INTRODUCTION TO PRODUCTION MANAGEMENT

Module 3

INTRODUCTION
Operations management (OM) is defined as the design, operation, and improvement of the systems that create and deliver the firms primary products and services. Production/operations management is the process, which combines and transforms various resources used in the production/operations subsystem of the organization into value added product/services in a controlled manner as per the policies of the organization.

Therefore, it is that part of an organization, which is concerned with the transformation of a range of inputs in to the required (products/services) having the requisite quality level. The set of interrelated management activities, which are involved in manufacturing certain products, is called as production management.

DEFINITION OF PRODUCTION
Production is 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 product to the user. Thus production is a value addition process. At each stage of processing, there will be value addition.

CONCEPT OF PRODUCTION

PRODUCTION MANAGEMENT

Production management is a process of planning, organizing, directing and controlling the activities of the production function. It combines and transforms various resources used in the production subsystem of the organization into value added product in a controlled manner as per the policies of the organization.

DEFINITION OF PRODUCTION MANAGEMENT

E.S. Buffa defines production management as, Production management deals with decision making related to production processes so that the resulting goods or services are produced according to specifications, in the amount and by the schedule demanded and out of minimum cost.

CHARACTERISTICS OF PRODUCTION MANAGEMENT

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Production is an organized activity. The system transforms various inputs in to outputs. It does not operate in isolation of the other organizational systems. There exists a feedback about the activities which are essential to control and improve the system.

PLANT LOCATION

Introduction :Plant location may be understood as the function of determining where the plant should be located for maximum operating economy and effectiveness. The selection of a place for locating a plant is one of the problems, perhaps it is one of the task for the entrepreneur while launching a new enterprise.

 Selection

of a location is on pure economic considerations will ensure an easy and regular supply of raw material, labour, efficient plant layout to reduce cost of production. Once a mistake is made in locating a plant, it becomes extremely difficult and costly to correct it.

Need for plant location : When the business is newly started. The existing business has outgrown its original

facilities and expansion not possible. The volume of the business or the extent market necessitates the establishment of branches. A lease expires and the landlord does not renew the lease. Social and economic reasons i.e., in-adequate labour supply and shifting of the market.

Steps in location :1. With in the country or outside 2. Selection of the region 3. Selection of the locality or

community 4. Selection of the exact site

With in the country or outside

1.With in the country or outside :

The first step in locating a plant is to decide whether the plant is located domestically of internationally. Due to globalization the issue of home or foreign is gaining more relevance. The choice of particular country depends on such factors like political stability, export & import quotas, currency, and exchange rates

2: Selection of the region

2.Selection of the region :a. b. c. d. e. f. g. Availability of raw material Nearness to the market Availability of power Transportation facilities Suitability of climate Government policy Competition between states

a. Availability of raw material:As a manufacturing unit is engaged in conversion of raw materials in to finished products, it is very essential that it should be located in a place where the supply of raw materials is maximum. Advantages :- Reduce in cost of transportation. - Regular and proper supply of raw material

Saving in the cost of storage of material

Example :Nizam sugar plant is located in Nizambad district where you find sugarcane is cultivated more in this district. Sugarcane is a raw material for sugar factory.

b. Nearness to the market :

Since goods are produced for sale, it is very essential that a plant should be located near to the market.

Advantages :- Reduction in cost of transportation of finished goods to the market - Availability of render prompt services to the consumer

The ability to adjust production program to suit the likes and dislikes of consumers.

Example :- Auto-servicing and repairing units.

c. Availability of power :Power is essential to move the wheels of an industry. Industries using electricity have to be located where the supply of power is available more Example:Steel industries are located near to power industries

D:- Transport facilities:

Transport facilities are very important for bringing raw material to the factory. Transport facilities are very important for carrying finished goods to the market. A place which is well connected by rail, road, air and water transport facilities is suitable for plant location.

Example :- Mumbai is best suitable for

transport facilities to locate industries

E : Suitability of climate:

It is important for two reasons: - There are certain industries which mainly depends on nature of production.

