UNIT-2 TOPICS
📘 Plant Location: A Strategic Decision for Business
Success
1. Concept
○ Plant location refers to choosing the geographical area or region where a
business/industry/plant will be set up.
○ It is a strategic decision because a good location reduces costs and
improves efficiency, while a poor location can cause long-term losses.
2. Factors Influencing Plant Location
a. Proximity to Raw Materials
■ Industries that need bulky raw materials (steel, cement, sugar)
should be near sources to reduce transport cost.
■ Example: Sugar mills are usually located near sugarcane fields.
b. Proximity to Market
■ Plants should be near the consumer market to reduce distribution
costs and ensure quick delivery.
■ Example: FMCG companies like Hindustan Unilever set up plants
near urban markets.
c. Availability of Labor
■ Skilled and unskilled labor must be available at reasonable wages.
■ Example: IT companies set up offices in Bangalore due to availability
of skilled engineers.
d. Transport Facilities
■ Easy access to rail, road, air, and sea reduces the cost of bringing
inputs and delivering products.
■ Example: Automobile plants near Chennai due to proximity to ports
and highways.
e. Power and Energy Supply
■ Reliable electricity/water supply is essential for industries.
■ Example: Aluminium plants set up near hydroelectric power plants
(like NALCO in Odisha).
f. Government Policies
■ Tax benefits, subsidies, or restrictions influence location decisions.
■ Example: Many electronics plants in Noida due to government SEZ
(Special Economic Zones).
g. Climate and Environment
■ Certain industries need specific climates.
■ Example: Tea industry in Assam and Darjeeling because of favorable
climate.
h. Community and Living Conditions
■ Housing, education, hospitals for employees and families must be
nearby.
3. Types of Location Decisions
○ Single Plant Location: One central plant serving the whole market (Ex:
Maruti Suzuki’s first plant at Gurgaon).
○ Multi-Plant Location: Multiple plants in different regions to serve local
markets (Ex: Coca-Cola has bottling plants across India).
4. Importance of Plant Location
○ Reduces operating and transport costs.
○ Ensures easy availability of raw materials and labor.
○ Increases efficiency and competitiveness.
○ Helps in long-term sustainability of the business.
5. Real-World Example
○ Tata Motors – Pune: Chosen for good transport links, skilled labor, and
proximity to Mumbai port.
○ ITC (Paper Division) – Bhadrachalam: Located near forests for raw material
supply.
📘 Plant Layout
1. Concept
● Plant layout is the physical arrangement of machines, equipment, departments,
and workers within a plant at a selected location
● Its aim is to ensure a smooth flow of materials, people, and information with
minimum cost and maximum efficiency.
2. Principles of Plant Layout
1. Overall Integration – Layout should integrate men, machines, and materials effectively.
2. Minimum Distance of Movement – Materials and workers should travel the shortest
path possible.
3. Safety and Flexibility – Safe working conditions with room for future expansion.
4. Environmental Conditions – Proper lighting, ventilation, and comfort for workers.
3. Types of Plant Layout
(a) Product or Line Layout
● Machines are arranged in the sequence of operations required to produce a product.
● Best for mass production of standardized goods.
● Example: Automobile assembly lines in Maruti Suzuki or Ford.
● Advantage: High efficiency, low material handling.
● Disadvantage: Not flexible; if one machine fails, the line stops.
(b) Process or Functional Layout
● Similar machines or processes are grouped together.
● Best for job shops or batch production where products differ.
● Example: A hospital – X-ray dept, OPD, ICU, etc. each department handles specific
functions.
● Advantage: Flexibility in handling varied products.
● Disadvantage: Higher material handling and cost.
(c) Combined Layout
● A mix of product and process layout.
● Suitable for firms producing several products in batches but not continuously.
● Example: Textile mills – weaving, dyeing, and finishing combined.
(d) Fixed Position or Location Layout
● Product stays in one place, resources (men, machines, materials) move to it.
● Best for large, bulky, immovable products.
● Example: Shipbuilding, aircraft assembly.
● Advantage: No movement of product.
● Disadvantage: High labor and coordination costs.
