PRODUCTIONS & OPERATIONS MANAGEMENT (UNIT-1)

 INTRODUCTION
The very essence of any business is to cater needs of customer by providing services and goods,
and in process create value for customers and solve their problems. Production and operations management
talks about applying business organization and management concepts in creation of goods and services.

Production/Operations management is the process which combines and transforms various

resources used in the Production/Operations subsystem of the organization into value added products/services
in a controlled manner as per the policies of the organization. Production/Operations function, therefore, is
that part of an organization which is concerned with the transformation of a range of inputs into the required
outputs (products/services) having the requisite quality level.

The set of interrelated management activities which are involved in manufacturing certain
products is called as production management. If the same concept is extended to services management, then
the corresponding set of management activities is called as operations management. So, in general, the
concept of manufacturing products/providing services is called as production/operations management.

Some examples of productions are: manufacturing custom-made products like, boilers with a
specific capacity, constructing flats, some structural fabrication works for selected customers, etc., and
manufacturing standardized products like, car, bus, motor cycle, radio, television, etc. Some examples of
services are custom-made services like, medical facilities and clinical tests, arranging food for parties, travel
booking services, etc., and standardized services like, developing standard computer software, providing
standard insurance policies, etc.

The characteristics of most service systems are as follows:

 It produces intangible items

 Quality of output is highly variable
 Production and consumption occur simultaneously
 No inventory is accumulated

In the process of managing various subsystems of the organization, executives at different levels of the
organization need to take several management decisions. The management decisions are classified into
strategic decisions, tactical decisions and operational decisions. The strategic decisions e.g. defining the
goals, making policies and determination of organizational objectives, etc. are taken at the top management
level. The tactical decisions are taken at the middle management level, which include acquisition of resources,
plant location, new products establishments and monitoring of budgets, etc. The operational decisions are
taken at the bottom
level of management.
Some examples under
this category are:
effective and efficient
use of existing facilities
and resources to carry
out activities within the
budget constraints. If
we closely examine the
relationship among the
number of decisions
taken at different levels,
 then it would be found moving from high to low from the bottom level management to the top level
management, respectively.

 PRODUCTION SYSTEM
The production system (function) of an organization is that part which produces the
organizations products. Production is the basic activity of all organizations and all the other activities revolve
around production activity. The output of production is the creation of goods or services, which satisfy the
needs of the customer. In some organizations the product is a physical (tangible) good. E.g. Refrigerators
motorcars, Television, tooth paste etc., while in others it is a service (insurance, health care etc.)

The production system has the following characteristics:

 Production is an organized activity, so every production system has an objective.

 The system transforms the various inputs (men, material, machines, information, and energy) in to
useful Outputs (Goods or Services.)
 Production system does not operate in isolation from the other organizational systems such as finance,
marketing etc.
 There exists a feedback about the activities, which is essential to control and improve system
performance.
 PRODUCTION AND PRODUCTION MANAGEMENT
Production is defined as the step-by-step conversion of one form of material in to another form
through chemical or mechanical process to create or enhance the utility of the product to the user. Thus
economists define production as an activity by which form utility is created or enhanced. For example, the
iron ore exists in the nature. It will be converted into steel by a chemical process, which is put to various uses
like, making bars, pipes, angles, channels etc. Thus, production is a value addition process. At each stage of
stage of processing, there will be a value addition.

Production management involves the planning, organization, direction and execution of production activities.
The ultimate goal of any production management solution is to convert a collection of raw materials into a
finished product. An efficient production management solution will also deliver products at the time they are
required by the market at the lowest achievable cost. Any successful production management solution requires
the optimum utilization of production capacity in order to reduce costs to a minimum. Techniques of
production management are employed in service as well as in manufacturing industries. It is a responsibility
similar in level and scope to other specialties such as marketing or human resource and financial management.
In manufacturing operations, production management includes responsibility for product and process design,
planning and control issues involving capacity and quality, and organization and supervision of the workforce.

There are several benefits to implementing the basic principles of production management; they include a
good reputation within a specific market and the ability to develop new products and bring them to the market
quickly. Reducing costs at every stage of the production process provides the main benefit of cutting a
company's overall costs. A manufacturer obviously does not want to incur costs when there are no orders, and
an effective production management solution - such as the one pioneered by Toyota - should make that an
achievable goal. Because firms adopting the principles of production management can keep a tight lid on their
costs, they can have a competitive edge in the market, and that can allow them to grow far more quickly than
would otherwise be the case.

Edwood Buffa defines production as “a process by which goods and services are created.”

Production management is a process of planning, organizing, directing and controlling the activities of the
production function. Edwood Buffa defines production management as, “Production management deals with
decision-making related to production processes so that the resulting goods or services are produced
according to specifications, in the amounts and by the schedule demanded and at minimum cost.”

