Introduction to

Industrial Management
2021
Curriculum contents- Module 1
•Introduction
•System- concept, definition, types, parameters, variables and behavior.
•Management – definition and functions.
•Organization structure:
•i. Definition.
•ii. Goals.
•iii. Factors considered in formulating structure.
•iv. Types.
•v. Advantages and disadvantages.
•vi. Applications.
•Concept, meaning and importance of division of labor, scalar & functional processes, span of control,
delegation of authority, centralization and decentralization in industrial management.
•Organizational culture and climate – meaning, differences and factors affecting them.
•Moral-factors affecting moral.
•Relationship between moral and productivity.
•Job satisfaction- factors influencing job satisfaction.
•Important provisions of factory act and labor laws.
 The Top 10 Fortune 500 Company of USA
Rank 2021 Business Focus 2020 1955 Business Focus
1 Wal mart It's e-commerce sales up 79% Walmart General Motors Automobile

 As the pandemic forced everyone

online, the Everything Store won Amazon Exxon Mobil Oil Company
2 Amazon big.
 Pandemic created challenges and Exxon Mobil U.S. Steel Steel Manufacturers
3 Apple opportunities for Apple
Hubs for testing and distributing Apple General Electric
4 CVS Health vaccines to local communities. Power, Renew energy
United Health Health insurer thrived during the CVS Health Esmark Steel Manufacturers
5 Group pandemic year
Warren Buffett’s conglomerate- Berkshire Hathaway Chrysler Cars
6 Berkshire Hathaway investment firm
UnitedHealth Group Armour Steel Manufacturers
7 McKesson America’s largest drug distributor
 pharmaceutical distributor and McKesson Gulf Oil Oil Company
8 AmerisourceBergen Drug wholesaler
9 Alphabet Google’s parent company AT&T Mobil Oil Company
10 Exxon Mobil Oil and gas giant AmerisourceBergen DuPont Paints and Chemicals
 Global Fortune 500 List

J
Comparing 1955's Fortune 500 to 2019's Fortune 500

Comparing the 1955 Fortune 500 companies to

the 2019 Fortune 500, there are only 52
companies out of 500 that appear in both lists
and have remained on the list since it started
In other
words, only 10.4 percent of the Fortune
500 companies in 1955 have remained on
the list during the 64 years since in 2019.

More than 89 percent of the companies from 1955 have either gone bankrupt
or have fallen from the top Fortune 500 companies (ranked by total revenues)
A Glimpse of Today’s Industry

https://www.youtube.com/watch?v=k4-eJsFdxaU
Environment In the New Millennium

Environment in the millenium

•Information and electronic age
•Information and knowledge is going to be readily available
to us all
•Information speed through Internet
•The future is going to be dominated by our need to
understand systems.
The Learning Organization Approach

learning organization approach to management is

the management approach, which makes the
organization to
anticipate change faster than its counterparts
to have an advantage in the market over its
competitors.
Building a Learning Organization
• System Thinking
• Every organization member understands his or her own job and how
the individual jobs fit together to provide final products to the
customer

• Shared vision
• All organization members have a common view of the purpose of the
organization and a sincere commitment to accomplish the purpose

• Challenging the mental models

• Organization members routinely challenge the way business is done
and the thought processes people use to solve organizational problems
Building a Learning Organization
• Team learning
• Organization members work together, develop solution to new problems together, and apply
the solutions together.
• Working as teams rather than individuals will help the organization gather collective force to
achieve organizational goals

• Personal mastery – knowing her job

• All organization members are committed to gaining a deep and rich understanding of their
work
• Such an understanding will help organizations to reach important challenges that confront
them
 Systems approach to
Management
Managing Organizations

Conversion
Inputs Outputs
Subsystem

Control
Subsystem

Organization as a System receives Input, transforms it

through a Process for Output, receives feed back from
customer for improvements. either at Input stage or at
conversion sub-system.
Systems approach to Management
…contd.
Systems Concepts
¨ System Boundaries and Subsystems
> Systems often consist of numerous subsystems.
> Each subsystem has elements, interactions with other
subsystems, and objectives.
> Subsystems perform specialized tasks for the overall
system, which meets the organizational goals.

Sub-System 1 Sub-System 2 Sub-System 3

Overview of Management
• Definition of Management
• Management is the attainment of organizational goals
in an effective and efficient manner through planning,
organizing, staffing, directing and controlling
organizational resources.
• Organizational resources include men, machines materials,
money.
• The process of reaching organizational goals
efficiently and effectively by working with and
through people and other organizational resources.
• Goals may be to create a surplus
• Management is concerned with “Doing the right
things right at all times”:
Definition of Management
Gurus speak
• The use of people and other resources to accomplish objectives -
Louis E Boone & David L Kurtz-.

• The act of getting things done through people - Mary Parker Follet.

• Management as the art of knowing what you want to do in the best

and cheapest way - Frederick Taylor.
History of Management Development
• Developed gradually through centuries to its present formidable state.

• Theories & approaches

– The Classical approach

– Human Resource Approach

– The Modern approach

Classical Approach
• The Classical Perspective to management emerged during the
nineteenth century and continued till the twentieth century.

• Due to new challenges the organizations faced management sought

methods of efficiency which included a rational and scientific
approach
The Classical Approaches
• The classical approach includes the following three theories and their
contributors:-

• Scientific Management by Frederick Taylor

• Administrative Principle by Henry Fayol
• Bureaucratic Organization by Max Weber
5 Primary Management Functions
by Henry Fayol
• Planning- Thinking before doing.
Involves decision on
Product or Services
Their Quantity
Method of Production, Time etc.
• Organizing- is the Process of arranging all the necessary resources

• Staffing- is the process of Recruitment and Placement

• Directing- is the process of leading, motivating and guiding people
• Controlling- is the process of measuring current performance and guiding it
towards the pre-determined goal
• Coordinating- is the integrating the above functions
Human Behavior Management
• Major Contributions at the early stage of this aspect of Management
was from

• Mary Parker Follet- She was the first to apply the principles of individual and group
psychology to the study of Management

• Elton Mayo-Father of Human Relation approach. he established Organization not merely

a formal structure but a live and dynamic social system.

• Maslow’s Theory of Human’s Needs which states that each one of us is motivated by
needs.

• Douglas McGregor’s Theory of Human Needs- Theory X and theory Y

Maslow’s Hierarchy of Needs
Modern Approach to Management
• Quantitative Techniques of Management
• Quantitative Technique uses mathematical model in the form of expressions and equations that
replicate the problem and can be processed for meaningful information for decision making.
• Popular QM Tools are

• Linear Programming Model

• Dynamic Programming Model
• Queuing Theory
• Inventory Management Techniques
• PERT/CPM (Network Analysis)
• Decision Theory
• Games Theory
• Transportation and Assignment Models.
Glimpse of a modern Industry

• https://www.youtube.com/watch?v=XV-L_f3RWVM

Isopropyl Alcohol (IPA), Rubbing Alcohol, Ethanol for cleaning grease dirt etc.
 Organization Structure
Organizing-
Organizing means assigning the planned tasks to
various individuals or groups within the organization and
creating a mechanism to put plans into action.

 Includes creating
 departments and
 job descriptions
 It helps in the process of deciding
 where decisions will be made,
 who will perform what jobs and tasks, and
 who will report to whom in the company
Characteristics of an
Organization
• An organization has a structure.

• An organization consists of a group of people

striving to reach goals that individuals acting
alone could not achieve.

Goals are the purpose that an organization strives

to achieve;
Organization Design

• Organization Design is a process in which managers develop or

change their organization’s structure.

• An organization structure defines how job tasks are formally

divided, grouped and coordinated.

