent to the seize block in single-server model, and the Leave
block is equivalent to the release block in the single-server model. These
blocks will update the folloing: ST, SCT(I), CST and MSCT.
Terminate This block removes the customers (transactions) from the system.
Transfer Blocks There are different types of Transfer blocks. These blocks are used
to transfer transactions (customers) to non-sequential blocks based on
certain conditions.
682 INDUSTRIAL ENGINEERING AND MANAGEMENT

Generate Block: This block can be thought of a door through which the customers. A GPSS program
can have any number of Generate blocks. The symbol for the GENERATE block is as shown in Figure 42.4.
The syntax for the, Generate block is:
Generate A, B, C, D, E.

Generate
A, B, C, D, E

Figure 42.4 Generate block

Table 42.4 GPSS Operand

Operand Significance Default value

A Average inter-arrival time Zero

B Half of the range over which the inter-arrival time is uniformly distributed Zero
C Offset interval This open
not used
D Limit count (maximum number of transactions allowed into the system) Infinite
E Priority level (higher the number, higher the priority) Zero

Table 42.5 Generate Block Illustration

Example Explanation
Generate 40, 5, 7, 500, 1 Mean inter-arrival time = 40
Half of the range = 5
Off-set interval = 7
Maximum number of transactions allowed = 500
Priority of the customers = I
Generate 30, 8, 2, Mean inter-arriaval time = 30
Half of the range = 8
Off-set interval = 0
Maximum number of transactions allowed = infinite
Priority of the customers = 2
•
Queue and Depart blocks: Queue block allows the transaction that is entering in it. Later, it checks
the server status. If the server is busy, the transaction is held in this block itself; otherwise, the Depart
block moves the transaction into the next Seize/Enter block. In this process, the necessary data for computing
the statistics on the queue will be updated. The symbols for Queue and Depart blocks are shown in
Figures 42.5 (a) and (b) respectively. The details of the operands of the above two blocks are summarized
in Table 42.6.
SIMULATION 683

(a) Que ie block (b) Depart block

Figure 42.5 Symbol of Queue and Depart block

Table 42.6 Operands of Queue and Depart

Block Operand Significance Default value

Queue A Name of the queue Error
B Size of the bulk arrival 1
(quantum of increase in the queue content)
Syntax: Queue A, B
Depart A Name of the queue Error
B Size of the bulk of transactions moving out of 1
the queue (quantum of decrease in the queue content).
Syntax: Depart A, B

Terminate Block: Whenever a transaction moves into a Terminate block, it is removed from the
system. The Terminate block always accepts incoming transactions. A GPSS program can have any number
of Terminate blocks.
The symbol which is used to represent the Terminate block is shown in Figure 42.6.

Figure 42.6 , Symbol of Terminate block.

The Terminate block has only 'A' operand and it represents the value by which the termination
counter is to be decreased whenever a transaction passes through it. Also, this is called as termination
counter decrement. The default value of this operand is 1. The syntax of this block is:
Terminate A: In addition to removing transactions from the model, the Terminate counter helps
to control the simulation run time with the help of Start command as shown below. The following GPSS
programming segment is known as timer segment. The Start command is to initiate the simulation run
and its argument (operand) carries the initial value of the termination counter. The simulation run will
be stopped whenever the value of this counter is reduced to zero.
684 INDUSTRIAL ENGINEERING AND MANAGEMENT

Generate 400
Terminate I
Start 1: As per the above timer segment, at exactly 400 minutes, a transaction will be introduced
into the model. When it passes through Terminate block, the termination counter (argument of Start)
will be decreased by the value of the Terminate block (1) As a result, the termination counter value
(argument of Start) will be reduced to zero and hence the simulation will be shutdown at 400 minutes.
Seize and Release blocks. Seize and Release blocks are used to fetch/engage and then release/disengage
a server (facility), respectively.
The entry of the incoming transaction into the Seize block is only conditional. This is equivalent
to asking: Is SCT = BIG? If the facility is free, then the incoming transaction will move into the Seize
block and immediately it will enter into Advance block where the amount of service time and related
details are updated. So, the stay-over time of the transaction in the Seize block is just a point of time.
If the facility is not free, the transaction will be held in the previous block and it waits for its turn.
The details of waiting will be updated in the Queue and Depart pair of blocks.
The Release block sets the facility free and it acts as a bridge to transfer the transaction to some
block beyond its location. So, the transactions which are attempting to enter the Release block are always
accepted into it and immediately they are moved into some succeeding blocks.
The symbols used for Seize and Release blocks are shown in Figures 42.7 (a) and (b), respectively
and operands in Table 42.7.

(a) Seize block (b Release block

Figure 42.7 Symbols for Seize and Release blocks

Table 42.7 Operands of Seize and Release

Block Operand Significance Default value

Seize A Name of the facility of be seized Error
Release A Name of the facility to be released Error

Advance Block: The Advance block computes the service time and updates related details for..
computing percentage utilization of the facility. This block always accepts incoming transactions. The
symbol used for the Advance block is shown in Figure 42.8.

Advance
A, B

Figure 42.8 Symbol of Advance block

SIMULATION 685

Enter, Leave and Storage Blocks: Consider the case of a banking system with two or more counters
providing service in parallel. Under this situation, Enter, Leave and Storage blocks are jointly used to
manage data on facilities. The Enter block and Leave block of the parallel servers model SIC similar
to the Seize block and Release block of the single server model, respectively. The Storage block defines
the number of the facility and the name of the facility which is used in the. Mter and Leave blocks.
The block diagrams' of the Enter block and the Leave block are shown in les 42.9 (a) and (b),
respectively.

(a Enter block 04 Leave block

Figure 42.9 Symbol of Enter and Leave block

Table 42.9 Operands of Enter and Leave

Block Operand Significance Default value

Enter A ' Name of the facility Error

to be seized
Leave A Name of the facility Error
to be released

The details of the operands of the above blocks are summarized in Table 42.9.

REVIEW QUESTIONS

42.1 What is simulation? Explain its purpose. List different advantages and limitations of simulation.

42.2 Why is simulation needed? When should it be used? Is it an optimization tool? Give reasons.

42.3 What is Monte Carlo Simulation? Explain the procedure involved.

42.4 What is the general methodology of simulation? Why is it necessary to use random numbers in simulation?

42.5 Simulate a waiting line with mean arrival rate of 6 minutes and mean service time of 5 minutes. The probability
distribution for arrival and service time is, observed to follow the following patterns:

Arrival Time (min.) 3 4 5 6 7 8

Probability 0.02 , 0.2 0.4 0.3 0.I 0.08

Service Time (min.) 3 4 5 6 7

Probability 0.1 0.2 0.4 0.28 0.02

•
686 INDUSTRIAL ENGINEERING AND MANAGEMENT

42.6. Simulate an inventory control system, for which the demand and lead time probability distributions are given
below:

Demand per Week

(In thousand) 0 1 2 3
Probability 0.1 0.4 0.3 0.2

(1 Time (Weeks) 2 3 4
Probability 0.25 0.4 0.35

The cost of placing the orders is Rs. 50 per order while carrying cost is Rs. 2.1 per thousand items. The
inventory policy that needs to be simulated states that whenever the inventory level touches or falls below
2000 items, the order is placed for the number of items that equal the difference between the present inventory
level and maximum replenishment level of 4000 items.
Assume opening balance of 2500 items in-stock; allow no back-orders; place order at the beginning of the
week following the drop in inventory level to the reorder point. Specify any other assumptions that you
incorporate in the simulation.

REFERENCES

1. Bleuel, W.H., 1975, "Management Science's Impact on Service Strategy", Interfaces, Vol. 6, No. 1, Part 2,
pp. 4-12.

2. Boulden, James B., 1975, Computer-Assisted Planning Systems. McGraw-Hill, New York.

3. Christy, D.P., and Watson HI, 1983, "The Application of Simulation: A Survey of Industry Practice". Interfaces,
Vol. 13, No. 5, pp. 47-52.

4. Davis, Otto A., and Frederick H. Rueter, "A Simulation of Municipal Zoning Decisions", Management Science.
Vol. 19, No. 4, Part 2, pp. 39-77.

5. Ernshoff, J.R., and R.L., 1970, Season. Design and Use of Computer Simulation Models, MacMillan,
New York.

6. Fourre, James P., 1970, Quantitative Business Planning TechniqueS. American Management Association, Inc.,
New York.

7. Gibbs, GI., 1974, Handbook of Games and Simulation Exercises, Sage Publications, Beverly Hills, Calif.

8. Huinburg, Morris, 197Q, Statistical Analysis for Decision Making, Harcourt, Brace, New York.

9. Hillier, F.S., and Lieberman GS., 1975, Introduction to Operations Research, 2nd Ed., Holden-Day, San Franscisco.

10. Jennings, John B., 1973, "Blood Bank Inventory Control", Management Science, Vol. 19, No. 6 (February),
pp. 637-645.

11. Kiviat, P.J., Villaneuva R., and Markowitz H.M., 1969, The Simscript II Programming Language, Prentice-
Hall, Englewood Cliffs, New Jersey.

12. Law, A.M., and Kelton W.O., 1991, Simulation Modeling and Analysis. 2nd Ed., McGraw Hill, New York.

13. Meier, Robert C., William T Newell, E:n d Harold L. Pazer, 1969, Simulation in Business and Economics,
Prentice-Hall, Englewood Cliffs, New Jersey.
SIMULATION 687

14. Naylor, Thomas H., and Hosrt Schauland, 1977, "A Survey of Users of Corporate Planning Models", Management
Science, Vol. 22, No. 9 (May), pp. 927-37.
15. Naylor, T.H., et. al. 1966, Computer Simulation Techniques, John Wiley & Sons, New York.
16. Schreiber, Thomas J., 1974, Simulation Using GPSS. Wiley, New York.

17. Soloman, S.L.,, 1983, Simulation of Waiting Lines, Prentice-Hall, Englewood Cliffs. New Jersey.
18. Watson, H.J., 1981, Computer Simulation in Business, John Wiley & Sons, New York.
19. Watson, Hugh J., 1973, "Simulating Human Decision Making", Journal of Systems Management, Vol. 24,
No. 5 (May), pp. 24-27,
20. Wheelwright, Steven C, and Spyros G. Makridakis, 1972, Computer-Aided Modeling for Managers, Addison-
Wesley, Reading, Mass.
688 INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 43
INDUSTRIAL ENGINEERING:
, BEGINNING OF A NEW DAWN

43.1 INTRODUCTION
The chapter which is titled 'Industrial Engineering: Begining of a New Dawn' is deliberate. As a discipline,
Industrial Engineering is at the hub of transition. At the onset of twenty first century, industrial engineers
are facing a lot many new challenges than ever before. This is mainly because of two reasons. Firstly,
there is a sudden transformation in the business/service scenario due to emergence of information-technology
(IT) inputs. Many old rules and terminologies of previous years are giving ways to new IT-enabled business
paradigms. We will have a closer look on IT-enabled business later in this chapter. Another reason that
has been causing transition is related to the emergence of new strategies to handle the business. Flexibility,
agility, quick-response-manufacturing, lead time reduction, customer-focus, ERP, e-business (e-biz), life
cycle costing, customization of product/services, globalization of business, setup-time reduction, uncertainty
and fluctuations in environmental forces and focus on core competencies, are just a few indicative terms
that will dominate the industrial engineering scene in days-to-come.

43.2 Changing Faces of Industrial Engineering (IE)

Information Technology (IT) is transforming the way people work, communicate, and learn. This transformation
has motivated us to probe important questions about how people and organisations will operate as IT:
• blurs the boundaries organisations, markets, industries and communities
• changes the nature of work, coordination and production
• shrinks the barriers of space, time, complexity, flexibility, reuse and agility
• redefines the notion of intelligence and knowledge
• expends the conventional role of computer aided business-activities beyond the sole purview of
software or hardware experts.
There are quite a few articles, regularly appearing in the contemporary journals about the changes
needed in Industrial Engineering (IE) curriculum. For example, Kuo and Deuermeyer (1998), Buzacott
(1984), Roy (1967), etc. provide some insights into things that are changing in IE curriculum. The classical
IE definition by IIE in 1955 was challenged in Roy's report and Buzzacot's paper.
690 INDUSTRIAL ENGINEERING AND MANAGEMENT

HE in 1955 about IE (Traditional one)

Industrial engineering is concerned with the design, improvement, and installation of integrated
systems of men, materials, and equipment. It draws upon specialized knowledge and skill
in the mathematical, physical, and social sciences together with the principles and methods
of engineering analysis and design, to specify, predict, and evaluate the results to be obtained
from such systems.

R.H. Roy's report in 1967 about IE

The objective of IE education is to prepare the students in the quantitative, economic, and
behavioral ingredients and processes of analysis and synthesis in design and decision making.

Industrial Engineering, in recent years, is far lacking in developing newer concepts, though it is
quick to adopt many concepts and changes in modern manufacturing processes. Some of these areas
that have developed outside the academic domain of IE are (Kuo and Deumermeyer, 1988):
• Pull system, JIT
• Single-item processing
• Continuous improvement
• Bottleneck management
• Supply chain
• "Jonah" programs of Goldratt (Theory of constraints)
• Deemphasis on cost accounting
• Taguchi method, etc.
More recently, many developments have appeared in industrial scene due to the fast changing IT
sector. Many "dot-corn" companies have appeared. The business paradigm is in 'the lane of a major
change. This is due to- e-factors such as: e-business, e-education, e-learning, e-biz, ERP, e-com, e-payment,
etc. The business, through the internet, will-open-up newer definition and scope of supply-chain that
is now more attractive due to features that are web-enabled. The learning in IE must incorporate the
e-culture such as:
• ERP
• e-biz
• e-learning
• e-commerce
• e-procurement
• e-payment and e-banking
• e-care (for customer, employee and business partner)
• e-marketing (personalized marketing for customer).
Automation and evolving shift in manufacturing strategy have further created a scope for defining
the new IE-curriculum, that incorporates issues such as:
• Flexibility
• Agility
INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN 691

• Time-based competition
• Competitiveness
• Low cost/price
• Quality, features and reliability for customer satisfaction
• Volume change and uncertainty and delivery °
• Product development, customization, etc.
• Integration issues: Supply chain, value chains, ERP
• Automation, FMS, Computer Integrated Manufacturing, cellular manufacturing
• Lean production, JIT, etc.
• IT-enabled business: e-commerce
• Customer relationship Management (CRM) in the web-enabled business, etc.
At Texas University, USA in A&M IE Dept. in 1994, new role industrial engineer. (Kuo and Deuermeyer,
1998) was defined as follows:

New 'Role of Industrial Engineer (1994)

The industrial engineer plans, designs, implements, and improves systems consisting of a network
of processes through which objects or information flow and undergo transformation. These
activities are undertaken for the long-term benefit of the firm or organization.

The new role of Industrial Engineer is due to three recently evolved industrial expectations:
1. Changes in traditional manufacturing system (Table 43.1). First fifteen items in this Table are from
Kuo and Deuermeyer, 1999.
2. Changes due to evolution of interne (Table 43.2).
3. Need of Industrial Engineer to assume the role of change agent (Figure 43.1).

Table 43.1 Differences between Traditional and world-class and IT-enabled manufacturing

S. No. Issues Traditional World-class and IT-enabled

1. Focus Internal External (on the customer and supplier)

2. Flexibility and agility Low High
3. Organizational Functional hierarchical Team-oriented
4. Lot sizes Long runs, economic order Small batch/lot size
quantity (EOQ)
5. Set-up times High Low
6. Quality focus Factory inspection Prevention, total quality
7. Product development Fragmented Integrated
8. Supervision Directive Working team leader
9. Information system Accounting-driven Business needs-driven
10. Inventory Fewer than three times More than 10 turns (Towards JIT)
11. Push pull Push Pull
12. Vendor Many (adversarial) Few partnerships yet closely connected
13. 1E role Traditional Change agent
14. Accounting Centralized Activity based
(Contd...)
692 INDUSTRIAL ENGINEERING AND MANAGEMENT

S. No. Issues Traditional World-class and IT-enabled

15. Subjects More mechanical-oriented Technology and software driven
16. Task Task specialization Task integration
17. Manager Individual expertise Cross functional team
18. Functional Optimize individual function of Optimize the entire organisation and
departments organisation external as one unit (supply chain)
19. Presence Local, shop-floor Global partnership
20. IT role Insignificant Highly dominating with e-commerce
21. Payment Cash/checks Cashless, e-banking, on-line negotiation
22. Expertise of managers Manufacturing management IT-managenient
in related area
23. Decision making Hierarchical Done in field
24. Processes Linear, sequential processes Non-linear, parallel processes
25. Organisation Functional organizations Networked organizations
26. Production Mass production Mass customizations
27. Customer Customer as target Customer as partner
28. Thinking Supply side thinking 'Demand side thinking
29. Focus Focus on efficiency Focus on effectiveness
30. Market Mass marketing via advertisement Target 1 : I interactive marketing in web
31. Catalogue Paper catalogue Electronic catalogue
32. 1E Main role Management control Management coordination
33. Driver Driven by machinery Driven by computers, network, e-business

Table 43.2 Evolution of the Internet (1969L2000)

1969: The Defense Department of USA commissions ARPANET to research computer networking. Later in the
year, the first nodes of the'system go on-line at UCLA Stanford Research Institute (SRI) and the University
of Utah.
1971 : Fifteen individual nodes of ARPANET go on-line thus, joining, 23 computers.
1972: Operators create the first email program to send and receive messages across the network. Norway and
England become the first international connections to ARPANET.
1975 : Usenet newsgroups are established between Duke University and University of North Carolina in USA.
1982 : The Transmission Control Protocol and Internet Protocol (TCP/IP) are approved as the communications
standard for ARPANET. This leads to the first definition of an "Internet" as a connected set of network
using TCP/IP.
1983 : Desktop workstations come into being.
1984 : Number of computers on ARPANET breaks 1,000.
1986 : The National Science Foundation at USA creates the NSFNet backbone on ARPANET(56 KB), and establishes
five supercomputing centers to provide high-speed computing power for all users. Cleveland Freenet comes
on-line and offers free, public access.
1987 : Number of computers on ARPANET breaks 10,000.
1988 : First business begins to connect to the system for research purposes.
1989 : Number of computers on ARPANET breaks 1,00,000. First email relay begins between a commercial online
service (CompuServe) and the ARPANET through Ohio State University.
1990: ARPANET creases to exist. The network is now officially referred to as the Internet.
(Contd..)
INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN 693

1991 : WAIS and gopher/Internet search and navigation tools, are released by Thinking Machines Corporation
and the University of Minnesota, respectively.
1992 : World Wide Web, a hyperlinked interface to the Internet, is released by a Swiss research network. Number
of computers on the Internet breaks one million. NFSNet relaxes its restriction on commercial network
traffic. By the end of the year, half of all Internet traffic is commercial in nature. First audio multicast
(March), and video multicast (November) real-time broadcast of video and audio via computers connected
to the Internet.
1993 : Stephen King becomes the first author to publish a short story on the Internet. First books about using
the Internet for business appear. Business and media take an interest in the Internet as the number of users
climbs above 14 million. Mosaic, graphical WWW browsing software, is released. Use of the Web proliferates
by more than 30,000 percent.
1994 : U.S. Congress brings its Internet server on-line. Shopping malls, advertising, and mass marketing surface
on-line.
1995 : • IBM, Microsoft and Oracle join Sun in proclaiming their "grand strategy" for network computing.
• In August, VSNL, begins to give internet connections in India.
1998 : Sabeer Bhatia sells Hotmail.com for $100 million to Microsoft.
• International venture capital firms starts financing the start-up in India.
1999 : • Many business firms puts paper for e-com ventures in India.
• Internet Service Providers (ISP) business is opened for private sectors in India. More than 175 firms apply.
• More than 23,000 India-centric sites on horizon.
• Internet users crosses one million in India.
• Software export exceeds Rs. 10,000 Cr. in India.
2000: US President visits to India. IT hype gets momentum.

Continuous
Improvement

Figure 43.1 Industrial Engineer as a change agent

The overall impact of the transition is visible on industrial sectors. Organisations are getting redefined
in many ways. Structure-wise, these are flatter and less hierarchical in an information-intensive age. Objective-
694 INDUSTRIAL ENGINEERING AND MANAGEMENT

wise, these are adopting to new work-culture due to globalization, liberalization and flexibility, Industrial
Engineering has to play a major a role in the process of transformation (see Figure 43.1). The three
key-routes of transformation are:
• Continuous Improvement: Gradual, TQM-route
• Benchmarking: Best-in-class route
• Reengineering: Radical, fundamental, dramatic change-route.

43.3 SOME CONTEMPORARY TRENDS

43.3.1 Organisation Trend
1. Network, information intensive
2. Knowledge management: key issue
3. Virtual organisation and management through web-enabled network
4. Large business 20 years hence will resemble a hospital or symphony orchestra more than a typical
manufacturing company (Drucker 1988):
• Cross-functional teams of knowledge specialists.
• Decision making in the field.
• Parallel rather than sequential processes.
• Management role is to coordinate, not control.
• Focus on effectiveness (meeting customer needs) than efficiency.
• Greater role of information and IT.
• Unpredictable environment, shorter product cycles.
• Global markets and suppliers.

Keys to success: New thinking, new processes, new behaviours!

• Extended enterprise: integrated value chain.

• A "win-win" combination of key players along the supply chaim.
• Dynamically integrates supply and demand streams.
• Optimizes value and cost across the entire chain.
• Creates new value propositions for customers innovative business models.
• Frequent reorganisations and not exceptionally stable structure

• Supply Chain: All activities involved in sourcing, producing, distributing and delivering products
from raw materials to end-users.
• Value Chain: All internal and external processes that add value to a product or service (Michael
Porter, 1985).
• Integrated Value Chain: An integration and enhancement of all internal and external processes
to increase product value to customers (Figure 43.2).
• New Business Ecosystem: An interacting community of business partners under a single,
leveraged brand to reach customers via the internet.
INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN 695

Supply stream Demand stream

Suppliers Raw Finished Sales Distribu-

of Suppliers Purchasing materials Production goods and tors and R.
suppliers inventory, Inventory marketing markctin
M

Demand-based planning
I I I I I I I I I
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Figure 43.2 Integrated Value Chain

43.3.2 Technology Trend

1. Connectivity is cheap, universal.
2. Dynamic two way interaction supported by the web.
3. Greater quality with lower price; many products are free (computers are given free by many
e-biz companies in western world).
4. Ramp growth of internet.
5. New portals, efficient search engine.
6. In-built expert software on net (BOTS) and intelligent agents that capture user's behaviour related
to preferences, etc.
7. Low fixed costs; rampant competition.
8. Fast spread of new technology.
9. Digital convergence of product, platform and network.
10. Interfaces on web is very personalized.
11. Secure transactions on net.
12. Data mining/OLAP/Data-warehousing.
13. Web-based standardisation of business processes.
14. Electronic-data interchange (EDI) is the norm.
15. Image technology is an operational necessity.
16. Digital signature and fire-wall for security on net.
17. Distributed work but linked through information/IT network.
696 INDUSTRIAL ENGINEERING AND MANAGEMENT

18. Location independent work-sites.

19. Standardisation in electronic business.
·20. Easy integration of back office and database and core-business/manufacturing.
21. Automation on shop-floor, Robotics, etc.
22. Computer integrated/flexible manufacturing.
23. Business is integrated from supplies to customer.
43.3.3 Other Trends
1. Customized production (rater than mass production)
· 2. Global sourcing (rather local purchase)
3. Agile manufacturing with flexibility
4. Extranet
5. Integrated logistics
6. Customer relationship management, CRM (rather than custo·mer seryice) ·
7. Vendor managed inventory
8. Build to order (rather than build to stock)
9. Value chain integration (rather than supply chain manag�ment)
10. Demand planning (rat_her than forecasting)
11. Strategic partners (rather than vendors)
12. Demand-based inventory control (rather than warehouse management)
13. Online electronic catalog (rather than annual catalog)·
14. Data mining (rather than customer research)
15. Use innovation as competitive advantage (leverage human capital)
16. Deliver value to _customer tltro�gh product/service differentiation
17. Build· customer loyalty and CRM
18..Knowledge management (rather than MIS)
19. Leverage information and technology
20. Exploit: .Innovation-knowledge-integration-speed-CRM.

-IBM's e-Business Strategy: New Role Model

• Four Goals ar� identified (transform, enhance, help, educate):
• to help IBM transform itself for the e-business era.
� to enhance business unit's effectiveness in using Internet/intranet, both internally and with
customers.
• to help customers conduct e-bus.iness with IBM.
• to educate customers on e-bus_iness potential and help them transform for the new economy.
• Key initiatives that will follow are:
• e-commerce: Sell goods/services via the web
• e-care (for customers, employees, and business partners): Online customer support, decision
support, ·operational ·processes, communication, etc. CRM is the key here
• e-procurement: Streamline and improve the tendering process
• e-marketing: Personalized marketing for customers.
INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN · 697

43·.4 WHAT IS THE FUTURE FOR' INDUSTRIAL ENGINEERING (IE}?

· Industrial Engineering will undergo some changes in years to come. This will be mainly because of emerging
expectations, such as:
(a) Change agent (for both manufactur;ng and services)
(b) New business scenario with web-enabled business (e-biz)
(c) Integration, such as: supply chain, value chain, integrated value chain, new business ecosystem and ERP
(d) High automation, computer integrated_ and flexible manufacturing
(e) Knowledge management
(/) Data mining (rather than conventional way of customer· research)
(g) 1Customer Relation. Management as one of the focal issues in e-biz
(h) New Product development, quality function deployment and mass customization.
43.5 SUMMARY
It is; therefore, important for the key personnel in IE to adopt the changes in autoMation, computerization
and e-biz model. It is expected that Industrial Engineering will adopt more and more IT-enabled, customer­
specific, integrated and eco-fr��ndly models to manage manuf�cturing and se..:Vices.

REVIEW QUESTIONS\\

43.1 What is the role of industrial engineer in new, information intensive business?
. 43.2 Select one computer-b�sed 'technology, give all overview of the technology and describe the current trends
for the technology that is relevant for Industrial Engineers.
....
43.3 Select an emerging technology and evaluate if in terms of the different dimensions of technology success.
43.4 Why is it important to· understand the trends in an emerging technology?
43.S Describe some of the changes taking place ih t1'e telecommunications industry and how these
• changes will
impact the introduction of new technologies. ·

43.6 It has been stated that the US is best at creativity, Japan excels at innovation and India excels in both.
Do you agree or disagree? Justify your answer. Be sure to define, compare and contrast creativity and innovation.
43.7 What can an organization do to provide a creative environment for Industrial Engineer? Give some specific examples.
43.8 R�ad the following and suggest the role of Industrial EngineJr (if any):
(a) All aerospace company ' which wants to modify the desiJn of the next generation
' of aeroplane
· to be
• more efficient
(,b) A large, information technology company which has been producing hardware and software since the
80's
.
(c) An automobile manufacturer who wants to remain competitive by offering an }nnovative .product
(d) Managing a group of senior technologist (typically 50 years of age or older)
(e) A university which wishes to improve its recruiting and reienti<;m
(f) E-biz firm that deals with consumer durables
�) .A new d·ot-com. company looking for new business areas
(h) Firm dealing with developing portals, web-sites, etc.
(i) Internet service provider (ISP) firm
698 INDUSTRIAL ENGINEERING AND MANAGEMENT

(j) Computer integrated manufacturing industry

(k) Consultancy firm dealing with layout, reengineering, etc.
(/) ERP-consultancy tirm.

REFERENCES.

I. Buzacott, J.A., 1984, The Future of Industrial Engineering as an Academic Discipline, IIE Transactions, 'March
1984.
2. Engineering Education for a Changing World: A Joint Project by the Engineering Deans Council and the
Corporate Roundtable of the American Society for Engineering Education, 1994.
3. Kuo, W, and Deuermeyer, B., 1998, IE2: The IE Curriculum Revisited, IE Solutions, June ·t 998, 16-22.
4. NSF Engineering Coalition, National Science Foundation, Pr�ject # EEC.:._9221460, 1993-98.
5. Roy, R.H., et. al., 1967, T-he Curriculum. in i'ndustrial Engineering1 Journal offndustrial Engineering, September
1967.
6. Shankar, R. and Jaiswal, S., 1999, Enterprise Resource Planning, Galgotia Publications, New Delhi.
 44
HUMAN RESOURCE MANAGEMENT AND
HUMAN RESOURCE PLANNING

44.1 HUMAN RESOURCE MANAGEMENT

Human Resources are the most important resource of any organization. Human resources mean the people
who work in the organization. People are vital for the effective operation of any company. To meet
the challenges and competitive atmosphere of today's business environment, managers must recognize
the potential of human resources, and then acquire, develop and retain these resources. This forms the
basis of human resource management (HRM). Human Resource Management (HRM) is concerned with
the "people" dimension of management. Every organization is made up of people, attain their services,
developing their skills, motivating them to give high levels of performance, and ensuring that they continue
to maintain their commitment to the organizational objectives; Human Resource Management has a key
role in the running of the organization. Human Resource Management (HRM) includes a variety of activities,
and key among them is deciding what staffing needs you have and whether to use independent contractors
Human Resource
Planning

Recruitment
Staffing
Selection

Traini ig and
Development

k
Performance
Appraisal

Compensation

Figure 44.1 Human Resource Management activities

700 INDUSTRIAL ENGINEERING AND MANAGEMENT

or hire employees to fill these needs, recruiting and training the best employees, ensuring they are high
performers, dealing with performance issues, and ensuring your,personnel and management practices conform
to various regulations. In general it is the function within an organization that focuses on recruitment
of, management of, and providing direction for the people who work in the organization. The various
activities in a HRM can be diagrammatically depicted in Figure 44.1.
• Growing Importance of HRM: The success of organizations increasingly depends on people-embodied
know-how-the knowledge, skill, and abilities imbedded in an organization's members. This knowledge
base is the foundation of an organization' core competencies (integrated knowledge sets within an organization
that distinguish it from its competitors and deliver value to customers).
HRM plays important role in creating organizations and helping them survive. Our world is an
organizational world. We are surrounded by organizations 'and we participate in them as members, employees,
customers, and clients. Most of our life is spent in organization, and they supply the goods and services
'on which we depend to live. Organizations on the other hand depend on people, and without people,
they would disappear.
To achieve the objectives of the management activities-like planning, organizing, leading, and controlling
activities take place. Human Resource Management deals with issues.related to people such as compensation,
hiring, performance management, organization development, safety, wellness, benefits, employee motivation,
communication, administration, and training. The model that provides the focus of various activities was

Human Resource
Areas
Outputs:
Focus:
us: Ass
Assuring I
"Pens,dr • Quality Work life.
ion and bet
faimess and • Productivity.
letits
consistenc • Readiness for
y
change.

Figure 44.2 Nine human resource areas

HUMAN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING 701

developed by the American Society for Training and Development shown in Figure 44.2, which identified
nine human resource areas like:
1. Training and development
2. Organisation and development
3. Organization/Job design
4. Human resource' planning
5. Selection and staffing
6. Personnel research and information systems
7. Compensation/Benefits
8. Employee assistance
9. Union/Labour relations.
The nine areas found in the HRM model can be divided with the spokes of the wheel. The HRM
function and HRD profession have undergone tremendous change over the past 20-30 years. Many years
ago, large organizations looked to the "Personnel Department," mostly to manage the paperwork about
hiring and paying people. Now the organizations consider the "HR Department" to play a key role in
staffing, training and helping to manage people so that people and the- organization are performing at
maximum capability in a highly fulfilling manner. So, Human Resource Management can be defined as
a process consisting of the acquisition, development, motivation, and maintenance of human resources
as shown in Figure 44.3. It is the art of getting activities done with and through other people.

Resource Demand Forecasting Resources Supply Forecasting

Long Range . Current Inventory
I. Strategic plans 2. Productivity levels
2. Demographics 3. Turnover rate
3. The economy 4. Absenteeism lute
4. Technological trends 5. Movemen among jobs rate
5. Social trends
Short Range
1. Production Schedules/Budgets
a. Time series
b. Ratios
c. Work standards
2. Affirmative action/Equal
Employment Opportunity
(EEO) Goals
3. Relocations/Plant Closings

Human Resource Actions

I. Hiring
2. Training
3. Career management
4. Productivity program
5. Reduction in force

Figure 44.3 Human Resource Management activities

Human Resource Planning: For any successful industry, planning its resources and activities are
important. It is true for the Human resources als HR planning is the process of determining future
702 INDUSTRIAL ENGINEERING AND MANAGEMENT

human resource needs relative to an organization's strategic plan and devising the steps necessary to
meet those needs. It involves estimating the size and composition of the future work force. This helps
the organization to acquire the right number and the right kind of people when they are needed. As
outlined in Figure 44.4, HR planning can be logically divided into three parts:
1. Forecasting manpower demand,
2. Forecasting manpower supply, and
3. Human resource actions.
Forecasting manpower demand involves assessing how many people will be required in the organization
.in the future and what abilities the workforce are required to possess in order to enable the organization to
be in operation and achieve the goal. Several factors need to be considered while forecasting the manpower
demand which is illustrated in Figure 44.4. The factors can be both long range as well as short-range.
The expected growth of the organization, budgetary constraints, and the introduction of new technology
are some of the important factors that need to be considered while forecasting manpower • demand.
Forecasting manpower supply is self-explanatory. Like any other resource, human resources are
subjected to erosion. Employees leave the organization for a wide variety of reasons, and there needs
a replacement. The management has to explore both internal and external sources of supply for such
replacement needs.