It is observed that one cannot demarcate the beginning and end points of Production Management in an
establishment. The reason is that it is interrelated with many other functional areas of business, viz.,
marketing, finance, industrial relation policies etc. Alternately, Production Management is not independent of
marketing, financial and personnel management due to which it is very difficult to formulate some single
appropriate definition of Production Management.

 MODELS OF PRODUCTION SYSTEM

A model is a representation of reality that captures the essential features of an object/system/process. Three
types of models are there such as physical, schematic and mathematical.

1) Physical Model: Replica of a physical object with a change of scale.

 For big/huge structure of physical object: small scale (Ex- Solar system)
 For microscopic objects: magnified scale (Ex- Atomic model)
2) Schematic model: These are 2-D models which represents:
 Price fluctuations with year.
 Symbolic chart of activities in sequence for a job.
 Maps of routings.
 Networks of timed events.
The pictorial aspects are useful for good demonstration purposes.
3) Mathematical model: Formulas and equations have long being the servants of physical sciences. One can
represent the important aspect of a system/problem in mathematical form using variables, parameters and
functions. This is called mathematical model. By analyzing and manipulating the mathematical model, we
can learn how the real system will behave under various conditions.
 OBJECTIVES OF PRODUCTION MANAGEMENT
Production is an organized activity and each organized activity has its objective, which helps to evaluate its
performance against the set objectives. The very essence of any business is to cater needs of customer by
providing services and goods, and in process create value for customers and solve their problems. Production
and operations management talks about applying business organization and management concepts in creation
of goods and services.

The objective of the production management is stated as: To produce goods/services of right quality and
quantity at the predetermined time and pre-established cost.

Thus the objective of production management are reflected in

1) Right Quality
2) Right Quantity
3) Pre-established Cost (Manufacturing Cost)
4) Pre-determined Time (Manufacturing Schedule)

1) Right Quality:
The quality of the product is established based upon the customer’s needs. Customer's needs are
translated in to product specifications by the design or engineering department. The manufacturing
department then translates these specifications in to measurable objectives. Thus the cost quality trade off
decides the final quality of the product. Thus a proper balance must be obtained such that the product quality
offered to the customer should be within the pre-established manufacturing cost.

2) Right Quantity:
The manufacturing organization should produce the products at the right number. If the
products are produced in quantity excess of demand the capital will block up in the form of inventory and if it
is produced in quantity short of demand, there will be shortages of products. Thus a decision is to be taken
regarding how much to produce. (Right quantity)

3) Manufacturing Costs:
Manufacturing costs are established before the product is actually manufactured. The
manufacturing department has to manufacture the products at the pre-established cost. In any case, any
variation between the actual costs and the standard (pre-established) should be kept at minimum.

4) Manufacturing Schedule:
Timeliness of delivery (schedule) is one of the important parameters to judge the effectiveness
of production department. There are many reasons like non-availability of materials at right time,
absenteeism, machine break down etc. Which affect the timely completion of the products. So, the
manufacturing department should organize its activities in such a way that the products will be manufactured
as per schedule.

 FUNCTIONS OF POM
The activities of production department of an organization are grouped into two broad categories:

 The activities that convert the available capital in to physical resources required for production.
 The activities that convert the physical resources in to saleable goods and services.

In carrying out the above activities, the production department must perform the following activities:

a) Production of goods at the right time and in sufficient quantity to meet the demand.
b) Production of goods at minimum possible cost.
c) Production of goods of acceptable quality.

Production and operations management concern with the conversion of inputs into outputs, using physical
resources, so as to provide the desired utilities to the customer while meeting the other organizational
objectives of effectiveness, efficiency and adaptability. It distinguishes itself from other functions such as
personnel, marketing, finance, etc., by its primary concern for “conversion by using physical resources.”

In the beginning the main function of production management was to control labour costs which at that time
constituted the major proportion of costs associated with production. But with development of factory system
towards mechanization and automation the indirect labour costs increased tremendously in comparison to
direct labour costs, e.g., designing and packing of the products, production and inventory control, plant layout
and location, transportation of raw materials and finished products etc. The planning and control of all these
activities required more expertise and special techniques.

The role of Production Management is quite elaborate. But the sole aim is to ensure the business
produces quality products that can satisfy the needs of customers on a regular basis. Below are functions of
production management:

1) Selection of Product and Design: Production management first selects the right product for production.
Then it selects the right design for the product. Care must be taken while selecting the product and design
because the survival and success of the company depends on it. The product must be selected only after
detailed evaluation of all the other alternative products. After selecting the right product, the right design
must be selected. The design must be according to the customers' requirements. It must give the customers
maximum value at the lowest cost. So, production management must use techniques such as value
engineering and value analysis.
Actually this is the phase in which the consumer needs are studied & are evaluated. A product
which satisfies the needs of the customer is decided. An existing product in market is selected or R&D
division develops a complete new product from scratch or modifies the existing product so that the
consumer’s needs are satisfied. After selecting a product, a right design is selected. At this stage,
involvement of production management is less. Because launching a product is strategic decision, hence,
top management (Board of Directors & Owners) are involved in this stage.

