Industrial Engineering and Management [2 ed.] 9788175156050

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INDUSTRIAL. ENGINEERING AND MANAGEMENT

INDUSTRIAL ENGINEERING AND MANAGEMENT By

Dr. Ravi Shankar PhD (IIT, Delhi), MBA (Systems & Operations), M.Sc. (Engineering), B.E. Moldmedalist)

Revised By

Dr. G. Kannan

(761sGALGOTIA ' Publications Pvt. Ltd.

5, Ansari Road, Darya Ganj, New Delhi-110 002

Dr. Ravi Shankar

INDUSTRIAL ENGINEERING AND MANAGEMENT

© Copyright 2000 by Galgotia Publications Pvt. Ltd.

All rights reserved. No part of this book may be reproduced in any form, by photostat, microfilm, xerography, or any other means, or incorporated into any information retrieval system, electronic or mechanical, without the written permission of the copyright owner. · First Edition - 2000 · Second Edition - 2009 · Reprint - 2015 · Reprint - 2016

2017

· ISBN - 978-81-7515-605-0 Published by Galgotia Publications Pvt. Ltd., 5, Ansari Road, Darya Ganj, New Delhi- 110 002 Printed at- Earam Offset Printers, Delhi- 110053

Galgotia Publications pvt. ltd.

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Dedicated to my respected Guru

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PREFACE TO THE SECOND EDITION The appearance of the large number of interesting and important developments prodded me to make a substantial revision on the Book. The major addition to the book is as follo,v�: Human Resource Management And Human Resource Planning: Human Resource Management. Factors Contributing to the Growing Importance of HRM. Organizational Behaviour, The Goals of Organizational Behavior, Individual, Group. Team, Human Resource Planning (HRP). Strategic· Planning and the Human Resource Planning Process.

· Purchasing: Functions of Purchasing Department, Duties ofPurchasing Offtcer,.Methods ofPurchasing, Purchasing Process/Procedure, PLtrchasing/Buying Decision as Per Procedure, Purchase Requisiiion Form, Purchasing Proe:edure, Tenders. Notice Inviting Tenders,. Compar�tive Statement, Importance of Materials Management. Store Records, Purchi;ising Systems/Buying Techniques, Purchasing/Buying Techniques, Vendoy Rating. Lean Manufacturing: Common Methods Used in Lean Manufacturing, Mechanisms for Environmental Improvement through Lean Implementation, Barriers to Successful lmplementati_on. and Flexible Manufacturing Systems (FMS) Group Technology: Production Flow· Analysis (PFA), PFA Procedure. Objectives in Cellular

Manufacturing.

Industrial Psychology: Evolution oflndustrial Psychology, Primary Role oflndustrial Psychologists. Service Operations And Service Products: Service Operations Management, Services Products and Service Characteristics, Operations Management in the Service Sector. Ergonomics: A Man-Machine System, Design and Types of Controls, Anthropometry, Principles in the

Application of Anthropometric Data, Anthropometry for Workplace Design, Ergonomics in Computer Workstation, Positioning the Monitor Screen, LightirJg, Ventilation, Noise Levels in the Coinputer Workstation, Computer Injuries. · Marketing Management: Marketing Concept, Marketing Mix, Functions of Marketing, Product Life Cycle, Pricing, Type_s ofPricing, Market Research. Six Sigma: Six Sigma Framework, Five Elements of the Six-Sigma Framework, Define-Measure­

Analyze-lmprove Control (DMAIC) Process. Total Quality Management ("TQM) c1nd Six Sigma, International_Organization for Standardization (ISO) 9000 Series and Six Sigma.

Agile Manufacturing: Need for Agile- Manufacturing, Four Principles, Co1npa1'ison between Lean Manufacturing and Agile Manufacturing, Difference between Traditional and Current Practice in Manufacturing.

Author·

------------------------------��PREFACE

Writing a book is a lonely and tiresome task. It requires a lot of reading, writing, typing and editing. Before you get a book of around eight hundred pages, a lot of revisions and changes have already taken place at different stages of the book preparation. But like any othe.r finished product, ultimately when · the book comes out, it should contain some real value for its users. I believe that the effort that has b_een put in structuring, writing and presenting the material for a textbook like this, would be of some real use to its intended readers. · WHY THIS B00.K

Industrial Engineering and Management is one ofthe inost attractive specializations for Mechanical Engineering graduates. This course is also a core course in almost. all the branches of Engineering. Howtver, at some places, its name differs a little bit, for example: Engineering Mangement, Engineering Economy and Management, Industrial Management, etc. This· book is aimed to cater to the need of these courses. Th�re is really a dearth of a comprehensive book that covers both the traditional and 'recent issues in Industral Engineering. Without exposure to the .recent developments, graduating engineers will certainly be off-guarded in the industry/field. This book is an attempt to bridge the gap that most of the available books in this subject seem to inherit and fail to the cover recent developments in a systematic manner. COV�RAGE

The book is carefully crafted to cover the tradition a,reas as well as recent areas, change management areas as well as IT-areas, quantitative models as well as management areas, and all that are relevant for Industrial Engineers. The coverage of this book includes many focal areas such as: Traditional Areas: Facility Planning, Material Handling, Inventory Control, Production Planning and ·· Control, Quality Control, Reliability, Scheduling, Product Development, Value Engineering, Work Study,' Work Measure�ent, Job-evaluation and merit rating, Wage-inc.entive plans, etc. Recent Areas: Just-in-Time, Supply Chain Management, Value Chain Management, Theory of Constraints, etc. Change Management: Continuous Improvement (TQM), Benchmarking and Reeng_ineering. IT-areas: MRP, · MRP U, ERP, Emergence of e-business, etc.. Quantitative Models: Linear Programming, Transportation Model, Assignment model, Queuing Models, CfM/PERT, Simulation, etc. Engineering Economy: Break Even. Analysis, Replacement and Selection decisions, Engineering Economy models. •

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Management Areas: Principles of Management, Organisation, Leadership, Entrepreneurship, type of Business Systems, etc. The coverage of the topics are planned to integrate concepts, models, numerial examples and idustrial applications. Sufficient care has been taken to present the recent developments and trends in each area. bespite this, it is always possible that some relevant topics outlined in the syllabus of few Universities are still missing. We would appreciate if such gaps are brought to the attention of the author so that improvements may be undertaken in the -.next edition .. We would also appreciate and acknowledge for any constructive suggestion for the improvement of this book. The wide coverage of the book makes it useful for many courses in M. Tech., M.B.A., PGDBM and D.B.A.Programmes, MCA and BCAProgrammes, M.Com., CA, ICWA and AMIE Programmes, etc.. ACKNOWLEDGEMENTS

During the preparation of this book, literature from various journals, magazines, and on-line articles have been referred. I express n1y gratitude to all such authors, publishers and institutions; many of them have been listed in references. If some are left out inadvertly, I seek their pardon. I express my sincere gratitude to Prof. Prem Vrat (IIT Delhi). His excellence in Industrial Engineering is � benchmark. He is a role-model and inspiration for many like me. I wish to acknowledge my sincere thanks to-Prof. S.G. Deshmukh (IIT Delhi), another role-model for excellence in teaching and research of Industrial Engineering. It is no surprise that many of my understandings are influenced by what. I have learned from my professors and students, I thank them all. There might be many gaps in the book, but all these are due to my own limitations and , lack of perfection. I also express my·sincere thanks t� Prof. D.K. Ban�et and Prof. Arnn' Kanda for their e�couragement.s. I thank my other colleagues and friends , for inspiration and encouragement. I thank my publishers, Mr. Suneel Galgotia and his Production M�nager, Mr. A.S. Khan for their g'reat support, hard work and help during the preparation of this book. I believe that the one who deserves all the best adjectives in this ackno�ledgment is none other than my wife, Dr. Poonam. Without her support, it is impossible to write a book of this magnitude. My two little children, Pratyush and Megha deserve special mention of'appreciation. Despite their tender age, they are intelligent enough to understand that this work had some purpose and urgency. During last couple of years. all the time spent in writing this Book actually belonged to · them.

Dr. RAVI SHANKAR June 2000 ·Department of Management Studies UT, Delhi New Delhi-110 016 email: [email protected]

CONTENTS

--------.------------------------Chapter

1.

Page No.

l�DUSTRIAL ENGINEERING : .... , .............. ......................................... ; .................. 1

1.1

Industrial Engineering .....................................-...........:.. :..................................................... 1

1.2

Historical Development oflndustrial Engineering ....................................... :....................-. 2 1.2.1

Pre-Industrial Revolution Era....... , .......................................... :................ :...... 2

1.2.2

Industrial Revolution and Post-Industrial Revolution Phase ............. :............. 3

1.3

Role ofIndustrial Engineer ................................ : .................... :· ......................................... 4

1.4

Application oflndustrial Engineering ................................................................................ 5

1.5

Industrial Engineei-ing and Production . Management........................................................... 5

1.6

Industrial Engineering and Management Science.......................... :..... ,................ :............. 6

Review Questions .......................................................·...............'............... ,................. :...................... p References ................ ,............................... :.................................. ,................... :....................... _........... 6

2. ·

PRODUCTION SYSTEM ......... ; .....................................·....................................... 9 2.1

Production .......................................................................................................................... 9

2.2 2.3

Life CycleApproach to a Production Syste� .................................................................... 10 . Types of Production System ............................................................................. ;............... 12. Project Production............................................... :........................- ........ :....- .... 12 2.3.1 2.3.2

Job Shop Production .................................................................................: ... 12

2.3.3

12 Batch Production ................................... :......... · Mass Production................ : ........................................ :..................................•13

2.3.4

2.4

1 .............................................

Continuous Production .................................................................................. 13 2.3.5 2.3.6 Comparison of Different Production Systems ......,........................................ 14 Supply Chain Management......... ,..................................................................................... 17

2.5

Concept of Value Chain.................. :.................................. :............................................... 17 .Review Questions ............ ,..........................................'................ :......................... :........................... 21 References....................................................... :................................................................................ 21

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INDUSTRIAL ENGINEERING AND MANAGEMENT

3.

PRODUCTIVITY ...............................,................... :..........·.................................... 23 3.1 3.2

Introduction ................ .'..................'.................................................... ............................... 23 · Definition of Productivity ........................................................_..................... : ................... 23

3.3 3.4

Difference between Productivity and.Production ........:............................ :....................... 23 Productivity, Efficiency and Effectiveness· ......·....... :........ , ......................................'.......... 25.

3.5

Different Approaches to MeasureProductivity ................................................................ 26 3.5.1 Partial Productivity .................................. : ...................'.................................. 26 3.5.2 3.5.3

Total Factor Productivity ............................................................................... 27

3.6

Total Productivity .......................................................... : ............................... 28 Effect of.Base Period on Productivity. ................... :.......................................................... 28

3.7

Types of Productivity Index° ................................ , .................. , .................. ,...................... 28

3.8 Ways to Improve Productivity .......................................................................................... · 30 Review Questions .................... : ....................................................... , ............................................... 32 . . · References ...................................................................·........................... .'........................................ 32

4.

FORMS OF BUSINESS ENTERPRISES ....................................... : ..................... 35 4.1

Introduction ................................................................. , ....................'................................ 35

4.2 4.3

Types ofOwnership ..................................................... : .............................................:...... 35 Sole Proprietor (Owner) Enterprise ......................... , ......................................................... 35 4.3.1 Salient Features ...................................... :....................................................... 35

4.4

·4.3.2 4.3.3

Merits of SoleOwnership .............................. :.: ............................................. 36 Limitations of SoleOwnership ...............: ...................................................... 36

4.3.4

Suitability of Sole Ownership ........................... ............................................ 36

Partnership Finn .............................'............... :.................................................................. 37 4.4.1 Salient Features of Partnership Finn ................ :......... : .................................. 37 4.4.2 4.4.3 . 4."4.4

4.5 4.6

Merits of Partnership Finns .......................:-................................................... 38 Limitations of Partnership Finns ............................................................. : ...... 38 Suitability .........................-..................... : ............ .::......................................... 38

4.4.5. Joint Hindu Family Business ............................................................................................ 38 . . . Joint StockCon1pany .............................................-....................... :.............................. :..... 39 4.6.1

4.7

37 Types of Partners .............. : ............................................................................ .

Limitations of aCompany ................................................................... : ...... :.. 40

Classification ofC01npany ............................................................................................... 40 4.7.1 CharteredCompany ..... :...........................................................: ..................... 40 4.7.2 StatutoryCompanY, ............�.: ..... , ................................................................... 40 Registered Company. :... : ........................ · _......................................................_..41 4.7.3 4.7.4 UnlimitedCompany ............................................................................:.......... 41

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CONTENTS

4.7.5

Linrited Co mpany...................................................................... :..................... 41

4.7.6

PrivateCo�pany...................... :............................................................ .-..... :.41

4.7.7 4.7.8

Public Co mpany............................................................................................ 41 Go vernment Co mpany............................................................... : ................... 41

4.8

Co mpariso n o f Public, Private and Jo int S ecto r Co mpanies ....'.............................. :......... 41

4.9 .

Coo perativeOrganisatio n...................................................................... 1...... ,.................... 42 4.9.1

4.10

Merits o f Coo perative Or ganisations............................................................. 42

Limitations o f Coo perative Organisations.....................................................43 · 4.9.2 Types o f Coo perative S ocieties.......................... :·..................... .'........................................ 44 4.10.1 Co nsumers' CooperatiyeSociety................................................... .-................ 44 4.10.2 Industrial Coo perative S ociet y ...................................................................... 44 4.10.3 Coo perativeMarket ing So ciety..................................................................... 44 4.10.4 4.10.5 4.10.6

Co operative Credit So ciety ................... :.................... ,......: ........................... 44 Coo perativeHo�1singS ociety ... '.................................................. ,.................. 44· Co opera_tive Farming S ociety ........................................................................ 44

Co mparison o f Different Fo rms of Business Owner sh ip............... '................................... 45 4.11 Review·Quest ions ........ ,............. :..................................................................................................... 46 Ref erences ......... ·••.•···............. : ........... :...........� ..................................................... : ........................... 46

5.

FORECASTING ............ ; .... ; .......... ,..................................................................... 47

5.1 5.2

Introduct ion................. :.................................................................................................... 47 Benefit s of Fo recasting............_ .......................................................................................... 47

5.3

Types of Fo recasting ................................................ _. ...........;................... : ......................... 49 · . Long-Range Fo recasting ..................................'..........................................'..'. 49 5.3.1 . 5.3.2 . Medium-Range Foiecast ing ... :....................... ,.................. :., ......................... 49 5.3.3 . Short-Range Forecasting ·······'··.-····························:····:······.. ·········.. ·\·············49 Co mmo nly Observed Demai1dPattern .............................................................................. 50

5.4 5.5

5.6 5.7

QualitativeMethods of Forecasting ................................................................................. 51 S.S.! Delph iMethod ......................................... :··.................................................. 51 5.5.2 MarketResearch ............................. : .............................................................. 51 Salesforce Fo recc1st......................................'.................................................. 51 5.5.3 Histo r i�al Analo gy....................'................................ ,....... :............................ 51 5.5.4 Accuracy of.Forecast........................................................................................................ 52 · 5.6.1 Measu res of For ecasting Err01: ..... :.................................................... :......... :.. 52 Quai1titativeMetho ds of For ecasting.................................................... :........................... 53 . Extrapolatio n.... : .......... '.......................:.......................................................... 53 5.7 .1 5.7.2

S

imple MovingAverage (SMA) .................................................................... 54

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INDUSTRIAL ENGINEE.RING AND MANAGEMENT

Weighted Moving Average ....................................................:.....................:. 56 5.7.3 ExponentialSmoothing ........................ :........................................................ 56 5.7.4 5.8 Statistical Forecasting...............................: ...........-................................ _. ........................... 61 Review Questions .: ................._ ............... :..................................................................................... :... 66 References .......... :....................................,, ....... :...............................................................'............... 68

6.

FACILITY LOCATION ................................................................. : ..•.................... 69 6.1 Introduction .......................... ,........................................................ :.................... .............. 69 6.2 Factors in Facility Loc�tion ............................................................................... _.·............ 69 6.3 Considerations in Plant L_ocation..........................................................·..................-............ 70 6.4 Comparative Study of Rural and Urban Sites:.................................................................. 73 6.5 CaseStudy ............................. :...................... :................................................................... 74 6.6 Case 2: Selection of Site for XYZ Company .................................................................... 77 Review Questions ............................................................................ :················································ 78 References ........................................... .''. .......................................................................................... 79

7.

FACILITY LAYOUT (PLAN T LAYOUT) ..................................... ,......................... 8'1 7. I · Introduction ........................'...................................;........................................................... 81 7.2 · Objective of Good Facility Layout ........................................ :.......................................... 81 7 .3 Principles of Facility (Plant) Layout .................................................................. :.............. 82 7.3. I Principle of Least Material Handling ............................................................ 82 7.3.2 Principle of Worker Effectiveness ......................................... :....................... 82 7.3.3 Principle of High Productivity...................... :................................................ 82 Principle of Group Technology ..................................................................... 82 7.3.4 I 7.4 Different Types ofCommqn Layouts ............ :.................................................................. 83 7.4.1 Product or Line Layout........ :...........................................................:............. 83 Process' Layout ......................................................... , ......................... '..... :.. ··· 84 7.4.2 Fixed Position Layout ...: ...... : ...................................'..................................... 85 7.4.3 Cellular or Group Layout ............................................................. ,................ 86 7.4.4 7.5 Part-Machine IncidenceMatrix inCMS Design .............................................................. 89 7.6 Comparison of Layouts .................................... ,............................................................... 90 Review Questions :..................................................... :........ :·······································:....... :............ 90 References .......................,...... :............................................... :........................................................ 91

8.

LINE BALANCING .........·........................................ ; ............................................ 93 8.1 Introduction ............... :................................... : ....................................... :.......................... 93 Objective in Line Balancing Problem .............................................................................. 93 8.2 8.3 Constraints in Line Balancing Problem ........ : ........ .. : ....................................................... 94 Definition and Terminology in Assembly Line ................................................................. 94 8.4 .

• CONTENTS

xv

Methods ofLiniy Balancing .............................................................................................. 96 8.5 Heuristic: Largest Candid�te Rule ................................... :..........,............................ ,......... 96 8.6 _ Kilbridge-Wester Heuristic for Line Balancing ................................................................ 99 8.7 8.8 Heuristic: Helgeson-Birnie (Ranked Positional Weight) Method ................................. :. 102 Review Questions· ........................................ :............ : ..... :........................................ , ....................... 105 References ....................................... :.............................................................................................. · 105

9.

�RODUCT DESIGN , PLANNING AND DEVELOPM�NT ................................. 107 Introduction ............................................................ ,........................................................ 107 · 9.1 9.t Requirements of a Good Product Design ............. :................................... :............. :....... 108 9.3 Product Developmept Approaches ..................: ................................... :.......................... 108 Product Development Process .......... ; ................... : .....................'.................................... 109 9.4 9.5 Some Concepts In Product Development ............... :·...........................'............... ,............ 109 9.5.1 Standardisation ............... , ........ :............................................................,..... : 109 9.5.2 Modular Design ................ :.... :.................................... :..........,: .................... 111 Sin1plification ..........................····;·................ ····...... .................................... 111 9.5.3 : _ . 9.5.4 Speed-to-Market ........................................................................ :................. 111 9.5.5 Concunent Engineering ............................................................................... 112 9.5.6 Quality Function Deployment (QFD) and House of Quality (HOQ) ........... 113 • 9.5.7 Design for Manufacturing (DFM) ............................................................... 114 9.5.8 Design for X (DFX) .................................. :................................................... 115 9.5.9 · Rapid Prototyping (RP) ............................................. :....:............................ 115 Review Questions : ................................................................................................. : ...................: ... 116 References· .............................. : ....... , .............. .'...........................................................:................... 116

10. · PRODUCTION PLANNING AND CONTROL: AN INTRODUCTION ................. 125 IO.I Introduction .... : ...................................................................... : ............ : ........................... 125 10.2 Objectives of PPC .......................:............................... : .................................................. 125 Functions of PPC ............................................................................................................ 126 t0.3 10.4 Production Planning ... :.................................. ,.............................:····· ..···········:............... 127 10.4.l StrategicLevel Decisions .....................................................,....................... 129 10.4.2 TacticalLevel Decisions ................... , ......,............. : ... :................................ 129 10.5 Steps in Production Planning and ContTOI ...................... :.................. : ........................'.... 130 10.5.1 Routing ..................................................................................................:..... 131 10.5.2 Scheduling andLoading ..........................................'..................................... 132 10.5.3 Dispatching ...............:········:...................................................:........"............. 133

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INDUSTRIAL ENGINEl;RING AND MANAGEMENT

10.5.4 . 10.6

Follow-up or Expediting or Progressing................................... , .................. 136

Effectiveness of l?PC ...................................................................................................... 136

Review Questions . _.................. ··;:·····························.. ····.···:·.. ······································...... ,._........... 137 � . References ............_............................................................................................................ .-... ,........ 138

11.

LINEAR PROGRAMMING .......... ! ............................................. :....................... 139 11.1

• Introduction ............'.......................................... ;..................................................·........... 139

11.2

Definition of Linear Programming ................................ '. ............ ,................................... 139 General Formulation of Linear Programming ...................... �...................... 140 11.2.1

11.2.2

How to Conv�rt,a Maximization Problem into a Minimization Problem? ... 140

11.2.3 11.3 11.4 115 11.6 11.7 11.8 11.9 11.10 11.11

· How fo deal with equal to(=) sign? ............................................................ 141 Graphical Method .................................................................................·........... :........ :..... 141

11.3.1 Characteristics of Corner Points .......·........................................................... 142 Maximization Case(Graphical Solution) ......... :............: ................................................ 143 Sensitivity Analysis in Graphical Solution ................................................................ :.... 145 Concept of Slack Va�iable .................. :............................... · , ........................................... 146 . Concept of Shadow Price .........................................................:...................................... 146 Multiple Optimum Solution ............................................................................................ 147 Infeasible Solution ..............................................:: ........................... ; ..........' ,.................... 147

Unbounded Problem............................. , ............................................. :........... :............... 148

Simplex Method to Solve LPP ........................ :.............................................................. 14� • l l .11.1 · Augmentation of Objective Function(OF) ........................................_.......... 149

Explanations and Rules in Simplex ............................................................. 151 11.11.2 . . Review Questions ....................................................................................... ·............................. :..... 156 References .............. :.. ,................................................._..,............................................................... 158

· 12.

TRANSPO�TATION MOD�L .... ; .......................... .'........................... .'................ 159 12.1

Introduction ............................ :······················................. ,............................................... l59

12.2

Mathematical Fmmation of Transportation Problem... :..............................'................. :.. 160

How to Solve the ;rransportation Problem (TP)? ........................................ :.................. 161 12.3 Review Questions ............................................................................. :............................................ 176 References .......................................................................................................... .......................... 177

13.

ASSIGNMENT MODEL ............. � ........................................ : ...•......................... 179 13.1 13.2 13.3 13.4

Introduction ..... :................................................ ,.........................................................'...... I 79 Mathematical Formulation of Assignment Problem ...................................... :................ I 79 Solution Methods for Assignment Problem ............................ :....................................... 180 .

· Algorithm.to Solve Assignment Model .......... :................................ .-.............................. 181 Method to Find the Total Opportunity Cost Matrix ............ :........................ 181 13.4.1 .

CONTENTS

xvii

13.4.2 Optimality Test of Total Opportunity Cost Matrix ...................................... 182 13.4.3 Illustration of Optimality Test and Assignment ........................................... 183 Review Questions .......................................................................................................................... 185 R:eferences ................... '.......... :........................................................................................................ 187

14.

ENGINEERING ECONOMICS ........................................................................... 189 14.1 14.2· 14.3

Concepfof Interest ......................................................................................................... 189 Sin1ple Interest ... :............................................................................................................ 189 Compound Inte�est .............................................................,.._ ........•................................... 190 Interest with Multiple Frequency ofCot1;1pounding ...................... :........:..... 190 14.3.1 14.3.2 Case ofContinuousCompounding .............................................................. 192 14.4 Present Value and Future Value .........................................................................., ............ 193 14.5 Relationship of Annuity.:.......... :........................................, .................. ,......................... 195 14.5. l Present Value of an Annuity ..................................... :.................................. 196 14.5.2 Sinking-Fund Factor ...................................................................... , ............. 196 14.5.3 Equal PaymentCapital Recovery Factor ..................................................... 197 . Profitability Projections (or Estimates of Working Results) ........................................... 199 14.6 14.7 ProjectedCash Flow Statement ...................................................................................... 200 14.8 Projected Balance Sheet .......... :.......................................................:.......·....... , ............... 201 Review Questions ................................................................................. :.......................................... 204 References ....................................................................................'................................................. 204

15.

DEPRECIATION ...............................................-................................................ 207 15.1

W hat is Depreciation ...................................................................................................... 207 15.1.1 Notations Used .................... : ...................................... : ................................ 208 15.1.2 AccountingConcept of Depr�ciation .......................................................... 208 15,.1.3 ValueConcept of Depreciation .......................................�............................ 208 . . 15.2 Classification of Depreciation ..... , .............. ,, ......................: ........................................... 208 15.3 Methods toCharge Depreciatiou ................................................................................... 209 15.3. l Strnight Line Method (SLM) ... :................................................................... 209 15.3.2 Declining Balance Method (DBM) ......................................................... :... 210 Double Declining Balance Method (DDBM) ...................................... , ....... 210 15.3.3 15.3.4 Sum of Year Digits Method (SYD) ................................................... : ......... 211 15.3.5 Sinking Fund Method (SFM) ...................................................................... 212 15.4 Service Life of Asset ...................................................................................................... 215 Review Questions ......................................................:..................................................................... 215 References ................................................................_...............................................................'........ 216

xviii

16.

INDUSTRIAL ENGINEERING AND MANAGEMENT

BREAK-EVEN-ANALYSIS .................,..............................................; ............... 217 16.1 16.2 16.3 16.4 16.5 16.6

Introdu.ction ..................................................................................................................... 217 Assumptions .............................................................., .................................................... 218 Steps inBreak- Even-Analysis(BEA) ............................................................................. 218 fixed Cost ...... :.............................................................·........................ :.:....................... 218 · Variable Costs ................................................................................................................. 219 . . Purpose ofBEA ................................................................ :.................. : ........................... 219 16.7 Margin of Safety··························································:················: ......................... , ........ 220 16.8 Detenni�ingProduction-Volume for a givenProfit ............................................. :.......... 221 16.9 Formula forBreak-Even-Analysis(BEA) ·········································:···························· 221 .16.10 Angle of Incidence(0) ...............................•....................... , ... , ........................................ 221 16.ll Profit-VolumeGraph(PNGraph) ...................'..............�·····················:.......................... 221 Review Questions ............................................ : .............. :: .......... :: ................................................. 223 References ................................................................................... : ............................................ : .... 223

17.

REPLACEMENT AND SELECTION ....................................................., ............ 225 17.1 17.2 17.3 17.4 1-7.5

Introduction ............. .'.............................'............................: ................ , ........................... 225 Nature of Selecti.onProblem ........... :........................................... , .................................. 225 Natur.e of ReplacementProblem ........................... , ........................................................ 226 Replacement. o.f Items which Deteriorate ....... . ................................................................ 226 Replacement of Machines whose Operating Cost Increases with Time and theValue of Money also Changes with Time .................................................. 227 17:6 Capitalized Worth Method ....................................................'......................................... 230 Review Questions· .......................................................................................................................... 231 References .........................................................................................., ..: ............................:.......... 232

18.

VALUE ENGINEERING ....................................................... :............................ 233 18.1 18.2 18.3 18.4 18.5 18.6

Intr�uction ·············································•.······································································· 233 Definition ...........................................::.......................................................................... 233 • Objective ofValue Engineering .............................. .-....................................................... 233 Other Related Terms ..................................................................................! .................... 234 Concept to Value Engineering ........................................................................................ 234 18.5.1 What isValue? ............................................................. : ............................... 234 Type ofValue ....................................................................:............................................ 234 .18.6..1 UseValue .................................................. : ................................................. 234 18.6.2 EsteemValue ...........'..........................:...................................................._. .... 234. 18.6.3 ScrapValue·················.····· ............................................................................ 23_5

xix

CONTENTS

Cost Value ................................................................................. : ................. 235 . 18.6.4 18.6.5 Exchange Value ....................-............................................................._ .......... 235 18.7 Function ...................................................................................... 235 _ ·18.8 Effect of Function and Cost on Value ......................................................................:...... 23 5 18.9 Cost and Worth ........... :............................................... ·;··;···············································236 18.10 Life Cycle of a Product and Value Engineering .............................................................. 236 18.11 Steps in Value Engineering .....................................................: ................... : .................. : 237 18.12 Methodology in Value Engineering ................................................................................ 238 . 18.13 Fast Diagram ....................... ,......................................................................_.............•...... 238 18.14 Matrix Method in Value Engineering .........................................................._. .................. 240 18.15 Other Approaches in :Value Engineering ......................................:...................... :........... 241 Review Questions ....... : ..........'.............., ................. ,....................................................................... 241 References ........................................................................ ·························································:····242

1

19.

.. . :... .........................

INVENTORY CONTROL ..................................... � ............................................. 243 19.1 19.219.3

19.4 19.5

19;6

19.7 19.8

Inventory ....................................................................... :................................................. 243 . Function of Inventory ....................'.................., .............................................................. 244 Inventory Costs·...................................................... :........................................................ 244 · 19.3.1 . Unit Cost of Inventory .....'........................, ..........................:........................ 244 19.3.2 Ordering Cost .........'......,........................................................._..................... 245 19.3.3 Holding Cost or Carrying Cost .........................................................: .......... 245 Shortages Cost or Stock-out Cost ................................................................ 245 19.3.4 . . Variables in Inventory Model ............: ............................_. ......................................... : ..... 245 Deterministic Inventory Models .........................................................'............................ 246 19.5.1 Model 1: Uniform Demand Rate, Infinite Production Rate .................... , .. :. 246 19.5.2 Operating'Policy oflnventory Control ........................................................ 2'47 19.5.3 Sensitivity ofEOQ Model .......................................................................... ,.247 Other Observations of Basic EOQ Model ............................................... : ................... :.. 249 \ 19;6. l High Cost Item Inventory ............................................................................ 249 19.6.2 Optimum Ordering Interval ................. .' ............ ,.......................................... 249 19.6.3 .Optimum Number of Orders ................. :...................................................... 249 19.6.4 Optimum Number of Days Supply .............................................................. 249 19.6.5, Implication ofAssumption that Demand is known with Certa(nty .............. 249 Model 2: Gradual Replacement Model ........................ , ................................................ : 251 19.7.1 Other Characteristics of the Model .............. :............................................... 253 Model 3 ................ '. .................................................. :........................... :.......................... 25-4 19.8.1 Other Characteristics of this Model ............................................................. 257 ,;

xx

INDUS"l;RIAL ENGINEERING AND MANAGEMENT

19.9

Model 4: Detenninistic EOQ Model with Quantity Discount ...................... ................... 258 19.9.1 Case 1: Inventory Model with Single Discount ........................ : .................. 258 19.9.2 19.9.3

19.10

Strategies for Seleytive Inventory Control ...................................................................... 261 19.10.1 19.10.2

19.11 19.12

Method to Deal with Single Discount Model .... : ............................. :........... 259 Case 2: Inventory Model with Double Discount .....................................·.... 259 ABCAnalrsis ............................................................................................... 261 . Other Apprpaches ........................................................................................ 263

Mufti-Item Inventory Systems with Constraints ............................................................ 264

Lagrangian Method ....................................:................................................................... 264 Fixed cycle (Equal-Order-Interval)°Method ...................................'................................ 265 19.13 Review Questions .......................................................................... '. ............................................... 268 References ....................................................................................................................................., 269

20.

MATERIAL REQUIREMENT PLANNING (MRP) AND MRPall .......................... 271 20.1 20.2 20.3 20.4 20.5 20.6 20.7

Introduction .................................................................................................................... 271 Terms Used in Material Requirements Plaljiling ............................................................ 271 Depenaent Den1and .........., ............................................................................................. 272 Lumpy Den1and ................................................................................................... ............ 272 ,Lead Tin1e ............................................................................................. : ......................... 273 20.5.1 How MRP Uses Lead Ti.me information? ................................................... 273 Common Use Iten1S ................ : ....................................................................................... 274 . . 20.6.l How MRP Uses Common use Items? .............................. , ........................... 274 Inputs to MRP ...................................................................................................·............. 274 20.7.1 Master Production Schedule (MPS) ............................................................. 274 20.7.2 20.7.3

20.8 20.9

Bill ofMaterial (BOM) File ......................................................................... 275 Inventory Status File ..........................................................._. ........................ 276

How MRP Works? .......................................................................................................... 277 Outputs cifMRP ..............................................................................., ............................. 278 29.9.1 Primary Output ............................................................................................ 278

20.10

Secondary MRP Outputs ................................................'............................. 279 20.9.2 Benefits ofMRP ......'..............................., ...............................: ................................: ...... 282

20.12

Drawbacks ofMRP ....................................................: ................................................... 182

20.12 20.13 20.14

_Order Point System vs MRP ........................................................ , ........................: ......... 283 Cfosed-Loop MRP ................................................... :..................................................... 284 Manufacturing Resource Planning (MRP II): ................................................................. 285 20.14.1 Benefits and Limitations ofMRP II ............... , ............................................ 286

e

�:;�::3; ��'.���...:::::::::::::::::::::::::::::::::::::::::::::·:::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::::�:�

xxi

CONTENTS

21.

JUST IN TIME (JIT) IN PRODUCTION SYSTEM .............................................. 289 21.1

Introduction :.................................................................................................................... 289

21.2

JIT Philosophy ... .' ............................................................................................................ 290

2L3

Push Systems Vs Pull System ................................................. : ....................................... 292

21.4

Kanban and Pull System ................................................. : ............................................... 293 21.4.1 Calculation for Number of Kanban ........................... :................................. 295

21.5

MRP Vs JIT System ........................................................................................ : ............... 295 AnAnalogy toJIT ........................ : ................................................................................. 296 Requirements for ImplementingJIT ......................_ ......................................................... 298 21.7.1 Training ...................................... .'..................................-.............................. 298 21.7.2 Long-Term Planning ................... ............................................................... :299 2,1.7.3 Stockholders ................................................................................................ 299 21.7.4 Labor and Union ............. :........................................................................... 299

21.6 21.7

21.7.5 21.7.6 21.7.7

Gove1nment Support ........................................................ : ................'.......... 299 Management Support .......... :........... :.................................... ,...................... 299 Management and Labour Responsibilities ................................................... 299

21.7.8

Cellular Layout and Work Flow ..... , ............................................................ 299

21.7.9

Departn1ent Function ................ :............................................................._..... _ 299

21.7.10 21.7.11

Supplier Management.................. ·:· ............................................................ 299 Reduction of Set-up Time................................................... : ........................ 300

21.8 21.9 21.10 21.11

Preliminaries toJIT Production ...................................................................................... 300 JIT Production Process .. :................................................................................................ 301 Benefits ofJIT ........................................................................................... , .................... 302 Evaluation ofJIT Production ....................................................................................... , . 302 Review Questi.ons ............................................... : .......................................................................... 303

References .............. :............................ :......................................................................................... 303

22.

SUPPLY CHAIN MANAGEMENT ................................ : ..................................... 305 22.1 ·

Introduction .................................................................................................................... 305

22.2

22.1.1 Definition .................................................................................................... 305 · Stevans Model of Supply Chain Integration ................................................................... 308 Benefits of Supply-Chain Improvement ......................................................................... 310

22.3 22.4

Performance of Supply Chain.......................................................................................... 310

22.5 22.6

AIMS of SCM ........................................................... .'................ : ..................... : ............. 311

.22.7 22.8

Dist01tion of Demand: A Case for ERP Implementation ...........................:.................... 313 W hat is in Offer ....................... : ........ , ............................................................................. 315

ERP Vs SCM .................................................................................................................. 313

xxii

INDUSTRIAL ENGINEERING AND MANAGEMENT

Third Party Logistics and Fourth Party Logistics ........:.................................................. 317 22.9 Vehicle.Routing Concept ..............................................................: ........................... : ...... 318 22.10 Check.list for Make-buy Decision ................................................................................... 320 22.l .l Review Questiorls .........................................: .....,........................................................... : .....:.......'... 321 References ...................................................·........: ..........:.............................................................. 322 '

23.·

'

MATERIAL HANDLING ..................... ; ....... : ............................... .'.; .. : .................. 325 Introduction ......: ..................: ..................'.................. :........... :....................·..................... 325 23.l 325 23.2 Principles of Material Handling ..................................................................................... . ' Material HandlingEquipment .........................., ................, ............................................ 326 23.3 23.3.l Pallets .......................................................................................................... 327 Conveyor ..................................................................................................... 327 23.3.2 Industrial Trucks ................................................................:......................... 328 23.3.3 Cranes-and Hoists .................: ....................................................................... 328 23.3.4 Elevators and Lifts ...................................................................., ...-.............. 331 23.3.5 · 23.3.6 Containers and Racks .................................................................................. 334 23.4 AS/RS ........ ; ...........................................'. ........................................................................ 334 23.5 Automated Guided Vehicle (AGV) ........ : ............. :..................................:...................... 334 23.5.1 Features ofAGV ................................. :....., .................................................. 334 23.5.2 Types ofAGV Systerns ................................................................................ 335 Comparison ofAGV Systems ...................................................................... 338 23.5.3 Safety Considerations for AGV .............., ................................................. :.. 340 23.5.4 23.5.5 Design ofAGV System ..........................:.........................: .......................... 341 Review Questions ............:................... "·····-'···········.............................: ....................... : ..............,.. 341 References ......................................................................................................., ............................. 341 '

24.

ENTERPRISE.RESOURCE PLANNING (ERP) .............. �:...-............................. 343 24.l What is ERP? .....:................................................................ ........................: .................. 343 24.2 Main Features of ERP .........................................' ......:.....·..............................:................ 343· 24.3 !'urpose of Modeling al!Enterprise ................................................................................ 344 • . r 24.4 Its Role inEnterp�ise Modeling ...: ................................................................................. 344 24.5 Information Mapping .........................',....................................._............: ......................... 346 _ 24.6 Role of Common/SharedEnterprise Database ..............:................................................ 34 7 24,.7 Scope ofEnterprise System ............................................................................. ,.............. 347 24.8 Generic;_Model ofERP System ........................................................ : .............................. 348 24.9 · Selection ofERP ..._...............................................................:......................................... 348 24.l 0 Ditticulty in SelectingERP ..................................................................................... : ...... 350 24.11 Approach toERP Selection ...................................................................................._......�. 350

CONTENTS

xxiii

The "Request For Proposal" Approach .:............................................. : .......................... 350 24.12.1 Li�tations ofRFP Approach .............................................: .......... ............. 351 24.13 ProofofConcept (POC) Approach .•................. : ..............: ...................'........................... 352 24.14 Application ofPOC-Approach .............................. ....................., ..............................'.... 353 24.15 Comparison ofRFP and POC Approaches ................................................................·..... 354 Narrowing ERP Alternatives .......................................................................................... 354 24.16 Analytic Hierarchy Process (AHP) Approach .................................:.............................. 355 24.17 24.17.1 Steps in AHP ..............:.:.......................'....................................................... 355 Application ofAHP in Evaluation of ERP ............. :....................................................... 355 24.17 24.18.1 Selection of Weights ......................................................................'.............. 358 ' ' Illustrative Problem ........................................................................................................ 358 24.19 Problen1 Staten1ent ............................: ....................-..................................... 358 24.19.l Solving the Illustrative Problem .................................. : ............................... 359 24.19.2 Calculation of Weights of Each Row ........................................................... 359 24.19.3 Calculation ofthe Overall Ranking ofeach Alternative of ERP Solution ... 362 24.19.4 Result ofthe Illustrative Problem ................................................................ 362 24.19.5 24.20 Methodology for ERP Implementation ........................................................................... 362 24.21 USA Principle for the Implementation ........................................................................... 363 24.22 Factors Involved in Successful Implementation .........................: .............:...............: ..... 364 24.23 Some useful Guidelines for ERP Implementation .......................................................f. .. 365 24.24 W hen ERP Implementation Fails? ...'................................: ............................................... 365 24.25 Summary ........................................................................................................................ 366 Review Question·s .......................................................................................................................... 366 · References ..................................................................................................................................... 367 24.12

25.

WORK STUDY .................................................................................................. 36� 25.l 25.2 25:3 25.4 25.5

25.6

Introduction ...............................................................:...:.....................................;·········· 369 Objectives of Work Study ..................................................................................: ............ 369 Steps in Work-Study .............................................................................................,.: ........ 370 Purpose of Method Study ........................................................................................: ....... 372 Procedure of Method Study .................................: ...............: ......:................................... 372 Economic Considerations ............................................................................ 374 25.5.l Technical Considerations .................................., ......................................... 375 25.5.2 Hulllan Reactions ...... ................................................................................... 376 25.5.3 Step 2: Recording Methods and Facts ............................................................................ 376 Flow Type Diagrams ..............................,. .................................................... 376 25.6. l 25.6.2 String Diagram ......................: ............................................................._ ........ 377

xxiv

INDUSTRIAL ENGINEERING AND MANAGEMENT

-25.6.3

Travel Chart (also Called as Cross Chart) .................................. :................ 378

25.6.4

MultipleActivity Chart (Figure 25.6) ....................................... :.................. 378

25.6.5

.Outline Process Chart (Figure 25.7) ............................................................ 379

25. 7

Flow Process Chart .........................................................................................·................ 381

25.8

Process Chart Symbol ............. : ................. , ..................................................................... 381

25.9 25.10

Step 3 of Method Study: Examine ........................................................................... : ...... 384 , Step 4 of Method Study: Develop and Define .......................................:........................ 384

25.11

Steps 5 and 6 Method Study: Install and Maintain ......................................... : .. : ............ 384 ·

25.12

Motion Economy ............................................................................................................ 385

25.13

WorkingArea .......................................................� ......................................................... 386

Review Questions· .......................: .........................................................................................'......... 391 References ·················;·························..·····························:............................................ , .............. 391

26.

WORK MEASUREMENT .......................'............................................. : ............. 393 26.1

Introduction .................................................................................................:................... 393

26.2

Purpose ofY{ork Measurement ....................................................................................... 393

. 26.3

Organisational Suitability .............................................................................. :................ 394.

26.4

Stop Watch Time Study .................................................................................................. 395 26.4.1 List of Time Study Equipment and Form ................................. : .................. 395 · 26.4.2

26.5

Steps in Timy Study (Stop Watch Method) .... :.............................................. 400

26.4.3 How to Determine the Sample, Size? .:........................, .......................: ........ 400 · Some Definitions (Based on JLO) ................................................................................... 401 26.5.1

W01k Content ..................................................................... '......................... 401

26.5.2

RelaxationAllowance ...................................•............................................. 401

26.5.3

ContingencyAllowance ................................................................... :........... 401 ....

26.5.4

.

.

.

PolicyAllowances .................................................................... :.................. 401

26.5.5 26.6

SpecialAllowance ........................................................... '..: ......................... 401 Perfonnance Rating ............................._. .......................................................................... 402.

26.7

Standal'd Tin1e ..........................................................................._..................................... 403

26.8

Work San1pling ................................................................'................................................. 404 26.8.1 Procedure of Work Sampling ........................-.............................................. 404

26.9

26.8.2

Application of Work Sampling ........................................ :........................... 405

26.8.3

Sample Size for Work Sampling ... : ............................................ : ................. 405

Analytical Sampling and Synthetic Data .......... '. ............................................................. 408 26.9.1 26.9.2

26.10

Predetermine Motion Time Standards (PMTS) ........................................... 409

Method Time Measurement (MTM) ........................................................... 409 Comparison of Work Measurement Teclmiques ........................................._. ................... 409

CONTENTS

XXV

26.11 Summary ........................................................................................................................ 411 Review Questions ............................................................................................... :........................... 411 References ...................................................... :.. :..................................... :...................................... 411

27.

JOB EVA[UATION AND MERIT RATING ....... :................................................. 413 Introduction .................................................................................................................... 413 27.1 27.2 Job Evaluation .....................................................................................-............................ 413. 27.2.1 Objective of Job Evaluation ........................................................................ 414 27.7.2 Pre-Requisite of Job Evaluation ............................... : .................. , ............... 414 Benefits of Job Evaluation ........................._.................................................................... 414 27.3 27.4 Limitations of Job Evaluation ................................................ : .........., ............................. 414 27.5 Methods of Job Evaluation ............................................................................. : ............... 415 27.6 Merit Rating•......... : ......................................................................................................... 419. 27.6.1 Objectives of Merit Rating .......................................................................... 420 27.6.2 Advanta.ges of Merit Rating ........................................................................ 420 27.6.3 Limitations of Merit Rating .._., ........................................................-............. 421 Methods For Merit Rating .............................................................................................. 421 27.7 27.8 Requirements for Success of Merit Rating System ......................................................... 423 Review Questions ........................................................................................................................... 424 References ...................................................................................................................................... 424

28.

WAGE-INCENTIVE PAYMENT PLANS ............................................................ 425 28.1 Introduction ........................... :.............................................................-............................ 425 28.2 Objectives of a Good Wage-Incentive Plan .................................................................... 426 28.3 Basis of a Good Wage-Incentive Plan ............... , ............................................................ 426 28.4 Types of Wages Incentive Plans ..................................................................................... 426 Review Questions ...................... y••·················· .. ·····································:................................. .'..... 433 References .........................................................................................: ...........;.:................. :........... 434

29.

GOLDRATT'S THEORY OF CONSTRAINTS................: .. ,................................ 435 29.1 Introduction ........................................................................................................: ........... 435 Some Concepts used by Goldratt ..................................................................................-435 29.2 29.2.1 Why to Manage Inventory aiid Operating Expenses? .................................. 436 29.3 Constraint ....................................................................................................................... 437 29.3.1 An Example from Industry (A Case-Study) ................................ :............ :... 437 29.4 Theory of Constraints (TOC) ................................................ :........................................ 439 Rules for Bottleneck Scheduling in TOC ....................................................................... 440 29.5 Rule I ................................................................................................., ........ 440 29.5.1 29.5.2 Rule 2 ..........................................................................................'................ .440· Rule 3 .......................................................................................................... 443. 29.5.3

xxvi

INDUSTRIAL ENGINEERING AND MANAGEMENT

Rule 4 .......................................................................................................,.. 444 29.5.4 Rule 5 ......................................... :................................ :.............................:.444 29.5.5 Rule 6 .................... ... :................................................................................ 446 29.5.6 Rule 7 .................................................... :..........................:........................... 446 29.5.7 Rule 8 ..............................................................,........, .........:......................:.447 29.5.8 Ru!� 9 .:.................................. : ...................................... _.............................. 447 29,5.9 29.6 Synchronous Manufacturing ..................................:................... , .....: ............................... 447 29.7 Summary ..................................:...............................................' ...................................... 449 Review Questions ...................................................................... :. .................................................. 449 ' References .......................................... , ............................................................................................ 449

30.

ENTREPRENEURSHIP ........................................................: ............................ 451 30.1 Introduction ......................., ..................................... :................................................. : .... 45 l 30.2 Role of Entrepreneurship in Economy ........................................................................... -4'52 30.3 Qualities of Good Entrepreneur .......................... : ...'. ......... :................... :..................... , ... 453 30.4 Some Myth and Reality aboutEntrepreneurship ............................................................ 454 30.5 · Role of Motivation in Entrepreneurship .....:...................................................................455 30.6 Functions and Need for Developing Entrepreneurship ....... :........ T................................ 455 30.7 Entrepreneurial Failure and Remedial Measures ....................:........................:.............. 456 Review Questions ..............................:............................................................................................. 457 References '. .........................................................................................................,........................... 457

.

31.

LEADERSHIP ................................................................................................... 459 31.1 31.2 31.3 31.4

. Introduction ...'.......................................... :..,.................................................................:... 459 Lt'jadership and Management ..................'........................................................ :··· ...... : ..... 460 Qualities of Good Leadership ............................'.: ..... .'................................ :.................... 46q Leadership Style ..................................................................................... :....................... 461

34.4.1 Aµtocratic or Authoritarian Leadership ·:..................................................... 461 · 31.4.2 · Participative, Consultative or Democratic Leadership ...........:.................... 463 31.4.3 Laissez-Faire or Free-Rein Leadership ........................................................ 463 35.4.4 Comparismi of Leadership Styles : .............:......._ ...............................:.......... 464 . 31.5 Leadership Grid .............................................................................................................. 4�4 31.5.1 Improvised Leadership ...........;.................................................................... 464 31.5.2 Authority Compliance ..................................... :... ,................. :............ .......... 464 31.5.3 Country Club Management .., ..................................................._................... 464 31.5.4 Middle of the Road Management .............................. : ................................. 465 Tea1n Manage1nent ................................., ............_... , .... ,................................ 465 31.5.5 Review Questions ..... :....... , .................................. , .....................-......................... , ........................... 465 . References .. .. : ................................................ :.................................. : ............................................. 466

CONTENTS

. 32.

xxvil

TO TAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT .............................. :.......... : ......................... 467 32.1 ·

Introduction .... :.., ..............................................·..............·..............: ......... : ....................... 467

32.2

What isTotal inTQM? .................................................................................... : .............. 467

32.3

What is Quality? ...................................... : ................._............. : ....................................... 467. . 32.3.1

Dimensions of Quality ................................................................................. 468

32.4

Total Quality Management (TQM) ................................................................................. 472 ·

32.5

Quality Guius· ................................................... :......................... , ................................... 474. 32.5.1

Philip B . Crosby ........... :................: .............: ............................................... 474

· 32.5.2

Deming's A pproach toTQM ......'.......... :...................................................... 474

32.5.3

Joseph M . Juran ................................: .......................................................... 475

.

.

32.6

Principal objectives ofTQM ................................................................................, ......... 476

32.7

Management in TQM ...................................... : ......................... : .................................... 477

32.8

Qu,ality In1provement .............................................................., .................... , ...·............... 477

32.9

Quality Cost ......: ......................... : .......................................................... : ..······:·· ..····'····.. 480

32.10

Elements ofTQM ........................................................................................................... 482

32.11

Seven QC Tools for Improvement .................................................................... : ......'....... 487

�2.12

Implementation ofTQM .............................................. : ........................._......................... 491

32.13

ISO 9000 .................................., .................. , ....... :..........................................:............... 491

32.14

32.13.l

ISO 9000 VSTQM ........................................................................................ 492

32.13.2

Basic Steps in Gaining ISO 9001 Registration ....... : .................................... 493

32.13.3

ISO 1400_0 Standaro .................................................................................... 494

32.13.4

Copies of an ISOStandard may be Obtained from the following Addresses ................................................·......... : ....... ................ 494

32.13.5

Standar'ds Make up of the ISO 9000 Family ....................... : ......................_.. 496

32.13.6

Comparison of ISO 9001, ISO 9002 and ISO 9003 ....................._. ............. :496

Quality Awards ................... " .............. :........................................................................_.... 499 32.14.1 Comparison of Malcolm Baldrige Award Criteria 1994, 1996, 1997-A Shift in Focus ........................................................................... 500 32.14.2 · Guidelines for Rajiv Gandhi National Quality Award ........ , ........................ 503

Review Questions .... :........................... : ........................................................................................... 506 References ....'........: ..................................................................................... , .. .'................................ 507

33.

STATISTICAL QUALITY CONTROL ................................................................. 511 33.1 33.2 33.3

Introduction ..........................................................·: ......................................................... 511 Process Control ................................................................................... ,............................ 511 Control Charts ......................... : ...................................................................................... 512

• xxviii

INDUSTRIAL ENGINEERING AND MANAGEMENT

Acceptance Plan .... : ........................................................................................................ 519 Advantages. of Acceptance Plan ......................'............................ :............... 520 33.4.1 Disadvanta�es of Acceptance Plan ...........................:.. : ........... '. ................... 520 33.4,2Suitability .................................................................................................... 520 33.4.3 33.5 Acceptance Sampling ...._.................................................................. !.............................. 520 33.5.1 Nomenclature and Symbols used in Sampling Plan..........................'...... :.... 521 33.6 Single Sampling Plan (SSP) ........................................................................................... 522 33.7 Double Sampling Plan (DSP) ......... '...................... : ..·.............,................................._........ 522 33.8 Sequential Sampling Plan .................................................................... :.......................... 523 The Operating Characteristics Curve .......................................................... :.................. 524 33.9 33.9.1 - How to Draw the OC-Curve? ........'.............. .': .............................................. 525 Procedure of Drawing OC-Curve ................................................................ 526 33.9.2 33.9.3 Different Conditions in the OC-Curve ......................................................... 527 33.10 Average Outgoing Quality (AOQ) .................................................................................. 529 33.10.1 A Special Feature of AOQ Curve ....................................,....... :................... 530 . Review Questions ...............................................- ............................................................................ 537 . References .......................................................... : ............................................................................ 538

33.4

'

34.

RELIABILITY .................................................................................................... 539 Introduction ............................................................................................................ ....... 539 Relationship between Reliability, Failure Rate and MTBF ......: ..................................... 540 Bath Tub Curve .............................................................................................................. 542 The Expected Life of a System .................... :.................................................................. 543 Failure Rate and Hazard Function .................................................................................. 544 Component Reliability from Test Data ............................................................................ 546 · Constant Hazard Model ............................................................. : .................................... 548 34.7.1 Mean Time to Failure (MTTF) .............'....................................................... 548 34.7.2 Mean Time Between Failure (MTBF) ......................................................... 548 34.8 Reliability of a Series System ........................................................ : ................................. 549 Reliability of a Parallel System ................ : .............................._....................................... 550 34.9 34.9.1 Mean-Time Between-Failure (MTBF) ................................................. : ...... 551 34.9.2 A Three Unit Parallel System .................................... , ...'... :.......................... 552 34.10 Software Reliability ..................................................................................................., .... 552 34.11 Software Reliability Metrics .......: ............................... , ................................................... 553 34.11.1 Requirement Reliability Metrics .............................. , .................................. 554 34.11.2 Design and Code Reliability Meh·ics ........................................................... 554 34.11.3 Testing Reliability Metrics .......................................................................... 555 Review Questions ........................................................................................ :.................................. 555

34.1 34.2 34.3 34.4 34.5 34.6 34.7

References ...................... ,........................................................................... ................................... 555

xxix

CONTENTS

35.

BENCHMARKING ........................................................ :................................ : .. 557 . 35.1

Introduction ..................................................................................................... : ............... 557

35.2

· Terms used in Benchmarking ..... :.................................................................................... 558

35.3

Process ofBenchmarking ..................................................................... , ......................... 560

35.4.

Types ofBenchmarking ............. �.................................................................................... 560 • I 35.4.1

.

�

Internal Benclunarking .............. :............................:.................................... 561

35.4.2

Competitive Benclrn1arking ................................ :........................................ 561

35.4.3

. Functional Benchmarking .....................................: ...................... ·: ............... 562

35.4.4

· 562 Best Practice Benchmark in ¥ .. '........'...............................................................

35.5

Process ofBenclu11arking ..... : ................. : ....................................................: .................. 563.

35.6

Benefits ofBenchmarking .........................................,.................................................... 567

35.5.1

· Different Phases in Benchmarking Process ................................................. 565

Review Questions ....................................................................................... " .................................. 5.68 References ..............................................................................................................................:....... 568

36.

BUSI.NESS REENGINEERING ................... ; ..................................................... 571 36.1

Introduction ..................................................................................................................... 571 36.1.1

Definition ofReengineering ...................................................... : ................. 571

36.1.2

Radical .....·............. :..................................................................................... 572

36.1.3

Redesign ...................................................................................................... 572

· 36.1.4

Fundan1ental ................................................................................................ 572

36.1.5

Process ................................ .'...........................................................:........... 572

J6.1.6

Dramatic·...................................................................................................... 572

36.1.7

Rethinking ................................................................................................... 572

36.2

Other Ways to Look at B.PR ....., .................................................... :................................ 573

36.3

Conunon Myths aboi1t BPR ............ :.:............................................................................. 575 36.3.1

36.4 ·

36.5

Process Improvement vs.Process Iimovation .............................................. 575

The 7 Rs. ofReengineering ............................................................................................ 576 36.4.1

Reorchestrate ........'............................................................................: .......... 577

36.4.2

Realization ........................................... .'...................................................... 578

36.4.3

Require111ents .........................'...................................................................... 578

36.4.4

Rethink: .................................................................................... .......... :....... 579

36.4.5

Redesign ..........................................................................................:........... 579, ·

36.4.6

RetoQl .............................................................: ................. .'.......................... 580

· 36.4.7

Reevaluate . .'.................................................................................. :.............. 581

How to Minimize Failure of BPR Projects? ...................................:............................... 582

INDUSTRIAL ENGINEERING-AND MANAGEMENT

XXX

36.6 36.7

BPR andIT .................................................................... ,............................................... 583 Recursive Relationship orERP/IT/E-Business andBPR ...................................... :........ 583

Review Questions ........................................................................................................................... 584 References ...................................................................................................................................... 585 ..

37.

PRINCIPLES OF MANAGEMENT ......... .'.......................................................... 587 37.1

Introduction ..................................................................................................................... 587

37.2

Principles ofManagement.............................................................................................. 589

37.3

Approaches ofManagement Thoughts .... :...................................................................... 589 37.3.1. ScientificManagement.:.... ,................... :..................................................... 590 37.3.2 . Fayol's Principles·........................................................................................ 590 37.3.3. Human RelationsApproach........................... :..........................._;................. 591 37.3.4 Manag�ment Science and QuantitativeApproach .......:.............. ;............... 591

37.4

37.5

37.6 37.7

37.3.5

Systen1S Theoiy ....................... :....................................................................591.

37.3.6

ContingencyManagement.................................................._..............;.......... 592

Role of.Management ..:..... :.. :...........................:............... �.............. :............................... 592 .37.4.1 lnter,-,ersonal Role· .........................._........................................�............. :...... 592 37.4.2 Inforn1ational Roles................................... ;..... :........................................... 592 37.4.3 Decisional Roles............... :.......................................................................... 592 37.4.4

Knowledge Leadership Role ..... :........................... : ............................... :..... 593

37.4.5

Change Handler ............................................. :............. : ............................... 593

Functions ofManag�ment .........................····:·················..·············_-········:.:.................... 59'3 37.5.1 Planning............... :··........ :..........-....................... :..........._............ .'...................594 37.5.2

Organising.................................................................. :................................ 594

37.5.3 37.5.4

Motivating and Directing ................................................................... '...... ;.. 594

Contro1ling ··:·······················:······:···'.······,···········:..................................._...... 595 Leve.ls ofManagement .................................,.......................... :._.............. : ................. :.... 596 Management: Science orAits.......................................................................................... 597

· Review Questions .......................... "-.................: ......-......................................... :.................,............. 598 _ References .................................................................................... :................................................. 598

38. . ORGANISATION ............................................................................................. :. 601 38.1

Introduction................................................................................... :................................ 601

38.2 38.338.4

Principles of Sound Organisation ..................:................................................................. 602 Organisation Structure ........ :........................................................................................... 604 Organisation Desi�n .............................. ,..................................................................._..... 605 38.4.1 FunctionalApproach ......................................................... ......................... 605 38.4.2

FunctionalApproach with Lateral Relationship ................................ :.......... 607

•

CONTENTS

38.5

39.

xxxi

38.4.3 Divisional Approach of Organisation Strncture ........................................... 608 38.4.4 Hybrid Approach of Organisation Stmcture ................................................ 609 38.4.5 �atrix Approach of Organisation Strncture ..............: ..,. ......................... :.... 610. Type of Organisational Structure and Relationship ........................................................ 611 Line Structure ........................................................................·...................... 611 38.5.1 38.5.2 Line and Staff Structure .......:........................................................................ 613 38.5.3 Functional Organisation ........................ :..................................................... 614 Review Questions· .......................,.: ................................................................................ 615 References· ..........................................: ................. : .....................·....................... : .......... 616

PROJECT MANAGEMENT AND CPIVI/PERT ............................................. , ..... 617 Introductiop .............. :·· .....................: ..····.............: ......................................................... 617 Critical P-ath Method (CPM) ...........: ........: ................:............ : ....................................... 617 Assumptio�s in CPM .................................................................................... 618 39.2.1 Principles Involved in CPM ......................................................., ................. 618 39.2.2. Methodology of Critical Path Analysis (CPA) ................................................ , ............... 618 39.3 39.3.1 Advantages of Critical Path Analysis (CPM and PERT) ....................:........ 618 39.4 Terminology in Project Management ..............................: ............. :......'.............. ,........... 619 39.5 Symbols used in Network Planning ........... : .................................................................... 620 621 Connnon Flaws in Network ............................................................................................ 39.6 ' Use of Dummy Activiti�s and/or Dummy Nodes ............................................ : ..........: ... 621 39.7 39.8 Rules for Constructing Network Diagram ...................................................................... 623 Numbering of Events in Network (Fulkerson Rule) ....................................................... 624 39.9 ' 39.10 625 AON Vs AOA Approaches for Diagramming ................................................................. 39.11 Float or Slack ..........., ..............................................................................: ...................... 629 · Illustration of Floats ....................................................................................................... 631 39.12 39.12 Program Evaluation and Review Technique (PERT). ....................................'.................. 632 ' �.............................. 632 39: 13.1 Time Estimate in PERT ................................................ 39.14 Difference between CPM and PERT ..................................:.: ............................................. 635 Review Questions ........................ .............................................................................................!.... 636 References .............................., ...................................... :...._................................, ........................... 637.

39.1 39.:Z

40.

SCHEDULING .. :......................................., .............·............•............................. 639 40.l

Introduction ................................................: ................................................................... 639 · . . Loading .. : .................................................................................................... 640 40.1.1 40.1.2 Sequencing .............................................................................................:.... 640 40.1.3 Detailed Scheduling .................................................................................... 640 40.1.4 Expedi.ting .................................................................................................... 640 40.1.5 Short-term Capacity (Input-output) Control ................................................ 649

xxxil

INDUSTRIAL ENGINEERING AND MANAGEMENT

40.2

Scheduling Ru1es ... ,.......................... : ....................................... :..................................... 641

40.3

Gantt Chart ..................................................................................................................... 644

40.4

How to Prepare a Gantt Chart? .................................................................... 6�4 40.3.1· Johnson's Rule.for Optimal Sequence ofN Jobs on 2 Machine ..............:...,................... 645 Process n Jobs on 3 Machines (n/3 Problem) and Jackson Algorithm ............................ 649

40.5 40.6

Processing of 2 Jobs on m Machine (2/m) Problem ................... : ................................... 650 Review Questions ........................................................... .'...........: ................................................... 654 References· ...................................................................................................................................... 655

41.

WAITING LINES: QUEUING MODELS ........... : ................................................ 657 41.l 41.2 41.3 41.4 41.5

Introduction: ...................................... :........ .................................................................... 657 · Issues Involved in Waiting Line ......: ........................................ :............................. ......... 657 ,. Characteristics of� Queuing Model ............................................................................... ($58 41.3.1 Ari'ival Characteristics ................................................................................. 659 . . Queue Characteristics ..................................................................................................... 661

41. 6 44.7

Service Characteristics ............... :......................................................... , .......... : .............. 661 Custo:.ner Behaviour .................... :....... :!......................................................................... 662 Kendall Notations ........................................................... . ............................................... 662

41.8

Single-Line-Single-Server Model ........................................... : ......................................'. 662

41.9. 41.10

Model II (M/M/1: N/FIFO) ..................................................................-.......................... 666 Model II (M/M/C: oo /FIFO) .............................. :.........................................'. ................. 667

Multiple Cha1mel Queuing Model ............................................................... 667 41.10.1 Review Questions ................................._..................., ....................................................................... 670 References ·······································/·························································�········ ·•························ (i,71 .

42.

SIMULATION .................................................................................................... 673 42. l

Introduction ....... :..................................-.......................................................................... 673 42.1.1 Purpose of Sin1t1lation ..........................................................- ....................... 673 42.1.2 Limitations of Simulation ............................................................................ 674

42.2 42.3 42.4 42.5

Monte Carlo Simulation ................................................................................................. 674 Steps in Si1nulation ............'............................................... ,............................................ :675 Sunu11ary ...........................:............................................................................................ 681 General Purpose Simulation System { GPSS) ........................................................ :........ 681 Revie,:v Questions ...................................................................................................................'........ 685 References .......·............·..................................................................................................... ............... 686

43. _ INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN ...................... 689 43.1 43.2

.Introduction ............................................... : .................................................................... 689 Changing Faces oflndustrial Engineering (IE) ......... : ............. :...................................... 689

xxxiii

CONTENTS

43.3

Some Contemporary Trends .................................................................·.......................... 694 43.3. l

Organisation Trenc! ........., ............................................................................ 694

43.3.2

Technology Trend ............... :·············.. ····················· .................................... 695

43.3.3

Other Trends ..................................................·.............................................. 696

43.4

What is the Future for Industrial Engineering (IE)? ....................................................... 697

43.5

Su1nn1ary ······:·: ..........:................:................................................................................... 697

Review Questions ........................................................................................... , ............................... 697. References .............................................................. :... ........: .......................................................... 698

44.

HUMAN RESOURCE MANAGEMENT AND HUMAN RESOURCE PLANNING ............................................................................... 699 44.1

Human Resource Management ..............·......................................................................... 699 Factors Contributing to the Growing Importance of HR.J\tI .............. : ............ 704 Organizational Behaviour ................................... : ....................: ...................................... 705

44.1.1 44.2

44.3

44.2. l

The Goals of Organizational Behavior ........................... ............................ 706

44.2.2

Individual .........................................................................,. .......................... 706

44.2.3

Group :.....................................................: ................................................... 707

44.2.4

Tean1 ................................................: ...........................: ............................... 709

Human Resource Plaiming (HRP) ...............................: .................................................. 710 44.3.1

45.

Strategic Planning and the Humm� Resource Pla.11.11ing .Process ................... 711

PURCHASING ............................................................ , .. : .................................. 715 45.1

Introduction ...... :.. ............................................................................, .............................. 715 45.1.l

Objective ..................................................................................................... 715

45.1.2

Functions ofPurchasing Department ....................................., ..................... 715·

45.1.3

Duties ofPurchasing Officer .......... ............................... : .............................. 716

45.2

Methods ofPurchasing ...........................................'......................................................... 716

45.3

Purchasing Process/Procedure ....... : .............................. :................................. : ............_ ... 718

45.4

45.5

45.6

45.3. l

Purchasing/Buying De.cision as Per Procedure ............................................ 718

45.3:2

Purchase Requisition Form .......................................................... :........._...... 721

45.3.3

Purcl�asing �rocedure ................................................................................._. 722

Tenders .., ................. :.'......................·............................................... :............................... 723 45.4.l

Notice Inviting Tenders ............................................................................... 723

45.4.2

Comparative Statement ............................................................................... 724

Importance of Materials Management ............................................................................ 725 45.5. l

St9re Records .............................................................................................. 726

45.5.2

Purchasing Systems/Buying Techniques ...................................................... 728

45.5.3

Purchasing/Buying Techniques .................................................................... 728 . t

Vendor Rating ............................................................·..................................................... 72'9

xxxiv

46.

INDUSTRIAL ENGINEERING AND MANAGEMEW

LEAN MANUFACTURING ................................................................................·. 731 46.1

Introduction .................................................................................................................... 73·1 ·

46.2 46.3

CommonMethods Used in Lean Manufacturing ............................................................ 732 Mechanisms for Environmental Improvement through Lean Implementation................ 736 Barriers to Successful Implementation ........................................................................... 7]7

46.4

47.

