UNIT - 1

CHAPTER – 1

PRODUCTION AND OPERATIONS MANAGEMENT

INTRODUCTION:
In our management studies we often come across the word ‘Production’ and ‘Operations’.
Let us understand in depth meaning of these words and what is the difference between
meanings of these two words?
The Production and Operations are synonymous words; however in practice production is
used to express tangible production resulting through Manufacturing processes and
operations is used to signify the intangible production resulting through Services. In
essence it is through operations that production becomes integral and subtle part of every
activity of an organization or an individual’s value added activities. Thus we can say that
the set of interrelated management activities, which are involved in manufacturing certain
products, is called as production management and when the same concept is extended to
services management, the corresponding set of management activities is called as
operations management.
Sometimes it becomes confusing to be talking about production management within
operations management but they are separate and distinct entities in the study of
management as ultimately, production is a part of the whole cycle of operations. While
operations management is focused upon administration, planning and execution of
operations involved in production of goods and services and trying to minimize the
resources at the same time increasing output, production management is more concerned
with input/output and churning out products in the shape of desired finished product.
Production management became the acceptable term from 1930s to 1950s. As F.W.
Taylor’s works became more widely known. Managers developed techniques that focused
on economic efficiency in manufacturing. On one side detailed studies were carried out of
the way in which workers were working and their works were carried out to eliminate
wasteful efforts and achieve greater efficiency. On the other hand psychologists, socialists
and other social scientists began to study people and human behaviour in the working
environment. Simultaneously economists, mathematicians, and computer socialists
researched and contributed newer, more sophisticated analytical approaches.
With the beginning of 1970s two distinct changes emerged in our views. The most obvious
of these, reflected in the new name operations management. As service sector became more
prominent, the change from ‘production’ to ‘operations’ emphasized the broadening of our
field to service organizations. The second, more suitable change was the beginning of an
emphasis on synthesis, rather than just analysis, in management practices.
The Production and Operations Management involves both the tangible
(Manufacturing) and intangible (Services) production. It is an area of management which is
concerned with overseeing, designing, and controlling the process of production and
redesigning business operations in the production of goods and/or services. It involves the
responsibility of ensuring that business operations are efficient in terms of using resources
conservatively, and effectively in order to meet customer’s requirements. In fact it is
concerned with managing the process that converts inputs (in the forms of materials,
labor, and energy) into outputs (in the form of goods and/or services).
In short the set of interrelated management activities, which are involved in manufacturing
of certain products, is called as production management and if the same concept is
extended to services management, then the corresponding set of management activities is
called as operations management.
DEVELOPMENT OF PRODUCTION FUNCTION
What is Production Management?
Production:
The word production is described in various dictionaries as the act of producing,
manufacturing, creation of an artistic work, a literacy production, and a presentation – as of
a play or other artistic performance.
Briefly stating meaning of the word ‘Production’ for all practical purposes is “Creation of
a Utility and/or Services”.
Management:
The word management is described in the various dictionaries as managing or handling,
control, direction, administrative skill, act or art of managing, to conduct the working of.
Briefly stating the meaning of word ‘Management’ for all practical purposes is “Art of
Managing”.
Production Management
Combining both the above definitions production management is “The Art of Managing
the Production”. It basically concerns itself with the conversion of inputs into outputs.
PRODUCTION & OPERATIONS​MANAGEMENT AND PRODUCTION
FUNCTION:
Production / operations management is the process, which integrates and transforms
various resources used in the production / operations subsystem of the organization into
value added product / services in a controlled and organized manner as per the policies and
plans of the organization. Therefore, it 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.
As discussed earlier the set of interrelated management activities, which are involved in
manufacturing certain products, is called as production management and if the same
concept is extended to services management, then the corresponding set of management
activities is called as operations management.
Brief History:
For over two centuries’ production and operations management has been recognized as an
important factor in any country’s economic growth.
The traditional view of manufacturing management began in eighteenth century when
Adam Smith recognized the economic benefits of ‘Specialization of Labour’. He
recommended breaking of jobs down into subtasks and recognizing workers to specialized
tasks in which they would become highly skilled and efficient.
In the early twentieth century, F.W. Taylor implemented Smith’s theories and developed
‘Scientific Management’. From then till 1930, many techniques were developed and
prevailed as the traditional view.
Production management became the acceptable term from 1930s to 1950s. As F.W.
Taylor’s works become more widely known, managers developed techniques that focused
on economic efficiency in manufacturing. Workers studied in great detail their work to
eliminate wasteful efforts and achieve greater efficiency. At the same time,
psychologists, socialists and other social scientists began to study people and human
behaviour in the working environment. In addition, economists, mathematicians, and
computer socialists contributed newer, more sophisticated analytical approaches.
From 1970s two distinct changes emerged in our views. First and the most obvious of
these, reflected in the new name ‘operations management’. This was a shift in the service
and manufacturing sectors of the economy. As service sector became more prominent, the
change from ‘production’ to ‘operations’ emphasized the broadening of our field to
service organizations. The second, more suitable change was the beginning of an emphasis
on ‘synthesis, rather than just analysis’, in management practices.

MANUFACTURING INDUSTRIES
Manufacturing industry refers to those industries which are involved in the manufacturing
and processing of items and indulge in either creation of new commodities or in achieving
value addition. The manufacturing industry accounts for a significant share of the industrial
sector in developed countries. The final products either serves as a finished goods for sale
to customers’ or as intermediate goods used in the production process. Out put of
manufacturing industries are mainly tangible products. All electrical appliances,
automobiles, textiles, furniture, chemicals, etc are examples of manufacturing products.
SERVICE INDUSTRY
Any business, trade, profession or organization that provides services to others instead of
manufacturing goods or agriculture products is service industry. Service products by nature
are intangible products. Health care and entertainment business, law firms and educational
institutes and colleges are examples of Service Industries.
BASIC DIFFERENCES BETWEEN GOODS AND SERVICES

PHYSICAL GOODS SERVICES

 (UTLITY PRODUCTS) (SERVICE PRODUCTS)
Tangible Not Tangible
Homogeneous Heterogeneous
Production and distribution are separated
Production, distribution and consumption
from consumption are simultaneous process
A physical thing An activity or process
Core value produced in the factory Core value produced in buyer-seller
interactions
Customers do not participate in the Customers participate in the production
production process
Can be kept in stock Can not be stocked
Transfer of ownership No transfer of ownership

SERVICE SECTOR INDUSTRIES​

CHARACTERESTICS OF SERVICES:
Basic characteristics of services are as follows:
1.​ INTANGIBILITY: Services are intangible in nature; it is difficult to experience
their benefits before they are bought. They are not a physical object. The buyer lacks the
opportunity to see, touch, hear, smell or taste before they buy, enjoy or use the services.
2.​ INSEPERABILITY: Services and their provider are closely associated and hence
are not separable; they are often interlinked with one another. Donald Cowell while
describing ‘The marketing of Services’ says “Goods are produced, sold and then
consumed, whereas services are sold, produced and then consumed.”
3.​ PERISHABILITY: Services are linked to time factor. Services have a high level of
Perishability and they can not be stored, or re-use them with effective returns. Services are
also perishable with related time. Any services provided are usually limited with a
particular time period agreed between service provider and service receiver.
4.​ DIVERSITY / HETROGENEITY: Services are diversified in nature. Same type
of services cannot be sold to all the consumers, even if they pay the same price. It is
impossible to set any standard for any service.
5.​ OWNERSHIP: A service is an activity or benefit that one party can offer to
another, which is essentially intangible, and does not result in the ownership of anything.
6.​ QUALITY DIMENSION: Quality aspect is the nucleus of any service dealing.
The service industry requires a measurable tool for quality measurement. The service
provided can be measured as per the level of ​ satisfaction at which the customers are
satisfied. Services can be distinguished on the quality of services provided by the service
provider to the service receiver.
7.​ FLEXIBILTY / NATURE OF DEMAND: Services are often related to flexibility.
Nature of service is often fluctuating for instance; the mobility of passenger is increased
during the vacation time. Tourists go to hill stations during the summer season hence it is a
high time for travel and tourism industry. Where as rainy season is often considered as an
off-season. This clearly indicates that flexibility is an essential dimension of the service
industry.
SERVICES DOMINATE THE MODERN ECONOMY:
WHY IS THE SERVICE SECTOR GROWING?
The service sector is going through almost revolutionary change, which dramatically
affects the way in which we live and work. New services are launched to satisfy our
existing needs and to meet needs that we did not even know we had.
Services make up the growing bulk of today’s economy and also account for most of the
growth in new jobs. The size of the service sector is increasing in almost all the economies
around the world. Even in emerging economies, service output is growing rapidly and often
represents at least half of the GDP. In developed countries, knowledge based services,
defined as those that are intensive users of high technology and/or have relatively high
skilled work forces are providing the most dynamic components.
In numerous countries, increased productivity and automation in agriculture and industry,
combined with growing demand both for new and traditional services, have jointly resulted
in a continuing increase over time in the percentage of the labour force that is employed in
services.
There is a hidden service sector within many large corporations that are classified by
government statisticians as being in manufacturing, agricultural, or natural resources
industries. These so called internal services cover a wide range of activities including
recruitment, human resource development, legal and accounting services, pay roll
administration, office cleaning, landscape maintenance, supply chain management,
advertisement and publicity, research and development, and many other kinds of services.
In recent time, organizations are increasingly choosing to outsource the internal services
that can be performed more efficiently by a specialist subcontractor.
Among the forces that shape service markets are government polices, social changes,
business trends, advances in information technology and internationalization /globalization.
1.​ Government Polices:
▪​ Change in regulations

▪​ Privatization

▪​ New rules to protect Customers, Employees and the Environment

▪​ New agreements on trades in service

2.​ Social Changes:

▪​ Rising Consumer Expectations

▪​ More Affluence

▪​ More People - Short of Time

 ▪​ Increased desire for buying Experiences Vs Things

▪​ Rising ownership of computers and Mobile Phones

▪​ Immigration

3.​ Business Trends:

▪​ Manufacturers Add Value through Service and sell Services

▪​ More Strategic Alliances

▪​ Marketing Emphasis by Nonprofits

▪​ Relaxation of Professional Association Standards

▪​ Quality Movement

▪​ Emphasis on Productivity and Cost Savings

▪​ Growth of Franchising

▪​ Innovative hiring practices

4.​ Advances in Information Technology:

▪​ Convergence of Computers and Telecommunications

▪​ Greater Bandwidth

▪​ Miniaturization creates more Compact Mobile Equipment

▪​ Wireless networking

▪​ Faster more Powerful Software

▪​ Digitization of Text, Graphics, Audio and Video

▪​ Growth of the Internet

5.​ Internationalization:
▪​ More Companies operating on Transnational Basis

▪​ Increased International Travel

▪​ International Mergers and Alliances

REASONS FOR GROWTH OF SERVICE SECTOR:

1.​ Affluence: The increase in per capita income has left the individuals with more surplus
funds. It is not only indicator of the increase in general affluence level but has resulted
in increased purchasing power for individuals empowering them to seek services not
availed hence before by them, giving rise to such services.
2.​ Leisure Times: People are now days keen on spending some time to travel and holiday
and therefore there is spurt in the economy of pleasure and travel sectors.
3.​ Life Expectancy: The health programmes have significantly contributed to an increase
in life expectancy, giving rise to services like old age homes, nursing home health care
etc.
4.​ Health Consciousness: As health consciousness is becoming widespread services such
as health clubs, dieticians, gyms, yoga, meditation etc have come up.
5.​ Working Women: As more and more women work the need for day care for children
has increased and also of packed and ready to use food and home delivery.
6.​ Product Complexity: A large number of products are now being purchased in house
holds which can be serviced only by specialized technicians, giving rise to repairs and
maintenance service providers.
7.​ Life’s Complexity: As the daily routine gets busier, individuals find it difficult to
manage things on their own. This leads rise to services of tax consultants, legal
advisors, property dealers, investment advisors etc.
8.​ Resource Scarcity and Ecology: As the natural resources are depleting and need for
conservation is increasing, consultants for water management, alternate energy such as
wind and solar powered energy sources are increasing.
9.​ New Products: The development in Information Technology has given rise to services
like IT related educational, training and awareness programmes. Mass Medias and
Audio Video and TV have pushed the exponential growth in the entertainment sectors.
10.​Increased Need for Communication: Progressive economy has created never before
urgencies of communications. This has increased demands for PCOs, Cyber Cafes,
Cellular phone providers etc.
WHY IT IS NECESSARY TO STUDY PRODUCTION AND OPERATIONS
MANAGEMENT?
Let us analyse whether it is necessary to study the subject of production and operations
management even if one is not interested in manufacturing business or activities?
It has been explained earlier that “PRODUCTION” is not restricted to only manufacturing
activities as normally visualized. End products of production system may result into
finished components or consumer products, completed paper work or documentations,
serviced customers or serviced patients. In short it has to be some kind of value added
products so that outputs are worth more than just the sum total of individual inputs.
Value addition is defined as follows:
When output is worthier than the sum total of all inputs, it is called ‘Value Addition’.
Peter Ferdinand Drucker (November 19, 1909 – November 11, 2005):
He was an Austrian-born American management consultant, educator, and author, whose
writings contributed to the philosophical and practical foundations of the modern business
corporation. He was also well-known for providing leadership in the development of
management education. He has wonderfully defined the meaning of ‘Production.’
Definition of Production as per Peter Drucker is as follows:
According to Peter Drucker “Production is not the application of tools to materials but is
the application of logic to work.”
Objectivity of all production system is always to apply logic to all operations and do it
smartly to bring in ‘Value Addition’, which helps organizations to bring the profit. Simply
applying knowledge or physical tools to the work without logical application do not bring
in Value Addition but may result in Value Equalization or Value Subtraction. Value
equalization results into no loss – no profit, as if the organization is running for charity,
even charitable organizations aim to do Value Addition so that they can serve more and
more beneficiaries. Opposite to Value Addition is Value Subtractions, which results into
organization running into loss, in fact it is beginning of the count down for the organization
towards getting finished, if it does not take quick remedial steps to reverse the situation and
start doing Value Additions as soon as possible.
Obviously at any given time we all are either engaged in tangible and/or intangible
production function. Hence it is very vital and important to know all aspects of this
management science with proper depth and detail and empower us with the skills of
production management to emerge as a versatile and efficient manager. It will not be out of
place to mention that production is omni present in every activity we carry out and hence it
is also known as operations management.
DEFINITIONS OF PRODUCTION AND OPERATIONS MANAGEMENT:
Production and operations management concerns itself with the conversion or
transformation of inputs into outputs, using physical resources, so as to provide the
desired utility/utilities – of form, place, possession, time or state or a combination thereof
– to the customer while meeting the objectives of effectiveness, adaptability or customer
satisfaction & efficiency.
Production is also defined as “the step-by-step conversion of one form of material into
another form through chemical or mechanical process to create or enhance the utility of
the products to the user.” Thus production is a value addition process. At each stage of
processing, there will be value addition.
Edwood Buffa defines production as ‘a process by which goods and services are created’.
Let us now understand about three basic factors of every production system without which
production can not exist. A series of sequential activities and operations, which are
indispensable in transforming material from a given form to a desired form, indicates
production.
Three Basic Factors:
In any production function 3 basic factors will be there
Input ​ ​ Transformation Output
Let us analyze three basic factors or elements associated with the subject of production
management in more detail.

INPUT CONVERSION OUTPUT

Raw Materials Physical Products
(Solid, Liquid or Gas, Manufacturing (Such as Car, TV, Freeze,
semi finished or Finished Products or
finished components, Assembled Components,
equipments etc...) etc…)
Paper Work Finished or Compiled
(Literature, Legal, Paper Work
Documentations,
Processing or (Books, Legal Agreements,
Financial Information Compiling of Data Balance Sheets or Cost
or Data Sheets etc...) Sheets, Project Reports
etc…)
Customers
Serviced Customers
(Requiring services
Delivery of (Delivery of Services such
such as repairs and
maintenance, transport, Services as repairs and maintenance,
hotel, banks etc...) airlines, railways, lodging
boarding, banks etc…)

Patients Rehabilitated Patients

(Delivery of Medical
(Requiring medical services etc…)
services)
___________________ Medical Services
(Treating and
rehabilitating patients) Outputs can be in form,
3-M
state, possession, place,
Men, Material time, physical products, or
& Machinery availability of services or
Using physical combination thereof.
resources, single or
multi - dimensional
processes.

All production systems should endeavour to achieve following output

EFFICIENCY + EFFECTIVENESS + CUSTOMER SATISFATION

A BUSINESS SYSTEM
Production and Marketing relativity and subtle form of conversions:
If we analyze any business system we will observe that almost all business firms perform
two basic functions, they are Production and Marketing.

Providing Products and Services Promotion, Sales & Distribution

Of course there are many other management functions which supports to these two basic
management functions. If we carry out detailed analysis of these different functions, we
will observe that there are number of situations even in marketing or personnel or other
management functions, which can be classified, or sub classified under production and
operations management. Naturally in all these functions also we can observe that the
fundamental principles of production of conversion of inputs to the value added output with
efficiency, effectiveness and ensuring of customer satisfaction is essential to make them
meaningful.
For example:
1.​ Physical distribution of items to the customer. (Marketing)
2.​ Arrangement of collection of marketing information. (Marketing)
3.​ Selection and recruitments process. (Human Resource)
4.​ The paper flow and conversion of the accounting information in an accounts office.
(Finance)
5.​ The paper flow and conversion of data into information usable by the judge in a
court of law during litigations etc can all be put under the banner of production and
operations management. (Legal)
Conversion in all the above examples is subtle (intangible) unlike in manufacturing where
it is obvious.
In cases 1 & 2, conversion is in terms of place and possession characteristics of the
products.
In case 3, conversion is in terms of receiving personnel services.
In cases 4 & 5, it is the conversion of state characteristics.
These conversions are effected by physical resources (added with other resources such as
information).
If we do not receive the outputs such as place, possession, services and state characteristics
in all the above operations, with required efficiency, effectiveness and to the satisfaction, of
the internal and / or external customers in all the above cases it will result into waste (and
not the production) as we have failed to achieve Value Addition at the time of conversion.
FACTORS AFFECTING A BUSINESS SYSTEM
From the above examples of diverse business functions, one can understand that ultimately
all business systems fundamentally, are engaged in conversion or transformation processes
either subtly or otherwise. These processes of conversions are sensitive to various factors
and as such these factors have the capacity to make or break the business. It is essential to
understand them and properly integrate them with the business systems to get the desired
out puts. Depth of understanding and degree of skills with which these factors are
integrated while carrying out conversion processes will decide as to how much robust,
meaningful and sustainable business systems we have been able to develop.
Diagram in the next page broadly classifies various important Internal, External and Input
factors to a Business System. In addition to these factors the current external environmental
factors of competition, supply and demand, trade unions, banks or financial institutions,
government, etc. also needs to be continuously analysed, integrated and adequate ‘ability to
adapt’ them must be built in the system to ensure success of the business. Output of any
business system needs to be analysed from the Management’s and Employees’ point of
view as both are inseparable and cohesive parts of any business.
Factors are classified as Internal if they are within the control of the organization and
External if they are beyond the control of the organization.
Internal Environmental Factors:
Strength and Weaknesses: Priority must be given to identify and analyze the weaknesses
of the self and of the business systems, as weakness has power to kill your results, purpose,
objectives and over and above the precious resources. Weaknesses must be converted to the
strength. One weakness can put you down in competition though you may have shown
great strengths.
One needs to analyze the strengths in order to exploit them and maximize the results.
Ignorance of one’s own strength leads to ineffective use or even non use of the strength and
loosing the battle which otherwise was quite possible to be won. Strengths have to be
identified and put to use, as not using the same will make them useless (less use - becomes
useless). It is necessary that one must continuously hone (sharpen) one’s strength in order
to enhance them.
History and Culture:
History: There can be three situations in regards to one’s family or business history – 1)
Having strong history, 2) Weak history or 3) No history. You need to deal with each
situation differently. If you are blessed with the strong history – exploit it to your advantage
(e.g. Mukesh and Anil Ambani), If you are blessed with weak history – enhance it (like
many second generation entrepreneurs), and if you are not lucky to get any history treat
that as the best opportunity of your life and create the one (like Dhirubhai Ambani,
Narayan Moorthy, Aziz Premji and many such illustrious individuals from the business
world).
Culture: Culture means the quality in a person or society that arises from a concern for
what is regarded as excellent in arts, letters, manners, scholarly pursuits, etc.
Organizational culture is the behavior of humans who are part of an organization and the
meanings that the people attach to their actions. Culture includes the organization values,
visions, norms, working language, systems, symbols, beliefs and habits. It is also the
pattern of such collective behaviors and assumptions that are taught to new organizational
members as a way of perceiving, and even thinking and feeling. Organizational culture
affects the way people and groups interact with each other, with clients, and with
stakeholders. Whether it is the matter of individual’s culture or organizational culture one
has to deal with it as your strength or weakness. Good culture is your strength and bad
culture is your weakness. Enhance the good culture – overcome the bad culture by
transforming it to a good culture.
The Business: The factor business deals with your decision power to make the right
choices. If you analyze the available opportunities to the hilt and make the right decisions
and right moves to select the business you will become leader in your field, if not, you will
always be follower. Making right choices about the business is one of the most important
factors affecting the business.
External Environmental Factors:
A business does not operate in a vacuum. It has to act and react to what happens outside the
factory and office walls. These factors that happen outside the business are known as
external factors or influences. These will affect the main internal functions of the business
and possibly the objectives of the business and its strategies.
Ethical, Social and Cultural changes:
Ethical changes:
Ethics is defined as the rules or standards governing the conduct of individuals or
organizations. The ethical behavior of an employee depends on factors such as his/her
ethical philosophy, ethical decision, ideology, other individual factors, organizational /
position-related factors, and external environmental factors. Analyzing from this view
point, ethical factors can also be considered as internal factor; however in our analysis we
include it as our strength or weakness.
Ethics as external factor is the standards governing the conducts of individuals and
society at large in the external environment. What we need to understand is that it is an
external factor and we have no control on it, however we need to have control on us and
our organization. We should not be adversely affected by the poor ethical standards of
individuals or society around us to degrade level of our standards. At the same time if we
come across in the external environment higher ethical standard than what we are
maintaining, we should be quick to adopt it. Remember maintaining high ethical standard is
like a winning horse and will always help you win. No doubt that climbing down on ethical
standards is much easier than climbing up in such standards, however it is advisable to take
this as challenge, not only to maintain, but also persistently enhance the ethical standards of
individuals and organization, from long term perspective of being winner in the business
world.
Social changes:
Social change is when the people in the community adjust their attitudes to way they
live. Businesses will need to adjust their products to meet these changes; the business also
needs to be aware of their social responsibilities. These are the way they act towards the
different parts of society that they come into contact with.
We are aware that although on one side poverty is increasing day by day and gap between
poor and rich is widening due to inflation, unemployment and various other uncontrolled
factors of economy, on the other side the standard of living and rate of literacy are
continuously improving in today’s society. Government’s project like slum redevelopment
is helping the people from hutments to get properly constructed houses; this does improve
the standard of living but not necessarily income per month. Rich are becoming richer and
demand for luxury goods are also increasing. Under the circumstances an organization
must keep constant watch on these changing patterns of the society and cater to society’s
needs in order to be winner in the market. What was considered as luxury in the past
becomes the necessity of the society today. How efficiently and effectively business is able
to adapt these changes decides the fate of the business.
Cultural changes:
The study of culture encompasses all aspects of a society such as its religion, beliefs,
knowledge, language, laws, customs, traditions, costumes, festivals, music, dance, art,
technology, work patterns, inter personal relations, products, etc. Different people have
different tastes, likes and dislikes and adopt different behaviour patterns while making
purchase decisions. All these factors keep on changing for the individuals and also society
depending upon the environment with which they interact in their day to day life.
We find radical changes in the food people eat, and the fashions they adapt from the ancient
time to today’s society and also as per different geographical regions. With the efficient
communication technologies, transfer of one culture to other region has been at much rapid
pace. Business needs to take note of such changes and keep on changing their products
from time to time. Business also needs to understand the cultural requirements of different
regions to ensure that people in a particular region will accept their product. For example
when KFC wanted to start their first food chain store in Bangalore, local people did not
allow them even to do the inauguration. This was because KFC’s food recipes were
prepared using beef. Use of beef offended the religious sentiments of people of the region.
Technologies:
Technology in the external world (outside of your business) continuously keeps on
upgrading, irrespective of whether you like or dislike. This is because every business
essentially has to bring the value addition in their products and services to survive.
Naturally this results in to new and innovative products and technologies. Businesses need
to have a two pronged approach in this regard. First adapt the best possible technology at
the time when you have opportunity to acquire them. Second keep a close watch on the
progress of the external technology in your field of activity. This will help you to measure
the gap between the technology you are using and the external world’s level. Knowledge of
this gap will pressurize and motivate you to create an early opportunity for replacing your
old technology with the updated one and will help you to achieve this efficiently as you are
aware about the latest technology in your field.
Economic changes:
The economic changes are external factor of significance for any business and needs
constant review. Entrepreneurship tends to focus on identifying and fulfilling consumer
needs in specific niche markets, but all businesses can be affected by large-scale economic
trends. Economy goes through a series of fluctuations associated with general ups and
downs in economic activity. In a boom nearly all businesses benefit and in a slump most
lose out. Other economic changes that affect business include changes in the interest rate,
wage rates, and the rate of inflation (i.e. general level of increase in prices). Businesses will
be more encouraged to expand and take risks when economic conditions are right, e.g. low
interest rates and rising demand. One must clearly understand that changes in economy
generate different types of opportunities, which businesses should be vigilant and efficient
to grab and it poses different type of risks which proactively should be dealt.
Input to the System:
Input factors are those tangible and intangible resources which are either converted to
output or are consumed during the process of conversion.
Output of the System:
Output is to be judged from the view points of management and of the employees.
Employees are the integrated part of the organization and are eligible to ripe the benefits of
the success of the company and at the same time will equally be affected by the adverse
results of output of the organization. Feedback is the connecting link between the output
and inputs of all the system and helps to evaluate the system’s performance and correct the
integrations of various factors in case of need.
Feedback:
Every business system must ensure efficient feedback link between out put and inputs.
Feedback has power to keep your organizations live. A positive feedback will help you to
accelerate the speed with which your organization is going ahead in the business while a
negative feedback will awaken you to look into the weaknesses which may have started
creeping in your organization and will help you to deal with them at an early date and
efficiently.
As has been shown in the diagram a business system’s output is judged from
Management’s point of view and also from the Employees’ point of view. Thus we look
forward to receive feedback from both the management and employees.
Feedback for the management is generated by parameters such as Profit, Cash Flow and
Added Value (Goodwill) of the organization in the society. Thus it is the customer in
particular and customer base in general will enable for these feedbacks.
Receiving customer feedback enables a company to correct any issues or concerns
customers may have with the company's products and its services. When customers provide
feedback, a company is able to save money, time and improve relationships with
customers.
Not being in tune with your customers is like living in an alternate reality; the way you
think your customers feel about your product is not always the same as what your
customers really think about your product.
A customer who is not satisfied may tell five or six other people about his bad experience,
which could harm your company's reputation and have an effect on market share and
profits. Feedback allows you to correct these problems.
Some customers will not tell you they are unhappy with your product or service; they will
just stop doing business with you. A situation such as this can be avoided when feedback is
requested.
Feedback allows you to correct product deficiencies and inefficiencies. A defective product
could cause an injury and lead to a lawsuit. Class action lawsuits can cost a company
millions of dollars.
When you receive feedback from customers, it can help management make decisions about
a product or service. Feedback can help determine if a product should be discontinued and
a new product be manufactured and brought to the market.
When you get customer feedback, it allows you to better understand your customers' needs
and concerns. This information can help you go above and beyond the call of duty and
exceed customers' expectations.
Employees’ feedback will ensure they are happy with the compensation, feel secured in
your organization and are able to derive the job satisfaction. Positive feedback from them
will ensure the motivated environment and better work culture and health progress for the
company. Negative feedback calls for an urgent attention, as any negligence on your part
will result into disaster for your company in future. Employees are the real asset for any
company and one can not effort to allow such valuable asset to be eroded without paying
heavy cost for the same.

FACTORS AFFECTING A BUSINESS SYSTEM

 External Internal
Environment Environment
1.​ Ethical, Social & 1.​ Strengths &
Cultural changes Weaknesses
2.​ Technologies 2.​ History & Culture
3.​ Economic Changes 3.​ The Business

Conversion Or Transformation
(Business Systems)

Outputs of the System

Inputs to the (a) Management
System 1.​ Profit
2.​ Cash Flow
1.​ Capital 3.​ Added Value
2.​ Skills
3.​ Raw Materials (b) Employees /
4.​ Labour Workers
5.​ Power 1.​ Job
Security,
2.​ Higher Pay,
3.​ Job
Satisfaction

​
Feedback

BUSINESS SYSTEMS
(Two Basic Functions)
 PRODUCTION ​ ​ ​ ​ ​ ​ MARKETING
All business systems whether manufacturing goods or providing services perform many
organizational (management) functions, however two most basic important functions
among them are Production and Marketing. Although marketing function will have no role
to play if production function do not create product or services; looking from this view
point Production is the most important function for the Business System, however if
product or services produced by production are not marketed / sold to the ultimate
customers, no business can exist and thus Marketing is also equally important function for
any organization. Without marketing the output produced by production will turn out to be
hobby (A hobby is a regularly undertaken activity that is done for pleasure, typically,
during one's leisure time) and not the business. Thus it is very important that the production
must always be guided by the Marketing needs.
As such a production system must always be designed keeping focus on marketing needs
and in the context of overall corporate effectiveness, because even the most efficient
business system is virtually useless if there is no market for its output.
Assigning due importance to the Marketing function; in our subsequent discussions we will
now focus on ‘Production Function’. In order to choose right direction for any activity, it is
always advisable to fix our goal. Goal helps us to derive our Objectives, objectives help us
to derive our Aims, and an aim helps us to Focus. Finally it is this focus which leads us to
achieve synergy of our efforts and helps us for achievement of our goals.

From the above discussion we understand that it is very important for all the production
systems to establish its goals, objectives and aims in the beginning of their operations,
these will ensure focused approach while deputing their finite resources and help achieve
maximization of their objectives and ultimate goals.
Basic Aim of every production system is to “Obtain overall corporate effectiveness”. To
achieve this, every production system must be practically oriented and tailored to suit the
objectives of the company.
Practically Oriented: For example a college is an educational institution and is engaged in
service production of educating the youth in various disciplines. It is pertinent that it is in
proper location, with right kind of infrastructure to cater the educational needs.
Tailored to Suit the Objectives of the Company: This means the college must be
equipped with the facilities suitable for the course it caters to, for example infrastructure of
an engineering college has to be suitable for teaching the engineering subjects with work
shops etc. and a science college must be equipped with the science laboratories.
Both of these considerations will lead towards achieving of the overall corporate
effectiveness.
Following diagram represents aims of a production system integrated with the various
objectives associated with it. A company is considered to be running successfully if it
achieves all its objectives.

AIMS OF A PRODUCTION SYSTEM

Tailored to Suit
Practically Objective of the
Oriented Company

OBTAIN OVERALL CORPORATE EFFECTIVENESS

Maintain Stability & Growth

Optimality in Fulfillment of
Multiple Objectives with
prioritization of objectives
To be Viewed in terms of Short
Term & Long Term Horizons
Combat Uncertain Eventualities
Not Be only Profitable and/or
Efficient but also necessarily
satisfy many more customers
Ability to Adapt
●​External environment
factors of competitors
●​Supply & Demand
●​Trade Unions
●​Banks/financial
institutions
●​Government

Definition of Effectiveness, Efficiency and Economy:

“Effectiveness, Efficiency and economy while engineering the production can be stated
as manufacturing / producing the requisite quantity of product / services, of required
quality, in tune with the predetermined parameters, at the required time, by the best and
most economical method”.
To achieve all the objectives of the production system and to reach to our goal of
effectiveness, and efficiency, and deliver customer satisfaction with the economy, at all
given point of time with the desired level of value addition being obtained perpetually and
for sustainable time, we as an individual and people in our enterprise must develop
following three very important virtues. One who integrates such virtues and practices them
always is bound to succeed in obtaining the over all corporate effectiveness o f the
production system.
Virtues desired for achieving Effectiveness, Efficiency and Economy:
Virtues Desired

1.​ Sincere, Meaningful, Persistent, Scientific & Goal oriented efforts.

2.​ Information* of-planning, system of collecting, correcting & compiling of
comprehensive data.
3.​ These will require thorough knowledge, systematic vision and great deal of
involvement.
(* Information means knowledge gained through study, communication, research,
instruction, etc.)
MULTIPLE OBJECTIVES OF PRODUCTION MANAGEMENT:
MAIN OBJECTIVES:
The main objective of production management is to produce goods and services of the
right quality, right quantity, at the right time and at minimum cost. It also tries to improve
the efficiency. An efficient organisation can face competition effectively. Production
management ensures full or optimum utilization of available production capacity and of all
resources.
Following explains some of important objectives of production management:
1. ​ Producing right kind of goods:
​ To produce desired goods and services as per the estimated manufacturing cost and
minimum inputs of resources. It identifies and produces products, which satisfy the
customers' needs and wants. So, the firm will increase its sales. This helps firm to
achieve its basic objectives of earning profits.
2. ​ Quality objectives:
​ To produce right quality goods and services as per the established standards and
specifications, to ensure that customer satisfaction will always remain our prime focus
while taking quality decisions.
3. ​ Efficiency and Timeliness:
​ Produce goods and services efficiently and as per the decided time schedule, so as to
ensure smooth and efficient operations of the firm.
4. ​ Cost objective:
​ Minimization of production cost and Reduction of wastes by eliminating none value
added activities and inputs. Minimize the use of resources to the optimum level. 4 M's
of resources are Machinery, Materials, Manpower and Money. ​These inputs are to be
used to full extent and judiciously to result minimum cost, quality and time.
5. ​ Maximization of the Profit:
​ Constantly strive for minimizing the total cost of production, improve overall
productivity and in particular improving labour productivity on the production shop
floor, so as to achieve maximization of profit for the organization.
6.​ Capacity utilization:
​ By proper planning and control production management ensures maximum utilization
of installed capacities of plant.
7.​ Environment protection:
​ In today’s world consciousness to protect environment while carrying out production
activities derives great importance and this also become an important objective of
production management.
OVERALL OBJECTIVES / IMPORTANCE IN RELATION TO THE FIRM /
ORGANIZATION:
In addition to the main objectives described above, production management is also
responsible to achieve following overall objectives of the firm / organizations for its
survival and growth.
1.​ Accomplishment of firm's objectives and goals:
​ Production management helps the business firm to achieve all its objectives and goals
2.​ Reputation, Goodwill and Image:
​ By satisfying firm’s customers, it helps firm to enhance its reputation, goodwill and
image. A good image helps the firm to expand and grow.
3.​ Helps to introduce new products:
​ By conducting ongoing Research and Development (R&D) activities, it helps the firm
to develop newer and better quality products. It takes care of positive or negative feed
backs from the market, external and internal environment and ensures necessary
changes in the product and services..
4.​ Supports other functional areas:
​ Production is the heart of any firm. Thus Production Management plays a very vital
role in any firm. It not only supports other functional areas in an organisation but also
help sustain other functions, such as marketing, finance, and personnel. The marketing
department will find it easier to sell good-quality products, and the finance department
will get more funds due to increase in sales. It will also get more loans and share capital
 for expansion and modernization. The personnel department will be able to manage the
human resources effectively due to the better performance of the production
department.
5.​ Optimum utilization of resources and maximization of Capital Utilization:
​ Production management facilitates optimum utilization of resources such as manpower,
machines, etc. so that the firm can meet its capacity utilization objective. This will
bring higher returns on investment (ROI) to the organisation.
6.​ Minimizes cost of production:
​ It tries to maximize the output and minimize the inputs. This helps the firm to achieve
its cost reduction and efficiency objective and improve over all productivity of the firm.
7.​ Helps to face competition: ​
​ Production Management by producing products of right quantity, right quality, and right
price and at the right time and delivering the products to the customers as per their
requirements helps the firm to face competition in the market.
8.​ Expansion of the firm:
​ The Production management helps the firm to expand and grow. This is because it tries
to improve quality and reduce costs. This helps the firm to earn higher profits. These
profits help the firm to expand and grow.
THE IMPORTANCE OF PRODUCTION MANAGEMENT TO CUSTOMERS AND
SOCIETY:
Following points highlight and explains the importance of Production Management from
the view point of customers /consumers.
1.​ Higher standard of living:
​ By conducting continuous research and development (R&D), Production Management
strives to produce new and better varieties of products and offer it to the society this
helps people enjoy a higher standard of living.
2.​ Generates employment:
​ Thanks to the production activities different job opportunities in the country are
created, either directly or indirectly. Direct employment is generated in the production
area, and indirect employment is generated in the supporting areas ​ such as
marketing, finance, customer support, etc.
3.​ Reduces Cost and Improves quality:
​ Because of large-scale production, there are economies of large scale. This brings down
the cost of production. So, consumer prices also reduce. Production management
improves the quality of the products because of research and development.
4.​ Boosting of Economy:
​ Because of production, other sectors also expand. Companies making spare parts will
expand. The service sector such as banking, transport, communication, insurance, BPO,
 etc. also expand. This offers more job opportunities and boosts ​overall economy. It
contributes maximum in GDP factor of the country.

*** *** ***

CHAPTER – 2
PRODUCTION SYSTEM
Production systems are the methods, protocols and procedures used to produce goods and /
or services for the market. It consists of following three stages.

POLICY

PLAN /PLANNING

PRODUCTION
(PRODUCTION FUNCTIONS)

POLICY
The overall specification of production system must commence at Policy Stage by
determining company’s aims in market terms within the corporate strategy. A policy in
general is a principle or rule to guide decisions to achieve rational outcomes of any
organization. A policy is a statement of intent, and is implemented as a procedure or
protocol. Policy will frame the direction and efforts of the organization towards a particular
goal. Policies are generally adopted by the Board of Directors and/or Senior Governing
Body within an organization’s overall Corporate Strategy.
PLAN / PLANNING
To achieve these objectives laid down at policy stage, tool employed is Production
Planning. The future can not be foreseen, It can only be guesstimated (An estimate based
on a mixture of guesswork and calculation) and therefore for obtaining objectives
effectively, economically and efficiently the best course of action among the available
alternatives is chosen and all the pros and cons (advantages and disadvantages), strengths
and weaknesses of available means are weighed and then the course of action is determined
this is termed as planning phase. A good planning will ensure systematic procedure,
improved methodology, and control at appropriate and strategic location to achieve and
attain desired efficiency.
PRODUCTION FUNCTIONS
Once company has formulated the policy and plans the next logical step is to go for
production / Production Functions. Production Function may be defined as the creation
of useful products / services out of various inputs (resources) such as men, money,
materials, machines, management, land etc. For any business organization production
function is the core function. It is the production function which is responsible for creation
of goods and services. Without production function there would be no need for any other
functions such as marketing, finance, or human resource function. It is responsibility for
production function to create the sound and solid base for a production system.
SYSTEM CONCEPT OF PRODUCTION FUNCTIONS:
Production is an organizational function, which is responsible for the management process
intended to convert a set of inputs into a predetermined set of outputs in the form of goods
and services in accordance with the objectives assigned to the management.
The function of production management is putting together inputs of men, materials,
capital, information & energy and transforming them into products and services in the
quantity, quality, time and location that will best meet the organizational objectives.
It is as simple as to ‘convert’ resources ‘inputs’, achieving ‘value addition’ into ‘end
outputs’.
Definition of a System:
A set of inter-related, inter-connected or inter-dependent elements that operates collectively
to accomplish some common purpose or goal, is called “SYSTEM.” (Analogy with an
automobile car explains us concept of a system).
Elements of a System:
All the elements of a system can be classified into two main categories, Abstract elements
and Physical elements. The elements which can’t be seen and touched but their presence
can only be felt are called Abstract (Intangible) and the elements which can be seen and
touched are called Physical (Tangible)
System Concept:
Complexity of production function is best studied by developing a conceptual framework,
which more precisely and effectively ties together all the functional efforts, contributions,
and knowledge with a common goal. This is called “System Concept”. A conceptual
framework is a theoretical structure of assumptions, principles, and rules that holds
together the ideas comprising a broad concept.
The production system of an organization is that part, which produces products of an
organization. It is that activity whereby resources, flowing within a defined system, are
combined and transformed in a controlled manner to add value in accordance with the
policies communicated by management. Establishing such system is capital intensive and
therefore before sinking precious capital to establish such (production) system it is
advisable to develop and conceptualize complete system to be implemented (through a
detailed project report), study and verify in detail all aspects of developed plan and check
the same for any complexity if left in the proposed concept.
Complexity of System:
If a system is considered as complex, a change in one variable / parameter within system
will affect many variables of the system. Thus in a production system, a change in
production rate may affect inventories, hours worked per week, overtime hours, facilities,
layout and so on.
Before implementing any production system it is advisable to develop the system concept
and check it with the complexity left within the system by changing some of the important
parameters. If destabilizes the entire system it is too complex to be implemented. It is
necessary to rework on such concept till all the complexities are removed from the system
and then only investment must be made.
TYPES OF PRODUCTION SYSTEM
Broadly the types of production system are grouped under two categories viz.
1.​ Intermittent production system, and
2.​ Continuous production system.
Now let's discuss in detail each of the above-mentioned categories.
Intermittent Type of Production System:
Intermittent means something that starts (initiates) and stops (halts) at irregular (unfixed)
intervals (time gaps). In the intermittent production system, goods are produced based on
customer's orders. These goods are produced on a small scale. The flow of production is
intermittent (irregular). In other words, the flow of production is not continuous. In this
system, large varieties of products are produced. These products are of different sizes. The
design of these products goes on changing. It keeps changing according to the design and
size of the product. Therefore, this system is very flexible.
Work of Gold Smith and Tailor are some of the examples of the intermittent production
system.
1. The work of a goldsmith is purely based on the frequency of his customer's orders. The
goldsmith makes goods (ornaments) on a small-scale basis as per his customer's
requirements. Here, ornaments are not done on a continuous basis.
2. Similarly, the work of a tailor is also based on the number of orders he gets from his
customers. The clothes are stitched for every customer independently by the tailor as per
one's measurement and size. Goods (stitched clothes) are made on a limited scale and are
proportional to the number of orders received from customers. Here, stitching is not done
on a continuous basis.
Continuous Type of Production System:
In this, the production activity continues for 24 hours or on three shifts a day basis. A steel
plant, for example, belongs to this type. It is impossible to stop the production process on a
short notice without causing a great damage to its blast furnace and related equipment.
Other examples include bottling plant, soft drink industry, fertilizer plant, power plant, etc.
Mass production and Flow (Process) production belong to continuous type.
 TYPES OF PRODUCTION SYSTEMS

Intermittent​ ​ ​ Continuous

Job​ ​ ​ Batch​ Mass​ ​ ​ Process

(A)​ JOB TYPE PRODUCTION SYSTEM:

​ A Tailor​ ​ ​ Group of Carpenters A Car Mechanic

Salient features of Job Production:
1.​ Job production is the manufacture of a single complete unit by an operator or a group
of operators.
2.​ Goods are produced according to definite customer requirements.
3.​ Manufacturing status depends on the receipt of specific items.
4.​ There is no assurance of continued demand.
5.​ This type of production is intermittent in nature.
Specific Characteristics of Job Production:
1.​ Resources in a job shop are general rather than specialized.
2.​ Basic materials with different specifications can be used in many different jobs.
3.​ Equipments should be adoptable to different users/customers.
4.​ The skills of employees/operators would be wide enough to enable them to work on
any job.
Limitations of Job Production:
1.​ Since each job is distinct in nature hence machines are general purpose and may not be
economical or efficient.
2.​ Machines need to be set up very frequently to suit needs of variety of jobs. This may
result in loss of production time.
3.​ Job execution location many times may be out of manufacturing unit.
4.​ As the resources such as manpower, process machine tools are employed on varieties of
non standard jobs it may not be used economically.
5.​ Productive techniques like work study; value analysis etc. may not be possible to be
introduced.
Examples: A Tailor shop, Carpentry job of making furniture, A Car Mechanic - garage,
Bridge building, Ship building, Work of installing capital plant in factories, etc…
(B)​ BATCH TYPE PRODUCTION SYSTEM:
In the batch production the work on any production is divided into operations, it means
that the work content of each unit is broken into a number of operations not
necessarily of equal work content, and the operators are again divided into groups. The
first group will then - complete the first operations of all the units, passing the batch as a
whole on the next group and so on until the manufacture is complete on that operation.

Readymade garments production unit Pharmaceuticals production unit

Salient features of Batch Production are as hereunder:
1.​ Some degree of specialization of labour is possible.
2.​ Capital investment is low.
3.​ The planning required to ensure freedom from idle and waste time is considerable.
4.​ The planning of resources can be done sufficiently and adequately, however
possibility of underutilization of certain machines and man power can not be ruled
out.
5.​ Cost minimization is one of the criteria for considering the size of a batch.
6.​ The production control department can derive greatest benefits
 Example: Pharmaceutical Production, Uniform Making, Ready Made Garments etc.
(C)​ MASS TYPE PRODUCTION SYSTEM:
This type is adopted when one or a few standard products are to be manufactured on
large scale. In this system demand for the product is continuous and ongoing. As demand
pattern is known well in advance all the resources can be planned very well.

Hardware Production Unit Electric Lamp Production Unit

Salient features of Mass Production are as hereunder:
1.​ Planning for optimum utilization of resources can be ensured.
2.​ A product wise layout and balance production line can be designed.
3.​ Semiskilled or even unskilled labour can be utilized; very small numbers of skilled
workers are required.
4.​ High output rating automatic machines can be utilized.
5.​ Maintenance or breakdown must be attended most efficiently and promptly
otherwise it may result into heavy loss of production.
6.​ There is lot of scope for introducing productive techniques to increase productivity.
7.​ Product quality can be better controlled in this system.
Example: Hardware items like - Washers, Screws, Springs etc., Electrical products like
-Fans, Lamps, Switches, Electronic Components, Dry Battery Cells. Etc.
(D) ​ PROCESS TYPE PRODUCTION SYSTEM:
 Reliance Industries’ Refinery at Jamnagar A Chemical Production Plant
This system is an extended form of mass production in which manufacturing is carried
on continuously through a uniform sequence of operations.
Salient features of Process Production are as hereunder:
1.​ Process production calls for the setting up of highly sophisticated automatic machines
as far as possible.
2.​ In this system usually one principal raw material is transformed in to several products
(disintegration type of industry) at different stages of the operations (such as in crude
oil refineries) or several raw materials (integration type of industry) are integrated into
one principal product (such as in chemical plants).
Example: Petroleum Refining, Heavy Chemicals etc.