• This process involves making decisions about how specialized

jobs should be allocated, the rules to guide employees’
behaviors, and at what levels decisions are to be made.
Factors considered in Formulating
Structure
• Six basic factors considered in formulating organization structure:

• Work specialization
• Departmentalisation
• Unity of command
• Span of control
• Centralization vs. decentralization, and
• Formalization
Elements of Organization Structure

• Work Specialization-
• In Work Specialization , a job is broken down into a number of steps
and each step is completed by an individual or group of individuals,
Multi-
rather than having one individual to do the whole job . Work
Skilling as
specialization makes efficient use of diversity of skills that workers hold
alternative?
(Forging, Machining, Welding, Assembly, Painting, etc. before the final
product is despatched).

• Departmentalization
• Once the jobs have been divided through work specialization, these
jobs have to be grouped together so that common tasks can be
coordinated. The basis by which jobs are grouped together is called
departmentalization.
• There are commonly used five departmental structures, discussed in
next two slides:
Departmentalization
Classifications…

• Functional Departmentalization
• The activities can be grouped by functions performed. Functional
departmentalization seeks to achieve economics of scale by placing people with
common skills and orientations into common units.

• Product Departmentalization.
• It groups jobs by product line. Each manager is responsible of an area
within the organization dependingXYZof his/her specialization
Automotive Ltd

Commercial Heavy
Car
Vehicles Vehicles
Departmentalization
Classifications…
 Customer Departmentalization. It groups jobs on the basis of common customers.

 Geographical Departmentalization. It groups jobs on the basis of territory or

geography.

 Process Departmentalization. It groups on the basis of process, for organization

where special skills are required to manage the processes.
 E.g. Inspection and Shipping department may be one for all the products and customers.
 Elements of Organization Structure
• Scalar Chain & Unity of Command:
The unity of command principle helps preserve the concept of an unbroken
line of authority. It states that a person should have one and only
one superior to whom he or she is directly responsible and straight chain of
command (Scalar chain) that extends unbroken from the top to the bottom.
Scalar Chain
Scalar chain is the formal line of authority which moves from highest to
lowest rank in a straight line. This chain specifies the route through which
the information is to be communicated to the desired location/person.

 Span-of-Control
 The purpose of organizing is to make human cooperation effective and
is limited by the number of persons a manager can ‘supervise’
effectively and efficiently.
 “Effective span” is influenced by maturity of managers to skill of the
subordinates; from clarity of plan to clarity of delegation.
Factors affecting Span of Control
• Key factors to review when determining the appropriate span of
control within an organization include the following:

• Geographical Location, if the branches of a business are widely dispersed,

then the manager will find it difficult to supervise each of them, as such
the span on control will be smaller.
• Organizational size. Large organizations tend have a narrow span of
control, whereas smaller organizations often have a wider span of control.
• Workforce skill level. Skill level required and competency of the work
force (professionally qualified workforce) affects the span of control.
Further, Theory Y type of people, need not be supervised much as they are
motivated and take initiative to work, as such the span of control will be
smaller.
• Nature of Job. The complexity or simplicity of the tasks performed by the
employees will affect the number of desirable direct reports. If the task
that the subordinates are performing are similar, then the span of control
can be wider, as the manager can supervise them all at the same time.
• Organizational culture. Flexible workplaces usually have a wider span of
control because employees are given more autonomy and flexibility in
their work.
 Fayol’s bridge
• Scalar chain in the organization structure provides for
straight chain of command that extends unbroken from
the ultimate officer to the lowest ranks. The principle
suggests that there should be a clear line of authority
from top to bottom linking all managers at all levels. It
is considered a chain of command.
• To avoid information overload in a large organization having
scalar chain and unity of command,
• Henry Fayol has proposed that subordinate employees should be
allowed to communicate directly with each other.
• This principle became known under the name of Fayol's
bridge.
• Decision power is distributed to individuals on lower levels
in the organization, and only decisions that exceed the pre-
defined decision scope of an employee are referred upwards.
Elements of Organization Structure
• Centralisation and Decentralisation :
• Centralisation refers to the degree to which decision making is concentrated
in the hands of the top management with little or no input from lower-level
personnel. In a decentralized organization, decisions can be taken at a lower
level within the broad framework of the policy guide lines. An organization
characterized by centralization is an inherently different structural entity than
the one is decentralized.

• Formalisation:
• This refers to the degree to which job within the organization are
standardized. There are explicitly job description lots of organizational rules,
and clearly defined procedures covering work processes in organizations in
which there is high formalization. Where formalization is low, job behaviours
are relatively non-programmed and employees have a great deal of freedom
to exercise discretion in their work.
Tall vs. Flat Structure

Organization Structure are classified into in to a tall (vertical) (Organization A)

structure or
a flat (horizontal) (Organization B) structures.
Large, complex organizations often require a taller hierarchy. In its simplest
form, a tall structure results in one long chain of command similar to the
military.
Flat structures have fewer management levels, with each level controlling
a broad area or group.

Flat organizations focus on empowering employees rather than adhering to

the chain of command. Small organizations generally have flat structures.
Contingency variables Affecting Structures

• The most appropriate structure to use will depend on

contingency factors that affect the operations of an
organization.

• There are two generic organization structures:

• Mechanistic Organization
• Organic Organization
Mechanistic Organization Structure

• The Mechanistic Organization (Bureaucratic) is the natural result of combining

the six elements of structure. Adhering to the chain–of-command principle
ensured the existence of a formal hierarchy of authority, with each person
controlled and supervised by one person. Keeping the span of control small at
increasingly higher levels in the organization created tall, impersonal structures
with increasing rules and regulations for standard practices. In such organization,
work specialization creates jobs that are simple, routine and standardized.
Organic organization Structure
• The Organic organization is a highly adaptive form that is as loose and flexible as the
mechanistic organization is rigid and stable.

• It has division of labor, but the jobs people do are not standardized. Employees tend to
be professionals who are technically proficient and trained to handle diverse problems.

• The organic organization is low in centralization so that the professional can respond
quickly to problems and because top management cannot be expected to possess all
the varied expertise that is necessary to make decision.
 Organic vs Mechanistic Structures
Mechanistic
Individual specialization:
Employees work separately
and specialize in one task
Simple integrating mechanisms:
Hierarchy of authority well-defined
Centralization:
Decision-making kept as high as possible.
Most communication is vertical.
Standardization:
Extensive use made of rules & Standard
Operating Procedures
Much written communication
Informal status in org based on size of
empire
Organization is a network of positions,
corresponding to tasks. Typically each
person corresponds to one task
Organic
Joint Specialization:
Employees work together and
coordinate tasks
Complex integrating mechanisms:
task forces and teams are primary
integrating mechanisms
Decentralization:
Authority to control tasks is delegated.
Most communication lateral
Mutual Adjustment:
Face-to-face contact for coordination.
Work process tends to be unpredictable
Much verbal communication
Informal status based on perceived
brilliance
Organization is network of persons or
teams. People work in different capacities
simultaneously and over time
How does strategy affect structure?
• An organization structure is a means to help management achieve
its objectives. It is only logical that strategy and structure should be
closely linked.
• Mechanistic
• For a mass production unit – its structure will be the one that promotes
standardized and efficient services; a mechanistic structure.
• An organization usually begins with a single product or line. The simplicity
of the strategy requires only a simple structure to execute it. Decisions can
be centralized in the hands of a single senior manager and complexity and
formalization will be low.
• In a cost leadership strategy organization’s focus efficiency and stability to
produce low cost goods and services. This can best be achieved with a
mechanistic organization.

