MATERIALS MANAGEMENT

UNIT – 5

5A. MATERIALS MANAGEMENT

4A. 1 INTRODUCTION

Materials, as we know, means the raw materials used in the manufacturing process to be transformed into

finished product. It is a well-known fact that no production work is possible without materials. Also it has

been estimated that most of the manufacturing concerns spend more than 60% of the money raw materials.

In other words, materials constitute a major portion of the money we invest in production. In this

connections, it should be noted that there are so many problems attached with the management of

materials such as investment in materials, storage and obsolescence problems, under utilization and ideal

capacity of funds, which require immediate attention of the management – that the cost of production may

be reduced to the minimum a the quality of he product may be maintained.

5A. 2 DEFINITION

Materials management is the planning, directing, controlling and co-coordinating of all those

activities concerned with materials and inventory requirements from the point of their inception to their

introduction into the manufacturing process. It begins with determination of materials quality and ends

with its issuance to productions in time to meet customers demand on schedule at the lowest cost.

P Gopalakrishnan and M. Sundaresan define management as “the function responsible for the

coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum

manner so as to provide a pre decide service to the customer at a minimum cost.

Bethel and others define the term materials management “controlling me kind, amount, location,

movement and timing of the various commodities used in and produced by the industrial enterprise.”

In general, materials management is a service function affecting the flow of materials in a manner in which

it helps in conserving the materials cost, best utilization of materials and maintaining the quality of both

incoming and outgoing materials. It covers all aspects pertaining to a) Materials cost, b) materials supply

and c) Materials utilization.

Now, let us discuss the functions of materials management.

5A. 3 FUNCTIONS OF MATERIALS MANAGEMENT

Materials Manageemnt covers all aspects of materials and material supply which are very important

for converting the raw materials and other inputs into the desired finished products. The various functions

of the materials management are as follows:

a. Materials planning

b. Purchasing of Materials

c. Reducing store-keeping and warehousing

d. Inventory control

e. Standardization simplification and value Analysis

PRODUCTION AND OPERATIONS MANAGEMENT

f. Transportation and material handling

g. Disposal of scrap surplus and obsolete materials

In the following paragraphs, let us discuss the importance of materials management.

5A. 4 IMPORTANCE OF MATERIAL MANAGEMENT

A survey conducted by the directorate of Industrials Statistics during 1954-57 showed that the

average material cost is 64% of the sales value. in some industries, it costs up to 70%. These figures show

the importance of materials management. Materials has its tentacles spread to all areas of production such

as men, machines and marketing. The concept of materials management has been gaining importance

very gradually now-a-days. In concerns, avoidance of wastage is very important for efficient utilization of

materials. Materials management helps to avoid wastage to a greater extent. As emphasized earlier,

materials management is a service function and is of very great importance to other sections like

manufacturing, marketing, engineering and finance by way of providing assistance to these sections in

their operations. Also, materials management is of very great help in efficient and judicious purchasing,

minimizing wastages in handling, storing and transporting the materials and the utilization of materials

very efficiently. It is worth mentioning here that the materials management contributes to the success or

failure of a concern. Form the national point of view, materials management plays a pivotal role, for the

success of national plans, because efficient materials management can exploit the national resources,

materials efficiency and according to the plans. In addition to reducing material costs, efficient materials

management is useful for the following purposes. A) for reducing foreign exchange by utilizing the

imported items, to their maximum value and thus helps in reducing the imports b) by reducing the cost of

finished goods, and maintaining the quality, it is possible for Indian manufacturing to compete better in

foreign market and earn more foreign exchange.

5A. 5 OBJECTIVES OF MATERIALS MANAGEMENT

The main objectives of materials management are as follows

(i) The first and foremost objective of materials management, as discussed earlier, is to minimize the

materials cost thus paying the way for reducing the cost of the product manufactured. The

company is able to maintain the price at a reasonable level.

(ii) It also aims at procuring and providing materials of desired quality when enquired, at the lowest

possible overall cost of the concern.

(iii) It also aims at reducing investment tied-up in inventories for use in other productive purposes and

to develop high inventory turn-over ratios.

(iv) The next objective of materials management is to purchase, receive, transport and store materials

efficiently and to reduce the related costs.

(v) Continuous supply of materials is an essential pre-requisite for uninterrupted production.

materials management aims at finding our new sources of supply and to develop cordial elations

with the suppliers.

PRODUCTION AND OPERATIONS MANAGEMENT

(vi) The next objective of the materials management is to cut down costs through simplification,

standardization, value Analysis, and import substitution etc.

(vii)Materials management aims at minimizing procedural delays in procuring materials.

In nutshell, various important objects of materials management can be summed up as follows:

1. To reduce material cost

2. For the efficient control of inventories which helps in releasing the working capital for productive

purposes.

3. To ensure uniform flow of materials for production.

4. To ensure right quality of products at right place.

5. To establish and maintain cordial relation-ship with customer

6. To ensure economy in using the important items and to find their substitutes.

7. To increase the profits of the concern

8. To contribute towards competitiveness and

9. To report changes in market conditions and other factors affecting the concern, to the customers.

5A. 6 INTEGRATED MATERIALS MANAGEMENT

Management of Materials is one of the most important functions of a business organisatoin. Its importance

may very from one industry to another but it is most important for a manufacturing organisatoin as it is

directly linked with profitability. The successful management of materials largely depends upon a)

adequate availability of funds b) proper procurement, storage and utilization of materials c) effective

handling, dispatch and disposal of incoming and outgoing material. In this connection, it should be noted

here that here that material management is not an individual or isolated function in an organisation. It is a

combination of inter-related functions. It is a management function having close links with all other fields

of a business enterprise, It has links with various aspects connected with materials such as purchasing,

storage, inventory control, materials handling standardization etc. Also, it covers a very wide field and

deals with the planning and programming of material and equipment, market research for purchase,

procurement of material, packaging, storage and inventory control, transportation of materials etc. To cite

an example, purchase of material should be done according to production schedule with in turn should be

determined on the basis of the marketing capabilities. If we want to change the design or appearance of

the product, the help of Design, Technical and Marketing departments are very vital. Decrease and

increase in the volume of production affects the financial position and ultimately affects all other activities

of the concern.

To be precise, Materials management may be said to be an activity integrated and coordinated with such

widely dispersed functions of management as Budgeting, Purchasing, Receiving, Production, Scheduling,

manufacturing maintenance, Inventory and Material Quality control as also, Storage, warehousing,

shipping, traffic and it begins working from the very inception stage of procurement of materials and then

getting the materials through successive stages of operations for the final embodiment into an end

product and distribution.

PRODUCTION AND OPERATIONS MANAGEMENT

Every organisation, or productions unit aims at a) decreasing the cost b) increasing the profitability

and c) improved productivity. If any organisation want to attain the above three objectives, we can easily

conclude that coordination and integration of all the activities become essential. Also, in order to get the

desired results, i.e. maximization of profits and minimizing the cost, the effective integrating of all the

inter – related segments are very essential. In this context, integrated materials management is a function

which integrates all the above said activities to financing storing and distributions for the efficient and

smooth functioning of an undertaking.

Let us now highlight the aims of Integrated Materials Managemnet.

5A. 7 AIMS OF INTEGRATED MATERIALS MANAGEMENT

An efficient and well-planned materials management programme serves the following aims:

a. COST REDUCTION

To bring down the prices of any products, the management, as far as possible, should try to

exercise care and diligence in purchase and issue of materials. Efficient purchase of materials

would result in reduction of costs.

b. ELIMINATION OF WASTE

Elimination of water is a very essential phenomenon that a company should adopt to ensure better

functioning of an enterprise. Wastages in receipt, issue, storage and movement of materials should

be avoided. Laborers and employees are entrusted with these jobs should be trained well to

exercise due care while at work.

C. COMPLETION OF WORK AS PER THE PRODUCTION SCHEDULE

Efficient Integrated Materials Management aims at completing the production job according to the

pre-determined programme. Dislocation of production schedules lead to unnecessary delay,

expenses and waste of time. IMM integrates and aims at sticking on to the pre determined

production schedule. IMM programme controls production at every step and stage of production.

5A. 8 ADVANTAGES OF INTEGRATED MATERIALS MANAGEMENT

A well coordinates IMM results in the following advantages both to the department and concern in

general.

ADVANTAGE OF THE DEPARTMENT

1. Better Inventory Planning:

A well programmed IMM is a boon to Inventory Planning. Without much loss of time Materials

department is in a position to know the quantum of existing materials stock. Also, it is easy to find out

the future requirements of materials, stock to be kept in reserve etc.

2. Faster Inventory Turnover:

PRODUCTION AND OPERATIONS MANAGEMENT

Both overstocking and/or understocking of materials is a dangerous phenomenon in an organisation.

Not only, will it affect the smooth flow of material movement and continuous productions, but it will

lock the capital without any better use which otherwise could have been used for a better purpose.

Efficient Integrated Materials management helps to invest in an optimum manner on it. Faster

inventory turnover brings about faster movement any cycling of funds in the organisation.

3. Material availability:

As IMM functions in a phased and programmed manner, production goes on without any interruption.

This is achieved through availability of materials as and when required.

4. Efficient coordination:

IMM helps in the integration and coordination of all the departments.

5. Better communication:

Communication means exchange of facts, ideas, opinions and messages among persons.

Communications has a very distinct place in IMM as it decides the success or failure of it. Thus IMM

improves the communications system in the organisation.

6. Improved productivity and Increased profitability:

Productivity which is one of the ultimate results of the IMM, is achieved in a shorter period. Cost

reduction. Elimination of wastes and productivity indirectly lead the concern to earn a higher profit.