4. Importance of Plant Layout
✅ Reduces production costs.
✅ Ensures smooth material flow.
✅ Increases safety and employee satisfaction.
✅ Improves product quality.
✅ Provides flexibility for future expansion.
5. Real-World Examples
● Product Layout: Toyota’s assembly line for cars.
● Process Layout: Apollo Hospitals (departments by specialty).
● Fixed Layout: ISRO rocket assembly.
● Combined Layout: Textile and electronics industries.
📘 Work Study
1. Concept
● Work study is the technique of analyzing how jobs are performed in order to improve
efficiency, reduce waste, and set performance standards
● It answers two key questions:
1. How should the job be done? (Method study)
2. How much time should it take? (Work measurement / Time study)
👉 In simple words: Work study = doing work in the best way + in the least time.
2. Objectives of Work Study
● Provide better quality products.
● Ensure effective use of 4M’s (Men, Machines, Materials, Money).
● Improve working conditions for employees.
● Pay fair wages by setting time standards.
● Contribute to cost reduction and productivity.
3. Techniques of Work Study
(a) Method Study (Motion Study)
● Analyzing the process to find the best way of doing a job.
● Steps:
○ Eliminate unnecessary motions.
○ Combine related activities.
○ Reduce worker fatigue.
○ Improve workplace arrangement.
○ Redesign tools/equipment.
● Example: McDonald’s arranges kitchen layout to minimize employee movement.
(b) Work Measurement (Time Study)
● Determining how much time a qualified worker should take to finish a task.
● Methods:
○ Stopwatch Time Study → Measuring job cycles.
○ Historical Records → Using past performance data.
○ Predetermined Time Standards → Published data from research.
● Example: Amazon uses time standards for packaging speed in warehouses.
4. Developing Work Methods
● Remove unnecessary steps.
● Improve workplace layout.
● Use better-designed tools and machinery.
● Ensure workers’ health and safety while improving speed.
5. Importance of Work Study
✅ Improves productivity and efficiency.
✅ Reduces costs and wastage.
✅ Ensures fair wage system.
✅ Provides safe, comfortable work environment.
✅ Increases employee satisfaction.
6. Real-World Examples
● Toyota uses work study for lean production (minimizing waste, maximizing value).
● Amazon warehouses use time & motion studies to improve packaging and delivery.
● Hospitals streamline operations by studying patient flow (method study).
📘 Statistical Quality Control (SQC)
1. Concept
● SQC is the application of statistical techniques to measure and control the quality of
products and processes.
● It is based on the idea that variation always exists in production. Some variations are
natural (acceptable), while others indicate problems that must be corrected.
👉 In short: SQC = Using statistics to monitor, control, and improve quality.
2. Objectives of SQC
1. Detect defects during production rather than after.
2. Maintain consistent quality of goods.
3. Reduce wastage and rework.
4. Lower inspection costs compared to 100% checking.
5. Build customer confidence by ensuring defect-free products.
3. Techniques of SQC
SQC mainly uses sampling and control charts:
1. Acceptance Sampling
○ Instead of checking every item, a sample is tested.
○ Decision: Accept/reject the whole lot based on sample.
○ Example: In a pen factory, instead of checking 10,000 pens, a sample of 100 is
tested.
2. Control Charts
○ Graphical tools to study variations in production over time.
○ Helps identify whether variations are within control (normal) or due to special
causes (abnormal).
○ Example: A bakery monitors the weight of bread loaves using a control chart.
4. Advantages of SQC
✅ Reduces cost of inspection.
✅ Improves efficiency and productivity.
✅ Identifies problems early in the process.
✅ Builds reputation for quality.
5. Limitations of SQC
❌ Requires statistical knowledge and trained staff.
❌ May not catch all defects if sampling is poor.
❌ Not suitable for very small production batches.
6. Real-World Examples
● Samsung uses SQC in electronics manufacturing to ensure defect-free smartphones.
● Nestlé applies sampling and control charts to maintain consistent taste and quality in
chocolates.
● Airbus applies SQC in aircraft parts production where safety is critical.