• Organic
• Similarly, if an organization is attempting to employ a growth strategy by
entering into global markets, it will need a structure that is flexible, fluid
and readily adaptable to the environment.
• If an organization pursues differentiation strategy, it has to continuously
innovate to survive. An organic organization matches best with this
strategy because it is flexible and maximizes adaptability.
Matrix Organizational Structure
• The matrix organizational structure is one in which
specialties of both functional and product are
combined to provide the advantage of the functional
specialization along with focus to simplify and amplify
the focus of resources on a narrow but strategically
important
product, project, market, customer,
or innovation .
Matrix Organizational Structure
Strictly speaking matrix management is the practice of pooling
people with similar skills for work assignments and are managed
with more than one reporting line
Matrix Organization
Organization Architecture
Organizational Architecture

• The organizational structure

• Control Systems
• Culture
• Human resource management systems

that together determine how efficiently and effectively the organizational

resources are used
 Organizational Culture
Culture is a pattern of basic
assumptions that are considered valid
and
that are taught to new members as the
way to perceive, think, and feel in the
organization
Every organizations have cultures that govern how their members should behave.

In every organization,
stories, rituals, material symbols and language evolve over time.

These shared values determine, in large degree, what employees see and how they
respond to their world.
Functions of Organizational Culture
• Culture provides a sense of identity to members and increases
their commitment to the organization

• Culture is a sense-making device for organization members

• Culture reinforces the values in the organization

• Culture serves as a control mechanism for shaping

behavior
Five Most Important Elements
in Managing Culture

• What leaders pay attention to

• How leaders react to crises
• How leaders behave
• How leaders allocate rewards
• How leaders hire and fire individuals
Characteristics of Organization Culture

• Member identity- The degree to which the employees identify with the organization as a
whole.
• Group focus-The degree to which work activities are organized around groups rather than
individuals.
• People focus-The degree to which management decisions take into consideration the effect
of outcomes on people within the organization.
• Control- The degree to which rules, regulations and direct supervision are used to oversee
and control employee behavior.
• Risk tolerance- The degree to which employees are encouraged to be aggressive, innovative
and risk taking
• Reward criteria- the degree to which rewards are allocated on employee performance
criteria in contrast to seniority.
• Conflict tolerance- The degree to which employees are encouraged to air conflicts and
criticisms openly.
Apple Organization Culture
Apple Inc. has an organizational culture for creative innovation. The company’s cultural features
focus on maintaining a high level of innovation that involves creativity and a mindset that challenges
conventions and standards. The business depends on cultural support and coherence, which are
determinants of competitiveness and industry leadership, especially in addressing aggressive and
rapid technological innovation and product development. The following are the main characteristics of
Apple’s corporate culture:

• Top-notch excellence
• Creativity
• Innovation
• Secrecy
• Moderate combativeness
Organizational Climate
• The organizational climate on the other hand is the sense, feeling or
atmosphere people get in the organization on either a day-to-day basis
or just generally.

• You know when you walk into a place and you either think:
• ‘wow this place has an amazing energy. People are really friendly and it feels positive’,
• Essentially, the climate are the perceptions and attitudes of the people in the
culture.
Organizational Culture Vs. Organizational Climate 

• A climate can be locally created by what leaders do, what circumstances

apply, and what environments afford.
• A culture can evolve only out of mutual experience and shared learning.

• Obviously the climate and culture are connected and feed off each other.

• It should be also apparent that the climate can often change pretty quickly.
• The climate is  often be based on events, peoples reactions and incidents between
people. The culture is less dependent on individual events but tends to drive
people’s interpretation, thinking and perspectives of events that occur.
Morale
• Morale is a mental condition or attitude of individuals and
groups
which determines their willingness to co-operate with others in the
accomplishment of an organization’s objectives.

• It’s an emotional force, an attitude of mind.

• For group of workers, morale, refers to the over-all tone, climate or

atmosphere of work.

• Morale reflects the attitude of employees towards their work

and leads to higher productivity
Factors affecting Morale
• The first factor affecting the employee morale is the organization
itself.
• The organization influences the worker’s attitudes to their jobs.
• The nature of the work.
• Repetition of the same task again and again makes the employees feel bored and alienated.
• Job satisfaction has a direct bearing on employees’ morale.

• Attitude of organizational leadership has a tremendous influence on

employees’ morale.
• Rigid supervision limits employees freedom to do her job and deprive her the joy
of work.
• The worker’s perception of organization’s rewards system affect employees
morale. 
Job Satisfaction
• Job satisfaction is an attitude which indicates how content an individual is
with his or her job.
• It is determined by a discrepancy between what one wants in a job and
what one has in a job.

• Five factors that can be used to measure and influence job satisfaction
are: 
• Pay or total compensation
• The work itself (such as projects, responsibilities)
• Promotion opportunities (i.e., job enlargement, more prestigious title)
• Relationship with supervisor
• Interaction and work relationship with coworkers

• Job satisfaction is a subjective construct representing an emotional feeling

an individual has about the different facets of the job and their scales vary
from person to person.
 Job Satisfaction
• Employee job satisfaction is both a function of the person and
the job environment.
• Some of the popular theories of Job Satisfaction are
• Intrinsic/Extrinsic –
• Intrinsic sources originate within the employee and have
psychological value (i.e., challenging work, recognition, sense of
accomplishment etc.)
• Extrinsic sources originate outside of the employee (i.e., working
conditions, relationships with co-workers, supervisors etc.)
• Fulfillment theory –
• Receiving more of something on the job is better
• Discrepancy theory –
• The perceived gap between what one wants from the job and what
one perceives it is offering
• Equity theory –
• Perceived equity in the employee’s outcome/input ratio compared
to others in the organization or in the society around him.
Job Satisfaction & Motivation
• Herzberg argued that that it is the feelings of job
satisfaction are more important than money for
persuading people to contribute more and increase
productivity.
• Workers become dissatisfied when opportunities for
meaningful achievement are lacking or eliminated.
• Contemporary author Myers argued that when basic
factors of job satisfaction were met by the worker,
attempts should be made to take the satisfaction to
another level by
• job enlargement (making jobs more challenging and
interesting by increasing variety) and
• job enrichment (by providing greater growth
opportunities).
Factories Act 1948-
Main Provisions
1. OBJECTIVE
The main objective of the Act is not only to ensure adequate safety measures but also to promote
health and welfare of the workers employed in factories as well as to prevent haphazard growth
of factories.
2. COVERAGE OF THE ACT
The coverage of the Act is confined to the: -
o factories using power and employing 10 or more workers on any working day of the
preceding twelve months;
o factories not using power and employing 20 or more workers on any working day of the
preceding twelve months; and the
o factories specially notified under Section 85 of the Factories Act by the State Govts./Union
Territories.
Factories Act 1948-
Main Provisions
3. IMPORTANT CONCEPTS AND DEFINITIONS

(a) Factory means any premises including the precincts thereof-

with 10 or more people working on any day of the preceding twelve months with the aid of power and 20 or
more people without power.

(b) Worker means a person (employed directly or through any agency including a contractor) with or
without the knowledge of the principal employer, whether for remuneration or not in any manufacturing
process, or in cleaning any part of the machinery or premises used for a manufacturing process

(c) Manufacturing process means any process for: -

i) Making, altering, repairing, finishing, packing, oiling, with a view to its use, sale, transport, delivery or disposal of
any article or substance
ii) Pumping oil, water, sewage or any other substance or

iii) Generating, transforming or transmitting power

iv) Preserving or storing any article in cold storage etc.
Factories Act 1948-
Main Provisions
4. RELEVENT PROVISIONS UNDER THE ACT
(a) Annual Leave with Wages
Every worker who has worked for a period of at least 240 days during a calendar year shall be allowed during
the subsequent year leave with wages at the rate of (a) one day for every twenty days worked in the case of
adults, and (b) one day for every fifteen days worked in the case of children.

(b) Safety

To ensure safety of the workers, the Act has provided several measures such as compulsory fencing of machines of all sorts.

(c) Canteens, Shelters or Rest Rooms and Creches etc.