ADVANTAGES TO THE ORGANISATION

Apart from the above advantages to the departments, IMM ensures the following advantages to the

organisation:

1. Centralized authority and responsibility

IMM helps in centralizing the functions and duties pertaining to materials. A centralized

organization always offers better accountability and responsibility. Under centralized system duties

and responsibilities are clearly spelt out and works evenly distributed. This helps in detecting the

errors and deficiencies of individual employees and workers.

2. Well coordinated efforts:

Under IMM, a well planned policy is installed. This ensures good support and cooperation from all

who are working with him. Outside people dealing with the concern also extend their hearty co for

the smooth conduct of the organisation.

3. Materials Manager benefited:

The material manager enjoys so many advantages after the installation of IMM. A well planned IMM

helps him to predict the ales in a better way. It is also very helpful for him to check out the

production plan efficiently. Material, requirements could easily be identified with the help of IMM.

Various inventory levels such as Minimum Level, Maximum Level, Reorder Level and Economic

Order Quantity can be easily fixed with the help of IMM. Better purchasing, efficient physical

control of materials are some of the direct outcome of a well-coordinated IMM .

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4. Performance Evaluation:

A well installed IMM helps to evaluate the performance of personnel attached to materials

department. The performance should be easily evaluated if the organisatoin is able to achieve the

following. They are reduced lead time, reduced storage and reservation cost, better communication

judicious and speedy solutions to problems pertaining to materials department.

5A. 9 RESOURCE REQUIREMENTS

Aggregate capacity plans develop strategies for employment levels (man power) machinery and

utility, sub-contract and purchase and facility modification. The planning horizon for aggregate capacity

plans usually very from six to eighteen months and short range master production schedules (MPB) are

developed within the capacity constraints stipulated by aggregate plans. The time horizon for short range

master production schedules vary from a few weeks to several months and indicate the finished products

or end items to be manufactured. The entire resource requirements planning system is based on the

master production schedules.

5A. 10 RESOURCE REQUIREMENTS PLANNING

Resource requirement planning is directed at the determination of the amount and timing of production

resources such as personnel, materials, cash and production capacity needed to produce the finished

products or end items as per the master production schedule.

Resource requirements planning is also known as rough-cut capacity planning. It can be used to evaluate

the feasibility of a trial master production schedule. It is an aggregate planning tool that is used to sum up

and evaluate the workload that a production plan (MPS) imposes either on all work centres or on only

selected key work centres where resources are limited, expensive or difficult to obtain from outside

sources (sub-contractors). This step ensures that a proposed MPS does not overload any key work centres

or departments or machines thus making the MPS unworkable. Rough-cut capacity planning is usually

applied to the critical work centres which are most likely to be bottlenecks.

Steps involved in rough-cut capacity planning are:

1. Developing a trial production plan (or trial master production schedule) that indicates the company’

s products that are planned for production during each week or month of the planning horizon.

2. Computing the work load that this production plan will impose on each key work centre and key

sub-contractors for each period (week or month) of the planning horizon. The load profile i.e., the

load on each work centre over time, is evaluated for feasibility, by comparing the load with the

available capacity in each of the key work centres or key sub-contractors.

3. If the trial production plan does not appear to be feasible or does not make optimal use of the

resources in the key work centres, the plan may be revised.

4. The capacity requirements of the revised production plan (revised MPS) can then be evaluated to

determine the feasibility of the plan.

5. Step No. 4 and 5 are repeated until a plan considered to be satisfactory is developed.

There are two main elements of resource requirements planning systems namely

PRODUCTION AND OPERATIONS MANAGEMENT

(a) Material requirements planning (MRP)

(b) Capacity requirements planning (CRP)

5A. 11 MATERIAL REQUIREMENTS PLANNING (MRP OR MRP-1)

For a manufacturing company to produce end items to meet demands, the availability of sufficient

production capacity must be co-ordinate with the availability of all raw materials and purchased items

from which, the end items are to be produced. In other words, there is a need to manage the availability of

dependent demand items from which the products are made. Dependent-demand items are the

components i.e. materials or purchased items, fabricated parts or sub-assemblies that make up the end

product.

One approach to manage the availability of dependent-demand items is to keep a high stock of all the

items that might be needed to produce the end items and when the on-hand stock dropped below a

present re-order level, the items are produced or bought as the case may be to replenish the stock to the

maximum level. However, this approach is costly due to the excessive inventory of components, fabricated

parts and sub-assemblies to ensure high service level (i.e. availability of dependent demand items at a

short notice)

An alternative approach to managing dependent-demand items is to plan for procurement or manufacture

of the specific components that will be required to produce the required quantities of end products as per

the production schedule indicated by the master production schedule (MPS). The technique is known as

material requirements planning (MRP) technique.

MRP is a computer-based system in which the given MPS is exploded into the required amounts of raw

materials, parts and sub-assemblies, needed to produce the end items in each time period (week or month)

of the planning horizon. The gross requirement of these materials is reduced to net requirements by

taking into account the materials that are in inventory or on order.

A schedule of orders is developed for purchased materials and in-house manufactured items over the

planning horizon based on the knowledge of lead items for procurements or in-house production.

5A. 12 OBJECTIVES OF MRP

The objectives of material requirements planning in operations management are:

1. To improve customer service by meeting delivery schedules promised and shortening delivery lead

times.

2. To reduce inventory costs by reducing, inventory levels.

3. To improve plant operating efficiency by better use of productive resources.

Three facts of MRP technique are:

a) The MRP technique as a requirements calculator

b) MRP – A manufacturing, planning and control system

c) MRP – A manufacturing resourced planning system.

PRODUCTION AND OPERATIONS MANAGEMENT

The MRP technique as a requirements calculator was originally used as an inventory control tool, providing

reports that specify how many components should be ordered, when they should be ordered and when

they should be procured or produced in-house. Since MRP is a computer-based system, it was possible to

expand the system into a manufacturing planning and control system by providing information for

planning and controlling both the material and the capacity required to manufacture the products. Hence,

MRP serves as a key component in an information system for planning and controlling production

operations and procurement of materials. It is the basic foundation for production activity control or shop

floor control, for vendor follow-up systems and for detailed capacity requirements planning. When both

the MRP and CRP are integrated within one system, the system is known as “Materials Requirements

Planning”, abbreviated as “MRP” or MRP-1. When MRP is extended to include feed-back from and control

of vendor orders and production operations, it is called ‘closed-loop MRP’ which helps managers achieve

effective manufacturing control.

When the capabilities of closed-loop MRP are extended top integrate financial, accounting, personnel,

engineering and marketing information along with the production planning and control activities of the

basic MRP system, the resulting broad-based resource-coordination system is known as manufacturing

resource planning or MRP-II. MRP-II is the heart of corporate management information system for many

companies, as it provides information about inventory investment levels, plant expansion needs, and

work-force requirements that is useful for coordinating, financial, engineering and manufacturing efforts

to achieve the company’s overall business plans.

The projections of what materials and components will be purchased and when, can be used to develop

purchase commitments and a projected purchasing budget. The labour hours projected in the capacity

requirement plant for each work centre, can be aggregated to develop personnel needs and labour

budgets. The projected on-hand inventory of material can be used to develop inventory budgets.

5A. 13 GENERAL OVERVIEW OF MRP

Basically, MRP consists of a set of computer programs hat are run periodically (once a week or once a

month) to incorporate the latest schedule of production requirements MRP performs three important

functions viz.

Order planning and control, i.e. when to release orders and for what quantity?

Priority planning and control i.e., comparison of expected date of availability with the need date of

each item.

Provision of a basis for planning capacity requirements and development of broad business plans.

MRP is applicable primarily to companies that carry out the fabrication of parts and assembly of standard

products in batch quantities.

The entire MRP system is driven by the MRP. The bill of materials file and inventory status file are fed in to

the MRP computer program to generate the output.

5A. 14 MRP SYSTEM INPUTS

PRODUCTION AND OPERATIONS MANAGEMENT

FIGURE : 5.1 ‘MRP’ STRUCTURE

1. MASTER PRODUCTION SCHEDULE (MPS)

The MPS specifies what end products are to be produced and when. The planning horizon should be long

enough to cover the cumulative lead times of all components that must be purchased or manufactured to

meet the end product requirements.

2. BILL OF MATERIAL FILE (BOM) OR PRODUCT STRUCTURE FILE

This file provides the information regarding all the materials, parts and sub-assemblies that go into the

end product. The Bill of Materials can be viewed as having a series of levels, each of which represents a

stage in the manufacture of the end product. The highest level (or zero level) of the BOM represents the

final assembly or end product. The BOM file identifies each component by a unique part number and

facilities processing the end product requirements into component requirements.

3. INVENTORY STATUS FILE

The inventory status file gives complete and up-to-date information on the on-hand quantities, gross

requirements, scheduled receipts and planned order releases for the item. It also includes other

information such as lot sizes, lead times, safety stock levels and scrap allowances, etc. The gross

requirements are total needs from all resources whereas the net requirements are ‘net’ after allowing for

available inventory and scheduled receipt. Scheduled receipts are quantities already on order from a

vendor or in house shop. Planned receipts are quantities that will be ordered on a vendor or in-house shop.

Planned order release indicates the quantities and date to initiate the purchase or manufacture of

materials that will be received on schedule after the lead time offset.

5A. 15 MRP SYSTEM OUTPUT

Two primary outputs are:

1. Planned order schedule which is a plan of the quantity of each material to be ordered in each time

period. The order may be a purchase order on the suppliers or production orders for parts and

sub-assembles on production departments.

2. Changes in planned orders – i.e., modification of previous planned orders. The secondary output

are:

1. Exception reports which list items requiring management attention to control

PRODUCTION AND OPERATIONS MANAGEMENT

2. Performance reports regarding how well the system is operating – e.g. inventory

turnovers, percentage of delivery promises kept and stock out incidences.