2) Selection of Production Process: Process selection refers to the strategic decisions of selecting the kind
of production process to have in a manufacturing plant. The process flow in an organization refers to how
a factory organizes material flow using one or more of the process technologies including the job shop,
batch shop, assembly line & continuous flows. Production management must select the right production
process. They must decide about the type of technology to be used, machines & equipment required,
material handling systems, etc. the process chosen depends on the customization of the product as well as
the volume required in the market.
As the production volume of project increases, specialized equipment & standardized materials
are used to minimize cost. In this stage, flow of raw materials, sub-assemblies is decided.

3) Selecting Right Production Capacity: Production management must select the right production capacity
to match the demand for the product. This is because more or less capacity will create problems. The
production manager must plan the capacity for both short and long term's production. He must use break-
even analysis for capacity planning.

4) Production Planning: Production management includes production planning. Here, the production
manager decides about the routing and scheduling.
 Routing means deciding the path (route) of work and the sequence of operations. The main objective of
routing is to find out the best and most economical sequence of operations to be followed in the
manufacturing process. Routing ensures a smooth flow of work & optimum utilization of resources
during production. It decides in advance, the quantity & quality of product, the men, machines &
materials to be used, the sequences in which the processes or operations to be arranged, the place
where the production is to be done.
 Scheduling means to decide when to start and when to complete a particular production activity. It
fixes the amount of work to do. It arranges the different manufacturing operations in order of priority.
It fixes the starting & completing date and time, for each operation. For this, different charts & control
techniques are used.

5) Production Control: Production management also includes production control. The manager has to
monitor and control the production. He has to find out whether the actual production is done as per plans
 or not. He has to compare actual production with the plans and finds out the deviations. He then takes
necessary steps to correct these deviations. The role of production manager at this stage is very much vital.

6) Quality and Cost Control: Production management also includes quality and cost control. Quality and
Cost Control are given a lot of importance in today's competitive world. Customers all over the world
want good-quality products at cheapest prices. To satisfy this demand of consumers, the production
manager must continuously improve the quality of his products. Along with this, he must also take
essential steps to reduce the cost of his products.
To remain competitive in a market the good quality products should be produced at the lowest
possible cost. The cost can be controlled by optimum utilization of resources, minimizing cost of
inventory & cost of holding finished goods. The quantities of the product at every stage in production
have to be assessed for procurement, storage, quality & receipt. Information flow at every stage helps to
identify the value additions that are taking place. A trustworthy record of the various stages, the time
consumed, costs involved & their impact on other processes helps in identifying the bottlenecks & also the
opportunities for continuous improvement.

7) Inventory Control: Production management also includes inventory control. The production manager
must monitor the level of inventories. There must be neither over stocking nor under stocking of
inventories.
 If there is an overstocking, then the working capital will be blocked, and the materials may be spoiled,
wasted or misused.
 If there is an understocking, then production will not take place as per schedule (it will get disturbed),
and deliveries will be affected.
The concepts of Just-In-Time (JIT) and lean manufacturing are applied to utilize the resources to the best
advantage & also to minimize or eliminate inventories.

8) Maintenance and Replacement of Machines: Production management ensures proper maintenance and
replacement of machines and equipments. The production manager must have an efficient system for
continuous inspection (routine checks), cleaning, oiling, maintenance and replacement of machines,
equipments, spare parts, etc. This prevents breakdown of machines and avoids production halts.
To obtain uninterrupted production, the machines & equipments used should be in good
conditions. Preventive maintenance is better than break down maintenance, hence, preventive
maintenance schedules should be prepared. These schedules should not affect the production schedule.

For businesses to be competitive, Production and Marketing need to work in an integrated way. Marketing is
concerned with knowing and understanding the requirements of customers, so that Production can provide the
market led products that are required. This also requires excellent communication systems to be in place.
Production is the functional area responsible for turning inputs into finished outputs through a series of
production processes. The Production Manager is responsible for making sure that raw materials are provided
and made into finished goods effectively. He or she must make sure that work is carried out smoothly, and
must supervise procedures for making work more efficient and more enjoyable.

 SCOPE OF POM
The objectives of production management are aimed at satisfying the needs of the customers through offering
organizations products / services. But, the scope of production management can be considered from the point
of view of both strategic decisions influencing the production system and at the operation level.