GROUP TECHNOLOGY ................................................................................... 739 47.1

Introduction·......................................... :................................................................ : ......... 739 47.l.1

47.2 47.3

48.

FLEXIBLE MANUFACTURING SYSTEMS (FMS) ............................................ 751 48.1

49.

Definitions....................................................................................... ........... 739 Objectives......................................................................... : ..: ....... :................................... 739 Production Flow Analysis (PFA) .................................................................................... 744 PFA Procedure.......................................... :....................................... :.......... 744 47.3.1 Objectives inCellular Manufacturing ......................................................... 745 47.3.2 Inh·oduction .................................................................................................................... 751

INDUSTRIAL PSYCHOLOGY ............................. :............................................. 759 49.1

Inh·oduction .................................................................... :............................................... 759 49.l.1

49.2 49.3

Definition .................................................................................................... 760

Evolution oflndustrial Psychology ................................................................................ 760 Primary Role ofindustrial Psychologists ....................................................................... 761

Review Questions ................................................................................................................... , ...... 762

50.

SERVICE OPERATIONS AND SERVICE PRODUCTS ..................................... 763 50.1 50.2 50.3 50.4

51.

Introduction .................................................................................................................... 763 Service OperationsManagement .................................................................................... 763 Services Products and ServiceCharac.teristics ............................................................... 764 OperationsManagement in the Service Sector ..........................·..................................... 764

ERGONOMICS ................................................................................................. 765 51.1 51.2 51.3

Definition of Ergonomics ............................ ,.-................................................................. 765

51.4

Objectives ....................................................................... ,................................................ 766 ls Ergonomics Related with Productivity? .................................................... :................ 766 A Man-Machine System ............ ,.................................................................................... 767

51.5

Design and Types ofCQntrols ..................................................................... 768 51.4.1 Anthropometry ............................................................................................................... 769 51.5.1

51.6 51.7

Principles in the Application of Anthropometric Data ................................. 769

Anthropometry for Workplace Design............................................................................ 770 Ergonomics inComputer WorJ. z-"I

Technology Development


Heavy capital deployment Improve existing process and provide better plant and equipment (Use TQM/Kaizan: refer to Chapter 32) —> No major capital deployment

Medium-term

Short-term

Simplify the product, reduce and standardize the product range —> May require some capital deployment

,

Improve existing methods of plant operation, Improve work planning and use of manpower Increase effectiveness of all employee —> May require little or no capital deployment

Results are subjected to effort and commitments

REVIEW QUESTIONS

3.1 Define the term productivity. How is it different from production? Give examples, using yuur own numbers. 3.2 Explain partial productivity and total productivity. Give examples. 3.3 What measures would you suggest to improve productivity of a firm? 3.4 Consider a company XYZ. The data for output and input for a particular time period is as follows: Output revenue = Rs. 1,00,000 Human input = Rs. 30,000 Material input = Rs. 20,000 Capital input = Rs. 30,000 Energy input = Rs. 10,000 Other expense input = 5,000 Calculate various forms of productivity. (Atm: Human productivity Rs./Rs. 3.33. Material productivity Rs./Rs. 5, Capital productivity Rs./Rs. 3.33, Energy productivity Rs./Rs. 10, Other expenses productivity Rs./Rs. 20, Total factor productivity Rs./Rs. 0.583, Total productivity Rs./Rs. 1.053). 3.5 Consider the balance sheet of company for two successive years. Analyze it from the productivity point of view. 3.6 State the advantages and limitation of the productivity measures. REFERENCES

1. Aggarwal, S.C., 1981, A study of productivity measures for improving benefits, International Journal ofProduction Research, 18(1); 83-103. 2. Craig, C.E., and Harris, C.R., 1973, Total productivity measurement at the firm level, Sloan Management Review 14(3), 13-39.

I'

PRODUCTIVITY

33

3. Dewitt, F., 1970, "Technique for measuring management productivity", Management Review, 59, 2-11. • 4. Eilon, S. and Judith, T., 1993, "On measures of productivity", OMEGA 1(5), 565-75. 5. Endosomwan, 1988, Productivity and Quality Improvement, IFS Publication, England. 6. Kendrick, J.W., 1984, Improving 'Company Productivity: Handbook with Case Studies. The John Hopkins University Press, Baltimore, Maryland. 7. Mundel, 1976, "Measures of Productivity", Industrial Engg., 8(5), 32-36. 8. Sardana, G.D. and Vrat, P., 1984, Models of Productivity Measurement, Productivity xxv (3), 271-89. 9. Sink, D.S., 1985, Productivity Measurement, Improvement, Evaluation and Control, John Wiley Publication, NY. 10. Sumanth, D.J., 1984, Productivity Engineering and Management,. McGra*-Hill Book Co., New York. 11. Taylor, B.W. III and Davis R.K., 1977, "Corporate productivity, getting all together", Industrial Engg., 9(3), 32-36. 12. Vrat, P. and Sardana, GD., 1984, Concept of Productivity: Pleas for Reapraisal, Udyog Pragati, VIII (1), 16-24. 13. Vrat, P., Sardana, GD. and Sahay, B.S., 1998, Productivity Management; A Systems Approach, Narosa Publishing House, New Delhi.

34

IN.DUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

/

' .

FO MS OF BJSINESS ENTERPRISES E7i1

Emm mmm

ma mum

faiD =A =A ETA I= LIA ESA

4.1 INTRODUCTION Business refers to a combination of economic activities involving production or purchase or sale of goods and services. The objective of these activities is to earn profit through the satisfaction of consumer needs. Business is a quite wide term. It encompasses small-size business like shoe-repair shop; medium-size business like automobile-repair shop, cloth-merchant, medicine shop or relatively large business like automobile factory, LIC, etc. It is important to note that business activity involve both production and service sectors. The service sectors are: banking, insurance, transportation, etc. Business is started and run by a person or a group of persons. They are called as owner(s). The owners of the business arrange funds to start and run the business and carry the risk of running it successfully. 4.2 TYPES OF OWNERSHIP A business may he owned by an individual or a group of persons haVing some common interest. When it is run by an individual, the ownership is termed as Sole Trader Enterprise. In case of more than one owner, the ownership may be a partnership firm, a company or a cooperative society. On the basis of size, the business may be classified as cottage industry, small scale industry (SSI), medium or heavy industry. Similarly, if the business may be owned by private sector, Government or public sector, or combination of these two (also, called as joint sector company). 4.3 SOLE PROPRIETOR (OWNER) ENTERPRISE The scic- trader (proprietor or owner) enterprise is one of the most common forms of business ownership. Its mf .n characteristics are one man's business in which the sole owner is fully responsible for: (a) arranging the capital, (b) bearing the risk of enterprise, and (c) managing the business. This type of enterprise is easy to form as there is not much legal formality. 4.3.1 Salient Features 1. Individual ownership and one-man effort. 2. Enterprise and owner entity is same. 3. All risks related to business are covered by one owner. 4. All profits after deduction of taxes go to the proprietor.

36

INDUSTRIAL ENGINEERING AND MANAGEMENT

5. Minimal legal formality to start. 6. Unlimited Liability: In case of loss, the entire debt or loan is recovered from the assets of owner. 7. Ownership and management have no separate entity. 4.3.2 Merits of Sole Ownership

1. Easy formation and closure. 2. Flexibility in Management: Easy to change the product/services, policies and control. '3. Extremely easy decision-making. 4. High Motivation: Due to single ownership, all profits and growth of business are shared by one owner. He is, therefore, highly motivated to work for improvement and profit. 5. Full control of business activities. 6. Secrecy: Trade secrets are easy to maintain. There is no compulsion to publish the account. 7. Personal touch for excellence. 8. Simple and less complicated operation. 9. Indirect support for family employment: Generally, the sole-trader firm is passed to the next generation in the family as there is no other stake-holder. 10. Liberal Government Support: Generally, this type of business is cottage or small-scale industry. Government provides liberal loans for starting and running these businesses. Generally, the electricity and water rate is less for small and' cottage industries. 11. Self-employment of individual is generated widely. 4.3.3 Limitations of Sole Ownership

1. Limitation on resources: Due to financial capacity of sole owner. 2. Limitation of managerial skill: Due to human limitation of excellence in all spheres such as production, marketing, finance, liaison, etc. 3. Unlimited liability: In case of failure or loss in business, the trader loss is not covered by anybody else. 4. Lack of continuity: In case the trader is ill or .busy in his family affairs, the business has to close down. 5. Absence of specialized knowledge in more than one or two areas of business operation. 6. Unduly stressed owner due to variety of jobs. 7. Generally, due to work pressure and limited capital, sole traders are exploited by big industries. 8. Not suitable for large-size operations: Due to limited resources. 9. Comparatively less stable: Due to non-availability of another person to share the responsibility. 10. Limited checks and control. 11. Limited scope for economies of scale: When the production volume is less (as the case of sole ownership), the over-head costs are not widely distributed on the price of the product. This may be a cause of high cost of product: 4.3.4 Suitability of Sole Ownership

Small business operations, which need less capital, less material and processing efforts, less management skill and more personal attention for customers, are suited for this. Some examples are: medical practice, hair-cutting saloon, hoe-making and repair shop, glossary shop, etc.

FORMS OF BUSINESS ENTERPRISES

37

4.4 PARTNERSHIP FIRM As compared to sole trader form of ownership, partnership firm has two major differences: 1. Number of owners are more than one but less than 20. 2. More capital, asset and diversified expertise are available due to more than one owner. As per Indian Partnership Act, 1932, partnership is the relation between persons, who have agreed to share the profit of business carried on by all or any of them acting for all. Partners, while joining together, agree to share capital resources and expertise. In lieu, they share profit (or loss) as per the agreed proportion mentioned in the partnership agreement. 4.4.1 Salient Features of Partnership Firm 1. More than one but less than twenty partners are needed. However, for banking sectors, upper limit is ten partners. 2. There must be an agreement among partners which could be written, oral or implied. Therefore, it is a contractual togetherness for business purpose, being governed by partnership deed. 3. Joint liability of all partners in case of liquidation (which may be proportional to their share in deed). 4. In case of death or indisposition of one partner, the deed becomes null. Then after, new deed is required to be forced. 5. Deed must be for gain in business and not for charity. 6. Transfer of share of one partner is possible only after all other partners agree. 7. Each partner may act as the agent or representative of the firm. 8. Success of the partnership firm is possible when there is full trust and honesty. Sharing of information, transaction and client dealing is must. 9. Registration of the partnership firm is not necessary. However, if registered with the registrar of firms, legal complications are minimized in case of disputes. 10. Time span of partnership firm depends upon the 'will' of all partners. It can be dissolved on death or any time when all partners agree. 4.4.2 Types of Partners Based on different characteristics, the following variety of partners may exist: _ I. Based o►► extent of participation 1. Active (or working) partner: Takes active part in business. 2. Sleeping (or dormant) partner: Simply invests in the business aid collects profit but does no interfere in day-to-day management. II. Based on profit sharing 1. Nominal partner: Only lends name to the business but does not invest in capital nor participate in day-to-day management. He shares profit due to lending his goodwill to the company. 2. Partner in profit: Only shares profit (but not the loss). He does not participate in the management. It is suited for a partner, who is still a minor. III. Based on exhibited Conduct and behaviour 1. Estoppel partner: Behaves in public as a partner of the firm. He does not share profit but covers partial liability of the firm. 2. Partner by holding out: Represents raelLanother person is also a partner of the firm.

38

INDUSTRIAL ENGINEERING AND MANAGEMENT

IV. Based on liabilities 1. Limited partner: Covers liabilities limited to the contributed capital. 2. General partner: He covers unlimited liability irrespective of contributed capital. Unlike limited partner, he participates in the day-to-day management of the firm. 4.4.3 Merits of Partnership. Firms 1. Ease in formation: By an agreement or partnership deed. 2. Larger pooling of financial resources: Due to more number of capital sharing members. 3. Sharing of managerial skill by partners. 4. Collective business decisions by partners. 5. Flexibility in change-over due to lesser number of mutually interactive members. 6. Secrecy due to lesser members. 7. Active interest by members due to major share in capital and direct risk in business dealings. 8. Check and control due to watchfulness of all partners. 9. The interest of partners is fully projected. In case of dissatisfaction, any partner can press for dissolution of deed. 4.4.4 Limitations of Partnership Firms 1. Limited, capital as compared to joint stock company. 2. Unlimited liability in case of dissolution of firm. 3. Uncertainty of existence due to death, bankrupty or demand of a partner. 4. Risk of sharing loss due to other partner's misdeeds. 5.' Risk of disharmony due to difference of opinion among partners. 6. Lack of public and institutional confidence: This is due to not so disclosed accounts and progress report of the firm. 7. Difficulties in expansion and modernisation: This is because not more than 20 partners can be accommodated in the firm. Therefore, future fund generation is difficult. 8. Difficult to withdraw from firm: This is because consent of all other partners may not be readily forthcoming. 4.4.5 Suitability Moderate-size business such as dealership, construction company, transport agency, automobile workshop, petrol pump ownership, etc. 4.5 JOINT HINDU FAMILY BUSINESS It is a form of family business governed by the Hindu law. Two systems of inheritance are common: (a) Dayabhaga: Both male and female members of the family can become co-partners in the family business or property. It is only found in West Bengal in India. (b) Mitakashara: This system is found in India at places other than West Bengal. Only the male members of the family can become the co-partner in the family business. Property of a Hindu is inherited after the death by his son, grand sons and great grand sons, i.e., by next three generations. Each member of the three generations are co-partner in the ancestoral property.

FORMS OF BUSINESS ENTERPRISES

39

The undivided family business (or property) is handled and controlled by the head of the family, who is called as Karla. Other salient features are as follows: (i) Membership is granted by birth of a child. In case of initakashara system, only male child gets automatic membership after the birth. (ii) Minors can become full-fledged members. (iii) There is no limit on number of members. However, the lower limit is two members. (iv) There is no need for the registration of the family business. (v) The management of business is handled by Karta of the family. (vi) Any member can ask for his share of account from the Karta. (vii) The system is continuous or perpetual. It runs generation-after-generation. (viii) The liability of Karta is unlimited, while the liability of other members is limited to the share of their property. (ix) Except in West Bengal, only male member can become member of the business. 4.6 JOINT STOCK COMPANY It is that form of business activity, which is most suited for large-scale business. It does not suffer from limitations of capital and management as in case of partnership firms. Sufficient number of skilled persons and experts may be employed to run the business professionally. Definition: "It is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership." —Prof Haney "... it is an association of many persons who contribute money or money's worth to a common stock and employ it for common purpose. The common stock so contributed is denoted in money, and is a capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable, although the right to transfer them is more or less restricted. —Justice Lindley "A person-artificial, invisible, intangible and existing only in the eyes of law. Being a mere creature of law, it possesses only those properties which the charter of its creation confers upto it, either expressly or as incidental to its very existence." The company, therefore, has following features: • A voluntary association of persons. • Separate legal existence. • Perpetual (on going) succession. • Common seal. • Registered body. • Artificial person: Run by elected representatives, known as directors. • Limited liability. • Transferability of shares. • Efficient management by experts. • Public confidence and better goodwill. • Social objectives not fully ignored and there should be sense of social responsibility. • Ownership is wide and distributed. • Collection of relatively large financial resources.

40

INDUSTRIAL ENGINEERING AND MANAGEMENT

• Better stability of company. • Growth and expansion-oriented mind-set of management. • Economies of scale: Due to large capital and professional management, the company may go for large-scale production, marketing, etc. • Tax relief from government from time to time on certain items. 4.6.1 Limitations of a Company 1. Time-consuming legal formalities in formation. 2. Lack of motivation of share-holders. 3. Corrupt practices by board of directors by mis-utilizing capital of the share holders. 4. Red tapism and bureaucracy may cause delay in decision. 5. Scope for personal initiative is lesser and therefore lesser sense of responsibility may crop up. 6. Board of directors take all the major decisions on behalf of share holders, whose capital is hooked in the business. Quite often, the director misleads the share holders and keeps control on business. This causes rule by few or oligarchy. In oligarchy, the voice of many share holders fails to affect the mis-utilisation of resources. 7. Despite much openness and globalisation during recent years, there is excessive government control and regulations. 8. Many times, directors manipulate the book of account for personal gains and speculation in sharemarket. Heavy speculations and share-market manipulations were seen few years back in Indian industries. Many shareholders badly lose in this situation. 4.7 CLASSIFICATION OF COMPANY The company may be classified as follows: CONll'ANY

Basis : Incorporation

--1

Basis : Liability of members

Basis : Ownership

-7 Chartered Statutory Registered

LUnlimited Limited

Public

Private Govt.

4.7.1 Chartered Company It is established by the special sanction from the head of state or Royal charter. Exclusive powers and privilege are granted to the chartered company. Since the Monarch regime is almost over in the world, this type of companies are not seen in these days. Examples of chartered company are East India Company (by Charter of Queen of England), Bank of England, etc. 4.7.2 Statutory Company It is formed by a special but separate act of the central or state legislature. All the powers, objectives and rules are specified in the special act of parliament/state legislation. Example of this type are Reserve Bank of India (RBI), Unit Trust of India (UTI), Indtistrial Development Bank of India (IDBI), etc.

FORMS OF BUSINESS ENTERPRISES

41

4.7.3 Registered Company It is formed by registering with the registrar of companies under companies act. It is governed by companies act. Some of the most important companies of this type are TISCO, Reliance Industries Ltd., etc. Based on the liability of the members, the registered companies are classified as: 4.7.4 Unlimited Company In this company, the liability of the members are unlimited. Unlimited liability means that the personal property of the members can be attached to meet the obligations of the creditors (who give loan). Such companies are rare in Indian economy. 4.7.5 Limited Company In this company, the liability of the members of the company is limited to the number of shares he holds. The company is registered with a specific share capital being contributed by its members. The liability of any member is limited to the proportion of share he holds. There are few companies, which are limited by guarantee. In these companies, the liability of any member (who is a guarantor) is limited to the amount he guarantees in case of the liquidation of the company. The guaranteed amount is over and above the share capital but it can be called upon only at the time of winding up of the company. Therefore, any such guarantee may be treated as a reserve capital. Some companies, which promote sports, art, literature, etc., fall under this category. Based on ownership, the companies are classified as follows: 4.7.6 Private Company It is established by an Article of Association, which has the main features as follows: 1. Restriction on the right of the members in transferring the shares. 2. Decides the number of its members which can be between 2 to 50. 3. Restricts involvement of public, other than its member, to subscribe its shares or debentures. 4.7.7 Public Company It is also established by an Article of Association, which has the main features as follows: 1. No restriction on the right of the members in transferring the shares. 2. Puts no upper limit on the number of members. 3. Keeps the company free to invite public to subscribe its shares or debentures. 4.7.8 Government Company In this company, at least 51% of the share capital is held by state and/or central government. The company in which the government holds the share is also called a joint sector company. Examples 1. Private Sector: Tata Iron and Steel Company (TISCO), Tata Engineering and Locomotive Company (TELCO), Grocery shop, scooter repair shop, etc. 2. Public Sector: Mainly central or state government-owned enterprises, such as: Railways, LIC, Mahanagar Telephone Nigam Limited (MTNL), National Thermal Power Corporation (NTPC), Delhi Transport Corporation DTC, etc. 3. Joint Sector: Cochin refineries, Praga Tools Corporation, Gujarat State Fertilizer Company, etc. 4.8 COMPARISON OF PUBLIC, PRIVATE AND JOINT SECTOR COMPANIES The main characteristics of public, private and joint sector enterprises' are compared in Table 4.1.

42

INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 4.1 Forms of Enterprises

Private Sector

Public Sector

Joint Sector

Ownership

Non-government private individual(s)

Government body

Combination of private entrepreneurs and government

Objective and Goal

Profit

Social obligations and profit

Social obligations and ' profit

Management

Generally private professionals or owner himself

Government nominees

Mainly board of directors having representations from both sides

Professional Competence and Productivity

Generally high

Generally low

Medium

Accountability

Owner

Public

Private and public both

Future after globalization and liberalization (In India)

Very open, Liberal permission in most sectors

Limited to selected sectors like Defence, Nuclear Power, Railways, etc.

More opening-up in air-lines, banking, insurance, housing, etc.

.

4.9 COOPERATIVE ORGANISATION The basic aim of cooperative organisation is self-help and mutual cooperations. The members are more concerned about their own interest and mutual help. The focus is voluntary association of members in this organisation. International Labor Organisation (ILO) defines it as "an association of persons, usi illy of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organisation, making equitable contributions to the capital required and accepting a fair share of risks and benefits of the undertakings." Indian Cooperative Societies Act (1912, Section 4) says that it is a society, which has as its objectives the promotion of economic interests of its members in accordance with cooperative principles. Salient features of cooperative societies

1. Voluntary organization. 2. Suited for relatively economical weaker sections. 3. Objective is mutual help and service motive. 4. Common interest of members. 5. Open membership. 6. Democratic set-up: One person-one vote principle.

7. Separate legislative entity: Registration is required. 8. Disposal of surplus, interest or profits, among members in accordance with their share capital 4.9.1 Merits of Cooperative Organisations 1. Easy formation: It is easy to form the cooperative societies. Registration with the registrar of cooperative

societies is needed. There should be minimum 10 members to start it. However, there is no upper limit for the membership.

FORMS OF BUSINESS ENTERPRISES

43

2. Open membership: Any member, irrespective of caste, creed, sex or religion, can become the member. 3. Voluntary association: Membership cannot be forced on any person. Therefore, it is a voluntary association. 4. Autonomy: These organisations have autonomy to invest or to do business, which is legal and beneficial to each member. 5. Stability and continuity: These organisations have separate legal entity. Therefore, their existence is not affected by insolvency or death of its member. 6. Limited liability: The liability of any Member is limited to his contribution in capital. For any debt of the society, members do not bear personal liability. 7. Democrative management: The election and functioning is democratic. Normally, one-member onevote principle is applicable. 8. Easy capital generation: Since the surplus and income are distributed among members, fund generation is easy. Sometimes, out of the generated profits, additional shares may also be allotted to the members. 9. Government control and patronage: As a measure of social welfare, government gives low interest loan, special quota in land and housing, and other patronages to these societies. 10. No speculation: There is very limited risk to the members as these organisations are normally not involved in speculative business. 11. Service inotive: The motive of these organisations is service to their members. Therefore, cooperative societies are very suited to the weaker section of society. 4.9.2 Limitations of Cooperative Organisations 1. Limited capital: The capital generated in this form of business is through share of limited members and the subscription of members. Therefore, the capital is limited. The business activity, therefore, is relatively limited in size. 2. Lack of management competency:schese societies are run by few elected members, who are among the subscribers. They may lack the management competency. 3. Lack of mutual interest: The members generally lack interest in the day-to-day running of the society. Their commitment level is much less. 4. Lack of coordination: Cooperative society generally lacks the coordination among the members. This is due to part-time activity and lack of interest among members and office-bearers. 5. Lack of motivation among -members: Due to low return on investment, most of the members are not interested in its running. The annual general meeting and lunch/dinner on that day are the concern for majority of the members. 6. Lack of secrecy: It is impossible to maintain the secrecy of the business activities as everything in the society is exposed to each member. 7. Chances of corruption: Due to limited interest by majority of persons, and manipulation in accounts and audits, there are major chances of corruption. 8. Chances of rift among members: The chances of rift among members are generally high. This is due to lack of regular activities, lack of proper communication and clash of interest. 9. Non-transferability of shares: The shares are non-transferable in cooperative society. Hence, the exit route for the member is to quit the organisation, which is sometimes difficult. 10. Undue government control: Each cooperative society should be registered with the government. Despite lack of support from government, the control of government is sometimes unjustified.

44

INDUSTRIAL ENGINEERING AND MANAGEMENT

4.10 TYPES OF COOPERATIVE SOCIETIES

The purpose of the cooperative society is to provide services and profit to its members. Based on the purpose, it may have following categories: 1. Consumers' Cooperative Society 2. Industrial Cooperative Society 3. Cooperative Marketing Society 4. Cooperative Credit Society 5. Cooperative Housing Society 6. Cooperative Farming Society. 4.10.1 Consumers' Cooperative Society

The purpose of consumers' cooperative society (or store) is to eliminate the middleman between consumers and producers. Second purpose is to ensure a steady and regular supply of goods and services which the consumers need. Any profit of the cooperative societies is to be shared among members in the form of dividend. 4.10.2 Industrial Cooperative Society

It is formed to help small-scale producers or artisans to face competition and to increase productivity. Raw materials, tools and equipments are generally supplied by these societies. In some of these societies, goods are collectively produced and sold. Income is distributed among members on the basis of the proportion of goods sold by each member to the society. 4.10.3 Cooperative Marketing Society

This society is formed for small producers and artisans. The purposes are as follows: (a) Enables members to secure appropriate remunerative price for their sold goods. (b) Improves bargaining power in the market. (c) Places even the small producers in the competitive position. (d) Common transportation, marketing, warehousing, grading, packaging, market research and market support save the small producers from excessive financial and resource constraints. (e) Eliminates middleman in marketing goods. ( f) Provides financial support to its members. 4.10.4 Cooperative Credit Society

The objective of this society is to promote the habit of saving among its members. It provides financial assistance or credit to its members when they need. The advantage of credit society is to save the members from the exploitation of money lenders. 4.10.5 Cooperative Housing Society It is formed to provide residential accommodation to its members on ownership basis on a fair price.

The cooperative buys land from municipal authority and constructs flats for its members. Payment is charged from members on instalments, which is very convenient. 4.10.6 Cooperative Farming Society

It is formed for the small farmers. It provides agricultural inputs like seeds, irrigation tools, fertilizers, etc., to its members. Small farmers, who cannot afford scientific farming and mechanization, are greatly helped by forming this society.

45

FORMS OF BUSINESS ENTERPRISES

4.11 COMPARISON OF DIFFERENT FORMS OF BUSINESS OWNERSHIP. Forms of Ownership

Factor Sole Ownership

Joint Hindu Family

Partnership

Private Limited Company

Public Limited Company

Cooperative Society

I. Ownership

Single

Family

In banking sector: 2 < members < 10 in other business 2 < members < 20

2 < members

Members < 7 Member > 10 No upper limit No upper limit

2. Formation

Easy; No legal formality

Easy; No major legal formality

Moderately easy; No major legal formality

Different; legal entity

Major legal formalities

Moderate legal formality

3. Separate None Legal Status

None

None

Yes

Yes

Yes

4. Capital Required

Limited

Limited

Large

Major

Not substantial

5. Management By owner

By owner

By owner(s) and shared

By hired experts or owner

Separate from owner

Few elected members

6. Secrecy

Complete

Complete

Shared among partners

Shared among members

No

No

7. Govt. Regulation

No

No

Fairly low

Fairly high

Highly regulative

Moderate

8. Expertise needed

Limited

Limited

Limited

Failry high'

Quite high

Moderate.

9. Owner's Liability

Unlimited

Unlimited

Unlimited

Limited

Limited

Governed by-laws

10.Profit Sharing

Complete by owner '

Shared among partners

Proportionate to share being held

11.Governed by law

No

No

Indian Parliament Act, 1932

Companies Act, 1956

12.Transfer of Ownership

Any time

After death of father to son

Relatively difficult

Very less

•

13.Tax . Structure 14.Audit

Based on volume of business by members Cooperative Society Act • 1912

Very easy by transfer of sham.,

Restricted

Very less

Heavy

Exemption

No

o Itlust

f,

/

'

t No

, •

No

•

Must

Must

/' Contd...

46

INDUSTRIAL ENGINEERING AND MANAGEMENT

Factor

Forms of Ownership Sole Ownership

15.Closure

Joint Hindu Family

Partnership

Private Limited Company

Public Limited Company

Any time

16.Documentation .-

Not much written papers

17.Suitability

18.Stability

Governed by will of owner

Cooperative Society As per Act

By consent of all partners

Not much

Very systematic; Governed by•Memorandum of Association

Small business, Dependent on the expertise of owner

Medium business; depends on capital, expertise and market forces

Medium to large business; depends upon market forces

Medium to large business; depends upon Govt. priorities

Medium business; depends upon mutual benefits of members

Life of owner

Depends upon all partners' will

Continuous

Continuous

Continuous

After the death of owner passed to son

REVIEW QUESTIONS 4.1 Explain briefly the various forms of the Business Enterprises. 4.2 What do you understand by Partnership? 4.3 Explain: (i) limited partnership, (ii) minor partner, (iii) sleeping partner. 4.4 What is a Joint Stock Company? Discuss its main features. 4.5 Explain the Cooperative Form of Organisation. What is the purpose of forming of (i) Credit cooperative society, (ii) Cooperative housing society, and (iii) Cooperative marketing society?. 4.6 Compare Public, Private and Joint Sector.

REFERENCES 1. Bhkishan, Y.K., 1987, Fundamentals Delhi.

of Business Organisation and Mcnagement, Sultan Chand & Sons: New

2. Ramesh, M.S., 1985, Principles & Practice of Modern Business Organisation, Administration & Management, Kalyani Publishers: New Delhi (Volume 1). 3. Singh B.P., and Chhabra TN., 1988. Business Organisation: and Management. Kitab Mahal: Allahabad.

FORECASTING

5.1 INTRODUCTION Forecasting is the first major activity in the planning. It involves careful study of past data and present scenario. The main purpose of forecasting is to estimate the occurrence, timing, or magnitude of future events. For example, the trend of past ten years in the demand of cars and corresponding pUrchasing power of the consumers may form a basis of forecasting the demand of cars during next year. Once, the reliable forecast for the demand is available, a good planning of activities is needed to meet the future demand. Forecasting, thus, provides the input to the planning and scheduling process. Precise forecasting of economic activities, such as product demand, is almost impossible because of many interactive factors, which are difficult to model. Despite the fact that highly reliable forecast is unrealistic, the approximate estimate forms the basis of planning process.

5.2 BENEFITS OF FORECASTING Good forecast of material, labour and other resources for operation are essentially needed by the managers. If good projection of future demand is available, the management may take suitable action regarding inventory. Similarly, if production activities are accurately forecasted, then balanced work-load may be planned. Good labour relations may be maintained as there would be lesser hiring and firing activities by the management with better manpower planning. Therefore, forecasting is useful due to following benefits: 1. Effective handling of uncertainty 2. Better labour relations 3. Balanced work-load 4. Minimisation in the fluctuations of production 5. Better use of production facilities 6. Better material management 7. Better customer service 8. Better utilisation of capital and resources 9. Better design of facilities and production system. Efforts in forecasting activity involve two types of costs. While more effort in forecasting causes increased cost due to data collection and analysis, lesser forecasting activity involves lost revenue, which may

INDUSTRIAL ENGINEERING AND MANAGEMENT

48

be due to unplanned labour, unplanned material or unplanned capital cost (Figure 5.1). Therefore, each firm should maintain a balance in its forecasting effort and stick to a zone near to accuracy cost trade off (Figure 5.2). Forecasting

Opportunity cost and lost revenue Less Effort Figure 5.1

-iIncreased cost of forcasting More Effort

Effect of forecasting efforts

Cost of increased effort

Cost (in Rs.)

O Data collection O Reporting O Analysis Opportunity Cost 0 Unplanned labour 0 Unplanned material o Unplanned capital, etc. Forecasting Effort (or Accuracy of forecast) —.Figure 5.2 Balance of forecasting efforts

Difference between Forecasting and Prediction Forecasting and prediction are two different things (Table 5.1). Forecasting is objective, scientific, reproducple, free from individual bias and error analysis is possible in it. Prediction, on the other hand, is subjective, mostly intuitive, non-reproducible and contains individual bias. Only limited error analysis is possible in prediction. Table 5.1 Forecasting

Difference between Forecasting and Prediction

a

I. Forecasting involves the projection of the past into the future. 2. Forecast involves estimating the level of demand for a product on the basis of factors that generated the demand in the past months.

Prediction I. Prediction involves judgement in management after taking all available information into account. 2. Prediction involves the anticipated change into the future. It may include even new factors that may affect future d..mand.

3. Forecasting is more scientific.

3. Prediction is more intuitive.

4. It is relatively free from personal bias. _

4. It is more governed by personal bias and preferences.

5. It is more objective.

5. It is more subjective.

6. It is generally called as "Throw Ahead" technique.

6. It is generally called as "Saying Beforehand"

7. Error analysis is possible.

7. Prediction does not contain error analysis.

8. Forecasting is reproducible, i.e., everytime same result

8. It is non-producible.

technique.

would be obtained by any particular technique.

FORECASTING

49

5.3 TYPES OF FORECASTING The forecasting may be classified on the basis of time span or range of forecast. Three categories may be identified as follows: 5.3.1 Long-Range Forecasting Long-range forecasting consists of time period of more than 5 years. Characteristics: Normally, it is difficult to model and foresee events for more than five years. It is mainly due to economic uncertainty and variation in the behaviour of the interrelated processes. For example, state of economy and technology may completely change in next five years and, therefore, the trend of data during past few years may not be sufficient. Applications: Long-range forecasting is useful in the following areas: • Capital planning • Plant location • Plant layout or expansion • New product planning • Research and development planning • Technology management, etc. Method of Forecasting: Long-range planning is a difficult task. Generally, these forecasts are broad in nature and general type in characteristic. Mostly, qualitative techniques are used. Studies, related to technological break-through, economic studies, marketing survey, demographic projections, etc., are used to make judgemental estimate of the future event. 5.3.2 Medium-Range Forecasting The range for medium-range forecasting is generally 1 to 5 years. Characteristics: As the range of forecast shortens from .5 to 1 year, the accuracy of forecast increases. This is due to better understanding of future and relatively lesser uncertainty. For these forecasts, more numerical estimates are needed. Estimate of reliability of forecast may be useful in medium-range forecast. Applications: Medium range forecast is vary useful in following areas: • Sales planning and sales force decisions • Productions planning • Capital and cash planning • Inventory planning • Enrollment of students in a college, etc. Method of frecasting: Medium-range forecasting needs judgement as well as time series analysis. Combination of collective opinion, regression analysis, correlation of different index and inflation, etc., may be useful in forecasting. 5.3.3 Short-Range Forecasting The ange for short-range forecasting is typically less—from one hour to one year. In most cases, it is for one season, a few months or a few weeks. Characteristics: The short-range forecasting is needed at detailed level, such as demand of specific items. This forecast may affect the purchasing activity. Specific value of forecast is needed. There is very less sLope of judgement in short-range forecast and, therefore, past data are mainly projected into future. Applications: Short-range forecasting is commonly used in immediate control of activities. Some related applications are: • Purchasing

50

INDUSTRIAL ENGINEERING AND MANAGEMENT

• Overtime decisions • Scheduling of job • Machine maintenance, etc. Methods of Forecasting: Short-range forecasting is based on past data. The trend of data is projected or extrapolated into future. For this exponential smoothing, graphical projections, part explosion into product family, etc., are used. For example, monthly forecast of sales may form the basis of production planning activities. 5.4 COMMONLY OBSERVED DEMAND PATTERN

Forecasting demand of a product is generally associated with the pattern of its past demand. Different products have different demands. With growing population, the demand for housing is likely to increase. But the demand for some products, for examples raincoat or umbrellas also depends upon season. In rainy season, their demand is quite high as compared to winter season. This is a seasonal demand pattern. Various demand patterns are shown in Figure 5.3.

Constant Demand

Cs E

E

E

Linear Demand (Growth)

Ramp Demand (New market) Time

Time

' Time

E Seasonal Pattern with

Growth

Cyclic Demand

Time

Time

Transient or Impulse Demand

73 Sudden Rise in Demand

Sudden Fall in Demand

Cs

E A f

(Step Demand)

Time

Time Figure 5.3

General Demand Pattern

Time

FORECASTING

51

Some demand patterns are abnormal for which forecasting is difficult. For example, transient impulse, sudden rise or sudden fall in the pattern. These may occur due to some unforeseen reasons like war or natural calamities. 5.5 QUALITATIVE METHODS OF FORECASTING Qualitative methods are needed in forecasting when data, necessary to use time series or causal model, are not available. For example, when a new product is to be launched in the market, its past demand data are not available. Therefore, time series trend analysis is impractical. Qualitative techniques, which incorporate human judgement, expert opinion, management intuition, market research, historical analogy or grass root forecasting are useful in such cases. Some approaches are as follows: 5.5.1 Delphi Method In this method, a panel of outside experts is identified. They are given a series of structured questionnaires. The answers of each questionnaire are used as input for the design of the next questionnaire. The identity of experts is not disclosed. This is for the purpose that nobody should influence the opinion of others. The coordinator of the project prepares the statistical summary of responses. This, along with the support for the responses, is provided to the experts in the next round. The participants are asked if they want to modify their previous response. In this way, after few rounds of questionnaires, the final forecast is derived. Delphi is used for long-range forecast. It is generally used for new product demand, technological forecast for new technology, effect of scientific advances, changes in society, changes in competitive environment etc. For example, the effect of intemet/intranet or information-highway in the educational system of India in next 25 years may be forecasted through this approach. Advantages of Delphi Method: The advantages of Delphi methd are: • It is effective, when past data is absent. • It does not require experts to meet in person. • It is extremely useful for the forecast of new technology or new product. Limitations of Delphi Method: The limitations of Delphi method are as follows: • It is a time consuming process, which may be around one year. During this period, the experts may change their perception. Sometimes, the very need of forecasting loses its significance due to the delay. • As experts are not accountable, their response may be less meaningful. • If the questionnaires are poorly designed, Delphi would be ineffective. • Accuracy or reliability of forecast is relatively poor in Delphi method. Therefore, it should only be used when past trend is absent and quantitative models are difficult to use. 5.5.2 Market Research It is used to determine consumer liking in a product or service. A set of hypothesis is tested through the data, which is generated in the survey. 5.5.3 Salesforce Forecast Salesforce is a team that is closest to the customer. Their estimates are compiled to assess the future demand. 1, pharmaceutical market, the estimates given by medical representatives of all territories are oftenly us to determine the sales forecast of a particular medicine. 5.5.4 Historical Analogy It is used when the new product or new technology is strongly similar to an established product whose demand dat-1 is known. This. approach is effective for medium to long-range forecast and it is quite cost effective.

52

INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 5.2 Summary of Qualitative models of Forecasting Qualitative Model

Range of Forecast

Description

Relative Cost

Time to Forecast

Application

Accuracy

Delphi

Experts panel respond to a series of questionnaires. They have access to all information.

Long range

Medium

High

• New product • New technology

Fair to good

Market Research

Use of survey, questionnaire for testing the hypothesis regarding consumer behaviour

Short or medium range

High

High

• New prdouct • Preferences of consumers • Pre-poll forecast

Excellent in short ranges. Fair in long range

Sales forecast Opinion, Judgement or Grass root Forecast

Projection of estimates by grass-root level people like sales force who are close to consumers

Short range

Low

Quick and frequent

• Estimate of medicine of a particular type • Govt. contract which may be procured, etc.

Fair to poor

Historical analogy

Life cycles of similar . Long range products or services are compared. Demand pattern for each stage of life cycle is assumed to be analogous for comparable products/services.

Low to medium

Quick

7

Poor to fair

/

New product • New services

5.6 ACCURACY OF FORECAST .

It is almost impossible to obtain an exactly right forecast every time. This is due to many factors, which affect the trend in data. It is difficult to capture the exact interrelation of these influencing factors. Therefore, some error in forecasted value and actual value is quite common. Sometimes, it is important to know if the forecaster (a forecaiting technique) is unbiased or not. An unbiased model should overestimate or underestimate the forecast in almost equal ratio. 5.6.1 Measures of Forecasting Error

1. Mean Absolute Deviation (MAD):' This is calculated as the average of absolute value of difference between actual and forecasted value. The negative sign in this difference is ignored as overestimate as well as underestimate are both off-target and thus undesirable.

E ID, —F,1 MAD = where;

t=i

n

D, = Actual value of demand for period t F, = Forecasted demand for period t N= number of periods considered for calculating the error.

2. Mean Sum of Square Error (MSE): The average of square of all errors in the forecast is termed as MSE. Its interpretation is same as MAD.

53

FORECASTING

(D, — Ff )2 MSE = 1=1 3. Bias: Bias is measure of overestimation or underestimation. A positive bias indicates under-estimation while a negative bias indicates overestimation.

E (D, — F,) Bias = (=I 4. Tracking Signal (TS): It is used to identify those items, which do not keep pace with either positive or negative bias or trend.

(D, — F,) TS = 1=1 (MAD)„ where,

(BIAS)„ (MAD)„

(MAD)„ = Mean absolute deviation till period n (Bias)„ = Bias till period n.

5.7 QUANTITATIVE METHODS OF FORECASTING 5.7.1 Extrapolation Extrapolation is one of the easiest ways to forecast. For example, based on the past few values of a production capacity, next value may be extrapolated on a graph paper. This may be done by extending the curve (or line) joining the already known values. For example, if the production capacity of a firm has been 445, 545 and 645, then in the next year one may expect a production capacity requirement of 745 units (Figure 5.4). 800

700 ,o Production Capacity

600

Future Projection by Extrapolation

500

400

•

Past Trend

I

I

1996

1997

I 1998

1999

Year

Figure 5.4 Forecasting of Production Capacity by Extrapolation

The limitation with the extrapolation method is its inability to deal with non-linear trend and swing in the pattern of past data. Time Series Analysis: There are some models in forecasting which involve analysis of past data or happenings. These models are as follows.

54

INDUSTRIAL ENGINEERING AND MANAGEMENT

1. Simple moving average 2. Weighted moving average 3. Exponential smoothing 4. Double exponential smoothing. 5.7.2 Simple Moving Average (SMA)

Following approach is followed in simple moving average method: Compute the mean of only a specified number of .consecutive data which are most recent values in series. Call this Ft. This F would be the forecast for next period. For example, a 5-month forecast of moving average should account for the last five values of demand in the demand forecasting. In general, the forecast at the end of t periods, the n period, simple moving average forecast for (t + 1)th period is given by F fr 1 =

1

E

Di n i=t+t-n where, D. is the actual demand for the 'th period n is the number of periods included in each average. Example 5.1 Week

Forecast for 3-Month Simple Moving Average. Demand for the week (units)

Cumulative demand for the last 3-week

3-week average demand

I- -1 105 1 I 110 — — — — 1 L 107_1

10 11 12 13 14 15 16

118 120 101 106

I— — --> 322 — —= 3— —X107.33 335 111.67 345 115 339 113

Example 5.2 Effect of period considered in SMA. Let us consider 3-weeks 5-week and 9-week simple moving average forecast. Week

Demand

3-week SMA

10 11 12 13 14 15 16 17 18

105 110 107 118 120 101 106 114 118

107.33 111.67 115 113 109 107

5-week SMA

112 111.2 110.4 111.8

9-week SMA

55

FORECASTING

Week

Demand

3-week SMA

19

121

112.(:7

111.4

I11

20

125

117.67

112

112.7

21

130

121.3

116.8

114.4

22

135

125.3

121.6

117

23

141

130

125.8

118.9

24

147

135.3

129.8

121.2

25

9-week SMA

5-week SMA

156

141

134.2

126.3

26

170

148

141.8

131.9

27

185

157.67

149.8

138.1

28

198

170.3

159.8

145.5

29

212

184.3

171.2

153.7

30

225

198.3

184.2

163.8

It may be observed in SMA approach: 1.The longer the moving-average period, the greater the random elements smoothening. 2. In case of trend (increasing/decreasing), the SMA has adverse trend. This is due to lagging trend. 3. The longer is the time span, the smoother is the forecast but with lagging trend. 4. Simple moving average method involves quite large data handling as we go fol. large period average (Figure 5.5). 250 co,

200 E 150

100

50

1111111111111111

III

10 II 12 13 14 15 16 17 18 18 20 21 22 23 24 25 26 27 28 29 30 Weeks Demand

-s- 3-week moving average

5-week moving average

-x- 9-week moving average

Figure 5.5

Effect of period in simple moving average method of forecasting

I

INDUSTRIAL ENGINEERING AND MANAGEMENT

56 5.7.3 Weighted Moving Average

This approach is based on the principle that more weightago should be given to relatively newer data. The forecast is the weighted • average of data. Thus: Iv; Di

F,1 = 1=14-1-n

where, wi is the relative weight of data for the ith period

E =

and

i=t+l-n

Example 5.3

What is the forecast for the 4th period, according to data given below? Period

Actual Demand

Weightage

I 2 3

105 108 112

0.1 0;3 0.6

Solution: The weighted moving average forecast for the 4th period F4 = (0.1x105 + 0.3 x108 + 0.6 x112) = 110.1 In case of simple moving average, 1 F4 = (105 +108 +112) = 108.33

-(0

In case that weightage is 0.6, 0.3 and 0.1 in the above problem, F4 = (0.6 x105 + 0.3 x108 + 0.1x112) ...(iii) = 106.6 It may be noted that when more weight is given to the recent values, the forecast is nearer to the likely trend. Weighted moving average is advantageous as compared to simple moving average as it is able to give more importance to recent data. 5.7.4 Exponential Smoothing

In exponential smoothing method, the weightage of the data diminishes exponentially as the data become older. In simple moving average, the only few past data are accounted. However, in exponential smoothing, all past data are accounted. The weightage of every previous data decreases by (1 - a) times, where a is called as exponential smoothing constant. For example, when a is equal to 0.3, the weightage of last period data is 0.3 and weightage of last to last period data is 0.3 (1 - 0.3) or 0.21.

Let

Period

Demand

1 2 3

101 105 110

Weight

0.147 a (1- a) = 0.21 a = 0.3

a (I - a)2 =

F1 = One period ahead forecast made at time t Di = Actual demand for period t a = Smoothing constant (0 a 1)

57

FORECASTING

Then,

Ft =

+ (1— a) Ft _ I

Alternately

Ff = 1) Thus, forecast for next period is the algebric sum of forecast for the last period and a times error in forecast for the last period. Now,

F, = a r _ I + (1— a) F,_, Fr-1 = aDi _ 2 + (1— a) Fr-2

Putting this in the previous equation, we get • = aDr

+ (1— a) [D,_2 + (1— a) F;_2 ] = CCA-1 + a (1— a) Di _ 2 + (1— a)2 F_ 2 1

Similarly, expanding for Ff _2 we get • = aDt _ i + a (1— a) Dt _ 2 + a (1— a)2 Thus,

+ (1— a)3 F,_3

F, = aDt _ i + a (1— a) /),_2 + a (1— a)2 Di_3 + a (1— a)3 Dt _ 4 ±...

Now, observe the above expression. We know that the value of a is between 0 and 1. Therefore, weightage to the past data decreases as the data becomes older. For example, if a is 0.3 weightage to the data, 3 period old is a (1 — a)2 or 0.147. Similarly, weightage to 4 period old data is a (1 — a)3 = 0.1029. Thus, weightage to the past data declines exponentially. A closer look at above equation reveals that higher value of a would give more weightage to error (Dt_1 — F,_1) in the forecast period t. Therefore, such a choice would lead to more adjustment for error in the next forecast. This case is similar to a situation that more value of past data is accounted in a moving average forecast. A lower value of a (say 0.001) will not provide much adjustment for error from its past forecast.

weightage of Past Data . •

a(I — a)t-i

2

r-3

3

—2

Period

Figure 5.6

Weight of past data in exponential smoothing

r—I

58

INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 5.4 Constant.

Comparison of Exponential Smoothing Forecast for Different Values of Smoothing

Let us consider demand of an item for ten weeks, given in the following table. The forecast for different value of a is also shown. Week

Demand

Forecast a = 0.1

a = 0.5

a = 0.9

1

1,000

2

350

1,000

1,000

1,000

3

950

935

675

415

4

975

937

813

897

5

2,100

940

894

967

6

750

1,056

1,497

1,987

7

550

1,026

1,123

874

8

300

978

837

582

9

1,200

910

568

328

10

1,770

939

884

1,113

Following observations pertain to the exponential smoothing constant (a): • Smaller is the value of a, more is the smoothing effect in forecast. • Higher value of a gives more robust forecast and response more quickly to changes. • Higher value of a gives more weightage to past data as compared to smaller value of a.

Dema n d/Forecast

2500

--•—

—o— 0.1 —A— 0.5 —X-- 0.9

Demand

2000 1500

f ( 1000

\ --gAir .

itAk„ ._ •At

500 0

I

I

2

I

3

,p.- •

4?-- —'41111111'9IlWri%,

I

4

J

5

I

6

I

7

I

8

Week

Figure 5.7 Effect of smoothing constant on forecast

I

9

10

59

FORECASTING

Exponential Forecasts (F1 ) versus Actual Demands (D1) Lagging Tenet

Flattening Effect a= .55

800

a= .35

E a = .15 400

F=

+ a (Di_ i — F,_1)

200

111[11 I

I

I

I

I

I

I

I

II III II

I

Time

Figure 5.8 Effect of Exponential Forecasting on Forecast Example 5.5 Problem of Exponential Forecasting. Week

Observed Demand

(t)

(Dt )

1

1,000 350 950 975 2,100 750 550 ' 300 200 1,770

2 3 4 5 6 7 8 9 10

Total Mean

Exponential Smoothing Forecast

Tracking Signal

a = 0.1 Forecast

Error

(F1)

(D1 - F1)

— 1,000 935 937 940 1,056 1,026 978 910 939

Absolute Error (D1 - F1 )

— -650 15 38 1,160 -306 -476 -678 290 831

— 650 15 38 1,160 306 476 678 290 831

224 24.9

4,444 493.8

Squared Error (Dt - F1) 2

— 4,22,500 _225 1,444 13,45,600 93,636 2,26,576 4,59,684 84,100 6,90,501

E (D1 - F1)2

650 332.5 234.3 465.7 433.8 440.8 474.7 451.6 493.8

=E(D1- Ft )/MAD,

— -1.00 -1.911 -2.5 1.21 0.591 -0.49 -1.89 1.34 0.45

60

INDUSTRIAL ENGINEERING AND MANAGEMENT

Sample calculation for 6th week forecast F6 = F5 + a (D5 - F5 ) = 940 + 0.1 (2,100 - 940) = 1,056 Error in forecast = D6 - F 6 = 750 - 1,056 = -306 Absolute error in forecast = 1 - 3,061 = 306 Squared error = (-306)2 = 93,636. Example 5.6 Find relationship between exponential smoothing coefficient (a) and N so that responses are same.

Solution: Average life of data 1 1 1 1 0*-+1*- +2*1+3*- +...+(N -1)* NN N N 0 +1+2+3...+ N -1

or, Average life of data

1 - (N -1) (N -1+1) 1 .2 = (N -

AT

1

- (N-1) 2 Average life of data for exponential smoothing =

S = 0*a +1*a (1- a) + 2*a (1-a)2 + + (N -1) a (1- a)N-1 +

= a (1- a) + 2a (1- a)2 + 3a (1- a)3 + = a [(1- a) + 2 (1- a)2 + 3 (1- a)3 +...] Now; multiplying (ii) by (1 - a) and subtracting from (ii) we get S = a [(1 - cc) + 2 (1 - a)2 + 3 (1 - a)3 + 4 (1 - a)4 + ...]

(1 - a) S = a [... (1 - al2 +2 (1 - a)3 +3 (1 - a)4 +...] S [1- (1- a)] = a [(1- a) + (1- a)2 + (1- a)3 + (1- a)4 + ...]

or

S * a =a

(1-a) 1- (1- a)

a (1 - a) a 1-a Or

S =

a

From Equations (i) and (iii) 1-a N -1

a 2 2 - 2a = Na - a

=1-a

61

FORECASTING

or or or

N*a =-2a+2+a=—a+2=2—a Na + a = 2 a (N +1) = 2

or

cc=

2 N +1

5.8 STATISTICAL FORECASTING

Statistical forecasting is based on the past data. We evaluate the expected error for the statistical technique of forecasting. Some common regression functions are as follows: Let, Ft = Forecast for time period t dt = Actual demand for period t t = Time period 1. Linear Forecaster Ft = a + bt where, a and b are parameters.

dt

Cyclic Forecaster

Linear Forecaster

t

Quadratic Forester

Cyclic Forecaster with Growth Figure 5.9

Some

2. Cyclic Forecaster 2rc 2n Ft = a + u cos — t + v sin — t N N where, a, u and v are parameters N = Periodicity.

common

forecasters

62

INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Cyclic Forecaster with Crowth 27c 27c = a +bt +u cos -- t + v sin — t

N

N

where, a, b, u and v are parameters N = Periodicity.

1

0

2

3

4

5

6

7

Figure 5.10 Curve Fitting using Least Squares

Linear Forecaster L'sing Least Squares Technique: We use least squares method for fitting a function to the given set of past data. In case of linear forecaster, the curve to be fitted in the past data is linear. Here,

F = a + bt We would now minimize the squared sum of error (SSE)

(SSE)

= E (d, - F,)2 (.1 E (d, - a - b,)2 r=i

•••(0

toy, to minimize (SSE) with respect to parameters a and b, we have to differentiate above equations with respe%. to a and b and equate to zero. Thus,

a as

a

— (SSE) = 0 =— [± (d, — a — bt)2

,

- a - bt) = 0

or Ed, —

or or Similarly,

or

Oa

— bEt = 0 Ed, = na + bEt

a ab

— (SSE) = 0 =

Etd, -Eat -bEt 2 = 0

Et (d, - a - bt)

...(ii)

63

FORECASTING

or

Etd, = Eat - bEt2

or

Etd, = aEt - bEt2

...(iii)

From Equations (ii) and (iii) the value of a and b is obtained as a=

Ed, Et2 - Et Etd,

nEt2 - (E02 b =.. nEt d, -(Et) (Ed,) nEt2 - (Et)2 As, t being 1 to n for n successive data n (n +1) Et = 2 n (n +1) (2n + 1) Et' 6 2 (2n + 1) Ed, - 6Etd, We get, a= n (n -1) (12Etd,) - 6 (n +1) Ed, b= n (n2 -1) Coefficient of Determination (r2): Coefficient of determination (r2) statistically determines the fact how closely the two variables in the regression analysis/ (t and d,) are related. It is expressed as: [nEtd, -Et Ed,:12 r2 [nEt 2 - (Et)2 ][nEd,2 - (Edi )2 ] Example 5.7

Regression Analysis. Linear Regression

S. No.

t

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

-5 -4 -3 -2 -1 0 1 2 3 4 5 6

E

Et = 6 -

d

,

t2

(t * di)

at (Forecasted)

(d1 - at )2

119 202 119 208 212 194 214 220 219 234 219 223

25 16 9 4 1 0 1 4 9 16 25 36

-995 -808 -597 -416 -212 0 214 440 657 936 1,095 1,398

196 199 202 205 208 211 214 217 220 223 226 230

9 9 9 9 16 289 0 9 1 121 49 9

Ed, = 2,553

Zt2 = 146,

Et* d, = 1,716

-

530

64

INDUSTRIAL ENGINEERING AND MANAGEMENT

For Linear regression of form. Forecasted demand for period t, = a + bt (Ed,) Et 2 — (Et) (Ed,) a= nEt 2 — (Et)2

b=

2553*146-6*1716 12*146— (6)2

= 211.2 (Etd,)— (Et/0 (Et) 12*1716— 2553*6 nEt — (Et)2

12*146— (6)2

= 3.07 Hence, equation for forecasted demand of period t is = 211.2 + 3 .07t. Example 5.8 The demand for six consecutive periods for a product is as follows: 105, 108, 112, 116, 120, 130. Establish a linear forecaster. Determine the forecasted-demand in 1/ th period. Also calculate the coefficient of determination and standard deviation for the line of best fit. Solution: (a) Period (t)

Demand (cid

t2

td,

0 1 2 3 4 5

105 I08 112 116 120 130

• 0 1 4 9 16 25

0 108 224 348 480 650

Sum 15

691

55

1810

a= b=

Ed, Et 2 —Et Et d,

691x 55 —15 x 1810

nEt 2 — (Et)2

6 x 55 — (15)2

nEt dt — (Et) (Edt)

6 x1810 —15 x 691

nEt 2 —(Et)2

6 x 55 — (15)2

= 103.4

= 4.71

dt = 103.4 + 4.71t

Thus,

Alternately: Six periods may also be adjusted with a middle value as zero and doing the forecast

as follows: (t)

(d,)

t2

td,

—2 —1 0 1 2 3 Sum 3

105 108 112 116 120 130 691

4 1 0 1 4 9 19

—210 —I08 0 116 240 390 428

65

FORECASTING

Alternately: Using summation in first table. Since; di = a + bt

td,= at

bt2

Or,

Ed, = Ea + bEt

Etd, = Eat + Ebt 2

or

Ed, = na + bEt

Eult = aEt + bEt 2

or, or,

691 = 6a + b x 15 6a + 15b = 691

1810 = a x 15 + b x 55 15a + 55b= 1810

(c) (t)

d1

Ft = a + bt

(d1 - F1)2

0 1 2 3 4 5

105 108 112 116 120 130

103.4 108.11 112.82 117.53 122.24 126.95

2.56 0.012 0.672 2.34 5.02 9.30 19.90

n=6

Standard error of the estimate

(Sidi) = =

I(d, I(d, -- F,)2 F,)2 \ n -2 19.90 _ - 2.23 6_2

Now, if let the demand be normally distributed around the regression line and we want 95.5% of the demand values to fall within the prediction interval (I), then I = ±2S,d, = ±2 x 2.23 = ±4.46.

66

INDUSTRIAL ENGINEERING AND MANAGEMENT

Thus, for 95.5% confidence interval, the forecast for the 1 1 th period would be, Prediction Interval for

F11 = 150.5 ± 4.46 154.96 Fn 146.04

Or

95% Conlidenc Limits

10

0

12

Figure 5.11 Confidence Interval of Forecast

REVIEW QUESTIONS 5.1 Explain the three basic time horizons for forecasts. What are the common methods forecasting? 5.2 When are qualitative forecasting techniques most useful as compared to quantitative ,one? 5.3 What is a time series analysis? Explain its advantages and limitations. 5.4 What are the commonly used qualitative forecasting techniques? Explain. 5.5 Explain the Delphi method. 5.6 Distinguish between moving average, exponential smoothing and trend projection methods of forecasting. 5.7 What are the effects of smoothing constant on the quality of forecast? 5.8 What are the common measures of forecast error? Explain. 5.9 What is a tracking signal in forecasting? Give example. 5.10 Calculate the 3-year simple moving average for year 2000, using the time series data in the following table:, Time Series Data Year

Sales

1981 1982 1983 1984 1985 1986 1987 1988

2000 1350 1945 1975 3100 1751 1550 1300 Contd...

67

FORECASTING

Year

Sidles

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

2200 2775 2350 2005 1355 1940 1970 3110 1750 1555 1316

5.11 For the data in above table, calculate a 6-year weighted moving average for year 2000, using the following weights: .1, .1, .1, .2, .2, and .3 from the oldest to the most recent years. 5.12 Using an a of 0.2, calculate the year 2000 forecast using the simple exponential smoothing model. Use the data in table above and assume a 1999 forecast of Rs. 1,800. 5.13 Draw a scatter diagram for the time series data of above table. 5.14 Using the method of least squares, find the regression equation for the time series data in above table. Use the regression equation to forecast sales for 2000. Write - computer program for the above problem. 5.15 A steel company faced the following demand for its products during past few months. Presently, the company is using last year's corresponding monthly sales as this year forecast. Month

Forecasted-Demand (in metric tons)

Actual Demand (in metric ton)

July August September October

21100 23600 22400 27500

20000 22000 21000 26500

Calculate MAD, Bias, MSE and tracking sign al and interpret them, 5.16 Forecast the production for next two years when the production quantity (in' 000 tons) for last ten years is as follows: 200, 225, 235, 240, 255, 260, 265, 275, 270: 271 Use following methods and comment on results: (a) Simple average (b) Weighted moving average (c) My ing average (3 years and 5 years) (d) &donential smoothing (for a = 0.3, 0.5 and 0.7) 5.17 Hew is forecasting different from prediction?

INDUSTRIAL ENGINEERING AND MANAGEMENT

68

REFERENCES

1.Biegel, 1974. J.E., Production Control—A Quantitative Approach, Prentice Hall of India: Delhi. 2. Box, GEP and Jankins, GM, 1976, Time series analysis: Forecasting and control, Holden-Day; San Francisco. 3. Brown, R.G., 1963, Smoothing, Forecasting and Prediction of Discrete Time Series, Prentice Hall, Englewoodcliffs. 4. Chambers, J.C., Mullick S.K. and Smith D.D., 1974. An Executive's Guide to Forecasting. John Wiley: New York. 5. Draper, N.R. and Smith N., 1966. Applied Regression Analysis, John Wiley: New York. 6. Firth, M., 1977. Forecasting Methods in Business and Management, Edward Arnold: London. 7. Hanke, 'J., 1989, "Forecasting in Business Schools: A followup survey", International Journal of Forecasting (Netherlands), 5 (2), 259-62. 8. Jarrett, J., 1987. Business Forecasting Methods, Basil Blackwell: London. 9. Lee, T.S and Adam, E.E. (Jr.), 1986, "Forecasting error evaluation in MRP production inventory systems", Management Science, 32 (9), (Sept. 1986), 1186-1205. 10.Makridakis, S. and Wheelwright S.C., 1978. Interactive Forecasting, Holden-Day: San Francisco 11.Makridakis, S., Wheelwright S.C. and McGee V.E., 1983. Forecasting: Methods and Applications, John Wiley: New York. 12.Martino, J.P., 1972, Technological Forecasting for Decision-snaking, American Elsevier; New York. 13.Montgomery, D.C. and Johnson L.A., 1976. Forecasting and Time Series Analysis, McGraw Hill: New York. 14. Wheelwright, S.C. and Makridakis, S., 1985, Forecasting Methods for Management, 4th Ed. John Wiley and Sons: New York.

FACILITY LOCATION 6.1 INTRODUCTION Location of facilities is a problem associated with the planning phase of a factory or even a service sector. Small entrepreneur to big industrial houses, hospital to a fashion designer shop and school to a five star hotel start the first planning activity with a questions: Where to locate the site so that no change is needed for years to come? It is a very vital decision which has long-term implications. We call this type of decision as a strategic decision. It is not very easy to answer a location problem. The reasons are: (i) uncertainty in future, (ii) complexity and conflicting factors associated with the site selection problem, and (iii) constraints and limitation of resources to produce a site, etc. Let us consider two sites for location of a .new factory. Site A is nearer to market but far from the raw material source; site .B is otherwise. Site A is a rural location with cheap availability of labour; site B is an urban location with better availability of power. Similarly, we can list many factors: Some are better at site A, while rest are better at site B. Which site to select? When site selection decision is needed, many options are available with their relative strength and weaknesses. A careful consideration is needed on an integrated framework before final site is selected. 6.2 FACTORS IN FACILITY LOCATION The factors, which affect the facility location, may be grouped into many categories. Some are as follows: Category Process input Process output Process characteristics Personal Preference Govt. Policy Local conditions Cost factors Competition Intangible factors

Factors Raw material, personnel, transportation of raw material, workforce availability, availability of water and power, road-rails, etc. Market nearness. Environmental factors such as pollution, noise, etc., weather (in case of knitting industry), Level of humidity and seasons, rainfall. Preference of executives or entrepreneur. Tax exemption, legal requirement, incentives, availability of loan/land, etc. Community culture and attribute, past history of industry located in the area, incidence of labour unrest in the area, political interference, etc. Cost of land, cost of transportation, wages of unskilled labour. Location of other industries in the area, market forces for competition etc. International consideration, room for expansion and growth, school, churches, medical facilities, recreational facilities, etc.

70

INDUSTRIAL ENGINEERING AND MANAGEMENT

6.3 CONSIDERATIONS IN PLANT LOCATION

No plant can be located at a place, which fulfills all the criteria of perfect location. Some factors compromised to take advantage of the other factors. For example, if the raw material is quite bulky and difficult to transport, then the plant may be located nearer to raw material source. Many iron and steel industries are geographically located near the place where iron-ore are found. Refer Figures 6.1 and 6.2. Jamshedpur, 72°

80°

88°

METALLIC MINERALS 432°.

•32°

24°

o Manganese Ore • Bauxite A Copper Ore • Zinc O Leaci • Gold Saud III Iron Ore 88°

Fig. 6.1 Location of Metallic Minerals in India

Bokaro and Rourkela are the places where iron-ore is found. To run the power plant. are, coal is needed. Many NTPC power plants are located near the place where coal is found (Figure 6.1). Similar observations are valid for oil-fields and location of refineries (Figure 6.3). However, some, other factors may have to be compromised. In general, following considerations are needed in a plant location decision:1. Nearness to raw material source 2. Nearness to market or consumer

71

FACILITY LOCATION

86.

72°

,_,. .

88°

r•V'''''.%. 1. Calcutta 2. Chiltaranjan 3. Durgapur 4. Ranchi 5.Bokaro 6. Jamshedpur 7. Rourkela 8. Rupnarainpur

\.

—...,

:.,...) l ./ r' i A Srinagar ...e e i '.4Jarrini-u.^ ' ' .N"...-1 v., i"--41— , - 4%. it ' Pinjora#,.% .• t x..... rJ / 0 Haridwar> .,_, -.; d ) it ss r,\

li mn

:.?. -7.'s

.1

32°

..,.:

"

1 ( (

i

\

- -•-v-i 4. 1,

'1/4.-. ,

: .-

...

.

4

r ,..

4. , '

. I' -,'

'

•- -,

16°

24°

..* rt. c• \ % 0

I'

V

1

f - .1

e

,.1

\

,

t) ,I 1 r e 44., i•• ,),...,r Alk . ./. I , ,.., r -11F-Pune e .1 A L1.-', rs.-.5 Vishakhapatnam . r Hyderabad ,e,i 4 t—t i•J 9_ Iron & Steel e 1 TunghbhadraR .;) Ca Coaches and Wagons • Bhadravati angnlorei V\--, %

'...

1

1,1

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Madras Perambur

;i7

.. ..°6 .1 • e

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qt ,../ -4s3 - . - iC --ii? t ,;...ti 1, l Os IA " ' r I-"di,.

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•

----..... i ,, .L.4-- -- Al .

4. -• C.•

.....,-,

1•••`"

r't.

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f° '.. 1

METAL BASED INDUSTRIES

4, rr

Salem . Tiruchchirappalli +.e

0

Ai

l Shipbuilding Yard

e Automobiles I A Heavy Enginooring

0

44 Machine Tools

I ea Locomotives I

._------II r--8' CHeavy Electricals — 'CI \ 88°

72

Fig. 6.2

Location ofd Few. Metal-Based Industries in India

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Coal Fields 72' I. RanIganj 2. Jharla r. 3. Bokaro ‘1, 4. Karanpura 5. Glrldh 6. Korba 7. Shandol — 8. Pench Valley 9. Kantapalli I ,o1 10. SIngarant • 11. Kamptee 12. Neyvell

Bo .

80°

MINERAL FUELS • Coal Fields

A

32° Retirery Potential Oil Areas nta r y A rea Sed i rn: cont i n e n ial she ll

011: e Mathura 61 (151 r

Bongalgaon •••

Barauni

e

gbot ...SAbbagar

Kalol re 8

.%‘ )‘ Mumbal High

hakhapatnam

• 12. Singraull 13. Rampur 15, Himplr 16. Talcher

Fig. 6.3 Location of Coal and Mineral Fuel in India

3. Good transportation facility 4. Availability of labour, both unskilled and skilled at comparative wages 5. Availability of fuel and power 6. Availability of water 7. Cheap availability of land 8. Suitable climatic conditions 9. Availability of sub-contractor, industrial climate and organized industrial complexes 10.Community receptivity of business 11.Construction cost 12.Quality of life: housing, recreation, school, climate, etc.