3. Planning reports such as inventory forecasts, purchase commitment reports, etc.

5A. 16 DEFINITIONS OF TERMS USED IN MRP SYSTEM

1. MASTER PRODUCTION SCHEDULE (MRP): This is the schedule of the quantity and timing of all end

products to be produced over a specific planning horizon. MPS is developed from customer’s firm

orders or from forecasts of demand or both. It is an input to the MRP system.

2. PRODUCT STRUCTURE: Indicates the level of components required to produce an end product.

3. BILLS OF MATERIAL: A list indicating the quantities of all raw materials, parts, components, sub

assemblies and major assemblies that go into an end product. It gives details of the build up of a

product. It may also be called as indented parts list.

4. BILLS OF MATERIAL FILE: A bills of material file, also known as product-structure file, is a

computerized file listing all finished products, the quantity of raw materials, parts sub-assemblies

and assemblies in each product. The bills of materials file must be kept up-to-date as and when

the products are redesigned or modified with addition/deletion of some parts, components and

sub-assemblies.

5. INVENTORY STATUS FILE: It is a computerized file with a comprehensive record of each and every

material held in inventory. The information included in this file are, materials on hand or on order,

planned orders, planned order releases, allocated materials, lot sizes, lead times, safety stock

levels, costs and suppliers for each material. The inventory file must kept up-to-date taking into

consideration the daily inventory transactions such as receipts, issues, scrapped materials, planned

orders and order releases.

6. MRP COMPUTER PROGRAM: It is a computer program, which processes the MRP information. Its

inputs are the MPS, inventory status file and bills of materials file. The primary outputs are: planned

order schedule, planned order releases and changes to planned orders.

7. AVAILABLE INVENTORY: Materials that are held in inventory of which are on order, but are not

either safety stock or allocated to other uses.

8. ALLOCATED INVENTORY: Materials that are held in inventory or on order but which have been

allocated to specific production orders

9. ON-HAND INVENTORY: The quantity of a material, physically held in inventory at a point of time. It

may include safety stock and allocated inventory except materials on order.

10. PLANNING HORIZON: The number of time periods (days, weeks or months) included in the MPS,

CRP, MRP and departmental schedules.

11. ACTION BUCKET: The unit of time measurement in MRP systems. It is a particular period of time in

the planning horizon. For example, Bucket # 10 means the tenth period (usually a week in duration)

of the planning horizon.

PRODUCTION AND OPERATIONS MANAGEMENT

12. GROSS REQUIREMENTS: The total quantity of an item at the end of a period to meet the panned

output levels, not considering any availability of the item in inventory or scheduled receipts.

13. SCHEDULED RECEIPTS: The quantity of an item that will be received at the beginning of a time

period from a supplier as a result of orders already placed (open orders).

14. PLANNED ORDER RECEIPTS: The quantity of an item that is planned to be ordered so that, it will be

received at the beginning of the time period to meet the net requirements for that time period. The

order is yet to be placed.

15. PLANNED ORDER RELEASES: The quantity of an item that is planned to be ordered and the planned

time period for releasing this order, so that, the item will be received when needed. This time

schedule is determined by off-setting the planned order receipts schedule to allow for lead times.

When this other is released, it becomes a schedule receipt.

16. NET REQUIREMENTS: The quantity of an item that must be procured to meet the scheduled output

for the period.

17. LOW-LEVEL CODING: It is the coding of each material at the lowest level in ay product structure

that it appears. A component can appear at more than one level in the product structure. Because

MRP computer programs process net requirements calculations for all products, level by level from

end items, down to the raw materials, low level coding avoids redundant net requirements

calculations.

18. LOT-SIZING DECISIONS: Whenever there is a need for the net requirement of a material, a decision

must be taken regarding the quantity of material to be ordered (either purchase order or

production order). Lot-sizing decisions include both the batch or lot-size (quantity) as well as the

timing of these lots.

19. DEPENDENT DEMAND: Demand for raw material, part or a component, that is dependent on the

demand for the end product in which these materials are used.

20. INDEPENDENT DEMAND: Demand for a materials that is independent of the demands for other

materials. For example, demand for end products re independent of demand for parts, raw

materials or components as their demands are determined, by customers outside the organizations.

21. LUMPY DEMAND: If the demand for the materials varies greatly from time period o time period (say

week to week), the demand is said to be ‘lumpy demand’.

22. CAPACITY REQUIREMENT PLANNING: The process of reconciling the Master Production Schedule to

the available capacities of production departments (viz., machine and labour capacities) over the

planning horizon.

23. PLANNED ORDER RELEASES: Number in ‘planned order releases’ row indicate when orders should

be placed to meet the requirement for the item. The time period at which the order should be

released is found by subtracting the lead time from the ‘net requirement’ period (this procedure is

called ‘offsetting’ by lead time)

5A. 17 ISSUES IN MRP

Some of the issues which deserve consideration in any comprehensive treatment of MRP are:

PRODUCTION AND OPERATIONS MANAGEMENT

1. Lot-sizing

2. Safety stock

3. Scrap allowances

4. Pegging

5. Cycle counting

6. Updating

7. Time fence

The above issues are discussed below:

1. LOT-SIZING: The MRP system generates planned order releases, which trigger purchaser order for

outside suppliers or production orders (or work orders) for in-house production departmens. As

certain costs such as the set-up cost (or ordering cost) and holding cost (or inventory carrying cost)

are associated with each order, it is necessary to consider the trade off between thse two types of

costs and take decision regarding how much to order (i.e., batch size/lot-size) A question that

should be examined is whether there is some economic lot-size (EOQ or EBQ) that should be

purchased or produced as the case may be. In production, a minimum lot-size is sometimes

established to reduce the set-up cost per unit produced. Such minimum lot-sizes may cause

excessive inventory, if it exceeds very much the net requirement of a period and followed by

periods with no requirements, which is counter to the benefit of the MRP system.

VARIOUS METHODS OF LOT –SIZING ARE:

(a) Lot-for-lot ordering (LFL) in which quantity equal the net requirement for a given period. Separate

orders are released for each period’s net requirement.

(b) EOQ technique in which the order quantity is larger than a single period’s net requirement so that,

ordering cost and holding costs balance out.

(c) Requirements may be batched until they reach some arbitrary minimum order size. If the

requirement exceeds this minimum, the requirement will determine the order size.

(d) The lot size may be determined by the period order quantity (POQ) technique. The ordering policy

is to order the net requirements of the number of periods equal to the EOQ.

(e) The lot size can be chosen to approximately balance ordering and holding costs. One method of

doing this is known as part-period method or part-period algorithm (PPA). This is a simple

approach to the lot-size selection when a series of requirements which are not necessary uniform,

are to be batched into orders so that the total cost will be near the minimum. This method does

not provide an optimal lot-size (i.e., EOQ) but it approaches optimality by attempting to make

holding cost for a lot, nearly equal to the ordering cost for the lot.

Unlike the EOQ model, the part algorithm method may select a different quantity to be ordered

each time the order is to be placed. The PPA assumes that an order will be scheduled in the first period in

which, there is a net requirement. The requirement for the next period is added into this order, if the cost

PRODUCTION AND OPERATIONS MANAGEMENT

of holding these units until they are used, is less than the cost of receiving them as a separate order.

Requirements for future periods continue to be added to the lot until the total holding cost for the

incomes a close as possible to the order cost without dividing a period’s requirement.

2. SAFETY STOCK: There are divergent views by MRP users regarding whether safety stock should be

used MRP systems or not. One side of argument supporting the use of safety stock is that, it

performs the function of avoided excessive stock –outs caused by uncertain lead times and daily

demands. On the other hand, those who oppose the use of safety stocks in MRP, argue that, safety

stock is not required because MRP systems adapt to changing conditions that affect demand and

lead times.

The use of safety stock can be justified only by the sources of uncertainty, present during lead

times. Safety stock is normally maintained for end items which have independent demand. For lower-level

items such as raw material and parts, the uncertainty of demand is adequately controlled, because the

demand is a dependent demand which is set by the MRP. However, uncertainties may be present during

lead times because of uncertainty of the lead time and the uncertainty of demand that occurs because of

changes in the MPS. Keeping some safety stock can be justified for raw materials, parts and other

low-level items, although at significantly reduced levels.

3. SCRAP ALLOWANCES : The bill of materials explosion could include multiplication by a factor (more

than one) to make an allowance for the usual scrap loss in manufacturing an item.

4. PEGGING: Pegging is a technique which enables the planner to trace from a work load in a work

centre, back through its higher-level assemblies to determine, what end item in the MPS caused the

load. Single level pegging is used often, which simply tells the immediately higher-level parent of a

component. When materials plans are disrupted, pegging helps to identify which components are

affected by such disruption. Pegging shows the level-by-level linkages among components and

their time-phased status in MRP records. Pegging showing the current records for an end item ‘X’

and for its sub components Y and Z at two lower level in the product structure.

Similarly, if the master production schedule were to increase week 7’s gross requirements for X

from 20 to 60 to meet a special customer order, the pegging procedure traces down through the

MRP records to identify associated changes at lower levels. The planned order release of X in week

6 has to be raised from 40 to 60 and the associated requirements for Y and Z, has to be changed

accordingly.

5. CYCLE COUNTING: Cycle counting is the process of counting on-hand inventories at regular

intervals to verify inventory of components including defective items at each stage of production

and in storage areas. This ensures that on-hand inventories tally with the quantities shown in the

MRP records Based on cycle counting, the MRP records are updated daily or weekly to show the

actual inventory status. This knowledge of actual inventory is helpful in adjusting the production

schedules at various work centres.

6. UPDATING: Whenever changes occur in MPS, in inventory status file, (e.g., revised lead times) or in

product structure file, or changes in product design occurs, the MRP system must be updated. Two

approaches to update MRP system are

PRODUCTION AND OPERATIONS MANAGEMENT

(a) Regenerative method which is a process used to update the MRP at regular intervals by

reprocessing the entire set of information and regenerating the entire MRP

(b) Net change method in which only those portions of the previous MRP directly impacted by

informational changes are reprocessed. Transactions are entered into a net change MRP

program frequently to reflect conditions as they change.