The strategic level decisions are mainly concerned with the design of product and production system. These
decisions involve decisions, which have long terms implications. The strategic level decisions are:

1) New Product Identification And Design

The success of an organization depends upon the product mix that it offers to the customer.
There exists a demands for the products if the product has good market acceptability. The products should be
designed in such way as to meet the expectations of customers. The tools like value analysis should be applied
at the design stage to avoid unnecessary cost building up in to the product.
Product design deals with conversion of ideas into reality. Every business organization have to
design, develop and introduce new products as a survival and growth strategy. Developing the new products
and launching them in the market is the biggest challenge faced by the organizations.
 2) Process Design And Planning
This involves the appropriate technology for conversion of raw materials in to products. The
choice of technology depends upon several factors such as demand, investment capability, labor availability
and degree of automation required. This, is followed by selection of the process of conversion and
determining the workstations and the flow of work. At this stage, macro level process planning is done.
Process design is a macroscopic decision-making of an overall process route for converting the
raw material into finished goods. These decisions encompass the selection of a process, choice of technology,
process flow analysis and layout of the facilities.

3) Facilities Location And Layout Planning

The facilities location is a strategic decision and facilities once located will not be altered in
near feature. So due considerations should be given to all the factors that affect the location. Location of
facilities for operations is a long-term capacity decision which involves a long term commitment about the
geographically static factors that affect a business organization. It is an important strategic level decision-
making for an organization. It deals with the questions such as ‘where our main operations should be based?’
Plant layout refers to the physical arrangement of facilities. It is the configuration of
departments, work centers and equipment in the conversion process. The overall objective of the plant layout
is to design a physical arrangement that meets the required output quality and quantity most economically.
According to James Moore, “Plant layout is a plan of an optimum arrangement of facilities including
personnel, operating equipment, storage space, material handling equipment's and all other supporting
services along with the design of best structure to contain all these facilities”.

4) Design Of Material Handling System

As per the principle of Material handling, the handling should he kept at minimum though it is
not possible to avoid handling. The selection of particular flow pattern and material handling equipment is
dependent on the distance between the workstations, intensity of flow or traffic and size, shape and nature of
materials to be handled.
Material Handling refers to the “moving of materials from the store room to the machine and
from one machine to the next during the process of manufacture”. It is also defined as the “art and science of
moving, packing and storing of products in any form”. It is a specialized activity for a modern manufacturing
concern, with 50 to 75% of the cost of production.

5) Capacity Planning
This decision is concerned with the procurement of fixed assets like plant and machineries. The
decision regarding the size of the plant, output etc. are decided at this stage. The capacity planning activity is
again a function of volume of demand.

The operational level decisions are short-term decisions. These are mainly concerned with planning and
control of production activities. The operational level decisions are:

1) Production Planning & Control

It is concerned with determining the future course of action regarding production to achieve the
organizational objectives. It is a management technique, which aims to see that the activities are carried out as
per the plan. Production control activity is concerned with comparing actual output with standard output and
to take corrective action if there exists a deviation between actual and standard.
Production planning and control can be defined as the process of planning the production in
advance, setting the exact route of each item, fixing the starting and finishing dates for each item, to give
production orders to shops and to follow up the progress of products according to orders. Planning is deciding
in advance what to do, how to do it, when to do it and who is to do it. Planning bridges the gap from where we
are, to where we want to go.

2) The other activities include

Inventory control, maintenance & replacement, cost reduction & cost control, dispatching,
quality control & work system design.

 PRODUCTION MANAGEMENT FRAME WORK

The division of production management functions in to 5 P's (Product, Plant, Programme, Processes &
People) will provide useful conceptual framework for the various activities performed by production or
operations manager. The 5 P's are as follows:

1) The Product:
Product is the link between production and marketing. It is not enough that a customer requires product
but the organization must be capable of producing the product.
As per the product policy of the organization an agreement is reached between the various functions
on the following aspects of the product:
 Performance
 Quality and reliability
 Aesthetics and ergonomics
 Quantity and selling price
 Delivery schedule
To arrive at the above, the external and the internal factors which affect the various aspects such as market
needs, existing culture and legal constraints and the environmental demands should be given due
consideration. Thus the major policy decisions regarding variety of product mix is going to affect the
producing system.

2) The Plant:
The plant accounts for major investment (fixed assets).The plant should match the needs of the product,
market, the worker and the organization.
The plant is concerned with:
 Design and layout of building and offices
 Reliability, perfect, maintenance of equipment.
 Safety of operations
 The financial constraint
Plant layout deals with physical arrangement of plants and machineries within the selected site. The layout
should be such that it should allow for smooth movement of men and materials with minimum back
tracking. The type of the layout is dependent on production type, volume of demand, etc.