Acquisition
• Human resource planning
• Recruiting
Internal
--- External
• Employee socialisation

Maintenance Development
• Safety and health External • Employee training
• Employee/Labour influence • Management development
relations • Career development

Motivation
• Jobs Design
• Performance evaluation
• Rewards
• Job evaluation
• Compensation/Benefits
• Discipline

Figure 44.4 Human Resource Planning (Source: Edwin B.Flippo)

Human resource actions are followed after the estimation of demand and supply. The managers
must take steps to balance the two. The matching of projected human resource needs with projected
availability of human resources provides the basis for undertaking various actions to ensure that supply
will equal demand at the time specified (Table 44.1).
HUMAN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING 703

Table 44.1 HR Actions based on Demand and Supply Forecasting

Situation Demand for Manpower Supply of Manpower HR actions

1. Low Low I. Need to pay attention to organizational planning
2. Training and development of manpower if industry
growth and change in demand is expected in the future
2. Low High I. Prepares plans for growth and expansion
2. Outplacement of employees
3. Layoff excess manpower
4. Demote certain personnel
5. Early retirement of employees
3. High Low 1. Internal promotions
2. Training and development of manpower
4. High • High 1. Offer competitive pay package

Staffing: Staffing is a part of the HRM process and plays an important role. Staffing involves
a set of activities aimed at attracting and selecting individuals for positions to facilitate the achievement
of organizational goals. The two basic steps of staffing are recruitment and selection. It is a systematic
attempt to implement the human resource plan by recruiting, evaluating and selecting qualified candidates
for job positions in the organization, placing the right man at right place at right time. Recruitment involves
finding and attempting to attract candidates who are suitable for filling the job vacancies. The tools
used for the recruitment process are job analysis, job description, and job specification. Once candidates
are attracted to the job position, the qualified people are sorted to fill the positions through the selection
process. Several selection processes are used like preliminary screening, application blank, selection test,
comprehensive interviews, etc.
Training and Development: Training is formally defined as a planned effort to improve the performance
of the employee in his area of work. Training is usually undertaken for new recruits as well as for existing
manpower. The new recruits and the existing work force require improved skills in order to advance
in the organization. The organization is also benefitted with this. Employees at all levels-managerial,
technical and operative-will require some training at some point of time in their careers. Although the
objectives, methods, and course or program contents often differ, the basic principles of teaching/learning
are the same.
Performance Appraisal: Performance appraisal compares an individual's job performance against
standards or objectives developed for the individual's position. The performance appraisal process involves
defining the expectations for employee performance, measuring, evaluating and recording employee performance
against these expectations, and providing the employee with feedback regarding his performance, The
main objective in performance appraisal is to influence and improve the employee performance and development
in a positive way. When the performance is high, the individual is likely to be rewarded (a hike in
pay or a promotion). If performance is low, some corrective action (such as additional training and development)
might be arranged to make the performance meet the desired standards.
Compensation: Compensation means the wages paid directly to the employees for the amount of
time worked or the number of units produced. It includes both monetary and non-monetary benefits that
an employee receives as part of his employment relationship with the organization. Wages paid for time
worked (or number of units produced) are typically payments made in the form of cash and reflect direct
work-related remuneration such as basic pay, merit increases, or bonuses.
 704 - INDUSTRIAL ENGINEERlf',;(, AND MANAGEMENT,

44.1.1 Factors Contributing to the Growing Importance of HRM

Accommodation to workers' needs: Workers are demanding that organizations accommodate their personal
needs by instituting such programs as flexible work schedules, parental -leave, child-care and elder-care
. assistance, and job sharing. The human resource department plays a central role in establishing and implementing
policies d�signed to reduce the friction between organizational demands and family responsibilities.
Increased complexity of the Manager's job: Management has become an increasingly complex
and demanding job for many reasons, including foreign comretition. new t_echnology, expanding scientific
1
inf01mation, and rapid change. Therefore , organizations frequently ask human resource managers for-assistance­
. in making strategic business decisions a�d in matching the 'distinctive competencies· of the firm's human
resources to the mission of the organization. Executives need assistance from the human resource department
in matters of recruitment, performance evaluation, compensation, and ci'iscipline.
Legislation and litigation: The enactment of state laws has contributed enormously to the proliferation
and importance of human resource functions. The record keeping and reporting requirements of the laws
are so extensive that to comply with them, many h�man resource departments must w�rk .countless hours
and often must hire additional staff. Four .areas that have been influenced most by le'gislation include
equal employment, Compensation, safety, and labor relations. An organization's failure to comply with
laws regulating these areas can result in extremely costly back-pay awards, class action suits, and I_>enalties.
Consistency: Huinan resource policies help to maintain consistency and equity within an organization.
Consistency is partic'ularly important i� compensation and promotion decisions. W hen managers make
compensation decisions without consulting the human resource department the salary structure tends to
become very uneven and unfair promotion decisions also may be handled unfairly when the HR department
does not ,mordinate the decis10n of -individual manger.
Expertise: Now a days there exist sophisticated personnel activities that require special expertise.
For e_xample, rese'archers have developed complex procedures for making employee-selection decisions;
statistical formulas that combine interviev,s, test scores, and application-blank information have replaced
the subjective interviews traditionally. used in making selection decisions. Similarly, many organizations
have developed compensation systems with elaborate benefits packages to replace simple hourly pay or
piece rate incentive systems.
Cost of Human Resource: Human resource activities have become increasingly important because
of the high cost of personal problem. The largest single expense in most organizations is labor cost,
which is often considerably higher than the necessary because of such problems as absenteeism, tardiness
and discrimination.
Why are we concerned with HRM?
Helps you to get results-through ,others: Different managerial techni-ques help mangers to direct
the performance of employees in desirable· direction in order to achieve the organizati9nal objectives.
Through the efforts of others working in· an organization, managers get things done that require effective
human resource management.
Helps you to avoid common personnel mistakes: Qualified HR mangers µtilize organization resources
m such a way that helps to avoid common personnel mistakes like the following:
• Hiring the wrong person for the job
• Experiencing high turnover.
• Finding employees not doing their best
• Having your company taken to court because of your discriminatory actions
• Having your company cited under federal occupational safety laws for unsafe practices
HUMAN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING 705

• Allowing a lack o� training to undermine your depar�ent's effectiveness

• Committing any unfair labor practices.
Helps you to gain Competitive Advantage: Among all the resources possessed by the organizations
it is only Manpower or the Human resources that create the real difference. Because all organizations
can have the same technology, they can possess same type of financial resources, same sort of raw material
can be used to produce the goods and services but the organizational �ource that can really create the
difference is work force �f the organization. Therefore they are the main sources of innovation creativity
in the organizations that can be used as a competitive advantage. In toJay's competitive environment,
these are the people who can create competitive advantage for the organizations.
The world aroui1d us is changing. No longe� can we consider our share of the "good Life'' given.
If we are to maintain some semblance of that life, we as individual, as organizations, as society will ·
have to fight actively for it an increasingly competitive global enyironment: If organizations ate able
to mange its work force efficiently/effectively this will be beneficial for all stakeholders (Organization, ..
Employees and Society). Challenges/Issues of Managing Human Resources in present era.
Following are the main issues that are faced by the mangers to manage the workforce of today's
organization for achievement of objectives:
• To Attract Pe.ople: People will be intereste·d to join any organization -if it is providing them quality
working environment, attractive benefi_t and opportunities to excel in future. Keeping in view ,the
opportunities in the market, the first issues will be to attract good peo'ple for your organization.
• To Develop People: Development is related to provide the opportunities for training and development
to match the skills to_ job in particular areas. It requires careful need assessment for training and
selecting effective training methods and tools. After attracting/selecting, continuous development
of workforce of the organization leads towards development of the organization, so that they ,viii
start playing their imp011ant role in the organization.
• To Motivate: Motivation means to influence performance of others and to redirect the effmts in
desirable direction by using different motivational tools that can help in fulfilling the mission of
organization. Third important issues/concern will be to keep your workforce motivated so that they
should keep on de!ivering effectively.
• To Keep Talented People: This is related to retention of workforce in organization and �o take
steps that can prevent undesirable detachments of talented and motivated workers from the organization.
44.2. ORGANIZATIONAL BEHAVIOUR
· People can be mbre productive· when working in groups than working alone. What managers can do
and what cannot do while managing people, organizations and society. is the niyths of management.
Basic pwpose of the working or existenc� of orga11izatio·11 is:
(a) Link_ individuals into relationships
(b) Allocate the tasks to fulfill the objective
(c) Allocate authority to perform individual tasks
(d) Coordinate the objectives and activities of separate units
(e) Facilitate the flow of work.
Organizational Behavior: Organizational _behavior is concerned specifically with the actions of
people at work. Managers need to develop their interpersonal or people skills if they are· going to be
effective in their jobs. Organizat'ional behavior (OB) is a field of study that investigates the impact that
individuals, groups,. and strncture have on behavior within an organization, and then applies that knowledge
706 INDUSTRIAL ENGINEERING AND, MANAGEMENT

to make. organizations work more effectively. Specifically, OB focuses on how to improve productivity,
reduce absenteeism and turnover, and increase employee citizenship and job satisfaction. We all hold
generalizations about the behavior of people. Some of our generalizationi- may provide valid insights
into human behavior, but many are eirnneous. Organizational behavior uses systematic study to improve
predictions of behavior that would be made from intuition alone. Yet, because people are different, we
need to look at OB in a contingency framework, using situational variables to moderate cause-effect
relationships. .
Organizational behavior addresses some issues that are not obvious; such as informal elements.
It offers both challenges and opportunities for managers. It recognizes differences and helps managers
to see the value of workforce diversity and practices that may need to change when managing in different
situation and countries. It can help improve quality and employee productivity by showing managers
how to empower their people as well as how to design and implement change programs. It offers specific
insights to improve a manager's people skills. In times of rapid and ongoing change, faced by most
managers today, OB can help managers cope in a world of "temporariness" and learn ways to stimulate
innovation. Finally, OB can offer managers guidance in creating an ethically healthy work environment.

44.2.1 Goals of Organizational Behavior . .

1. The emphasis will be on employee productivity, reduce absenteeism, and turnover.
2. Organizational citizenship-a fourth type of behavior becoming important in determining employee
performance.
3. Attitudes are evaluative statements-favorable or unfavorable-concerning objects, people, or events.
4. An attitude is made-up of three components: cognition, affect, and behavior.
5. The cognitive component consists of a person's beliefs, opinions, knowledge, and information held
by a person.
6. The affective component of an attitude is the emotional, or feeling, segment of an attitude.
7. The behavioral component of an _attitude refers to an intention to behave in a certain way.
_8. The three most important job-related attitudes are: job satisfaction, job involvement, and organizational
•
cornnlitment.
Basic OB Model: The basic OB model suggests study of the organization at·following three levels:
1. Organization
2. Group
· 3. Individual.
The purpose of understanding organizations from all three levels (individual, group, and "rganization)
is to develop a well-rounded view that ·will prepare us for the challenges that managers face in today's
business environment. Focusing on the individual level allows us. to understand individual differences,
perception, motivation, and learning. Focusing on the gl'oup level shows us how more than two people
can work together in groups or teams within an organization. Focusing on the organization level allows
us to see the effects of the organizational environment, technology, strategy, structure, and culture.
44.2.2 Individual
Individuals are important units of any organization. If we understand the behavior of individuals, we
can predict the outcomes; it will become easy to manage the behaviors of individuals in desira?le directions.
We have to look at three individual variables namely biographical characteristics, ability, and learning.
Biographical characteristics are readily available to managers. Generally, they include data that are
contained in an employee's personal file. The most important conclusions are that, age seems to have
,
HUMPN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING 707

no relationship to productivity; older workers and those with longer tenure are less likely to resign; and
married employees have fewer absences, less turnover, and report higher job satisfaction than do unmarried
employees. But what value can this information h·,ve for managers? The obvious answer is that it can
help in making choices among job applicants. Ability directly influences an employee's level of performance
and satisfaction through the ability-job fit. Given management's desire \o get a compatible fit, what can
be done? First, an effective selection process will improve the fit. A job analysis will provide information
about jobs currently being done and the abilifies that individuals need to perform the jobs adequately.
Applicants can then be tested, interviewed, and evaluated on the degree. to which they possesi;;
the necessary abilities. Second, promotion and transfer decisions affecting individuals already in the
organization's employ should reflect the abilities of candidates. With ne,v employees, care should be
taken to assess critical abilities that incumbents will need in the job and to 'match these requirements
with,the organization's human resources. Third, the fit can be improved by fine-tuning the job to better
match an incumbent's abilities. Often modifications can be made in the job that while not having a significant
impact on the job's basic activities, better adapts it to the specific talents of a given employee. Examples
would be to change some of the equipment used or ·to reorganize tasks within a group of employees.
A final alternative is to provide training for employees. This is applicable to both new workers and
present job incumbents. Training can keep the abilities of incumbents current or provide ne\X· skills as
times and conditions change.
Any observable change in behavior .is prima facie evidence that learning_ has taken place. What
we want to do, of course, is ascertain if learning concepts provide us with any insights that would al1_ow
us to explain and predict behavior. Positive reinforcement is a powerful tool for modifying behavior.
By identifying and rewarding performance-enhancing behaviors, management increases the· likelihood that
they will be repeated. Our knowledge about learning further suggests that reinforcement is a more effective
tool than punishment. Although punishment eliminates undesired behavior m9re quickly than negative
reinforcement does, but punished behavior tends. to be only temporarily suppressed rather than permanently
changed. Punishment may produce unpleasant side effects such as lower morale and higher absenteeism
or turnover. In addition, the recipients of punishment tend to become resentful of the punisher. Managers, ·
therefore, are advised to use reinforcement rather than punishment.. Finally, managers should expect that
employees would look to them as models. Managers who are constar.tly late to work, or·take two hours
for lunch, or help themselves to company office supplies for personal use should expect employees to read
the message they are sending and model their behavior accordingly. Individual differences do �ot dictate
people's behavior: Instead, they limit a person's behavioral range, making some behavior easier than others.
44.2.3 Group
A group is defined as two or more · interacting and interdependent individuals who come together to
achieve particular objectives.
Types of Groups
(a) Formal groups are work groups established by the organization and have designated work assignments
and established tasks. The behaviors in which one should engage are stipulated by and directed
toward organizational goals.
(b) Informal groups are of a social nature and are natural formations. They tend to form around friendships
and common interests.
Why do People Join Groups?
There is no ·single reason why individuals join groups.
1. Security reflects a strength in numbers.
708 INDUSTRIAL ENGINEERING AND MANAGEMENT

• The group helps the individual to feel stronger, have fewer self-doubts, and be more resistant
to threats.
2. Status indicates a prestige that comes from belonging to a particular group.
• Inclusion in a group viewed as important provides recognition and status.
3. Self-esteem conveys people's feelings of self-worth.
• Membership can raise feelings of self-esteem-being accepted into a highly valued group.
4. Affiliation with groups can fulfill one's social needs.
• Work groups significantly contribute to fulfilling the need for friendships and social relations . .
5. One of the appealing aspects of groups is that they represent power.
• What often cannot be achieved individually becomes possible through group action.
• Power might be desired to protect themselves ji·om. unreasonable demands.
• Informal groups additionally provide opportunities for individuals to . exercise 'power.
6. Finally, people may join a group for goal achievement.
. • There. are times when it takes more than one person to accomplish a particular task.
· • There is a need io pool talents, knowledge, or power in order to get a job completed.
Group Roles
1. The concept of rol�s applies to all employees in organizations and to their life outside the organization
· as well. ·
2. A role refers to a set of expested behavior patterns attributed to someone who occupies a give�
position ih a social unit.
3. Individuals play multiple roles. ·
4. Employees attempt to determine what behaviors are· expected of them.
5. An individual who is confronted by divergent r.ole expectations experiences role conflict.
·6. Employees _ in organizations cifte� · face such role conflicts.
Following are the different types of group roles:
1. Task-oriented roles
2. Relationship-oriented roles
3. Individual roles.
Task-oriented roles
• Initiator-Contributors
• Information seekers/providers.
Relationship-oriented roles
--... � • Encouragers
• Harmonizers.
Individual roles
• Blockers
• Jokers. ,_
Characteristics of a Well-functioning, Effective Group: A group is considered effective if it is having
following characteristics.
HUMAN Ri;SOURCE MANAGEMENT AN0 HUMAN RESOURCE PLANNING 709

(a) Relaxed, comfortable, informal atmosphere

(b) Task to be performed are well understood and accepted
(c) Members listen well and participate in given assignments
(d) Clear assignments made and accepted
(e) Group aware of-its operation and function
(f) People express feelings and ideas
(g) Consensus decision making
(h) Conflict and disagreement center around ideas or method.

44.2.4 Team
'A team is a mature group with highly indep�ndent members who are completely committed to a common
goal. All teams 'start o�t as groups, but not a�l groups become teams. The elements that distinguish teams
from groups are:
• full commitment by members to a common goal and nuss1on
• interdependent
• mutual accountability.
• shared leadership
• trust and a collaborative culture, arid ·
• achievement of synergy.
Differentiating Groups -and Teams: Groups and teams are different. All teams are groups, but
a group is not always a team. A team is always distinguished by the fact that its members are committed
to a common purpose, . a set of performance goals, and an approach for which they hold themselves
mutually accountable. A group is defined as two or more persons who are interacting with one another
m such a manner that each person influences and is influenced by each other· person.
Types of Tea1i1s
Organizations use four types of teams, whic_h differ acc.ording to the complexity of their task and
the fluidity of their membership.
1. Self-managed Teams
2. Cross Departmental Team
3. Quality Circles
4. Virtual Teams.
Self-Directed/managed Work Teams: A self-managed work team is a fonnal group of employees
who operate without a manager and are responsible for a complete work process or segment that delivers
a product or service to an external or internal customer. This kind of team has control over its work
pace, detennination of work assignments, etc. .Fully self-managed work teams even _select their own members
and evaluate performance.·
As a result, supervisory positions take on decreased importance and may even be eliminated.
Cross Departmental Team: Cross-departmental teams work on sirppler tasks, and their membership
fluidity is high, which means that members come and go over time. Process teams, which address complex
tasks, have highly fluid membership.
Problem solving Team: Problem solving also known as Quality circles, which are simple work
teams, consist of eight to ten volunteers from a common work area who meet to find solutions to specific
 710 INDUSTRIAL ENGINEERING AND MANAGEMENT

· problems about the quality of work processes, products, or services. Quality circles have a clear and
specific focus on qual_ity improvement within a single work unit. They meet regularly and have limited
power to implement their ideas. Organizations can establish quality circles without making major organizational
changes, because they operate in parallel to the rest of the structure.
Virtual Teams: A virtual team is an extension of the electronic meetings; virtual team allows groups
tc meet without concern for space or time and enables organizations to link workers together that in
the past couldn't have been done. Team members use technology advances to solve problems-even though
a.
they may be geographically dispersed or dozen time zones away.
Process Teams
Today's team-based organizations rely mainly on process teams, which do not have departmental
�ffiliation but function independently to undertake broad organizational-level process improvements. In
many cases; organizations that implement process teams then partially or totally disband their traditional
departments. Self-managed teams (SMTs) are process teams of employees who have full managerial control
over their own work. Functioning without outside supervision, they have the power to manage their own
work and to implement their own decisions.
A team leader within the SMT provides internal facilitation to remove work obstacles and obtain
needed resources. As a team, members coordinate and cooperate with other teams and individuals who
are affected by their decisions and activities. Using SMTs requires a total change in organizational structure;
not surprisingly, lack of commitment. is the common reason for failure.
Making Teams Effective through Team Building: Team building-activities _aimed at improving
the internal work and relationship processes of team requires attention to both task and interpersonal
relationships: In team building, organizations apply the principles of group dynamics to select complementary
members, suppo1t more cohesion, manage stages of group development, and establish constructive nonns
that foster high performance. Membership in teams is based on expertise in areas that are necessary·
for task accomplishment. The shamrock team combines a core of permanent members with part-time
members and outside subcontractors.
Turning Individuals in to teams: Productive teams require careful selection, training, and management.
Guidelinesfor building effective teams include: seek employee input; establish urgent, demanding performance
standards; select members for skill and skill potential; pay special' attention to first meetings and actions;
set clear rules of behavior; move from "boss" to "coach;" set a few immediate performance-ori.ented
tasks and goals; challenge the group regularly with fresh facts and information; use the power of positive
feedback; shoot for the right team size; choose people who like teamwork; and train, train, train.
44.3 HUMAN RESOURCE PLANNING (HRP)
To understand the Human Resource Planning first, we will see what is Planning? and why is _if needed?
What is planning?
Plans are methods for achieving a desired result. Goals or objectives are specific results you want•
to achieve. �Janning is thus "the process of establishing objectives and courses of action prior to taking
action." ·
What is planning concerned · with?
Planning provides a sense of purpose and direction. It is a comprehensive framework for making
. decisions in advance. It also facilitates the organizing, leading, and controlling functions of management. .
Planning: allows you to make your decisions ahead of time; it helps you to anticipate the consequences
of various courses of action; it provides direction and a sense of purpose; _it provides a unifying framework
against which to measure decisions, and thus helps you avoid piecemeal decision making. Planning also
. ,HUMAN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING 711

helps identify potential opportunities and threats, and facilitates control. It is concerned with the end
(what is to be done) as well as with means (h�w it is to be done).
Is planning really needed?
If organizations never faced changes in the environment, there would have been no need for planning.
Planning _is one of the functional areas of HR.
· 44.3.1 Strategic Planning and the Human Resource Planning Process
Strategic Planning: It is the process by which top management detennines overall organizational purposes
and objectives · and how they are to be achieved.
Human Resour�e Planning (HRP): It is the process of systematically reviewing.human resource
requirements to ensure that the required number of employees, with the required skills, is available when
they are needed. After an organization ! s strategic plans have been formulated, human resow:ce planning
can be undertaken. Human resource planning has two components: requirements and availl!bility. Forecasting
human resource requirements involves detennining the number and type of employees needed by skill
level and location. In order to forecast availability, the human resource manager looks to both internal
sources (presently employed employees) and external sources (the labor ma_rket). When employee requirements
and availability have been analyzed, the firm c;m detennine whether it will have a surplus or shortage
of employees. Ways must be found to reduce the number of employees if a surplus is projectt;d. Some
of these methods include restricted hiring, reduced hours, early retirements, and layoffs. If a shortage
is forecasted, the firm must obtain the proper quantity and quality of workers from outside the organization.
In this case, external recruitment and selection is required. The process of anticipating an organization's
future human resource needs and then developing action plans for fulfilling identified needs. The systematic
review of human resource requirements getting the right people at the right place at the right, time.
(i) Objectives of Human Resource Planning: Enable organizations to anticipate their future HR needs
to identify practices that will help them meet those needs.
(ii) Benefits of HR Planning
• Helps in planning job assignments
• Helps cope with fluctuations in staffing Identifies recruiting needs
• Provides other useful information.
(iii) Planning Includes Forecasting: Forecasting is carried out in two basic areas which are dc,mand
forecast of workforce for organization and supply forecast for the organization following approaches
are used to perform this function or activity:
• Statistical approaches
(a.) Trend analysis
(b) Ratio· analysis
(c) Regression analysis.
• Judgmental methods
(a) Managerial judgment.
Forecasting Involves two Activities
• Monitoring current HR programs and personnel staffing levels
• Investigating future HR needs and concerns.
Forecasting Human Resource Requirements: A requirements forecast is an estimate of the numbers
and kinds of employees the organization will need at future dates in order to realize its goals. Several
techniques of forecasting human resource requirements and avai,lability are currently being used by organizations.
712 INDUSTRIAL ENGlt'/EERING AND MANAGEMENT

. (a) Zero-Base Forecasting: This method uses the organization's current level of �·mployment as the
starting point for determining future staffing needs. The key to .zero-base forecasting is a thorough
analysis of human resource needs.
(b) Bottom-Up Approach: A forecasting method in whic;h each successive level of the organization,
starting with the lowest, and forec·asts _its employee requirements in order to, ultimately, provide
· an aggregate forecast of employment needs.
(c) Use Of Mathematical _Models: Mathematical models can assist in forecasting HR requ,irements.
The relationship between sales demand and the number of employees needed is a positive one.
(d) Simulation: It is a technique for experimenting with a real-world situation through a mathematical
model representing that situation. A model is an abstraction or' the real �orld.
Forecasting Human Resource Availability: Determining whether the firm will be able to secure
employees with the necessary skills and from what sources these individuals may be obtained is called.
an availability forec·ast.
Surplus of Employees Forecasted: When a comparison of requirements and. av�ilability indicates
a worker surplus will result, restricted hiring, reduced hours, early retirements, or layoffs may be required
to correct the situation.
(a) RestrJcted Hiring: When a firm implements a restricted· hiring policy, it reduces the workforce
by not replac'ing employees who leave.
(b) Reduced Hours: Reaction to a declining demand can also be made by reducing the total number
of hours worked. Instead of continuing a 40-hour-week, management may decide to cut each employee's
time to 30 hours.
(c) Eai-ly Retirement: Early retirement of some present employees is another means of reducing the·.
supply of workers.
(d) Layoffs: At times, the firm has no choice but to actually lay off part. of its workforce.
Shortage of Workers Forecasted: Faced with a shortage of workers, many organizations had to
intensify their efforts to recruit the necessary people to meet the needs· of the firm. Some actions that
were taken included: ·
(a) Creative Recruiting: A shortage of personnel often' mj!ans that new approaches to recruiting must
be• used. The organization may have to recruit in different geographical areas than in the past,
explore new methods, and seek different kinds of candidates.
(b) Compensation Incentives: _Firms competing for workers in a high-demand situation may have to­
rely on compensation incentives. Premium pay is one obvious method. However,. this approach may
trigger a bidding war that the organization cannot sustain for an extended period. More subtle forms
of rewards may be required to attr-act employees to a firm, such as four-day workweeks, flexible
working hours, telecommuting, part-time employment, and child c·are centers.
(c) Training Programs: Special training programs may be needed to prepare pre�iously unemployable
individuals-for positions with a firm. Remedial education and skills training are two types of programs
that may help to attract individuals to a particular �ompany.
(d) Different Selection Standards: Another approach for dealing with shortages of workers is the lowering
of employment standards. Selection criteria that screen out certain workers may have to be altered
to ensure that enough people are available to fill jobs. For instance, instead of desiring extensive
work experience, a firm may be willing to hire an inexperienced worker and train him or her to
do the job.
HUMAN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING 713

Succession Planning and Development

(a) Succession Planning: The process of ensuring that a qualified person is available to assume a
managerial position once the position . is vacant.
. (b) Succession Development: The process of determining a comprehensive job profile of the key positions
and then ensuring that key prospects are properly developed to match these qualifications.
(c) The Goal of HR Plami The goal of forecasting and planning is to keep a stable workforce
that meets needs of the organization.
(d) Steps in HRP Process:
• Determine the impact of organizat'ional objectives on specific organizational unit
• Define the skills required to meet objectives (demand for Human Resource)
• Determine. additional human resource requirements
.
in light of current HR (net HR
.
requirements)
• Develop action plan to meet the anticipated HR needs.
(e) Importance of HRP: HRP has become more important in recent years for a number of reasons like:
• Globalisation of business
• New technologies
• The changing skill levels in the Workforce
• The changing demographics of the workforce
• Mergers and acquisitions
• Legal developments.
(/) Requirements for effective HR planning: Successful HR planning requires:
• HR personnel understand the HR planning process
• Top . management is· supportive
• The .communications between HR staff and li1)e management are healthy ,
. • The HR plan is integrated with the organization's strategic business• plan.
714 fNDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES
 5
PURCHASING
lliB - - - ___ liilila _. - - ea aa aa ma-a 11a1._ m111 a.-.. lliill ma a:a ma aiiliilll 11a 1:&111 - a.11&1- - -

45.1 INTRODUCTION
Purchase means buying of equipments, materials, tools, parts, stores etc. required for industry. The first
act in any industry is to purchase materials, hence purchasing is a primary function·. Competitive sales
cannot be made unless the· materials_ used for manufacturing or for resales, are purchased at ultimate
cost which is commensurate with that available· to competitors. The importance of the purchasing vary
with the nature and size of industry. In small factories, this function is performed by Works Manager.
In large manufacturing concerns, where large quantities of materials are consumed, the buying function
is· done by a separate department under a.highly competent executive as Chief Buyer of Purchase Manager
or Purchasing Officer.
Purchasing must be done with utmost care as it helps in reducing the cost of materials and, thereby
increasing profits.
45.1.1 Objective
The main objectives of purchasing department are:
(a) What to purchase?
(b) When to purchase?
(c) Where to purchase?
'(d) How much to purchase?
(e) What rate to purchase?
To achieve the al;,ove mentioned five objectives, certain functions are to be performed by the purchasing
department, which are described .ahead:
45.1.2 Functions of Purch�sing Department
1. Purchase materials on properly authorized requisitions.
2. Place orders of the requisitioned goods with height suppliers.
3. Obtain right type and quality of goods at cheapest price._
4. Puochase right quantities in right time.
716 INDUSTRIAL ENGINEERING AND MANAGEMENT

5. Deliveries of all goods are received on time. ,

6. To check and see that the goods are received in accordance with the orders placed in respect of
quality,. quantity and specifications.
7. Advice the management regarding possible economies to be maintained by manufacturing an item
· instead of purchasing or vice-versa.
8. To study the market conditions and enter into rate contract with the large suppliers to ensure availability
of materials all the time.
9. Study the various sources of supply and decide upon the most convenient as well as alternate supplies.
10. List the available and reliable suppliers.
11. To keep the iist of articles needed in the organization up to date with their quantities for placing
orders.
12. Prepare specifications, to obtain quotations and compare these quotations for placing orders.
13. Suppliers' payments are made promptly so that public relations are maintained.
14. Purchase directly all small items, which do not require quotations.
15. Consider first the interest of the enterprise.
16. Assist purchasing agents, co-operate all, raise the purchasing standards.
45.1.3 Duties of Purchasing Officer
The essential duties of a purchasing officer are:
I. To maintain the standard of quality of product by selecting right quality of materials during purchases.
2. To organize and direct the purchasing department for efficient working.
3. To represent. the concern with other concerns during purchasing contacts.
4. To maintain the reputation of the concern for integrity and fair dealings with other's yvhile negotiating.
5. Shops should not wait for materials.
6. To make a final check on all the requisitioned goods from different shops in the interest of economy
as regards quality, quantity and specifications.
· 7. Act as a representative of the firm in the preparation of purchasing budget.
8. Spend money on purchases very carefully and wisely as the money is yours.
9. Suggest, the materials which can economically be pr<.'duced in the concern instead of purchasing
antl vice-versa. ·
45.2 METHODS OF PURCHASING
The various methods · of purchasing are explained below: ·
(a) Purchasing strictly by requirement
(b) Purchasing for a specified period
(c) Market. purchasing
(d) Contract Purchasing
(e) Central Purchase Organization.
(a) Purchasing Strictly by Requirement: This is also known as hand to mouth purchasing. ·When
a job is taken in hand, only then the required quantity of materials needed for that particular job ·
is purchased.
PURCHASING 717

Advantages
(i) The market fluctuations will not affect as costing is based on the market rates.
(ii) storage space required is small.
(iii) Inventory carrying cost less.
Disadvantages
(i) Distribution cost will be higher.
(ii) Sudden demands cannot be satisfied.
(iii) Bargaining is not possible due to the small amount involved.
(b) Purchasing for a Specified Period: Generally, the standard items, which are regularly used are
purchased in quant�ties that will be sufficient for a particular future period.
Advantages
(i) As the order is received, produ�tion can at once be started.
(ii) The market fluctuations will not affect to a small size.
(iii) Working capital involved will be less.
(iv) Less storage space is rieeded.
(v) It is easier to make Cost analysis.
(c) Market Purchasing: The reasonable requirements based on production planning are calculated.
Market trends are analyzed and then purchasing is done. Generally, raw materials in process of
manufacturing ,are purchased by this method.
Advantages
The -distribution cost is less as purchasing 1s done in lot.
Disadvantages
(i) If the market topples, there is big loss.
(ii) Large space is required in this kind of purchasing.
(d) Rate Contract Purchasing: Contracts are given to suppliers for large amounts of requirements
needed in �ture say 2-3 years, subject to review and cancellation with an appropriate period of
notice. The approximate quantity and time etc. are specified while calling quotations. Contract purchasing
can be classified in the following two classes:
(i) Rate Contract: Under this system, rates are fixed for certain items of stock .or component
part of product for certain period. In this system, no tenders are invited but rates are fixed
by analyzing the market trends by the purchaser. This simple and convenient method. Now­
a�days most of the government departments such as P.W.D., Irrigation and Housing Board
etc. adopt this m�thod. In this method, they are not bound to purchase fr�m one supplier
but they can receive the materials from any reliable s�mrce.
(ii) Running contract: In this, the rate as ·well as quantify for certain period is fixed. As soon
�s the desired quantity is. supplied, by the suppliers, the contract is automatically terminated. ..
Advantages
(i) It avoids necessity for keeping stocks.
(ii) Gives a measure of safety to suppliers.
(iii) Purchase is_ not affected by market fluctuations and the supply ensured.
718 INDUSTRIAL ENGINEERING AND MANAGEMENT

(iv) Fewer purchase orders are required fo be placed, therefore it can reduce to. a great extent clerical
,
work, accounting and receiving work etc.
(v) The purchase department is relie"ved from the routine work and hence can pay more attention on
the major works.
(vi) Quick purchase is ensured as no time is needed to be wasted in calling quotations and finalizing
the purchases.
(vii) Maintenance of records is improved as 'the items are standardized.
(viii) Normally there is no change in price rate during the period of, contract.
Disa_dvantage
The supply may not be regular, as it is out of control of production department.
(e) Central Purchase Organization: Large_ concerns or certain big government concerns may
have section-wise stores' at different places and each section �ith a separate store. In such case,
there arises a probl em whether each store should make its own purchases or whether purchases
should be made by the . Central Stores that would go on supplying material to section-wise
stores.
If the local sectional stores is allowed to IJ¥lke its own purchases, there ·would not be delay and
the shops can get materials very· soon after they have sent their requisitions. This ktn<l of purchase
may sometimes lead to malpractice. The purchase officer may have some kind of understanding
with the local dealers and this may result in purchases at higher rates.
Advantages
· (i) When the Central Stores make a purchase, it is on a large scale, a good bargain is possible and
the things will be cheaper.
(ii) There will be a strict control and check is possible. Therefore, there will be a little chance of
malpractices.
(iii) A direct contract with the manufacturer and can get things as per specifications.
(iv) Suitable anangements for storage can be made. f
Difficulty in this system is that there may be delay in getting materials from the Central Store
but this can be minimized by supplying sectional stores with sufficient quantities in advance.
45.3 PURCHASING PROCESS/PROCEDURE -
In the broad scale the purchasing steps or process or procedure in a simplified way is as follows in
.Figure 45.1.
45.3.1 Purchasing/Buying Decision as Per Procedure
Purchasing/buying dec-ision differs for each type of purchase mentioned above, but every time, value,
time, availability are the important needs which is ·given top most importance.
Purchasing could be done from various sources for capital equipment to components or raw materials
from national or i.nte�national sources. .i ', ·
,
• Purchase source
• Natio11al
• Private
• DGS & D
PURCHASING 719

Purchase requisition from user department

Source selection

Bid/Tender preparation

Tender floating

Tender receipt

Tender evaluation

Tender evaluation

Tender negotiation

Order placement

Order placement

Expediting

Receipt of materials

Inspection and testing

Invoice checking and approval for paymen

Forwarding to stores

Figure 45.1 Flow sheet for Purchasing Process/Procedure Simplified

.720 INDUSTRIAL ENGINEERING AND MANAGEMENT

• International
Summary of purchase procedure is as follows:
• Need recognition
• Generated from user department
• Purchase requisition
• Requisition by user department with technical specification for newer materials/equipment
•Bill of Materials for regular materials/equipment
0 Source Sel�ction-Vendor Selection through
• Catalogues
• Trade journals (ITJ-Indian Trade Journal and other)
• Advertisement for various industries
• Trade exhibitions
• Industry hand books
• Trade association
• Consultants.-
• Tender preparation
• Technical
• Commercial
• Price.
• Tender floating (Given free to tenderer or at some cost)
• Single
• Limited
� •Open_
•DGS & D.
• Tender receipt
• As a single part tender (Technical + Commercial + Price).
• As a two part tender (Technical + commercial as one part and .Price separately as 2 nd part,
sealed separately).
• Along with the tender, tenderer may have to deposit-Earnest Money Deposit-EMO say about
1 to 2% of tender value or some fixed amount in Rupees or in terms of foreign currency.
This is not returnable to the tenderer who withdraws from the tender quote in the midcourse.
• Ten�er opening
• In presence of tenderers in case of single part tender: Reading out the technical, commercial
and price as per the request oftenderers (Prerogative ofthe buyer/as per the procedure mentioned·
in the letter sent to the tenderers or in the tender conditions).
• In presence of tenderers in case of two part tender: Reading out only technical details and
commercial terms and conditions of various tenders if requested by other tenderers (Prerogative
of the buyer/as per the procedure mentioned in the letter sent to the tenderers or in the tender
conditions).
• Signing of aU papers of tenders by the tender committee representative and noting in the
register in regard to number. tendered, number received, tenderers attended, etc.
PURCHASING 721

• Tender analysi§
• Comparative statement of tenders such as Technical, commercial, and Price and meeting with
tenderers in regard to clarifications.
• Tender negotiation
• Technical conditions agreement
• Commercial terms and conditions agreement
• Price negotiation after satisfactory completion of techni.:al and commercial terms.
• Purchase order release
• After the tender committees approval on all technical, co,nmercial and price acceptance the
order will be issued to the successful tenderer called herein after as contractor.
• Order comprises basically technical data, drawings, if necessary, commercial terms and conditions,
price.
• Successful tenderer/Contractor. is asked to furnish a Security . deposit to the value of about
5 to 10% of the contract value in the form of Bank Guarantee so that it fom1S security against
withdrawal of the contractor in mid course.
� Follow-up and expediting
• Following up by the purchase department in regard to the progress of the order placed and
schedule of inspection at manufacturers works, despatch, etc.
• Vendor invoice processing
• As per the payment terms arrived at the negotiation and as per order the invoice will be
sent by the contractor to the purchase department which has .to be proce<;sed.
• Final invoice also will have to be processed and total payment release approval has to be
done with respect to the receipt of material or as per the terms pf the order taking into account
all discounts, taxes, duties.
• O.rder closing
• Maintenance of all record systematically from the start.
45.3.2 Purchase Requisition Form
The· purchasing department places the orders for materials according to ,!he requisitions received from:
(a) Store•keeper for the standard items, the stocks of which require restocking again and again.
(b) Production shops, for special materials, which are not stocked in stores.
Whenever any special material is required in the shops, the production department prepares at least
three copies of the purchase requisition form. A sample purchase requisition form is shown in Figure 45.2.
The form has three parts. The first part is completed by the indenter (Production Department).
For quick purchasing and minimizing the work of purchase section, he should mention the addresses
of probable suppliers, who can supply the needed .special materiak;.' Out of three copies t.yo copies are
sent to the storekeeper for onward transmission and one copy is retained by the Indenter. The part II
is filled by the storekeeper in remaining two copies and he reports on it whether the required material
is available in the store or not. If storekeeper also wants this material for stocking in store, he adds
his demand also in the form. Both the· copies are passed on to' the purchase section and part III of
form is filled by them later making necessary arrangement for purchases. Out of these two copies, one
is kept by purchase section for records and other sent back to the requisitioner, so that he may come
to know that arrangement for the required purchases has been made. The purchase procedure depends
on the organization and it may differ from organization to organization.
722 INDUSTRIAL ENGINEERING AND MANAGEMENT
•

This form is in three parts as shown below:

Date:
Requisition No •
Shop•
Required for:
1. (a) Work Order No •
(b) Department use•
(c) To stock•

SI. No. Description of material Specification Quantity Approx. Cost Remarks

Delivery required up to Signature (indentor)

Addresses of probable
suppliers

2. Report of Storekeeper

Signature (storekeeper)

3. (For the use of purchase section)

Supplier
Purchase order No •
Date of delivery promised

Signature (Chief Buyer)

Figure 45.2 A typical purchase Requisition Form

45.3.3 Purchasing Procedure

In a medium industry, following purchasing procedure is generally adopted, although there will be variation
depending upon the circumstances:
1. After receiving the purchase requisitions form, exact quantity of material to be purchased and
its specification is decided.
2. A list of suppliers who deal with the business of the articles to be purchased and are reliable
is prepared.
3. If the material to be purchased is of small amount and required urgently, it may be purchased
locally.
4. Prepare. and issue N.I.T. (Notice Inviting Tenders), if necessary to the concerning supplier, mentioning
different terms, conditions, date and time of opening of tenders.
5. Open the tenders at prescribed time on the prescribed date.
6. Prepare a comparative statement of the rates, terms and conditions mentioned in the tenders and
then make a comparative study. •
PURCHASING 723

.
7. If required, samples may be received from the firm who has quoted the lowest rates.
.
8. Place the purchase order, to the firm selected after the study of sample, rates, tem1s and other
conditions, mentioning the date by which the material must be received.
9. Copy of the purchase order must be sent to the stores, the department who has sent the requisition,·
Accounts Section and to Inspection Department.
10. A detailed inspection is carried out after the material is received: If the material is found to be
satisfactory, the bill of the supplier is passed and the payment is made to the finn.