Comparison of various Production types for

Production Volume Vs Variety & Capacity Vs Flexibility
We can observe from the schematic diagram that (i) Job Type will offer highest production
varieties however production volumes will be lower (ii) where as Process Type will offer
minimum or no varieties but generate very high volumes (iii) flexibility will reduce as you
go from Job to Process Type (iv) where as capacity will increase as you go from Job Type
to Process Type.
FUNCTIONS OF PRODUCTION MANAGEMENT & PRODUCTION CYCLE:

The functions of production management were limited and also simple in the earlier days
where production was conducted on a low scale using very simple methods and techniques
and products manufactured were very simple.
With the progress of time new technologies have developed resulting into advance products
with large volume being produced. This has necessarily increased the importance of the
production management at the same time added responsibilities.
CLASSIFICATION OF MOST IMPORTANT DECISION AREAS OF
PRODUCTION MANAGEMENT (FOR EFFICIENT AND EFFECTIVE
PRODUCTION FUNCTIONS):
Decisions in relation to Production and Operations management functions can broadly be
divided into the following four areas:
1.​ Technology Selection & Management.
2.​ Capacity Management.
3.​ Scheduling/Timing/Time Allocation.
4.​ System Maintenance.
1. Technology Selection & Management:
Technological Selection is a long term decision and one do not get the opportunity often to
have the selection of latest and new technology. In today’s competitive business
environment this decision derives more significance as it is often being observed that
companies with the latest technology at their fold are winners and have higher and faster
growth potentials.
If you miss the bus to select the appropriate technology while starting a new business /
project, it will be long time before you get the opportunity again.
Apart from selecting the best technology at the initial stage one must always remain update
with this external factor to evaluate the gap getting created between the technology at your
disposal and where the external world has reached at. Knowledge of such gap will motivate
you to take early initiatives to upgrade your self periodically and remain with the fast
changing external world.
Once you take the right decision to select the right technology, it is not sufficient, it is
important that you manage it well as well. Having latest and updated technology but not
able to manage it well will make under utilization of the potential of such technology and
probably you may not maximize the benefits.
Thus technology selection and management decisions are particularly more vital in present
day business environment.
2. Capacity Management:
The capacity of a production unit (e.g. machine, factory) is its ability to produce or do that
which the customer requires. In production and operations management, three types of
capacity are often referred to:

The capacity that can be made available to influence the planning of

Potential senior management (e.g. in helping them to make decisions about
Capacity overall business growth, investment etc). This is essentially a long-term
decision that does not influence day-to-day production management

The amount of production capacity that can be made available in the

Immediate
short-term. This is the maximum potential capacity - assuming that it is
Capacity
used productively
 An important concept. Not all productive capacity is actually used or
Effective
usable. It is important for production managers to understand what
Capacity
capacity utilization is actually achievable.

Measuring capacity
Capacity, being the ability to produce work in a given time, must be measured in the unit
of work.
For example, consider a factory that has a capacity of 10,000 "machine hours" in each 40
hours a week. This factory should be capable of producing 10,000 "standard hours of
work" during a 40-hour week. The actual volume of product that the factory can produce
will depend on:
●​ The amount of work involved in production (e.g. does a product require 1, 5, 10
standard hours?
●​ Any additional time required in production (e.g. machine set-up, maintenance).
●​ The productivity or effectiveness of the factory
Constraints on capacity:
In capacity management there are usually two potential constraints - TIME and
CAPACITY
Time may be a constraint where a customer has a particular required delivery date. In this
situation, capacity managers often "plan backwards". In other words, they allocate the
final stage (operation) of the production tasks to the period where delivery is required; the
penultimate (the second last) task one period earlier and so on. This process helps identify
whether there is sufficient time to meet the production demands and whether capacity
needs to be increased, albeit (although) temporarily.
3.​ Scheduling/Timing/Time Allocation:
A schedule is a representation of the time necessary to carry out a particular task. The best
example to understand is the college time table. Imagine if proper time table is not drawn
then how coordination of class room, faculties and students would work?
Similarly a job schedule shows the plan for the manufacture of a particular job. It is
created through "work / study" reviews which determine the method and operations time
required.
Most businesses carry out several production tasks at one time - which entails
amalgamating several job schedules. This process is called "scheduling". The result is
known as the production schedule or factory schedule for the factory/plant as a whole.
In preparing a production schedule, attention needs to be paid to:

▪​ Delivery dates (when are finished products due?)

▪​ Job schedules for each relevant production task

▪​ Capacities of production sections or departments involved

▪​ Efficiency of these production sections or departments

▪​ Planned holidays

▪​ Anticipated sickness / absenteeism / training

▪​ Availability of raw materials, components and packaging

Timing aims to organize proper sequencings of each job based on its priority, and allocation
of time relates to the availability of facility for a particular job depending upon its cycle
time.
Thus Scheduling / Timing and Time Allocation are totally interrelated and a mess up in the
same will result in to gross inefficiency and unsatisfied customers, with increasing costs
and reducing productivity.
4.​ System Maintenance.
When we talk about System Maintenance, we are targeting all the production systems such
as plant’s infrastructure, buildings, machineries, equipments, tools, communication net
work, computer systems, electric supply and even men power, in short all the facilities
which help to run the production smoothly.
Objectivity of planned maintenance is to increase the availability factors of all such
facilities to maximum (ideally 100%), by reducing the break down time.
System maintenance is a planned maintenance concept developed over a span of time, and
is made up of numerous functions, all designed to compliment each other, improve the
effectiveness of maintenance through the use of systematic methods and plans. The
primary objective of the maintenance effort is to keep equipment functioning in a safe and
efficient manner. This allows production to meet production targets with minimum
operating cost.
PRODUCTION CYCLE
Some of the basic functions of the production management which constitute
Production Cycle are as follows:
1.​ Design and development of production process.
2.​ Production planning and control.
3.​ Implementation of plan and related activities to produce the desired output.
4.​ Administration and co-ordination of the activities of various components and
departments responsible for producing the necessary goods and services.
5.​ Monitoring and controlling of men, machineries and materials.
6.​ Developing system of monitoring through feed back.
7.​ Comparing results and
8.​ Taking corrective actions.
In short Production Cycle consists of
Planning – Operations – Control.

1. Planning.

​ ​ ​ ​ 3. Control 2. Operations

1.​ PLANNING:
Effectiveness and Economy while engineering the production can be studied as
manufacturing the required quantity of a product of required quality in tune with the
required time by the best and economical method. To realize this objective the tool
employed is known as production planning.
PLANNING

‘Insight’ ‘Experience’​ ‘Feelings’​ ‘Ideas​ ‘Market’ ‘Resources

‘Foresight’​ ​ ​ ‘Objectives’​ regarding​ & disposal /
​ ​ ​ ​ ‘Assumptions’ kind of​ ‘Economy’ allocation’
​ ​ ​ ​ ‘Risks’​​ business’

Choice of Rational Course of Action ​

Effects on people outside business

Effects on Business

Action Plan or Plan for Operation

​
Above schematic diagram represents a generic planning system and some of the most
important factors to be integrated for developing the action plan in general for establishing
any production / operations system.
While designing the corporate planning and control system it is indeed needed to chart out
both, the long range and short time plans, programmes, procedures and policies using all
the insight, foresight and experience at your disposal. It should take care of feelings,
objectives, assumptions and risks; it should be planned keeping in mind the kind of
business (like seasonal or otherwise). It should utilize inputs of information from market
and economy, in short, utilize all information and input at your disposal. It should consider
resources disposal / allocation for various activities.
2. ​ OPERATIONS:
The second phase is operations. The production plan set the standard. The actions are
performed in tune with these pre-set details in this phase.

Quality Process ​ Capacity Inventory Work force

●​ Quality: It is an important operations responsibility, which requires total organizational

support. Quality decisions must ensure that quality is built into the product in all stages
of production.
●​ Process: These decisions determine the physical process or facility utilized to produce
the product. The decisions include type of equipment and technology, process flows,
layout of facilities etc.
●​ Capacity: Capacity decisions are aimed at providing the right amount of capacity of
the right place, at the right time. In short run, available capacity must be allocated to
specific tasks and jobs in operations by scheduling people, equipment and facilities.
Long run capacities are determined by the size of the physical facilities, which are built.
●​ Inventory: These decisions determine what to order, how much to order and when to
order. Inventory control systems are used to manage materials from purchasing, raw
materials through semi-finished products or work in process to finished products.
●​ Work Force: People who make the product are ultimate to any production system
without whom nothing will be produced. Hence this is area of very crucial decisions. It
includes selection, hiring, firing, supervision, training, and above all compensation.
Managing work force in a creative, productive and humane way is key task for
operation.
3. ​ CONTROL:
It is always desirable to compare where we are standing at present and where we want to go and accordingly corrective action can be
initiated to bridge the gap.
 CONTROL

●​ Monitoring performance through feedback.

●​ Comparing results with pre-set targets.
●​ Corrective actions.

*** *** ***

CHAPTER – 3

PRODUCT DEVELOPMENT
PRODUCT & PROCESS DESIGN
CLASSIFICATION
PRODUCT DEVELOPMENT
Definition of Product Development:
Product Development means the overall process of strategy, organization, concept
generation, product and marketing plan creation and evaluation, and commercialization
of a new product.
Product development is the process of designing, creating and marketing new products or
services to benefit customers. Sometimes it is also referred to as new product development.
The basic activities in this are focused on developing systematic methods for guiding all
the processes involved in getting a new product to market.
An integral part of any organization for their business growth strategy involves the creation
of innovative products and services. This helps them to achieve competitive market
advantages and to meet with their customers’ needs and expectations. New product
development is a challenging, complex undertaking that involves critical interdependent
activities and considerations, including, but not limited to marketing, research,
development, risk assessment, cost analyses, quality, regulatory compliance, launch
preparation, commercialization, cross-functional collaboration, corporate strategy, portfolio
management and resource allocation.
Product development involves either improving an existing product or its presentation, or
developing a new product to target a particular market segment or segments. Consistent
product development is a necessity for companies striving to keep up with changes and
trends in the marketplace to ensure their future profitability and success. A competitive
product development strategy should include a company-wide commitment to creating
items that fulfill particular consumer needs or characteristics.
These characteristics might include consumers' desire for the following:
●​ Products that are high-quality or low-cost;
●​ Products that provide the consumer with speed or flexibility; or
●​ Products that offer some other form of differentiation that posits them a desirable
purchase.
How to find when a new product is needed for our company?
It is crucial to diagnose a problem with existing products as early as possible before we
loose our market share. We need to identify symptoms of a declining product line to help us
in advance to do something about the problem before it's too late. Not all the symptoms
will be evident in every situation, but one can start suspecting their product line when more
than just one or two of following symptoms crop in.
Symptoms of a declining product line:
1.​ We are experiencing slow growth or no growth.
2.​ Our top customers are giving us less and less business.
3.​ We find our self competing with companies we have never heard of.
4. ​ We are under increasing pressure to lower our prices.
5. ​ We are experiencing higher-than-normal turnover in our sales force.
6. ​ We are getting fewer and fewer inquiries from prospective customers.
7. ​ Customers are asking for product changes but we can't or don't want to make.
8. ​ Some of our competitors are leaving the market.
When we have taken a policy decision to go for a new product based on any of the above
circumstances and / or for reasons of growth and development of the business, we will have
to initiate actions in a planned way through stage wise activities of product development.
Stages of Product Development
Following points briefly describes general stages for development of a product. Every stage
demands highly skilled and professional inputs and elaborative and thoughtful actions and
efforts before going to the next stage. The success of the developed product depends on
how much matured efforts have been invested in each of these stages. This is a very
challenging task.
1.​ Market Research: It probes the market in attempt to ascertain the need for a new
product.
2.​ Design for a Prototype: It is prepared based on technical research and information, (a
prototype is an early sample, model, or release of a product built to test a concept or
process).
3.​ Production of Prototype: Based on design of the proto type, prototype is made to
develop and evaluate the product design. Well developed prototype also helps to
prepare catalogues etc., getting market feedback, experimenting and testing.
4.​ Design Work for Product: Based on the feed back from market, experimentation and
testing carried out using prototype, design work for actual product to be produced is
initiated and finalized with due caution and care and integrating inputs and suggestion
from all the sources.
5.​ Development Work: Once the product design is prepared based on the experiments
and studies carried out on proto type, action is started to develop a designed product.
6.​ Pre-Production: During this stage all the components of product as nearly as designed
are produced under as much as possible actual factory conditions using the tools,
equipments, raw materials, which ultimately are to be used on the production, line.
These initial samples are very critically tested with micro accuracies for Type Tests and
Performance Tests. Some of them are sent to customers for Field Trial Tests and
feedbacks and criticisms. Based on test results, feed back from the field trials, and
criticisms from customers, necessary corrections and improvements in the product are
being carried out at this stage.
(Type Tests are conducted on initial samples of product to confirm the design
specifications. Once the design is frozen after required improvements, these tests are
not repeated on other products of same type).
The product after all the above steps and after all the corrections is frozen for design
and other parameters and then put into full production.
7.​ Manufacturing: Initially a predetermined build up of finished products is
manufactured to ensure and take care of contingence, rejection etc. This is a confidence
building stage for all concerned.
Marketing can simultaneously start of the initial orders. The goods then leave for the
warehouse and become the responsibility of the sales organization.
Even after all the above steps and pre-production stage all bugs are not ironed out and it
is advisable to plan for initially low level to have the damage control within
manageable limits.

Market Research

Design for a Prototype

Design Work for Product

Development work

Production of Prototype

Pre – Production
 Manufacturing

RESEARCH DEVELOPMENT AND DESIGN OF A PRODUCT

As stated earlier new product design and development is a crucial factor in the survival of a
company. Firms must continually revise their design and range of products in an industry
that is changing fast. This is necessary due to changing preference of customers, continuous
up - gradations and change in technology and development and to meet with the
competitions in the market.
What are Research, Design and Development?
To keep ahead of the market you need to check you're meeting customer needs and
anticipate what customers may require in future. Research, design and development are the
key to this process, whether you sell goods or provide services. You can do your own
research, design and development in-house or outsource it to external contractors.
Research:
Research can be defined as the search for knowledge, or as any systematic investigation,
to establish novel facts, solve new or existing problems, prove new ideas, or develop new
theories, usually using a scientific method.
The initial stage of research for product development involves assessing the current and
future needs of customers and suppliers - asking for their views and feedback and carrying
out market research. Once you understand customers' needs and your marketplace, you can
identify:
●​ Modifications to your product or service
●​ New, commercially viable products or services
●​ Improvements to business processes that will benefit customers
Development:
Research will reveal ideas and markets for potential new products or services. The
development process tests these ideas, demonstrates whether they are achievable and helps
turn your ideas into reality. The process should examine all the potential risks and hurdles
you will need to overcome to get the product to market. For example, it should look at
whether the product meets a market need and whether it will sell at the price needed to
make profit. It involves defining the specification and design of your product or service
through drawings, models or prototypes.
PRODUCT SELECTION
(STEPS OF IDENTIFYING THE PRODUCT FOR MANUFACTURING)
It is often good to identify a number of criteria upon which product selection is based.
Marks and/or Weightage can be given to each criterion to achieve an objective evaluation
for the final selection from amongst the various ideas generated through thorough market
research.
As such we can consider four basic steps for product/venture selection. These are idea
generation, evaluation, choice and elimination of causes of product failure
Idea Generation: Product ideas or investment opportunities come from different sources
such as business/financial newspapers, research institutes, consulting firms, natural
resources, universities, competitors. Etc…
The starting point for idea generation could be a simple analysis of the business’s strengths
and weakness. Ideas could also be generated through brainstorming, desk research and
various types of management consensus procedures.
Many organizations conduct extensive Market Research in order to get the knowledge
about the market’s needs. Market research is a key factor to get advantage over
competitors. Market research provides important information to identify and analyze the
market need, market size and competition and in turn help company to develop the idea
about new product to be introduced in the market.
Evaluation: Once numbers of ideas for the new product are generated, screening of these
product ideas is the next step till evaluation process is completed. Criteria for evaluation
can be such as potential value of the product, time required for the development of the
product, money / capital investment for development of the product and the kind of
equipments and tools required, fitting of potential product into the business’s long-range
sales plan and availability of qualified people to handle its production and marketability
need be thoroughly considered.
Each identified product / investment opportunity needs to be adequately evaluated and
short listing of some of the products after preliminary evaluation must be done. For all such
short-listed products a pre-feasibility study of the market for the product, technical and
financial aspect is necessary at this stage to have a clear picture of the associated cost and
benefits. A pre-feasibility is a preliminary version of a feasibility study. It is similar to a
feasibility study except that it is less detailed. It is usually carried out for large and complex
product / project to determine whether to proceed to the more elaborate feasibility study. A
detailed feasibility study should be made before finally selecting a product.
Choice: Through above steps finally a choice is made of product which has been found to
be commercially viable, technically feasible and economically desirable. At this stage,
necessary machineries are set in motion.
Elimination of Causes of Product Failure:
Once a choice of product is made, manufacturer must study and eliminate causes of
product’s failure, before final selection for the manufacturing. A wrong choice when made,
often leads to product failure.
Product failure may be caused as a result of one or combination of the following:
1.​ Management oversight during the basic planning stages – initial research may be either
inadequately done or bungled in the interpretation.
2.​ Subtle changes in the market. For instance, competitor may introduce a competing
product into the market unexpectedly.
3.​ Lack of sound market appraisal
4.​ Product problems and defect e.g. the manufacturing of a product that is too costly or too
complicated.
5.​ Inadequate marketing support. For Instance, the company may have rated the product
so high in the market that they cut back on promotion.
6.​ Lack of consumer education about the product.
STRATEGIES FOR NEW - PRODUCT INTRODUCTION
There are three fundamentally different strategies / ways to introduce new products. These
approaches are called market pull, technology push, and inter - functional.
Market Pull:
According to this view, the market is the primary basis for determining the products a firm
should make, with little regard for existing technology. A firm should make what it can
sell. The customer needs are determined, and then the firm organizes the resources and
processes needed to supply the customer. The market will “pull” through the products that
are made.
Technology Push:
In this view, technology is the primary determinant of the products that the firm should
make, with little regard for the market. The firm should pursue a technology-based
advantage by developing superior technologies and products. The products are then pushed
into the market, and marketing’s job is to create demand for these superior products. Since
the products have superior technology, they will have a natural advantage in the market and
the customers will want to buy them.
Inter - functional View:
This view holds that the product should not only fit the market needs but have a technical
advantage as well. To accomplish this, all functions (e.g., marketing, engineering,
operations, and finance) should cooperate to design the new products needed by the firm.
Often this is done by forming cross-functional teams that are responsible for development
of the new product. This is the most appealing of the three views but also the most difficult
to implement. Often cross-functional rivalry and friction must be overcome to achieve the
degree of cooperation required for inter - functional product development to succeed. If it
can be implemented, inter – functional approach will usually produce the best results.
PRODUCT & PROCESS DESIGN
Designing is the most important & crucial stage of production system. Many companies
have a separate Design & Development department. Services of Industrial Designers are
being taken for the development of product & process designs. This is a pre-requisite stage
before initiating the production.
Design indicates the determination of size, shape, standard and pattern of the products to be
produced. It also includes functional parameters and technical specifications.
Functional designs are transformed to product design so as to make manufacturing easy and
feasible. Product designs are further integrated to process designs to establish production
systems.
Computers have proved to be boon to the designing industry and CAD (Computer Aided
Designs) and other specially developed soft wares are available to help the product
designers and drafts men. It not only helps in efficiency of designing but also for better
accuracies and selection of best designs apart from storing and retrieving of the drawings.
In business and engineering, new product development (NPD) is the complete process of
bringing a new product to market. A product is a set of benefits offered for exchange and
can be tangible (that is, something physical you can touch) or intangible (like a service,
experience, or belief). There are two parallel paths involved in the NPD process: one
involves the idea generation, product design and detail engineering; the other involves
market research and marketing analysis. Companies typically see new product development
as the first stage in generating and commercializing new product within the overall
strategic process of product life cycle management used to maintain or grow their market
share.
Designing aspects are mainly divided in two important avenues as follows:
DESIGN

PRODUCT DESIGN ​ ​ ​ ​ PROCESS DESIGN

Though the designing includes designs of tangible and also intangible products, we will
focus on the design of utility products which are tangible in nature. Designing of service
products (Intangible) requires complete different set of considerations.
Following illustration will give you bird’s eye view and broad outlook about the various
concerns and considerations while designing a new product:

Product Design: Following schematic diagram highlights some of the important aspects of
the new product’s design.

PRODUCT DESIGN
​

TECHNICAL PACKAGING
FUNCTIONAL AESTHETIC & &
PRODUCTION MARKETING

FUNCTIONAL DESIGN:
Why customer spends money and buys a product? It is to satisfy their needs. By
performing the desired functions, customer wishes the product to satisfy their needs, for
which they have spent their money. For e.g. one buys washing machine so that it can help
them get their clothes washed or buys an air conditioner so that it can cool the environment
as per the customer’s wish, in short customer exchanges money with the product simply to
get the desired function being carried out by the product. The aim of the functional design
is of responding to such needs or desires of the customer who will use an item or a product
in a way that allows their needs or desires to be met. Functional Designs of products
ensures that product will perform assigned tasks to meet the multiple needs of the
customers.
In order to create a product that works, there are some basic questions one should ask, such
as who will be using it, and how they’ll be using it? What need of customer the product
will satisfy? In short you need to identify the product’s goal for preparing its functional
design. Take for example the screwdriver, the goal of a screwdriver is pretty
straight-forward, to drive screws, or a simple ball point pen the function of which is to
smoothly write as expected by the customer. The science of the design of the product
keeping in mind its ultimate customer is known as QFD (Quality Function Deployment).
AESTHETIC DESIGN:
The term ‘aesthetics’ is broadly used to describe the characteristics of the appearance of a
design, the concepts of ‘style’, ‘fashion’, ‘taste’ and ‘originality’ are often connected
with aesthetics’. A style or fashion refers to designs which possess a few recognizable
common characteristics (e.g. Art Deco), while taste refers to personal preferences,
sensitivity or appreciation of certain type of beauty or style.
If you are confronted for a choice between two products which are almost same from
functional, cost, technicality, durability, brand image and several other factors of similarity,
your choice will be decided by its aesthetic appeal. Thus the next important aspect of the
product’s design after functionality is to give it appealing aesthetics to differentiate your
product from one to another and those of the competitors to give your customers wider
choice to select from.
For e.g. if you visit a departmental store for purchasing a fashion garment, you would find
several dresses with the same price, same brand, same clothe and several other similarity,
however you will select the one, which will appeal you with its aesthetics.
TECHNICAL AND PRODUCTION
The technical (design) aspects are concerned about the durability, reliability,
maintainability and consistency of the functionality of the product to assure ‘value for
money’ to the customer. It tries to make the product convenient to use and user friendly. It
takes care of the safety factors for the users of the product.
It deals with all kinds of technical aspects of the products such as material’s and
component’s selections, specifications, tolerances, quality aspects, compliance with all the
statutory, mandatory and your own company’s standards, your company’s brand image,
efficiency and effectiveness of the product for the designed functions.
For e.g. what should be the specification of the cable for an electric iron.
Production design deals with the conversion of the functional, aesthetic and technical
design from the view point of feasibility and ease of production, cost competitiveness of
the production process, productivity of the production.
For e.g. while giving the aesthetic to the product, the designer may create such artifacts
which may be good for making (fabricating) an individual product, but when it comes to
the mass production it may not be feasible. It is the interaction between the aesthetic
designer and production designer that you may be able to give the final shape to your
product.
PACKAGING AND MARKETING
Packaging is the science, art, and technology of enclosing or protecting products for
distribution, storage, sale, and use. Packaging also refers to the process of design,
evaluation, and production of packages. Packaging can be described as a coordinated
system of preparing goods for transport, warehousing, logistics, sale, and end use.
Packaging contains, protects, preserves, transports, informs, and sells. It is often observed
that customer’s first encounter with the product is through its packing and this aspect
emphasis necessity of good aesthetic designs for the packaging. A good design of package
gives the convenience to carry home the product by providing excellent handles on the
boxes.
Many types of symbols for package labeling are nationally and internationally
standardized. For consumer packaging, symbols exist for product certifications,
trademarks, proof of purchase, etc. Some requirements and symbols exist to communicate
aspects of consumer use and safety, for example the estimated sign that notes conformance
to EU (The estimated sign (℮) (also referred to as "e-mark") is a mark that sometimes can
be found on pre-packed goods in Europe. Similarly “ISI’ (Indian Standard Institute) symbol
on the package indicates that the product complies with the ISI standards and is certified as
ISI product. The e-mark indicates that the packaging is filled according to the European
Directive), weights and measures accuracy regulations. Examples of environmental and
recycling symbols include the recycling symbol, the resin identification code and the
"Green or Red Dot" to indicate the Vegetarian or Non Vegetarian products.
Bar codes, Universal Product Codes, and RFID (Radio-frequency identification) is the
use of a wireless non-contact system that uses radio-frequency electromagnetic fields to
transfer data from a tag attached to an object, for the purposes of automatic identification
and tracking
Labels are common to allow automated information management in logistics and retailing.
Country of Origin Labeling is often used.
Packaging may be looked at as being of several different types. For example a transport
package or distribution package can be the shipping container used to ship, store, and
handle the product or inner packages. Some identify a consumer package as one which is
directed toward a consumer or household.
Shipments of hazardous materials or dangerous goods have special information and
symbols as required by UN, country, and specific carrier requirements. Two examples are
below:

​ ​
With transport packages, standardized symbols are also used to communicate handling
needs. Some common ones are shown below.
 1 2 3 4​ ​ 5

​ 6​ ​ 7​ ​ ​ 8 9
1. Fragile, 2. Do not use hand hooks, 3. Keep this way up, 4. Keep away from sunlight, 5.
Keep away from water, 6. Centre of gravity, 7. Clamp as indicated, 8. Do not clamp as
indicated, 9. Handle with care.
Following are some of the statutory/ other requirements in relation to the packaging.
1. Country of origin.
2. Ingredients (listed in order of amount).
3. Weight or Volume.
4. Instructions for use (including safety hazards).

In addition food products must also contain:

5. Manufacturers name, address and date of manufacturing.

6. Name and description of the food.
7. Nutritional information.
8. Storage and cooking instructions (to include shelf life).
9. ​ MRP (Maximum Retail Price inclusive of all taxes)

MARKETING designs are for products, advertising, marketing and promotion.

The present globalized marketing scenario tells us that product marketing is very important
for any business. It helps in increasing the sales volume of the product. Your product
advertisement should be something unique that can grab the attention of viewers and
compel them to think over the product. There are creative ads to market your products and
services, which you might have seen. The innovative approach of a marketer and designer
together creates magic that directly effects viewers and compel them to become a user of
that product. It is well said that marketing and selling a product is an art that requires
creative approach and that’s why it is stated that most graceful ads are those which are most
creative. It includes both print and electronic media.
Marketing designs among other things include designs of advertisements, product leaflets,
catalogues, product manuals, instruction books, guarantee / warrantee cards, etc.

Factors to be considered in designing of the product:

1.​ Product should be fashion leader and not fashion follower.
2.​ It should utilize as far as possible standard parts and aim at simplifications and
diversification of the product.
3.​ It should be attractive enough to draw the attention of the customers and have utility,
cost effectiveness & salient USP (Unique Selling Points).
4.​ Introduction of New Models at regular interval helps in expanding customer base and
establishing better Brand Equity and good will for the company. Normally it is seen that
products are designed by adoption of concepts from leaders in the industries, however
large industries have their own R & D departments and do huge investments to be
innovative and industry leader.
5.​ Selection and optimizing of varieties & models of products to support the marketing
and yet remaining economic in production is a challenge to be met by the production
management. It is a corporate decision and involves discussions with marketing,
finance, procurement & engineering departments. It takes care of factors like product
life cycle and break-even point analysis.
Steps Involved In Product Design:
01​ Visualization of need for the product in consultancy with the marketing department and
market research done. Marketing department makes and submits a brief on the product
to be designed to the design department.
02​ Preparation of schematic drawings and aesthetic design and design’s portfolios
prepared to take corporate feedback and approvals.
03​ Preparations of engineering drawings, technical specifications, short listing of
components and preparing of bill of inventories with cost projections and other details.
Preparations for proto type designs.
04​ Reviewing the design in relation to Cost analysis, value analysis, miniaturization,
maintenance and reparability. Improvements, corrections and freezing of the designs.
05​ Design & development of tools, jigs, fixtures and other production accessories and
preparations of drawings and specifications etc for the same.
06​ Preparation of PERT (Programme Evaluation & Review Techniques) charts and CPM
(Critical Path Method) charts also known as network analysis are drawn to have overall
control on the product development work.
07​ Designing of packaging and marketing portfolios and literature etc. to start
simultaneously with other developments.
08​ Final cost studies and pricing carried out in consultancy with the procurement and
costing departments.
Process Design:
While product design concerns itself with the Design & Development of the product,
Process Designs defines the steps and processes in sequential order, detailing all the inputs
and specifications of tools, machines, operations and/or processes to produce the desired
product with the shortest possible route and best of engineering practices so as to meet the
objects of quality, quantity and economy in the defined time frame.
It also ensures best possible layout for the machines, material and men power to achieve
highest degree of efficiency in the production process with the least degree of rejections
and wastages of material, labour and time, thus ensuring optimum utilization of production
capacities.
Process design is the most important step of the production system and requires best of the
engineering expertise, knowledge and management. It must take care of all the marketing
needs including short term and long-term corporate goals and visions of the company.
Total capital exposure and layout of facilities have direct relativity with the process design.
Thorough study and knowledge of latest technological developments in the field is a
prerequisite to process design.
In nutshell adoption of a particular process design is the most important and crucial
decision of the production management.
LEVELS OF PRODUCT
Levels of a Product are a marketing concept:
Basically, when we buy a product, we are not buying one product but we are buying three
levels of a product. They are as follows:
1.​ Core Product
2.​ Actual Product and
3.​ Augmented Product.
For most of the people a product is simply the tangible, physical entity that they may be
buying or selling.
Let us consider that we buy “a new car” (The Product). When we buy a car, the product is
in fact more complex than we first thought.
In order to understand this complexity, we need to explore the nature of the product further,
let’s consider it as three different products - the CORE product, the ACTUAL product,
and finally the AUGMENTED product. These are known as the 'Three Levels of a
Product.'
Let us now understand as to what is the difference between the three products, or more
precisely 'Three Levels of one Product’?
The CORE product is not the tangible physical product. (In fact it is intangible product)
You can't touch it. That's because the core product is the BENEFIT of the product that
makes it valuable to us. In the car example, the benefit is convenience i.e. the ease at which
we can go where we like, when we want to. Another core benefit is speed since we can
travel around relatively quickly.
The ACTUAL product is the tangible, physical product. We can get some use out of it.
Such as pleasant colour and aesthetics, comfortable seating etc., again it is the vehicle that
we test drive, buy and then collect.
The AUGMENTED product is the non-physical part of the product. It usually consists
of lots of added value, for which we may or may not pay a premium. So when we buy a
car, part of the augmented product would be the warranty, the customer service support
offered by the car's manufacture, and any other after-sales services.

(Three levels in case of a car - Augmented Products are Warranties, Customer Care, Finance, Installation, Services, and
Delivery. Actual Products are Quality, Colour, Style, Branding, and Fashion. Core Product is Benefit)

PRODUCT CLASSIFICATIONS
Marketers have traditionally classified products on the basis of its characteristics such as A)
Durability, B) Tangibility, and c) Use (Consumer or Industrial / Business), and
D) Marketing View Point as shown in the schematic diagram.
Each product type has an appropriate marketing-mix strategy.

[A] Durability and Tangibility of Products:

Products can be classified into three groups, according to durability and tangibility:
1. ​ Nondurable goods – are those tangible goods which are normally consumed in one or
a few uses, like milk, bread and soap. Because these goods are consumed quickly and
purchased frequently, the appropriate strategy is to make them available in many
 locations, charge only a small markup and advertise heavily to induce trial and build
preference.
2. Durable goods - are those tangible goods that normally survive many uses, like
Refrigerators, Machine tools, and Clothing. Durable products normally require more
personal selling and services command a higher margin and require more seller
guarantees.
3. ​ Services - are intangible, inseparable, variable, and perishable products. As a result,
they normally require more quality control, supplier credibility, and adaptability.
Examples include haircuts, legal advice, and appliance repairs.
[B] Consumer Products:
Based on sustainability, the products are also classified by whom and for what these
products are consumed. Based on these criteria, the product can be differentiated Consumer
Products and Industrial / Business Products. These groupings are based primarily on
characteristics of buyer’s purchasing behavior. Consumer products are consumed by final
consumers for their own uses (individuals and households), a product bought to satisfy
personal and family needs and not for commercial purposes. There are four categories of
consumer products. This classification is based on buying habits of consumers, as
evidenced by the following three aspects:
●​ Efforts of consumers to reach a purchase decision;
●​ Attributes that consumers assigns for the use while purchase, and
●​ Frequency of purchase.
Four categories of Consumer Products are as follows:
1)​ Convenience Products
2)​ Shopping Products
3)​ Specialty Products
4)​ Unsought Products
1) Convenience Products - Is a relatively inexpensive, frequently purchased item for
which buyers want to exert only minimal effort. The buyer spends little time in planning
the purchase of a convenience item or in comparing available brands or sellers.
Examples: Bread, Gasoline, Newspapers, Chewing Gum, Soft Drinks, etc…
2) Shopping Products - Is an item for which buyers are willing to expend considerable
effort on planning and making the purchase. The buyer allocates ample time for comparing
stores and brands with respect to prices, product features, qualities, services, and
warranties. These products are expected to last for a fairly long time and thus are purchased
less frequently than convenience items.
Examples: Appliances, Furniture, Fashion Garments, Bicycles, Cellular Phones, etc…
3) Specialty Products - It possesses one or more unique qualities for which a buyer is
willing to expend considerable purchasing effort. Buyers actually know what they want and
will not accept a substitute. In searching for specialty products, purchasers do not compare
alternatives.
Examples: Unique Sports Cars, Rare imported wine, Specific type of antique china,
Special handcrafted furniture, etc…
4) Unsought Products - Are those products which consumer do not know about, does not
seek or does not normally think of buying, like smoke detectors. The classic examples of
known but unsought goods are life insurance, cemetery plots, gravestones, and
encyclopedias. Unsought goods require advertising and personal-selling support.
[C] Industrial / Business Products - A product bought for resale, for making other
products, or for use in a firm’s operation.
They are as follows:
1.​ Raw Materials
2.​ Major Equipment
3.​ Accessory Equipment
4.​ Component Part
5.​ Process Material
6.​ Supply (Consumable Goods)
7.​ Business Service
1. Raw Materials are a basic material that actually becomes part of a physical product. It
usually comes from mines, forests, oceans, or recycled solid wastes. Raw materials usually
are bought and sold according to grades or specification.
Examples: Various types of solid, liquid or gas materials, Metals, Wood, Chemicals etc…
2. Major Equipment includes large tools and machines used for production purposes.
Some of the major equipments are custom-made for particular organizations, but other
items are standardized products that perform one or several tasks for many types of
organizations.
Examples: Cranes, Bulldozers, Furnaces, Dump Truck, etc…
3. Accessory Equipment is standardized equipment used in a firm’s production or office
activities. Compared with major equipment, accessory items are usually much less
expensive and are purchased routinely with less thought.
Examples: Hand tools, Computers, Calculators, etc…
4. Component Part is part of a physical product and is either a finished item ready for
assembly or a product that needs little processing before assembly.
Examples: Tyres, Computer chips, Switches, etc…
5. Process Material is used directly in the production of another product. Unlike a
component part, a process material is not readily identified in a finished product. Like
component parts, process materials are purchased according to industry standards.
Examples: Food Preservatives, Industrial Glue, etc…
6. Supply (Consumable Goods) facilitates production and operations, but it does not
become part of the finished product.
Examples: Paper, Pencil, Oil, Cleaning Agents, etc…
7. Business Service is an intangible product that an organization uses in its operations.
Purchasers must decide if they want to do their own services or to hire them from outside
the organization.
Examples: Financial, Marketing/Advertising, Legal, etc…
(D) From the Marketing view point Products are also classified as:
1) Fast Moving Consumer Goods (FMCG):
Fast Moving Consumer Goods (FMCG), also known as Consumer Packaged Goods (CPG),
is product that have a quick turnover and relatively low cost. Though the absolute profit
made on FMCG products is relatively small, they generally sell in large numbers and so the
cumulative profit on such products can be large.
Examples of FMCG generally include a wide range of frequently purchased consumer
products such as toiletries, soap, cosmetics, teeth cleaning products, shaving products and
detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products
and plastic goods. FMCG may also include pharmaceuticals, consumer electronics,
packaged food products and drinks.
2) Consumer Durables:
Highly durable goods such as refrigerators, cars, or mobile phones usually continue to be
useful for three or more years of use, and hence durable goods are typically characterized
by long periods between successive purchases. These durable goods are referred to as
Consumer Durables and examples of consumer durable goods include cars, household
goods (home appliances, consumer electronics, furniture, etc.), sports equipment, and toys.
As the second purchase for durable goods lags time difference, generally they are sold on a
higher margin.
The Consumer Durables industry consists of durable goods and appliances for domestic
use such as televisions, refrigerators, air conditioners and washing machines. Instruments
such as Cell Phones and Kitchen Appliances like microwave ovens are also included in
this category.
The consumer durables industry can be broadly classified into two segments: Consumer
Electronics and Consumer Appliances. Consumer Appliances can be further categorized
into Brown Goods and White Goods.
Brown goods and White goods
The term ‘brown goods’ stands as the colloquial slang for the electronic consumer
products as mobile phones, television, CD/DVD player, and personal computer etc. ‘Brown
goods’ much stressed to the relatively light and low-priced and fast-moving electronic
goods including gazettes of various nature. On the other hand, white goods signify for the
relatively high-priced, heavy, and slow-moving electronic goods like fridge,
air-conditioner, micro woven etc. It’s evident that white Goods mainly include all ranges of
home appliances.
The key product lines under each segment are as follows:
Kitchen Appliances
●​ Mixers
●​ Grinders
●​ Microwave Ovens
●​ Iron
●​ Electric Fans
●​ Cooking Range
●​ Chimneys
White Goods
●​ Large Kitchen Appliances
●​ Refrigerators
●​ Washing Machines
●​ Air-conditioners
●​ Speakers and Audio Equipment
Brown Goods Consumer Electronics
●​ Mobile Phones
●​ Televisions
●​ MP3 Players
●​ DVD Players
●​ VCD Players
●​ iPad

*** *** ***

CHAPTER – 4

FACILITY PLANNING - PLANT LOCATION & LAYOUT

Facility Planning determines how an activity’s tangible fixed assets best support achieving
the activity’s objectives.
Examples:
a. In manufacturing, the objective is to support production.
b. In an airport, the objective is to support the passenger airplane interface.
c. In a hospital, the objective is to provide medical care to patients.

Strategic Facilities Planning Issues

An organization planning for the facilities will have to confront and resolve following
issues for arriving at the conclusion for best strategic planning of the facilities.
1.​ Number, location, and sizes of warehouses and/or distribution centers.
2. ​ Centralized versus decentralized storage supplies, raw materials, work-in-process,
and finished goods for single- and multi-building sites, as well as single- and
multi-site companies.
3.​ Acquisition of existing facilities versus design of model factories and distribution
centers of the future.
4.​ Flexibility required because of market and technological uncertainties.
5.​ Interface between storage and manufacturing.
6.​ Level of vertical integration, including "subcontract versus manufacture" decisions.
7.​ Control systems, including materials control and equipment control.
8.​ Movement of materials between buildings, between sites.
9.​ Changes in customers' and suppliers' technology as well as firm's own
manufacturing technology and materials handling, storage, and control technology.
10.​ Design-to-cost goals for facilities.
Facility Planning Objectives:
Following are some of the important generic objectives of all facility planning process:
1.​ Support the organization's mission through improved material handling, materials
control, and good housekeeping.
2.​ Effectively utilize people, equipment, space, and energy.
3.​ Minimize capital investment.
4.​ Be flexible and promote ease of maintenance.
5.​ Provide for employee safety and job satisfaction.
Level of Automation:
Automation is the use of machines, control systems and information technologies to
optimize productivity in the production of goods and delivery of services. The correct
incentive for applying automation is to increase productivity, and/or quality beyond that
possible with current human labor levels so as to realize economies of scale, and/or realize
predictable quality levels. The incorrect application of automation, which occurs most
often, is an effort to eliminate or replace human labor. Simply put, whereas correct
application of automation can net as much as 3 to 4 times original output with no increase
in current human labor costs, incorrect application of automation can only save a fraction
of current labor level costs. In the scope of industrialization, automation is a step beyond
mechanization.
Whereas mechanization provides human operators with machinery to assist them with the
muscular requirements of work, automation greatly decreases the need for human sensory
and mental requirements while increasing load capacity, speed, and repeatability.
Automation plays an increasingly important role in the world economy and in daily
experience.
ADVANTAGES AND DISADVANTAGES OF AUTOMATION:
ADVANTAGES:
The main advantages of automation are:
1.​ Increased throughput or productivity.
2.​ Improved quality or increased predictability of quality.
3.​ Improved robustness (consistency), of processes or product.
4.​ Economy improvement - Automation may improve in economy of enterprises, society
or most of humanity.
5.​ Reduces operation time and work handling time significantly.
6.​ Frees up workers to take on other roles.
7.​ Provides higher level jobs in the development, deployment, maintenance and running of
the automated processes.
DISADVANTAGES:
The main disadvantages of automation are:
1.​ Security Threats/Vulnerability: An automated system may have a limited level of
intelligence, and is therefore more susceptible to committing errors outside of its
immediate
2.​ Scope of knowledge (e.g., it is typically unable to apply the rules of simple logic to
general propositions).
3.​ Unpredictable/excessive development costs: The research and development cost of
automating a process may exceed the cost saved by the automation itself.
4.​ High initial cost: The automation of a new product or plant typically requires a very
large initial investment in comparison with the unit cost of the product, although the
cost of automation may be spread among many products and over time.
The following methods are often employed to improve productivity, quality, or
robustness:
1.​ Install automation in operations to reduce cycle time.
2.​ Install automation where a high degree of accuracy is required.
3.​ Replacing human operators in tasks that involve hard physical or monotonous work.
4.​ Replacing humans in tasks done in dangerous environments (i.e. fire, space, volcanoes,
nuclear facilities, underwater, etc.)
5.​ Performing tasks that are beyond human capabilities of size, weight, speed, endurance,
etc.
In manufacturing, the purpose of automation has shifted to issues broader than productivity,
cost, and time.
Reliability and precision
The old focus on using automation simply to increase productivity and reduce costs was
seen to be short-sighted, because it is also necessary to provide a skilled workforce who
can make repairs and manage the machinery. Moreover, the initial costs of automation were
high and often could not be recovered by the time entirely new manufacturing processes
replaced the old. (Japan's "robot junkyards" were once world famous in the manufacturing
industry.)
Automation is now often applied primarily to increase quality in the manufacturing
process, where automation can increase quality substantially.
FACILITY PLANNING FOR THE MANUFACTURING:
Doing facilities planning for a manufacturing facility is a positive exercise for a company
in terms of its competitiveness with its competitors. The production flow can be examined
by simulation and potential bottlenecks can be smoothed. Also a facilities plan for a
manufacturing facility outlines the skill levels of employees required to operate the
equipment on the manufacturing floor and it provides for the latest and best equipment to
make the product. Companies that do not engage in facilities planning end up having
uneven production flows improper labor skills and either too much or too little labor on the
floor and outdated equipment that must be heavily maintained. The place where such
manufacturing facilities are established is known as Plant.
Plant:
The Physical means of production such as buildings, machineries, dies, tools, jigs, fixtures,
service machineries and/or workshop equipments erected and equipped at a given location
for the purpose of converting the raw materials to finished goods using men, machineries
and materials is called plant.
The economy of operations, effectiveness and efficiency of production is directly attributed
to the type of plant and its location. In other words the optimum utilization of the available
resources and capital employed is in direct proportion with the right decision of plant
location and layout.
Location:
Location may be defined as a particular area/site/place selected for setting up of a
manufacturing/production unit or plant.
Biggest question that needs to be answered before one set up the production plant is where
our main operations should be based? One of the key features of a production system is the
efficiency with which the output is transferred to the recipients. Any consideration of this
will include the determination of where to place the plant.
The selection of appropriate location can be done in two stages: (i) Evaluation of various
geographic areas and the selection of an optimum area. (ii) Within each area there is a
choice of proper site which can be urban, suburban or rural.
Once the manufacturing plant is set up it is a long-term commitment on the capacity
created. Capacity not only in terms of the machinery and equipments but also in terms of
arrangements and development for the resources such as raw material suppliers, labour
force, market and distribution channels, conveyance and transport arrangements and
adjustments with the environments.
Once a decision is taken in favor of a particular location, then the organization has to live
for a long time with the prospects and problems of that location in regards to the raw
materials, labour, other resources and market etc.
Thus selection of site and location of the plant has to be done with considerable thought,
taking into account the various aspects leading to the end profitability of the enterprise. The
ideal location for the plant will be one where lowest cost and maximization of profitability
is possible.
Total costs = Fixed costs + Operational costs • Fixed costs include expenditure on land,
building, machines and other equipments etc. Operational costs are the expenditure
incurred on inputs, transformation process and the distribution of output etc.
The contribution of various factors to the total cost will vary form place to place
To help in selection of the best and most ideal location for the plant number of factors
needs to be analysed. They can broadly be grouped into two areas, Primary and Secondary
factors.
Factors to be considered for the Selection of Plant Location:
The factors connected with the location needs careful consideration at the time of
establishing plant or/and at the time of adding new plants to substantiate/expanding the
existing production and/or to add new products/diversify the activities, and/or shifting of
the plant from one location to another due to one or other reasons.
It is advisable to divide such factors as Primary (Very important) Factors and Secondary
(Or less important) Factors. As a thumb rule we can state that primary factors can not be
compromised where as for secondary factor some degree of calculated compromise can be
done. This compromise is essential as there will not be any particular site which will satisfy
all the secondary factors and if we do not calculatedly compromise our search for the ideal
location will be endless. However as mentioned it should be calculated compromise after
due considerations of the weaknesses of the area and no factor should be ignored. A factor
which is not considered and simply ignored may become a cause of concern over a period
of time.
Following listing is a generic distribution of such factors, however it is important to note
that some of these factors are interchangeable depending on the type of production
activities, which means what is shown as a secondary may become of primary importance
in some cases and vice versa.
Primary Factors:
1.​ Market: Organization may choose to locate facilities close to their market, not merely
to minimize transportation costs, but to provide a better service.
2.​ Raw Materials: A location near main suppliers will help to reduce cost and permit
staff to meet suppliers easily to discuss quality, technical or delivery problems.
3.​ Labour Availability: Certain geographical areas have traditional skills but it is very
rare that a location can be found which has appropriately skilled and unskilled labour in
 the desired proportions or quantities. A large unit may be capable of migrating the
necessary man power near the production unit, however for a small industry the factor
is very vital.
4.​ Fuel & Power: Easy and economical availability of fuel and power will help save costs
in a big way.
5.​ Transportation: It is important that good transport facilities are readily available.
Many large company choose the location where railway siding may be feasible for
bringing goods train closer to the unit. Road transport will make it essential to find
locations near State / National highways.
Secondary Factors:
1.​ Climate.
2.​ Water Supply and infra structure development.
3.​ Legislation/ Government and Local authorities’ industrial policies.
4.​ Political factors.
5.​ Socio-economic factors.
6.​ Emotional factors.
7.​ Law and order situation.
8.​ Availability or Expiry of the lease arrangements.
9.​ Financial Aids availability.
10.​ Banking facilities.
11.​ Geographic Locations like Urban, Rural, City, suburb etc.
12.​ Draught prone, Seismic Zones or other climatic hazards.
13.​ Developing Zones/Industrial Zones.
14.​ Proximity of Ports, Airports, Railway Stations or Highways.
15.​ Topography & Contour of the land.
16.​ Government’s incentive Schemes etc.
17.​ Availability of land for future expansions.
18.​ Existence of auxiliary industries.
19.​ Facility of technical research.
20.​ Religious & Vastu Shashtra Principles.
21.​ Economics of the land and financial aspects.
Location evaluation based on ranking the various weighted factors.
1.​ Examine the various factors and assign to them weights representing their importance
to the situation being changed. The least important factors may be given a weighting of
1 and all other factors then expressed as multiples of this, as whole numbers.
2.​ Each of the locations is examined and ‘ranked’ for each factor, this ranking being
carried out factor by factor, not location by location.
3.​ Each ranking is then multiplied by the appropriate weighting factor and the scores
totaled for each possible location. These totals indicate the desirability of the possible
locations compared with each other.