3) The Process:
There are always number of alternative methods of creating a product. But it is required to select the one
best method, which attains the objectives.
In deciding about the process it is necessary to examine the following factors:
 Available capacity
 Manpower skills available
 Type of production
 Layout of plant
 Safety
 Maintenance required
 Manufacturing costs

4) The Programme:
The programme here refers to the timetable of production. Thus, the programme prepares schedules for:
 Purchasing
 Transforming
 Maintenance
 Cash
 Storage and transport

5) The People:
Production depends upon people. The people vary in their attitudes, skill and expectations from the work.
Thus, to make best use of available human resource, it is required to have a good match between people
and jobs which may lead to job satisfaction. The production manager should be involved in issues like
 Wages/salary administration
 Conditions of work/safety
 Motivation
  Training of employees

 PRODUCTIVITY
Productivity is a relationship between the output (products/services) and the input (resources
consumed in providing them) of a business system. Productivity has now become an everyday watchword. It
is crucial to the welfare of the industrial firm as well as for the economic progress of the country. High
productivity refers to doing the work in a shortest possible time with least expenditure on inputs without
sacrificing quality and with minimum wastage of resources.

Today the term productivity has acquired a wider meaning. Originally, it was used only to rate
the workers according to their skills. The person who produced more either faster or harder were said to have
higher productivity. Subsequently emphasis was laid to improve the hourly output by analyzing and
improving upon the techniques applied by different workers. A system of measurement was then evolved to
compare the improvement made in relation to the rate of output and in order to improve productivity further,
machines were introduced. Manufacturers of machines started incorporating new features with the help of
latest technological developments. Today we have machines that are completely controlled by computers.
Computers have now become powerful tools towards improving productivity.

Productivity is the quantitative relation between what we produce and what we use as a resource
to produce them, i.e., arithmetic ratio of amount produced (output) to the amount of resources (input).
Productivity can be expressed as:

Output
Productivity = Input

Productivity refers to the efficiency of the production system. It is the concept that guides the management of
production system. It is an indicator of how well the factors of production (Land, Capital, labor and energy)
are utilized to its optimum level.

European Productivity Agency (EPA) has defined productivity as, “Productivity is an attitude of mind. It is
the mentality of progress, of the constant improvements of that which exists. It is the certainty of being able
to do better today than yesterday and continuously. It is the constant adaptation of economic and social life
to changing conditions. It is the continual effort to apply new techniques and methods. It is the faith in
human progress.”

For the survival of any organization, this productivity ratio must be at least 1. If it is more than
one, the organization is in a comfortable position. So, the objective of the organization should be to identify
ways and means to improve productivity to the highest possible level. There are several strategies for
improving the productivity which are:

1) Increased output for the same input:

In this strategy, the output is increased while keeping the input constant. Let us assume that in a steel
plant, the layout of the existing shops is not proper. By slightly altering the location of the billet-making
section, i.e. bringing it closer to the furnace which produces hot metal, the scale formation at the top of
ladles can be reduced to a greater extent. The molten metal is usually carried in ladles to the billet-making
section. In the long run, this would give more yield in terms of tons of billet produced. In this exercise,
there is no extra cost involved. The only task is the relocation of the billet-making facility by shifting it
closer to the furnace which involves insignificant cost. So, this is an example where the output is increased
without any increase in the input.

2) Decreased input for the same output:

In this strategy, the input is decreased to produce the same output. Let us assume that there exists a
substitute raw material to manufacture a product which has the required properties and it is available at a
lower price. If we can identify such material and use it for manufacturing the product, then certainly it will
reduce the input cost. In this exercise, the job of the purchase department is to identify an alternate
substitute material. The process of identification does not involve any extra cost. So, the productivity ratio
 will increase because of the decreased input by way of using the cheaper raw material to produce the same
output.

3) Proportionate increase in the output is more than the proportionate increase in the input:
Consider the example of introducing a new product into the existing product mix of an organization. Let
us assume that the existing facilities are not fully utilized. So, the R&D wing of the company has
identified a new product which has a very good market and which can be manufactured with the surplus
facilities of the organization. If the new product is taken up for production, then the following will result:
 There will be an increase in the revenue of the organization by way of selling the new product in
addition to the existing product mix.
 There will be an increase in the material cost, and operation and maintenance cost of machineries
because of producing the new product.
If we closely examine these two increases, we will ultimately find that the proportionate increase in the
revenue will be more than the proportionate increase in the input cost. Hence, there will be a net increase
in the productivity ratio.

4) Proportionate decrease in the input is more than the proportionate decrease in the output:
Let us consider the reverse case of the previous example, i.e. dropping an uneconomical product from the
existing product mix. This will result in the following:
 There will be a decrease in the revenue of the organization because of dropping a product from the
existing product mix.
 There will be a decrease in the material cost, and operation and maintenance cost of machineries
because of dropping an existing product from the product mix.
If we closely examine these two decreases, we will ultimately find that the proportionate decrease in the
input cost will be more than the proportionate decrease in the revenue. Hence, there will be a net increase
in the productivity ratio.