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FACILITY LOCATION

13. Taxes and Government regulations 14. Site for waste disposal and environmental regulations. 6.4 COMPARATIVE STUDY OF RURAL AND URBAN SITES

After the general territory for a site has been identified, specific site location is the major issue. The alternative sites may have one of the following locations: Table 6.1 Comparison of Different Locations Factors

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22.

Availability of land Cost of land Connected by rail/road etc. Availability of labour -Wages of labour Communication network, like internet, fax, telephone, fax, postal etc. Power and water availability Supporting industries and ancillaries' units Quality of life, such as recreation, school, hospital, etc. Market and consumer Building for site Availability and retaining potential for professionals like manager and engineers Training of workers and foremen Security Expansion of site Taxes Government support Union problem and industrial relations Pollution and environmental constraints Waste disposal Location of sub-contractor, retailer, etc. Incentives from financial institutions like banks, IDBI, IFCI, etc.

Urban or City Site

Less High Well Less More Very good Good Nearby Very good Nearby May be rented or built Better In local institutes Better Difficult More Less Poor More Difficult Nearby Less

Sub-urban

Moderate Moderate Moderate Moderate Moderate Moderate Moderate Nearby Moderate Moderate Rented/ built Moderate Either Moderate Moderate Moderate Moderate Moderate Moderate Moderate. Nearby Moderate

Rural or Country Site

Plenty Low Poor More Less Poor Poor Far ' Poor Far To be built Poor Not available outside Less Easy Less More Better Less Easy Far More

1. Urban or city locations like Lucknow, Kanpur, Hyderabad, Calcutta, Chennai, Patna, Nagpur, etc. 2. Sub-urban location like Faridabad, Gurgaon, etc. 3. Country or rural location. Urban locations have major advantages as: • Well connected by rail, road and communication network such as internet, fax, e-mail, telephoneline, etc. • It is easy to locate and retain professional manager and engineer. • Power and water supply is available.

INDUSTRIAL ENGINEERING AND MANAGEMENT

74

• Easy to rent a building rather than building a new one. • Supporting industries and ancillaries may be nearby. • Better quality of life. • Market or consumers may be near-by. Therefore, the urban site and the rural site have their own strengths and weaknesses. A compromise could be the suburban site. These sites are located near the cities. For example, Faridabad, Gurgaon, and Ghaziabad are located in close proximity of Delhi. Many industries have come up in these areas. Maruti, BTL, etc., are located in Gurgaon, ABB, Escort, Goodyear, etc. are located in Faridabad. Similarly, near Allahabad city, many industries are located in Nani. 6.5 CASE STUDY Objective

Selection of site for a software company. Case Details

Samir, a non-resident Indian working with a multinational company in USA is planning to come back to India. He is a computer science graduate of IIT, Delhi and postgraduate in software side from a prestigious US Institute. He has now worked for over ten years in this area. Before coming to India, he asked his friend, Rakesh, to locate a proper site in India. Rakesh is working with a software industry in Bangalore. akesh scam newspapers (during August to November 1998), and suggests for Bangalore. His recommendation is based on statement of ten software companies based in Bangalore (Table 6.2). Table 6.2 Ten major software companies. of India, located In Bangalore city of Karnataka state, give reasons for selecting Bangalore as their site of operation (Period: Late 1998) Company

I. Novell (Fully)

Year of Starting (or selecting site)

1994

owned subsidiary of US-based Novell Inc.)

2. Tata-IBM

Early 90's

Major Criteria for Selecting Bangaloie as their site

How they feel now about their decision in site selection

• Fast emerging Silicon valley of India • Required software talents available • Easy to attract new talent from any part of globe

• Since last four years Novell Bangalore has established its credibility as the quality product organisation • Planning to expand its operation in Bangalore —Vikram Shah (M.D.)

Expectation

.

• Good decision as the • Improved • Bangalore is helpful in company is continually infrastructure attracting top IT talent growing above the to meet customer • More direct industry rate international satisfaction . connections • Government of Karnataka has encouraging outlook and supportive means —Ravi N. Marwaha • Chances of joint ventures (MD & CEO) and govt. support in spreading IT message Contd...

75

FACILITY LOCATION

Company

Year of Starting (or selecting site)

3. Compaq India

4. Texas Instrument

Major Criteria for Selecting Bangalore as their site

• Availability of vast pool of IT skill • No problem in attracting as well as retaining quality talent

1984 (after the assessment of 9 potential locations)

How they feel now about their decision in site selection

Expectation

• Bangalore continues to be the real IT city of India

• Availability of support industries and services at reasonable cost

—Som Mittal (MD)

• Best hi-tech climate • Presence of world class educational institutes • Unique ability to attract professional talent

• Today it is the largest R & D centre for IT in Asia and among top three R & D centres outside Asia . • Friendly Govt. support • Worked closely with Govt. & DOE (Dept. of Electronics) in formulating business friendly Software Technology Part (STP) —Srini Rajam (MD)

5. Sun Microsystem

1995

• Bangalore had best IT talent • Cost of operations less expensive as compared to Mumbai and New Delhi • Partners and customers mostly located there

• Ability of talent and the consumpolitan nature of city will definitely attract other IT companies. —Bhaskar Pramanik (M.D.)

6. Wipro

Early 1980's

• Supporting role of Govt. or Karnataka • Easy land acquisition • Quick approval of plans • Incentive for software (such as floor index of 2 in Electronic city) • Sales tax exemption for capital goods and diesel • Lower power tariff

• Wipro has emerged as Karnataka's largest software exporter (i.e., Rs. 400 crore in 1997-98). • Shifted its corporate office from Mumbai to Bangalore. • Investment is more than 300 crores.

.

• Generated 4500 employment of IT professionals • Top ten R & D invertors of India Contd...

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Company

Year of Starting (or selecting site)

Major Criteria for Selecting Bangalore as their site

How they feel now about their decision in site selection • By year 2000, it plans to hire another 1500 IT professionals in Bangalore —Ashok Soota (Group President)

7. Microland

1989

• In the long run • It is centre of science infrastructure will be a and educational institutions matter of concern. But and electronics industry. the climate is so good • State has the maximum that it will continue to number of engineering be here. colleges. • Better place to live mainly due to brillant weather —Pradeep Kar (Chairman and MD) • Choice for single rather than geographically dispersed locations

8. Sonata Software

• Better availability of manpower • Better quality of living • Infrastructure • State Govt. has IT policy. • Better Govt. interfaces to support. —B. Ramaswamy (President and MD) • Wonderful climate • Good people work available locally —Pradeep Singh (CEO)

9. Aditi Technologies

10.Infosys Technologies

1983

• Excellent reservoir of technical resources • Network of educational institutions • Good climate

•

• Quality of life —Nandan Nilekani (Deputy MD)

*Based on newspaper (Economic limes) report.

• No plan to have another centre outside Bangalore

Expectation

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FACILITY LOCATION

Samir has his family links in Delhi. His personal preference for Delhi is also due to his past association contacts, family-owned land available for use. He finds it disgusting that Bangalore does not have an international airport, which Delhi has. He comes to know that IBM has moved to Delhi, and many other companies (which are of course small one). He sends e-mail to Rakesh about his dilemma and asks for more details. Rakesh sends details and recommends for Bangalore. Questions

I. In your opinion, what problem is likely to come if Delhi is opted as site for the upcoming software company of Samir? 2. Compile the major plus and minus points for software company's site in Delhi, and Bangalore. What problems do you perceive if instead, a suburban site like Faridabad is opted? 3. Assume that land in Delhi is not available with Samir. For purchasing, the initial expenses are too high. Do you recommend a rural, site as the cost of land is very cheap there? 6.6 CASE 2: SELECTION OF SITE FOR XYZ COMPANY For XYZ company five alternative cities are selected for possible location of its plant. These are city 1, city 2, ... and city 5. Management hired a consultant group to help on site selection. The consultants prepared a list of factors that affected the location. They did this by asking the managers and executives of the XYZ company. Nine major issues are identified (Table 6.3). Table 6.3 S. No.

I. 2. 3. 4.

Fdctor A B

7.

C .D E - F G

8. 9.

H J

5.

6.

Factors Identified for Site Selection Description

Nearness to raw material source Transport facility and logistics support Availability of water and power Adequacy in labour availability Quality of life, like market, school and recreation Competition. in the local market Nearness of market Incentive from financial institution Cost of land

Then, the consultant made' a pairwise comparison of all nine alternatives. They give score of 1, 2, or 3 on every 36 comparisons (it is 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1). The scoring scheme for comparison is done as follows (Table 6.4): Table 6.4 Scoring Scheme in Pairwise Comparisons Comparison

If the factor X scores a major factor as compared to factor Y If the factor Y scores a major factor as compared to X If X scores a medium as compared to Y If Y scores a medium as compared to X If X scores a minor as compared to Y If Y scores a minor as compared to X

Score

X, X, Y2 XI

Now, each factor is pairwise compared. For ea&&i pair, a weight is provided as per the scheme of scoring. Table 6.5 for relative score for each factor is obtained. The score in the table is obtahed

78

INDUSTRIAL ENGINEERING AND MANAGEMENT

for all values of scores for factor in corresponding row. For example for factor F weights in column F and row F is added as (F2 + F3 + + F3) + (Fi + F3 ) F (2 + 3 + 2 + 3 + 1 + 3) = F14. Table 6.5

A

/13

Scoring of Importance of each Factor through Pairwise Comparison I

Score

Percentage

Al

A3

A3

F,

A,

A,

A3

17

0.218

C2

B1

B3

F3

GI

H,

1 1

4

0.052

C2

C2

F,

G2

H1

C,

8

0.102

D3

F3

G2

112

1

3

0.038

F2

G2

H2

/2

2

0.026

F3

11

14

0.179

H2

I I

7

0.090

11

H3

13

0.167

10

0.128

78

1.00

G

Total

The percentage in Table 6.5 is obtained by dividing the row score by total score (= 78). For example, for factor F, it is 14/78 = 0.179. All the five cities are given weight (au) on a scale of 0 to 100 for each factor A to I. This is done on the basis of extensive field survey, questionnaire and interview of experts in the area. Following observations are obtained (Table 6.6): Table 6.6

S. No. Candidate for Site

I.

2. 3. 4. 5.

City 1 City 2 City 3 City 4 City 5

Comparative Strength (ay ) of each City on dDifferent Factors Factors

A

B

C

D

E

F

G

H

I

0.218

0.052

0.102

0.038

0.026

0.179

0.09

0.167

0.128

70 40 100 70 55

75 80 90 100 80

80 80 80 45 80

65 60 70 80 70

25 20 30 100 50

65 90 85 40 30

90 80 60 95 30

90 70 90 50 30

80 80 90 70 60

Weighted Score 2W, au

75.445 65.48 85.24* 63.71 48.51

Looking at the last column of the above table, city 3 scores* highest, followed by city 1, city 2, city 4 and city 5. Therefore, city 3 becomes the obvious choice for the site of XYZ company.

REVIEW QUESTIONS 6.1 Why do we consider the facility location problem as a strategic decision? What are the major factors 'in

leciding the facility location problems?

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FACILITY LOCATION

6.2 Consider ten industrial sectors in India (such as steel, software, hydropower plants, etc.). Identify the existing locations of these industries on a map of India. Give separate reasons for the location of these industries in a particular cluster of regions. (You may take the help of India Yearbook/Manorma Yearbook, or a class XII book on Resource Geography). 6.3 List major considerations in a plant location decision. 6.4 Compare the advantages, limitations and suitability of rural, urban and semi-urban industrial sites. 6.5 Identify the states where software industries are preferring to get established. Compare Andhra Pradesh, Karnataka, Delhi and Madhya Pradesh for locating a software industry. (You may consult newspaper and relevant websites).

REFERENCES 1. Aly, A.A. and Litwhiler, D.W. Jr., 1979, "Police briefing stations: A location problem, AIIE" Transactions. 11 (1), 12-22. 2. Banwet, D.K., 1981, Some studies in facilities location planning, unpublished Ph.D. Thesis, IIT Delhi. 3. Buffa, E.S. and Sarin, R.K., 1994, Modern Production/Operation Management, 8th ed., John Wiley, New York. 4. Drezner, Z., 1995, Facility location: A survey of applications and methods, Springer, NY. 5. Francis, R.L. and White, JA, 1974, Facility layout and location, Prentice Hall, Englewood Cliffs, N.J. 6. Love, R.F. and Yerex, L., 1976, "An application of facility location model in prestressed concrete industry" Interfaces, 6 (4), 45-49. 7. Schmenner, R.W., 1979, Look beyond the obvious in plant location, Harvard Business Review, 57 (1), 126-132. 8. Sule, D.R. 1994, Manufacturing Facilities: Location, Planning and Design, PWS Publishing Co., Boston. 9. Swamidass, P.M., 1990, "A comparison of the plant location strategies of foreign and domestic manufacturers in the US", Journal of International Business Studies, 21 (2), 301-17. 10. Thompkins, J.A. and White, J.A., 1984, Facility planning, John Wiley & Sons, NY.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

A.

fi

FACILITY LAYOUT (PLANT LAYOUT) 7.1 INTRODUCTION Plant layout problem is an area of arranging facilities such as equipment, depai inent, section, etc., inside plant or work place. It is one of the most critical strategic decisions. This is because: (i) Plant layout is generally a one time activity as it is very difficult to frequently rearrange the facilities. (ii) It requires a long-term vision about factory so that minimal dislocations occur when the factory ' expands or goes through minor changes in process, production schedule or product mix. (iii) Wrong arrangements of facilities lead to more travel time between procbesses. This causes more through-put time, more work-in-process, more material handling, etc. 7.2 OBJECTIVE OF GOOD FACILITY LAYOUT The objectives of good facility layout are as follows: [A] Objectives Related to Material (i) Less material handling and minimum transportation cost. (ii) Less waiting time, for in-process inventory. (iii) Fast travel of material inside the factory without congestion or bottleneck. [B] Objectives Related to Workplace (i) Suitable design of work-stations and their proper placement. (ii) Maintaining the sequence of operations of parts by adjacently locating the succeeding facilities. (iii) Safe working conditions from the point of ventilation, lighting, etc. (iv) Minimum movement of workers.

(y) Least chances of accidents, fire, etc. ( vi) Proper space for machines, worker, tools, etc. (vii) Utilization of vertical height available in the plant.

[C] Performance-related Objectives (1) Simpler plant maintenance. (ii) Increased productivity, better product quality, and reduced cost.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(iii) Least set-up cost and minimal change-over. (iv) Exploitation of buffer capacity, common workers for different machines, etc. [D] Objectives Related to Flexibility (i) Scope for future expansion. (ii) Considerations for varied product mix. (iii) Considerations for alternate routings.' 7.3 PRINCIPLES OF FACILITY (PLANT) LAYOUT Facility layout problem is a multi-criteria problem. Numerous factors, such as location of work centres, offices, computer centre, design and drawing section, tool-room, storage space, utilities, etc., are to be considered. The principles of good facility layout involve: 1. Least material handing cost. 2. Worker effectiveness. 3. High productivity and effectiveness. 4. Group technology: 7.3.1 Principle of Least Material Handling For less material handling, following approaches are adopted: (i) Place facilities as per sequence of part operations. (ii) Proper location of store and packaging area. (iii) Smooth and continuous flow of material. (iv) Utilization of vertical space (i.e., height) in material transport. 7.3.2 Principle of Worker Effectiveness For better worker effectiveness, following approaches are adopted: (i) Integration of similar facilities at same location. For example, all milling maching may be placed at same location. (ii) Sufficient space for worker movement. (iii) Sufficient space for the movement of material between machines. (iv) Safe working environment. 7.3.3 Principle of High ,Productivity For high productivity and effectiveness following approaches are adopted: (i) Flexibility to expand, re-routing, varied product mix, etc. (ii) Scope to use multi-skilled worker. (iii) Proper utilization (or over-utilization) of resources, etc. 7.3.4 Principle of Group Technology For deriving the group technology benefits, following approaches are adopted: (i) Group similar parts in one family. (ii) For each part-family, design a machine-cell. Machine-cell is a combination of machines which caters to all the processing requirements of corresponding part-family. (iii) As far as possible, minimize intercell transfer of parts.

83

FACILITY LAYOUT (PLANT LAYOUT)

7.4 DIFFERENT TYPES OF COMMON LAYOUTS Commonly, the layouts are of the following types: (i) Product or line layout. (ii) Process or functional layout. (iii) Fixed position layout. (iv) Cellular or group technology layout.

7.4.1 Product or Line Layout In a product (or line) layout, various facilities, such as machine, equipment, work force, etc., are located as per the sequence of operation on parts (Figure 7.1). Even if a facility (or machine) is needed again after few other operations, we duplicate the facility at every required sequence. Product layout is preferred when production is continuous, part variety is less, production volume is high and part demand is relatively stable. Product A

Product .13 -

Legend L = Lathe M = Milling

I) = Drilling G = Grinding

Figure 7.1 Product Layout

Advantages of Product Layout Advantages 1.Less work in process (WIP) inventory as the flow of material is continuous along a line. 2. Compared to process layout, it requires less space for same volume of production. 3. Conveyorised material handling or automation in the material handling is cost effective, as the flow of material is well known. 4. The through-put time (or product cycle time) is less as compared to process layout. This is due to less chances of congestion and less waiting time on machine. 5. Simple production planning and control and better coordination of different activities may be achieved. 6. The skill level of workers may be lesser, as a particular worker has to do a particular operation, which seldomly changes due to standardised production line. 7. The flow of material is smooth and continuous. Limitations of Product Layout 1. Change in product design is difficult to accommodate. 2. Product variety is very much limited. 3. Breakdown of a particular machine in line halts the production output. 4. Capital investment in machines may be higher as compared to process layout as duplication of machines in line may be needed. The flexibility to increase the production capacities is limited.

84

INDUSTRIAL ENGINEERING AND MANAGEMENT

Suitability pf Product Layout

1.Assembly line such as automobile factory. 2. Low variety, high-volute' production system. 3. For standardised products, which have quite stable demand in near future. 7.4.2 Process Layout

Process layout is also called as functional layout. Similar machines or similar operations are located at one place as per the functions. For example, all milling operations are carried out at one place while all lathes are kept at a separate location. Grinding or finishing operation is kept at a separate location. This functional grouping of facilities is useful for job production and non-repetitive manufacturing environment (Figure 7.2). Advantages of Process Layout

1.Initial investment in process layout is low. 2. Varied degree of machine utilization may be achieved in process layout as machine is not dedicated to a single product. 3. Greater flexibility and scope of expansion exist in this layout. 4. Different product designs and different production volumes can be easily adopted. Therefore, high product variety may be easily handled. 5. The overhead cost is low. 6. Maintenance of machine is easy. Breakdown of one machine may not result in total stoppage of production. 7. Easy, effective and specialized supervision of each function area is easy to achieve. 8. There is low set-up and maintenance cost. 9. Due to different departments for different processes, better team work may be achieved in each section. Disadvantages of Process Layout

1. There is high-degree of material handling. Parts may have to backtrack in the same department. 2. Large work in-process inventory is common. This may lead to more storage area. 3. Workers are more skilled. This is because of variety in products and difference in design. Therefore, labour cost is higher. 4. Total cycle time is high. This is due to waiting in different departments and longer material flow. 5. Inspection is more frequent which results in higher supervision cost.' 6. It is difficult to fix responsibility for a defect or quality problem. The work moves in different departments in which the machine preference is not fixed: Therefore, which machine or which operator was faulty during a quality lapse may be difficult to trace in some cases. 7. The production planning and control is relatively difficult. Suitability of Process Layout

1. For non-standardised product. 2. For low-volume, high variety manufacturing environment. 3. For frequent cLange in product design.

85

FACILITY LAYOUT (PLANT LAYOUT)

Mining

Lathe

Store for Receiving and Shipping

Figure 7.2

Process-type Layout

4. For job-shop manufacturing. 5. For very expensive machines like CNC milling, co-ordinate measuring machine, etc. 7.4.3 Fixed Position Layout

In fixed position layout, the main product being produced is fixed at a particular location. Resources, such as equipment, labour and material are brought to that fixed location. This type of layout is useful when the product being processed is very big, heavy or difficult to move. Some examples of fixed position layout are shipbuilding, aircraft assembly, wagon building, etc. (Figure 7.3). Advantages of Fixed Position Layout 1. Easy for products which are difficult to move.

R E S 0 U R C E

Labour Tools

Final Product (SHIP)

Equipments Material

Ship building yard

Figure 7.3

Fixed Position Layout

86

INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Flexibility for change in design, operation sequence, labour availability, etc., exists in this layout. 3. This layout is very cost effective when many orders of similar type are existing in different stages of progress. 4. Large project type of jobs such as construction are suited in this layout. Limitation of Fixed Position Layout 1. High capital investment due to long duration to complete a product. 2. Space requirement for storage of material and equipment is large. 3. It requires careful project planning and focussed attention on critical activities otherwise confusion, delay and conflict may arise. 7.4.4 Cellular or Group Layout*

Cellular layout is based on the group technology (GT) principle. Therefore, it is also called as group layout. This layout is suitable for a manufacturing enviromnent in which large variety of products are needed in small volumes (or batches). The group technology principle suggests that parts, which are similar in design manufacturing operations, are grouped into one family, called part-family. For each part-family a dedicated cluster of machines (called machine cell) are identified. Generally, all the processing requirements of a particular part-family are completed in its corresponding machine cell. In other words, the intercell transfer of part should ideally be zero (Figure 7.4). Legend

Cell I M

L = Lathe

_____________________

M = Milling,

Cell 2 Store for Receiving

D= Drilling M

(.1

G = Grinding A = Assembly Store for Shipping Cella

Figure 7.4

Group Technology or Cellular Layout

The cellular layout is, thus, a combination of process and product layout. Therefore, it possesses the features of both. Cellular manufacturing system (CMS) involves decomposition of manufacturing system into subsystems of -similar parts/machines. CMS allows batch production to give economical advantages similar to those of mass production with additional advantages of flexibility, normally associated with job shop production systems. Advantages of Cellular Manufacturing System (CMS) The advantages of CMS are given in Table 7.1. *Based on: Shankar, R. and Vrat, P., 1998, "Cellular Manufacturing system: An overview," In "Advanced Manufacturing Technology, Ed. Deshmukh. F (1 and Rao" P.V., IIT Delhi, 7-19.

87

FACILITY LAYOUT (PLANT LAYOUT)

Table 7.1 Advantages of Cellular Manufacturing System S.No. Feature

Reason

1.

Short throughput times

2.

Low stock

3.

Low stock holding cost

Groups complete parts, and

4.

Better customer service

Machines are close together under one foreman in each group.

5.

Better quality

6.

Lower material handling cost

7.

Better delegation and accountability

8.

Reduced indirect labour cost

9.

More reliable production

10.

Training for promotion

Unlike process organization, which produces a specialist, CMS gives experience in a much wider range of tests.

11.

Stepping stone to automation

CMS is the first evolutionary step in automation. In general, it is the Flexible Manufacturing System (FMS) with some manual operation.

12.

Increased capacity

Due to easier sequencing, and reduction in set-up times, some buffer capacity is created.

13.

Improved job-satisfaction

(a)

Team work,

(b)

Processing of products in the cell,

(c)

Better feedback .in the cell,

(d)

Identification of quality and performance of job with the

•

All parts and machines of the group are close together and under same supervision, which can be made responsible for cost, quality and due-date.

cell workers. 14:

Easy retrieval of parts

Standardized product design and coding and classification.

15.

Shorter lead time

Due to low set-up and throughout times.

16.

Efficient production planning and control

Due to similarity of parts in each cell.

17.

Flexibility to adopt to market fluctuation

(a)

Low stock,

(b)

Easy switch over from one part to another inside a cell.

18.

Reduced scrap and wastage

Due to specific machines for each part family.

19.

Easy plant Maintenance

Due to decomposition of plant into smaller cells.

20.

Simplified tooling and set-ups

(a) (b)

Specific jigs and fixtures, designed for each' part-family, Machine tools, not requiring many change-overs for any part-family, due to similarity.

21.

Simplified estimation, accounting and work measurement

(a) (b)

One supervision for each cell Decomposition of plant into smaller but independent cells.

22

Better utilization of manufacturing resources and space

(a) (b)

Dedicated machines cell for each part-family. Less material handling, less WIP.

23.

No fallout in human factor

Due to team and'perso-nal involvement in cell.

INDUSTRIAL ENGINEERING AND MANAGEMENT

88

Table 7.2

S. No.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Quantitative Estimate of some Reported Benefits of CMS Feature

Reduction in new parts designs Reduction in number of drawinbs through standardization Reduction in new shop drawings Reduction in production floor space required Reduction in scrap and rework Reduction in production and quality control costs Reduction in production lead time Reduce tooling Reduction in set-up time Reduction in throughput time Reduction in overdue orders Reduction in raw material inventory Reduction in WIP Reduction in finished goods inventory Reduction in labour Reduction in employee output per unit time

Value

52% 10% 30% 20% 15-75% 80% . 20-88% 20-30% 20-69% 70% 82% 42% 88% 60% 15-25% 33%

Suitability of CMS The implementation of CMS can significantly increase productivity, which is essential for the survival in increasingly competitive industries. Many large and medium, size manufacturing firms have experienced quality improvements after adopting CMS. CMS and Batch Manufacturing CMS has wide applicability, since it can be implemented in both job-shop and assembly lines. However, CMS is most suited for organisations that have a degree or part standardization and moderate batch size. The importance of CMS can be well realized, as according to a study more than 75% of all manufacturing units are engaged in the production of a large variety of parts in batches. CMS and JIT Cell manufacturing is an important element in the successful implementation of Just in Time (JIT). It reduces production-related wastes, such as inventory (WIP, finished goods or raw materials), production set-up times, insufficient job scheduling and parts having long queues for a long time at various work centers, Details of JIT are covered in Chapter 21. CMS and FMS Cellular Manufacturing System is the building block of Flexible Manufacturing System (FMS). It is the first evolutionary step in automation. In general, it is the FMS with some manual operations: The applicability of CMS concept in FMS may be justified on account of four reasons (Kusiak, 1986): (1) It is easy to process large volume of information with the decomposed manufacturing system, such as CMS, (2) Automated Guided Vehicle (AGV) and robot are the most common type of material-handling carries in FMS. Oftenly, the services of these material-handling carriers are limited to few machines, (3) it is easy to m...iage the operational facilities in CMS as compared to functional manufacturing. This is due to limitation on cell size and (4) there may be technological compulsions for grouping some operations like forging machines and treatment unit.

89

FACILITY LAYOUT (PLANT LAYOUT)

7.5 PART-MACHINE INCIDENCE MATRIX IN CMS DESIGN A part-machine incidence matrix is used in CMS design problems to represent the processing requirements of parts on individual machines or facilities. This is derived from the process plan of each part. In this, a value of one indicates that the part of the corresponding column needs the facility of the row joining it. A zero value indicates otherwise. Figure 7.5 represents a manufacturing system having six parts and six machines. For example, part 1 needs machine 2 and machine 4 for completing its processing requirements. Similarly, machine 2 caters to processing needs of parts 1 and 5. PART 2

3

4

5

6

1 2

•I

Machine 3 4 5 6

Figure 7.5 Part machine Incidence Matrix

For a CMS design problem, the part-machine incidence matrix is a very important input information. Numerous algorithms, heuristics and mathematical programming techniques have been used to rearrange the rows and columns of this matrix so that a block diagonal structure of one is achieved. For example, the rows and columns of the incidence matrix shown in Figure 7.5, can be rearranged into a block diagonal structure (Figure 7.6). It is a cellular arrangement of three-cell structure. Machines 2, 4 and part 1, 5 are in cell 1, Machines 1, 5 and parts 4, 2 are in cell .2. Machines 3, 6 and parts 3, 6 are in cell 3. PART 5

2

4

3

6

2 4

1

Cell 1

5 3

Cell 3 Cell 2

6

Figure 7.6 Perfect Clustering of Incidence Matrix shown in Figure 7.5, after Rearranging its Rows and Columns

Limitations of CMS 1. Difficulty, faced during initial planning and implementation. 2. High ' cost in layout. 3. Difficult to bringing too many or too often changes. • 4. Difficult to produce new part or non-standardized part. 5. Too much dependence on GT curtails flexibility of the cellular manufacturing system.

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7.6 COMPARISON OF LAYOUTS Four different layouts have been explained in Table 7.3, these layouts are compared: Table 7.3 Comparison of Common Characteristics of Different Layouts

Types of Layout Factors

Fixed Position

Product (Line)

Cellular (GT)

Process (Functional)

1. Type of Operation

Ship building, large scale project, construction or industrial project

Continuous and repetitive

Small to medium batch

Job or small batch

2. Arrangement of facilities

Facilities moves to a fixed product/project

Placed along the line of product flow

Similar parts are grouped in part-family. For each part-family, one machine cells is formed which contains all facilities needed by corresponding part-family.

Grouped by speciality

3. Cost of layout

Moderate to low

Moderate to high

Moderate to high

Moderate to low

4. Material handling 5. Material travel

Moderate Variable path

Less Fixed path

Less Fixed path

High Variable path

6. Utilization of facilities

Moderate

Very high

High

Low

7. Operating facilities 8. Employee skill

General purpose Unskilled/skilled

Special purpose Unskilled .

Special purpose Multi-skilled as one operator may handle more than one operation

General purpose Skilled

Large (Q/P)

Moderate (Q/P)

Small (Q/P)

9. (Q/P) ratio: Q is Normally 1 as single production Quantity product production P is number of products or variety

REVIEW QUESTIONS 7.1 What are the objectives of a good plant layout? Explain. 7.2 What a-2 the most common approaches for plant for layout? Compare. 7.3 Explain the advantages, limitations and suitability of following layouts; (a) Product layout. (b) Process layout. (c) Fixed position layout. (d) Cellular layout. 7.4

How do you justify the suitability of cellular layout for the followings? (a) Batch manufacturing. (b) Just-in-time manufacturing. (c) Flexible manufacturing.

FACILITY LAYOUT (PLANT LAYOUT)

91

7.5 What are the purposes of part-machine incidence matrix? Why do we attempt to obtain clustering of "ones" • (in a block-diagonal form) in the zero-one incidence matrix? Give an example.

REFERENCES 1. Apple, J.M., 1977. Plant Layout and Material Handling, John Wiley & Sons: New York. 2. Buffa, E.S. and Sarin, R.K., 1993. Modern Production/Operations Management, John Wiley & Sons: New York. 3. Francis, R.L. and J.A. White, 1974. Facility Layout and Location—An Analytical Approach, Prentice-Hall Inc.: Englewood-Cliffs. 4. Immer, J.R., 1950. Layout Planning Technique, McGraw Hill Book Company: New York. 5. Ireson, W.G., 1952. Factory Planning and Plant Layout, Prentice-Hall Inc.: Englewood-Cliffs. 6. Moore, J.M., 1970. Plant Layout and Design. The Macmillan Company: New York. 7. Muther, R., 1955. Practical. Plant Layout, McGraw-Hill Book Company Inc: New York. 8. Shankar, R. and Vrat, P., 1998. "Cellular Manufacturing system: An overview," In Advanced Manufacturing • Technology, Ed. Deshmukh. S.G. and Rao, P.V., IIT Delhi, 7-19. 9. Shankar, R. and Vrat, P., 1999. "Some Design issues in Cellular Manufacturing using Fuzzy programming approach", International Journal of Production Research, 37 (11), 2545-63. 10. Waghodekar, P.H. and S. Sahu, 1986. "A critique of Some Current Plant Layout Techniques", International Journal of Operations and Production Management, Vol. 6 (No. 1), pp. 54-61.

92.

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IMPORTANT NOTES

i·

LINE BALANCING

8.1 INTRODUCTION Assembly line is a sequence of progressive assembly stations linked by some material handling devices. Assembly line is a special case of product layout in which the operations pertain to assembly of different parts at few stations. Line (or, product) layout is useful for high volume, single product type of manufacturing activity. In this, a moving conveyor may bring the work unit or sub-assemblies units near to the workers, who carry them along the next station and do the required operations. At each station, one or more workers perform the required operations. 8.2 OBJECTIVE IN LINE BALANCING PROBLEM In an assembly line, the problem is to design the work station. Each work station is designed to complete few processing and assembly tasks. The objective in the design is to assign processes and tasks to individual stations so that the total time required at each work station is approximately same and nearer to the desired cycle time or production rate. In case, all the work elements which can be grouped at any station have same station time, then this is a case of perfect line balancing. Production flow would be, smooth in this case. However, it is difficult to achieve this in reality. When perfect line balancing is not achieved, the station time of slowest station would determine the production rate or cycle time. Example: Let us consider a five-station assembly system in which the station times are 12, 16, 13, II and 15 minutes respectively. The slowest station is station 2, which takes 16 min., while station 4 is fastest with 11 min. of station time. Work carrier enters•at station 1 and leaves at station 5. Now Station Time (min.) Work Carrier

12

r

Assy Station 1

16

Assy Station 2

13

Station 3

Figure 8.1

11

15

Assy Station 4

Assy Station 5

Finished Assembly

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INDUSTRIAL ENGINEERING AND MANAGEMENT

a work carrier at station I cannot leave station I after 12 minutes as station 2 is not free after 12 minutes of work on a previously arrived work carrier Only after 16 minutes it is free to pull work carrier from station I. Therefore, station 1 will remain idle for (16— 12) = 4 min. Similarly, in each cycle, station 3 and 5 would be idle for 3, 5 and 1 min (Figure 8.1). Since, idle time at any station is the un-utilized resource, - the objective of line balancing is to minimise this. 8.3 CONSTRAINTS IN LINE BALANCING PROBLEM The operations in any line follow same precedence relation. For example, operation of super-finishing cannot start unless earlier operations of turning, etc., are over. While designing the line balancing problem, one has to satisfy the precedence constraint. This is also referred as technological constraint, which is due to sequencing requirement in the entire job. Another constraint in the balancing problem is zoning constraint. It may be either positive zoning constraint or negative zoning constraint. Positive zoning constraint compels the designer to accommodate specified work-elements to be grouped together at one station. For example, in an automobile assembly line, workers are doing work at both sides of automobile. Therefore, at any station, a few operations have to be combined. Many times, operation and inspection are grouped together due to positive zoning constraint. In a negative zoning constraint few operations are separated from each other. For example, any work station, which performs spray painting, may be separate from a station, which performs welding, due to safety considerations. Therefore, following constraints must be following in a line balancing problem: 1. Precedence relationship. 2. Zoning constraints (if any). 3. Restriction on number of work stations (n); which should lie between one and total number of work elements (N). Thus: 1 _1 3. Total Work Content (Twc): This is the algebric sum of time of all the work elements on the line. Thus,

N

Tyr

=

E 1=1 TIN

95

LINE BALANCING

4. Station Time (Ts.): It is the sum of all the work elements (i) on work station (s). Thus, if there are n 1 to n2 work elements assigned at station s, then "i Tsi = 1TiN 5. Cycle Time (Td: Cycle time is the rate of production. This is the time between two successive assemblies coming out of a line. Cycle time can be greater than or equal to the maximum of all times, taken at any station; Necessary clarification is already given in the previous example. max {Tsi} If, Tc = max {Ti}, then there will be ideal time at all stations having station time less than the cycle time. 6. Delay or Idle Time at Station (Tds): This is the difference between the cycle time of the line and station time. Tds =

—Ti.

7. Precedence Diagram: This is a diagram in which the work elements are shown as per their sequence relations. Any job cannot be performed unless its predecessor is completed. A graphical representation, containing arrows from predecessor to successor work element, is shown in the precedence diagram (see Figure 8.1). Every node in the diagram represents a work element. 8. Balance Delay or Balancing Less (d): This is a measure of line-inefficiency. Therefore, the effort is done to minimise the balance delay. Due to imperfect allocation of work elements along various stations, there is idle time at station. Therefore, N

Balance Delay where,

nT -E nTe — Twe _ c (d) = nT, nTe

TN

Tc = Total cycle time TM" = Total work content and n = Total number of stations.

9. Line Efficiency (LE): It is expressed as the ratio of the total station time to the cycle time, multiplied by the number of stations (n):

where,

Tsi LE = i=1 x100% (n) (Tr) 7'si = Station time at station i, n = Total number of stations, and T, = Total cycle time.

10. Smoothness Index (SI): Smoothness index is a measure of relative smoothness of a line.

SI

=

i=1 where,

[(Tsi)max Tsif

(Tsdniax = Maximum station time.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

8.5 METHODS OF LINE BALANCING It is not possible (to date) to have an approach, which may guarantee an optimal solution for a line balancing problem. Many heuristics exist in literature for this problem. The heuristic provides satisfactory solution but does not guarantee the optimal one (or the best solution). We would discuss some of the heuristics on a sample problem of line balancing, as given below: Problem 8.1 Let us consider the precedence diagram of 13 work elements shown below. The time each work element is at the top of each node (Figure 8.2).

Figure 8.2

8

3

6

3

Precedence Diagram for Problem 8.1

In a tabular form, this precedence diagram is represented as follows: Work Element

Duration (min)

1

8

2

3

3

3

4

3

5

6

Immediate Precedence

1

2

6

7

4

7

5

3, 5, 6

8

3

7

9

2

7

10

5

7

II

8

8

12

5

10

13

10

9, 11, 12

Total

68

8.6 HEURISTIC: LARGEST CANDIDATE RULE

The following steps are followed: Step 1: List all work elements (1) in descending order of their work elements (TIN) value. Step 2: Decide cycle time (To).

97

LINE BALANCING

Step 3: Assign work element to the station. Start from the top of the list of unassigned elements. Select only feasible elements as per the precedence and zoning constraints. Select till the station does not exceed cycle time. Step 4: Continue Step 3 for next station. Step 5: Till all work elements are over, repeat Steps 3, 4. Problem 8.2 Refer the problem shown in Figure 8.2. Decide cycle time. Total work content = 68 min Largest work element time = 10 min Thus, cycle time (Te) must satisfy T > 10 min 68 For minimum cycle time of 10 min.,., number of stations would be — = 6.8. Therefore, we must take stations lesser than this. Let us select 5 stations design. For 5 stations the station time should be 68 nearly equal to — = 13.6 min. 5 List work elements in descending order of their work element. Work Element

TIN

Immediate Precedence

13 1 11 6 5 7 10. 12 2 3 4

10 8 8 7 6 5 5

9, 11, 12 —

5 3 3 3

10 1 1

8 9

3 2

8 4 2 3, 5, 6 7

1 7 7

Step 3: Station

11

at Station

Element

TN

1 2 3

8 3 3

14

4. 6 5

3 7 6

16

E TiN

Contd...

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Station

Element

TIN

E TN at Station

III

7 10 8

5 5 3

13

11 12 9

8 5 2

15

13

10

10

IV

V

Here, final cycle time is maximum station time which is 16 min. nT —ET N Balance delay = En T. 5 x 16 — 68 5 x 16 Let us consider a 4 station design: Approximate cycle time

Station

x100% = 15%

ET,N No. of Stations 68 = — = 17 min 4 Element

TN

E 7-,,,, at Station

1 2 3 4

8 3 3 3

17

6 5 7

7 6 5

18

10 8 11

5 3 8

16

12 9 13

5 2 10

17

II

III

IV

Since maximum station time is 18 min. (for station II), the cycle time would also be 18 min. =

4 x 18 — 68

x100% = 5.55% 4 x 18 As the balance delay is quite less in 4 station design, we may select 4 station design provided the capacity of station II is at least 18 min (Figures 8.3 and 8.4). .Here, balance delay

99

LINE BALANCING

3

8

3

11

Station

Station 11 Figure 8.3

Station III

Station IV

Four stations line Design for Problem 8.1

Station III 8, 10, 11 (16 min.)

Figure 8.4

Physical Layout of 4 ct-'

^si c

8.7 KILBRIDGE-WESTER HEURISTIC FOR LINE EbALANCING

In this heuristic, work element is selected as per its position in precedence diagram. Step 1: Construct precedence diagram. Make a column I, in which include all work elements, which do not have a precedence work element. Make column II in which list all elements, which follow elements in column I. Continue till all work elements are exhausted. Step 2: Determine cycle time (Tc) by finding all combinations of the primes of

E TN which is

i=i the total elemental time. A feasible cycle time is selected. Number of stations would be:

E Tiw

= i=i

T.

100

INDUSTRIAL ENGINEERING AND MANAGEMENT

Step 3: Assign the work elements in the work station so that total station time is equal to or slightly less than the cycle time. Step 4: Repeat Step 4 for unassigned work elements (Figure 8.5). IV

III

V

VI

VII

Figure 8.5 Seven Columns Initial Assignment

Now, selecting cycle time as equal to 18 seconds we follow these steps: Column

Work Element, i

TN

Column Sum

Cumulative Sum

1

8

8

8

2 3 4

3 3 3

9

17

5 -6

6 7

13

30

IV

7

5

5

35

V

8 9 10

3 2 5

10

45

11 12

8 5

13

58

13

10 Omax)

10

68

II

III

VI VII

Total elemental time is 68 minutes which is 2 x 2 x 17. The cycle time must lie between 68 (for one station) to 10 min. (which is max of all TEN): 10

7',

5 68

LINE BALANCING

101

The possible combinations of primes (17, 2 and 2) of work content time (68 min) are as follows: Feasible Cycle Time 17 17 x 2 = 34 17 x 2 x 2 = 68

Infeasible Cycle Time 2 2x2=4

Let us arbitrarily select 17 as the cycle t ime. Now, regroup elements in columns I and II till we get 17 min. of station time. Thus, elements 1, 2, 3, 4 are selected at station I. We proceed in the same way for remaining elements: TIN

Station Sum (Ts)

(Tc — Ts) for T, = 17 min

1 2 3 4

8 3 3 3

17

0

5 6

6 7

13

4

III

7 8 9

5 3 2

IV

10 11 12

5 8 . 5

I5

2

13

4

10

7

Station

II

V

Element, i

13 Line Efficiency =

10

68x 100 = 80% 5x17

Smoothness Index = J02 + 42 + 22 +42 + 72 = /83 = 9.22 5x17 —68 Balance Delay = x 100 = 20% 5x17 Now, looking at the previous table, little readjustment in work element is possible if the cycle time is extended to . 18 min. This is apparent when we consider the following grouping: Column Work Element, i

TIN

1

1 2 3

8 3 3

11

4 5 6 7

3 6 7 5

Station Sum (Td

— T5 ) for Tc = 18 min

17

1

18

0

Contd...

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INDUSTRIAL ENGINEERING AND MANAGEMENT

❑1

IV

8 9 10 11

3 2 5 8

18

0

12 13

5 10

15

2

68

Line Efficiency

=

Smoothness Index

= V12 + 22 = = 2.24 4 x 18 — 68 = x 100 = 5.56%. 4 x 18

Balance Delay

4 x 18

x 100 = 94.44%

8.8 HEURISTIC: HELGESON-BIRNIE (RANKED POSITIONAL WEIGHT) METHOD Following steps are followed: Step 1: Draw the precedence diagram. Step 2: For each work element, determine the positional weight. It is the total time on the longest path from the beginning of the operation to the last operation of the network. Step 3: Rank the work elements in descending order of ranked positional weight (RPW). Calculation of RPW would be explained in the example to follow. Step 4: Assign the work element to a station. Choose the highest RPW element. Then, select the next one. Continue till cycle time is not violated. Follow the precedence constraints also. Step 5: Repeat Step 5 till all operations are allotted to one station. Example: Let us consider the previous example. The precedence diagram is shown in Figure 8.1. Assume cycle time is 18 min. Solution: Refer to Figure 8.1. RPW of any work element (i) is the sum of the time of work elements on the longest path, starting from ith work element to the last work element. Therefore, for all activities, first find longest path, starting from that element to the last work element. This is given below in last column. The ranked positional weight (RPW) of all work elements, i, is shown below: Work Element, i

Rank

RPW

1. 2.. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

I 3 6 2 5 4 7 8 12 9 10 11 13

44 35 29 36 32 33 26 21 12 20 18 15 40

Longest Path

1-4-6-7-8-11-13 2-5-7-8-11-13 3-7-8-11-13 4-6-7-8-11-13 5-7-8-11-13 6-7-8-11-13 7-8-11-13 8'11-13 9-13 10-12-13 11-13 12-13 13

103

LINE BALANCING

Assignment of work station is done as follows: Station

II

III

Element, i

Element time TIN

1

8

4 6

3 7

Smoothness Index Balance Delay

18

0

2

3 3 6

7

5

17

1

8 9 10

3 2 5 8

18

0

5 10

15

3

12 13

Line Efficiency

TG — Tin

3 5

11 IV

Station Time, T„„

68

x100 = 94.44% 18 x 4 = V02 +12 + 02 + 32 =3.16 4 x 18 — 68 x 100 = 5.56%. 4x18

Problem 8.3 Design the work stations for an assembly line shown below. Use RPW method. Desired time is 10 minutes. 2

3

N

Solution:

Tut^ =

E TIN i=i

= Total

work content

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INDUSTRIAL ENGINEERING AND MANAGEMENT

= 2 + 4 + 1 + 2 + 2 + 3 + 3 + 2 + 1 + 5 + 3 + 2 + 1 + 3 = 34 Range of cycle time: Max (TiN) < T, < or

E TN

i=1 5 < T, 34 Desired cycle time C = 10 min. Minimum number of work stations =

ETA, 34 = = 3.4

T,

10

=4 Using Rank Position Weight (RPW) method: Task

RPW

1 3 2 4 5 9 6 7 10 8 11 12 14 13

(20) (18) (17) (14) (13) (11) (12) (11) (8) (7) (6) (5) (5) (3)

Now, grouping on the basis of weight: Work Station Job

-->

Work Station Time -4

(a) Balance Delay

Work Station 1

Work Station 2

Work Station 3

Work Station 4

1, 3, 2, 4

5, 6, 9, 7

10, 8, 11, 12, 13

14

(10)

(9)

(10)

(5)

S TN

Total Ideal Time

nT,

Cycle Timex No. of Stations

i=t

34 4x10

x100=15% ,

105

LINE BALANCING

(b) Line Efficiency

= [1 — Balance delay] x 100 = [1 — 0.15] x 100 = 85%

(c) Smoothness Index

=

roma>, — Ts; f

= V(10 —10)2 + (10 — 9)2 + (10 —10)2 + (10 — 5)2 =Ni0 +1+ 0 + 25 = 26 = 5.1. REVIEW QUESTIONS 8.1 Explain the objectives in a line-balancing problem. 8.2 Define and explain the following terms: (a) Work element, (b) Work stations, (c) Total work content, (d) Station time, (e) Cycle time, (f) Station idle time, (g) Precedence diagram, (h) Balancing delay, (i) Line efficiency, and (j) Smoothness index. 8.3 The precedence relationship of an assembly line is as follows: A—>B—>C-->D,E—>F—>G The processing time in minutes for activities is given in the brackets: A (0.61), B (0.39), C (0.27), D (0.14), E (0.56), F (0.35), G (0.28). The line operates seven hour per day for a desirable output of 600 units per day. Calculate: (a) Cycle time, (b) Theoretical minimum number of workers, (c) Work station configuration, and (d) Balance delay. (Ans: (a) 0.7 min/unit, (b) 3.73 workers, (c) station 1: A; station 2: B, C; station 3: D, E; station 4: F, G, (d) 93%). REFERENCES I. Arcus, AL, 1966, "COMSOL: A computer method for sequencing operations for assembly lines", International Journal of Production Research, 4, (4). 2. Kilbridge, M.D. and Wester, L., "A heuristic method of assembly line balancing", Journal of Industrial Engg., 12 (4). 3. Held, M.K. and Sharesian, 1963, "Assembly line balancing, Dynamic Programming with precedence constraints", Operations Research, 11 (3). 4. Helgeson, MB and Birnie DP, 1961 "Assembly line balancing using RPW technique", Journal of Industrial Engineering, 12 (3). 5. Hoffman, TR, 1963, "Assembly line balancing with precedence matrix", Management Science, 9 (4). 6. Vrat P., Wadhwa S., Shanker R, Deshmukh S.G, 1996, "A Two phase Heuristic for line balancing", In MechnoVision: 2001, Ed. Sharma, Pv., et. al. (New Delhi: New Age International (P.) Ltd. Publishers), pp IV 55-61.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

PRODUCT DESIGN, PLANNING AND DEVELOPMENT

9.1 INTRODUCTION New products haVe revolutionalised the life of one and all. Few years back, it was beyond our imagination that computer could be so powerful learning aid for the school going children. Children can now read a lot of material through computer-aided learning software and web-based internet sites. The advent of internet has created a vast pool of information at our door-step. Look around at the table, chair, T.V., fan, watch, car, etc. You may notice variety. You may notice designs, vastly different compared to those 20 years back. All this is due to new product design. So, this is an area of tremendous potential in years to come. Product development is also important because of following reasons: 1. Customers, have become very demanding. They seek variety before selecting an item of their choice. In general, need and liking of one individual differ from others. This causes company to look for new model or new product. 2. Competition in the market is stiff due to many companies dealing with same type Of product. This causes companies to look for new product with different features, size, colour, or other attributes. 3. This is an age of advertising and media support. New product, launched by a company, attracts the support from media. 4. Technology is fast changing. Focus of R&D and education institute is gradually changing towards end-user. Therefore, new ideas are fast getting converted into deliverable products. Nobody is now interested in a research, which confines in the lab only. 5. The purchasing power of common people has been considerably improved. This is due to dynamics of economy and growth of nation. Therefore, new product development has a tremendous future. 6. New regime of patent and legal protection against copying the ideas, design or product has changed the area of new product development. People are more concerned about developing first, getting patent and copyright to use or sell. Therefore, there is a lot of money in this area. 7. There is a strong relationship among good product design and manufacturing, industrial-engineering and management. Westinghouse•study (1984) shows that 80% of all costs during product life cycle are fixed during design phase. Even the best of manufacturing techniques and management principles cannot compensate for the cost of a pool- design.

108

INDUSTRIAL ENGINEERING AND MANAGEMENT

9.2 REQUIREMENTS OF A GOOD PRODUCT DESIGN

1. Should cater to the customer's need. 2. Should provide customer delight (in TQM, this means providing some good feature which the customer did not expect). 3. Profitable to the firm's earnings. 4. Should provide all functional requirements. 5. Reliable. 6. High quality and conformance to international standard. 7. Environmental friendly: 'no environmental degradation while disposing. 8. Safe and no health hazard. 9. Proper packaging. 10. Durable and long lasting. 11. Easy to handle and simple controls. 12. Availability of spare parts. 13. Good-looking; pleasant features and colour. 14. Easy to store. 15. Compared to existing products, competitive price and better features. 16. Design for manufacturing (DFM): Easy to manufacture. 17. Design for assembly (DFA): Easy to assemble. 18. Availability in different range of price and performance for giving choice to customer. 19. Easily available peripherals, software, attachments, power supply, etc. 20. Possibility of add-on features. 9.3 PRODUCT DEVELOPMENT APPROACHES

•

Product development is an area of tremendous creativity, skill, knowledge and experience. It requires originality in approach. Recently, there is focus on using computer-assisted product development toc'.s. Following approaches are followed in the area of product development: (i) Imitation: This is an approach of using features, which some other product of similar or dissimilar type already possesses. Example: (a) Computers are now available with features of remote control devices. Remote control device is in use for home-TV sets. For computers, it is a new feature. This is an external imitation. (b) Stereo is available with auto-reverse features for cassettes. Many companies of this product have added this feature in their product. This is an internal imitation. (;1) Adoption: This is area of developing a product for which the market is already existing. Example: (a) MTNL has introduced telephone directory on CD, which can be operationalized on a computer. For telephone directory, the market is already existing, but integrating it with computer is an adoption of technology for the same product. • (b) Few years back, slide rules were replaced by electronic calculators for scientific calculation. This is an example of product development through adoption.

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109

(iii) Invention: This is an area of innovation and doing something new which others have not done so far. Example: Few years back, telephone, electricity, bulb, AC, etc., were developed through invention. It requires high R & D effort, and, therefore, these new product developments are quite few 9.4 PRODUCT DEVELOPMENT PROCESS The process of product development involves few systematic steps. These are as follows: 1. Identification of the needs of customers. 2. Generation of ideas to fulfill needs. 3. Evaluate the fitness of ideas on customer acceptability,- market requirement, cost, productibility and resources. 4. Drop unacceptable ideas and select the feasible idea. 5. Advanced Product Planning: Preliminary market analysis, creating alternative concepts in product features, precise definition of operational features, supply-chain planning with detailed logistic planning, sales planning, economic analysis, costing, profitability, market share analysis, etc. 6. Advanced Design: Analytical testing, experimentation, physical modelling, control and power supply features, etc. 7. Make prototype. 8. Product Evaluation and Improvement: Launch the product in limited market (test market) for feedback, customer response, improvement and last minute changes. 9. Product Support: Support the product with marketing strategy, advertising planning, after sales service, warranty management and repair station planning. A detailed, self-explained flow chart for product development is presented in Figure 9.1. This flow chart clearly gives us an idea regarding various steps needed in the product-development efforts. It may also be noted that product development is an iterative process, which goes through modifications at various levels. Another important point in product development is the rejection of ideas, which may be quite high due to filtering at many stages. 9.5 SOME CONCEPTS IN PRODUCT DEVELOPMENT For product development, following concepts have been used: 9.5.1 Standardisation Product standardisation is an important factor in product design and development. Standard product is preferred in many situations. This is for the ease in replacement, ease in use and compatibility. Screws, power supply, break-horse power of motor, etc., are standard for ease in adoption. Standardisation provides following advantages: (i) It saves duplication of effort in designing standard products for which some other design already exists. (ii) Reducing burden on product process, as standard parts are available at cheap rate due to mass production by other firms. (iii) Simplified material planning, attractive subcontracting. (iv) Reduced drawing, specifications, time to design, mistakes, etc. (v) Reduced production cycle, as standard part may be subcontracted at a time when it is just needed. It, therefore, facilitates Speed-to-market.

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110

Input (Technology) R&D

Idea & innovation

Input (Industry) Product: Similar & different

Input (External) • Customer • Supplier Profile • Competitors

Input (External) 1

• Capability of firm

Product development

• Internal R & D

.1

• Finance &

strength & weaknesses

Assessment of technology

marketing effort

Study for the feasibility

Assessment of market

,Cost-benefit analysis

No

Is product technically feaible?

Stop

Yes Is product economically feasible?

No Stop

Yes • Establish pereliminary design • Make a prototype • Circulate drawing to concerned expert

Yes

• Establish process plan • Procure production system • Machine, tools and other resources 1

Establish detailed production planning & control

Analyse the process and system

Commecrialize the product

Figure 9.1 Development of new Product and Processes

PRODUCT DESIGN, PLANNING AND DEVELOPMENT

Some limitations of standardisation are as follows: (i) Difficulty to undertake .charges. (ii) Reduction in variety and limits on customized product. (iii) Stagnation in innovation. (iv) Chances that competitors may quickly develop similar product, if standardised. 9.5.2 Modular Design Modulars are common components grouped together in one interchangeable sub-assembly. Concept of modular design is very helpful in providing variety to the customers. Let us understand this by an example of computer hardware market. Let two different types of colour monitors, one mono-monitor, two varieties of keyboards, three varieties of printers, and three varieties of motherboards are available to the customer. These are examples of modular design, if all are compatible. Now, with these modular items, total varieties of final product will be [(2 + 1) * 2 * 3 * 3] or fifty four. Modular design offers following advantages: (i) Stabilized design of modular item reduces development of final product. (ii) Considerable range of product. (iii) Very high speed-to-market. (iv) Considerable flexibility in design. (v) Easy service, diagnosis of fault and replacements. (vi) Simplified material planning, less inventory due to easily available modular sub-assemblies. (vii) Less paper work in record keeping as there is no need to maintain the records of parts used in the modular sub-assemblies. 9.5.3 Simplification It is the process of reducing variety of a product by limiting product range, design or type of material. Simplification offers boost to standardisation. Let us understand it by an example. The technology for colour TV is available to its manufacturers. They can manufacture TV set of any size from palm size to big-screen. But normally, 14", 15", 16", 18", etc., are the fixed sizes. Why not to have 14.01", 14.02". 14.03" ..., as the variety to a customer. The answer is simplification in marketing, manufacturing and planning. The marginal difference in size or specification does not offer real change in attributes, which may be termed as variety. Therefore, simplification is needed in product development. Simplification provides better customer service due to limited variety, better after-sales planning, and reduced volume. It is also helpful in reducing inventory level and complex material planning. It is helpful in focussing effort on limited parts and therefore lesser cost may be anticipated. It is also helpful in better product quality due to concerted effort on limited product range. Combination of simplification and standardisation leads to specialization. Limited but focussed product variety is helpful for a company to specialize in a particular area. 9.5.4 Speed-to-Market Speed-to-market is a term widely used these days. This means, introduce your product in the market as fast as possible. The reason is stiff competition, globalisation and access of technology to all competitors. The idea of new product gets very fast peculated in the market. Therefore, first company to hit the market is likely to capitalize the virginity of market. Many software companies, automobile companies, computer hardware firms, pharmaceutical companies, etc., are eager to first hit the market with their innovative product. Let us look into some of the examples. During past few years, software firms were

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keen to launch a product to handle Y2K problem. This was a problem, which computer system has faced due to change of year from year 1999 to year 2000. Most of the earlier versions were unable to copeup with the problem arising due to non-recognition of year 2000 by computers. These computers were designed to recognize a two digit slot (i.e., "99" for 1999, "00" for 2000 or 1000, both). Therefore, the company to first launch a software, which could be helpful in distinguishing year 1000 and year 2000, is expected to hit and capitalize the market in big way. Similar examples are numerous in many other sectors. In the pharmaceutical industry, the company, which will introduce an effective and affordable drug for diseases like cancer or AIDS, is likely to derive the greatest profit from market. This aspect calls for the industrial focus-on speed-to-market. 9.5.5 Concurrent Engineering "Concurrent engineering", "simultaneous engineering" "integrated-product-development" are the few terms for same meaning. It helps the companies to remain competitive by producing high-quality product and services for the first time. Concurrent Engineering is a systematic approach to the integrated, concurrent design of products and their related processes, including manufacture and support. This approach is intended to cause the developers, from the outset, to consider all elements of product life cycle from conception through disposal, including quality, cost, schedule and user requirements. • —Institute of Defense Analysis, US Report, R-338. Four Elements of Concurrent Engineering 1. Voice of customer (customer focus). 2. Multidisciplinary teams (team work; focus on producibility and supportability). 3. Automated tools (automation, CAD/CAM integration; at product developments age, evolve "buildto" technical data package). 4. Process management (Evolve process, plan it and stabilize it in parallel, while the product is being developed). Benefits of Concurrent Engineering 1. Lower cost Customer

F

Development of process Detailed product design sL1

Conceptualization

Common sequential design & development of product Conceptualization

Detailed product design

Customer

Development of process I

Concurrent engineering product development Time of I'roduct Development Figure 9.2

Reduced-time of Product Development in Concurrent Engineering

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PRODUCT DESIGN, PLANNING AND DEVELOPMENT

2. Speed-to-market due to reduced cycle time 3. Better understood user requirements 4. Quality design of producible items 5. Quicker development period 6. Team work 7. Customer satisfaction 8. Integration of design and manufacturing 9. Better chances of succeeding product in market 10. Low scrap and wastages. 9.5.6 Quality Function Deployment (QFD) and House of Quality

(HOQ)

QFD was originally developed by Japanese professor, Yoji Akao, but it has become very popular in USA, Europe and also in India. The QFD integrates two design inputs: (1) Customer desires and (2) Marketing findings. These two inputs are translated into technical requirements and then these are integrated with computer-aided design (CAD). This approach of concurrent engineering saves a lot of lead time (around 60-80%) in product development. The QFD is a discipline for product planning and development in which key customer wants and needs are deployed throughout an organisation. Quality: Customer need or expectation. Function: Ways to satisfy customer needs/expectations. Deployment: Making it happen throughout the organization. The Quality Function Deplyment team uses all means to analyze the customer needs. For this, the Kano model may be understand, how the customers view and evaluate quality in the product. Team uses planning tool to product and process specifications (Figure 9.3): Happy customer Spoken requirement

Zone of customer requirement/ Expectations— Not satisfied

Unspoken expected

Zone of customer requirements/ Expectations— satisfied

Hostile

Figuro 9.3 Kano Model regarding the Way Customer Evaluates Quality

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The framework for working a QFD program is called as House of Quality (HOQ). It is a matrix, which displays the interrelationship between customer need and technical know-how. The principle behind HOQ is that product should be developed to reflect customer needs, tastes, desires or expectations. A multifunctional team of marketing people, design professionals and shop-floor experts should work in tandem to form an initial idea regarding product features. The process in QFD allows cascading through a chain of related-houses by linking the customer requirements to engineering characteristics to manufacturing capabilities. In the customer matrix (we call it house), customer needs are translated into engineering specifications. This is cascaded in the next house into deployment of parts and assemblies. In the next house, this is cascaded to process planning stages. At the end, the cascading is done for translating it into production planning and scheduling (Figure 9.4). Advantages of QFD (i) Minimizes communication barrier in assessing customer needs. (ii) Establishes link between product feature, customer need and process requirements. (iii) Short product development cycle (30 to 50% less). (iv) Firm design available without many iterations (30-50% lesser changes). (v) Less chances of product failure due to focus on customer need.

Engineering features Production milestone

Figure 9.4

Production needs

Cascading Matrices of HOQ in QFD

(vi) Less changes in personnel and strong team spirit. (vii) Strengthens quality culture. (viii) By evaluation and comparison with competitors, it provides an opportunity to improve through benchmarking. (ix) Multifunctional team provides synergy in product development. Thus, good ideas evolve quickly. (x) Focus on gaining competitive edge over key areas of product, process and market-requirement. (xi) Lower development-cost for a product results in lesser price to the customer. This may be a competitive edge fdr the success of a new product (about 20-60% lesser start-up cost). (xii) Due to customer focus, the developed product is likely to perform better and satisfy the customers (about 20-50% lesser warranty claims). 9.5.7 Design for Manufacturing (DFM) The DFM aims at designing products with a focus on its manufacturing. The design process is basically a cost driven design (COD) approach. It is basically a structured approach to look into the cost competitiveness

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115

for a successful product. In DFM, many generic rules andl guidelines exist. For example, minimize the total number of parts. Similarly, minimization rule applies to minimize the steps in a process and minimize the number of suppliers. 9.5.8 Design for X (DFX)

The DFX is a focussed-DFM. In this, certain area (we call this X) is selected for attention. Improvement in X is proposed after detailed analysis of the process. ,For e xample, in a refrigerator, failure of compressor is identified by customer and marketing team as the area of iml )rovement. Therefore, a concurrent engineering, team takes up a project: "Design for compressor reliabil ity". Following steps are needed in DFX: (i) Identify X (focussed area). (ii) Identify team of experts who are cross functional. (iii) Establish performance measures, like mean-time between failure (MTBF), power consumption load characteristics, etc. (iv) Generate data for X in existing and competitors p•rodu cts. (v) Identify process changes to improve the performance measure. Use research to identify improvements, such as minimize parts; use standard components, etc. (vi) Evaluate alternatives and physically test the design. (vii) Generate analysis report and feedback for improvement in area X. 9.5.9 Rapid Prototyping (RP)

RP is the technology for converting design from computer representations (such as CAD model) directly into solid objects without human intervention. Rapid prototyping is a fast emerging area in product development. Computer-Aid-Design (CAD) models are converted into manufacturing codes for metal processing. No human intervention is needed at this stage. Therefore, RP reduces time between conceptualization to marketing of the product. Many options of design may be evaluated on a computer screen with the help of CAD models. However, RP is still in developing stage. Its full commercialized uses are very few. Detailed discussion on rapid prototyping is available in the "o ptional reading material" at the end of this chapter. Approaches of Rapid Prototyping (0 Stereo lithography: In this, solid or surfaced CAD data is used to convert data into sliced or crosssections plane. A laser which generates ultraviolet beam, is us ed to establish cross-section on the work-material in a successive manner. (10 Laminated Object Manufacturing (LOM): In this, solid or sur faced CAD data is gradually sliced into many cross-sections. Section outline is cut in small thicl messes (0.002 to 0.020") by laser beam. Successive layers are bonded on the previous one with h eat-seal adhesive coating on layers. The process of trimming is continued till cutting and laminat ion give a 3-D multilayered solid object. WO Machined Prototypes: In this, many 3-D objects are cut from z i large variety of solid work-piece by using CAD-data and multi-axis CNC machining centres. Advantages of RP (i) Very fast manufacturing. (ii) Manufacturing is direct from CAD data file or drawings of a product.

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116

(iii) Easy to produce master-pieces for casting and plastic products. (iv) Easy to detect flaws in drawing and design. (v) Easy to evaluate manufacturability of design on a computer screen. REVIEW QUESTIONS

9.1 Why is the area of product design so important in years to come? Explain. 9.2 What are the requirements of a good product design? 9.3 Explain the following approaches of the product development: (i) Imitation, (ii) Adoption and (iii) Invention. 9.4 Explain the product development process. 9.5 Explain the following in the context ofproduct development: (i) Standardisation, (ii) Modular design, (iii) Simplification and (iv) Speed-to-market. 9.6 Explain the concept of concurrent engineering. What are its benefits? 9.7 Explain QFD and house of quality. What are the advantages of QFD? 9.8 Explain the process of rapid prototyping. What are its advantages? 9.9 Write short note on the following: DFM, (ii) DFX and (iii) Kano model. REFERENCES

1. Abell, D.F. and Hammond, J.S., 1979, Strategic Market Planning, Prentice Hall, N.J. 2. Bicheno, J. and Elliott B.R., 1997, An active learning approach: Operations Management, Blackwell Publishers Ltd. U.K. 3. Dalela, S. and Shankar, R., 2000, A Textbook of Production Engineering, Galgotia Publications, New Delhi. 4. Hitomi K., 1996, Manufacturing System Engineering, 2nd Ed., Viva Books Pvt. Ltd. 5. Kotler, P., 1991, Marketing Management, 7th Ed., Prentice Hall N.Y. 6. Monks J.G, 1987, Operations Management: Theory and Problems, 3rd Edition, McGraw Hill Book Co., N.Y. • 7. Monks, J.Q, 1996, Operations Management: Schaum's outlines series, 2nd Edition, McGraw Hill Co., N.Y. 8. Porter, M.E., 1985, Competitive Advantages, Free Press, N.Y. 9. Roome, N., 1994, "Business Strategy, R & D, Management, and Environmental imperatives"; Research and Development Management, January. 10. Turner, W.C., Mize, J.H., Case, K.E., and Nazemetz, 1993, Introduction to Industrial Systems Engineering, Prentice Hall Inc. N.J.