7. TIME PERIOD: It is a length of time that must elapse without changing the MPS to stabilize the MRP

system. The MPS may be changed only after this time period. The time fence is the shortest lead

time form raw material to finished production for an end item. Within the time fence, the MPS

becomes frozen and the planned order releases become firm planned orders.

5A. 18 Potential benefits from ‘MRP’

MRP is not just a way of calculating how much material to order and when; but it is a new way of

managing manufacturing operations. MRP is a decision support system or managerial information system,

which provides timely and valuable information to operations managers.

When properly developed and implement, MRP can provide the following benefits to the firm:

(1) INVENTORY: The information provided by the MRP system is useful to better coordinate orders for

components with production plans for parent items. This results in reduced levels of average inventory for

dependent-demand items (i.e., raw materials and work-in-process).

(2) PRODUCTION: Information from MRP facilitates better utilization of human and capital resources.

Because of more accurate priority information from MRP, it is possible to improve delivery performance. It

can also improve flow of work, thereby reducing intermittent delays and reducing the manufacturing cycle

time for the jobs.

3. SALES: MRP helps to check in advance whether the desired delivery dates are achievable. It improves the

company’s ability to react to change in customer orders, improves customer service by helping production,

meet assembly dates and helps cut delivery lead times.

4. ENGINEERING: MRP helps in planning the time of design releases and design changes.

5. PLANNING: MRP can simulate changes in the MPS for the purpose of evaluations of alternative MPS. It

facilitates the projection of equipment and facility requirements, workforce planning and procurement

expenses for a proposed MPS.

6. PURCHASING: MRP helps the purchase departments by making known the real priorities and

recommending changes in due dates for orders so that the purchase staff may expedite or delay the

orders placed on vendors. Because of this, the vendor relations can be improved.

7. SCHEDULING: Better scheduling can result from MRP through better knowledge of priorities.

8. FINANCE: MRP can help better planning of cash flow requirements. It can identify time capacity

constraints or bottleneck work centres, there by helping operations managers to make better capital

investment decisions.

5A. 19 IMPLEMENTATION OF MRP

PRODUCTION AND OPERATIONS MANAGEMENT

Successful implementation of MRP depends on the following factors:

1. MANAGEMENT COMMITMENT: Top level managers and other managers in all parts of the organization

that will be affected by MRP must be aware of the efforts needed to achieve the new way of managing

other activities.

2. USER INVOLVEMENT: A team consisting of people from all those parts of the company that will use the

MRP system, will be responsible for the development and implementation of the MRP. This will ensure

that the participation of users of he system in its development will make them more familiar with the

system and its use.

3. EDUCATION AND TRAINING: All the people who work with the MRP system must understand it an must

know how to use it. They must know what information to provide and how to provide it, what

information to ask and how to obtain it. Hence, it is necessary that all people connected with the MRP

system must be trained in its application and use.

4. SELECTION OF PACKAGES: the potential user must be able to decide about the use of the net change

or regenerative MRP package, knowing their advantages and disadvantages. Also the user must decide

whether to develop his own programs for MRP system or to purchase and adapt the available package.

5. DATA ACCURACY: After a MRP system is installed, careful attention and discipline must always be

exercised to ensure that all data used by the system are accurate. Managers must exert effort to see

that, accurate and timely data are supplied to the system.

6. RELEASING MPS: The MPS developed should be realistic and achievable. The MPS should not overload

the plant capacity. The company must develop MPS that effectively users its capacity without causing

bottlenecks or overloads.

5A. 20 Problems in using MRP

1. MPS: Preparations of MPS, which is realistic in the midst of uncertainties in market environment and

non-availability of adequate lead time form customers for delivery of end products. Frequent

changes in MPS aggravate the problem.

2. MAINTAINING ACCURATE BOM FILES: Changes incorporated in BOM by the design department

should be communicated to all users of BOM.

3. INCORRECT STOCK (INVENTORY) STATUS: A major problem is to know the correct status of all

materials at all stages. Incorrect stock status results in an erroneous net requirement of materials.

4. UNREALISTIC LEAD TIMES: Most crucial step in the MRP system which minimizes inventory is the

time-phasing of requirements and release of orders; advancing by the lead time required, so that,

materials arrive just when required.

5A. 21 PROBLEMS IN DESIGNING THE MRP SYSTEM

Inadequacies of software chosen

Deficient system design

Improper and untimely information flow among various related departments.

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5A. 22 SOLUTION TO MRP DESIGN PROBLEMS

Solution to overcome the above problems in the design of MRP system are:

1. Careful choice of software package to suit organization’s specific needs.

2. Careful planning of activities and scheduling

3. Assigning work to competent man-power.

4. Continuous monitoring of progress against schedule.

5. Substantial education and training at all levels.

6. Involvement of users at the systems design stage itself.

7. Maximum attention at the stage of creating the database.

5A. 23 PROBLEMS IN MANAGING THE MRP SYSTEM:

1. Need for formal systems and role of systems

2. Need for proper organization of function viz., production planning and control, materials,

production, quality, engineering

3. Importance of proper appreciation of planning and control systems production and Operations

Management

4. Timeliness of generating information required in managing the plant

5. Effective communication system

6. Proper motivation of people concerned with the implementation of the system

7. Right leadership

5A. 24 EVALUATION OF MRP

The advantages of the MRP system over conventional inventory-planning approaches viz., fixed

order quantity system (Q system) and fixed order-point system (P system) are:

Improved customer services,

Reduced inventory level and

Improved operating efficiencies of production departments.

However, MRP systems cannot be used in all the production systems. Conventionally, MRP is applied

only to manufacturing systems which process discrete products for which BOM can be generated. MRP

is seldom used in service systems viz., petroleum refineries, retailing systems, transportation firms and

other non-manufacturing systems.

5A. 25 CHARACTERISTICS OF ‘MRP’ SYSTEM

PRODUCTION AND OPERATIONS MANAGEMENT

The production systems suitable for MRP should have the following desirable.

CHARACTERISTICS:

1. An effective computer system.

2. Computerized BOM files and inventory status file for all end products and materials with the

highest possible accuracy.

3. A production system that manufactures discrete products made up of raw materials, parts,

sub-assemblies and major assemblies which are processed through several production steps or

operations.

4. Production processes or operations requiring long processing times.

5. Short and reliable lead times for procurement of raw materials and components from vendors.

6. The time fence for the frozen MPS should be sufficient to procure materials without undue

expediting effort.

7. Support and commitment of the top management.

MRP is more useful in process-focused systems that have long processing times and complex

multi-stage production steps. It simplifies production and inventory planning in process-focused

systems by its ability to offset planned order receipts to planned order releases to account for long

lead times for in-house processed items or raw materials and components purchased from suppliers.

For MRP to be effective supplier lead times must be short and reliable and the MPS must be frozen

before the start of actual production to the MPS. What is to be produce (i.e., the MPS) must be known

with certainty and quantity and timing of receipts of raw materials and components must be

dependable? MRP offers advantages in inventory planning when lot-sizes are small and demand is

highly variable.

However, it should be remembered that MRP is not a panacea to solve all our inventory planning

problems. Basically, MRP is a computerized information system for production and operations

managers MRP will not be of much help when computer systems are ineffective, inventory status and

BOM files are inaccurate and MPS are unrealistic. MRP is best applied when production systems are well

managed and when a comprehensive production and inventory planning system is needed.

5A. 26 Manufacturing resource planning (MRP II)

Manufacturing Resource Planning (MRP II) has been developed by manufacturing manages to

address the planning and controlling of a manufacturing process and all of is related support functions. It

encompasses logically correct planning and control activities related to materials, capacity, finance,

engineering, sales and marketing. MRP II is universally applicable to any manufacturing organization,

regardless of its size, location, product or process.

MRP II is a management process for taking the business plan and breaking it down into specific,

detailed tasks that people evaluate, agree upon and are held accountable for. It involves all departments

viz., materials departments, engineering department that must maintain bill of materials, sales/marketing

PRODUCTION AND OPERATIONS MANAGEMENT

department that must keep sales plan up to date, purchasing and manufacturing departments that must

meet due dates for bought-out items and in-house manufactured items respectively.

From MRP I to MRP II: Manufacturing resourced planning (MRP II) is a natural outgrowth of materials

requirements planning (MRP I). Whereas, MRP I focuses upon priorities of materials, CRP is concerned with

time. Both material and time requirement are integrated within the MRP system (i.e., MRP I). Beyond this,

MRP II has been coined to ‘close the loop’ by integrating financial, accounting, personnel, engineering and

marketing information along with the production planning and control activities of basic MRP systems.

MRP II is the heart of the corporate management information system for many manufacturing firms.

5A. 27 Evolution of MRP II

The earlier resource requirement planning systems were quite simple and unsophisticated. The

MRP technique was used for its most limited capability to determine what materials and components are

needed, how many are needed and when they are needed and when they should be ordered so that, they

are likely to be available when needed. In other words, MRP simply exploded the MPS into the required

materials and was conceived as an inventory control tool or a requirements calculator. Later, the logic of

MRP technique was extended to serve as the key component in an information system for planning and

controlling production operation and purchasing. It was helpful to production and operations manage to

determine the relative priorities of shop orders and purchase orders. As a manufacturing planning and

control system, MRP laid the basic foundation for production activity control or shop-floor control.

Closed-Loop MRP: Later, during the 1970s, closing the loop in MRP systems was thought of by

experts in manufacturing management. The term “closed-loop MRP” means ‘A system built around

material requirement planning (MRP I) and also including additional planning functions such as master

production scheduling and capacity requirement planning’. Once the planning phase is complete and plans

have been accepted as realistic and attainable, execution functions such as shop-floor control function

(viz., input-output measurement, detailed scheduling, dispatching, anticipated delay reports from shops

and vendors, purchase follow-up and control etc.) same into the picture. The closed-loop MRP system

implies that, not only the above elements included in the system, but also that there is feed back from the

execution functions so that, planning can be kept valid at al times. Further to the closed – loop MRP

systems, the MRP I was improved to manufacturing resource planning (MRP II).