5) Simultaneous increase in the output with decrease in the input:

Let us assume that advanced automated technologies like, Robot, Automated Guided Vehicle System
(AGVS), etc., are available in the market which can be employed in the organization of our interest. The
outcome of these modern tools can be summarized as following:
 There will be a drastic reduction in the operation cost. Initially, the cost on equipment would be
very high. But, in the long run, the reduction in the operation cost would break-even the high
initial investment and offer more savings on the input.
 These advanced facilities would help in producing more number of goods because they don't
experience fatigue. The increased production will therefore yield more revenue.
In this example, there is an increase in the revenue while there is a decrease in the input in the long run.
Hence, the productivity ratio will increase at a faster rate.

 FACTORS INFLUENCING PRODUCTIVITY

Factors influencing productivity can be classified broadly into two categories:
1) Controllable or Internal factors and
2) Non-controllable or External factors.
3) Miscellaneous Factors

1) Controllable Factors (Internal Factors):

a) Product factor: In terms of productivity means the extent to which the product meets output
requirements. Product is judged by its usefulness. The cost benefit factor of a product can be
enhanced by increasing the benefit at the same cost or by reducing cost for the same benefit.
b) Plant and equipment: These play a prominent role in enhancing the .productivity. The increased
availability of the plant through proper maintenance and reduction of idle time increases the
productivity. Productivity can be increased by paying proper attention to utilization, age,
modernization, cost, investments, etc.
c) Technology: Innovative and latest technology improves productivity to a greater extent. Automation
and information technology helps to achieve improvements in material handling, storage,
 communication system and quality control. The various aspects of technological factors to be
considered are:
 Size and capacity of the plant.
 Timely supply and quality of inputs.
 Production planning and control.
 Repairs and maintenance.
 Waste reduction.
 Efficient material handling systems.
d) Material and energy: Efforts to reduce materials and energy consumption brings about considerable
improvement in productivity. The factors that are to be considered are:
 Selection of quality material and right material,
 Control of wastage and scrap,
 Effective stock control,
 Development of sources of supply,
 Optimum energy utilization and energy savings.
e) Human factors: Productivity is basically dependent upon human competence and skill. Ability to
work effectively is governed by various factors such as education, training, experience aptitude, etc.,
of the employees. Motivation of employees will influence productivity.
f)Work methods: Improving the ways in which the work is done (methods) improves productivity.
Work study and industrial engineering techniques and training are the areas which improve the work
methods which in term enhances the productivity,
g) Management style: This influence the organizational design, communication in organization, policy
and procedures. A flexible and dynamic management style is a better approach to achieve higher
productivity.

2) Non-Controllable (External Factors):

Structural adjustment includes both economic and social changes. Economic changes that influence
significantly are:
 Shift in employment from agriculture to manufacturing industry,
 Import of technology,
 Industrial competitiveness.
Social changes such as women's participation in the labor force, education, cultural values, and attitudes
are some of the factors that play a significant role in the improvement of productivity.
a) Natural resources: Manpower, land and raw materials are vital to the productivity improvement. The
natural factors such as physical, geographical and climatic exercise considerable impact on the
industrial productivity. The relative importance of these factors depends upon the nature of the
industry, goods and services produced and the extent to which physical conditions are controlled.
The geological and physical factors play a very dominant role in determining the productivity of
extractive industries likes coal-mining in which the physical output per head is greatly influenced by
the depth of the coal-mines, the thickness of the coal seams, the topography of the region and the
quality of coal available. In other industries like tailoring, grain-milling, hosiery, soap-making,
confectionary, medium and coarse cotton manufacturing, etc., the geographical, geological and
physical factors exercise little influence on productivity.
b) Government and infrastructure: Government policies and programmes are significant to
productivity practices of government agencies, transport and communication power, and fiscal
policies (interest rates, taxes) influence productivity to the greater extent. The industrial policies of
the Government have an important impact on the industrial productivity. The Government should
frame and implement such policies which create favorable conditions for saving, investment, and
flow of capital from one industrial sector to another and conservation of national resources.
Certain industries may be granted protection, and incentives may be given to the others for the
development in view of the national interest. The Government should flow the taxation policy which
does not discourage the further expansion of business. It is also the duty of the Government to check
the growth of monopolistic enterprises so that the interest, of the consumers and the workers are not
jeopardize.

3) Miscellaneous Factors:
The factors affecting industrial productivity are inter-related and interdependent and it is a difficult task to
evaluate the influence of each individual factor on the overall productivity of industrial units.
 a) Availability of Finance: The ambitious plans of an industrial unit to increase the productivity will
remain mere dreams if adequate financial resources are not available to introduce technical
improvements and give appropriate training to the workers. The greater the degree of mechanization
to be introduced, the greater is the need for capital. Capital will also be required for investment in
research and development activities, advertisement campaign, better working conditions to the
workers, up-keep of plant and machinery, etc.
b) Managerial Talent: The significance of managerial talent has increased with the advancement in
technology. Professional managers are required to make better use of the new technological
development. Since the modern enterprises are run on a large scale, the managers must possess
imagination, judgment and willingness to take imitative. The managers should be devoted towards
their profession and they should understand their social responsibilities towards the owners of the
business, workers, customers, suppliers. Government, and the society this is essential if the managers
want to manage their organizations effectively. The managers should have conceptual, human
relations and technical skills in order to increases the productivity of the enterprise.