📘 Control Charts
1. Concept
● A control chart is a graphical tool in Statistical Quality Control (SQC) that shows how
a process changes over time.
● It helps distinguish between:
○ Common causes (natural variations, acceptable).
○ Special causes (abnormal variations, require corrective action).
👉 In short: Control charts tell us whether a process is under control or needs correction.
2. Structure of a Control Chart
● Central Line (CL): Average of the quality characteristic (mean).
● Upper Control Limit (UCL): Maximum acceptable value.
● Lower Control Limit (LCL): Minimum acceptable value.
● Formula:
○ UCL = CL + 3σ
○ LCL = CL – 3σ
If points fall within UCL and LCL, the process is under control.
If points fall outside, the process is out of control.
3. Types of Control Charts (for Variables)
(a) X̄-Chart (Mean Chart)
● Used to monitor average value of a sample.
● Shows whether the process average is stable.
Formula:
● CL = Average of sample means (X̄)
● UCL = X̄ + A2 × R̄
● LCL = X̄ – A2 × R̄
👉 Example: Monitoring the average diameter of machine parts (e.g., bolts, bearings).
(b) R-Chart (Range Chart)
● Used to monitor variability (spread) within a sample.
● Tells whether the process variation is under control.
Formula:
● CL = Average of sample ranges (R̄)
● UCL = D4 × R̄
● LCL = D3 × R̄
👉 Example: Monitoring variation in bread loaf weights in a bakery.
4. Simple Problem (Illustration)
A factory produces metal rods. Five samples (n = 5 rods each) were measured, giving these
average lengths (in mm):
Sample means: 50, 49, 51, 50, 52
Sample ranges: 3, 2, 4, 3, 5
● Step 1: Calculate averages
○ X̄ = (50+49+51+50+52)/5 = 50.4
○ R̄ = (3+2+4+3+5)/5 = 3.4
● Step 2: For n=5, standard constants are (from SQC tables):
○ A2 = 0.577, D3 = 0, D4 = 2.115
● Step 3: Control limits
○ X̄-chart:
■ UCL = 50.4 + (0.577 × 3.4) = 52.36
■ LCL = 50.4 – (0.577 × 3.4) = 48.44
○ R-chart:
■ UCL = 2.115 × 3.4 = 7.19
■ LCL = 0 × 3.4 = 0
✅ Interpretation: If future sample points stay within these limits, the process is under control.
5. Real-World Examples
● Maruti Suzuki uses X̄-charts to monitor car engine dimensions.
● Amul Dairy uses R-charts to check variation in milk fat content.
● Pharmaceuticals apply control charts to monitor drug ingredient proportions.
📘 Total Quality Management (TQM)
1. Concept
● TQM is a management philosophy that focuses on continuous improvement in all
aspects of an organization, with the goal of achieving customer satisfaction.
● It involves everyone in the organization – from top management to workers – in
improving processes, products, and culture.
👉 In simple terms: TQM = Do it right the first time, every time, and improve continuously.
2. Key Principles of TQM
1. Customer Focus
○ Quality is defined by customer needs and expectations.
○ Example: Apple focuses on user experience in all its products.
2. Continuous Improvement (Kaizen)
○ Never-ending effort to improve processes and reduce waste.
○ Example: Toyota’s Kaizen philosophy in manufacturing.
3. Employee Involvement
○ Every employee is responsible for quality.
○ Example: Infosys conducts internal quality circles where employees suggest
improvements.
4. Process-Centered Approach
○ Focus on improving the process rather than just final inspection.
○ Example: McDonald’s ensures consistent cooking procedures globally.
5. Integrated System
○ All departments work together towards common quality goals.
○ Example: In hospitals, doctors, nurses, and admin staff collaborate for patient
satisfaction.
6. Fact-Based Decision Making
○ Use data (SQC, control charts, feedback) to make quality decisions.
7. Communication & Training
○ Clear communication and training ensure employees understand quality goals.
3. Steps in Implementing TQM
1. Commitment from top management.
2. Training employees in quality tools.
3. Forming quality circles and teams.
4. Using tools like SQC, control charts, benchmarking.
5. Continuous review and feedback.
4. Benefits of TQM
✅ Higher customer satisfaction.