Manufacturing resource planning is a broader resource co-ordination system. In this, the

capabilities of closed-loop MRP are extended to provide information on financial resources, personnel and

labour budgets. It provides a means of simulating to provide information on the use of various assured

plans. Information about inventory investment levels, plant expansion needs and work force requirements

is useful for coordinating marketing, finance, engineering and manufacturing efforts to achieve the overall

business plan of the firm. MRP II is a direct outgrowth and extension of the closed – loop MRP.

5A. 28 INTEGRATED SYSTEM

MRP II is an integrated system for planning and control. In this process, a production plan is

developed from a business plan to specify production levels for each months for each produt line for the

next one to five years. Once the produtoin plan is accepted by all the functional departments, it becomes a

commitment for all concerned i.e. the production department is expected to produce at he committed

levels, the sales department to sell at these levels and the finance department to ensure adequate financial

resources for these levels of production. based on the production plan, the MPS specified the quantities of

specific products to be produced every week. Rough-Cut capacity planning is done to determine whether

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the capacity available is roughly adequate to sustain the proposed MRP. The MPS is then used to generate

material requirements and priority schedules for production. then detailed capacity planning is done to

determine whether the capacity is sufficient for producing specific components at each work centre,

during the scheduled time periods. After a realistic capacity-feasible schedule is developed, the plan is

executed. Purchase schedule and shop floor schedules are generated, based on which work centre

loadings, shop floor control and vendor follow-up activities can be determined to ensure that the MPS is

met.

************

PRODUCTION AND OPERATIONS MANAGEMENT

5B. INVENTORY CONTROL

5B. 1 INVENTORY

Inventory is a detailed list of movable goods such as raw materials, work-in-progress, finished

goods, spares tools, consumables, general supplies which are necessary to manufacture product and to

maintain the plant and machinery in good working condition. The list includes the quantity and value of

each and every item, Inventory is defined as an idle resource of any kind having an economic value since

these resources are idle when kept in the stores.

5B. 2 TYPES OF INVENTORIES

The inventories most firms hold can be classified into one of the following types:

(i) Raw materials and purchased parts: These include, the raw materials directly used for production

and the semi finished products – which are produced and supplied by another firm and sold as a

raw materials by the firm under considerations.

(ii) In – process inventories (or) partially completed goods (or) goods in transit are the semi finished

goods at various stages of the manufacturing cycle.

(iii) Finished goods inventories (manufacturing firms) or merchandise (retail stores) are the finished

goods lying in the storage yards after the final inspection clearance and waiting dispatch.

(iv) Indirect inventories include lubricants, spares, tools, Consumables, component parts and general

supplies needed for proper operation, repair and maintenance during the manufacturing cycle.

5B. 3 FUNCTIONS OF INVENTORY

Good inventory managemnet is important to the successful operation of most organisatoin.

Adequate inventory facilitates smooth production operations and help to assure customers for various

goods and services offered by the company. On the other hand, carrying inventories ties up working

capital on goods that are kept idle – not earning any return on investment. Hence the major problem of

inventory management is to maintain adequate but not excessive levels of inventories. By holding the

optimum inventory, the following functions can be realized.

(i) To meet the expected customer (immediate and seasonal) demands. A customer can be a person

who walks in off the street to buy some cosmetics say, a tooth paste, and if a particular brand

he/she is asking for is not available then they may switchover to some other brand. In this process,

the company losses sale opportunity. In most cases, expected demand requirements are based on

forecasts.

(ii) To smoothen production requirements and establish an efficient production flow, the organizations

often build up inventories in anticipation of seasonal increase in demand, and take up the

production to replenish the depleted inventory during the off-season periods.

(iii) To decouple internal operations: A buffer oil in-process inventory will be created at successive

operations. If this is not created, a breakdown in any one operation will cause the entire system to

come to a grinding halt.

PRODUCTION AND OPERATIONS MANAGEMENT

(iv) Desired quantities are purchased to protect the firm against the effects of process changes and

possible stock-outs. Delayed deliveries and unexpected increases in demand increase the risk of

shortages. Delays can be due to weather conditions, supplier stock-outs, delivery of wrong and

defective materials. The risk of shortage can often be reduced by holding stocks in excess.

(v) To take advantage of economic lot sizes in order to minimize frequent ordering costs, it is

necessary to buy quantities that exceed the immediate usage requirements. This necessitates

strong some or all of the purchased items for later use. Similarly, it is economical to produce items

in batches which are generally in large quantities. Here also, the excess finished goods must be

stored for firm to buy and produce in economic lot sizes without having to try to match purchases

or production with demand requirements in the short run.

(vi) To derive advantages against price increases: If the firm expects the prices of raw material or any

other input material to go up due to price revision by the suppliers or due to changes of policy by

the government, they procure these items in excess of their requirements. Similarly if they expect

the demand (due to seasonality) or price of the firm’s finished good to go up, they produce the

items in excess and stock them thereby increasing the firm’s profit.

(vii)Facilitate the production of different products using the same facilities: If two or more products can

be manufactured using, the existing facilities of a firm, batch processing form of production may

be adopted, thereby first produce on product in excess of the current demand and store it for

future use. Then take up other product and adopt the same mode of production so that the firm

will be able to produce more than one product and serve its clients in a better way.

5B. 4 REPLENISHMENT OF STOCK

A firm which is already in the process of manufacturing a particular product or products will have a

certain type of inventories of required quality and in desired quantities. Adequate control has to be

exercised on the stock. If the control becomes inadequate, it will result in either under stocking or

overstocking of items. Under stocking results in missed deliveries, lost sales dissatisfied customers and

production bottlenecks while overstocking unnecessarily ties up funds that might be used more

productively elsewhere in the case of continuous process industry, under stocking will cease the

production line.

FIGURE: 5.2 DEMAND – LEAD RELATIONSHIP

PRODUCTION AND OPERATIONS MANAGEMENT

Enormous effort and resources are required to re-start the production. in the case of overstocking,

the major consideration has to be given to the cost of carrying the inventory. To achieve balance with

stock replenishment decision-avoiding both under stocking and overstocking, fundamental decisions must

be made relates to the timing and size of the orders (i.e. when to order and how much to order). This can

be better decided by making forecasts on the material requirements.

5B. MATERIAL DEMAND FORECASTING

FIGURE : 5.3 ‘P’ SYSTEM OF INVENTORY

FIGURE : 5.4 ‘Q’ TYPE OF INVENTORY

Since inventories will be used to satisfy the demand requirements, it is essential to have reliable estimates

of b amount and timing of demand requirements. Similarly, it is essential to know how long it will take for

orders to be delivered. In addition, it is necessary to know the extent to which demand and lead times

might vary: the more potential variability, greater the need for additional stock to insure against as

between deliveries. Thus, there is a crucial link between forecasting and inventory management.

5B. 6 TOOLS OF INVENTORY CONTROL

PRODUCTION AND OPERATIONS MANAGEMENT

5B. 7 ABC ANALYSIS

FIGURE : 5.5 ‘ABC’ ANALYSIS

This is one of the basic analytical management tool which enables top management to place the

effort where the results will be greatest. This technique tries to analyze the distribution of an characteristic

by money value of importance in order to determine its priority. The annual materials consumption

analysis of an organisation would indicate that a handful of high value items-less than 10 percent of the

total number will account for a substantial portion of about 70-75 percent of the total consumption value,

and these few vital items are called ‘A’ items which needs careful attention of the materials manager.

Similarly, large number of bottom’ items over 70 percent of the total number called the trivial many

– account for about 10 percent of the total consumption value, and are known as the ‘C’ class. The items

that lie between he top and bottom are called the ‘B’ category items.

5B. 8 PROCEDURAL STEPS OF ‘ABC’ ANALYSIS

a) Identify all the items used by a company

b) List all the items as per their money value in the descending order. i.e. The high valued

items will be listed first followed by the next valued item.

c) Count the number of high valued, medium valued and low valued items

d) Calculate the individual values of the high, medium and low valued items. This is arrived at

first by multiplying the number of items as in step and

(a) Their values as in step (b) and adding all the items in different categories high,

medium and low.

e) Find the percentage of high, medium and low valued items. High valued items normally

contribute for 70 percent or so of the total inventory cost and medium and low valued items

20 and 10 percent respectively.

f) A graph can be plotted between percent of items and percent of total inventory cost.

5B. 9 PURPOSE OF ABC ANALYSIS

The object of carrying out ABC analysis is to develop policy guidelines for selective control. After

the analysis, broad policy guidelines can be established.

A. Items High Consumption Value

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B. Items : Moderate Value

C. Items : Low Consumption Value

5B. 10 ADVANTAGES AND DISADVANTAGES OF ABC ANALYSIS

This approach helps the materials manager to exercise selective control and focus his attention

only on a few items when he is confronted with lakhs of stores items. By concentrating on high valued ‘A’

items, the manager will be able to effectively control inventories and show the ‘visible’, results in a short

spen of time by reducing the overall working capital requirement and increasing the profit of the company.

By this analysis obsolete stocks are automatically pin pointed. This results in better planning and improved

inventory turnover.

The major limitation of the ABC analysis is that it takes into account the total consumption value of

items but not their vitality. Some items, though negligible in monitory value, may be vital for running the

plant or machines. For example, the connecting belts in case of motors, foundation bolts etc. the results of

ABC analysis have to be reviewed periodically and updated. Low valued item in ‘C’ category, like diesel oil

to ruin the generator, may become B for A category item during the power crises.