(CHART FOR CALCULATION TO BE INSERTED)

Steps in selection of the location:

1.​ For International operations-Selection of country of operations.

2.​ Region- State or province.
3.​ Locality – City or suburb.
4.​ Exact Site for the plant.

Layout for the Plant

Plant Layout is a systematic study of the allocation and arrangement of the plant
space in order to ensure efficient operation of the plant by virtue of the inherent
factors of layout design such as amount of material handling sequencing or processes,
storages etc.
A distinction between factory layout and the plant layout should be noted carefully. The
factory layout is a broad (Macro) consideration and it concerns itself with the housing of all
the activities inside the factory. Where as plant layout is a detailed (Micro) considerations
and is concerns itself with the actual production process and takes steps in that direction to
establish efficient and economical setups for initiating the production of desired products in
a plant.
Factors like owned or hired building, new construction or ready-made building, single story
or multy-story buildings have considerable effect on the decision of the arrangements of
various departments in a factory.

Layout of a plant/factory is designed in the beginning of a unit and is used normally for a
very long period except that there may be occasionally minor changes or adjustments. Thus
it is very much essential to design the plant layout with utmost care and long-term vision.
Industrial engineers play a positive role while designing the suitable plant layout.
Though implementation of plant layout comes in to effect only after the building facilities
have been made available, it is considered along with the construction of the factory.
Certain specific requirements of the administrative department and special characteristics
of the production process and plant services have direct bearing on the construction of the
factory building. Thus both factory building and plant layout are considered
simultaneously.
A) Factory Layout:
A factory layout needs to take care of some of the following areas in to consideration:
1.​ Office area consisting of various administrative departments.
2.​ Plant area consisting of production department, Technical departments, Laboratories,
store rooms, stock rooms, tool rooms, inspection divisions, power house or generating
stations, boiler rooms, air conditioning plants, shipping and forwarding departments,
servicing and maintenance departments.
3.​ Research & Development wings.
4.​ Personnel Departments and services such as parking areas, timekeeper’s office, and
canteens/lunch room, recreational areas, medical and other emergency facilities,
refreshing rooms etc.
B) Plant Layout:
A plant layout needs to take care of some of the following areas in to consideration:
1.​ Types of production process.
2.​ Design of the production process.
3.​ Sequences of production process.
4.​ Material handling requirements.
5.​ Materials and tools storage requirements.
6.​ Space required for the machine maintenance and repairs.
Objectives of Plant Layout:
01​ To raise productive efficiency by integrating the production processes.
02​ To control wastage of time in the production and elimination of bottlenecks through
balancing of plant capacities, high material turnover through shorter operating cycles.
03​ To reduce damage and spoilage of materials by way of economizing the handling of the
materials, semi finished and finished products.
04​ Effective use of installed capacities so that return on investment can be maximized.
05​ Decency and orderliness inside the plant area.
06​ Reduce the congestion of the Men, Machineries & Materials and Maximize the utility
of the land and space to get best and economic output. Effective utilization of cubic
space of the factory area.
07​ Special provisions for jobs with odour, noise and vibrations.
08​ Organize proper supervision and controls for qualitative production.
09​ Keep provisions for contingences and future expansions and offer required degree of
flexibility for change of production.
10​ To provide excellent environment and working conditions taking care of safety factors.
11​ Should be worker friendly to offer them maximum convenience of operation.
12​ Better customer services through cheaper and better product supplies according to the
delivery schedule.
Factors to be considered at the time of designing Plant Layout:
01​ Type of Industry, items of production and materials to be handled.
02​ Type of Production system i.e. intermittent or continuous.
03​ Scale of production, types of machines, material-handling equipments etc.
04​ Plant location, Size and type of building etc.
05​ Detailed design of Production Process.
06​ Space available for material storage & Movement.
07​ Sizes of machines and space requirements for their installations, operations and
maintenance.
08​ Facilities for workers & their welfare.
09​ Product design, quality requirements, future planning of expansion and strategic
policies of management.
10​ Miscellaneous other factors, Climatic conditions. Light & Ventilations etc. External
factors such as transportation of materials, railway siding etc.
11​ Government policies, laws under factory act, pollution control and fire safety
requirements and related rules and regulations.
Principles of Plant Layout:
There are certain basic principles of plant layout, they are universal in application and
must be applied by the design engineers while working out the plant layout:
Principles of:-
1.​ Minimum and easy movement for transport of materials.
2.​ Sequence and flexibility.
3.​ Unidirectional Flow.
4.​ Visibility and Accessibility.
5.​ Low investments & Principle of compactness.
6.​ Full utilization of available space in all the three dimensions.
7.​ Safety and satisfaction of workers.
8.​ Proper integration of production system and minimizing of investments.
Advantages of Scientific Plant Layouts:
A scientific plant layout has many advantages such as:
1.​ Lower production costs, higher turnover, satisfied and efficient work force, effective
supervision and better quality control, superior customer service.
2.​ It would ensure lower costs and investments on space and on movements of materials
from one workstation to another.
3.​ Help for better controls on production delays by better handling of the material and
control on wastages of materials and time.
4.​ Ensure better output from workers by providing them better safety and satisfaction and
reduce labour costs by enhancing their efficiency.
5.​ By way of offering better flexibility it will also ensure demand for future investments
on space and production facilities whenever changes in production are required.
Material Flow Systems:
Men, machines and materials are three basic inputs in the production process. Generally
men and machines tend to remain static where as materials move from one workstation to
another. Raw materials pass through various paths till they are finally converted to the
finished products. The patterns of material flows inside the plant are prescribed under
various types of floor systems.
Pattern of material flow is an important parameter in the plant layout as good layout takes
care of minimizing of the path for material flow and results into lower operating cycle
period from start to finish.
It involves right type of material handling equipments and systems and is designed
considering the type of production process.
They are described based on their geometric designs such as ‘I’ type, ‘L’ type, ‘U’ type so
forth and so on. Each type has its merits and demerits and needs to be evaluated from the
critical requirements of the production process and design.
It takes care of factors such as elimination of bottlenecks, rushing and back tracking of the
materials, proper spots, for storing of the materials near workstations. Reduction in the
handlings costs of the materials and effective utilization of plant space, thus contributing in
a major way in plant productivity and profitability.
Material flows are mainly divided into two systems depending on the floor space
availability.
1.​ Horizontal Flow System: These systems are developed when there is only ground
floor structure and flat shop floors are available.
2.​ Vertical Flow System: These systems are developed where there are multy story
buildings and limited land areas are available.
Types of Plant Layout:
There are at least five basic types of plant layouts, which are popular and widely accepted:
1.​ Process or Functional Layout
2.​ Product or Line layouts
3.​ Combined Layout
4.​ Static or Stationary Layout.
5.​ Cellular Layout.
1.​ Process Layout / Functional Layout: In this type of layout all the machines
performing similar functions or types of operations are grouped at one location. For
example all the lathe machines or grinding machines or power presses in a
manufacturing unit.
Characteristics of this type of layout are as follows:
●​ Several products may share one machine maximizing use of each machine.
●​ Sequential arrangements of the machine group are generally, but not necessarily
made on the basis of type of operations.
●​ In this type process rather than the product has dominating role and product needs
to be moved to the process center for the necessary operations.
●​ This type of layout is more suitable for the job type of production system where
processes differ from job to job and hence machines are organized on the basis of
processes rather than the product.
Advantages of this layout are as hereunder:
●​ It eliminates the duplication of machines and hence optimizes the utility of the plant
capacity.
●​ It offers flexibility in the product range.
●​ Break down of one machine does not interrupt the entire product flow.
●​ Close supervision and specialization of supervision becomes possible
Disadvantages of this layout are as hereunder:
●​ Since line sequence of production is not possible, problems of waiting and idle
capacity arise.
●​ Cost of material handling increases due to long routing and back tracking of the job
between the processes.
●​ Processing time increases resulting into increase in inventory costs.
●​ Due to frequent changes in the machine set-ups inspection demand is increased
increasing the costs of inspection.
 ●​ Cost of supervision increases as specialized supervision is required at each
workstation.
●​ Production planning becomes difficult due to individual job wise routing,
scheduling, dispatching and follow-ups.
●​ More space is required for storage of different jobs and also for provision of future
expansion of a particular job station.
Examples of this layout are: These types of layouts are suitable for the intermittent type
of production system. Such as job type or batch type of manufacturing set-ups, where small
quantities of large jobs are required to be produced e.g. Big Machines, made to order
furniture, light and heavy engineering units etc.
2.​ Product Layout or The product-line Layout:
In this type of layout machines are laid down in the sequence of processes as required
by a particular product to be manufactured.
One product goes through each machines set up in sequential order as per requirements
of its production design. Product is dominating over the processes.
Characteristics of Product Layout are as follows:
●​ Machines are arranged in sequence as required by the particular product.
●​ One product goes through all the machines in the product line layout.
●​ Product dominates the process i.e. processes are lined up as required by the product
in particular.
●​ For each product a separate product-line is set-up.
●​ It is used when small varieties of products in large quantity are to be manufactured.
Advantages of the Product Layout are as hereunder:
●​ Reduced material handling costs due to straight-line production flow.
●​ Mechanization of material handling possible because of fixed points of operations.
●​ Bottlenecks and idle capacity are eliminated.
●​ Shorter operating cycle due to well designed and tailored made material
movements.
●​ Maximum utilization of men and machineries.
●​ Possible to use less skilled workers and production can be controlled with less
supervision as standard sequence of repetitive operations carried out by same set of
workers.
●​ Less frequent changes in machine sets-ups, improved quality control with less
number of checkpoints.
●​ Effective production control as material routing, scheduling, and dispatching
possible with fixed product cycle time.
Disadvantages of this layout are as hereunder:
 ●​ Necessitates duplication of machines and equipments resulting into idle capacities.
●​ It is highly inflexible because each line of production is set-up as required by
particular products.
●​ Breakdown at any one point can interrupt entire flow of production.
Examples of Product layouts are: Product layouts are suitable for continuous processes
industries such as chemical industries, sugar industry, refineries. They are also suitable
where assembling work is significant such as car industries. They are also suitable in steel
or aluminum plants, flour mills, textile, paper and pulp industries.
3.​ Mixed or Combined Layout:
Generally pure process or product layouts are not found in practice, as both are
mutually exclusive. Combinations of both reaping the benefits of both the system are
possible to some extent. This helps to overcome the disadvantages of both the system to
a great extent.
4.​ Static Product Layout or Project Layout:
Manufacturing involves men, machines and materials. As observed in earlier layouts,
normally machines are stationery, where as material mainly moves as per requirements
of the job from machines to machines for the purpose of operations. However where
products are large and heavy in weight and also due to its characteristics where product
needs to remain stationery in such situations product remains stationery where as men
and machines have to move near the product. Such layouts are classified as Static
Product Layout or Project Layout.
Examples: construction of Ships, Bridges etc.
5.​ Cellular Layout
Cellular manufacturing is a type of layout where machines are grouped according to
the process requirements for a set of similar items (part families) that require
similar processing. These groups are called cells. Therefore, a cellular layout is an
equipment layout configured to support cellular manufacturing.
Processes are grouped into cells using a technique known as group technology (GT).
Group technology involves identifying parts with similar design characteristics
(size, shape, and function) and similar process characteristics (type of processing
required, available machinery that performs this type of process, and processing
sequence).
Features:
1.​ Workers in cellular layouts are cross-trained so that they can operate all the
equipment within the cell and take responsibility for its output.
2.​ Sometimes the cells feed into an assembly line that produces the final product.
3.​ In some cases a cell is formed by dedicating certain equipment to the
production of a family of parts without actually moving the equipment into a
 physical cell (these are called virtual or nominal cells). In this way, the firm avoids
the burden of rearranging its current layout.
4.​ However, physical cells are more common.
5.​ An automated version of cellular manufacturing is the flexible manufacturing
system (FMS). With an FMS, a computer controls the transfer of parts to the
various processes, enabling manufacturers to achieve some of the benefits of
product layouts while maintaining the flexibility of small batch production.
Advantages:
Some of the advantages of cellular manufacturing include:
●​ Cost: Cellular manufacturing provides for faster processing time, less material
handling, less work-in-process inventory, and reduced setup time, all of which
reduce costs.
●​ Flexibility: Cellular manufacturing allows for the production of small batches,
which provides some degree of increased flexibility. This aspect is greatly
enhanced with FMSs.
●​ Motivation: Since workers are cross-trained to run every machine in the cell,
boredom is less of a factor. Also, since workers are responsible for their cells'
output, more autonomy and job ownership is present.
Conclusion:
After thorough study of the product, process designs, plant locations and availability of
space for various operations etc., factory and plant layouts are prepared. Few alternative
layouts are designed to study the relative advantages and disadvantages of each layout.
After in depth considerations and threadbare discussions suitable type of flow line and
plant layouts are selected to get the best output from the unit. Considerations of various
limitations make it to transcend from the most ideal layout to a practical layout.
Various types of techniques and charts are used for developing plant layouts, computer
programme help in a great way in development of the layouts.

*** *** ***

 CHAPTER – 5

PURCHASE MANAGEMENT
THE PURCHASING FUNCTION
INTRODUCTION
The art of trading in materials i.e. buying and selling is as old as man himself. Before the
advent of money as a medium of exchange, man bartered items surplus to his requirements
for things, which he needed. From the time man discovered that he could put his talents to
produce or manufacture things, he began to specialize.
The purchasing function achieved specialization quite early in man’s history. The earliest
example of purchase order dates back to 2500 B.C. It was a clay tablet of Babylonian
(Civilization) origin and was meant for “supply of fragrant oil to be delivered in lots of 50
jars at 15 days intervals”
Almost 50 to 60 per cent of a company’s expenditure is incurred on materials. The
purchase department therefore becomes the biggest spending department of the company.
The structure of purchase department and the procedures followed for various types of
purchases vary considerably not only from industry to industry, but also from company to
company. The nature of purchases made, the volume and the variety of purchases, the
degree of the specialization needed to make the purchases, especially of items, which have
a high quality control factor, etc., all go to determine the organization for purchase.
Similarly, the procedures adopted in the purchase department may vary from company to
company.
In some cases there may be considerable amount of delegation to the purchase manager and
his subordinates. In other cases purchase decision may be prerogative of top management.
In some companies though delegation might exist on paper, in practice there might not be
much trust and confidence reposed on purchase department and hence most cases might be
decided by the senior bosses only.
As in case of every other aspect of management, there cannot be a standard method of
organizing a purchase department or having a standard set of systems or procedures. Each
set up has to be tailor made to suit the specific requirements of that particular company,
enterprise or institute.
BUYING V/S PURCHASING
Essentially, both the terms mean to acquire something against money. However, there is
some difference between the terms, specifically regarding the context of the terms. Buying
is considered a general term, which is most commonly used to refer to everyday goods and
commodities. Some of the less progressive organizations tend to equate purchasing
function with the buying function. The buying function is simply buying an item at a price.
Purchasing, however is much wider and formal term and encompasses planning and
procurement of materials. It would include prescription of detailed specifications to ensure
quality compliance. Correct relations are to be developed with the supplier so that they do
not turn away from the company and to ensure compliance of the order in time and terms
that are mutually acceptable.
IMPORTANCE OF PURCHASING FUNCTION
In present days, even in propriety concerns most of time of the proprietor is spent in raising
finance and managing men. They are hardly left with any time to manage materials. Further
a lot of skill is required nowadays in purchasing materials and professional purchase
managers can only provide such skill. Thus the organizing of the purchase function has
assumed considerable importance and has to be manned by specialized purchase personnel.
OBJECTIVES OF CREATIVE PURCHASING
The important objectives of the purchasing function are:
1.​ To assure uninterrupted supply of raw materials, consumables, spare parts, etc. so that
there is no disruption at any level. While doing so efforts should be to reduce the
ultimate costs.
2.​ To purchase competitively and wisely. (Principles of six rights).
3.​ To keep inventory investment at the minimum.
4.​ To maintain adequate standards of quality. That means ensure suitability for the
intended purpose rather than purchase of materials of the highest quality.
5.​ To develop new and alternate source of supply.
6.​ To maintain good buyer supplier relationship.
7.​ To avoid duplication and waste and control obsolescence.
8.​ To maintain most cordial relations with other departments.
9.​ To recruit and train purchase personnel.
There are two basic types of purchasing in the business world:
1.​ Purchase for resale (Trading).
2.​ Purchase for conversion or consumption (Production or Manufacturing).
Merchants and traders or speculators do purchase for resale. There is more of
intuition than science involved.
In our studies further we will concentrate more on purchase for conversion or consumption,
i.e. for industrial purchasing. It is impossible for any industrial organization to achieve its
full potential without a successful purchasing activity.
PURCHASING PRINCIPLES – SIX RIGHTS
01.​RIGHT QUANTITY
How much to buy at a time is the first consideration of a purchase manager. He will have to
procure a quantity, which will be most economical. The quantity he buys at a time is
directly related to inventory holding. If he buys a large quantity each time, he will have to
make fewer purchases of the item but this will result in larger inventory.
On the other hand, if he buys smaller quantity each time, he will have to make a larger
number of purchases of the items but his inventory will be low. Also prices for larger
quantities are cheaper than the prices for smaller quantities. In the former case his purchase
costs-which includes cost on purchase staff, purchase stationery, purchase follow ups etc.
will be low but cost on inventory holding will be high.
How, then, one should deal with these opposing costs-purchase costs v/s inventory carrying
costs? The best solution would be to find out ‘economic order quantity’ to be purchased
for each item at a time whereby the total of the two costs is lowest.
It will be the purchase manager’s responsibility to ensure that proper forecasts of materials
required to be purchased are made. Some items may have regular consumption, others may
have large seasonal fluctuations, and still other may be required only occasionally in
emergencies. It will be his skill to forecast the consumption of a vast variety of items
accurately by using the latest forecasting techniques so that on the one hand he does not
buy quantities larger than needed and on the other hand he does not buy such small
quantities that fail to give the required service to the consumers and cause stock-outs.
A good purchaser has to keep his eyes and ears open. He will have to keep himself
constantly in touch with the market. For instance, if he comes to know that sometime hence
there would be labour trouble in certain industries, he should affect snap purchases of
adequate quantities of such materials in order to avoid stock-outs.
There may be periods when certain items are usually scarce. He must make advance
purchases of such raw materials in sufficient quantity. If there is threat of transport strike,
he should secure his critical material purchase in advance to tie over the strike situation.
There may be some items, consumption of which is steadily declining and their place is
being taken by the new items. If proper care is not taken, surplus or overstock will result.
In short, an efficient purchase manager will continue to watch the behavioural pattern of
each item individually and groups of items generally, firstly, to procure right quantities as
required and secondly, to take such corrective actions in time as the situation demand.
02.​RIGHT QUALITY
Quality of materials to be purchased is defined by national standards/ specifications like
ISI or by international standards specifications such as DIN, BSS and ASTM etc. If such
standards are not available for specific items, company must try to draw up its own
specifications.
In some cases, it may even be necessary to prepare detailed working drawings. Some time
it may be better if instead of design specifications if performance specifications are
drawn up.
One may prescribe a very superior quality for procurement in which case the cost of the
materials will rise for the end use in view. It may not be necessary to purchase such a
superior quality, which may make product economically unviable, and a lower quality
would suit just as well.
A purchase manager has therefore, to decide on the lowest possible specification, which
will meet the functional parameters. Good specifications/standards must be simple. They
must not be very rigid. Tolerances prescribed should be reasonable. They must be complete
in all respect and there should be no loopholes. They must not be theoretical but such that
industries can produce. Proper testing methods for various attributes must be laid down.
The purchaser must be constantly on look out, as new materials are appearing in the market
at breath-taking pace. The process of reviewing the material he is buying must continue
endlessly to ensure that he is buys the best value for the end use.
03.​RIGHT PRICE
The art of a purchase manager lies in paying the right price. To enable him to do so he must
have complete data about the past price histories of the materials he is buying. He must also
be well versed with the market conditions to know the trends of prices in the recent past.
To pay the right price he will have to enforce adequate competition. He will therefore have
to bring more and more suppliers on his approved list.
A purchase manager will have to be alert so that he is not carried away by a very low price
quoted by a particular vendor. He will have to see whether the price quoted by the vendor is
workable and if in his opinion the price is un-workable; he should not hesitate rejecting
such a quotation. Obviously he cannot risk a failure on part of his supplier. The prices of
items will be lower if the purchases are planned. On the other hand, rush purchases are
always very costly.
Certain items when purchased in large quantities are available at discounted price; he will
have to purchase large quantities of such items to avail the quantity discounts, how ever he
must persuade the suppliers to agree to phased deliveries to keep control on the inventory
situation.
There are certain indirect factors, which affect the price. For example if the company takes
too long to pay the suppliers they will necessarily raise the prices. Purchaser will have
therefore to ensure efficiency in getting the suppliers payments efficiently and as per
schedule.
Tenders or offer prices are time bound and many times a delay in placing the order or
approval of the tender will raise their price of offer. To avoid this purchaser will have to be
efficient to effectively purchase within the time frame of the offer.
Finally, a purchaser will have to maintain good buyer-supplier relationships. It will have a
healthy effect on the price.
04.​RIGHT TIME
Purchase is a service function. A purchase manager will have to ensure that materials are
made available when they are required. If this is not done and if there are stock-outs,
production activity will suffer.
He therefore will have to ensure that he initiates the purchases at the right time so that by
the time he enters the contracts and supplier delivers the material he does not run out of
stocks.
He must have with him up to date information as to what is the lead-time for each item and
needs to initiate action for each item in the right time.
He must remember that neither the rate of consumption of each item nor the lead-time for
each item may remain constant. Fluctuations do take place in both and hence adequate
safety stocks will have to be provided.
One important factor a purchase manager will have to remember is the trend in regards to
the commodity prices during the year. He will have to be effective for the purchases in such
a way that they are made at the most opportune times during the year so that the prices
paid are the lowest.
Purchaser must be able to organise the alternative arrangements promptly when a supplier
enforces the force majeure clause to protect him self from the non supply when there are
strikes, lock-outs, or disaster etc.
05.​RIGHT SUPPLIER
It has to be ensured that against all the contracts materials are received as planned. It
therefore follows that the supplier on whom orders are placed are reliable and dependable.
A purchase manager will have to maintain detailed records about the performance of each
supplier.
The three most important qualities expected from a supplier are:

​ He should quote competitive price.

​ He should supply on time.

​ He should supply quality material.

It is important for purchase manager to know the financial status of each supplier. His
experience for the items he intends to supply and his integrity.
A good supplier tries to build good relations with the purchase manager and expect him to
reciprocate. He will make sensible suggestions for the benefit of the company, which
should be considered with the due weightage.
As far as possible it would be best to deal with the manufacturers directly and in case they
do not sell directly, the next alternative will be to deal with their authorised agents or the
stockists appointed by them. It is, however, not possible to eliminate the middlemen
altogether.
06.​RIGHT TERMS
The terms and conditions governing the contract must be notified at the time of tendering.
The terms and conditions as finally accepted by the purchaser must be incorporated in the
contract. They should be practical and unambiguous.
The company should ensure that the terms stipulated are not one sided and are not
unreasonable. Otherwise, good supplier may shun away. It will be a good idea if the term
and conditions are reviewed periodically with the references stipulations made by the
suppliers in their tenders to see whether it is essential in the company’s interests to revise
a few conditions to the mutual advantage of both the parties.
ORGANISATION - CENTRALISED v/s DECENTRALISED
When a company is small, almost all the purchase activities are concentrated at one place.
However, when the company grows and has two or three factories under it, then the
problem may arise as to whether the purchasing function should be centralised in one place,
e.g. the head office or whether it should be decentralised say among the different divisions,
or branches or factories.
There are advantages and disadvantages in both the systems.
The question, therefore, of centralisation and decentralisation will have to be examined on
merits in each case and decisions taken on the basis of actual requirements and objectives
of the enterprise concerned. It will depend on the location, type of materials purchased and
numerous other factors.
There are three possible alternatives:
1.​ Complete decentralisation, allowing full autonomy to each of the units.
2.​ Complete centralisation, which in practice means that apart from local purchases of
small value or of emergency purchases, all purchases are made by a central office.
3.​ A combination of the above two systems whereby there is some centralisation and some
decentralisation.

ADVANTAGES
Sr. Centralized organization Decentralised Organisation
Nos.
01 The purchasing function is performed There is a positive involvement on the
most economically and efficiently, due part of actual user and, therefore, they
to specialisation. will take faster decisions when
compared to a somewhat impersonal
attitude likely to be adopted by an
independent purchase department.
02 Purchase for all indenters will be The factory purchase officer will have a
made centrally. The requirements of better and more in-depth knowledge of
all items can therefore, be bulked and the needs of his factory, of local
bulk discounts can be availed of. suppliers and of transport and storage
Anomalies of price between different facility in his area.
factories and competition between
 them for materials in short supply can
be avoided.
03 There will be no haphazard buying. He will be able to respond faster to
All purchases will be in planned emergency requirements, partly because
manner resulting in fewer purchase of the shorter line of communication and
orders and reduced costs in partly because he will have a greater
purchasing, receiving, inspection, bill awareness of the local circumstances
passing and other administrative than someone stationed at long distance.
expenses.
04 It is possible to use modern techniques The factory’s purchase officer’s direct
of forecasting and planning the responsibility to his factory manager
requirements. will produce a better liaison and a
tighter control by factory management,
particularly where it operates as profit
centre. Since material represents a large
portion of works’ cost in manufacturing,
a common argument revolves around
authority and responsibility. The
argument runs: if the local management
is not allowed, for example to select and
deal with its own suppliers, how it can
be held responsible for the output which
heavily depends on the efficient supplies
of materials.
05 Better and effective inventory control
is possible
06 Budgetary control will be easy, as
overall financial needs are well
known.
07 Supervision will be easy. Therefore,
there are fewer chances of
malpractices.
08 It will be possible to impart
specialised training to purchasing
personnel. Specialists in the art of
purchase will come up.
09 Since the business community will be
dealing with qualified and experienced
purchasing staff healthy and business
like relations will develop between
buyers and suppliers.
 10 All information is centralised. All
buyers will know good work done by
anyone.
11 Management control will be easy. It
will be easy to computerise.

12 It is simple to enforce prescribed

procedures.

A COMBINATION OF THE ABOVE TWO SYSTEMS WHEREBY THERE IS

SOME CENTRALISATION AND SOME DECENTRALISATION
Generally speaking, the advantages of one approach are the disadvantages of the other, thus
a combination of both is often used to obtain the benefit from the best features of each,
while avoiding disadvantages of both approaches.
A typical example of the third type of organisation stated above i.e., part centralisation and
part decentralisation is where the head office will be responsible for the following:
a.​ Determining policy, standards, procedures and group specifications.
b.​ Negotiation of contracts for commonly used large-value and volume materials of the
group.
c.​ Major plant and equipment and project contracts.
d.​ Imports and exports where relevant.
e.​ Legal aspects of purchase contracts.
f.​ Co-ordination of group inventory and overall control of inventory.
g.​ Training and development of purchasing personnel within the group and the provision
of advice on staffing and related requirement.

STEPS IN PURCHASING - BASIC STEPS

A good organisation will have to undergo the following basic steps in purchasing before the
required material becomes available.
1.​ Recognition of the need and generation of the demand.
2.​ Inquiries-requests for bids or quotations.
3.​ Source selection-determination of price.
4.​ Placing of contracts.
5.​ Post Contract work.
6.​ Purchase through petty cash.

FUNCTION OF THE PURCHASING DEPARTMENT - PURCHASING CYCLE:

The purchasing department is expected to perform following functions these are some of
the basic elements in the purchase transaction, which is common to all types of purchases.
01​ The need for the materials is recognized and their requirements are determined. (Needs
for materials get generated in user departments).
02​ Specifications for each item are spelt out.
03​ The need is transmitted to the purchase department (by the user departments).
04​ Research and Development (Survey) for potential alternative materials and for newer
sources of supply is done involving user or indenting department and a purchase plan is
made out.
05​ A suitable source is selected for the supply after due investigation.
06​ Rates and terms and conditions of purchase are negotiated and finalized.
07​ A purchase order is prepared and sent to the supplier. The purchase order would spell
out the terms and conditions of the purchase contract.
08​ The supplier’s consent of the purchase order is obtained.
09​ Follow-up is done by the purchase department with the supplier to ensure prompt
deliveries of the right quality and quantity of materials.
10​ The material when received is inspected against specifications (quality and quantity).
Some time it is inspected at the vendor’s factory, and often is at the time of receipt.
Help if needed of the production / inspection department is taken for acceptance of the
materials received.
11​ The supplier’s invoice is checked against the purchase order and goods received are
documented.
12​ A cheque is issued to the supplier towards payment for supplies received based on
terms and on due dates.
RECOGNITION OF THE NEED AND GENERATION OF THE DEMAND OF
INVENTORY AND NON-INVENTORY ITEMS
Before a purchase is initiated the need for it must be clearly established and a proper
authorised demand generated. Purchase in the absence of an authorised demand is a source
of malpractices and, therefore, even in an emergency a written demand from the authorised
person must be insisted upon. The demand may be for i) an inventory item, i.e. an item in
regular consumption, stocks of which are maintained, ii) A non- inventory item. This may
be for an item required for production, maintenance or for capital goods or special works.
The requirement is usually one time and non-recurring.
The demand is usually generated by the stockist, i.e. the stocking warehouse, and if a
separate inventory control cell exists it checks it. It must be signed by an authorised officer.
If a computer is installed it will automatically generate the demands when stocks (plus
quantities on order) reach appropriate minimum levels.
The requisition for a non-recurring demand is generated by an authorised officer from the
user department. Special onetime purchases are usually costly and uneconomical and,
therefore, before deciding to requisition a non-inventory item we must carefully examine
whether such non-standard purchase is essential and it is not possible to use the standard
item in the inventory. The requisition must be signed by an authorised officer.
Purchase of capital equipment is usually a management decision and requisitions for such
equipments are generated only after authorisation by the management.
All requisitions are routed through the inventory control cell/stocking warehouse, which
will meet the demands for the same or offer suitable substitutes from the stock if available.
If not, they will be sent to the purchase department for procurement action. Usually, one
requisition should be prepared for one item.
Exceptions to this general rule are:
1.​ Bills of materials/material schedules for special projects or constructions. Here also a
number of requisitions may be prepared grouping together items pertaining to a
sub-group. As far as possible such requisitions should be trade GroupWise even within
a sub group.
2.​ Requisitions for the spares. Here also grouping should be trade group-wise.
3.​ Items of stationery, etc.
Requisitions found complete in all respects are taken up for further processing. If they are
found to be incomplete in any respect they may be returned to the parties raising them who
should complete them as desired and return them for further processing. Returning the
requisitions in this manner should not cause any ill-will since it educates the persons
preparing them and ensures that future requisitions are not defective. Correcting such
requisitions by the purchase department or the inventory control cell would not be a proper
course as any misjudgement may lead to incorrect procurement.
THE PURCHASE REQUISITION
When a department or stores needs a particular material, which may be raw materials,
spares or equipments or stationery, it prepares a material requisition usually on the material
indent form. This form is usually prepared in duplicate, one copy being sent to the purchase
department and the duplicate being retained by the requisitioning department, for reference
and follow-up. Only the officers so authorized by the management can sign purchase
requisitions. Very often this authority is in the terms of value. For example only the works
manager can sign a requisition for any material whose value is likely to exceed Rs. 20,000.
His deputy might have authority to sign for materials up to Rs. 20,000. The assistant works
manager up to Rs. 5000, the foreman up to Rs.1, 000 and so on. For capital equipment, the
top management’s approval will be necessary. It is necessary to specify these various
authorities in writing. The purchase department should ensure that all purchase requisitions
received by it have been signed by persons duly authorized to do so, otherwise they should
be returned with a request for counter signature by the appropriate authority.
THE PERMANENT ORDER CARD OR TRAVELLING REQUISITION
This method or requisitioning is used for materials purchased on repeat basis or for
standard stock items, i.e., items which are stocked on a regular basis in the stores. This is
permanent card with all details of the material recorded therein. Each time a quantity is
needed, the card is sent to the purchase department indicating the volume required. This
card saves a great deal of copying work because most of the details required are already on
this card. It has the further advantage of avoiding possible errors, which may occur when
transcribing the information into a regular purchase requisition. It also serves as a
continuous record of the transactions with respect to a particular item.
A travelling requisition or TR would normally include the following information.
1.​ Complete and detailed description of the material required. (Specifications).
2.​ Stock code number and part number where applicable.
3.​ Copy of drawing or drawing number.
4.​ List of names and addresses of potential suppliers.
5.​ Cumulative record of quantities purchased from various suppliers with prices paid.
6.​ The reorder level. (When the stock reaches a particular level, action has to be initiated
to purchase fresh quantities of the item. This will depend upon the lead-time of the
material and also on the quantity required. This level of stocks is called the re-order
level).
7.​ Estimated value of Purchase and budget provisions.
8.​ Date by which material is required. And
9.​ Details of outstanding orders if any.
The TR carries all relevant information required to enable the purchase department to place
orders for fresh supplies. When the stock level reaches the reorder level, the stock control
clerk sends the TR to the purchase department. In order to indicate that this has been done,
a coloured strip is attached to the stock card. Such a system will prevent mistakes from
occurring. When the TR is received, the purchase department swings into action. It decides
upon the source from which the purchase is to be made, as also the quantity that is to be
ordered, and then passes the card on for typing out the purchase order. The number of the
purchase order is then entered on the TR and it is returned to the stock clerk who places it
in the appropriate file.
ENQUIRIES – REQUESTS FOR BIDS OR QUOTATIONS
TENDER SYSTEM
The essence of the purchasing process is the rational selection of the source of supply and
determination of the price to be paid for the product to be procured. (Barring exceptional
circumstances like purchase of spare parts from original equipment suppliers where their
price list is available or a repeat order for an item purchased in the recent past or purchase
by small organisations), the usual method is to issue enquiries – request for bids or
quotations – tenders.
This method is usually followed in government organisations, municipal corporations or
public sector organisations, for buying number of types of items or services. Intention is
mainly to curb the possibilities of favouritism and give good way to auditing function. The
method motivates buying process impersonal. It also gives opportunities to the variety of
known and unknown suppliers.
Generally, the value of order is high. For larger value projects and higher technical
requirements global tenders are invited. The methodology takes more time.
Methodology followed is as hereunder:
01​ Define the requirements/project clearly.
02​ The advertisement to be given in minimum three national level English papers and
trade journals calling for offers.
03​ Tender documents are made available at cost. It also contains terms and conditions.
Sufficient time is given to fill the tender.
04​ Generally, offers to be received with earnest money and before a stipulated date and
time, after which it will not be accepted. Offers are to be filled on the tender form
issued and as per the conditions laid therein.
05​ The tenders are opened publicly in decided date and the work is ordered normally to
lowest bidder.
06​ If the lowest bid is more than the estimated cost the negotiations are done with the
party and then they are awarded the work. If it is too lower than estimated cost than
through analysis of the tendered cost is carried out to make sure that tenderer has
understood the items under consideration properly and is capable of honouring the
commitment.
The following types of tenders are generally issued.
1.​ Single. 2. Limited. 3. Advertised or Open.
Some other types of Tenders are: Telephone Tenders, Per Bearer Tenders, Bulletin
Tenders, these are modified form of Limited Tenders.
PLACING OF CONTRACTS
Various types of contracts are entered into. Chief amongst them are:
1) Rate Contract /Blanket Orders
2) Running Contract and
3) Fixed Contract
RATE CONTRACTS:
Rate contracts also known as blanket orders are contracts under which rates of the items
are fixed for the currency of the contract – usually one year but may be longer – (subject to
such escalations or variations agreed upon between the purchaser and supplier) but
quantities to be ordered, however, are not specifically included in the contract. Although a
rough idea of the requirements during the currency of the contract is required to be given at
the time of tendering, the purchaser does not guarantee any off take.
The supplier is, however, expected to supply any reasonable quantity demanded during the
period of the contract.
Rate contracts are usually placed for items, which are readily available in the market, and
for which there are a large number of customers. The items are usually of low value but
have high annual uses but the rate of uses is such which cannot be accurately foreseen or
planned. The suppliers are expected to maintain adequate inventories. Deliveries are made
against release or withdrawal orders from the authorised officers of the organisation. There
is no harm in authorising officers of the other departments to issue release orders but the
purchaser must ensure that he does not loose control.
Rate contracts do not succeed for items, which are unique to an organisation, i.e., when
there are no other buyers for the items. This is particularly so because on such contracts
there is no guaranteed off take and no vendor would care to maintain inventories of an item
for which releases are not forth coming regularly. This difficulty is overcome by entering
into running contracts as against the rate contracts.
RUNNING CONTRACTS:
This are modified forms of blanket orders under which rates of the items are fixed for the
currency of the contract – one year or more – (subject to such escalations or variations
agreed upon between the purchaser and supplier) and in addition the purchaser undertakes
to order and the supplier undertakes to supply a certain quantity with the + tolerance
which is agreed upon in advance (normally not more than 25%) during the period of the
contract.
Since there is a guaranteed off take the supplier does not loose interest even for unique
items and the contracts succeed. For effective control release orders should be placed by
materials department only against running contracts.
Specific advantages derived from blanket orders – rate and running contracts are:
01​ Lower prices – As requirements over the contract period get grouped the purchaser gets
the advantage of lower. Such contracts ensure bulk prices that are protection against
price rises during the contract period.
02​ Lower purchasing cost: Since fewer purchase orders are placed the purchasing cost
(inclusive of accounting, receiving, bill passing etc.) goes down.
03​ Increase in efficiency: The purchaser is released from the routine work of a large
number of small orders. He is, therefore, relatively free for undertaking major
responsibilities.
04​ Lower Inventory cost: The supplier maintains inventories. For the purchaser’s
organisation the inventory carrying cost is reduced.
FIXED CONTRACTS:
These are contracts where both quantities and rates (subject to such escalations or
variations agreed upon between the purchaser and suppliers) are fixed. Most contracts are
one time contract and fall under this category.
SUB CONTRACTING
This method is used basically for the purpose of getting the assembly or the subassembly of
the products from the vendors. The vendors in this case, have generally small factory. He
may be having the small assembly tables at house. The investment in the equipment is low
and more of labour force available. The people recruited there may be with low skills and
they often need guidance and training from the buyer’s factory.
In fact such small vendors form an extension of the assembly shops of the buyer’s factory.
So the supervisors from the buyer’s factory are the real bosses of the vendor. All the
technical help, process, tools, gauges, inspection / check sheets are provided by and over
seen by the factory supervisors till the assemblies are approved by the quality control
department. Often the quality control engineers and inspectors do the checking at the
vendor’s place, so that the approved assemblies can be packed and sent to the warehouse.
This methodology took popularity in the countries like Japan, Korea where the small
vendors were groomed to develop the cottage industry. This concept is taking roots in
India.
Reasons for going for sub contracting are as follows:
1.​ The labour cost is at increase.
2.​ Overheads are increasing.
3.​ Assembly technology is not complex and does not need costly equipments. So the
assembly function is easy to be given out.
4.​ The small vendor can manage the labour properly and can demand high rate of
production from operators and paying them lesser salaries.
5.​ The efficiency and the productivity of the operators in the big industries are poor and at
declined day by day.
6.​ The purchase department has no major job, excepting the job of the rate fixing.
7.​ There is good need to develop the small vendors. The technocrats are required.
There are problems as follows in Sub Contracting:
1.​ The union has to be cooperative. They fear in the reduction of strength.
2.​ The secrecy of the technical matters of the products, process, tools etc. is difficult to
maintain. The vendor has to maintain confidentiality.
3.​ Lot of material has to be sent to the vendor with the high frequency. In the big and
developed company there are number of tedious procedures, paper work and legal
commitments. This increases work and irritations of the factory people.
4.​ It is urged that the quality of the assemblies produced at vendors place is inferior as
compared with those made in the factory.
However, on long range the method will prove beneficial.
ZERO STOCK OR STOCKLESS PURCHASING
The recent materials management demands to reduce or avoid inventory. That is aimed at
by stockless purchasing. For getting success in that purpose, it is necessary for the buyer
and the supplier to work together very closely. There is no financial commitment from the
side of purchasing company. This responsibility is lying on the supplier. The goods may be
located either at the supplier’s or buyer’s location.
The inventories are to be maintained at the supplier’s location. Generally supplier is
preferred who is nearby placed.
The cost at the suppliers’ end may be lower, because he may be able to perform these
functions more economically than the buyer, since he is a specialist in the products. Also
the cost saving is generated due to the fact that the supplier may be serving a number of
similar buyer and thus be in a position to consolidate and lower the total maintenance of the
inventory for the purpose of back-up. They may need smaller safety stocks. Often the items
may be of the ‘off the shelf’ type. Both sides gain in this methodology. Buyer gains due to
no inventory condition and for reducing the purchase routine. The seller has assurance of
the business and he can lookout for other customers. The salesman is freed to do job for
additional clients. On both the side paper work is reduced quite considerably.
The chief advantages of stockless purchasing are:
1.​ The purchaser does not have to tie up his capital in inventories.
2.​ Purchasing routine is reduced.
3.​ Reduction of lead-time.
4.​ Less obsolescence.
5.​ Since the supplier will have the customer’s requirements and may, therefore, reduce his
prices.
6.​ The supplier may be able to club other customer’s requirements and may, therefore,
reduce the prices.
7.​ All round reduction in paper work at both the purchaser’s and the supplier’s end.
LETTER OF INTENT/ADVANCE LETTER OF ACCEPTANCE
When the time interval between the decision on a tender and the validity of the tender is
short and it is not adequate to issue a formal contract, a letter of intent or an advance letter
of acceptance is quickly made out and is issued. It is not necessary that such a letter should
be an exact replica of the detailed purchase contract. It should refer all the correspondence
between the purchaser and the vendor, give full description of the material including
specification, drawing etc., quantity to be supplied, rate applicable and delivery period. It
should also include details of important terms agreed upon and above all affirm that the
issue of the letter concludes the contract and delivery period shall count from the date of
issue of the letter.
CAPITAL EQUIPMENT PURCHASE
The purchase of the capital goods usually planned while starting a new unit or in the days
of prosperity when the production and sales are on rise and capacities needs to be
expanded. The manufacturing and related departments are generally aware as to what they
for progress and to enhance the capabilities. They know the detailed specifications and
different makes for such equipments. They study in detail about their requirements and
equipment catalogues etc. Purchase department has to gather literature and price
information etc.
Normally following methodology is used for capital equipment purchase:
1.​ Detailed specifications and user department requirements are listed.
2.​ Obtain the sanction from the senior management to initiate the action.
3.​ Float Tenders or Contact different parties.
4.​ Make comparative chart of all the offers received.
5.​ Make the decision about selection of the offer.
6.​ Place the indent (An official requisition for supplies.)
7.​ Negotiate the price and terms with the vendor.
8.​ Observe the demonstrations and trials of similar equipments.
9.​ Place the order. In case of imports follow the import procedures.
Important consideration in the capital equipment purchase is reliability of the equipment
and supplier, and after sales service capabilities of the supplier.
POST CONTRACT WORK
Following activities are normally included in post contract work:
1.​ Publication of awards of contract.
2.​ Follow-up of purchase orders.
3.​ History Cards for each contract awarded should be maintained.
4.​ Performance cards,
5.​ Extension of delivery period and levy of liquidated damages in case of delay in
completion of the contract.
6.​ Risk Purchase – (In case of non-compliance by vendor). Usually, a risk purchase clause
is included in the general condition of contracts, which authorises the purchaser to
recover the loss from the defaulting vender at whose risk and costs the fresh purchase is
made.
7.​ Changing terms and conditions.
8.​ Discussion on mode of transport in case if changes are required from the earlier agreed
mode of transport.
9.​ Repeat orders, in case of new demand arising within the stipulated time of first
contract.
10.​Receipt of Material and Inspection.
PETTY CASH SYSTEM (CASH PURCHASE)
NEED: Small purchases cost almost as much as large purchases by way of purchasing cost
if the usual procedure is followed. Occasionally purchase cost may be equal to or even
higher than the value of items to be purchased. The best ay out is to dispense with the
tender system for fixation of price and also the practice of placing purchase contracts.
Instead practice the methods used by every one in making their personal purchases.
One goes to the market, to ascertain the current price by contacting one or more
shopkeeper, buys from the shopkeeper who quotes lowest, pays cash and collects a cash
memo. Tender system is devised for the purpose of accountability however for small
purchases we can dispense with an elaborate system and trust individuals in responsible
positions.
Salient Features:
1.​ A sum of money called Imprest cash is sanctioned in favour of nominated purchase
officer (Roving Buyer) for making purchases on payment of cash.
2.​ With the requisitions in hand he visits the market and makes his purchases.
3.​ When he has used up about half or two thirds of money given to him, he makes out a
statement called Imprest account, asking for recoupment of the money spent by him.
This will take cash available with him again to the original level of sanctioned Imprest.
4.​ On receipt of the Imprest account, the account department replenishes him the money
asked for after exercising checks. In the meantime his purchase activity still goes on
from the balance amount already in hand with him.
5.​ The Materials Manager or the accounts department to check the Imprest account and
also to check the prices paid may carry out surprise check.
GUIDELINES FOR PURCHASE THROUGH IMPREST CASH:
1.​ Purchases from Imprest cash are made only of small value items, which are readily
available from the local market.
2.​ Items, which are to be specially manufactured, and are not readily available, where
supplier quotes for forward delivery are not to be purchased through Imprest cash.
3.​ Since purchase is being made on cash, purchases may not be restricted from registered
suppliers only.
4.​ For purchases up to Rs.50 to Rs.100 each a cash memo from the vendor should be
adequate. For purchases beyond this value, an upper limit may be fixed and two
quotations must be obtained on the letterheads of the suppliers.
5.​ The material should be purchased on “cash and carry basis”. Money is to be paid
against the purchase. If purchase officer is not having money he shall not purchase. No
credit purchase is permissible.
6.​ Purchases are made on trust. If materials on being checked up in the purchaser’s
premises are found to be bellow expectation, the vendor will replace it or take it back.
There should be no arguments against this. If the supplier is reluctant, purchase officer
will not go to them again.
SOURCE SELECTION - VENDOR DEVELOPMENT
RIGHT SOURCE:
1.​ A good supplier should ensure supplies of right quality, at right time, at right price.
2.​ He must be ethical in his behaviour.
3.​ He should be progressive enough to implement all the recent technological
developments for improving his products and he should pass on the benefits of quality
and price to his customers.
4.​ He must be fully dependable.
5.​ He must maintain sound and healthy business relations with all concerned.
Selecting capable suppliers is one of the important responsibilities of a purchase manager.
If the selection is satisfactory, competitive pricing, on time delivery, quality, satisfactory
after sales service – the goals of good purchase will be achieved almost effortlessly.
However, having selected a good supplier the purchaser can’t sit tight. He will have to
evaluate him continuously to see if he comes up to his expectations. Occasionally he may
even have to assist him technically, financially and in other ways and also motivate him.
Every organisation maintains a list of vendors’ trade group wise whom they approach for
their needs of materials. This list is under constant review. Unsatisfactory suppliers are
eliminated and new suppliers are added to enhance the competition. Also new suppliers
have to be found for newer materials required in an ever-expanding business.
How does one obtain information regarding potential suppliers? An important function of
the Purchase Research Section will be to obtain this information from the following sources
and keep a classified record for reference when necessary.
SOURCES OF INFORMATION REGARDING POTENTIAL SUPPLIERS
Following list gives some of the common sources to identify and register potential
suppliers:

❖​ News paper advertisements

❖​ Trade journals

❖​ Trade directories- Indian and foreign trade directories are available which give
classified information of suppliers, industry wise.