 CONCEPT OF PRODUCTION COST

Cost is the amount of resources sacrificed or given up to achieve a specific objective which may
be the acquisition of goods or services. Costs are always expressed in money terms, e.g., a manufacturer
incurs costs in buying materials and in hiring labor, etc.
Production cost refers to the cost incurred by a business when manufacturing a good or
providing a service. Production costs include a variety of expenses including, but not limited to, labor, raw
materials, consumable manufacturing supplies and general overhead. Additionally, any taxes levied by the
government or royalties owed by natural resource extracting companies are also considered production costs.
The production manager must maintain a close watch over the costs that are incurred in production
department. The type and nature of the costs incurred must be known before appropriate measures can be
implemented.
The costs of production include:
 Purchase costs of raw materials, bought out components and sub-assemblies, procurement and
transportation costs.
 Purchase costs of supplies such as oils, lubricants, tools of small value, fuel oil, machinery spares, cotton
waste, etc.
 Wages and salaries paid to direct production workers, maintenance inspection, stores staff, supervisors
and other staff.
 Costs paid to subcontractors for the orders placed on them.
 Cost of production line rejections, wastage, spoilage and rework.
 Expenses towards rent and insurance of factory buildings, insurance on plant and machinery, stores, etc.
 Interest on working capital to the extent it relates to inventory.
 Cost of procurement of capital assets like buildings, machinery, tooling, inspection equipment, furniture,
etc., and the depreciation of these capital assets.

 DIFFERENT COST CONCEPTS

1) Fixed Costs: Fixed Costs—also known as ‘overhead cost’ are costs which do not vary with output. These
costs will be the same whether output is 1 unit, 10 units, or even 100 units of a commodity. They will be
the same even when output is zero. Fixed costs include rent of factory and any office building, insurance
charges, interest on bank loans, depreciation of machinery, annual license fee which is paid to the
government and so on. A fixed cost is a cost that does not change with an increase or decrease in the
amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by a
company, independent of any business activity.
2) Variable Costs: Variable Costs—also known as ‘prime (direct) cost’ are costs which vary with changes in
output. The greater the output, the greater will be the variable costs. If output is zero, no variable cost has
to be incurred. Variable costs include wages, costs of fuel and power and costs of raw materials. A
periodic cost that varies in step with the output or the sales revenue of a company. Variable costs include
raw material, energy usage, labor, distribution costs, etc.
3) Mixed Cost: A mixed cost is a cost that contains both a fixed cost component and a variable cost
component. It is important to understand the mix of these elements of a cost, so that one can predict how
costs will change with different levels of activity. Typically, a portion of a mixed cost may be present in
 the absence of all activity, in addition to which the cost may also increase as activity levels increase. As
the level of usage of a mixed cost item increases, the fixed component of the cost will not change, while
the variable cost component will increase.
4) Sunk Cost: A sunk cost is a cost that has already been incurred and cannot be recovered, i.e. Money
already spent and permanently lost. Sunk costs are past opportunity costs that are partially (as salvage, if
any) or totally irretrievable and, therefore, should be considered irrelevant to future decision making. Also
called as retrospective cost, embedded cost, prior year cost, stranded cost, or sunk capital. For example, if
a firm sinks $400 million on an enterprise software installation then that cost is "sunk" because it was a
one-time expense and cannot be recovered once spent.
5) Direct Costs and Indirect Costs: Direct costs can be defined as costs which can be accurately traced to a
cost object with little effort. Cost object may be a product, a department, a project, etc. Direct costs
typically benefit a single cost object therefore the classification of any cost either as direct or indirect is
done by taking the cost object into perspective. A particular cost may be direct cost for one cost object but
indirect cost for another cost object. Most direct costs are variable but this may not always be the case. For
example, the salary of a supervisor for a month who has only supervised the construction of a single
building is a direct fixed cost incurred on the building. Examples includes Cost of gravel, sand, cement
and wages incurred on production of concrete, direct labor, direct materials, commissions, piece rate
wages, and manufacturing supplies.
Costs which cannot be accurately attributed to specific cost objects are called indirect costs.
These typically benefit multiple cost objects and it is impracticable to accurately trace them to individual
products, activities or departments etc. Examples includes Cost of depreciation, insurance, quality control
costs, power, salaries of supervisors incurred in a concrete plant.
6) Controllable Costs and Uncontrollable Costs: Controllable costs are costs that can be influenced or
regulated by the manager or head responsible for it. For example: direct materials, direct labor, and certain
factory overhead costs are controlled by the production manager. Another example: the sales manager has
control over the salary and commission of sales personnel. Controllable cost is an expense that can be
increased or decreased based on a particular business decision. In other words, the management has the
power to influence such decisions. These costs can be altered in the short term. In general, costs relating to
a particular business decision is controllable; if the company decides to refrain from making the decision,
the costs will not have to be incurred. The ability to control costs mainly depends on the nature of the cost
and decision-making authority of the managers.
Uncontrollable costs are those that are not under the control of a specified manager. These
cannot be influenced by decisions or actions of the manager. These costs are imposed by the top
management or allocated to several departments. For example, a company-wide advertising cost that is
allocated by the central office to different departments is not under the control of the department heads.
Uncontrollable cost is a cost that cannot be increased or decreased based on a business decision. In other
words, it is an expense that a manager has no power to influence. For example: a foreman in-charge of a
tool room can only control costs pertaining to the same department and the matters which come directly
under his control, not the costs apportioned to other department. The expenditure which is controllable by
an individual may be uncontrollable by another individual.