5B. 11 VED analysis

This analysis attempts to classify items into many categories depending upon the consequences of

materials stock out when demanded. The cost of storage may vary depending upon the seriousness of

such a situation. The items are classified into V (Vital), E (Essential) and D (Desirable) categories. Vital

items are the most critical having extremely high opportunity cost of shortage and must be available in

stock when demanded. Essential items are quite critical with substantial cost associated with shortage and

should be available in stock and by and large. Desirable group of items do not have very serious

consequences if not available when demanded but can be stocked items.

Hence, the percentage risk of shortage with the ‘vital’ items has to be quite small, thus calling for

high level of stock. With ‘Essential category we can take a relatively high risk of shortage and for

‘Desirable’ category even higher. So, depending upon the seriousness of the requirement of the item they

are classified.

5B. 12 FSN ANALYSIS

The items that are being used in a company are note required to be purchased at the same

frequency. Some materials are quite regularly required, yet some others are required very occasionally and

some materials may have become absolute and might not have been demanded for years together. This

FSN analysis groups then into three categories as fast moving. Slow-moving and Non-moving items.

Inventory policies and models for he three categories have to be different. Most spare parts come under

the slow moving category which has to be managed on a different basis. For non-moving dead stock, we

have to determine optimal stock disposal procedures and rules rather than inventory provisioning rules.

Categorization of materials into three types on values, critically and usage enables us to adopt the right

type of inventory policy to suit a particular situation.

5B. 13 ECONOMIC ORDER QUANTITY (EOQ)

PRODUCTION AND OPERATIONS MANAGEMENT

FIGURE : 5.6 ECONOMIC BATCH QUANTITY

FIGURE 5.7 ECONOMIC ORDER QUANTITY

Inventories are built to act as a cushion between supply and demand. The supply could be a one time

supply (static) or a continuously repetitive one (dynamic). The demand could be totally known (certain), be

known over a range of probable values (risks) or be totally unknown (uncertain). The goal of the basic EOQ

model is to identify the order size that will minimize the sum of the annual costs of holding inventory and

the annual cost of ordering inventory. The major elements of the inventory carrying cost are:

i. opportunity cost of the funds utilized for the purchase of items

ii. cost incurred in the storage of these items

iii) obsolescence and deterioration cost

iv) insurance cost when items are bought and stored in the company’s stores

The ideal inventory movement pattern for a given material a company can be drawn.

The inventory cycle begins with receipt of an order of Q units. These items are utilized for producing

certain product as a constant rate over a period of time. When the quantity on hand is not sufficient to

satisfy demand during the lead time (the time requirement between submitting an order and receiving that

order), an order for Q units is submitted to the supplier. Because it is assumed that both the usage rate

and the lead time dot not vary, the order will be received at the precise instant that the inventory on hand

falls to zero. Thus, orders are timed to avoid having excess stock on hand and to avoid stock outs.

The optimum order quantity reflects a trade off between inventory carrying costs and ordering costs. as

order size in varied one type of cost will increase while the other one decreases. The ideal solution will be

an order size that causes neither a few large orders or many small orders but one that lies somewhere

between those two extremes.

Annual carrying cost is computed by multiplying the average amount of inventory on hand by the cost to

carry one unit for an year, even though any given unit would not be held for a year. The average inventory

is one half of the order quantity, the amount on hand decreases steadily form the maximum of Q units to

PRODUCTION AND OPERATIONS MANAGEMENT

0, for an average of (Q+O)/2 or Q/2. The average annual carrying cost per unit is expressed as C, the total

annual carrying cost is calculated as.

Annual carrying cost = Q/2 C

On the other hand, annual ordering cost will decrease as order size increases, since for a given annual

demand, the larger the order size, the fewer the number of orders needed. The hunger of orders per year

will be D/Q where D = Annual and Q = order size. Unlike inventory carrying costs, ordering costs are

relatively incentive to order size in that regardless of the amount of an order, there are certain activities

which must be done, such as determine how much is needed, periodically evaluate sources of supply, and

prepare the invoice. Annual ordering cost is a function of the number of orders per year and the ordering

cost per order:

Annual ordering cost = D/Q S

Where S = ordering cost

Because the number of orders per year, D/Q, decreases as Q increases, annual ordering cost is

inversely related to order size.

The total annual cost associated with carrying and ordering inventory when Q@ units are ordered each

time is

TC = Annual carrying cost + Annual ordering cost

= Q/2 C + D/2 S

Where D = Demand in unit per year

Q = Order quantity in units

S = Order cost in rupees

C = Carrying cost in rupees per unit per year.

The total cost curve is U and that it reaches its minimum at the quantity where carrying and

ordering costs are equal.

To minimize the total cost, differentiate TC with respect to Q and equating is to 0,

We will get:

Optimum Order Quantity: Q = (√ 2DS) / C

We can calculate the ordering cost per order and the annual carrying cost per unit, the optimum

(economic) order quantity can be computed if the annual demand is given.

The minimum total cost is,

PRODUCTION AND OPERATIONS MANAGEMENT

TC min = Q/2. C + D/Q. S

5B. 14 INVENTORY CONTROL OF SPARES

The spares are required for the upkeep of various general and special purpose equipment and

machineries in a company. The requirement of spares will emerge preventive or breakdown maintenance

operations. The requirement of spares can be well planned in the case of items required during routine

preventive operations irrespective of its cost, critically or its essentiality. In the case of breakdown of

certain machineries, the requirement of spares becomes critical for the repair and rectification of the

machinery. If the machine itself as an important special purpose machinery, then the requirement and

availability of the spares at that point of time is very much vital irrespective of the cost of the spare. The

required item may fall in any of the A,B,C category, but its availability is to be ensured by stocking certain

expected items to the required numbers. The inventory control of spares items call for a trade – off

between the cost of the spares stored and the breakdown or stoppage of production because o f the

non-availability of certain critical and vital spare parts.

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5C. NETWORK

5C.1 INTRODUCTION

Operations managers must plan organize and control a variety of manufacturing and service

operations. Some or they are one time activities and others are repetitive. Besides, some activities might be

continuous or intermittent or job shop production required scheduling, loading and control techniques

whereas continuous production requires line balancing techniques. The one-time activities are generally

one-time projects such as construction of a hospital, research and development of a missile or

manufacturing an aircraft or building a ship and the like. A different approach known as project approach

is used to develop, manufacture and market new products and services.

5C. 2 WHAT IS A PROJECT

Project is a term which covers once-through and small –batch programmes. When attempting to determine

the completion data for nay task/project. Where it is

Construction projects, building of a bridge etc.

Research and development Projects

Designing of a new pieces of equipment

Erection and commission of Industrial Plants

Preventive maintenance

Trial manufacture.

Heavy engineering

Custom-engineered Products

Market launching of new Products

Finalization of annual accounts

An inaugural

A banquet

A marriage programme

Preparation for a dinner party

A picnic party

A picnic outing etc.

Or any other project it is necessary to time-table all the activities which make up the task or the project,

that is to say, a plan must be prepared. The need for planning has always been present, but the

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complexity and competitiveness of modern undertaking now requires that this need should be met rather

than just recognized.

5C. 3 PROJECT MANAGEMENT

A project is an organized endeavour to accomplish a specified non-routine or low volume task. Although

projects are not repetitive, they take significant amount of time to complete and are large-scale or

complex enough to be recognized and managed as separate undertakings.

Management of a project differs in several ways from management of a typical business.

Operations manager must often organize project team to plan and control projects. The objective of a

project team is to accomplish its assigned mission and disband. The project teams must ordinarily work to

tight time schedules, adhere to strict budgets, report to top management personnel of the organisatoin

and be temporarily removed from their regular jobs. While the project work is proceeding, the remainder

of the organisation must continue to produce the organisation’s products. Because of the difficulty of

simultaneously managing the projects and producing the products and services, operations manages have

developed new approaches to managing and controlling projects. The type of techniques required to

manage the projects depndss on the complexity of the projects. For small projects, Gantt chats are

adequate whereas for large and complex projects, the critical path method (CPM) or the program

evaluation and review technique (PERT) would be more effective.

In this architect’s office, representatives from human resources and product management bring their skills

together from their “home” departments to complete this facility expansion. Workmanship, pleasure from

job flexibility, and pride in the team effort. All of these can be fostered and encouraged by project

managers.

5C. 4 CONVERSION SYSTEM: PROGRESS REPORTING

Project management involves more than just planning, it also requires controlling, monitoring

progress and taking corrective action when activities deviate from schedules or costs get out of line.

Progress reporting helps managers control by showing cost variances (actual versus budgeted) and time

variance (actual versus scheduled) during the projects.

5C. 5 MATRIX ORGANIZATION

The matrix organization is a team approach to special projects. When teams are established, the

firm’s organization departs from the conventional functional basis a for organization –

departmentalization.

Today, project teams enjoy widespread acceptance in many of our major industries. They are especially

effective in large companies that emphasize new product development and rapid launching of new

products in the marketplace.

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Several factors seem to have been responsible for this trend toward project teams. Rapid technological

changes forced organizations to minimize development lead times, reduce costs, and avoid obsolescence.

There pressures resulted in the need for a kind of organization that could cut across functional areas. The

project matrix organization fills that need. Engineers, scientists, technicians, market specialists, and other

skilled personnel can be effectively and efficiently loaned from their “home” unit to another unit for

periods of time, thus avoiding duplicated skills and unnecessary costs.

5C. 6 BEHAVIORS IN A PROJECT ENVIRONMENT

Project manages must not only be competent technically but must also be skilled in analysis,

interpersonal relations, and decision making. Let’s briefly examine a few key behaviours within project

teams.