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117

OPTIONAL STUDY MATERIAL* RAPID PROTOTYPING INTRODUCTION

Rapid prototyping (RP) refers to a new class of processes, which generate physical prototypes material addition. It covers technologies for converting design from computer representation of object into solid object without human involvement in processing and planning. RP is, therefore, termed as solid-freefrom-fabrication, layered manufacturing, 3D printing, or computer automated fabrication. It has come into fore\ront during late 1980's. Definitions of RP: Rapid prototyping refers to a set of processes in which physical object is obtained directly from its CAD (Computer-aided Design) model without explicitly going through the various steps of manufacturing, which includes tooling and material removal. Rapid prototyping starts with quick creation of manufacturing ready, CAD models; continues to verify the design using CAE (Computer-aided Engineering) tools; moves on to the manufacturing of physical representation and finally ends with a prototype in the correct material (Cater, 1994). RP uses technology) so that the required object is printed in three dimensional (3D). ADVANTAGES OF RP

Rapid prototyping offers many advantages to its users. These are: (i) It offers direct manufacturing from CAD (Computer-aided Design) files and sketches. (ii) It is a paperless manufacturing. (iii) Very fast development of functional parts is possible. Therefore, it offers tremendous potential in the area of new product development. (iv) For conventional metal casting, master part is needed for moulds. The RP provides a quicker way to manufacture these. For plastic parts also, RP is a useful process. In the investment casting, wax may be used as material to be deposited in RP. (v) RP may be used to test the suitability of a functional part during the early development of a product. Initial defects in the design may be detected and rectified. (vi) Before any product is commercialised, few pieces are tested for performance and customer's acceptability. If this is done after procuring high cost dedicated machines, there are risks in the event of product failure. Few pieces, made by RP, may be used for the test and specimens. (vii) It is very useful and effective tool for the physical visualization of design. (viii) RP can be used to test the assemblies for the intend6d functions and interface with related elements. (ix) RP is used to develop parts (as prototypes), which may be used for initial testings, such as photoelastic tests. Polymers, which are very common material, used in RP, are highly suited for the photoelastic tests of material. (x) RP parts can be used as a templet for copy-milling machine. (xi) It reduces lead time to produce prototype component. (xii) It offers greater capability to compute mass properties of components and assemblies. This study material is for optional reading. It may be relevant for Mechanical/Production Engineering Students. This text is adopted from the author's book: A Text Book of Production Engineering by S. Dalela and R. Shankar, Galgotia Publications, 2000 (Chapter 42).

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118 LIMITATIONS OF RP

(i) It is still in developing stage. Only few proprietary plastic materials are being used in RP. However, this technology is fast emerging for other materials, such as metals and alloys. (ii) RP does not offer good surface finish and, therefore, dimensional accuracy is quite poor in RP. (iii) Machines for RP are very costly and it is difficult for small and medium-size firms to afford. However, with emerging technologies, the cost is expected to fall in near future. PRINCIPLE OF RP

Rapid prototyping is unique in the sense that the prototype part is produced by adding materials rather than removing materials, as in conventional machining process. The RP directly generates physical object from a geometric model of the object. A 3D object is represented as a 2D by cutting it into thin slices with the help of a computer software. Therefore, 2D layer manufacturing generates a 3D object in RP. The produced 2D slices are glued over one another to set the desired 3D object (Figure 9.5-). The steps are as follows: (i) Model the parts by a surface/solid modeller (geometric modeller).

/' Figure 9.5 Slicing and Scanning of Object

(ii) Section the part (Slicing), mathematically, using software. Generate a series of such parallel crosssections. For each layer, generate appropriate command (process plan) for RP apparatus. This process is quite analogous to numerical control (NC), tool path generation. In both cases, the planning task involves generation of the tool path and associated commands, such as a rapid movement of tool, etc. (iii) Generate curing/binding path for these pieces. (iv) Use RP machine for producing the prototype. Use curing/binding path, generated in the earlier step, to decide the solidification or binding a thin sheet of material. Develop a new layer, either by deposition of material or selective phase transformation of appropriate material. (v) Generate a new layer using steps (iii) and (iv). (vi) Repeat Step (v) till complete prototype is developed in a 3D form. SYSTEM FOR RAPID PROTOTYPING

The technology for RP is fast growing. Some of the common RP systems are as follows: 1. Stereolithography Apparatus (SLA) 2. Selective Laser Sintering (SLS) 3. Fused-Deposit Modelling (FDM)

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4. Laminated-Object Manufacturing (LOM) 5. Photo Masking or Solid Ground Curring (SGC) 6. Ballistic Particle Manufacturing (BPM) 7. Three-Dimensional Printing (3D Printing). Stereolithography Apparatus (SLA)

This process was developed and patented by a physicist, Charles W. Hall in 1986. In this process, a solid-plastic part, out of a photosensitive liquid polymer, is fabricated with the help of a directed laser beam. This would solidify the polymer. Laser light causes polymer to harden. Solid and surface CAD data is presented as sliced into cross-sections with the help of software. A laser beam is used which generates ultra-violet beam. Using computer-controlled scanning system, this beam is navigated across the top of a photosensitive liquid polymer. Initially, the process of scanning is done for the base or bottom layer of the part. Strike of laser beam over liquid polymer causes solidification of polymer. After the first base layer solidifies, a second layer is scanned by laser beam using CAD data file. The layers are approximately 0.005 to 0.020 inch or 0.13 to 0.50 mm thick. The deposited layers gradually move down so that a fresh layer is scanned and deposited over the earlier ones. An elevator is used to lower the solidified polymer so that a fresh layer or new layer is scanned and deposited over the earlier layer (Figure 9.6). X-Y positioning system>.< y X Plateform

Moving laser

> is called as greater than or equal to = is called as equal to 11.2.2 How to Convert a Maximization Problem into a Minimization Problem?

The maximization objective function is equivalent to a minimization objective function except with changed sign. Thus, Maximize

Z =

E c. x. J

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is equivalent to Minimize

Z=

E

i=1 Similarly, a minimization problem may be transformed into a maximization problem by changing the sign of the decision coefficients. Thus, Minimize

Zi =

E c;

is equivalent to Maximize

z, =

E -c;

11.2.3 How to deal with equal to (=) sign? The equal to (=) sign in a constraint may be handled by adopting two constraint sets with > and signs. For example: 5x1 + 3x2 = 24 Its equivalent is: 5x1 + 3x2 24 and 5x1 + 3x2 or < signs as equal to sign, Plot them on a graph paper. Step 3: Based on the original sign or of the constraint, mark the feasible region in space. Step 4: Identify the corner points (or intersection of constraints, represented by lines) of the feasible region. Also include the two intersections on two axes by the feasible region. All these points constitute a set of possible solution, as optimal solution always lies on the corner points. Step 5: For the objective function, draw straight line, called as isoprofit/isocost line. This may be done by equating the objective function to a very small profit figure or a high cost figure depending upon the nature' of the objective function, i.e., maximization or minimization respectively. Step 6: Draw parallel lines to the isoprofit line in maximization problem: moving away from the origin. Stop only when there is only one point_ in the feasible region, which is also on the isoprofit line. For the minimization problem, draw parallel lines to the isocost line and move towards the origin. Stop when there is only, one point in the feasible ,region which is also on the isocost line. ,

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Step This point represents optimal solution. From the optimal solution point, draw perpendicular lines on both axes (X and Y axes). The point of intersection on the axis will give the values of two variables which give optimal solution.

11.3.1 Characteristics of Corner Points The corner points are points where lines representing constraints or axes intersect with each other. In other words, lines joining corner points enclose the feasible region. Therefore, Step 5 and Step 6 may also be undertaken as follows: Step 5 (a): Calculate the value of objective function at each 'possible solution (i.e., corner point of feasible region). Find that corner point, which satisfies the objective of maximization Or minimization as the. case may be. This is, the optimum solution point. Step 6 (a): Draw a line with slope, same as that of objective function, and passing through the optimum solution point. Go to Step 7. Example 11.1 A company is manufacturing two different types of products, A and B. Each product has to be processed in 3 different departmentscasting, machining and finally quality inspection. The capacity of the departments is limited to 35 hrs., 32 hrs. and 24 hrs. per week respectively.. Product A requires 7 hrs. in casting department, 8 hrs. in machining shop and 4 hrs. in inspection, whereas product B requires 5 hrs.,' 4 hrs. and 6 hrs. respectively in each shop. The profit contribution for a unit prod,uct of A and B is Rs. 40 and Rs. 30 respectiVely. (i) Formulate the problem. (ii)-Find the optimal quantities of product A and B. (iii) What is total profit contribution? Solution: Processing time by product and department: Department

Casting Machining Inspection 'Profit contribution per unit

Product A

B

7 8 4

5

Rs. 40/-

Rs. 30/-

4 6

Capacity per week

35 32 24

Formulation of problem: 7x + 5y- 35 —(1) 8x + 4y 5 32 ...(2) 4x + 6y 24 —(3) Also, x>0 y >0 and objective function, to be maximized: Z = 40x + 30y Refer to Figures 11.1 and 11.2, for the graphical solution. Optimal profit (maximum) is at point N; when (x, y) is (3, 2). Hence, 3 units of A and 2 units of B should be manufactured for which the profit is Rs. 180.

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6

3,

Shaded region represents constraint (1)

Shaded region represents constraint (2)

7x + 5y and < sign is to be replaced by a = sign. Example

Constraint 5x + 4y < 20

becomes 5x + 4y + S = 20. Here, Si is an additional variable and we call it as Slack Variable. It is the difference by which (5x + 4y) fall short of 50. Example

Constraint 20x + 30y > 600

becomes.

20x + 30y — S2 = 600. Here, S2 is the Suiplus Variable, which is subtracted so that the excess of (20x + 3y) is consumed over 600. However, an extra variable, called as an artificial variable, must be added. Therefore, the constraints of "greater than type", i.e., with > sign should be augmented with a surplus variable and an artificial (slack) variable with equality sign. Therefore, the constraint 20x + 30y 600 would become 20x + 30y — 52 + A2 = 600 Why is the artificial variable added? The reason is that we do not want to violate the non-negativity constraints. The simplex starts with an initial solution that all real variables are equal to zero. What happens when we consider 20x + 30y — S2 = 600? Putting x and y as zero, we get, S2 = —600, which violates non-negativity constraint. Now, look at the augmented constraint 20x + 30y — S2 + A2 = 600. By putting x and y as zero; S2 is zero and A2 is 600. Therefore, non-negativity requirement of variables may be maintained. 11.11.1 Augmentation of Objective Function (OF)

The objective function must contain all the variables, which appear in the constraints. Therefore, slack, surplus and the artificial variables are added in the objective function as follows: Constraint Type

Add &towing In the constraint

In O.F.

+S

0.S.

—S + A

Max OS — MA Min OS — MA Max —MA or Min + MA

+A Here, M is a very large number. We will illustrate this with examples to follow.

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Simplex Table

Objective Function . Coefficient ->

Replacement Ratio C,.

Cr

Basic variable (Program variable)

CSI

0

0

,

Decision variable

0 ... 0

•

xI

X2

8 11+ I

bt

a ll

85+2

b2

a 2I

a 12 — a In a 22 ". a2,,

bm

am I

ani, ... am

0

0

...

1

0

0

0

0

...

0

CI

C2 C„ 0

Slack variable

•

...

Xn

Sm

S1

S 2 "•

1

0

0

0

1

0

•

'CH+,n

Opportunity

0

Quantity or Resource in RHS bi

'

0

C 2 — Cn

Z1 = E Cs; au

0

...

cost row (Zi) Simplex criteria row (C. - Z)

I

.1

0

0

(Net Evaluation Row—NER) -4

Example 11.8 A company is manufacturing two different types of products, A and B. Each product has to be processed in 3 different departments—casting, machining and finally inspection. The capacity of 3 departments is limited to 35 hrs., 32 hrs. and 24 hrs. per week, respectively. Product A, requires 7 hrs. in casting department, 8 hrs. in machining shop and 4 hrs. in inspection whereas product B requires 5 hrs, 4 his. and 6 hrs. in respective shops. The profit contributed for a unit product of A and B is Rs. 30 and Rs. 40, respectively. (i) Formulate the problem. (ii) Find out the optimal quantities of product A and B. Solution: Processing time by size and department as shown in table given below: Processing time by Size and Department

Department

Casting Machining Inspection Profit contribution per unit

Product A

B

7 8 4 Rs. 30/-

5 4 6 Rs. 40/-

Capacity per week

35 32 24

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Formulation of problem 7x + 5y 35 8x + 4y < 32 •4x + 6y < 24 Also;

x>0 y>0

and; Objective Function = 30x + lOy (To maximize) Step 1: Removal of inequality sign 7x + 5y + Si = 35 '8x + 4y + S2 = 32 4x + 6y + S3 = 24 where, Si , S2 and S3 are slack variables, which are like imaginary production. Step 2: Revise objective function Revised O.F. = 30x + 40y + OS + 0S2 + 0S3 Subjected to: 7x+5y+151 +0S2 +053 = 35 8x + 4y + OS1 +152 +0S3 = 32 4x + 6y + 0S1 + 0S2 + 1S3 = 24 Step 3: Its description is given in Table 11.1. Table 11.1 Coefficient_ OF

Quantity

S2

0 0

35 32

S3

0

24

Program

Net Evaluation Row:

30

40

•7 8

5 4

.

0

0

0

1

0

Replacement Ratio

35/5 = 7 32/4 = 8 24/6 = 4

30

40

Key column (incoming variable)

0

Key number

Key row (Outgoing variable)

11.11.2 Explanations and Rules in Simplex

(i) Calculation of NER: To get a number in the NER under any column, multiply the entries in that column by the corresponding numbers in the objective function column and add the products. Then subtract this sum from the number listed in the objective function row at the top of this column. (a) For maximization problem: Any positive number in the NER is indicative of the presence of positive opportunity cost and implies that a better program can be designed. (b) For minimization problem: Any negative number in the NER is indicative of the presence of a better solution.

152

INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Identification of key column For maximization problem: The column, which has the largest positive opportunity cost, forms the key column. For minimization problem: The column, which has the largest negative net-evaluation-row entry, is the key column. (iii) Identification of key row: Divide the entries under the "Quantity" column by the corresponding non-negative entries of the key column, and compare these ratios (called- as Replacement Ratio). The row in which the smallest replacement ratio falls is the key row. (iv) Identification of key number: The number which lies at the intersection of the key row and the key column of a given table is called as the key number. (v) Transformation of key row in the second table: Divide all the numbers in the key row by the key number. (vi) Transformation of non-key row: Subtract from the old row number (in each column) the product of the corresponding key-row number and the corresponding fixed-ratio formed by dividing the old row number in the key column by the key number: Corresponding Corresponding x fixed New row number = Old row number -(number in key row ratio Old row number in key column where, Fixed ratio = Key number Application of Simplex approach in Table 11.1: We will continue now from the end of Table 11.2. Table 11.2

Program

Profit per unit

Quantity

30 . x

SI

0

(35 - 24 xl 6

(7 -4x 5) 6

S2

0

(32- 24 x-4-) 6

(8- 4x 1 6

y

40

4

6

4

40 y

0 S,

0 S2

0 S3

(5 -6x5) 6 4 (4-6x-) 6

0 -0)

(0 _ 0)

(0 - 0)

(1 - 0)

0-1x5 6 4 0-Ix6

1

0

0

1

6

In simplified form Profit per unit

Quantity

30 x

S1

0

15

— 3

S2

0

16

y

40

4

Program

Net evaluation row:

II 16 3 4 6 10

40 y

0 Si

0 S2

0

0 0

0

1

1

0

0

0

0

0

0 S3

Replacement Ratio

-5

15

6 -4 6 I 6

11 11 6 I x3=3 16 4 -x 6 = 6 4

-20 3

45

—x3=—

153

LINEAR PROGRAMMING

Table 11.3 Program

Profit per unit

Quantity

30 x

S1

0

X

30

[16 x 3 16] —

Y

40

(4 -16 x 4 x 3 1 6 16)

3 16] 3

rr [15 -16 X

11 •

[1 1

40 y

0 S1

0 S2

0 S3

0-0

1 -0

1 0 -1.116

---5-+ 4 • 1 1 6 6 10

16 1 1 3

3---3-..-i16] 31 [1 36 x 16,1 i4

L6 -

16 11 3 8] -

00

1x

3 16

-4 3 6 I6

[1 -0]

[0 _ 0]

1 0-1x8

0

0 S3

-11 16 3 16 -1 8

-3 8 -1 8 1

-5

-25 4

6

4.1 . 1 6 i

In simplified form Program

Profit per unit

Quantity

30 x

40

0

Si

0

4

0

0

1

X

30

3

1

•0

0

Y

40

2

0

1

0

0

Net evaluation row:

0

8

Since all NER are either zero or negative, we have reached at the optimal solution. Hence, we have optimal solution: X = 3 units Y = 2 units and, Total profit contribution: Z = 10x + 40y =30x3+40x 2 = 90 + 80 = Rs. 170 Thus, 3 units of product A and 2 units of product B will give the optimal allocation of resources. For this, the minimum cost is Rs. 170. MAXIMIZATION CASE The maximization LPP for ii variables and in constraints is written as the following: max Z =

E cj xi 1=1

Subjected to

xi i=1

for i,

i = 1, 2, ..., in xi >_0; j= 1,2,..., n

154

INDUSTRIAL ENGINEERING AND MANAGEMENT

Using slack variable, we add in slack variables; one for each constraint. Thus, the revised form of standard LPP is: In

II

max Z =

E

E OS,

1=1

J=1 Subject to

E a1./ x• + S• = b. i=1

for all i, and, xj 0 for all j, 0 for all i,

i = 1, 2, ..., m

j= 1, 2„ ..., in = 1, 2, ...,

Example 11.8 Minimization Problem. Minimize Z = 30x .+ 40y Subject to 7x + Sy 35 8x + 4y > 32 4x -F 6y > 24 x, y 0 Solution: Step 1: Formulation: Already done above. Step 2: Removal of inequality sign 7x+5y-1S1 +0S2 +0S3 +1A1 +0A2 +0A3 = 35 ' 8x + 4y + OS, -1S2 + 053 +0A1 +1A2 + 0A3 = 32 4x 4.: 6y + OS, +052 -:1S3 +04 +0A2 +1A3 .= 24 Step 3: Revising objective function (OF) Revised O.F. = 30x + 40y + OS, + 0S2 + 0S3 + MAI + MA2 + MA3 where, SI , S2, arid S3) are slack variables and A1, A2, and A3 are artificial slack variables. The artificial slack variables are attached to an extremely large cost coefficient M. We do so, as these variables can never enter into the optimal solution. Note that the column, which has largest negative value of NER, is the key row (as this is a minimization problem). Step 4: (Its detail is in Table 11.4). Table 11.4

Program

Coeff. O.F.

Quantity

30 x

40

0

0

0

y

S,

S2

S3

M A,

M A2

M A3

0

0

I

0

0

A, Al

35 7 5 —I

A,

M

32

8

4

0

—1

0

0

I

0

Mr

24

4

6

0

0

—1

0

0

I

M

M

0

0

0

NER:

(30-19M)

(40— I5M)

35 7 32

=5

=4'i 8 24 —— 6 4

155

LINEAR PROGRAMMING

Program Coeff. O.F.

Quantity

30 x

7

0

40 y

0 S,

0 S2

2

—1

30

4

1

0

1

2

0

8

8

• M

NER: 0 (25 —

— 2

0

4

0

7 14 —x 2 = --- = 4.661 3 3

0

8 — 8

1 A3

M A3

1

—1 0

M A2

—7

8

1 X

M Ai

7 .

3 A,

0 S3

0

4 —x2=8 1

1

8 — = 24 4

—1 —1

0

0 S3

M Al

16

+3 8

1

—3

+1

16

8

2

2

19 • 1 A4)114 0 (— M —15 8 8

M) Al (15

—4

Table 11.5 (Revising of Second Program) Program Cost per unit

Quantity

30 x

40 y

0 S1

4

0

0

—1

0

S2

11 A X

30

3

I

0

0

Y

40

2

0

I

0

NER:

0

0

0

—1 8 -11

M

16

0

4

M+ ) 8 8

M A2

M A3

—11

—3

64

16

8

11

3

—1

16

8

—1

1

8

4

—164 16

_ 5) (1 1 25) —3 5) (27 8 M+ 2 0 M_ 4) 4 16 M 8) 8

Table 11.6 (Revising of Third Program) Program

Cost per unit

Quantity

30 x

40 y

0

0

64 Si

I1

0 Si •

0 S3

M Al

—16

6

16

—6

11

11

I I

11

—3

5

3

22

II

—7

—2

22

11

45 30

11

1

0

0

1

0

0

0 S2

0

II

14 Y

40

11 NER:

0

II

90

80

11

11

10 .— 11

—5x30+7 x 40 0

22 =

130 22

Al

M A2

M A3

5 0

22 7

0

22 130

10 II

M

M

22

156

INDUSTRIAL ENGINEERING AND MANAGEMENT

Since all NER are positive or zero (note that, as M is very high number, NER for A2 and A3 are positive), the minimization problem is optimum now. 45 14 Hence, x = — ; and y = — 11 11 Z= 30x + 40y Objective function 14 45 = 30 x — + 40 x — 11 11 =173.64.

REVIEW QUESTIONS 11.1 What are the different types of problems that can be solved using linear programming approach? Give five examples. 11.2 Define and explain the following terms used in a linear programming problem: (i) Objective function, (ii) Constraint, (iii) Feasible solution, (iv) Optimal solution, and (v) Decision variables. 11.3 Find the values of decision variables, x and y that maximize: Z= 4x + 1 Oy Subject to the conditions: 0 s x S. 400 0 s y _s 300 x + y s 600 [Ans: x = y = 300]. 11.4 Give a general mathematical formulation for a linear programming problem. Explain all terms. 11.5 Explain the steps involved in a graphical method to solve a linear programming problem. What are the limitations of this approach? 11.6 Give examples of following problems: Unbound problem, (ii) Infeasible problem, (iii) Problem with multiple solution. 11.7 Explain the concept of shadow price and slack variable in linear programming. 11.8 What do you understand by sensitivity analysis in a linear program? Give example and explain. 11.9 Solve following LP problem: Maximize: Z = 20x + 10y Subject to: 5x + 4y S 24 2x + 5y S 13 x, y 0 Use sensitivity analysis also. 11.10 Solve the following problem, using graphical method: (a) Minimize Z = 12x + 9y Subject to x < 10 3 5_ y .5. 8 2.5x + y > 10 4x + 3y > 18 x, y > 0

157

LINEAR PROGRAMMING (b) Solve (a) above except objective function is: Z = 12x + 3y (c) Solve (a) above, except in place of constraint: 4x + 3y 18; use 4x + 3y 5_ 18 (d) Solve (a) above, except in place of constraint: 3 5 y 5 8; use y 3. (e) Solve (d) above, except in place of objective function: Minimize Z = 12x + 9y; use, Maximize Z = 12x + 9y. z = 2x + 3y

11.11 Maximize:

x + y 0

[Ans: z = 3]. 11.16 Minimize:

z = 2x1 + 3x2

ST

x i + x2 10x1 + x2 5 x + lOr2 > x1, x2 0

[Ans: (1, 0), 11.17 Minimize: ST

z = 2]. z = 3x + 2y —2x + 3y < 9

158

INDUSTRIAL ENGINEERING AND MANAGEMENT

x - 5y 20 x, y > 0 [Ans: Infeasible]. z = 4x + ty

11.18 Maximize:

x +y>

ST

-2x + y < x, y < 0 [Ans: Unbound]. z = 5x + 7y

11.19 Maximize:

x+y 5-S;

Add a dummy destination (or column) for which all shipping costs are zero and have demand = Ed; - ES;

Es; > Yd./

No

Add a dummy origin from which all shipping costs-are zero and having capaCity = ES; - Ed/

Yes ES; = Edi

0

Optimal

Find • Total cost • Shipping quantities in each route

Not optimal

Revise Solution

Figure 12.3 The Transportation problem Solution Approach

Example 12.1 An organisation has four destinations and three sources for supply of goods. The transportation cost per unit is given below. The entire availability is 700 units which exceeds the cumulative demand of 600 units. Decide the optimal transportation scheme for this case (Figure 12.4). Solution: Step 1: Check for balance of supply and demand E Supply = 250 + 200 + 250 = 700 units E Demand = 100 +150 + 250 +100 = 600 units Decision Rule (i) If Z Supply = E Demand, then go to next step. (ii) Else, if E Supply > E Demand, then, add a "dummy destination" with zero transportation cost.

163

TRANSPORTATION MODEL Destination

D2

D

1 13

D3

Availability (Supply)

D4

1 16

19

17

250

S, Source

S,

S3

17

1

19

16

15

15

I 17

I 17

1 16

100

Requirement (Demand)

150

Figure 12.4

250

100

200

250

00 600

Sample Problem

(iii) Or else, If E Supply < E Demand

then, add a "dummy source" with zero transportation cost. Since, in this problem E Supply > E Demand Hence, add a "dummy destination" (say D5) with zero transportation cost and balance demand which is difference in supply and demand (= 100 units). The initial transportation matrix is now formulated with transportation cost in the small boi of each route (Figure 12.5). Note that each cell of the transportation matrix represents a potential route. Destination

D

D2

13

D3

D4

17

250

16

15

200

17

1 16

I 16

1 19

1 19

1

1 17

1

I

L

Si

Supply

Source 17

S2

15

S3

(Demand)

Figure 12.5

100

150

250

100

250

0

100

700 700

Introducing Dummy Column for Balancing the Supply and Demand

Step 2: (i) Decide the nature of problem: Minimization of transportation cost. (ii) Make initial assignment.

INDUSTRIAL ENGINEERING AND MANAGEMENT

164

Initial assignment may be done by using any of the following approaches: (i) Least-cost method (ii) North-West corner method (iii) Vogel's approximation method. We would demonstrate all the three methods. (i) Initial Solution by Least Cost method: (a) Select the lowest transportation (or shipping) cost cell (or route) in the initial matrix. For example, it is route S, D5, S2 D5 and S3 D5 in our problem with zero shipping cost. (b) Allocate the minimum of remaining balance of supply (in last column) and demand (in last row). Let us select S, D5 route. One can also select other route (S2 D5 or S3 D5) in case of tie. For S, D5, available supply is 250 and available demand is 100 units. The lower is 100 units. Hence, allocate 100 units through this route (i.e., S, D5). With this allocation, entire demand of route S1 D5 is consumed but supply of corresponding source, S, is still (250 — 100) or 150 units left. This is marked in last column of supply. The entire demand . of destination, D5, is consumed. We get the following matrix by crossing out the consumed destination (D5) (Figure 12.6). Destination

D2

Di 13

S,

03

04

05

I '7

S3

1 '5

(Demand)

100

Figure 12.6

20

19

1 17

I 19

I16

15

L

17

1 17

16

0

16

Source

S,

Supply

150

250

100

150

200

250

10o

With 100 Units Allocation in Route Si D5

,Now, we leave the consumed routes (i.e., column D5) and work for allocation of other routes. Next, least cost route is S, D1, with 13 per unit of shipping cost. For this route, the demand is 100 units and remaining supply is 150 units. We allocate minimum of the two, i.e., 100 units in this route. With this destination D1 is consumed but source S, is still left with (150 — 100) = 50 units of supply. So, now leave the destination D1 and we get the following matrix (Figure 12.7). Now, we work on remaining matrix, which excludes first column (D1 ) and last column (D5), Next assignment is due in the least cost route, which is route S2 D4. For this route, we can allocate 100 units which is lesser of the corresponding demand (100 units) and supply (200 units). By this allocation in route S2 D4, the demand of destination D4 is consumed. So, this column is now crossed out (Figure 12.8).

165

TRANSPORTATION MODEL

Di

Di

D2

16 S,

D4

Supply

D5

2$0 1$0 50

1 17

I 19

1 17

I 19

I16

15

15

1 17

I 17

I 16

200

S,

S,

(Demand)

100

150

250

I0

250

100

100

Figure 12.7 Assignment for Destination Di and D5 Consumed

DI

D,

D3

D4

I 16

19

I 17

19

1 16

15

17

1 17

s,

D5

Demand

ifrfo

150

250

2$0 1$0 50

17

200 100

L

S2

S3

Supply

250

1 16

100

100

Figure 12.8 Assignment with Destination Di , D4 and D5 Consumed

Now, we work on the remaining matrix which excludes, columns, Di, D4 and D5. Next assignment is due in the least cost route of the remaining routes. Note that we have two potential routes: S1 D2 and S2 D3. Both have 16 units of transportation cost. In case of any tie (such as this), we select any of the routes. Let us select route, Si D2, and allocate 50 units (minimum of demand of 150 and supply of remaining 50 units). With this, all supply of source S, is consumed. Therefore, cross out row of Si. We get the matrix as shown in Figure 12.9. Now, remaining allocation is done in route S2 D3 (as 100 units). With this source, S2 is consumed. Next allocation of 100 units is done in route S3D2 and 150 units in route S3 D3. Final initial assignment is as follows (Figure 12.10): Total cost in this assignment is (13 x 100 + 16 x 50' + 100 x 0 + 16 x 100 + 15 x 100 + 17 x 100 + 17 x 150) or Rs. 9,450. Step 3: Count the number of filled (or allocated) routes.

Decision rule (i) If filled route = m + n — 1, then go for optimality check (i.e., Step 5).

166

INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) If filled route < in + n — 1, then the solution is degenerate. Hence, remove degeneracy and go to . Step 4. D2.

D3

D5

D4 [19

Supply

2/0 1%0 $0'

17

s, 17

I 19

I 16

15

17

1 17

200 100

S,

12_

,1 16

5,

Demand

100

100

Figure 12.9

100

250

250

100

Destinations D1 , D4 and D5 Source S, are Consumed

D3

D2 16

13

D5

Supply

250

17

1 19

.

SI 50

S,

S3 Demand

1 '7

19

I 15

17

100

Figure 12.10

150

1 16

250

100

0

200

0

250

100

Initial Assignment by Least Cost Method

»1 = number of destinations, including dummy column, if any n = number of source, including dummy row, if any For our problem (in + n — 1) = 5 + 3 — 1 = 7. The number of filled route is equal to 7. Hence, problem is not degenerate. Therefore, proceed to Step 5. (ii) Initial Assignment by North-West Corner Method (an alternative to least cost method): This approach is also for making initial assignment, as we have done in the least cost method. Therefore, this approach should not be applied if initial assignment has already been made by any other method. In the North-West Corner (NWC) method, we start with the top-left (corner-most) route, which is S1 Irrespective of cost, allocation is made in this route for the minimum of supply or demand. In our case, demand for this route is 100,and supply is 250. Therefore, allocate 100 units in this route. With this, column corresponding to D1 is consumed. Here,

TRANSPORTATION MODEL

167

Now, work on the remaining matrix, which excludes column D1 . Again, select the top-left route. Now, it is cell S1 D2. Allocate in the same way. Thus, 150 units are allocated in this route. Note that, with this, both D2 and S, are consumed. Remaining matrix excludes S1, D, and D2. Hence, allocation in the top-left cell is due in route S2 D3. Here, 200 units may be allocated and S2 is now consumed. Remaining allocations are done in S2 D3, S3 D4 and S3 D5 in sequential order. We get the initial solution by north-west corner method as follows (Figure 12.11): Di

D2

D3

D5

D4

Supply

17

250

1 15

200

19 SI

52

1 17

1 19

15

17

5,

250

17 50

Demand

100

150

Figure 12.11

• 250

100

100

Initial Assignment by North-West Corner Method

For this assignment, the total cost is (13 x 100 + 16 x 150 + 16 x 200 + 17 X 50 + 16 x 100 100) or Rs. 9,350. Step 3: Check for degeneracy (in + — 1) = 5 + 3 — 1 = 7 Number of filled cells = 6, which is one less than in + n — 1. Hence, go to Step 4 for removing degeneracy. Step 4: In case of degeneracy, allocate a very-very small quality, E (which is zero for all calculation purposes), in the least cost of un-filled cells. In the above Figure 12.11 of North-West corner method allocation, the least cost unfilled cells are S1 D5 and D2 D5. Let us select S1 D5 and allocate E in this. We get the following allocation after removing degeneracy (Figure 12.12).

+0

x

DI

D,

D3

1 19

13

SI

17

1 15

Demand Figure 12.12

100

0

L

250

115

1 17

0 150

1 17

Supply

200

19

6.2

S3

D5

D4

250

[IL

250

100

100

Initial Assignment by North-West Corner Method after Removing Degeneracy

INDUSTRIAL ENGINEERING AND MANAGEMENT

168

(iii) Initial Assignment by Vogel's Approximation Method (VAM): This is the third alternative method for doing initial assignment of a transportation problem. In this method, we calculate the difference between the two least-cost routes for each row and column. The difference is called 'as penalty cost for not using the least-cost route. Once the penalty cost for all destinations and sources are calculated, select the maximum one. Assign the maximum possible in this row or column, as the case may be. Assignment must be done in the least-cost route of the selected row or column. We get the following first allocation (Figure 12.13). Di

D2

I

D3

D4

D5

16

19

17

L_

13 — 0 = 13

I 19

''

Lo_

15 — 0 = 15

16

13

SI

S2

1

S3 Penalty Cos

15

Difference in least cost cells (penalty)

1

17

1

17

1

15 — 0 = 15

16

15-13=2 17-16=1 17-16=1 16-15=1 0-0=0

Figure 12.13 First calculation of Penalty cost in VAM

Highest of all calculated penalty costs is for S3 (and S2). Therefore, allocation is to made in row of source S3. The route (or cell), which one must select, should be the lowest cost of this row. This route S3 D5. Hence, first allocation is as follows (Figure 12.14). Di

D2

D3

D4

19

13

1 16

1

17

19

1

1

15

17

1

SI

S2 1

100

150

Supply

250

17

0 16

S3

Demand

D5

250

17

0

15

I 16 100

200

2%0 150

100

Figure 12.14 First calculation in Vogel's method

Now, with the first allocation, destination D5 is consumed. We exclude this column and work on the remaining matrix for calculating the penalty cost. We get the following matrix (Figure 12.15). Now for this, source SI has highest penalty cost. For this row, the least cost route is S, DI . Hence, next assignment is due in this route (Figure 12.16).

169

TRANSPORTATION MODEL

Di

1 13

''

S,

Penalty Cost

Figure 12.15

Penalty Cost

1 19

17

16-13=3

I 19

[ 16

I15

16- 15= I

17

1.16

16 - 15 = 1

17

15-13=2

D4

16

1 15

S3

D3

1)2

17-16=1

17-16=1

16--15=1

Second Calculation of Penalty Cost in VAM

Di

D2

D3

1 17

Supply

1 19

1 17

19

16

15

200

17

1 17

16

150

1 16

S'i

1)4

250 ISO

S2

I

S3

Demand

100

150

Figure 12.16

250

100

Second Allocation in Vogel's Method

After second allocation, since destination Di is consumed, we leave this column and proceed for calculation of next penalty cost. Allocation is done in route Si D2. Since there is tie between all routes (Figure 12.17), we break the tie by arbitrarily selecting any route (S1 D2 in this case). D2

1)3

I 16

Penally Cost

D4

1 19

1 17

17- 16= 1

1 16

I 15

16 - 15 = 1

SI

S.2

17

1 17

Penalty cosi

17 - 16 = 1 1 16

S3

17 - 16 - 1

17 - 16 = 1

16 15 = I

Figure 12.17- -Third Calculation of Penalty cost

INDUSTRIAL ENGINEERING AND MANAGEMENT

170

D3

D2

D4

Penalty Cost

19

17

Si

S2

'9

1 16

17

1 17

150

16

S3

Demand

200

1 15

250

100

Third allocation in Vogel's method

Figure 12.18

Similarly, next allocations are done as follows (Figures 12.19 and 12.20): D4

D3

15

I 16

D3

Penalty cost

Supply

2110 100

I 16

16 — 15 = 1

S2

S2

1 17

16

1 17

17 — 16 = 1

16

150

S3

53

Penalty Cos

D4

17 — 16 = 1

Demand

16 — 15 = 1

250

Figure 12.20 Fourth Allocation in Vogel's Method

Figure 12.19 Fourth Calculation of penalty cost in VAM

With the fourth allocation (Figure 12.20), column D4 is consumed. In the only left column D3 , the allocations of 100 units and 150 units are done in routes S2 D3 and S3 D3 respectively. Thus, we get the following allocations in the Vogel's approximation method (Figure 12.21). D,

D3

D2

D5

D4

19

Supply

250

17

SI

17

1 19

IS

17

200

S;

250

16

S3

Demand

100 Figure 12.21

150

250

100

100

Final Allocation through Vogel's Method

171

TRANSPORTATION MODEL

The initial cost for this allocation is (13 x 100 + 16 x 150 + 16 x 100 + 15 x 100 + 17 x 150 + 0 x 100) or equal .to Rs. 9,350. Step 3: Check for degeneracy (til + n — 1) = 7 Number of filled cell = 6, which is one less than (m + n + 1). Hence, go to Step 4 for removing the degeneracy. Step 4: We allocate E in the least-cost unfilled cell. This cell is route Si D5 or S2 D5. Let us select route S1 D5. Thus, we get following matrix after removing degeneracy (Figure 12.22). Di

D.,

D3

D4

1 19

D5

Supply

250

17

s,

O 1

17

1

15

16

1 19

0

200

S2

S3

Demand Figure 12.22

100

250

16

150

250

100

100

Final Allocation after Removing Degeneracy in Vogel's Method

Optimization of Initial Assignment: The initial feasible assignment is done by using least-cost method or North-West corner method or Vogel's approximation method. However, none of these methods guarantees optimal solution. Hence, next step is to check the optimality of the initial solution. Step 5: Check the optimality of the initial solution: For this, we have to calculate the opportunity cost of un-occupied routes. First, we start with any row (or column). Let us select row 1, i.e., source S1. For this row, let us define row value, u1 = 0. Now consider all filled routes of this row. For these routes, calculate column values v. using following equation: ui + i= Cij (for any filled route) where, ui = Row value v. = Column value = Unit cost of assigned route Once first set of column values (v) is known, locate other routes of filled cells in these columns. Calculate next of u1 (or values using above equation. In this way, for all rows and columns, u and V. values are determined for a nondegenerate. initial solution. Step 6: Check the optimality: Calculate the opportunity of non-allocated or unfilled routes. For this, use the following equation: Opportunity unassigned route = ± — C.•1.1 • Ili = Row value where,

INDUSTRIAL ENGINEERING AND MANAGEMENT

172

v. = Column value = Unit cost of unassigned route If the opportunity cost is negative for all unassigned routes, the initial solution is optimal. If in case any of the opportunity costs is positive, then go to next step. Step 7: Make a loop of horizontal and vertical lines which joins some filled routes with the unfilled route, which has a positive opportunity cost. Note that all the corner points of the loop are either filled cells or positive opportunity cost unassigned cells. Now, transfer the minimal of all allocations at the filled cells to the positive opportunity cost cell. For this, successive corner points from unfilled cell are subtracted with this value. Corresponding addition is done at alternate cells. In this way, the row and column addition of demand and supply is maintained. We show the algorithm with our previous problem. Let us consider the initial allocation of least-cost method (Figure 12.23). For this, we start with row, S1 and take u1 = 0. Now S, D1, Si for filled cells; (vi = Cu —

D2, and

S1

D5

are filled cells. Hence,

v1 = 13 — 0 = 13 v2 = 16 — 0 = 16 vs = 0 — 0 = 0 DI

D3

D2

D4

13

1 16

19

17

'9

16

D5

1 1-7

•

Supply

it;

10

250

0

0

200

0

L

250

s,

S2

I 16

15

Demand

100 13

Figure 12.23

150 16 Calculation for

u.

250

100

100

16

15

0

'

1

and v. in Least Cost Initial Assignment

Now cell S3 D2 is taken, as this has a v. value. For this cell u3 = 17 — 16 = 1. Now, cell S3 D3 is selected, as this has a cis value. For this cell v3 = 17 — 1 = 16. Now, cell S2

D3 is

selected, as it has a vi value. For this cell u2 = 16 — 16 = 0.

Now, cell S2 D4 is selected, as it has a u1 value. For this cell v4 = 15 — 0 = 0. Thus, all ui and vi values are known. Step 6: Calculate opportunity cost of unassigned routes (Table 12.1). Since route S3 D5 has positive opportunity cost, the solution is nonoptimal; hence, we go to next step and make a loop as follows (Figure 12.24).

173

TRANSPORTATION MODEL Table 12.1 Opportunity cost Or; + yj -

Unassigned 'route S,

0 + 16 — 19 = —3

Si D4

0 + 15 — 17 = —2

S2 D,

0 + 13 — 17 = —4

S2 D2

0+ 16 — 19 = —3

S2 D5

0+0—0=0

S3 D,

0 + 13 — 15 = —2

S3 D4

I + 15 — 16 = 0

S3 D3

1 + 0 — = +1

Di

D2

D3

1 16

D4

D5

17

19

SI

H

S2

1

S3

Figure 12.24

250

100

D2

D3

19

16

19

D5 and S3 D2 to

D5

1)4

SI

17

100

Closed Loop for Cell S3 D5

The revised allocation involves 100 units transfer from cells S, Thus, revised allocation is as, follows (Figure 12.25).

1

0

1 15

Demand

1

17

Ui .

0

250

0

12_

200

—1

25(1

0

1 16

100

150

250

100

100

13

16

16

15

0

Figure 12.25

cells S3 D5 and S, D,.

Supply

17

S2

15

.200

(+) 150

S3

L t-

(-)

D,

250

250

1 16

15

0 1

16

1 19

Supply

Revised Allocation in Least-cost Assignment

, INDUSTRIAL ENGINEERING AND MANAGEMENT

174

Since above solution is degenerated now, we allocate e to the least-cost unfilled cell S1 D5. Fresh calculation of u1 and vi is also done in the similar way as explained in Step 5. For this assignment, the opportunity cost of unassigned cells is as follows (Table 12.2). Table 12.2

Opportunity Cost in Figure 12.25

Unassigned route

Opportunity cost (ui + vi —Cu)

SI DS ,', D4

0 + 17 — 19 = —2 0 + 16 — 17 = —1 —1 + 13 — 17 = —5 —I + 16 — 19 = —4 —1 + 0 — 0 = —1 0 + 13 — 15 = —0 0 + 16 — 17 = —1 0 + 16 — 16 = 0

S2 D, S2 D2 S2 Ds S3 D, S3 D2 S3 D,

•

Now, since all unallocated routes have negative (or zero) opportunity cost, the present assignment is the optimal one. Thus, optimal allocation of route is given in Table 12.3. Optimal Allocation in Different Routes

Table 12.3

Route

Unit

Cost of this route

S , Di

100

13 x 100 = 1,300

S, D2

150

16 x 150 = 2,400

S, D3

100

16 x 100 = 1,600

S2 D4

100

15 x 100 = 1,500

S3 D3

150

17 x 150 = 2,550

S3 Ds

100

0 x 100 = 0 Total cost = Rs. 9,350

Note that total cost is less than the initial assignment cost of least-cost method (= Rs. 9,450). Similarly, optimality of North-West corner method, solution is done (Figure 12.26). Di

D3

D2

D5

D4 19

Supply

17

SI

0

250

0

200

—1

250

1

0 I 17

19

1 15

17

16

L

S2

16

Demand

100

150

250

100

100

'V,

13

16

17

16

0

Figure 12.26

Calculation of u, and vifor N-W Corner Method's Initial Solutions

175

TRANSPORTATION MODEL

Opportunity cost of above assignment (Figure 12.26) is as follows. Since all opportunity costs are negative or zero, the initial assignment is optimal one with total cost of Rs. 9,350. The optimal assignment of routes is 100 units in S1 D I, 150 units in Si D2, 200 units in S2 D3, 50 units in S3 D3, 100 units in S3 D4. ' Similarly, the optimality of Vogel's method's initial solution is (Figure 12.27) done. Opportunity cost of above. N-W corner (Figure 12.26) assignment is as follows. Table 12.4 Opportunity Cost in Figure 12.26 Unassigned route

Opportunity cost (u, + vi — Cd

0+

S1 D3 Si D4 S2 Di

17 — 19 = —2 0 + 16 — 17, = —1 —1 + 13 — 17 = —5 —1 1- 16 — 19 = —4 —1 + 16 — 15 = 0 —1 + 0 — 0 = —1 0 + 13 — 15 = —2

S2D2 S2 D4 S2 Ds S3 Di S3 D,

.

0 + 16 — 17 = —1 D2

D3

D5

1) 4 19

S,

Supply 0

250

0 it;

II)

200

—1

250

1

17

0 I 17

19

S2

S3

I 15

I 17

Demand

100

150

250.

100

100

13

16

17

16

0

Figure 12.27 Calculation of ui and vi for Vogel method's initial solutions

Opportunity cost of above assignment is—as follows: Table 12.5 Opportunity Cost in Figure 12.27 Unassigned route

Opportunity cost (u, + vi — Cd

S1 D3 Si D4 S2 /31 S2 D2 S2 D, S3 Di • S3 D2 S, D4

0 + 17 — 19 = —2 0 + 16 — 17 = —1 —1 + 13 — 17 = —5 —I + 16 — 19 = —4 —1 + 0 — 0 = —1 0 + 13 — 15 = —2 0 + 16 — 17 = —1 0 + 16 — 16 = 0

INDUSTRIAL ENGINEERING AND MANAGEMENT

176

Since all opportunity costs are negative or zero, the initial assignment of Vogel's solution is optimal with total cost of Rs. 9,350. The optimal assignment of routes is 100 units in Si Di , 150 units in S1 D2, 100 units in S2 D3, 100 units in S2 D4, and 150 units in S3 D3. Note that this solution is different from North West corner solution but total cost is same and minimum. REVIEW QUESTIONS 12.1 Explain the nature of the transportation problem. Give its mathematical stimulation as an LP problem. 12.2 Explain the methods to find the initial feasible solution of a transportation problem. 12.3 Explain the MODI method to find the optimal solution of a transportation problem. 12.4 Find the optimal transportation plan for the following table of shipping cost, availability and requirements. Plant A

Market

Requirement 8

1

21

11

2

16

20

12

25

3

10

7

18

35

4

12

8

9

40

40

50

70

Availability

30

12.5 Solve the above problem for the following matrix:

(i)

Plant A

B

C

D

Requirement 50

3

3

2

1

2

.4

2

5

9

20

3

1

2

1

4

30

20

40

30

10

Market

Capacity (ii)

Plant A Market

Requirement

1

20

• 12

10

15

2

10

22

10

20 •

8

3

15

20

12

8

13

5

11

8

8

C

D

E

Capacity (iii)

11

Plant

Market

Capacity

A

B

F

Requirement

1

6

5

9

11

3

11

2

2

6

8

11

2

2

10

9

3

7

3

7

7

5

5

6

4

9

12

9

6

9

10

5

4

4

6

2

4

2

177

TRANSPORTATION MODEL

Market

(iv) AB

C

D

Capacity

2

71 41

3

20

31 9 31

41 71 51

61 21 11,

7 9 18

5

8

7

14

Plant

Requirement

12.6 Solve Problem 12.4, when the entries in the main matrix are unit profit rather than unit cost. [Hint: Use one of the following strategies: ' (1) Subtract the maximum value of the profit per unit (i.e., 21) from all the entries of the profit. Ignore negative sign. Solve as usual. However, use original matrix for the calculation of the profit. (ii) Make all the entries in the matrix with a negative sign. Solve as usual. However, for calculation of profit, use original matrix].

REFERENCES 1. Budnick FS, Mc Leavey D and Mojena R, 1996, Principles of Operations. Research for Management, 2nd ed., Richard D. Irwin Inc., Illinois. 2. Gupta MP and Sharma JK, 1995, Operations Research for Management, National Publishing House, New Delhi. 3. Hiller, .FS and Lieberman GJ, 1974, Introduction to Operations Research, 2nd ed., Holden-Day, Inc., San Francisco. 4. Loomba NP, 1964, Linear Programming, McGraw Hill, New York. 5. Ozan T, 1986, Applied programming for Engineering and Production Management, Prentice Hall, New Jersey. 6. Rao, SS, 1978; Optimization—Theory and Applications, Wiley Eastern, New Delhi. • 7. Rao KV, 1986, Management Science, McGraw Hill, Singapore. 8. Sesieni, MA, Yaspan A and Friedman L, 1959, Operations Research: Methods and Problems. John Wiley & Sons, New York. 9. Shogan AW, 1990, Management Science, Prentice. Hall. 10. Taha, HA, 1971, Operations Research: An introduction, McMillan Publications Co. New York. 11. Wagner, HB, 1975, Principles of OR, NJ, Prentice Hall.

178

INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

)

ASSIGNMENT MODEL

13.1 INTRODUCTION Assignment problem pertains to problem of assigning n jobs to n different machines. This model can be effectively used for any other problem in which n items' (or persons) are to be assigned to other n items so that each one of the first group is assigned to one distinct item from the second group. Assignment model can be solved by conventional linear programming approach or transportation model approach. It is a square matrix, having equal number of rows and columns. The objective is to assign one item from row to one item from column so that total cost of assignment is minimum (Figure 13.1). 4 Machines

4 Operators

Figure 13.1 Four Machines, Four Operators Assignment Problem

13.2 MATHEMATICAL FORMULATION OF ASSIGNMENT PROBLEM (FIGURE 13.2) Let there be n jobs which are to be assigned to n operators so that one job is assigned to on operator. i = Index for,job, i = 1, 2, ..., n

180

INDUSTRIAL ENGINEERING AND MANAGEMENT

j= Index for operators, j = 1, 2, ..., n Cu = Unit cost for assigning job `i' to operator `I' 1 If job i is assigned to operator j X.. = v {0 Otherwise The objective is to minimize the total cost of assignment. If job 1 is assigned to operator 1, the cost is (C11 X11). Similarly, for job 1, operator 2 the cost is (C12 X12). The objective function is: n n

Miniinize

Z

= E E c.. X.. 1=1

.41)

j=i

Since one job (i) can be assigned to any one of the operators, we have following constraint set: 11

E xi; = 1; for all j; j = 1, 2,. ..., n

...(2) i=i Similarly for each operator, there may be only one assignment of job. For this, the constraint set is:

E xu = i;• j=I

for all i; i = 1, 2, ..., n

The non-negativity constraint is: X.. O

...(4) n n

Minimize

Z

=

z cox. u i=1 J=1

E

Subject to

I ; for all j; j = 1,

1=l

E

1; for all i; i = 1, 2, ...,

1=1 Xii 0 for all i and all j Figure 13.2

Mathematical Formulation of Assignment Problem

13.3 SOLUTION METHODS FOR ASSIGNMENT PROBLEM

- The assignment problem is solved in the following manner (Figure 13.3): Start

Formulate the Assignment Matrix

Generate Opportunity Cost Matrix

Is the solution optimal? No

4

Yes

Find • Assignment of row with column of matrix • Total cost of asignment

2evise the solution'''.

Figure 13.3

Solution Method of Assignment Problem

181

ASSIGNMENT MODEL

Example 13.1 Let us understand it with an example. Let there be four machines and four operators. Operator 1 charges 6, 7, 7 and 8 units on machine I, II, III and IV respectively. Operator 2 charges 7, 8, 9 and 7 units, operator 3 charges 8, 6, 7 and 6 units and operator 4 charges 8, 7, 6 and 9 units respectively. The problem is to assign one operator on one machine so that over-all payment is least. Model: The assignment model in the form of operator-machine matrix is shown in Figure 13.4. The entries in the matrix represent unit charge (in Rs.) per hour. Machine

2 Operator

4

II

III

IV

6

7

7

8

7

8

9

7.

8

6

7

6

8

7

6

9

Figure 13.4 Representation of an Assignment Model

13.4 ALGORITHM TO SOLVE ASSIGNMENT MODEL Opportunity Cost Approach: Opportunity cost is the cost of possible opportunity which is lost or surrendered. The given problem is related to assigning operators on machine for it least cost objective. Consider that if operator 2 is assigned on machine I, it will cost Rs. 7. With this, no other operators can be assigned machine I as one-to-one assignment is required. However, if operator 1 is assigned on machine it will cost Rs. 6. Therefore, a potential saving of Rs. 7 — Rs. 6 = Re. 1 is possible, if instead of operator 2, operator 1 is assigned on machine 1. This is nothing but opportunity cost in case we assign operator 2 on machine 1. Similar logic may be put for opportunity cost of not assigning the least cost machine to an operator. So, to form a total opportunity cost matrix, we adopt a very simple two-step method. 13.4.1 Method to Find the Total Opportunity Cost Matrix Step 1: Select any column. Subtract the lowest entry of this column from all the entries of this column and prepare a new column. Repeat for all columns of the matrix. In this problem, it will be the "operator opportunity" matrix. Step 2: Select any row of the revised matrix obtained in Step 1. Subtract the lowest entry of this row from all the entries of this row. Prepare a fresh row. Repeat this for rows of the revised matrix (operator-opportunity matrix). This would be the total opportunity cost matrix. For example, in the problem of operator-machine assignment, we get the operator-opportunity matrix as follows (Figure 13.5). The total opportunity matrix is as follows (Figure 13.6).

182

INDUSTRIAL ENGINEERING AND MANAGEMENT

Machine

Iv

Operator

1

0

I

1

2

2

1

2

3

1

3

2

0

1

0

4

2

1

0

3

Figure 13.5 Operator-Opportunity Matrix Machine

Operator

II

III

Iv

1

0

1

1

2

2

0

1

2

0

3

2

0

1

0

4

2

1

13— .

3

Figure 13 6 Total Opportunity Cost Matrix 13.4.2 Optimality Test of Total Opportunity Cost Matrix

Step 1: Draw minimum number of possible horizontal and/or vertical lines so that all the zeros of the total opportunity cost matrix are covered. If these lines are equal to the number of rows (or columns) then solution is optimal. Make assignment as per scheme outlined in Step 3. If number of vertical and horizontal lines are less than number of rows, go to Step 2, as the solution may be non-optimal. Step 2: From the uncovered entries of Step 1 (i.e., entries which are not struck by lines just drawn) select the lowest entry. Subtract this entry from all the entries of uncovered position. Add this entry at the junction points of line just drawn. By junction point we mean entries where both horizontal and vertical lines meet. Check for optimality as per Step 1. If optimal, go to Step 3; otherwise repeat Step 2. Step 3: Optimal Assignment of the Matrix: Select row (or column), which has least number of zeros (say, one zero). Note that all rows (or columns) will have at least one zero. Make assignment of this row with corresponding column. Strike-off the already assigned row and column. Now, select row and column which have minimum number of zeros. Make next assignment. Repeat the process till all rows are assigned to one column.

183

ASSIGNMENT MODEL

13.4.3 Illustration of Optimality Test and Assignment Refer Figure 13.6. Apply Step 1 for the check of optimality. Draw minimum number of possible horizontal/ vertical lines to cover zeros. We can do it in no less than four lines. Hence, present assignment is optimal. Nit:whine

t

2

ii

Ill . I

0

1

0

1

-2

----0

. 1

)

I

i)

i

, 2 b

Operator 3

IV

. 4

-.

O Figure 13.7 Four

Lines Needed to Cover all Zeros

Therefore, the assignment for Figure 13.6 (which is optimal) may be done in this manner. Column II has only one zero. Therefore, assign machine II to operator 3. Remove column II and row 3. From the remainder matrix, it may be noticed that column III has only one zero. Therefore, assign machine III to operator 4. Remove row 4 and column III. In the remainder matrix, only row 1 and 2 and column I and IV remain. In this, column IV will have one zero at row 2. Therefore, assign machine IV to operator 2. The last assignment is the leftover machine I to operator 1. Thus, the final assignment is:

Example 13.2

Operator

Machine

Cost

1 2 3 4

IV II III

7 6 6

Total cost

Rs. 25

Assign three jobs on three machines for following cost matrix: Jobs

JI

J2 J3

Machines M1

M2

M3

Rs. 14 Rs. 11 Rs. 20

Rs. 12 Rs. 17

Rs. 16 Rs. 21

Rs. 8

Rs. 7

184

INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: Step 1: Subtract minimum entry in each column from all the entries on that column. This is a job-opportunity cost matrix (Figure 13.8): Machine

Jobs

Ml

M2

M3

11 '

3

4

9

J2

0

9

14

J3

9

0

0

Figure 13.8 Job-opportunity Cost Matrix of Example 13.2

Step 2: Subtract minimum entry in each row of job-opportunity cost matrix from all the entries of that row. This is a total opportunity cost matrix (Figure 13.9): Machine MI

Jobs

M2

M3

J1

0

J2

0

9

14

J3

9

0

0

6

Figure 13.9 Total Opportunity Cost Matrix of Example 13.2

Step 3: Check for Optimality: Draw minimum, number of horizontal and vertical lines to cover all zeros. This can be done in 2 lines (Figure 13.10), which is one less than the number of rows (which is 3). Thus, the solution is yet not final. Hence, go to Step 4. Machines Ml

M2

.11

Jobs

M3

6

J2

9

14

J3

0

-0

Figure 13.10 Check for Optimality

185

ASSIGNMENT MODEL

Step 4: From the uncovered entries, the minimum is 1. Thus, subtract 1 from all the entries, which are uncovered. Add one at junction of lines. i.e., at J3-Ml. We get the following matrix now, as the revised opportunity cost matrix (Figure 13.11). Machine

Jobs

MI

M2

.11

0

0

J2

0

8

13

J3

10

0

0

Figure 13.11

M3 .

5

Revised Total Opportunity Cost Matrx

Now, go to Step 3 to check the optimality. We can cover all zeros of above matrix by atleast three lines (which is also equal to number of rows). Hence, above solution may be used for optimal assignment. Step 5: Assignment Scheme: Refer revised total opportunity cost matrix (Figure 13.11). Row J2 has only one zero at M/ column. Hence, assign J2 to M/. Remove row J2 and column M/. Column M3 of remainder matrix has one zero at J3 row. Assign J3 to M3. The last assignment is remainder job JI to M2. Thus, the final assignment is: Job

Machine

Cost

J1

M2

Rs. 12

J2

MI

Rs. 11

J3

M3

Rs. 7

Total cost

Rs. 30

REVIEW QUESTIONS 12.1 Explain the steps involved in solving an assignment problem. 12.2 Give a general LP formulation of the assignment problem. 12.3 In a big project work, there are four major jobs. For each job, one contractor will be given the work to complete. Four contractors have submitted tender. The quoted amount (in lakhs of Rupees) is given in the table below. Find the optimal award of contracts.

Jobs

A

Contractor

[Ans:

I

16

22

28

12

II

9

26

34

16

III

10

24

30

15

IV

12

20

32

10

(A 1I , B III, C I, D IV); or (A II, B I, C Ill, D IV); or (A II, B IV, C III, D 1); Cost = 71 unit].

186

INDUSTRIAL ENGINEERING AND MANAGEMENT

13.4 An organisation is having five salesmen and five sales divisions. There was a study to assess the capability of the salesmen and the nature of each district. It is estimated that the sales per month (in lakhs of Rs.) for each salesman in different divisions are as follows: Salesman

Division

1

2

3

4

5

A

32 38

40 24

41 27

22

B

C D E

40 28 40

28 21 36

' 33 30 37

38 41

29 33 40

36 35

36 39

Use assignment method to allocate different divisions to each salesman to maximize sales. [Hint: For the maximization problem, use one of the following strategies: (i) Put negative sign with each entry of the matrix. Solve using same algorithm as used for minimization problem. After assignment, calculate sales per month by taking values from original matrix. (ii) Subtract the maximum entry of the above matrix (41 in this problem) from all the entries of the matrix. Ignore negative signs.. Solve the problem as per .ihe algorithm of minimisation case. After assignment being known, calculate sales per month [by taking values from original matrix]. (Ans: 1-B, 2-A, 3-E, 4-C, 5-D for maximum profit of 191 lakhs of rupees per month). 13.5 There are four depots having one car each. For four customers, these cars are to be deputed. The distance from depot to the customer's place is as follows. Make assignment to minimise total distance covered. Depot

A

E

1

135

• 160

140

55

50

2

120

130

110

35

50

3

130

175

125

80

80

4

160

190

170

80

80

5

175

200

185

105

110

[Ans: 1-E, 2-B, 3-C, 4-D, 5-A; 560 km]. 13.6 Four salesmen are to be assigned to four most suitable territories so that there would be nne salesman for one territory. There are five territories where these salesman may be deployed. The profit in Rs. is given below. Find the assignment to maximize profit. Which territory should be declined? Territory Salesman

1

2

3

4

5

A

6.2

7.8

5

10.1

8.2

B

8.7

9.2

11.1

7.1

8.1

C

7.1

8.4

6.1

7.3

5.9

D

4.8

6.4

8.7

7.7

8

[Hint: The problem is unbalanced. Use a dummy row having infinite profit. Solve as the maximization problem. Hints are given in unsolved Problem 13.4 for this].

187

ASSIGNMENT MODEL

REFERENCES 1. Budnick FS, Mc Leavey D and Mojena R., 1996, Principles of Operations Research for Management, 2nd ed., Richard D. Irwin Inc., Illinois. 2. Gupta MP and Sharma JK, 1995, Operations Research for Management, National Publishing House, New Delhi. 3. Hiller, FS and Lieberman GJ, 1974, Introduction to Operations Research, 2nd ed., Holden-My, Inc., San Francisco. 4. Loomba NP, 1964, Linear Programming, McGraw Hill, New York. 5. Ozan T., 1986, Applied Programming for Engineering and Production Management, Prentice-Hall, New Jersey. 6. Rao, SS, 1978, Optimization—Theory and Applications, Wiley Eastern, New Delhi. 7. Rao KV, 1986, Management Science, McGraw Hill, Singapore. 8. Siseni, MA, Yaspan A and Friedman L, 1959, Operations Research: Methods and Problems, John Wiley & Sons, NY. 9. Shogan AW, 1990, Management Science, Prentice Hall. 10. Taha, HA, 1971, Operations Research: An Introduction, McMillan Publications Co. Inc., New York. I I. Wagner, H.B., 1975, Principles of OR, NJ, Prentice Hall.

188''

INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

14 ENGINEERING ECONOMICS This chapter is focussed on the economic aspects of Industrial Engineering. The chapter is also useful for the financial management aspect of industrial system. We would first consider the time value of money. Later, the use of this concept in project selection and evaluation would be explained in Chapter 17.

14.1 CONCEPT OF INTEREST Let us assume that we go to a bank and deposit Rs. 1,000 in a term deposit account. Current rate of interest is 10% per year for a deposit of one year. 11% per year for deposits of more than one year but upto 2 years and 12% per year for any deposit of more than three years. Bank may give interest at the end of the year or may give it quarterly (i.e., after every 3 months). Now, we are interested to know the maturity value for each alternative. Interest, which a deposit earns, is of two types: 1. Simple Interest, and 2. Compound Interest.

14.2 SIMPLE INTEREST Simple interest is computed on the basis of the assumption that any interest does not itself earn interest. Therefore, if we deposit Rs. 1,000 today, the interest at the end of year would be 100 if the simple interest rah:. is 10%. Original deposit (i.e., Rs. 1,000) is called as principal. In case of simple interest, the principle never changes. Therefore, in the second year, the interest earned would be again Rs. 100, which is 10% of the principal. At the end of second year, the total amount, which the depositor will get, is Rs. 1,000 + Rs. 100 + Rs. 100 = Rs. 1,200. Let us generalise it: Let, P = Principal amount (in Rs.) i = Rate of simple interest per year in % of principal n = Period of deposit (in years) Then, the interest earned after n years is: o 1= P • i • n —(1) The final amount, which the depositor will get after n years, is principal plus the interest earned. Value of principal after n years = P + 1

•

INDUSTRIAL ENGINEERING AND MANAGEMENT

190

= P + P.i• n = P (1 + i • n).

.(2)

14.3 COMPOUND INTEREST

Banks, generally, offer compound interest. Compound interest is calculated on the basis of total balance in the account. This may be principal plus interest earned in the previous period. Now, if the bank gives compound interest at the rate i per year, then = P+P*i Value of principal after one year = (P + P*i)+ (P + P*i) i Value of principal after two years = P (1+0+ P (1+0i = P (1+i) (1 + i) Value of principal after three years:

P (1+ 02 = Value of principal after two years + interest earned in the third year on the value of interest at the beginning of second year =P(l+i)2 +P(l+i)2 *i = P (1+ 02 (1+ i) P (1+ 03

Similarly, value of principal after n years: = P (1 + i)"

-(3)

Therefore, and investment of Rs. 1,000 would become 1,000 (1 + 0.1)2 = Rs. 1,21.0 after two years, when rate of interest is 10% per year on compound basis. Note that it is Rs. 10 more than the case when simple interest rate was used. 14.3.1 Interest with Multiple Frequency of Compounding

Many deposits earn compound interest, which may be semi-annual or quarterly. In all such cases, the value of principal would be calculated at the end of the period, when the interest is due. For example, at 10% rate of compound interest, when we calculate quarterly, the principal of Rs. 1,000 may increase as follows: Value of principal after 3 months Value of principal after 6 months

0 ) = 1,000 (1+ 2 4 4 )1 ( 0.1 = [1,000 (1+ 1+ 4

1

° 2 =1,000 (1+2 4 0 = 1, 000 (1 + 1 4 Value of principal after 12 months (or one year) 0.1) 4 = 1,000 (1+ — = Rs. 1,025 4

Value of principal after 9 months

When we generalize this approach, a principal of P, when earns a compound interest of i% after every mth fraction of year, then:

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ENGINEERING ECONOMICS

) m,, = P (1 + — m Therefore, a principal of Rs. 1,000, when earns a compound interest of 10% every quarterly, then:

Value of principal after n years

Value of principal after 2 years

= 1,000 (1 +

0 1 4s2

4 ) = Rs. 1,050.62 • It may be noted, this value is more than the value computed for simple interest or simple compounding.

Example 14.1 Compute the value of principal for Rs. 1,000, when 12% rate of interest is simple, compounded annually, compounded semi-annually and quarterly and monthly. Compute it for next 5 years. Solution: Given, Principal, P = Rs. 1,000 Rate of interest,

i = 12% = 0.12

Number of years;

n = 5 years

(a) When interest is simple: Value of principal

= P (1 + i • n) = 1,000 (1 + 0.12 x

= Rs. 1,600

(b) When interest is compounded annually: Value of principal

= P (1 + = 1,000 (1 + 0.12)5 = Rs. 1,762

(c) When interest is compounded semi-annually: . 1 2n Value of principal = P(1+ —1

2'5

0.121 = 1,000 (1+ ---2 J

= Rs. 1,791

(d) When interest is compounded quarterly: . )4n Value of principal = P(1+ —1 4 = 1, 000 (1 +

0 114.'5 = Rs. 1,806 4

(e) When interest is compounded monthly: )I2n

Value of principal

= P(1+

12

= 1,000 (1+

0.12 )12.5 12

= Rs. 1,817

INDUSTRIAL ENGINEERING AND MANAGEMENT

192

10892

11000 10000 -

10641 9000 8000 7000 Value of Principal 6000 f

5996 3400

5892

5000 -

2800

010

3

4000 -

o/c

3362

3000 -

00 2000 -

1806 600

1000 0

5

10

20

15

Year -Figure 14.1

Table 14.1

Value of Principal in Example 14.1 Compounded Value of Principal

Principal Rs. 1,000; Interest 12% 5 years

10 years

15 years

20 years

1,600

2,200

2,800

3,400

• 1,762

3,106

5,474

9,646

1,791

3,207

5,743

10,286

(iii) Quarterly

1,806

3,262

5,892

10,641

(iv) Monthly

1,817

3,300

5,996

10,892

Mode of Interest Simple Compounded:

(i) Annually (ii) Semi-annually

14.3.2 Case of Continuous Compounding

When the interest is considered to be compounded continuously, we may assume that interest is compounded for infinite number of times per year Table 14.2. For this case: i Inn ) Value of principal after n years = P lim ( 1 + — m—>oo

in

in

)lli = P hill [ (1+ — 1 in In)..) —

i

in i =P [ lira(1 + — i ni—>co

ni

= P [e]in = Pei .