Canteens are to be provided in factories employing over 250 workers and lunch rooms, shelters and rest rooms in those
employing more than 150 workers.
Factories Act and Shop and Establishment Act

• Both are Acts to regulate conditions of service of workers engaged.

• While the Factories Act is applicable to establishments wherein a manufacturing activity is carried out.

• Shops and Commercial Establishments Act is applicable to establishments which do not fall under the definition of factory, mine or plantations.

• The Factories Act is a central Act whereas the Shops and Commercial Establishments Act is a state Act and as such
there will be separate Shops Act for separate state.

• Information Technology companies

• The factories Act, 1948 defines ‘factory’ emphasizes on the words of physical process of “manufacturing”.
Information technology companies provide “Services” and hence come under Shops and Establishment Act.
Introduction to Industrial
Management
Module-2
2020
Module 2
•Critical Path Method (CPM) and Programme Evaluation Review Technique (PERT):

•2.1 CPM & PERT-meaning, features, difference, applications.

•2.2 Understand different terms used in network diagram.

•Draw network diagram for a real life project containing 10-15 activities, computation of LPO and EPO.(Take
minimum three examples).

•Determination of critical path on network.

•Floats, its types and determination of floats.

•Crashing of network, updating and its applications.

Project Planning
PERT/CPM
Ram Setu
• It is a bridge, built by Rama's army of monkeys across the sea, under
the leadership of Hanuman 
and
Under the engineering supervision of Nal.

• Nal, the engineer, was also a monkey ! 

He was the son of 'Visvakarma', the engineer of Gods in the heaven.
PROJECT DEFINITIONS
According to Harrison,
“ Project is a non routine, non repetitive, one-off undertaking, with well
defined time, financial and technical performance goal;”
 It should have a start and an end.
According to Project Management Institute (PMI),
 “Project can be defined as a temporary endeavor undertaken to accomplish
a unique objective at goal.”
 Project Network

• Network analysis is the general name given to

certain specific techniques which can be used for
the planning, management and control of
projects

66
Work Breakdown Structure
• It is foundation of project planning

• It defines tasks
• that can be completed independent of other tasks,
• facilitating resource allocation,
• assignment of responsibilities and
• measurement and control of the project

• It is followed by

• identification of dependencies and

• estimation of activity durations

• It can be used to identity the tasks in the CPM and PERT

67
Project Network

• Activity
– A task or a certain amount of work required in the project
– Requires time to complete
– Represented by an arrow
• Dummy Activity
– Indicates only precedence relationships
– Does not require any time of effort 68
 Project Network

• Event
• Signals the beginning or ending of an activity
• Designates a point in time
• Represented by a circle (node)
• Network
• Shows the sequential relationships among activities using
nodes and arrows

69
Project Network
 Activity-on-node (AON)
nodes represent activities, and arrows show precedence
relationships
 Activity-on-arrow (AOA)
arrows represent activities and nodes are events for points
in time

70
 Gantt Chart
Graph or bar chart with a bar for each project activity that shows passage of time
Provides visual display of project schedule

71
History of CPM/PERT

• Critical Path Method (CPM)

• E I Du Pont de Nemours & Co. (1957) for

construction of new chemical plant and
maintenance shut-down
• Deterministic task times
• Activity-on-node network construction
• Repetitive nature of jobs

72
PERT

• Project Evaluation and Review Technique (PERT)

• U S Navy (1958) for the POLARIS missile program

• Multiple task time estimates (probabilistic nature)

• Activity-on-arrow network construction

• Non-repetitive jobs (R & D work)

73
Arrows and Nodes in Project Network
• Use of nodes and arrows (PERT)

Arrows An arrow leads from tail to head directionally to

indicate ACTIVITY, a time consuming effort that is required to
perform a part of the work.

Nodes  A node is represented by a circle to indicate EVENT, a point in time

where one or more activities start and/or finish.

74
Arrows - as Activities in PERT

• Activities are pieces of Work that consumes time.

May or may not consume resources ( Waiting is an
Activity which does not consume resources).

• Used in PERT as Activity on Arrow (AOA).

75
Nodes- as Activity in CPM

• Nodes are used to denote Activities in CPM networking and the

Arrow is used to denote the inter relationship and the approach is
called AON (Activity on Node).

76
 Situations in network diagram
B
A
A must finish before either B or C can start

C
A
C
both A and B must finish before C can start
B

A
C both A and B must finish before either of C or D can
start
B
D

A
B
A must finish before B can start
Dummy both A and C must finish before D can start

C
D darla/smbs/vit 77
Concurrent Activities

3
Lay foundation Lay
Structure foundation Dummy
work 2 0 Structure
2 3
work
1
2 4
Order material
Order material

(a) Incorrect precedence (b) Correct precedence

relationship relationship

78
Class work

Activity No.
Activity Duration Dependency
(AON) (AOA)

1. (1-2) Go to Common room 30 -

2. (2-3) Watchout if anyone seeing 20 1 (1-2)

3. (2-4) Entering Common room 10 1 (1-2)

4. (4-5) Go to table 30 2,3 (2-3), (2-4)

5. (5-6) Pick up TT ball 20 4 (4-5)

6. (6-7) Hide in the basket 40 5 (5-6)

 CPM

CRITICAL PATH METHOD

Go to Watch out
Common
Go to Pick up TT Hide in
Room
2 Table ball Basket

1 4 5 6
3
Entering
Common
room
PERT
Activity List For Project
Activity No.
Activity Duration Dependency
(AON) (AOA)
1. (1-2) Notice for project 1 -
2. (2-3) Select partner 2 1 (1-2)
3. (2-4) Students go to guide. 1 1 (1-2)

4. (4-5) Guide discusses 3 2,3 (2-3), (2-4)

5. (5-6) Allocates project. 2 4 (4-5)

6. (6-7) Students do literature survey. 4 5 (5-6)

7 (7-8) Develop software 5 6 (6-7)

8 (8-9) Guide approves project. 3 7 (7-8)
CRITICAL PATH METHOD (CPM)
PROGRAM EVALUATION REVIEW TECHNIQUE (PERT)
Drawing Network
Task. A project has been defined to contain the following list of activities along with
their required times for completion.
a. Draw Networks using AOA (Activity on Arrow) and AON (Activity on Node) approach.
b. Calculate the earliest expected completion time.
c. Show the critical path.
Activity No. Activity Duration Dependency
(AON) (AOA)
1. (1-2) Design house & obtain 3 -
financing
2. (2-3) Lay Foundation 2 1 (1-2)
3. (2-4) Order and Receive 1 1 (1-2)
Material
4. (4-6) Build House 3 2,3 (2-3), (2-4)
5. (4-5) Select Paint 1 2,3 (2-3), (2-4)
6. (5-6) Select Carpet 1 5 (4-5)
7. (6-7) Finishing work 1 4,6 (4-6), (5-6)
AOA Project Network for House

3
Lay foundation Dummy
2 0 Build Finish
3 1 house work
1 2 4 6 7
Design house Order and 3 1
and obtain receive Select 1 1 Select
financing materials paint carpet
5

AON Project Network for House

Lay foundations Build house
2 4
3 Finish work
2
7
Start 1 1
3
Design house and 3 6
obtain financing 1 5 1
1 Select carpet
Order and receive
darla/smbs/vitSelect paint 86
materials
Example-PERT Network
• An assembly is to be made from two parts X and Y. Both parts
must be turned on a lathe. Y must be polished before
assembly. Activities and their predecessor activities are given
below. Draw the Network:
Activity Description/ Duration Predecessor activity
AOA
A 1-2 Open work order 5 days -
B 2-4 Get material for X 10 A 1-2
C 2-3 Get material for Y 3 A 1-2
D 3-5 Turn Y on lathe 4 C 2-3
E 5-6 Turn X on lathe 5 B,D 2-4, 3-5
F 5-7 Polish Y 2 D 3-5
G 7-8 Assembly X & Y 10 E,F 5-6, 5-7
H 8-9 Pack 1 G 7-8
 PERT Example - Solution
• The Network diagram for the project is given below.