45.4 TENDERS
To define a tender or a quotation, it is a written offer to do a work or to provide a material at a
given price within a prescribed period and under certain specific conditions. The various types of ten-
ders are:
1. Si11gle Te11der: When the quality is of extreme importance, only a reliable firm will be asked to
supply and rates are fixed by inutual acceptance.
2. Closed Te11der: When material is required, firms which are registered will be invited to tender
their rates and the most economic offer will be considered for placing the order.. In this type of
tenders, some limited firms are only invited. Hence, this system is also called "Limited Tender
System". If the rate quoted by more than
· one firm are same, the order is placed on a known reliable
· firm.
3. Ope11 Te11der: This type of tender system is adopted when quantities to be purchased involved
large amount. Here this system is also known as 'unlimited tender system'. A tender notice in
trade journals is published, so that wide publicity can be given. All. interested firms· can apply
for the tender form available at certain-price. These tender forms contain dates of receiving and
opening the tenders, the approximate quantity required, period and place of delivery, specifications
and other terms and conditions etc., "ror supply. A certain amount will have to be deposited by
·the supplier, as earnest money at the time of tendering to ensure that the supplier · does not back-
out after his rates are approved.

45.4.1 Notice Inviting Tenders

Tenders are invited by an industry when some materials are required to be. purchased. The tenders are
invited from the firms deaiing with the supply of the items· to be purchased. ,Tl;ie· notice Gontain the
following details:
1. Name of material to be purchased wi.th detailed specification and if necessary drawing must also·
be enclosed.
2. Quantity to be purchased.
3. If the material required is of particular make, it must also be mentioned.
4. Whether the sample is to be sent with the tenders.
5. Period of delivery.
6. Earnest money to be deposited. ,
7. Purchasing terms and conditions.•
8. Date, time and place f�r receiving and opening of the tenders.
724 INDUSTRIAL ENGINEERING AND MANAGEMENT

A specimen of Tender Notice is being given below: a

TENDER NOTICE
Sealed quotations are invited for the supply of 20 numbers of 4 H.P. Centrifugal Bore Hole
Submersible electrical Pumping sets, what will be received by the undersigned upto 3 P.M. on
20th May 1985.
The pumping set should be complete with all fittings, viz. Btarter; cable etc. Full specifications
and other details including drawing and model of the pumping set, should accompany with the
tender.
Rates must be inclusive of packing and forwarding charges and must be F.O.R. Patna.
An earnest money of Rs. 2,000 must accompany the tender in the form of treasury challan or
bank drafts.
Pumps will have to be supplied within 30 days of the issue of the supply order. 90%
payment, will be made after the corporation of satisfactory supply and remaining 10% after the
satisfactory working of the pumps for 9 months.
sd
Name and Address of the
authority inviting tenders

After seeing this Tender Notice, suppliers must send the tenders or quotations so that it may reach
before the time of opening. While filling up the tenders, conditions mentioned in the notice must be
fulfilled. Other conditions, if any, must also be mentioned so that no dispute arises afterwards. The following
details should also be clearly mentioned in the tenders:
1. Whether the rates are F.O.R. or ex-go down.
2. If rates for items having different specifications are quoted, it must be clearly mentioned.
3. Guarantee period, if any.
4. If necessary, drawing must be enclosed.
5. Whether rates are inclusive of sales tax or not.
6. Percentage of advanCe payment, if desired.
7. Whether packing and forwarding charges are extra or included in the rates.
The tenders are sent by the suppliers in sealed. On the date of opening, at the prescribed time,
purchase officer opens all the tenders or quotations received till that time, in the presence of the representatives
of the suppliers, if present. At the time of opening the tenders or quotations, the purchase officer writes
on each tenders—S. No. of tender/Total No. of tenders received/Number of pages in that particular tender
e.g., when he writes on any tender IV/13/3, it means, this tender is IV out of 13 tenders received and
it has .3 pages. He also attests the corrections and over-writings if any, at the time of opening the tender.
After opening and numbering all the tenders or quotations, a comparative statement is prepared. This
helps to study the proposals in one sight. Following proforma is generally used for preparing the comparative
statement:

45.4.2 Comparative Statement

A comparative statement is prepared after opening and numbering all the tenders or quotations. This helps
to study the proposals in one sight. Following proforma is generally used for preparing the comparative
statement:
PURCHASING 725

Comparative Statement

Date of Issue of N.I.T Date of receipt of tenders

S.No. Name of article with Quantity Firm No. 1 Firm No. 2
specifications required Rate in Rs. Rate in Rs.

Terms and
conditions
I I
2 2
3 3
This statement gives all the details including alternative offers, terms and conditions of delivery,
if differs than that required. This statement should be perfectly correct. On this basis, Purchase Officer
studies the statement thoroughly and takes the advice of the experts, if required. It is not always necessary
to purchase the items only from the firms quoting lowest rates. For this purpose, sample, specifications,
make, guarantee period, period of supply, other expenses like freight, sales tax, packing and forwarding
charges etc. are considered.

45.5 IMPORTANCE OF MATERIALS MANAGEMENT

• Materials refer to raw materials, spare parts, and components, semi-assemblies that directly go into
production of finished goods. Besides, other materials called operating supplies such as lubricating
oil, cleaning materials, and others are required for maintenance and' repairs. In addition to this
other materials of concern are products in semi-finished stage (work in process inventory), finished
good in the warehouse (but yet to be sold), or products or rawmaterials in the transit, packing
materials also come under the scrutiny of materials management.
• Table 45.1 and 45.2 indicate the importance of the materials management in the form of number
of parts for various products/systems.
Table 45.1 Various systems and number of parts

Product Number of parts

Cheap ball pen 5
Costly ball pen 18
Rotary lawn mower 300
Mechanical Piano 12,000
Automobile 15,000
Small transport plane Over 40,00,000
Boeing 747 Over 60,00,000
Table 45.2 Break down of costs in Production and operations

Description Percentage of total cost

Design 5%
Materials 50%
Direct Labour 15%
Over heads 30%
726 INDUSTRIAL ENGINEERING AND MANAGEMENT

• It is, most often, observed that around 60-70 per cent of the price we pay for goods and services
are towards the cost of materials integrating the bare cost to processing to transportation to marketing,
etc. Hence, materials management plays a very significant role in controlling not only the availability
but also costs. In short the importance of materials management is felt because of following i.-easons,
which is divided into internal, and externals factors.
• Internal factors
• In an average over 60% of cost of the product is attributable to materials or their activities
• This directly related to the cash flow position of the industry thus relating to the productivity
of the plant. The plant may be idling many times because of want of materials. The insufficiency
of feed to plant is because of the cash crunch in the industry, thus unable to procure the
same in time.
• External factors
• Globalisation (Supply could be -from internal or external sources and this has to be properly
coordinated taking into consideration undue delay in supply due to personal reasons to government
restrictions. (e.g. many till}es it so happens that U.S.A. imposes sanctions against export of
certain materials or equipment against it s export to various countries)
• Reduced time to market ,(Due to the communication and transportation improvement the
product introduced in one country takes very less time to be introduced or known in other
countries. In case it is . not introduced to · other markets sooner there is every chance that
the competitor may introduce the product first time and catch the market considerably.)
• JIT (Just In Time) inventori-es (This is another important finance control related problem
which is followed regularly in Japanese manufacturing industries and in some Indian industries
too in a judicious manner to reduce the unnecessary holding of costly inventories)
• Variety/shorter product life cycle (More product varieties are hitting the market day by
day making the industries to compete with each other thus reducing the product life cycle
of the product, e.g. snow-a facial cream introduced into the market in 1960's ruled
- the roost for. almost 20 years without any further change in packing, compositi<;m, etc. but
in the present circumstances every month one new facial cream is introduced thus making
the product life cycle of each product to a minimum of one moth to maximum one
year.
• Responsibility (Responsibility of holding oneself for the product quality the industry is increasing
the warranty period from one year to 7 years for consumer durable products such as fans,
TVs etc;. to prove beyond the point of doubt that their products are the best product; and·
in case any. undue thing happens they would like to take the responsibility of replacing at
free of cost particular item like TV tubes, or the total TV itself).
45.5.1 STORE RECORDS
Store records facilitate the maintenance of accounts for each item of inventory. The position of inventory
can be updated from time to time. There is no standard list of store records but a record may be designed
to suit to the needs of the organisation.
The following are the store records in common use:.
(a) Material requisition note
(b) Purchase order
(c) Invoice
PURCHASING ,727

(d) Goods received note

(e) .Goods retumed note
(f) Stores ledger _account
(g) Bin card.
These are explained below:
Material requisition note: Whenever the materials are required by a department/section, this form
has to be filled in. This note provides infomiation about the job .number, description of the items required
in terms of number. It should-be authorised by the head of the department/section. Whenever the materials
are issued, the receiving person should sign the note.
Purchase order: The purchasing officer will release the purchase order. The following is the format
of a purchase order. Here, we find Vivek Enteq,rises placing a purchase order on Business Solutions
Ltd for the following materials. The terms and conditions of the purchase order such as delivery, payment,
and others have to be mentioned clearly.
Invoice: Invoice is a statement sent by the seller to the buyer mentioning the particulars of the
goods supplied, net amount payable for the goods, and the terms and conditions governing the sale.
It is a very i�portant document because it shows the net amount payable by the buyer after all the
discounts and the taxes, if any.
The delivery is stated here as free on board (FOB), which means that till the goods are loaded
into the port of shipment, the supplier will bear the costs. It is free for the buyer till that point. To
protect the interest of the seller from any type of mistl!kes in the preparation of the above invoice, the
clause.of 'Errors and Omissions Excepted' (E. and O.E.) is included. In other words, all the invoices
are subject to this clause, which means that the seller at his end, if any, in this invoice can subsequently
correct the mistakes.
Goods received noteL The goods received note furnishes the particulars of the suppliers, purchase
order number, purchase requisition number, and the ·job for which the goods are received. These details
are to be certified by a competent authority. On this basis, the accounts department initiates the process
of payment for the goods received.
Goods returned note: Sometimes, a part or whole of the goods received may not be of acceptable
quality, and hence, these have to be returned to the supplier. In this context, the goods received note
is prepared. This is also called the 'debit note' because the suppliers or creditors' account has to be
debited by the amount mentioned in this debit note for the goods returned.
Stores ledger account: This is maintained to provide the details of the quantity, price, and amount
of the receipts, issues, and balance of stocks on a day-to-day basis. At any given time, the physical
quantity of. stocks should match with the balance as per the stores ledger account. A separate account
is maintained for each type of the materials in the stores. It should necessarily mention the method'
such as FIFO or LIFO, followed to value the issues of stocks. It is a valuable tool for the costing department
in exercising stores control. It facilitates the valuation· of stocks from time to time.
B_in card: Bin card is the slip or tag attached to the bin where the goods are stocked. Whenever
the materials are received or issued, an entry is made on. the bin card. The purpose of bin card is to
reveal the particulars of the quantities received, issued, and available as on a given date at a- glance.
Where separate bins are maintained for each item of the store, each. bin will have a tag hung to . it.
It reveals the latest balances at a given point of time. It can be used to tally the number of items
in the stock with the physical quantity of. the stocks.
728 INDUSTRIAL ENGINEERING AND MANAGEMENT

The bin card is different from the stores ledger account. Bin card does not reflect the monetary
value of the stocks whereas the store ledger account gives the total information about the quantities and
their monetary values.
45.5.2 Purchasing Systems/Buying Techniques
Purchase system is divided basically into three divisions as mentioned below for convenience of systematising
the purchasing
• Prepurchase · systems comprises
• Requisition
• Vendor selection
• Obtaining quotation
• Preparation of comparative statement of tenders.
• Ordering system comprises
• Preparation of technical specification, financial terms, price statement
• Order placement incorporating above.
• Post-purchase system comprises
• Follow-up/expediting
• Invoice checking
• Contract law binding .
• Payment to vendors.
45.5.3 Purchasing/Buying Techniques
Purchasing/buying techniques are divided into- following sections depending on the size and type of the
organisation.
• Forward buying
• The purchase for the total year is planned in advance as per the fund availability and materials
•
requirements.
• Tender buying
• Single tender basis
• Limited tender basis
• Open tender basis
• National or International buying.
• Blanket order
Agreement is n:ide for a specific rate, time, quantity, etc. with one or a few organisations.
• Zero Stock (JIT-Just In Time)
To have agreement or tie-up with exclusive suppliers or having own sister concern for SUP.ply
of specific item(s) .'
• Rate contrad
DGS and D (Directorate of General Supplies and Disposals) have entered into standing rate
contract system with many vendors who are· registered with them for variety of machineries
for a specific period.
PURCHASING 729

45.6 VENDOR RATING

Important objective of purchasing management is to keep good vendor relations who are the source of
supply of machine, materials and even human resources. This leads to:
• Vendor selectiol).
• Performance monitoring/vendor rating of selected vendors
• Vendor development.
Vendor selection is based on following points:
• Prodcution capabilities of vendor if he is the manufacturer
• Supply capabilities of vendor if he is the authorised agent
• Financial soundness of the vendor
• Quality orientation of the vendor
• Industrial relations of the vendor.
Vendor rating is based o·n tangible and other intangible factors.
• Ta11gible factors
• Deliveryillespatch: Whether vendor has delivered the goods in time and in required quantity
at the required place
• Quality; Whether vendor has -maintained better quality than purchasers specification
• Price: Whether supply price is competitive.
. • J11ta11gible factors
• Dependability
• Rising to the occasion in case of need
• Dissemination of technical knowledge of the product by the vendor to the purchaser by supplying
0

catalogues, power point presentation, etc.

• Supply of similar product information of the competitors
• Readiness to try new product design or altogether new type of product as per the purchasers
requirements
•. Readiness to help the purchaser both by direct financial help and indirect financial help when
needed by purchaser.
The purchaser for above said factors gives vendor-rating points for all vendors selected by the
purchaser. Selection of the vendors is done the basis of best-rated vendor available for the particular
item for floating the tender or sometimes even for direct purchase also.
Vendor rating evaluation plans are:
• Categorical plan
• Weighted point plan
• Cost-Ration plan.
(a) Categorical plan: This method depends on individual judgement. It is only a qualitative statement
and no quantification is done by this method such as:
-High-value assigned for Delivery, price and quality-Good/Bad
-Medium-value assigned for Location, Suppliers reputation-Good/Bad
-Low-value assigned for Minor services-Good/Bad
730 INDUSTRIAL ENGINEERING AND MANAGEMENT

By assigning various values as mentioned above the v@ndor is rated as good and bad in overall
sense.
(b) Weighted point plan: Specific points are given for each factor as per individual organisation. Following
way the points can be given or modified as per the requirement. This modification may be as
per the type of industry or as per the product:
• Quality 35 Points
• Price 30 Points
• Delivery 20 Points
• Service 15 Points
For example, if it is a toy we attach more importance to the attraction and price component and
hence price may be given 70 points instead of above 30 points and others modified accordingly.
In case of Aerospace industry Quality is given maximum points.
(c) Cost-Ratio plan: In the cost-Ratio plan various items can be grouped and total cost and the ratio
of importance of the group can be found out and the vendor is rated accordingly.
Cost Ratio = (Cost of the item/Total purchase cost for the industry) x 100
Vendor Development: It means the development of both existing and future vendors by the Purchaser.
Hence, purchaser can help the vendor in various ways as mentioned below tq establish himself
as the most successful.
• Technical help
• Financial help
• R and D help
• Assurance for purchase certain percentage/quantum of the products manufactured by the vendor
• Collaborating with vendors for developing new products · if vendors are market leaders.

(
 46
LEAN MANUFACTURING

46.1 INTRODUCTION
Lean manufacturing means doing more work with fewer resources. Lean manufacturing is the systematic
elimination of waste from all aspects of an organization's operations, where waste is viewed as any use
or loss of resources that does not lead directly to creating the product or service a customer wants when
they want it.
Lean production is an adaptation of mass production in which work is accomplished in less time,
in a smaller space, with fewer workers, and with less equipment, and yet achieves higher quality levels
in the final product. The ingredients of a lean production system can be visualized as the structure shown
in Figure 46.1.

Just-in-time
production

Figure 46.1 The structure of a lean production system

732 INDUSTRIAL ENGINEERING AND MANAGEMENT

"A systematic approach to identifying and eliminating waste through continu·ous improvement,
flowing the product at the pull of the customer in pursuit of perfection."
In the 1950 's, the Toyota Motor Company pioneered a collection of advanced manufacturing methods
that aimed to minimize the resources it takes for a single product to flow through the.entire production
process·. Inspired i:>y the _waste elimination concepts developed by Henry Ford in the early 1900's, Toyota
created an organizational culture focused on the systematic identification and elimination of all waste
from the production process. In the lean context, waste was viewed as any activity that does not lead
directly to creating the product or service a customer wants when they want it. In many industrial processes,
such "non-value added" activity can comprise more than 90 percent of the total activity as a result of
time spent waiting, unnecessary "touches" of the product, overproduction, wasted movement, and inefficient
use of raw materials, energy, and other factors. Toyota's success from implementing advanced manufacturing
methods has lead hundreds of other companies across numerous industry sectors to tailor these advanced
production methods to address their operations.
Companies primarily choose to engage in lean manufacturing for three reasons:
• To reduce production resource· requirements and costs
• To increase customer responsiveness
• To improve product quality
All which combine to boost company profits and competitiveness. To accomplish these improvements
and associated waste reduction, lean involves a fundamental paradigm shift from conventional "batch
and queue" mass production to product-aligned "one-piece flow" pull production. Whereas "batch and
queue" involves mass production of large lots of products in advance based on potential or predicted
customer demands, a "one-piece flow" system- rearranges production activities in a way that processing
steps of different types are conducted immediately adjacent to each other in a continuous flow. This
shift requires highly controlled. processes operated in a well maintained, ordered, and clean environment
that incorporates principles of employee-involved, system-wide, continual improvement.
Table 46.1 Comparison of Mass production and Lean production
Mass Production Lean Production
Inventory buffers Minimum waste
Just-in-case deliveries Just-in-time deliveries
Just-in-case inventory Minimum inventory
Acceptable quality level (AQL) Perfect first-time quality
,, Taylorism (workers told what to do) Worker teams
Maximum efficiency Worker involvement
Inflexible production systems Flexible production systems
If it ain't broke, don't fix it Continuous improvement

46.2 COMMON METHODS USED IN LEAN MANUFACTURING

There are numerous methods and tools that organizations use to implement lean production systems. Eight
c;,ore lean methods are described briefly below. The methods include:
• Kaizen
• 5S
• Total Productive Maintenance (TPM)
 LEAN MANUFACTURING 733

• CeUular Manufacturing/One piece flow production systems

• Just-in-Time Production/Kanban
• Six Sigma
• Pre-Production Planning (3P)
• Lean Ente,prise Supplier Networks.
Ka�zen Rapid Improvement Process: Lean production is founded on the idea of Kaizen, or continual
improvement. This philosophy implies that small, incremental changes routinely applied and sustained
over a long period result in significant improvements. Kaizen, or ·rapid improvement processes, 'often
are considered to be the. 'building block" of all lean production methods, as it is a key method used
to foster a culture of continual improvement and waste elimination., Kaizen focuses on eliminating waste
in the targeted systems and processes of a� organization, improving productivity, and achieving sustained
continual improvement. The kaizen strategy aims to involve workers from multiple functions and·levels
in the organization in working together to address a problem or improve a particular process. The team
uses analytical techniques, such as Value Stream Mapping, to quickly identify opportunities to eliminate
waste in a. targeted process. The team works to· rapidly implement chosen improvements (often within
72 hours of initiating the kaizen event), typically focusing· on ways that do not involve large capital
outlays. Periodic follow-up events aim to ensure that the improvements from the kaizen "blitz" are sustained
over time. Kaizen can be used as an implementation tool for most of the other lean methods.
5S: 5S is 'a system to reduce waste and optimize productivity through maintaining an orderly workplace
and using visual cues to achieve more consistent operational results. It derives from the belief that, 'in
the daily work of a company, routines that maint�in organization and orderliness are essential to a smooth
and efficient flow of activities. Implementation of this method "cleans up" and organizes the workplace
basically in its existing configuration, and it is typically the starting point for shop-floor transformation.
The 5S pillars, Sort (Seiri), Set in Order (Seiton), Shine (Seiso), Standardize (Seiketsu), and Sustain
(Seitsuke), provide a methodology for organizing, cleaning, developing, and sustaining a productive work
environment. 5S encourages workers to improve the physical setting of their work and teaches them
to reduce waste, unplanned downtime, and in-process inventory. A typical 5S implementation would result
in significant reductio� in the square footage of space needed for existing operations. It also would
- result in the organization of tools and materials into labeled and color coded storage locations, as well
as "kits" that contain just what is needed to perfomi a task. 5S provides the foundation on. which other
lean methods, such as TPM, cellular manufacturing, just-in-time production, and six sigma, can be introduced
effectively.
Total Productive Maintenance (TPM): Total Productive Maintenance {TPM) seeks to engage all
levels and functions in an organization to maximize the overall effectiveness of production equipment.
This method further tunes up existing processes and equipment by reducing mistakes and accidents. Whereas
maintenance departments are the traditional center of preventive maintenance programs, TPM seeks to
involve workers in all departments and levels, from the plant-floor to senior executives, to ensure effective
equipment operation, Autonomous maintenance, a key aspect of TPM, trains and focuses workers to take
care of the equipment and machines with which they work. TPM addresses the entire production system
lifecycle and builds a solid, plant-floor based system to prevent accidents, defects, and breakdowns. TPM
focuses on preventing breakdowns (preventive maintenance), "mistake-proofing" equipment (or poka-yoke)
to eliminate equipment malfunctions and product defects, making maintenance easinr (corrective maintenance),
designing and installing equipment that needs little or no maintenance (maintenance prevention), and quickly
repairing equipment after breakdowns occur (breakdown maintenance). TPM's goal is the. total elimination
. of all losses, including breakdowns, equipment setup and adjustment losses, idling and minor stoppages,.
734 INDUSTRIAL ENGIIJEERING AND MANAGEMENT

reduced speed, defects and rework, spills and process upset conditions, and startup and yield losses,
The ultimate goals of TPM are zero equipment breakdowns and zero product defects, which lead to
iinprove� utilization of production assets and plant capacity.
· , · Cellular Manufacturing/One-Piece Flow Systems: Processing of parts or part families in a single
cell, with no pack tracking. Individual cells may be ouilt around group technology formed part families
or based on a single product line. In c'ellular manufacturing, production work stations and equipment
are arranged in a product-aligned sequence that supports a smooth flow of materials and components
through the production process with minimal transport or delay. Implementation of this lean method often
represents the first major shift ·in production activity and shop, floor configuration, and it is the key enabler
of increased production velocity and flexibility, as well as the reduction of ,capitat requirements, in the
form of excess inventories, f�cilities, and large production equipment. Rather· than processing multiple
parts before sending them on to the next machine or process step (as is the case in batch-and-queue,
or large-lot production), cellular manufacturing aims to move products through the manufacturing process
one-piece ar a time, at a rate determined by customer demand (the pull). Cellular manufacturing can
also provide companies with the flexibility to make quick "changeo�ers" to vary prodm;;t type or features
on the production line in response to specific customer demands. This can eliminate the need for uncertain
forecasting as well as th� �aste associated with unsuccessful forecasting. Cellular manufacturing methods
include specific analytical techniques for assessing current operations and designing a new cell-based
manufacturing layout that will shorten cycle times and changeover times. To enhance the productivity
of the cellular design, an organization must often replace large, high volume production machines with
small, mobile, flexible, "right-sized" machines to fit well in the cell. This transformation often shifts
worker responsibilities from watching a single machine, to managing multiple machines in a production
celL While plant-floor workers may need to feed or unload pieces at the beginning or end of the process
sequence, they are generally freed to focus on implementing TPM and process improvements, Using
this technique, production capacity can be incrementally increased or decreased by adding or removing
production cells.
Just-in-time Production Systems/Kanban: Just-in-time production, or JIT, and cellular manufacturing
are closely related, as a cellular production layout is typically a prerequisite, for achieving just-in-time
production. JIT leverages the cellular manufacturing layout to reduce significantly inventory and work­
in process (WIP). JIT enables a company to produce the products its customer's want, when they want
them, in the amount they "Want. JIT techniques work to level production, spreading production evenly
over time to foster a smooth flow between processes. JIT frequently relies on the use of physical in\'entory ·
control cues (or kanban), often in the form of reusable containers, to signal the need to move or produce
new raw materials or components from the previous process. Many companies implementing lean production
systems are also requiring suppliers to deliver components using JIT. The company signals its suppliers,
using computers or delivery of empty containers, to supply more of a· particular component when they
are needed. The end result is typically a significant reduction in waste associated with unnecessary inventory,
WIP,. packaging, and overproduction.
'
I

Six Sigma: Six Sigma was developed by Motorola in the 1990s, drawing on well-established statistical
· quality control techniques ·and data analysis methods. The term sigma is a Greek alphabet letter used • ·
to describe variability. A sigma quality level serves as an indicator of how often defects are likely to
occur in processes, parts, or products. A Six Sigma quality level equates to approximately 3.4 defects
per million opportunities, representing high quality and minimal process variability. Six Sigma consists
of a set of structured, data-driven methods for systemically analyzing processes to reduce process variation,
which are sometimes used to support and guide-organizational continual improvement activities. Six Sigma's.
LEAN MANUFACTURING 735

toolbox of statistical process control and analytical techniques are being used by some companies to
a&sess process quality and waste areas to which other lean methods can be applied as solutions. Six
Sigma is also being used to further drive productivity and quality /mprovements in lean operations. Six
Sigma has evolved among some companies to include methods for implementing and maintaining performance
of process improvements. The statistical tools of the Six Sigma system are designed to help an organization
correctly diagnose the root causes of performance gaps and variability, and apply the most appropri�te
tools and solutions to �ddress those gaps.
Pre-Production Planning (3P): Whereas other lean methods take a product and its core production
process steps and techniques as given, the Pre-Production Planning (3P) focuses on eliminating waste
through "green field" product and pro�ess redesign. The 3P represents a key pivot point, as organizations
move oeyond a focus on efficiency to incorporate effectiveness in meeting customer needs. Lean experts
typically view 3P as one of the most powerful and transformative advanced manufacturing tools, and .
it is typically only used by organizations that have experience implem�nting other lean methods. 3P seeks
to meet customer requirements by starting with a clean product development slate to rapidly create and
test potential product and process designs that require the least time, material, and capital resources.
This method typically engages a diverse group of employees (and at times product customers) in a week­
long creafr;e process to identify several alternative ways to meet the customer's needs using different
product or process d�signs. Participants seek to identity the key activities required to produce a product
(e.g., s_having wood for veneer, attaching an airplane engine to the wing), and then look for examples
of how these activities are performed in nature. Promising designs are quickly "mocked up" to test their
feasibility, and are evaluated on their ability to satisfy criteria along several dimensions (e.g., capital
cost, production cost, quality, time). The 3P typically results in products that are less complex, easier
to manufacture (often referred to as "design for manufacturability"), and easier to use and maintain. The
3P can also design production processes that eliminate multiple process steps and that utilize homemade,
right-sized equipment that better meet production needs.
Lean Enterprise Supplier Networks. To fully realize the benefits of implementing advanced manufacturing
systems, many companies are working more aggressively with other companies in their supply chain to
encourage and facilitate broader adoption of lean methods. Lean enterprise supplier networks aim to deliver
products of the right design and quantity at the right place and time, resulting in shared cost, quality,
and waste· reduction benefits. As companies move to just-in-time production,· the in'lplications of supply
disruptions due to poor quality, poor planning, or unplanned downtime become more acute. Some suppliers
may increase their own inventories to meet their customer's just-in-time needs, merely shifting inventorying
carrying costs upstream in the supply chain. At the same time, some lean companies are finding value
in tapping supplier knowledge and experience by collaborating with key suppliers to design components,
instead of sending out specifications and procuring from the low bidder. It is estimated that many companies
can only· 1ean operations by 25 to 30 percent if suppliers and customer firms are not similarly leaned.
Some larger companies have initiated lean enterprise supply chain activities to support the implementation
of lean methods throughout their supply chain. Specific techniques can include training, technical assistance,
annual supply chain meetings, site visits, employee exchanges, and joint projects (e.g., product or component
design).
When companies implement several or all of these lean methods, several outcomes consistently result:
• Reduced invent01y levels (raw material, work-in-progress, finished product) along with associated
carrying costs and loss due to damage, spoilage, off-specification, etc.
• Decreased material usage (product inputs, including energy, water, metals, chemicals, etc.) by reducing
material requirements and creating less material waste during manufacturing.
736 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Optimized equipment (capital equipment utilized for direct production and support purposes) using
lower capital and resource-intensive machines to drive down costs.
• Reduced need for factory facilities (physical infrastructure primarily in the form of buildings and
associated material demands) by driving down the space required for product production.
• Increased production velocity (the time required to process a product from initial raw material to·
delivery to a consumer) by eliminating process steps, movement, wait times, and downtime. ·
• Enhanced production flexibility (the ability to alter or reconfigure products and processes rapidly
to adjust to customer needs and changing market circumstances) enabling the implementation of
a pull production, just-in-time oriented system which lowers inventory and capital requirements.
• Reduced complexity (complicated products and processes that increase opportunities for variation
and error) by reducing the number of parts and material types in produ.;ts, and by eliminating
unnecessary process steps. and equipment with unneeded features.
At the same time, lean implementation consistently fosters changes in organizational culture that
exhibit the following characteristics:
·• A continual improvement culture focused on identifying and eliminating waste throughout the production
process
• Employee involvement in continual improvement and problem-solving
• Operations-based focus of activity and involvement
• A metrics-driven operational' setting that e1!1phasizes rapid performance feedback and leading indicators
• Supply chain investment to improve enterprise-wide performance
• A whole systems view and thinking for optimizing performance.'
Lean methods typically target eight types of wastes. These waste types are listed in Table 46.2.
Table 46.2 Eight Types of M_anufacturing Waste Targeted by Lean Methods

Waste Type Examples

Defects Production of off-specification products, components or services that result in scrap,
rework, replacement production, inspection, and/or defective materials
Waiting Delays associated with stock-outs, l.ot processing delays, equipment downtime, capacity
bottlenecks ,.
Unnecessary processing Process steps that are not required to produce the product
Overproduction Manufacturing items for which there are no orders
Movement Human motions that are unnecessary or straining, and work-in-process (WIP) transporting
long distances
Inventory Excess raw material, WIP, or finished goods
· Unused employee Failure to tap employees for process improvement suggestions
Creativity
Complexity More parts, proce�s steps, or time than necessary to meet customer needs

46.3 MECHANISMS FOR ENVIRONMENTAL IMPROVEMENT THROUGH

LEAN IMPLEMENTATION
Lean implementations yield environmental improvements, it seems appropriate to ask what are the mechanisms
by which these improvements are being achieved. Conceptually, the link between lean production and
environmental improvement is strong. The fundamental objective �f lean systems is th.e systematic elimination
 LEAN MANUFACTURING 737

of waste by focusing on production costs, product quality and delivery, and worker involvement. At a
. "".hole systems level, advanced manufacturing methods work to lower the· resource intensity necessary
to deliver a product or service to m.eet customer needs. This means that organizations implementing lean
methods continually seek to• reduce the materials, energy, water, space, and equipment needed per unit
of production. Even though environmental endpoints, such as hazardous ,waste, air emissions, and wastewater
discharges, are frequently not directly identified in the types of manufacturing wastes targeted by lean
initiatives, improvements in these areas are deeply embedded in the other types of manufacturing wastes.
Table 46.3 lists seven common types of wastes that lean works to eliminate, along with the environmental
impacts that are often associated with e·ach of them.
Table 46.3 Environmental Impacts Linked with Manufacturing Waste

Waste Type Environmental impa'cts

Defects Raw materials consumed in making defective products

Defective components require recycling or disposal
• More space required for rework and repair, increasing energy use for heating,
cooling, and lighting
Waiting • Potential material spoilage or component damage causing waste
• Wasted energy from heating, cooling, and lighting during production
downtime
Unnecessary processing. • Mo�e parts and raw materials consumed per unit of production
• Unnecessary processing increases wastes, energy use, and emissions
Overproduction More raw materials consumed in making the unneeded products ·
• Extra products may spoiJ or become obsolete requiring disposal
Movement More energy use for transport
Emissions from transport
More space required for WIP movement, increasing lighting, heating, and
cooling demand and energy con�umption ·
• More packaging required to protect components during movement
Inventory More pac�aging to store work-in-process
• Waste fr�m deterioration or damage to stored WIP
More materials needed to replace damaged WIP
More energy used to heat, cool, and light inventory space
Unused employee creativity ' •· Fewer suggestions on waste minimization opportunities
Complexity More parts and raw materials consumed per unit of production
Unnecessary processing increases wastes, .en�rgy _ use, and emissions

46.4 . BARRIERS TO SUCCESSFUL IMPLEMENTATION

Many of the companies �hat attempt to implement Lean experience difficulties and/or are not able to
achieve the anticipated benefits. Some of our own observations in this area include:
• The company fails to tie the improvement metrics to financial statements. In other words, the company
only reports the percent improvement and doesn't convert this to a monetary measure. By not
communicating in the same.language as m&nagement, the department or function implementing Lean
doesn't get the support needed to continue the efforts.
738 INDUSTRIAL ENGINEERING AND MANAGEMENT

• The company implements the building. blocks in the wrong sequence. For example, if batch sizes
are reduced prior to reducing changeover time, and changeover times are lengthy; equipment utilization
will drop, and the ability to serve customers will be reduced. A typical reaction to this might be, ·
"We tried to implement Lean, and things got worse." Of course, they did.
• Choosing a difficult or low-impact project as the first one. Lean isn't difficult, but can be complicated
because of all the variables and communication involved. If the first Lean project isn't successful
or generates little return on investment, cooperation and support for future projects will fade.
• Overlooking administrative areas. Some manufacturing environments, especially continuous processes
(e.g., high-volume chemical manufacturers) have only small or insignificant opportunities 'in the
production or operations areas. Implementing Lean there will provide little impact
I
• The company spends too much time on training and not "doing," or they start at the wrong place.
• Failing to expand lean implementation to. the supply_ chain. Because of the need for just-in-time
delivery of materials, minimization of inventories and Lean's dependence upon high quality products
and services, companies need to bring · suppliers into the improvement efforts. If critical suppliers
cannot deliver on time, and in smaller quantities, the benefits of Lean will be greatly. diminished
or even non-existent. The development of a lean supply chain is probably one of the most difficult, .
but more financially rewarding, aspects of implementing Lean.
• Lean radically impacts every person in every function of an organization, . and literally ,chal}ges
the organizational culture. T!ie change c·auses discomfort, and many companies are not able to cope
with this magnitude of change.
• It takes years to fully understand and implement lean throughout a large organization; frequently
longer than the life expectancy (i.e., turnover cycle) of U.S. managers and decision_makers. One
manager might decide to implement lean, just to have his/her successor scrap thi:: program.
• Finally, many of the concepts we learn in Lean are different than managers, accountants, and other
decision makers were taught. ·
 GROUP TECHNOLOGY
------------------------------Dl!--amlmel
47.1 INTRODUCTION
Group tt:chnology (GT) is a clustering approach which has been widely used in many industries, including
the design of job-shops and flexible manufacturing systems. It is an engineering and manufacturing methodology
in which similar parts are identified and grouped together to take advantage of their similarities in design
and production. Similar parts are arranged into part families, where each part family possesses similar
design and/or manufacturing characteristics. The aim is to reduce work-in-progress and improve delivery
performance by redueing lead• times.
47.1.1 Definitions
Group technology has 'got different definitions:
• Identifying and grouping similar or related machines, parts !n a production process in order to
· · make use of their similarities by considering the inherent economies of flow production methods.
• Logical arrangements and sequence of all facets of company operation to bring in the benefits
of mass production to high variety, mixed quantity production,
• Development of technological processes, efficient setting up of machine tools and equipment
planning, so as to insure the most profitable technical planning of p�oduction in the shortest
time.
• By realizing that many problems are �imilar and that by grouping similar problems, a single solution
can be found to a set of problems, there by saving time and effort.
• Classification of parts or machines into groups in order to increase the efficiency in .the field of
design as well as in production.
47.2 OBJECTIVES
The objectives of Group Technology are best achieved in business concerned with small to medium batch
production; these represent a major part of manufacturing industry. The traditional approach to this type
of manufacture is to· make use of a process layout (Figure 47.1) in the factory, i.e., similar machines
are grouped according to type. As a resu1t of this form of machine layout, where ouly machining operations
of a particular type may be performed in a limited area of the workshop, the work piece itself must
740 INDUSTRIAL ENGINEERING AND MANAGEMENT

travel a considerable distance around the workshop before all the operations are performed upon -it. This
usually leads to a long throughput time. The planning of process route becomes an extremely difficult
task since a number of similar machine tools may be considered at each point in the sequence of manufacturing
operations. Also the scheduling and control in such a system are difficult because numerous alternatives
are available. '

DrIl
Man

Shipping and
receiving

Figure 47.1 Process layout: The need for GT layout (Turn — Turning; Mill — Milling; Drill — Drilling;
Grnd — Grinding; Asby — Assembly; Man — Manual operations; arrows indicate work flow thrOugh plant;
dashed lines indicate separation of machines into departments)

To overcome this difficulty, a different concept of manufacturing organization and layout has been
developed. Instead of being functionally laid out, the factory is divided into smaller cells (Group technology
layout Figure 47.2) in such a way that each cell is equipped with all the machines and equipment needed
to complete a particular family of components. It has been found that by switching to this type of cellular
manufacture, many benefits of flow line production can be attained in a batch production system.
Group technology is most appropriate under the following conditions:
• The plant currently uses traditional batch production and a process type layout, which results in
much material handling effort, high in-process inventory, and long manufacturing lead times.
• The parts can be grouped into part families. This is a necessary condition. Each machine cell
is designed to produce a given part family, or .a limited collection of part families, so it must
be possible to group parts made in the plant into families.
Group technology can increase,
• Component standardization and rationalization
• Reliability of estimates
GROUP TECHNOLOGY 741

• Effective machine operation

• Productivity
• Costing accuracy
• Customer service
• Order potential.
Group technology can reduce,
• Planning effort
• Paper work
• Setting time
• Down time
• Work in progress
• Work movement
• Overall production times
• Finished parts stock
• Overall stock.