1

in

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ENGINEERING ECONOMICS

Table 14.2 Frequency of Compounding

Effective annual interest rate for various compounding period

Period of Compounding per year

Annually Semi-annually Quarterly Monthly Weekly Daily Continuously

Effective annual interest rate 12% at nominal rate

1 2 4 12 52 365 cc

Effective annual interest rate at nominal rate 20% 20% 21% 21.55% 21.939% 22.093% 22.1336% 22.1403%

, 12% 12.36% 12.5509% 12.6825% 12.7341% 12.7475% 12.7497%

14.4 PRESENT VALUE AND FUTURE VALUE

Present Value (or, worth): It is the value of a future payment if in case it is paid immediate. Future Value (or, worth): It is a payment of a present amount which is made at some later date. For example, let us assume that we have Rs. 1,000 and we deposit in bank at 12% interest. Let us also assume that interest is compounded annually. What amount will we get after five years? We have seen in Example 14.1, that it is Rs. 1,762. In the present context, the future worth of present worth of Rs. 1,000 after 5 years from now is Rs. 1,762 at 12% interest. Relationship between present worth and future worth Let P = Present worth in Rs. F = Future worth in Rs. at the end of nth year n = Number of years i = rate of interest compounded annually FF P,,i n = Factor, which converts present worth (P) into future worth (F) at i% rate of interest after n years Fp F. " = Factor, which converts future worth (F) into present worth (P) at i% rate of interest after n years IF P 0

1

2

3

4

Year

After one year: F = P + P = P (1+ 0 After two years, Value of P would be: F = [P (1+ i)] (1 + i) = Pi (1+ 02. Similarly, after n years: F = P (1 + i)" As defined earlier F =(FF,p,i,n) P where, FF,P,i,n = (i i)" From Equation (4) above, we have 1 P = F (1+ i

(n-I )

it

...(4)

—(5)

Here, factor which converts future worth into its present worth: 1

n =

P.".

(1+ On

...(6)

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194

[Fp, Fd.„] is pronounced as "factor which converts future worth into present worth, when rate of interest is i% for n years". Table 14.3

FpF „ i.e., Present Value of Re. 1

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1 2 3 4 5 6 7 8 9 10

.990 .980 .971 .961 .951 .942 .933 .923 .914 .905

.980 .961 .942 .924 .906 .888 .871 .853 .837 .820

.971 .943 .915 .888 .863 .837 .813 .789 .766 .744

.962 .925 .889 .855 .822 .790 .760 .731 .703 .676

.952 .907 .864 .823 .784 .746 .711 .677 .645 .614

.943 .890 .840 .792 .747 .705 .655 .627 .592 .558

.935 .873 .816 .763 .713 .666 .623 .582 .544 .508

.926 .857 .794 .735 .681 .630 .583 .540 .500 .463

.917 .842 .772 .708 .650 .596 .547 .502 .460 .422

.909 .826 .751 .683 .621 .564 .513 .467 .424 .386 ,

.900 .812 .731 .659 .593 .535 .482 .434 .390 .352

.893 797 .712 .635 .567 .507 .452 .404 .361 .322

Present value

n

100 90

0 Percent

80 70

5 Percent

60 50 40 20 10 0 0

Figure 14.2

10 Percent

30

12 Percent 1 2 3 4 5 6 7 8 9 10 Year

Present value of Rs. 100 to be Received in Future and Discounted Back to Present Date

Table 14.4

FF

p

n

i.e. Compounded Sum of Re. 1 after n Years at i% Rate of Interest

n

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

1 2 3 4 5 6

1.010 1.020 1.030 1.041 1.051 1.062

1.020 1.040

1.030 1.061 1.093

1.040 1.082 1.125

1.050 1.102 1.158

1.060 1.124 1.191

1.070 1.145 1.225

1.080 1.166 1.260

1.090 1.188 1.295

1.100 1.210 1.331

1.11 1.23 1368

1.126 1.159 1.194

1.170 1.217 1.265

1.216 1.276 1.340

1.262 1.338 1.419

1.311 1.403 1.501

1.360 1.469 1.587

1.412 1.539 1.677

1.464 1.611 1.772

1.518 1.685 1.870

1.120 1.254 1.405 1.573

7 8 9

1.072 1.083 1.094

1.149 1.172 1.195

1.230 1.267 1.305

1.316 1.369 1.423

1.407 1.477 1.551

1.504 1.594 1.689

1.606 1.718 1.838

1.714 1.851 1.999

1.828 1.993 2.172

1.949 2.144 2.358

2.076 2.304 2.558

2.211 2.476 2.773

10

1.105

1.219

1.344

1.480

1.629

1.791

1.967

2.159

2.367

2.594

2.839

3.106

1.061 1.082 1.104 1.126

1.762 1.974

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ENGINEERING ECONOMICS

300 —

12 Percent

250 —

10 Percent

Future Value (Rs.)

200 — 150 —

5 Percent

100

0 Percent

50 — 0

I I I I I I I I I I 0 1 2 3 4 5 6 7 8 9 10 \'ear

Figure 14.3 Future Value of Rs. 100 Initially and Compounded at Different Interest Rates

14.5 RELATIONSHIP OF ANNUITY Annuity (A) is equal payment at the end of each year. It is like constant amount, recurring deposit scheme. In an industrial situation, such a series of cash flow is shown in Figure 14.4. A A A A A A n . (n — 1) 1 0 2 3 4 Year Figure 14.4 Annuity and an Equivalent Future Worth

The future worth of annuity may be calculated as follows: Future worth of annuity paid at the end of 1st year = A [FF,p" 01_1] = A (1+ on-1 . Future worth of annuity paid at the end of 2nd year = A [FF , p, i%,n-2]= A (1 + i)n-2 • Similarly, Future worth of an annuity paid at the end of (n — 1)th year = A (1 + i) Future worth of last year annuity = A (Figure 14.5). A A .4 A 0

1

n

. (n — 1)1

2

F

Year

A .v (1 + i) X ( 1 -I-

jp-2.

A (1 + i)

, A ( 1 + On-2 A (1 +

X (I + 011-1 Figure 14.5 Transferring Annuity at the End of nth Year

Therefore, referring Figure 14.5 for more clarity: F =A(1+0n-l +A(1+0"-2 +...+A(1+0+A

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Multiplying F by (1 + i) both sides in above equation, we have: F (1 + i) = A (1 On + A (1 + On-1 + , + A (1 + i)2 + A (1 + i) Subtracting Equation (7) from Equation (8), we get: F (1 + = A (1+ On + A (1+ On-I

+ A (1 + 02 + A (1 + i)

F = A (1 + On-I + A (1 + On-2 + A (1 + 02 + A (1 + i) + A F (1 + i) F = A (1 + On — A or

F (1 + i — 1) = A [(1 + i)" — 1] F=A [(1+i)"-11

or

—(9) Since multiplication of

(1+ On — 1

From Equation (9)

converts an annuity into the future worth, it is written as FF,A,in•

A=F

...(10) [(1 + )" —1]

(1 + On —1

is similarly termed as FA, F , 01.

14.5.1 Present Value of an Annuity We have seen that

P = F[

+ (1

(1+1)" —11

F =A

and,

] on

C Putting the later equation in the first one, we get A or,

[(1+i)"-11 [

1

[(1 A- On ]

P=A r +i)" —11 i (1 + On Also, from above equation: [ i + On A=P (1+i)" —1 Here,

(1+ i)" —1 i (1 +

is termed as Fp, A,i,„ and

...(12) i (1+ i)" (1 + On —1

is termed as FA,P,i,n

14.5.2 Sinking-Fund Factor In the annuity or equal payment series, we have the relationship: A=F

[

i (1 +

—1

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ENGINEERING ECONOMICS

Here,

1

(1+i)„ -1

of FA,F,i,„ is the factor which converts a future requirement of fund (say F)

into equal payment of annuity (say A). This factor is also called as sinking-fund factor. Example 14.2 For a future requirement of Rs. 1,270, what equal payment is needed for five

years when rate of interest is 12% compounded annually? Solution: Given: F = Rs. 1,270, i = 0.12, n = 5, A = ? A = FA, F,0.12, 5 A = Rs. 1,270

0.12

[

1

(1+ 0.12)5 -11

= Rs. 1,270 x (0..1574) = Rs 200. 14.5.3 Equal Payment Capital Recovery Factor Let us assume that a person deposits P amount at an annual interest rate of i%. He is interested to withdraw the principal and the interest earned in a series of equal withdrawals for n year. How much should he withdraw each year so that at the end of nth year he withdraws the full amount? 1 0

14

2 14

3 14

. (n - I) f

fn 1

Figure 14.6 Capital Recovery, Equal-payment Series

We have already derived that:

A=P

[ i (1+ i)" (1+ i)n —1

Here,

i (1 A- ir

(1+ i)" -1 or

FA,p",n is also called as capital recovery factor.

Example 14.3 An old lady deposits Rs. 1,00,000 at 12% interest compound annually. She invests for 10 years and wants equal payment each year. How much will she get if the balance will be nil at end of 10th year? Solution: Given: P= Rs. 1,00,000, i = 0.12, n = 10, A = ?

A = Rs. 1,00,000

[0.12 (1+ 0.12)10

= Rs. 17,698.

(1+0.12)10 -1 Table 14.5 Summary of Relationship S.No. To find Given Algebric relationship

L 2.

F

P

P F

Relationship by factor

Compoundinterest factor

F=P0+W P = F/(1+

Name of factor

F=F

Present value factor

Cash flow

iP 0 1

2

nIn

Contd...

INDUSTRIAL ENGINEERING AND MANAGEMENT

198

S.No. To find Given

3.

F=A

A

F

Algebric Relationship

-1]

[(1+

Relationship by factor

Name of Factor

F= F = A (FA, P,, ,,) /

Equal Paymentvalue factor series future

(FP, F,i,n)

4.

A

A=F

F

0

A = FFA , F",„ A = F (FF , „

[ 0 + oin

Cash Flow

e Ai Ai Al o_n n 1 2

Sinking fund factor

( FA,P,i,n)

5.

P

A

P-A

[a + on —

Unacost presentvalue factor

P = A (FF.4 ,1. „)

i (1+i)"

A

Ai Ai 1A

1 2 n-I n 6.

A P A=P

[

e(1+ i)"

Capital Recovery factor

A = P (F4 , F ,1 „)

(l +i)" -1

Example 14.4 Consider the cash flow situation in which cash is received from first year to 8th year as follows: Rs. 100, 200, 500, 800, 800, 800, 800 and 800 respectively. Assuming 20% rate of return, find: (i) Present value, (ii) Future worth at 8 year, and (iii) An equivalent annuity for this cash flow. Solution: The cash flow is shown in Figure 14.7. Rs. 100

Of

200

500

800

800

800

800

800

2

3

4

5

6

7

8

P0 Figure 14.7 Cash flow of Example 14.4

(i) Present value:

For

1 1 1 100 200 500 P= + + + + 800 + + (1 + (1 + +107 [ (1 + ° (1+ 0 (1+ 02 (1+ i = .2 1 1 1 1 100 200 500 1 ,+ + + + +800 [ ., + + PA = 8 ° (1.2) (1.2)2 (1.2)' (1.2r (1.2)' (1.2)6 (1.2)7 (1.2) = 511.57 + 800 [1.73]

= Rs. 1,895.57 Alternately: Find equivalent present worth of all five annuities at t = 3 year and then bring back at t = 0. 100 200 500 + „ + 800 [Fp, A,i,5 * P=—+ ° 1.2 (1.2)2 (1.2)"

199

ENGINEERING ECONOMICS 100

200

500

800

1

1

800

800

800

800

2 Po 800 * FpA,i.5

1 800 * (Fp 4, 5)* Fp ,

i,3

Figure 14.8

or,

100

200

P° = 1.2 + 1.2

+

500

+800

(1+ 0.2)5 —1

1

0.2 (1+ 0.2)5

(1+ 0.2)3

= 511.57 + 800*(2.99) (0.579) = 511.57 +800*1.73 = Rs. 1,895.57. (ii) Future worth after 8 years: F8 = Po (FF,P,i,8) = PO (1 +

= 1,895.57 (1+ 0.2)8 = Rs. 8,150.60 Alternately, in the manner similar to part (i), all cash flow may be brought to year 8. (iii) Equivalent annuity for this cash flow: A = Po [FA, p,i 8]

= 1,895.57 =1,895.57

i 0 +08 [ (I +1)8 _ r

[0.2 (1.2)8 (1.2)8 —1

— Rs. 494.

14.6 PROFITABILITY PROJECTIONS (OR ESTIMATES OF WORKING RESULTS)

Profitability projections are needed when you are starting a business or if already running a business, the projection of profitability is very much essential. Given the estimates of sales revenue and cost of production, the next step is to prepare the profitability projections. The estimates of working results may be prepared along the following lines: (a) Cost of production—Cost of materials, labour, utilities and factory overheads. (b) Total administrative expenses—consists of administrative salaries, remuneration to directors, professional fees, light, postage, telegram and telephones charges, insurance and taxes on office property and miscellaneous items. (c) Total sales expenses—commission payable to dealers, packing and forwarding charges, salary of sales staff, advertising expenses and other miscellaneous expenses. (d) Royalty and know how payable-rate is usually 2-5%of sales: it is payable often for a limited number of years say 5-10. (e) Total cost of Production (a + b + c + d).

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(f) Expected sales—figures of expected sales are drawn from the estimates of sales and production

prepared earlier in financial analysis and projection exercise. (g) Gross profit before interest = Expected sales — Total cost of production. (h) Total financial expense = Interest on term loans, on bank borrowings, commitment charges on term

loans and commission for bank guarantees. [In estimating the interest on term loans (i) Interest on term loans is based on present rate of interest charged by the term lending financial institutions and banks, (ii) Interest amount would decrease according to the repayment schedule of term loan]. (i) Depreciation—This is important in capital intensive projects. [In figuring out the depreciation charge, the following points should be borne in mind: (i) Contingency margin and preoperative expenses provided in estimating the cost of project should be added to the fixed assets proportionately to ascertain the value of fixed assets for determining the depreciation charge. (ii) Preliminary expenses in excess of 2.5% of project cost (excluding working capital margin) should be added to fixed assets for determining the depreciation. (iii) Income tax act specifies that the written down value method should be used for tax purposes. (iv) For company law purpose the method of depreciation may be either the written down value (WDV) method or the straight- line (SL) method]. (j) Operating profit = g— h — i. (k) Other income—Income arising from transaction not part of the normal operations of the firm disposal of scrap, sale of machinery. (I) Write off of preliminary expenses—preliminary expenses up to 2.5% of the cost of project or capital employed whichever is higher can be amortized in ten equal annual installments. (m) Profit or loss before taxation = j + k — I. (n) Provision for taxation—while calculating the taxable income a variety of incentives and concessions has to be taken into account. (o) Profit after tax • = m — n. (p) Retained profit (also called ploughed back earnings) = Profit after. tax — Dividend payment. (q) Net cash accrual = Retained profit + Depreciation + Write off of preliminary expenses + noncash charges. 14.7 PROJECTED CASH FLOW STATEMENT

The projected cash flow statement shows the movement of cash into and out of the firm and its net impact on the cash balance within the firm. The format for preparing the cash flow statement which is really a cash flow budget, as prescribed by Indian financial Institutions is given below. The format calls for preparing the Cash flow statement on a half yearly basis for the construction period and on an. annual basis for the operating period for ten years for managerial purposes, it may be helpful to prepare it on a quarterly basis for a construction period and on a half yearly basis for the first 2 to 3 years of operating for managerial purposes. This would facilitate better financial planning, project evaluation and fund control. Cash flow statement: The cash flow statement is having two parts. The source of funds and the disposition of funds. The source gives the idea of the various fund sources and how the fund is to be disposed is given in the second part, which is enumerated as follows.

201

ENGINEERING ECONOMICS

Sources of funds 1. Share issue. " 2. Profit before taxation with interest. 3. Depreciation provision for the year. 4. D.evelopment rebate resery 5. Increase in secured medium and long-term bon-owings for project. 6. Other medium and long-term loans. • 7. Increase in unsecured loans and deposits. 8. Increase in bank borrowings. 9. Increase in liabilities for deferred payment (including interest) to machinery suppliers. 10. Sale of fixed assets. 11. Sale of investments. 12. Other income. Total (A) Disposition of funds 1.Capital expenditure for project. 2. Other normal capital expenditure. 3. Increase in working capital. 4. Decrease in secured medium and long-term borrowings. 5. Decrease in unsecured loans and deposits. 6. Decrease in bank borrowings for working capital. 7. Decrease in liabilities for deferred payments to machinery suppliers. 8. Increase in investments. 9. Interest on term loans. 10. Interest on bank borrowings. 11. Taxation. 12. Dividends. 13. Other expenditure. Total (B) — Opening balance of cash in hand and at bank — Net surplus or deficit (A — B) — Closing balance of cash in hand and at bank. 14.8 PROJECTED BALANCE SHEET The projected balance sheet shows the balance in various asset and liability amounts reflects in financial condition of the firm at a given point of time. Format of a balance sheet as prescribed by, the companies act is given below: Liabilities Share capital Reserves and surplu's'

Assets Fixed assets Investments Contd...

202

INDUSTRIAL ENGINEERING AND MANAGEMENT

Secured loans Unsecured loans Current liabilities & provisions

Current assets, loans and advances Miscellaneous expenditure & losses

The liabilities side of the balance sheet shows the sources of finance employed the business. • Share capital consists of paid up equity and preference capital. • Reserves and surplus represent mainly the accumulated retained earnings. They are shown in different accounts like the capital reserves, the investments allowance reserve and the general reserve. • Secured loans represent the borrowings of the firm against which the security has been provided. The important components of secured loans are debuntures, term loans from financial institutions and loans from commercial banks. • Unsecured loans represent borrowings against which no specific security has been provided. The important constituents are fixed deposits from public and unsecured loans from promoters. • Current liabilities are obligations which mature in the near future, usually a year. These obligations arise mainly from items which enter the operating cycle; payable from acquiring materials and supplies used in production and accruals of wages, salaries and rentals. • Provisions—Tax provision, provision for provident fund, pension, gratuity and proposed dividends. The assets side of balance sheet shows how funds have been used in the business. The major asset components is listed below: • Fixed assets are tangible long-lived resources used for producing goods and services. • Investments are financial securitiqs owned by firm. • Current assets, loans and advances—Cash, debtors, inventories of different kinds and loans and advances made by the firm. • Miscellaneous expenditures and losses—Outlays not covered by the previously described asset accounts and accumulated losses. For preparing the projected balance sheets at the end of the year n + 1 the following information is needed: 1. Balance sheet at the end of year n. 2. Projected income statement and the distribution of earnings for year n + 1. 3. Sources of external financing proposed to be tapped in the year n + 1. 4. Proposed repayment of debt capital during the year n + 1. 5. Outlays and the disposal of fixed assets during the year n + 1. 6. Changes in the level of current assets during the year n + 1. 7. Changes in the other assets and certain outlays like preoperative and preliminary expenses during the year n + 1. 8. Cash balance at the end of year n + 1. Sample Problem: Balance sheet of ABC enterprises at the end of the year 2005 is as follows: Liabilities

Share capital Reserves and surplus Secured loans

Assets

100 2Q 80

Fixed assets Investments Current assets

180 0 180 Contd...

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ENGINEERING ECONOMICS

Liabilities

Assets

Unsecured loans

50

Cash

20

Current liabilities

90

Receivables

80

Provisions

20

Inventories

80

360

360

Projected income statement and distribution of earnings for the year

n + 1 is

given below:

Sales

400

Profit before tax

60

Cost of goods sold

300

Tax

30

Depreciation

15

Profit after tax

30

Profit before interest and taxes

90

Dividends

10

Interest

20

Retained earnings

20

During the year n + 1 the firm plans to raise a secured term loan of 10, repay a previous term loan to the extend of 5 and increase unsecured loans by 15. Current liabilities and provisions are expected to remain unchanged. Further the firm plans to acquire fixed assets worth 30 and increase its inventories by 5. Receivables are expected to increase by 15. Other assets would remain unchanged, excepting of course cash. The firm plans to pay 10 by way of equity divided. Solution: Projected Cash flow statement of ABC enterprises Sources of funds: 1. Profit before taxation with interest 90 2. Depreciation provision 15 3. Increase in secured loans 05 4. Increase in unsecured loans 15 Total (A) 125 Disposition of funds: 1. Capital expenditure for project 30 2. Increase in working capital 25 3. Interest 20 4. Taxation 30 5. Dividends-equity 10 Total (B) 115 — Opening balance of cash in hand and at bank 20 — Net surplus or deficit (A — B) = 125 — 115 = 10 — Closing balance of cash in hand and at bank 30 Projected Balance Sheet Account category

Opening balance

Changes during the year

Closing balance

Liabilities Share capital

100

100

Reserves surplus

20

(+20) Retained earnings

40

Secured loans

80

(+10) additional term loans (-5) repayment

85

Contd...

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Account category

Unsecured loans Current liabilities Provisions

Opening Balance

Changes during the year

(+15) proposed increase

50 90 20

Closing balance

65 90 20 405

Assets Fixed assets

180

Investments Current assets Cash Inventories Receivables

180 20 80 80

(+30) additional outlay (-15) Depreciation

(+5) proposed increase (+15) expected increase

195

215 30 85 95 405

REVIEW QUESTIONS 14.1 Explain the concept of: (a) Simple interest and (b) Compound interest. Give examples. 14.2 Compute the value of the principal for Rs. 5,000 when 10% interest is charged as (a) Simple interest, (b) Annually compound interest, (c) Semi-annual compound interest, (d) Quarterly compound interest, and (e) Monthly compounded interest. Compute it for next 10 years. 14.3 Prove that the value of principal (P) after it years for continuous compounding at i% interest is P . ein. 14.4 Establish relationship between: (a) Present value and future value (b) Present value and annuity (c) Future value and annuity. 14.5 Derive expression for: (a) Sinking-fund factor (b) Equal payment capital recovery factor (c) Unacost present value factor. 14.6 Consider the cash flow in which cash is received from first year to sixth year as Rs. 100, 400, 500, 600, 600 and 600, respectively. For 10% rate of return, find: (a) Present value, (b) Future value at the end of 6th year, (c) Equivalent annuity for this cash flow.

REFERENCES 1. Brighton, EF and Pappas, JL, 1976, Managerial Economics, 2nd ed., The Dryden Press. 2. Canada, JR, and Sullivan WG, 1989, Economic and Multiattribute Evaluation of Advanced Manufacturing System, Prentice Hall, New Jersey. 3. DeGarmo, EP, Canada, JR and Sullivan WG, 1979, Engineering Economy, 6th, ed., The MacMillian Co., New York.

ENGINEERING ECONOMICS

205

4. Jelen, FC, and Black, JH, Cost Optimization Engineering, McGraw Hill Book Co., New York. 5. Kolb, RW, and Rodriguez, R.V., 1992, Financial Management, DC Heath & Co., Lexington. 6. Park, WR. 1973, Cost ,Engineering Analysis,• John Wiley & Sons Inc., New York. 7. Petty JW, Keown AJ, Scott (Jr.) DF, and Martin JD 1993, Basic Financial Management, Prentice Hall, • New Jersey. 8. Murthy, MRS, 1988, Cost Analysis for Management Decisions, Tata McGraw Hill, New Delhi. 9. Newmann, DG, 1980, Engineering Economics Analysis, Calif: Engineering Press. 10. Ostwald, PF, 1974, Cost Estimating for Engineering and Management, Prentice Hall Inc., New Jersey. 11. Riggs, JL, 1977, Engineering Economics, McGraw Hill Book Co., New York. 12. Taylor, GA, 1980, Managerial and Engineering Economy, 3rd ed., D. Van Nostrand Co. Inc., New York.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

15 DEPRECIATION

15.1 WHAT IS DEPRECIATION Depreciation is the way to avail tax benefits for a tangible property or intangible property, which loses the value due to passage of time. Tangible property is such property, which can be seen or touched, e.g., office car, furniture and machine. Intangible property is the property, which cannot be touched or seen, e.g., copyright, licence, franchise, patent, etc. Generally, the value of a property becomes lesser as time passes. This is because of following reasons: 1. Obsolescence or becoming out-of-date. 2. Depletion. 3. Wear and tear. 4. Rusting and corrosion. 5. Improper .repair. 6. Frequent breakdown and accidents. 7. Insufficient capacity to cope up with the changed demand situation. 8. High maintenance. Example 15.1 A machine is purchased for Rs. 10 lakhs. If it is sold after five years, most likely the price, which it will fetch would be substantially less than its purchase price. This may be due to obsolescence in technology and high wean tear and maintenance. This loss is value in accounted for tax-rebate purpose and the term is technically called as depreciation. Example 15.2 A machine, which is purchased today, is based on current product demand. However, after 5 years, the product demand and profile may change. This may necessitate to procure a high capacity, versatile machine. In accounting, the provision to change the loss due to insufficient capacity, obsolescence or depletion is called as depreciation. Example 15.3 Although the depreciation is treated as expense in accounting (as this is a loss in value of an asset), there is no physical flow of cash. Therefore, depreciation is a non-cash expense. A major reason to consider depreciation is to lessen the taxable income by the amount of depreciatio4 charged during that financial yeas:

INDUSTRIAL ENGINEERING AND MANAGEMENT

208 15.1.1 Notations Used

As we charge depreciation, the value of asset decreases by the amount of depreciation. This remained value of the asset (which is the difference between purchase price and total depreciation charged till that period) is also called as book-value of the asset. (BV)n = Book value at the end of nth year Let d,,= Depreciation charged in the nth year P = Purchase price (or the original cost) of the asset N = Service life of the asset S = Scrap value of the asset at the end of its life D,: = Total depreciation charged till nth year Thus, as defined earlier: (BV),,= P —±d„ n=1 S = P —Ed„ =(BV)„„.N n=1 and, total depreciation charged till the end of nth year: DN =

E d„ n=1

and

(BV)„ = (BV)„_i —d„

We would like to clarify two common misconceptions in depreciation: 1. Depreciation is not charged for the purpose of procuring another asset as its life ends. Rather it is for the purpose of accounting of the capital expenditure and tax calculation. 2. Book value is not to be confused with the resale price of the asset. In fact, resale price and bookvalue are generally different in all cases. 15.1.2 Accounting Concept of Depreciation

Suppose an asset is purchased for Rs. 10,000. This cost is viewed as the pre-paid operating expense, which will occur during the use of the asset. Therefore, it should be charged against profit during its life-time. The scheme of charging this expense provides the real significance of depreciation. 15.1.3 Value Concept of Depreciation

The physical capital such as machine, building, etc., in real sense, does not get spent. But the accounting considers this as an expense, spread over its life-time. Original price minus the retained value of the asset (i.e., book value) is the total depreciation of the asset. 15.2 CLASSIFICATION OF DEPRECIATION (TABLE 15.1)

Depreciation is classified as: 1. Physical depredation 2. Functional depreciation " 3. Accident.

209

DEPRECIATION Table 15.1 Classification of Depreciation

Physical

Example

Description

Depreciation •

Physical impairment of an asset

1. Wearing of tyre

•

Wear and tear

2. Rushing of pipes

•

Deterioration in the item

3. Corrosion in metal

More vibration, shock, abrasion, impact, noise

4. Chemical decomposition 5. Old car, etc.

Functional

Accident

•

Due to change in demand, the service of the asset becomes inadequate

1. An office has one good manual typewriter. Still, it is profitable and desirable to dispose the manual type-writer and purchase a computer-printcr for DTP job.

•

More efficient model of asset is available (or obsolescence of existing one)

2. A 386-computer with mono-screen is in good conditon, yet it may be inadequate for current use, and a pentium II computer with multimedia kit and colour monitor is needed.

•

Accidental failure or partial damage

• Due to sudden voltage fluctuation, the TV burns out

15.3 METHODS TO CHARGE DEPRECIATION 15.3.1 Straight Line Method (SLM)

In this, the value of the asset decreases uniformly through the life of the asset. Thus, = dN = d (say) di = d, = d3 Since depreciation is charged for N years during the life-time and total loss in value is the difference between purchase price (P) and scrap value (S); P—S d„= d N

E

D„=Id„ = d =nd n=i n=1 or, Total depreciation charged upto n years: D11 = nd = n Therefore,

P—S N

(BV)„ = P — D„ = P n[ P

Example 15.4 Let purchase price of an asset is Rs. 20,000 and scrap value is Rs. 2,000. The life of asset is 10 year. Then total depreciation, which should be charged in the life-time, is: DN = P — S = 20,000 — 2,000 = 18,000 N = 10 years d = 18,000/10 = 1,800.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

End of year (n)

0 1 2 3 4 5 6 7 8 9 10

Depreciation charged during year (n) = do

1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800 1,800

Book value at the end of year = (13V), = P - Edn

20,000 (= P) 18,200 16,400 14,600 12,800 11,000 9,200 7,400 5,600 3,800 2,000 (= S)

15.3.2 Declining Balance Method (DBM)

Here, we assume that the asset loses its value faster in early life period. A fixed percentage of book value at the beginning of any year is taken as the depreciation charge for that year. Therefore, every year the book value of the asset decreases by a fixed percentage. One of the weaknesses of DBM is that asset never depreciates to zero. If the book value declines by a per cent every year, then: = a (BV),_, (BV), = (BV),_1 - d, = (BV),_1 -a (BV),_1 = (1- a) (BV),_ 1 Example 15.5 For an asset worth 20,000, we will have the following depreciation charges at 20% declining balance method: End of year (t)

0 1 2 3 4

Depreciation charged during the year (d1) = 0.2 (BV),_,

Book value at the end of year = (BVt) = (BV),_1 d, Rs. 20,000

(0.2) (20,000) = 4,000 (0.2) (16,000) = 3,200 (0.2) (12,800) = 2,560 (0.2) (10,240) = 2,048 (0.2) (8,192) = 1,638

20,000 - 4,000 = 16,000 16,000 - 3,200 = 12,800 12,800 - 2,560 = 10,240 10,240 - 2,048 = 8,192 8,192 - 1,628 = 6,554

15.3.3 Double Declining Balance Method (DDBM)

1 It is noticed that in straight line method (SLM) of depreciation, the rate of depreciation is - , where, (P - V) N is the asset useful life. This is because in SLM, d, --, and is constant. Now, if one takes N 2 double of this rate, i.e., ( -I and applies the declining balance method, the method to charge depreciation is called as double declining balance method. Therefore, DDBM is a special case of DBM where percentage 2 a is taken as - • N

211

DEPRECIATION

2 Hence, in the previous example, if we use DDBM, the value for a would be — = 0.4 when the 5 asset life is 5 years. Method to calculate depreciation and book value remains same. Example 15.6

Show that for the declining balance method the rate of depreciation:

S j iiN P where, S and P are salvage values and purchase prices, and N is the asset life. a = / — (—

Solution: Depreciation during first year, di = aP Book value at the end of first year,

(BV)1 = P — di = P (1— a) Similarly,

d2 = a (BV), = a (1— a) P

(B112 = P (1—a) — a (1— a) P =P(1— a)(1—a)= P(1— a)2 d3 = a (BV)2 = a (1 — a)2 P (BV)3 = (BV)2 — d3 = (1— a)2 P — a (1— a)2 P = (1— a)2 (1 — a) P (1— a)3 P Therefore, at the end of asset life after N years: (B V)N = (1— a)N p The book value at the end of asset life is also the salvage value. Therefore,

S = (1— a)N P or, or,

(1— coN _ S p

I/N

1 — a = (p c,

or,

1/N a=1—t ) •

15.3.4 Sum of Year Digits Method (SYD) In this method, we assume that the value of the asset decreases with a decreasing rate as it becomes older. Let us understand this through an example. Example 15.7 Let P = Rs. 20,000, S = Rs. 2,000; N = 5 years. In sum of year digits method, the first step is to sum all digits starting from .1 to N. We call it sum of year digit. Thus, for N =5, this sum is I + 2 + 3 + 4 + 5 = 15. Next step is to calculate depreciation and book value. The depreciation in the first year would 5 be — time purchase price minus salvage value. Here, numerator indicates the last year digit, i.e., 5. 15 The denominator indicates sum of year digit which we have calculated in Step 1. The book value at the end of first year would be purchase price minus depreciation charged. In the second year, the depreciation

INDUSTRIAL ENGINEERING AND MANAGEMENT

212

4 charge would be — times, purchase price minus salvage value. Similarly, the depreciation charged in 15 3 third year is — times book value at the end of second year. 15 ,Calculations: Now, the value of asset which would depreciate in 5 years =P—S = 20,000 — 2,000 = Rs. 18,000. End of year (t)

Year in reverse order

Depreciation charged during the year di

0 2 3 4 5

Example 15.8

5 4 3 2 1 SUM = 15

(5/15) (18,000) = 6,000 (4/15) ( I 8,000) = 4,800 (3/15) (18,000) = 3,600 (2/15) (18,000) = 2,400 (1/15) (18,000) = 1,200

Book value at the end of year (BV),

20,000 20,000 — 6,000 = 14,000 14,000 — 4,800 = 9,200 9,200 — 3,600 = 5,600 5,600 — 2,400 = 3,200 3,200 — 1,200 = 2,000 (= S)

Show that for SYD method, depreciation during nth year is (P S

2 (N - n + I) N (N + 1)

Solution: Let N = year of life for the asset. Sum of digit from 1 to N =1+ 2 + 3 + + N N (N +1) 2 For nth year the reverse number of year is (N — n + 1) Hence, depreciation factor for the nth year N - n +1 2 (N - n +1) N (N +1) N (N +1) 2 Hence, depreciation in the nth year 2 (N - n +1) tin = (P S) N (N +1) Hence, proved. SYD method has following features: 1. It gives rapid depreciation in early years. 2. The asset depreciates to the salvage value at the end of life. This is not the case in DBM or DDB method. 15.3.5 Sinking Fund Method (SFM)

We assume that a sinking fund is established and accumulated in this method. By sinking fund we mean that each year depreciation is so charged that the future worth of all depreciation and salvage value becomes equal to purchase price of the asset. Thus, if rate of interest is i, the cash flow diagram is given in Figure 15.1.

213

DEPRECIATION

0

1

N- 1

N- 2

2

Year —.-

Figure 15.1

E (Future worth of depreciation till Nth year) 11=1

P=S

=S+d+d(1+0+d(l+i)2 +...+d (1+0N-1 = S + d [1+0+0+0+02 +..+0—ON-1 ]

=S+d

[(I + O N — 1 1 (1 - 0 — 1

=S+d

[(I + i)N —11 i

or, Total depreciation t'll nth year s shown as D,, (Figure 15.2).

Figure 15.2

Putting the value of d from earlier derivation: [ i [(1 +

= (P — S)

D,, = (P — S) Also,

(1 + ON —1 ]

i

= (P S)

[(1 + On — I] + 0N-I

(1+i)» -1

(1 + ON —1]

=P—

Sinking fund method is generally not very common for accounting purpose. It gives a low depreciation in early year (Figure 15.3). 100

Book value as a percentage of first cost 50

0

Age of Asset

Figure 15.3 Comparison of Different Methods of Depreciation

10

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 15.9 A machine is purchased for Rs. 75,000 with an estimated age of 10 years. Its scrap value is Rs. 5,000 at the 10th year What will be the depreciation for 6th year and book value at the end of 6th year? Assume an interest rate of 5%. Solution: Given; P = Rs. 75,000, S = Rs. 5,000, N = 10 years, n = 6 year. (P — S) 75,000 — 5,000 Straight line method d= N = Rs. 7,000 10 In 6th year depreciation charged is Rs. 7,000 Total depreciation charged till 6th year = 6 x 7,000 D6 = 42,000 Book value at the end of 6th year = P — D6 = 75,000 — 42,000 = Rs. 33,000 Declining balance method a = 1-10

5,000 = 75, 000

0.237 5

(BV)5 = 75,000

5,000 jto= 19,365 75,000 6

(BV)6 = 75,000

Therefore

5,000 ) to 75,000

= 14,771

d6 = (BV)6 —(BV)5 = 19,365 — 14,771 = Rs. 4,594.

Double declining method — a

2 2 = — = 0.2 N 10

(BV)5 = 75,000 (1— 0.2)5 = 24,576 (BV)6 = 75,000 (1— 0.2)6 = 9,661 d6 = 24,576 —19,661 = Rs. 4,915 Sum of years digit method (SYD) Sum of year depreciation factor for 6th year

=1+ 2 +3+...+10 = 55 5 55 5 = (75,000 — 5,000) — = Rs. 6,363.6 55 6

(BV)6 = 75, 000 —

d„

• 215

DEPRECIATION

10 9 8 7 6 51 = 75,000 - (75,000 -5,000) [— + — + — + — + — + — 55 55 55 55 55 55 = 75,000 - 70,000 x 0.818 = Rs. 17,727.27 Sinking fund method (SFM) d = (75, 000 - 5, 000) [

(1+ ON-I [ 0.05 1 = 70,000 , = Rs. 5,565.32 (1 + 0.05r-'

d6 = 5,565.32

(1+

- 11 1

= 5,565.32

[0 .05)5 -11 0.05

= 30,751.90 (1+ i)6 -1 + olo _ 1

(BV)6 = 75,000 - (75,000 - 5,000) [

= 75,000 - 70,000 C 13 4 = 75,000 - 70,000 x 0.54 0 63 = Rs. 37,145 Method of depreciation ->

Depreciation in 6th year (Rs.) Book value at the end of 6th year (Rs.)

SLM

DBM

DDB

SYD

SFM

7,000 33,000

4,594 14,771

4,915 19,661

6,363.64 17,727.27

30,751.90 37,145.00

15.4 SERVICE LIFE OF ASSET

The estimate of service life has important bearing on the calculation of depreciation. It depends upon the experience of the industry. Some guidelines are as follows: Asset

Range for the life of asset in calculating depreciation

Furniture Aircraft Computer Electric equipment Motor Car Construction

8 - 12 5-7 5-7 9 - 15 9 - 15 4-6 REVIEW QUESTIONS

15.1 Explain the term "depreciation". Why is this charged? 15.2 Explain the following terms with example: (a) Book value, (b) Scrap value, (c) Service life, (d) Depreciation. 15.3 Explain and compare the following methods to charge depreciation: (a) Straight line method (b) Declining balance method

INDUSTRIAL ENGINEERING AND MANAGEMENT

216 (c) Double declining balance method (d) Sum of years digits method (e) Sinking fund method.

15.4 An asset is purchased for Rs. 5,50,000 with an estimated service life of 15 years. Its scrap value is estimated as Rs. 50,000. What will be the depreciation charged in the 5th year and book-value at the end 5th year? Assume a rate of return of 10% per year. 15.5 A computer system is purchased for Rs. 95,000. Its scrap value is estimated as Rs. 5,000 at the end of five year of its service life. Plot the annual depreciation, total depreciation charged and book-value on a time scale. Use all the methods you have learned. Make different plots for different methods.

REFERENCES 1. Brighton, EF, and Pappas, JL, 1976, 2. Canada, JR, and Sullivan WG, 1989, System, Prentice Hall, New Jersey.

Managerial Economics, 2nd ed., The Dryden Press. Economic and Multiatiribute Evaluation of Advanced Manufacturing

3. DeGarmo, EP, Canada, JR and Sullivan WG, 1979, New York.

Engineering Economy,

6th, ed., The MacMillian Co.,

Cost Optimization Engineering, McGraw Hill Book Co., New York. Financial Management, Lexington: DC Heath & Co. 6. Park, WR. 1973, Cost Engineering Analysis, John Wiley & Sons Inc.; New York. 7. Petty J.W., Keown AJ, Scott (Jr.) DF, and Martin JD 1993, Basic Financial Management, Prentice Hall,

4. Jelen, FC, and Black, JH,

5. Kolb, RW, and Rodriguez, RJ, 1992,

New Jersey.

Cost Analysis for Management Decisions, Tata McGraw Hill, New Delhi. 9. Newmann, DG, 1980, Engineering Economics Analysis, Engineering Press, Calif. 10. Ostwald, PF, 1974, Cost Estimating for Engineering and Management, Prentice Hall Inc., New Jersey. 11. Riggs, JL, 1977, Engineering Economics, McGraw Hill Book Co., New York. 12. Taylor, GA., 1980, Managerial and Engineering Economy, 3ed ed., D. Van Nostrand Co. Inc., New York. 8. Murthy, MRS, 1988,

BREAK-EVEN-ANALYSIS

16.1 INTRODUCTION

Break-even-analysis is a powerful analytical tool, which uses simple graphical technique to compare few feasible alternatives. It is useful for analysing cost/revenue relationship with respect to production volume (Figure 16.1). At what minimum level of production-volume, feasible production systems will give profit can be determined by break-even-chart. F1 = Fixed cost for process 1 Let, F2 = Fixed cost for process 2 Vt = Variable cost for process 1 (per unit item) V2 = Variable cost fOr process 2 (per unit item) QBEP = Break-even-quantity TBEP = Total cost of manufacturing at break-even-quantity, 0BEP.

Process I

Cost (Rs.)

Process 2

f 1 : BEP 1

(V2) (QBEP)

QBEP

Quality (Q)

Figure 16.1 Break-Even-An'alysis for Two Processes

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INDUSTRIAL ENGINEERING AND MANAGEMENT

A chart is plotted, as shown in Figure 16.1, in which x-axis is for production-volume. On y-axis, cost or revenue is plotted. 16.2 ASSUMPTIONS

It is assumed that all cost/revenue functions (such as fixed cost, variable cost, sales, etc.) are linear with respect to production-volume. However, non-linear functions may also be considered in special cases. Another assumption in break-even-analysis is related to cost-volume information. All informations related to cost are assumed to be deterministic. We also assume that the influence of a variety of non-volume factors on cost data is of no significance in break-even-analysis. Assumptions in BEA 1. Linearity of cost/revenue function with respect to production volume. 2. Deterministic cost/volume/revenue information. 3. Functions other than volume-dependent cost (or revenue cost) are ignored. 4. Single product firm. 5. Constant product mix. 6. Unconstrained conditions. 16.3 STEPS IN BREAK-EVEN-ANALYSIS (BEA) ' 1. Classify various elements of costs on the basis of their dependence on change in volume.

2. Select suitable measures of activity related to the variability of cost elements. 3. Decide range of activities for which the cost/revenue date are valid. 4. Collect and prepare empirical data for deciding the variability of cost elements. 5. Determine the rate of variability of each cost-element with the help of mathematical or statistical tools. 6. Plot/calculate the break-even-chart or break-even volume. 7. Analyse. It is important to understand the classification of cost into two elements: fixed cost and variable cost. 16.4 FIXED COST

Fixed costs are those elements of costs, which remain unaffected by the change in volume or level of activity. In a factory, suppose 100 items are manufactured in a month. For this production-volume, the rent of building is Rs. 50,000. Now, suppose, in the next month, the production falls to 98 units. However, the rent remains the same. So, this is a fixed cost. Other examples of fixed cost are: administrative staff salary, overhead expenses related to plant, machinery, building, office car, etc. These overhead costs may be in the form of depreciation, rent, insurance charges, etc. These overhead charges are on a regular basis irrespective of the use or production-volume. Fixed costs are also called as period costs because the variation of fixed costs is in direct proportion to the passage of time. However, we presume that _BEA is for a given period of time in which fixed cost remains fixed with respect to the production-volume.

219

BREAK-EVEN-ANALYSIS

Fixed cost per unit item or fractional utilization of the capacity is not fixed. A lower utilization means higher fixed cost per unit item while a higher utilization means a low fixed cost per unit production. 16.5 VARIABLE COSTS Variable costs are those elements of costs, which are proportional to the variation in the volume, activity or utilization of resources. For example, direct material costs or direct labour costs are proportional to the production and thus termed as variable costs. 16.6 PURPOSE OF BEA 1. BEA is useful in determining the critical level of operation over which the organisation makes profits and below which there would be losses. 2. Level of profit or loss at a projected production-volume may be known. 3. Selection of process for a projected production-volume may be known. In Figure 16.1, process 1 is more profitable till break-even-quantity (QBEP) production level. However, above this production level, process 2 becomes economical. 4. Implication of cost reduction policy on the profitability of the firm may be known. 5. Decision-related to make or buy or product may be taken. 6. Decision related to product mix may be taken. 7. Effect of increase in variable cost on the profitability of the firm may be known. 8. Effect of increased capacity of firm may be known. Example 16.1 A company is producing certain type of circuit breakers. The fixed cost of land, building, etc., is Rs. 40,000. The variable 'cost is Rs. 10 per unit production. If the sales' price of the product is Rs. 20 per unit, what should be the minimum production level? If the firm is operating at present so that production is 8000 units, what is the firm's profit and margin of safety? Solution: Given, Fixed cost

F = Rs. 40,000

Variable cost

V = Rs. 10 per unit

Sales price

S = Rs. 20 per unit

At break-even-point of production, there would be neither profit nor loss. Any production above this level gives profit. The break-even-chart is as follows (Figure 16.2). In this problem, at 4000 units of production, the total cost line crosses the revenue line. Total cost line is drawn by adding fixed cost (F) and the product of variable-cost (V) and production quality. i.e., Total cost

= F + QV

-W

The total revenue or sales line is drawn by the product of sales price (S) and productionvolume (Q). i.e.,

Revenue = QS

...(ii)

At break-even-point (BEP), total cost is equal to total revenue, thus, F + QV= QS or

Q = S -V

...(iii)

INDUSTRIAL ENGINEERING AND MANAGEMENT

220

Margin of Safety = 4000 Units 1,60,000 Margin of Safety = Rs. 80,000

Profit

Break-EvenPoint (4000 Units)

Revenue or Cost 80,000

: Angle of Incidence

Total Cost Line

Sales Revenue at BEP Rs. 80,000

Variable Cost 1• .

40,000 Loss Revenue Line

Fixed Cost

2

3

4

5

8

Production-Volume (Q) (in '000) Figure 16.2 Break-Even-Analysis for Problem 16.1

S and V are expressed in Rs. per unit of production. For the given problem, at BEP, 40, 000 = 4,000 units QBEP = 20 — 10 Equation (iii) is multiplied by sales piice (S) both sides, then we get break-even-point in monetary terms. For the given problem, at BEP the revenue or cost is: FS 40,000 x 20 BEP = = Rs. 80,000 S—V 20 —10 Other Observations: At any production level above BEP, i.e., 4000 units, the firm will have profits and below this there will be loss. Here,

16.7 MARGIN OF SAFETY

It is the difference between the operating sales and break-even-sales. Margin of Safety = Present sales — Break-even-sales In ratio term, margin of safety (MIS) ratio is: M/S Ratio =

Margin of Safety

Present Sales Higher is this ratio, more sound is the economics of the firm. Therefore, higher margin of safety means that in case of little fall in productitin, the firm will keep earning profit. Thus, for a production of 8,000 units in the Example 16.1, margin of safety is: M/S = Production Volume — BEP Production = 8,000 — 4,000= 4,000 units In Rs. terms, M/S = 4,000 x Sales Price

221

BREAK-EVEN-ANALYSIS

= 4,000 x 20 = Rs. 80,000 In ratio terms, MIS Ratio Margin of Safety

Rs. 80,000

Present Sales

Rs. 1,60,000

= 0.5.

16.8 DETERMINING PRODUCTION-VOLUME FOR A GIVEN PROFIT Let us assume that we want a profit of P. Then, looking at the region of profit, which is at the right of break-even-point, we have: Fixed Cost + Variable Cost = Sales — Profit or, F + VQ = SQ— P Q=F+P

or, Multiplying S both sides, Example 16.2 Solution: Here,

in unit terms S—V QS = (F+P)S = F+P S—V

1— VIS

in Rs. terms.

For a profit of Rs. 10,000 what would be the production in the previous example? Q=

F+P

40,000 + 10,000

S—V

20 — 10

= 5,000 units.

16.9 FORMULA FOR BREAK-EVEN-ANALYSIS (BEA) Although the BEA is generally a graphical technique, following set formula is useful to verify the results: BEP =

1 — VIS

in turnover or Rs. terms

BEP = F in unit of production S—V Production quantity for P profit F+P 1 — V/S Profit

units

V = Sales Volume [1 — —] — F.

16.10 ANGLE OF INCIDENCE (8) This is the angle between the lines of total cost and total revenue. Higher is the angle of incidence, faster will be attainment of considerable profit for given increase in production over BEP. Thus, the higher value of 0 makes system more sensitive to changes near break-even-point. An indirect (numerical surrogate) measure of Q is profit volume ratio. This is defined as: Sales — Variable cost Profit Volume Ratio — Sales Higher is the profit volume ratio, greater will be angle of incidence and vice-versa.

16.11 PROFIT-VOLUME GRAPH (P/V GRAPH) Profit-Volume graph is a plot similar to BEP analysis. It is useful for comparing different processes or systems. The chart shows quantity on x-scale and profit on the y-scale. Therefore, at no producion

INDUSTRIAL ENGINEERING AND MANAGEMENT

222

level the y-coordinate is negative and equal to the fixed cost. The slope of the line starting with (zero production; fixed cost) point is dependent on the profit-volume ratio. Profit (or loss, if negative) (Rs.)

Profit

0 Quantity

Loss

Fixed Cost

Figure 16.3 Example 16.3 The fixed cost of Rs. 24,000 and a break-even-quantity of 34,000 unit are estimated for a productions. Draw profit graph and calculate the P/V ratio and profit at .a sales volume of 50,000 units.

Solution: (a) P/V Ratio

Fixed cost Break — even — quantity 24, 000 = 0.706. 34, 000

Profit (or loss, if negative) (Rs.)

10

35

Figure 16.4

(b) At sales-volume of 50,000 units Fixed cost + Profit P/V Ratio =

40

45

50

55

BREAK-EVEN-ANALYSIS

Or,

223

0.706 =

24,000 + P 50,000

P = 50,000 x 0.706 — 24,000

or,

= Rs. 11,295 Rs. 11,295 Ans.

REVIEW QUESTIONS 16.1 Explain the concepts in break-even-analysis with examples. What are the assumptions involved? 16.2 Explain the steps involved in break-even-analysis. What are the advantages and limitations of break-evenanalysis? 16.3 Differentiate between fixed cost and variable cost. How do they help in determining break-even-point? 16.4 Define and explain the followings in the context of break-even analysis: (a) break-even-point. (b) safety margin. (c) angle of incidence. 16.5 What is a profit-volunie chart? Explain. 16.6 A manufacturing firm has three proposals for a product. Either it can be purchased from an outside vendor at Rs, 4.00 per unit or it canbe manufactured in-plant. There are two alternatives for in-plant manufacturing. Either, a fully automatic unit is procured, involving fixed cost of Rs. 30,000 and variable cost of Rs. 2.75 per unit. Alternatively, a semi-automatic unit would cost Rs. 20,000 as fixed, cost and Rs. 3.00 per unit as variable cost. Draw a break-even-chart for these alternatives. Suggest range of production-volume suited for these alternatives.

REFERENCES I. Bierman, H. and Hyckman T.R., I976,. Managerial Cost Accounting, McMillan, New York. 2. Gallagher C.A. and Watson H.J., 1980, Quantitative Methods for Business Decisions, McGraw Hill, New York. 3. Gordan, S., 1977, Managerial Cost Accounting, Home Wood, Ill: Irwin. 4. Horngren, C.T., 1978, Introduction to Management Accounting, Prentice-Hall, New Jersey. 5. Murthy, MRS, 1988, Cost Analysis for Management Decision, Tata McGraw Hill, New Delhi. 6. Rappaport, A. (edited); 1975, Information for Decision-Making—Quantitative and behavioral Dimensions, Prentice-Hall, New Jersey.

224

INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

REPLACEMENT AND SELECTION 17.1 INTRODUCTION In a manufacturing or service system, we face many situations when we have to take decision for the selection of a particula. r alternative. For example, for a particular operation on a part, various alternative machines are available. It may be a conventional machine, semi-automatic, automatic or numerical control machine. All have different production capacity, different cost and different life. Which amongst them is economical? The decision regarding such a problem is called as selection problem. Sometimes, we face situation of machine replacement. This may be due to following reasons: 1. Existing machine (or unit) has completed its effective life and it is not economical to run it any more. 2. Existing machine (or unit) is damaged or destroyed due to some accident or breakdown. 3. Very high maintenance and repair cost of the machine. 4. Due to technological innovation, a new machine (or unit) is available in the market. 5. Unavailability of spare parts of the machine. 6. Change in product mix, product design, specification and quality standard, production volume, company policy (say, for modernisation), government regulation (say, for pollution), etc. Therefore, it is essential to evaluate various alternatives existing in the market and present unit. Economic evaluation is an important part of this decision. Sometimes, it is essential to estimate the age at which replacement is more essential as compared to continuing with the existing unit at an increased operation and maintenance cost. 17.2 NATURE OF SELECTION PROBLEM Selection problem is related to economic evaluation of alternative proposal. This requires following information: (i) Initial cost of the unit. (ii) Annual operating and maintenance cost. (iii) Economic life of project. (iv) Rate of return for money invested in the project. We will discuss this with some illustrative problems. The guiding principle in the selection problem is to bring all cash flow at one point of time. For this different approaches are: (i) Present worth method,

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Future worth method, (iii) Annuity method, (iv) Internal rate of return. method, and (v) Capitalized cost method. 17.3 NATURE OF REPLACEMENT PROBLEM

Replacement problem may be of following variety: (i) Capital equipments, which deteriorate with time, for example, trucks of a transport agency, lathe machine, etc. (ii) Items, which fail completely. These are handled under group replacement policy, for example, electric bulbs, electronic items, etc. (iii) Mortality and staffing problem. (iv) Other problems. 17.4 REPLACEMENT OF ITEMS WHICH DETERIORATE

Some capital items, such as truck, bus, machine tools, etc., are items, whose maintenance and operation cost increases with time. By not purchasing a new unit we are doing two things: (i) Saving in fresh capital expenditure, and (ii) Losing due to extra operating cost. At an age, when average monthly loss due to extra operating cost exceeds average monthly saving due to fresh capital expenditure for replacement, one should go for replacement. Let us assume that time is a continuous variable and operating cost (0,) is a function of time (t). Let C be the capital cost and S be the salvage cost of the item. Then, total operation and maintenance cost in period t, 0= J 0,dt Total cost till time, 1:

TC = C + SO, dt — S Average total cost till time t: (

TC)avg =

C—S t

1 + JO, dt to

Differentiating above expression with t and equating to zero for minimum of average-total cost, we get:

dt Thus,

(C

(TC) av

- S) (

2

+

[1 1

{0} - 2 SOt dti= 0 t 0

1 C - S TC 0, = — 10, dt + o

t

Thus, for minimum total cost, the operating and maintenance cost at time t should be equal to average cost in time t.

227.

REPLACEMENT AND SELECTION

Example 17.1 The cos (of an equipment is Rs. 7,.200 and the scrap value is Rs. 200. The maintenance costs are as follows: Year 1 2 3 7 8 4 5 6 Annual maintenance Cost /50 300 450 650 950 1,300 1,850 2,500 When should the equipment be replaced? Solution: Given; C = Rs. 7,200, S = Rs. 200 Loss in Capital = C - S = 4,700 Replacement at the end of year (t)

Maintenance Cost (0)

Total maintenance cost (M)

Loss in Capital (C-S)

Total Cost (TC) (C-S) + E01

Average Cost (TW/t)

1 2 3 4 5 6 7 8

150 300 450 650 950 1,300 1, 850 2,500

150 450 900 1,550 2,500 3,800 5,650 8,150

•7,000 7,000 7,000 7,000 7,000 7,000 7,000 7,000

7,150 7,450 7,900 8,550 9,500 10,800 12,650 15,150

7,150 3,725 2,633 2,137 1,900 1, 800 1,807 1,893

We observe that the maintenance cost in 7th year (Rs. 1,850) exceeds average total cost in 6th year (Rs. 1,800), hence the equipment should be replaced at the end of 6th year. 17.5 REPLACEMENT OF MACHINES WHOSE OPERATING COST INCREASES WITH TIME AND THE VALUE OF MONEY ALSO CHANGES WITH TIME We have seen in Chapter 14 that money has got a time value. As time passes, value of money decreases. Present value ot Rs. 100 will always be (1 + i)" times less than its future value after n years. Here i is the rate of interest and n is the number of years under consideration. (1 + i)" is also called as discount

factor. When we are considering the option of evaluating flow of money in a given project, it may be important to consider the time value of money. The principle behind all such approaches is simple. All the transactions at different points of time should be brought at one point of time and be added so as to judge the superiority of one of the alternatives.. 10%

Example 17.2 A company has option to purchase either of the two machines. If money is worth per year which machine would you recommend for the following data? Year

Cost at the.beginning of year (Rs.) Machine I

Machine II

1 2 3 4

3000 2700 2700 3100

3500 2200 2800 3000

Total

11,500

11,500

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: At a discounting rate of 10% per year, the expenditure for machine I in the second year would be worth[2700 (1 +10.1)] Similarly, the present worth of expenditure in the third year for machine I is 2700

(1 +0.1)2 1 ]

We get the following discounted cost table.

Year

Discounted cost @ 10% per year (Rs.) Machine I

Machine II

3000

3500

1 2

2700

(

1

1+ 0.1) 2

1

3

— 2454

2700 (— ) = 2231 1.1

2200

(1 +10.1)

1 2 2800 (—) = 2314 1.1

3

3100 Total discount cost (Rs.):

11

= 2000

3

= 2329

3000

10,014

11

= 2254

10,068

Now, since total discounted outlay of machine I is lesser, it is more economical. ite approach for the evaluation and selection may be extended for comparison by annual cost method' or internal rate or return method. However, the principle is same: Key Point An alternative, which requires the minimum net capital outflow and will produce satisfactory functional results, should be opted, unless these are definite reasons why an alternative requiring a larger net outflow should be adopted. Example 17.3 Consider four machines I, II, III and IV. The installation cost is Rs: 6,500, 8,500, 10,000 and 14,500 respectively. The total disbursements on maintenance, operation, electricity and labour are Rs. 20,000, 18,000, 11,000 and 10,000. Each has an economic life of 5 years. Compare and select the most economical machine. Assume money is worth 10% per year Solution: Present Worth Method Machine Cost

Installation cost Present worth of annual disbursement (A) A * (P/A, 10%, 5) =

(1+ 0.1)5 —11 A[ — 3.79 A 0.1 (1+0.1)5

Total

Machine ll

Ill

;V

6500

8500

10000

14500

3.79 x 20000

3.79 X 18000

3.79 x 11000

3.79 x 10000

= 75816

= 68234

= 41690

= 37908

82316

76734

51690

52408

/.

229

REPLACEMENT AND SELECTION

Thus; machine III is the most economical machine as its equivalent present worth is least. Comparison by Annual Cost Method Machine

Machine

Cost

1

11

111

IV

6500 x 0.26 = 1690

8500 x 0.26 = 2210

10000 x 0.26 = 2600

14500 x 0.26 = 3826

Annual disbursements

20000

18000

11000

10000

Total

21,715

20,243

13,600

13,826

Equipment annuity of installation cost (I) or capital recovery I (AIP, 10%, 5) [0.1 (1+ 0.1)5]

= 0.261

(I + 0.1)5 —1

Thus, machine III is the most economical. Comparison by Internal Rate of Return: We compare the two alternatives (say A and B) at one time and see which is more economical. For this, we calculate the change in investment and annual savings (from A to B). For each comparison, the rate of return, which equates the increment in investment and annual saving, is termed as internal rate of return (IRR). If IRR is more than the rate of return (for example, 10% in the example which we an considering), then the switch-over (from A to B) is justified. • Machine

Machine IV

Cost

Investment Annual disbursement Life (Years)

6500 20000 . 5

Increment in cost Increase in Investment (Ai) Increase in disinvestment (SD) (—ve sign indicates savings) IRR on A/ Is IRR justified? (Yes, when IRR > i%)

I —+ II 2000. —2000 95%* Yes

8500 18000 5

10000 11000 5

II --> III 1500 —7000 480%** Yes

III —› IV 4500 1000 3.5% No

*Sample Calculations (i) *For I —> II comparison II is justified if IRR (say i') is more than 10%. Extra investment or, or, Or,

(pm,

= present value of savings in disbursement

2000 = 2000 (P/A, i'%, 5) 5) 2000 = 2000

(1 + i')5 —1

1

i' (1 + i')5 By trial and error method, = 0.95

14500 10000 5

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Since this is more than 10% (i.e., 0.1), IRR of 0.95 is sufficient to justify that machine II is superior than machine I. **Sample Calculations (ii) **For II ---> III (1 + 5 —1 1500 = = 0.214 7000 i' (1 + 05 By trial and error i' = 4.8 (or 480%). Hence machine III is justified as compared to machine II. ***Sample Calculations (iii) ***For III —> IV (1 + i')5—1 = 4500 =4.5 1000 (1 + i')5 i' By trial and error, i' = 0.035 = 3.5% Since < 10%, hence machine IV is not justified as compared to III. Therefore, machine III is most economical. Comparison by Future Worth Method Machine

Machine

Future worth of all costs

IV

1. Future worth of installation cost (/) = I (F/P, 10%, 5) = / (1 + 0.1)5 = 1.6/ 2. Future worth of annual disbursement (A) = A (F/A, 10%, 5) =A

1.6 x 6500 = 10468

1.6 x 8500 = 13689

1.6 x 10000 = 16000

1.6 x 14500 = 23352

6.1 x 20,000

6.1 x 18000

6.1 x 11000

6.1 x 10000

= 122000

= 109800

= 67100

= 6100

1,32,468

1,23,489

83,100

84,352

(1+ 0.1)5 —1 = 6.1 A 0.1

Total future worth

Thus, machine III is the most economical followed by IV, II and I.

17.6 CAPITALIZED WORTH METHOD Capitalized worth method is very useful when the lives of the alternates are not equal. We will first consider disbursements for over an infinitely long length of time. Let there be an annuity for an infinite (cc) period at the rate of interest 1% per year. Its present worth is: lim (PIA), 1%, 1‘1] * Al = — lim (1 + i)N 11 A N—)4 1 (1 + i) = lim 1 N-400

1

,1A

(1 + 0"

A A [ 1 = lim — — — lim N—") i

i N —*oo (1. +

A I, A =A— = i

This is equal to the capitalized worth of the annuity A.

231

REPLACEMENT AND SELECTION

For applying the capitalized worth method in the selection problem, all disbursements, investments or receipts are expressed in terms of annuity. These are further converted into the capitalized worth. Example 17.4 Two alternative machines are under consideration. Their cost structure is given below. Their economic life is different. Machine

A

Purchase Price

50,000

Salvage Value Economic life

0

10 years 15,000

Annual maintenance and operation cost

70,000 30,000 25 years 17,000

Solution: When economic life of alternatives is different, capitalized worth method is useful. For machine B, the total capitalized cost is lesser in the table below. Therefore, machine B is economical. Machine

A

1. Purchase Price (P) 1.1 Capitalized worth for replacement of machine A 0.1 ,n 0.1 0.0'" 1 1.2 Capital worth for replacement of machine B = 50,000 [

= (70, 000 — 30, 000)

0.1 [(I.1)"

50,000

31,373

•1

7,118

—i][o.i]

2. Annual disbursements 15,000 2.1 0.1 2.2 17,000

70,000

15,000 1,70,000

0.1 Total (1.1 + 2.1) or (1.2 + 2.2)

1,81,373

1,77,118

REVIEW QUESTIONS 17.1 What is the nature of a replacement problem? Show that for the optimal replacement of items, which deteriorate with time, the operating and maintenance cost at the time of replacement is equal to the average cost of the items till that time. • 17.2 A machine MI costs Rs. 9,010. Annual operating cost is Rs. 200 for the first year. It increases by Rs. 2,000 every year. Determine the best age at which one should replace the machine. For the optimal replacement policy, determine the average yearly cost of owning and operating the machine. Another machine M2 costs Rs. 10,000 with annual operating cost of Rs. 400 in the first year. This cost increases by Rs. 800 every subsequent year. The company wishes to replace its MI , which is one year old by M2. Is it justifiable? If yes, then when should they go for replacement? 17.3 A company wishes to purchase a machine for its maintenance shop. The initial costs and annual operating costs are- given below for two options of machines. Which unit is economically justified?

232

INDUSTRIAL ENGINEERING. AND MANAGEMENT

Cost of machine/operating cost (Rs.)

Year

1 2 3 4 5

Machine I

Machine II

50,000 5,000 10,000 15,000 20,000

80,000 5,000 5,000 5,000. 10,000

17.4 Consider the option of selecting a machine out of four options whose initial installation costs are Rs. 10,000, 15,000, 20,000, and 25,000, respectively. The total annual disbursements for maintenance and labour are 25,000, 20,000, 15,000 and 10,000 respectively. Which machine should be procured? Use following approaches for 10% worth of money per year? (a) Present worth method (b) Equivalent annual cost method (c) Future worth method (d) Internal rate of return. 17.5 Explain the concept of capitalized worth. Prove that capitalized worth of an annuity, A is A/i, where i is the worth of money per year. 17.6 Two alternative machines have the following cost structure. Which should be selected? Note that their economic life is different. A

Machine

Purchase price (Rs.) Salvage value (Rs.) Economic Life (year) Annual maintenance cost (Rs.)

1,00,000 5,000 10 10,000

,

1,25,000 10,000 12 8,000

REFERENCES 1. Brighton, EF, and Pappas, JL, 1976, Managerial Economics, 2nd ed., The Dryden Press. 2. Canada, JR, and Sullivan WG, 1989, Economic and Multiattribute Evaluation of Advanced Manufacturing System, Prentice Hall, New Jersey. 3. DeGarmo, EP, Canada, JR and Sullivan WG, 1979, Engineering' Economy, 6th, ed., The MacMillian Co., New York. 4. Jelen, FC, and Black, JH, Cost Optimization Engineering, McGraw Hill Book Co., New York. 5. Kolb, RW, and Rodriguez, RJ, 1992, Financial Management, DC Heath & Co., Lexington. 6. Park, WR, 1973, Cost Engineering Analysis, John Wiley & Sons Inc., New York. 7. Petty JW, Keown AJ, Scott (Jr.) OF, and Martin JD, 1993, Basic Financial Management, Prentice Hall, New Jersey. 8. Murthy, MRS, 1988, Cost Analysis for Management Decisions, Tata McGraw Hill, New Delhi. 9. Newnan, DG, 1980, Engineering Economics Analysis, Engineerihg Press, Calif. 10.Ostwald, PF, 1974, Cost Estimating for Engineering and Management ; Prentice Hall Inc., New Jersey. 11. Riggs, JL, 1977, Engineering Economics, McGraw Hill Book Co., New York. 12. Taylor, GA, 1980, Managerial and Engineering Economy, 3rd ed., D. Van Nostrand, Co. Inc., New York.

VALUE ENGINEERING

18.1 INTRODUCTION

Value engineering or value analysis has occupied very important position in industrial engineering and operations management. It is a systematic, approach of continuously identifying unnecessary costs in products, processes or systems. The cost of a product and expectation from the product to perform a particular function are interlinked in value engineering. 18.2 DEFINITION

Value engineering is an organised creative technique directed at analyzing the functions of a product, service or a system with the purpose of achieving the required functions at the lowest overall cost consistent with all the requirements, which comprise its value, such as performance, reliability, maintainability, appearance, etc. Achieves

Value Engineering

Analyses

• Product • Service • System

Matches with • Performance • Reliability • Appearance • Maintainability • Service Life • Range of Operation • Safety • Alternatives, etc.

Figure 18.1 What is Value Engineering?

18.3 OBJECTIVE OF VALUE ENGINEERING

Value engineering emerged into prominence after World War II. Basic ideas related to it were developed by Lowrence D. Miles in 1947. The industrial situation during that period was so that there was overall

234

INDUSTRIAL ENGINEERING AND MANAGEMENT

recession. Material was in short supply. Trained and skill manpower was insufficient. Therefore, manufacturing technologists were looking for alternative material, improved processing requirements, better designs, low cost operation, and efficient system. Foundation of value engineering got its root during this period to achieve some of these objectives. The major focus, however, was to cut-down cost while retaining the desired function of the product. The objective of value engineering is the systematic application of recognized techniques to identify the function of a product or service; establish norms for the function; and provide the necessary function related to these at lowest cost. 18.4 OTHER RELATED TERMS

Value engineering, value analysis, value management, value performance, value control, etc., are the many terms used for same meaning. However, we would generally slick to the term-value engineering or VE. 18.5 CONCEPT TO VALUE ENGINEERING

Value engineering is focussed on identifying a series of step-by-step techniques to identify the unnecessary costs and to eliminate them. To do so, it concentrates on their functions and their cost. 18.5.1 What is Value?