 PRODUCTION PROCESS
Production process is a complex of phenomena and activities that involve materials and goods
gradually undergoing changes. They cause successive development of features of products, directed by its
intended use. The end of the production process occurs when all the necessary features of given product have
been achieved. The production process is concerned with transforming a range of inputs into those outputs
that are required by the market.
Any production process involves a series of links in a production chain. At each stage value is
added in the course of production. Adding value involves making a product more desirable to a consumer so
that they will pay more for it. Adding value therefore is not just about manufacturing, but includes the
marketing process including advertising, promotion and distribution that make the final product more
desirable. It is very important for businesses to identify the processes that add value, so that they can enhance
these processes to the ongoing benefit of the business.

1) Job Production: The process of creating a single item. Typically applies to unique items or things that
have low demand. It is one-of-a-kind production in which only one unit is manufactured at a time. This
type of production is often used for very large projects or for individual customers. Because the
 customer’s needs and preferences play such a decisive role in the final output, it’s essential for the
operations manager to maintain open and frequent communication with that customer. The workers
involved in this type of production are highly skilled or specialists in their field.
The equipment for job shop productions are divided for use in different departments. The
requirement of each machine is different based on the operation to be performed for a particular job. So, a
proper system of planning and control has to be in place for optimizing the job shop production.
For example, a machine shop that produces an industrial part ordered by a customer, custom
home construction, haircuts, etc.

2) Batch Production: The term batch refers to a specific group of components, which go through a
production process together. As one batch finishes, the next one starts. Batches are continually processed
through each machine before moving on to the next operation. This method is sometimes referred to as
“intermittent” production as different job types are held as work-in-progress between the various stages of
production.
Batch production is a method used to produce similar items in groups, stage by stage. In batch
production, the product goes through each stage of the process together before moving on to the next
stage. The degree to which workers are involved in this type of production depends on the type of product.
It is common for machinery to be used for the actual production and workers participate only at the
beginning and end of the process.
Producing a number of items together as a batch. For example, 1200 pastries that move
through 6 steps together with each step bringing them closer to being a finished product, textiles,
furniture, etc.

3) Mass Production: Mass production is the continuous production of items. This involves a series of
workstations that can all be in use at the same time. Mass production is used by companies that need to
create standardized products in large quantities as economically as possible. Products are mass produced
in order to generate the inventory needed to meet high market demand. This type of production usually
requires heavy investment in machinery and equipment; workers are generally needed to assemble
component parts to make the finished good.
For example, a guitar factory that has 12 workstations that continuously has one guitar at each
station at a different stage of production. When one guitar is beginning production, another is finishing.
Other examples are cell phones, automobiles, toilet paper, etc.

4) Flow/Continuous Production: Batch production is described as “intermittent” production and is

characterized by irregularity. If the rest period in batch production disappeared it would then become flow
production. Flow production is therefore a continuous process of parts and sub-assemblies passing on
from one stage to another until completion. Units are worked upon in each operation and then passed
straight on to the next work stage without waiting for the batch to be completed. To make sure that the
production line can work smoothly each operation must be of standard lengths and there should be no
movements or leakages from the line, i.e. hold-ups to work-in-progress.
For flow production to be successful there needs to be a continuity of demand. If demand
varied, this could lead to a constant overstocking of finished goods. Although with modern robotics it is
possible to create variations in products being produced through continuous flow techniques, typically
such products will be relatively standardized. Achieving a smooth flow of production requires
considerable pre-production planning to make sure that raw materials are purchased and delivered just-in-
time, that sufficient labor is employed and that there is continuous attention to quality throughout the
production process.
For example, gas & oil, steel, chemicals, etc.