Turn
Man

••
• Mill
Man

Mill Turn Drll

Man Man Man

Figure 47.2 Group technology layout (arrows indicate work flow in machine cells)
There are two major tasks that a company must undertake when it implements group technology.
These two tasks represent significant obstacles to the application of GT.
1. Identifying the part families.
2. Rearranging production machines into machine cells.
742 INDUSTRIAL ENGINEERING AND MANAGEMENT

Part Families: A part family is a collection of parts that are similar either in geometric shape
and size or in the processing steps required in their manufacture. The parts within a family are different,
but their similarities are close enough to merit their inclusion as members of the part family. Figure 47.3
and 4 show two different part families. The two parts in Figure 47.3 are very similar in terms of geometric
design, but quite different in terms of manufacturing because of differences in tolerances, production
quantities, and materials. The parts shown in Figure 47.4 constitute a part family in manufacturing, but
their different geometries make them appear quite different from a design viewpoint.

(A) (b)

Figure 47.3 Two parts of identical shape and size but different manufacturing requirements
(a) 1,000,000 pc/yr, tolerance = t 0.010 in, material = 1015 CR steel, nickel plate; and
(b) 100 pc/yr, tolerance = t 0.001 in, material = 18-8 stainless steel.

Figure 47.4 A family of parts with similar manufacturing process requirements but different
design attributes. All parts are machined from cylindrical stock by turning; some parts
require drilling and/or milling

Methods for developing part families:

1. Visual inspection
2. Parts classification and coding
3. Production flow analysis.
Visual inspection method: It involves the classification of parts into families by looking at either
the physical parts or their photographs and arranging them into groups having similar features. This method
is the least expensive one than the others.
Parts Classification and Coding: The main aim of classification in any manufacturing environment
is to provide an efficient and rapid method of information retrieval for decision making. Parts classification
GROUP TECHNOLOGY 743

and coding requires examination and analysis of the design and/or tnanufacturing attributes of each part.
The need for GT classification and coding can be for the following purposes:
1. To find the parts for tooling and material families.
2. To_ find the optimal components for parts.
3. To find the optimal scheduling sequence for loading.
Classijicatio11: The division of parts into classes based on their differences or combining of pa1is
into classes based on their similarities. Classes should be exhaustive (cover all parts) and exclusive (each
part assigned to one ahd only one class).
Codi11g: The assignment of symbols to classes. Form of symbols can be numeric, alphabetical or•
alphanumeric. The construction method for codes can be:_
Monocode: This is a hierarchical code with higher level classes being refined (sub-classified) by
lower level classes. The code lists the classes from higher to lower in order from left to right. The
meaning of numbers or letters in the code depends on the classes (digits) before it in the code.
Polycode: This is a fixed position code. Each class has a fixed position and fixed code independent
of the other classes.
Mixed: This is a combined monocode and polycode.
In the early l 960s, Opitz carried out an investigation into work piece statistics, which showed that
although firms manufacture a variety of products, the spectrum of them all was remarkably similar. Based
on the findings of this investigation, he established a classification system which enabled components
to be codified by means of their geometrical similarity. Coding is not necessary these days because classification
and retrieval can be, achieved via artificial intelligence software (neural networks) or by key word search.
Opitz Classification System: The Opitz coding system uses the following digit sequence:
12345 6789 ABCD.
The basic code consists of nine digits, which can be extended by adding four more digits. The
first nine digits are intended to convey both design and manufacturing data. The first five digits, 12345,
are called the "form code". and describe the primary design attributes of the part. The next four digits,
6789, constitute the "supplementary code". It indicates some of the attributes that would be of use to
manufacturing (work material, raw work piece shape, and accuracy). The extra four digits, "ABCD", are
referred to as the "secondary code" and are intended to identify the production operation type and sequence.
The secondary code can be designed by the firm to serve its own pa1ii�ular needs.
The Miclass System: The MICLASS classification number can range from 12 to 30 digits. The
first 12 digits are universal code that can be applied to any part. Up to 18 additiona'l digits· can be
used to code data th_at are specific to the particular company or industry. For example, lot size, piece
time, cost data, and operation sequence 'might be' included in the 18 supplementary digits. The component
attributes coded in the first 12 digits of the MICLASS number are as follows:
1st digit Main shape
2nd and 3rd digits Shape elements
4th digit Position of shape elements
5th and 6th digits Main dimensions
7th digit Dimension ratio
8th digit Auxiliary din1ension
9th and l 0th digits Tolerance codes
11th and 12th digits Material codes
744 INDUSTRIAL ENGINEERING AND MANAGEMENT

47.3 PRODUCTION FLOW ANALYSIS (PFA)

Production Flow Analysis (PFA) is a method for identifying part families and associated grouping of
machine tools. The major aim of PFA is to eliminate all unnecessary routes, or material flow paths,
in order to find the simplest material flow system. The secondary aims are:
• To find families or lists of parts related so that all the parts in each family can be completely
processed on one special group of machines.
• To select the families and groups so that as far as possible no type of machine exists in more
than one group.
• To select the families and groups so that they draw their materials from a minimum number of
sources and deliver the processed components to the minimum number of destinations
• To select the families and groups so that incompatible processes are allocated to different groups.
Since PFA uses manufacturing data rather than design data to identify part families, it can overcome
two possible inconsistencies that can occur in parts classification and coding. First, parts whose basic
geometries are different may, nevertheless, require similar process routings. Second, parts whose geometries
are similar may nevertheless require different process routings.

47.3.1 PFA Procedure

1. Data collection: Part number and operation sequence are the data needed for production flow analysis,
which is available in shop documents called route sheets or operation sheets. Since each operation
is associated with a particular machine, the operation sequence will determine the machine sequence.
2. Sortation of process routings: Here, the parts are arranged into groups according to their process
routings similarity.
3. PFA chart: The processes used for each group of parts with identical routings are displayed in
a PFA chart (also known as Part-Machine Incidence Matrix), which is a tabulation of process or
machine code numbers for the entire parts group. A simplified example of PFA chart is shown
in Table 47.1. In this chart the value 1 indicates that the corresponding parts i requires processing
on machine j, and 0 (here empty space for clarity in presentation) indicates that no processing
of component i is accomplished on machine j.
Table 47.1 PFA chart
Parts (i)

Machines (j) A 8 C D E F G • H

1
2 1 1
3 1 1 1
4 1 1
5 1
6 1
7 • 1 1 1 1
4. Cluster analysis: From the PFA chart related groupings are identified and rearranged as a new
one which brings part groups together with similar machine sequences. The possible rearrangement
of original PFA chart is shown in Table 47.2, where different machine groupings are indicated
within blocks (machine cells).
GROUP TECHNOLOGY 745

Table 47.2 Rearranged PFA chart

Machines (j) C E 1 A

3 I 1 I
2 1 1
6 1 1
1 1 1 1
5 1 1
7 1 1
4 1 1

The major drawback in the production flow analysis is that the data used in the analysis are obtained
from existing production route sheets. Since, these route sheets have been prepared by different process
planners and the routings may contain unnecessary, non-optimal or illogical operations, the final machine
groupings obtained in the analysis may be sub optimal.
Cellular Manufacturing: Group technology is also very important for designing cellular manufacturing
systems. Cellular manufacturing involves processing a collection of similar parts (part families) on a dedicated
cluster (or cell) of machines or manufacturing processes. The cell formation problem is the decomposition
of the manufacturing systems into cells. Part families are identified such that they will be ideally processed
within a machine cell.
Organizing the production equipment into machine cells, where each cell specializes in the production
of a part family, is called cellular manufacturing.
47.3.2 Objectives in Cellular Manufacturing
• To reduce the manufacturing lead times—By reducing the setup, work part handling, waiting times,
and batch sizes.
• To reduce the work-in-process inventory—Smaller batch sizes and shorter lead times reduce work-
in-process.
• To improve quality—By allowing each cell to specialize in producing smaller number of different
parts which in turn will reduce process variability.
• To simplify production scheduling—The similarity among parts in the family reduces the complexity
of production scheduling.
• To reduce setup times—By using group tooling (cutting tools, jigs, and fixtures) that have been
designed to process the part family, rather than part tooling, which is designed for an individual
part. This reduces the number of individual tools required as well as the tool changing time between
parts.
Machine Cell Design: Design of the machine cell is a critical aspect in cellular manufacturing.
The cell design determines the performance of the machine cell.
Types of Machine Cells and Layouts: GT manufacturing cells can be classified according to the
number of machines and the degree to which the material flow is mechanized between machines. Four
common GT cell Configurations are:
1. Single machine cell---One machine plus supporting fixtures and tooling.
2. Group machine cell with manual handling—Arrangement of more than one machine used collectively
to produce one or more part families. Human operators perform the material handling function.
746 INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Group machine cell with semi-integrated handling—Uses a mechanized material handling system,
such as conveyor to move parts between machines in the cell.
4. Flexible manufacturing cell or flexible manufacturing system—Combines a fully integrated material
handling system with automated processing stations.
Application of Group technology: Application of cell formation and GT offers a solution to a
case of Emergency Room (ER) management to optimally manage the critically ill patients. Consider the
emergency room as a system where each patient is defined as a part and each medical procedure is
defined as a machine. Table 47.3 shows examples of medical procedures. Unlike other systems, the emergency
room is in constant operation. It uses a group of resources, including doctors, nurses, laboratories and
technicians. These resources provide the medical procedures for all the patients that are admitted into
the ER. Figure 47.5 presents an example of 10 typical patients and their respective processing sequences.
For each patient, different operation plans are illustrated.
Table 47.3 Examples of Medical procedures

Procedure # Medical procedure

Physical examination
2 Intravenous (IV) line placement
3 Laboratory values (electrolytes, white blood cells, etc.)
4 X-ray
5 Arterial blood gas data
6 Medication administration
7 Gastric suctioning
8 Respiratory intubation
9 Cardiac isoenzyme test
10 Cardioversion/defibrillation
Figure 47.5 illustrates the possible operation plans for patients admitted into the ER. The volume
represents the typical number of patients admitted with the same diagnostic problem during a 24-hour
shift. The patient number identifies the patient and the plan number corresponds to the number of alternative
plans to accomplish the same goals for the same patient. The capacity limit is an important component
in that several patients may require the same medical procedure at the same time, while there are a
limited number of resources available. Here the goal is to find an optimal operation plan for each
patient.
In general, the ER is run by a Triage system, meaning that when patients arrive to the ER they
are designated into a certain category and the most serious cases are given precedence. Generally, patients
with a less severe condition must wait until all the more serious cases are taken first. The advantage
of using this approach is that resources are efficiently used while shorter waiting times for patients are
achieved.
Once a patient arrives to the ER, the first medical procedure is usually a physical examination
to obtain a past medical history and determine the chief complaint. The exception occurs when a patient
arrives with a life-threatening situation, which requires immediate intervention (e.g. see patients #2 and
#3 in Figure 47.5). In this circumstance, this procedure is only temporarily postponed and as a result
each patient will undergo a physical examination. After a physical examination, a variety of actions can
be taken, such as starting an intravenous line, obtaining laboratory values, acquiring X-rays, medication
administration, gastric suctioning, respiratory intubation, or cardioversion/defibrillation (see Table 47.3).
GROUP TECHNOLOGY 747

Diagnostic tests, completed by the laboratory, can analyze data such as arterial blood gases, electrolytes,
white blood cells, and enzymes to help clinicians treat each patient. However, due to life-threatening
situations, the priority of medical procedures is adjusted depending on each patient's condition.

Vol Pt # Plan Chief Complaint Ref Procedure 4

# 4 I 2 3 4 5 6 7 8 9 10

20 1 I • SOB hest pain I 1,10 2,5 3,60 4,130 5,10 6,15 1 I 1 I

1 2 2 1,10 3,5 5,60 2,130 4,10 6,15
15 2 I • SOB ill atelectasis 3 2,5 . 1,130 3,10 4,15
2 2 4 1,5 ' 3,130 2,10 4,15
110 3 I *Abdominal pain 5 1,10 2,5 3,60 5,15 4,15
3 2 6 2,5 3,60 1,15 4,15
40 4 I • Fever 7 1,10 2,5 3.60 4,15
4 2 8 1,0 3,15 2.5 •
10 5 I *Attempted suicide 9 1,10 3,15 2,15
5 2 10 2.10 3,5 4,60 5,15 1,15
5 3 II 1,10 2,5 3,60
1,0 6 I •Bone fracture 12 1,10 2,15
6 2 13 1,10 2,5 3,60 4,15
30 7 I •Chest pain 14 1,10 2.5 3,60 4,10 6,15 5,15 7,2
7 2 15 1,10 2,5 3,10 5,15 4,5 6,2
7 3' 16 1,10 3.5 4,60 2,15 5,2
10 8 I • Bleeding 17 1,10 2,5 3,15
8 2 18 1,10 2,15
20 9 I • SOB r/t asthma 19 1,10 2,5 5,130 3,10 6,15 4,5
9 2 20 1,10 4,130 2,15 3,5
25 10 I • Arm and chest pain 21 1,10 2,5 3,60 5,10 6,15 4,15 7,2
10 2 22 1,10 2,5 4,15 5,5 3,15 6,2

Capacity Limit I 5 5 2 I 6

Figure 47.5 Example of patient processing sequence in the emergency room (where Vol. is volume,
Pt # is patient number, Ref # is the reference number, SOB is shortness of breath,
and r/t stands for related to)

For illustration purposes, consider patient #1 in Figure 47.5. He is admitted into the ER with complaints
of chest 'pain and shortness of breath. Consider plan #1 for patient #1; the first procedure is to give
a physical examination to inspect the chief complaint and observe a 12-lead ECG strip of the patient's
heart rhythm. The second medical procedure is to insert an intravenous line and acquire laboratory data.
Following this, a chest X-ray (procedure #4) is completed, arterial blood gases are obtained (procedure
#5), and lastly medication is administered (procedure #6). Now consider plan #2 of patient #1. This
plan begins with a physical examination and immediately afterwards acquiring a chest X-ray, inserting
an intravenous line, obtaining arterial blood gases, attaining laboratory values, and medication administration.
Now consider patient #2 in Figure 47.5. This patient is admitted into the emergency room with
complaints of shortness of breath, and he has a past medical history of atelectasis (partial lung collapse).
748 INDUSTRIAL ENGINEERING AND MANAGEMENT

Plan #1 for_pl!tient #2 involves immediately obtaining a chest X-ray to verify if it is indeed atelectasis.
Following this, an intravenous· line is inserted to acquire arterial blood gas and laboratory data. This
will provide detailed information, such as-the patient's pH level and the concentrations of different molecules,
including oxygen and carbon ·dioxide. Plan #2 of Patient #2 begins with immedi"ately inserting an intravenous
line, obtaining. arteria1 blood data, acquiring a chest X-ray, and administration of medication.
In order to increase the efficiency of resources and optimize ER management,- the following initial
solution is illustrated in Figure 4i6. In Figure 47.6, patients are organized into cells in which similar
procedures are completed. Only one plan was taken from each patient and grouped·with the corresponding
medical. procedures. The significance of this solution is that the ER can be an:anged such that similar
medical procedures can be accomplished together. The use of cell formation in the ER optimizes 1he
use of, resources and increases the rate of care_. Furthermore , there is a decrease in waiting time for
other patients.
Vol Pt Plan Ref Procedure#
# # #
I 2 (i 3 7 5 4 8 9 10

40 4 I 7 I 2 4 3

10 8 I 17 I 2 3

· 10 6 2 13 I 2 4 J

110

10
3

5
I

2
5

10
I

2
2

3
5

5
3

4
, .
4

I
.
20 I I I I 2 6 3 5 4
15 2 I 3 2 4 3 I
20 9 I· 19 I 2 6 3 5 4
30 7 I 14 I 2 6 J 4 5 7

25 10 I 21 I 2 6 3 5 4 7

Figure 47.6 Initial solution

Now we discuss how to improve the solution shown in Figure 47.6. In the initial solution it is
evident that all patients receive a physical examination and an intravenous ·Jine. Therefore, we recommend
procedures #1 and #2 to be an independent cell. Due to the frequency of procedures #6, 3. and 5, we
also recommend duplicating these procedures· in each cell. As a result, there are four cell operations.
Cell #1 is a common cell in that all patients receive procedures #1 and #2. Cells #2, 3 and 4 categorize
each patient to a group. that will receive similar medical procedures. The improved solution is demonstrated
in Figure 47.7. tab),; 47.4 displays the final grouping from Figure 47.7. This table illustrates what procedures
each patient will receive in their respective cell.
Table 47.4 Final grouping of improved solution

Cell Patient# Procedure#

Cell # I (Common) All Patients 1, 2
Cell # 2 4, 8, 6, 3, 5 6,_ 3, 1, ·s
Cell # 3 I, 2, 9 6' 3', 5 , 4, 8
Cell # 4 -7, 10 . 6, 3, 5', 9, .0
GROUP TECHNOLOGY 749

Vol Pt Plan Ref Procedure #

# # #
6 3 7 6 . 3 5 4 8 6" 3" 5' 9' 10

40 4 I 7 4 4

10 8 I• 17 3

10 6 2 13 4 4
4
110 3 I 5 5 5

10 5 2 10 4 4 I

20 1 1 1 6 3 5 4

4 3 3
15 2 1 2
----4
20 9 I 19 6 3 5

30 7 I 14 6 3 4 5 7

25 10 I 21 6 3 5 4 7

Figure 47.7 Improved solution

Determining optimal plans increases the efficiency of hospital resources, such as nurses, doctors,
and laboratories. Another outcome is a decrease in expenditure; by grouping different patient's routes,
staffing and materials will be conserved. A significant advantage of using cell formation is that it reduces
length of care and waiting time, while maintaining a high quality of care. In addition to these benefits,
cell formation allows patients to travel more rapidly through the ER, preventing a surplus of patients,
which is a common dilemma in the emergency room.
Benefits of Group technology: When group technology is applied, a manufacturing company will
typically realize the following benefits:
1. Product Engineering
• Reduce part proliferation
• Help design standardization
• Provide manufacturing feedback.
2. Manufacturing Engineering
• Process selection
• Tool selection
• Machine purchases
• Materials handling.
3. Production Engineering
• Reduce lead-time
• Reduce delays
• Reduce set-up time
• Improve product quality.
4. Production Planning and Control
• Group scheduling
• Stock accountability
750 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Reduce e�pediting
• Improved product design
• Reduced materials handling
• Better employee satisfaction.
5. Other Benefits
• Increased productivity
• Improved accuracy in estimation of costs
• Standardization of tooling, fi xturing and setups
• Variety reduction
. • Reduced set up times
• Better product delivery (helps to implement JIT) - Reduced cost of purchasing
• Improved plant efficiency:
 48
FLEXIBLE MANUFACTURING. SYSTEMS
(FMS)

48.1 INTRODUCTION
Flexibility has become a key consideration in the design of the manufacturing systems. Flexibility refers
to those properties of manufacturing system that support changes in production capabilities or activities.
Flexibility is referred to as the ability to identify and distinguish among the different part or product
styles processed by the system, quick changeover of operating instructions, and quick changeover of physical
setup. The flexibility is not a single homogeneous property but it consists of various different components
(Figure 48.1) such as machine flexibility, process flexibility, routing flexibility, volume flexibility etc.

Volume
flexibility

Manufacturing
: flexibility :'

Delivery
flexibility

Figure 48.1 Flexibility -In traditional FMS

A Flexible Manufacturing System (FMS) consists of a group of processing stations (usually CNC
machines), interconnected by means of an automated handling and storage system and controlled by an
integrated computer system. As this is capable of processing a variety of different types of jobs/parts
simultaneously under NC program control at the various workstations, it is referred to as FMS.
752 INDUSTRIAL ENGINEERING AND MAl� !\GEMENT

"A Flexible Manufacturing System (FMS) is a production system where a discrete number of raw
parts are processed . and assembled ·by controlled machines and/or robots"
An appropriate term for FMS would be flexible automated manufacturing system. The use of the
word "automated'' would distinguish this type of production technology from other manufacturing systems
that. are flexible but 'not automated, such as a manned GT. machine eel( The word "flexible" would
distinguish it from other manufacturing systems that are highly automated but not flexible, such as a
conventional transfer line:
FMS technology can be applied to the following production situations:
• The plant either produces parts in batches or uses manned GT cells, and management wants to automate.
· • It is possible to group the parts into part families, whose similarities permit them to be processed on the
machines in the flexible manufacturing system. Part similarities can be interpreted to mean that (i) the
parts belong to a common product and/or (ii) the parts possess similar geometries. In either case·, the
processing requirements of the parts must be sufficiently similar to allow them to be made on the FMS.
• The parts or products made by the facility are in the mid-volume, mid-variety production range.
If annual production range is below 5,000 to 75,000 parts year, an FMS is likely to be an expensive
alternative. If production volume is above this range, then a more specialize.d production system
should probably be considered.
Differences between FMS and Manually operated machine cell: The differences between installing
a flexible manufacturing system and implementing a manually operated machine cell are given in the
Table 48.1.
Table 48.1 FMS Vs Manually Operated Machine Cell

Flexible Manufacturing System Manually Operated Machin�Ce/1

Requires greater capital investment to install new equipment Only existing equipment to be rearranged
Technologically more sophisticated for the human resources Less sophisticated for human resources
Potential benefits are substantial-increased machine utilization, Potential benefits are less
reduced factory floor space, greater responsiveness to change,
lower inventory and manufacturing lead times, and higher labor
productivity.

Types of FIWS: Flexible manufacturing systems can be classified according to the number of machines
-used in the system and on the level cif flexibility designed into the system.
Ac�ording to number of machines: The foll?wing are typical categories:
I. Single machine cell,
2. Flexible manufacturing cell, and
3. Flexible manufacturing system.
Single ;nachine cell: It consists of one CNC machining center combined with a parts storage system
• for unattended operation. Completed parts are unloaded periodically from the parts storage unit, and raw
work parts are loaded into it. The cell can be designed to operate in a batch mode (machine processes
parts of a single style in specified lot sizes .and then _changed over to process a batch of next part style),
a flexible mode (capable of processing different part styles, responding to changes in production schedule,
and accepting new part introductions), or a1. combination of the two.
Flexible manufacturing cell: A flexible manufacturing cell (FMC) consists of two or three processing
workstations (typically CNC machining centers or turning centers) plus a parts handling system. The parts
handling system is connected to a load/unload station and usually includes a limited parts storage capacity.
FLEXIBLE MANUFACTURING SYSTEMS (FMS) 753

Flexible manufacturing system: A FMS has four or more processing stations connected mechanically
by a common parts handling system and electronically by a distributed computer system. An important
distinction between a FMS and a FMC is in the number of machines: a FMC has two or three machines,
while a FMS has four or more. Other differences are:
1. FMS generally includes non-processing workstations that support production but do not directly
participate in it. These other stations include part/pallet washing stations, coordinate measuring machines,
and so on.
2. Computer control system of a FMS is generally larger and more sophisticated, often including functions
not always found in a cell, such as diagnostics and tool monitoring. These additional functions
are needed more in a FMS than in a FMC because the FMS is more complex.
The distinguishing characteristics of these three categories of FMC and FMS are summarized in
Figure 48.2.

V
Flexible
o manufacturing
• E system
—z
-o 0
•o >
Flexible
• 2 manufacturing
cell

Single
machine
cell

2 or 3 4 or more Number of
machines

Figure 48.2 Characteristics of the three categories of FMC and FMS

According to the level of flexibility: The two categories of flexibility are:

1. Dedicated FMS.
2. Random-order FMS.
Dedicated FMS: A dedicated FMS is designed to produce a limited variety of part styles, and
the complete universe of parts to be made on the system is known in advance. The part family is likely
to be based on product commonality rather than geometric similarity. The product design is considered
stable, so the system can be designed with a certain amount of process specialization to make the operat;ons
more efficient. Instead of using general purpose machines, the machines can be designed for the specific
processes required to make the limited part family, thus increasing the production rate of the system.
Random-order FMS: A random-order FMS is more appropriate when the part family is large, there
are large variations in part configurations, new part designs will be introduced into the system and engineering
changes will occur in parts currently produced, and the production schedule is subject to change from
day to day. To accommodate these variations, the random-order FMS must be more flexible than the
dedicated FMS. It is equipped with general purpose machines to deal with the variations in product
and is capable of processing parts in various sequences (random order). A more sophisticated computer
control system is required for this FMS type.
754 INDUSTRIAL ENGINEERING AND MANAGEMENT

The dedicated FMS is less flexible but capable of higher production rates. The random-order FMS
is more flexible but at the cost of lower production rates. A comparison of these two FMS types is
presented in Figure 48.3. Table 48.2 presents a comparison of the dedicated FMS and random-order
FMS in terms of the four flexibility tests.

Random-
order FMS

>; Dedicated
FMS

Production rate
annual volume

Figure 48.3 Comparison of dedicated FMS and random-order FMS

Table 48.2 Comparison of dedicated FMS and random-order FMS in terms of four flexibility tests

System type Part variety Schedule change Error recovery New part
Dedicated FMS Limited. All Limited changes Limited by No. New part
parts known can be tolerated. sequential introductions
in advance processes. difficult.
Random-order Yes. Substantial Frequent and Machine redundancy Yes. System
FMS part variations significant changes minimizes effect of designed for new
possible. possible. machine breakdowns. part introductions.
Components of FMS: The several components of a FMS are:
1. Processing Stations: Typically the processing stations are computer numerical control (CNC) machine
tools, that perform machining operations on families of parts. They are designed with other types
of equipments including inspection stations, assembly work heads, and sheet metal processing. Most
of the machines in. FMS utilize randomly selectable heads to perform functions such as drilling,
tapping etc.
2. Material Handling and Storage System: Various types of material handling equipment are used
to transport the work parts and sub assemblies between the processing stations. For work transportation
individual conveyors are used. The load and unload stations are used for loading and unloading
of raw materials and finished parts. The material handling and storage system in a flexible manufacturing
system performs the following functions:
• Allows random, independent movement of work parts between stations.
• Enables handling of a variety of work part configurations.
• Provides temporary storage.
FLEXIBLE MANUFACTURING SYSTEMS (FMS) 755

• Provides convenient access for loading and unloading work parts-The handling system must
include locations for load/unload stations.
• Creates compatibility with computer control—The handling system must be under the direct
control of the computer system which directs it to the various workstations, load/unload stations,
and storage areas.
The material handling system, establishes the FMS layout and the layout configurations in FMS
can be classified into the following five categories:
In-line layout: In this type of layout the machines and handling system are arranged in a straight
line. In its simplest form, the parts progress from one workstation to the next in a well-defined sequence
with work always moves in one direction and no back-flow as shown in Figure 48.4.
Partially con pleted
work parts
Part transport system

Work flow

Mach Mach Much

Aut Ant Ant

Figure 48.4 FMS in-line layou (Lo'ad Man-Manua parts loading station, Unld Man-Manual parts
unloading station, Mach Aut-Automatect machining station)

Loup layout: The workstations are arranged in a loop that is served by a parts handling system
in the same shape, as shown in Figure 48.5. Parts usually Mow in one direction around the loop with
the capability to stop and be transferred to any station. A st:condary handling system is shown at each
workstation to allow unobstructed flow around the loop. The load/unload station(s) are typically located
at one end of the loop.

- Parts transport
Completed loop
parts
- • • •
DinNtion of
- • • • • work flow
Starting
workparts •

Figure 48.5 FMS loop layout

Ladder layout: It consists of a loop with rungs between the straight sections of the loop, on which
workstations are located, as shown in Figure 48.6. The rungs increase the number of possible ways of
getting from one machine to the next, and prevent the need for a secondary handling system. This reduces
the transport time between stations.
756 INDUSTRIAL ENGINEERING AND MANAGEMENT

_
Mach
Aut

IF
Mach
Aut
--••-
- 15.-
Direction of
workflow

Mach
Aut
--..-

Mach
Aut

► OCOO 0000 —.-

Start ng Completed
workrifrts parts

Fig e 48.6 FMS ladder layout

Rechg tech

Completed
parts
000 I oall eir'lisp
Unkid ■
000 Ma Aut
Starting
workparts p

Clog
Mach
Aut Aut

Mach
Aut

Mach Mach
Aut Aut

l.1
AGV AGV guidepath

Figure 48.7 FMS open field layout (AGV—atIomated guided vehicle, Rechg—battery recharging station for AGVs)
FLEXIBLE MANUFACTURING SYSTEMS (FMS) 757

Open field layout: This type of layout consists of multiple loops and ladders, and may include
sidings as well, as illustrated in Figure 48.7. This layout type is generally appropriate processing a large
family of parts. The number of different machine types may be limited, and parts are routed to different
workstations depending on which one becomes available first.
Robot-centered layout: This layout (Figure 48.8) uses one or more robots as the material handling
system. Industrial robots can be equipped with grippers that make them well suited for the handling
of rotational parts, and robot-centered FMS layouts are often used to process cylindrical or disk-shaped parts.
3. Auxiliary Equipments: Apart from the machine tools, FMS can also include cleaning, automated
measurement and inspection equipment.
Robot

Machine worktable Machine tool

Figure 48.8 FMS robot-centered layout

4. Computer Control System: Computer control is used to co-ordinate the activities of the processing
stations and material handling system. It oversees the operation of an entire FMS.
Some of the main functions of the controller are:
• Machine control (CNC, DNC)
• Production control
• Distribution of control instructions to workstations
• Tools control
• Tool life monitoring
• Traffic control-Management of primary material handling system
• Shuttle control-Control of the secondary handling system at each workstation
• Work piece monitoring
• Performance monitoring and reporting
• Diagnostics-To plan preventive maintenance in the system.
FMS Work Stations: The various types of machines used in FMS are:
Machining Centers: It is a highly automated stand-alone machine, which can be used as a component
of FMS. The special features like automatic tool changing and tool storage, use of palletized work parts
CNC control makes it more compatible with FMS.
Head Changers: Head changer is a special machine tool with capability to change tool heads.
Tool heads are usually multiple spindle tool modules that can be stored in a rack or drum located on
or near the machine. They are used for multiple simultaneous operations.
758 INDUSTRIAL ENGINEERING AND MANAGEMENT

Head Indexers: In this the heads are attached semiperrnently to an indexing mechanism on the
machine tool.
Milli11g Modules: Special milling machine modules help to ai;hieve higher production levels than
machine center.. A milling module can be horizontal, spindle, vertical spindle or multiple spindles.
Tumi11g Modules:" Many of the parts tl}llde on FMS are held in a pallet fixture throughout processing
on the FMS, thus the turning mo,dule must be designed to rotate the single point tool around the work.
Assembly Workstations: Industrial robots are usually considered to be the most appropriate for
automated assembly workstations in FMS. Thi;y can be programmed to perform tasks with variation in
sequence and motion patterns to accommodate the different products made on the systern.
/11spectio11 Stations: Inspection can be included in FMS either at the wqrkstations or by designing
special inspec;tion stations. Co-ordinate measuring machines, special inspection probes that can be used
in machine tool spindle and machine vision..
Sheet metal Processi11g Macl,i11es: Includes processing machines for opera'tions such as punching,
shearing, bending, forming etc.
Forgi11g Statio11s: FMS are developed to automate the forging.
FMS Design: The important decisions in designing and developing FMS fall in to two categories:
Initial specification decisions and Implementation decisions.
Initial· specificatio11 decisions:
• Types of parts to be produced (variety)
• Process planning for these p,arts
• Type of flexibility that is required
• Type of FMS to be developed
• Type, capacity specification of material · handling systems
•. Decide the control system. i.e., hierarchy of computer control.
Impleme,1tatio11 decisio11s:
• Determination of layout of F.MS
• Detemline the number of pallets required
• Determine tpe type and number of each type of fixture and design of these fixtures.
• Specification of strategies for FMS.
FMS Be11efits:
• Increased machine utilization
• Reduced capital investment
• Fewer machines required
• Reduction in the amount ·of factory floor space required
• Greater responsiveness to change
• Reduced inventory requirements
• Lower manufacturing lead times
• Reduced direct labor requirements and higher labor productivity
• Opportunity for unattended production
• Consistent quality
• Better control ·of work.
 49
----------------------------------
INDUSTRIAL PSYCHOLOGY

49.1 INTRODUCTION
Industrial and organizational psychology also known as work psychology, work and organizational
psych9logy, occupational psychology, personnel psychology or talent assessment mainly concerns in the
application of psychological theories, research methods; and intervention strategies to issues relating to
task oriented groups such as those in the workplace or in non-workplace settings. This is commonly
associated with the interactions between workgroup membe.rs, leadership, management, and other aspects
of task oriented group mentality and behavior. The .Industrial psychologists are interested in making organiza­
tions more productive ensuring physically and psychologically productive and healthy lives of work group
members. Some of the relevant topics in Industrial Psychology include personnel psychology, motivation
and leadership, employee selection, training and development, organization development and guided change,
organizational behavior, and work and familY, issues.
This chapter discusses the concepts and need for knowing Industrial Psychology. Psychology deals
with the study of human beh�vior. The personnel problems are essentially the problems of industrial
psychology and constitute a main subject of study. The individual comes in contact with the personnel
department of an industry at the time of recruitment. The personnel department encounters with the problems
of selection and placement growing out of individual differences at the time of recruitment. Many of
the- psychological studies in industry have been directed to tests, rating· scales, interviews, and similar ·
techniques ap.d devices fo� use in vocational selection.
Concepts: ,It has been recognized that some of the greatest improvements in competence result
from training not only the workers but also the foremen and executives. The principles of motivation
and learning follow the accident prevention in the industry, awareness and implementation· of safety· and
health habits, and development of efficient habits of work follow. The problems of morale and commitment,
grievan�es and misunderstanding; and various aspects of labour and management relations are unavoidable .
in any industry. There needs a good understanding of human motives, about which modem psychology can
help. In order to understand the real application of psychology in personnel, there is a need to study what
is industrial psychology, its objectives, and functions and how does it helps in the area of personnel
management?
 760 INDUSTRIAL ENGINEERING AND MANAGEMENT

, 49.1.1 Definition
The study of people at work is known as Industrial psychology. It is dealing with the aptitudes and
qualifications for a job. Industrial psychology is firstly the study of human behavior and is concerned
with the discovery of information relating to human behavior. Secondly, it is concerned with the application
of information about human behavior to the various problems of human life. Industrial _psychology holds
the professional features of psychology. This makes a study of human relations, mental health of the
personnel on the job and ways to maintain good mental health for those people who have become confused
and upset in their job. It is the study of relations between the bosses and subordinates. How the boss
can tackle the subordinate and vice-ver:sa. The application of psychology to the problems of industry
is mainly in the areas of placement, training and study of the behavior of the people in the organization,
the ergonomic design of man-machine system, etc.
. To quote William Shakespeare, "All- the world's a stage, and all the men and women are merely
player." Each one of us plays different roles at various -stages of life, like one at schools, at home,
in colleges and in social and political circle�. As we charge hats from one ro.le td another we are actually
becoming different individuals. Industrial psychology addresses itself to the study of behavior· at these
various roles of life and the application of information about human behavior to the solution of
human problems. The main aim with which Industrial Psychology is studied is to give the worker greater
physical and mental ease at his work, so that he will enjoy th; work and improve the productivity.
The aim of industrial psychology can be described as follows:
(a) Investigating in an unbiased manner the ways in which psychological problems are handled· at
present. · ·.
(b) Developing new methods and to modify the methods which have been tried out and evaluated.
(c) Formulation of certain principles which will help in the solution of new problems.
The aim of industrial psychological is explore rather than management. The scope of industrial
psychology is limited to material and social environn1ental to which an individual adapts himself while
he is at work and by which his attitude is modified. It is important to note that industrial psychology
lays emphasis on scientific research aspects of people at work and omits many of the routine managerial
details. Industrial psychology aids in the efficient management of people at wor�.