✅ Reduced defects and waste.
✅ Better employee morale and teamwork.
✅ Competitive advantage in market.
✅ Long-term profitability and sustainability.
5. Limitations of TQM
❌ Requires cultural change, which takes time.
❌ High training and implementation cost.
❌ Resistance from employees if not motivated.
6. Real-World Examples
● Toyota – TQM and Kaizen helped Toyota become the global leader in automobile
quality.
● Infosys – Adopted TQM for software quality and client satisfaction.
● Xerox – Used TQM to regain market leadership in the 1980s after losing to Japanese
competitors.
📘 Six Sigma
1. Concept
● Six Sigma is a quality management approach developed by Motorola (1986) and
popularized by General Electric (GE).
● It focuses on reducing defects and variations in processes so that products/services
are nearly perfect.
● The term “Six Sigma” means a process produces only 3.4 defects per million
opportunities (DPMO) → extremely high quality.
👉 In short: Six Sigma = Data-driven method to eliminate errors and improve quality.
2. Objectives of Six Sigma
● Improve customer satisfaction.
● Reduce process variation and defects.
● Lower costs through efficiency.
● Build a culture of continuous improvement.
3. Key Principles of Six Sigma
1. Focus on the customer.
2. Identify and improve processes.
3. Reduce variation and defects.
4. Use data and statistical analysis for decisions.
5. Involve and train employees (certifications like Green Belt, Black Belt).
4. Six Sigma Methodology (DMAIC Cycle)
The most widely used improvement model in Six Sigma:
1. D – Define
○ Define the problem and project goals.
○ Example: Reduce late deliveries in an e-commerce company.
2. M – Measure
○ Collect data on the current process.
○ Example: Track delivery times for 1 month.
3. A – Analyze
○ Identify causes of defects/variations.
○ Example: Delays due to warehouse packing speed.
4. I – Improve
○ Implement solutions to eliminate root causes.
○ Example: Automate packaging process.
5. C – Control
○ Monitor improvements and ensure consistency.
○ Example: Use control charts to track delivery performance.
DMAIC Cycle)
The most widely used improvement model in Six Sigma:
6. D – Define
○ Define the problem and project goals.
○ Example: Reduce late deliveries in an e-commerce company.
7. M – Measure
○ Collect data on the current process.
○ Example: Track delivery times for 1 month.
8. A – Analyze
○ Identify causes of defects/variations.
○ Example: Delays due to warehouse packing speed.
9. I – Improve
○ Implement solutions to eliminate root causes.
○ Example: Automate packaging process.
10.C – Control
○ Monitor improvements and ensure consistency.
○ Example: Use control charts to track delivery performance.
DMADV Cycle
The Six Sigma approach for designing new processes, products, or services:
1. D – Define
○ Define design goals consistent with customer demands and the enterprise
strategy.
○ Example: Design a new e-commerce website to improve customer satisfaction.
2. M – Measure
○ Measure and identify CTQs (characteristics that are Critical To Quality), product
capabilities, production process capability, and risks.
○ Example: Survey potential users to identify key features and usability
requirements for the new website.
3. A – Analyze
○ Analyze to develop and design alternatives, create a high-level design, and
evaluate design capability to meet the CTQs.
○ Example: Analyze different website layouts and navigation structures, and
evaluate their potential impact on user experience.
4. D – Design
○ Design the details, optimize the design, and plan for verification. This phase may
require simulations.
○ Example: Develop detailed wireframes and prototypes of the website,
incorporating user feedback and best practices for e-commerce design.
5. V – Verify
○ Verify the design, set up pilot runs, implement the production process and hand it
over to the process owner(s).
○ Example: Conduct A/B testing on the new website, launch a pilot version to a
small group of users, and monitor performance before full rollout.
5. Benefits of Six Sigma
✅ Drastically reduces defects and errors.
✅ Improves efficiency and productivity.
✅ Boosts customer satisfaction.
✅ Reduces cost of poor quality (scrap, rework).
✅ Creates a culture of data-driven decision-making.
6. Limitations of Six Sigma
❌ High training and implementation cost.