Example :- Humid climate for Cotton

textiles and Jute. - Based on climate which also affects the labour efficiency

F: Government policies:Government policies like - licensing policy - Freight rate policy - Establishing a unit in the public sector in remote areas - Institutional finance and government subsidies Example :- NANO car projected

G :- Competition between states:

Various states offer investments, susidies and sales tax exemptions to new units. The incentives may not be big but help to large scale industries but not for small and medium scale industries. Pasco steel company in Orissa

Example :-

3: Selection of the community

 Selecting

a particular community is the third step in the process of plant location. The selection of a locality in a particular region influence following factors :-

A : Availability of labour :

Labour is an important factor in the production of goods. A sufficiency of labour supply at reasonable wages is very essential for smooth and successful working of the industries. Now a days the influence of skilled labour on plant has lost because of mobility.

B : Finance and research facilities:

Adequate capital is essential for the successful working of any organisation A place where facilities for raising capital are available attracts new industries. Example :- Gujarat The manufacturing unit has to be dynamic i.e., it should always be on the look out for new technology.

C :- Civic amenities for workers:Besides of working conditions inside the factory, the employees need facilities outside it. Recreation facilities such as clubs, parks, schools for children etc must be provided for the employees. Example: All facilities provided by BHEL to their employees

D : Availability of water & fire:Some industries require plenty of water for there working. Example: NHPC power plant which uses water to produce power Some industries require fire for there working. Example: NTPC power plant which makes fire from coal to produce power

E: Local taxes and restrictions:

Local authorities collect charges for the supply of water, electricity and other facilities. They also collect various other taxes from industrial units. The imposed restrictions on the location of new unit in the public interest.

4: selection of the exact site

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A: Soil, size and topography:

For the industries based on agriculture require fertile soil to locate a plant. The area of the land should be such as to accommodate not only the existing purpose but offer for scope for future expansion also. The topography of the place deserves consideration to some extent. A hilly rocky and ruff terrain is unsuitable for plant location.

B: Disposal of waste :The problem of the disposal of waste is common to many industries, particularly chemical, sugar, steel and leather industries. The site selected for location of the plant should have provision for the disposal of waste. Example: NTPC use coal ash ( waste ) to construct bricks

PLANT LAYOUT

Layout identically involves the allocation of space and the arrangement of equipment in such a manner that overall operating costs are minimized. Plant layout is an effort to arrange machines and equipment, and other services within a predesigned building-ensuring steady, smooth and economical flow of material. Plant layout involves the development of physical relationships among building equipment and production operations which will enable the manufacturing process to be carried on efficiently

OBJECTIVES OF PLANT LAYOUT

Proper and efficient utilization of cubic (i.e. length, width and height) of available floor space. To ensure that work proceeds from one point to another without any delay. Provide enough production capacity. Reduce material handling costs. Reduce hazards to personnel. Utilize labor efficiently. Increase employee morale. Eliminate conjugation and bottle neck at work.

Provide for volume and product flexibility. Provide ease of supervision and control. Provide for employee safety and health.[ Reduce accidents ] Allow ease of maintenance. Allow high machine or equipment utilization. Improve productivity. Reduce Capital Investment.

FACTORS INFLUENCING LAYOUT

Nature of product. Production process. [Including Waiting Time] Type of machinery. Repairs and maintenance. Human needs. Plant environment. Materials. Material Handling Equipments. Auxiliary Services. Future Changes. Factory building.

TYPES OF PLANT LAYOUT

There are mainly four types of plant layout: (a) Product or line layout (b) Process or functional layout (c) Fixed position or location layout (d) Combined or group layout

PRODUCT OR LINE LAYOUT

In this type of layout the machines and equipments are arranged in one line depending upon the sequence of operations required for the product. It is also called as line layout. The material moves to another machine sequentially without any backtracking or deviation i.e the output of one machine becomes input of the next machine. It requires a very little material handling. It is used for mass production of standardized products.

Product Layout
Receiving Raw matl. storage Fabrication line-part A Drill Mill Mill Drill Grinder Fabrication line-part B Planer Lathe

Finished goods storage

Small number of high volume products

Mill
Assembly line Automatic

Advantages of Product layout:

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Low cost of material handling, due to straight and short route and absence of backtracking. Smooth and continuous operations. Continuous flow of work. Lesser inventory and work in progress. Optimum use of floor space. Simple and effective inspection of work and simplified production control. Lower manufacturing cost per unit

Disadvantages of Product layout:

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Higher initial capital investment in special purpose machine (SPM). High overhead charges. Breakdown of one machine will disturb the production process. Lesser flexibility of physical resources.