B
F G H
A 5 7 8 9
1 2
D
C E
6
3

• Both X and Y have to be turned on a lathe machine, activity E (turning X) has to

be preceded by D (turning Y). Assembly of X & Y can be taken up only after
Polishing of Y (F) and turning of X (E) are completed.
Simple rule of Computing Node in CPM
EST
(Earliest EFT
Start Time) A (Earliest
(Activity) Finish Time)
S
(Slack or
Float)
LST LFT
(latest Start D (Latest
Time) (Duration) Finish Time)
CPM Assignment
Duration
Activity Predecessor (WKs)
A (1-2) - 5
B (1-3) - 4
C (2-3) A 1-2 3
D (2-4) A 1-2 4
E (2-5) A 1-2 6
F (3-6) B,C 1-3,2-3 4
G (4-7) D 2-4 5
H (5-7) D,E 2-4,2-5 6
I (6-8) F 3-6 6
J (7-8) H,G 5-7,4-7 4
CPM Network Example
Float in PERT

• Total float: It is a time duration by which an activity can be delayed or extended without delaying or
extending the overall project duration.
 

• Free float: It is a time duration by which an activity can be delayed or extended without delaying the
successor’s activity.
 PERT CHART IN NETWORKING

Total Float= (LSTj-ESTi)- Tij & Free Float = (ESTj- ESTi) - Tij
Critical Path Analysis
• The objective of Critical Path Analysis is to estimate the
minimum time required for the completion of a project and to
assign starting and finishing times to all the activities involved
in the project.
• Time estimates of each activity can be deterministic (CPM) or
can be stochastic with three time estimates (Most likely,
Pessimistic and Optimistic times) as in the case of PERT.
• This helps to identify
• Total completion time of the project
• Earliest and Latest Start Time (EST & LST) of each activity.
• Critical activities and critical path
• Float of each activity which are not falling on the Critical Path. (Floats
for activities on the Critical Path are zero.
Floats
• The Float or Slack of an activity or an event is the free time of an
activity in which a non-critical path activity and/ or an event can be
delayed or extended without delaying the total project completion
time.

• Total Floats:
• This is the length of time by which an activity can be delayed when
• all preceding activities are completed at their earliest possible time and
• all successor activities can be delayed until their latest possible time.

• This is given by

Total Float = (LSTj – ESTi) – Tij

• In a Network i and j are the Event Numbers (1,2,3,..n) which are consecutively
numbered , where j is > i and Tij represents the activities connecting them.
Free Float & Independent Float

• Free Float
• The Free Float of a non-critical activity is defined as the time by
which the completion of an activity can be delayed without causing
any delay in its immediate succeeding activities. (Both EST)
• Free float values for each activity (i,j) are computed as follows:

• Free Float (Ffij)

= (ESTj – ESTi)- Tij
 Example –
PERT with Float Computations

Activity Description Duration Immediate

(Wks) Predecessor
A (1-2) Design new premises 14 -
B (2-3) Obtain Tenders from the contractors 4 A
C (3-4) Select the contractor 2 B
D (4-7) Arrange details with selected contractor 1 C
E (2-5) Decide which equipment is to be used 2 A
F (5-7) Arrange storage of equipment 3 E
G (5-6) Arrange disposal of other equipment 2 E
H (5-8) Order new equipment 4 E
I (11-13) Take delivery of new equipment 3 H,L
J (9-10) Renovations take place 12 K
K (7-9) Remove old equipment for storage or disposal 4 D,F,G
L (10-11) Cleaning after contractor has finished 2 J
M (11-12) Return old equipment for storage 2 H,L
 Network Diagram
E3=18 E4=20
L3=18 L4=20
C
3 4
(2) D (1)
E7=21 E8=25
B (4) E6=19 L7=21 L8=25
L6=21
A K E9=37
1 2 6 7 8
(14) (4) L9=37
E2=14 E (2) F(3) J
(12)
E1=0 L2=14 G (2) 9
L1=0 5
L (2)
E5=16 H (4)
E10=39
10
L5=18 L10=39
M (2)
I (3)

E11=41 E12=42
11 12 L12=42
L11=42
Float Calculation
EST LST Float Computation

Activity Duration Start Finish Start Finish Total Free Float

Float

(Tij) Ei Ej Li Lj (Lj-Tij) - Ei (Ej-Ei)-

=Ei+Tij =Lj-Tij Tij

2-5 2 14 16 16 18 (18-14) -2 = 2 (16-14)- 2= 0

6-7 3 16 19 18 21 (21-16)-3=2 (21-16)- 3 =2

5-7 2 16 18 18 21 (21-16)-2=3 (21-16)-2=3

5-10 4 16 20 35 39 (39-16)-4=19 (39-16)-4=19

11-12 2 39 39 42 42 (42-39)-2=1 (42-39)-2=1

Note: For Float calculation the EST and LST of the dependent subsequent activity
is to be considered as Ej and Li and not the calculated Ej and Li.
 PERT
• PERT is based on the assumption that an activity’s duration
follows a probability distribution instead of being a single value
• Three time estimates are required to compute the parameters of
an activity’s duration distribution:
• pessimistic time (tp ) - the time the activity would take if
things did not go well
• most likely time (tm ) - the consensus best estimate of the
activity’s duration
• optimistic time (to ) - the time the activity would take if things
did go well

Mean (expected time): te = tp + 4 tm + to

6
2
Variance: Vt =2 = tp - to
darla/smbs/vit
6 100
 PERT analysis
• Draw the network.

• Analyze the paths through the network and find the critical path.

• The length of the critical path is the mean of the project duration probability
distribution which is assumed to be normal

• The standard deviation of the project duration is computed by

adding the variances of the critical activities (all of the activities that
make up the critical path) and taking the square root of that sum

• Probability computations can now be made using the normal

distribution table.
101
Probability computation-
for a project to be completed within a specified time
Determine probability that project is completed within
specified time

Given by

x-
Z=

where  = te = project mean time
 = project standard mean deviation time
x = (proposed ) specified time
and then using the Z value from the Standard Normal Distribution Table.
(Values Represent AREA to the LEFT of the Z score in a Normal Distribution
Curve).
102
 PERT Example
Immed. Optimistic Most Likely Pessimistic Te V Activity
Preced. Time Time Time

A -- 4 6 8
B -- 1 4.5 5
C A 3 3 3
D A 4 5 6
E A 0.5 1 1.5
F B,C 3 4 5
G B,C 1 1.5 5
H E,F 5 6 7
I E,F 2 5 8
J D,H 2.5 2.75 4.5
K G,I 3 5 7 103
 PERT Example
PERT Network

A E H J

B I K
F

104
PERT Example
Activity Expected Time Variance
A 6 4/9
B 4 4/9
C 3 0
D 5 1/9
E 1 1/36
F 4 1/9
G 2 4/9
H 6 1/9
I 5 1
J 3 1/9
K 5 4/9
105
PERT Example
Activity ES EF LS LF Slack
A 0 6 0 6 0 *critical
B 0 4 5 9 5
C 6 9 6 9 0*
D 6 11 15 20 9
E 6 7 12 13 6
F 9 13 9 13 0*
G 9 11 16 18 7
H 13 19 14 20 1
I 13 18 13 18 0*
J 19 22 20 23 1
K 18 23 18 23 0*
106
PERT Example
Variance of the Critical Path:
Vpath = VA + VC + VF + VI + VK
= 4/9 + 0 + 1/9 + 1 + 4/9
= 2
path = 1.414
Probability of Project Duration within 24 wks is

z = (24 - 23)/(24-23)/1.414 = .71

From the Standard Normal Distribution table: Values

Represent AREA to the LEFT of the Z score.
Area P(z < .71) = .7612
107
PROJECT COST
 Cost consideration to reduce project duration
• Project managers may have the option or requirement to crash the project, i.e. to
accelerate the completion of the project.