❖​ Hand books of registered suppliers of DGS and D (Director General, Supplies and
Disposals).

❖​ Hand books of indigenous manufacturer’s published by DGTD (Director General,

Technical Development)

❖​ Telephone directories

❖​ Catalogues

❖​ Salesmen

❖​ Personnel form other departments of the company

❖​ Trade exhibitions and fairs

❖​ Exchange of information between

❖​ Similar companies

❖​ Speeches of presidents of companies at their annual meetings

❖​ Advertised tender.

SUPPLIER SELECTION – IMPORTANT FACTORS

Following points describes some of the important factors while considering the selection of
potential suppliers:
01.​SIZE OF SUPPLIER: We have in India large industries, medium industries, small
industries and tiny sector or cottage industries. Correspondingly there are large,
medium and small suppliers. Each one of them has different merits and demerits. A
large-scale manufacturer reaps the benefits of economics of scale and has highly
professional approach to business and is capable of giving excellent services. A small
unit may be able to get many incentives like sales tax subsidies or excise exemptions
etc. and hence may be able to offer competitive price. He may be able to give more
personalised attention to the purchaser. A purchaser has to judiciously weigh the merits
and demerits of each of his purchase decision by thoroughly studying these factors.
Usually, it should be a good policy to leave orders of small annual volume with small
units and large annual volume with larger units. The purchaser thus will not overload
any one and each one will be able to offer better services.
02.​MANUFACTURERS OR DISTRIBUTOR:
​ It may look that buying from a manufacturer will be economical or advantageous;
however an agent or distributor offers services, which the manufacturer is not able to
give. The real criteria are the overall cost and also other advantages, which are being
offered.
​ For example, an agent or a stockist may be able to offer following advantages:​
1.​ Give ex stock deliveries.
2.​ May be able to give smaller quantities.
3.​ Offer credit payment facilities.
4.​ May pass on manufacturer’s quantity and/or trade discounts to remain competitive.
5.​ Offer better services being locally available.
6.​ Inventory carrying costs may shift to stockists.​
Here also again merits and demerits of individual situations will help to make the right
decision.
03.​NUMBER OF SUPPLIERS: If the entire business is given to one supplier, he will be
able to give much better services and competitive price. However, introducing two or
more suppliers will bring an element of competition, and will help avoid dependency
on any one. If one supplier fails for any adverse situation supply will not suffer.
 Criticality of the product, necessity of competition, motivation etc. will decide the
issue.
04.​BUYING LOCALLY: Everything else being equal, a local supplier must be preferred.
​ This will offer following benefits:
1.​ Cost of transportation, insurance, packing, octroi etc. will reduce.
2.​ Deliveries will be quicker and dependable.
3.​ Lead times will be low, helping to maintain balance inventories and consequent
reduction in costs.
4.​ Because of logistic advantages there will be better co-ordination with the supplier.
05.​BUYING NATIONALLY: Throwing open the competition to the much wider national
level offers distinct advantages, particularly for large orders. Such suppliers have
benefit of scale and offer much competitive price. Usually they are more efficient and
give good service and superior technical assistance. Due to their greater production
capacities they offer greater production flexibility, which in turn helps to deal
fluctuating demand much better.
06.​BUYING INTERNATIONALLY: Buying internationally through global tenders or
through their authorised agents in India is usually resorted to for materials where
indigenous capacities are not enough or where international quality is required. The
international purchase may require import formalities.
07.RECIPROCAL BUYING: Many companies have a mutual arrangement with their
suppliers whereby the supplier purchase the goods produced in the buyer’s company in
exchange for the same consideration. This is called reciprocity. However such
arrangements should be done on merit without compromising the basic considerations
of principles of six rights of purchasing.
QUALITIES TO LOOK FORWARD IN A GOOD SUPPLIER:
A purchaser looks for the following qualities in a potential supplier.
1.​ COMPETITIVE BIDS: Will he be able to give competitive bids?
2.​ TECHNICAL CAPACITY: Will he be able to produce the goods of the desired
quality with the existing capacity and quality control?
3.​ RELIABILITY: Will he be able to maintain the delivery schedules? Is he financially
strong? Have there been frequent lockouts or strike? Does he plan well so that he does
not run short of basic raw materials? How is his integrity and goodwill judged by others
in the market?
4.​ PRE AND AFTER SALES SERVICE: Has he under his employment technically
qualified sales representatives to give best services? Are they eager to serves their best
to clients? Whether he maintains easy availability of spare parts?
5.​ SALES ASSISTANCE: How will the purchaser’s product behave in the market, by
association with the supplier’s name as component suppliers? Will it enhance the repute
and marketability?
6.​ BUYING CONVENIENCE: Do the sales representatives of the supplier act in a way
so as to cut the necessities of the buyer’s men’s visit to his factory or telephonic follow
up etc.?
REGISTRATION OF SUPPLIERS, APPROVED LIST OF SUPPLIERS
VENDOR DEVELOPMENT & VENDOR RATING
The first attempt at bid invitation should result into successful purchase. Frequent failures
indicate some deep malady. Approaching the right suppliers with the bid requests is the
foundation of a good purchase. Therefore, all good purchase organizations maintain an
approved trade group wise list of suppliers. It is obvious that credentials of likely suppliers
should be carefully examined before they find a place in his list. Such examination may be
conducted in a step-by-step manner as listed bellow.
1.​ Trade groups for enlistment:
Since certain vendors deal with only certain types of stores it is important to classify the
items likely to be purchase by an organization into the correct trade groups. When
approaching likely suppliers, it will be very easy to request them to list out the trade
groups in which they are interested.
2.​ Approaching likely suppliers for registration:
Quite often the firms themselves approach the organizations seeking registration.
Otherwise, the organization itself can make out a tentative list by referring to various
sources of information’s as discussed earlier. As a last resort a newspaper advertisement
may be inserted requesting likely suppliers to come forward.
3.​ Standard questionnaire form:
The firms tentatively selected are then issued a standard questionnaire form. Advantage
of following this method is that all possible information, which the organization wants
to know, is obtained in one stroke and no information is missed. On receipt of the form
the information supplied is to be checked.
4.​ Financial Status:
A confidential reference may be made to the firm’s bankers for advice about its
financial position. The banker may advice whether it is satisfactory or unsatisfactory
and, in their opinion, up to what value of annual business the firm can be relied upon.
Further idea can be formed from their annual turnover during the last three years, the
last annual report and balance sheet and their income tax clearance certificate.
Financial analysis by looking into various financial ratios as explained on the next page
will be useful. It is of utmost importance to enlist a financially sound supplier. Imagine
what happens if a supplier-
1.​ Does not have working capital
2.​ Underbids - how will he then maintain quality?
05. Plant Visit: One must visit the plant of the prospective supplier and asses the details
filled in the vendor assessment, verify degree of correctness of the data filled by the
supplier and evaluate them in terms of their future requirements.
​ ​ ​ Current Assets
a. Current ratio =
​ ​ ​ Current Liabilities
​ ​ ​ ​ ​ ​ Usually a ratio of 2:1 is satisfactory.

Current Assets -Inventories

b. Acid test ratio =
​ ​ ​ Current Liabilities
Ratio of 1:1 is satisfactory.

​ ​ ​ ​ ​ ​ Sales
c. Sales receivable ratio =
​ ​ ​ ​ Accounts receivable

If terms of payment are 90 days, not more than this amount of total sales should be
in receivables.
 ​ ​ ​ ​ Net profit
d. Profitability =
​ ​ ​ ​ ​ Sales

​ ​ ​ ​

The quantum of profits indicates the possibility of bringing down their rates during
future negotiations.

​ ​ ​ Net profits after taxes

e. Cash flow =​ ​ ​
​ ​ ​ ​ Depreciation

​ ​ ​ ​ ​ Value of goods sold in a year

f. Inventory Turnover Ratio =
​ ​ ​ ​ ​ ​ Average inventory
A low ratio means the firm is either over inventoried or under sold. A high ratio is
preferable.

UNIT – 2
CHAPTER – 6
MATERIALS MANAGEMENT
IMPORTANCE, CONCEPTS, OBJECTIVES AND,
MATERIAL HANDLING SYSTEMS
IMPORTANCE OF MATERIALS MANAGEMENT
In the subject of Production Management, we studied that there are three basic factors in
any Production Process. They are, Inputs-Conversion-Output. Inputs can be Men,
Machines, Materials and/or Money. Output can be product or services. In all such acts of
production importance of Materials cannot be underestimated. In fact, most of the activities
of all the organization revolve around Materials. For all practical purpose we must equate
Material as Money. Almost 50 to 60 per cent of a company’s expenditure is incurred on
materials.
Basic objective of all the business organization is to earn profit. Profit is directly
proportionate to the efficient management of materials. If materials are handled with
the required care and efficiency it will add to profit of the organization, otherwise it
will bring additional losses.
Let us take a step towards understanding the subject.
A simple business operation involves Buying and Selling and is known as Trading. This
can be further classified as organizations, which do Buying-Storing-Selling and
Buying-Shifting-Selling.
In either of this organizations materials management requires to focus on following
objectives:
1.​ Reducing of inventories, keeping control on uncertainties of demand and supply.
2.​ Reducing excessive variety of materials without loosing on sales.
3.​ Proper planning and stores layout.
4.​ Organizing systems and policies for material issuance.
5.​ Avoiding pilferage and losses of materials.
For increasing productivity in such organizations various methods are under use, such as:
1.​ Standardizations
2.​ Codifications
3.​ Variety reduction and
4.​ Reduction in wastage of materials.
Materials Management is one of the very important organizational jobs for every unit
whether they produce product or services of economic value.
Let us now consider manufacturing units. The difference between the trading unit and a
manufacturing unit is, in a mfg. Unit inputs are processed and a new product by way of
‘value addition’ is generated or produced. This makes the organization large. It also
involves labour force and many other functions and departments.
It is important to have proper materials management to bring effectiveness and efficiency,
irrespective of it being a manufacturing unit or a service organization, whether it is a
business unit or a non-profit (charitable) organization, materials management is important.
We now understand that materials management is important for all types of organizations.
Many large organizations maintain a separate materials management department, which
generally handles Purchasing, Production and Inventory Control, Stores and Warehouse
etc. In short, this department encompasses every activity in relation to materials.
Importance of this branch of management can be highlighted, by knowing that to develop
and design better systems for materials management, there are International Materials
Management Societies.
These institutes work for promoting excellence in materials management and bringing
National Prosperity through sustainable development.
Materials Management concerns itself with the management of Material Resources. It
concerns itself with the cost we incur on materials and seeks to reduce this cost.
Traditionally we think the cost of materials in terms of price we pay for purchasing of the
materials, that is their basic costs. This amounts to 50 to 60 % of the net price of a product.
Today, however materials management not only concerns itself with the cost of materials,
but also pays equal attention to the cost we incur on materials.
There are two distinct and different costs relating to materials:
They are Cost of Materials and Cost on Materials.
We will deal with all such aspects of the Materials in this subject.
OBJECTIVES OF MATERIALS MANAGEMENT:
Basic objective of the materials management is to help the business to generate additional
profits by attacking the costs of materials and costs on materials to the maximum. Make
products more competitive and hence more salable. Regulate investment on materials,
within the predetermined limits and thus increasing efficient use of working capital funds
employed in the business. Enhance the output of every rupee spent through the best of
management practices. These objectives can be further elaborated as follows:
1.​ To ensure continuous and uninterrupted production or operations, by maintaining a
steady flow of materials;
2.​ To achieve the above objective in an efficient and economic manner;
3.​ To effect economies in the cost of materials by purchasing the materials of the right
quality, in the right quantity, at the right time, from the right source, and at the right
price.
4.​ To achieve economies in the costs incurred on materials after they have been purchased,
through storage, processing and warehousing, till the finished goods ultimately reach
the customer.
5.​ To reduce working capital requirements through proper and scientific inventory control;
6.​ To be alive to the changes in the market in respect of new products;
7.​ To improve the quality of manufactured goods by use of better raw materials or
components and there by increase the competitiveness of such goods put on sale;
8.​ To increase the competitiveness of manufactured goods by reducing their prices
through cost reduction and value analysis;
9.​ To save foreign exchange through import substitution and economizing on foreign
purchases;
10.​To ensure cooperation among all the departments of the enterprise to meet materials
management objectives, both at the corporate and functional levels, and to ensure
proper coordination in respect of such activities; and
11.​To conserve material resources within the enterprise, there by contributing to the
conservation of national resources.
WHAT ARE MATERIALS?
The materials management is concerned with materials required by organizations for their
internal consumption or conversion to carry on with their manufacturing or service
activities. Materials can thus be broadly classified as hereunder:
1.​ Purchased Materials: Raw Materials, Components, spare parts and also consumable
stores like oils, grease, cotton waste etc., tools and machinery etc.
2.​ In-Process Materials: These are materials under semi-finished condition on shop
floors.
3.​ Finished Goods: These are final manufactured products, ready for sale.
PROFIT CENTRE CONCEPT
A study 10 year back revealed that in India Materials worth Rs.30, 000 crore flow into
production channels annually. Inventory tie up, i.e. value of materials held in stock, by
industries amounted to about Rs.15, 000 crore. Considering the progress of industries in
last decade these figures have to be revised to much higher figures now.
A little imagination can give us idea that how much savings can be made by better control
on purchase and inventories. It is obvious that any such savings will directly reflect into the
improvements on profitability and Return on Investment (ROI).
ROI = Profit / Investment
= Profit / Fixed Assets + Current Assets
= Profit x Sales / (Fixed Assets + Current Assets) x Sales.
Now, if Profit and Sales remain constant, the only way to improve the ROI is by reducing
the Investment i.e. Assets which appear in the denominator. Here again the fixed assets
represent money sunk in buildings, machines, etc., so one has to fall back upon current
assets, a large - proportion of which are in the form of materials - inventory holdings. One
must therefore find out a way of reducing inventory holdings to improve ROI.
Illustrations:
Let us consider a hypothetical example, of an industry with a sales volume of Rs.100 lakhs
having profit of 10% i.e. Rs.10 Lakhs. Top Management has set the goal for coming year to
improve the profit to Rs.12 lakhs i.e. increase by Rs.2 Lakhs.
Now this can be achieved in following three ways:
1.​ Instead of charging profit by 10%, charge 12%. However, in the competitive market
this may adversely affect to sales and hence is not feasible.
2.​ Increase the sales to Rs.120 lakhs keeping profit percentage same at 10%. This means
marketing department will have to strive very hard to increase the sales by 20%
compare to the previous year’s sales.
3.​ Assuming raw material content in the product at 50% cost of purchases amounts to
Rs.50 lakhs.
Consider reducing the purchase cost by Rs.2 lakhs that will add to the profit improving it to
Rs.12 lakhs (an increase of 20% in profit). Thus, a reduction in purchase by just 4%, we
can achieve our goal. In other words, savings of 4% in material equals to 20% increase in
sales.
From the above case study, we can realize, that it is far easier to effect reduction in material
cost. In the above example we observe that every rupee saved in material cost is equal to
efforts made to improve sales of Rs.10. Every rupee saved in material cost goes directly to
profit.
Materials management therefore is an area where there is a good potential for increasing
the profitability of the organization through cost reduction. In other words this a Profit
Centre, which requires careful nursing.
This is known as Profit Centre Concept.
WHAT ARE THE COSTS? WHERE DO THEY LIE?
Some of the costs involved in the management of materials are as follows:
1.​ Basic cost of materials i.e. the cost paid to the supplier
2.​ Purchasing Cost i.e. cost incurred in effecting purchases, e.g. cost on staff, cost of
tendering, cost of stationery, postage, cost of identifying and selection of right
vendors/supplier, cost of receiving and inspection of supplies.
3.​ Inventory carrying cost i.e. cost on warehousing building, godown staff, interest
and/or financial cost on working capital locked in inventory. Cost due to
obsolescence/deterioration/depreciation and pilferage of material under inventory.
4.​ Cost on materials wasted during the production process, transportations, material
handling etc.
5.​ Rejection due to quality problems, defective designs, inefficiency in production,
delayed compliance of orders etc.
6.​ Generation of scrap during production process.
There may be much more hidden cost which needs to be identified by the materials
management department and kept under vigilance and control.
The primary objective of any organization is to reduce the above costs so that the
ultimate materials cost is lowest.
INTEGRATED SYSTEMS APPROACH TO MATERIALS MANAGEMENT:
There are several functions in management, which are related with Materials. In order to
obtain best results all these functions must be placed under one department viz. Materials
Management.
Let us first understand and list out these functions:
1.​ Materials Planning – ascertaining needs of users well in advance. Translation of sales
Projections into production requirements. Making a close realistic estimate of various
items of materials required their quantities and time when required.
2.​ Make or Buy Decisions – which of these are to be produced internally and which are
to be off-loaded for purchase, based on relative economics.
3.​ Purchase – of the required materials, to ensure their uninterrupted supply to meet needs
of production. This includes raw materials and consumables for items to be produced
for self-consumption. It will also include stores and consumables for maintenance
department.
4.​ Receipt and Inward Inspection – of all the items received. Although assistance of
production department may be taken, it is primary responsibility of the MM department
and ultimate decision of acceptance or otherwise of materials received must rest with
MM department.
5.​ Storage – providing right storage warehouses, using proper methods of preservation,
providing proper security so that loses due to pilferage and deterioration are minimized.
6.​ Distribution of Materials – arranging most efficiently and expeditiously supply to
indenters/customers.
7.​ Transportation – arranging most economical and expeditious transportation for the
incoming and out going materials.
8.​ Inventory Control – maintaining economic level of investment in inventories so as to
reduce needs of working capital.
9.​ Disposal – of over stocks, surplus and scrap and also salvage of materials.
10.​Developing – ancillary industries, new sources of supply for purchases to remain
competitive, and also keep in touch with market to search new and economic but
equally effective substitute items.
11.​Developing Import Substitutions – by locating alternate indigenous source of supply
for replacing imported items of purchase, thus economizing the product costs.
12.​Material Cost Control – by using various scientific and management techniques for
cost reduction such as value analysis, ABC analysis etc.
13.​Coordination and Inter-relationship – with various departments to bring in effective
corporate governance.
14.​Research and Development – with reference to the materials.
WHY INTEGRATED FORM OF MATERIALS MANAGEMENT?
As stated above, for best results it is prudent to follow an integrated approach in the
materials management. Let MM handle materials planning, sourcing, purchase or
procurement, receipt and inspection, storage, distribution, inventory control, scrap and
inactive items disposal, transportation, etc.
The advantages of such a system are obvious. If some of the functions are allotted to other
disciplines, curious situations may arise.
An over enthusiastic production manager, who may be in charge of materials planning may
insist on holding large inventories with un-economical safety/stocks to ensure unhampered
production. A purchase manager who may be solely in charge of purchasing function will
most likely concern himself in buying cheap and may therefore, give undue weightage on
buying in bulk to avail of quantity discounts without realizing its impact on capital
requirements, warehousing needs, carrying costs, etc.
In both situations, sub optimization of available resources is the net result. For the
organization the results are disastrous.
To balance the various interest from an over all angle, all inter related functions as above
may be entrusted to one individual at the helm of the MM function, so that he is able to
co-ordinate all the functions, look at them from a total concept and exercise effective
control. He ensures that no single activity gets undue weightage and no activity though less
important is lost sight of.
This results in optimization and ensures a predetermined service level.
Advantages in this arrangement are:
1.​ MM will take decisions keeping a right balance of various conflicting interest under
different functions.
2.​ With the centralization of authority, clear-cut accountability is ensured. As a result
every one knows where to look for all the problems on materials. If a failure has
occurred investigation has to be directed towards one department only. The attitude of
fault finding or “I am not responsible” disappears. It is easier to take corrective actions.
3.​ Coordination of various functions listed above is much better. Various sections under
the department develop an identity of purpose. Other departments, too, know that they
have to approach one department only and gradually an atmosphere of trust develops
resulting in improved relations with user departments.
4.​ Decisions can be taken speedily and accurately. Judicious decisions can be taken
leading to lower cost for materials, improved inventory turnover, less stock-outs, less
lead time etc.
5.​ Since all functions relating to materials are centralized, it is now much easier to collect
the mass of data and analyze the same for improved decision taking. It is now possible
to introduce advance Electronic Data Processing (EDP) systems.
6.​ Every individual in the department gets exposed to all aspects of materials function
with the result that an improved materials management cadre develops. An opportunity
for their growth improves, resulting in long-range benefit to the organization.
RELATIONS OF MATERIALS MANAGEMENT DEPARTMENT WITH
PRODUCTION DEPARTMENT:
Materials Management Department is a service department. It must make serious and
sincere efforts to supply materials to the user departments most effectively and efficiently
(i.e. at the time required in the required quality and quantity and at most economical
prices). It is quite possible that the materials management and other departments like,
production, marketing, finance, etc. view the same problem differently. This is a normal
and healthy situation, provided departmental opinions are held objectively and a feeling of
mutual trust is created.
MATERIALS MANAGEMENT AND PRODUCTION:
1.​ When the production department demands materials without allowing sufficient time to
purchase wisely, needles expenses creep in into the final costs of the products. The
production department has to be educated to give adequate lead-time for the
 procurement. But even when there has been a lapse the material management
department must go all out to assist the production department to avoid a production
shut downs as the results of such an eventuality is disastrous to the organization.
2.​ In case there is a delay the material department should advice the production
department as soon as they become available. Also, when delays are anticipated, the
latter should be informed so that action for rescheduling of production can be taken.
3.​ The production department should try new substitute materials with an open mind.
4.​ Production Department may advocate large inventory holdings as a logical safe guard
against possible production stoppages. But the material department has objective of
accomplishing the task with the minimum capital investment in inventory. Reconciling
these two conflicting views requires capable, well-informed and understanding
departmental heads.
5.​ Production department should assist materials department in selection of the capital
goods and other items requiring sound technical back ground and practical experience.
6.​ It should also help in the inspection of incoming material.
MATERIAL HANDLING SYSTEMS:
Raw materials are basic inputs for any manufacturing firm. Movements of raw materials
subsequent to their being received in the storeroom, through all the operations up to
conversion to the finished products and its final transfer to the shipping room are confined
to material handling.
Material Handling involves the movements of the materials from one place to another for
the purpose of processing. They are moved either manually or mechanically with the help
of different type of material handling equipments. Movements may be vertical, horizontal
or combination of both. Materials can be solid, liquid or gas. Apart from various
operational processes, movements may be required for the purpose of packaging and
storing.
Jobs involved could be of various varieties such as loading, unloading, lifting, moving,
pushing, dropping, positioning, holding, releasing, stacking etc. They are handled as a
single unit or in a lot depending on the weight, size, type of the material and process and
capacity of the material handling equipments. Since men and machines are normally
stationary or confined to limited area, but the material travels extensively inside the plant
area hence material handling derives great importance in the production function and has
its important role in profitability contribution of the unit.
A good plant layout reduces the material handling requirements to the minimum. Plant
layout and materials handling functions are so closely connected with each other that they
cannot be isolated.
Factors involved in the material handling are Types of products, Plant layout, Production
system, Factory building, Production Planning & Control, Packaging and material handling
equipments.
Objectives of material handling are:
1.​ Reduction in the costs of material handling
2.​ Improve speed and safety while handling the materials
3.​ Help in increasing the volume of the production or in other words to help achieve better
utilization of plant capacities
4.​ To help in increasing storage capacities in the plant by handling material efficiently.
5.​ Help to avoid loss of time and delays in production process
6.​ Avoid human fatigue in materials handling
7.​ To improve customer services through reduced costs and raising overall productivity.
Principles of materials handling:
01​ Not to handle the material at all. Design the plant layout in such a manner that materials
handling is eliminated as far as possible.
02​ Time and distance of each move should be minimized.
03​ Principle of Unit Load should be used. It means lots of optimum number of pieces
rather than individual are moved using pallets or containers thus reducing the costs.
04​ Principle of gravity used, as it is the cheapest and natural source of motive power.
05​ Re-handling and backtracking should be avoided.
06​ Efficient and appropriate material handling equipments should be selected and used so
that safety, efficiency and flexibility are maintained.
07​ Design of the pallet, containers, drums etc. should be such that they are easy to be lifted
and shifted and are safe for the materials being handled reducing the transit damage to
nil.
08​ Material handling services should not interfere with the production flow.
09​ Safety at the time of material handling is of prime importance and must receive through
consideration at the time of adoption of a particular system.
10​ Provision of stand by facilities must be kept so that in the instance of break down entire
production facility does not come to stand still.
11​ Proactive maintenance of the material handling equipments must be part of the systems
design.
12​ Material handling system may be periodically reviewed and should incorporate
improvements wherever necessary and feasible.
Types of Material Handling Equipments:
1.​ Cranes and hoists
2.​ Conveyors
3.​ Trucks, Tractors & Trailers, Fork Lifts
4.​ Rails, Rope ways and cable ways
5.​ Pipe Lines
Auxiliary Equipments:
These are devises or attachments that accompany material handling equipments to enhance
their usefulness and effectiveness.
1.​ Weighing equipments.
2.​ Hook devices and their counter parts, Chain pulley blocks.
3.​ Containers, Pallets and skids.
4.​ Pallet Loaders and un-loaders.
5.​ Lift-truck attachments.
6.​ Positioners.
7.​ Ramps, Dock-boards and Levelers.
8.​ Robots.
(INSERT FEW PHOTOGRAPHS OF MATERIAL HANDLING EQUIPMENTS)

*** *** ***

CHAPTER -7
INVENTORY MANAGEMENT
INVENTORY CONTROL
From purchasing to receipt, to inventory stocking, to production and storage of in-process
and finished goods, to distribution of the produced goods is one continuous or integrated
system of operations where material flows from external supply market to the customers of
the company. The management of the materials will not be effective if this entire flow is
not kept in view. Policies for various components of this flow (or delays, storage or
stoppages) have to be made, and there should be enough interaction between the different
components of the management of materials as also enough flexibility or adoptability built
into such a policy framework.
The inventory control department is often (in various organizations) a part of production
planning & control. After all, inventory of raw materials and work in process goods are
kept to facilitate the production function. Therefore, inventories have to be considered
along with the other costs and problems of production as the objective is to minimize the
totality of production related costs, of which cost of materials is one component (and major
component). The gamut (whole range of anything) of production costs includes wages,
regular and overtime, overhead costs, and the cost of materials. Optimizing only the
materials costs may result in sub optimization of the overall production costs. Due to labour
and machine capacity availability concerns, what may appear to be an optimal decision
(given by an inventory control model as detailed under ‘inventory control’- in pages to
follow) may not fetch adequate results for the production function as a whole? Inventory
control and materials planning should form a part and parcel of the production planning
exercise. The decision about the labour allocation, the quantities of different products to be
produced at different periods of time in the year, the allocation of the machine capacity, and
inventory of work in process, finished goods and raw material to be carried may be taken
together.
Decisions of how much to procure and how much to store can not be taken without a
proper understanding of the availability of the storage space, of the characteristics of the
deterioration of materials, of the risks and costs of handling materials, of the costs of
maintaining component parts and materials in the stores and warehouses. Stores,
warehousing, and materials handling have inputs in materials – stocking or producing
decisions.
What may appear to be an economic batch quantity of production may not be so if the
logistics (the art of arithmetical calculations) are also considered. The mode of shipment,
the in-transit inventories, the number-size-location of the warehouses, etc., have a
significant impact on inventory and procurement policies.
There should be enough adaptability in the system to take into consideration abnormal
situations as and when they present themselves. In this connection a frequent interaction
with the other related departments such as purchasing, logistics, etc., is very essential to
achieve the goals of the organization.

Similarly, the purchasing department should be aware of the various components of costs
related to inventories, the problems of inventory-keeping, so that their own job of getting
information about the supply market and feeding relevant information back into the
organization is facilitated. Adoptability considerations necessitate integration of various
component functions of the management of materials.
INVENTORY
Inventory simply in single word can be described as ‘stocks’.
It is a usable resource or more simply stock on hand at a particular time, of (a) raw
materials, (b) goods-in-process of manufacture, (c) finished products, (d) goods purchased
for sales, (e) spare parts and (f) physical and tangible assets, which can be seen, measured
and counted.
In connection with the financial statements and accounting records, the reference may be to
the amount assigned to the stocks of goods owned by an enterprise at a particular time.
Inventory may also be defined as a “complete and detailed list” of articles. An inventory of
property or goods tells us, how many articles are there and what each one of them is worth?
INVENTORY CONTROL MANAGEMENT
It constitutes the maintenance of inventories, at a desired level, or control of the level of the
normal or basic stock, maintaining an adequate supply of items of need to meet the
expected demand pattern, subject to budgeting considerations. It is an area of organization
and operation, which revolves around materials and forms an important constituent of
materials management.
Effectiveness of the materials and production function depends to a large extent upon
inventory management.

Inventory turnover ratio is an index of business performance. Higher inventory turnover

ratio reflects better and sound production management.
Inventories have to be procured, stored, and carried for production system, since a situation
when they can be instantaneously available is difficult. In case of a manufacturing
organization, inability to supply an item from inventory could bring production process to a
halt. Looking from the other side, if a firm carries excessive inventories, the added carrying
costs may eat away a part of hard earn profit. Effective inventory control therefore can
significantly contribute to the overall profit position of an organization.
FUNCTIONS OF INVENTORY:
In any organization inventory add an operating flexibility that would otherwise be lost. In
production function work-in-process inventories are an absolute necessity.
Some of the functions inventory performs can be summarized as described
hereunder:
1.​ Regularizing demand and supply:
Cotton is produced during the cotton harvesting season, where as it is demanded
through out the year by cotton mills. In case like this sufficient amount of cotton bales
must be purchased by mills during the harvesting season to last the demand through out
the year.
2.​ Economizing purchase or productions by lot buying and/or by batch production:
If the product does not have the demand to sustain continuous production, a batch
production will help to build an inventory of finished goods so that sales can be
effected during the time when goods are not being produced.
3.​ Inventory helps store labour:
Since most of the finished goods stored are conversion of input to the output there is
significant component of labour involved in the process. Thus a finished product also
stores the labour.
4.​ Inventory facilitates transit and handling:
It is costlier and non-feasible to dispatch the single items in many cases; in such cases
creation of inventory will help for transport and material handling.
5.​ Inventories serve to isolate the Supplier, the Producer and Consumer:
Isolating also called decoupling of producer from supplier, and production department
from another, and consumer from producer is necessary for two reasons (a) first to
reduce the dependency of one another. (b) Enable each organization to schedule its
operations independent of another department. It safe guards against certain
contingencies like strikes at supplier’s place, transport bottle necks, natural and men
created crisis etc.
6. ​ It helps to reduce material handling costs.
7. ​ It helps to obtain a reasonable utilization of manpower.
8. It helps for products display and service to consumer.​ ​ ​ ​
INVENTORY COSTS:
Inventory cost money and hence cost factor must be considered while taking any decision
regarding inventories. Inventory costs may be classified as follows:
1.​ Ordering cost: This includes cost of placing an order on the vendor. It includes
Preparing of a purchase order. Processing payments, receiving and inspecting the
material.
2.​ Carrying cost: This are the costs directly connected with the material. They include
cost of obsolescence, deterioration, pilferage etc.
3.​ Financial costs: This includes capital costs, storage space costs, inventory service costs
etc. These costs can be further classified as cost of tax, insurance, storage & security,
Interest, etc.
4.​ Handling equipment costs: This includes capital cost towards transport vehicles, fuel
and maintenance for the same and costs of equipments and power and electric bills etc.
5.​ Out of stock costs and Capacity costs: This includes costs of loss of production due to
stock outs and also costs of lost capacity utilization because of the loss of production.
SELECTIVE INVENTORY CONTROL:
Literally thousands of items are kept in inventory by various organizations. Periodic
reviews of inventories of these items have to be undertaken for effective inventory control.
The underlined idea of such reviews is to keep stocks at a low level but at the same time
keep the service percentage high. The problem is how to review such a large number of
items. Is it necessary to have the same type of control for each and every type of items? An
equally critical analysis of all items is very expensive and time consuming. Selective
control of items with reference to a particular function under examination is the solution.
Item should, therefore, be classified so that the more important amongst them receive the
greater attention.
PARETO’S PRINCIPLE OR PARETO’S LAW OF 80/20
The 80/20 Rule means that in anything a few (20 percent) are vital and many (80 percent)
are trivial. In Pareto's case it meant 20 percent of the people owned 80 percent of the
wealth. In Juran's initial work he identified 20 percent of the defects causing 80 percent of
the problems.
You know 20 percent of you stock takes up 80 percent of your warehouse space and that 80
percent of your stock comes from 20 percent of your suppliers. Also 80 percent of your
sales will come from 20 percent of your sales staff. 20 percent of your staff will cause 80
percent of your problems, but another 20 percent of your staff will provide 80 percent of
your production. It works both ways. You have to find out How It Can Help You.
CLASSIFICATION OF INVENTORIES
Broadly inventories may be classified as Production Inventories, MRO i.e. Maintenance,
Repair and Operating supplies, in-process inventory, finished goods inventory, etc.
CLASSIFICATION METHODS:
Various methods of classification are adopted:
1.​ Always Better Control (ABC) classification.
​ {Annual usage Value}
2.​ High Medium and Low (HML) classification
​ {Unit Price of Items}
3.​ Vital, Essential and Desirable (VED) classification.
​ {Criticality of items, particularly components and spares}
4.​ Scarce, Difficult and Easy to obtain (SDE) classification
​ {Problems in procurement}
5.​ Fast, Slow and Non moving (FSN) classification
​ {Consumption pattern of the items}
6.​ Seasonal, Off Seasonal (SOS) classification
​ {Availability – whether in particular season or all seasons}
7.​ Government, Ordinary, Local, Foreign (GOLF) classification
​ {Source of Availability}
ABC ANALYSIS
In ABC classification, the items are classified according to the annual usage value, which is
by far the most important aspect of the inventory control.
Unit cost or annual consumption in units is not relevant. It has been the universal
experience that a very few items whose annual consumption value is large contribute
significantly to the total inventory holding of the organization. On the other hand, there is
very large number of items whose annual consumption value is small and their contribution
to the total inventory holdings is negligible or insignificant.
The problem is to segregate items that are:
(A) Most important, (B) Less Important, and (C) Least Important, and to devise the type of
controls, which are adequate for the three groups of items.
Mechanics of ABC Classification:
Exactly how the inventory items are classified is illustrated by the table bellow:

A B C D E F

Item Nomenclature Annual Usage Price Annual Cumulative

Count List or Code in Units Per Usage Annual
Nos. Unit Value Usage Classifications
Value

1 4375908 3000 100 3,00,000 3,00,000 ‘A’

I
2 2486501 290000 1 2,90,000 5,90,000
t
3 1825456 20000 14 2,80,000 8,70,000
e
ITEMS –A m
s
503 6432197 1980 25 49,500 6,99,69,500
A ---------------------------------------------------------------------------- A

504 5652201 4900 10 49,000 7,00,18,500 ‘B’

I
505 8590307 2700 18 48,600 7,00,67,100
t
506 7125783 24000 2 48,000 7,01,15,100
e
ITEMS –B m
s
1995 3267104 1240 8 9,920 9,00,03,600

B ---------------------------------------------------------------------------- B

1996 9132568 400 24 9,600 9,00,13,200 ‘C’

I
1997 6218325 1360 7 9,520 9,00,22,720
t
1998 2870678 860 11 9,460 9,00,32,180
e
ITEMS –C m
s
10042 5398102 320 3 960 9,99,08,270

C ---------------------------------------------------------------------------- C

Steps are as follows:

List items serially in descending order of their annual usage value (E) – neither according
to their annual usage in units(C) nor according to unit prices (D). These two factors are
irrelevant in ABC Classification. The only relevant factor is annual usage value in
rupees.
1.​ Strike cumulative totals of annual usage value as done in last raw and column
(10042/F). The last cumulative total is Rupees 9, 99, 08,270 – say Rs. 10 Crore.
2.​ Draw the first cut of line AA where the cumulative total of annual usage value is
around 70 % of the above total, i.e. Rs. 7 Crore. In this case Rs. 6,99,69,500.(At
503/F)
3.​ Draw the second cut off line BB where the cumulative total of annual usage value is
around 90%. (A further 20%) of Rs.10 Crore, i.e. Rs. 9 Crore. In this case Rs. 9, 00,
03,600(At 1995/F).
4.​ Items above the first cut off line AA are called ‘A’ items. These are high annual usage
value items. In the illustration, 503 items (Approx 5%) out of a total of 10,042 items
contribute 70% of annual usage value. All these items are individually over the annual
usage value of Rs.49, 500 – say Rs. 50,000.
5.​ Items between the two cut off lines, AA and BB, are called ‘B’ items. These are annual
medium usage value items. In the illustration 1492 items (Approx 15%) contribute
20% of the annual usage value. All these items fall within the range of Rs.9, 920 to
49,500 – say Rs. 10,000 to Rs. 50,000.
6.​ Items bellow the cutoff line BB is called ‘C’ items. There are low annual usage value
items. In the illustration 8047 items (Approx 80%) contribute 10% of annual usage
value. All these items are bellow Rs.10000 annual usage value.
OBSERVATIONS:
1.​ Usually 10% of the items account for 70% of the total annual usage value, the next 20%
account for the next 20% of the items account for next 20% of the total annual usage
value and the remaining 70% of the items contribute just 10% of the total annual usage
value.
2.​ For the large organizations which stock a very large number of items, even 10% of the
total number of items is quite substantial for effective selective control.
3.​ There is nothing sacrosanct about having cutoff points at 70% and 90% of the annual
usage value and one can select higher or lower cutoff points to suite One’s convenience
depending upon the capabilities developed for effective control.
4.​ For simplicity, after the ABC classification has been done, items are defined as A, B or
C depending upon whether they are above a fixed annual usage value.
For instance an organization may classify A, B and C items as under:
A- Items - items whose annual usage value is Rs.50, 000 or above.
B- Items - items whose annual usage value is between Rs.10,000 and Rs.50,000
C- Items - items whose annual usage value is below Rs. 10,000
5.​ ABC analysis, for the purpose of fixing the limits is not done often. The limits once
fixed continue to be in force for a few years.
6.​ Usually it is difficult to carry out ABC analysis manually. It is quite simple for
organizations, which have installed computers for materials management applications.
SELECTIVE CONTROL PROCEDURE:
Control procedures to be followed for A, B and C categories of items are illustrated in the
table bellow.

Factor A B C

1 Control Very Strict Medium Low

2 Intervals for More frequent, Less frequent Six months

inventory review Daily-weekly-month Once a month or or so may
ly quarter even be
dispensed
with except
for
 non-movin
g items.

3 Level at which Highest Medium Level Junior

authority-Senior Level
periodic review is
Level
To be undertaken

4 Record Keeping Detailed and Not as detailed as No detailed

and accurate A items but not so records,
loose as C items even the
Material Planning two-bin
system is
adequate.

5 Ordering Frequent EOQ A reasonably Bulk

Procedures to be good analysis of ordering.
strictly followed. order quantity is Even EOQ
Staggered deliveries adequate formula
may be obtained gives large
against blanket quantities
orders. to be
procured

6 Safety Stocks Eliminate or have Moderate safety Large

low safety stocks for stocks. safety
select few items. stocks.
Review to avoid
stock outs.

7 Steps to increase Better Market A few reliable A couple of

research. Increase sources are sources
Competition may be
and improve sources adequate
of supply. enough

8 Inventory Holdings Maintain low Maintain medium Maintain

inventory inventory large
inventory

9 Obsolete or surplus Serious attempts Less serious Annual

stock reduction must be made attempts review is
enough

10 Value Analysis A concentrated May be attempted Not worth

attempt to be made for a few selected the efforts/
items
OTHER APPLICATIONS OF ABC ANALYSIS:
A number of applications of ABC analysis can be thought of, some of them are:
1.​ Classifying vendors by volume of Business Secured:
​ Analysis of the vendors may be done, by arranging them in descending order of volume
of business. The most important will be on the top of the list and more insignificant on
the bottom of the list. Organizations may organize their relations with the vendors
considering this important aspect – volume of business.
2.​ Disposal of overstocks, surplus scrap:
Whether one likes it or not, every organization collects a large number of items of
overstocks, surplus or scrap. The problem is how to tackle such a large number to
achieve the best financial results. The solution is ABC analysis. List the item in the
descending order of their inventory holdings. Tackle the larges value items first and
dispose them of. It will not serve much purpose by dealing with the very large number
of low inventory items of over stocks, surplus or scrap. Tackle the heaviest first and if
time permits then the others.
3.​ Analysis of purchase orders:
Similar to above one can also analyze the purchase orders based on value and classify
them in ABC classification and decide the amount of time spent on such orders in that
priority.
In short ABC analysis offers vast scope to personnel in the materials management field.
With imagination one can devise more and more applications of this technique.
XYZ - CLASSIFICATION (ANALYSIS)
In this classification, the items are arranged in descending value of inventory holdings. This
study is usually undertaken two to three months before the end of the financial year for
which materials management performance is evaluated so that corrective action, if
required, can be taken in advance.
X items are those items whose inventory values are high, Z items are one whose
inventory values are low and Y lie some where in between X and Z.
For understanding the principles of XYZ Analysis, let us do the case study of an
organization as hereunder:
A items are those items whose annual usage value is Rs.50, 000 and above.
B items are those items whose annual usage value is between Rs. 10,000 and Rs.50, 000.
C items are those whose annual usage value is Rs. 10,000 or bellow.
This organization has also fixed the ideal inventory levels for A, B and C items as follows:
A items – less than 3 months annual usage value.
B items – less than 6 months annual usage value and
C items – less than 12 months usage value.
X Y Z limit may be fixed as:
X items – those whose inventory holdings are Rs.12, 500 and above.
Y items – those whose inventory holdings are between Rs. 5000 and Rs.12, 500.
Z items – those whose inventory holdings are Rs.5000 or bellow.
For effective results priorities for inventory control may be fixed
in terms of following table:

Annual
Classifications Usage X Y Z
Value Rs.