PROCESS LAYOUT

This type of plant layout is useful when the production process is organized in batches. Personnel and equipment to perform the same function are allocated in the same area. The different items have to move from one area to another one, according to the sequence of operations previously established. The variety of products to produce will lead to a diversity of flows through the facility. The variations in the production volumes from one period to the next one (short periods of time) may lead to modifications in the manufactured quantities as well as the types of products to be produced.

Assembly line

THIS HONDA ASSEMBLY LINE ALLOWS TECHNICIANS THE FLEXIBILITY TO TRADE WORK ELEMENTS, AND ALLOWS MANAGEMENT TO ADD OR SUBTRACT OPERATORS AS NECESSARY.( mixed model line balancing)

Process Layout
Receiving Mills Raw matl. Assembly Grinders

storage

Large number of low volume products

Drills
Planers Finished Inspecgoods tion storage

Lathes

Automatics

Part A Part B

Advantages of Process layout:

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3. 4. 5. 6.

Lower initial capital investment is required. There is high degree of machine utilization, as a machine is not blocked for a single product. The overhead costs are relatively low. Breakdown of one machine does not disturb the production process. Supervision can be more effective and specialized. Greater flexibility of resources.

Disadvantages of Process layout:

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Material handling costs are high due to backtracking. More skilled labour is required resulting in higher cost. Work in progress inventory is high needing greater storage space. More frequent inspection is needed which results in costly supervision.

FIXED POSITION OR LOCATION LAYOUT:

Fixed position layout involves the movement of manpower and machines to the product which remains stationary. The movement of men and machines is advisable as the cost of moving them would be lesser. This type of layout is preferred where the size of the job is bulky and heavy. Example of such type of layout is locomotives, ships, boilers, generators, wagon building, aircraft manufacturing, etc.

Fixed Position Layout

Raw Material Finished Product (Aircraft)

Machines & Equipments

AIR CRAFT ASSEMBLY

Labour

Advantages of Fixed position layout:

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The investment on layout is very small. The layout is flexible as change in job design and operation sequence can be easily incorporated. Adjustments can be made to meet shortage of materials or absence of workers by changing the sequence of operations.

Disadvantages of Fixed position layout:

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As the production period being very long so the capital investment is very high. Very large space is required for storage of material and equipment near the product. As several operations are often carried out simultaneously so there is possibility of confusion and conflicts among different workgroups.

COMBINED LAYOUT:

A combination of process & product layout is known as combined layout. Manufacturing concerns where several products are produced in repeated numbers with no likelihood of continuous production, combined layout is followed.

PRODUCT LAYOUT
Product layouts are found in flow shops (repetitive assembly and process or continuous flow industries). Flow shops produce high-volume, highly standardized products that require highly standardized, repetitive processes

PROCESS LAYOUT
Process layouts are found primarily in job shops, or firms that produce customized, low-volume products that may require different processing requirements and sequences of operations. Process layouts are facility configurations in which operations of a similar nature or function are grouped together

Output. Product layouts can generate a large volume of products in a short time.
Cost. Unit cost is low as a result of the high volume. Labor specialization results in reduced training time and cost. A wider span of supervision also reduces labor costs. Accounting, purchasing, and inventory control are routine. Because routing is fixed, less attention is required.

Flexibility. The firm has the ability to handle a variety of processing requirements.
Cost. Sometimes, the general-purpose equipment utilized may be less costly to purchase and less costly and easier to maintain than specialized equipment.

Utilization. There is a high degree of labor and equipment utilization.

Since there are multiple machines available, process layouts are not particularly vulnerable to equipment failures.

Motivation. The system's inherent division of labor can result in dull, repetitive jobs that can prove to be quite stressful. Also, assembly-line layouts make it very hard to administer individual incentive plans.
Flexibility. Product layouts are inflexible and cannot easily respond to required system changes especially changes in product or process design.

Utilization. Equipment utilization rates in process layout are frequently very low, because machine usage is dependent upon a variety of output requirements.

If batch processing is used, inprocess inventory costs could be high. Lower volume means higher per-unit costs. More specialized attention is necessary for both products and customers. Setups are more frequent, hence higher setup costs.

The system is at risk from equipment Constantly changing schedules and breakdown, absenteeism, and routings make juggling process downtime due to preventive requirements more difficult. maintenance.