❌ Time-consuming for small organizations.
❌ Too much focus on numbers may ignore creativity.
7. Real-World Examples
● General Electric (GE): Saved billions by applying Six Sigma to manufacturing and
services.
● Motorola: Improved product quality, reducing defects by over 90%.
● Bank of America: Used Six Sigma to reduce errors in loan processing and improve
customer service.
● Infosys: Applies Six Sigma in IT processes to reduce software defects.
.
📘 Material Management – Need for Inventory Control
1. Concept of Material Management
● Material Management ensures the right material, at the right place, in the right
quantity, at the right time, at the right cost.
● Inventory = stock of raw materials, work-in-progress (WIP), and finished goods.
● Proper control prevents shortage (stock-out) and excess (overstock).
2. Need for Inventory Control
1. Avoid Stock-Outs
○ Shortage of raw material halts production.
○ Example: An automobile company stopping production due to shortage of
semiconductor chips.
2. Reduce Excess Investment
○ Overstock increases storage cost, insurance, and risk of obsolescence.
○ Example: Retailers suffering losses when unsold fashion items become outdated.
3. Ensure Continuous Production
○ Steady availability of materials ensures smooth workflow.
4. Minimize Wastage & Deterioration
○ Proper control prevents spoilage, theft, or damage.
○ Example: Food industries use strict inventory control for perishable goods.
5. Better Customer Service
○ Finished goods must be available on time to meet demand.
6. Reduce Cost of Production
○ Controlled purchasing and storage lowers overall cost.
3. Objectives of Inventory Control
● Maintain optimum stock (not too much, not too little).
● Balance between carrying cost (cost of holding stock) and ordering cost (cost of
placing orders).
● Provide information for better planning and forecasting.
4. Techniques Used in Inventory Control
● EOQ (Economic Order Quantity) – Optimal order size.
● ABC Analysis – Based on value of items.
● HML, SDE, VED, FSN Analysis – Based on cost, scarcity, criticality, or movement.
5. Real-World Examples
● Amazon warehouses use advanced inventory control to ensure fast delivery.
● Coca-Cola balances raw material inventory (sugar, water, bottles) to avoid both shortage
and wastage.
● Pharmaceutical companies carefully manage drug stock since expiry risk is high.
📘 Economic Order Quantity (EOQ)
1. Concept
● EOQ is the optimal order quantity of inventory that minimizes the total cost of ordering
and holding stock.
● Ordering too frequently → high ordering cost.
● Ordering too much at once → high carrying (holding) cost.
● EOQ finds the balance point.
👉 In short: EOQ = Order size where total inventory cost is the lowest.
2. Costs Involved in Inventory
1. Ordering Cost – Cost of placing orders, paperwork, transport, etc. (decreases if order
size is large).
2. Carrying Cost – Cost of storing inventory (warehouse, insurance, depreciation,
interest). (increases if order size is large).
3. Purchase Cost – Cost of buying goods (not affected by EOQ).
EOQ balances ordering cost vs. carrying cost.
3. EOQ Formula
EOQ=2DSHEOQ = \sqrt{\frac{2DS}{H}}EOQ=H2DS
Where:
● D = Annual demand (units)
● S = Ordering cost per order (₹)
● H = Carrying cost per unit per year (₹)
4. Simple Problem Example
A company uses 10,000 units of raw material annually.
● Ordering cost per order = ₹200
● Carrying cost per unit/year = ₹5
ANs 894
✅ So the company should order 894 units each time for minimum total cost.
5. Advantages of EOQ
✅ Minimizes total inventory cost.
✅ Avoids both overstocking and understocking.
✅ Simple and practical method.
✅ Helps in budgeting and planning.
6. Limitations of EOQ
❌ Assumes demand and costs are constant (not always true in real life).
❌ Does not consider bulk discounts.
❌ Difficult if prices or demand fluctuate heavily.
7. Real-World Examples
● Retail chains like Big Bazaar use EOQ models to restock groceries.
● Automobile manufacturers apply EOQ for spare parts procurement.
● Pharma companies use EOQ to balance medicine stocks and expiry dates.