Value is the required or needed performance at minimum cost. Now, what is the needed performance? Needed performance is what the customer expects. If it is less than the desired performance, one should focus on eliminating the waste caused due to overdesign, such as costly material, high factor of safety in design, etc. Value in general is the ratio of function and cost. Thus, Function Value Cost In the above expression, function is expressed as units of performance and cost is expressed as a monetary unit (such, as Rs., $, etc.) related to expenditure of resources. Therefore, value is expressed as a relationship of what a product (or service/system) accomplishes and at what Cost. Example 18.1 Suppose, we want to travel between two cities. The distance between these cities is 1,000 km. The air ticket costs Rs. 4,000, the train ticket costs Rs. 3,000 and the road-bus costs Rs. 2,000. Then by air way, the value of air travel is 1000 kin or. 0.25 km/Re. Similarly, value of train travel Rs. 4,000 1000 is or 0.33 km/Re and the value of road travel is 0.5 km/Re. 300 In this example, we have ignored any function other than distance travelled. If comfort, quality of services or time to travel are also important then the numerator in value (i.e., function) is a combination of the needed performance measure. However; it is important to note in the above example that value gives a quantitative measure of what we are getting at every spent rupee. 18.6 TYPE OF VALUE

Value is categorized into following types: 18.6.1 Use Value

It is • defined as the qualities and properties needed to accomplish a service, product or work. 18.6.2 Esteem Value

It provides properties, features and attractiveness to a service, product or work, which make the ownership desirable.

235

VALUE ENGINEERING

18.6.3 Scrap Value It is the money, which can be recovered when the item is not needed. It is the scrap value. 18.6.4 Cost Value It is the total cost of material, labour, overhead and services to produce an item (or to deliver a service). 18.6.5 Exchange Value It is the property and qualities, which enable to exchange (or trade) a product (or service) for something else, which is needed by the exchanger. A customer purchases an item when the exchange value is less than the perceived (or guessed) use and esteem value. The most important issue, which a customer generally looks into a product, is a combination of use and esteem value. For example, new car models coming into market provide either better service or (and) are good looking. Value is a relative concept. Normally, it increases when product cost decreases. Value can change with time and place. Sc, it has its own dynamics. It can be computed performance wise. Value is a relationship between want and willingness to pay for it. 18.7 FUNCTION Function is what makes an item useful. For every product. (or services), there must be reasons to justify why it is of any use. This is answered by a verb. For example, pencil (which is product) makes a mark (a function). Other examples are given in Table 18.1. Table 18.1 Function and Value Function Category

Item

Verb

Noun

Value

Shaft Pillers Cloth Blanket Old stamp Book Luxury Car

Transmits Hold Covers Provides Exchange Enriches Makes

Power Roof Body Warmth Money Knowledge Proud

Use Use Use Use Exchange Use Esteem

Services

Consultant Firebrigade

Consults , Extinguishes

Client Fire

Use Use

System

Organisation

Facilitate

Management

Use

Product

18.8 EFFECT OF FUNCTION AND COST ON VALUE Value is affected by change in function and cost. It increases with increase in function while cost is same and with decrease in cost while function is same. When increased function is associated with increased cost, value would increase if improvement in function is more than increased cost. Similarly when cost is less while some functions are compromised, value would increase if and only if cost reduction is more than loss in function (Table 18.2).

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 8.2 How to increase value? Cost (C)

1.

Same

2.

Fall \

3.

Same

4.

Increase /

5.

Fall \

6.

Value (= F/C)

Function (F)

S. No.

Same

>

Same

÷

>

Increase / Increase /

>

Increase value

/I Steeper Increase Same Fall \

\ Steeper Fall

18.9 COST AND WORTH Cost is the amount that we actually pay for a product or services. Worth is what we should pay for the functions, which we want. So, the reasonable cost of the functions we seek is the worth of product. The objective of value engineering is to make cost close to worth: If: Cost

= Worth Value =

Worth (i.e., intended function) Cost

=1 The objective of cost worth analysis is, therefore, to select areas of higher cost worth ratio because these areas are the potential areas of improvement through value analysis. Worth is applicable for the function and not for the product, services or system. Table 18.3 Cost Worth Example. Function Cost Rs.

Item

Product Services Advanced Technology

Suit Glass Computer Chartered accountant Automated guided vehicle

5000 50 30,000

Verb

. Covers Contains Calculates

Noun

Worth for intended funciion, Rs.

When compared with

Body Water Arithmatics

500 0.50 300

Cotton Shirt/Pant Clay pot Scientific Calculator

200

Tax guide book

5000

Calculates

Tax

20 lakhs

Transports

Material

I lakh

Conveyor

18.10 LIFE CYCLE OF A PRODUCT AND VALUE ENGINEERING We have studied product life cycle in Chapter 2. Product life cycle involves various phases from idea conceiving to birth of product, growth phase and maturity phase. Upto growth phase, value engineering is not very relevant as compared to maturity phase. In the last phase, attempts are needed to reduce cost while retaining the functions. In such cases, product life cycle becomes flater rather than declining' in later phases (Figure 18.2). Value analysis is useful for products which are (i) imported, (ii) have long

VALUE ENGINEERING

237

design to market time, (iii) high cost item, (iv) critical parts, etc. One may think of indigenous substitute for imported item. Shorter lead time and higher speed to market may be achieved through concurrent engineering. Pareto-analysis (refer Chapter 33) or ABC analysis (refer Chapter 19) may be done to identify high value items. For these 'items, cost reduction efforts may be focussed.

Value oriented product 1 Resources assigned

4

Performance oriented product

Idea conceiving

Growth phase

Maturity phase

Time

Figure 18.2 Life Cycle of a Product and Effect of Value Oriented Product

18.11 STEPS IN VALUE ENGINEERING

The main focus in VE is to reduce cost and/or increase the functional property of an item. This may be achieved by using alternative, cheaper material and/or processes. Many companies in India have adopted simple rule of thumb to judge the potential area of improvements. They ask these questions and if answer is yes then they go for them: (i) How to reduce cost of operation? (ii) How to reduce cost of material? (iii) How to reduce time of operation/set-up of tools, jigs, etc.? (iv) How to reduce manpower needed in the production? (v) Is automation or advanced manufacturing system cost effective, if yes, then should it be adopted now? Similarly, there are many questions related to product performance starting with What, Why, When, Where, What else, How, Does, Do, Is, If, etc. These questions give answer to the VE strategies. Some examples are: (i) What is the item? (ii) How much is the cost? (iii) What does it do? (iv) What are its other uses? (v) What is the cost of an alternative? , (vi) What special skill ,is needed in the factory? (vii) What special skill company does not have?

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(viii) What machines does the company have? (ix) What are the surplus equipments which may be liquidated? (x) Does the product need all features? (xi) Is low cost alternative product available for consumer? (xii) What is the strategy of competitors? (xiii) Does the company possess surplus manpOwer? (xiv) What does the vendors, subcontractors, or suppliers say about cost reduction? (xv) Is the profit margin reasonable? (xvi) What are the quality standard, specification, size, type, shape, weight packaging, etc.? 18.12 METHODOLOGY IN VALUE ENGINEERING Value engineering starts with the identification and classification of the items. Then functions of the items are identified. Each function is evaluated and compared. Alternative strategy for cost reduction or function improvement is adopted. The methodology in VE is given in Figure 18.3. Get all available cost •

Avoid generality

Identify and overcome road-blocks

Use information from best source

Utilize the strength and synergy of supply chain/ value chain

Pay for vendor/ subcontractor supplier skills

Identify key tolerance: not to he too light

Use specialized knowledge

Reduced cost in Supply Chain Improved function of production

Figure 18.3 Methodology of Value Engineering

18.13 FAST DIAGRAM FAST diagram is an effective graphical-cum-analytical tool in value engineering (Figure 18.4). FAST stands for Function Analysis System Technique. Objective: To validate the purpose of a part using questioning method to establish the function that is served. Steps in FAST Diagram Step 1: Define scope of the analysis. It includes the need (or basic objective) of the part and the interface, which is needed for the part. Interface may not serve the bask objective but may be necessary to make the part functional.

239

VALUE ENGINEERING - Scope of FAST Diagram

Critical path

Component I (Cost Rs. 10)

Component 2 (Cost Rs. 2)

Component 3 (Cost Rs. 600).

Upper bound governed by Product Functions

Lower bound governed by Interface of the Product Function 4 (a when query) Component 4 (Cost Rs. 500)

Figure 18.4

FAST diagram showing components with their functions

Step 2: Explode part into smaller components. Step 3: Create a well defined list of functions for each part, assembly, etc. Use noun-verb combination as shown in Tables 18.1 and 18.3. Step 4: Organise functions as per the sequence of questions which starts with how query, then why query, and then when query. Step 5: Create FAST diagram using the listed functions in Step 4. A high level function, which is why query-type, is placed in the box near the left boundary. Next function is placed in the box which is right of this box. A why query, if placed in second box, should be satisfied by the function in the previous box. This process continues. Step 6: Determine critical path of functions. Critical path is the connection of all the cross-referenced functions in the FAST diagram. Step 7: The functions in Step 3 which are not listed in the FAST diagram are the secondary functions. Place them on FAST diagram by answering to a when query. Show these by dotted lines. Step 8: All how, why and when query functions are now shown in FAST diagram. Remaining functions are unnecessary or redundant functions. List these functions. Sep 9: Place component near to the respective functions in FAST diagram. Advantages of FAST Diagram 1. It creates a reference to validate the function of a component. 2. Graphically represents critical components and their function. 3. Alternate redrawing of FAST diagram would provide an analyst a list of minimum parts to serve the function at lowest cost.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

18.14 MATRIX METHOD IN VALUE ENGINEERING

In matrix method the most suitable alternative is selected by using a numerical evaluation technique. • Step 1: List all functions required to attain the desired objectives. Step 2: Generate a relative importance matrix by comparing each factors among them. A 1 is filled if function of a row is more or equally important than the function in column. For example, in Table 18.4, F 1 is more important than F3 but less important than F4. Table 18.4 A sample of relative importance matrix Function

Fl

F2

F3

F4

F5

Sum of Importance

F1

1

0

1

0

0

2

F2

1

1

1

1

0

4

F3

0

0

1

1

0

2

F4

1

0

0

1

1

3

F5

1

1

I

0

1

4

Step 3: Sum all rows. Step 4: Arrange functions in descending order of the sum in last column. This is the relative rank of functions. For example, in Table 18.4, the relative rank is F2, F5, F4, Fl and F3. Step 5: Create a weight factor (Wi) for each factor (F1). WW is determined on the basis of the impact of Fi on the overall product. Step 6: Evolve alternatives (Ai) to satisfy the overall objective of the product/service. List cost (Ci) for each Table 18.5 Sample of main evaluation matrix for Table 18.4. The values for fi an(

in the matrix are

hypothetical Ranked Function (Fi ) Weight (Kt) Alternative (A1)

F2 0.3

F5 Fl F4 0.15 0.25 0.20 Value of Evaluation factor (Fi)

F3 0.1

Cost (C1)

Sum of Product, G1

Ratio (G1/C1)

= E (Wi * fo)

Al

3

7

8

4

1

4.98

4.95

0.99

A2

2

6

5

1

4

5.1

3.65

0.71

A3

6

8

4

2

5

5.2

5.4

1.04

A4

5

9

2

3

9

8

f5.51

0.68

Step 7: Fill evaluation factor (4) for each combination of alternative (Ai). and function (F1) in the main evaluation matrix. is between 0 to 10 and depends upon the degree of attainment of the function. For 0; the alternative is rejected.

4=

4

For the illustration purpose, we have taken few hypothetical values off and C for four alternatives in Table 18.5.

4

for each alternative (Au). List it in last column Step 8: Calculate the sum of product Wi and as G. For example, in Table 18.5, alternative Al has G. value as 3 x 0.3 + 7 x 0.25 + 8 x 0.2 + 4 x 0.15 + 1 x 0.1 =4.95.

241

VALUE ENGINEERING

Step 9: Select alternative on one of the following criteria given below: S. No.

Criteria

Measure

1.

Lowest cost alternative Best product Best product per unit cost

Lowest (Ci) Highest (Gd)

2. 3.

Highest (G/Ci)

Example

A 1 in Table 18.5 A4 in Table 18.5 A3 in Table 18.5

18.15 OTHER APPROACHES IN VALUE ENGINEERING

1. MISS: Modify, substitute or subdivide or exchange/eliminate to help change. od-

M

fy ubstitute

J

t_

ub-divide

'S

Exchange/eliminate

2. DARSIRI: Data collection, analysis, record ideas, speculate, innovate, review and implement. D

ata collection

A

nalysis

R

ecord ideas

S

peculate nnovate

R

eview mplement

3. PROFIT: Product Return Opportunities by Function Investigation Techniques. 4. FIRST: Functional Ideas Regarding system Technique. 5. FACTS: Functional Analysis of Components of Total System. REVIEW QUESTIONS

18.1 Explain the concept of Value Engineering. Why is it important in the area of Industrial Engineering? Give examples.

18.2 Explain the following terms: (i) Value, (ii) Function, (iii) Worth.

10.3 What are the different types of value? How are function and value related? 10.4 Explain the different steps in value engineering process. Explain the methodology. 10.5 Explain the FAST diagram in value engineering. What are its advantages?

INDUSTRIAL ENGINEERING AND MANAGEMENT

242

REFERENCES

1. Arthus, E. Mudge, 1971, Value Engineering—A Systematic Approach, McGraw-Hill Book Co., New York. 2. Crum L.W.; 1971, Value Engineering, Longman, London. 3. Dlugatch, 1., 1973, "Methodology for Value Engineering", IEEE Trans, on Reliability, U.S.A., Volume R-22, No. 1, April 1973, pp. 20-23. 4. Edward, D. Heller, 1971, Value Management, Value Engineering and Cost Reduction, Addison-Wesley Publishing Co., Massachusetts. 5. Falcon, William D, 1964, Value Analysis Value Engineering. American Management Association New York. 6. Fallon, Carlos, 1971, Value Analysis and Value Engineering, John Wiley and Sons, Inc., New York. 7. Gibson, John F.A., 1968, Value Analysis—The Rewarding Infection, Pergamon Press Ltd., Oxford. 8. Miles, L.D., 1955, "How to Gut Costs with Value Analysis", Harvard Business Review, Volume 33, No. 1, January-February. 9. Miles, Lawrence, D, 1961, Technique of Value Analysis and Engineering, McGraw-Hill Book Co., New York. 10. Miller, S., 1955, "How to Get Most from Value Analysis", Harward Business Review. Volume 33, No. 1, January-February.

19 INVENTORY CONTROL

19.1 INVENTORY Inventory may be defined as any resource that has certain value and which can be used at a later time, when the demand for the item will arise. It is thus a stock of goods, which may be in the form of raw material,. semi-finished goods (or, work-in-proces•!s, WIP), or finished product. Every such stock involves blocked capital (or resource). It is, therefore, important to plan a proper level of inventory. The nature of inventory depends upon the type of business activity of the firm. For example, a manufacturing unit carries raw material, some purchased or sub-conti;acted parts, WIP, and finished goods. It may also carry tools, spare parts, etc., for the next few weeks. 1\hese are called as inventory. Inventory is equally relevant in non-manufacturing or service sectors. For example, a hospital keeps a reasonable stock of medicines, life saving injections, operation and surgicai1 equipments, hospital ward including beds, etc. Even house wives prefer to keep some stock of food-srck in reserve. This is nothing but inventory. A major reason to maintain inventory is to keep the operations going without interruptions due to shortages of material. In-process inventory acts as a buffer so that the intermediate processes do not stop. It acts as the safeguard against ill-planning and scheduling of prc cesses and machines. Finished item inventory is the item ready for consumption by the consumers. It is important to note that: (i) Inventory serves as the buffer or safety against ill-planning, sudden demand, continuous production, etc. (ii) Any form of inventory is a sign of inefficiency. The tend today is to go for minimum inventory. The level of inventory may be reduced by: (a) Better planning (b) Continuous monitoring of stock (on-line) (c) Reliable vendors (d) Use of Just-in-Time (JIT) concepts. (For details, refpr Chapter 21 on Just-in-Time). (iii) Reduced level of inventory is a direct saving in the oper ational cost of the plant. Less inventory also occupies less storage space and less records of stock i,n the store. Lesser inventory is desirable as this is an opportunity cost, which may be reduced by better planning and control. If inventory is less, there would be less chances of theft and loss in store.

244

INDUSTRIAL ENGINEERING AND MANAGEMENT

19.2 FUNCTION OF INVENTORY

Despite being blocked capital, certain level of inventory is desirable in most of the situations. This is for the following reasons: 1. Inventory is required to meet the anticipated demand. Customer generally does purchasing without any pre-information to the seller or producer. Many times, he is undecided about the model, make or quantity of the purchase. He would like to see the performance of all the available models. After judging his need and expenditure, he would select one piece. It is almost impossible to know how many pieces of a product would be needed each day. Therefore, inventory serves as a buffer to the anticipated demand. 2. Inventory guards against stock-out situations. There could be many exogeneous factors due to which the arrival of raw material may be delayed. Inventory works as the safety stock for such situations. 3. Inventory ensures smooth flow of production process. Satisfaction of customer is dependent on the timely availability of finished goods and spare-parts. Inventory plays an important role in it. 4. Inventory management is a high priority area in industry or service sector. This is due to conflicting role of inventory (Figure 19.1). For example, the Falesman wants high level of inventory to keep the promises and quick delivery. On the other hani, warehousing people of the same industry will prefer lower finished goods inventory so that l's storage space is needed.

Flow of Inventor), Customer Plant

Suppler

Purchasing Deptt. wants more raw material to, gain from discount on bulk purchase. 'Finance Deptt. wants less raw material to deploy less investment.

Warehouse iLroduction Deptt. wants ;large inventory for large production run and few set-ups.

Salesman wants high inventory to keep promises and quick delivery.

Control Deptt. wants less WIP for less breakage and less material handling.

Warehousing demands for low inventory to save storage space.

lnprocess tventory (WIP)

Raw Material

Figure 19.1

Finished Goods

Conflic g goals in Inventory Management

19.3 INVENTORY COSTS

In an inventory models various cost elen nts are considered. Generally, these costs are dependent upon the timing (i.e., when) and quantity ( ., how much) to order. The costs relevant to the inventory models are: 19.3.1 Unit Cost of Inventory

Unit cost of inventory is the price, whichls paid to the supplier for procuring one unit of the inventory. For parts manufactured in house, cost o f inventory is the direct manufacturing cost. The unit cost of inventory may be independent of quant,iy of inventory produced. In this case, unit cost of inventory

INVENTORY

CONTROL

245

is irrelevant for the inventory models. This is because .the decision regarding how much and when to order is independent of the unit cost of inventory. In some situations, the unit cost of inventory is dependent upon the quantity of inventory. For example, on a bulk purchase, some quantity discount is offered. Quantity discount means that if inventory is purchased in bulk, it is available at a price lower than the normal unit price. In such cases, the cost of inventory affects the decisions regarding when and how much to order. Therefore, in quantity discount model, cost of inventory is considered in the inventory models. 19.3.2 Ordering Cost

This is the cost associated with the placement of an order for the acquisition of inventories. The expenses, incurred in the purchase department, are its main constituents. Salary of purchase department, postages bills, telephone, stationary and follow-up measure by the purchase department are clubbed together to determine ordering cost. If in case, a company is producing its own inventory rather than taking it from an outside supplier, then the cost of set-up for making one batch of product is termed as set-up cost. Set-up cost is used when inventory is made within the organisation. Similarly, in case of buy situation, we use ordering cost. 19.3.3 Holding Cost or Carrying Cost

Holding costs are incurred due to maintaining an inventory level in the organisation. It is due to interest on the held-up capital in inventory, insurance cost, rent, salaries of storage staff, obsolescence, deterioration and pilferage/theft of material, depreciation of material handling equipment, etc. Generally, carrying cost is expressed as a percentage of the inventory value. 19.3.4 Shortages Cost or Stock-out Cost

When there is a stock-out situation, the customer demand is not satisfied. In case of raw material/WIP shortages, the production gets disrupted. This causes loss due to emergency purchase. Unsatisfied customer results in loss of goodwill and lost-sale. The lost-sale may be due to two reasons: (i) the customer may postpone or drop the idea to purchase, and (ii) the customer may go to another producer of similar product/services. 19.4 VARIABLES IN INVENTORY MODEL

In the sections to follow, we will discuss some of the commonly used inventory models. For these models, following notations are used: Q= Quantity ordered each time Q* = Optimum quantity of inventory ordered for minimum total cost D= Annual demand of parts (in unit) C = Cost of inventory per unit item Cc = Carrying cost per unit of individual item, expressed as a percentage of unit cost Co = Ordering, set-up or procurement cost per order R= Reorder point Tc = Total annual costs TL = Lead time Cs = Cost of shortages due to non-availability of inventory.

246

INDUSTRIAL ENGINEERING AND MANAGEMENT

19.5 DETERMINISTIC INVENTORY MODELS 19.5.1 Model 1: Uniform Demand Rate, Infinite Production Rate

This is one of the oldest developments in material management. Ford Harris developed it in 1915 and later R.H. Wilson in 1943, popularized it among researchers and practitioners. Assumption's of the Model 1 1. Demand for the inventory is deterministic, i.e., it is known with certainty. 2. Demand rate is constant and known beforehand. 3. All orders are placed in single lot. 4. No stock-out shortages or back orders are allowed. 5. No quantity discount is allowed. Thus, purchase cost per unit is fixed. 6. Lead time is constant and it is independent of demand. 7. Inventory is controlled from one point of the system, i.e., in a stockroom or in a warehouse. Let us further assume that lead time is zero; which means that the inventory is delivered instantaneously after the order is placed. Total cost during the year is the sum of the inventory carrying cost during year and total ordering cost. Thus, TC = (Ordering Cost) (Number of Orders placed in a year) + (Carrying cost per unit) (Average inventory level during year) ...(i) Number of orders to be placed in a year Demand in a year Quantity ordered each time Q Average inventory carried during the year Q+0Q 2 = 2 This is because the inventory level is uniformly decreasing from Q to zero (Figure 19.2).

Inventory Ordered (Q)

Quantity

I (Q)

Average Inventory Level (Q/2)

Q/2

Figure 19.2 EOQ model with uniform demand

247

INVENTORY CONTROL

Hence, from Equation (i): ...(ii)

TC = Co (— D J+ C Cc — Q 2

What level of inventory should be ordered (i.e., Q*), so that total cost will be minimum? To answer this, Equation (ii) is differentiated with respect to Q and equated to zero. Second differential should be positive for cost minimization: d0 d (Tc) C c/Q _ 0 ...(iii) — C0 D 2 dQ = dQ dQ

or

For total cost minimization; 1 Cc Qz 2 =0 Cc DC0 = Q2 2

or

I 2DC0

or

Q=

Cc

\

2 2C D d2 dQ2 (TC) = C0 D( — , = (a positive quantity) Q' Q0' For total inventory cost minimization, we have defined Q as Q and we will call it as economic order quantity (EOQ). = I 2DCo Q*

Minimum Total Cost, (TC)* will be obtained by putting Q* as Q in Equation (ii). Thus,

Cc + Cc 2DC0

(TC) = C0 D

2DC0 2

I q. 2DC0

Co D2 Cc 2DC0 I Co Cc D \

2

Cc

\

4

Cc

1C0 Cc D = .\ 2

Cc D 2

= 2c0 cc. D.

19.5.2 Operating Policy of Inventory Control • Delivery is instantaneous. Therefore, reordering should be done just at the time inventory stock is zero). This policy has a presumption that lead time is zero. If in case, lead time is known and constant, the order should be placed exactly ahead of lead time so that the instantaneous supply of Q* arrives when the stock depletes to zero. 19.5.3 Sensitivity of EOQ Model It is important to note that the total cost curve is quite flat near the EOQ zone (Figure 19.3). Slight change in the value of Q is near the EOQ point (i.e., when Q Q ), the change in total cost is insignificant.

248

INDUSTRIAL ENGINEERING AND MANAGEMENT Total Cost (TC)

11,g) CoasrtrY(iC

Lowest Total Cost

Ordering Cost (Co)

Cost

Q* (EOQ)

0

Quantity (Q)—.-Figure 19.3 Economic Order Quantity

Mathematically, dividing Equation (ii) by Equation (iv):

D

D i [ 2C0 Q

Cc Q 2

C° co

,CQ . + _ + 'Co (TC)* \12C0 Cc D V 2C0 Co D 2 V 2C0 Co D V 2Co Q D (TC)

= _

1

1 12Co D +

2

Q .\

Cc

I Co Q ,\ 2C0 D

1 [Q* Q ] + Q Q*

2

If we increase or decrease the EOQ by twice, the increase in total cost is only 25% (Figure 19.4). Thus, total cost is not very sensitive in the vicinity of EOQ. The physical significance of this observation is quite important. If there is a slight error in deciding the EOQ, the total inventory cost is insignificantly affected.

2 1.5 1.25 1 [ TC (TC)*

0.5

1.0

1.5

(Q/Q*) Figure 19.4 Sensitivity of EOQ model

2.0

249

INVENTORY CONTROL

Now, let us summarize the concept of EOQ. Economic Order Quantity (EOQ) is that size of order which is able to minimize the total cost of carrying inventory and cost of ordering for a given period under the assumption of known and certain demand.

19.6 OTHER OBSERVATIONS OF BASIC EOQ MODEL 19.6.1 High Cost Item Inventory I 2DC0

As

Q* =

or Average Inventory,

Cc

DC6 Q* = 1 I 2DC0 2 2 \ Cc 2Cc

or Average Inventory is proportional to

1

Cc=

Therefore, for high cost items (i.e., high value of Cc), the average inventory level should be low.

19.6.2 Optimum Ordering Interval (e) EOQ = Demand rate x Optimum ordering interval or Or

Qs = Dts

Qs _ 1 2C0 D D CCcc= DCc 2 x Setup Cost Demand x Carrying Cost

19.6.3 Optimum Number of Orders (N*) The optimum number of orders per year is obtained by dividing annual demand by economic order quantity. or

N* = Ds .

1 Cc _ . 1DCc D. Q 2DC0 2C0 \

19.6.4 Optimum Number of Days Supply (d) The optimum number of days for which an order is to be made is sometimes required. Since annual 365 demand (D) is for 365 days, therefore for each optimal order, the supply is for ( — days. Therefore,

N*

d* = 365 ,\1

2C0 DC Cc

days.

19.6.5 Implication of Assumption that Demand is known with Certainty The EOQ model assumes that demand of inventory is known with certainty. Someone may argue that it is not a real life case as market fluctuation, inflation, etc., affect demand. How, EOQ level is affected by slight deviation in demand. This is again an issue of model sensitivity and uncertain demand. Let us examine their implications through an example.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 19.1 Let us assume that ordering cost per order is Rs. 10, carrying cost as a percentage of purchase price is 10%. Purchase price per unit is Rs. 20.

Solution: Thus, EOQ = and total cost, (TC*)

2C0 D f 2 xl0D . ,---‘/ 10D Cc = (0.1) (20)

D = V 2Cc. Co D = J2 x (0.1) (20) (10) D = 2 ../T-0—

and, Optimum number of orders (N*) iD DCc. ID x (0.1) (20) l10 = = 11 2C0 = I - 2 x 10 Let us examine the implication of different demand levels on EOQ, minimum total cost and optimal number of orders per year. We will use the equations derived for this example: Annual Demand, (D)

Total Cost, (TC*)

EOQ, (Q*)

100 316.2 1,000 3,162 10,000

1000 10,000 1,00,000 1,000,000 1,00,00,000

Number of Order (N*)

10 32 100 317 1,000

200 632.45 2,000 6.324.55 20,000

Therefore, as demand increases 10 times in each subsequent row, the EOQ increases by 3.162 times, which is VT). Similarly, total cost and number of order per year is proportional to square root of demand. We, therefore, conclude that unless the demand is highly uncertain, the EOQ model gives fairly satisfactory decision values. In other words, this model is quite robust near EOQ. This is one of the most important reasons due to which the basic deterministic EOQ model is so useful.

The annual demand for an item is 3200 parts. The unit cost is Rs. 6 and the inventory carrying charges are estimated as 25% per annum. If the cost of one procurement is Rs. 150, find: (i) Economic order quantity (ii) Time between two consecutive orders (iii) Number of orders per year (iv) The optimal cost. Solution: Given, D = 3200 units per year Cc = 25% of unit cost Carrying cost, Example 19.2

= 0.25 x 6 Co = Rs. 150

Ordering cost Hence, (i) EOQ

-

=

I 2DC

\

Cc

0 =.\

I 2 x 150 x 3200 6 x 0.25

= 800 units.

(ii) Time between two consecutive orders =

EOQ

D

Q* 800 800 x 12 — — 3200 years = 3200 months = 3 months D

251

INVENTORY CONTROL

(iii) Number of orders per year (iv) Optimum cost

D

3200

Q*

800

=4.

= (Annual Demand) (Price of unit item) + V2DC0 Cc = 6x3200+42x3200x150x6x0.25 = Rs. 20,400.

1%7 MODEL 2: GRADUAL REPLACEMENT MODEL Sometimes, instantaneous supply of delivery may not be possible. Supplier continuously replenish items at a rate, which is more than the consumption rate. The inventory level never reaches the level to which it has been ordered. This is because for the time, inventory is supplied, the consumption also continues (Figure 19.5). (Q) = Inventory Ordered p)

Q( 1 -T

Maximum inventory

= level reached in the

/ system

P>C Onhand Inventory

eot,

Average Inventory _

2

cl

T Time Figure 19.5 EOQ model with uniform demand and uniform production

Let

P = Production rate in unit per day C = Consumption rate in unit per day D = Demand rate in unit per year Q = Size of lot ordered (or produced) Tp = Procurement time To = Depletion time. All the assumptions of Model 1 are sa:ne.except that the supply is instantaneous. In the present model, the supply is gradual for period Tp. During the period Tp, the rate at which inventory builds up is (P - C) unit per unit time. After time TP, inventory depletes at rate C (Figure 19.6). TP - — p Maximum on-hand inventory = Tp (P - C)

•••(i)

252

INDUSTRIAL ENGINEERING AND MANAGEMENT

Supply Period

Q

Supply or Production

P

P

Inventory onhand

TD

Time

Tp

Q Consumption Period

P>C

Q(1Average Inventory

—1—— P C

= 2 Q(

Inventory onhand Time

Figure 19.6 In the upper portion, inventory is building-up at rate P and in the lower portion of this figure, Inventory building-up with consumption and production both

=--- (P — C)

Q

1 — —C ) P C` 1——

T D =Q

...(iii)

P C

I

Q Q Q Tp + TD =Q + — — = , PCP C

Average Inventory level

C 2

P

253

INVENTORY CONTROL

Thus, in the same way as used in Model I, (TC) = Total ordering cost + Total carrying cost D Q = — Co + — (1- — c )cc. Q 2 P Differentiating (TC) with respect Q and equating it to zero, we get d (TC) dQ

=

D Q2 Cn 2DC0

Qt

or

1 C —p JC, = 0 2 (1 — EOQ formula.

C — ) cc

19.7.1 Other Characteristics of the Model

1. Optimal number of production run per year: (1— — C )Q D P 2C0

N* = D

Q

2. Length of each lot size production run: T

. . Q*

.

i

T 2DCo

\t CciP (P — C) 3. Total minimum inventory cost: . P

•

P

Q _C (TC)* =1-)— Q. Lo 1- 2 1 - Co p

pc0 •

2DC0

P + 1r

.-C )

Cc 0

, p) c \i 2Dcor Cc

P

—C)

= , 2DCo Cc (1— C j• \1 Example 19.3 An item has annual consumption of 10600 units per year The ordering cost is Rs. 30 per order and unit cost of the items is Rs. 2. The inventory holding cost is estimated as 20% of_average value of the inventory. The inventory consumption rate is 20 units per day while the arrival of items is gradual, at a rate of 25 units' per day. Find the economic order quantity. Solution: This problem pertains to gradual replacement model (model 2). For this, EOQ =

2DC0

\(1where,

ce

D= 10,600 units Co = Rs. 30

INDUSTRIAL ENGINEERING AND MANAGEMENT

254

C = 20% of Rs. 2 = 0.2 x 2 = 0.4 P = 25 units per day C = 20 units per day Hence,

EOQ =

I 2 x 10, 600 x 30 \ (1 — 20/25) x 0.4

= 2,682 units. Example 19.4 A company produces 4800 parts per day and sells them at approximately half of that rate. The set-up cost is Rs. 1,000 and carrying cost is Rs. 5 per unit. The annual demand is 4,80,000 units. Find: (a) Optimal lot size. (b) Number of production run that should be scheduled ,per year (c) Length of each production run. Solution: Given, D = 4,80,000 units; C = Rs. 5 per unit Co = Rs. 1,000 units P = 4,800 units per day C = 0.5 x 4,800 = 2,400 units per day (a) Optimal lot size, I 2 x 4, 80, 000 x 1, 000 x 4, 800 Q" =

5 (4,800 — 2,400)

\

= 19,596 units

(b) Optimal production runs per year D

48, 000

Q — 19,596

= 26 runs per year (approximate)

(c) Length or each production run, tp Q* P

19, 596 4, 800

— 3 days (approximate).

19.8 MODEL 3 Inventory control model for deterministic demand, lead time zero, reordering allowed and shortages allowed: In this model, following assumptions are made: (i) Demand is deterministic and known (ii) Shortages are allowed (iii) Production rate is infinite (iv) Lead time is zero (v) Reordering is allowed. Let Q = Total order size S = Inventory remaining after backlog is satisfied Co = Cost of ordering C = Annual cost, of carrying one unit of inventory CS = Penalty for the shortage of one unit per year

255

INVENTORY CONTROL

ti = Stock replenishment time for zero inventory t2 = Backlog time D = Demand rate. In the Figure 19.7, the dotted area (ADBC) represents 'the failure to meet the demand and the shady area (AAOB) shows the inventory.

Units of inventory and shortage

t Shortage

Time

t (7)

Figure 19.7 EOQ model with shortages

Number of cycle per year =

D

In time t1, the carrying cost for one order cycle and average inventory of — for the cycle is: 2 2 =[In

time t2, the shortage cost for the average shortage of

2—S 2

[2—S 1

and for one cycle is: ...(iii)

2 t2 Cs Hence, total cost for one cycle: Q —S = [z

ce

L

2

i2

1 , cs co

J

and, total cost per year: s TC =[— ti Ce + Q 5. t2 Cs +Co — D Q 2 2

...(iv)

256

INDUSTRIAL ENGINEERING AND MANAGEMENT

D

as -- is the number of cycle per year; from AilOB and ACBD (which are similar):

+ t2

tl + t2

Q-S S+(Q-S) Q

S

s

of

t1 = — Q (ti + t,)

and

t2

=

QS

...(v)

(ti +t2 )

Now, substituting the values of ti and t, from Equations (v) and (vi) into Equation (iv).we get,

TC

2 Q

(ti + t2 ))Ce +(Q

(Q - S)2 =[s2tC+ , 2Q

2Q

2

S) (Q S) (ti + t2)

D + Cni— Q

1

o— +C D Q

where, t = t i + t2 (say). Now, since we are considering for one year: 131 is the frequency per year t = Q as — — D Q

s2 Q (Q - S) 2 Q +co l TC =[- —D + 2Q D Q 2Q (Q - S)2 Q D S2 Q D Cs +Co + TC = y-1 2Q D Q Q c (Q — s)2 D Cs + Cs + TC = 2Q

hence,

s'

_

...(vii)

0

Now, differentiating Equation (vii) w.r.t. 'S' and equating it to zero (for minimization of total cost) we get:

a (TC) 2S C + 2 (Q - S) ( 1) Cs + 0 = 0 = r

as

S

— Cc

Q

2Q -

S

or

Cs = 0 Q Q SC, - QCs + SCs = 0

or

S(C + Cs ) - QCs = 0

or

S =Q

or

2Q

CS

...(viii)

+ Cs Now, differentiating Equation (vii) w.r.t. `Q' and equating it to zero (TC) aQ

S2 2Q2

c,+

1 [ Q x 2 (Q - S)- (S - S)2 2

Q2

l

c

Co D Q2

=°

257

INVENTORY CONTROL

or or

-S2 c. + [2Q (Q - S) - (Q - S)2 1 Cs - 2C0 D = 0 2Q2 5 - 2QSC5 - Q2 Cs + 2QSC5 - S2 Cs - 2C0 D = 0

-S2

or

-S2 (c. + Cs ) + Q2

= 2C0 D

Substituting from Equation (viii) C5

(Cc +

C5 )2 Cs2

Q2

or

Co + Cs Q2

or

[

+ Q2 Cs = 2C0 D

Cs +CeCs+ Cs2 ] = 2Co D

Ce + Cs

or

`

Co

cs 1

Q, [ Ce + Cs

or

= 2C0 D

Q2 = 2Co D + C5 Ce Cs

or

Q=

+C 1 2C 0 D ICe s Cs ‘ C. \

Now, when; shortage is not allowed, i.e., lim Cs

C +C Cs

= lim c4.-)c.

Cs

+

= ic e +1

00

= 1 Hence, under the condition that shortage is not allowed: .12Co D Q— This is also called as Wilson's formula for Economic order quantity (as derived in Model 1). 19.8.1 Other Characteristics of this Model 1. Maximum Inventory Level(s): Optimum value of S = S* 2DCo =

Ce

CoC1-3 Cs )

2. Time between receipt of order, Iihich also gives 'when to order: Q*

12C0 (Cs + Ce )

D DC, Cs ) \

INDUSTRIAL ENGINEERING AND MANAGEMENT

258 3. Optimal total inventory cost: (TC* ) = 112DC0 C

Cs Cs + C.

4. Reorder Level, (R) = Q* — S

=Q

CS (1 • C C)

Example 19.5 The demand of bearing, produced by a company, is uniform at 25 units per day. It is estimated that each time a production is set, the company incurs Rs. 60 as fixed cost. Production cost is Rs. 4 and carrying cost is Re. I per unit per day. If the shortage cost is Rs. 6 per bearing per day, find the frequency of production run and the optimal production size. Solution: Given: Daily requirement D = 25 bearings Carrying cost

(c) = Re. 1 per bearing per day

Shortage cost

(Cs) = Rs. 6 per bearing per day

Production cost

= Rs. 4 per bearing

Set-up cost

= Rs. 60 per set-up

(a)

2DCo

EOQ =

C S

J

C

or

Q* =

12 x 25x 60 ( 6 +1) 1

1

6

- 60 units (approximate)

(b) Optimal time during successive production runs = = 60/25 = 2.4 days. 19.9 MODEL 4: DETERMINISTIC EOQ MODEL WITH QUANTITY DISCOUNT

In many situations, suppliers give discount on bulk purchase. In such cases, the unit cost of inventory is not constant as it is dependent on number of items procured. By price discount, we mean that the suppliers provide inventory at price lower than the per unit price on single item purchase. Price discounting may be an attractive strategy for both supplier and purchaser. For supplier, the price discount encourages fast movement (or turnover) of inventory to next distribution channel. This, in turn, lowers the carrying cost of supplier. Availing price discount on bulk purchase may be an attractive strategy for buyer, as it offers lower unit price. However, the carrying cost increases with bulk purchase. Therefce, a prudent strategy for buyer should be decided after proper evaluation regarding trade-off between higher carrying cost and less unit price. 19.9.1 Case 1: Inventory Model with Single Discount

Let us assume that the supplier offers C1 unit price upto b quantity of purchase. Any quantity higher than b is offered at unit cost C2, where C2
7rin Table 25.2. Table 25.2 Technical Consideration Area Skill, competence and training of work-study practitioners

Technical limitation of process

Purpose To handle the present assignment

Example The assembly line is running poorly due to bad line-balancing. The workstudy experts must have the expertise in individual work-element and line balancing at the bottleneck station.

1. Avoid landing at unworkable alternates.

The machine tool is not cutting at optimal condition of speed. There is a

2. No need to invent a new process/machine

need to devise new tools, but toolmaterial is not available in market.

3. Establishing the nonavailability of appropriate technical expertise

Hence, expert advice is needed, other wise abandon this item from study.

376

INDUSTRIAL ENGINEERING AND MANAGEMENT

25.5.3 Human Reactions

A lot of emphasis is needed in the selection step on understanding the human reactions to the task undertaken. Work-study can only be implemented with active cooperation with workers and supervisors. For this, some understanding of human reactions to work-study is needed. One need is to handle mental and emotional blocks in the mind of worker. Proper scheme to handle resistance-to-change is needed. For this, we need to do the following: (i) Consultation, meeting with workers and Union (ii) Defining objectives, scope and needs (iii) Proper written and oral communication with workers (iv) Dispelling fears related to cut in- wages, firing of workers, more efforts in work, higher target, etc. 25.6 STEP 2: RECORDING METHODS AND FACTS

Once the work is selected, it needs to be studied. For this, the most important thing is to accurately record all relevant facts. Following types of records are commonly used: I. Flow Type Diagram (a) Flow diagram (b) String diagram (c) Travel chart. .2. Multiple activity chart. 3. Process chart (a) Outline process chart (b) Flow process chart for worker (c) Flow process chart for material (d) Flow process chart for worker and material (e) Flow process chart for equipment ( f) Two-handed (or operator) process chart. 4. SIMO (Simultaneous motion chart). 5. Memomotion. 6. Cyclegraphic (a) Cyclegraph (b) Chrono-cyclegraph. 25.6.1 Flow Type Diagrams

These diagrams are the pictorial representation of flow of material in the factory while different sequence of operation, transportion, inspection, delay and storage takes place. There are three types of flow diagrams that are common in use: (i) Flow diagram: It shows the location and sequence of all the activities, which are carried by the workers. It also shows the route, followed by material, components or sub-assemblies (Figure 25.3). Definitions (as per BS 3138): It is a diagram of model substantially to scale which shows the location of specific activities carried out and the routes followed by workers, materials or equipment in their execution.

377

WORK STUDY

Amount of details: It shows location of each department and sequence of principal activities. Applications: Mainly used in studying plant layout.

---t l7

Entry Lathe

Store

Drilling

M/CS

O

Q I Milling M/C Shaper

Inspection Packaging 04*— (6)

Outgoing store

Rework Delay Finishing

024 0

/ 2V Store

Inspection

Figure 25.3 Flow Diagram

25.6.2 String Diagram It is a scale diagram on which colour threads are wrapped around pins or pegs, which are used to indicate the paths taken by either worker or material or equipment when processing is done on material from start to finish (Figure 25.4). Definition (as per BS 3138): A scale plan or model on which a thread is used to trace and measure the paths of workers, materials or equipment during a specified sequence of events. Amount of Details: Only the nature of movement within the work area. Application: 1. For studying layout of the plant. 2. Indicates backtracking in material movement, congestion, bottleneck and over/Under utilization of shop-floor. 3. The pattern of material movement, as indicated by the strings, is helpful in the modification in plant and machinery.

Figure 25.4 String Diagram

378

INDUSTRIAL ENGINEERING AND MANAGEMENT

25.6.3 Travel Chart (also Called as Cross Chart) (Figure 25.5) a more detailed type of movement chart in which the recorded details are like: (i) pattern of movement, (ii) extent of movement or volume. Definition (as per BS 3138): It is a tabular record for presenting quantitative data about the movement of workers, materials or equipment between any number of places over any given period of time. Amount of Details: Volumetric data during travel between work-area. Application: For studying layout problem in deciding how to minimize total flow (of material) °in the plant or work-place. It is

To From

Raw Material Store

Raw Material Store

Dept # 1 ,

8000

Dept # 1

Dept # 2

500

Insp.& QC Finished Goods Store

1000

Insp. & QC

Finished Good Store

1000

2000

5000

4000

2000

1000

3000

3000

Dept # 2

Dept # 3

Dept # 3

500

4000

Unit: kg per day

5000

\

' Figure 25.5 Travel Chart

25.6.4 Multiple Activity Chart (Figure 25.6) Synonyms: activity analysis; worker and machine charts Definition (as per BS 3138): It is a chart, on which the activities of more than one subject (like • worker, machine or equipment) are each recorded on a common time-scale to show their relationship. Amount of Details: Limited to plot against a common scale.(of time) for few types of activities like operation, idleness, delay, etc. How to construct: (i) Start with the preparation of flow process chart for elements like machine or operative involved in the process. (ii) Group activities to be recorded into convenient elements for time-study. (iii) Take sufficient observations of time-study for determining accurate elemental time.

WORK STUDY

379

(iv) Draw in the form of bar-chart for each activity of the leading operative or machine. Take a common scale such as time for each activity. • (v) Use different colour codes for different sections within each 1:). r. (vi) Calculate the amount of effective work per cycle in percentage of total time. Application: (i) For preliminary investiv 'on to study the extent of accuracy of particular activities. (ii) Helps in balancing activities. (iii) In a situation of one operative running one or several operatives. (iv) In a situation of several operatives running one or several machines. (v) A team of operatives or a bank of machines. (vi) Helps in exploring the possibilities of elimination, change in work sequence, combination and simplification of work elements. Operation Hole punching

Machine

Part name RT 16

Part no.

Date

Method

19/9/99

Authorized by

Punch # 18

RT 16 Old

WM

0

New ri

Charterd by

DO Symbol Activity

Operator

Time

Pick up sheet and position in machine

3.00

•

Start machine

0.50

' Idle

Idle

0.85

Punch plate

0.85

Unload machine

0.65

Idle

0.65

Machine

Time

3.5

I.

Independent work

CI

Waiting Combined work

(Repeat cycle)

(Repeat cycle)

Summary (time n M nutes) Operator

Machine

Idle time

0.85

4.15

Operation time

4.15

0.85

Cycle time

5.00

5.00

4.15/5 = 83%

0.85/5 = 17%.

Utilization (%)

Figure 25.6

Multiple Activity Chart (Man-machine chart) for hole punching operation

25.6.5 Outline Process Chart

(Figure 25.7)

In records principle operations and inspectitin of the processes. Definition (as per BS 3138): A process chart giving an overall picture by recording, in sequence only ,the main operations and inspections. / Amount of Details: It shows only two principal elements: (i) Operation, and (ii) Inspection. Application: • Used in the preliminary investigation. • When operation activities are subject to frequent changes or a more detailed analysis.

380

INDUSTRIAL ENGINEERING AND MANAGEMENT

Jack up scooter Activity

: Repair of punctured scooter tyre

Remove hub-cap of wheel

Chart begins : Scooter ready for jacking up Chart ends

: Tube ready after repair to mount on tyre

Method

: Present

Charted by

: Mr. Author

Loosen nut and place properly Remove wheel Remove outer cover

Remove the tube

Locate the puncture in tube

Mark the puncture Repair the puncture and remove nails, if any

Summary Activity

Method (Present)

Operations

0

Inspectionl=

8

Recheck

2

Figure 25.7 Outline Process Chart for Repairing a Punctured Scooter Some Conventions in Outline Process Chart: A few conventions in outlined process chart are shown in Figure 25.8-25.10. Entry of material —)

Operation I Operation 2

Numbering system

Repeat 3x 4-- The (n — 1) rule

Operation 6

Inspection 5

Combined symbol

Combined inspection and operation

Figure 25.8 Activity 2 and inspection 1 occur four times, but the number used in repeat line is always one less than the total as the first occasion is already plotted before the repeat break (Hence the (n-1) rule)

381

WORK STUDY

Figure 25.9

Symbols showing duplicate operation 2

Figure 25.10 Symbol showing dismantling and re-assembly

25.7 FLOW PROCESS CHART

It helps in setting out the sequence of the flow of a product or a procedure by recording all events under review using appropriate process chart symbols. It covers symbols for operation, inspection, storage, delay and transportation. Types of Flow Process Charts (i) Flow process chart for workers: Presents the process in terms of activities of the person. Definition (as per BS 3138): A process chart is setting out the sequence of flow of a product or a procedure by recording all events under review using appropriate process chart-symbols. This chart gives a record of all events associated with the worker. Amount of Details: Operation, inspection, movement and delay associated with the workers Application: • Generally used as a principal means of recording work methods. • Helps to understand the overall nature of the system being studied. • Helps to eliminate flow patterns that are not suitable. • Helps to allow storage space adequate to support the production rate. • Helps to eliminate costly errors by analyzing the material flow. • Helps to allow adequate space to avoid safety problems. • Helps to locate and size aisles appropriate for product handled. • Helps to avoid backtracking of the material. • Helps to identify the possibility of combining operations by grouping different machines or operations to avoid handling, storage, and delays. • Helps to decide whether product flow or process flow layout pf factory will be useful. 25.8 PROCESS CHART SYMBOL

Process charts use five common symbols for recording the nature of events. These were developed by ASME (American Society of Mechanical Engineers) in 1947. 1. Operation 0: This indicates steps in a process, methods or procedure. It represents the modification or change during an operation. Through each operation, the material, component, or service or assembly move towards completion. Operation is thus a value added activity. Some examples are shown in Figure 25.11.

382

INDUSTRIAL ENGINEERING AND MANAGEMENT

Operation

: A large circle indicates an operation such as

---fzi."-. ft" ---, .------II

' li Drive nail

Type letter

Mix

Drill hole

•

Transportation

ri An arrow indicates a Move material by truck transportation such as Storage

Move material by conveyor

„,,. 0 IIII e 0 miliallilm., I .•

A triangle indicates a storage, such as

iiiiiiiiil .- . ‘ ilLg m

Finished stock stacked on pallets

11 ,

0 IrP

il IIIIW. • •

Inspection

.

_.

1

1-•

CProtective tiling of documents

-'''''',

Delay

A large capital D indicates a delay, such as

.p ......,.. -i. -,-

1

Material in Factory store

Move material by carrying (messenger)

111 N.

Wait for elevator

Material in truck or on floor at bench waiting to be processed

nrgh

*44 =40

Examine material for quality or quantity

Figure 25.11

N\--

Bulk storage of raw materials

151filliiiMI 1.011•••

rTh1.'"zm - -"' Papers waiting to be filed

Finished product waiting for packaging .AUW:00 • ••

A ------

Read steam gage on boiler

-

/

-40100-

‘1,

( A square indicates an inspection such as

Move material by hoist or elevator

'-

Examine printed from for information

Process chart symbols and some examples

2. Inspection 0 : This indicates inspection, quality audit check for quality or examining an event. Inspection is a non-value added activity, as it is only a verification process. 3. Transportation c=>: This indicates movement of material, workers, equipment or place of work. This is also a non-value added activity. 4. Delay D: This indicates delay or temporary storage in-between a sequence of operations. This is a non-value added activity like waiting. 5. Storage v : This indicates planned and controlled storage of material. Storage is different from temporary storage (in delay category) in the sense that here proper record of receipt and • sue is maintained or atleast some authorization is maintained for storage. 6. Combined Symbols 0 : This indicates that two operations (such as inspection and operation) are performed simultaneously. In different forms of process charts, the relevance and use of these symbols are given inFigure 25.12. No entry against any chart indicates that this symbol is not commonly used in that chart.

383

WORK STUDY

Process chart Symbol

0

Outline

Man type

Material type

Operation

Operation

Operation

Operation

Produces, Accomplishes, Furthers the process

Transportation

Transportation

Transportation

Travels

Inspection

Inspection

Inspection

c> 173 V

D

Predominant Result

Two handed (or operator)

Flow process chart

Storage

Hold

Holds, Keeps, Retains

Delay

Delay

Interferes or Delays

— Delay

.

Figure 25.12

Flow Process Chart Job: Requisition of Petty cash

Analyst ABC

Verifies quantities and/Or quality

—

Page I to 2

Flow Process and Process Chart Symbols

Operation Movement Inspection Delay Storage Distance

Details of method Requisition made out by department head Put in "pick-up" flag

0

To accounting department

0

Account and signature verified

0

Amount approved by treasurer

g>

0

i•

• 0

•

D

V V

D

7

D

V

c*.

0

D

V

Amount counted by cashier

•

=>

0

D

V

Amount recorded by bookkeeper

•

g>

0

D

V

=:::.

0

D

7

0

D

V

D

V

V

Petty cash sealed in envelope Petty cash carried to department

0

Petty cash checked againse requisition

0

g>

0

D

0

g>

0

D

0

f.>

0

D

V

Receipt signed Petty cash stored in a box Summary

Distance

g>

Operations

6

0

b.

0

D

V

Inspections

2

0

g>

o

D

V

0

g>

o

D

V

Transport

2

Delays

I

Total

I1

15 m

Figure 25.13 Flow Process Chart

lo m

5m

•

384

INDUSTRIAL ENGINEERING AND MANAGEMENT

25.9 STEP 3 OF METHOD STUDY: EXAMINE In this stage, the focus is on the critical examination of all the recordings done in the previous step. Various probing questions are addressed to the existing method. These questions start with 5 Ws and 1 H: Why?, What?, Where?, When?, Who?, and How (Table 25.3)? Table 25.3 Examine Stage Items Examined (few samples) challenge "AS-IS" methods

• Why is the process needed? • What purpose does the process serve? • Where is the process undertaken and why? • When is the process undertaken and why? • Who are involved in the process and why? • How is the process undertaken and why?

Appredch to Answer the Questions

• Examine questions as these exist now. Do notget guided by how they appear, how they should be, etc. • Biasness and preconceived notions should be carefully dispelled. • Involve all (including workers) in the examination. • Do not go for hasty conclusions, • Challenge all "AS-IS" approaches. Examine records in details. Do not accept answer, unless convinced. • Gut-feeling intuition and hunches must be documented and discussed. • Examine all alternative-new methods. • Focus on non-value added activity. Reduce or remove delay storage and transport.

25.10 STEP 4 OF METHOD STUDY: DEVELOP AND DEFINE After critical examination of records is complete, it is necessary to transform the learnings into the development of new methods. Some approaches are: (a) Eliminate unnecessary activities. (b) Combine two or more activities. For example, if one uses a combination tool for two operations, say, facing and drilling, the total set-3.1p time will reduce. (c) Resequence activities so as to reduce time and effort. process to reduce number of operations or reduce effort or reduce throughput, etc. (d) Simplify process (e) Attack on constraints, which are preventing the method to Perform better.

25.11 STEPS 5 AND 6 METHOD STUDY: INSTALL AND MAINTAIN Installation of new process is a major step towards fulfilling the objective of the entire approach. This involves evolving a time-frame for installing the new (TO-BE) system. Training of the personnel, rearrangement of machine, arrangement of tools and reorientation of workplace are some efforts to install the new system. In general, four-phased strategy is needed: (i) Selling the proposal: Communication, approval and confidence of those, involved in, installation and use. (ii) Preparation for installation: Purchase of required machine and equipment, relay out of plant, time-table for installation, planning, arranging and rehearsing. (iii) Commencement of new method. (iv) Initial monitoring of installation activities: After the installation of the new system, new method is to be maintained. Periodic review is necessary for maintaining the new system.

385

WORK STUDY

25.12 MOTION ECONOMY Motion economy provides a set of well-structured guidelines for analyzing and designing (or improving) the jobs. It encompasses a wide set of guidelines for the scientific use of human body, tools and work place arrangement to increase the efficiency of the man-machine system. It also covers the aspects for reducing work-related fatigue. Table 25.4 presents the principle of motion economy. It is segmented into three broad areas: (i) Principles related to the use .of human body (ii) Principles related to the arrangement of the work-place (iii) Principles related to the design of tools and equipment. Table 25.4 Principles of motion economy: Use of the worker's body and. design of the workplace, tools and equipment

Use of the worker's body 1. Ensure to work with two hands rather than one, as it is easier and natural. 2. Ensure that the two hands should begin and complete their movements at the same time. 3. Ensure that the motion of the arms should be in opposite directions and should be made simultaneously and symmetrically. 4. Ensure that hands and arms naturally move smoothly in arcs, and this is preferable to a straight-line movement. 5. Ensure that head, arm and body movements should be confined to the lowest classification with which it is possible to perform the work satisfactorily, e.g., Gilbreth's classification of hand movements: (a) fingers (b) fingers and wrists (c) fingers, wrists and forearms (d) fingers, wrists, forearms and upper arms (e) fingers, wrists, forearms, upper arms and shoulders. 6. Ensure that work should be arranged to permit natural and habitual movements. 7. Ensure that movements should be continuous and smooth with no 'lharp changes in direction or speed. 8. Ensure that the two hands should not, except, during rest periods, be idle at the same time. 9. Ensure that, whenever possible, momentum should be employed to assist the work and, minimized if it must be overcome by the worker. 10. Ensure that ballistic movements are faster, easier and more accurate than controlled (fixation) movements. 11. Ensure that the need to fix and focus the eyes on an object should be minimized and, when this is necessary, the occasions should occur as close together as possible. Arrangement of the workplace 1. Ensure that there should be a definite and fixed position for all tools, equipment and materials. 2. Ensure that all tools, equipment and materials should be located as near as possible to the workplace. 3. Ensure that drop deliveries of materials (and even tools and equipment) should be , used whenever possible. 4. Ensure that tools, equipment and materials should be conveniently located in order to provide the best sequence of operations. 5. Ensure that illumination levels and brightness ratios between objects and surroundings should be arranged to avoid visual fatigue. 6. Ensure that the height of the workplace and the seating should enable comfortable sitting or standing during work. 7. Ensure that seating should permit a good posture and adequate "coverage" of the work area. (C6nId...)

INDUSTRIAL ENGINEERING AND MANAGEMENT

386

8. Ensure that the workplace should be clean and adequately ventilated and heated. 9. Ensure that noise and vibration, both local and general, should be minimized. Design of tools and equipment

I. The hands should be relieved of all work that can be done more advantageously by a jig, a fixture, or a foot-operated device. 2. Two or more tools should be combined wherever possible. 3. Tools and materials should be pre-positioned wherever possible. 4. Where each finger performs some specific movement, such as computer keyboard, the load should be distributed in accordance with the inherent capacities of the fingers. 5. Handles should be designed to permit the surface of the hand to come in contact with the handle as possible. This is particularly true when considerable force is exerted in using the handle, for light assembly work (like, screwdriver handle) should be so-shaped that it is smaller at the bottom than at the top. 6. Levers, crossbars, and hand wheels should be located in such positions that the operator can manipulate them with the minimum change in body position. 25.13 WORKING AREA

Use of motion economy rules calls for use of lowest possible (i.e., class 1 is lowest and class 5 is highest) classified movement of human body (Refer rules 4 and 5 in Table 25.4). This classification is as shown in Table 25.5. Table 25.5 Class

5.

Body Member(s) Moved

Pivot

I. 2. 3. 4.

Classification of Movements

Knuckle

Finger

Wrist Elbow

Hand and fingers Forearm, hand and fingers Upper arm, forearm, hand and fingers Torso, upper arm, forearm, hand and fingers.

Shoulder Trunk

Class 2 includes class 1 item, class 3 includes class 1 and 2 and so on. Figure 25.14 shows different working area for these classes. Material, tool and workplace should be located in the working area. Preference should be given to lower class body elements. Field of vision is important for seeing objects, control panel, etc. For inspection, the field of vision is an important consideration in locating items. Common working area for both hands

Edge of bench

71/4"

21/r j

13"

Figure 25.14 (a) Normal working

area

using finger, wrist and elbow

387

WORK STUDY

Average Physical data for man

Weight: 69 kg Height: 5 ft 8"

Length of forearm: 18" Length of hand: 7"

Length of Arm: 30" Common area for both hands _....NIMIMIIMINmft, . -411111MIIIMWW1111r101 .IIIIIIMIINIP"

ii 1

"=.7 v ilorl'

MEMEL AMIIIIIIIII

Illy \ , Ir V;

Left hand maximum working area

Normal , working area

A. 4

vionsime

• -viiimommommr... "evommimmiw vi. V Mb. vilmum v IIIIMMIE Mika. ,q. •

A ..

• A.

WM= AMINE \ 1 111. 11.

9.111, _

..ky

W♦ N• I. t

, A. • 'MN/ wilMO • •

Normal working area

223/4"

Right hand maximum working area

41, , Figure 25.14 (b) Maximum working area using shoulder movement

Motion-study involves two kinds of analysis for the improvement in method. On the basis of data recorded on motion picture film or video, the approaches are: 1. Micromotion study (or detailed breakdown of motion). 2. Memomotion analysis (or breakdown of motion at the level of family of micromotions). The detailed analysis of the recorded motion is done through seventeen categories of activities called as therbligs. Therblig is the name given to the basic motion activities. Therblig is the reverse order spelling (except for the letter "th") of Gilberth, who was a pioneering researcher in the area of time and motion-study. Table 25.6 presents definition of therbligs. Table 25.7 presents symbol, color and explanation of these therbligs. These are the most common basic human activities at work-place. For each therblig-specific colour is also specified. Table 25.6 Therblig Definitions 1. Grasp is taking hold of an object, closing the fingers around it preparatory to picking it up, holding it, or manipulating it. Grasp begins when the hand or fingers first make contact with the object and ends when the hand has obtained control of it. 2. Position is turning or locating an object in such a way that it will be properly oriented to fit into the location for which it is intended. It is possible to position an object during the motion transport loaded. Position begins when the hand begins to turn or locate the object and ends when the object has been placed in the desired position or location. 3. Preposition is locating an object in a predetermined place or locating it in the correct position for some subsequent motion. Preposition is the same as position except that the object is located in the approximate position that will be needed later. Usually a holder, bucket, or special container of some kind is used for holding the object in a way that permits it to be grasped easily in the position in which it will be used. Preposition is the abbreviated term used for "preposition for the next operation." (Conk!...)

388

INDUSTRIAL ENGINEERING AND MANAGEMENT

4. Use is manipulating a tool, device, or piece of apparatus for the purpose for which it was intended. Use may refer to an almost infinite number of particular cases. It represents the. motion for which the preceding motions have been more or less preparatory and for which the ones that follow are supplementary. Use begins when the hand starts to manipulate the tool or device and ends when the hand ceases the application. 5. Assemble is placing one object into or on another object with which it becomes an integral part. Assemble begins • as the hand starts to move the part into its place in the assembly and ends when the hand has completed the assembly. 6. Disassemble is separating one object from another object of which it is an integral part. Disassemble begins when the hand starts to remove one part from the assembly and ends when the hand has separated the part completely from the remainder of the assembly. 7. Release load is letting go 'of the object. Release load begins when the object starts to leave the hand and ends when the object has been completely separated from the hand or fingers. 8. Transport empty is moving the empty hand in reaching for an object. It is assumed that the hand moves without resistance toward or away from the object. Transport empty begins when the hand begins to move without load or resistance and ends when the hand stops moving. 9. Transport loaded is moving an object from one place to another. The object may be carried in the hands or fingers, or it may be moved from one place to another by sliding, dragging, or pushing it along. Transport loaded also refers to moving the empty, hand against resistance. Transport loaded begins when the hand begins to move an object or encounter resistance and ends when the hand stops moving. 10. Select is the choice of one object from among several. In many cases it is difficult, if not impossible, to determine where the boundaries lie between search and select. For this reason, it is often the practice to combine them, referring to both as the one therblig, select. Using this broader definition select then refers to the hunting and locating of one object from among several. Select begins when the eyes or hands begin to hunt for the object and ends when the desired object has been located. 11. Select is that part of the cycle during which the eyes or the hands are hunting or groping for the object. Search begins when the eyes or hands begin to hunt for the object and ends when the object has been found. 12. Hold is the retention of an object after it has been grasped, no movement of the object taking place. Hold begins whefi the movement of the object stops and ends either the start of the next therblig. 13. Unavoidable delay is a delay beyond the control•of the operator. Unavoidable delay may result from either of the following causes: (1) a failure or interruption in the process; (2) a delay caused by an arrangement bf the operation that prevents one part of the body from working while other body members are busy. Unavoidable delay begins when the hand stops its activity and ends when activity is resumed. 14. Avoidable delay is any delay of the operator for which he is responsible and over which he has control. It refers to delays which the operator may avoid if he wishes. Avoidable delay begins when the prescribed sequence of motions is interrupted and ends when the standard work method is resumed. 15. Rest for overcoming fatigue is a fatigue or delay factor or allowance provided to permit the worker to recover from the fatigue incurred by his work. Rest begins when the operator stops working and ends when the work is resumed. 16. Plan is a metal reaction which precedes the physical movement, that is, deciding how to proceed with the job. Plan begins at the point where the operator begins to work out the next step of the operation and ends when the procedure to be followed has been determined. 17. Inspect is examining an object to determine whether or not it complies with standard size, shape, colour, or other qualities previously determined. The inspection may employ sight, hearing, touch, odor, or taste. Inspect is predominantly a mental reaction and may occur simultaneously with other therbligs. Inspect begins when the eyes •or other parts of the body begin to examine the object and ends when the examination has been completed.

389

WORK STUDY Table 25.7 S.No. 1.

Therblig Grasp

Therblig Definitions and Symbols

Symbol

Colour Lake red

nG

Definition Begins when hand or body member touches an object for holding. Consists of gaining control of an object. Ends when control is gained.

2.

Position

Blue

/ P

Begins when hand or body member causes part to begin to line up or located or orient Consists of hand or body member causing part to line up, orient; or change position. Ends when body member has part lined up.

3.

Preposition

8

PP

Pale blue

Same as position, except used when line-up is previous to use of part or tool in another place.

4.

Use

U U

.

Purple

Begins when hand or body member actually begins to manipulate tool or control. Consists of applying tool or manipulating control. Ends when hand or body member ceases manipulating tool or control.

5.

Assemble

# A

Dark violet

Begins when the hand or body member causes parts to begin to go together.Consists- of actual assembly of parts or putting together. Ends when hand or body member has caused parts to go together.

6.

Disassemble

* DA

Light violet

Begins when body member causes integral parts to separate. Consists of taking objects apart. Ends when body member has caused complete separtion.

7.

Release load

iv— RL

Carmine red

Begins when body member begins to relax control of object. Consists of letting go of an object. Ends when body member has lost contact with object.

(Contd...)

390

INDUSTRIAL ENGINEERING AND MANAGEMENT

S.No.

Therblig

Symbol

Definition

Colour

Transport empty

......._., T E

Olive green

Begins when body member begins to move without load. Consists of reaching for something. Ends when body member touches part or stops moving.

9.

Transport loaded

-.....c,..- TL

Grass green

Begins when body member begins to move with an object. Consists of body member's changing location of an object. Ends when body member carrying object arrives at general destination or movement ceases.

10.

Search

Black

Begins when body member searches for part.

8. •

SH

Consists of attempting to find an object. Ends when body member has found location of object. 11.

Select

—> ST

Light gray

Begins when body member touches several objects. Consists of locating an individual object from a group. Ends when body member has located an individual object.

Gold ochre

Begins when movement of part of object, which body member has under control, ceases.

•

12.

ri

Hold

H

Consists of holding an object in a fixed position and location. Ends with any movement. 13.

Unavoidable

, UD

Yellow ochre

delay

Begins when hand or body member is idle. Consists of a delay for other body member or machine when delay is part of method. Ends when body member begins any work.

14.

Avoidable delay

/

0 AD

Lemon yellow

Begins when body member deviates from standard method. Consists of some movement or idleness. Ends when body member returns to standard position. (Contd..)

391

WORK STUDY

S.No.

Therblig

15.

Rest for

Symbol

R

Orange •

overcoming fatigue

Definition

Colour

Begins when body member is idle. Consists of idleness necessary to overcome fatigue from previous work. Ends when body member work again.