5C. 7 COMMUNICATION

Project leaders must be able to communicate freely with both team members and line employees

who are not regular team members. Within the project team, communication is frequent and often involves

intensive collaboration Short daily meetings, written correspondence, and one-on-one problem-solving

sessions are often necessary for the sort of tasks required of project teams. The non routine, diverse,

loosely structured tasks that project teams often engage in require flexible relationships and

communications to avoid duplication of effort and costly project delays.

5C. 8 MOTIVATION

Project managers motivate team members in much the same way other manages motivate their

staff Motivation comes from either extrinsic of intrinsic rewards. One difficulty a project manages may face

is they may not have sufficient latitude to give monetary rewards. They may be able, however, to give

monetary rewards in the form of incentives for cost control and completion time. Or hey may rely on

intrinsic rewards, such as satisfaction from tasks accomplished, pride in quality.

5C. 9 GROUP COHESIVENESS

As the size of the project team increases, group cohesiveness decreases. The higher a group ranks

in organization status (measured by project importance, skills required, and job flexibility), the more

cohesive the group tends to be. If group members’ social economic or psychological needs are met by a

group, they tend to feel strong ties to the group. The more a project team fills these needs, the more

cohesive the team. Finally, the closer group members work in close proximity to one another under stress

conditions, the greater the groups cohesiveness.

Overall, the more cohesive the group, the better the chances a project can be completed on budget

and on time. Because of both the diversity of team members and the one-shot nature of the project, group

cohesiveness is difficult to achieve in project teams. But project teams that are cohesive increase their

chance of achieving their primary goals.

5C. 10 PROJECT LIFE CYCLE

A project passes through a life cycle that may vary with the size and complexity of the project.

Typically an project will pass through the following phases:

1. The Concept Phase: During this phase, the organization realizes that a project may be needed or

the organisation is requested to propose a plan to perform a project for some customer.

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2. Initial Planning of Feasibility phase: During this phase, the project manager plans the project to a

level of detail, sufficient for initial scheduling and budgeting.

3. Detailed Planning Phase: If the project is approved, then detailed scheduling and budgeting is done

in this phase.

4. Organisation Phase: During this phase, a detailed project definition such as the work breakdown

structure (WBS) is examined. A WBS is a document similar to the bill of material and divides the

total work into major packages to be accomplished.

Personal and other resources necessary to accomplish the project are then made available for all or

a portion of the projects duration through temporary assignments from other parts of the

organisatoin or by leasing resources or subcontracting portions of the projects.

5. Execution Phase: During this phase the various activities planned are completed as per the

schedule, utilizing the allotted resources.

6. Termination Phase: This is the phase, during which the project is terminated or disbanded after

completion. The personnel who were working in the project are assigned back to their regular jobs

or to other jobs in the organisation or to other projects in this phase.

5C. 11 PROJECT ORGANIZATION

Project organizations have been developed to ensure both continuity of the production system in

its day to day activities and the successful completion of projects. A variety of organizational structure are

used by enterprises to perform project work. The various considerations in forming a project organisation

are:

(a) Proportion of the company’s work that is performed by projects

(b) The scope and duration of the projects

(c) The capabilities of the available personnel

(d) The preferences of the decision makers

There are four options available in choosing an appropriate organization for project.

1. Functional organization: in functional organizations, functional departments are formed that

specialize in a particular type of work such as production and sales. These functional departments

often are broken into smaller units that focus on special areas within the function. Top

management may divide project into work tasks and assign them to the appropriate functional

units. The project is then budgeted and managed through the normal management hierarchy.

2. Project co-ordinator: A project may be handled through the organisation as described above,

except some one is appointed to co-ordinate the project. The project is still funded through the

normal organization and he functional manages retain responsibility and authority to their portion

of the project work. The project co-ordinator meets with the functional managers and provides

focus and impetus for the project and may report its status to the top management.

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3. Project matrix: In a matrix organisation, a project manager is responsible for completion of the

project and often assigned a budget. The project manager contracts with the functional managers

for completion of specified parts of the project. The functional managers for completion of

specified parts of the project. The functional managers assign work to employees and co-ordinate

work within their areas. The project managers co-ordinates project efforts across the functional

units.

4. Project Team: A particularly significant project that will have a long duration and require the full

time efforts of a group may be run by a project team, specially constituted for that purpose.

Personnel are assigned full-time to the project and are physically located with other team members.

The project has its own management structure and budget as though it were a separate division of

the company.

5C. 12 THE ROLE OF A PROJECT MANAGERS

The project manager’s job is important and challenging. He is responsible for getting work

performed, but often has no direct, formal authority over must of the people who perform the work. He

must often rely on broader knowledge of the project and skills at negotiation and persuasion to influence

participants. He may have the assistance of a staff if the project is large.

5C. 13 PROJECT ORGANISATOIN : ADVANTAGES

Perhaps the one overriding advantage of project organization is that by grouping people and tasks,

the organization can tackle unusual project opportunities on short notice. A key disadvantage, however, is

that creating and dispersing project teams can be upsetting to the routine employees have developed.

Furthermore, project manages often feel considerable constraints in having to accept responsibility for

completing the project without being given line authority to control it.

5C. 14 BASIC FUNCTIONS OF PROJECT MANAGEMENT

1. Manage the project’s scope to define the goals and work to be done, in sufficient detail to facilitate

understanding and correct performance by the participants.

2. Manage the human resources involved in the project

3. Manage-communications to see that, the appropriate parties are informed

4. Manage time by planning and meeting a schedule

5. Manage – quality so that, the project’s results are satisfactory

6. Manage-costs so that, the project is performed at the minimum practical cost and within budget if

possible.

5C. 15 PROBLEMS IN MANAGING A PROJECT

1. Managing a project can be a complex and challenging assignment.

2. Since projects are one-of-a-kind endeavors, there may be little in the way of experience, normal

working relationships or established procedures to guide participants.

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3. A project managers may have to co-ordinate diverse efforts and activities to achieve the project

goals.

4. Persons from various disciplines and from various parts of the organization who have never worked

together may be assigned to the project for differing spans of time.

5. Sub-contractors who are unfamiliar with the organisation may be brought in to carry out major

portions of the project.

6. The project may involve a large number of inter-related activities performed by persons employed

by any one of several different sub-contractors.

For the above reasons, it is important that the project leaders have an effective means of identifying and

communicating the planned activities and the way in which they are to be inter-related. An effective

scheduling and monitoring method is absolutely essential for the management of a large project. Network

scheduling methods such as, PERT and CPM have proven to be highly effective and valuable tools during

both the planning and execution phases of projects.

5C. 16 HISTORY OR NET ANALYSIS

Before CPA coming on the scene probably the best-known method of trying to plan was by mean of a bar

or Gantt chart. There were certain drawbacks and problems in it. In Great Britain the Operational Research

Section of the Central Electricity Generating Board investigated the Problems concerned with the overhauls

of Generating Plant – an area of considerably complexity which was increasing in importance as new higher

Performance Plant was being brought into service. By 1957 the O.R. section had devised a technique which

consisted essentially of identifying the “Longest irreducible sequence of events”, and using this technique

they carried out in 1958 an experimental overhaul at a Power Station which reduced to overall time on 42%

of the previous average time for the same work. Continuing to work upon these times the overhaul time

was further reduced by 1960 to 32% of the previous average time. The name, “Longest irreducible by

sequence of events” was soon replace by the name, “Major Sequence, and it was pointed out for example,

that delay in the “major-sequence” would delay completion times,, but the difficulties elsewhere need not

necessarily involve extension in total time. This work of the O.R. group was not made public, although

comprehensive reports were circulated internally elsewhere.

Similar development work was being undertaken elsewhere – for example in the U.S. Air force

under the code name P.E.P. Also in 1958, the E.I. du pont de Nemours Company used a technique called

the “Critical Path Method” “CPM” to schedule and control a very large project, and during the first complete

year’s Use of CPM it was credited with credited with saving the company $ 1 million. Subsequent use

underlined the basic, simplicity and extra-ordinary usefulness of this method, and by 1959 Dr. Machly,

who had worked on the Du Pont Project, set up an organisation to solve industrial problems using the

Critical Path Method.

Since 1958 considerable work has been carried out, mainly in the United States of America, in

consolidating and improving these techniques. Much of the effort has been expanded by the Computer

Companies, who have devised special names to distinguish their own work.

Network analysis is synthesis of two techniques namely Programme Evaluation and Review

Technique and Critical Path Method evolved independently during 1956-57. The two methods have many

features in common and are now combined and called Network Analysis. For large non-repetitive

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operations or projects CPM-PERT and other related network technique are usefully aids for project

managers. A few of the features making the techniques are:

A logical and disciplined basis for planning

Simplicity

Improves co-ordination and communication

Pinpoints trouble spots and responsibility

Better management of resources

Versatile and application

Scope for unseen changes

5C. 17 ORIGIN OF NETWORK PLANNING

The very nature of the one-time large project demands that what has to be done and the schedule

for performance must be planned together. These factors are interdependent, and the planning of large

projects involves planning for deployment of resources to the total project. To accomplish this, we must

determine the activities required, the timing and interdependencies, the requirements of various possible

schedules for manpower and other resources, and the relationship of all the foregoing to a project

completion date. The project completion date most often is part of a contract that carries penalties for

nonperformance. Therefore, the complexities and the one-time nature of the project require a coordinated

plan that involves activities required, scheduling, and deployment of resources. The great complexity of

such projects calls for special methods; network planning techniques have been developed to meet this

need.

Network planning techniques go under a confusion of actronyms with variations. The two original names.

PERT (Performance Evaluation and Review Technique) and CPM (Critical Path Methods), have been

differentiated into a variety of brand names that essentially have been applied to the same basic

methodology. Some of the alternative names used are: CPS (Critical Path Scheduling), LES (Least-cost

Estimating and Scheduling)(, Micro-PERT, 1-Time-PERT, PERT/COST and PEP. The variety of names for

PERT/CPM techniques are a measure of the degree of interest that has developed.