Inventory Inventory holdings Inventory

holdings between Rs.5,000 holdings
Rs.12,500 and and Rs.12,500 Rs.5,,000
above and bellow

A 50,000+ Priority I

B Between Priority II Priority IV

10,000
and 50,000

C 10,000 and Priority III Priority V Priority

bellow VI

From the above table we can observe that CX items indicate positively lax materials
management. AY, AZ and BZ items are already under control. Depending on available man
power and time items may be taken up for review in the following order.
AX, BX, CX, BY, CY and CZ and corrective steps may be taken to bring the inventory
levels to specified limits.
DECIDING WHAT TO STOCK AND HOW MUCH TO ORDER:
It is often said that inventory control consists fundamentally of finding answers to
three questions:
1.​ Should this item be stocked at all?
2.​ If so, when to order?
3.​ How much to order?
No item, not even the cheapest item or the ones whose annual consumption value is least,
should be stocked without a careful review. This should be continuous process, because
costs consumption, source of supplies, availability, all varies making previous decision
obsolete. In many cases, items, which were previously stocked, can be eliminated by –
1.​ Standardization
2.​ Using near equivalents, and
3.​ Merely by eliminating items which are no longer used as regular items.
One of the primary considerations for deciding upon stocking of materials and stock levels
will be availability and delivery. Stocks of materials in the stores act as a cushion for the
factory which is affected by fluctuations in the rate of deliveries or from total stoppages
even for short periods, say, due to strikes floods, disasters in the supplier’s factory,
transport problems etc. When the production is seasonal, stocking also needs to be only
seasonal.
AD HOC DECISION ON INVENTORY:
The managers usually take decisions on the three questions posed earlier on ad hoc basis or
a rule of thumb basis. Hunch (A strong feeling - which something will turn out in a certain
way) plays a great role in such decision, more likely than not, such decisions without
proper evaluations are likely to prove to be wrong decisions. Let us examine some typical
cases as mentioned in the table bellow and see decisions taken on the basis of hunch are
likely to be wrong.

Sr. Situation Action by Possible error

No. Manger

01 A company requires an Buys one Ordering costs will be high,

item costing 0.10 paisa month’s stock costs on packaging and
each. 5000 such items are transportation will be high.
required monthly. at a time. Receiving and inspection
costs will be twelve times
more than if the material
was bought once a year.
After all annual costs are
just Rs.6000

02 Now consider that the Buys six The costs of carrying such
unit costs are high, say months’ stock at high value of inventories for
Rs.1000. 500 such items a time long periods will be very
are required monthly. high. There is risk of
deterioration, or spoilage or
obsolescence during storage

03 An item is available Places order The storage space is

literally off the self and very early by unnecessarily occupied.
delivery, lead-time is ‘way of abundant Inventories become high for
hardly two days. caution’ no particular reason.
Spoilage may occur before
use. Unnecessary handling is
required. If the material was
so easily available, perhaps
 it could have been delivered
direct to the factory floor,
each time it was required.

A material requires long Places order too Stock-out might take place
lead-time. late. and this might not only be
04 expensive because of
production stoppages but it
might also offset sales and
customer goodwill.

05 The machines set up The production Production costs naturally

costs in production are manager increase this production
high. schedules short costs add up to the cost on
production runs. materials and naturally
finished product costs more.

06 The machines Set up The production Unnecessary stocks of

costs in production are manager finished goods might be
low schedules long built up which, apart from
production runs. leading to higher inventory
carrying costs might lead to
problems of shortages of
storage space and some time
also of deterioration, of the
products, if they have a
definite shelf life.

07 Finished goods are Yet the same Finished goods will

maintained as per earlier inventory levels certainly be surplus to
inventory levels when are maintained. requirements and, besides,
demand was very high. high carrying costs might
Of late, the demand has result in a situation where
shown a sharp down distress sales may have to be
ward trend. restored to by the company
to rid itself of the stocks.

09 Some products are Sales manager During the peak season

seasonal in nature. The decides to keep production cannot obviously
demand for particular the inventories at produce 500% more than the
item rises very sharply a constant level usual. (When the product is
(500%) in the rainy through out the seasonal inventories are
seasons. year. built up during the off
season)
 10 Market is temporary and Sales manager Obsolescence occurs and
demand some time has maintained obsolescence costs can often
vanish as fast as they very high be very high. Rapid market
appear. (Ready inventory in changes and changes in
Garments) keeping with his consumer tastes can affect
previous sales.
experience.

HOW MUCH TO ORDER? THE ECONOMIC ORDER QUANTITY

Among the most useful techniques for determining ‘how much to order’ is the Economic
Order Quantity.
As would be appreciated, the time wise quantities needed by production need not
necessarily be the same as the time wise quantities purchased. Several other considerations,
other than the production needs would determine the quantities to be purchased. The
objective is to keep over all costs to the minimum.
One of the most effective techniques for determination of the quantity is called
Economic Order Quantity (EOQ).
There are two major costs involved in purchasing. (Ordering Costs)
1.​ Purchasing cost or acquisition cost - purchase department in making purchases incurs
this.
2.​ Inventory carrying cost.
The primary aim in determining the right quantity is to ensure that sum total of these two
costs, are at the minimum possible.
Definition: The ‘Economic Order Quantity’ is that quantity at which the cost of
procuring the annual requirement of an item and the inventory carrying cost are equal,
i.e. where the total of the two costs is lowest.
The following formula is used to determine the E.O.Q. of an item:

Q = √ 2AP/UC

Where A = Annual consumption in units.

P = Procurement cost per order
C = Inventory carrying cost expressed as a Percentage (of value), e.g. X/100
U = Unit Price
QUESTION: Following table states Annual Consumptions of various items of inventories
of a company. Work out the E.O.Q for each items based on the basis of Rs.150 as
Purchasing Cost per Order and Inventory Carrying cost @ 30%, and Unit Value of One
Rupee.

Annual
consumption
Units

1000

9000

16000

49000

80000

100000

400000

The actual working for Annual Consumption of 80000 is illustrated as hereunder:

​
2AP​ A = 80,000 P = 150
Q=
UC​​ U = Rs.1 ​ C = 30% i.e. 30/100

2x80000x150
Q=
1x30/100

Q=​ 80000000
Q = 8944 or say 9000, 52 weeks in a year and 9 orders to be placed therefore order
will be placed every sixth week.
Students can do the practice for the other quantities as home work.
Answers for each of the other quantities are given in the table hereunder:
 Annual E.O.Q No. of orders Period
consumption (Qty. per order) per year
Units Units

1000 1000 1 1 year

9000 3000 3 4 months

16000 4000 4 3 months

49000 7000 7 7.5 weeks

80000 9000 9 6 weeks

100000 10000 10 5.5 weeks

400000 20000 20 18 days

Few other examples on EOQ:

EXAMPLE -1:
A Company is determining its frequency of orders for an ‘electrical switch’. Each product
costs Rs.20. The annual carrying cost is Rs.400 and the cost per order is Rs.15. The
company expects to sell 50 units of ‘electrical switch’ each month. It has also decided to
maintain an average inventory level of 40 units. Find the EOQ. ​

SOLUTION-1:
A (Annual usage in units) = 50 units per month x 12 = 600 units annually. ​
P (Ordering cost per order) = Rs.15​
C = Average inventory x Carrying cost per unit. In this case, Rs.400 is the total carrying
cost annually.
Therefore, Holding Cost per unit H = Rs.400 / 40 = Rs.10 per unit.​
​
EOQ = √2AP / H = √(2 x 600 x 15) / 10 = 42 units (after rounding) ​
Number of orders per year = S / EOQ = 600 units/42 = 14.29 or 14 orders (rounded)
EXAMPLE-2:
Metro runs a mail-order business for Washing Machines. Annual demand for the Washing
Machine is 16,000. The annual holding cost per unit is Rs.2.50 and the cost to place an
order is Rs.50. What is the economic order quantity?
SOLUTION-2: A= 16000 P=50, U = Not given H =2.50
EOQ = √2AP / H = √(2 x 16000 x 50) / 2.50 = 800 units (after rounding)
EXAMPLE -3:
A = Annual usage =1000 piece​
U = Cost per piece=Rs 250​
P = Ordering cost + Expediting cost =Rs 6 + Rs.4 per order​
C = Inventory holding cost+20% of average inventory​
Material handling cost=Rs 1 per piece
SOLUTION-3:
EOQ = √2AP / UC
= √(2•1'000•(6+4)/(0.2•250)) = √400 = 20
EXAMPLE–4:
A company uses 75 numbers of an item per month, each unit cost the company Rs.25, The
Cost of putting through each order and inventory carrying charges per month are computed
at Rs.36 and 1.5% of the average inventory investment respectively. In what economic
lots the items should be purchased to minimize the cost?
SOLUTION-4:
A = 75 X 12 = 900
U = 25.00
P = 36.00
C = 1.5% X 12 = 12X1.5/100 = 0.18
EOQ = √2AP / UC
= √2*900*36 /25*.18
​ = 120
EXAMPLE – 5:
Impellers are procured by the water pumps manufacturer from a local firm and are
consumed at an average rate of 500 nos. per month. If the procurement cost is Rs.36 per
order, and the cost of holding it in the stock is Rs.1.20 per unit per year, determine the
quantity that should be procured at a time to optimize the costs involved.
If the consumption of above item increases to 40 numbers per day and its actual inventory
carrying cost is Rs.0.20 per unit per day, what shall be its revised EOQ?
SOLUTION-5:
Part-1:
A = 500X12 = 6000
P = 36
U = Not given
H = 1.20
EOQ = √2AP / H
= √2*6000*36 / 1.20
 = 600
Part-2 :
A = 40*300 (Assuming 300 working days per year) = 12000
P = 36
U = Not given
H = 0.20*300 = 6.00
EOQ = √2AP / H
= √2*12000*36 / 6 = 379
EXAMPLE-6: INVENTORY COSTS NOT SPECIFIED DIRECTLY:
A manufacturer of control panels spends Rs.34000 per annum on its purchasing activities.
Rs. 67,200.00 are spent each year in maintaining inventory of Rs. 4.2 lacs (expenses
referred above are only the variable portion of the total expenses) Around 850 orders are
placed every year to replenish stocks of the various items.
One of the items whose annual consumption is 9600 nos. is bought by the company at the
rate of Rs.30 each. The company has entered into annual contract with the supplier of the
item based on staggered deliveries. How frequently should be company receive the
staggered deliveries and in what quantities.
SOLUTION-6:
A = 9600
P = 34000 / 850 = 40
U = 30
C = 67200 / 420000 = 0.16
EOQ = √2AP / UC
= √(2*9600*40/30*016 = √160000 = 400
SOME PRACTICAL CONSIDERATIONS WHILE DECIDING ON E.O.Q.:
The mathematical calculations should be used, in most case, only as guide line, and it
would be necessary to alter the figures for certain practical considerations. Some of these
considerations are as follows:
1.​ Simplification of routine. If the E.O.Q. formula tells us that 13 orders have to be placed
in a year, we may place 12 orders, i.e. once in a month.
2.​ Ordering in the package sizes. Many goods are packed in units of one gross. If our
figure shows a quantity of 11.2 it must be changed to 12 dozens.
3.​ Economical freight rates. If the mathematical figure gives 9/10th of a lorry or a rail
wagonload, it is better to increase the quantity to have one full lorry load or one full
wagon load.
4.​ For perishable articles whose shelf-life is very low E.O.Q. should be very much less
than the theoretical figure and should be based on practical considerations.
5.​ For articles of a seasonal nature, e.g., cotton or groundnuts or oil seeds, bulk purchases
during the season would be cheaper than the purchases based on the E.O.Q.
6.​ In certain cases, considerable discounts would be available for bulk purchases. This
should be compared to the savings as a result of the application of E.O.Q. formula and
decision should be taken based on which is cheaper.
7.​ E.O.Q. cannot be successfully applied in the case of imports with its attendant problems
of obtaining the import license, uncertain lead times etc.
SOME OF THE USUAL OBJECTIONS AGAINST E.O.Q.:
1.​ Often the inventories holding cost and ordering cost cannot be identified accurately and
some times cannot be even identified properly.
2.​ The E.O.Q. as calculated is often an inconvenient number.
3.​ The use of E.O.Q. usually leas to orders at random points in time, so that the suppliers
receive an irregular stream of orders.
4.​ E.O.Q. applied without due regards to the possibility of falling demand can lead to a
high value of obsolescent inventory.
5.​ E.O.Q. may not be applicable when the requirements are irregular, or where there is an
impending price rise.
This is where the human judgment comes in. Techniques in management do not always
give results, which are 100% correct. Every decision will depend upon the environmental
conditions, i.e. those relating to prices, competitions, costs, economic climate, markets,
new technology, imports and exports, consumer tests and myriad of other factors, all of
which play a very vital role in decision making. As such, every decision is to be taken on
the merits of a problem, and E.O.Q. formula should not be treated as gospel.
BULK DISCOUNTS OR QUANTITY DISCOUNTS:
A major factor that will have an influence on the quantities to be stocked relates to quantity
discounts:
To give an example:
Bulk discount offered by a supplier is 15% for purchase of 1000 units and above.
E.O.Q. is = 500 units to be procured once in an every three months.
Average inventory = 250 units @ Rs.100 per unit =Rs.25, 000
Inventory carrying cost @ 20% =Rs. 5, 000 per annum.
If we avail of the discount, purchase is made of 1000 units once every six months.
Average inventory = 500 units @ 100 each = Rs.50, 000
Inventory carrying cost @ 20% = Rs.10, 000
Cost savings on discounts available for an annual consumption of 2000 nits:
2000x100x15% = Rs.30,000
It is, therefore, cheaper to get discounts and buy more than E.O.Q. figure.
INVENTORY CONTROL TECHNIQUES
Various Scientific Inventory control techniques are employed by the organization within
the framework of one of the basic inventory model viz. fixed order quantity system or fixed
order period system.
The techniques most commonly used are:
1.​ Economic Order Quantity (EOQ)
2.​ Max and Minimum system
3.​ Two Bin system
4.​ MRP i.e. Materials Requirement Planning
5.​ JIT-just in time.
All the above inventory models can be elaborated for further understanding.
OBJECTIVES OF A SCIENTIFIC INVENTORY CONTROL SYSTEM –
BENEFITS TO BE ACHIEVED:
Scientific inventory control system is designed keeping the following objectives in
view:
1)​ To ensure improved and better service to user. Scientific inventory control ensures
adequate and prompt supplies of materials at lowest prices and prevents shortages and
avoids work interruptions at the same time keeping stock levels low. There is no point
in reducing inventories at the cost of service.
2)​ To keep capital tie-up at the minimum so that the available capital is most effectively
used.
3)​ To increase inventory turn over ratio.
4)​ To reduce costs by taking best buying decisions regarding when to buy and how much
to buy. Both inventory carrying costs and acquisition costs (purchase costs) are to be
kept at the optimum levels.
5)​ To improve management control so that remedial action is taken well before particular
situation develops.
6)​ To reduce risks due to obsolescence, deterioration and so on.
7)​ To ensure effective co-ordination between departments and to develop inter
departmental harmony.
8)​ To increase profit.
A WORD OF CAUTION
Inventory control techniques discussed are irrelevant when there is no free availability of
material and in scarce economy. It is only when the seller’s market disappears (i.e. when
there is buyer’s market) that these techniques can optimize benefits due to inventory
holdings.
DETERMINING STOCK LEVELS /
MODERN CONCEPT OF STORE KEEPING:
One of the primary tasks in inventory control is to determine stock levels. The modern
concept of store keeping does not accept the outworn idea of a store as a place where goods
are kept until they are needed, or where materials are dumped to make requirements if any
in future. The new approach considers store keeping as a profit earning service to
production or in the case of warehouse, to distribution. Store keeping should contribute
directly to the profitability of a company and big concern with such matters as flow, lead
times, storage costs, acquisition costs, materials handling, open access methods,
preservation, preparation, packing, packing and dispatch.
The general levels of the stocks should be related with the sales and production policies of
the firm, in the same way as specifications are related to technical needs. Control should,
therefore, be directed and exercised in a prudent manner. There are various levels of the
stocks, which are explained bellow:
1.​ DEFICIENCY LEVEL ( Stock in hand is inadequate to meet the needs):
​ This stock level indicates the difference between the physical stock and the demand for
work in hand. It therefore, indicates an actual or potential production stoppage.
2.​ EXHAUST BIN LEVEL (stocks are exhausted):
​ This is the point popularly known as ‘stock-out’. At this point, the storage bin is empty
and any further demands nearly have the effect of producing and aggravating deficiency
level. The implications to all concerned especially to those in the follow up or order
chasing section, are too obvious to need elaboration.
3.​ BUFFER STOCK OR MINIMUM STOCK LEVEL:
​ This is the level at which any further demands upon the bin will necessitate
withdrawals from the buffer or reserved stock, particularly when demand is immediate
and fresh deliveries will take time to arrive.
​ Definition: The buffer stock is the ‘insurance stock’ carried to meet exceptional
conditions of demand or delivery.
4.​ DANGER WARNING LEVEL:
​ This is the level, which exists in almost every stores situation. It can be employed for
the purpose of following up on delivery on outstanding orders of high priority. It is of
the ‘point of no return’ after which a stock-out is inevitable if delay occurs. Computer
programme can readily include warning levels.
​ The level should be set at such a value that if there is a possible delay in delivery, the
action of progressing would reveal this in time for the purchase department to take one
or all of the following action:
​ Find an alternative source of supply. Usually the list of approved suppliers can give the
desired information quickly.
 a.​ Request the sales department, in turn, to warn their own customers of possible delay
in supplies.
b.​ Inform the production personnel about the situation, as they may be able to revise
the production plan and manufacture items for which materials are available.
c.​ Put extra pressure on the supplier to keep to his original delivery dates. The
importance of sound supplier relationship cannot be over emphasized here. Much of
the success will depend upon this one single factor.
5.​ RE-ORDER LEVEL OR PROVISIONING LEVEL (The point at which the order
has to be placed):
​ At this level, the stock controller takes action to send off replenishment orders for
further supplies.
​ As far as the stock controller is concerned he should proceed on the assumption that the
normal conditions for replenishment of the supplies exists and replenishment will arrive
before the buffer stock level is reached.
In order to calculate the buffer stock and re-order level it is necessary to understand and
estimate the lead time for each item of the inventory.
LEAD TIME
Lead Time starts when a decision to place purchase order is taken and it ends when the
material against the purchase order is received accepted and is ready for issue.
The time elements of the Lead Time are:
01​ Time required by the stockist (if an item is stocked) or indenter to convey the need
through a requisition to the purchase branch.
For A and B category stock items the time will be somewhat more as a review at the
senior level is usually prescribed.
02​ Pretender work – Time taken to prepare the tenders and to invite tenders plus time
allowed to Tenderers to submit their tenders. This time will be longer for advertised
tender and shorter for limited tenders and still shorter if the limited tenders are
restricted to local vendors only.
03​ Tender processing time – Time taken to process the tenders received and to place the
purchase order. Postal transit time, for the purchase order, to reach the selected supplier.
04​ Delivery period allowed to vendor for the supply of the material.
05​ Transportation time – time taken for transit of material from the vendor’s premises to
the purchaser’s warehouse.
06​ Receipt and inspection time – this includes the time taken in receiving the material,
inspecting it for quality and also documentation.
07​ Time taken in handing over accepted material to stocking storekeeper or to the ultimate
user.
Lead-time will vary from item to item and from time to time for the same item. It is
essential to work out the lead time, item wise and if it is not practicable to work them out
subgroup wise or at least GroupWise. If they differ from time to time a fairly good average
may be adopted.
Lead times in India are considerably larger than those in industrially advanced countries.
Since inventory levels have a direct bearing on lead time, efforts must be directed towards
reducing lead times by cutting out administrative delays and selecting more efficient
suppliers.
METHODS OF CONTROLLING STOCK LEVELS:
The basic approach to all stock-control method is to establish a reorder level which, when
reached, would indicate that the stock needs replenishment. The methods of determining
this level should be appropriate for each application. However, they fall into two main
groups: a) Visual and b) Clerical.
The latter would include not only manual stock card records but also punched cards and
magnetic tape.
Physically, each method envisages the holding of a stock sufficient to maintain production
until the replenishment arrives. It is the setting and adjustment of this important level to
suit demand that would determine if the operation is successful or not.
A) RE-ORDER LEVEL SYSTEM:
Let us assume a smooth average rate of consumption of 100 units per month. Supplies
are obtained once a quarter i.e. equivalent to 3 months consumption of 300 units. The
minimum level (or safety or buffer stock) is fixed at 100 units or one month’s
consumption. The lead-time in this case is 45 days. This means that when the stock
reaches a level equal to 45 days consumption (150) above the minimum stock level
(100), the replenishment must be ordered. This level is at (100+150) 250 units and is
called the re-order level. The maximum stock held is 400 units, i.e. reorder quantity
(300) plus buffer stock (100), this is called the maximum stock level.
B)​ FIXED TIME SYSTEM:
This is also called the constant cycle system. In this case, instead of considering the
stock level, we consider the time. Orders are placed at constant intervals of time. For
example, orders placed on the 15th of February, May, August and November.
In the re-order level system, the quantity ordered was fixed, while in the fixed period
system it may vary.
1)​ The times of replenishment are chosen purely from the pint of view of the
administrative convenience. It may be once a week, a fortnight, one month or three
months as the case may be. It may, depend on the number of orders to be placed per
annum, as given by the E.O.Q formula, where the consumption is fairly steady
through out the year in most cases; however this may not be the case. In such a
case, the quantity to be ordered on each occasion will be adequate –

​ To replenish the stock to the pre determined maximum level or

 ​ To meet the production requirements (which in-turn, will depend on the sales
requirement) during the next time interval and

​ Both the above put together.

The limitations of the two systems are as follows:

​ Re order Level System: 1) It will not be possible to meet minimum order
restrictions for a group of items, as re-order quantities of individual items are
constant. 2) Perpetual inventory record keeping very essential with this system.
3) The system will be very insensitive to changes in the demand and may result
in an increase of the frequency of re-ordering.

​ Fixed Time System: 1) Inventory costs are not explicitly considered. 2) It is

often not possible to meet the minimum or package quantity restriction. 3) The
system will react quickly to the most recent consumption, which may be random
occurrence and not representative at all. 4) Frequent re-ordering for small
quantities cannot be avoided when operating this system.
C) IMPREST STOCK CONTROL:
This is the simplest method of inventory control and involves the documentation of a
maximum level for the bin and a periodical inspection of stock levels in the bin. The
bin is then topped up as required immediately to the maximum level.
Usually the Imprest method is restricted to classification ‘C’ materials of
comparatively low value, and to those where replenishment can be obtained
immediately. It is used in the postal department for e.g. where a fixed quantity of
stamps is kept. At the end of each week (or first thing to be done on Monday morning),
the remaining quantities are examined brought back to the maximum levels.
D) OPEN ACCESS BINS:
Let us take example of nuts and bolts in a motorcar or a tractor factory. It will be a
terrible waste of time for accounting for each nut and observing the same procedures
as, say for example batteries or tyres. In this case nuts are kept at the work point and
workers are free to pick them as needed. This is called open-access bins.
Imprest stock control can be used along with ‘open access bins’. The Imprest system is
very satisfactory for this work and replenishment of the bin can be made direct from
the stores to
the open access bin. In a case where there are number of such bins, a store vehicle may
travel round the bins at fixed intervals, making replenishments and bringing the levels
up to the desired maximum level. The quantity replenished is taken as the quantities
consumed.
E) TWO BIN SYSTEM:
In this system two bins are kept having different levels. When the first bin is exhausted,
that means it is time for replenishment. The second bin is like a reserve stock and is
 similar to the reserve stock level indicated in the petrol gauge of a car. When the needle
indicates that the car is operating on the reserve stock, it is an indication to the owner
that it is time to fill up.
The title ‘two bin system’ is often used to describe clerical methods of inventory
control involving reserve stocks, maintained by inventory control records. In such
cases the use of the terms is not strictly correct. While there are two levels, there will
only be one bin. The term ‘two bin system’ should be restricted to the visual method of
the inventory control using two actual bins, or one bin divided at two levels. One
section only is used at one time, and on its completion the second is broken into and
steps is taken to replenish the stocks.
There are various methods of replenishing stocks under the ‘two bin system’.

WHEN TO BUY – ORDER POINT

Having determined how much to buy (E.O.Q.) the next step in the decision process in the
control of inventory is when should one buy this quantity? To answer this question the
available or virtual stock is compared with a certain level of stock called order point to see
whether it is time to buy. Certain organisations call the order point “Minimum”
Virtual stock is arrived at by adding
Quantity on hand + Quantity on order and subtracting from this total ‘demand on hand’ yet
to be complied.
Order Point should be equal to such quantity, which should suffice for the intervening
period called lead-time, which elapses between the recognition of the need to buy an item
to the fulfilment of the need, i.e. when material becomes physically available for issue.
Order Point = Lead Time X Forecast usage per unit of time.
EXAMPLE:

The inventory model for an item whose – Monthly consumption is = 100 Units,
Lead Time = 2 months, EOQ = 300 units
If supply of 300 units against a purchase order has been received at point of time zero, the
stock will be reduced to 200 units at the end of one month (as monthly consumption of 100
units is consumed), and at this point a purchase order for 300 units EOQ has to be placed
(because lead time is two months and balance available is just 200 units capable of meeting
the requirements for two months @ 100 units per month.) At the end of two months the
stock will be reduced to zero. But supply against the purchase order released at the end of
first month will be received of 300 units and cycle will be repeated.
ORDER POINT:
The standard EOQ model assumes that material can be procured instantaneously and hence
implies that the firm may place an order for replenishment when the inventory level drops
to zero. In the real world, however, procurement of material takes time and hence the order
(reorder) level must be such that the inventory at the time of ordering suffices to meet the
needs of production during the procurement period.
Having worked out the lead-time and forecast usage per period (may be a week or a
month), and if the Usage Rate for materials and Lead-time for procurement are known with
certainty then the order point can be worked out simply as:
FORMULA –1
Order Point (When Usage Rate for materials and Lead-time for procurement are
known with certainty)
Order Point = Lead-time in periods X Forecast Usage per period.
(Order Point may also be described as Order Level or Reorder Level)
It may be also described as:
Reorder Level = Lead time (In days or periods) X Average Usage (daily or per period)
Whenever the available or virtual stock is equal to this order point, a fresh purchase order
equal to EOQ is to be placed.
Three situations arise:
1. EOQ > LEAD TIME CONSUMPTION (ORDER POINT)
2. EOQ = LEAD TIME CONSUMPTION (ORDER POINT)
3. EOQ < LEAD TIME CONSUMPTION (ORDER POINT)
When the usage rate and lead-time are likely to vary, which is often the case; the reorder
level should be higher than the normal consumption period requirement during the
procurement period to provide a measure of safety in face of variability of usage and lead-
time. Put differently the reorder level should be equal to as follows:
FORMULA - 2
Reorder Level (In case of variability of usage and lead- time)
Reorder Level = Normal Consumption (or usage) + Safety Stock.
SAFETY STOCKS (BUFFER STOCK):
(SAFETY STOCKS TO MEET FLUCTUATIONS IN DEMAND AND LEAD TIME)
We can easily visualize a case where the condition of demand and supply are very
predictable and steady. In actual practice, however, such predictability is seldom possible.
Firstly, sales and consequently production do not follow predicted patterns and these can
upset the estimated consumption of materials. The actual may be higher or lower than the
estimates. Secondly anything can happen to supplies. Delays may occur because of
problems at the vendor’s factory or because of other external factors for which the vendor
cannot be held responsible. Like floods, damage to roads, or to rail tracks, or fire in his
factory and so on. Under these circum stances if proper care is not taken a situation may
arise when, all the stocks in the factory is being issued and exhausted, it is called
stock-outs. Such event may hamper the smoothness of the production. This unpredictability
requires us to have buffer stocks. Such stocks are also called ‘safety stocks, insurance
stocks, protection stocks or minimum stocks’.
Definition: In order to guard against the situation of stock-outs it is essential to keep
some extra stocks. These extra stocks are called as “safety stocks”
Buffer stock is ‘ideal stock’ since it is only drawn upon an emergency and represents
tied-up capital. Efforts must be made, therefore, to keep them at the lowest level,
consistence with the maintenance of supply, taking into account the acceptable risk or
stock-out or service level, we wish to maintain with respect to our commitments to our
customers.
SAFETY STOCK UNDER DIFFERENT SITUATIONS:
Let us take a very simple case and see how the inter play of the various factors would
affect inventory.
CASE 1:
Usage Rate is uniform and Lead-Time is also steady:
First, let us assume that the demand is uniform, say 500 units per week of a particular
material and that the lead time, i.e., time between the placing an order and receiving,
supplies is steady, say one week. For no shortage to occur, an order should be placed when
we have an inventory of 500 units. This will meet the demand till the supplies arrive.
Safety Stock = Usage per period (in this case 500 units)
CASE 2:
When Usage Rate is variable but Lead-Time is steady:
What should be the level of safety stock? In a simple situation where only the usage rate is
variable and the maximum usage rate can be specified, the safety stock required to take
total protection against stock-out in such case is given by following formula:
Safety Stock = (Maximum Usage Rate – Average Usage Rate) X Lead- Time.
CASE 3:
When both the Usage Rate and Lead Time vary: (and averages for both are known)
When both the lead-time and usage rate vary, which is often the case, and range of
variation is wide, complete protection against stock-out may require an excessively large
safety stock.
Safety Stock = { Maximum possible usage – Normal Usage }
​ = { (Max. Usage X Max. Lead Time) – (Average Usage X Average Lead-Time) }
Let us understand application of above formula through an example:
Example:
When, the lead-time varies between 60 days and 180 days with an average value of 90 days
and the usage rate varies between 75 units and 125 units per day with an average value of
100 units per day, calculate the safety stock required for protection against stock-out.
Applying above formula:
Safety Stock = {Maximum possible usage – Normal Usage}
 = {(Max. Usage X Max. Lead Time) – (Average Usage X Average Lead- Time)}
= {(125 X 180) – (100 X 90)}
= 13,500 units.
OPTIMAL LEVEL OF SAFETY STOCK:
Since inventory-carrying costs are proportional to the level of inventories carried, it rarely
makes sense to seek total protection against stock out. In view of the trade-of between
stock out cost and inventory carrying cost, the optimal level of safety stock is usually much
less than the level of safety stock required for achieving total protection against stock out.
In such case many firms would find following formula helpful for reorder point:
Reorder Point = S (L) + F √ SRL
Where:
S=Usage, L = Lead-time, R= Average quantity ordered, F= Stock out acceptance
factor.
The value of F, the stock out acceptance factor, depends on the stock out percentage rate
applicable to the firm and the probability distribution of usage.
Let us understand Optimal Reorder Level through formula:
EXAMPLE:
For an ABC Company, whose usage is 20 units per day, lead-time needed to obtain the
additional inventory when the order is placed is 60 days, average quantity worked out by
EOQ formula is 500 units, and if the stock out acceptance factor is kept at 1.2, work out the
Optimal Reorder Level:
Applying above formula:
Reorder Point = S (L) + F√ SRL​
Here:
S=Usage =20 Units per day, L = Lead-time = 60 days,
R= Average quantity ordered = 500 units, and F= Stock out acceptance factor = 1.2.

Reorder Level = 20 X 60 + 1.2 √ 20X500X60

= 1200 + 1.2 X 774.60
= 1200 + 929.52
= 2129.52 (Say 2130)
Example:
M/s Supreme Auto Company manufactures cars. They need steel sheets. They consume 10
Tons of steel sheet every day. Supplier will deliver this within 30 days. Average order
quantity for them is 300 tons if they maintain factor of stock run out as 1.5. Find the
reorder level for Supreme Auto.
Reorder Level = S (L) + F√ SRL​
S =10, L =30, F =1.5, R = 300
Reorder Level = 10 x 30 +1.5√10 x 300 x 30
= 300 + 1.5 x 300
= 750 Tons.
Once you derive safety stocks or optimal safety stocks - following formulas can be used to
obtain different levels of inventory.
Re Order Level = Normal Consumption + Safety Stock
Maximum Inventory Level = Order Quantity +Safety Stock.
Minimum Inventory Level = Safety Stock
And Average Inventory = ½ Order Quantity + Safety Stock.
Example:
A critical item is used as follows, normal uses 50 units per week, minimum uses 25 units
per week, and maximum uses 75 units per week, reorder quantity
400 units, reorder period or lead time 4 to 6 weeks; calculate (i) Re-order level (ii)
Maximum Level (iii) Minimum Level, (iv) Average inventory.
Since both the consumption and Lead-time are variable we will have to use the formula of
case 3 above:
Safety Stock = {Maximum possible usage – Normal Usage}
​ = {(Max. Usage X Max. Lead-Time) – (Average Usage X Average Lead-​
​ Time)}
= {(75 x 6) – (50)} [since normal usage is already given as 50]
= {450 –50}
= 400
Re Order Level = Safety Stock + Normal Consumption
= 400 + 50 = 450
Maximum Level = Order Quantity + Safety Stock
= 400 + 400 = 800
Minimum Level = Safety Stock = 400
Average Inventory = ½ Order Quantity + Safety Stock
= ½ 400 + 400 = 600.
EXAMPLE:
A Mixer Grinder factory is consuming Electric Motors as follows, normal uses 150 units
per week, minimum uses 125 units per week, maximum uses 175 units per week, reorder
quantity 200 units, reorder period or lead time 3 to 5 weeks, calculate (i) Re-order level (ii)
Maximum Level (iii) Minimum Level, (iv) Average inventory.
Normal usage = 150, Minimum Usage = 125, Maximum Usage = 175,
Order Quantity = 200, Lead Time Max = 5 weeks, Lead Time Minimum = 3 weeks.
Now:
Safety Stock = {Maximum possible usage – Normal Usage}
​ = {(Max. Usage X Max. Lead Time) – (Average Usage X Average Lead-Time)}
= {(175 x 5) – (150)} [since normal usage is already given as 150]
= {875 –150} = 725
Re Order Level = Safety Stock + Normal Consumption
= 725+ 150 = 875
Maximum Level = Order Quantity + Safety Stock
= 200 + 725 = 925
Minimum Level = Safety Stock = 725
Average Inventory = ½ Order Quantity + Safety Stock
= ½ 200 + 725 = 825.
Answers:
(i) Re-order level = 875 (ii) Maximum Level = 925
(iii) Minimum Level = 725 (iv) Average inventory = 825

REPLENISHMENT SYSTEMS: (P and Q systems)

Having studied the two questions – (a) When to buy (order point), and (b) How much to
buy (EOQ), let us see how the principles evolved are actually applied in making
replenishment of stocks.
First for each items a stock order point (termed minimum by many organizations) and
economic order quantity (termed maximum by many organizations) are to be fixed on
principles discussed above.
For stock recoupment one of the following two methods is deployed:
1.​ Perpetual review system or reorder level system - ‘Q’ system.
2.​ Periodic review system – ‘P’ system.
In this system a continuous review of stocks is made every time an issue transaction is
posted and when available stock level touches a quantity equal to minimum, a quantity
equal to maximum is replenished or recouped.
For simplicity, let us assume, for a typical stores item:
Monthly consumption = 100 units
Lead Time = 1 month
EOQ – Maximum = 300 units
Safety Stock = 100 units.
Then,
Stock Order Point – Minimum
= Lead Time Consumption + Safety Stock
= 100+100 = 200 Units.
PERIODIC REVIEW SYSTEM – P SYSTEM:
Instead of the following the perpetual or continuous review system where a review is made
every time an issue is made, some organizations prefer to carry out review of stock at fixed
intervals of time prescribed separately for individual items or for groups of items.
Two methods are followed:
1) Fixed quantity recoupment and 2) Variable quantity recoupment.
Here the review period fixed is small – a fortnight or even a week. When review periods
are so short not much damage is done if recoupment is missed when an issue brings the
stock level to reorder point. Therefore, replenishment is made only when a review is due
and if at that time available stock has touched the stock order point or has crossed it. Then
quantity recouped is in- variably equal to the maximum or EOQ. No calculations are
necessary. The number of reviews to be made under the system is numerous. Adequate staff
support is necessary though staff may be at lower levels.

*** *** ***

UNIT - 3
CHAPTER – 8
BASICS OF PRODUCTIVITY
INTRODUCTION
Productivity and Quality Management is an extension of the subject of Production
Management. We understand that the production concerns itself with three basic elements
viz. Inputs – Conversion (Value added) – Output (having effectiveness, efficiency and
consumer satisfaction). Subject of Productivity and Quality Management focuses on the
factor of conversion, as to how efficiently, effectively and qualitatively the inputs to a
production system are converted / transformed to achieve highest output without loosing
focus on the quality. During the study of this subject, we will learn several techniques and
management principles empowering us to achieve these objectives.
PRODUCTIVITY - Productivity is the ratio of Output to Input in any organization. Total
Productivity is the Systematic and Quantitative Approach to Compete in Quantity, Quality,
Price and Time.
QUALITY – Quality is an important dimension of production and operations management.
Quality is defined in various ways.
Quality is the performance of the product as per the commitment made by the producer to
the consumer. The ‘commitment’ may be explicit such as a written contract or it may be
implicit in terms of the expectations of the average consumer of the product. The
‘performance of the product’ relates to the ultimate functions and services, which the final
product must give to the consumer. There is also a ‘service and time dimension’ to the
quality. The same quality of physical performance should be available over a reasonable
length of time. Thus time is also an essential aspect of the quality.
C. D. Lewis has defined quality as ‘an asset, which may be offered to the potential
customer of a product or service.’
Quality means the degree to which a specific product satisfies a particular class of
customers or consumers in general or the degree to which it conforms to a design
specification or distinguishing feature of a product’s taste, colour, appearance etc.
Productivity and Quality Management - PQM is the art of enhancement of Productivity
and Quality, while carrying out production/operation functions.
PRODUCTIVITY
Simply putting productivity is the ratio of out put and input in any organization.
Here output may be utility/goods or services. Input may be all the resources used, including
Basic Inputs to a production system and all the inputs used and consumed for the
transformation or conversion function. Thus output may be in the form of product (utility
or services) quantity/quality and price and the inputs may be in the form of raw materials
quality/quantity price and/or physical assets such as land, infrastructure, men and
machineries.
Arithmetically: Productivity = Output/Input
In short productivity takes in account output in relation to input.
PRODUCTION V/s PRODUCTIVITY
Production is conversion of inputs to out put, it takes into account output alone, whereas
productivity is putting life in the process of production. Productivity is like evaluation
and/or measurement of results of production process in relation to the inputs. It is normally
observed that when production starts increasing, productivity starts decreasing.
Illustration:
 MONTH INPUT OUT PUT PRODUCTIVIT REMARKS
(Men Production Output
Hours) (Nos. of = -------------
articles
Produced) Input Production
Productivity

April 40000 80000 2

May 50000 ↑ 95000 ↑ 1.9 ↓ Increase Decrease

June 60000 ↑ 108000 ↑ 1.8 ↓ Increase Decrease

Why this happens that when production increases, productivity decreases?

This happens mainly because to increase the production, normal practice is to increase the
work hours close to the month/quarter/year end, of the same force of workmen, by giving
them overtime and asking them to produce and comply with the additional orders/ un
full-filled targets etc. However their efficiency during the overtime is low and they do not
give same output. Lots of time is wasted. As seen from the above when markets are rising
employing additional resources and incurring heavy expenditure boost production, but
productivity may fall.
Objectivity of PQM is to arrest this trend of decreasing productivity Vs increasing
Production.
Various techniques such as Kaizen – (Japanese word - Kai means Change and Zen means
Betterment), TQM- Total Quality Management, JIT –Just In Time, QC – Quality Circles -
etc are employed in present day management to achieve this objective.
IMPORTANCE OF PRODUCTIVITY

​ Globalizations of markets have increased multi fold competitions from National and
International players.

​ Profit Margins in the buyer markets are diminishing and there is ever looming threat to
survival.
​ The challenges and cost of failure are greater than ever before

​ Customers are more educated, informed, demanding and efficient, posing greater
challenges to the business.

​ Internet and expanding media exposures have brought world before the consumer and
with a touch of finger they are able to compare the products and price across the globe.
 ​ Fundamentally it is necessary to improve the productivity because resources are
becoming scarce and costly, and hence main aim of the productivity is optimize the
utilization of the same.

​ To increase National Productivity. Prosperity and Economy of the Nation is directly

proportionate to the productivity of the business houses and entrepreneurs in the
country hence it is pertinent for every entrepreneur to increase the productivity.
TOTAL PRODCTIVITY MANAGEMENT:
Total productive Management is a systematic and quantitative approach to compete in
quality, price and time. Total Productivity Management deals human resource situation
with a caring, customer-oriented, yet competitive attitude through integration of technical
and human dimensions. This makes use of a set of proven models and provides a
systematic framework and structure to consider total productivity to an organization’s
profitability. Total Productivity Management describes the tasks of all constituents, all
resource categories including direct labour, administrative staff, managers, professional
personnel, materials, liquid assets, technologies, energy and other areas. In both input and
output all the tangible factors have to be taken into account. Often it is found that they are
difficult to be calculated.
PRODUCTIVITY AND PROFITABILITY:
For any company, profitability is the most important factor. The profitability depends on
various factors. The break Even Point (BEP) is the level of production volume at which the
product starts yielding profit to the company. In any factory it is very important to bring
down the break-even point. Productivity is a major tool to do that. This is because, higher
the productivity, lower will be the costs of the product. Thus increased productivity will
bring down the costs, lower the BEP, and increase the profitability of the company.
PRODUCTIVITY AND STANDARD OF LIVING
By increasing the productivity, industries will be able to produce more and more from less
and less resources. This will help to reduce the costs of production as a whole, thereby
increasing the profitability of the company. Companies will be able to effort higher wages,
bonus etc. to the employees empowering them with more surplus income and purchasing
power. Employees will purchase more luxury goods such as car etc., increasing its
demands. This will help industries to increase the production and take benefit of economics
of scale, ultimately triggering a positive cycle of economy leading to better standards of
living for the people of that country.
QUALITY AND PRODUCTIVITY
There is a clear relationship between quality and productivity. Poor quality results into
wastage and scrap lowering productivity. Those products, which are salvageable, will
consume further labour and materials, thus further reducing material and labour
productivity. In short poor quality of goods and services will add to the cost through a)
disruptive schedules, b) delayed deliveries, c) Product returns and costs associated with it,
d) generation of scraps, e) wasted man power and materials and f) lost machine times, thus
reducing productivity and profitability. This will also result into customer dissatisfaction
and loss of goodwill.
BENEFITS OF INCREASED PRODUCTIVITY
●​ TO THE ORGANIZATION: Higher productivity in an organization will mean
production of more goods and services. With reduction in costs. This will increase
turnover, more profits and dividends, more revenues to the Government, cheaper goods
to the customers, greater stability and incentive to expand, vide spread markets and
over all prosperity.
●​ TO WORKERS: Higher productivity yields more wages and better standard of living,
better working conditions, better and improved morale, and highly satisfied work force,
resulting into increased good will.
●​ TO CONSUMERS AND SOCIETY IN GENERAL: higher productivity means
increased supplies of quality goods and services at lower cost, higher surplus money
and purchasing power, greater satisfaction and improved standard of living.
●​ TO THE NATION: higher productivity means higher for its citizens, more
employment opportunities, increased GNP (Gross National Produce), higher per capita
income, better standards of living, improved utilization of resources, expansion in
international markets.
Productivity thus acts as a tool for over all economic development. It generates surplus in
the economic system, which can be used for industrial growth. Also national development
programme can be carried out to help the nation over cum problems of unemployment,
hunger, disease, illiteracy, population development etc.
IMPROVEMENT IN PRODUCTIVITY:
It is obvious therefore that in any organization the efforts have to be taken to improve the
productivity at all levels. The motivated atmosphere to optimize the utilization of all the
resources like men, material time, machine, place etc needs continually to prevail in a
progressive and advanced company. Product and process improvement are the areas where
major cost savings can be generated. New product development cycle time reduction is
identified as one of the important requirement for improvement. On the labour front, low
cost automation to avoid manual efforts and fatigue, have been used along with number of
advanced management techniques. This technique attacks on and reduces non-value added
activities and costs thereof. Productivity is taken as improving health or profitability of the
enterprise.
TECHNIQUES TO IMPROVE THE PRODUCTIVITY
Many advanced countries have started employing more and more electronics and computer
controlled processes to avoid loss and waste due to human errors and inefficiency.
New technologies using computers and computer aided technologies, FMS (Flexible
Manufacturing Systems), Robotics, CAD (Computer Aided Designs), CAM (Computer
Aided Machines), Automation, use of CNC (Computerized Numerically Controlled)
Machines etc. together with unmanned production lines, etc are replacing old age
technologies.
It is said that at any given point of time every business either grows up or sinks down. Thus
if one does not improve the productivity and grow he is going down and sooner or latter
will be compelled to sell off, close down or face natural death. Hence to survive it is
compulsory to grow, expand and improve productivity.
Productivity can be improved by various management principles and applications such as –
work study, inventory control, value analysis, low cost automation, operations research,
incentive schemes, industrial safety, job evaluation, suggestion schemes, TQM, JIT, Quality
Circles, BPR (Business Process Re-engineering), bench marking (trying to imitate the
leaders), etc..