16.

Plan

PM

Brown

Begins when body members are idle while worker decides on course of action. Consists of determining a course of action. Ends when course of action is determined.

17.

Inspect

0 I

Burnt ochre

Begins when body member begins to feel or view an object. Consists of determining a quality of an object. Ends when body member has stopped to see an object.

REVIEW QUESTIONS 25.1 What is work-study? Discuss the different techniques of motion-study. 25.2 Discuss the nature and importance of motion study. 25.3 (a) Outline the basic procedure of methods study. (b) How is standard time for a job arrived at? 25.4 What are the steps involved in a complete work-study exercise? 25.5 What is Time Study? How is it related to Motion-Study? 25.6 Write notes on the following: (a) Method Engineering (b) Flow Process Chart (c) Multiple Activity Chart (d) Therbligs 25.7 What is motion study? How does it help in the simplification and standardisation of manual work? 25.8 Discuss the role of motion and time-study in increasing productivity. 25.9 Describe the different types of charts used in motion-study and explain their uses. 25.10 (a) What do you understand by therbligs? (b) What is a string diagram? Where is it used? (c) What factors should be kept in mind while selecting the job for methods-study?

392

INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES 1. Barnes, R.M., 1968, Motion and fine Study (6th ed.), John Wiley, New York. 2. Batty, J., 1979, Industrial Administration and Managenient, Mc-Donald & Evans, London. 3. Curie, R.M., 1984, Work Study, BIM, London. 4. Davis, L., 1971, "The Coming Crisis for Productive Management: Technological Organization," International Journal of Production Research, 1. 5. Davis, L., and Taylor J.C., eds., 1972, Design of jobs, Middlesex, Penguin, England. 6. Davis, L.E., Cherns A.B., et. al., 1975, The Quality of Working Life. Free Press, New York. 7. Dickman, R.A., 1971, Handbook for Supporting Staff, Job Analysis and Job Evaluation. Balti-more: Johns Hopkins Press. 8. Fine, S., and Wiley W.W., 1973, Functional Job Analysis Scales, Kalamazoo, Mich.: W.E. Upjohn Institute for Employment Research. 9. Fine, S., and Wiley W.W., 1971, An Introduction to Functional Job Analysis. Kalamazoo, Mich W.E. Upjohn Institute for Employment Research. 10. Ford, R.N., 1978, "Job Enrichment Lessons from AT&T," Harvard Business Review; 51, January, pp. 96106. 11. George, Claude S., 1985, Management for business and industry, Prentice Hall of India, New Delhi. 12. Hackman, J.R., 1975, "Is Job Enrichment Just a Fad?" Harvard Business Review, 53, No. 5, SeptemberOctober, pp. 129-38. 13. Hackman, J.R. and Lawler E.E., 1971, "Employee Reactions to job Characteristics,"Journal ofApplied Psychology, Monograph 55, pp. 259-86. 14. Haynes W. W. and Massie J.L., 1984, Management-Analyses, Concepts and Cases, Prentice Hall of India, New Delhi. 15. Herzberg, F., 1975, "Job Enrichment Admits Disparity between. Promise and Reality," Industry Week, 187, November 24, pp. 44-45. 16. I.L.O., 1979, Introduction to Work Study, International Labour Office, Geneva 17. Kilbridge, M., and Webster L., 1966, "An EconoMic Model for the Division of Labor Management Science, 12, No.6, February, pp. B255-69. 18. McCormick, E.J., 1970, Human Factors Engineering (3d ed.). McGraw-Hill; New York. 19. Niebel, B.W., 1976, Motion and Time Study (6th ed.). Homewood, Ill: Richard D. Irwin. 20. Reif, WE., and Luthans F., 1972, "Does Job Enrichment Really Pay Off?" California Management Review, 15, No. 1, Fall, pp. 30-37. 21. Scott, W.E., and Cummings L.L., 1973, Readings in Organizational Behavior and Human Performance (rev. ed.). Homewood, III: Richard D. Irwin, pp. 126-233. 22. Steers, R.M. and Mowday R.T., 1977 "The Motivational Properties of Tasks," Academy of Management Review, Volume 2, No. 4, October, pp. 645-58. 23. Tresko, J., 1975 "Myths and Realities of Job Enrichment," Industry Week, 187, November 24, pp. 39-43. 24. U.S. Department of Labor, 1972, Handbook for Analyzing Jobi. U.S. Government Printing Office, Washington, D.C. 25. Walker, G.R. and Guest R.H., 1952, The Man on the Assembly Line. Harvard University Press, Cambridge, Mass. 26. Yorks, L., 1974 "Determining Job Enrichment Feasibility," Personal, November-December, pp. 18-25.

26 WORK MEASUREMENT

26.1 INTRODUCTION Work measurement is used to determine the length of time a job should take for completion. This time is important for the following reasons: (i) It helps in manpower planning (ii) It helps in estimating labour cost (iii) It helps in scheduling activities (iv) It helps in budgeting (v) It helps in designing incentive scheme. Definition of Work-Measurement Work measurement is the application of techniques designed to establish the time for a qualified worker to carry out a specific job at a defined level of performance. —ILO (International Labor Organisation) 26.2 PURPOSE OF WORK MEASUREMENT . Work measurement is necessary for the following reasons: 1. To evaluate labour performance 2. For planning the need of workforce 3. For determining available capacity 4. For comparing work methods 5. For facilitating operation-scheduling 6. For determining price or cost of a product or output, involving human labour 7. For establishing wage incentive schemes 8. For determining standard time •for various operations.

394

INDUSTRIAL ENGINEERING AND MANAGEMENT

Standard time is a useful information for determining machine capacity, production targets, manpower planning, etc. 9. For determining idle or rest time of an operator. The idle time is a useful information for planning "one operator-multiple machine" type of manufacturing system. In JIT (Just-In-Time) and cellular manufacturing systems, the concept of "one-operatormultiple machine" is very useful, as it reduces waste due to excess manpower. It helps in easy planning of machine cells. 10. For generating necessary input information for decisions related to estimating, tendering, pricing, etc. 11. For generating information related to line-balancing in assembly-line. 26.3 ORGANISATIONAL SUITABILITY

Work measurement procedure should be undertaken in only those organisations, where there are some jobs, which are repetitive. ILO prescribes three criteria for measurable jobs (Figure 26.1): Work Characteristics

(In terms of numbers of units a worker performs)

(In ternis of accomplishing the job)

Volume

Justifiable for Spending in Work Measurement

Figure 26.1

Work Characteristics

Techniques of Work Measurement (Figure 26.2) In work measurement, the main techniques are: 1. Work sampling. 2. Stop watch study. 3. Predetermined Time Standards (PTS).

Repetitive Job

395

WORK MEASUREMENT

Work Measurement

Develop

Examine

Select

Measure quantity 01 work performed

Stop Watch

Work Sampling

To get standard time of operations with allowances

Predetermined time standard

Compile

To establish standard • data bank

To get standard time of operation

Standard Data

Figure 26.2 Domain of Work Measurement

26.4 STOP WATCH TIME STUDY In this, the actual times required to perform different activities are recorded in their elemental form is. Time study is defined as a work measurement technique for recording the times and rate of working for the elements of a specified job, carried out under specified condition, and for analysing the data so as to obtain the time necessary for carrying out the job at a defined —ILO level of performance. 26.4.1 List of Time Study Equipment and Form (Figures 26.3 to 26.8) Equipment and Type

Remark

Stopwatch

• Fly-back _type

Fly-back type with decimal minute type, having

• Non-fly back type

smallest graduation equal to 1/100th of minute is

• Split hand stop watch

the most common one.

Time study Board

Used to hold time study sheet properly. Generally made of plywood or plastic sheet

Time study Form

For recording observations on a predesigned ' printed or xeroxed form.

INDUSTRIAL ENGINEERING AND MANAGEMENT

396

S : Slide for stopping and starting the movement W : Winding knob: This returns both watch to zero, when being pressed

Figure 26.3

Figure 26.4

Time Stud}, board for general purpose form

Stop Watch

Figure 26.5 Time Study for short cycle form

397

WORK MEASUREMENT

Time Study Top Sheet Study No.

Department:

of

Sheet No.: Operation:

Time off :

MS No.:

Time on : No.:

Plant/Machine:

Elapsed time :

Tools and gauges:

Operative : Clock No.

Product/part:

No.: Studied by :

DWG No.:

Date :

Material:

Quality:

Checked :

Note : Sketch the workplace layout/set-up/part on the reverse, or on a separate sheet and attach.

Element description

Note : R = Rating

R

W It

ST

f3T

Wit =-Watch reading

Figure 26.6

Element description

ST = Subtracted time

Time Study Top Sheet

R

WR

BT = Basic time

ST

13T

INDUSTRIAL ENGINEERING AND MANAGEMENT

398

Study No. :

Element description

Time study continuation sheet

R

\VR

ST

BT

Sheet No. of

Elemen description

R

\VR

Note : Reverse side is similar, nit is without upper headin& line

Figure 26.7

Continuation Sheet for General Purpose Time Study (form)

ST

•BT

399

WORK MEASUREMENT • Short Cycle Study Form • Study No.

Department:

Sheet No. :

•

Time off:

MS No.:

Operation:

of

Time on : No.:

Plant/Machine:

-• Elapsed time :

•

Operative :

Tools and gauges: • No.:

Product/part:

.

Clock No. . Studied by : . Date :

DWG NO.:

Material: •..

Quality:

Working Conditions:

Checked .:

Note : Sketch the workplace overload El. No.

Observed Time (OT)

Element description

1

2

4

3

5

"

6

.8

7

9

10

Total Average OT OT, R- BT

_.

•

-

• • Note : R = Rating

OT = Observed time Figure 26.8

BT = Basic time Short Cycle Study Form

.

400

INDUSTRIAL ENGINEERING AND MANAGEMENT

26.4.2 Steps in Time Study (Stop Watch Method) The general step are: • Select work for work measurement. • Obtain and record all relevant information about job, operator and the surrounding conditions. • Record complete work description. • Breakdown operation into elements. • Examine the detail breakdown. • Ensure the most effective method and motions being used. • Determine sample size. • Use time measuring device like stop-watch to measure and record the time taken by the operator in performing the elements of the job. • Assess the effective speed of working of the operator as compared to standard rate in the perception of observer. • Compile the basic cycle-time for operation or work cycle. • Determine the standard time by adding relaxation and personal allowances in base time. • Define the total procedure of performing an activity along with time standards. 26.4.3 How to Determine the Sample Size? In Step 4 or time study, we have seen that small sample of observations are recorded in the examination phase. The sample size should be such that it should satisfy a predetermined confidence level and accuracy margin. Let: n ., Number of cycles to be timed, i.e., preliminary readings first taken n : Number of observation (or, sample size) required at a given confidence . level Ex : Sum of the preliminary set of individual observations (x) Ex2 : Some of squares of preliminary observations (x) For a confidence level of 95% and an accuracy level of ± 10%, it is statistically derived that sample size: i n (EX2 n = 400

Ex

Z0 )2

401

WORK MEASUREMENT

Example 26.1 For determining the sample size of stop-watch time study, five sets of observations are taken. These are 8, 7, 8, 9, and 7 units of time (1 time unit = 0.01 minute). Find appropriate sample size for a confidence level of 95% and ± 10% accuracy level. Solution: Given: I n=5

a = 8 + 7 + 8 + 9 + 7 = 39 Ex2 = 64 + 49 + 64 + 81 + 49 = 307 Thus, sample size for 95% confidence level and + 10% accuracy level is: i2 [ x 307 — 392 n = 400 39 = 3.87 11 4 Therefore, sample size of 4 is to be selected: 26.5 SOME DEFINITIONS (BASED ON ILO) 26.5.1 Work Content The work content of a job or operation is defined as: Basic time + Relaxation allowance + Any allowance for additional work e.g., that part of contingency allowance which represents work. 26.5.2 Relaxation Allowance Relaxation allowance is an addition to the basic time intended to provide the worker with the opportunity to recover from the physiological and psychological effects of carrying out specified work under specified conditions and to allow attention to personal needs. The amount of allowance will depend on the nature of the job. 26.5.3 Contingency Allowance A contingency allowance is a small allowance of time which may be included in a standard time to meet legitimate and expected items of work or delays, the precise measurement of which is uneconomical because of their infrequent or irregular occurrence. 26.5.4 Policy Allowances A policy allowance is an increment, other than bonus increment, applied to standard time (or to some constituent part of it, e.g., work content) to. provide a satisfactory level of earnings for a specified level of performance under exceptional circumstances. 26.5.5 Special Allowance Special allowance may be given for any activities, which are not normally part of the operation cycle but which are essential to the satisfactory performance of the work. 26.5.5.1 Allowances in Work-Content Work content allowances are shown in Figure 26.9.

INDUSTRIAL ENGINEERING AND MANAGEMENT

402

• Basic I lurnan Fatigue

Personal needs

Environmental stress and strain

I

Contribute to

Variable allowances

Relaxation alkiwances

Contingency , allowances

Polley allowances

Special allm'vances

adds to • Total allowances

Basic Time .

Work Content

Figure 26.9

Different allowance in work content

26.6 PERFORMANCE RATING

In work 'measurement, it .is important to determine the performance rating of the worker, whose job is measured. Rating is the assessment of the worker's rate of working relative to the observer's concept of the rate corresponding to the standard pace. —ILO Therefore, the rating of the worker gives• the comparison of the rate of working observed with respect to the standard level, which is the average rate of a qualified worker, when he uses concept methods and 'when he is motivated to apply himself to the work. Standard performance is the rate of output which qualified workers will naturally achieve without over-exertion as an average over the working day or shift, provided that they know and adhere to the specified method and provided that they are motivated to apply themselves to their work. The standard performance'is denoted as 100 on the standard rating and performance scales. —ILO Rating is always compared with the standard rating, which may be taken as 100. Then, Basic Time = Observed Time x

Rating Standard Rating

403

WORK MEASUREMENT

For example, if an operator is judged to be working faster (rating 125) and the observed time is 0.23 min., then, 125 Basic Time = 0.23 x — = 0.287 min • 100 26.7 STANDARD TIME

Standard time is the total time in which a job should be completed at standard performance. It is the sum of the standard times for all the elements of which it is made up, and contingency allowance plus considerations for the frequencies with which the elements recur (Figure 26.10 and 26.11). Contingency alloWance (CA) -

Observed Time (0T)

Rating factor (RF)

Relaxation allowance (RA)

CA for work

CA for unavoidable delays

Base Time Base

Work Element Standard Time

Figure 26.10 Constituents of Standard Time: If observed time is performed at a pace greater than Standard pace Contingency allowance (CA) Observed Time (OT) Rating • factor (RF) ...'— CA for work Relaxation allowance (RA)

CA for unavoidable dalays

Base Time Work Element Standard Time

Figure 26.11 Constituents of Standard Time: If observed time is performed at a pace lesser than standard time

404

INDUSTRIAL ENGINEERING AND MANAGEMENT

Example 26.2

In a time study for a job done by a worker whose rating is 90, the data are

as follows: Observed time

= 20 minutes

Personal needs allowance

= 4% of Basic time

Fatigue allowance

= 2.5% of Basic. time

Contingency work allowance = 2% of Basic time Contingency delay allowance = I% of Basic time. Find: (i) Basic time, (ii) work content, and (iii) Standard time.

Solution: (i) Basic Time

= Observed time x Rating factor Standard rating 90 = 15 x — 100

13.5 minutes

(ii) Allowances are:

4 (a) Personal needs allowance =100 — x 13.5 = 0.54 min . (b) Fatigue allowance =

.5 x 13.5 = 0.3375 mM . 100

(c) Contingency work allowance = 100 x 13.5 = 0.135 min. Hence, Work content = Basic time + relaxation allowances + contingency work allowance While, (a) and (b) above fall under the category of relaxation allowance; Work content = 13.5 + (0.54 + 0.337) + 0.27 = 14.65 min, Standard Time = Work 'content + Contingency delay allowance = 14.65 + 0.135 = 14.78 min = 14 min 0.78 x 60 sec = 14 min 47 sec. 26.8 WORK SAMPLING In this approach, a large number of instantaneous observations are made over a randomly selected period of time for a group of workers, machines or process. Each observation records what is happening at that instant. The percentage of observations recorded for a particular activity or delay is a measure of the percentage of time during which that activity or delay occurs. (BS 3138 definition). Definition Work sampling is a method of finding the percentage occurrence of a certain activity by statistical sampling and random observations. 26.8.1 Procedure of Work Sampling Stage 1: Preparing for work sampling (i) Specify the main objective and make statement (ii) Obtain approval. of the concerned department's supervisor (iii) Identify quantitative measure of activity

405

WORK MEASUREMENT

(iv) Select and train personnel (v) Plan for the procedure of observations. Stage 2: Start work sampling (i) Get all details of job(s) to be measured (ii) Divide jobs into activity (iii) Conduct pilot study to: (a) determine number of observations (b) check methods (c) gain confidence (iv) Describe and classify the elements to be studied (v) Design observation sheets (vi) Identify the number of days/shifts for the study (vii) Identify scheme for properly randomized times of observations (viii) Observe activity; record time and compile for each shift/day/week (ix) Summarize data. Stage 3: Evaluate and present results (i) Evaluate and validate data (ii) Analyze data (iii) Calculate proportion of time for each activity (iv) Planning for future studies. 26.8.2 Application of Work Sampling Work sampling is useful for: 1. Intermittent work 2. Work with long cycle times 3. A starting point like preliminary investigation. 26.8.3 Sample Size for Work Sampling Based on statistical theory, the sample size fOr the work sampling is determined. Let, n = Sample size (to find): Number of observations required for the desired confidence level and margin of error. p = Percentage occurrence of the activity s = Error (desired accuracy) in fraction k = A factor depending upon the confidence level k = 1 for confidence level of 68% \ k = 2 for confidence level of 95% k = 3 for confidence level of 99.7% ps = k\l[p (1— p)I n]

or

n=

k 2 p (1 — p)

(sp)2

406

INDUSTRIAL ENGINEERING AND MANAGEMENT

A trial observation is needed for the initial estimate of p. Value of p is subsequently revised as more and more observations are taken. P

Number of Observations of the activity (x) Total number of Observations (N)

The value for number of observations in work sampling may be directly known from tables such as Table 26.1 or graphs such as Figure 26.12. Table 26.1

pin Percent

Required number of observations at 95/100 probability of not exceeding error indicated, for values of p (percent of activity) Values of N

Values of N

Error

Error

5 Percent of Total

1 • Percent of Total

1

16

396

3,960,000

2

32

784

3

47

1,164

62 76

6 7 8

4 5

•

1 Percent• of p

5 Percent of p

pin Percant

5 Percent of Total

1 Percent of Total

1 Percent of p

5 Percent of P

158,400

26

308

7,696

113,846

4,554

1,960,000

78,400

27

316

7,884

108,148

4,326

1,293,000

51,720

28

323

8,064

102,857

4,114

1,536

Q60,000

38,400

29

330

8,236

97,930

3,917

1,900

760,000

30,400

30

337

8,400

93,333

3,733

92

2,255

626,667

25,067

31

343

8,556

89,032

3,561

102

2,605

531,429

21,257

32

349

8,704

85,000

3,400

118

2,944

460,000

18,400

33

354

8,844

81,212

3,249

9

131

3,276

404,444

16,178

34

360

8,976

77,647

3,106

10

144

3,600

360,000

14,400

35

365

9,100

74,286

2,971

11

157

3,916

323,636

12,945

. 36

369

9,216

71,110

2,844

12

169

4,224

293,333

11,733

37

373

9,324

68,108

2,724

13

181

4,524

267,692

10.708

38

377

9,424

65,263

2,611

14

193

4,816

245,714

9,829

39

381

9,516

62,564

2,503

15

205

5,100

226,667

9,067

40

384

9,600

60,000

2,400

16

216

5,376

210,000

8,400

41

3,87

9,676

57,560

2,302

17

226

5,644

195,294

7,812

42

390

9,744

55,238

2,210

18

236

5,904

182,222

7,289

43

392

9,804

53,023

2,121

19

246

6,156

170,526

6,821

44

395

9,856

50.909

2,036

20

256

6,400

160,000

6,400

45

397

9,900

48,889

1.956

"

fl

266

6,636

150,476

6,019

46

398

9,936

46,957

1,878

22

275

6,864

141,818

5,673

47

399

9,964

45,106

1,804

23

284

7,084

131,913

5,357

48

8400

9,984

43,333

1,733

24

292

7,296

126,667

5,067

49

400

9,996

41,633

1,665

25

300

7,500

120,000

4,800

50

400

10,000

40,000

1,600 (Contd..)

WORK MEASUREMENT

407

Values of N Error p in Percent

5 Percent of Total

1 Percent of Total

51

" 400

52

Values of N Error 1 Percent of p

5 Percent of p

pin Percent

5 Percent of Total

1 Percent of Total

1 Percent of p

9,996

38,441

1,537

76

292

7,296

12,632

505

400

9,984

36.923

1,477

77

284

7,084

11,948

478

53

399

9,964

35,472

1,419

78

275

6,864

11,282

451

54

398

9,936

34,074

1,363

79

266

6,636

10,633

425

55

397

9,900

32,727

1,309

80

256

6,400

10,000

400

56

395

9,856

31,429

1,257

81

246

6,156

9,383

375

57

392

9,804

30,175

1,207

82

236

5,904

8,780

351

58

390

9,744

28,966

1,159

83

226

5,644

8,193

328

59

387

9,676

27,797

1,112

84

216

5,376

7,619

305

60

384

9,600

26,667

1,067

85

208

5,100

7,059

282

61

381

9,516

25,574

1,023

86

193

4,816

6,512

261

62

377

9,424

24,516

981

87

181

4,524

5,977

239

63

373

9,324

23,492

940

88

169

4,224

5,455

218

64

369

9,216

22,500

900

89

157

3,916

4,944

198

65

365

9,100

21,538

862

90

144

3,600

4,444

178

66

360

' 8,976

20,606

824

91

131

3,276

3,956

158

67

354

8,844

19,701

788

92

118

2,944

3,478

139

68

349

8,704

18,824

753

93

102

2,604

3,011

120

69

343

• 8,556

17,971

719

94

92

2,256

2,553

102

70

337

8,400

17,143

686

95

76

1,900

2,105

84

71

330

8,236

16,338

654

96

62

1,536

1,667

67

72

323

8,064

15,556

622

97

47

1,164

1,237

50

73

316

7,884

14,795

592

98

32

784

8I6

33

74

308

7,696

14,054

562

99

16

396

404

16

75

300

7,500

13,333

533

5 Percent of P

Example 26.3 It is estimated that an operator in an assembly line has 20% of idle time. The expected accuracy in work-sampling is ± 4%. For a 95% of confidence level, how many observations are needed? Solution: Given;

k = 2 for 95% confidence p = idle time estimate = 0.20 q = (1 - p) = 1 - 0.2 = 0.8 h = sp = half of the accuracy interval = 0.04

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INDUSTRIAL ENGINEERING AND MANAGEMENT

10,000 -

9060Error + 1.0 Percentage Point 8000

7000

6000 0-

o

5000Error + 1.5 Percentage Point

Tzi ° 40000

..o 3000Error + 2.0 Percentage Point 2000Error + 2.5 Percentage Point Error + 3.0 Percentage Point 1000Error + 3.5 Percentage Point 0

40 20 30 Percent Occurrence of Activity

10

50

60

Figure 26.12 Number of Observations Required to Maintain Precision within the Percentage Points Indicated a 95% Confidence Level

Then,

n=

k 2 p (1 — p) k 2 pq (sp)2 (2)2 (0.2 x 0.8)

h2 = 384 observations.

(0.04)2

26.9 ANALYTICAL SAMPLING AND SYNTHETIC DATA There are many work elements for which previously conducted time studies are available. These elements are: loading, unloading, inspection, etc. For these elements, actual measurement of time may be skipped

409

WORK MEASUREMENT

and these may be adapted from predetermined studies. This study is called as synthetic data. Use of standards is beneficial as it saves time and money involved in the actual measurements. 26.9.1 Predetermine Motion Time Standards (PMTS) In this, time established for human motions is used to build up the time for a job at a defined level of performance. In this system, the operations, under study, are divided into the basic motions (or therbligs). Then, the timings for these basic motions are individually computed and added for getting the basic operation time. 26.9.2 Method Time Measurement (MTM) In this approach, every manual operation is defined into basic motions. These motions are assigned a predetermined time standard, which is based on the type of motion and the condition under which the motion is performed. The data for motion time are provided in MTM tables, in which the unit of time is TMU (time-measurement-unit). One TMU is one hundred thousand of an hour (or 1 TMU = 0.0006 minute). The time (in TMU) is noted for all the basic motions and added to get the cycle time for manual operation of an assigned work-cycle. MTM has following advantages: (i) Data are based on extensive observation (ii) Performance rating is not needed (iii) No stoppage or disruption in the plant (iv) Standards can be established even before a job is completed. 26.10 COMPARISON OF WORK MEASUREMENT TECHNIQUES A comparison of different work-measurement techniques is presented in Table 26.2. And in Table 26.3, the suitability of different work measurement techniques for different applications is listed. Some uses of work measurement are: 1. Method analysis 2. Production scheduling Table 26.2 Comparison of Work Measurement Techniques Issues

Type of Standard Produced ' Main Advantages

Main Disadvantages

Stopwatch Time Study

Predetermined Time Standard

Work Sampling

• Very,accurate for the repetitive task

• Extremely accurate for repetitive task

• Tight Standard • Accurate • Speedy applicatiort,s

• Very Tight Standard • Accurate • Speedy application

• Generates detailed informations • Chances of employee reaction • Not suited for long cycle • Not suited for mental work

• Generates detailed information • Specialised training is needed • Not suited for long cycle or mental operation

• Fairly accurate for both short and long cycle operations • Loose Standard • Ease of application • Employee's reaction is favourable • May be used for the long cycle operations. • Lacks detailed information • Needs long sample period • Difficult to explain and and justify.

• Chances of subjective leveling

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INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Cost estimation 4. Wage and incentives schemes 5. Manpower planning 6. S6ndard costing and budgetary control 7. Line-balancing 8. Performance comparison 9. Distribution of work load, and 10. Scheduling of activities. Table 26.3 Application of different work-measurement techniques Work-measurement Technique Application

Issues

Basic objective

Explanation

Time Study

PMTS

Work Sampling

Need to establish reasonably accurate relationship between work volume and required man-hour. It should be accurate but may needed not be highly precise.

Very good

Too detailed; but good

Excellent

To allocate the cost in products and functions

Excellent

Very good; but Too detailed

Excellent

Planning

Basic objective

Relative precision is needed.

Wage or incentive

Precision needed Basic objective

Excellent

Excellent

Poor

Performance Comparison

Precision needed Basic objective

Excellent

Good but detailed

Excellent

Very good

Good but detailed

Very good

Manpower Requirement Planning

'

Cost

Precision needed

Precision needed Distribution of workload and Scheduling of activities

Basic objective

Precision needed

To make provision for payment on the basic of output High precision is . needed For evaluating output according to standard. Fairly accurate but not too high • Time table for different tasks • Define priority. • Proper distribution of work among employees Accurate for production line but needed moderately accurate for distribution.

411

WORK MEASUREMENT

26.11 SUMMARY Work measurement is the application of different techniques that are designed to establish the time for a qualified worker to carry out a specific job at a defined level of performance. Different approaches of work measurement are: time study, work sampling and predetermined time standards.

REVIEW QUESTIONS 26.1 What is the purpose of work measurement? Explain the different application. 26.2 Define work measurement. What are the different techniques of work measurement? Explain them. 26.3 What are the different equipments and forms uped in time study? Explain the steps in time study. 26.4 Using example, explain the method to determine the sample observations in time study. 26.5 Explain the different allowances in time study. How is standard time determined? 26.6 Explain • the process of work sampling. How is the sample, size known in work sampling? Give example.

REFERENCES I. Adam, E. E. and Ebert, R.J., 1994, Production and Operations Management, Prentice, Hall of India New Delhi. 2. Barnes, R.M., 1980, Motion and Time Study: Design and Measurement of Work, John Wiley and Sons, New Jersey. 3. Buffa, E.S. and Sareen, R.K., 1987, Modern Production/Operations Management, John Wiley, New Jersey. 4. Chary, S.N., '1995, Them and Problems in Production and Operations Management, Tata McGraw Hill, New Delhi. 5. Adler, P.S., 1993, "Time and Motion Regained", Harvard Business Revieiv, Jan-Feb, 97-108. 6. Currie, R.M., 1971, Financial Incentives Based on Work Measurement, Management Publications London. 7. International Labor Office, '1974, Introduction to Work Study, Geneva. 8. Ireson, W.G. and Grant, E.L., 1971, Handbook of Industrial Engineering and Management, Prentice Hall of India, New Delhi. . 9. Kohn, A., 1993, "Why incentive Plan cannot Work", Harvard Business Review, Sept.-Oct., 54-63. 10. Maybard, H.B. 1971, Industrial Engineering Handbook, McGraw-Hill, New York. 11. Mundel, M.E., 1978, Motion and Time Study, Prentice-Hall, New Jersey. 12. Muthukrishnan, AV ancj Sethuraman; 1986, "Financial Incentives: A Managerial Tool", Productivity, 27 (1), 61-69. 13. Niebel, WW., 1988, Motion and Time. Study, Irwin: Homewood. 14. Polk, E.J., 1984, Methods Analysis and Work Measurement, McGraw Hill, New York.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

27 JOB EVALUATION AND MERIT RATING

27.1 INTRODUCTION Industrial organizations face the challenging problem of adequately compensating their workers according to the nature of job they perform. Talented persons will join an organisation only when they get enough wages and incentives. The financial compensations to a worker are dependent on many factors. These factors are: complexity of job, risk and hazard involved in the job, working condition, skill or expertise needed to perform the job, number of subordinates or helpers available to handle the job, etc. Job evaluation is a systematic technique for determining the wage-rate or relative importance of the job by considering various aspects of jobs. It is helpful in determining the wage-rates and incentives. 27.2 JOB EVALUATION Job evaluation is a technique to rate a job (but not a worker). Therefore, after the job is evaluated, it becomes the starting point to fix the base-wage for a worker so that the wage is fair and equitable. Job evaluation is the criterion for relative differentiation of base-wage rates by establishing the relative worth of various jobs in an organisation. The bases for semi-skilled or unskilled worker's job evaluation are factors related to job, such as: skill, effort, responsibility, job risk, hazard, job conditions, etc. For skilled jobs, factors related to qualification, experience, dynamics of responsibility and complexity in decision-making, leadership quality, accountability, etc., are major factors in job evaluation. Job evaluation is an attempt to determine and compare the demands which the normal performance of particular jobs makes on average workers, without taking into account the individual abilities or performance of the workers concerned. —International Labor Organisation (ILO) Job evaluation is used to analyse and assess the job for ascertaining its relative worth by objective assessment and comparison for determining the basis for a rational wage. structure. For an effective job evaluation, proper description and specification of the job are needed. The main purpose of job evaluation is to decide the basic for wage-payment for different categories of jobs (Figure 27.1).

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INDUSTRIAL E�GINEERING AND MANAGEMENT

Job Description .lob Evaluation

Job

Analysis

Wage Survey

Job Specification Figure 27.1

Wage payment

• Salary • Incentive

Purpose of job-evaluation

27.2.1 Objective of Job Evaluation The main obj_ectives of job-evaluation are as follows: 1. Job evaluation is used to determine the relative worth of every job. Relative wages may be fixed· on the basis of an objective evaluation and comparison. 2 . It establishes the general wage level, which would be comparable with factories nearby. 3. It proyides a basis for ranking different jobs. 4. The relative worth and wage-structure of a new job may be easily established in comparison with the established jobs. 5. It helps in establishing line of authority, responsibility and accountability. 6. It provides a sound basis for wage negotiation. It reduces grievances of workers due to improper wages. It eliminates wage inequality within the organisation. 7. Job evaluation is useful in the selection and recruitment process, as skill match with job profile may be achieved. 8. It is helpful in achieving cordial relations between management and union. 9. H provides a base for on-job training �nd orientation programs. 27.2.2 Pre-Requisite of Job Evaluation 1. Facts related to job content which are termed as: (a) job description, and (b) job-specification. 2. Top management support and commitment. 3. Cooperation of union and individual workers. 4. Comparison of jobs. 5. Involvement of expert in job-evaluation techniques. 27.3 I. 2. 3. 4. 5.

BENEFITS OF JOB EVALUATION · It helps the management in establishing an· objective rationale for acceptable wage-structure. It takes into account many factors other than the skill difference. It helps in skill match with job. It is helpful in the selection, training and promotion of workers. It estabiishes cordial labour relationship. It helps in determining the rate of a new job.

27.4, LIMITATIONS OF JOB EVALUATION 1. Exactness or precision is missing in the job-evaluation. There is no standard table for all the activities. All. jobs cannot be measured and compared accurately. 2. It does not account for many inter-rela.ted economic factors. For example, the law of demand and supply of labour is a prime factor in determining wage rate in industry. Due tO' high demand of

JOB EVALUATION AND MERIT RATING

415

software engineers in handling special problems (say, Y2K problem), the temporary wage structure was quite high. This remains unattended to in a generalised approach of job-evaluation. 3. No special attention is paid for exceptional merit, needed in the performance of the job. Many a times, workers feel frustrated due to this. For example, many highly talented scientists and professors feel frustrated in R & D activities, as their counterparts in field and civil services are better compensated in terms of promotion, power, perks and salary. 4. The basic assumption in job-evaluation is that a work of equal worth should be equally paid as these are both equally attractive and equally demanding. In real life, this contention is challengeable. In real life, there are numerous examples when the job of same worth (say, a lecturer and an I.A.S.) are not equally attractive to the job seekers. 5. The change in production technology (for example, conventional lathe to CNC lathe), information system, subordination, etc., severely affect the job content. Therefore, a job-evaluation conducted few days back may not be valid today: The job content of an operation is a dynamic process and so should be the job-evaluation also. However, generall job-evaluation is not a regular affair in industry. Therefore, the wage-structure on the basis of obsolete job-evaluation is a source of great irritant in industrial relation. 27.5 METHODS OF JOB EVALUATION

There are four general methods for job-evaluation. 1. Simple Ranking System: This is the simplest and most inexpensive way to do job-evaluation. This method is suited for small organisations where the evaluators have an intimate knowledge of all the jobs. A committee of experts is constituted for the evaluation of the jobs. Each member should have a complete knowledge of the job-content because job-content forms the basis for the evaluation. The experts evaluate the job-content and job description and then they rank the jobs in hierarchical (either ascending or descending) order on the basis of the relative importance of the job. The decision is on a cumulative perception of the job-content and no specific factor is deeply analysed. All the rankings of each committee member are averaged to find a final score in terms of relative ranking of each job. Advantages: (i) It is the simplest method. (ii) Easy to understand and easy to adopt. (iii) Inexpensive, as it involves no major cost or time. (iv) it takes less time than any of the other methods. Disadvantages: (i) In this method, no rating is used. Only a simple listing of order is generated. Hence, there is no distinction between each. (ii) The method is subjected to chances of high error and therefore it is less accurate. (iii) No commonly acceptable base is available for dealing with ranks. (iv) The method is not suited for large companies. 2. Classification or Grade Description Method: This is a non-quantitative method and suited for organisations that have a large number of activities. This method is an improvement over the ranking method, as a predetermined scale of values is used.

416

INDUSTRIAL ENGINEERING AND MANAGEMENT

The job-evaluation is done by establishing job classes or grade description. An evaluation team is assigned the job of looking into each job description and gives weight to it in the light of relevant factors such as, skill experience, education, etc. Each job is assigned to a particular grade or class. For each grade, different monetary compensation or wage is decided. Advantages: (i) A large number of jobs can be handled easily after the grade descriptions are documented. (ii) It is relatively simple and inexpensive. (iii) It is easy for people to understand in terms of grades or classification. Disadvantages: (i) Compared to simple ranking system, it takes more time and thus costs more. (ii) Compared to point-rating method, it is less accurate. (iii) It does not use a detailed job analysis. 3. Factor Comparison Method: This is a quantitative approach for job-evaluation. It resembles the classification method as levels or grades are used in both. Five key-factor scales are used for analysis and evaluating jobs. These factors are: (i) skill, (ii) mental effort, (iii) physical effort, (iv) responsibility, and (v) working conditions. A composite score is obtained for all factors. Following steps are followed in this method: Step 1: Select a number of "key" jobs (generally 15 to 25). Record wages of "key jobs". Keyjobs are selected in such a way that these/are is fairly paid. Step 2: Analyse each "key job" for the five critical-factors, namely: (i) mental requirement, (ii) physical requirements, (iii) skill requirements, (iv) working conditions, and (v) responsibility. Step 3: Rank each of the key-jobs within each factor. The rank may vary between factors. Step 4: Assign wages according to each factor. It should be in proportion to the requirement of each factor in the job. Step 5: Calculate total wage-rate for a job by adding the wage-rate for each factor. This provides a job comparison scale. Insert key-jobs in it. Step 6: Evaluate the job under consideration using factor-by-factor in relation to the key jobs on job comparison scale. Then evaluate and compare each job with other jobs in terms of each factor. Step 7: Design, adjust and operate the wage-structure. Advantages: (i) It uses wages of the existing key jobs, which provide standard against which all other jobs are compared. (ii) Direct comparison is used for determining wages. (iii) A scale for comparing factor of new jobs is available in this method. This speeds up the evaluation for non-key or new jobs. (iv) It is quantitative, yet relatively easy to apply once the factor and levels have been decided. Disadvantages: (i) It is costly and time-consuming to setup initially. (ii) The initial set-up is to be changed every time the wage-structure changes. (iii) If unfairly paid jobs are selected as key-jobs, then the entire scaling of factors gives wrong results.

417

JOB EVALUATION AND MERIT RATING

(iv) Subjectivity in the grading is often challengeable. Different evaluator may give different wages for one factor. 4. Point Method: It is a detailed, quantitative technique, which uses analytical approach to measure the worth of a job. Merill Lott (1925) deVeloped this method. Each job is broken into different component factors. For each factor, a point or weight is assigned as per its relative importance. Total point value is the summation of all such points. Following steps are adopted: Step 1: Select the jobs to be evaluated. Step 2: Determine the factors for consideration. These factors may be: (a) skill, (b) effort, (c) initiative, (d) physical requirement, (e) Responsibility, etc. Clearly define each factor. Step 3: For each factor, determine the number of degrees to be allocated. Step 4: Assign points for each degree of all factors. Step 5: Choose few (say, 5 to 10) key-jobs and evaluate each by applying Step 1 to Step 5. Example 27.1 In a job-evaluation on scheme, three job factors are needed. Tables 27,2-27.4 give point value for each degree of these factors. A particular job of office-staff needed 3 degrees of mental demand, 5 degrees of experience and training and 2 degrees of personal contact. (a) Determine the cumulative points for this. (b) Plot a linear curve of wage-rate vs point when 3 key-jobs with cumulative point of 100, 150 and 225 have wages as Rs. 2,000, Rs. 5,225 and Rs. 10,000 respectively. (c) Determine a suitable base for the office-staff under consideration in (a): Table 27.1

Job factors of office staff job

Job factor

Degree

1. Mental demand 2. Experience and training 3. Personal contact

3 5 2

Table 27.2 Degree

1 2 3 4

Factor

1 2 3 4 5 6 7

Point Value

Independent judgement judgement under general guidance Judgement under special guidance Limited judgement Table 27.3

Degree

Mental demand for office job

Factor

Above 10 year 7 to 10 year 5 to 7 year 3 to 5 year 2 to 3 year I to 2 year Below 1 year

200 150 125 100

Experience and training for office job Point Value

100 75 50 35 25 10 5

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 27.4 Personal contact in office job Degree

Point Value

Factor

1

Contact within organization and outside organization at all positions

50

2

Contact within the organization at all levels

25

3

Contact within the organization at specific level

10

Solution: (a) In this hypothetical job, an office -staff has relative ranking of three factors as follows: S. No.

1.

Percent

Total point (Weight)

Factor

200

200

Mental demand

x 100 = 57.14

350 2.

Experience and training

100

100

x 100 = 28.57

350 3.

Personal contact Total

50

50 x 100 = 14.29 350

350

100%

Total point of each factor in above table is the maximum point value in Tables 27.2-27.4. Now, for the given job, the degrees for three factors are 3, 5 and 2 respectively. From Table 27.2, mental demand of 3 degrees has a point value of 125. From Table 27.3, 5 degrees of experience, and training has 25 point value in Table 27.4, 2 degrees of personal contact have point value equal to 25. Thus, we get the following total points for this job: Degree

Factor

Points

Judgement under special guidance

3

125

Experience and training

2 to 3 years

5

25

Personal contact

Within organization at all levels

2

25

Total points

175

Mental demand

Thus, cumulative point for this job is 175. (b) For three key-jobs, cumulative points vs wages are as follows: Key Job

Points

Wages (Rs.) 2,000

1

100

2

150

5,225

3

225

10,000

Its plot is given in Figure 27.2. (c) For the given office job, the total points are 175. In Figure 27.2, we see that for this point the

wages are Rs. 6,800. Advantages of Point Method

(i) Most reliable and accurate due to detailed analysis. (ii) Less chance of subjectivity and judgement after initial grade tables are established. (iii) Most widely used.

419

JOB EVALUATION AND MERIT RATING

10,000 6,/i00

wages (Rs.) 6.000

2,000

0

75

100

150

l75

225

300

Points

Figure 27.2 Points vs wages for key-jobs

Limitations of Point Method

(i) Analysis involves experienced persons. (ii) Time-consuming in establishing initial grade tables. (iii) Subjectivity in initial grade table cannot be totally eliminated. Table 27.5 Comparison of Different Job Evaluation Methods Factors

Simple Ranking

Job Grading

Factor Comparison

Point System

1. Nature

Non-quantitative

Non-quantitative

Quantitative

Quantitative

2. Type of comparison

Job to Job

Job to category definition

Job to Job

Job to Category

3. Factors evaluated No

No

3 to 7

Around 10

4. Technique

Ranking of jobs in order of difficulty

Comparing job to arbitrarily defined grade

Multiple scaler of point and key-job titles

Multiple scale of points and definitions of factor degrees

5. Adoption

Least

Medium

Medium

Most popular

6. Comparative stage

Easy, simple and crude.

Easy, simple and crude

Modification over simple ranking

Modification over job-grading

7. Advantage

Simple

Simple

Practical

Practical

27.6 MERIT RATING Introduction: Merit-rating is associated with performance appraisal of an employee. This is a systematic

approach for evaluating the performance of an employee on the job, which lie performs. This is also called as performance appraisal, personnel rating and employee evaluation. Merit-rating is a formal, objective procedure for evaluating personality, contributions and potentials of employees in a working o►ganisation. Job Evaluation vs Merit Rating: Job-evaluation and merit-rating are compared in the following ways (Table 27.6).

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Table 27.6 Job Evaluation vs Merit Rating Job Evaluation

I. It evaluates a job or work. 2. It is for the purpose of fixing a base-wage for a job. 3. It is independent of operator or worker. It is impersonal in nature. 4. Useful for decision regarding wage and salary administration, skill match, etc. 5. It considers requirement of job.

Merit Rating

I. It evaluates a worker. 2. It is for the purpose of deciding reward for exceptional merit of worker. 3. It is independent of job. It is impersonal in nature. 4. Useful for decision regarding training, placement, promotion, counselling, etc. 5. It considers ability and performance of individual.

27.6.1 Objectives of Merit Rating 1. Helps in executive decisions related to human resource department (HRD). 2. Appraisal of workers. 3. Continuous record for the worth of a worker. 4. Tool for decisions related to training, placement, promotions, confirmation, increment, transfer and counselling of workers. 5. Useful for understanding areas of improvement in a worker. 6. Helps in discovering special talent in a worker. 7. Useful in personal research, validation of training objectives and training methodology. Performance appraisal (or merit-rating) is the process of evaluating the employees' performance on the job in terms of requirements of the job. —Scott, Clothier and Spriegel Merit-rating refers to all formal procedures used in working organisations to evaluate personalities and contributions and potential of group member. —Yoder 27.6.2 Advantages of Merit Rating Merit-rating plays very important role in the human resource administration of a firm. Its advantages are: 1. Systematic evaluation of employees 2. Facilitates matching of job with individual. 3. Facilitates promotion related decisions. 4. Facilitates training related decisions. 6. Helpful in identifying weaknesses of the employees which may systematically be removed. 7. Provides base for guidance and counselling for the employees. 8. Develops healthy competition among workers to improve performance. 9. Serves as motivational tool for employees. 10. Provides objective basis for bonus, incentive wage, and salary related decisions. 11. Improves employee-employer relationship due to increased trust and confidence. 12. Sound base for negotiation with trade union.

JOB EVALUATION AND MERIT RATING

421

27.6.3 Limitations of Merit Rating

1. Bias of rater may under-rate or over-rate an employee. 2. Due to Halo Effect (which is the tendency of a rater to rate consistently under or above the average), the ratings may not be accurate. 3. Assessment of irrelevant factors may result in deceptive rating. 4. Due to improper weighted of factors, the ratings may be improper. 5. Due to fear, negligence, insufficient time, insufficient information or temperdment, the rater may play safe and give average rating to an otherwise good or unsatisfactory employee. 6. Reward for employee may not follow immediately after a good rating due to organisational constraints. This may lead to dissatisfaction. 7. Many rating factors are very subjective. Due to this, exact rating may not be forthcoming. For example, innovativeness, drive, organisational loyality, etc., are difficult to be quantified in exact terms. 27.7 METHODS FOR MERIT RATING

Employees are rated on the basis of many factors related to personal attributes, leadership quality, on job performance, interpersonal quality, loyality, attendance, etc. Some of these factors are: 1. Quality of work 1.1 Accuracy 1.2 Rejections and scrap 1.3 Thoroughness 1.4 Economy of time 1.5 House keeping 1.6 Contribution in quality circle team 1.7 Contribution in other TQM effort. 2. Quantity of work 2.1 Output 2.2 Approach in meeting over-demand. 3. Personal Qualities 3.1 Team spirit 3.2 Attitude for work 3.3 Loyalty 3.4 Leadership 3.5 Relations with superior 3.6 Relations with subordinates 3.7 Integrity 3.8 Judgement. 4. Others 4.1 Attendance 4.2 Ability to follow instructions 4.3 Safety habits

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4.4 Interest in training and learning 4.5 Interest 'in corporate culture, etc. Generally, a rater gives grade on a scale of one to five or remarks such as: exceptional good, fair, satisfactory and unsatisfactory. All such ratings are added to find the total performance. There are other ways to express in qualitative terms, such as exceptional, good, fair and poor. On the basis of cumulative performance, the overall rating is given which may be above-standard, standard or below standard. Some specific approaches of merit rating are as follows: 1. Ranking Method: This is the simplest method in which all the employees are compared with one another. They are ranked in descending order from best to worst. This method has a serious limitation that it is not diagnostic to point the specific areas of weakness and strength of a worker. The method is highly subjective. The difference in' rank does not provide the exact nature or quantum of merit-differential. There are chances of personal bias of the rater. 2. Paired Comparison Method: In this method, each member of the group is compared with remaining other members of the group. Each judgement is recorded in terms of score. These scores are added up to find the final ranking of each person. This method is an improvement over ranking method. It is a more rational and comprehensive method. The bias of the rater is minimized, yet it may not be over. The method involves large number of comparisons. For example, for a group of n persons, total number of comparisons are factorial (n — 1)! Therefore, for a group of 10 persons, the trained comparisons would be 362880 and for 50 persons, it is 6.08 x 1062. Therefore, this method is quite time consuming when number of employees are more. 3. Checklist Method: In this method, the rater is given a set of statements related to the employee's performance, attitude, behaviour and shortcomings. The rater is asked to tick-mark either yes or no. Each yes/no carries certain points, which when added up, give final rating of the employee. Specimen Checklist XYZ Pvt. Ltd. New Delhi : SQC Department Date of Rating : 27-06-2000 : R-18 Rater Code

Employee : Bhim Employee Code : QC-387 Position Tickmark ('I) The most appropriate box. Statement

True

False

4

3

1. Understands work 2. Assumes responsibility 3. Makes no mistakes 4. Innovative in approach 5. Keeps work area clean 6. Does not need close supervision Very regular on work Total Signature of rater

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JOB EVALUATION AND MERIT RATING

4. Graphic Rating Scale: In this method, the rater marks the rating on a graphic rating scale, the

scale containing different degrees of performance in terms of phrases, such as: outstanding, excellent, good, average and poor. For each degree, few numbers are allotted. Different performance measures are rated on this scale: Specimen Graphic Rating Scale Degree of Scale Performance measure

Outstanding Excellent 10 98

Good 76

Average 543

Poor • 2100

Knowledge of work Leadership Housekeeping Regularity 5. Rating by Result: In this method, the rating is done on the basis of achievement of set objectives.

Therefore, performance standards are set in advance. It is known to both rater and employee. Under achievement or over achievement is noticed by the rater. Therefore, this method eliminates the personal bias of the rater. Another advantage of this method is transparency in rating. Thirdly, continuous review of rating is possible by both employee and his supervisor. Possibility for improvement maybe explored at regular intervals. Since approach is participative, it instills confidence in employees. The method is more suited for executives and managers as it requires proper education and training on the part of employees. 27.8 REQUIREMENTS FOR SUCCESS OF MERIT RATING SYSTEM

A successful merit rating system should be objective. Standard for outputs should be set against which performance should be measured (Figure 27.3): Output

Input

Actual Performance of an Employee

Objective and goals which are verifiable

* Compare performance against standard o Comprehensive annual review : Formal • Periodic or progress review : monthly or quarterly for milestone o Continuous review on daily basis for self-control

Review and corrective action for un-acceptable deviations from standard

Figure 27.3

The Merit Rating/Performance Appraisal Process

For a merit rating system, these requirements are of prime importance:

1. Commitment and support of top management

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2. Approval of employees and union 3. Knowledgeable rater, 4. Education and training of employee to understand the rating system 5. Continuous rating system and periodic review 6. Grievance redressal system 7. Administrative support for generating and retrieving necessary information 8. Sufficient time, fund and formats for the rating.

REVIEW QUESTIONS 27.1 What do you understand by job-evaluation? Explain the different objectives of job-evaluation. 27.2 What are the main benefits and limitations of job-evaluation? 27.3 Using examples, explain the following methods of job-evaluation: (i) Simple Ranking System (ii) Grade description method (iii) Factor comparison method (iv) Point method.

27.4 Compare the different approaches of job-evaluation. 27.5 Differentiate between job-evaluation and merit rating. 27.6 What do you understand by merit rating? Explain its advantages and limitations. 27.7 Explain the different methods of job-evaluation. 27.8 Explain the objectives and main requirements of merit rating. REFERENCES 1. Adam, E.E. and Ebert, R.J., 1994, Production and Operations Management, Prentice Hall of India, New Delhi. 2. Barnes, R.M., 1980, Motion and Time Study: Design and Measurement of Work, John Wiley and Sons, New Jersey. 3. Buffa, E.S. and Sareen, R.K., 1987, Modern Production/Operations Management, John Wiley, New Jersey. 4. Chary, -S.N., 1995, Theory and Problems in Production and Operations Management, Tata McGraw Hill, New Delhi. 5. Adler, P.S., 1993, "Time and Motion Regained", Harvard Business Review, Jan-Feb, 97-108. 6. Currie, R.M., 1971, Financial Incentives Based on Work Measurement, Management Publications, London. 7. International Labor Office, 1974, Introduction to Work Study, Geneva. 8. Ireson, W.G. and Grant, E.L., 1971, Handbook of Industrial Engineering and Management, Prentice Hall of India, New Delhi. 9. Kohn, A., 1993, Why incentive Plan cannot Work, Harvard Business Review, Sept.-Oct., 54-63. 10. Maybard, H.B., 1971, Industrial Engineering Handbook, McGraw-Hili, New York. 11. Mundel, M.E., 1978, Motion and Time Study, Prentice-Hall, New Jersey. 12. Muthukrishnan, A V and Sethuraman, 1986, "Financial Incentives: A Managerial Tool", Productivity, 27 (1), 61-69. 13. Niebel, B.W., 1988, Motion and Time Study, Irwin: Homewood. 14. Polk, EJ., 1984, Methods Analysis and Work Measurement, McGraw Hill, New York.

WAGE-INCENTIVE PAYMENT PLANS

28.1 INTRODUCTION

What is a one line answer to a question: "Why people work?" The first thing which comes to our mind is money or payment for work. Since money comes in the form of wages and incentives for an employee, its planning and administration is a crucial issue. Next thing, which needs to be answered is:-"Should the wage be fixed or be proportional to the output?" Now, this is a ticklish issue and no straightforward answer is forthcoming. We address this issue in this chapter. For this, following definitions are needed: Wages It is the payment for the use of effort, which may be physical or manual. It includes both financial and non-financial payments. Fair Wages It is the wages which are fair to the efforts (or labour) and work-accomplishment of an employee. These should be sufficient to fulfill the basic needs of life. Fringe-Benefits Non-financial part of wages is called as fringe-benefits. Examples axe: free official car, free house, attendant for house-hold work, etc. Incentive It is a reward or encouragement or inducement to an employee for the hard work and efficiency at job, assigned by the organisation. It is for motivating employees to do better and harder.

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There is no real difference between wages and salaries. However, some texts refer wages as a payment for hourly payment to a physical labour while salary as payment other than hourly-basic (say monthly or meekly) to an office staff, foremen, managers, technical staff and executives. Wages provide a reason to work for an organisation. These serve as the financial bond between organisation and employee. Incentives may be direct or indirect. Direct incentives are given to an employee while indirect incentives are given to a group. Direct or indirect monetary payment is termed as financial incentives, such as: bonus, profit sharing, etc. Non-monetary payment of this type is non-financial incentives, such as: social benefits, recognition, appreciation, good work condition, job satisfaction, chances of promotion, job security, training, etc. Some incentives are semi-financial, such as: subsidised ration, subsidised medical facility, subsidised education for children, pension, etc. 28.2 OBJECTIVES OF A GOOD WAGE-INCENTIVE PLAN 1. Good employee-employer relationship. 2. Helps in increasing productivity. 3. Boosts morale of employee. 4. Motivates employee to perform better. 5. Controls absentism and labour turn-over. 6. Basis for cost control. 7. Sufficient to overcome minimum wage limit in "minimum wage-act". 8. Improves quality of life. 9. Helps organisations to better utilise the labour, machine, equipment and other resources. 10. Improves the image of the organization. 6 11. Flexible to meet the changing conditions of the enterprise. 28.3 BASIS OF A GOOD WAGE-INCENTIVE PLAN 1. Simple to understand, simple to use and administer. 2. Incentive as per accomplishment and should be paid -without much delay. 3. Standards: fair, and comparable with other industries of similar type. 4. Agreement of both employee and employer. 5. Encourages workers, to perform more and better. 6. Based on time-study information. 7. No undue loss to workers due to uncontrollable reasons such as power-failure, machine breakdown, etc. 28.4 TYPES OF WAGES INCENTIVE PLANS The compensation to an employee may be in three forms (Figure 28.1): (i) Based on time spent on work, i.e., time tate system. (ii) Based on production in quantity terms, i.e., piece-rate system. (iii) Combination of (i) and (ii) both, i.e., wage-incentive system. 1. Time Rate Method: The payment under this plan is made in accordance with the time spent on the job. The time may be on hourly, daily, weekly, fortnightly or monthly basis.

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WAGE-INCENTIVE PAYMENT PLANS

L Time Rate System

Wagc Payment Plan

Piece Rate System

Wage-Incentive Systenj

time-based Approach Productivity-based Approach Halsey Plan

Straight Piece Rate

Bedeax Plan

Straight Piecc Rate with minimum guarantee

Figure 28.1

I

Differential Piece Rate

Methods of Wage Payment

Example 28.1 If the worker is paid at the rate of Rs. 20 per hour and he spends 50 hours during a week, the weekly payment is: = (Number of hours worked during the week) x (Rate per hours) = 50 x 20 = Rs. 1000 per week. Advantages of Time Rate Method 1. Simple to calculate. 2. Focus on punctuality, regularity and work 3. Less wastages, as worker is not unnecessarily worried about very high production rate. 4. Better quality of work due to above reason 5. Advance knowledge about wage 6. Easy to operate in different situation 7. Consistency in calculation and approach 8. Preferred by trade unions 9. Workers feel assured of wages irrespective of machine failure, breakdown, etc. Disadvantages 1. Lack of motivation to do exceptional 2. Requires close supervision as worker may waste production time 3. Encourages inefficiency in workers. Weekly wages

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INDUSTRIAL ENGINEERING AND MANAGEMENT

2. Straight Piece Rate System: Wages are paid in this system in accordance with the output of production. This is independent of time spent on the job. Example 28.2 a worker produces 325 pieces per day and he is paid at the rate of Rs. 0.20 per piece, the daily wage is 325 x 0.20 = Rs 65. Advantages

Disadvantages

Simple Easy to understand focus on productivity

Discourages quality focus No job security No compensation for breakdown No compensation for sickness No guarantee of minimum wage Discourages group effort.

Efficient and fast worker feels better Easy to satisfy worker Suitability 1. Repetitive jobs having no innovation 2. lobs where individual contribution may be measured 3. Skilled workers in small firms 4. When the production or output is the focus

3. Straight Piece Rate with a Minimum Guaranteed Base Wage: In this method, in addition to the payment in accordance with an individual's output, a fixed guaranteed base-wage is also provided. However, for a production upto a certain level there is no incentive (Figure 28.2). Example 28.3 The standard output in a hypothetical welding shop is 110 pieces per day. For a production less than or upto the standard output, the minimu►n guaranteed daily wage is Rs. 70. Over the standard output an incentive at the rate of Rs. 0.25 per piece is given. This is an example of minimum guaranteed base-wage system: Input : Base wage (B) output (0) standard production (P) wage rate (R)

I Wage = B

Wages = B + (0 P) R

Pay wage to the worker

7 Figure 28.2

Approach of straight piece rate with minimum guaranted base-wage

4. Differential Piece Rate System (or Taylor's Plan): In this scheme, upto a certain production level, which may be standard output, a piece rate (say R-I) is given. For anybody, who achieves more than this output, will get, the payment for over achievement at a higher rate (Figure 28.3).

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WAGE-INCENTIVE PAYMENT PLANS

However, it does not guarantee minimum base wage. Standard output may be decided by careful time and unction study procedure. Advantages

1. Provides incentives to efficient worker 2. Penalises inefficient worker 3. Focusses on high production rate 4. Simple and easy to implement. Disadvantages

1.Minimum wage is not assured. 2. No considerations for the machine failure, power failure, etc. 3. Over emphasis on high production rate. 4. There are chances that quality of work may suffer. Input : Differential wage rate (R 1, R2) Standard Production (P) Output (0)

Wage = R I * 0

Wages = RI*P + (0 — P) R2

Pay wage to the worker

Figure 28.3 Approach of Taylor's Plan of differential piece-rate system

All thL three approaches of piece-rate system are compared in the Figure 28.4.

Taylor's differential Piece rate "

Wage during Period

Straight Piece rate

Guaranteed base-wage ,or Straight Piece rate with minimum guaranteed wage

Standard output Output in pieces produced ' Figure 28.4 Comparison of three piece rate systems

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INDUSTRIAL ENGINEERING AND MANAGEMENT

5. Halsey Premium Plan: In this plan incentive is given to a worker, who is fast and completes work before the standard time to complete a job, However, a minimum base-wage is guaranteed to a worker, who completes the job upto the standard time, fixed for this job. Example 28.4 Let, Standard time : S hours Time taken by worker T hours Wage rate : Rs. R per hour Incentive or premium : Wages for I percentage of time saved at a rate of R per hour Wages to be Paid to a Worker (W) (i) When T> S 1 W = TR +--R(S —T) 100 (ii) When T 100% of (SO); W = 120% of piece rate. Advantage Efficient workers are rewarded handsomely. Disadvantages. (i) Wide gap in slabs of differential wage rate (ii) Over emphasis in high production rate. 10. Gantt Task and Bonus Wage Plan: In this, a minimum wage is guaranteed. Minimum wage is given to anybody, who completes the job in standard time. If the job is completed in less time, then there is a hike in wage-rate. This hike varies between 25% to 50% of the standard rate. Example 28.6 Standard time = S hour Actual time = T hour (T < S) Time rate for wages = Rs. R per hour Bonus rate = P% of hourly rate = Rs. (PR) per hour Thus wage = (RS + PRS) in T hour RS + PRS

per hour T Thus, actual time (T) is lesser, hourly wage-rate would be more. Advantages (i) Minimum wage in guaranteed. (ii) Suited to efficient workers. Disadvantages: Emphasis on over-speed or high production rate.

REVIEW QUESTIONS 28.1 Define: Wage, Fairwage, Fringe-benefits and incentives. Explain these. 28.2 What are the objectives of a good wage-incentive plan? Explain the basis for designing a wage-incentive plan. 28.3 Explain the different methods of wage-incentive plan. Compare them. 28.4 Use an example to illustrate the different schemes of wage-incentive plan. 28.5 Compare the following wage-incentive plan, and differentiate between them: (a) Taylor's differential piece-plan and straight piece-rate method.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(b) Rowan plan and Halsey plan. (c) Emerson and Bedeaux plan. REFERENCES •

I. Adam, E.E. and Ebert, R.J., 1994, Production and Operations Management, Prentice Hall of India, New Delhi. 2. Barnes, R.M., 1980, Motion and Time Study: Design and Measurement of Work, John Wiley and Sons, New Jersey. 3. Buffa, E.S. and Sareen, R.K., 1987, Modern Production/Operations Management, John Wiley, New Jersey. 4. Chary, S.N., 1995, Theory and Problems in Production and Operations Management, Tata McGraw Hill, New Delhi. 5. Adler, P.S., 1993, "Time and Motion Regained", Harvard Business Review, Jan.-Feb., 97-108. 6. Currie, R.M., 1971, Financial Incentives Based on Work Measurement, Management Publications, London. 7. International Labor Office, 1974, Thtroduction to Work Study, Geneva. 8. Ireson, W.G. and Grant, E.L., 1971, Handbook of Industrial Engineering and Management, Prentice Hall of India, New Delhi. 9. Kohn, A.,1993, "Why Incentive Plan Cannot Work", Harvard Business Review, Sept.-Oct., 54-63. 10, Maybard, H.B., 1971, Industrial Engineering Handbook, McGraw-Hill, New York. II. Mundel, M.E., 1978, Motion and Time Study, Prentice-Hall, New Jersey. 12. Muthukrishnan, AV and Sethuraman, 1986, "Financial Incentives: A Managerial Tool", Productivity, 27 (1), 61-9. 13. Niebel, B.W., 1988, Motion and Time Study, Irwin: Homewood. 14. Polk, E.J., 1984, Methods Analysis and Work Measurement, McGraw Hill, New York.

29 GOLDRATT'S. THEORY OF CONSTRAINTS

29.1 INTRODUCTION •

Eliyahu M. Goldratt introduced the principle of theory of constraints (TOC). In his book, The Goal, he (along with his co-author Jeff Cox, 1984) presented it in the form of a novel, which is written in a setting of manufacturing environment. The main character of the novel (The Goal) uses the principle outlined as "Theory of Constraints" (or, TO,C) to make a turn-around for his failing industrial plant. The principle of TOC is structured as an embodied approach called as, 'Optimized Production Technology (or, OPT). The manufacturing system, which incorporates TOC/OPT, is referred to as synchronous manufacturing. Thus, TOC, OPT and synchronous manufacturing are related in some ways. Goldratt has used many commonly used terms that carry special meanings in the context of TOC. Terms commonly used in this context are: through-put, inventory, operating expenses, drum-buffer-rope system, constraints, goal, etc. We will discuss them in subsequent sections. 29.2 SOME CONCEPTS USED BY GOLDRATT

The Goal, despite being written in a novel form, gives many messages for planning, scheduling and control of the manufacturing firm. Some are as follows: Key point The success of the manufacturing business comes from determining the aim of the business and then dealing with the constraints, which make the goal more difficult to achieve. — Chapter 2 of The Goal What is Goal? The goal of a manufacturing company is to make money, ...and everything else we do is a mems to achieve the goal. —Goldratt in The Goal (1993) 1•••211MinSiii=lii

Two plints are important here: 1. The goal (i.e., to make money) may be achieved in short-term but it can he counter-productive in long-term. A simple example is: generate money by selling plant or equipment. But, this would

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INDUSTRIAL ENGINEERING AND MANAGEMENT

be detrimental in long run. Therefore, the emphasis should be on the goal of "making money now as well as in the future". 2. To achieve The Goal, i.e., to make more and more money, one must try to: (a) increase throughput, (b) minimize operating expenses, and (c) minimize inventory. What can we do about above three paths? We can reduce operating expenses and inventory to a certain extent. In any case, these cannot be less than zero (which is the ideal case). Since we cannot endlessly reduce the inventory or operating expenses, the focus shifts on looking at the possibility of increasing the throughputs (Table 29.1). The elements that restrict the expansion of throughput are termed as constraints in TOC. Table 29.1 Three Common Terms in The Goal Term

Throughput Inventory Operating Expenses

Definition

The rate at which the system achieves the Goal. i.e., to make money through sales It contains all the money that the system in TOC invests in purchasing things, which system intends to sell. It contains all the money that the system in TOC spends in turning the inventory into throughput.

29.2.1 Why to Manage Inventory and Operating Expenses? Synchronous manufacturing calls for: (a) Increased throughput requirements (b) Manage inventory and production expenses.

. Establish balance between reduced inventory and operating expenses -

Figure 29.1 Three elements of The Goal Increased throughput means better (fast and smooth) flow of material. But, inventory and production expenses are inversely related. When inventory increases, the operational, expenses may reduce (Figure 29.1). For example, to reduce the operational expenses, we may decide to so for large batch-size and fewer

437

GOLDRATT'S THEORY OF CONSTRAINTS

set-ups. But what will be the effect on inventory? The work in process inventory will start building up. (Note that in JIT, we go for smaller batch-size and more set-ups). Conversely, low inventory causes higher operational expenses. Now, the next question is: what can be the lowest limit of batch-size? It is one item per batch (like, ideal MT system), in which the inventory is minimum. But, this system of one item per batch will have highest possible batch-processing and thus will lead to very high operating expenses. Therefore, there is a need to manage the inventory and operating expenses so that their cumulative effect is minimum at a high throughput. 29.3 CONSTRAINT The throughput of a manufacturing system will naturally increase until it is limited by some constraint or bottleneck. Typically, a bottle is narrowest at its neck and thus the flow through the bottle is restricted by the size of its neck. Resource, which is bottleneck (also, termed as constraint), is the main cause Of low flow of material through all the processes (or, throughput). Goldratt, in his initial work, used the term "bottleneck" to describe a limiting-machine. Later, he realised the fact that in a complex system, many things are related. These-are: resources, both manufacturing and non-manufacturing, schedules, capacities, etc. In these systems, the identificatiOn of real bottleneck is difficult. He used the term constraint to describe limitation that restricts throughput and goal (Figure 29.2). Queues or upstream to he serviced

Upstream

Bottleneck restricts the flow

Bottleneck (Constraint)

Downstream Starved of Full Flow

Downstream

Figure 29.2 Effect of constraint on the flow (or throughput)

Bottleneck ... a point or storage in the manufacturing process that holds down the amount of product that a factory can produce. It is where the flow of material, being worked on, narrows to —Bylinsky (1983) a thin stream. A machine, which is always busy will limit the throughput of the entire plant. A highly skilled or specialised operator or a very costly tool may be the bottleneck. 29.3.1 An Example from Industry (A Case-Study) A leading scooter factory of northern India had an assembly line, in which there was a special purpose machine (SPM). It had four workstations. Station 1 was for loading/unloading of the parts (which is a crank shaft).