Network planning methods seem to have been developed by two different groups independently. As an

internal project of the DuPont Company, critical path methods were developed to plan and control the

maintenance of chemical plants; subsequently the were used widely by DuPont for many engineering

functions. Parallel efforts were undertaken by the U.S. Navy at about the same time to develop method for

planning and controlling the Poiaris missile project. We can glimpse the magnitude of the task when we

realize that approximately 3,000 separate contracting organization were involved. The result was the

development of the PERT methodology. The immediate success of both the CPM and PERT methodologies

may be gauged by the following facts. Do Pont’s application of its technique to a Louisville maintenance

project resulted in reducing down time for maintenance from 125 to 78 hours, the PERT technique was

credited widely with helping to shorten by 2 years the time originally estimated for the completion of the

Polaris missile engineering and development program.

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PERT and CPM are based on substantially the same concepts, although there are some differences in

details. First, as originally developed, the PERT methods were based on probabilistic estimates of activity

times that resulted in a probabilistic path through a network of activities and a probabilistic project

completion time. The CPM methods, however, assumed constant or deterministic activity times, and they

now use the slightly simpler deterministic model is equally applicable to and usable by either technique.

As a matter of fact, most present day applications of PERT methods have dropped the use of the

probabilistic activity times estimates. The second difference between the two techniques is in the detail of

how the arrow diagram is prepared. In the discussion that follows, we shall note more fully both the

probabilistic – deterministic and the arrow diagram differences.

In the following sections, we shall develop PERT planning methods and then show the difference between

PERT and CPM methods.

5B. 18 UTILITY OF NETWORKS

1. It aids the manager in planning, scheduling, controlling the activities.

2. In guiding and directing team efforts more effectively

3. It permits advance planning, indicates current progress wants of potential future trouble spots

when there may still be time to avoid them.

4. It aids in handling uncertainties regarding time schedules, co-ordination of many activities and

control of cost involved.

5. It shows its values most strikingly when a special projects of new kind is undertaken.

5C. 19 NETWORK TECHNIQUES OF PROGRAM MANAGEMENT

The need for management direction on a program or job depends upon two factors-its

repetitiveness and complexity. Simple jobs that occur infrequently do not require any involved direction.

The techniques for direction of project-type jobs are the new. However, there has recently been an

explosive growth in the family of these technique a number of network techniques have been developed

which are named below:

(1) PERT :Programme Evaluation and Review Technique

(2) CPM : Critical Path Method

5C. 20 PROJECT PLANNING AND CONTROL TECHNIQUES

PROJECT PLANNING: Project planning includes all activities that result in a course of action for a

project. Planning begins with setting well defined objectives (such as implementing an new management

information system). Also, planning involves decision making regarding resources to be committed,

completion times, priorities of activities etc. Areas of responsibility must be identified and assigned. Time

and resource requirements to perform the work activities must be forecasted and budgeted. Planning also

involves establishing project boundaries and identifying controllable and uncontrollable variables that

must be managed. Also, the performance criteria should be stated related to the project objectives and in

measures of time, cost and quality characteristics.

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PROJECT SCHEDULING: Project scheduling establishes times and sequences of the various phases of

the project. In project scheduling, the project manager considers the various activities of an overall project

and the tasks that must be accomplished and relates them coherently to one another over the projects

time horizon.

Techniques for scheduling projects include Gantt charts and network techniques such as PERT and

CPM. Gantt Charts do not reflect the inter-relationship among resources or the precedence relationships

among project activities. Network technique overcome this shortcoming of Gantt charts by including

precedence relationships.

5C. 21 DEVELOPMENT OF PERT

Project Managers increasingly noted that the technique of Frederick Taylor and Henry L. Gantt

introduce during the early part of he century for large scale productions, were inapplicable for a large

portion of the industrial effort. The work was being undertaken in the U.S.A. and in early 1958 the U.S.

Navy Special Project. Office concerned with performance tends on large military development programs set

up team of the management consulting firm of Booz-Allen and Hamilton; to devise a means of dealing

with the planning and subsequent control of complex work. This investigation was known as the

Programme Evaluation Research Task, which gave rise to (or possible derived from) the code name PERT.

By February 1958, Dr. C.E. Clark, mathematical in the PERT team presented the early notions of

arrow-diagramming, military drawing from his study of graphics. This early work of Dr. Clark was rapidly

published and by July 1958, the firs report, PERT Summary Report, phase I, was published. By this time the

full title of the work had become “Programme Evaluation and Review Technique”, and the value of the

technique seemed well established.

FIGURE: 5.8 “PERT” – A SAMPLE

By October, 1958, it was decided to apply PERT to the Fleet Ballistic Missiles Programmes where it was

credited with saving two years in the development of Polaris Missile. Since that time PERT has spread

rapidly through out the U.S. defence and Space industry Currently almost every major Government and

military agency concerned with space Age Programs is utilizing the technique as large industrial contractor

in this field. Small business wishing to participate in national defence programs has found it increasingly

necessary to develop PERT capability.

In 1958 the U.S. Navy developed Program Evaluation and Review Technique (PERT) for planning

and control of the Polaris nuclear submarine project. The results of using PERT in that application, in which

some 3,000 contractors were involved, is generally reported to have reduced by two years the project

completion time for the Polaris project in both government and industry today, PERT is still widely used. A

similar modeling approach called the Critical Path Method (CPM) is also used by business and government.

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5C. 22 Application of PERT

First we should clarify the conditions under which PERT may be appropriately used. If your situation

lacks the following features, PERT will yield little benefit. First, the project must be one whose activities

clearly are distinct and separable. Second, the project and activities must all have clear starting and ending

dates. Third, the project must not be complicate by too many interrelated tasks. Fourth, the project must

be one whose activities afford alternative sequencing and timing.

5C. 23 LANGUAGE OF ‘PERT’

Symbol Name Meaning

Activity

FIGURE : 5.10 PERT – A GLOSSARY

The PERT language comprise simple symbols and terms. Key symbols are those for activity, dummy

activity, event, and critical path of the network. Since the critical path requires the longest time through

the network, management should watch is most closely to avoid unnecessary project delays.

5C. 24 HOW DOES PERT WORK

It works by following these steps:

Clearly identify all activities in the project

Identify the precedence requirements of the activities

Diagram the precedence requirements as a sequence of activities

Estimate the time each activity will take.

Calculate the critical path and other project performance criteria, creating the schedule and plan for

subsequent control.

Reevaluate and revise as experience dictates.

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Time estimates are obtained form either past data or from people experimented in a particular activity.

Optimistic, pessimistic and most likely times must be estimated so that the expected (average) time can be

calculated from the following equation.

5C. 25 ADVANTAGES OF PERT

It provides clear objectives

It provides an analytical approach to the achievements of an objective

It enumerates detailed plans and important programmes and events

It establishes sequence of activities and their inter relationship.

It focuses attention on important and critical activities and events.

It provides a logical plan for formulating a realistic schedule of activities.

It provides up-to-date status information of the project and enables quick revive of the progress at

all stages

It can point out improbabilities and may even predict be fore their occurrence and they help to

remedy the situation.

It can foretell the feasibility of a plan and can help in formulating new schedules if the one under

consideration is found impracticable or wanting.

It avoids slippage of plan and waste of time, energy and money

It is an aid for allocating the available resources for optimum results.

It brings about time and cost consciousness at all levels of management

5C. INTRODUCTION “PERT” INTO AN ORGANIZATION

As with any other new managerial tool, PERT will require to be introduced into an organisation with

care. It is suggested that the following points should be observed.

1. PERT is not a universal tool – there are situations where it cannot be usefully employed. These

situations are, in general those where activity is Continuous, for example, flow production. A PERT

type situation is characteristically on which has a definable start and definable finish.

2. PERT is not a life saving drug, it does not cure all ills – Indeed, PERT in itself does not solve any

problems, but it does expose situations in a way which will presuit effective examinations both of

the problems and of the effect of possible solutions. How ever. The formulating and implementing

of nay solution will remain the responsibility of the appropriate manager.

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3. PERT must not be made a mystery, known only toa chosen few. All levels require to appreciate the

method and its limitations, an extensive educational programme will be necessary to ensure that

knowledge is spread as widely as possible.

4. The person initiating PERT into an organisation must be of sufficient stature and maturity to be

able to influence both senior and junior personnel.

5. Wherever possible, the early applications for PERT should be to simple situations. If PERT is first

employed on a very difficult task, it may fail, not because of the difficulty of PERT but because of

the difficulty of he task itself.

However, the failure is likely to be attributed to PERT and the technique will be discredited.

6. PERT will involve committal to, and the acceptance of, responsibilities expressed in qualitative

terms. Many supervisors find this difficult to accept, and will often try to escape by creating unreal

problems, it is vital to make it quite clear that PERT is not a punitive device; it is a tool to assist, not

a weapon to assault.

7. Difficulties in using PERT are almost always symptoms of same Managerial Weakness.

5C. 27 PERT PLANNING METHODS

The essence of PERT planning is based on the development of a network representation of the

required activities. Here, the arrows represent the required activities coded by the letters with estimated

performance time shown near the arrows. In network planning, the length of the arrows ordinarily has no

significance. The numbered circles define the beginning and end points of activities and are called events

or nodes. The direction of arrows indicate flow.

5C. 28 STEPS IN ‘PERT’ PLANNING

Define clearly the end objectives.

Determine the major events that must be completed prior to reaching the end objectives.

Analyses and record the work to be done in between events.

The project is broken down into different activities systematically.

Arrange the events and activities in the order of sequence of their occurrence.

The network diagram is drawn. Events and activities are numbered and make sure no activity is left

over.

Layout and finalize the network in a neat form. May be more than one attempt is needed.

Event numbers should be given with the starting event as I, and progressing successively to the

right in the order in which they occur.

Any dummy activity should be shown by dotted arrow time on the network.