• This is accomplished by reducing the length of the critical path(s).

• The length of the critical path is reduced by reducing the duration of the activities on the
critical path.

• If each activity requires the expenditure of an amount of money to reduce its

duration by one unit of time, then
• the project manager selects the least cost critical activity,
• reduces it by one time unit, and
• traces that change through the remainder of the network.

• As a result of a reduction in an activity’s time, a new critical path may be created.

• When there is more than one critical path, each of the critical paths must be reduced.

• If the length of the project needs to be reduced further, the process is repeated.

109
 Project Crashing
• Crashing
• reducing project time by expending additional resources
• Crash time
• an amount of time an activity is reduced
• Crash cost
• cost of reducing activity time
• Goal
• reduce project duration at minimum cost

110
 Activity crashing

Crash
cost Crashing activity

Slope = crash cost per unit time

Activity cost

Normal Activity
Normal
cost
Normal
time

Crash Activity time

time
111
 Time-Cost Relationship
 Crashing costs increase as project duration decreases
 Indirect costs increase as project duration increases
 Reduce project length as long as crashing costs are less than indirect cost reduction

Time-Cost Tradeoff
Min total cost is Total project cost
at optimal project
time Indirect cost
cost

Direct cost

time 112
 CPM Chart
Task. A project has been defined to contain the following list of activities along
with their required times for completion. Time-Cost data is also provided. :

Activity Activity Expected Dependency

No completion time
1. Requirements collection 12 -
2. Screen design 8 1
3. Report design 4 1
4. Database design 12 2,3
5. User documentation 4 2,3
6. Programming 4 5
7. Testing 4 4,6

a. Draw a Network chart for the activities.

b. Calculate the earliest expected completion time.
c. Show the critical path.
d. Find the minimum duration of the project based on the Time-Cost Data provided. 113
Time Cost data

Activity Normal Normal Crash Crash

time cost time cost
Rs Rs
1 12 3000 7 5000
2 8 2000 5 3500
3 4 4000 3 7000
4 12 50000 9 71000
5 4 500 1 1100
6 4 500 1 1100
7 4 1500 3 22000

114
Project Crashing example
Network using CPM technique.

2 4
12
8
7
1 4
12

3 6
4 5 4
4

115
 Time Cost data

Activity Normal Normal Crash Crash Allowable

crash time
Slope
time cost time cost (Reduction of Cost
time feasible)
Rs. Rs. /unit time
1 12 3000 7 5000 5 400
2 8 2000 5 3500 3 500
3 4 4000 3 7000 1 3000
4 12 50000 9 71000 3 7000
5 4 500 1 1100 3 200
6 4 500 1 1100 3 200
7 4 15000 3 22000 1 7000

75000 110700
116
 R500 R7000
Project duration = 36
2 4
8 12 R7000
7 From…..
1 4
12

R400 3 6
4 5 4
4 R200
R3000
R200

R500 R7000

2 4
8 12 R7000
To….. 7
1 4
7
Project
R400 3 6
duration = 31 4 5 4
4 R200
Additional cost R3000
R200
= Rs.2000
117
Project Crashing Example
• Second level of iteration.
• Further reduction may be prohibitively costly.
R500 R7000

2 4
5 12 R7000
7
1 4
7
Project
R400 3 6
duration = 28 4 5 4
4 R200
Additional cost R3000
R200
= Rs.1500
Example

•Details of Project Activities along with their durations, costs and inter-dependencies are given below.
•Draw a PERT Network and find out the Critical Path and project duration.
•You are also advised to reduce the project duration with a limitation that Crashing cost if it is more than Rs.
3000 per week is not acceptable.
•Find out the cost of the project with Normal cost and Crash cost.
10+ 5 + 5 Marks
Project Activity Duration and Cost

Duration
Immediate Normal Crash Crash
Activity Description
Predecessor Cost Time Cost
(Wks)
Rs. Wks Rs.
A Design new premises 14 - 20,000 10 44,000
B Obtain Tenders from the contractors 4 A 2,000 2 10,000
C Select the contractor 2 B 1,000 2 1,000
D Arrange details with selected contractor 1 C 1,000 1 1000
E Decide which equipment is to be used 2 A 1,000 2 1000
F Arrange storage of equipment 6 E 4,000 3 7000
G Arrange disposal of other equipment 2 E 2,000 1 3000
H Order new equipment 4 E 2,000 2 6000
I Take delivery of new equipment 3 H,L 6,000 1 8000
J Renovations take place 12 K 24,000 8 32,000
K Remove old equipment for storage or disposal 4 D,F,G 20,000 2 30,000
L Cleaning after contractor has finished 2 J 3,000 1 6,000
M Return old equipment for storage 2 H,L 5,000 2 5000
Time –Cost Data
Time -Cost Data
Normal After After After
Normal Crash
Slope Critical Crashing Crashing Crashing
cost cost
Normal Crash Path 1 2 3
Activity
time Rs. time Rs. Cost
    /unit
time
A 14 20000 10 44000 6000 CP CP CP CP
B 4 2000 2 10000 4000 CP CP CP
C 2 1000 2 1000 0 CP CP CP
D 1 1000 1 1000 0 CP CP CP
E 2 1000 2 1000 0 CP CP CP CP
F 6 4000 3 7000 1000 CP CP CP CP
G 2 2000 1 3000 1000
H 4 2000 2 6000 2000
I 3 6000 1 8000 1000 CP CP CP CP
J 12 24000 8 32000 2000 CP CP CP CP
K 4 20000 2 30000 5000 CP CP CP CP
L 2 3000 1 6000 3000 CP CP CP CP
M 2 5000 2 5000 0
CRITICAL PATH- A-E-F-K-J-L-I
Network Diagram Normal Cost-91,000
Network Diagram (1)
E3=18 E4=20 Time- 43 Wks
L3=19 L4=21
C
3 4
(2) D (1)
E7=22 E8=26
B (4) E6=22 L7=22 L8=26
L6=22
A K E9=38
1 2 6 7 8
(14) (4) L9=38
E2=14 E (2) F(6) J
(12)
E1=0 L2=14 G (2) 9
L1=0 5
L (2)
E5=16 H (4)
E10=40
10
L5=16 L10=40
M (2)
I (3)

E11=42 E12=43
11 12 L12=43
L11=43
 Network Diagram
Crashing- F & I

CRITICAL PATH- A-E-F-K-J-L-I-M Crash Cost (1)-93,000

Network Diagram (2)
& A-B-C-D-K-J-L-M-I E3=18 E4=20 Time -41 Wks
L3=19 L4=21
C
3 4
(2) D (1)
E7=21 E8=25
B (4) E6=21 L7=21 L8=25
L6=21
A K E9=37
1 2 6 7 8
(14) (4) L9=37
E2=14 E (2) F(5) J
(12)
E1=0 L2=14 G (2) 9
L1=0 5
L (2)
E5=16 H (4)
E10=39
10
L5=16 L10=39
M (2)
I (2)

E11=41 E12=41
11 12 L12=41
L11=41
Network Diagram
Network Diagram (3)
Network Diagram
Network Diagram (4)
Benefits of CPM/PERT
• Useful at many stages of project management
• Mathematically simple
• Give critical path and slack time
• Provide project documentation
• Useful in monitoring costs

CPM/PERT can answer the following

important questions:
•How long will the entire project take to be completed? What are the risks involved?
•Which are the critical activities or tasks in the project which could delay the entire project if
they were not completed on time?
•Is the project on schedule, behind schedule or ahead of schedule?
•If the project has to be finished earlier than planned, what is the best way to do this at the
least cost?