*** *** ***

CHAPTER – 9
 MODELS OF CALCULATING PRODUCTIVITY
PARTIAL, MULTIFACTOR & TOTAL FACTOR MODELS:
1.​ PRODUCTIVITY
Simple definition of productivity is ratio of output to input.
​ Output
​ Productivity = ---------
​ Input
Example: In an appliance manufacturing company, Unit A produces 1000 articles at the
gross cost of Rs.1, 00,000 and Unit B manufactures 900 articles at a gross cost of Rs 1,
00,000. Both are of the same quality and design. So we can state that Productivity of Unit
A is 1000/100000 and Productivity of Unit B is 900/100000 thus Productivity of Unit A is
higher than the Productivity of Unit B. The above comparison can also be made for Month
A, and Month B of the same unit.
2.​ PARTIAL PRODUCTIVITY
Partial productivity is a ratio of output to only a particular class of input.
Output
Partial Productivity = --------------------------------
​ ​ A particular class of Input
In any production system there is generally more than one input factor and only one output
factor involved. The ratio of output to one of these input factors is productivity related and
is called partial productivity. Often we find that a certain particular factor plays an
important role and is an appropriate factor for comparison, this is called an ‘apple to apple’
comparison. This is good only for a comparison of different cases, and as such may not be
meaningful if used only for a case. Such productivity ratios are used for selection of a
particular area of improvement.
Organizations can use this formula to determine the performance of labour, machines,
energy, capital, a department, an organization or even a country.
Example:
B. Auto produces 5000 scooters in a shift employing 200 workers, where as HH Auto
manufactures 9000 scooters employing 300 workers. If we compare the results of partial
productivity in relation to a number of men power, HH Auto has a higher productivity of
30 compared to the productivity of B Auto which is 25.
However in the case of HH Auto, capital investment in plant and machinery is higher than
B. Auto. Hence this particular comparison does not mean that HH Auto is better than B.
Auto, but it does say that there is scope of improvement of productivity per worker in B.
Auto.
OTHER EXAMPLES OF PARTIAL PRODUCTIVITY
PRODUCTIVITY OF LAND:
​ ​ ​ Yield of Maize (In quintals)
POL = -----------------------------------
​ ​ Area of plot (Hectors)
Let’s compare the farms of two farmers ‘A’ and ‘B’ .Farmer ‘A’ to cultivate maize uses
advance techniques for agriculture production whereas Farmer ‘B’ uses traditional
techniques. Farmer ‘A’ achieves higher production of maize per hector of land compared
to. Farmer ‘B’ This is where Farmer ‘B’ can learn for improving the use of his land.
Now if maize is replaced and some other high value crop of the same weight is being
produced from the same area of plot, then the partial productivity comparison will give us
an idea that the turnover from the same piece of land can be increased by changing the
product for the same farm. However it should also be seen in terms of other inputs.
PRODUCTIVITY OF FLOOR SPACE
Similarly we can find out productivity of floor space of a factory/or of an office/or of a
petrol pump.
For example: R. Petroleum sells its petrol at Rs. 30000 with the help of three pumps in an
area of 1000 sq. ft., whereas Y. Petroleum sells its petrol worth at Rs. 40000, with the same
parameters.
Partial Productivity of space for Y. Petroleum is better than R because of a better layout and
an appropriate entry and exit system.
We can compare productivity of Material, Men, Energy, Machines, Time, Salesman,
Students, and Money etc. In case of money one can compare one’s investment in a
particular share V/s another share or a Bank F.D.
3. ​ TOTAL PRODUCTIVITY
Total Productivity is the ratio of Total Output and Total Input.
​ ​ ​ ​ Total Output (Value of Produce)
​ Total Productivity = ------------------------------------------
​ ​ ​ ​ Total Input (Value of Input)​
4.1 ​ TOTAL FACTOR PRODUCTIVITY (‘JOHN W. KENDRICK’)
In an effort to improve productivity of labour, company should install more machines. Only
then will the productivity of labour go up bringing down the capital productivity. Partial
productivity, which typically uses only one resource at a time, will fail to grasp this
paradox.
Labour and capital are always considered to be the most significant contributors to the
process of production. Therefore in the Total Factor Productivity Model developed by ‘John
W. Kendrick’ in 1951, he has taken labour and capital as only two input factors for
calculating Total Factor Productivity.
EXAMPLE: Production worth Rs. 80 lakhs was manufactured and sold in a month. It
consumed labour hours worth Rs. 12 lakh and capital worth Rs. 48 lakh
​ Output
Total Factor Productivity is = -------------------------------------
(As per ‘John W. Kendrick’) Inputs of (Labour + Capital)
​ ​ ​ ​ ​ = 80 / (12 + 48)
​ ​ ​ ​ ​ = 80 / 60 = 4 / 3
​ ​ ​ ​ ​ = 1.33
The Advantages of working out Total Factor Productivity in this manner are as follows:
a)​ Data is easy to obtain,
b)​ Appealing from the viewpoint of the Corporate and the National Economist.
A Disadvantage of working out Total Factor Productivity:
It does not consider the impact of Material and Energy inputs, even though material
typically forms 60% of the product cost.
4.2 ​ MULTI FACTOR PRODUCTIVITY (‘SCOT D. SINK’)
‘Scott D. Sink’ has further developed total Factor Productivity Model as Multi Factor
Productivity Measurement Model. In this he considered Labour, Material and Energy as
major inputs. He deliberately left out Capital, as it is very difficult to estimate how much
capital is being consumed in a unit of time. The concept of depreciation used by
accountants makes it further difficult to estimate actual capital being consumed.
Output
Multi Factor Productivity is = --------------------------------------------------
(As per ‘Scot D. Sink’) Inputs of (Labour + Material + Energy)
5. TOTAL PRODUCTIVITY MODEL (‘David J Sumanth’)
In 1979 ‘David J Sumanth’ suggested a further extension of the earlier models. He
considered 5 items as inputs; which were Human, Material, Capital, Energy and an item
called Other Expenses.
According to Sumanth “Total Productivity is a relationship between outputs and sacrificed
different input items to create these outputs”. This model can be applied both, in any
manufacturing or service organization.

6.​ TOTAL PRODUCTIVITY MEASURE (‘Craig and Harris’)

Craig and Harris (1972, 1973) defined total productivity measure as a model which can be
summarized as follows:
He included Labour, Capital, Raw Materials and Purchased Parts as Inputs.

​ ​ ​ Total Tangible Output (Ot)

Total Productivity (Pt) = ------------------------------ = ----------------
(As per ‘Craig and Harris’) Total Tangible Input (L+C+R+Q)
Where:
‘Pt’ is Total Productivity,
‘Ot’ is Total Output.
‘L’ is Labour Input Factor,
‘C’ is Capital Input Factor,
‘R’ is Raw Materials and
‘Q’ is Purchased Parts of an Input Factor

7.​ TOTAL PRODUCTIVITY MODEL (‘V. Sumanth’ - 1979):

Mr. Sumanth considered Total Productivity as the ratio of Total Tangible Output and Total
Tangible Input.
Total Productivity Total Tangible Output (Ot)
(As per ‘V. Sumanth’) Pt = ------------------------------- = ---------
Total Tangible Inputs.​ (It)
​ ​ ​ ​ ​ (O1) + (O2) + (O3) + (O4) + (O5)
Total Productivity: Pt = -----------------------------------------------
(As per ‘V. Sumanth’)​ (H) + (M) + (FC) + (WC) + (E) + (X)
Where:
Total Tangible Output (Ot) includes:
Value of Finished Units produced (O1)
+ Partial Units Produced (O2)
+ Dividends from Securities (O3)
+ Interest from bonds (O4)
+ Other-Incomes. (O5)
Total Tangible Input (It) includes:
Value of human inputs (employees) (H)
+ Materials purchased (M)
+ Capital Inputs [(FC) Fixed Capital + (WC) Working Capital]
+ Energy Inputs (E)
+ Other Expenses [(X) includes Taxes, Transport, office etc.]
The Advantages of working out Total Productivity Factor are as follows:
a)​ All quantifiable inputs are considered.
b)​ Sensitivity analysis can be done
c)​ Provides both firm level and operational unit level productivity.
Disadvantages of working out Total Productivity Factor are as follows:
a)​ Data is difficult to compute.
b)​ Does not consider intangible factors of input and output.
8. ​ AMERICAN PRODUCTIVITY CENTER (APC) MODEL
American Productivity Center has been advocating a productivity measure that relates
profitability with productivity and price recovery factor.
Price Recovery Factor is a factor that takes care of a result of inflation.
Over a period of time the changes in this factor indicate whether the firm has been able to
absorb the changes in the costs of inputs, or has passed on, or has over compensated the
same price of the company’s output. Thus Productivity as per APC Model is calculated as
follows/:
​ ​ Sales Quantities of Output x Price
Profitability = -------- = ----------------------------------- = Productivity X Price Recovery
Factor.​​ Costs Quantities of Inputs x Price
PERFORMANCE INDEX
Performance is related to personal, where as production and productivity is related with the
quantity produced related with the quantity of input. Performance index is ratio of the same
parameter i.e. ratio of actual production or work done and standard expected production or
work done.
Marks obtained by a student in examination are a perfect example of performance index of
that student.
​ ​ ​ ​ Actual Quantum of Output
​ Performance Index = ----------------------------------- X 100 (Percent)
​ ​ ​ ​ Standard Quantum of Output
Example:
Amin is expected to make 100 shirts out of a bale of cloth of 200 Mtrs. In five days.
However he manages to make only 90 shirts find out:
A)​ What is Amin’s Production?
B)​ What is Amin’s Performance Index?
C)​ What is productivity of the cloth?
Ans. A= 90 shirts.
Ans. B= 90/100X100= 90%
Ans. C = 90 shirts/200 Mtrs. Cloth
Example: Find out the Total Productivity and partial productivity from the following
data:
 Input Rupees Partial Productivity

Human 1000 10500/1000=10.5

Material 3000 10500/3000=3.5

Capital 2500 10500/2500=4.2

Energy 500 10500/500=21

Total Output is Rs.10500

Total Productivity = 10500/7000 = 1.5

*** *** ***

CHAPTER 10
 QUALITY MANAGEMENT
HISTORICAL EVOLUTION OF QUALITY MANAGEMENT SYSTEM
It was during the Industrial Revolution that the concept of quality first emerged. In
periods earlier to the Industrial Revolution, goods were made from start to finish by the
same person or team of people. The same person or team was made responsible to meet
'quality criteria'. Mass production brought huge teams of people together to work on
specific stages of production where one person would not necessarily complete a product
from start to finish.
Frederick Winslow Taylor and Henry Ford (Pioneers of the late 1800s) recognized the
limitations of the methods being used in mass production resulting into variation in quality
of output. For the first time separate Quality Departments to oversee the quality of
production and rectifying of errors were established by Taylor. Mr. Ford emphasized the
need for Standardization of design and specific standards for components to ensure a
standard product was produced. Management of quality was the responsibility of the
Quality department and was implemented by Inspection of product output to 'catch'
defects.
Quality is an important dimension of production and operations management. It is not
enough to produce goods and services in right quantity and at the right time; it is important
to ensure that the goods and services produced are of the right quality. The consumer of the
final product of a company needs a certain quantity of products of a quality appropriate to
his needs. Without quality the other dimensions of quantity and time have little relevance.
Quality Management, which includes ensuring proper quality for a company’s output, is
important not only for its survival in the market, but also to expand it’s market or when it
wants to enter into a new product line and/or various other marketing ventures.
As stated earlier, Quality is defined in various ways.
Quality is the performance of the product as per the commitment made by the producer to
the consumer. The ‘commitment’ may be explicit such as a written contract or it may be
implicit in terms of the expectations of the average consumer of the product. The
‘performance of the product’ relates to the ultimate functions and services, which the final
product must give to the consumer. There is also a ‘service and time dimension’ to the
quality. The same quality of physical performance should be available over a reasonable
length of time. Thus time is also an essential aspect of the quality.
C.D. Lewis has defined quality as “an asset, which may be offered to the potential
customer of a product or service.”
Quality means the degree to which a specific product satisfies a particular class of
customers or consumers in general or the degree to which it conforms to a design
specification or the distinguishing feature of a product’s taste, colour, appearance etc.
“Quality is never an accident; it is always the result of intelligent efforts.”
Quality is a strategic marketing decision taken by the company at the outset. It is based on
the market or the target market decided by the company. Thus it is a corporate level
decision. It is based on various marketing considerations, production constraints,
manpower or personnel constraints, and equipment or technology constraints.
The decisions regarding quality are not in the hands of one functional manager as this
involves overall strategic decisions for the running or the business of corporation. Once
such a strategic decision regarding the quality is taken, it is the job of all functional
managers, including the production and operations manager, that such strategic objectives
and goals are implemented.
QUALITY CONTROL:
“According to Alford and Beatty quality control is “that techniques of industrial
management by means of which products of uniform acceptable quality are
manufactured”
According to Broom quality control is “systematic control by management of the
variables in the manufacturing process that affect goodness of the end product”
Quality control is one of the important aspects of the production planning and control. It is
basically concerned with the “quality production” through regular inspection
techniques for Input Raw Materials, Production Process, in Process Products and Final
Output Products.
Quality assurance:
We may say that there are three aspects of assuring quality.
●​ Assuring of incoming raw material’s quality.
●​ Assuring that proper processes are operating on the raw materials.
●​ Assuring of the quality of the out going finished goods.

Raw Materials Finished Goods.

Are Raw Materials Are right processes Are finished goods

Okay? Operating on the Okay to be sent to
Raw materials? Customers?
BASIC ASPECTS OF ASSURING QUALITY
Planning and Control aspects of quality control:
To achieve the required quality for a product, number of specifications are finalised at the
time of designing the product. This is planning aspect of the quality. At the time of the
production of the product, strict adherences to these specifications are observed; this is
control aspect of the production. Thus quality is a combination of both the aspects of
production viz. planning and control.The prime importance is to be given to the “Consumer
Satisfaction” and for consumers’ satisfaction a product or service, which a consumer wants,
must possess certain features. They are properties or attributes of the products/services,
which make them “fit for use”, or makes consumer satisfied. When these characteristics or
attributes are mentioned specifically for a particular product or service they become
specifications of that particular product/service. As far as possible theses characteristics
should be expressed in quantitative terms, so that they can be measured or observed
objectively. Many times these characteristics can easily be measured on numerical scales.
For e.g. weight or volume of a particular packed product in each packet, or average of a
vehicle in terms of kilo meters per liter of petrol consumed in standard drive condition, size
of an electrical cable in diameter etc. Such characteristics are known as ‘variables’. It is not
possible to 100% adhere to these specifications and hence an upper and/or lower limits of
variance from these specifications are finalised as acceptable values. These are known as
tolerances. The products beyond these tolerances are considered defective or unacceptable
as per quality specifications/standards and are rejected.
Some of the characteristics of the product/service may not be feasible to be specified in
numerical terms. For e.g. colour of a car. Consumer can appreciate it as good or bad. Here
the measurement or assessment of quality becomes more difficult. It depends on the person
making a decision. What one, may consider good, may be considered bad by another. The
quality characteristics of this type are called ‘attributes’, assessment of which is subjective
and is left to the consumers. Attributes are binary (yes or no) conditions. One has to say yes
or no.
Quality of Design and Quality of Conformance:
A functional definition of quality leads us to consider two aspects, which contribute to the
ultimate quality of the product. The intrinsic quality intended in the design is the first
aspect, while the degree to which this quality is achieved in production is the second
aspect. The first is called ‘quality of design’ and the second, ‘quality of conformance’.
Some of the quality characteristics (properties or specifications) are acquired by a product
at the design and development stage. Properties acquired by product at this stage depends
on the type of materials used, tolerances specified, method of production or type of process
used, safety factors allowed, knowledge and skill of the design, personnel employed etc.
Quality of design refers to these specifications or properties, which are acquired at the
design and development stage. To provide a customer with a good quality of
product/service, quality of design is a fundamental prerequisite.
Once the designer has produced a quality design for the market, the production function has
to adhere to the specifications laid down by the design and produce it in accordance with
the same. The success with which this is achieved is called ‘quality of conformance’.
Thus a manufacturer/service provider must satisfy the customer by meeting their
expectations on both the aspects of quality i.e. Quality of Design and Quality of
Conformance.
Howsoever successful the production is in achieving quality of conformance; it cannot go
beyond the quality laid down by the design. The production achieves the quality that is
balance between their capability and the requirements of a design. The design itself
should consider the type of manpower available and the equipments to be used. Quality is a
collaborative effort of the designer and the production.

Costs aspect of quality:

To most of the people, quality means high quality. Actually it is not so. Generally, the
customer wants the best quality they can buy within the money they can afford to
spend. It does not mean that they want only the very best. They select the very best
from the products or services available at the price, which they are willing to pay.
Therefore, a manufacturer/supplier/service provider tries to achieve the best quality within
the price range that their potential customers are willing to pay.
Thus Cost of quality is another important area of design and production. While increasing
the quality of the product, we tend to increase its cost, but the value added to the final
product tends to grow less rapidly. (See the graph bellow)

​ Value of the final

Product being sold​
​
Rupees
Production Cost
Quality
From the above graph you can observe that at some point (A) cost of production goes
higher than the value of the final product being sold and thus we can observe that stretching
development of quality to such an extent becomes unviable from the business point of
view.
Irrespective of the above, importance of Quality cannot be underestimated. It is very
important for a manufacturer of products or services to be qualitative, because the very
existence of a manufacturer depends on the quality level. Good quality ensures higher
profitability, creates goodwill, and makes the employment of highly skilled manpower with
better wages possible.
Poor quality or high proportion of defective products results in the extra cost to a producer.
Often it is observed that a producer has to bear losses due to poor quality.
Following point explains the consequences of poor quality:
1.​ Poor quality results in to reduction in sales.
2.​ Manufacturer’s goodwill in the market is affected.
3.​ Manufacturer, who has guaranteed the goods, is required to sustain the loss/replace the
goods, to compensate the customer for the poor quality of the products sold.
4.​ Defective goods may be required to be sold at discounts/loss as seconds.
5.​ Defective products may create stoppages and delays in production thus adding to the
loss.
6.​ Cost of rework/servicing and/or repairing of defective products may be additional
burden on the manufacturer.
7.​ Cost of defective products include, not only raw material cost but also cost of taxes,
transport, labour, machine time and overheads of the company.
8.​ It also adds to burden of inventory and blocking of cash flow because many times
decision to dispose of such products involves more than one authority (such as higher
level management, excise departments etc.)
9.​ Generation of defective goods invites more vigorous inspection adding to the cost of
production.
10.​Nobody wants to own the responsibility of the production of defective products and
thus tries to push the liability on other persons/departments. This in turn creates
disharmony in the mutual relationships amongst the various departments and lowers the
morale of the people working in the company.
11.​Diagnosing of the fault to reduce the defective goods and redeveloping of the products
adds to the cost of redesign and development and extra burden on R & D department.
How to decide about the quality?
In earlier pages we looked in to various aspects related with the quality of
products/services. Now important question is who, when, where and how decides about the
quality.
The marketing department in terms of quality, quantity and price generally makes the
assessment of customer’s needs. These details are provided to the designing department of
the firm. On basis of such information a committee consisting of representative of various
concerned departments, headed by the designed engineer develops detailed specifications
of the product planned. Specifications include detailed characteristics of each component
and final product. They describe the quantitative specifications of the quality of the product
desired in brief or precise manner. The costs of production and performance parameters of
the product are also considered while developing proper specifications. However designing
of the product is a dynamic job and product needs to be updated and improved on ongoing
basis as per the customer’s needs and market feed back.
Generally three types of specifications are used to describe the product: They are
01)​ Technical Specifications,
02)​ Performance Specifications and
03)​ Product’s Brand/model name.
Technical specifications will state physical and chemical properties desired in the product.
Performance specifications will state the performance or use of the product. Products brand
or model name helps consumer to precisely indicate their selection and ordering.
Quality Management:
Just in any management process, quality management also has three main components:
(a) Planning, (b) Implementation and (c) Monitoring and Control.
Planning for Quality:
The planning part must deal with the following aspects:
1.​ To set the quality objectives and targets and take into account customers’ needs and the
marketability of the products.
2.​ To carry out pre-production process capability or quality deliverability studies (to find
out whether the company is capable of producing and marketing the products of certain
quality).
3.​ To establish the relative importance of the quality characteristics and specifications, and
communicate it to the production line people as well as to the vendors supplying the
raw materials.
4.​ To look after various vendor quality control aspects such as examining new vendor
facilities, their procedures and systems, setting up of the vendor rating scales and
periodic performance evaluation of the vendors.
5.​ To establish statistical control techniques, charts and sampling plans.
6.​ To establish training programmes for various personnel in the company so that quality
consciousness gains a firm ground in the organization.
In short, designing the desirable and deliverable quality standards is the job of
Quality Planning.
Quality Implementation:
The implementation part of quality management deals with the following:
1.​ Performing laboratory tests and analysis on the raw materials, semi finished and
finished products for acceptance/rejection or for process control.
2.​ Maintaining quality control equipments. (Process, Laboratory and Inspection)
3.​ Advising and providing assistance for the clarification and solution of quality
management problems in manufacture.
Quality Monitoring and Control:
The monitoring and control function deals with the following:
1.​ Appraising the quality plan vis-à-vis the problems of production and the problems of
vendor quality so that appropriate action is taken to correct the initial planning errors.
2.​ Appraising quality planning vis-à-vis the actual quality which has reached the customer
and what the latter’s reaction is regarding the product quality; how such reactions (if
negative) can be set right by modifications to the original quality plan.
3.​ In addition to performing quality audits, monitoring the costs of quality and providing
such information to the quality-planners so that they take appropriate action for the
future.
Quality Assurance:
Quality assurance refers to the assurance to the customer that the products, parts,
components, tools, etc. contained specified characteristics and are fit for the intended use.
Assurance of quality is not a responsibility of a single person or a department only. Only
the inspection department or its personnel cannot be held responsible for assurance of
quality. It is the responsibility of everybody connected with the production, directly or
indirectly, e.g. each and every department connected with the production – from design and
raw material stage to dispatch and transportation stage is responsible. Thus designing
engineering department, purchasing department, inspection department, materials handling
department, repairs and maintenance department, stores department, production
department, sales department, etc. are all equally responsible for assuring quality. There for
everyone in the company has important role to play in final quality assurance of their
company and has to be alert and perform their duty with sincerity and efficiently.
Employees of the company must be made quality conscious. They should e motivated, they
must be made aware as to why the quality is important for themselves as well as for their
unit.
Quality Organization:
We now understand that quality is not the concern of only manufacturing department.
Quality is everyone’s business. Each department has to contribute to the quality. Quality is
built into the product at the product concept stage and is ubiquitous all through out its life.
Poor quality can occur because of organizational problems anywhere, or even outside the
organization. Top management’s commitment to quality is proper beginning. Quality
improvement is to be viewed as a positive effort. Continuous training is thus a key to
quality control. Quality function can be organized in several alternative methods, keeping
the above principle in mind.
Factors involved in building quality organization:
1.​ Employees’ morale: Increase in morale of the employees’ results into improvement of
quality. Morale of the employee may be affected because of many reasons, such as
monotony of work, frustration due to lack of chance of promotion, absence of
incentives, stress and fatigue due to working for certain period continuously. For
building a quality organization management must take care of all these factors and keep
the morale of the employees always at high level.
2.​ Technical Factors: Unclear specifications and faulty designs, improper or unsuitable or
substandard equipments and tools, complex or improper process design, improper
repairs and maintenance of tools and machines etc. may work against quality, hence all
these factors must be efficiently dealt with in a quality organization.
3.​ Other factors: Poor or unsatisfactory working conditions, improper ventilation,
insufficient light, abnormal temperatures, unsafe working conditions, absence of safety
gears, absence of proper sanitation facilities, absence of canteen facilities, etc works
against building of quality organization and can not be underestimated or neglected.
Steps to be taken for quality assurance:
1.​ For quality assurance first of all quality specifications for product must be established.
This includes specifications for input raw materials, components, parts, tools,
production and process design etc. This is to be done at the product design stage.
2.​ Next step is to develop and evolve the inspection and testing procedures to control the
specifications fixed up at step 1 above.
3.​ Random checking and testing of the product at various stages and systems audit to be
carried out surprisingly so as to detect any lethargy in implementation of inspection and
procedures.
4.​ Lastly periodical evaluation of the methods and procedures of inspection as well as
quality control is essential to measure the efficiency and effectiveness. On the basis of
such evaluation if any changes are warranted they should be implemented without any
delay and efficiently.
5.​ TQM-Total Quality Management, TQC - Total Quality Control, SQC - Statistical
Quality Control, QCs - Quality Control Circles, Company - wide Quality Control i.e. to
include suppliers and vendors also and assist them in develop and achieve certain
quality levels, On going education and training of all involved in the production,
implementation of ISO standards, adherence to various quality standards, Kaizen and
Six Sigma principles are some of the latest techniques and advancements in quality
control management.
Finally we will conclude the chapter on quality control with listing of quality control
functions even at the cost of repetitions of some of them.
Quality Control Functions:
1.​ To ensure that the product or service is designed in such a way that it meets to the
customers’ expectations.
2.​ To ensure that the product used by customer is not harmful and or injurious and is safe
for use and meets with the specifications of mandatory or otherwise required safety
standards and specifications.
3.​ Maintain discipline amongst the employees and keep them in high morale.
4.​ Ensure that raw material, components, all the parts, tools and equipments of standard
quality are only purchased and used.
5.​ To keep a check on variations occurring in the production and efficiently triggers the
corrective actions so that there are no slippages on the quality front at any level.
6.​ To make employees quality conscious by scientifically fixing their responsibilities and
accountability in reference to the quality of the product and organization as a whole.
7.​ To reduce the generation of waste, spoilage and scrap during the production.
8.​ To ensure excellent service after sales network to support the customers.
Meanings of some of the words connected with the quality:
Reliability: Reliability is something different from quality. It is related to quality but it is
something more than that. It is the probability that a product or a part or system or
equipment will perform satisfactorily for a given time under normal condition of use. May
be it relates to the sustainability of the quality over long period of time. A product of better
quality may not be reliable. Quality is related with the initial performance of a product but
the reliability is related to the continuation of performance over a period of time. A product
with better initial performance may fail to give the same performance after some time, in
such a case product is not considered reliable. There for manufacturers should not produce
quality products but also reliable products.
Maintainability: It relates to how fast a product when it fails can be repaired and brought
back to use. The time the product is non functional is known as down time.
Availability: It is specified in terms of a ratio between the uptime of the product (i.e. the
time for which product was under use, say Tu) and total of the uptime and down time (the
time product could not be used because of failure, say Td).
Availability = Tu/(Tu+Td).
HOLISTIC QUALITY MANAGEMENT
HOLISTIC: The word holistic means taking in the whole of something; over all;
inclusive; a holistic approach, holistic is based on the theory that a whole culture or
organism is a more fruitful field of study than its parts or symptoms.
HOLISTIC APPROACH
Holistic approach for Quality Management views quality as function of the entire
enterprise and not of any particular department or product. Entire organization strives to
achieve the highest quality of management at the lowest cost in pursuit to deliver the
greatest customer satisfaction. It is an approach towards making the entire management
process and systems holistically qualitative and through such effort to make the product
and service qualitative.
Holistic Quality Management is extension of concepts and principles of TQM. Total
Quality Management is a management philosophy that seeks to integrate all organizational
functions (marketing, finance, design, engineering, and production, customer service, etc.)
to focus on meeting customer needs and organizational objectives. It is mainly focused on
Internal and External Customers. Holistic Management goes beyond this, while continuing
to focus on internal and external customers and providing management to meet their needs,
it also seeks to integrate External Environment and Social Responsibility as a part of the
organizations management endeavour.
Basically quality management is fundamental requirement for excellence in production and
operations management. Successful companies are managing quality standards not just
within the company but across their enterprise, regardless of where products are produced,
assembled or sold. This global approach to quality requires a holistic process rather than
local, plant-based initiatives. Of course at the same time, each plant needs the ability to
adapt to its own unique situations, processes and needs.
Quality management is considered to have four main components:
1.​ Quality Planning,
2.​ Quality Control
3.​ Quality Assurance and
4.​ Quality Improvement
Quality management is focused not only on product and service quality, but also the means
to achieve it. It delivers quality assurance, through both control of processes and products -
of more consistent quality. A comprehensive quality management infrastructure ensures
procedural perfection in policy-making, product and process design and documentation of
the production of specific commodities or services. "Total Quality Management” system
will also take care of qualitative cultural development, crisis management, risk
management, change management as well as leadership.
Successful implementation of such a comprehensive quality management system goes
beyond meeting customer needs. "It should enable a company to outperform its competitors
and meet the various stakeholder requirements including the safety regulations laid down
by governments and regulatory institutions.
However Project and Programme (or Production) Management in today’s Globally
Competitive Economic Environment has to be holistic in its approach. Such Holistically
Managed organizations go beyond their call of duty and take into consideration and are
responsible for the care of
(1) External Environment (to save the planet earth, sound and air pollutions etc. and
social responsibility such as health, humanity and hunger, education, enrichment of people
and the country etc.) as well as its
(2) Internal Concerns (of economic such as profit and growth of the enterprise). It
considers the different stakeholders (those that will be positively and negatively affected by
project outcomes).
More often we find that laymen relate and restrict the term quality management only with
the aspects of product and process related operations. In fact, ‘quality’ and ‘quality
management’, in a business context, involve a great deal of interactive functions including
product quality management, processing and performance management, as well as risk and
crisis management, just to name a few.
The Quality Management System standards created by ISO are meant to certify the
processes and the system of an organization, not the product or service itself. ISO 9000
standards do not certify the quality of the product or service. We can understand from this
that efforts have to be invested for the Holistic Quality Management, the product and
service quality will be a natural output of such organizations.
It is no wonder that increasing number of organizations, irrespective of concerns for ‘profit’
or ‘not for profit’, today pursues Holistic Approach for the Quality of their Management.
It is this holistic approach for the quality management which helps companies to achieve
sustainability in the globally competitive business environment.
HOLISTIC QUALITY MANAGEMNET AND SUSTAINABILITY:
Sustainability enables an organization to measure, manage and report on the Triple
Bottom Line – Environmental, Social and Economic indicators – and determine business
strategies that reduce risk and increase shareholder value.
Sustainability has become a topic of global relevance. Corporations and other economically
acting organizations increasingly need to realize that in order to survive; their performance
now requires sustainability measures across (1) Social, (2) Environmental and (3)
Economic factors. This in turn requires setting new goals and transforming internal
organizational cultures by taking the vital steps of integrating and analyzing the external
data.
The most strategic enterprises will use data, and the intelligence gained from it, to their
competitive advantage – driving increased brand value through innovation and improving
internal efficiencies and accountability. They will also build loyalty in consumers,
employees and other stakeholders.
Supplementary to "classical" environmental management, realizing corporate sustainability
requires comprehensive approaches which allow the integration of social and economic
aspects. Such concepts can be seen. in international excellence models mainly based on
pursuing of a TQM, thinking beyond the focus on output product and customer satisfaction,
that also include the field of human factors in organizational design and management.
Understood as systems approaches, they include the interests of all relevant stakeholders
with a mid or long-term time perspective and are thus highly linked with the principles of
sustainable development.
Internationally leading scientists discuss the issue of sustainability from their perspective,
resulting in an innovative view on different management approaches under the umbrella of
corporate sustainability, and leading to the Holistic Approach for the management. One of
the ways to evaluate the organization’s success is to adopt a holistic approach of assessing
their organization. One of the examples of such a holistic approach is the Malcolm Baldrige
National Quality Award Assessment approach.
ELEMENTS OF TOTAL QUALITY SYSTEM
W. EDWARDS DEMING AND QUALITY MANAGEMENT SYSTEMS
‘W. Edwards Deming’ a statistician, after whom the Deming Prize for quality is named, is
credited for pioneering work to establish Production methods and Quality Management
Systems. Application of statistical control came later as a result of World War. During the
second-half of the 20th century, quality, as a profession and the managerial process
associated with the quality function, was introduced and has evolved since then. (Read
more about Deming in Chapter no. - )
QUALITY MANAGEMENT SYSTEM (QMS) – MAIN FIVE ELEMENTS
A quality management system can be built by incorporating the following five main
elements in a most organized and planned manner.
1.​ Organizational Structure
2.​ Responsibilities
3.​ Procedures
4.​ Processes
5.​ Resources
Five Fundamental Elements of Quality Management System can further be integrated with
thirteen elements that reflect an organizational and cultural attributes of various
organizations. Organizations in order to maintain QMS must regularly review these thirteen
elements. Review will help to draw the attention to any internal changes that occur in an
organization. It will help organizational efforts towards improvement, as driven by the
customer-identified needs. Such efforts should be documented to ensure the innovative
approaches and techniques that can be implemented into Total System for Quality
Management.
BRIEF DESCRIPTIONS OF THE THIRTEEN ELEMENTS OF TOTAL QUALITY
SYSTEM FOR AN ORGANIZATION
1.​ Quality of Work life:
Key to continually producing the highest quality product reflects any organizations ability
to attract and retain the most capable people. To attract those people, organizations need to
offer quality work environment, second to none in the industry. After hiring, they need to
offer the opportunity to excel within a profession, no limit to advancement, and a wealth of
experience to draw from.
2. Creating the New Analog:
Achieving quality and customer satisfaction requires that a company must have a strong
future orientation and the willingness to make long term commitments to customers,
employees, stockholders, and the community. Today's global business market makes focus
on quality more essential than ever before. Continuous quality improvement is mandatory
if we need to prosper in this environment.
3. Quality Tools:
The global business environment in which we operate today makes a priority to focusing
on customer needs, quality, and continuous improvement. To respond to this challenge, we
have to adopt TQM, to develop higher quality products and services. We need to be
committed in making TQM an integral part of culture and approach to management.
4. Design for Manufacturability:
The fundamental purpose of Design for Manufacturability Program is to improve the time
and cost on market for new products and new processes. The DFM program executes this
mission by working on to enhance communications with the product line customers during
the new product development process. The end result is predictable to a new product
performance.
5. Statistical Process Control:
They need to be committed to use Statistical Process Control (SPC) as a key tool to achieve
world class manufacturing levels.
6. Quality System:
The Quality System in operation at all manufacturing locations should address all elements
of an ISO 9001.
7. Customer Satisfaction:
They need to be committed through constant communication, for maintaining the highest
level of customer satisfaction. They need to place maximum effort to solve problems
relative to customer satisfaction.
8. Management Review:
They should design goals and then should take actions to achieve those goals. An essential
part of all of those processes is management review. The purpose of this quality tool is to
centralize management reviews in a manner that facilitates the Plan-Do-Check-Act
(PDCA) process and to provide an auditable trail.
9. Subcontractor Management:
By working together as a team with the subcontractors, and developing partnerships and
open lines of communication, Subcontractor Management can be developed into a low
maintenance, complete, and auditable monitoring system.
10. Training:
They should be committed to carry out continuous skill development of employees.
Education and training systems are designed to ensure employees have the requisite
capabilities to meet customer and business requirements.
11. Technology Development:
They should be committed to maintain a leadership position in research and development
of innovative quality products that have a real value to the customers. And they should
develop and deliver products to the customers on a predictable schedule at minimum cost.
12. Financial System:
They should maintain a financial system that provides management with an appropriate
information to develop plans and to make sound business decisions.
13. Quality Strategies:
They should make a mission to foster and encourage an environment that is focused on
continuous improvement and strives for excellence in Quality, Reliability, and Systems.

*** *** ***

 CHAPTER - 11
TOTAL QUALITY MANAGEMENT
1.​ TQM - DEFINITION & PHYLOSOPHY
2.​ BASIC CONCEPTS
3.​ EIGHT BUILDING BLOCKS
4.​ PRINCIPLES OF TOTAL QUALITY MANAGEMENT
5.​ SEVEN STAGES AND PILLARS OF TQM
6.​ SEVEN DEADLY DISASTERS
7.​ TQM IN SERVICES
11.1​ ​ TQM - DEFINITION & PHILOSOPHY
DEFINITIONS:
TQM is an enhancement to the traditional way of doing business.
TQM is a proven technique guaranteeing survival in global competition.
TQM is a comprehensive and structured approach to organizational management that
seeks to improve the quality of products and services through ongoing refinements in
response to continuous feedback.
As defined by ISO: "TQM is a management approach of an organization, centered on
quality, based on the participation of all its members and aiming at long-term success
through customer satisfaction and benefits to all members of the organization and to
society."
PHILOSOPHY
TQM is a management philosophy that seeks to integrate all organizational functions
(marketing, finance, design, engineering, and production, customer service, etc.) to focus
on meeting customer needs and organizational objectives.

​ The word "total" in TQM means that everyone in the organization must be involved in
the continuous improvement effort.

​ The word "quality" shows a concern for customer satisfaction, and

​ The word "management" refers to the people and processes needed to achieve the
quality.
TQM is not a program, it is a systematic, integrated, and organizational way-of-life directed
at the continuous improvement of an organization.
11.2 BASIC CONCEPTS
TQM views an organization as a collection of processes. It maintains that organizations
must strive to continuously improve these processes by incorporating the knowledge and
experiences of workers.
The simple objective of TQM is "Do the right things, right the first time, every time".
TQM is infinitely variable and adaptable. Although originally applied to manufacturing
operations, and for a number of years only used in that area, TQM is now recognized as a
generic management tool, just as applicable in service and public sector organizations.
Concept of TQM or Total Quality Management was originated in the 1950's and has
become more popular since the early 1980's.
TQM is the description of the culture, attitude and organization of a company that aims to
provide customers with products and services that satisfy those needs.
There are essentially eight elements
to TQM and each element needs to be done correctly in order for TQM to work the way it
was meant to.
The implementation of TQM is a long term process. For TQM to work properly all key
elements need to be implemented properly and adhered to.
Managers and all employees need to embrace all of the elements and follow what the
elements say.
Outside consultants are best hired to help train all employees including managers on the
correct ways to implement TQM. If TQM is implemented correctly it can be a powerful
technique for unleashing employee creativity.
THE CONCEPT OF CONTINUOUS IMPROVEMENT BY TQM:
TQM is mainly concerned with continuous improvement in all work, from high level
strategic planning and decision-making, to detailed execution of work elements on the shop
floor.
It stems from the belief that mistakes can be avoided and defects can be prevented.
It leads to continuously improving results, in all aspects of work, as a result of continuously
improving capabilities, people, processes, and technology and machine capabilities.
A central principle of TQM is that people may make mistakes, but most of them are
caused, or at least permitted, by faulty systems and processes.
This means that the root cause of such mistakes can be identified and eliminated, and
changing the process can prevent repetition.
 11.3 EIGHT BUILDING BLOCKS OF TQM

i)​ Act Always in line with the customer needs understanding their stated and implied
needs and supplying them products and services as per their needs that is implement
Quality Function Deployment (QFD). This will lead to achieving the customers’
satisfaction and ultimately market leadership.
ii)​ Develop an internal customer – supplier relationship so that every one in the
organization strives to excel in the chain of operations from start to finish in the
hierarchy of operations till product is finished. Building a strong supply chain
management.
iii)​Measure the value added to the process or sub-process. Measure both the value added
in the input and the cost of value addition, i.e. the cost of resources consumed. The
difference will indicate the surplus created and help evaluate the efficiency of the
process management. Ensure out put results in Effectiveness, Efficiency and Economy
leading to Customer Satisfaction.
iv)​ Do it right the first time, this calls for the implementation of the statistical process
control (SPC) or the six sigma to ensure the reliability in terms of the zero defect in the
product, elimination of wastages and timely delivery of the products and services. Use
principles of JIT, Poka – Yoke
v)​ Work under the ‘7’ zero banners. The seven zeros are as follows:
1.​ Zero disdain (look on with contempt) for others.
2.​ Zero stock or inventory.
3.​ Zero delay.
4.​ Zero paper.
5.​ Zero downtime.
6.​ Zero defects.
7.​ Zero accident.
vi)​ Focus on the prevention to prevent the repetition of mistakes. Any mistake or failure
has to be analysed to find out the root cause and take the suitable corrective and
preventive actions so that the mistake or failure never repeats. Work for giving Quality
Assurance.
vii)​Involve all the participants in the organization. TQM advocates involvement not only
of its employees, but also the organization’s suppliers, vendors and as well as its
customers. Integrate total value chain right from the word go to finish.
viii)​ Satisfy all the parties at the same time. Organization must endeavour to satisfy not
only its employees, suppliers and customers, but also the environment, its share
 holders, society and the country at large. Emphasizing on Environment awareness, and
protection along with the business and profit objectives.
These eight building blocks are practiced in a cyclic manner, so that the objective of
attaining the performance level of highest order for each and every employee as well as
suppliers. These together with the other principles of TQM not only help the organization
achieve the market leadership globally but also to implement the world class management
system.
11.4 PRINCIPLES OF TQM:
THE FIVE KEY PRINCIPLES OF TQM ARE AS FOLLOWING:
1.​ Management Commitment
​ Plan (drive, direct)

​ Do (deploy, support, participate)

​ Check (review)

​ Act (recognize, communicate, revise)

2.​ Employee Empowerment
​ Training
​ Suggestion scheme
​ Measurement and recognition
​ Excellence teams
3.​ Fact Based Decision Making
​ SPC (statistical process control)
​ The 7 statistical tools
​ TOPS -Team Oriented Problem Solving
4.​ Continuous Improvement
​ Systematic measurement and focus
​ Excellence teams
​ Cross-functional process management
​ Attain, maintain, improve standards
5.​ Customer Focus
​ Supplier partnership
​ Service relationship with internal customers
​ Never compromise quality
​ Customer driven standards
THERE ARE THREE MAJOR MECHANISMS OF PREVENTION
1.​ Preventing mistakes (defects) from occurring (Mistake - proofing or Poka-Yoke).
2.​ Where mistakes can't be absolutely prevented, detecting them early to prevent them
being passed down the value added chain (Inspection at source or by the next
operation).
3.​ Where mistakes recur, stopping production until the process can be corrected, to
prevent the production of more defects. (Stop in time).
STEPS IN MANAGING THE TRANSITION
Beckhard and Pritchard (1992) have outlined the basic steps in managing a transition to a
new system such as TQM:
1.​ Identifying tasks to be done,
2.​ Creating necessary management structures, and developing strategies for building
commitment,
3.​ Designing mechanisms to communicate the change, and
4.​ Assigning resources.
1. Task identification would include:
●​ A study of present conditions (assessing current reality, as described above);
●​ Assessing readiness, such as through a force field analysis;
●​ Creating a model of the desired state, in this case, implementation of TQM;
●​ Announcing the change goals to the organization; and
●​ Assigning responsibilities and resources. (This final step would include securing
outside consultation and training and assigning someone within the
organization to oversee the effort. This should be a responsibility of top
management.)
2. ​ Designing transition management structures:
●​ It is also a responsibility of top management.
●​ Management must be heavily involved and committed as leaders rather than relying
on a separate staff person.
●​ An organization wide steering committee to oversee the effort may be appropriate.
3. To communicate the change:
●​Mechanisms beyond existing processes will need to be developed.
●​Special all-staff meetings attended by executives and/or dialog sessions and
●​ TQM newsletters may be an effective ongoing communication tool to keep
employees, aware of activities and accomplishments.
4. Assigning of resources for the change effort is important with TQM:
 Because, outside consultants will, almost always be required. Choose consultants based
on their prior relevant experience and their commitment to adapting the process to fit
unique organizational needs. While consultants will be invaluable with initial training
of staff and TQM system design, employees (management and others) should be
actively involved in TQM implementation, perhaps after receiving training in change
management which they can then pass on to other employees.
Conclusion:
1.​ TQM encourages participation amongst shop floor workers and managers.
2.​ It evolves discipline and philosophy of management.
3.​ This results into planned and continuous improvement and assumes
4.​ That quality is the outcome of all activities that take place within an organization;
5.​ That all functions and all employees have to participate in the improvement process;
6.​ That organizations need, both quality systems and a quality culture.
11.5 SEVEN STAGES AND PILLARS OF TQM
11.6 SEVEN DEADLY DISASTERS
Following is the list of deadly disasters / impediments in implementation of TQM
1.​ Lack of long-term commitment and leadership for management
2.​ Insufficient empowerment of workers
3.​ Lack of cross-functional, cross-disciplinary efforts
4.​ Misdirected focus – emphasis on the trivial many problems facing the company rather
than a critical few
5.​ Emphasis on internal processes to the neglect of external - customer-focused –
results
6.​ Lack of focus in training and coaching
7.​ Lack of cost-of-quality measurement, performance reporting, and reward/formal
recognition systems. Emphasis on quick fixes and low-level reforms, short-term
performance at the expense of long-term improvements
11.7 TQM IN SERVICES
We need to understand the principles of TQM in services by asking basic question as to
what according to us is service quality. Following seven points highlight the requirement
for service quality:
1. ​ Time & Timeliness - customer-waiting time, completed on time
2. ​ Completeness - customer gets all they asked for
3. ​ Courtesy - treatment by employees
4. ​ Consistency - same level of service for all customers
5. ​ Accessibility & Convenience - ease of obtaining service
6. ​ Accuracy - performed right every time
7. ​ Responsiveness - reactions to unusual situations
TQM covers the four guiding principles to improve quality at par in either sector i.e.
manufacturing or services:
1. ​ Delight the customer
2. ​ Management by fact
3. ​ People-based Management
4. ​ Continuous improvement
Delight the customer: This focuses on external customer and asks " what would delight
them" " Delight" means being best at what really matters most to the customers and this
can change over time. Being in touch with these changes and always satisfying the
customer are an integral part of TQM.
Management by Fact: Knowing the current quality standards of the product or service in
customer's hands is the first stage of being able to improve. We can only mean
improvement if we know the base we are starting from.
 People-based Management: If people understand what to do, how to do it and obtain
feedback on their performance, they can be encouraged to take responsibility for the quality
of their work. The more people feel involved, the greater will be their commitment to
customer satisfaction. Systems, standards and technology themselves will not provide
quality. The role of people is extremely important in the continuous improvement of quality
within an organization.
Continuous Improvement: TQM is not a short-term activity that will finish when a set
target has been achieved. It is not a programmes or a project. It is a management process
that recognizes that however we may improve, our competitors will continue to improve
and our customers will expect more and more from us. Here, continuous improvement is an
incremental change and not a major breakthrough, which shall be the aim of all who wish
to undertake the total quality management journey.
Impact of TQM throughout the organization is crucial to understand. TQM doesn’t mean
for shop floor quality. It has total impact on organization as whole.

*** *** ***

 CHAPTER - 12

PHILOSOPHIES AND APPROACHES OF

MANAGEMENT GURUS
12.01​​ DEMING AND HIS CONTRIBUTION TO QUALITY,
​ ​ DEMING’S 14 POINTS FOR MANAGEMENT

1900 –1993
Deming was an American Statistician, Professor, Author, Lecturer, and Consultant. He had
a Ph.D. in Physics. No individual has more influence on quality management than Dr.
Deming. He used to work for Western Electric during 1920s-1930s; this was the time when
this company had started their pioneering effort to bring in statistical quality control.
Deming recognized the importance of viewing the management processes statistically. He
has received extensive credit for improving production in United States during World War
II; however his work in Japan has given him far more recognition as a management guru.
Right from 1950 onwards he guided the top management specifically about how to improve
design (and thus service), product quality, testing and sales in the global markets through
various methods, and including application of statistical methods. Due to Deming’s
significant contribution, Japan has a reputation for innovative, high-quality products and
economic power. It is important to note that his work had more impact upon Japanese
manufacturing and business than any other individual of Japanese heritage. It is sad to
know that despite being considered a hero in Japan, he won widespread recognition in the
U.S. only at the time of his death.
DEMING’S PHILOSOPHY
Dr. Deming emphasized that by adopting appropriate principles of management;
organizations can increase quality and can simultaneously reduce costs. He suggested that
this can be achieved by:
1.​ Reducing waste, rework,
2.​ Staff attrition and
3.​ Increasing Customer Loyalty instead of increasing litigations with the customers.
The key is to practice continual improvement and think of manufacturing as a system,
not as bits and pieces."
Some of Japanese proponents of Deming’s Philosophy summarized it in a simple
'a'-versus-'b' comparison as follows:
(a) When people and organizations primarily focus on quality as a result of work efforts
and they invest more in extra efforts towards improving quality as defined by the following
ratio, Quality tends to increase and costs (automatically) falls over time. This will help
to improve the Quality Ratio of an organization in more than one way. Deming claimed that
higher quality leads to higher productivity, which in turn leads to long-term competitive
strength.