49.2 EVOLUTION OF INDUSTRIAL PSYCHOLOGY

Frederick W. Taylor, al.so well-known us the engineer in management, after he· advanced personnel �nagement
in various private manufactµring companies during the last decades of the 1800's, made his efforts to
promote and further give time and effort towards the further enhimcement of it. Taylor made i;nore advancement
in· core components, concepts, principles and applications or practices in first decade of the 1900 's and
before 1907 of what we now call HRM, HRD, HR, Human Capital Management, Personnel Management,.
Industrial and Organizational Psychology, Organizational Behavior and Development. In oast these were
called ·as Job Performance Measurement, Job Analysis, Job Design, Job Enrichment, Job Enlargement,
Job Restructuring, Benchmarking/Standardizing, Delegating, Change Process Management, Classifications,
Cost-Benefit Analysis, Applied Motivation at Work, and Organizational Re-Engineering/Reduction-In-Labor
Force/Down-Sizing/Right-Sizing or Laying-Off.
Taylor introduced the basic economics concepts, theories, and practices such as:
·• Return-On-Investment (ROI).
• Break-Even Point.
• Feasibility Study and Analysis.
INDUSTRIAL PSYCHOLOGY 761

In fact the science of management introduced by Taylor were so advanced at. that time that Frederick
W. Taylor Scientific Management enlightened a high caliber manag�ment team named " Vickers"
brought from England which was &oing to be used in the NAVY in lieu of Taylor's by one skeptic
major division.
According to th0 author of the text book about Taylor's systems, there is no account of whether
The Vicker's System was ever. used in the NAVY. Taylor's certainly was adopted and used more by
some than by others. On the contrary, when Taylor executed his in-kind "government-efficiency" consulting
service with the ARMY, he found that they were quite advanced already. In the first decade of 1900
The ARMY already "selected officers from the line by competitive examinations" or what we might
'now refer to as civil servi_ce process.
Taylor's first contributions to this science within United States of America were with the engineering
and manufacturing work of Navy yards and Ai!lly Ordinance Department. In 'the present day world these
are applied to other industries, 'and business-sectors such as the non-profit sector, publi� sector, and private
sector.
Progress of Organizational Psychology: According to Uhlaner, "Effective behavior and work
performance are not always the additive effects of whatever variables may be involved, as different variables
interact in this process and may be complicated further with different types of jobs." The development
.of organizational psychology has entailed a growing attention in leadership styles, management ph_ilosophies.
Both human satisfactions and organizational effectiveness. are very well related to the Organizational policies
and structures, incentive systems, and other aspects of organizations. Simultaneously to tlie development
of Industrial Psychology there was also developments in the areas of Human E�gineering or Ergonomics
which is dealt in a different chaJ?ter. The objective of Industrial Psychology which is an interdisciplinary
field is to design physical equipment and facilities tailored to human abilities and limitations. Large efforts
•have been put in by the industrial psychologists to study the indepe.ndent relationships between specific
variables on one ha�d and various aspects of work-related· behavior on the other.

49.3 PRIMARY ROLE OF INDUSTRIAL PSYCHOLOGISTS

The primary role of industrial psychologists is in the dealing of human problems in the in�ustrial arena.
Industrial psychologists involve in a variety of activities, but in a sense their roles can be viewed as
relating either to the science of psychology or to the profession of p�ychology. With deference to' this
there is a need for an emphasis about the profession of psychology and needs to be rooted in psychologi­
cal research. Industrial psychologists work for an organization often work in the HR department.
Psychology as a profession is concerned with the 'application' of knowledge to some practical problem.
Th�s, industrial psychologists who perform such functions are serving as professional practitioners. Gene­
rally the industrial psychologist work as independent' consultants or applied academic researchers for the
· Industry.
Psychologist's Role in Individual Evaluation: In the evaluation of Individuals, the Industrial psychologist
functions much like a clinical expert in assessing the potentialities of individual for specific positions,
promotions, and so forth, or in counseling the individual himself. This is one of the only fields of individual
evaluation where the psychologist in industry applies hi., psychological background extensively iri dealing
with individuals as individuals. The Industrial psychologist deals with human behavior in conceptual terms
than on an individual basis. The following a.re the areas of the management where the various findings,
principles and techniques of industrial psychology are applied:
· (a) Selection and placement of employees
(b) Tr<1ining and executive ·development
762 INDUSTRIAL ENGINEERING AND MANAGEMENT

(c) Human engineering

(d) Motivation of employees
· (e) Attitude and morale
(f) Counseling for employees
(g) Public relations
(h) Organizational behavior.

REVIEW QUESTIQNS

49.t What is significance of industrial psychology in the present day of competitive world?
49.2 Explain the contributions made by the Taylor in the field of industrial P,sychology.
49.3 J�stify the need and role of industrial psychologists.
49.4 Enumerate the application of industrial psychology in an Industry.

I
 50
SERVICE OPERATIONS AND
SERVICE PRODUCTS
_______ 11111118 ____________ "________________

50.1 INTRODUCTION
The growth of service sector businesses during the last three decades has been enormous and it represents
a big challenge to the service provider today. In the developed nations such as the USA or EU
countries, 'services represents almost 75% of the total GDP generated. The service sector includes a
0

diversity of businesses such as banking, communication, travel, hospitality, health care, and education
etc. This chapter: intends to examine the following objectives to study the service systems and processes:
• to define 'service operations' and to understand the nature and purpose of service operations manage­
ment in general,
• to define and classify the 'service product' and to compare with· 'manufactured goods',
• to identify and understand 'service characteristics' as different from that of manufactured goods.
50.2 SERVICE OPERATIONS MANAGEMENT
Operations management deals with the production and delivery of service products. In 'this regard, it
focuses on the day to day operations, improving the service operations in the medium tenn, and developing
a framework for future operations. However, operations management is a line function where the management
has to deal with day to day issues of providing quality and customer satisfaction as well as meeting
the operational and financial targets of the company. For the efficient and effective prod:iction and delivery
of services requires planning as well as successful implementation of strategies. In the manufacturing
sector, it's about the efficient and effective production of tangible goods that are normally studied under
'Industrial Engineering'.
· But in the service sector such as travel, communication, courism and hotel or banks, the production
function does not involve any production of tangible goods. Nevertheless, services are considered virtual
product, and as in the manufacturing sector, service products need to be produced and delivered to customer
as efficiently and effectively as possible.
In the production of goods and services, one of the ctitical issues· is the efficient and effective .
. allocation of resources. Such resources are raw materials, capital, human resources as well as machinery
and equipment. In addition, space and facilities (also considered as resources) are also required for
the production function. Efficient and effective allocation of these resources for the production
"/64 INDUSTRIAL ENGINEERING AND MANAGEMENT

function becomes the ultimate objective ,of Operations Management function in general. In the service
sector, the focus of operations management is mainly on managing customer expectations and experience.
50.3 SERVICES PRODUCTS AND SERV.ICE CHARACTERISTICS
Service products are either collection of service activities or a combination of services activities and
some fo� of tangible goods that are offered in the market place for a price. Even most of the manufactured.
goods that are considered purely tangible can have some elements of intangible services attached to it.
Services operation is different from the production of goods in many' ways. This is because, services
as products differ from the manufactured products and goods. In order to understand these differences, ·
we should first examine the nature and characteristics of service products. Three major characteristics
any services are as follows:
• Services are intangible 6 Intangibility
• Services are heterogeneous 6 Heterogeneity ,
• Services are perishable 5 Perishability
The first important difference between goods and services is that the fatter is intangible or virtual.
This means, the service products cannot be seen or felt as in the case of goods. Service product is
rather an experience. Some services such as teaching or treating a patient by a doctor are at the extreme
end of the product range. They are called pure services where human interaction is high. But.some service
product such as a flight in an airline, provide some tangible components to the service element. The
aircraft, seat, flight ticket etc. are such tangible components. It must be born in mind that every service
product has some form of tangible component.
. The secprtd most important characteristic of a service product is heterogeneity. Being heterogeneous
means, the delivery of a service product, even if it is similar in nature, is different from each other.
For example, the experience of reserving a hotel room to checking in and staying- in the hotel is different
every time we purchase · hotel product. . We cannot be guaranteed to get the same experience even if
we purchase from the same hotel.
Moreover, because of this nature, it is also difficult to stoie the ·service products for future consumption.
Service is thus a perishable product and "it cannot be stored for future sale or use. Moreover, the consumer
cannot claim any ownership as in the case of a manufactured good such as a car.
The fourth and one of the most important characteristics of services is the simultaneous production
and consumption of service products. This means, the production and consumption take place at the
same time. When the service products are produced and delivered (either by the employees or employees
and technology), it is almost immediately consumed by the customer. Sometimes, the customer participates
in the production and delivery process while consuming.
50.4 OPERATIONS MANAGEM!=N T IN THE SERVICE SECTOR
The above characteristics make the service a unique product. Efficiency and effectiveness of service production
and delivery also become difficult to achieve but not impossible. In the service operations management,
we therefore attempt to apply the principles and concepts of the production methods and rational operafions
management tools to achieve this objective. The tem1 'operation' in the service sector is synonymous
with
· production function in the manufacturing sector.
The service opedtions management therefore deals with issues of service production and delivery.
As in the manufacturiag sector, the objectives are clear: effective and efficient allocation bf resources and
the quality of services produced. In order to achieve this objective, we use rational and scientific methods
and tools to plane, analyze, evaluate (control), and make sound decisions. Although it is line function,
operations management requires the heip of staff functions such as marketing, HRM, and finance as well.
 51
--------------------------------- ERGONOMICS

·summary: Definition �f Ergonomics, Objectives, Is Ergonomics related with productivity? A Man-Machine

system, Man in .a control loop system, Ergonomics in Computer work station.

51.1 DEFINITION OF ERGNOMICS

The word Ergonomics ha� its origin in two Greek words Ergos meaning work and Nomos meaning laws.
So, it is the study of the man in relation to his work. The word ergonomics is used commonly in Europe.
· In USA and· other countries it is called by the name "human engineering or it is also called human
factors rngineering".- Today, how.ever, the word .is used to descripe the science of "designing the job
to fit the worker, not forcing the worker to fit the job."
Ergonomics is a discipline which i�volves arranging the enviro!}Jl1ent to fit the person in it. When
ergonomics is applied correctly in the work environrrlent, visual.and musculoskeletal discomfort and fatigue
are reduced significantly. Ergonomics covers .all· aspects of a job; from the physical stresses it- places·
on joints,. muscles, nerves, tendons, bones and the like, to environmental factors which can affect hearing,
vision, and general comfort and health. ILO defines human engineering as, "The application of human
biological sciences along with engineering sciences to achieve optimum· mutual adjustment of1 me-n and
his work, the benefits being measured in ·terms_ of human efficiency and well-being." The human factors
or human engineering is concerned with man-machine system. Thus another definition which highlights
the.man-machine system is, "The design ofhuman tasks, man machine systerv, ,\nd effective accomplislunent
of the job, including displays for presenting information to human sensors, controls for human, operations
and complex man-machine systems."
As mentioned above the Physical stressors include repetitive motions such as those caused by typing
o! continual use of a manual screwdriver. Other physical stressors could be tasks involving vibration such
__ as using a jackhammer, or tasks which involve using· excessive force, such as lifting a heavy box ofbooks.
Working in an awkward position, such as holding a telephone to your ear with your shoulder, can also
cause problems. _Repetitive motions, vibration, excessive force, and awkward postitions are frequently
linked to ergonomic disorders; however, the majority of"Cumuhitive Trauma Disorders" (CTDs}'or_"Repe­
titive Strain Injuries" (RSis) are caused by repeti_tive motions that would not result iii undue stress or harm
ifonly performed once. Carpal tunnel syndrome, Tendonitis, Tenosynovitis, DeQuarvain's syndrome, Tiioracic
·outlet Syndrome, many back injuries, and several oth�r conditions may result from repetitive motions.
Environmental factors could include such things as indoor air quality or excessive noise. "Sick
building syndrome," with its accompanying headaches, congestion, fatigue �nd even rashes, can' result

"
766 INDUSTRIAL ENGINEERING AND MANAGEMENT

from poor air quality in a building or office. Excessive noise around heavy machinery or equipment
can cause permanent hearing loss. Improper lighting can cause eyestrain and headaches, especially in
conjunction with a computer monitor. Listen to the signals your body gives you. If you suffer pain in
the wrists or hands after a long day of typing, examine your work area and work practices to see if
they may be causing the problems. Learn to make adjustments. Raise or lower chairs to avoid typing
with your wrists at an odd angle. Adjust computer monitors to avoid glare. Take frequent breaks from
repetitive tasks to give your body a rest. Always use proper lifting techniques. Sometimes small modifications
to work procedures, posture, habits, and/or work station design can make a big difference in the way
you feel at the end of a day.

51.2 OBJECTIVES
Human engineering focuses on human beings and their interaction with products, equipment facilities
and environments used in the work. Human engineering seeks to change the things people use and the
environment in which they use the things to match in a better way the capabilities, limitations and needs
of people.
The two broader objectives of ergonomics are:
1. To enhance the efficiency and effectiveness with which the activities is carried out so as to increase
the convenience of use, reduced errors and increase the productivity.
2. To enhance certain desirable human values including safety reduced stress and fatigue and improved
quality of life.
Scope of Ergonomics: The scope of ergonomics is to design for human use and optimize the
working and living conditions and thereby making the job fit the worker, not forcing the worker to fit
the job.
The various disciplines that are going to have influence on human factors are:
1. Engineering, 2. Physiology,
3. Anatomy, 4. Psychology,
5. Industrial hygiene.
51.3 IS ERGONOMICS RELATED WITH PRODUCTIVITY?
In simple terms Productivity is the ratio of Output to Input. Productivity is a powerful tool for improve
the standards of living of people and to enhance the quality of work life (QWL). Ergonomics is concerned
AIMS IN ERGONOMICS USER-SYSTEM 'MATCH' •

Health, Safety, Satisfaction, Usability Effectiveness, Efficiency,

Comfort, Convenience and Interest
Utility [ Performance (Quality and Quantity)

Absenteeism, Labour turnover

Motivation, Commitment,
Acceptance of change

I Purchase, Use, Sell

Well-being of Well-being of
employee or user employer or producer

Figure 51.1 Benefits of ergonomics to the employees

ERGONOMICS 767

with man and his working conditions. Ergonomics aims at providing comfort and improved working condi-
tions so as to channelize the energy, skills of the workers into constructive productive work. This
improves the productivity, safety and reduces the fatigue of the worker. This helps to increase the
plant utilization, energy, skills of the workers into constructive productive work. This accounts for
increased productivity, safety and reduces the fatigue. Figure 51.1 gives the benefits of ergonomics to
the employees.

51.4 A MAN-MACHINE SYSTEM

A man-machine system consists of the following component as shown in Figure 51.2.
1. Design of information displays.
2. Design of controls.
3. Environmental factors.

Training and experience

Sensory
Functions

Data Pipeessing
Decision-Making

Manipulative
Functions

Environment, i.e., light, hear, noise, humidity, vibration

Figure 51.2 Man-Machine System Diagrammatic representation

Man in a Control Loop System: A typical man-machine control loop is shown in Figure 51.3.

Decision Element Display Element

Display Communication Channel

Control [lenient
Decision
Communication
Channel

Control Communication Channel

Figure 51.3 Man-Machine control loop system

Decision Communication Channel: The man machine control loop system starts with the decision
communication channel. The information is sent to the operator from a display element through display
communication channel. Any source of information which aids the operator in the control process is
called as display. The typical displays include dial gauges, digital displays, warning lights, etc.
768 INDUSTRIAL ENGINEERING AND MANAGEMENT

Types of displays: The displays can be classified as two: visual and audio.
1. Visual Displays
(a) Quantitative display
(b) Qualitative display
(c) Check display.
2. Auditory displays.
Decision Commun ,ion Channel: In a decision communication channel the information from .a display
is passed on to the control mechanism of the brain of the man via nervous system. There it is processed
to arrive at a decision relative to the required performance. This decision is communicated to mechanical
system of the human bone and muscular system which completes the decision communication channel.
Control Communication Channel: The control communication channel has a control. It is any device
which regulates the action of a machine. Some of the typical control includes hand wheels, levers, pedals,
control knobs, push buttons, etc. The contact between the operator and machine takes place at two channel
only, i.e., display communication channel and control communication channel. A poor design of display
and control may cause an error in the system hence the displays and controls must be designed ergonomically.
51.4.1 Design and Types of Controls
Controls are the means by which information is transmitted to the machine from the man. So the selection
of control is important and should be -considered as a functional requirement of the system. The various
types of controls are:
Hand controls: To design the dimensions of hand controls the anthropometric data for the human
hand can be used as an aid.
•
Check overhead lights and
ventilation ducts
4t2:31.°

Check for glare front and hack O

•
Hips, back and neck
form straight line
Display is slightly
below eye lavel

Wrists form straight

extension of the
Thighs are parallal
fore arms
to the floor

Foot are flat on the ground

or on a footrest

Figure 51.4 Optimum equipment set-up for ergonomics

ERGONOMICS 769

Hand levers: Levers give a quick control action anq can acCOQ'UTIOdate large forces. They are
not suitable for fine adjustments, but levers can provide efficient ON/OFF or step by step control.
·Hand wheels: Hand wneel provide a controlling torque via both hands and_ they are_ used for heavy
loads with good accuracy of adjus�ents.
Cranks: If it required to provide torque via one hand, cranks are used: Smaller cranks are used
· for fa�t control.
Knobs: Rotating knobs are recommended for light loading control with eith_er fingers or with whole
hand. Knobs are typically use in applications such as instrument control panels. Push buttons and toggle
switches: These are essentially used as light load ON/OFF controls and are normally designed for operation
by -one · finger.
Joysticks: This is a type of hand control now extensively use in computer applications including
CNC machines.
Foot pedals: These are used for fast action control with medium or heavy loading capacity. They
lack iri accuracy and range which may be obtained with hand controls. These are used in sitting position.
51.5 ANTHROPOMETRY
Anthropometry is a science that deals with the measurements of the dimensions and certain other physi­
cal characteristics of the body such as volumes, centre of gravity, inertial properties and body
segments.
-�
There are two pnmary types of body measurements: Static and dynamic (functional).
Static dimensions are measurements taken when the body is· in a fixed position. These consist
of:
• Skeletal dimensions (between dimensions of joints).
• Contour dimensions (skin surface dimensions).
The body measurements vary as a function of age, sex and for different countries. There are differences
in anthropometrics of male and female. Figure 51.5 gives the details of the anthropometric dat� or specific
body features. The dynamic (functional) dimensions are taken under conditions in which the body is
engaged in some physical activity.
Application of Anthropometric ,Data: It is essential in the design when items are designed for.
specific• groups soch as adult males, children, �tc., the data used should be specific for such groups
in the country or culture in question.

51.5.1 Principles in the Application of Anthropometric Data

Design for .extreme individuals: Designing for maximum population value is the recommended strategy
if a given maximum (high) value of some design feature should accommodate others. Designing for minimum
population value is an appropriate strategy if a given minimum (low) value of some design feature has
to accommodate all. For example,_ the distance of control switch from the operator ·and force required
to operate the switch.
Designing for adjustable range: While designing the features of equipment or facilities, provision fo{
adjust111,ent must be there for the individual who use t�em e.g., chairs, desk height, t.:tc.
Designing for average: Designers often design for the average as a compromise as do not have
to deal with anthropometric data.
 770 INDUSTRIAL ENGINEERING AND MANAGEMENT

Stature height (I)

i Stature height (I)

_l_ Eye height (2) Stature height erccl (6)

1--�-Shouldcr
height (3)
Chest depth -

Elbow rest -Thigh clearance height (9)

1
height (8)

T !- Buttock - knee
length (11)

Popliteal height (12)

(
) j- l·lbowtodbm, brcadth(l4)
�

ill
, �Hip brcad,n (15)
r

Fig 51.5 Anthropometric data (specific body features).

51.6 ANTHROPOMETRY FOR WORKPLACE DESIGN

While designing the workplace the designer must begin with the operator in mind. The design should
. be_ in such a way that the operator will have adequate and comfortable posture that he can see what
he must an operate his controls in an effective manner. If the workplace is not properly adapted to dimensions
and to his typically human characteristics, he will not bt:: able to perform his work with maximum efficiency.
The production jobs in industry oblige the worker to remain sitting or standing for long of time ·while
performing a given series of tasks. Such workplace design is influenced by many considerations. Inadequate
· design of the Wl)rkplaces will inhibit the ability of the worker to perform his tasks and may result the
injuries, strain or fatigue a reduction in quality. The determination of the work place involves the thorough
examination of the elements of work cycle and the body measurements, reach and capabilities of the wo'rker.
Dimensions ·of working surface: The normal and maximum working area for an operator is shown
in the Figure 51,6. The circumscribed line defines the maximum reach area for the operator. Any control or
ERGONOMICS 771

object that is to be grasped must be located within this area. It is the greatest distance from which from
which small objects can be procured. Large and heavy objects will have to be located even closer to
the body.
Normal work
Maximum work area area Work position

Male

Maximum work area Work position

Normal
work
are

Edge of work.

height

40
58
Female

Maximum

itto,
411

A(11(1111111 .A1.
10

at tt.„
Normal

.wP
Figure 51.6 Normal and maximum working space in three dimensions
772 INDUSTRIAL ENGINEERING AND MANAGEMENT

Dimensions of the working envelope: Operator not only performs the jobs in horizontal planes,
work is often done above the horizontal working plane. This is particularly important in man-machine
system when controls are to be manipulated. To determine the location of where controls are to be placed,
it is necessary to visualize a complex three-dimensional envelope of the space in front of the operator.
Design of workplace height: The correct working height depends on the nature of the task being
done. Many manual tasks are performed-when the work is at elbow height. If the job requires the perception
of fine visual detail, it will be necessary to raise the work above elbow height and bring it closer to
the eye.
84.7

3.9.5
35.7"
33.5
18.6 I 9
110 1 16-6
18.0
1170_
1
69.2" 5 —I

84.869.1
50.3
viri
12 9 .2
12.0 10.4 86
1 1.1 7.0

54.7 —

F-

: O R 3.2

40"
37.2 Counter ht

32.4 c cP

-0

7.6
24 min

19.2

3.2

5
3.9 I 4.
3.3
'hoe— 2 1-0-2

Figure 51./ Human dimensions of the average adult male

ERGONOMICS 773

Sit-Stand and Standing Workplace: In general, a sit-stand workplace is more desirable than either
sit or a stand workplace. Sit-stand �vorkplace is to be suitable for use of the operators, it must be provided
with an adjust height chair and an adjustable foot rest. However, the workplace for a standin•g job will
be greatly improved if it is made adjustable in height. When this is done, the distance from the floor.
to top of the working surface, should be variable from 36 to 42 inches for females ijnd 40 to 46 inchys
for males (Figure 51.7).
The Various aspects of dimensions of chairs like the width of the chafr, depth of the seat, the
back rest dimension is considered in designing °the �hair.
The general guidelille$ for designing the workplace are enumerated below:
(a) Within the· normal working area of the operator the materials and tools should be located as far
as possible.
(b) The materials and tools should be located in the_ order which they are used in assembly.
(c) Wherever possible gravity should be employed to make the raw materials reach the Qperator and
deliver it to next work station.
(d) Maximum comfort to the operator·must be kept in mind while designing the height of the chair
and other dimensions.
(e) Foot pedals should be used wherever possible.
51.7 ERGONOMICS IN COMPUTER WORKSTATION
The use of computer is becoming imperative in the day-to-day life. So, the need for kn.owing the Ergonomics
in Computer workstation is important. It is sure that the students referring this text will be using computers
in their routine work tomorrow when they take up a job. Some Suggestions for designing the computer
worlcstation is discussed.
Setting up the office using ergonomic considerations is important to protect the health of the employee.
Most ergonomic experts agree on certain ergonomic designs that will further the well being and productivity
of the employee. Similar to any workstation, Ergonomic design and correct compu_ter posture are essential
for good computer workstation (Figure; 51.8). It is most important that to maintain good posture at an
ergonomic workstation and otherwise there is a good chance for computer-related injury.

Figure 51.8 Ergonomics In Computer station

774 INDUSTRIAL ENGINEERING AND MANAGEMENT

Ergonomically designed computer furniture and accessories assist in creating a more healthy and
comfortable workstation. The adjustable LCD monitor arms, ergonomic keyboard trays, am1 rests and
wrist rests allow healthy positioning. The height and tilt adjustable computer workstations and laptop
stands can be used in sit stand position are worthwhile investments for health and productivity.Another
factor in designing the computer work station is the number of users. If·the computer is used by one
person then the arrangement can be optimized for that single person's size and shape, and features.
The case is different, _when there are multiple users. There ·is a need to create an arrangement that
closely satisfies the needs of the extremes that is the smallest and tallest, thinnest and broadest persons,
as well as those in between. The time of use is also to be considered. If it's a few minutes a day
then ergonomic issues need not be of a high priority. If use is more than 1 hour per day, it is advisable
that you create an ergonomic arrangement and more than 4 hours, then a thorough ergonomic setting
is needed...
For Desktops it is advisable that the computer monitor is separated from the keyboard. This permits
the user to easily place each of the separate components (monitor, keyboard, and mouse} at comfortable
settings. A Laptop pr notebook computers are designed for short periods of computer work, but many
people are using them for fulltime compu!ing. Ergonomic designs for laptop are more difficult because
laptop design ,is inherently problematic. That's because when the screen is at a comfortable height and
distance, the keyboard isn't and vice-versa. If a laptop is used for sustained lengths of time, purchasing
an external keyboard can be considered preferably with a negative-tilt keyboard tray. This \1/ill help in
arranging the workspace to create a good workstation layout. The computer system (monit@r, CPU system
unit, keyboard, and mouse) must be placed on a stable working surface with adequate room for proper
arrangement. The work surface should be between 27"-30" above the floor (suitable for most adults).
The system that is adjustable in height allows tilting .the keyboard down for ·better wrist posture. This
allows using the mouse with upper arms relaxed and as close · to the body as possible, arid with the
wrist in a comfortable and neutral position. ·
In a computer work station, a comfortable chair is necessary. As the name suggests it is for the_
users comfort to sit in. It should have ·a good backrest that provides support, and also possible to adjust
both the height and the tilt of the backrest. The seated posture of 100-110 degrees and NOT the upright
90 degree posture is often considered as the best posture. There are significant decreases in postural
muscle activity and intervertebral disc pressure in the lumbar spine when the user sets the chair's backrest
to the recommended reclined posture and work for the body.
Kind of work-Priority?
• Word processing-arrange . the best keyboard/mouse position 1s high priority.
• Net surfing, graphic design-a_rrange the best mouse position is high priority.
• Data entry-arrange· the best numeric keypad/keyboard is a high priority.
• Games-arrange the best keyboard/mouse/game pad is a high priority.·
51.7.1 Positioning the Monitor Screen
• The documents must be placed for reading ·as close to the computer monitor.
Computer monitor: The computer monitor should be placed directly in front and facing the
user. It should not be angled to the left or right. This helps to eliminate excessive neck twisting.
Center the monitor on the user. The body and/or neck should not be twisted when looking at the
screen.
. Monitor height: The Monitor height is also important. The users should not have to tilt heads
up or down to view the screen image clearly. Seated comfortably, the user's eyes should at least be
ERGONOMICS 775

in line with a point on the screen about 2-3" below the top of the monitor casing (not the screen).
Sit back in the chair at an angle of around 100-110 degrees (i.e., slight recline) and hold the right
arm out horizontally, the middle finger of the user should almost touch the center of the screen. This
is the best position for monitor.
Viewing distance: The monitor should be at a comfortable horizontal distance for viewing, which
usually is around an arms length (sit back in your chair and raise your arm and your fingers should
touch the screen).
Screen quality: Use a good quality computer screen. Make sure that the text characters on the
screen look sharp, and that they are a comfortable size (change the screen resolution to find a comfortable
and clear character size).
Eye checkup: It's a good idea to periodically have your eyes checked by a qualified professional.

51.7.2 Lighting, Ventilation, Noise Levels in the Computer Workstation

The lighting, ventilation and noise level in a computer work station is as important as in any other work
station. An even lighting which is not excessively bright is needed. There must not be any bright light
glare on the computer screen. Use a shade or drapes to control window brightness. With regard to the
ventilation, there must be adequate fresh-air ventilation and proper heating or cooling making a comfortable
working. Excessive or specific noises can cause stress for individuals, causing muscle tension and can
increase the risk of injury. A quiet place is needed for workstation (Figure 51.9).
Comfortable Display
Viewing distance height

Lamp

Document
holder

Back support

Table adjustable
for height for
terminal and
keyboard

Figure 51.9 Ergonomically designed computer work station

Have a Break: It is advisable to take a break in between the work. The different kinds of break
are:
Eye breaks: It is recommended that computer users briefly look away from the screen to a more
distant object every 15 minutes. This allows the muscles inside the eye to relax. Also, blink your eyes
rapidly for a few seconds. This refreshes the tear film and clears dust from the eye surface.
Micro-breaks: In a micro-break (< 2 minutes) stretch briefly, stand up, move around, or do a different
work task. Take one every 30 to 60 minutes.
776 INDUSTRIAl ENGINEERING AND MANAGEMENT

Exercise breaks: A minute or two of gentle stretching and exercises to help relieve muscle fatigue.
It is recommended every 1-2 hours.
Ergonomic gizmos: These days it's a commonly seen label that "ergonomically designed" and much
of the time this isn't true. When buying an "ergonomic product" it is better to ask the following four
que�tions and get the proper answers:
1. Do the product design and the manufacturer's claims make sense?
2. Any research evidence is provided by the manufacturer to support their claims.
3. Is it comfortable to use the product after an initial "getting acquainted period?
4. Whether ergononucs experts recommend it for use.
51.8 COMPUTER INJURIES
1. Cumulative Trauma Disorders: What is Cumulative Trauma Disorders (CTDs)? To understand
this, it is necessary to understand how the body works. The body movements are caused by the
contracting and relaxing muscles. The muscles are attached to bones by tendons. Tendons are smooth,
and in some parts of the body they glide back and forth inside tubes called synovial sheaths. The
sheath produces a lubricant called synovial fluid to help the tendons glide easily. Cumulative Trauma
Disorders are ,formed when repeated stress is placed on the tendons, muscles, or nerves causing
inflammation or damage.
The mo�t common Cumulative Trauma Disorders are: Tendonitis-inflammation of the tendons,
Tenosynovitis-inflammation of the synovial sheath and Carpal Tunnel Syndrome-results when the
median nerve is compressed, either from the· swelling of tendons and sheaths or from repeated
bending of the wrist.
The conditions that may lead to CTD are:
• Repetition-the long or concentrated hours of typing or using a mouse
• Posture-!.itting in the same position for long hours while typing, especially if it is in an uncomfortable
or poorty supported position, or if the wrists are bent
• Lack of Rest-intensive hours at the keyboard with few breaks
The Symptoms of CTDs are: .
• Tingling or numbness in the hands or fingers
· • Pain in fingers, . hands, wrists, or even shooting up into the arms or forearms
• Loss of strength or coordination in the hands
• Numbness or discomfort in the hands which wakes you up at night. ·
How to prevent. CTDs to Hands and Wrists: To prevent CTDs to hands and wrists, keep the
hands and wrists in as "neutral" ,a position as possible as shown in Figure 51.10. In other words,
avoid typing with the wrist bent to either side, or up or down. The wrists to be flexed in any
· direction. -
. The neutral position may be obtained by a_djusting the desk height, chair height, or keyboard position..
Some tips for preventing hand and wrist CTDs are given below:
• The keyboard -should be slightly lower than normal desk height. If it is not low enough, try
raising your chair height. Prevent your legs fro'm dangling by using a footrest.
. • While typing, it is best not to rest your wrists, and they should n�t be bent up, down, or
to the side. This may be easier if the back edge of the keyboard is tilted down slightly,
· away from you. The knuckle, wrist, and top of forearm should form a straight line. Wrist
ERGONOMICS 777

supports or rests give you a place to rest your hands only when pausing from typing, not
while you are typing.
fi r•

Figure 51.10 Neutral Position of the wrist on Keyboard

• Do not batter the keys. Use a light touch.