BREAK EVEN ANALYSIS

BREAK EVEN ANALYSIS

Break Even is:

the

sales point at which the Company neither makes profit nor suffers loss, or level where fixed cost are fully absorbed by, or level where contribution margin equals the fixed cost.

sales

the

BREAK EVEN ANALYSIS

Breakeven analysis provides data for

profit planning

policy formulating and

decision making

BREAK-EVEN ANALYSIS

Break-even analysis may be based on:

historical data, past operations, or future sales and costs depending on managements need and desire.

BREAK-EVEN ANALYSIS

The break even analyses technique is used in various business decision making areas, as this help in knowing the minimum desired level to be achieved to avoid loss situation. The Breakeven analysis is mostly used at the time of investing in new project and introducing new products. The organizer of this workshop must have seen Break even for this workshop.

BREAK-EVEN ANALYSIS

In case a company installed a new plant where huge fixed cost is incurring. Management would be interested in knowing the minimum number of units to be produced and sold to recover its monthly fixed cost i.e. called its breakeven point.
This will be the point where company will not incur any loss nor make any profit.

USE OF BREAK EVEN ANALYSES

Hospital or Hotel management would like to know

sales point in terms of number of beds/ rooms, to recover fixed cost to reach at a breakeven point.

The school owner would be interested in knowing minimum number of students to be admitted to reach at breakeven
New branch of bank would need to know minimum deposits from customer

USE OF BREAK EVEN ANALYSIS

On introduction of new products certain

huge sales promotional expenses are planned in order to achieve planned sales.
The management while deciding about

approving expenditures would be interested to see cost / benefit analyses or minimum expected sales (break even) to be achieved to recover these expenses (disregarding the very ambitious sales budgets submitted by the sales and marketing team)

Advantages and Disadvantages of Break even Analysis.

Certain Formulas of Break Even Analysis

Contribution
Contribution = Sales Variable cost OR = Fixed cost + Profit

Profit Volume (P/V) Ratio

P/V Ratio = Contribution x 100 Sales OR P/V Ratio = Changes in profit x 100 Changes in sales Contribution = Sales x P/V Ratio Sales = Contribution P/V Ratio

Break-even Point
BEP (Rs.) = Fixed costs P/V Ratio OR BEP (Quantity) = Fixed costs Contribution per unit Where, Contribution per unit = S.P V.C

Margin of Safety
Margin of Safety = Sales Break-even sales = Sales Fixed costs P/V Ratio = Sales x P/V Ratio Fixed cost P/V Ratio = Contribution Fixed cost P/V Ratio = Profit P/V Ratio

Sales for Targeted Profits

Sales = Fixed cost + Targeted profit Contribution

EXAMPLE 1
a) Participants are advised to work out BREAK EVEN on the basis of data given below:

Fixed Expenses Rs 600 Sales priceRs 1.75 per unit Cost variable Rs 0.95 per unit

b) Determine no. of units to be sold to earn a profit of Rs. 720

EXAMPLE 2

If actual sales of a company are Rs. 5,00,000 and sales at break even point are Rs. 3,00,000, then calculate the margin of safety in amount and in percentage.

EXAMPLE 3
Sitara Companys most recent income statement is shown below: Total Per Unit Sales (20,000 units) . Rs.300,000 Rs. 15.00 Less : Variable expenses 180,000 9.00 Contribution margin .. 120,000 Rs. 6.00 Less : Fixed expenses 70,000 Net income Rs. 50,000 Required Prepare new income statement under each of the following condition: Other information:
1. 2. 3. 4. 5. 6. The selling price increases by Rs. 1.50 per unit, Fixed expenses increase by Rs. 20,000. the sales volume decreases by 5%. The selling price increases by 12% Variable expenses increase by 5% The sales volume decreases by 10%,and fixed expenses reduced by 25%

Example 4

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5. 6.

The following is the data for XYZ ltd. Total sales: Rs. 50 000(Rs 10 p.u) Total variable cost: Rs 30 000(Rs 10 p.u) Total Fixed cost : Rs 8000 Answer the following Calculate the BEP units. Calculate the BEP in Rs. Calculate the profit at current level of sales. How many units be should be sold in next year for increasing the profits by 10 of current profit level? Calculate the margin of safety .. Calculate BEP (in Rs.)using P/v ratio)..