(b) However, when people and organizations primarily focus on costs which we have often
seen as dominant / typical human behavior, costs tend to rise and quality declines over
time. This is obviously due to following reasons:

1.​ Your focus is primarily on reducing costs and not on minimizing waste.
2.​ The focus on reducing costs inadvertently breeds habit of ignoring amount of rework
(while generation of waste is not minimized).
3.​ Taking staff for granted, not rapidly resolving disputes.
4.​ Failing to notice lack of product and productivity improvement resulting into over time
and loss of customer loyalty.
Above philosophy can also be described as Deming’s “Chain Reaction” theory:

THE DEMING CHAIN REACTION

Improved Quality

Costs decreases because of less rework, fewer

mistakes, fewer delays and snags, and better use of
time and materials

Productivity Improves

Capture the market with better quality and lower

price

Stay in business
 Provide Jobs and more jobs
THE DEMING SYSTEM OF PROFOUND KNOWLEDGE:
Deming’s philosophy underwent many changes as he himself continued to learn. He
preached ‘14 Points’ during his early work in United States, as described latter in this book.
These points were confusing and were not understood well by people. In order to clarify
these points further, he synthesized the founding principles underlying these 14 points and
these synthesized a set of principles and are named by Mr. Deming as “A System of
Profound Knowledge”
The System of Profound Knowledge makes us understand and provides critical insights
needed for designing effective management practices. It also inculcates art of making
decisions in today’s complex business environment. Such understanding helps us to
visualize as to what to do in order to get long-term improvements in quality and efficiency.
It is needless to mention that organizations led by people who are guided by the ‘System
of Profound Knowledge’ are likely to be much more efficient and successful than
organisations which continue with the ‘prevailing style of management’
System of profound knowledge aims to provide an outside view – ‘a lens’ which provides
guidelines to help understand the organizations that we work in. The system of profound
knowledge basically revolves around following fundamental principles:
1.​ The prevailing style of management must undergo transformation.
2.​ A system cannot understand itself.
3.​ The transformation requires a view from outside.

WHY UNDERSTANDING OF ORGANIZATIONS THAT WE WORK IN IS SO

IMPORTANT?
Since everything we want (product or services) comes from organisations; hence to get
more of what we want, the organizations must work efficiently and involve in supplying it.
For example, when we are ill we need two things:
●​ We need a good doctor and
●​ We also need that doctor to work in a good organisation.
A good doctor is not enough. To start with there should be an adequate appointment
system. The doctor should buy supplies from sterile equipment. Lab results should be
accurate and quick. The treatments prescribed must be available and of good quality. And it
should be provided at a cost patients can afford. All this needs a good organization and not
just good individuals to deliver them.
For organisations to transform, "The first step is the transformation of an individual”.
This transformation is discontinuous. It comes from understanding of the system of
profound knowledge. An individual, transformed, will perceive new meaning to his life, to
events, to numbers, to interactions between people.
Once an individual understands the system of profound knowledge, he will apply its
principles in every kind of relationship with other people. He will have a basis for
judgment of his own decisions and for transformation of the organizations that he belongs
to.
An individual, once transformed, will:
●​ Set an example;
●​ Be a good listener, but will not compromise;
●​ Continuously teach other people; and
●​ Help people to pull away from their current practices and beliefs and move into the new
philosophy without a feeling of guilt about the past."
Deming advocated that all managers need to have what he called a System of Profound
Knowledge, which consists of following four interrelated parts:
1.​ Appreciation of a system: understanding the overall processes involving suppliers,
producers, and customers (or recipients) of goods and services
2.​ Knowledge of variation: the range and causes of variation in quality, and use of
statistical sampling in measurements;
3.​ Theory of knowledge: the concepts explaining knowledge and the limits of what can be
known;
4.​ Knowledge of psychology: concepts of human nature.
Deming explained the underlying spirit in his philosophy of Profound Knowledge as
follows:

​ One need not be eminent in any part nor in all four parts in order to understand it and
to apply it.

​ The 14 points for management in industry, education, and government follow

naturally as application of this outside knowledge, for transformation from the
present style of Western Management to one of optimization.

​ The various segments of the system of profound knowledge proposed here cannot
be separated. They interact with each other and are interrelated. Thus, knowledge of
psychology is incomplete without knowledge of variation.

​ A manager of people needs to understand that all people are different. This is not
ranking people. He needs to understand that the performance of anyone is governed
largely by the system that he works in, thus it is the responsibility of the
management.
The Appreciation of a system involves understanding how interactions (i.e. feedback)
between the elements of a system can result in internal restrictions that force the
system to behave as a single organism that automatically seeks a steady state. It is this
steady state that determines the output of the system rather than the individual
elements. Thus it is the structure of the organization rather than the employees, alone,
which holds the key to improving the quality of output.
The Knowledge of variation involves understanding that everything measured consists of
both "normal" variation due to the flexibility of the system and of "special causes"
that create defects. Quality involves recognizing the difference in order to eliminate
"special causes" while controlling normal variation. Deming taught that making
changes in response to "normal" variation would only make the system perform
worse. Understanding variation includes the mathematical certainty that variation will
normally occur within six standard deviations (thus six sigma: the symbol for standard
deviation) of the mean.
The Theory of Knowledge explains that when we come up with ideas to improve products
or processes; these ideas will be based on our current knowledge and our theories about
the way things work. But theories can be wrong so we must actively check to find out if
they are correct. The way to improve a product or a process economically is to increase
our knowledge of the way it works. The practical steps for increasing knowledge are
the 'Plan, Do, Study, Act' cycle.
Knowledge of psychology: concepts of human nature. Psychology is the study of the
human mind, including how people act and interact in different situations. Successful
managers get promoted because they understand people. But they only understand how
people act under the current style of management. If they have never seen an
organisation transformed by the principles described above, they will have no
understanding of how people act in that environment.
The basic rules of motivation and reward are completely different. For example, it is
commonly accepted that targets and deadlines are necessary to keep people focused on the
job. But with the right type of leadership, people will want to do their best for an
organization and in these circumstances it is harmful to apply crude external
motivators.
It is seen that too much job security makes people lazy. But when individuals feel
insecure, instead of co-operating with one another, they tend to compete for recognition of
merit from their superiors. In a system when the components do not fully co-operate this
leads to huge inefficiencies. Internal competition makes it difficult to learn anything.
The System of Profound Knowledge is the basis for application of Deming's famous 14
Points for Management, described below.
DEMING'S 14 POINTS
Deming offered fourteen key principles for management for transforming business
effectiveness. Deming's fourteen points for Management gives guidance on good
management practice. Some of these points will not make much sense to people who are
tied up in the current management philosophy. They make a lot more sense with some
understanding of the System of Profound Knowledge.
1.​ Create constancy of purpose toward improvement of a product and service with a plan
to become competitive and stay in business. Need to decide to whom top management
is responsible.
2.​ Adopt the new philosophy. We are in a new economic age. We can no longer live with
commonly accepted levels of delays, mistakes, defective materials, and defective
workmanship.
3.​ Cease dependence on mass inspection. Requires statistical evidence that quality is
built in. (prevent defects instead of detect defects.)
4.​ Ending the practice of awarding business on the basis of price tag. And to, depend
on meaningful measures of quality along with price. Eliminate suppliers that cannot
qualify with statistical evidence of quality.
5.​ Find Problems. It is a management’s job to work continuously on the system (design,
incoming materials, composition of material, maintenance, improvement of machine,
training, supervision, retraining)
6.​ Institute modern methods of training on the job
7.​ The responsibility of the foreman must be to change from sheer numbers to
quality - This will automatically improve productivity. Management must prepare to
take immediate action on reports from the foremen concerning barriers such as inherent
defects, machines not maintained, poor tools, and fuzzy operational definitions.
8.​ Drive out fear, so that everyone may work effectively for the company.
9.​ Break down barriers between departments. People in research, design, sales and
production must work as a team to foresee problems of production that may be
encountered with various materials and specifications.
10.​Eliminate numerical goals, posters and slogans for the workforce, asking for new
levels of productivity without providing methods.
11.​Eliminate work standards that prescribe numerical quotas.
12.​Remove barriers that stand between the hourly worker and his right of pride of
workmanship.
13.​Institute a vigorous program of education and retraining.
14.​Create a structure in top management that will push every day on the above 13pts.
The Seven Deadly Diseases:
1.​ Lack of constancy of purpose.
2.​ Emphasis on short-term profits.
3.​ Evaluation by performance, merit rating, or annual review of performance.
4.​ Mobility of management.
5.​ Running a company on visible figures alone.
6.​ Excessive medical costs.
7.​ Excessive costs of warranty, fueled by lawyers who work for contingency fees.
A Lesser Category of Obstacles:
1.​ Neglecting long-range planning.
2.​ Relying on technology to solve problems.
3.​ Seeking examples to follow rather than developing solutions.
4.​ Excuses, such as "Our problems are different."
12.02​ JURAN'S PHYLOSOPHY AND HIS CONTRIBUTION TO QUALITY
 1904 - 2008
Dr. Joseph M. Juran was born on December 24th, 1904 at Braila, Rumania. He graduated as
an Electric Engineer in 1924. He is considered the leader of quality management since
the last 70 years. The 5th edition of Juran’s Quality Handbook is considered as the core
of quality management. Dr. Juran conceptualized the Pareto Principal* which is applied
in quality management. He also spent some years with reengineering concepts. During
this time he observed that an organization can work better if they standardize the
process and give more importance to quality. Dr. Juran worked together with tools like
Pareto Principle and Total Quality Management and others that are part of the program that
Dr. Juran used for increasing the culture of quality in companies. (* Pareto Principal - is
explained later in this book)
THE JURAN PHILOSOPHY:
The Quality of a product is defined by Juran as a "fitness for use".
According to him, Quality is related to:
(1)​ Product performance that results in customer satisfaction;
(2) ​ Freedom from product deficiencies, which avoids customer dissatisfaction.
The design of goods, the process of manufacturing, delivery and service, all relate to the
fitness of use. So, when it comes to producing quality, one must look at the firm as a whole.
And each department should design and conformance quality respectively.
Juran supported continuum of cycle of all activities. Such activities include right from
market research, design, planning for manufacture, purchasing, production process control,
inspection and testing, and sales, followed by customer feedback.
The interdependency of these functions emphasizes the need for competent company and
wide quality management. Senior management must play an active and enthusiastic
leadership role in the quality management process.
Instead of proposing a major reorganization of processes within the organization, which
Deming implemented, Juran proposed programs that were designed to fit into a company's
current strategic business planning with minimal risk.
In the usual top-down hierarchical management system that Americans use, he claimed that
the top management speaks in the language of dollars; workers speak in the language of
things; and the middle management must be able to speak in both languages and translate
between dollars and things.
Juran advocated the use of quality cost accounting and analysis (top-management
language); and increased conformance to specifications, supported extensively by
statistical tools for analysis (worker's language). Juran's noticed that most companies
focused most of their efforts on quality control of the trilogy but felt that more effort should
go into quality planning and, especially, quality improvement. Amongst the fundamental
similarities of the Juran and Deming philosophies, we have management commitment, the
need for improvement, the use of quality control techniques, and the importance of
training.
JURAN’S TRILOGY:
(Trilogy means a set of three works of art – in Juran’s case art of making quality products -
that are connected, and that can be seen either as a single work or as three individual
works)
Dr. Juran’s trilogy defined the three management processes required by every
organization to improve:
1.​ Quality Planning.
2.​ Quality Control,
3.​ Quality Improvement and
This Trilogy shows how an organization can improve every aspect by better
understanding of the relationship between processes that plan, control and improve
quality as well as business results. It was created in the 1950’s and defines managing for
quality as three basic quality-oriented, interrelated processes:
Quality Planning - To determine customer needs and develop processes and products
required to meet and exceed those of the customer needs. The processes are called Design
for Six Sigma or Concurrent Engineering. This can be particularly challenging for a
planning team, because customers are not always consistent with what they say they
want. The challenge for quality planning is to identify the most important needs from
all the needs expressed by the customer.
●​ Identify who are the customers.
●​ Determine the needs of those customers.
●​ Translate those needs into our language.
●​ Develop a product that can respond to those needs.
●​ Optimize the product features so as to meet our needs and customer needs.
Quality Control - The purposes of quality control is to ensure the process is running in
optimal effectiveness, or to ensure that any level of chronic waste inherent in the
chronic waste, which is a cost of poor quality that can exist in any process, may exist due
to various factors including deficiencies in the original planning.

​ It could cost a lot of money to the company, from rework time to scrap product to
overdue receivables.

​ If the waste does get worst (sporadic spike), a corrective action team is brought in
to determine the cause or causes of this abnormal variation.

​ Once the cause or causes had been determined and corrected, the process again falls
into the zone defined by the “quality control” limits.
 ​ Prove that the process can produce the product under operating conditions with
minimal inspection.

​ Transfer the process to Operations.

Quality Improvement - Eliminate waste, defects and rework that improves processes
and reduces the cost of poor quality.

​ Chronic waste, which is a cost of poor quality that can exist in any process, may exist
due to various factors including deficiencies in the original planning.

​ It could cost a lot of money to the company, from rework time to scrap product to
overdue receivables.

​ If the waste does get worst (sporadic spike), a corrective action team is brought in
to determine the cause or causes of this abnormal variation.

​ Once the cause or causes had been determined and corrected, the process again falls
into the zone defined by the “quality control” limits.

​ Prove that the process can produce the product under operating conditions with
minimal inspection.

​ Transfer the process to Operations.

JURAN’S TEN STEPS TO QUALITY IMPROVEMENT

1.​ Build awareness of the need and opportunity for improvement
2.​ Set goals for improvement
3.​ Organize to reach the goals
4.​ Provide training
5.​ Carry out projects to solve problems
6.​ Report progress
7.​ Give recognition
8.​ Communicate results
9.​ Keep score,
10.​Maintain momentum by making annual improvement part of the regular systems and
processes of the company
STRENGTHS OF JURAN’S TRILOGY:
The methodology searches a continuous improvement of quality in every aspects of the
organization, because if the implementation of the methodology does not give the
desire results it is possible to start all over again. The methodology allows the use of
different quality tools to cover the steps of Juran’s Trilogy. It allows a better understanding
of the relationships of every stage of the company.
The methodology is well structured and allows the companies that implement it, an easy
understanding and application.
WEAKNESSES OF JURAN’S TRILOGY:
To have quality control it is necessary to have a trained person with knowledge in statistical
processes or train a special person to be in charge of quality. The program is focus in the
company process and not in labor force.
Analyzing the requirements of the program we found that the companies who apply the
program have a complex level of organization. ​
These kinds of methodologies show results in a long term; this represents a risk for the
company because the implementation of the quality program can be a waste of time, money
and resources.
EXAMPLES OF USE AND WHERE IT IS USED
The Juran quality program is used in health care improvement. The Institute of Juran has
been helping health care providers like hospitals and clinics improve the quality of their
care as well as reducing costs. The institute provides consulting and training, so
organizations can understand the importance of improving their main processes and help
them to create a plan for it.
The Dr. Juran quality program is also used in benchmarking, change management, design
for six sigma, lean techniques, performance improvement, quality management and six
sigma deployments.
12.03​​ KAIZEN (ELEMINATION OF MUDA, MURA MURI):
MASAAKI IMAI

1930
Born in Tokyo in 1930 Imai was a quality management consultant. He did his bachelors in
1955 from the University of Tokyo. Imai established the Kaizen Institute in 1986, to help
Western companies introduce Kaizen concepts, systems and tools. The term Kaizen became
famous due to Imai’s book, “Kaizen: The Key to Japan's Competitive Success.”
INTRODUCTION
‘KAI’ means 'change' or 'the action to correct'.
‘ZEN’ means 'good'.
In Chinese this is pronounced 'gai shan':
●​ ('gǎi shàn') means 'change for the better' or 'improve'.
●​ ('gǎi') means 'change' or 'the action to correct'.
●​ ('shàn') means 'good' or 'benefit'.
'Benefit' is more related to the Taoist or Buddhist philosophy, which gives the definition as
the action that 'benefits' the society but not one particular individual (i.e. multilateral
improvement). In other words, one cannot benefit at another's expense. The quality of
benefit that is involved here should be sustained forever, in other words the 'shan' is an act
that truly benefits others.
Kaizen is a culture of continuous improvement, focusing on eliminating waste in all
systems and processes of an organization.
Kaizen is a daily activity whose purpose goes beyond simple productivity improvement.
It is also a process that, when done correctly, humanizes the workplace, eliminates overly
hard work (both mental and physical) “Muri”, and teaches people how to perform
experiments on their work using the scientific method and how to learn to spot and
eliminate waste in business processes.
The Kaizen strategy begins and ends with the people. Kaizen makes people to continuously
improve their ability to meet expectations of high quality, low cost, and on time delivery.
The real challenge to management is to improve quality while reducing costs. It is a matter
of balance between process and results.
TWO ELEMENTS AND THREE PRINCIPLES OF KAIZEN:
There are two elements that construct Kaizen:
1.​ Improvement / Change for better.
2.​ Ongoing / continuity.
To be most effective kaizen must operate with three principles in place:
1.​ Consider the process and the results (not results-only) so that actions to achieve effects
are surfaced;
2.​ Systematic thinking of the whole process and not just that immediately in view (i.e. big
picture, not solely the narrow view) in order to avoid creating problems elsewhere in
the process; and
3.​ A learning, non-judgmental, non-blaming (because blaming is wasteful) approach and
intent will allow the re-examination of the assumptions that resulted in the current
process.
FORMAT FOR KAIZEN
People at all levels of an organization can participate in kaizen, from the CEO down, as
well as external stake holder when applicable. The format for kaizen can be individual,
suggestion system, small group, or large group.
KAIZEN BENEFITS
1.​ Problems are identified at source and resolved.
2.​ Small improvements which are realized can add up to major benefits for the business.
3.​ Improvements which lead to changes in the business quality, cost and delivery of
products mean a greater level of customer satisfaction, and business growth.
4.​ By involving employees in looking at their environment to bring about change, results
in improved morale as people begin to find work easier and more enjoyable.
KAIZEN AND INOVATION
Innovation refers to breakthrough activity initiated by the top management, which may
include, buying new machines, equipments or developing new markets, change of strategy
or initiating new R & D. etc.
In contrast Kaizen aims to achieve results not from massive reorganizations or large-scale
investment projects, but from the cumulative effects of successive incremental
improvements. The aim is to do what we are already doing, do it better. (Comparison Table
is given on next page).
KAIZEN AND SUGGESTION
Suggestion refers to the change suggested by an employee with a view to achieve cost
reduction. Although Kaizen and Suggestion both are employees participation scheme, and
suggestions scheme may bring in good amounts of savings for the company, many a time it
remains only as proposal, which is not implemented. Where as Kaizen, is already
implemented. (Comparison Table is given on next page).
METHODOLOGY OF KAIZEN
Following are the 7 steps towards Kaizen:
1.​ Individuals have to find the pain areas in their working areas.
2.​ Analyze the pain.
3.​ Find out solutions for the problems.
4.​ Implement solutions for some days till you get out of that particular pain.
5.​ Write on the paper old and new situations.
6.​ Display it in the appropriate place so that all can see it and appreciate it.
7.​ Then on a particular day of the month you are asked to explain the Kaizen to a small
group of employees where all will understand it. A small gift is given to you to give
happiness and sense of satisfaction.
In good organizations in Japan, each employee gives average 5 Kaizens per month.

ELIMINATION OF MUDA, MURI, MURA

KAIZEN is a Commonsense Approach to Low Cost Management. It focuses on MUDA
elimination
WHAT IS MUDA?
Muda means any wasteful activity or any obstruction to smooth flow of an activity.
Activity = Work + Muda
Expenditure = Cost + waste
That is, for each activity there is expenditure and every work there is a cost associated. Any
expenditure on the Muda is a waste!
Therefore, Less Muda = More happy clients (as it impacts on quality, cost and delivery of
products and services).
WHAT IS GEMBA?
Gemba - Real place - (in our context Work Place)
Gembutsu - tangible objects found at the Gemba
Gemba is where Value Is Added. (The Managers cabin is not a Gemba!)
WHAT IS GEMBA KAIZEN?
A process of continuously

​ Identifying

​ Reducing

​ Eliminating

Muda from our Gemba

SOME TYPICAL MISCONCEPTIONS ON KAIZEN

​ Kaizen is for workers; It is not for managers

​ Kaizen is SMALL improvements only

​ Kaizen is only a sort of implemented-suggestion scheme

​ Any implemented improvement is Kaizen

WHEN DOES IT BECOME KAIZEN?

​ Large improvements are made

​ Small time and small money is used

​ Bottleneck problem is attacked

​ Process observation is used

 ​ KAIZEN paradigms are deployed

​ Management participation exists

GEMBA KAIZEN ALSO FOCUSES ON MURA AND MURI

WHAT IS MURA?
Mura = Inconsistencies in the system (Discrepancy)
​ Happens sometimes?

​ Happens some places

​ Happens to some people

​ One side is ok; the other side is not ok

All this is Mura

WHAT IS MURI?
Muri = Physical Strain
​ Bend to work?

​ Push hard?

​ Lift weight?

​ Repeat tiring action?

​ Wasteful walk?

All this is Muri

GEMBA KAIZEN NOW REDEFINED …..

A process of continuously
​ Identifying

​ Reducing

​ Eliminating

Muda, Mura, Muri (3 Mu) from our Gemba

CARRYING OUT GEMBA KAIZEN WORKSHOPS INVOLVES:

​ Focused Improvement

​ Setting up of Cross-functional teams

​ A KAIZEN Time slot (4 to 5 days)

​ Applying 5 golden rules of Gemba management

​ Avoid spending money (no investment)

​ Working in PDCA cycle (Plan, Do, Check, Act Cycle)

✔​ PLAN means to avoid MURI, or unreasonableness

✔​ DO means to avoid MURA, or to control inconsistencies

✔​ CHECK means to avoid MUDA, or to find waste in outcomes

✔​ ACTION indicates the will, motivation, and determination of the Management.

FIVE GOLDEN RULES OF GEMBA KAIZEN WORKSHOP

1) Go to the Gemba
2) Check Gembutsu - (item at Gemba)
3) Take Temporary Measures on the spot
4) Find root cause & kill
5) Standardize to Prevent Recurrence
CONCLUSION:
It is now well understood that Kaizen involves finding the pain areas, these are work
related areas which create waste, inconsistencies in the system and generate physical
strains. In Japanese words they are Muda, Mura and Muri. Once you identify these pain
areas, you can focus to find out the solutions for eliminating them, and implementing these
solutions ultimately will improve your performance.
12.04​​ PHILIP B. CROSBY’S PHILOSOPHY ​
​ ​ RELATING TO QUALITY – QUALITY IS FREE

Jun 18, 1926 – Aug 18, 2001

Philip Bayard Crosby was a business philosopher. He had 40 years of experience on

management. He published fourteen books, all of which were best sellers. His first book,
Quality is Free, is considered instrumental in the beginning of quality revolution in the
U.S. and Europe. It has sold over 2.5 million copies and has been translated into 15
languages. His early concepts concerning "quality" began to form in the American Society
for Quality Control in the Richmond section. In 1957 he was offered a job as a senior
quality engineer in Martin Marietta in Orlando, Florida. During his eight years with
Martin Marietta Mr. Crosby developed his "Zero Defects" concepts. He even began
writing articles for various journals, and started his speaking career.
Philip Crosby believes management should take prime responsibility for quality and
workers only follow their managers’ example. He firmly believed that “Quality has to be
caused, not Controlled”. He defined the Four Absolutes of Quality Management.

THE FOUR ABSOLUTES OF QUALITY MANAGEMENT

1.​ Quality is a conformance to requirements

2.​ Quality prevention is preferable to quality inspection
3.​ Zero defects is the quality performance standard
4.​ Quality is measured in monetary terms – the price of non conformance

CROSBY'S 14 STEPS TO QUALITY IMPROVEMENT

1.​ Management is committed to quality – and this is clear to all.
2.​ Create quality improvement teams – with (senior) representatives from all
departments.
3.​ Measure processes to determine current and potential quality issues.
 4.​ Calculate the cost of (poor) quality.
5.​ Raise quality awareness of all employees.
6.​ Take action to correct quality issues.
7.​ Monitor progress of quality improvement – establish a zero defects committee.
8.​ Train supervisors in quality improvement.
9.​ Hold “zero defects” days.
10.​Encourage employees to create their own quality improvement goals.
11.​Encourage employee communication with management about obstacles to quality.
12.​Recognize ‘participants’ effort.
13.​Create quality councils.
14.​Do it all over again – quality improvement does not end
Philip Crosby has broadened his approach to include wider improvement ideals.
He defined the:

​
Five characteristics of an “Eternally Successful Organization”

1.​ People routinely do things right first time.

2.​ Change is anticipated and used as an advantage.
3.​ Growth is consistent and profitable.
4.​ New products and services appear when needed.
5.​ Everyone is happy to work.
12.05 ​ COST OF QUALITY
​ ​ PHYLOSOPHY OF ARMAND VALLIN FEIGENBAUM
​ ​ ON COST OF QUALITY & TOTAL QUALITY CONTROL

Apr 6, 1922 – Nov 13, 2014

Armand Vallin Feigenbaum (born 1922) is an American quality control expert and
businessman. He received a bachelor's degree from Union College, and his master's degree
and Ph.D. from MIT. He was Director of Manufacturing Operations at General Electric
(1958-1968), and is now President and CEO of General Systems Company of Pittsfield,
Massachusetts, an engineering firm that designs and installs operational systems. He wrote
several books and served as President of the American Society for Quality (1961-1963).
In one of his interview he stated that:
“Most companies still don't know what things cost. That's a reality. And because of that,
many decisions with respect to what is the best way to go for business or quality
improvement are made incorrectly.”
Basically, quality cost deals with the effectiveness through which you deliver customer
satisfaction. But traditional cost accounting doesn't pick up on that. That's the point.
By cost of quality I mean two things: the cost of getting it right and the cost
of failing to get it right”.
COST OF QUALITY
Feigenbaum projected the work on the “Cost of Quality”. It is a methodology for
financially quantifying the cost of quality or rather the “Cost of not Quality”, with regard
to prevention and rectification activities. Feigenbaum’s “hidden plant” theory maintains
that every factory or service has a portion (up to 40%) of its capacity wasted due to
inefficiencies, repeated operations and scrap. Quantifying and communicating these costs
throughout the company will motivate and direct business improvement to reduce the cost.
COST OF QUALITY MEASUREMENT:
The cost of doing a quality job, conducting quality improvements and achieving of goals
must be carefully managed, so that the long-term effect of quality on the organization is a
desirable one. These costs must be a true measure of the quality effort, and are best
determined from an analysis of the costs of quality.
Such an analysis provides:
1.​ A method of assessing the effectiveness of the management of quality and
2.​ A means of determining problem areas, opportunities, savings and action ​
priorities.
Cost of quality is also an important communication tool. Crosby demonstrated what a
powerful tool it could be to raise awareness of the importance of quality. He referred to the
measure as the “Price of Non conformance”, and argued that organizations chose to pay
for poor quality.
QUALITY-RELATED ACTIVITIES THAT WILL INCUR COSTS MAY BE SPLIT
INTO:
1) Prevention Costs,
2) Appraisal Costs and
3) Failure Costs.

1)​ Prevention Costs: Prevention costs are associated with the design, implementation
and maintenance of the TQM system. They are planned and incurred before actual
operation
They could include:
• ​ Product or service requirements – setting specifications for incoming materials,
processes, and finished products/services.
•​ Quality planning – creation of plans for quality, reliability, operational, production,
inspection.
• ​ Quality assurance – creation and maintenance of the quality system.
• ​ Training – development, preparation and maintenance of programmes
2)​ Appraisal Costs: Appraisal costs are associated with the suppliers’ and customers’
evaluation of purchased materials, processes, products and services to ensure they
conform to specifications.
They could include:
• ​ Verification – checking of incoming material, process set-up, and products against
agreed specifications.
• ​ Quality audits – check that the quality system is functioning correctly.
• ​ Vendor rating – assessment and approval of suppliers, for products and services.
3) Failure Costs: Failure costs can be split into those resulting from Internal and External
Failure.
 Internal Failure costs occur when the results of work fail to reach designed quality
standards and are detected before they are transferred to the customer.
They could include:
• ​ Waste – doing unnecessary work or holding stocks as a result of errors, poor
organization or communication.
• ​ Scrap – defective product or material that cannot be repaired, used or sold.
• ​ Rework or rectification – the correction of defective material or errors.
• ​ Failure analysis – activity required to establish the causes of internal product or
service failure.
External Failure costs occur when the products or services fail to reach design
quality standards, but are not detected until after transfer to the customer.
They could include:
• ​ Repairs and servicing – of returned products or those in the field
•​ Warranty claims – failed product that are replaced or services re-performed under
a guarantee
•​ Complaints – all work and costs associated with handling and servicing customers’
complaints
• ​ Returns – handling and investigation of rejected or recalled products, including
transport costs
The relationship between the quality-related costs of Prevention, Appraisal and Failure
(the P-A-F model) and increasing quality awareness and improvement in the
organization is shown graphically as:

This shows the four segments of quality costs

Expenditure on prevention and improvement activities is an investment from which
a return is expected.
 Effective quality improvements should result in a future stream of benefits, such as:
• ​ Reduced failure costs
•​ Lower appraisal costs
• ​ Increased market share
• ​ Increased customer base
• ​ More productive workforce
Many organizations will have true quality related costs as high as 15% of their sales
revenue, and effective quality improvement programmes can reduce this substantially,
thus making a direct contribution to profits.
An alternative to the P-A-F (Prevention - Appraisal – Failure) model is the Process Cost
Model, which categorizes the cost of quality (COQ) into the cost of conformance
(COC) and the cost of non-conformance (CONC), where: COQ = COC + CONC
COC is the process cost of providing products/services to the required standards, by a
given specified process in the most effective manner.
CONC is the failure cost associated with a process not being operated to the
requirements, or the cost due to the variability of the process.
To identify, understand and reap the cost benefits of quality improvement activities the
following fundamental steps should be included in the approach:

• ​ Management commitment to finding the true costs of quality

• ​ A quality costing system to identify, report and analyze quality related cost
• ​ A quality related cost management team responsible for direction and co-ordination
of the quality costing system
• ​ The inclusion of quality costing training to enable everyone to understand the
financial implications of quality improvement
• ​ The presentation of significant costs of quality to all personnel to promote the
approach
•​ Introduction of schemes to achieve maximum participation of all employees
The system, once established, should become dynamic and have a positive impact on the
achievement of the organization’s mission, goals and objectives.
Feigenbaum's contributions to the quality body of knowledge include:
●​ TOTAL QUALITY CONTROL (TQC): Total quality control is an effective
system for integrating the “Quality Development, Quality Maintenance, and
Quality Improvement” efforts of the various groups in an organization so as to
enable production and service at the most economical levels which allow full
customer satisfaction."
●​ THE CONCEPT OF A "HIDDEN PLANT”: The idea that so much extra work is
performed in correcting mistakes that there is effectively a “Hidden Plant” within
any factory.
●​ ACCOUNTABILITY FOR QUALITY: Because ‘Quality is everybody's job, it
may become nobody's job” — it implies that quality must be actively managed
and have visibility at the highest levels of management.
Armand V Feigenbaum was the originator of “total quality control”, often referred to
as ‘Total Quality’.
He defined it as:
“An effective system for integrating quality development, quality maintenance and
quality improvement efforts of the various groups within an organization, so as to enable
production and service at the most economical levels that allow full customer
satisfaction”.
He saw it as a business method and proposed three steps to quality:
1.​ Quality leadership
2.​ Modern quality technology
3.​ Organizational commitment

*** *** ***

 CHAPTER - 13
PRODUCT AND SERVICE QUALITY DIMENSIONS
QUALITY & PRODUCTIVITY IN RELATION TO SERVICE BUSINESS
Quality and Productivity have been historically seen as issues concerned to only the
Manufacturing Industries and thus for Production Managers in the Factories. In selection,
training, supervision and negotiations with labour, of course Production Managers do seek
support of Human Resource Managers. However the concern must equally be applicable to
Service Industry also.
In context to service business, Productivity and Quality strategy aims at creating better
service processes so as to deliver better customer satisfaction. Linking of service quality
with the customer satisfaction made it necessary to also involve Marketers and it is being
now realized that they too have an important role to play. In fact productivity and quality
dimension in both manufacturing and service business encompasses all functional
managers.
We must realize that one can not underestimate the importance of quality in service
business. It is the quality of service which greatly helps the companies to retain their
customers and achieve the growth and profit maximization in the service business. A study
by Harvard University shows that “the companies can boost their profit by almost 100
percent by retaining just 5 percent more of their customers than their competitors
retain”.
Services are intangible and cannot be stored; measuring of quality in services is not an easy
task. It is during the service delivery process itself, the evaluation of service quality can be
done. It is the ‘moment of truth’* mainly comprising of an encounter between the
customer and server, thus a. most crucial dimension of service quality.
We must also realize that a service marketer in today’s competitive world is required to
downsize the expenditures on the human resource and several other operational fronts, at
the same time he has to enhance value delivery to maintain customer satisfaction and keep
profit base intake. It is this task of value enhancement, which necessitates
quality-improvement programmes to deliver and continuously enhance the benefits
desired by the customers while delivering the services. At the same time it is the
productivity point of view which necessitates reducing the costs involved in the service
delivery. The challenge is to ensure that these two programmes, quality-improvement and
measures and efforts to reduce costs for achieving better productivity, works to
complement each other rather than being at logger ends.
Thus quality and productivity is twin path for creating value for both customers and
companies. Carefully integrating quality and productivity improvement programmes
will improve the long-term profitability of the firm.
The intangible, multifaceted nature of many services makes it harder to evaluate the quality
of services than of goods. Quality components in Manufacturing and Services are
distinctive in nature and many times contrasting. We will now understand distinctions
between both of them clearly.
* MOMENT OF TRUTH
•​ The term 'Moment of Truth' was coined by Jan Carlzon, who managed the Scandinavian SAS Airlines. He
used the term to mean those moments in which important brand impressions are formed and where there
is significant opportunity for good or bad impressions to be made.
•​ Richard Normann borrowed the metaphor (not literal meaning) ‘moment of truth’ from bullfighting to
show the importance of contact points with customers.
•​ Normann writes: “We could say that perceived quality is realized at the moment of truth, when the
service provider and the service customer confront one another in the arena (stadium/field/ring). At that
moment they are very much on their own… It is the skill, the motivation, and the tools employed by the
firm’s representative and the expectations and behaviour of the client which together will create the
service delivery process.”

THE QUALITY COMPONENTS IN MANUFACTURING

The quality components in manufacturing mainly revolve around following:
1.​ Performance – Performance relates to the functional aspect of the product.
Performance can be judged from the answers to the question as to how well your
microwave cooks or is mixture grinder delivers the desired performance.
2.​ Features – This aspect deals with the diversified utility of the product. Evaluation
depends on the answers to the question as to whether the microwave is also combined
with the convection oven. Whether the mixer grinder has also liquidizer and a small
chutney grinder?
3.​ Reliability – This aspect deals with the consistent and qualitative performance of the
functions by the product every time it is being used. Evaluation depends on the answers
to the question as to whether the microwave will cook properly and liquidizer will
function efficiently, when guests are expected at home or morning breakfast is to be
served to the school going children?
4.​ Conformance – This aspect deals with the various specifications of the product.
Evaluation depends on the answers to the question as to whether the cake is getting
ready in the prescribed time or whether the coco nut pieces are getting completely
grinded in the chutney grinder as claimed by the manufacturer in the recipe book and
product manual.
5.​ Durability – This aspect deals with the qualitative performance for sustainable time.
Evaluation depends on the answers to the question as to how long the product will
function and provide the value and utility to the customer.
6.​ Serviceability – This aspect deals with the efficiency with which product can be
maintained and restored back to service in case of break down. Evaluation depends on
the answers to the question as to how easy it is to self-repair and possible to solve the
problem? Is the service provided to fix the problem, by the manufacturer efficient,
courteous, and competent?
7.​ Aesthetics – This aspect deals with the look and the beauty of the product. How is the
appeal of the product (to any or all the senses of the customer)?
8.​ Perceived Quality - This aspect deals with the perception of the prospective consumer
about the manufacturer. Evaluation depends on the answers to the question such as, is
the company having good reputation and better brand image in the eyes of the
consumer?
Quality components as described above deals with the manufacturing and serviceability of
the physical goods. Let us now look for service-based components of quality.
QUALITY COMPONENTS BASED ON SERVICES
(FUNCTIONAL QUALITY AND TECHNICAL QUALITY)
Services as we understand are intangible products. This distinctive nature of services
requires a distinctive approach in defining and measuring service quality. Customers are
often involved in service production – particularly in people-processing services. We must
clearly understand the distinction between the service delivery process and actual output
of the service.
‘Christian Gronroos’ describes theses distinction as follows:
According to him,

​ Quality components associated with the processes can be described as Functional

Quality and

​ Quality components associated with the actual output (or what is offered to the
customer) as the Technical Quality.
Functional Quality of a service is influenced by:

​ Attitude,

​ Behaviour,

​ Service Mindedness,

​ Appearance,

​ Accessibility,

​ Courtesy,

​ Empathy etc. of the Service Provider.

In the competitive market, when the technical quality in a particular service sector is almost
the same, functional quality derives the significant importance in attracting customer
preference and may also turn out to be a tool of brand creation and market positioning of
the service product with the great advantage.
Perceived quality of a service is evaluated by comparing the perceptions of service
delivery and how is the service delivery, vis-à-vis the expectation’s of customer. Essentially
all the research related to the service quality is user oriented. Researcher such as
Zeithamal, Parasuraman and Berry has identified 10 criteria which consumer use in
evaluating the services. This after subsequent research and consolidation has been
condensed to five broad dimensions. We will look in detail into all these 10 criteria
(dimensions/determinants) (Refer table on the next page) and their consolidation into five
broadband dimensions as explained here under:
1.​ Tangibles – (appearance of physical elements) Tangibles are those factors, which the
consumers can feel, hear and touch. Tangible are used while assessing the physical
qualities and before the service is experienced. For an example, you would never like to
be served by an unclean waiter with dirty uniform.
2.​ Reliability – (dependable, accurate performance) it is the capacity to deliver the
promised service accurately on time. The newspaper boy, milkman who delivers
regularly in time is example of reliability.
3.​ Responsiveness – (promptness and helpfulness) it refers to the willingness to help
customers and provide prompt service. Responsiveness is an important dimension for
those customers who require some extra service over and above that is usually
provided.
4.​ Assurance – (competence, courtesy, credibility, and security) it means that knowledge
which the provider possesses which enables him to perform the service completely. It
also includes courtesy aspect such as politeness and respect for customers.
5.​ Empathy – (easy access, good communications, and customer understanding) it means
the power of understanding the customer’s feelings and needs, that enables the server to
take care of the customer and provide personal attention. It is described as human
touch.
Only one of these five dimensions, reliability, has a direct parallel to quality in relation to
manufacturing.
CUSTOMER’S PERSPECTIVE OF SERVICE QUALITY ‘SERVQUAL’
For measuring customer satisfaction with different aspects of quality, a survey research
instrument called ‘SERVQUAL’ is developed by Zeithamal and her colleague. It is based
on the assumption that customer’s can evaluate a firm’s service quality by comparing their
perception of its service with their own expectations. SERVQUAL is a generic
measurement tool and can be used for evaluation of quality across a wide spectrum of
service industries. In its basic form, the scale contains 21 perception items and a series of
expectation items, reflecting the five dimensions of service quality viz. Tangibles,
Reliability, Responsiveness, Assurance and Empathy.
In ‘SERVQUAL’ method:

​ Respondents are asked to measure their expectations of a particular industry on a wide

variety of specific service characteristics.
 ​ Using same characteristics, respondents are also asked to record their perception of a
specific company whose services they have used.

​ When perceived performance ratings are lower than expectations, it is a sign of poor
quality. The reverse is a good quality.
Comparing performance to expectations works well in reasonably competitive markets
where customers have knowledge and option to choose the service that meets their needs
and wants. However in uncompetitive markets or where there is no free choice with the
customer it is difficult to use Servqual* measures.
*SERVQUAL was originally measured on 10 aspects of service quality:
Credibility, Security, Access, Communication, Understanding or Knowing the Customer, Tangibles,
Reliability, Responsiveness, Competence, and Courtesy. It measures the gap between customer’s expectations
and experience.

TABLE DESCRIBING ‘GENERIC DIMENSIONS’

CUSTOMERS USE TO EVALUATE SERVICE QUALITY

CRITERIA/
SR. DIMENSIONS/
No. DETERMINANTS DEFINITIONS EXAMPLES

01 Credibility Credibility is Does the garage (car

evaluated on the basis mechanic) repair car with
of Believability the original components?
Trustworthiness, and Does the repair
Honesty of the service guaranteed? Does the
provider. service provider have
good reputation?
02 Security Freedom from danger, Is it safe for me to use
risk or doubt. bank’s ATM at night? Is
my credit card protected
against unauthorized use?
Does my insurance policy
secure me against all the
types of risks?
03 Access Approachability and How much easy it is for
ease of contact me to talk to a supervisor
when I have a problem?
Does the airline have a 24
hour toll free phone no.?
04 Communication Listening to customers When I have a complaint,
and keeping them is manager willing to
informed in language listen to me? Dose my
they can understand doctor explain me in
 simple language avoiding
use of technical jargon?
Does the technician call
back and inform me when
not able to maintain
schedule?
05 Understanding Making the effort to Does some one in the
the customer know customers and bank/hotel recognize me
their needs as a regular customer?
Does my life insurance
advisor try to determine
my specific financial and
risk cover objectives?
06 Tangibles Appearance of Is my on line share
physical facilities, transactions’ statement
equipment, personnel easy to understand? Are
and communication the hotel staffs elegantly
materials. dressed? Does my
carpenter use modern
tools?
07 Reliability Ability to perform the Does my lawyer attend the
promised service court date in time? Is my
dependably and bank statement/electric
accurately bill without errors? Is my
washing machine/TV
repaired right first time?
08 Responsiveness Willingness to help Is my stockbroker willing
customers and provide to answer my questions?
prompt services Is the shopkeeper willing
to give me specific time
for delivery of my ordered
material?
09 Competence Possession of the Is my income tax/sales tax
skills and knowledge advisor capable to
required to perform accurately compute tax
the service and advise me legal ways
to save on the taxes? Does
my lawyer draft
agreement with the
adequate and correct
clauses to with stand all
unknown eventualities?
10 Courtesy Politeness, respect, Does the telephone
consideration, and operator consistently and
friendliness of contact politely reply when more
personnel than few questions are
 asked? Does the
repairperson clean the
room and furniture after
finishing the repairs job?
Does the bank cashier
help you deliver the cash
in denomination you
request?

*** *** ***

CHAPTER - 14
CHARACTERISTICS OF QUALITY
Characteristics can be defined as distinguishing feature or attribute of an item, person,
phenomenon, etc., usually it is divided into three categories: (1) Physical, (2) Functional
and (3) Operational. Having understood the meaning of word characteristics let us look into
what can be considered as Characteristics of Quality. Fundamentally we must understand
that:
“Quality is never an accident;
it is always the result of intelligent efforts.”
Several definitions and methodologies have been created to promote, monitor and assist
management of quality related aspects of business operations. Many different techniques
and concepts have evolved to improve product or service quality. There are two common
quality-related functions within a business. One is ‘Quality Assurance’ which is the
prevention of defects, such as by the deployment of a ‘Quality Management System’ and
preventative activities like ‘FMEA’ (Failure Mode and Effects Analysis). The other is
‘Quality Control’ which is the detection of defects, most commonly associated with
testing which takes place within a quality management system typically referred to as
verification and validation..
Generally we may consider that Quality in business, engineering and manufacturing has a
pragmatic interpretation as the non-inferiority or superiority of something. Quality is by
and large a perceptual, conditional and somewhat subjective attribute and may be
understood differently by different people. From the view point of a consumer, quality of
the product/service is what its specification is; or how it compares with the similar
product/service of competitors in the marketplace. Specifications define all the three-
physical, functional and operational attributes of the product or service. Generally three
types of specifications are used to describe the product: They are
1.​ Technical Specifications,
2.​ Performance Specifications and
3.​ Product’s Brand/model name.
Technical specifications will state physical and chemical properties desired in the product.
Performance specifications will state the performance or use of the product. Products brand
or model name helps consumer to precisely indicate their selection and ordering.
A customer will always explicitly (consciously) or implicitly (subconsciously) compares
the options available to him/her, before finally selecting a product or service.
A producer views the quality of product/service from the point of conformance aspect, or
degree to which the product/service was produced correctly. While designing a product, a
producer would try to invest his best efforts to put the excellent features in the design and
develop the specifications of the product using tools such as Quality Function Deployment
(QFD)*. While finalizing the specifications for the product, producer will also like to
incorporate use of strategic tool such as determination of Order Winners and Order
Qualifiers**. We must also understand that some of the characteristics of the
product/service may not be feasible to be specified in numerical terms. For e.g. color of a
car. Consumer can appreciate it as good or bad. Here the measurement or assessment of
quality becomes more difficult. It depends on the person making a decision. What one, may
consider good, may be considered bad by another. The quality characteristics of this type
are called ‘attributes’, assessment of which is subjective and is left to the consumers.
Attributes are binary (yes or no) conditions. One has to say yes or no.
A functional definition of quality leads us to consider two aspects, which contribute to the
ultimate quality of the product. The intrinsic quality intended in the design is the first
aspect, while the degree to which this quality is achieved in production is the second
aspect. The first is called ‘quality of design’ and the second, ‘quality of conformance’.
Some of the quality characteristics (properties or specifications) are acquired by a product
at the design and development stage. Properties acquired by product at this stage depends
on the type of materials used, tolerances specified, method of production or type of process
used, safety factors allowed, knowledge and skill of the design, personnel employed etc.
Quality of design refers to these specifications or properties, which are acquired at the
design and development stage. To provide a customer with a good quality of
product/service, quality of design is a fundamental prerequisite.
It is not possible to 100% adhere to the specifications and hence an upper and/or lower
limits of variance from these specifications are finalized as acceptable values. These are
known as tolerances. The products beyond these tolerances are considered defective or
unacceptable as per quality specifications/standards and are rejected.
Once the designer has produced a quality design for the market, the production function has
to adhere to the specifications laid down by the design and produce it in accordance with
the same. The success with which this is achieved is called ‘quality of conformance’.
Thus a manufacturer/service provider must satisfy the customer by meeting their
expectations on both the aspects of quality i.e. Quality of Design and Quality of
Conformance. One must remember that, howsoever successful the production is in
achieving quality of conformance; it cannot go beyond the quality laid down by the
design. The production achieves the quality that is balance between their capability
and the requirements of a design. The design itself should consider the type of manpower
available and the equipments to be used. Quality is a collaborative effort of the designer
and the production.
We can conclude by saying that all efforts finally must result to deliver following attributes
through a quality product.