• Use two hands to perform the double key operations like Ctrl-C or Alt-F instead of twisting
one hand to do it.
• The elbows should form a 90 degree angle while "hanging" at the sides from the shoulders.
The shoulders should remain relaxed in a lowered position while typing.
• Take breaks to stretch and relax. Take frequent micro-breaks as well as longer breaks every
hour or so.
• Hold the mouse lightly.
• Keep your hands and arms warm.
2. Eyestrain and VDT's: Eyestrain is another ergonomic probtem frequently associated with the use
of computers and Video Display Terminals (VDTs).
Symptoms of eyestrain may be:
• Sore, tired, itchy, dry, or burning eyes
• Headaches
• Difficulty focusing between the VDT and source documents
• Blurred or double vision
• Color fringes/after images
• Increased sensitivity to light.
The*se symptoms may be caused by:
1. Improper lighting: If the light in the work area is too bright or too dim, the human eye has to
work extra hard to compensate for these harsh environmental factors. People may not even be aware
that their eyes are under duress, but over time they may develop symptoms of eyestrain.
Solution: Use indirect, ambient lighting and an adjustable light source at the desk, where extra illumination
is required.
2. Glare: Glare can be caused by sources of light such as windows, lamps, or overhead lighting.. Look
at your monitor screen to see if there are any bright spots of light. While you may not be conscious
of this irritation, it can cause eyestrain over the course of a long day. Glare can also be caused
by too much contrast between the screen background and the .displayed text.
778 INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: Adjust your monitor so that it is not reflecting the light source. Tilt the monitor down
so that it doesn't reflect overhead lights, or move it perpendicular to windows. Move lamps so
that they are not reflected directly in the monitor. U�e glare screens.
3. Eyewear: Many computer users we<N bifocals or trifocal lenses fitted for reading print and distance
viewing. Sometimes these prescriptions may not be adequate for computer work.
Solution: If you wear. glasses of any sort and frequently experience headaches _while working at
a computer, you should probably check with your eye doctor to make sure you are wearing the
correct prescription for such work. ·
4. Viewing angle and distance: If the monitor is too far away, the user may have to strain to read
the print. Likewise, if it is too close, user may also strain their eyes. If the monitor is too high,
user will have to angle the neck to look up at it, which could cause their neck to be sore, and
may contribute to headaches. Also, when you are continually looking up,. you may not fully close
your eyes when you blink, and this can cause your eyes to dry out.
Solution: Some literature will suggest keeping the monitor between 18-30 inches from the user,
with the first line of text just slightly below eye level.
5. Uninterrupted focus on the screen: When people concentrate, they blink less often. Sometimes
they concentrate so hard that they blink only once per minute, instead of the normal once every
five seconds. This, too, will cause the eyes to dry out and become irritated.
Solution: Take micro-breaks
6. Dust on screen: The dust on the screen can make it hard to distinguish characters. This may also
contribute to glare and reflection problems.
Solution: Dust off your monitor every dar
7. VDT and document holder location: If the document holder is below the VDT or off to the
side, each time your eyes look from one source to the other, your pupils have to adjust. If you
have to do this for long periods of time, it can cause headaches and eyestrain.
Solution: Place document holder at the same level, angle, and distance as the screen to avoid
having to s�ift eye focus.
---------------------------------
MARKETING MANAGEMENT

52.1 INTRODUCTION
Marketing is the business process by which products are matched with the markets and through which
the transfer of ownership is effected resulting ii:i the financial realiz�tion of the efforts of the company.
· 52.1.1 Marketing Concept
Marketing concept is. based on three basic points viz.
• Profits through satisfaction of customers.
• Interacting business activities:
• Price
• Promotion
• Distribution.•
• Integrating company's goal with business activities. ·
Marketing concept features are as given below:
• Customer orientation
• Marketing· research
• Marketing planning
• Integration of organizati011 activities.
Marketing and selling appear to be similar sounding activities but they differ markedly to a large
p
exte t as stated in Table 52.1.
Table 52.1 Marketing and Selling concept differences

Marketing concept Selling concept

Customer focus
Customer needs to define products
Profits )hrough customer satisfaction
. Product planning and development to_ match
products with markets
Present and future products
Integrated approach to achieve long term goals
Purpose of marketing is selling
Buyer focus
Products or services to money
Profits through sales volume
High pressure selling to sell goods already
produced
P�csent Products
Approach for short term goals/gains
Selling forms part of marketing
 780 INDUSTRIAL ENGINEERING ANO MANAGEMENT

1
52.1.2 Marketing Mix
Marketing mix is the term used to :describe the combination of four inputs otherwise· called as 4 Ps
which constitute the core of the company's marketing system.
4 "P"s of marketing mix are:
• Product
• Price
• Promotion
• Physical distribution.
Product (Core product, tangible/jntangible (service)]
• New product• introduction-Product design, range, volume
. • Improvement of old product
• Elimination of non-profit products
• Packaging
• Branding
• Warranties and after sales service
. • Product testing.
• Price
. • Deciding profit margin
• Pricing in various segments (Psychic cost)
• Fair price
• Price policy
• Discount and credit.
• Promotion
• Advertising-budget, media
• Personal selling
• E Selling
• Sales promotion-Free �ample, sale display, Prize contest; fairs and exhibitions
• Publicity. 0

• Physical distributibn
• Selection of distribution channel shops/shopping �ll/e shopping (Channel type, number of
channels, size of channel, location of channel)
• Transportation
• Storage or. warehousing.
52'.1.3 Functions of Marketing
The process of marketing involves various functions as detailed below:
• Upgrading function for trading companies:
• Assembling
• Selling.
• Facilitating function· for manufacturing companies:
• Marketing Research
MARKETING MANAGEMENT 781

• Product planning and development

•Standardisation
• Packaging
• Brnnding.
• Pricing
• Advertising
•Sales promotion
• Financing
· · • Risk taking.
· • Supply function for above companies:
• Transportation
•. Type
• Own
• Hired
• Mode
• Goods/passenger train
• Truck/other modes
• Aeroplane
•Ship·
• Other modes (Mule/donkeys, etc.).
• Storage
• Private warehouse
• Public warehouse
• Bonded warehouse
• Transportation company warehouses
• Government (Railways) warehouses.
52.1.4 Product Life Cycle
Most products have limited profitable life eventhough the life of the product may be infinity. The demand
pattern or the acceptance of a product follows a specific pattern called the product life cycle. The product
life cycle of a product is drawn in a two dimensional graph. drawn in x-axis with time and y-axis with
sale or demand and profit divided into basically following stages:
• The Introductory stage
• The Growth stage
• The Maturity stage
• The Saturation or stagnation stage
• The Decline or obsolescence stage. &
f
All the above said stages can be analysed in regard to the farrlous 4 s, which is normally used
in marketing terminologies;
• P-Product,
• P-Price,
782 INDUSTRIAL ENGINEERING AND MANAGEMENT

• P-Promotion, and
• P-Product distribution.
Besides the above, more points are included and the effects and characteristics of each stage with
respect to various stages are given. in Table 52.2 and is shown in Figure 52.1. Product Life' cycle.

I
Introduction Growth Maturity Saturation Decline

�
-.....""'"
"'C""
Sales or
-- Demand
,,.
·-
/.-
Sales -- -· .....

'·
or
Demand >�'
- /-�-----
and
profit · · Profit

1-Ve'I Time

Figure 52.1 . Product life cycle stages

Table 52.2 Product life cycle stages and effects of various activities

Description Various stages in Product Life cycle

Introduction Growth . Maturity Saturation Decline
Product Product Quality· focus, Brand Stagnation and Decline in
status deficiencies 'product variation differentiation faithful customers acceptance
stick to it
What to do Iron out Bring out Differentiate Encourage the Find other uses
for the above deficiencies excellence in j t with other faithful customers; of the product,
product the product 'Similar ones simplify the Simplify the
product line product line
Product Greater Increasing Emergence of Single product High
variety status variety standardisation a dominant product rules the roost standardisation

Volume status Low sales Increasing sales High volume High volume but Decline of sales·
volume. volume but with less no _growth volume
growth rate
Price status

Promotion
Highest or
lowest
Create
High

Heavy advertising
Moderate

Build and
Low
..
Product image
Very low

Create other use

tactics awareness to create image maintain building demand
of the brand
Product Selective Extended coverage Seek close Seek closer. Selective culti-
distribution dealer dealer relationship vated product
tactics · relationship distribution
Competition Product ch- Product qual,ity Price and Price reduction Price reduction
sustenance aracteristics and availability dependability
Business Less Fall out and· Few large com- Survivors Survivor's
status competition consolidation _ panics survive
MARKETING MANAGEMENT 783

The introductory stage: In the introductory stage, new product or modified product or first introduction
of any product, four types of situations· can be seen such as:
• Profits will rise rapidly
• Profits will rise graduaUy
• From beginning loss will be there and subsequently runs into profits
• From beginning to end only loss.
The product launch is terminated apruptly once it is seen that the product is going to give only
losses. In the event it is seen that there is likelihood of profit in future the production of this particular
product is continued.
The growth stage: In the growth stage of the product life cycle, which is considered as the_ critical
stage, since the remaining life of the .product will be seen from the result of this stage. This can be
typically divided into two types. • ,
• Pro_fits will rise rapidly once the product is launched successfully
. • When the customers have still 'some resistance in accepting the product, profits will rise gradually only.
In this stage, the manufacturing cost per unit volume tend to de.cline as the time passes since the
•volume of production will be in�reasing slowly ,and slowly to the optimal level.•
The maturity stage: In the maturity stage of the product life cycle, which is the third stage, indicates
the further \ife of the product. This stage gives whether the manufacturer should cont(nue production,
if so what should be the quantity. This stage gives the remaining life of the product. This can be typically
divided into two types.
• Profits will rise rapidly once the product is launched successfully
• When the customers have still some resistance in accepting the product; profits will rise gradualiy only.
In this stage, the manufacturing cost per unit volume tend to incline as the time passes since the
volume of production will be increasing slowly and slowly to the optimal level.
The saturation stage: In the saturation stage of the product life cycle, which is the fourth stage,
indicates the further life of the product. This stage gives whether the manufa�turer should continue production,
if so what should be the quantity. This is the last stage of the product life and further will be only
decline in consumption. This can be typically divided into two types:.
• Profits will stay as is where is condition since the quantum of acceptance has come to a saturation level
• Customers are very much ·conservative type and hence they are clinging to the product.
In this stage, the manufacturing cost per unit volume has come to the minimum level since the
volume of consumption or demand has corrie to maximum.
The decline or obsolescence stage: In this stage, the · acceptance of the pr�duct in the consumers
mind decreases thus. the decline in the sales and profit starts. This stage gives the time perio4 for the
manufacturer to stop the production or modify the product so th�t the product life· cycle can restart again.
The decision of the manufacturer is divided into three groups as given below:
• Stopping/withdrawing the products either temporarily or permanently
• Modifying the �xisting product
• Introduction of altogether new product
In this stage, the manufacturing cost per unit volume tend to increase rapidly as the time passes
since the volume of production will be decreasing due to non-saleability of the product. · �
784 INDUSTRIAL ENGINEERING AND MANAGEMENT

52.2 PRICING
Price denotes the money value of the product. It represents the amount of money one has to pay to
gain the ownership of the same.
Objectives and policy
• To achieve target return on investment or on net sale
• To achieve price stabilisation
• To meet or prevent competition
• To maintain or improve market share
• To maximise profit.
52.2.1. Types of Pricing
• Cost plus
• Marginal cost
. • Competitive
• Skimming the cream-higher prices for new product initially later lower prices.
• Penetration-�elow the competitive level
• Follow the leader
• Discrimination-Different prices to different customers-now a days it is not pre".ajling.
Channels of Distribution: Channels of distribution are the route through which products move
form manufacturer to the ultimate consumer.
Channels of distribution is represented as:
• Product flow-from Producer to i;:onsumer
• Cash flow-From consumer to Producer
• Marketing information flow from. consumer to producer to conswner.
Types of Channel Distributions:
• Direct to consumer
• Own retail store
• Door-door to sales
• Direct mail
• Internet
• Vending mac�ines.
• Indirect
• Producer to1 retailer to consumer
• Producer to wholesaler· to retailer to consumer
• Producer to agent to retailer �o consumer
• Producer to agent to wholesaler to retailer to consumer.
Choice of channel: Choice of channel mentioned above depending on below said factors:
• Product consideration
• Perishability�Like vegP,tables, flowers, fruits, meat, fish
\
• Unit Value-small safety pin cir a ship
·.)
MARKE!ING MANAGEMENT 785

• Bulkiness-Iron ore, coal

• Standard/non-standard-Varying sizes and shapes •
• Nature-Acids, fuming products
• Technicality-Actual use to be demonstrated-Washing machine, Microwave oven, Water purifier
• Age of the product-Obsolete/old or new product.
• Market consideration
• Individual consumer or industrial consumer
• Number and location of buyer
• Size · and frequency of order
• Customers buying habits.
• Company consideration
• Market standing or. brand acceptance level
• Financial resources availability
• Volume of production
• Services t9 be pro'vided
• Desire fort control _of channel.
• Middlemen consideration
• Availability
• Attitude
• Technical capability
• ·sales capability
• Legal constraints-Liquor arid drugs through licenced shoifs only
• Reputation of middlemen.
.
I
Type of Middle men: Basically there are two type of �ddlemen are available for selling the
products, viz. Agent type middlemen and Merchant type middlemen
• Agent type Middle men-Brokers, Commission agents, Auctioneers, Others
• Merchant type middlemen:
• Wholesalers
• Retailers
• Small scale-Mobile traders, Fixed shop traders
• Large scale traders-Departmental stores, Chain of stores, Supermarkets, Hire-Purchase
shops, Consumer Cooperative stores, Defence stores, Mail order houses, Internet sales.
Advertising and Sales P�omotion: To sell the product it has to be known to tlie consumer thorough
soine means and that is· called product promotion in marketing management and it is divided into three
categories viz. Advertising, Salesmanship and Sales promotion.
· Advertising: Advertising involves the preparation of written or oral messages and their dissemination
to the consumer or their family through paid medi11 without personal contact. So, the main features of
advertising is:
(i) non-personal,
(ii) paid for the services, and
(iii} identifo;d sponsor.
786 INDUSTRIAL ENGINEERING AND MANAGEMENT

Eventhough no generalisation can be done in regard to quality of advertising, still it can be generally
grouped as given below: -
• Public presentation: Public communication making the customer aware about the presence of the
product.
• Pervasiveness: Repeating the message many times so that it goes into the mind of the consumer
and when he goes to the market to find out the generic product availability the first name of the
product comes shall be the Specific Company's. e.g. L.G, Samsung, Colgate, advertisement in T.V.,
newspaper etc.
· • Amplified pervasiveness: Dramatic advertisement of the product. e.g. Onida.
• Impersonality: It· is a monologue and not dialogue.
(a) Functions of advertising:
• Introduction of the product
• Sales promotion of the product
• Builds the reputation of the product
• Awareness amongst consumer increases thereby sales volume is increased and thus reduces
the cost of the product
• Important source of revenue for many many people directly or indirectly involved in these industries
• Encourages new source of usage of these products
• Competitors are aware of these products and they bring out similar or better models thereby .
variety is available to consumer and further due to stiff competition the product is available
at lower price to the consumer.
(b) Types of advertising:
• Product advertising-Awareness and improvement of sale
• Institutional advertising-Image building, reputation building
• Constructive advertising-Stimulates the consumer
• Competitive advertising-To teU the consumer the superiority of their product over other
similar ones
• Destructive advertising-To bring iH reputation to the competitors products.
(c) Scientific advertising: Foll!Jwing steps.are involved in. scientific advertising:
• Investigative or research analysis-Market survey, product analysis, location of consumer,
tastes,. preferences
• Advertising objectives
• Advertising budget.
• Advertising copy-Includes title, headlines, illustrations, theme, pictures, audio, video
(motion/still)
• A ttention value-e.g. · Headache of Ravana
• Memorising value-e.g. Jingle bells-Nursery rhymes
• Suggestive value-e.g. Health and Sundrop oil
• Sentimental value-e.g. Everest Masala-mothers recipe
• Conviction value-e.g Fair and 'Lovely cream contains Kurnkumadhi thailam from ancient
Sanskrit scr'ipts
• Instinctive appeal value-e.g. Vanaspathi.
MARKETING MANAGEMENT 787

• Themes (He�rt of advertising): Prestige (Car, Credit card), Comfort (Credit card), Economy,
Health, Beauty, Parental affection, Fear (of de�th, accident), Achievement, Patrio�ism, Curiosity
(for new products)
• Choice of media
• Execution-Corning into contract with the media for advertising
• Evaluation or testing-How effectively it has reached the consumer.
(d) Advertising media: Various advertising media is available for advertising depending on the economy
of scale planned.
• Pres.s advertising:
• Newspapers
• Magazines
• ·oirectories
• Yellow pages.
• Direct mode advertising:
• Circulars/Bit notic�s
• Catalogues
• Brochures
• Leaflets
• Sales letters
• Supplying banians, hankerchiefs, bags printed with the name of the company
• Company logo worn by famous personalities in prominent places from games to films.
• Outdoor advertising:
• Posters
• Banners
• Wall writing
• Balloons
• Hoardings in 'national-international sports stadium..
• Speciality advertising:
.• Radio
• Film
• Television
• Internet
• Telephone
• Window display.
Sales promotion: Sales promotion consists of all promotional activities other than advertising, personai
selling and publicity that help in increasing sales through non-repetitive and one time communication.
The quality of sales promotion can be generally grouped as given below:
• Insistence of presence: Attention inviting
• Product demeaning: "Don't Purchase my Product if you do not want � quality one"-high
repetition may give negative effect.
788 INDUSTRIAL ENGINEERING AND MANAGEMENT

(a) Objective
• For introduction of new products into the market
• For attracting new customers
• For increasing the sales from the d0wn trend
• For encouraging the dealers to purchase larger stock of the products
• For improving the public image of the c?mpany.
(b) Techniques: Sales promotion technique is the incentive offered in various forms to encourage the ·
' customers to buy the specific product.
• Consumer promotion: Sales premium or bonus offer with the pack/extra quantity, free samples,
free coupons, money refund offers, prices off, prize contest, trade fair and exhibitions, clearance
sale, festival or off season sale, demonstration in house/anywhere
• Trade promotion: Dealer sales promotion (foreign trip), higher credit time, free goods, merchandise
allowance, cooperative advertising
• Sales force promotion: Rallies, bonuses, contests.
Personal selling: Personal selling is the oral presentation in a conversation and various methods
or types of the same are as given below:
• Field selling-Say house to house
• Retail selling-Supermarket, show rooms
• Executive selling-Fiat company calling on SAIL chairman for a dinner party in a golf club for
a chit-c�at and tells in the personal talk about the launch of his latest car.
The quality of personal selling can be generally grouped as given below:
• Personal confrontation: One to one talk
• Cultivation: Development of friendship with long ra_nge selling in mind
• Response: It puts the customer under obligation
Publicity: Publicity is the non-personal stimulation of demand of a product such as:
• High credibility: By first page news in paper (as advertisement)
• Off guard: When you are seeing tlie T.V. "T.V. news comes stating about the product as the
only news exactly like a news time T.V." Finally it is declared as advertisement.
• Dramatising: Like Supari a9vertisement wherein the product is seized as smuggled product,
finally it is said as advertisement.
52.3 MARKET RESEARCH
Marketing research is the systematic investigation of all phases of above mentioned marketinr mix. It
is detailed out as various researches iri the following fields. Market research is that research which is
conducted to learn the needs and desires of customers. With the data so obtained a thorough analysis
is done by the organisation to further the market potential of the products manufactured by the specific
organisation. This helps the organisation to formulate mark&t policy of the organisation in regard to what
to produce, how much to produce? when to produce, which plant has to produce and so on. The market
research analysis of the product_ is made to find out following points viz.
• Type of product mix
· • Sales volume
• Capital requirement
MARKETING MANAGEMENT 789

• Advertising requirement
• Raw material suppliers
• Business condition and trend
• Seasonal market characteristics
• Time of productioo
• Other factors
(a) MR Classification: Market research is classified or subdivided into following to concentr�te on
analysis of certain characteristics viz.
• Product analysis-Product, Price, Consumer preference
• Market analysis
• Distribution analysis-Promotion, advertising
• Competition analysis.
With the combined re!jearch of the above topics a combined analysis is done and conclusions are
drawn in regard to the market policy of the organisation.
(b) MR steps: Various steps followed in MR are as follows:
• Define the problem-Like new product launching or old product launching in a new market, etc.
• Primary data collection from the salesman, customers, details
• Secondary data collection .through survey, inter:view, etc.
• Analysis for the suitability of the product, market, etc.
• • Evaluation of various alternatives
• Identification of correct product or market
• Launching of the product or in the specific market segment.
(c) MR Techniques: Market research analysis ·techniques are divided into following methods, viz.
• Desk study: Collection of data in regard to sales trend for past years from company data
sheets, similar company's products sales volume for various years from various published
data
• Interview: Sampling interview to find out the views of customers and dealers by various
communication methods
• Market survey: With well formulated questionnaire
• Statisticat methods: Statistical methods for finding out the future trend from the past by
various methods right from simple bar chart to regression analysis.
(d) Product analysis: The organisation does product analysis with sole aim of acceptability of the
products by consumers. This is compared with the competitor's products acceptability. This helps
in simplifying the product Jines, product itself. For that a detailed questionnaire with the following
points in mind is prepared:
• Products acceptability by consumers
• Product price v.s. usefulness and the worth of the products
• Distribution channel's performance
• Product design change necessity
• Price change necessity
• Future 'trend in regard to this type of product.
790 INDUSTRIAL ENGINEERING AND MANAGEMENT

(e) Market analysis: The organisation does market analysis with sole aim of market potential of the
products. This is compared with the competitor's products and other similar products potential.
This helps in simplifying the location of the market, consumers habits, etc. This helps in arriving
at the addition or decreasing of the product mix, capacity, etc. For. that a detailed questionnaire
with the following points in mind is prepared:
• Market location
• Customer type like old, young, women, men, rich, poor, etc.
• Details about other competitors
• Sales volume and the time graph for the same
• Customers choice is directed tQwards quality, price, packing, shape, ergonomics and other
technical matters
• Customers habits, like buys in advance, buys only when necessary, etc.
• Discount and credit terms acceptable by customers.
(f) Distribution analysis: The distribution analysis comprise distribution channel, pricing methods and
other price related.matters, seilirig methods, sales promotion. This' helps ·in arriving at the economic
way of distributing the products to the consumers.
(g) Competition analysis: The competition- analysis forms a part of market anlaysis. This compi;ises
all data in regard to competitors like the number of competitors, their products, their pricing policies,
their distribution channel, etc. This helps in arriving at the competitor's way of doing the things
and finding out whether the same 'is better suitable for this product, if so the same to be followed,
and so on.
 53
--------------------------------- SlX SIGMA
.

53.1 WHAT IS SIX SIGMA?

Sigma (cr) is a letter in the Greek alphabet that has become the statistical symbol and metric of process
variation. The sigma scale of measure is perfectly correlated to such characteristics as defects-per-unit,
parts-per-million defectives, and the probability of a failure. Six is the numbl,!r of sigma measured
in a process, when the variation around the target 'is such that only 3.4 outputs out of one million are
defects under the assumption that the process average may drift over the long term by as much as
1.5 standard deviations.
Six Sigma may be defined in several ways. Tomkins (1997) defines Six Sigma to be "a program
aimed at the near-elimination' of defects from every product, process and transaction." Harry (1998) defines
Six Sigma to be "a strategic initiative to boost profitability, increase market share and improve customer
satisfaction through statistical tools that Ci\n lead to breakthrough quantum gains in quality." Six Sigma
was launched by Motorola in 1987. It was the result of a series of changes in the quality area starting
in the late 1970's, with ambitious ten-fold improvement drives. The top-level management along with
CEO Robert Galvin developed a concept called Six Sigma. After some internal pilot implementations,
Galvin, in 1987, · formulated the goal of "achieving Six-Sigma capability by 1992" in a memo to all
Motorola employees (Bhote, 1989). The results in terms of reduction iii process variation were on-track
and cost savings totalled US$13 billioq and improvement in labor productivity achieved 204% increase
over _the period 1987-1997 (Losianowycz, 1999).
In the wake of successes at Motorola,. some leading· electronic companies such as IBM, DEC, and
Texas Instruments launched Six Sigma initiatives in early 1990s. However, it was not until 1995 when
.GE and Allied Signal launched Six Sigma as strategic initiatives that a rapid dissemination took place
in non-electronic industries all over the world (Hendricks and Kelbaugh, 1998). In early 1997, the Samsung
and LG Groups in Korea began to introduce Six Sigma within their companies. The results were amazingly
good in those companies. For instance, Sa�ung SDI, �hich is a ·company under the Samsung Group,
reported that the cost savings by Six Sigma projects totalled US$150 million (Samsung SDI, 2000a).
At the present time, the number of larg� companies applying Six Sigma in Korea is growing exponentially,
with a stro�g vertical deployment into many ·-small- and medium-size enterprises as �ell.
As a result of consulting experiences with Six Sigma in Korea, the author (Park et. al., 1999)
believes that Six Sigma is a "new strategic paradigm of management innovation for company survival
.
792 . INDUSTRIAL ENGINEERING AND MANAGEMENT

in this 21st century, which implies three things: statistical measurement, management strategy and quality
culture." It tells us how good our products, services and processes really are through statistical measurement
of quality level. It is a new management strategy under leadership of top-level management to crc:;ate
quality innovation and total customer satisfaction. It is also a quality culture. It provides a means of
doing things right the first time and to work smarter by using data information. It also provides an atmosphere
for solving many CTQ (critical-to-quality) problems through team efforts. CTQ could be a critical process/
product result characteristic to quality, or a critical reason to quality characteristic.
Why is Six Sigma Fascinating?
Six Sigma has become very popular throughout the whole world. There are several -reasons for
this popularity. First, it is regarded as a fresh quality management strategy which can replace TQC, TQM
and others. In a sense: we can view the development process of Six Sigma as shown in Figure 53.1.
• Many companies, which were not quite successful in implementing previous management strategies such
as TQC and TQM, are eager to introduce Six Sigma.

I
�I
Tl
TQC TQM � Six Sigma

. i
Scit:ntilic
ISO 9000 management tools
Series such as SPC, TPM..
QE and TCS

Figure 53.1 Development process of. Six Sigma in quality management

Six Sigma is viewed as a systematic, scientific, statistical and smarter (4S) approach for management
innovation which is quite suitable for use in a knowledge-based information· society. The essence of Six
Sigma is the integration of four elements (customer, process, manpower and strategy) to provide management
innovation as shown in Figure 53.2.

Customer Six S igma

_
Process Management
Manpower innovation
Strategy Systematic and
Scientific Approach

Figure 53.2 Essence of Six Sigma

Six Sigma provides a scientific and statistical basis for quality assessment for all processes through
measurement of quality levels. The Six Sigma me\hod allows us to draw comparisons among all processes,
and tells how good a process is. Through this information, top-level management learns what path to
follow to achieve process innovation and customer satisfaction. Second, Six Sigma provides efficient
manpower cultivation and utilization. It employs a "belt system" in which the levels of mastery are classified
as green belt, black belt, master black belt and champion. As· a person in a company obtains certain
training, he acquires a belt. Usually, a black belt is the leader of a project team and several green belts
work together for the project team. Third, there are many success stories of Six Sigma application in
well known world-class companies. As mentioned earlier, Six Sigma was pioneered by Motorola and
launched as a strategic initiative in 1987. Since then, and particularly from 1995, an exponentialiy growing
number of prestigious global firms have launched a Six Sigma program. It has been noted that many
SIX SIGMA 793

globally leading companies run Six Sigma programs (see Figure 53.3), and it has been well known that
Motorola, GE, Allied Signal, IBM, DEC, Texas Instruments, Sony, Kodak, Nokia, and Philips Electronics
among others have been quite successful in Six Sigma. In Korea, the Samsung, LG, Hyundai groups
and Korea Heavy Industries & Construction CoMpany have been quite successful with Six Sigma.
Lastly, Six Sigma provides flexibility in the new millennium of 3Cs, which are:
• Change: Changing soci. ty
• Customer: Power is shifted to customer and customer demand is high
• Competition: Competition in quality and. productivity.
The pace of change during the last decade has been unprecedented, and the speed of change in
this new millennium is perhaps faster than ever .before. Most notably, the power has shifted from producer
to customer. The producer-oriented industrial society is over, and the customer-oriented information society
has arrived. The customer has all the rights to order, select and buy goods and services. Especially,
in e-business, the customer has all-mighty power. Competition in quality and productivity has been ever-
increasing. Second-rate quality goods cannot survive anymore in the market. Six Sigma with its 4S (systematic,
scientific, statistical and smarter) approaches provides flexibility in managing a business unit.

53.2 SIX SIGMA FRAMEWORK

53.2.1 Five Elements of the Six Sigma Framework
Management strategies, such as TQC, TQM, and Six Sigma, are distinguished from each other by their
underlying rationale and framework. As far as the corporate framework of Six Sigma is concerned, it
embodies the five elements of top-level management commitment, training schemes, project team activities,
measurement system and stakeholder involvement as shown in Figure 53.3.

Top management commitment

Design for Six Sigma

Training scheme
Improvement
Project team activities strategy I Manufacturing Six Sigma

Measurement, system
Transactional Six Sigm
Stakeholder involvement

Figure 53.3 The corporate framework of Six Sigma

Stakeholders include employees, owners, suppliers and customers. At the core of the framework
is a formalized improvement strategy with the following five steps: define, measure, analyse, improve
and control (DMAIC) which will be explained in detail in Section 53.2.2. The improvement strategy
is based on training schemes, project team activities and measurement system. Top-level management
commitment and stakeholder involvement are all inclusive in the framework. Without these two, the improvement
strategy functions appeared to be poorly.
All five elements support the improvement strategy and improvement project teams. Most big companies
operate in three parts: R&D, manufacturing, and non-manufacturing service. Six Sigma can be introduced
into each of these three parts separately. In fact, the color of Six Sigma could be different for each
part. Six Sigma in the R&D part is often called "Design for Six Sigma (DFSS)," "Manufacturing Six
Sigma" in manufacturing, and "Transactional Six •Sigma (TSS)" in the non-manufacturing service sector.
794 INDUSTRIAL ENGINEERING AND MANAGEMENT

All five elements in Figure 53.3 are necessary for each of the three different Six Sigma functio1,1s. However,
the improvement methodology, DMAIC, could be modified in DFSS and TSS.
53.2.2 Define-Measure-Analyze-Improve Control (DMAiC) Process
The most important methodology in Six Sigma management is perhaps the foniialized improvement methodology
characterized by DMAIC (define-measure-analyze-improve control) process. This DMAIC process works
well as a breakthrough strategy. Six Sigma companies everywhere apply this methodology as it enables
real improvements and real results. The methodology works equally well on variation, cycle time, yield,
design, and others. It is divided into five phases as shown in Figure 53.4. In each phase the major activities
are as follows:
Phase 0: (Definition) This phase is concerned with identification of the process or product that
needs improvement. It is also concerned with benchmarking o� key product or process characteristics
of other world-class companies.
Phase 0: Definition

Phase I: Measurement

Phase 2: Analysis
Improvement
strategy

Phase 3: Improvement

Optimization

Phase 4: Control

Figure 53.4 Improvement phases

Phase 1: (Measurement) This phase entails selecting product characteristics; i.e., dependent variables,
mapping the respective processes, making the necessary measurement, recording the results and estimating
the short and longterm process capabilities. Quality function deployment (QFD) plays a major role in
selecting critical proquct characteristics.
Phase 2: (Analysis) This phase is concerned with analyzing and benchmarking the key product/
process performance metrics. Following this, a gap analysis is often undertaken to identify the common
factors of successful performance; i.e., what factors explain best�incclass performance. In some cases,
it is necessary to redefine the performance goal. In analyzing the product/process performance, various
statistical and. basi� QC tools are used. .
Phase 3: (Improvement) This phase is related to selecting those product performance characteristics
which must be improved to achiev� the goal. Once this is done, the characteristics are diagnosed to
reveal the major sources of variation. Next, the key process variables are identified usually by way of
statistically designed experiments including Taguchi methods and other robust design of experiments (DOE).
The improved conditions of key process variables are verified.
Phase 4: (Control) This last phase is initiated by ensuring that the new prqcess conditions are
documented. and monitored via statistical process co·ntrol (SPC) methods. After the "settling in" period,
SIX SIGMA 795
0

the process capability is reassessed. Depending upon the outcome of such a follow-on analysis, it may
become necessary to revisit one or more of the preceding phases.
The flowchart for DMAIC quality improvement process is sketched in Figure 53.5.
Definition

Mesurement

Analysis Redesign

Modify
design?

• Improvement

Yes

Control

Figure 53.5 Flow Chart of DMAIC process

53.3 TOTAL QUALITY MANAGEMENT (TQM) AND SIX SIGMA

While Six Sigma is definitely succeeding in creating some impressive results and culture changes in
some influential organizations, it is certainly not yet a widespread success. Total Quality Management
(TQM) seems less visible in many businesses than it was in the early 1990's. However, many companies
are still engaged in improvement efforts based on the principles and tools of TQM. It appears at least
in Korea that Six Sigma is succeeding while TQM is losing its momentum. One of the problems that
 796 INDUSTRIAL ENGINEERING AND MANAGEMENT

plagued many of the early TQM initiatives was the pre-eminence placed on quality at the expense of
all other aspects of the business. Some organizations experienced severe financial consequences in the
rush to make quality "first among equals." The disconnection between management systems designed
to measure customer satisfaction and those designed to measure provider profitability often led to unwise
investments in quality, which has been often practiced in TQM.
· Ronald Snee (1999) points out that although some people believe it is nothing new, Six Sigma·
is unique in its approach and deployment. He defines Six Sigma as a strategic business improvement
approach that seeks to increase both. customer satisfaction and an organization's financial health. Snee
goes on to .c laim that the following eight characteristics account for Six Sigma's increasing bottom-line
(net income or profit) success and popularity with executives.
• Bottom-line results expected and delivered
• Senior management leadership
• A disciplined approach (DMAIC)
• Rapid (3-6 months) project completion
• Clearly defined measures of success
• Infrastructure roles for Six Sigma practitioners and leadership
� Focus on customers and processes
• A sound statistical approach to improvement.
. Other quality initiatives including TQM have laid claim to a subset of these characteristics, but
only Six Sigma attributes its success to the simultaneous application of all eight. Six Sigma is regarded
as a vigorous · rebirth of quality ideals and methods, as these are applied with even greater passion and
commitment than often ':"as the case in the past. Six Sigma is revealing a potential for success that
goes beyond the levels of improvement achieved through the many TQM efforts. Some of the mistakes
of yesterday's TQM efforts certainly might be repeated in a Six Sigma initiative if we are not careful.
A review of some of the major TQM pitfalls, as well as hints on how the Six Sigma system can keep
- them. from derailing our efforts is listed below:
1. Links to the business and bottom-line success: In TQM, quality often was a "sidebar" activity,
separated from the key issues of business strategy and performance. The link to the business and
bottom-line success was undermined, despite the term "total" quality, since the effort actually was
limited to product and manufacturing functions: Six Sigma emphasizes reduction of costs, thereby
contributing to the bottom-line, and participation of three major areas: manufacturing, R&D and
service parts.
2. Top-level management leadership: In many TQM efforts, top-level management's skepticism has
beep. app�rent, or their willingness to drive quality ideas has been weak. Passion for and belief
in Six Sigma at the very summit of the business is unquestioned in companies like Motorola, GE,
Allied Signal (now Honeywell), LG and Samsung. In fact, top-level management involvement is
the beginning of Six Sigma.
3. Clear' and simple message: The fuzziness of TQM started with the word "quality" itself. It is
a familiar term with many shades of meaning. In many companies, Quality was an existing department
with specific responsibilities for "quality control" or "quality assurance," where the discipline terided
to focus more on stabilizing rather thari improving processes. Also TQM does not provide a clear
goal at which to aim. The concept of Six Sigma is· clear and simple. It is a business system for
· achieving and sustaining. success through customer focus, process management • and improvement,
and the wise use of facts and data.
Six S1GMA 797

4. Effective training: Total Quality Management (TQM) trammg was ineffective in the sense that
tlie · training program was not so systematic. Six Sigma divides all the employees into five groups
(WB, GB, BB, MBB and Champion), and it sets very demanding standards for learning, acking
.
them up with .the necessary investment in time and money to help peop.le meet those standards.
5. Internal barriers: Total Quality Management (TQM) was a mostly "departmentalized" activity in
many companies, and it seemed that TQM failed to break down internal barriers among departments.
Six Sigma places priority on cross-functional process management, and cross-functional project teams
are. created, which ·eventually breatcs down internal barri�rs.
6. Project team activities: Total Quality Management (TQM) utilized many "quality circles" of blue­
collar operators and workers, and not many "task force teams" of whitecollar engineers even if
they are needed. Six Sigma demands a lot of project teams of BBs and GBs, and the project team
activities are one of the major sources of bottom-line and top-line success.
53.4 INTERNATIONAL ORGANIZATION FOR STANDARDIZATION (ISO) 9000 SERIE S AND
SIX SIGMA
ISO (International Organization for Standardization) 9000 series standards were first published in 1987,
revised in 1994, and re-revised in 2000 by the ISO. The 2000 revision, denoted by ISO 9000 : 2000,
has attracted broad expectations in industry. As of the year 2001, more than 3,oo·,ooo organizations worldwide
have been certified to the ISO 9000 series standards. It embodies a consistent pair of standards, ISO
9001 : 2000 and ISO 9004 : 2000, both of which have been significantly updated and modernized. The
ISO 9001 : 2000 standard specifies requirements for a quality management system for . which third-party
certification is possible, whereas ISO 9004 : 2000 provides guidelines for a comprehensive quality management
system and performance improvement through Self-Assessment.
The origin and his_torical development of ISO 9000 and Six Sigma are very different. The genesis
of ISO 9000 can be traced back to the standards that the British aviation industry and the U.S. Air
Force developed in the 1920's to reduce the need for inspection by approving the conformance of suppliers'
product quality. These standards developed into requirements for suppliers' quality assurance systems
in a number of western countries in the 1970's. In 1987 they were amalgamated into the ISO 9000
series standards. Independent of ISO 9000, the same year also saw the launch of Six Sigma at Motorola
and the launch of Self-Assessment by means of the Malcolm Baldrige National Quality Award in USA.
Both Six Sigm� and Self-Assessment can be traced back to Walter A. Shewhart and his work on variation
and continuous improvement in the 1920's. It was Japanese industry that pioneered a broad application
of these ideas from the l 950's through to the l 970's. When variation and continuous improvement caught
the attention of some of the American business leaders in the late 1980s, it took the form of the Malcolm
Baldrige National Quality Award, on a national level, and of Six Sigma at Motorola.
Some people are wondering if the ISO 9000 : 2000 series standardJ; make Six Sigma superfluous.
They typically refer to clause 8 of ISO 9001: "Measurement, analysis, improvement." It requires that
companies ins�all procedures in operations for the measurement of processes and data analysis using
statistical techniques with the demonstration of continuous improvement as shown in Figure 53.5. They
also partly refer to the ISO 9004 : 2000 standards that embody guidelines and criteria for Self-Assessment
similar to the national quality awards.
It believes that Six Sigma is needed regardless of whether a company is compliant with the ISO
9000 series. The two initiatives are not mutually exclusive and the objectives in applying them a�e different.
A Six Sigma program is applied 1n organizations based on its top-line and bottom-line rationales. The
primary objective for applying the ISO 9000 series standards is to demonstrate the company's capability
79� INDUSTRIAL .ENGINEERING AND MANAGEMENT

to consistently provide conforming products .and/or services. Therefore, the ISO' 9000 series standard
falls well short of making Six Sigma superfluous. The ISO 9000 series standards have from their early
days been regar.ded and practiced by industry as a minimum set of requirements for doing business.
Quality Management System
Continual Improvement

R s
e. a
C t C
q
U II u
s s
t r I
o C
a 0
m C m
m
e t C
e
r n Product
Product 0
(and/or service)
Service 11
realization
Quality Management
System

Figure 53.6 The new process model in ISO 9000 : 2000

The new ISO 9000 : 2000 standards do not represent a significant change to this perspective (Figure 53.6).
Six Sig� on the other hand, aims at wo.rld-class performance, based on a pragmatic framework for
continuous improvement. The author believes that Six s·igma is superior in such important areas as rate
of improvement, bottom-line and top-line results, customer satisfaction, and top-level management commitment.
However, considering the stronghold of ISO 9000 in industry, Six Sigma a11d ISO 9000 are likely to
be applied by the same organization, but ·for. very different purposes.
 54
----------------------------------
AGILE MANUFACTURING

54.1 INTRODUCTION
In 1991, a group of more than 150 industry executives participated in a study. Their efforts culminated
in a two-volume report titled '21st Century Manufacturing Enterprise Strategy', which describes how
US industrial competitiveness will-or might-evolve during the next 15 years. As a result, theAgile Manufacturing
Enterprise Forum (AMEF), affiliated with the lacocca Institute at Lehigh University, was formed and
the concept of agile manufacturing was introduced. ·
In today's global market, there is constantly increasing pressure to make products more quickly,
with more variety, at the lowest possible cost. In the end, those companies that meet and exceed customers'
demands will succeed by remaining competifive. Then, the question is, how do companies become competitive
and retain their competitiveness? This question may not be easy to answer because manufacturing systems
are complex, and simple solutions to manufacturing problems may not exist. Therefore, companies must
choose from available techniques to. develop t_heir own solution�. ·In the past, companies adopted programs,
such as lean manufacturing or six sigma, which focus primarily on production efficiency or quality, respectively.
However, neither of these systems addresses the total requirements demanded by the current market, which
include a simultaneous focus on efficiency and quality, as well as flexibility and new product development.
In response to this fact. severai new philosophies for manufacturing improvement ·have been developed,
such as agile manufacturing and design for six sigma. These new appro.tches specifically address flexibility
by focusing on making an increased variety of products in smaller quantities and responding quickly
to dynamic changes in demand.