126
 Limitations to CPM/PERT

• Clearly defined, independent and stable activities

• Specified precedence relationships
• Over emphasis on critical paths
• Deterministic CPM model
• Activity time estimates are subjective and depend on judgment
• PERT assumes a beta distribution for these time estimates, but
the actual distribution may be different
• PERT consistently underestimates the expected project
completion time due to alternate paths becoming critical

To overcome the limitation, Monte Carlo simulations can be performed

on the network to eliminate the optimistic bias

127
Materials Management &
Inventory Control
Module 3
Materials management-definition
Definition: A process encompassing acquisition, shipping, receiving, evaluation,

warehousing and distribution of goods, supplies and equipment.

Materials management involves planning, programming, organising, directing,

controlling, and coordinating the various activities concerning the materials.

Materials management assumes responsibility for whatever happens in

purchasing, storing, inventory or any other area connected with materials.

Satish 129
Purpose

Purpose Of Materials Management Is to obtain efficiency of

operations through integration of

1) Material Acquisition,

2) Material Movement, and

3) Material Storage.
Functions of Materials Management
Sourcing
• Planning and Programming of materials-determines the need
• Purchasing of materials-ensure uninterrupted supply at the most cost effective
way

Storage & Control

• Inventory control- to reduce inventory carrying costs
• Store Keeping- to ensure proper storage, retrieval, issue and controls.
• Stores Accounting- to maintain reorder level, perpetual stock taking.
• Material Handling- both incoming , within storage area and outgoing materials

Inventory management
• Material Economics- to ensure the overall input costs to the company
• Waste management- to identify the cause of wastage and eliminate them
• Disposal of non-moving and unusable materials -at a most cost effective
manners.
Objectives of Material management
• Primary objective is to reduce the cost of buying, storing,
handling, insuring, transporting and packaging of material.
This also includes:-
• Uninterrupted flow of input materials
• Initiate cost reduction drives both in the process (using MRP etc) and also
in the cost of materials purchased (using VA/VE in conjunctions with other
functions)
• Implement inventory control techniques to reduce inventory investments
• Maintaining adequate records of stores and purchases for proper controls
• Effective storage system to reduce deteriorations, pilferage, and other
losses.
• Developing vendor-customer relationship to reduce costs and improve
quality.
• Minimizing wastage of material by sourcing right material at right
dimensions to suit the consumption.
• Disposal of surplus materials to free capital and the storage space and
reduce threat of obsolescence.
Importance of Materials management
• The objective of any commercial organization is to get the best mileage out of every rupee invested in the
company. In other words, Management through their policies, decisions, coordination and control
mechanisms must maximize the Return On Investment (ROI)
•
Profits
• ROI = ———————— Capital
Employed

• Profit= Sales –Manufacturing Costs,

• Where Manufacturing Cost = Material cost + Labor+ Overhead
• Capital Employed= Fixed Asset + Current Asset
• Again Current Asset = Cash + receivables + Inventory, where inventory is generally 70% of the Current Assets.

• From the above, it is clear that ROI can be maximized either by increasing Profit Margin or by reducing the
Capital Employed or by both. In the current market situation, Sales Price cannot be increased (rather
there is a demand to reduce it) and as such Profit can be increased only by reducing the Material Costs.

On the other hand, the opportunity to reduce the Overheads and Capital Employed is more by Inventory
Reduction.
• It is thus evident that the ROI can be maximized by either reducing the material cost or reducing the
current assets by way of inventory of materials

• Materials Management focuses on reducing the material cost by following scientific buying process and
reduces inventory holding cost by adopting appropriate Stores management techniques and helps
improving the profitability of the organization.
Purchase Management

• Purchasing is a process of obtaining the materials, tools and supplies that are required to
manufacture a product or services in a most cost effective manner.

• Purchase management is the process of

mapping the function
and
defining the responsibility and
ensuring its efficient operation.
 Purchasing Activities
• PRE-PURCHASE ACTIVITIES
• Plan procurement
• Determine specifications of product qualities needed
• Determine appropriate inventory levels
• Determine appropriate order sizes
• Prepare ordering documents
• PURCHASING ACTIVITIES
• Contact vendors
• Establish formal competitive bid process
• Solicit competitive bids
• Evaluate bids
• Fix financial terms
• Award contract to vendor
• Receive shipment
• Arranging Incoming Inspection
• Issue products to production and service depts.
• Monitor contract performances
• Evaluate and follow up
• Handle adjustments
• Arrange payments
• Negotiate refunds
Purchasing Procedure
• Major steps in Purchasing that constitutes the purchasing procedure:-
• Indenting Purchase requirements
• First step in the process, where for stock items it is indented by stores departments and for non-
stock items by the consuming/ production control department.
• Inspecting Purchase indents
• Whether the indents have passed through stores to check the stock or approved by appropriate
authority
• Selecting source of supply
• A source that can supply goods of right quality at right price and are able to meet the quantity
requirements of the buyer.
• Order preparation
• Placing Purchase orders
• Follow-up with suppliers
• Pre-delivery follow-ups
• Shortage chasing
• Communicating changes
• Receiving Materials by stores
• Goods Receipt Notes (GRN) are prepared by stores after checking against purchase order and
supplier invoices.
• Arranging inspection of goods
• Incoming inspection for conformance to Dimensions, to Material specifications, and to Performance
• Storage and Record keeping
• After separating accepted and rejected based on Incoming Inspection
• Checking of Invoicing and payments requests of the suppliers
Purchasing Objectives
• Maintain Adequate Supply
• An adequate stock level, one that prevents running out of items between deliveries, is crucial
for smooth running of any organization. A good purchase management ensures this as a prime
objective of the purchasing function.

• Minimize Investment blockage

• This objective seems to conflict with the first. Purchasing management attempts to find some
kind of trade-off between the investment level and the risk of running out. The objective is to
ensure a continual flow of products at an optimized investment level.

• Maintain Quality of supplies

• Maintaining quality within the desired specifications of the purchased product is one of the
prime objectives of the purchasing function. The objective is to make sure that, once set, the
quality standards are controlled to vary only within the acceptable limits. Regardless of the
associated difficulties in transit or during storage it is the responsibility of the buyers is to
maintain quality of the delivered goods at the consumption point.

• Economic Buying objectives

To maximize its contribution to the company’s overall performance, purchasing must establish
the following two overarching objectives:
• Assure economic supply through the procurement of goods, supplies and services to keep
the company in operation.
• Contribute to profits by efficiently controlling the total cost to the operation.
Purchasing Management Objectives

• In addition to the above overarching objectives, some

specific purchasing objectives include:
• To develop satisfactory sources of supply and maintain good
relationships with them
• To secure optimal supplier performance, sometimes by seeking
process improvements across boundaries between trading
partners
• To work as window to the outside world for the organization to
identify new technology and better materials and products to help
improving organizational efficiency.
• To carry out programs to continually reduce total cost of purchases
• To develop effective controls and procedures
Purchasing Functions
• Planning Source
• Identifying source to meet the organizational requirements
• Keeping tracks of new development to keep his organization ahead of
competitions.
• Supports design and user department to develop the specification for
convenient sourcing
• Purchase Order Processing
• Scrutinizes purchase indents for appropriate buying.
• Gets competitive bids and selects the right source.
• Negotiate price and supply schedules for a win-win contract.
• Releases purchase orders.
• Co-ordination
• Follow-up for supplies in case of supply delays or organizational urgencies
• Arranges payment for satisfactory supplies
• Processes supplier’s requests for order amendments, if acceptable.
• Support roles
• Disposes excesses, outdated and wastage
• It works as the links between the organization and the outside world to identify
opportunities for incorporation of newer cost effective inputs.
Blanket Order
• Confirmed long term order by a buyer to a seller for
• supplying specified good(s) or service(s),
• for a fixed period or in a fixed quantity,
• at agreed-on prices or pricing method.
• After its acceptance by the supplier, supplies may be
made against it periodically,
• on as-and-when-required basis, or as specified in the order,
without calling for new purchase orders.
• It is normally made when there is a recurring need for a
expendable goods.
• Having a blanket order dispenses the customer from
holding large inventories and avoids the administrative
expense of processing frequent purchase orders.
Purchasing Documents

• The three most common types of procurement process documents

are
• Request for Information (RFI),
• Request for Proposal (RFP), and
• Request for Quotation (RFQ). 