❖​ COST EFFICIENCY – Lower costs, higher productivity.

❖​ DEPENDIBILITY – Reliable, Efficient and timely delivery to customers.

❖​ FLEXIBILITY – Responding rapidly with new products or change in volume.

❖​ CUSTOMER SATISFACTION – Delighting the customers.

❖​ RELIABILITY - Reliability is something different from quality. It is related to quality

but it is something more than that. It is the probability that a product or a part or system
or equipment will perform satisfactorily for a given time under normal condition of use.
May be it relates to the sustainability of the quality over long period of time. A product
of better quality may not be reliable. Quality is related with the initial performance of a
product but the reliability is related to the continuation of performance over a period of
time. A product with better initial performance may fail to give the same performance
after some time, in such a case product is not considered reliable. There for
manufacturers should not produce quality products but also reliable products.

❖​ MAINTAINABILITY - It relates to how fast a product when it fails can be repaired

and brought back to use. The time the product is non functional is known as down time.

❖​ AVAILABILITY - It is specified in terms of a ratio between the uptime of the product

(i.e. the time for which product was under use, say Tu) and total of the uptime and
down time (the time product could not be used because of failure, say Td). Availability
= Tu/(Tu+Td).
* QFD – QUALITY FUNCTION DEPLOYMENT:
​ Several tools and methods have been developed to help product designers make products
of higher quality at lower cost. One of that is QFD, it can be described as follows:
•​ A systematic way of documenting and breaking down customer needs in manageable
and actionable detail.
•​ A planning methodology that organizes relevant information to facilitate better decision
making.
•​ A way of reducing the uncertainty involved in product and process design.
•​ A technique that promotes cross functional-teamwork.
•​ A methodology that gets the right people together, early, to work efficiently and
effectively to meet customers, needs.
 •​ QFD is a valuable decision support tool but it is not a decision maker.
** Order Qualifiers and Order Winners
​ Terry Hill has coined the terms “Order Qualifiers and Order Winners. An interface between Marketing
and Operations is necessary to provide a business with an understanding of its markets from both these
perspectives.
​ Order Qualifiers are the characteristics of a product or service that qualify it to be considered for
purchase by a customer. An order qualifier is a screening criterion that permits a firm’s products to even
be considered as possible candidates for purchase. Professor Hill relates a firm must re-qualify the order
qualifiers every day it is in business.
​ An Order Winner is the characteristics of a product or service that wins orders in the market place – the
final factor in the purchasing decision by the customer. An order winner is a criterion that differentiates
the products or services of one firm from another. Depending on the situation order winning criterion
may be the cost of the product (Price), product quality or other priorities.
Thus price range may become a product qualifier where as actual Price and USPs or features of the
product may be the product winner.
It is important to note that the order winning and order qualifying criteria may change over time.

*** *** ***

CHAPTER – 15
QUALITY ASSURANCE
Quality Assurance means an assurance given to a customer that the products, parts,
components, tools, etc. contain the specified characteristics and are fit for intended use.
There are three aspects of assuring quality.
Assurance of quality is not a responsibility of a single person or a department only.
Only the inspection department or its personnel cannot be held responsible for
assurance of quality. It is the responsibility of everybody connected with the
production, directly or indirectly, e.g. each and every department connected with the
production – from design and raw material stage to dispatch and transportation stage is
responsible. Thus designing an engineering department, purchasing department, inspection
department, materials handling department, repairs and maintenance department, stores
department, production department, sales department, etc. are all equally responsible for
assuring quality. Therefore everyone in the company has an important role to play in the
final quality assurance of their company. They should be alert and should perform their
duty efficiently and with sincerity.
Employees of the company must be made quality conscious. They should be motivated;
they must be made aware as to why the quality is as important for themselves as well as for
their unit.
●​ Assuring the quality of incoming raw materials.
●​ Assuring an appropriate process to be operated on raw materials.
●​ Assuring the quality of outgoing finished goods.
Is an appropriate process operated on raw materials?

Raw Materials Finished Goods.

Are the Is an Appropriate ​ Are Finished Goods

Raw Materials Okay? Process Operated on​ ​ Okay
​ ​ ​ ​ Raw Materials? To send to Customers?
BASIC ASPECTS OF ASSURING QUALITY
PLANNING AND CONTROL ASPECTS OF QUALITY CONTROL
To achieve the required quality for a product, numbers of specifications are finalized at the
time of designing the product. This is planning aspect of the quality. At the time of the
production of the product, strict adherences to these specifications are observed; this is
control aspect of the production. Thus quality is a combination of both the aspects of
production viz. planning and control.
Prime importance should be given to “Consumer Satisfaction” and to gain consumer
satisfaction a product or service, which a consumer wants, must possess certain features.
These are properties or attributes of the products/services, which make them “fit for
use”, or makes a consumer satisfied. When these characteristics or attributes are
mentioned specifically for a particular product or service they become specifications of
that particular product/service. These characteristics should be expressed in quantitative
terms, so that they can be measured or observed objectively. Many times these
characteristics can easily be measured on numerical scales. For e.g. weight or volume of a
particular packed product in each packet, or an average of a vehicle in terms of kilo meters
per liter of petrol consumed in standard driving conditions, size of an electrical cable in
diameter etc. Such characteristics are known as ‘variables’. It is not possible to adhere
100% to these specifications and hence an upper and/or lower limit of variance, from these
specifications are finalized as acceptable values. These are known as tolerances. The
products beyond these tolerances are considered defective or unacceptable as per the
quality specifications/standards and are rejected.
Some of the characteristics of a product/service may not be feasible to be specified in
numerical terms. For e.g. colour of a car. Consumer can appreciate it as good or bad but the
measurement or assessment of quality becomes difficult. Decision making varies from
person to person. What one, may consider good, may be bad for another. The quality
characteristics of this type are called ‘attributes’, assessment of which is subjective and is
left to the consumers. Attributes are binary (yes or no) conditions. One has to say yes or no.
Howsoever successful the production is in achieving quality of conformance; it cannot go
beyond the quality laid down by the design. The production achieves the quality that is
a balance between their capability and requirements of a design. The design itself
should consider the type of manpower available and the equipments to be used. Quality is a
collaborative effort of the designer and the production.
HOW TO DECIDE ABOUT THE QUALITY?
So far we have looked into various aspects related with the quality of products/services.
Now an important question is who, when, where and how decides about the quality.
The marketing department in terms of quality, quantity and price generally makes an
assessment of customer’s needs. These details are provided to the designing department
of the firm. On basis of such information a committee consisting of representatives of
various concerned departments, headed by the designed engineer develops detailed
specifications of the product planned. Specifications include detailed characteristics of
each component and final product. They describe the quantitative specifications of
quality of the product desired in brief or precise manner. The costs of production and
performance parameters of the product are also considered while developing proper
specifications. However designing of the product is a dynamic job and product needs
to be updated and improved on ongoing basis as per the customer’s needs and market
feed back.

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CHAPTER – 16
QUALITY CIRCLE
Quality Circle is an employee participation method and has emerged as a mechanism to
develop and utilize tremendous potential from people for improvement in product quality
and productivity.
It implies to development of skills, capabilities, confidence and creativity of people through
a cumulative process of education, training, work experience and participation. It also
implies to a creation of facilitative conditions and environment of work, which creates and
sustains motivation and commitment towards work excellence.
DEFINITION
‘Quality Circle is a small group of 6 to 12 employees, doing similar work who voluntarily
meet together on a regular basis, to identify improvements in their respective work areas,
using proven techniques, for analyzing and solving work related problems coming in the
way of achieving and sustaining excellence, leading to mutual up-liftment of employees
as well as the organization, for capturing the creative and innovative power that lies
within the work force".
PHILOSOPHY
Quality Circle is a People – Building philosophy, providing self-motivation and happiness
in improving work culture and environment of an enterprise. Participating in Quality Circle
is voluntary. An organization doesn’t need to make it mandatory for any employee to
participate in quality circle nor do they need to offer any compensation or monetary
benefits to any participant. It represents to a philosophy of managing people, especially
those at the grass root level. It is a clear defined mechanism and methodology for
translating people – building philosophy into practice and helps create a required structure
to make it a way of life for the people working in that organization. It will succeed where
people are respected and are involved in decisions, concerning their work and life, and in
environments where a person’s capabilities are looked upon as assets to solve work-area
problems.
The philosophy of Quality Circle requires following approach by the management:
1.​ Display of a progressive attitude on their part.
2.​ Willingness to make adjustments, if necessary, in their style and culture.
3.​ If workers are prepared to contribute their ideas, the management must be willing to
create a congenial environment to encourage them to do so.
CONCEPT:
The concept of Quality Circle is primarily based upon recognition of the value of the
worker as a human being, as someone who willingly activates his job, his wisdom,
intelligence, experience, attitude and feelings. It is based upon the human resource
management considered as one of the key factors in an improvement of product quality &
productivity. Quality Circle concept has three major attributes:
1.​ Quality Circle is a form of participation management.
2.​ Quality Circle is a human resource development technique.
3.​ Quality Circle is a problem solving technique.
Objective: The objectives of Quality Circles are multi-faced.
a) ​ Change in Attitude​
From "I don’t care" to "I do care" ​
Continuous improvement in quality of work life through humanization of work.
b) ​ Self Development​
Bring out ‘Hidden Potential’ of people​
People get to learn additional skills.
c) ​ Development of Team Spirit​
Individual Vs Team – "I could not do” but “we did it"​
Eliminate inter departmental conflicts.
d) ​ Improved Organizational Culture​
Positive working environment,​
Total involvement of people at all levels,​
High motivational level,​
Participate in Management process.
Quality Circles are not limited to manufacturing firms only. They are also applicable for
variety of organizations where there is a scope for group-based solution of work related
problems. Quality Circles are relevant for factories, firms, schools, hospitals, universities,
research institutes, banks, government offices etc.

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CHAPTER – 17
ISHIKAWA (FISH BONE) DIAGRAM
CAUSE AND EFFECT ANALYSIS

1915 - 1989
Kaoru Ishikawa was a Japanese organizational theorist and Professor at the Faculty of
Engineering at The University of Tokyo. He is considered a key figure in the development
of quality initiatives in Japan, particularly the quality circle. He was known for his quality
management innovations in Japan, however he is best known outside Japan for the
Ishikawa or cause and effect diagram (also known as fishbone diagram) often used in the
analysis of industrial processes. 1982 saw the development of the Ishikawa diagram which
is used to determine root causes. It was developed by Ishikawa in the Kawasaki shipyards
in 1943 and in the process, he became one of the founding fathers of modern management.
It is extensively used to explore all the potential or real causes (or inputs) that result in a
single effect (or output).

Features of the diagram are as follows:

❖​ Causes are arranged according to their level of importance or detail, this helps in
establishing of relationships between the events and also hierarchy of events.

❖​ This in turn will help to search for root causes, identify areas where there may be
problems, and help to compare the relative importance of different causes.

❖​ Causes in a cause & effect diagram are frequently arranged into four major categories.
While these categories can be anything, we often see them as follows:

1.​ Manpower, Methods, Materials, and Machinery (recommended for

manufacturing)
2.​ Equipment, Policies, Procedures, and People (recommended for administration
and service).

❖​ These guidelines can be helpful but should not be used if they limit the diagram or are
inappropriate. The categories you use should suit your needs.

❖​ The C&E diagram is also known as the fishbone diagram because it was drawn to
resemble the skeleton of a fish, with the main causal categories drawn as "bones"
attached to the spine of the fish, as shown below.
 Example of a Cause-and-effect diagram:
How to Construct:
1.​ Place the main problem under investigation in a box on the right.
2.​ Have the team generate and clarify all the potential sources of variation.
3.​ Use an affinity diagram to sort the process variables into naturally related
groups. The labels of these groups are the names for the major bones on the
Ishikawa diagram.
4.​ Place the process variables on the appropriate bones of the Ishikawa diagram.
5.​ Combine each bone in turn, insuring that the process variables are specific,
measurable, and controllable. If they are not, branch or “explode" the process
variables until the ends of the branches are specific, measurable, and
controllable.
TIPS:

​ Take care to identify causes rather than symptoms.

​ Paste diagrams to stimulate thinking and get input from other staff.

​ Self-adhesive notes can be used to construct Ishikawa diagrams.

​ Sources of variation can be rearranged to reflect appropriate categories with

minimal rework.

​ Ensure that the ideas placed on the Ishikawa diagram are process variables, not
special caused, other problems, tampering, etc.

​ Review the quick fixes and rephrase them, if possible, so that they are process
variables.
FISHBONE DIAGRAM APPLICATION IN AN ORGANIZATION
This Ishikawa fishbone diagram example shows the various causes of a missed deadline.
The causes are grouped into six categories: people, method, measurement, machine,
environment, and materials. The category “people” refers to any humans that may have
contributed to the undesired outcome. “Method” refers to any complications in process or
policy. “Measurement” relates to data collection and time. “Machine” encompasses errors
caused by technology or computers. “Environment” covers problems with surroundings.
“Materials” explains any issues caused by supplies or software. All together, these
problems resulted in the (Missed Dead Line) outcome shown in the circle at extreme right
against centre line.
EXAMPLE OF A CALL CENTRE

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 UNIT – 4
QUALITY IMPROVEMENT STRATEGIES
Quality improvement is understood by Juran to be the systematic pursuit of improvement
opportunities in production processes. Several methodologies are proposed in literature for
quality improvement projects. Three of these methodologies – Lean Thinking, Taguchi's
methods, and the Six Sigma programme – are included here. Both Taguchi's methods and
the Six Sigma programme exploit statistical modeling techniques. The Six Sigma
programme is the most complete strategy of the three.

CHAPTER – 18
LEAN THINKING
DEFINITION:
“Becoming ‘lean’ is a process of eliminating waste with the goal of creating value.”
Note: This stands in contrast to definitions of lean that only focus on eliminating waste,
which is too often interpreted as cost cutting- independent of its impact on value delivery
Lean manufacturing is the production of goods using less of everything compared to mass
production, less human effort, less manufacturing space, less investment in tools, and less
engineering time to develop a new product. Lean manufacturing is a generic process
management philosophy derived mostly from the Toyota Production System (TPS) and also
from other sources. Toyota's steady growth from a small player to the most valuable and
the biggest car company in the world has focused attention upon how it has achieved this,
making "Lean" a hot topic in management science in the first decade of the 21st century.
Taiichi Ohno, the mastermind of the Toyota Production System, identified seven types of
manufacturing waste:
THE SEVEN WASTES OF MANUFACTURING
1.​ Overproduction
2.​ Inventory
3.​ Extra Processing Steps
4.​ Motion
5.​ Defects
6.​ Waiting
7.​ Transportation

ADD NOTHING BUT VALUE (ELIMINATE WASTE):

The first step in lean thinking is to understand what value is and what activities and
resources are absolutely necessary to create that value. Once this is understood, everything
else is waste. Since no one wants to consider what they do as waste, the job of determining
what value is and what adds value is something that needs to be done at a fairly high level.
THE TEN SIMPLE RULES OF LEAN PROGRAMMING:
1.​ Eliminate Waste
2.​ Minimize Artifacts
3.​ Satisfy All Stakeholders
4.​ Deliver as Fast as Possible
5.​ Decide as Late as Possible
6.​ Decide as Low as Possible
7.​ Deploy Comprehensive Testing
8.​ Learn By Experimentation
9.​ Measure Business Impact
10.​ Optimize Across Organizations

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 CHAPTER – 19
KEPNER TREGOE METHODOLOGY
OF PROBLEM SOLVING
When confronted with difficult problems, important decisions, and the need for successful
actions, you can't just make a “best guess” and hope for a positive outcome. Hunches,
instinct, and pure intuition may occasionally be inspiring, but they more often lead to
unforeseen difficulties.
Kepner-Tregoe Problem Solving and Decision Making (PSDM) is a step-by-step process
that helps people rapidly and accurately resolve a wide range of business issues. Used in
organizations worldwide, PSDM helps people at all levels in an organization efficiently
organize and analyze information and take appropriate action. PSDM helps people tap into
the know-how of individuals, develop consensus, and gain commitment while resolving
issues by using a common approach and language.
PSDM processes provide a framework for problem solving and decision making that can
easily be integrated into standard operating procedures. They are often used to enhance
operational improvement initiatives such as Six Sigma, Lean Manufacturing, and others. In
many organizations PSDM becomes THE way that problems are solved and decisions are
made.
Kepner-Tregoe offers a variety of options for learning the PSDM processes
PSDM is comprised of four distinct processes:
Situation Appraisal is used to clarify issues, set priority and plan appropriate resolutions.
When confusion is mounting, the correct approach is unclear, or priorities overwhelm
plans, use Situation Appraisal.
Problem Analysis is used to find the cause of a positive or negative deviation. When
people, machinery, systems, or processes are not performing as expected, Problem Analysis
provides a structured process to identify and verify the cause.
Decision Analysis is used for making choices. When a choice is not clear, when there are
too many choices, or the risk of making the wrong choice great, Decision Analysis
maximizes benefits and minimize risks, yielding durable, supported decisions.
Potential Problem/Opportunity Analysis is used to protect plans and exceed expectations.
When a task or project simply must go well, Potential Problem/Opportunity Analysis
reveals the driving factors and identifies ways to ensure success.

*** *** ***

 CHAPTER – 20
SIX SIGMA FEATURES, ENABLERS, GOALS,
DMAIC / DMADV
Six Sigma is a quality discipline that focuses on product and service excellence to create a
culture that demands perfection on target, every time. It is a mathematical term (Sigma is
a Greek word) that represents a measure of standard deviation or variability within a
given population around the mean. It represents population that falls within plus or minus
six standard deviations. Six Sigma methodologies, provides the techniques and tools to
improve the capability and reduce the defects in any process.
It was started in Motorola, in its manufacturing division, where millions of parts are made
using the same process repeatedly. Eventually Six Sigma evolved and applied to other non
manufacturing processes. Today you can apply Six Sigma to many fields such as Services,
Medical and Insurance Procedures, Call Centers.
Motorola company’s engineers in 1980, decided to measure the defects per million
opportunities, instead of traditional quality levels – measuring defects in thousands of
opportunities. They developed this new standards and created methodology and necessary
cultural changes associated with it.
Six Sigma focuses first on reducing variation and then on improving process
capabilities.
A common goal of Six Sigma programme is to minimize variation within all of our critical
processes. Quantitatively it means fewer than 3.4 defects per million ‘opportunities’. An
opportunity is defined as a “chance for non-conformance”. Statistically, Six Sigma ensures
that 99.9997% of all products produced in a process are of acceptable quality
It aims for the businesses to adjust its culture towards accepting a near perfect operation in
executing key processes. Such a cultural change will directly contribute towards customer
satisfaction and increased productivity. Motorola on successful implementation of Six
Sigma programme documented more than US$16 Billion in savings.
Six Sigma can also be defined as a process focused methodology, designed to improve
business performance through improving specific areas of a strategic business process.
Six Sigma methodologies improve any existing business process by constantly reviewing
and re-tuning the process. To achieve this, Six Sigma uses a methodology known as
DMAIC (Define opportunities, Measure performance, Analyze opportunity, Improve
performance, Control performance).
Six Sigma is in short a powerful tool that can help an organization to design, operate, and
control every process in such a manner that no process yields more than 3.4 defects for
every million opportunity. Concept of Six Sigma is applicable to the service and
manufacturing industries, to all functions – production, marketing, personnel, etc. and all
the processes such as manufacturing, pay roll or dispatch operations.
Six Sigma experts (Green Belts and Black Belts) evaluate a business process and determine
ways to improve upon the existing process. The processes of improvements are over seen
by Six Sigma Master Black Belts.
If a given process fails to meet the criteria, it is re-analyzed, altered and tested to find out if
there are any improvements. If no improvement is found, the process is re-analyzed, altered
and tested again. This cycle is repeated until you see an improvement. Once an
improvement is found, it’s documented and the knowledge is spread across other units in
the company so they can implement this new process and reduce their defects per million
opportunities.
Six Sigma experts can also design a brand new business process using DFSS (Design For
Six Sigma) principles. Typically it’s easier to define a new process with DFSS principles
than refining an existing process to reduce the defects. The Six Sigma improvement
process used to develop new products or processes is DMADV (Define, Measure, Analyze,
Design, and Verify)
Six Sigma incorporates
1) ​ The basic principles and techniques used in Business,
2) ​ Statistics and
3) ​ Engineering.
These three form the core elements of Six Sigma.
Six Sigma:
1) ​ Improves the process performance,
2) ​ Decreases variation and
3) ​ Maintains consistent quality of the process output.
This leads to defect reduction and improvement in profits, product quality and customer
satisfaction.
Six Sigma methodologies are also used in many Business Process Management initiatives
these days. These Business Process Management initiatives are not necessarily related to
manufacturing. Many of the BPM’s that use Six Sigma in today’s world include call
centers, customer support, supply chain management and project management.
METHODOLOGY: Let us first understand some of the terms associated with the
implementation of Six Sigma.:
SPONSOR – is business executive leading the organization.
CHAMPIONS – Business leaders who lead Six Sigma by sponsoring projects. Champions
are trained to select the projects keeping in view business goals. They are responsible for
Six Sigma strategy deployment and vision.
BELTS – They are project leaders selected and mentored by the Champions.
PROCESS OWNER – they are owner of the process product or service being improved.
MASTER BLACK BELTS – they are coach Black Belts having expertise in statistical
tools.
BLACK BELTS – they are experts working on 3 to 5 projects per year, project being
worth $2,50,000.
GREEN BELTS – works with black belts on projects.
Six Sigma methodologies have evolved out of decades of research and is a proven strategy
for improving all aspects of an organization’s structure. As mentioned before core of Six
Sigma methodology is DMAIC. The leaders chosen by the company called Six Sigma
Black Belts and Green Belts have to go through rigorous training to seek out defects and
eliminate them.
DEFINE: Define all the parameters to be included in the Six Sigma process. They can be
team which will work on improvements, customers of the process, their needs and
requirements, define problem in concrete measurable terms with an operational definition.
Define customers and requirements critical to quality. Develop problem statements.
MEASURE: Once the project has a clear definition with a clear measurable function the
process is studied to determine the key process steps and key process inputs for each
process. After the key input list is ready the Belt will consider the potential impact each
input has with respect to the project variations. Inputs are prioritized to establish a short list
to study in more detail. With this list Belts will determine the potential ways the process
can take place. How the input can go wrong? Once the reason for input failure is
determined, preventive action plans are worked out.
ANALYZE: Through analysis the team can determine the cause of the problem that need
improvement.
IMPROVE: This step consists of generating, selecting and implementing of solutions.
Pilot studies may be carried out and potential improvements validated, corrected and
re-evaluated till Six Sigma goal of 3.4 defects per million opportunities is achieved.
CONTROL: Define and validate monitoring system to control that improvements
achieved with the above process are sustained for long time.
Once benefits are realized, cost savings generated and profit growth due to changes are
ensured, proper documentations for the improved system should be finalized and properly
documented before closing the Six Sigma project. The project report should be circulated,
due credits to the concerned persons to be given and success celebrated.

*** *** ***

 CHAPTER – 21
TAGUCHI'S QUALITY ENGINEERING
DR GENICHI TAGUCHI

1924 - 2012
Taguchi was born and raised in the textile town of Tokamachi, in Niigata prefecture. He
initially studied textile engineering at Kiryu Technical College with the intention of
entering the family kimono business. However, with the escalation of World War II in
1942, he was drafted into the Astronomical Department of the Navigation Institute of the
Imperial Japanese Navy.
After the war, in 1948 he joined the Ministry of Public Health and Welfare, where he came
under the influence of eminent statistician Matosaburo Masuyama, who kindled his interest
in the design of experiments. He also worked at the Institute of Statistical Mathematics
during this time, and supported experimental work on the production of penicillin at
Morinaga Pharmaceuticals, a Morinaga Seika company.
Dr. Taguchi believed it is preferable to design product that is robust or insensitive to
variation in the manufacturing process, rather than attempt to control all the many
variations during actual manufacture.
To put this idea into practice, he took the already established knowledge on experimental
design and made it more usable and practical for quality professionals. His message
was concerned with the routine optimization of product and process prior to manufacture
rather than quality through inspection.
Quality and reliability are pushed back to the design stage where they really belong,
and he broke down off-line quality into three stages:
1.​ System design
2.​ Parameter design
3.​ Tolerance design
“Taguchi methodology” is fundamentally a prototyping method that enables the
designer to identify the optimal settings to produce a robust product that can survive
manufacturing time after time, piece after piece, and provide what the customer wants.
Today, companies see a close link between Taguchi methods, which can be viewed along a
continuum, and quality function deployment (QFD).

*** *** ***

 CHAPTER – 22
ISO STANDARDS REGARDING QUALITY
SUCH AS ISO 9000, ISO 14000, QS 9000
AND OTHER EMERGING STANDARDS (SUCH AS ISO/TS 16949)
WHAT IS ISO?
The International Organization for Standardization, widely known as ISO, is an
international standard-setting body composed of representatives from various national
standards organizations. Founded on February 23, 1947, the organization promulgates
world-wide industrial and commercial standards. It is headquartered in Geneva,
Switzerland.
Although ISO as a non-governmental organization, the command with which it sets the
standards, they often become law, either through treaties or national standards. These
pioneering works of development of standards makes ISO more powerful than most
non-governmental organizations. In practice, ISO acts as a consortium with strong links to
governments
WHAT IS ISO 9000?
ISO 9000 is a family of standards for quality management systems.
ISO 9000 is maintained by ISO, the International Organization for Standardization and is
administered by accreditation and certification bodies. Some of the requirements in ISO
9001 (which is one of the standards in the ISO 9000 family) include:
●​ a set of procedures which cover all key processes in the business;
●​ monitoring processes to ensure they are effective;
●​ keeping adequate records;
●​ checking output for defects, with appropriate corrective action where necessary;
●​ regularly reviewing individual processes and the quality system itself for effectiveness;
and
●​ facilitating continual improvement
A company or organization which has been independently audited and certified to be in
conformance with ISO 9001 may publicly state that it is "ISO 9001 certified" or "ISO 9001
registered."
Certification to an ISO 9000 standard does not guarantee the compliance (and therefore
the quality) of end products and services; rather, it certifies that consistent business
processes are being applied.
Although the standards originated in manufacturing, they are now employed across a wide
range of other types of organizations. A "product", in ISO vocabulary, can mean a physical
object, or services, or software. In fact, according to ISO in 2004,
"Service Sectors now account by far for the highest number of ISO 9001:2000 certificates -
about 31% of the total."
HISTORY OF ISO 9000
PRE ISO 9000
During WWII (World War II), there were quality problems in many British high-tech
industries such as munitions, where bombs were exploding in factories during assembly.
The adopted solution was to require factories to document their manufacturing procedures
and to prove by record-keeping that the procedures were being followed. The name of the
standard was BS 5750, and it was known as a management standard because it did not
specify what to manufacture, but how to manage the manufacturing process. According to
Seddon*, "In 1987, the British Government persuaded the International Organization
for Standardization to adopt BS 5750 as an international standard. BS 5750 became ISO
9000."
(*John Seddon is a British occupational psychologist and "management guru",
specializing in the service industry. He is lead consultant of Vanguard, a consultancy
company he formed in 1985.)
VERSION 1987
ISO: 9000 quality system standard series was developed by the Technical Committee 176,
of the International Standards Organization (ISO) and approved in its present form in
1987, revised in 1994 and again in 2000. It describes a basic set of series of standards
from which a Quality management system can be evolved.
The success of ISO 9001 is exceptional and unparalleled. It has spread across the globe,
attracting followers and has made in roads in markets, industries, and professions that is
beyond imagination. This has been possible because the requirements for QMS (Quality
Management System) are the same, be it USA, UK, Japan, China, India or elsewhere and
ISO 9001 is a good architecture of quality management system.
It defines an organization structure, responsibility, procedures, process and resources,
documentation etc. This system focuses and ensures compliance on key aspects, vital to
obtaining customer satisfaction. It focuses and guides organizations in regards of customer
needs, design, inspection, testing, packaging, storage, sales, distribution etc. Thanks to it’s
generic nature ISO 9000 finds application in any type and size of organization. From
manufacturing to service, small shops to multinational corporations, moneymaking
enterprises to nonprofit and governmental agencies, the standard has proven its worth as an
effective model for managing an organizational system.
Indian equivalent of ISO: 9000 is IS: 14000 series.
VERSION 2000
ISO 9001:2000 combines the three standards 9001, 9002, and 9003 into one, now
called 9001.
Following are the salient features of changes brought in while revising the ISO 9001 in
the year 2000:

​ Design and development procedures are required only where a company is engaged
in the creation of new products.
 ​ The 2000 version sought to make a radical change in thinking by actually placing
the concept of process management front and centre. ("Process management" was
the monitoring and optimizing of a company's tasks and activities, instead of just
inspecting the final product.)

​ The 2000 version also demands involvement by upper executives, in order to

integrate quality into the business system and avoid delegation of quality functions
to junior administrators.

​ Another goal is to improve effectiveness via process performance metrics —

numerical measurement of the effectiveness of tasks and activities.

​ Expectations of continual process improvement and tracking customer satisfaction

were made explicit.
VERSION: 2008
Latest version of ISO 9000 series is ISO 9001: 2008.
It is officially published on 15-November-2008. Following are some of the important
aspects of revised version.
ISO 9001:2008 specifies requirements for a quality management system where an
organization.

❖​ Needs to demonstrate its ability to consistently provide product that meets customer
and applicable statutory and regulatory requirements.

❖​ Aims to enhance customer satisfaction through the effective application of the

system, including processes for continual improvement of the system and the
assurance of conformity to customer and applicable statutory and regulatory
requirements.

❖​ All requirements of ISO 9001:2008 are generic and are intended to be applicable to
all organizations, regardless of type, size and product.

❖​ Where any requirement(s) of ISO 9001:2008 cannot be applied due to the nature of
an organization and its product, this can be considered for exclusion.

❖​ Where exclusions are made, claims of conformity to ISO 9001:2008 are not
acceptable unless these exclusions are limited to requirements within Clause 7, and
such exclusions do not affect the organization's ability, or responsibility, to provide
product that meets customer and applicable statutory and regulatory requirements.
MEMBERSHIP OF ISO
ISO has 157 national members, out of the 195 total countries in the world.
ISO has three membership categories:
●​ Member bodies are national bodies that are considered to be the most representative
standards body in each country. These are the only members of ISO that have voting
rights.
●​ Correspondent members are countries that do not have their own standards
organization. These members are informed about ISO's work, but do not participate in
standards promulgation.
●​ Subscriber members are countries with small economies. They pay reduced
membership fees, but can follow the development of standards.
Participating members are called "P" members as opposed to observing members which are
called "O" members.
WHY ISO?
With the opening up of Indian economy and rapid advancement towards globalization,
country is poised to excel in all-round development including quality standards to global
demand. With increasing export trade, Indian industries are left with no choice except to
meet the expectation of their global buyers. Its no surprise that today the most talked about
quality initiative is ISO: 9000 quality system standards. Most of the organizations all over
the world seek to register to this standard and Indian industries are fast catching up on this
front.
SOME OF THE BENEFITS OF HAVING AN ISO: 9000 QUALITY SYSTEM
1.​ Facilitates access to National and International Markets.
2.​ Increases customer’s confidence.
3.​ Clarity in the distribution of responsibilities.
4.​ Increased involvement of employees in quality goals and a better company image.
STEP FOR ISO: 9000 IMPLEMENTATIONS
1.​ Understand the standard system and its interpretation.
2.​ Conduct necessary training programmes.
3.​ Line managers should generate documentation - if required outside consultant may be
appointed for this purpose.
It may take about a year or a year and half’s consistence efforts to achieve ISO: 9000.
METHODOLOGY
1.​ Make application to the agents or the bodies (called as certifying agencies- e.g. BVQI),
which are affiliated with ISO for certification.
2.​ Prepare the quality manual of in-house procedures and systems under their guidance.
3.​ Ratify for adequacy above procedures to meet the requirements in line with ISO.
4.​ Appoint Management Representative (MR), to look after ISO requirements.
5.​ Check will be conducted by certifying agencies as to whether the concerned
departments maintain those procedures in actual working.
6.​ The procedures must be adhered to strictly.
7.​ If any deficiencies are found during the check, same will be pointed by an important
document called ‘NCR’ – Non Conformity Report.
8.​ This NCR has to be resolved and replied efficiently.
9.​ On being satisfied that systems are running properly, agency will award ISO
certification to the organization.
ISO AUDIT:
The quality manual is a very important document. ISO certifying body regularly audits the
operations in the organizations at decided intervals. Also they help organization to carry out
internal audit at specific regular intervals. Every time system of NCR is followed if the
procedures are in deviation to one being specified in the manual. Failing to resolve the
NCR will poise risk of loosing the certification by the organization. Employees are given
extensive training and team for internal audit is prepared, their examinations are taken.
Internal audit plays important role, finally external auditors check their reports.
ISO believes that if the procedures are followed within, then customer is assured of quality
services. This is the basic foundation of the quality management system.
SALIENT FEATURES OF ISO: 9000:
1.​ It is obligatory to identify non-conformities. Non-conformity is a shortfall between
what is, desired to be achieved and what is actually achieved. It leads to identification
of problem areas or prospective areas of improvement.
2.​ Systematic prevention of non-conformities is another salient feature.
3.​ It requires formally documented procedure for each and every activity, which is likely
to have bearing directly or indirectly on quality.
4.​ It requires in letter and spirit implementation of procedures and their revisions
whenever called for.
5.​ It confines itself to standard formulation and is generic in nature, not dependent on type
or size of company or country. Implementation is left to individual nations.
6.​ In India “National Accreditation Board” accredits certifying agencies. This bodies
conduct certification audits.
7.​ The organizations have to furnish documentary evidence to substantiate the effective
operation of quality management system.
8.​ Certifications are not valid for more than 3 years. In this period also, surveillance audits
are carried out to see compliance.
BENEFITS OF HAVING ISO: 9000 QUALITY SYSTEM IS AS FOLLOWS:
1.​ Facilitates access to National and International markets.
2.​ Increases confidence of customer on the organization.
3.​ Responsibilities within the organization gets clearly defined and distributed.
4.​ Enhances image and good will of the company and increases involvement of employees
in quality goals.
5.​ Make organization eligible for getting the incentives declared for ISO registered
companies.
6.​ Though not mandatory, it is advantageous to have ISO for exporting to EC Countries,
especially when there is threat to human safety.
ISO AND TQM
While TQM is a mechanism to change a company’s culture to reach its goals, ISO
facilitates this change. In this context ISO is sub-set of TQM.
NO GUARANTEE OF QUALITY
ISO: 9000 is conditional. It guarantees consistency of quality of output subject to following
the procedures. Even after registration, a company producing 25% bad quality prior to
registration may continue to do so. Of course, ISO identifies the problem areas, which can
be taken as inputs for the quality improvement programme, only then ISO benefits accrue
to the organization. ISO 9000 represents minimum quality requirements unlike Deming
Prize (Japan), or Malcolm Award (US), which require greater planning, as they are focused
on customer satisfaction and excellence. Japan therefore has not adopted ISO: 9000 as its
quality standard.
SELECTION OF APPROPRIATE STANDARDS
ISO standards are used in two situations (1) Contractual purposes and (2) Internal quality
assurance purposes. Appropriate standards from amongst the series of ISO standards must
be selected by the organizations.
ISO 14000
The ISO 14000 environmental management standards exist to help organizations
minimize how their operations negatively affect the environment (cause adverse changes
to air, water, or land), comply with applicable laws and regulations.
ISO 14001 is the international specification for an environmental management system
(EMS). It specifies requirements for establishing an environmental policy, determining
environmental aspects and impacts of products/activities/services, planning environmental
objectives and measurable targets, implementation and operation of programs to meet
objectives and targets, checking and corrective action, and management review.
ISO 14000 is similar to ISO 9000 quality management in that both pertain to the process
(the comprehensive outcome of how a product is produced) rather than to the product itself.
The overall idea is to establish an organized approach to systematically reduce the impact
of the environmental aspects which an organization can control. Effective tools for the
analysis of environmental aspects of an organization and for the generation of options for
improvement are provided by the concept of Cleaner Production.
As with ISO 9000, certification is performed by third-party organizations rather than being
awarded by ISO directly. The ISO 19011 audit standard applies when auditing for both
9000 and 14000 compliance at once.
ISO 19011
ISO 19011 is an international standard that sets forth guidelines for quality management
systems auditing and environmental management systems auditing
It is developed by the International Organization for Standardization. The standard offers
four resources to organizations to "save time, effort and money".
1.​ A clear explanation of the principles of management systems auditing.
2.​ Guidance on the management of audit programmes.
3.​ Guidance on the conduct of internal or external audits.
4.​ Advice on the competence and evaluation of auditors.
QS 9000
QS 9000 is a quality standard developed by a joint effort of the "Big Three" automakers,
General Motors, Chrysler and Ford. It was introduced to the industry in 1994. It has
been adopted by several heavy truck manufacturers in the U.S. as well. Essentially all
suppliers to the automotive industry need to implement a QS 9000 system.

​ QS-9000 replaces such quality system requirements as Ford Q-101, Chrysler's Supplier
Quality Assurance Manual, GM's NAO Targets for Excellence and the Truck
Manufacturer's quality system manuals.

​ The influence of QS-9000 is being seen throughout the automotive industry as it has
virtually eliminated varying demands and waste associated with redundant systems.

​ Proof of conformance to QS-9000 is certification/registration by an accredited third

party such as Underwriter's Laboratories (UL) or the American Bureau of Shipping
(ABS).

​ Companies that become registered under QS-9000 will be considered to have higher
standards and better quality products.
WHY QS-9000?

​ QS-9000 helped companies to stay ahead of their competition.

​ It helped filling gaps in the business and quality systems that can cause problems.

​ QS-9000 eliminates redundant and unnecessary work practices.

 ​ QS-9000 tells current and potential customers that the product has consistent quality
and is manufactured under controlled conditions.

​ This system is globally accepted as proof of quality in the automotive industry and is
also a major customer requirement.
DESCRIPTION
The standard is divided into three sections with the first section being ISO 9001 plus
some automotive requirements.
The second section is titled "Additional Requirements" and contains system
requirements that have been adopted by all three automakers - General Motors, Chrysler
and Ford.
The third section is titled the "Customer Specific Section" which contains system
requirements that are unique to each automotive or truck manufacturer.
HOW DOES QS-9000 DIFFER FROM ISO-9000?
QS-9000 is sometimes seen as being identical to ISO 9000, but this is not true. Even
though each element of ISO 9000 is an element of QS-9000, QS-9000 adds clauses to the
majority of the ISO 9000 elements. For example, QS-9000 adds requirements for a
business plan, tracking customer satisfaction and bench marking to element 4.1 of ISO
9000, Management Responsibility. QS-9000 also uses sector-specific requirements.
The following are some of the specific requirements of QS 9000 which are not part of ISO
9000:
●​ Production part approval process
●​ The requirements for gaining approval from the customer to run a new or altered part or
process
●​ Continuous improvement
●​ Automotive suppliers are required to have systems in place to ensure that organized,
measurable improvement activities take place for a variety for business aspects
●​ Manufacturing capabilities
●​ Requirements for planning and effectiveness for equipment, facilities and processes
●​ Requirements for mistake proofing, and tooling management.
PLEASE NOTE

❖​ On December 14, 2006, all QS9000 certifications were terminated.

❖​ With QS9000, the middle certification between ISO 9001 and ISO/TS 16949, no longer
valid, businesses had a choice between either ISO9001 or TS16949.

❖​ QS9000 is considered superseded by ISO/TS 16949.

ISO/TS 16949:2009,
ISO/TS 16949:2009 in conjunction with ISO 9001:2008, defines the quality
management system requirements for the design and development, production and,
when relevant, installation and service of automotive-related products.

​ ISO/TS 16949:2009 is applicable to sites of the organization where

customer-specified parts, for production and/or service, are manufactured.

​ Supporting functions, whether on-site or remote (such as design centers, corporate

headquarters and distribution centers), form part of the site audit as they support the
site, but cannot obtain stand-alone certification to ISO/TS 16949:2009.

​ ISO/TS 16949:2009 can be applied throughout the automotive supply chain.

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​ CHAPTER – 23
MALCOM BALDRIGE NATIONAL QUALITY AWARD
MBNQA
The Malcolm Baldrige National Quality Award is an annual award that recognizes U.S.
organizations in the business, health care, education, and nonprofit sectors for
performance excellence.
●​ The Baldrige National Quality Program and the associated Award were established by
the Malcolm Baldrige National Quality Improvement Act of 1987 (Public Law
100–107).
●​ The Baldrige Award is the only formal recognition of the performance excellence of
U.S. organizations given by the President of the United States.
●​ It is administered by the Baldrige National Quality Program, which is based at and
managed by the National Institute of Standards and Technology, an agency of the U.S.
Department of Commerce.
●​ The Program and Award were named for Malcolm Baldrige, who served as United
States Secretary of Commerce during the Reagan administration, from 1981 until
Baldrige’s 1987 death in a rodeo accident.
●​ The Award promotes awareness of performance excellence as an increasingly
important element in competitiveness and information sharing of successful
performance strategies and the benefits derived from using these strategies.
●​ To receive a Baldrige Award, an organization must have a role-model organizational
management system that ensures continuous improvement in the delivery of
products and/or services, demonstrates efficient and effective operations, and
provides a way of engaging and responding to customers and other stakeholders.
●​ The Award is not given for specific products or services.
●​ Up to 18 Awards may be given annually across six eligibility categories:
1.​ Manufacturing,
2.​ Service,
3.​ Small Business,
4.​ Education,
5.​ Health Care, And
6.​ Nonprofit.
●​ As of 2009, 84 organizations had received the Award.
CRITERIA FOR PERFORMANCE EXCELLENCE
The main uses of the Baldrige Criteria for Performance Excellence are education and
organizational self-assessment and self-improvement.
The seven categories of the Criteria are as follows:
1. ​ Leadership​
2. ​ Strategic Planning​
3. ​ Customer Focus​
4. ​ Measurement, Analysis, and Knowledge Management​
5. ​ Workforce Focus​
6. ​ Process Management​
7. ​ Results
The Criteria are also the basis for giving Baldrige Awards and giving feedback to Baldrige
Award applicants.
In addition, the Criteria have the following three roles in strengthening U.S.
competitiveness:
1.​ To help improve organizational performance practices, capabilities, and results
2.​ To facilitate communication and sharing of information on best practices among U.S.
organizations of all types
3.​ To serve as a working tool for understanding and managing performance and for
guiding planning and opportunities for learning
The Baldrige Criteria for Performance Excellence provide organizations with an integrated
approach to organizational performance management that results in
​ Delivery of ever-improving value to customers and stakeholders, contributing to
organizational sustainability
 ​ Improvement of overall organizational effectiveness and capabilities

​ Organizational and personal learning

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CHAPTER – 24
DEMING APPLICATION PRIZE AND TQM AWARDS
The Deming Prize is one of the highest awards on TQM (Total Quality Management) in
the world. It was established in 1950* in honor of the late Dr. William Edwards Deming
who contributed greatly to Japan’s proliferation of statistical quality control after the
World War II.
JAPANESE UNION OF SCIENTISTS AND ENGINEERS (JUSE)
The JUSE organization, impressed with the advances Dr. Deming had made, instituted the
Deming Prize in his name. Teachings of Dr. William Edwards Deming helped Japan
build its foundation by which the level of Japan’s product quality has been recognized as
the highest in the world.
Award was originally designed to reward Japanese companies for major advances in quality
improvement. Over the years it has grown, under the guidance of Japanese Union of
Scientists and Engineers (JUSE) to where it is now also available to non-Japanese
companies, albeit usually operating in Japan, and also to individuals recognized as having
made major contributions to the advancement of quality.
The award originally was given to only to Japanese companies or individuals; however,
during recent years there has been a strong showing for many companies around the world
to compete for the prize. The prize committee has opened up to this option and now
awards to recipients all around the world.
The party responsible for the selection of the recipient is known as the Deming Prize
Committee. They review the persons or groups that are under consideration for the prize.
This committee has the final say as to who the recipient shall be.
The Deming prize medal was originally designed by Mr. Yoji Yamawaki.
The ceremony to award the medal has been held in November every year.
DIFFERENT CATEGORIES OF THE DEMING PRIZE
Two categories of awards are made annually, the Deming Prize for Individuals and the
Deming Application Prize.
Table on the next page gives details about different categories of the Deming Prize.
* The prize was originated in 1951; however, there is some disagreement on this point. While reviewing
this date from various sources, it can be found to have begun in 1950 or 1951.

CATEGORIES OF THE DEMING PRIZE

For individuals or groups

Given to those who have made outstanding
The Deming Prize for Individuals contributions to the study of TQM or statistical
methods used for TQM, or those who have made
outstanding contributions in the dissemination of
TQM
For individuals whose primary activities are outside
Japan
The Deming Distinguished
Service Award for Dissemination Given to individuals who have made outstanding
and Promotion (Overseas) contributions in the dissemination and promotion of
TQM. Examination will be carried out every 3-5
years.
For organizations such as companies, institutes,
divisions of organizations, operational business units
and headquarters office (organization, hereafter)
The Deming Application Prize Given to organizations that have implemented TQM
suitable for their management philosophy,
scope/type/scale of business, and management
environment (Annual award)

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