54.2 NEED FOR AGILE MANUFACTURING

As the product life cycle becomes shortened, high product quality becomes necessary for survival. Markets
become highly diversified and· global_, and continuous and unexpected changes become the key factors
for success. The need for a method of rapidly and cost-effectively developing products, production facilities
and supporting software, including design, process planning and shop floor control system has led to
the concept of agile manufacturing.· ·•
Definition: Agile manufacturing can be defined as the capability to survive and prosper in a competitive
environment of continuous and unpredictable change by reacting quickly and effectively to changing markets.
driven by customer-designed products and services.
800 INDUSTRIAL ENGINEERING AND MANAGEMENT

A definition of `agile' manufacturing has been adopted that applies to light mechanical assembly
of products made from components in parts families: Agile manufacturing is the ability to accomplish
rapid changeover between the manufacture of different assemblies. Rapid changeover, further, is defined
as the ability to move from the assembly of one product to the assembly of a similar product with a
minimum of change in tooling and software.
The goal of an agile manufacturer is to present a solution to its customer's needs-and not just
a product. The agile manufacturers should respond to:
• Rapidly changing markets
• Global competitive pressures
• Decreasing new product time-to-market
• Increasing inter-enterprise co-operation
• Interactive value-chain relationships
• Global sourcing/marketing/distribution
• Increasing value of information/service.
Four dimensions: The agile manufacturing enterprise can be defined along four dimensions:
• Value-based pricing strategies that enrich customers
• Co-operation that enhances competitiveness •
• Organizational mastery of change and uncertainty
• Investments that leverage the impact of people and information.
The components of agile manufacturing are shown in Figure 54.1.
Agile manufacturing

Philosophy of change

Information technology Corporate partners Intelligent workers

Figure 54.1 Components of Agile Manufacturing

54.3 FOUR PRINCIPLES

Agility has four underlying principles:
• Delivering value to the customers
• Being ready for change
• Valuing human knowledge and skills
• Forming virtual partnerships.
Agile manufacturing is not simply concerned with being flexible and responsive to current demands,
though that is an obvious requirement. It also requires an adaptive capability to be able to respond
to future changes. This has two elements:
(i) Development of internal capability. Foe example, a lead-time reduction target may be achieved through
product redesign, using JIT or the improvement of an MRP system, leading to capabilities in design,
factory-floor organization.
 AGILE MANUFACTURING 801

(ii) Ability to CQ)lfigure the company's assets (huII1an and capital) to take advantage of future short­
lived opportunities. This may depend on the use of technology, flexible organizafion, or the reliance
. on shifting alliances, created and dissolved according to market needs.
Agile manufacturing proposes to create an open, scalable_ infrastructure for manufacturing, and to
demonstrate its effectiveness in pilot production. The infrastructure should provide standardized ways
of assessing a wide variety of agile production servic,es over .local area networks (LAN), as well as
the Internet. The infrastructure is open because anyone will be able to offer services; it is s'ca_lable because
no distinction is drawn between services available on one's own shop floor, those obtained from other
parts of one's company,. and those obtained from other companies· across the country. A fully developed
agile manufaoturing system will provide access to a national network of agile manufacturing services
that a company can utilize as seamless extensions ·of their own internal production capabilfties.
54.4 COMPARISON BETWEEN LEAN MANUFACTU.RING AND
AGILE MANUFACTURING
Lean Manufacturing (LM) is a well-known production philosophy that focuses on optimjzing processes
through continuous improvement. It encompasses parts of both Just-11)-Time and Total Quality Management.
Lean manufacturing is defined as a program that drives out waste, increases value to customers, improves
profitability and competitiveness using tools and techniques that focus on teamwork and problem solving
methodologies. \
Agile· Manufacturing (AM) c.annot be fully successful on its own; first a company sµould be lean.
Without the prerequisite of leanness, the transition• to agility may be difficult to accomplish.
AM actually builds on many of the principles of LM. The primary objective of any product(on
system is to provide customers with the products they need in a timely 'and cost efficient manner. Given
this objective, many similarities between LM and AM can be ident_ified. Both systems demand high guality
to achieve their maximum potential, but neither has a structured program for solving difficult quality
· problems. In these systems, production fl_ow is controlled through a pull system where actual .customer
demand dett?rmines production. Since demand drives production, invep.tory needs to be minimized in
all areas. In order to smooth production· flow, both systems utilize the concepts of small lot sizes, quick
changeovers, and cellular production. Furthermore, these systems place a high value on supplier partnerships
to improve efficiency through supplier quality and reliability. For implementation of either system, a fundamental
culture change must occur where the system is. driven by management support and worker involvement.
Although these systems share many of the same fundamentals, there are also many distinct differences
between them, LM is a response to competitive pressures with limited resources. AM, on the other hand,
is a response to complexity brought about by constant change. Lean is a colk,·tion of operational techniques
focused on productive use of resources. Agility is an overall strategy focused on thriving in an unpredictable
environment. LM emphasizes technical and operational issues, while AM emphasizes organizational and
people issues. The main objective of LM is to produce a limited number of products efficiently, while
AM focuses on simultaneously producing a larger variety of interrelated products. AM is a planned approach
to deal with constant change; ther�fore, it has to be mor'e flexible than LM and adaptation must become
part of the normal state of operation. Additionally, in an AM system, low inventory levels may have
to be sacrificed to some degree to allow for product variety. In AM, it may be a challenge to smooth
production flow due to product· variety; lot sizes as small as one will need to be a reality rather than
a goal, _as is practiced in LM. Furthermore, even the et'licient changeovers of LM may not be suf-ficient
in AM, where changeovers will occur often because of product variety. Finally, production flow is further
controlled in AM by the idea of cellular manufacturing. In AM, this idea is transformed into virtual
production cells· in order to provide additional production flexibility to handle high product variety.
802 INDUSTRIAL ENl.31NEERING AND. MANAGEMENT

LM values long-term supplier partnerships whereas AM focuses on. short-term partnerships with
suppliers after the point of product differentiation. Furthermore, LM traditionally produces commodities
or staple products, whereas AM focuses on more inno.vative products where new product development
is n·eeded to provide customers with variety in order to build a larger customer base. AM again uses.
partnerships to support riew product development through the use of virtual enterprises 1n which suppliers
and customers form temporary partnerships to introduce new products. This type of alliance allows companies
to share the risks and benefits of new product development by sharing resources to get products to market
quickly in order to capture the largest possible market share. To create successful partnerships, AM uses
IT to facilitate communication between partners. Furthermore, IT is used to expedite planning and production
. processes and provides a check and balance system to the pull process of LM, where it is possible
for information to become distorted between steps throughout the production chain. AM uses customer
feedback and the pull system together to determine production requirements. Finally, AM requires a culture
change above and beyond that of LM since management and workers must learn to deal with constant
change and adaptation.

54.5 DIFFERENCE BETWEEN TRADITIONAL AND

CURRENT PRACTICE IN MANUFACTURING
The difference between traditional and current practice in manufacturing is presented in Table 54.1 with
the objective to demonstrate the potential of agile manufacturing and the multi-facet of the agile manufacturing
is presented in Table 54.2.
Table 54.1 Traditional versus Current focus on manufacturing.

Traditional practice Current focus

Unifonn/standardized Highly variable/customized ·
Self-contained Open-ended platform ·for upgrades/information/services
Expected to have a longer marktt life Expected to have a shorter market life
Produced to forecast Produced to order
Low on information content High information content
Priced by manufacturing unit cost+ margin Priced by customer perceived value
Characterized by a specific-market niche Characterized ·by multiple-market niche

Table 54.2 Multi-facet · of the agility in manufacturing

Areas in manufacturing Strategies for agile manufacturing

Marketing Individual customer-perceived value
.
Design and production Rapidly producing variety ofgoods and services to customer order.in arbitrary
order quantities, a methodology that integrates supplier relations, production
processes, business processes, customerrelations, and the product's use
and eventual disposal
Organization Ability to synthesize new productive capabilities-facilities and skills regardless
of their physical location
Management Leadership, motivation, support and trust
People Knowledgeable, skilled, empowered and entrepreneurial total work­
force
AGILE MANUFACTURING 803

How does a company become more agile?

Two important approaches are:
• To reorgani�e the company's production systems to make them more agile:
• To manage relationships differently and value the knowledge that exists in the organization. Let
· us examine each of these approaches in a company's operations as it seeks to become an agile
manufacturing firm.
Reorganizing the Production System for Agility: Companies seeking fo be agile must organize
their prodµction operations differently than the traditional organizati,on. The changes · in three basic
areas are:
1. Product design
2. Marketing
3. Production operations.
1. Product Design: Reorganizing production for agility includes issues related to product design. As
we have noted previously, decisions made in product design determine approximately 70% of the
·manufacturing cost of a product. For a company to"be more agile, the design engineering department
must develop products that can be characterized as follows:
• Customizable: Products can be customized for individual niche markets. In some cases, the
product must be customizable for individual customers.
• Upgradeable: It should be possible for customers who purchased the base model to subsequently
buy , additional options to upgrade the product.
• Reconfigurable: Through modest changes in design, the product can be altered to provide
it with. unique features. A new model can be developed from the previous model without
drastic and time-consuming redesign effort.•
• Design modularity: The product should be designed so that it consists of several modules
(e.g., subassemblies) that can be readily as.sembled to create the finished item. In this way,
if a module needs to be redesigned, the entire product does not require redesign. The other
modules
•
can remain the same.I
• Frequent model changes within stable market families: Even for products that succeed in
the marketplace, the company should nevertheless introduce new versions of the product to
re�in competitive.
• Platforms for information and services: Depending on the type of product offering, it should
include some a&pect of information and serYice.
In addition, the company must achieve rapid, cost-effective development of new products,
and it must have a life cycle design philosophy (the life cycle running•from initial concept
through production, distribution, purchase, disposal, and recovery).
2. Marketing: A company's design and marketing objectives must be closely linked. The best efforts
of design may he lost if the marketing plan is flawed. Being an agile marketing company suggests
the following objectives, several of whfch are related directly to the preceding product design attributes:
• Aggressive and proactive product marketing: The sales and marketing functions of the firm.
should make change happen in the marketplace.· The company should be the change agent
that introduces the new models ?nd products.
• Cannibalize successful products:·;The company should introduce new models tci replace and
obsolete its most successful current m9dels.
804 INDUSTRIAL ENGINEERING AND MANAGEMENT

• Frequent new product introductions: The company should maintain a high rate o( new pro.duct
introductions.
• life cycle ·product siipport: The company must provide support for· the prod4ct throughout
its life cycle.
• Pricing by customer value: The price of the product should be established according to its
0

value. to · the customer rather than according to its own cost.

• Effective niche market competitor: Many companies have become successful by competing
effectively in niche markets. Using the same basic product platform, the product has been
reconfigured to provide offerings for different markets.
°
3 .. F rodu<:,tion _Operations: A substantial impa_ ct on the agility of the production system can be achieved
by reorganizing factory operations and the procedures and systems that support these operations.
Objectives in production operations and procedures that are consistent with an agility strategy are
the following:
•Be a cost-effective, low-volume producer: This is accomplished using flexible production systems
and low setup times. '
• Be able to produce to customer order: Producing to customer order reduce;· inventories of
unsold finished goods.
• Master mass customization: The agile company is capable of economically producing a unique
product for an individual customer.
• Use reconfigurable and reusable processes tooling, and resources: Examples include computer
numerical control machine tools, parametric part programming, robots that are reprogrammed
for different jobs,. programmable logic controllers.
Managing Relationships for Agility: Cooperation should be the business strategy of first choice.
The general policies and pr!lctices that promote cooperation in relationships and, in general, promote.
agility in an organization include the following:
• Management philosophy that promotes inotivation and support among employees
• Trust-based relationships
• Empowered workforce.
The following are enabling Technologies and Management Practices for Agile Manufacturing:
1. Computer n umerical control
2. Direct numerical control
3. Robotics
4. Programmable logic controllers
5. Group technology and cellular manufacturing
6. Flexible manufacturing systems
7. CAD/CAM and CIM
8. Rapid. prototyping
9. Computer-aided process planning
10. Concurrent engineering
11. Manufacturing resource planning
12. Just-in-time production systems
13. Reduced setup and changeover tiines.
AGILE MANUFACTURING 805

There are two different types of relationships that should be distinguished iri the context of agility:
1. Internal relationships, and
2. Relationships between the company and other organizations.
Internal.Relationships: Internal relationships are those that exist within the firm, between co-workers
and between supervisors and subordi_nates. Relationships inside the firm must be managed to promote
agility. Some of the important objectives include:
I. Make the work organization adaptive,
2. Provide cross-funcdonal training,
3. Encourage rapid partnership fonnation, and
4. Provide· effective electronic communications capability.
External relationships: External relationships are those that exist between_ the company and external

reasons:
.
suppliers, customers, and partners. It is desirable
. to form and cultivate external relationships for the following
.

I. To establish interactive, proactive relationships with customers,

2. To provide rapid identification and certification of suppliers,
3. To install effective electrcmic communications and commerce capability, and
4. To encourage rapid partnership fonnation for mutual_ commercial advantage.
The fourth reason raises the issue of the virtual enterprise. A virtual enterprise (the terms virtual
organization and virtual corporation are also used) is defined as a temporary partnership of independent
resources (personnel, assets, and other resources) intended to exploit a temporary market opportunity.
• Once the market opportunity is passed and the objective is achieved, the organization is dissolved. In
such a partnership, resources are shared among the partners, and benefits (profits) are also shared. Virtual
enterprises are sometimes created by competing firms.
The fonnation of a virtual enterprise has the following potential benefits:
• It may_ provide access to resources and technologies not available in-house,
• It may provide access to new markets and distribution channels,
• It may reduce product development time, and
• It accelerates technology transfer.
806 INDUSTRIAL ENGINEERING ANO MANAGEMENT

IMPORTANT NOTES
 APPENDIX

Normal Distribution

.00 .01 .02 .03 .04 .05 .06 .07 .08 .09

.0 .5000 .5040 .5080 .5120 .5160 .5199 .5239 .5279 .5319 .5359
.1 .5398 .5438 .5478 .5517 .5557 .5598 .5636 .5675 .5714 .5753
.2 .5793 .5832 .5871 .5910 .5948 .5987 .6026 .6064 .6103 .6141
.3 .6179 .6217 .6255 .6293 .6331 .6368 .6406 .6443 .6480 .6517
.4 .6554 .6591 .6628 .6664 .6700 .6736 .6772 .6808 .6844 .6879
.5 .6915 .6950 .6985 .7019 .7054 .7088 .7123 .7157 .7190 .7224
.6 .7257 .7291 .7324 .7357 .7389 .7422 .7454 .7486 .7517 .7549
.7 .7580 .7611 .7642 .7673 .7704 .7734 .7764 .7794 .7823 .7852
.8 .7881 .7910 .7939 .7967 .7995 .8023 .8051 .8078 .8106 .8133
.9 .8159 .8186 .8212 .8238 .8264 .8289 .8315 .8340 .8364 .8389
1.0 .8413 .8438 .8461 .8485 .8508 .8531 .8554 .8577 .8599 .8621
1.1 .8643 .8665 .8686 .8708 .8729 .8749 .8770 .8790 .8810 .8830
1.2 .8849 .8869 .8888 .8907 .8925 .8944 .8962 .8980 .8997 .9015
1.3 .9032 .9049 .9066 .9082 .9099 .9115 .9131 .9147 .9162 .9177
1.4 .9192 .9207 .9222 .9236 .9251 .9265 .9279 .9292 .9306 .9319
1.5 .9332 .9345 .9357 .9370 .9382 .9394 .9406 .9418 .9429 .9441
1.6 .9452 .9463 .9474 .9484 .9495 .9505 .9515 .9525 .9535 .9545
1.7 .9554 .9564 .9573 .9582 .9591 .9599 .9608 .9616 .9625 .9633
1.8 .9641 .9649 .9656 .9664 .9671 .9678 .9686 .9683 .9699 .9706
1.9 .9713 .9719 .9726 .9732 .9738 .9744 .9750 .9756 .9761 .9767
2.0 .9772 .9778 .9783 .9788 .9793 .9798 .9803 .9808 .9812 .9817
2.1 .9821 .9826 .9830 .9834 .9838 .9842 .9846 .9850 .9854 .9857
2.2 .9861 .9864 .9868 .9871 .9875 .9878 .9881 .9884 .9887 .9890
2.3 .9893 .9896 .9898 .9901 .9904 .9906 .9909 .9911 .9913 .9916
808 INDUSTRIAL ENGINEERING AND MANAGEMENT

.00 .01 .02 .03 .04. .05 .06 .07 .08 .09
2.4 .9918 .9920 .9922 .9925 .9927 .9929 .9931 .9932 .9934 .9936
2.5 .9938 .9940 .9941 .9943 .9945 .9946 .9948 .9949 .9951 .9952
2.6 .9953 .9955 .9956 .9957 .9959 .9960 .9961 .9962 .9963 .9964
2.7 .9965 .9966 .9967 .9968 .9969 .9970 .9971 .9972 .9973 .9974
2.8 .9974 .9975 .9976 .9977 .9977 .9978 .9979 .9979 .9980 .9981
2.9 .9981* .9982 .9982 .9983 .9984 .9984 .9985 .9985 .9986 .9986
3.0 .9987 .9987 .9987 .9988 .9988 .9989 .9989 .9989 .9990 .9990
3.1 .9990 .9991 .9991 .9991 .9992 .9992 .9992 .9992 .9993 .9993
3.2 .9993 .9993 .9994 .9994 .9994 .9994 .9994 .9995 .9995 .9995
3.3 .9995 .9995 .9995 .9996 .9996 .9996 .9996 .999§ .9996 .9997
3.4 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9997 .9998
---------------------------------
GLOSSARY AND _TERMS·
ABC 1 analysis This is a classification which attempis
• • \� distinguish the 'vital few from the trivial many'.
In inventory management the basis is annual value
(units x price). A, B, and C are categories of
importance. Different controls are adopted for each
category.
Acceptable quality level (AQL) In quality control used
to define good lots.
Acceptance
' plan In quality control, the scheme for
· accepting or rejecting a product lot based on
information from samples.
Acquisition cost Cost of purchasing or producing material
or product.
Action bucket In the MRP record for the current week,
a cell calling for immediate action to meet the
MPS goal..
Activity In project management, a task or a certain amount
of work required in a project.
Aggregate plan The highest-level operations plan. Derived
from the marketing, finance and business pfans.
Uses inputs as the. sales forecast and inventory
targets. Process involves trading off the costs of
inventory, normal time, overtime, hiring, layoff,
rate changes, etc.
Agile manufacturing Coined by the Lacocca Institute
to indicate a l@nger-term aim of being able to
manufacture largely to customer specification with
minimal lead time.'
Activity chart A graphic tool to analyze and time the
small, physical actions of worker and machine in
performing a routine, repetitive, w_orker-niachine
task so that idle time can be identified.
Allowance fraction The fraction of time lost on a nob­
because of workers' personal needs, fatigue, and
other unavoidable delays: the remaining fraction
of time is the available fraction.
Andon A warning light used as a visible control technique
in total quality control. Overhead problell) display
used by Toyota to indicate location and type of
problem.
Appraisal costs The Costs of inspecting for quality.
Arrival Occurs when one person machine part, etc.,
arrives and demands service.
Arrival rate The rate at w,hich things or persons arrive.
'Arrival rate is usually normal or· Poisson distri­
buted.
Assemble-to-order firm The Firm that assembles, from
a relatively few major assembly's items or compo­
nents, customer ordered end items having many
options.
Assembly chart Chart listing all major materials,
components, subassembly and assembly operations
and inspec_tions for a product.
Assignment method Final solution, method used to assign
jobs or pe�sonnel to machines or departments.
Attributes In- quality control, product characteristics
classified into one of �wo categories defective or
nondefective.
Automated assembly system Automated assembly
machines linked together by automated assembly
maclines and automated materials handling
equipment.
Automated flow line Automated machines linked together
by automated parts transfer and handiing machines.
810
Automated guided vehicle(AGV) Driverless trains, pallet
trucks, and unit load carriers to deliver items to.
work stations in operations.
Automated storage and retrieval system (ASRS) Used
for receiving orders for materials, collecting and
delivering them to work stations in operations.
Average outgoing quality (AOQ) Average percentage
of defectives in lots of an inspection station.
Average outgoing quality limit (AOQL) Maximum
average outing quality.
Backlogging of orders For some business reasons, it
is the holding orders for late shipment
Backward Used in inventory control for outstanding or
unfilled customer orders.
Backward scheduling It is used for scheduling waiting
jobs by assigning them to the latest available time
slot that will enable each job to be completed
just when it is due but not before.
Basic times It is the work,study measurement for carrying
out an element or work that takes into account
· the stanqard time for the job and the relaxation
allowance.
Baldridge An American award for total quality.
Batch production For large variety, it is the production
- in which large batches of standardized products
follow direct linear routes in the same production
system.
Behavioral management This approach is one of three
primary theories of management emphasizing
human relations and the behavioral sciences.
Benchmarking Used as change strategy for establishing·.
internal standards of performance by looking to
how world-class companies run_ their businesses.
Best-in-class Used as benchmarking for ideritifying the
best product or service in a particular class of
products or services.
Bias It detiries the trend of error. So, it is the forecast
error measure that is the average of forecast error
with regard to direction and shows any tendency
consistently to over or underforecast. It is calculated
as the sum of the actual forecast error far all periods
divided by the total number of periods evaluated.
Bills of material file It gives the complete list of all
Finished products, quantity or each material in
each product. and the structure of all products
may also be called an indented parts list."
Bill of materials(BOM) A listing of all the subassemblies,
intermediates parts and raw materials that go into
INDUSTRIAL ENGINEERING AND MANAGEMENT
a parent assembly showing the quantity of each
required to make an assembly' (AP/CS Dictionary).
Blanket rule It is used to define a general policy for
inventory control that can be modified as needed
for total inventory costs.
Bottleneck operation It is the·station on an assembly
that requires the longest task time. Also used in
theory of constraints.
Box-Jenkins model It is the forecasting model that filing
a mathematical function to actual historical data
points, with that function then _becoming the
forecasting model for future estimates.
Break-even point It is the level of output volume for _
which total costs equal total revenues.
Bucket It is used in MRP as a principal unity of time
measurement usuaJly one week.
Business strategy Long-range plan of an organization.
It defines the methods to be used to achieve its
corporate objectives.
Buffer It is the·quantity of inventory awaiting further
processing, usually held in front of a workcentres
to allow for disruption at prevmus workcentres.
The term is sometimes used for safety stock.
Capacity The capability of a worker, machine, work
centre, plant Qr organisation to produce output per
time period. (AP/CS Dictionary).
Capacity Requirements Ptinning (CRP) It is the activity
of evaluating and establishing the capacity required
to execute the material, requirements. plan. For
shopfloor planning, CRP translates the output of
materials requirements planning such as, planned
and released orders) into hours of work required
by workcentres in future t_ime periods.
Carrying(holding) costs Total cost of holding a material
in inventory expressed in Rs. per- unit per year.
Costs of maintaining the inventory warehouse and
protecting the inventoried items.
Cause and effect diagram A fishbone-shaped diagram
u�ed identifying reasons· of a problem. Also known
as the Ishikawa diagram.
Cell Based on group technology principles, to make a
family of parts that share common manufacturing
processes. The cell comprises a group of unlike
machines that are designed to make a complete
part.,
Cellular manufacturing (CM) Arrangement of a facility
so that equipment used to make similar parts or
families of parts is grouped together. Grouping
GLOSSARY AND TERMS
of machines info cells that function like a product
layout within a larger job s�op or process layout.
Changeover time It is the time take.n from the last product
of one batch to the first good product of the next
. hatch. It consists of set-up time and adjust time..
Channel Waiting line in a service system. A single channel
system has only one line and a multichannel system
. has two or more lines.
Classical management it is one of three main theories
of management, emphasizing efficiency at the
production, division of labor, the separation of
planning and doing work and management
principles and functions.
Closed-loop MRP Material requirements planning 0
including production planning, master pro duction
scheduling, capacity requirements planning, and
various execution junctions.
Computer-aided manufacturing (CAM) Manufa�turing
system's utilizing CNC and computer software
programs for the control the machine and shop
floor.
Computer-aided design (CAD) Includes computerized
process for designing new products or modifying
existing ones.
Computer-integrated manufacturing (CIM) Manu­
facturing resources, utilizing a shared manufacturing
database for engineering design, manufacturing
engineering. Factory production, and information
management.
Consumer's risk (type II error) (13) It is the probability
of accepting a bad lot. The risk or probability
of incorrectly concluding that the conversion
process is in control is also determined by this.
Continuous operations It is the manufacturing approach
for standardized high-volume, capital-intense
products made to· store in inventory by special
purpose equipment and by continuous product flow.
Control limits (CL) Used in quality control. Two limits
are: upper (UCL) and lower (LCL) boundaries
defining the range of variation in a product
characteristic such that manufacturing process is
in control for quality standard.
Control The process that measures deviations from
planned performance and provides information·
upon which corrective action can be taken.
Conversion process l,t is the process of changing inputs
of material information labor, capital, land, and
management into outputs of goods and services.
811
Control chart Used for continuously monitoring a
production operation to determine if its outputs
meet quality standards.
Continuous improvemeot Make small incremental
improvements toward excellence.
Cost of quality (CoQ) It is the.management or accounting
procedure for tracking the costs of poor quality
and the costs of prevention and inspection.
Cross docking It is the distribution procedure where
goods are transferred mov_ed and sorted between
two trucks without going into storage or warehouses..
Critical activity When an activity has no room for schedule
slippage; i.e., has zero slack.
Critical path It is a chain of critical activities from start
to end of a project.
Critical ratio It is the sequencing rule by which the
next job to be processed is the one with the least
critical ratio (time to due date divided by total
remaining time) among the waiting jobs.
Customer satisfaction Focus TQM and a determination
· of customer requirements and demonstrated success
in meeting them.
Cycle time Time needed between completed units coming
off an assembly line.
· Decision variable It is a numerical controllable parameter.
that if modified yields a variety of results.
Degeneracy It is II quality of a linear transportation
programming problem such that there are too few
occupied cells to enable evaluation of the empty
cells.
Delphi technique It is a qualitative forecasting technique
in. which a panel of experts working separately
and not meeting, arrive at ii consensus through
• the summarizing of ideas by a skilled coordinator.
Deming's 14 points for management Deming provided
guidelines for improving quality as part of total
quality control.
Deming Prize Quality management awarded to a company
that has distinguished itself in quality management
programs.
Dependent demand When demand for component items,
can be related to ,the demand for another item
of, fail product. this should be calculated not
forecast.
Depreciation It is an accounting procedure to recover
expenditures for an asset over its lifetime.
Detailed capacity planning It ·is ari iterative pro. cess
of modifying the MPS or planned resources to
812
make capacity consistent with the production
schedule.
Detailed scheduling It is the process of determining start
times, finish times, and worker assignments Tor
all jobs at each work center.
Deterministic model When a model has variable values
t�at are known with certainty.
Disggreation It is the process of translating aggregate
plans into detailed operational plans for individual
products.
Distribution requirements planning (DRP) Planning
for the replenishment of regional warehouse
inventories.
Distribution resource planning Planning for the provision
of the key resources of warehouse space-number
of workers, cash, shipping vehicles, etc. in the
right quantities and when needed.
Double sampling Used in quality assurance for acceptance
sampling -based on � first, small sample and, if
results are inconclusive, a second, larger sample.
Dummy activity In PERT and CPM, it is a. fictitious
· activity consuming no time, symbolized by a dashed
arc.
Earliest due date It is a sequencing r.ule in which the
next job to be processed•is the one with the earliest
that an activity can finish.
Economic order quantity (EOQ) Used i_ n inventory
control it is a fixed order quantity of inventory
that reflects the optimal balance between ordering
costs and holding costs.
Economics of scale It is the reduction in unit cost as
fixed costs are spread over increasingly more units.
Economics of scope It is the production of many product
models in one highly flexible productio11 facility
more cheaply than in separate production facilities.
Electronic Data Interchange (EDI) It is inter-computer � Fonv ard scheduling It is a process for determining
communication protocol enabling direct transfer
of data. There are several standard systems, for
example EDIFACT and Tradanet.
Event Used in CPM/PERT for a signal that an activity
has· either begun or ended.
Expected time Used in PERT, the -amount of time an
activity is expected to consume.
Expediting It is, the process of tracking a job's progress
and taking special actions to move it through the
facility.
Exponential smoothing It is a short-range forecasting
model. that takes the forecast for the preceding
INDUSTRIAL ENGINEERING AND MANAGEMENT
period and adds an adjustment to obtain the forecast
for the . next period.
External failure costs Used in TQM as costs attributable
·to the failu;e of products in the field.
Facility layout It is the plan for the location of machines
for the physical arrangement of all manufacturing
·processes and their support functions.
First-come-first-served rule (FCFS) It is the priority
rule that gives top priority to the waiting job that
arrived earliest in the production system.
Fishbone (cause and effect) diagram It is a schematic
model of quality problems and their causes; used
to diagnose and solve these problems.
Fixed-position layout It is the arrangement of a facility
· so that the product stays in one location; all the
tools, equipment, and workers are brought to it
as needed.
Fixed
· order quantity system Inventory planning that
places fixed quantity orders whefl the inventqry
level falls to a pre-det�rmined critical level.
Flexibility It is the capability of a manufacturing system
to adapt successfully to changing environmental
conditions and process requirements.
Flow process chart A graphic tool to analyze and
categorize interstation activities so that the flow
of the product throughout the ove�all production
ptoccss is represented.
Flow time It is the total time that a job is in the system
for which the sum of waiting time and processing
time.
• Forecast error It is the numeric difference of forecasted
demand and actual demand.
Fonvard scheduling The process of determining the start
and finish times for waiting jobs by assigning them
to the earliest available time slots at th� work center.
scheduled start dates. The calculation process beings
with the start date of the first operation and works
forwards to determine staFt dates for each
activity.
Gantt chart Chart that shows the progress of eac� 'job
in relation to its scheduled finish date.
Gradual replacement model Inventory model in which
demand is withdrawn while production is underway; -
no stockouts, constant and known demand, lead
time and unit costs.
Gross requirements The total of independent and
dependent demand for a component or product
GLOSSARY AND TERMS
prior to the netting of on-hand inventory and
.scheduled receipts. (Adapted from AP/CS Dic­
tionary).
·Incentive pay system In this, pay system that makes
the amount of workers' pay dependent upon job
performance.
In-control process When the process for which all
variations are random is in control process.
Independent deinand Demand for an item that is unrelated
to demand for other items' (AP/CS Diclio�1a1y).
In-process inventory (WIP) Inventory in-process of
completion o_r partially completed products. Internal
customer In long production chain, the next
production operation.
Internal failure costs Used in TQM costs attributed to
errors and defects· in production at the plant.
Internal rate of return Rate at which the present value
of outflows equals 'the present value of inflows,
Internal set-up time It is the time taken to change a
machine over from batch to batch when the machine
is actually stopped for change-over.
Infinite sched_ullng When schedule takes no account of
the available capacity and MRP assumes infinite
capacity.
Jidoka A system to stop the process or line if a fault
is detected. Boch, manual (line stop) or automatic
(pokayoke) Jidoka.
Job Involves group of related tasks or activities· that
needs to be performed to meet organizational
objectives.
Job· ,..nlargement Involves redesigning jobs to provide
6reater variety, autonomy, task identity, and
feedback.
Job enrichment Involves redesigning jobJ to give more
·
meaning and enjoyment to the job by involving
employees in planning, organizing, and controlling
their work.
Job design Involves description of a job's content and
specification
_ to perfom, that job.
Job shop When work centers are organized around
particular operations; products flow through
departments as per customer orders:
Just-in-Time (JIT) A philosophy of manufacturing based
on planned elimination of all waste and continuous
improvement of productivity. It encompasses the
successful execution of all manufacturing activities
required to produce a final produc,t, from design.
engineering to delivery and including all stages
813
of conversion from raw material onward. The
primary elements .... arc to have only the required
inventory when needed; to improve quality to zero
defects, to reduce lead times by reducing set-up
times queue lengths, and lot sizes; to increment.
tally revise the operations themselves; and to
accomplish these things at minimum cost.· In the
broad sense it applies to all forms of manufacturing.
job shop and process as well as repetitive, Sy11011y111 ·
short-cycle manufacturing, stokless production
zero inventories, (AP/CS Dictir;11a1y).
Kanban A signalling system to authorise the making
of the next batch or unit on the previous process,
or the delivery of parts. Can take many fo1:ms,
for example: cards, squares, lights, ping-pong balls,
fax ban. EDI-ban, or even voice method of
· controlling, materials flow through a JIT manu­
facturing syst�m by using cards to authorize a work
station to transfer or produce materials.
Kaizen Means continuous improvement. A management
philosophy developed by Imai of Japan.
Latest finish (LF) Used in project management the latest
elapsed time from the beginning of the project
that an activity can be finished.
Layout It is physical configuration of departments work
centers, and equipment.
Lean manufacturing Evolved in 'the book 'The Machine
that Changed the World' by Womack et. al., J 990.
JJT manufacturing_ in the broad co_ntext. .
Lead time Time required from placing an order to receiving
it. In materials requirements planning (MRP), it
_is. the time required to complete a stage of
manufacturing once all Jhe required parts are on
hand.
Lead-time demand Items, demanded during lead time:
can be describ1:d by a probability distribution iri·
·
stochastic situations.
Lead-time offsetting Detennining the timing of a planned
order release; preparing from the timing of a planned
order receipt by the length of lead ,time.
Line balancing The balancing of work content of assembly
line for equalising the time taken by each operator
or process. Normally, governed by the required
production_ rate.
Linear programming Mathematical method for selecting
the optimal allocation of resources to maximize
profits or minimize costs.
Load 'The ·amount of planned work scheduled and actual
work 1eleasec.l for. a fa9ility, workcentres, or
814
operation for a specific span of time. Usually
expressed in terms •of standard hours of work....'
(AP/CS Dictionary).
Lot-for-lot ordering It is a lot sizing policy in which
order quantity equals net requirements for
the period.
Logistics It is the management. of the movement of
materials within a factory. Also includes shipmen.I
of incoming materials from suppliers, and·shi�ment
of outgoing products to customers
Lot tolerance percent defective (LTPD) Used
. in quality .
.
control, if lots have greater than• LTPD; they are
considered bad lots.
Lumpy demand· It is the demand for a maietial· th�i · ·
has -an irregular period-to-period pattern. ·
Master production schedule (MPS) It is the schedule
of products or services that .,viii be offered. It is
compatible with the production plan.
Material requirements planning (MRP) It is a technique
for calculating the requirements for, and timing
of components and assemblies that will be required
to make an end product. May be a computer
packages which carry out this calculation process,
and which include bill of material rt>co�cls,
on-hand inventory records, as well as features such
as · firm planne� orders and pegging.
Mathematical modeling A technique for rcating and
using mathematical representations of management
problem to predict outcomes of proposed courses
of action.
Matrix organization A type of organisation; an
organization that combines functional and project
bases for groupings of organization units.
Manufacturing resource planning (MRPII) It is an
integrated computer package for manufacturing
planning and control comprising production
planning, master production scheduling, material
requirements planning capacity requirements
planning, and production activity control. The
output is linked with finance and '.lccounting, and
somtimes has simulation capabilities. MRPII is
an extension of MRP and closed loop manu­
facturing.
Modular design The creation of products from some
combination· of a fundamental, basic, preexisting
sub-products.
Monte Carlo A technique for generating random values
from ·discrete distributions.
INDUSTRIAL ENGINEERING AND MANAGEMENT
Moving average method It is short-range forecasting
method that averages the data from a few recent
past periods to form the forecast for the next
period.,
Multiechelon inventories P roducts stocked at various
levels-factory, warehouse, ·retailer, customer-in a
distribution system.
Net requirements Used in MRP, each period are calculated
from gross requirements less schedt:led receipts
and on-hand inventory.
Net present value Discounting all cash flows of an
investment back to their present values and netting
out the inflows against the outflows..
N ominal group techni'que (NGT) A qualitative
forecasting technique in which a panel of experts
working together in a meeting, arrive at a consensus
through discussion and ranking of ideas.
Normal time-It is the averag1.: cycle time for-a job, adjusted •
· by a worker rating to account for variations in
"normal' performance.
Objective function An algebric function that describes
an objective; maximizing profits or minimizing
·
costs are common onjective functions.
Offsetting for lead time In MRP preponing for the time
required to produce or to receive a lot purchased
from a supplier.
Operating ch;uacteristil; (OC) curve Graph of the
performance of an acceptance plan.
Opportunity costs It is the invisible returns that are
lost or forgone as a result of selecting one alternative
over another.
Optimistic time (t0) In PERT, when all goes well the
least amount of time an activity is expected to
,
consume.
Optimized production technology (OPT) Used in theory
of constraints. A system that emphasizes identifying
bottleneck wurk centers, and management of
resources related to those bottlenecks, to maximize
output and produce inventories,
p chart Used in quality control for a control c)lart using
sample fractions defective.
Pegging Tracing the MRP records and all [levels in the
product structure t identify how changes in the
records, of one component will affect the records
of other components.
Periodic inventory system Stocks are replenished up
to a fixed base stock level after a fixed time period
has passed.
GLOSSARY AND TERMS
Pessimistic time (IP) In PERT, when all goes worst, the
greatest amount of time an activity is expected
to consume.
Planned order release It involves deciding the required
quantity of parts that mast be released to begin
a stage of manufacture on a particular date in order
to complete the product according to the MPS
requirement.
Pokayoke A japanese term for a failsating or a fool
proofing. device, used for defect prevention.
Principles of motion economy Guidelines focusing on
work arrangements, the use of human hands and
body, and the use of tools by human beings.
Process layout Facility arrangement so that work centers
or department are grouped together according to
their functional type.
Producer's risk (type I error) (a) It is the risk or
probability of incorrectly concluding that the
conversion process is out of control. It is probability
of rejecting a good lot. · periodically, resulting in a new MPS, an updated
Product layout Facility arrangement so that work centers
·or e.quipment are in a line to afford a specialized
sequence of tasks.
Program Evaluation and Review Technique (PERT )
• A project management tool originally designed for
planning and controlling the U.S. Navy's Polaris
nuclear submarine project.
Project Set of one-time activities that has a. definite
. beginning and ending point in. time.
Productlo•1 system Conversion process for set of inputs
into a set of desired outputs.
Predetermined time standards work Historically
developed data to determine labor standards before
an operation is performed.
Present-value analysi� Money that must be invested now
at a specified rate of interest to accumulate to
a cert11in amount in the future.
Preventive maintenance (PM) Activities that are ·
performed before malfunction of facilities or
· machines occurs.
Produce-to-order System to produce products only after
customers orders are in hand.
Produce-to-stock System to produce products ahead of
time and place them in inventory until customers
deniand them.
Pull system Production planning and control in which
the next stage of production detem1ines what is
needed, and it only is produced. AJIT system.
815
Push system Prod4ction planning and control in which
· products are moved forward by the preceding step
in the· process. An MRP based or EOQ-based
system.
Q/R inventory system System of fixed optimal reorder
point R-the trigger level-and an optimal order
quantity Q '(economic order quantity).
Quality It is what customer wants. Degree to which
a or service conforms to its design specifications.
Quality circle Group of employees voluntarily' and
regularly meet to analyze and solve production
and quality problems. �
Quality function deployment (QFD) Identifying customer
wants and eliminating wasteful. product features.
Queue Referred as waiting line.
R chart In quality control, control chart for sample
ranges.
Regenerative MRP system· MRP is processed
inventory status file, and an updated bills of material
file. that generates a complete set of_ outputs · in
the MRP computer program.
Reliability It is the ability of a product to perform its
expected under normal conditions during its life
time.
Reorder point (ROP) Level of inventory triggers a
replenishment order in sufficient time for it to. be
delivered without running out.
Route sheet Representation of routing of a �omponent,
through its production processes.
Routing The steps or needed to create a product or to
do a jo�. r .
Safety stock Inventory to be used in time periods' when
demand is greater than planned or when supply
is less· than planned:
Salvage value Revenue_ from selling an asset.
Set-up It is the time taken to change a machine from
producing one batch to another.
Sequential�sampling plan That sampling plan in which
each time a unit is tested, an accept, reject or
continue-sampling decision is made.
Shop floor control Shop floor activities includes loading,
sequencing, detailed scheduling, and expediting
jobs in production.
Simpltx method L:i:icar prrigramming algorithm that
provides solutions to problems that have many
variables and constraints that arc linear.
816
Single-sam,,ling plan That sampling plan in which an
accept or reject decision is made alter drawing
only one sample from a lot.
Slack Time that a noncritical activity or group of activities
can slip without causing delay in the completion
of the project.
Stockless prod uction system Production systems that
aims at no raw materials, work-in-process, or
finished goods. JJT philosophy is the basis.
Standard time Used in work study for time to complete
job and an 'allowance' as the operator cannot work
at exactly the same pace throughout the working day.
Solution space The feasible region or possible values
of variables in a linear programming problem.
Synchrono1•s manufacturing Production system in which
all parts of an organization work-together to achieve
the organization's goal.
Theory Z William Ouchi stressed the contribution of
every employee in solving problems through group
consensus.
Throughput The conversion process of items through
the production processes.
Time measurement unit (TMU) Equivalent to 0.00001
hours, useo as, basis for methods time measurement
(MTM).
T ime study Establishing time standards by 4sing
stopwatches to time operations.
Total quality management (J'QM) System of at all level
quality.
Total productive (preventive) maintenance (TPM) It
is the maintenance activities for prevention and
improvement, making use of the workforce not
just maintenance specialists.
Transportation method. Special case or· Linear
programming used to find the minimal cost of
shipping products from scvual sources to several
destinations.
INDUSTRIAL ENGINEERING AND MANAGEMENT
1\vo-bin system Fixed-order quantity inventory control
system that uses two bins .to hold a rr.aterial in
inventory; orders are made when one bin becomes
empty, and both bins are filled when inventory
is replenished.
Value analysis/engineering Creative team-based
procedure aimed at reducing cost for a given product
functionality, or at improved functionality at a given
the same cost.
Waste All processes or activities that do ·not add value
for the customer.
Waiting time The time an arrival spends in queue.
Warehousing Management of material space and
personnel while �hey are in storage.
Weighted moving average in forecasting averaging
method that allows for varying weighting of old
demands.
Worker produ_ctlvlty Rs. value of all goods and services
in a given year divided by the direct labor-hours
used in producing those goods and service!s.
Work measurement It is a process of estimating the
amount of worker time required to generate one
unit of output.
Work sampling It is work measurement technique
that randomly samples the work at periodic
intervals to determine the proportion of the total
Qperation that is accounted for by one particular
activity. ,
World-class company .Generally a benchmark, _each
product and service would be considered best
in-class by its customers.
X-chart In quality control used as a control chart using
sample averages:
Zero defects In TQM, a program to change workers,
attii�des about quality by stressing error-free
perfonnance.
____ .w!l ________ _. _
INDEX
__.ea111_. .. _ ... .., __ mu_m._lm!!lmaam -- -- --
A Approaches of Management Thoughts, 589
A Man-Machine System, 767 Arrival Char'!cteristics, 659
A Special Feature of AOQ Curve, 530 AS/RS, 334
A Three Unit Parallel System, 552 Assignment Model, 179
ABC Analysis, 261 Assumptions in CPM, 618
Acceptance _Plan, 519 Assumptions, 21 ls
Augmentation of Objective Function (OF), 149
Acceptance Sampling, 520
Authority Compliance, 464
Accounting Concept of Depreciation, 208
Autocratic ·or- Authoritarian Leadership, 461
Accuracy of Forecast, 52
Automated Guided Vehicle (AqV),. 334
Advantages of Acceptance Plan, 520
Average Outgoing Quality (AOQ), 529
Advantages of Critical Path Analysis (CPM and
PERT}, 618 B
Advantages of Merit Rating, 420 Barriers to Successful. Implemen_tation, 737
Agile Manufacturing, 799 Basic Steps in Gaining ISO 900 I Registration, 493
AIMS of SCM, 311 Basis of a Good Wage-Incentive Plan, 426
Algorithm to Solve Assignment Model, 181 Batch Production, 12
An Analogy to JIT, 296 Bath Tub C,1rve, 542
An Example from Industry (A Case-Study), 437 Benchmarking, 557
Analytic Hierarchy Process (AHP) Approach, 355 . Benefits and Limitations of MRP II, 286
Analytical Sampling and Synthetic Data, 408 Benefits of Benchmarking, 567