• Request for Information (RFI)

• The first document type is the Request for Information.
• These are typically used when a buyer has limited experience and access to an industry.
• Take enterprise CRM as an example; if you as the buyer have never used a CRM and have
limited understanding of what CRMs are, you may issue an RFI to get a better handle on the
industry.
Request for Proposal and Request for
Quotation
• The second step in the procurement documentation process is the
Request for Proposal (RFP) or Request for Quotation (RFQ).

• These two documents aren’t interchangeable, but there are cases where you can jump right
to the RFQ.

• If the Request for Information process gave you enough information to

determine your exact needs, then you may directly use a Request for Quotation.

• With an RFQ, the buyer is telling the sellers exactly what they want: “provide me with a
quotation for the following items.”

•  A RFP, however, asks the seller to propose how they will resolve or address the buyer’s
needs: “provide me with your proposal on how to solve my problems.”
Request for Proposal (RFP)- As a Combined
option

• Request for Proposal is the most common document type as it acts as

a catch-all for the others. Many companies issue an “RFP” that
requests information and also a request for quotations.

• This is best suited when the service expectations have already been well
structured and vendors are short listed.
A Purchase Order should contain
• A basic purchase order features the following elements:

• Buyer: Name, address, and the contact information of the party paying for the goods.

• Seller: Name, address, and the contact information for the party accepting payment for the goods.

• Purchase Order Number: A unique identifier assigned to each purchase order for easy tracking.

• Order Information/Item Description: The details, quantity of goods, unit price and total cost of goods.

• Shipping Address: Where the goods will be shipped.

• Shipping Date: When the goods will be delivered to the final location

• Billing Address: Where the seller should send the invoice for payment so the buyer can make payment

• Signatures: Each purchase order should contain at least two signatures: one (or more) for the person or people
authorizing the purchase on behalf of the business and one (or more) for the person or people accepting the
order on behalf of the seller.

• Order Date: The date which the business transaction occurred.

Purchasing Contract Terms
• Most common Purchasing contract terms are

• Prices: At the very least prices are always agreed.

• Units of Measurements: Pcs., Weight etc.

• Mode of delivery and its Cost: FOB (Freight on Board or Free on Board), CIF (Cost, Insurance & Freight) etc.

• Discounts: Many vendors offer and purchasers expect that when order quantities increase, discounts on prices be
provided.

• Delivery Schedules: When the products will be delivered. When services are procured, this will be a start and end
date.

• Payment Terms: This is when payment is expected, in what format and what fees are charged for late payments.

• Exception Handling: This describes the process for late, over or under deliveries or non-delivery. Cancellations and
changes to orders may also be included.

• Quality Expectations: Many companies may describe the quality that they expect the products to meet, including
dimension, weight, performance parameters and other quality control parameters. 
FOB, CIF & CNF
• FOB- Freight on Board or Free on Board

• Seller’s responsibility ends on delivery of goods to the agreed shipping agents. Cost of
transportation till the delivery point and loading on the carrier is generally borne by the
seller. Remaining lies with the buyer.

• CIF- Cost, Insurance & Freight

• In Cost, Insurance, and Freight (CIF), all expenses are paid by seller while the
goods are in transit. ...
• The seller pays for and arranges the insurance and freight. It's a popular term because the
buyer knows the final cost of goods and need not organise the shipping and insurance
suppliers.

• CNF – Cost & Freight or Cost Net Freight

• The acronym stands for “Cost Net Freight.”
• It’s shipping agreement where the seller pays for delivering the item to the port closest to the
buyer, but it doesn't include the cost of insurance.
Definition of Make or Buy Decisions
• Make-or Buy decision is the act of choosing between
manufacturing a product in-house or purchasing it from an
external supplier.
• In a make-or-buy decision, the two most important factors to
consider are
• cost and
• availability of production capacity.

• An enterprise may decide to purchase the product rather than

producing it, if it is cheaper to buy than make or if it does not have
sufficient production capacity to produce it in-house. With the
phenomenal surge in global outsourcing over the past decades, the
make-or-buy decision is one that managers have to grapple with very
frequently.
Factors affecting Make-or-BUY

Factors that may influence a firm's decision to buy a

part rather than produce it internally include

• lack of in-house expertise,

• small volume requirements,
• desire for multiple sourcing, and
• the fact that the item may not be critical to its strategy.

Similarly, factors that may tilt a firm towards making an

item in-house include existing idle production capacity,
better quality control or proprietary technology that
needs to be protected.
Levels of Make-or-Buy Strategy

Current trend favors outsourcing all activities that do not directly

represent or support core competencies.

There are 3 levels of a make-buy decision:-

• Strategic – affects the shape & capabilities of the organisation

• Tactical – deals with issues of temporary imbalances of capacity
• Component–decisions usually made at the design stage
Outsourcing Challenges

• Finding the Right Outsourcing Partner. ...

• Attitude Towards Work. ...
• Understanding the Scope of Work. ...
• Quality of Work. ...
• Product Design. ...
• Meeting Deadlines. ...
• Language. ...
• Communication.
Stores Management
• Responsibilities of Stores Management are to

• receive materials,
• to protect them while in storage from damage or
unauthorized removal,
• to issue materials in the right quantity, at the right time to
the right place and
• to provide these services at the least costs.
Types of Stores
• Depending on the types of industries there are
various types of stores:-
• Receiving – incoming material
• Main store - storage and issuance of accepted
materials
• Warehouse- receipt, packing and dispatch of
finished goods to various destinations
• Special purpose
store- receipt, storage and issuance of
special materials or at special condition-ex
bonded warehouse
• Scrap yard- deals with various types of scrap.
Coding
• Coding is the method of specifying a unique identification to the
materials in the stores or in inventory.
• A good coding system has the following characteristics:-
• Flexibility –should be able to last long period so that maximum benefits can
be achieved.
• Precision –unique code is assigned for every material
• Brevity – the length of the code should not be too long or too short. Should
be such that the material can be easily identifiable by looking at the code.
• Comprehensiveness- should include the nature of material, the name of the
supplier, end users etc.
Methods of Coding
• There are three methods of coding
• Group Classification
• Group coding is the grouping of inventories and assigning a unique
number to each group. In this method numbers are reserved for
each group.
• Raw material
• Purchased goods
• Spare parts, etc.
• Mnemonic Coding
• The mnemonic coding method includes alphabets and numerals.
Ex.- FR100M
• F:-Say Fabric
• R:- Red color
• 100M-100 Meters
• Hybrid System
• Hybrid system of coding is the combination of both the group
classification and mnemonic coding methods. Ex. -001R100M,
where 001 represents Fabric Group.
Buffer Stock
• Buffer stock is the Inventory of inputs held as a reserve
against short-term shortages and/or to dampen
excessive fluctuations in the prices of commodities and
thus protect the buyer from wild swings in prices.
• Adequate Buffer (Safety) stock levels permit business
operations to proceed according to their plans.
• Buffer stock is held when there is uncertainty in the demand
level or lead time for the product; it serves as an insurance
against stock outs.
• The less accurate the forecast, the more safety stock is
required.
• However, a common strategy is to try and reduce the level of
safety stock to help keep inventory costs low by making the
product demand more predictable.