📘 ABC Analysis
1. Concept
● ABC Analysis is an inventory control technique based on the Pareto principle (80/20
rule).
● It classifies items into A, B, and C categories according to their annual consumption
value (cost × quantity used).
👉 In short:
● A items: Very important, few in number, high value.
● B items: Moderate importance, moderate value.
● C items: Many in number, low value.
2. Classification
1. A Items (High Value, Low Quantity)
○ About 10% of items account for 70% of total value.
○ Require strict control, frequent review, and accurate records.
○ Example: In a car factory – engines, gearboxes.
2. B Items (Moderate Value, Moderate Quantity)
○ About 20% of items account for 20% of total value.
○ Require moderate control and periodic review.
○ Example: Tyres, batteries.
3. C Items (Low Value, High Quantity)
○ About 70% of items account for 10% of total value.
○ Simple controls, bulk ordering is sufficient.
○ Example: Nuts, bolts, screws, stationery.
3. Steps in ABC Analysis
1. Calculate annual consumption value for each item (unit cost × annual usage).
2. Arrange items in descending order of consumption value.
3. Categorize into A, B, and C groups using cut-off percentages.
4. Advantages of ABC Analysis
✅ Focuses management attention on most valuable items.
✅ Reduces working capital tied up in inventory.
✅ Saves time and effort by applying strict control only where needed.
✅ Improves purchasing and stock management efficiency.
5. Limitations of ABC Analysis
❌ Considers only monetary value, ignores other critical factors like scarcity or urgency.
❌ Not suitable where all items are equally important (e.g., medicines in a hospital).
6. Real-World Examples
● Pharmaceutical companies: High-value drugs (A), medium-value vitamins (B), cotton
swabs & syringes (C).
● Automobile industry: Engines (A), tyres (B), nuts & bolts (C).
● Retail stores: Electronics (A), clothing (B), pens/paper (C).
📘 Other Inventory Control Techniques
1. HML Analysis (High, Medium, Low cost items)
● Classification is based on unit price (cost per item).
● H-items: High cost per unit → Need strict control and authorization for purchase.
● M-items: Medium cost → Moderate control.
● L-items: Low cost → Simple, bulk purchase possible.
👉 Example:
● In a hospital: MRI machines (H), surgical instruments (M), syringes (L).
2. SDE Analysis (Scarce, Difficult, Easy to obtain items)
● Classification is based on availability of items.
● S-items (Scarce): Very hard to procure, may be imported, long lead times. → Maintain
high safety stock.
● D-items (Difficult): Available but not easily. → Moderate stock.
● E-items (Easy): Easily available in market. → Low stock is enough.
👉 Example:
● In automobile manufacturing: Specialized imported chips (S), special alloy parts (D),
common nuts and bolts (E).
3. VED Analysis (Vital, Essential, Desirable items)
● Classification is based on criticality for production/operations.
● V-items (Vital): Absolutely necessary; stock-out stops production. → Strict control.
● E-items (Essential): Important but production can continue for a short while without
them.
● D-items (Desirable): Nice to have, but not critical.
👉 Example:
● In hospitals: Life-saving drugs (V), bandages (E), decorative items (D).
4. FSN Analysis (Fast-moving, Slow-moving, Non-moving items)
● Classification is based on consumption rate and movement of items.
● F-items: Used frequently, require continuous replenishment.
● S-items: Consumed slowly; periodic review needed.
● N-items: No movement for a long time; may need disposal.
👉 Example:
● In retail stores: Grocery staples (F), seasonal goods like woolens (S), outdated stock like
last year’s calendars (N).
5. Why Use These Techniques?
● Each method focuses on different control criteria:
○ ABC → Consumption value.
○ HML → Unit cost.
○ SDE → Availability.
○ VED → Criticality.
○ FSN → Usage rate.
● Managers often use them together for effective inventory control.
6. Real-World Examples
● Pharmaceutical companies:
○ High-cost imported machines (HML), life-saving drugs (VED), fast-selling OTC
medicines (FSN).
● Automobile industry:
○ Rare imported chips (SDE), engines (ABC – A class), vital safety components
(VED).