Angle of Incidence (?), 221 Benefits of Forecasting, 47

Benefits of JIT, 302
Anthropomelry for Workplace Design, 770
Benefits of Job Evaluation, 414
Anthropometry, 769
Benefits of MRP, 282
AON V s AOA Approaches for Diagramming, 625
Benefits of Supply-Chain Improvement, 310
Application of AHP in Evaluation of ERP, 355
Best Practice Benchmarking, 562
Application of Industrial Engineering, 5 Bill of Material (BOM) ·File, 275
Applif'llion of POC-Approach, 353 BPR and IT, 583
App' ,cation of Work Sampling, 405 Break-Even-Analysis, 217
Approach to ERP Selection, 350 Business Recnginecring, 571
818 INDUSTRIAL ENGINEERING AND MANAGEMENT

C Comparison of Work Measurement Techniques, 409

Calculation for Number of Kanban, 295 Competitive Benchmarking, 561
Calculation of the Overall Ranking of each Alternative Component Reliability from Test Data, 546
-.9L
ERP Solution, 362 Compound Interest, 190
Calcul�tion ·of Weights of Each Row, 359 Computer Injuries, 776
Capitalized Worth Method, 230 , Concept of Interest, 189
• Case I: Inventory Model with Single Discount, 258 Concept of ShadO\v Price, 146
Case 2: Inventory Model with Double Discount, 259 Concept of Slack Variable, 146
Case 2: Selection of Site .for XYZ Company, 77 Concept of Value Chain, 17
Case of Continuous Compounding, 192 Concept to Value Engineering, 234
Case Study, 74 Concurrent Engineering, 112
Cellular Layout and Work Flow, 299 Considerations in Plant Location, 70
Cellular or .Group Layout, 86 Co_ nstant Hazard Model, 548 .. ·
Change Handler, 593 Constraint, 437
Changing Faces of Industrial Engineering (IE), 689 Constraints in Line Balancing Problem, 94
Characteristics of a Queuing Model; 658 Consumers' Cooperative Society; 44
· Characteristics of Corner Points, I 42 Containers and Racks, 334
·Chartered Company, 40 Contingency Allowance, 401
Checklist for Make-buy Decision, 320 Contingency Management, 592
Classification of Company; 40 Continuous Production, I 3
Classification of Depreciation, 208 Control Ch_arts, 512
Closed-Loop MRP, 284 Controlling, 595
Common Flaws in Network, 621 Conveyor, 327
Common Methods Used in Lean Manufacturing, 732 Cooperative Credit Society, 44
Com_mon Myths about BPR, 575 ; Cooperative Farming Society, 44
Common Use Items, 274 Cooperative Housing Society, 44
Commonly Observed Demand Pattern, 50 Cooperative M&rketing Society, 44
Co_mparative Statement, 724 , Cooperative Organisation, 42
Comparative Study of Rural and Urban Sites, 73 Cost and Worth, 236
Comparison between Lean Manufacturing and Agile Cost Value, 235
Manufacturing, 801 Country Club Management, 464
Comparison of AGV Systems, 338 Cranes and Hoists, 328
Comparison of Different Forms of Business Owner- Critical Path Method (CPM), 617
ship, 45 Customer �ehaviour, 662
Comparison of Different Production Systems, 14
Comparison of ISO 9001, ISO 9002 and ISO 9003, 496 D
Comparison of Layouts, 90 Decisional Roles, 592
Comparison of Leadership Styles, 464 Declining Balance Method (DBM), 210
Comparison of Malcolm Baldrige Award Criteria 1994, Define-Meusure-Analyze-lmprove Control (DMAIC)
1996, 1997-A Shift in Focus, 500 Process, 794
Comparison of Public, Private and Joint Sector Compa_nies, Definition and Terminology in Assembly Line, 94
41 Definition of Ergonomics, 765
Comparison of RFP and POC Approaches, 354 Definition of Linear Programming, 139
INDEX 819

Definition of Productivity, 23 Effectiveness of PPC, 136

Definition of Reengineering, 571 Element� of TQM, 482
Definition, 233 Elevators and Lifts, 331
Definition, 305 Engineering Economics. 189
Definition, 760 Enterprise Resource Planning (ERP), 343
Definitions, 739 Entrepreneurial Failure and Remedial Measures, 456
Delphi Method, 51 Entrepreneurship, 451
Deming's Approach to TQM, 474 Equal Pay�1e11t Capital Recovery Factor, 197
Department Function, 299 Ergonomics in Computer Workstation, 773
Dependent Demand, 272 Ergonomics, 755
Depreciation, 207 ERP V s SCM, 313
Design and Code Reliability Metrics, 554 Esteem Value, 234
Design and Types of Controls, 768 · Evaluation of JIT Production, 302
Design for Manufacturing (DFM), 114 Evolution of Industrial Psychology, 760
Design for X (DFX), 115 Exchange Value, 235
Design of AGV System, 341 Expediting, 640
Detailed Scheduling, 640 · Explanations and Rules m Simplex, 151
Determining Production-Volume for a given Profit, 221 Exponential Smoothing, 56
Deterministic Inventory Models, 246 Extrapolation, 53
. Difference between Productivity ,and Production, 23
Difference between Traditional and Current Practice in F
Manufacturing, 802 Facility Layout (Plant Layout), 81
Different Approaches to Measure Productivity, 26 Facility Location, 69
Different Conditions In the QC-Curve, 527 Factors Contributing to the Growing Importance of
Difrercnt Phases in Benchmarking Process, 565 IIRM, 704
Different Types of Common· Layouts, 83 Factors in Facility Location, 69
· Difficulty in Selecting ERP, 350 · Pactors Involved in Successful Implementation, 364
Dimensions of Quality, 468 Failure Rate and Hazard Function, 544
Disadvantages of Acceptance Plan, 520 Past Diagr�m, 238
Dispatching, 133 Features of AGV, 334
Distortion of Demand: A Case for ERP ln,plementa- Five Elements of the Six Sigma Framework, 793
tion, 313 Fixed Cost. 218
Divisional Approach of Organisation Structure, 608 Fixed cycle ( Equal-Order-Interval) Melhod, 265
Double Declining Balance Method (DDBM), 210 Fixed P0sitio11 I .ayout, 85
Double Sampling Plan (DSP), 522 Flexible Manufacturing Systems (FMS), 751
Dramatic, 572 Float or Slack, 629
Drawbacks of MRP, 282 Flow Process Chart, 381
Duties of F urchasing Officer, 716 Flow Type Diagrams, 376
Fullm,--up or Expediting or Progressing, 136
E Forec�sting, 47
Economic Considerations, 374 Forms of Business Enterprises, 35
Effect of Bfise Period on Productivity, 28 Formula for Break-Even-Analysis (BEA), 221
E!Tect of F,J!Jction and Cost on Value, 235 Foui· Principles, 800
820 INDUSTRIAL ENGINEERING AND MANAGEMENT

Fayol 's Principles, 590 How to Draw the QC-Curve, 525

Function of Inventory, 244 How to Minimize Failure of BPR Projects, 582
Function, 235 How to Prepare a Gantt Chart, 644
Functional Approach with Lateral Relationship, 607 How to Solve the Transportation Problem· (TP), 161
Functional Approach, 605 Human Reactions, 376
Functional Benchmarking, 562 Human Relations Approach, 591
Functional Organisation, 614 Human- ·ResOL•rce Management and Human Resour"e
Functions and Need for Developing Entrepreneur- Planning, 699
ship, 455 Human Resource Management, 699
Functions of Management. 593 Human Resource Planning (HRP), 710
Functions of Marketing, 7-80 Hybrid Approach of Organisation Structure, 609
Functions of PPC, 126
Functions of Purchasing Department, 715
Fundamental, 572 Illustration of Floats, 631
Illustration of Optimality Test and Assignment, 183
G Illustrative Problem, 358
Gantt Chart, 644 Implementation of T.QM, 491
General For·mulation of Linear Programming,· 140 Implication of Assumption thatDemand is known with
General Purpose Simulation System- (GPSS), 6.[31 Certainty, 249
Generic Model of ERP System, 348 Importance of Materials Management, 725
Goldratt's Theory of Constraints, 43:5 Improvised Leadership, 464
Government Company, 41 Individual, 706
Government· Support, 299 . Industrial. Cooperative Society, 44
Graphical Method, 141 Industrial Engineering and Management Science, 6
Group TechnoJogy, 739 Industrial Engineering and Prodtction Management, 5
Group, 707 Industrial Engineering, I
Guidelines for Raj iv Gandhi National Quality Award, 503 Industrial Engineering: Beginning of a New Dawn, 689
Industrial Psychology, 759
H Industrial Revolution and Post-Industrial Revolution
Heuristic: Helgeson-Birnie (Ranked Positional Weight) Phase, 3
Method, 102 Industrial Trucks, 328
Heuristic: Largest Candidate Rule, 96 Infeasible Solution, 147
High Cost Item Inventory, 249 · Information Mapping, 346
Historical Analogy, 51 Informational R�les, 592
Historical Development of Industrial Engineering, 2 Inputs to MRP, 274
Holding Cost or Carrying Cost, 245 Interest with Multiple Frequency of Compounding, 190
How MRP Uses Common use Items, 274 Internal Benchmar\ing, 561
How MRP Uses Lead Time Information, 273 lnt.emational Organization for Standardization (ISO) 9000
How MRP Works, 277 Series and Six Sigma, 797
How to Convert a Maximization Problem into a Interpersonal Role, 592 .
Minimization Problem, 140 Introduction, I 07
How to deal with equal to (=) sign, 141 Introduction, 125
How to Determine ·the Sample Size, 400 Introduction, 139
 INDEX 821

Introduction, 1159 Life Cycle Approach to a Production System, I 0

Introduction, 179 Life Cycle of a Product and Value Engineer!ng, 236
• Inventory Control, 243 Lighting, Ventilation, Noise Levels in· the �omputer
Inventory Costs, 244 Workstation, 775
Inventory Status File, 276 Limitations of a Company, 40
1!1ventory, 243 Limitations of Cooperative Organisations, 43
Is Ergonomics Related with Productivity, 766 Limitations of Job Evaluation, 414
ISO 14000 Standard, 494 Limitations cif Merit Rating, 421
ISO 9000 vs· TQM; 492 Limitations of Partnership Firms, 38
ISO 9000, 491 Limitations of RFP Approach, 351
Issues Involved in Waiting Line, 657 Limitations of Simulation, 674
!Ts Role in Enterprise Modeling, 344 Limitations of Sole Ownership, 36
Limited Company, 41'
J Line and Staff Struct_ure, 613
JIT Philosophy, 290 Line Balancing, 93
JIT Production Process, 30 I Line Structure, 611
Job Evaluation and Merit Rating, 413 Linear Programming, I 39
Job Evaluation, 413 List of Time Study Equipment and Form, 395
Job Shop Production, I 2 Loading, 640
Johnson's Rule for Optimal Sequence of N Jobs on 2 I,,ong-Range Forecasting, 49
Machine, 645 Long-Term Plann'ing, 299
Joint Hindu Family Business, 38 Lumpy Demand, 272
Joint Stock Company, 39
Joseph M. Juran, 475 M
Just in Time (JIT) · in Production System, 289 Main Features of ERP, 343
Management and Labour Responsibilities,' 299
K Management in TQM, 477
Kanban and Pull System, .293 Management Science and Quantitative Approach, 591
Kendall Notations, 662 Management Support, 299
Kilbridge-Wester Heuristic for Line Balancing, 99 Management: Science or Arts, 597
Knowledge Leadership Role, 593 Manufa�turing Resource Planning (MRP II), 285
Margin of Safety, 220,
L Market Research, 51 •
Labor and Union, 299 Market Research, 788
Lagrangian Method, 264 Marketing Concept, 779
Laissez-Faire or Free-Rein Leadership, 463 Marketing Management, 779
Lead Time, 273 Marketing Mix, 780
Leaders�ip and Management, 460 Mass Production, 13
Leadership Grid, 464 Master Production Schecwle (MPS), 274
Leadership Style, 461 Material Handling Equipment, 326
Leadership, 459 Material Handling, 325
Lean Manufacturing,. 731 Material Requirement Planning (MRP) and MRP-11, 271
Levels of Management, 596 Mathematical Formation of Transportation Problem, 160
822
Mathematical Formulation of Assignment Problem, 179
Matrix Approach of Organisation Structure, 610
Matrix Method in Value Engineering, 240
Maximization Case (Graphical Solution), 143
.Mean Time Between Failure (MiBF), 548
Mean Time to Failure .(MTTF), 548
Mean-Time Between-Failure (MTBF), 551
Measures of Forecasting Error, 52
Mechanisms for Environmental Improvement throµgh
Lean Implementation, 736
Mediu�-Range Forecasting, 49
r:-,ierit Rating, 419
Merits of Cooperative Organisations, 42
Merits of Partnership Firms, 38
Merits of Sole Ownership, 36
Method Time Measurement (MTM), 409
Method to Deal with Single Discount Model 259
Method to Find the Total Opportunity Cost Matrix, 181
Methodology for ERP Implementation, 362
Methodology in Value Engineering, _238
Methodology of Critical Path Analysis (CPA), 618
Methods For Merit Rating, 421
Methods of Job Evaluation, 4.15
Methods of Line Balancing, 96
Methods of Purchasing, 716
Methods to Charge Depreciation, 209
Middle of the Road Management, 465
· Model I: Uniform Demand Rate, Infinite Production
Rate, 246
Model 2: Gradual Repla�ement Model, 251
Model 3, 254
Model 4: Deterministic EOQ Model with Quantity
Discount, 258
Model II (M/M/1: N/FIFO), 666
Model II (M/J\1/C: /FIFO), 667
Modular· Design, 111
Monte Carlo Simulation, 674
Motion Economy, 385
Motivating and Directing, 594
I Other Approaches in Value Engineering, 241
MRP Vs JIT System, 295
Multi-It�m Inventory Systems with Constraints, 264
Multiple Activity Chart, 378'
Multiple Channel Queuing Model, 667
Multiple Opti_ mum S�lution, 147
INDUSTRIAL ENGINEERING AND MANAGEMENT
N
Narrowing ERP Alternatives, 354
Nature of Replacement Problem, 226
Nature of Selection Problem, 225
Need for Agile Manufacturing, 799
Nomenclature and Symbols used in Sampling Plan, 521
Notations Used, ;W8
Notice Inviting Tenders, 723
· Numbe;ing of Events in Network (Fulkerson_ Rule), 624
0
Objective in Line Balancing Problem, 93
Objective of Good Facility Layout, 81
Objective of Job Ev.aluation, 414
Objective of Value Engineering, 233
Objective, 715
Objectives in Cellular Manufacturing, 745
Objectives of a Good Wage-Incentive Plan, 426
Objectives of Merit Rating, 420
Objectives ·of PPC, 125
Objectives of Work Study, 369
Objectives, 739
Objectives, 766
Operating Policy of Inventory Control, 247
Operations Management in the Service Sector, 764 ·
Optimality Test of Total Opportunity Cost Matrix, 182
Optimum Number of Days Supply, 249
Optimum Number of Orders, 249
Optimum Ordering Interval, 249
Order Point System vs MRP, 283
Ordering Cost, 245
Organisation Design, 605
Organisation Structure, 604
Organisation Trend, 694
Organisation, 601
Organisational Suitability, 394
Organising, 594
Organizational Behaviour, 705
Other Approaches, 263
.
Oth�r Characteristics of the Model, 253
Other Characteristics of this Model, 257
Other Observations of Basic EOQ Model, 249
INDEX
Other Related Terms, 234
Other Trends, 696
Other Ways to Look at BPR, 573
Outline Process Chart, 379
Outputs of MRP, 278
p Process Layout, 84
Pallets, 327
Partial Productivity, 26
Participative, Consultative or Democratic Leadership, 463
Part-Machine Incidence Matrix in CMS Design, 89
Partnership Firm, 37
Performance of Supply. Chain, 3 10
Performance Rating, 402
PFA Procedure, 744
Philip B. Crosby, 474
Planning, 594
Policy Allowances, 401
Positioning the Monitor Screen, 774
Predetermine Motion Time Standards (PMTS), 409
Pre-Industrial Revolution I?ra, 2
Preliminaries· to JIT Production, 300
Pre-Requisite of Job Evaluation, 414
Present Value and Future Value, 193
Present Value of an Annuity, 196
Pricing, 784
·Primary Output, 278
Primary Role of Industrial Psychologists, 761
Principal objectives of TQM, 476
Principle of Group Technology, 82
Principle of High Productivity, 82
Principle of Least Material Handling, �2
Principle of Worker• Effectiveness, 82
Princip_le� in the AP.plication of Anthropornetri•c
Data, 769
Principles Involved in CP.M, 618
Principles of Facility (Plant) Layout, 82
Principles of Management, 587
Principles of Management, 589
Principles of Material Handling, 3i5
Principles of Sound Organisation, 602
Private .Company, 41
Problem Statement, 358
823
Procedure of Drawing QC-Curve, 526
P.rocedure of Method Study, 372
Procedure of Work Sampling, 404
Process Chart Symbol, 381
Process Cont_rol, , 11
Process Improvement vs Pro!less Innovation, 575
, Process n Jobs on 3 Machines (n/3 Problem) and Jackson
, Algorithm, 649
Process of Benchmarking, 560
Process of Benchmarking, 563
Process, 572
Processing of 2 Jobs on m Machine (2/m) Problem,
650
Product Design, Planning and Development, I 07
Product Development Approaches, I 08
Product Development Process, I 09
Product Life Cycle, 781
Product or Line· Layout, 83
Production Flow Analysis (PFA), 744
Production Planning an·d Control: An- Introduction, 125
Production Planning, 127
Production System, 9
Production, 9
Productivity, 23
Productivity, Efficiency and Effectiveness, 25
Profitability Projections (or Estimates of Working
, Resu Its), 199
Profit-Volume Graph (P/V Graph), 221
Program Evaluation and Review Technique (PERT), 632
Project Management and CPM/PERT, 61i
Project Production, 12
Projected Balance Sheet, 20 I
Projected Cash Flow Statement,_ 200
Proof of Concept (POC) Approach, 352
Public Company, 41
Purchase Requisition Form, 721
Purchasing Procedure, 722
Purchasing Process/Procedure, 71 8
Purchasing Systems/Buying Techniques, 728
PURCHASING, 715
Purchasing/Buying Decision as Per Procedure, 718
Purchasing/Buying Techniques, 728
824 INDUSTRIAL· ENGINEERING AND MANAGEMENT

Purpose of BEA, 219 Requirements for Implementing JIT, 298

Purpose of Method Study, 372
furpose of Modeling an Enterprise, 344
Purpose of Simulation, 673
Purpose of- Work Measurement, 393
Push Systems Vs Pull Systeri,, 292
Q Retool, 580
Qualitative Methods of Forecasting, 51
Qualities of Good Entrepreneur, 453
Qualities of Goo_d Leadership, 460
Quality Awards, _ 499
Quality Co_st, 480
Quality Function Deployment (QFD) and House ofQuality
(HOQ), 113
Quality Gurus, 474
Quality Improvement, 477
Quantitative Methods of Forecastii:ig; 53
Queue Characteristics, 661
R Salesforce Forecast, 51
Radical, 572
Rapid Prototypi_ng (RP), 115
Realization,· 578
Recursive.Relationship or ERP/IT/E-Business and BPR,
583
Redesign, 572
Redesign, 579
Reduction of' Set-up Time, 300 ·
Reevaluate, 581
Registered .Company, 41
Relationship between Reliability, Failure Rate and
MTBF, 540
Relation!ihip of Annuity, 195
Relaxation Allowanc.e, 40 I
Reliability of a Parallel System, 550
Reliability of a Series System, 549
Reliability, 539
Reorchestrate, 577
Replacement and Selection, 225
Replacement of ltei:,,s which Deteriorate, 226
Replacement ofMachines whose Operating Cost Increases
with
Requirement Reliability Metrics, 554
Requirements for Success of Merit Rating System, 423
Requirements of a Go_od Product Design, I 08
Requirements, 578
Reslllt of the Illustrative Problem, 3�2
Rethink, 579
Rethinking, 572
Role of Common/Shared Enterprise Database, 347
Role of Entrepreneurship in Economy, 452
· Role of Industrial Engineer,
Role of Management,
Role of Motivation in Entrepreneurship,
. Routing,
Rules for Bottleneck Scheduling in TOC,
Rules for Constructing Network Diagram,
S
Safety Considerations· for AGV,
Salient Features of Partnership Firm,
Salient Features,
Sample Size for Work Sampling,
Scheduling and Loading,
Scheduling Rules,
Scheduling,
Scientific Management,
Scope cif Enterprise System,
Scrap Value, 235
Secondary MRP Outputs, 279
Selection of ERP, 348 •
Selection of Weights, 358
Sensitivity Analysis in Graphical Solution, 145
Sensitivity of EOQ Model, 247
Sequencing, 640
Sequential Sampling Plan, �23
Service Characteristics, 661
Service Life of Asset, 215
Service Operations and Service Products, 763
Service Operations Management, 763
Services Products and Service Characteristics, 764
Seven QC Tools for lm!)'ovement, 487
Shortages Cost or Stock-out Cost, 245
INDEX
Short-Range Forecasting, 49
Short-term Capacity (Input-output) Control, 640
Simple Interest, 189
Simple Moving .Average (SMA), 54
Simplex Method to Solve LPP, 149.
Simplification, 111
Simulation, u73
Single Sampling Plan (SSP), 522
Single-Line-Single-Server Model, 662
Sinking Fund Methoo (SFM), 212
Sinking-Fund Factor, 196
Six Sigma Framework; 793
Six Sigma, 791
Software Reliability Metrics, 553
Software Reliability, 552
Sole Proprietor (Owner) Enterprise, 35
Solution Methods for Assign111ent Problem, 180
Solving the Illustrative Problem, 359
Some Concepts In Product Development, I 09
Some Concepts used by Goldratt, 435
Some Contemporary Trends, 694
Some Definitions (Based on ILO), 401
Some Myth and Reality about .Entrepreneurship, 454
Some Useful Guidelines for ERP Implementation, 365
Special Allowance, 40 I
Speed-to-Market, 111
Standard Time, 403
Standardisation, I 09
Standards Make up of the ISO 9000 Family, 496
Statistical Forecasting, 61
Statistical Quality Control, 511
Statutory Company, 40
Step 2: Recording Methods and Facts, 376
Step 3 of Method Study: Examine, 384
Step 4 of Method Study: Develop and Define, 384
Steps 5 and 6 Method Study: Install and Maintain, 384
Steps in AHP, 355
Steps in Break-Even-Analysis (BEA), 2 i 8
Steps in Production Planning .arid Control, 130
Steps in•.Simulation, 675
Steps in Time Study (Stop Watch Method), 400
Steps in Value Engineering, 237
82S
Steps in Work�Study, 370
Stevans Model of Supply Chain Integration, 308
Stockholders, 299
Stop Watch Time Study, 395
Store Records, 726
Straight Line Method (SLM), 209
Strategic Level Decisions, 129 ·
Strategic Planning and the Human Resource Planning
• Process, 711
Strategies for Selective Inventory Control, 261
String Diagram, 377
Suitability of Sole Ownership, 36
Suitability, 38
Suitability, 520
Sum of Year Digits Method (SYD), 211
Summary, 411
Supplier Management, 299
Supply Chain Management, 17
Supply Chain Management, 305
Symbols used in Network Planning, 620
Synchronous Manufacturing, 447
Systems Theory, 591
T
Tactical Level Decisions, 129
Team Management, 465
Team, 709
Technical Considerations, 375
Technology Trend, 695
Tenders, 723
Termin_ology in Project Management, 619
.
Terms used in Benchmarking, 558
Terms Used in Material Requirements Planning, 271
Testing Reliability Metrics, 555
The "Request For Proposal" Approach, 350
The 7 Rs. of Reengineering, 576
The Expected Life of a System, 543
The Goals of Organizational Behavior, 706
The Operating Characteristics Curve, 524
Theory of <;::onstraints (TOC), 439
Third Party Logistics and Fourth Party Logistics, 317
Time and the Value of Money also changes with
Time, 227
826 INDUSTRIAL ENGINEERING AND MANAGEM�NT

Time Estimate in PERT, 632 V

Total Factor Productivity,- 27 Value ·concept of Depreciation, 208
Total Productivity, 28 Value Engineering, 233
Total Quality Management (TQM) and Six Sigma, 795 Variable Costs, 219
Total Quality Management (TQM), 472 Variables in Inventory Model, 245
Training, 298 Vehicle Routing· Concept, 3 I 8
Transportation Model, 159 Vendor Rating, 729
Travel Chart (also Called as Cross Chart), 378
Type of Organisational Structure and Rellltionship, ,611 w
Type of Value, 234 Wage-Incentive Payment Plans, .425
Types of AGV Systems, 335 Waiting Lines: Queuing Models, 657
Types of Benchmarking, 560 Ways to Improve Productivity, 30
Types of Cooperative Societies, 44 Weighted Moving A'!erage, 56
Types of Forecasting, 49 What is Depreciation, 207.
Types of Ownership, 35 What is ERP, 343
Typt!s of Partners, 37 What is in Offer, 315
Types of Pricing, 784 What is Quality, 467
Types of Production System, 12 What is Six Sigma, 791
Types of Productivity Index, 28 What.is the Future for Industrial Engineering (IE), 697
Types of Wages Incentive Plans, 426 What is Total in TQM, 467
What is Value, 234
u When ERP Implementation· Fails, 365
Unbounded Pr(!blem, 1'48 Why to Manage Inventory and Operating Expenses, 436
Unit Cost of Inventory, 244 Work Content, 40 I
Unlimited Company, 41 Work Measurement, 393
USA Principle for the Implementation, 363 Work Sampling, 404
Use of Dummy Activities and/or Dummy Node �, 621 Work Study, 369
Use Yalu�, 234 · Working Area, 3 86