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INDUSTRIAL ENGINEERING AND MANAGEMENT

The second, third and fourth workstations were for various operations in a sequential order. These operations were drilling, spot-facing, chamfering, boring and counter boring. The company hired a consultantteam. The consultants observed the entire assembly line. SPM was found to be heavily loaded. The cost of duplicating SPM was too high. The company wished to increase the production capacity of the plant (which was around 30,000 two-wheelers). The cycle-tin ^ on SPM was about 71 seconds per part. It was lesser elsewhere in the assembly line. Thus, SPM was identified as the bottleneck. The consultants deliberated on the working of SPM and designed a combination tool, which was sufficient for all the operations, earlier performed on the three stations (Stations 2, 3 and 4) (Figure 29.3). Station 3 (Operation 2)

I

Station 2 (Operation I

(1

Station 4 Operation 3) SPM

Station I (Loading/ Unloading)

L WIP-out

(a) Present SPM is the Bottleneck 3 (Loading, Unloading)

50% Combination tool

Combination tool

SPM WIP-out

Station 2 (Operation I, 2, 3)

Station 4 (Operation 1, 2, 3) Station I (Loading, Unloading)

100%

7""

50%

(b) Proposed change in SPM : Handling of Bottleneck Machine by introducing two combination-tools at station 2 and 4 Figure 29.3

Industrial example of TOC-application

This improvement in SPM, by introducing two combination tools (of same type) at stations 2 and 4 and two loading/unloading stations at stations 1 and 3, virtually increased the throughput. by nearly seventy percent (Ideally, it should have been little more due to increase capacity of the SPM). One of the important lessons of this case-example is: reduced set-up time increases the throughput. By combining three operations, which were easier performed on three stations, there is a substantial saving in nonvalue-added time. of production. The bottleneck capacity increases dramatically due to more time available for value-added operations. Incidentally, once this SPM ceased to be the bottleneck, another process. in the assembly line wouln become the constraint. The company may now wish to attack the emerging bottleneck machine/operation for increasing the throughput to a still higher level.

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GOLDRATT'S THEORY OF CONSTRAINTS

The manufacturing system may be considered, to be analogous to the chain having different links. The chain is as strong as its weakest link. It is important to improve the strength of the weakest link for improving the strength of chain. Same is true for any system. In the context of a manufacturing system, the concept of constraint, and the analogy of chain provides following insights: • Throughput of system is limited by the critical (or, weakest) link in the system, which is the constraint of the system. • It is of no great significance where the weakest link or constraint is located. As soon as this link fails, the entire system will fail. • Manufacturing system, like the chain, should be considered as a whole. • Due to bottleneck (or, constraint): 1. Production upstream will produce excess inventory and generate queues. Any queue is a sign of inefficiency, which must be removed. 2. Production (or, operation) downstream will remain starved. This will cause the underutilization of manufacturing/human resources. The under-utilization is again a sign of inefficiency, which must be removed. • Due to above reasons, the thrust should be on continuous identification and removal of constraints. This gives rise to the Theory of Constraints. 29.4 THEORY OF CONSTRAINTS (TOC)

Theory of constraints (TOC) has evolved through different works of Eli Goldratt. The base of TOC is a combination of cause and effect and thinking process (Figure 29.4). Identify the constraints or the system

2 Decide how to exploit the constraints or the system

3 Subordinate everything else to the above decision

4 Elevate the system's constraints of the system

5 Does a new constraint limit throughput?

Yes

No 6 Do not allow inertia to cause a system constraint

Figure 29.4 Focussing Steps in TOC

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INDUSTRIAL ENGINEERING AND MANAGEMENT

To Understand TOC, Dr. Goldratt gives a simple example. Corporate may be analogous to a chain. Different links are connected one after another to form the chain. Various divisions, departments, products or rules are analogous to link. The strength of the chain is the strength of its weakest link. The weakest link restricts the chain's capability in transmitting a greater force. Similar is the case for corporate. Every system contains at least one constraint, which prevents the system from attaining very high level of performance. Therefore, TOC emphasises the need to identify constraints that prevent the system from achieving infinite profits, which is the goal of the co►porate. Constraint • Anything that limits a system from achieving highest performance verses its goal is the constraint. TOC 1. Every system must have at least one constraint, limiting its output. 2. The more complex the system, the less independent process paths exist, so the lower the number of constraints. Generally, complex systems have only one constraint at a given time. 3. Identify the system constraints. Constraints of weakest link are the critical link. Unless weakest link is strengthened by removing the constraints, no improvement is possible. 4. Exploit the system constraints. A system of optimum processes cannot be an optimum system. 5. Subordinate everything else to that decision by aligning every other part of the system to support the constraints. This may sometimes reduce the efficiency of non-constraint resources. 6. Elevate the system constraints. For inadequate output, acquire more resource so that it is not a constraint now. 7. A void inertia to become the system constraint. If the constraint has already been resolved, go to Step 1. For continuous improvement, identify constraints, break them, and repeat the process again and again. 8. An optimum system runs the constraint (or bottleneck) at optimum capacity (focused on the goal of the system), and all other process steps must have excess capacity. 29.5 RULES FOR BOTTLENECK SCHEDULING IN TOC

A proprietary scheduling system for TOC by Goldratt initiated aggressive marketing of software, Optimized Production Technology (OPT). The principles involved in OPT are helpful in handling bottlenecks in the scheduling of the production systems. These rules are as follows: 29.5.1 Rule 1

Rule 1: Balance Flow, not Capacity Line balancing, which is an example of tradition system, attempts to balance the capacity of each workstation. Work-stations are so designed that their capacity is nearly same and, hence, there is a high utilization factor. OPT, using TOC on the other hand, focusses on balancing the flow within the plant (rather than resources as in line-balancing). This will ensure the identification of bottleneck (on constraint). Once the bottleneck is handled for improvement, the throughput of the system increases. 29.5.2 Rule 2

Rule 2: The level of utilization of a non-bottleneck resource is determined not by its own potential but by some other constraint in the system.

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GOLDRATT'S THEORY OF CONSTRAINTS

To understand this rule, let us consider the four classic relationships of bottleneck and non-bottleneck resources: (i) Type I Relationship: In this relationship, a bottleneck resource (B) feeds work-in process material (WIP) to a non-bottleneck (N) resource. Let us presume that both resources (B and N) are placed in the middle of an assembly line. Thus, these are followed and preceded by few other resources, which are non-bottleneck (N). Figure 29.5 depicts this relationship: Material is Material -flow t supplied at a N(throughput) is limited by B rate B

Material is consumed at a rate B

Legend

F131 Bottleneck resource, having slower processing rate, B resource having faster processing FN1 Non-bottleneck rate; N (note, B < N) Material flow Figure 29.5 Type I relationship

For this relationship, despite non-bottleneck resource being faster, cannot deliver faster than the output rate of bottleneck resource, which is B. Thus, the non-bottleneck resource is a starving resource, which is under-utilized. This is also illustrated in Figure 29.2. (ii) Type H Relationship: In this relationship, a non-bottleneck resource (IV) feeds work-in-process material (WIP) to a bottleneck (B) resource (Figure 29.6). Building-up of inventory at a rate (N-B) Material can be supplied at rate N

Material can be consumed at N rate N

rnl

1

1 1 Material consumed at rate B

Material-flow (throughput) is limited by B

Legend

I BI

Bottleneck resource, having slower processing rate, B

N Non-bottleneck resource having faster processing rate; N (note, B < N) Material flow

Figure 29.6 Type, II relationship

For this relationship, the difference between the supply rate of non-bottleneck (N) and bottleneck (B) is the inventory pile-up rate between the non-bottleneck and bottleneck resources (see Figure 29.6). The throughput is still limited by the capacity of the bottleneck.

INDUSTRIAL ENGINEERING AND MANAGEMENT

442

(iii) Type III Relationship: In this relationship, a bottleneck and other non-bottleneck resources feed parts to an assembly operation (which is a non-bottleneck). Material is supplied at rate B

Material is consumed at rate B

Material flow (throughput) is limited by B

B Material can be consumed at rate B

Material can be supplied at rate N

N \ Material going at a rate B to the next assembly station Inventory I I I pilling up at I I I rate (N-B) Legend C

B I Bottleneck resource, having slower processing rate, B

Ei

Non-bottleneck resource having fastei processing rate; N (note, B < N) Material flow

Figure 29.7 Type Ill relationship

For this relationship (Figure 29.7), the difference between non-bottleneck and bottleneck resource is the inventory pile-up rate. The assembly resource (A) is also• under-utilized, m its capacity is faster than that of bottleneck resource. (iv) Type IV Relationship: In this relationship, both non-bottleneck and the bottleneck resources directly supply in the market (Figure 29.8): Material consumed at rate B

Material could be consumed at rate N

B

B

Material supplied at rate B

Material could be supplied at rate N

Figure 29.8 Type 'IV relationship

The bottleneck resource, whose rate is lesser than the market demand, is utilized at its 100% capacity. The non-bottleneck resource can be utilized at 100% only when the market demand increases, otherwise it will remain under-utilized.

443

GOLDRATT'S THEORY OF CONSTRAINTS

Through all the four relationships just discussed, following guidelines emerge: (a) Utilize bottleneck at 100% capacity. (b) Under-utilize non-bottleneck to eliminate the inventory pile-up. (c) The level of utilization of non-bottleneck is determined by the capacity of bottleneck and not by its own capacity. In the last (IV) relationship, it is driven by market demand. (d) Enforcing idle time on non-bottleneck and tolerating a certain level of inventory pile-up should have an optimal trade-Off. (e) Throughput of the plant is limited by the capacity put of the bottleneck resource (which is the constraint). Therefore, these rules suggest that the non-bottleneck should not produce more than the absorptioncapacity of bottleneck resources, otherwise there will be an increase in inventory pile-up and the operating expenses. Thus, under-utilization of non-bottleneck is the only prudent strategy. 29.5.3 Rule 3

Rule 3: Utilization and activation of a resource are not synonymous or the same thing. Traditionally, activation of resource and utilization of resource are treated as same thing. Goldratt, in his TOC, treats these two issues separately. First, let us understand: what is the difference between utilization and activation? Activation: "What we should do" is activation. It is the indication or doing the required work. Activation is directed towards effectiveness. It is system's measure of performance or holistic approach. A non-bottleneck machine may be active (producing 100%), yet not doing anything useful beyond the capacity of bottleneck. Utilization: "What we can do" is utilization. It also includes performing work not needed at a particular time. Utilization is directed towards efficiency. It is a reductionist measure of performance or mechanistic approach. Example 29.1 Non-bottleneck (capacity : 100 per day)

100 parts coming out

At 100% efficiency of non- bottleneck

60 parts going in

Bottleneck (capacity : 60 per day)

60 parts coming out

100% efficiency of bottleneck

Inven ory building up I at 40 part per day 1

ral

I

l

1

Figure 29.9 Both non-bottleneck and bottleneck operating at 100% efficiency

Let us assume that a non-bottleneck has a capacity of 100 parts per day while a subsequent bottleneck has capacity of 60 parts per day (Figure 29.9). When both resources work at 100% efficiency, the inventory building-up is (100-60) or 40 parts per day. However, at a global or holistic level, the system (combined) is operating at only 60% efficiency level as throughput is 60 parts per day. Thus, the utilization of nonbottleneck (i.e., 100%) is not same as its activation (i.e., 60%) as it is effective for only 60% of its capacity.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Traditionally, activation and utilization have been considered as same: TOC/OPT/Synchronous manufacturing treats these separately. Therefore, the scheduling of all non-bottleneck resources of the manufacturing system should be done on 6e basis of the constraints of the system (i.e., bottleneck resources). A non-bottleneck should be scheduled so that it is always available, when needed, to support the· non-bottleneck resource. However, it cannot remain busy all the time. Scheduling Rul.es in TOC (Goldratt): 1. Balance the flow, not capacity 2. The level of utilization of a non-bottleneck resource is determined not by its own potential but by some other constraint in the system. 3. Utilization and activation of a resource are not synonymous or the same thing. 4. An hour lost at a bottleneck is an hour lost for the entire system. 5. An hour saved at a non-bottleneck is just a mirage. 6. Bottlenecks govern both throughput and inventory in the system. 7. Transfer ·batch may not and many times should not be equal to the process batch. 8. A process batch should be variable both along its route and in time. 9. Set the schedule by examining capacity and priority simultaneously arid sequentially. Lead times are the result of a schedule and cannot be predetermined. 29.5.4 Rule 4 Rule 4: An hour lost at a bottleneck is an hour lost for the entire system.

Let us presume that there is sufficient demand for parts in the market. Now, if the bottleneck of . the previous example· (in, Rule 3), is running at 100% capacity and, by chance, it stops for an hour, say, for repair and maintenance. An hour lost on this. bottleneck will directly reduce the overall production rate (throughput) by one hou:r. This will be the case, even if there is enough inventory pile-up before the bottleneck. An hour lost on bottleneck can never be recovered because this machine will never have time to process parts, which would otherwise been made in the lost time. This is due to non-availability of buffer capacity for bottleneck. · Therefore, an hour lost on bottleneck is an hour lost for the entire factory. In short, if the bottleneck has lost one hour, the overall impact is: '.'the factory has stopped for one hour." 29.5.5 Rule 5 Rule 5: An hour saved at a non-_bottleneck is just a mirage:

For a non-bottleneck resource, there is some idle time, during which either this res·ource is unutilized or producing inventory pile-up. Even in case 'lhe working or processing time of this resource is crashed, the overall impact on, the system will be zero as far as throughput is concerned. This is b�cause throughput is dictated by the bottleneck resource. Therefore, TOC advocates attack on bottleneck for increasing its efficiency. Let us look at the set-up time, which is needed for setting the tool/machines, etc., for each batch of part�processing. Traditional system treats set-up time for bottleneck and non-bottleneck resource equaUy. TOC advocates different approaches.

445

GOLDRATT'S THEORY OF CONSTRAINTS

In Table 29.2, an example is presented. In this, the bottleneck resource processes one batch of part in 14 time units (hour), while non-bottleneck does it in 12 time units (thus, has 2 units of idle time per batch). Read this table column-wise. The processing of batch of this part first goes to bottleneck, followed by on the non-bottleneck. Originally, due to lesser processing time (PT) on the non-bottleneck, there is an idle time (IT) of 2 hours on non-bottleneck. When, the set-up of bottleneck is squeezed by one hour, the idle time of non-bottleneck reduces by one hour and the system throughput increases due to faster disposal at bottleneck. However, when the set-up of non-bottleneck is squeezed by one hour, its idle time increases by one hour due to no change at bottleneck resource. Throughput remains same: Table 29.2 Effect of an hour saved on bottleneck or non-bottleneck

Bottleneck Resource --3

'

Schedule Chart (Original)

Resource

Set-up ' time (ST) I 2

0

Processing time (PT )

1 4

i 6

I 8

. I I 10 12 14

Set-up time (ST) I 2

0

. • Set-up time Processing time IT (PT) (ST) I 0

Observation

—3

2

4

Set-up time (ST)

Processing time (pT) i 4

I 6

i 8

ill I 10 12 14

0

Set-up time (ST)

I

I

t I I'

6

8

10 12 14

0

2

I

I

6

8 /40 12

i 6

I 8

i i 10 12 14

Time (hour) --4

Set-up time (ST)

Processing time I (PT) T

4

Processing time (PT)

i ) i 2 4

'l'ime (hour) —3

Time (hour) —)

Non-bottleneck Resource

When an hour is saved on set-up of nonbottle-neck (Rule: 5)

When an hour is saved on set-up of bottleneck (Rule : 4)

i / 1 ! 1 14

0

I 2

Processing time (PT)• I 4

I 6

I 8

IT

I I 10 12

1 14'

Time (hour) -'lime (hour) --4 Time (hour) —3 Original: For bottleneck: ST = 4; PT = lo When an hour is saved on When an hour of set-up is saved set-up of non-bottleneck on bottleneck: For non-bottleneck: ST = 4; PT = 8 IT = 14 — L2 = 2 For bottleneck: ST = 3; PT = 10 For bottleneck: ST = 4; PT = 10; For non-bottleneck ST = 4; PT = 8 For bottleneck: ST = 3; PT = 8; IT= 13 —12 = 1 11=14-11=3 Processing rate = One batch 4 per 14 time units

Processing rate = One batch per 13 time units

Processing rate = One batch per 14 time units

Thus. throughput increases (Refer: Rule 4)

Thus, throughput is same as original one (Refer: Rule 5)

Thus, an hour saved on non-bottleneck has no impact on the system performance (which is the throughput in this case). Looking at the condition of lower set-up time of non-bottleneck, we find an important observation.' Lower set-up time of non-bottleneck can facilitate more numbers of set-ups and, thus, batch-size can be reduced in part processing. The effect of lower batch size means: (a) Lower build-up inventory (b) Lower operating expenses (c) No effect on throughput.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

29.5.6 Rule 6 Rule 6: Bottlenecks govern both throughput and inventory in the system. One of the most important reasons to maintain in-process inventory is to keep bottleneck machine busy. There must b;° no time loss on it. WIP is to ensure continuous feed to bottleneck. Throughput of the system is governed by the bottleneck and an hour lol/saved on it will reduce/increase the system throughout. This feature is already explained in the previooJ c. Ample. 29.5.7 Rule 7 Rule 7: Transfer batch may not and many times should not be equal to the process batch. Lot size is an important variable, which plays vital role in inventory build-up and throughput. OPT advocates two lot sizes (rather than one, as in traditional system). These are transfer-batch and processbatch (Figure 29.10). From part point of view, lot size is the transfer batch size. However, from resource point of view, lot size is process batch size.. Let us look at . the example to follow: Example 29.2 Let us consider an example. Suppose a part requires three operations: milling, drilling and inspection. The processing time for individual part and for one process-batch of 100 parts is as follows: Operation

Processing Time for one part

Milling Drilling Inspection Total

Processing Time for one batch of 100 pails

0.45 hour 0.35 hour 0.20 hour 1.00 hour

45 hours 35 hours 20 hours 100 hours

When process-batch is same as transfer-batch, the situation is same as in Figure 29.10. Thus, when milling of 100 items is complete, they are transferred to drilling and so on. The total time is 100 hours. If the transfer-batch is smaller than process-batch (which is 100), a smaller batch (say 44 parts, after getting processed on milling, transferred from milling to drilling after every 20 hours; and 57 parts, after getting processed on drilling, transferred to inspection after every 20 hours of drilling for this batch) •may be transferred to next operation on the process-sheet. The situation may be one like shown in Figure 29.11. In the modified scenario, there will be a substantial reduction in total busy time of machines and overall increase in the throughput-time. In addition, there will be marked reduction in inventory pile-up and Inspection

Drilling

Operation Milling

0

20

,40

60

80

100

Time (hour) Figure 291.0

Process batch and transfer batch are equal

447

GOLDRATT'S THEORY OF CONSTRAINTS

Inspection

' Drilling

Operation

•

I Milling

0

20

40

60

80

100

Time (hour)

Figure 29.11 Process batch is. greater than transfer batch operating expenses.

Thus, one process-batch (which is 100 in above example) needs one set-up on machines. However, in each process-batch, there may be more than one transfer to next machines. As shown above, the smaller transfer-batch (than process-batch) increases the throughput, reduces inventory pile-up, operating expenses and the total busy time of the resources. 29.5.8 Rule 8 Rule 8: A process-batch should be variable both along its own route and in time. The process-batch at different levels of manufacturing: both route2wise and time-wise, should be different. Traditionally, we follow a fixed batch-size unless exceptional situation occurs. OPT argues against it. In OPT, lot size is a dynamic decision, which should change as per time and situation. It should be decided upon issues such as inventory level, set-up time/cost, material handling, flexibility and agility of the system, uncertainty on the shop-floor as well as in market, etc. It the resource is non-bottleneck, we can afford to have smaller process-batch; but if the resource is bottleneck, we should gd for larger process-batch. 29.5.9 Rule 9 Rule 9: Set the schedule by examining capacity and priority simultaneously, not sequentially. Lead times are the result of a schedule and cannot be predetermined.

In a tradition system (such as, MRP), the lead time is fixed and predetermined. However, OPT advocates that scheduling must recognize that lead time is not necessarily a fixed quantity. It may vary Jos efunciion of schedule. The schedule should be set by examining the capacity and priority simultaneously. 29.6 SYNCHRONOUS MANUFACTURING Synchronous manufacturing is a relatively newer approach, which uses forward scheduling to manage the production/manufacturing system. Just-in-time (JIT)-based system of kanban-approach and Drum-bufferrope (DBR)-based system of TOC-approach are the two• common types of forward scheduling approaches (Table 29.3). MRP, on the other hand, is a backward scheduling approach. We have already covered MRP in Chapter 20 and JIT in Chapter 21. Synchronous manufacturing uses TOC as a way to incorporate forward scheduling. It focusses on critical resources so that time-wise forward scheduling is do. Non-bottleneck or non-critical resources are used to resolve critical constraint. Process-batch size and t1ansfer-batch size are charged in-synchronous

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INDUSTRIAL ENGINEERING AND MANAGEMENT

manufacturing to reduce lead time and WIP. A backward scheduling technique, such as MRP, cannot perform this task. Table 29.3 Forward Scheduling Technique

Forward Scheduling Approach Approach

Philosophy Involved

Just-in-time (JIT)

Kanban

Implementation during uncertainty and disturbances of system In case of high uncertainty and/or disturbances (Just-in-time) in the production system, JIT tends to be a failure in delivering the real benefits. In case of non-repetitive manufacturing, non-stable production level, inflexibility in the product produced, far off located vendors, etc., JIT system is in-effective.

Drum-buffer-rope (DBR)

Theory of

Effective implementation is possible in these

Constraints (TOC)

conditions.

Definition of Synchronous Manufacturing Synchronous manufacturing is a manufacturing management philosophy that includes a consistent set of principles, procedures,

global goal of the

system.

and techniques, where every action is evaluated in term of the —A PICS Dictionary

The traditional and synchronous manufacturing are differ as follows

(Table 29.4):

• Table 29.4 Traditional vs. Synchronous Manufacturing System

Traditional approach 1. Focus on reducing the production cost as a

Synchronous Manufacturing approach 1. Focus on fast yet smooth flow in the shop

means to establish the best process and practice of manufacturing 2. Efficiency of system is more important than product flow. 3. The reduced product cost requires: (a) Large batch-size (b) Fewer set-ups 4. Reduced cost at individual product and

2. Smooth and efficient product/material flow is more important. 3. Rules of game (a) Smaller batch-size (b) More set-ups 4. Enterprise-level broad view with global goals of

level will reduce the total enterprise cost

the system will make the enterprise most

due to their cumulative effect.

effective.

5. Measure of performance: — Low cost

5. Measure of performance — Throughput — Inventory — Operating expenses

6. Philosophy: conventional cost optimi-

6. Philosophy: JIT or. TOC

zation approach 7. Approach: Reduce cost, increase profit, value engineering

7. Approach: Meet throughput, and efficiently manage inventory and operating expenses.

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GOLORATT'S THEORY OF CONSTRAINTS

29.7 SUMMARY Goldratt's theory of constraint has attracted the attention of many practioners in the industry. His concept of goal, constraint, throughput, thinking process, critical chain and scheduling through OPT have helped many industries to improve their performance. Nine rules of OPT are helpful in developing the framework for TOC.

REVIEW QUESTIONS 29.1 What is the concept of goal? Explain the terms: constraint, bottleneck, non-bottleneck and throughput. 29.2 How does bottleneck affect the throughput? 29.3 Why is it important to manage inventory and operating expenses? 29.4 Explain the concepts involved in TOC. What are the different steps involved in TOC? 29.5 Explain the nine rules for bottleneck-scheduling in TOC. 29.6 Explain the synchronous manufacturing. How is TOC related to it?

REFERENCES 1. Bauer, Bowden and Browne J, 1991, Shop Floor Control Systems, Chapman and Hall. 2. Browne, J., Harhen, J. and Shivnan, J., 1988, Production Management Systems: A CIM perspective, AddisenWesley Publishing Company. 3. Chase R.B., Aquilano, N.J. and Jacob F.R., 1998, Production and Operations Management, Irwin McGraw Hill, Boston. 4. Childe S.J., 1977, An introduction to Computer-aided Production Management, Chapman and Hall, London. 5. Goldratt, E., 1980 "Optimized production time tables: a revolutionary program for industry", In the proceedings of the 23rd APICS Conference, Los Angeles, Oct. 1980, pp 172-76. 6. Goldratt, E., 1990 a, Theory of Constraints, North River Press, New York. 7. Goldratt E., 1990 b, The Haystack Syndrome; North River Press, New York. 8. Goldratt. E., 1994, It's not Luck, Gower, Aldershot. 9. Goldratt, E. and Cox, J., 1993, The Goal Gower, Alder Shot. 10. Shucavage D., 1995, Crazy about constraints (http://www.bn.com/--dshu/toc/cac.htin1).

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IMPORTANT NOTES

30 ENTREPRENEURSHIP

30.1 INTRODUCTION

Peter F. Drunker; a leading management expert defines entrepreneur as follows: An entrepreneur is one who always searches for change, responds to it, and exploit it as an opportunity. Entrepreneurship is the trait or characteristic which an entrepreneur possesses. It is the prime-mover of industrial development. A spirit of enterprise makes a person an entrepreneur. Entrepreneur is thus an innovator, who carries out new combinations in ever-changing environment, to initiate and accelerate the process of economic, social and technological development. Initiates . Organises Manages Business • Agriculture • Industry & Trade

Enterprise to-

Individual

Controls Carries Risks Innovates Brings Resources

• Service Sector • Profession ....

Figure 30.1 A Model of Entrepreneurship

In Figure 30.1, entrepreneur is explained as an individual, who interacts with a business environment of agriculture, industry, service or profession. His main trait includes initiative, organisation, management, controller, risk-taker and innovator. Cantillon, whO was a French banker, first used the term entrepreneur. In the context of food-processor and a seller-agent, he used this term as one, who carries risk due to uncertainty in farming and for a price to be paid by city dwellers. Further developments in this area established entrepreneurship as an established discipline of knowledge and research. It is the key element in the industrial development

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INDUSTRIAL ENGINEERING AND MANAGEMENT

of any nation. There is a great interest in this discipline due to the economic link of entrepreneurship in 'nation building. A relatively recent term in this context is Intrapreneuring. Gifford Pinchot III in 1985 wrote a book on this. He refers this term to a person, who as a manager in a company functions like an entrepreneur. Independent business units or profits-centres are devised within an organisation. Each is headed by a chief executive, who carries all the qualities of an entrepreneur. Many multinational companies are now working on this idea. The difference in entrepreneur and intrapreneur is related to the bigger organisational network in case of intrapreneur which covers risks and helps in raising capital for an intrapreneur. 30.2 ROLE OF ENTREPRENEURSHIP IN ECONOMY

Entrepreneurship is basically a process of "creative destructions". Joseph Schumpeter (1911-1950) explains this. Established ways of doing things are destroyed by creative, new and better ways of doing things. Entrepreneurship therefore challenges the order of society through creative changes. Entrepreneurship is the process and entrepreneurs are innovators who use the process to shatter the status quo through new combinations of resources and new methods of commerce. —Joseph Schumpeter Entrepreneur has to redirect resources from areas of low or diminishing results to areas of high or increasing results. He has to slough off yesterday and to render obsolete what already —Peter Ducker (1974) exists and is already known. He has to create tomorrow. Entrepreneurship is the process of creating wealth by bringing together resources in new ways to start a venture that benefits customers and rewards its founders for their innovation. —David H. Holt (1993) Resources to produce results must be allocated to opportunities rather than to problems.... Maximization of opportunities is a meaningful, indeed a precise definition of the entrepreneurial job. It implies that effectiveness rather than efficiency is essential in business. —Peter Drucker (1964) Entrepreneurship plays an important role in the development of economy. Every developed nation have benefited from their entrepreneurs in building the economy. Bill Gate in USA is one such entrepreneur, who steered the software industry to new heights through his Microsoft Company. In India, numerous examples exist for successful entrepreneurs, who successively built empire of their corporate structure. Dhirubhai Ambani grew to a phenomenal height through Reliance industries. Jamshedjee Tata, in Steel Industry, Pawar in computer education are few other examples of successful entrepreneurs in recent times. Government is also keen to develop the entrepreneurship skill' in emerging technocrats. For this, elective courses are available in many engineering disciplines: Concept of industrial estate has emerged during recent years. Many big industries and engineering institutions have industrial estates in near vicinity. For example, near Regional Engineering Colleges at Allahabad and Jamshedpur industrial estates have been established for giving entrepreneurial opportunities to up-coming technocrates.

ENTREPRENEURSHIP

453

30.3 QUALITIES OF GOOD ENTREPRENEUR

Entrepreneurs are business leaders. They are persons with vision. They have drive and talent. They spot out the opportunities and promptly seize them for exploiting to economic gains. Entrepreneurs should have the following qualities (Table 30.1): Table 30.1 Qualities of Good Entrepreneur

An entrepreneur should be: • Creative • Innovative • Risk Taker • Capital Generator • Leader • Motivator • Adaptive to Suggestions • Energetic • Committed • High Perseverance Person • Able to Assume Responsibility • Able to Deal with Failure • Tolerant for Ambiguity

• Good Manager • Self-confidence • Flexible to Changes • Dynamic • Profit Oriented • Optimist • Versatile • Knowledgeable in Technology • Intuitive • Achiever • Resourceful • Goal Directed • Problem Solver • Peripheral (Related) Area Aware • Low Need for Status and Power

An entrepreneur should have qualities of many individuals in one. He should be resourceful to bring capital and management. He should have a vision for future. He should be an example setter and a good leader. He should be energetic, yet flexible to environmental changes. A good entrepreneur should have good knowledge of product and technology. He should have a quest for success and achievement. He should have capability to build an organisation culture. According to Peter Kilby, an entrepreneur should have the following functions: • Purchasing inputs • Dealing with bureaucrats • Perceiving market opportunities • Gaining command over market • Managing human resources of the firm • Managing customer and supplier relations • Managing finance • Managing production • Industrial engineering • Upgrading process and product quality

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INDUSTRIAL ENGINEERING AND MANAGEMENT

• Introduction of new production techniques and products • Marketing the products

Growth

Later Growth Stage

•

Pre-stag-up Stage J Stages in Business Venture

0

Planning of venture and preliminary work to bring resources and start-up for organisation.

Position the venture into market and make necessary changes Ibr survival and growth.

Bring major changes in market, finance, resource utilization, technology adoption, corporate building, diversification, total quality and continuous improvement strategy.

Consolidation of growth and image building. Need to involve professional management into venture, brand establishment, diversification, acquisition, and business process re-engineering strategy.

Role of Entrepreneurship 11

Figure 30.2

Role of Entrepreneur in Different Phases of Venture

30.4 SOME MYTH AND REALITY ABOUT ENTREPRENEURSHIP

There are many myths about entrepreneurship in literature. In fact, unlike popular belief, entrepreneurship is a trait, which needs to be taught rather than being a trait, which is natural. Myths and realities are shown in Table 30.2.

ENTREPRENEURSHIP

455 Table 30.2

Myth and Reality about Entrepreneurship

Myth

Reality

1, Entrepreneurs are born; not made.

,'Entrepreneur traits and characteristics may be acquired through structured learning,

2. Entrepreneurs are doers; not thinkers.

Frequent thinking in planning, innovation, creativity and risk behaviour are needed.

3. All that is needed in entrepreneurship is money

Generally, it is observed that excessive and surplus capital reduces the risk of taking behaviour, care for scarce resources and grasp for opportunities.

4. All that is needed is luck.

Successful entrepreneurs assume responsibility for success and failure. They downplay the role of luck in the success and failure.

5. Entrepreneurship is a profile of traits and characteristics.

Entrepreneurship is a combination of situational issues.

6. Business schools have no place in entrepreneurship.

Entrepreneurship has emerged a, a well-developed discipline in business school and engineering courses.

30.5 ROLE OF MOTIVATION IN ENTREPRENEURSHIP Motivation is central to the way an entrepreneur behaves in a business environment. Motivation is dependent

upon the potencies of needs. Moslow identified a hierarchy of needs, which govern the pattern of motivation. These needs are physiological, safety, social, esteem and self-actualization. Porter and Lawler (1968) proposed need-expectancy theory for explaining the effort needed to fulfill an unfulfilled need. A modified motivation model for entrepreneurship is shown in Figure 30.3. The strength of an unfilled need of an entrepreneur and expectation of beneficial-outcomes motivate an entrepreneur for efforts in venture. Combined with these, the individual capabilities of the entrepreneur govern his performance. The opportunities in business environment and risk due to future uncertainty affect the rewards, which. are intrinsic and extrinsic both. Intrinsic rewards are related to factors internal to the entrepreneur, such as self-satisfaction, pride, etc. Extrinsic rewards are more towards material, wealth and growth. Environment Strength of need

Efforts of Entrepreneurship

Expectation or outcome

Industrial Capabilities

Satisfactions Generated

Figure 30.3

Rewards • Intrinsic • Extrinsic

Rewards • Performance of Entrepreneur

Uncertainty & Risk

Modified Porter and Lawler (1968) model for Entrepreneurship

30.6 FUNCTIONS AND NEED FOR DEVELOPING ENTREPRENEURSHIP An entrepreneur plays important role in developing nation's economy. Following functions may be listed: (i) Prime-mover of economy

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Management of business venture (iii) Decision making (iv) Location of plant site and decisions regarding product and production (v) Organisation of business (vi) Management of supply-chain, which includes customer and supplier-relations. (vii) Innovations in business strategy. (viii) Bringing finance into business and arrangement of material, machinery and man-power (ix) Personnel decisions (x) Dealing with Government bureaucracy, tax department, electricity and other personal-relation activities (xi) Pricing decision making (xii) Overall coordination of a business venture. 30.7 ENTREPRENEURIAL FAILURE AND REMEDIAL MEASURES

There are many causes of failure in an entrepreneurial venture. Some of the important reasons and their possible remedial measures are listed in Table 30.3. Table 30.3 Reasons for Entrepreneurial Failure and Remedial Measures Reasons for Entrepreneurial Failure 1. Management related problems

• Inexperience • Incompetencies • Inefficient • Lack of support 2. Individual problem • Arrogance • Lack of faith • Behavioural problem 3. Production problems • Insufficient technological know-how • Power and water problem • Product related problem • Machinery related problem • Worker related problem 4. Financial problem • Capital problem . • Working capital problem 5. Tax problem 6. Marketing problem 7. Indulgence in fraud and cheating 8. Natural calamities 9. Negligence of entrepreneur 10. Governme-t policies 1 I. Market competition

Remedial Measures

• Training • On-job experience

• Behavioural therapy • Behavioural training for modification

• Hiring professional plant engineers and industrial engineers • Hiring professional management • Hiring consultants

• Seeking supports of financial institutions like SIDBI, NABARD, IFCI, IDBI, etc. • Hiring tax consultants • Hiring good sales force • Non-indulgence in these activities • Insurance and precautions • Precaution and partnership • Devising alternatives • Devising market research and planning.

457

ENTREPRENEURSHIP

REVIEW QUESTIONS 30.1 Define and explain entrepreneurship. Explain the role of entrepreneurship in the nation's economy. 30.2 What are the qualities of a good entrepreneur? . 30.3 Explain the role of an entrepreneur during different phases of the venture which he undertakes. 30.4 What do you understand by motivation? Explain the role of motivation in building entrepreneurship. 30.5 What are the needs for developing entrepreneurship? 30.6 Why does entrepreneur fail in his/her venture? What can be done to avoid this?

RE1ERENCES 1. Burch, J.G., 1986, Entrepreneurship, John Wiley & Sons, New York. 2. Gupta, C.B. and Srinivasan, 1994, Entrepreneurial Development, Sultan Chand & Sons: New Delhi. 3. Pareek, U. and Rao, T.V., 1978, Developing Entrepreneurship, Learning Systems: New Delhi. 4. Sharma, R.A., 1985, Entrepreneurial Performance in Indian Industry, Inter-India Publication: New Delhi. 5. Sharma, R.A., 1980, Entrepreneurial Changes in Indian Industry, Sterling: New Delhi.

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IMPORTANT NOTES

31 LEADERSHIP

31.1 INTRODUCTION Leadership is the art (or process) of influencing people for willingly and enthusiastically striving for the achievement of group goals (Figure 31.1). Leadership, thus involves the following ingredients: 1. Ability to influence and persuade others 2. Seeking same defined group-goal or objectives E N

V 1

Organisation'al goals

Higher productivity ti

Role/Behaviour

Better management 11

R N M E N

Management Activities

Influenced/ Motivated subordinates

—1=1 Figure 31.1 Basic Process in Leadership

3. Enthuse people for willing acceptance of responsibility (or role) 4. Involvement of a group of people 5. Human factor to bind and motivate the group 6. Important in achieving the management goal of planning, organising, staffing, controlling, supervision, coordination and decision-making 7. Focus on human or people aspect of management 8. Managerial activity, which influences people to maximize productivity, stimulates creativity for problem solving, promotes morale and satisfaction, and enthuses to achieve organisational objectives. 9. A good working inter-personal relationship between leader and followers 10. Situation specific

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11. Generally emerges through a power relationship between leader and followers 12. COntinuous, dynamic process which changes with time. 31.2 LEADERSHIP AND MANAGEMENT

Leadership and management are often confused to be same. These have many similarities such as: (i) Both aim at achieving goals. (ii) Both mobilise and utilizes resource. (iii) Both serve as a link between top management (or board) and subordinates (or followers). (iv) Both depend upon subordinates (or followers) and hence try to motivate them. However, there are some differences, as follows: (i) Management is a term used in the organisational context. Leadership is wider in that sense as it may also be outside a defined organisation. • A mob, a procession, a movement, and a rally may also have a leader but no manager. • Management is possible in formal organisation while leadership may be present in both formal and informal organisations. (ii) Subordinates of a manager are always junior to him. Followers of a leader may not be always junior to him. They may be contemporary or even seniors. (iii) Manager is always appointee. He derives power by virtue of his post. Leader may not always be appointed. He derives power by virtue of influencing his followers. Manager get subordinates by virtue of his behaviour position. Subordinates follow the manager (iv) as it is their defined duty and role. Leader does not get followers by virtue of any position. It is his art of influencing others which determines his followers. profile. Followers are not duty-bound to follow the leader. (v) Manager is accountable for his behaviour and the behaviour of his subordinates. His expected performance is well defined. Leader is not questionable for the behaviour of the followers in a strict sense. He is more concerned about common goal of the group, rather than achieving organisational objectives. (vi) Manager has derived power to write the annual report on the performance of fthe subordinates. He is instrumental in promotion, reward or punishment. Leader, on the other hand, does not have such direct powers. (vii) Leadership is for directing and guiding the followers. Managers have to direct, guide, organise, coordinate, plan and control. Thus, all managers must have the qualities of a good leader but all leaders need not perform all the functions of managers. 31.3 QUALITIES OF GOOD LEADERSHIP

Good leaders are those, who are achievers. They have to demonstrate their capabilities to motivate people to achieve the organisational goal in an enthusiastic manner. Important leadership traits may be clubbed as qualities of good leadership. Some important qualities are as follows: 1. Desire for occupational. success and responsibility 2. Feeling of competency in problem solving situation 3. Intelligence, reasoning skill and creative ability

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461

4. Decisiveness 5. Supervisory skill in management task of planning, organising, staffing, directing and control 6. Vision for future foresight and a sense of mission 7. Well-educated and trained in skill 8. Administrative ability 9. Mature behaviour 10. Energetic 11. Innovative in approach 12. Positive attitude 13. Constructive nature 14. Dependable 15. Open-minded 16. Pleasant personality 17. Social 4018. Good communication ability 19. Approachable for subordinates 20. Example setter 21. Flexible to changes 22. Good character 23. High character and respect by subordinates 24. Sound physique, vigour and hard work. 25. Representative of the group 26. Facilitator to change. 31.4 LEADERSHIP STYLE Leadership style is the behaviour pattern of leader while influencing the actions of the followers. It is generally a natural outcome of training, culture and background of the leader. There is no "the beststyle" to ler.d. It is situation specific and, therefore, dynamic in nature. The leaders may be classified into a two-dimensional matrix, whose coordination is concern for people and concern for task. Four patterns of leaders emerge with this grouping (Figure 31.2). These patterns are supportive leaders, participative leaders, abdicative leaders and directive leaders. The participative leaders are the best and abdicative as least desirable. All other leaders must try to reach in top-right corner (i.e., participate) of the matrix in Figure 31.2. Different styles of leadership are as follows (Figure 31.3). 34.4.1 Autocratic or Authoritarian Leadership , This style leads to complete control of the leader over the subordinates. Salient features are: • Centralised power-base at leader • All decisions by leader without mutual consultance among subordinates • Complete dominance, command and drive through coercion actions • No delegation of authority.

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High

Concern fcr people

Snp,iortive Concern for people : High Concern for Task : Low

Participative Concern for people : High Concern for Task : High

Abdicative Concern for people : Low Concern for Task : Low

rective lbr people : Low Concern for Task : High . 011Call

Low High

Low Concern for Task Figure 31.2 Two Dimensional Leadership Model

O,

Autocratic

Democratic

I

Laissez-Faire

Figure 31.3 Leadership Styles

Therefore, autocratic leadership is a directive style in which power is centered in leader or a coregroup of individuals. It focusses on task, centralized personal power, and, therefore, has extremely low concern for people. Advantages (i) Permits quick decisions. (ii) In case of less competent subordinate, it is effective. (iii) Facilitates speedy implementation of plans. (iv) Highly satisfied leader. (v) In case of extreme crisis, this style may be the only solution. Limitations (i) In-built frustration in employees. (ii) Low morale of work-force. (iii) Ill-motivated subordinates escape the responsibility and initiative. (iv) Creativity of subordinates remains untapped. (v) No positive development in the profile of subordinates. (vi) High turn-over of subordinates due to frustration. Suitability (i) When there is unskilled, submissive, untrained workforce. (ii) When there is inexperienced workforce.

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463

(iii) When there is very poor discipline in the organisation. (iv) When there is very-very competent, prolific and dominant leader, who is fully sure of results and productivity. Autocratic style is not preferred these days as the workforce is more educated, trained and organised. Level of technology is high and expertise of leaders is also in narrower area. All this calls for a more participative leadership style. 31.4.2 Participative, Consultative or Democratic Leadership Leaders of this type take decision in consultation with the followers. Their authority is decentralized and delegated down below to the subordinates. Majority opinion is honoured in the group. There is a freedom of expression and ideas. Advantages (i) High job satisfaction and morale among the followers (ii) Positive participation by followers (iii) Chances of good decisions are more due to involvement of followers (iv) Joint responsibility for the successful implementation of decisions (v) Decision making ability in subordinates is cultivated. This facilitates developing a second line of leadership. Disadvantages (i) Time consuming process of decision-making. (ii) In case of uneducated/unskilled worker, it is not very effective. (iii) Evasive employees, who prefer not to be involved, may create problems. (iv) Passing the buck for failure may be common. (v) Due to lack of communication-skill, some important suggestions may get unheard. Suitability General industrial-scenario, R and D organisations, project work, consultancy firms, software industry, quality circle, etc. , 31.4.3 Laissez-Faire or Free-Rein Leadership In this situation, the leader delegates his authority in totality. He avoids his authority and does not exercise the power to go‘Tern. Leader is like any other member of the team and generally works as the contact person in the group. Advantages (i) Effective, if subordinates are extremely responsible (ii) High job satisfaction and morale (iii) Scope of development for followers (iv) No negative feelings in the group. Limitations (i) Chances of misdirected followers, doing unwanted activities (ii) Lack of guidance and support (iii) Chances of confusion and chaos (iv) Leader may feel ignored and sidelined.

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Suitability R and D organisation, highly talented and responsible group 35.4.4 Comparison of Leadership Styles .•

Different leadership styles are compared in the Table 31.1. Table 31.1 Comparison of Leadership Styles Factor

Leadership Style Autocratic

1. Motivational approach 2. Decision maker 3. Communication 4. Discipline 5. Deligation of authority 6. Responsibility 7. Hierarchy of need 8. Focus 9. Initiative 10. Followers

Punishment, fear (negative) Leader only Downwards and one way Compulsively obey the leader Rare Leader Physiological and safety Task • By Leader Subdued

Participative

Laissez-Faire

Involvement and reward (positive) Leader in consultance with followers Two-way

Self-control, selfdiscipline Subordinates independently Free flow

Exchange ideas

Self-imposed

Fairly good Leader and followers Ego

Complete Individual Self-actualization

People By team Active

People By individual Full scope of showing talent .

31.5 LEADERSHIP GRID

Five different styles of leadership are described by a leadership (or managerial) grid. The two-dimensional managerial grid had dimensions of concern for people and concern for production (task) (Figure 31.4). Robert R. Blake and Jane S. Monton have classified the five leadership styles as follows: 31.5.1 Improvised Leadership

These leders exert minimum effort to get the required accomplishment of task. This is the bottom-left corner of the grid '(1, 1). It is only appropriate to sustain organisational membership. Such leaders have little regard for work or people. The leadership style is of Laissez-faire type, which is unconcerned even if situation for work or people deteriorates. 31.5.2 Authority Compliance

The (9, 1) or bottom-right corner of leadership style is for a high regard for efficiency. Such leaders maximize production by exercising pow:r and authority on their own. These leaders are production-oriented, authoritarian, use threat and coercion, exercise close-supervision, and are very frustrating for subordinates. No involvement of subordinates is sought in decision-making. 31.5.3 • Country Club Management

The (1, 9) or extreme top-left corner of leadership grid relates leadership style in which there is high regard for people but least concern for production. Such leaders are more worried in keeping their subordinates

465

LEADERSHIP

happy and friendly. They presume that happy subordinates will do the work automatically. On their own part, the leaders of such type ignore production related issues. High

(1, 9) Country Club Management Thoughtful attention to the needs of. people to satisfy relationships leads to a comfortable,friendly _ organisational atmosphere and work tempo

Concern for people

I

I

Team Management (9, 9) Work accomplishment is form committed people; intcredependcncc through a common stoke in organisation purpose leads to relationships of trust and respect

I

Middle of the Road management (5, 5) Adequate organisation performance is possible through balancing the necessity to get out work with maintaining morale of people at a satisfactory level (I, I) Improvised _ Management Exertion of minimum effort to get required work done is — appropriate to sustain organisation membership

Low

(9, 1) Authoelty-Compliance Management Efficiency in operations results from arranging conditions of work in such a way that human elements interfere to a minimum degree

•

—I 1

2

3

6

I 7

8

Low

9 I ligh

Concern for Production --I-- ,

Figure 31.4 Leadership (or, Managerial) Grid

31.5.4 Middle of the Road Management .. The (5, 5) or mid of the leadership grid represents a balanced (but not maximum) approach towards concern for people and concern for task. Limited authority is exercised by such leaders so that task is accomplished smoothly. It is least risk and noncontroversial style of leadership. Such leaders involvestibordinate in decision making to some extent but the results are not optimum. 31.5.5 Team Management The (9, 9) or top-right corner of the leadership grid is one of the best ways to lead and manage. Team approach is the key to accomplish task so that operational results are maximized. Conducive environment for satisfaction of the needs of employee is provided. The authority is exerted by leader after taking tea in into confidence. The productivity is maximized with a committed, team-oriented set of subordinates and leader. Blake and Mouton suggest that this is the best possible style to achieve results. REVIEW QUESTIONS 31.1 What is meant by leadership? Is it correct to say that managing is same as leadership? 31.2 Classify business leaders and point out some important qualities that make for successful leadership.

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INDUSTRIAL,. ENGINEERING AND MANAGEMENT

31.3. Explain the concept of managerial grid. Do yo.u think that the most desirable leader is of (9,. 9) :type in all circumstances? 31.4. Explain the desirable qualities of a good leader. , 31.5. Explain the following types of leadership: (i) Participative leadership. (ii) Autocratic leadership. (iii) Laissez-faire leadership. Compare these styles for different managerial issues. 31.6. Wh,at are the different patterns of leadership style? Give their advantages, limit11tions and suitability.

REFERENCES I. Bennis, W.G, 1975, The unconcious conspiracy: Why _leaders. cannol lead. AMACOM: New York. 2. Bennis W.G. and Nane B, 1985, Leaders: The stratrgy for taking charge. Harper & Row: New York. 3. �einard, C.I., 1938, The functions of the executive, Harvard University Press: Cambridge. 4. Blake, R.P. and Monfon, J.S., 1954, The mailagerial grid, Gulf Publishing. 5. Fielder F.E.; 1957, A Theory of leadership effectiveness: McGraw Hill Book Co., New York.

6. Holt, D.H., 1993, Management: Principle and Practice. Prentice Hall: New Jersey. 7. Likert R., I951, /few pattern of management. McGraw Hill Book Co., New York: 8. McGregor, J.B., 1978, Leadership, Harper & Row: New York. 9. Reddin, W .J., 1970, Managerial eflectiyeness, McGraw Hill Book Co., New York. I0. Selznick, P.; •t 957, Leadership· in administration, Row Peterson: Evanston. 11. Vroom V.H. and Gago AG, 1988, The new leadership: m·anaging participation in organisation, Prentice Hall: New Jersey.

•

32 TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

32.1 INTRODUCTION Total Quality Management (TQM) is a very popular term which goes with the culture of many manufacturing and service sectors. Since, many organisations are trying to adopt TQM as a way of life, a careful understanding about the basic philosophy, core issues, implementation aspects and pitfalls is needed. There are many myths about TQM which are quite different from reality. A company which gets an ISO 9000 certification will achieve TQM goal. Is it really true? No; this is a common myth, as total quality cannot be ensured through mere obtainment of ISO 9000 certification: Then, what is the need of getting ISO certification! We must understand it clearly. To start with, let us understand: what is "total" and "quality" in TQM? 32.2 WHAT IS TOTAL IN TQM? In TQM, total means involvement of all aspects of the organisation in satisfying the customer. It aims at a goal that can only be accomplished if the usefulness is recognized by having a partnership environment at each stage of the business process, both within and outside the organisation. "Within the business process" means functions under organisational boundary. By outside, we mean a successful customersupplier relationship. This involves: (i) Customer-supplier relationship based on mutual trust and respects. There must be a win-win strategy for both. (ii) Organisation's in-house requirements by the customers. (iii) Customer's needs are well understood by supplier. (iv) Suppliers are partners in achieving zero-deled situation. (v) Regular monitoring of supplier's processes and products by the customer. 32.3 WHAT IS QUALITY? Quality is what customer wants. It is the customer's perception about the degree to which the product or service meets his/her expectations. Therefore, quality is defined by customer needs and expectation. Like beauty, quality lies in the eyes of the beholder.

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Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy a given need. —as defined in American Society of Quality Control, Standard A3-1987: Glossary and Tables for SQC. Another definition of quality is given by Badiru and Ayeni (1993): Quality refers to an equilibrium level of functionality possessed by a product or service based on the producer's capability and customer's need.

32)3.1 Dimensions of Quality Quality symbolises many aspects of what customer wants. Some dimensions of quality are given in Table 32.1. Table 32.1 Dimensions of Quality Dimension

I. Performance

2. Features 3. Durability 4. Reliability 5. Serviceability 6. Appearance 7. Uniformity 8. Consistency and Conformance 9. Safety 10. Time I I. Customer Service 12, Compatibility

Description

It is the primary operating characteristics, which determines how well the product or service performs the intended function.' Example: Durability of batteries, fuel economy of ears, BHP of an engine, etc. These are special features (secnedary) which appeal to customers Example: Design of seats in a car look and color of a refrigerator, etc. It is the time duration or amount of use before being replaced or repaired. Likelihood of breakdown, repair or expected time of fault-free operation. Convenience and cost of repair and maintenance and is related to case in resolving the customer complaints. Look, taste, smell, sound or any other effect which is felt by human senses Example: Noise of a refrigerator Limited variations among different products of same type. Conformance with standard, matching with documentation, being on-time, etc. Harmless from health and environment point of V:JW Waiting time, Completion time for a service After sales service, treatment received during or before sales Compatibility of the product/services with existing or standard interfaces, peripherals or other attachments, power source, etc.

A system-oriented definition of quality is as follows: Quality refers to an equilibrium level of functionality possessed by a product or service based and the producer's capability and customer needs. Quality is descriptively simple but endlessly complicated when it is to be defined precisely. "Quality is equal to people plus right attitude to achieve excellence; producing error-free products and services , to the customers on time; and satisfying the requirements and expectations of customers." Quality means

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providing both external and internal (within organisation) customers with innovative goods and services that meet their needs effectively. Quality generally signifies "excellence" of a product or service. Example of product is the item which a customer use, such as car, house, book, etc. Services are like hospital, bank, post-office etc. We have just mentioned about customer. In the context of TQM, customer are of two types: (i) Internal customer (ii) External customer. Inside the business system, one employee uses the output of another employee. In assembly line, as assembly moves, it changes hands. In this context, the successive person is the internal-customer of the previous person. In general, one department may also be internal customer of another. For example, packaging dept is internal customer to production dept.; while marketing dept is the internal customer to the packaging dept. By external-customer, we mean end-user of the product or services, who is external to the organisation. The linkages of internal and external customers form the quality chain (Figure 32.1). This may be broken at any time when one person, piece of product or services fail to meet the requirements of internal/external customer. ► OUTSIDE

ORGANIZATION

OUTSIDE ORGANIZATION

Figure 32.1 Oakland Model of the Quality Chains

If this chain breaks any where due to non-fulfillment of customer expectations, the effects display a multiplying characteristics, which means, poor quality is reflected elsewhere also. Therefore, the actionplan is to continuously examine the requirements and meet them with continuous improvements. Different authors have identified quality in different ways:

• Fitness for purpose or use.

—Juran.

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• The totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs'. —BS 4778, 1987 (ISO 8402, 1986) Quality Vocabulary: Part 1 International Terms. • 'Quality should be aimed at the needs of the consumer, present and future' —Deming. • 'The total composite product and service characteristics of marketing, engineering, manufacture and maintenance through which the product and service in use will meet the expectation by the customer.' —Feigenbaum. • 'Conformance to requirements.' —Crosby. A customer-related look at quality is: Quality is achieving arid exceeding customer expectations and needs in order to produce business for future. The goal is to achieve a continuous quality improvement effort that permeates every process, all products and every service in the organisation. Business exist to deliver quality. Customers are buyers and users of products and services. They can be internal or external. Thus, quality is the key attribute that customer use to evaluate product or services. Quality is driven by market-place, by the competition, and especially by the customer. Key point It is not the producers but the customers who determine whether or not quality has been achieved. Quality is the capability of a product or service to satisfy. "knowingly" those preconceived composite wants of the user(s) that are intelligibly related to characteristics of performance or appearance, and do not cause major overt or covert reactions or actions by other people. Customers Requirements

Feedback

J Inputs

Quality Feedback

Figure 32.2 Customers determine quality in two ways: Requirement and Assessment

If we consistently meet the customer requirements, we can move to a different plane of satisfaction— which is "delighting the customer". Many world-class companies have so well fulfilled their capabilities to meet their customer' requirements On a continual basis, that this has created a reputation for excellence; we can identify quality with this "reputation for excellence". Quality is a complex value for money, expectation of performance, expectation of appearance, service (pre-sale and after-sale), warranty, etc. Quality is a moving target. "Market-Driven Quality starts with making customers' satisfaction an obsession and empowering our people to use their creative energy to satisfy and delight their customer. It means our quality goals and objectives must be deployed throughout

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471

the company so that each person knows what their responsibility is, and also knows that they will be measured accordingly." J.F. Akers, CEO of IBM. Meeting Customer's expectation

Legend Traditional TQM route Modem TQM route

Customers

•

Satisfaction

Delight

Better Product

Profit

Profit with growth

Better Product More-patronage Unexpected Product Characteristic which delights customers

Support

Figure 32.3 Business-Customer Integration Loop CUSTOMER FOCUS: THE ULTIMATE GOAL CUSTOMER FOCUS: Ultimate goal to reach at Exceeds customer's expectations — Understanding customers business —Consulting and training —Organizational alignment CUSTOMER FIT: Works as binder —On-time delivery — Quality — Price PRODUCT/SERVICE FIT: Core issue to start with —Functionality — Performance —Reliablity

Figure 32.4 Ultimate Goal in TQM

For the survival of manufacturing and service industries in a hostile environment, customers complete satisfaction is a must. Quality includes: (i) meets the customers' needs in every respect, (ii) available when required, (iii) at a price the customer is prepared to pay. As customers' needs are ever changing there is no such thing as absolute quality. However fitnessfor-purpose and value-for-money are the two things that will bring back the customer again and again

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INDUSTRIAL ENGINEERING AND MANAGEMENT

to the organisation. As quality level changes, the profit margin also changes due to increase in the production related cost for maintaining quality. Extreme cases of very poor quality or very high quality also renders loss to the organisation, (Figure 32.5). Therefore, a proper level of quality standards are needed for retaining profits. Definition; Quality Assurance 'All activities and functions concerned with the attainment of quality'. --13S 4773 Definition: Quality Control `The operational techniques and activities that sustain the product or service quality to specified requirements. It is also the use of such techniques and activities'. Cost of quality (production costs)

13reakeven Customer's Valuation --(related to sales)

Profit

A Poor

C.

Fair

Good

High

Quality level Figure 32.5

Cost and Returns of Quality

32.4 TOTAL QUALITY MANAGEMENT (TQM)

TQM is a system approach to quality management. It refers to complete commitment to quality in all spheres of the organisation. A plan for quality system is shown in Figure 32.6. Total in TQM stands for an overall integrated approach to all aspects of quality, all domains of system, including, organization, people, resources, time, hardware/software and even management commitments. TQM is a management approach of organisation, centered on quality, based on the participation of all its members and aiming at long-term success through customer satisfaction and benefits to the members of organisation and society (ISO 8402/IS 13999). As defined by MacDonald, "TQM can be seen as a process, used to manage the change in e.ivironment that will ensure that company reaches the goal, of total continuous improvement (TCI). TQM sustains on four pillars: Systems, Top management commitment, Team work and SPC (statistical process control) tools. The links to these pillars are culture, communication, commitment and customer focus (Figure 32.7).

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TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

Establish a quality policy

Written quality policy issued by the chief executive

Define TQM objectives

Total quality management should be detailed

Define responsibilities

Quality is the direct operational responsibility of the management Prepare job descriptions towards TQM

Establish quality system

Identify problem areas

Prepare quality Improvement programme

The requirements of the customer and of the company must be met and the system, in the terms of specific produres, methods and instructions, profitability, and growth profile clearly defined, widely disseminated, understood and enjoyed by all. Regular audits of the operations areas by self-assessment and team work will lead to continual updating of solution to potential problems.

Programme designed to achieve established objectives must start

Implement programme

Implementation must involve the commitment and involvement of all employees

Monitor progress

Qaulity improvement programme must defend the agreed time table.

Audit and review overall effectiveness

Practical implementation and usefullness of the quality system should be continually compared with the objectives. A method for changes in the plan shuld be identified and documented.

Figure 32.6 Plan for a Quality System (Modified from Oakland, 1994)

TQM is an organization-wide quality focused culture. It is a journey to achieve excellence in all aspects of the organization's activity. It involves all members of the organization at all levels of operation.

CO • 1% . C.2`‘I°

Top Management Commitment

06

0-4° 400)5

Vendor Development

C

Suppliers

Customer delight Systems

Processe,s

Reliable Vendor

SPC Tools

Customers Quality

Culture ' Team • Work

Figure 32.7 Model on Total Quality Management

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INDUSTRIAL ENGINEERING AND MANAGEMENT

TQM is a management philosophy rather than a quality-technology. Ironically, TQM began in Japan based on the quality philosophy of Dr. W. Edwards' Deming who is an American. Three major phases of TQM are: statistical-quality-control, total-quality-control and total-qualitymanagement. 32.5 QUALITY GURUS During recent years few quality experts or Gurus have contributed a lot in popularising the quality culture in organisation. They have mainly focused on the ways to manage the quality. We look into the approaches outlined by some of them, like Philip B. Crosby, W. Edwards Deming, and Joseph M. Juran.

32.5.1 Philip B. Crosby Crosby proposed four absolutes of quality: 1. Definition—Quality is conformance to requirements; and not goodness. 2. System—Prevention, not appraisal. 3. Performance standard—Zero defects; and not 'that's close enough." 4. Measurement—Price of non-conformance to requirements (cost of quality); and not quality indices. Crosby proposed management fourteen steps to improvement: 1. Make it clear that management is committed to quality. [Key: Management Commitment]. 2. Form quality improvement teams with representatives from each department. [Key: Quality Improvement]. 3. Determine where current and potential quality problems lie. [Key: Quality Measurement]. 4. Evaluate the cost of quality and explain its use as a management tool. [Key: Cost of Quality]. 5. Raise the quality awareness and personal concern of all employees. [Key: Quality Awareness]. 6. Take actions to correct problems identified through previous steps. [Key: Corrective Action]. 7. Establish a committee for the zero defects programme. [Key: Zero Defect Planning]. 8. Train supervisors to actively carry our their part of the quality improvement programme. [Key: Supervisor training]. 9. Hold a 'zero defects day to let all employees realize that there has been a change. [Key: ZD day]. 10. Encourage individuals to establish improvement goals for themselves and their groups. [Key: Goal setting]. 11. Encourage employees to communicate to management the obstacles they face in attaining their improvement goals. [Key: Error-Cause removal]. 12. Recognize and appreciate those who participate. [Key: Recognition]. 13. Establish quality councils to communicate on a regular basis. [Key: Quality Councils]. 14. Do it all over again to emphasize that the quality improvement programme never ends. [Key: Doit-over-aga14:

32.5.2 Deming's Approach to TQM Deming is among the pioneers of the TQM concept. His views on improving quality contains fourteen point approaches as follows: 1. Aim at creating consistency of purpose for improving services and products 2. Aim at adopting the new philosophy for making the accepted levels of defects, delays, or mistakes unwanted.

TOTAL QUALITY MANAGEMENT

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3. Aim to stop reliance on mass inspection as it neither improves nor guarantees quality. Remember that teamwork between the firm and its suppliers is the way for the process of improvement. 4. Try to stop awarding business with respect to the price. 5. Aim to discover problems. Management must work continually to improve the system. 6. Aim to take advantage of modern methods used for training. In developing a training program, take into consideration sue- items as • Aim at identification of company objectives • Aim at identification of the training goals • Airn at understanding of goals by everyone involved • Aim at orientation of new employees • Focus on training of supervisors in statistical thinking • Plan on team-building • Aim at analysis of the teaching need. 7. Aim to institute modem supervision approaches.' 8. Aim to eradicate fear .so that everyone involved may work to his or her full capacity. 9. Aim to tear down department barriers so that everyone can work as a team member. 10. Try to eliminate items such as goals, posters, and slogans that call for new productivity levels without the improvement of methods. 11.Aim to make your organization free of work standards prescribing numeric quotas. 12. Aim to eliminate factors that inhibit employee workmanship pride. 13. Aim to establish an effective education and training program. 14. Establish ways to develop a program that will push the above 13 points every day for never-ending improvement. The Quality system Drives' the deming cycle PLAN

\ow CVNt v, ffect CatISC ecoe tue lobke Dent, Implement Process I PLAN I ACT Recommen- Define Problems dation

ACT

DO

!CHECK I

I DOI

Group and value

Collect Data

7+ Pareto diagrams Check Both internally and externally with suppliers and customers Figure 32.8

Deming Cycle (PDCA)

4 Histograms 4 Scatter Diagrams 4 Run Charts 4 Control Charts Figure 32.9

Elements of Deming Cycle

32.5.3 Joseph M. Juran

Juran's advocated ten steps to quality improvement: 1.Start with building awareness of the need and opportunity for improvement 2. Set realistic goals for improvement

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INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Organize to reach the goals (by methods to establish a quality council, identify problems, select projects, appoint teams, designate facilitators) 4. Emphasis on training 5. Solve problems by carrying out projects' 6. Progress must be reported 7. Give recognition to any body who achieves 8. Communicate results with all concerned 9. Keep score by being quantitative 10. Maintain a regular momentum by making annual improvement part of the systems and processes of the company. 32.6 PRINCIPAL OBJECTIVES OF TQM

A Total Quality oriented organization must have at least following principal objective. Organisation should have many more additional specific objectives. 1. Customer focus, customer delight/satisfaction. 2. Continuous improvement as a culture of the organisation, which must be the way of life. 3. Focused, continuous and relentless cost reduction. 4. Focused, continuous and relentless quality improvement. 5. To create an organisation whereby evervone is working towards making their organization the best in its business, and to capitalise on the sense of achievement and working in a world-class organisation. To achieve these objectives, TQM must include a ten dimensional-framework (Figure 32.10)

Figure 32.10 An Integrated TQM Model

TOTAL QUALITY MANAGEMENT

(TQM) AND CONTINUOUS IMPROVEMENT

477

32.7 MANAGEMENT IN TQM

The key ingredient in TQM is meeting customers' requirements with continual improvements in product as well services. An integrated model for managing quality and services in TQM environment is shown in Figure 32.11. The important elements of TQM are integrated in this model. • Quality • Strategy

Develop the quality theme into an • operations objective • Product (service) design issues • Conformation to design issues

Understanding .elationships among factors affecting quality and pertormance quality

Factors atlecting quality • Management • Employees • Product (Service) design • Facilities, processes and equipment. • Materials • Vendors etc.

• Customer perceptions • Expected quality outcomes • Factors affecting quality

Analysis: The basis for continual improvement, assurance, and control • Management directed diagnosis: Cost of quality loss studies, measurement, tishbone diagrams, and Pareto analysis, • Statistical analysis: Inspection, sampling and control sharts.

Top management commitment •

Action to imp ow and assure conformance to objectives

Customer Involvement

• Management initiated approaches

Supplier partnership

• Behavior and quality

• Design product for quality • Disign and control of production process for quality • Customer service distribution and installation.

Benchmark al d continuous improvement

• Build team of empowered employees.

Results: Consistent quality in all products and services in conformance with the strategic position desired

Figure 32.11

Managing for quality products and services (Modified from Adam and Evertt, 1998)

32.8 QUALITY IMPROVEMENT

Improvement is a continual process in TQM. It starts with a mission statement stating quality objectives. A survey of customer needs follows then after. An analysis of organization capabilities and development of overall corporate strategy follows. By integrating functional strategies with the evaluation of self, customer and vendor, the overall improvement strategy should evolve. Figure 32.12 shows quality improvement in TQM.

478

INDUSTRIAL ENGINEERING AND MANAGEMENT

Mission and Quality Objectives

Surs'ey of Customer Needs

Analysis of Organizational • Capabilities

Overall Corporate Strategy

• Engineering Strategy

Communication

Business Strategy

Marketing Strategy

Manufacturing Strategy

Cooperation

Coordination

Customer Evaluation

Self-Evaluation

Vei dor Evaluation

I

Figure 32.12 Quality Improvement in TQM

Sometimes, as an important strategy to arrive at improvements, benchmarking should be adopted on case4o-case basis. For the details of benchmarking, refer the chapter dedicated on tLis topic. The strategy for quality improvement is shown in Figure 31.13. Various aspects of this diagram will be explained in sections to follow. The process starts with top-management commitment and aims at continuous improvement. The quality system is maintained by proper and detailed documentation in the quality manual. Various quality control (QC) tools such as pareto analysis, control charts, etc. are used to ensure quality level. 5S and 3 Mu help in improving the system performance. The 5S stand for Seiri (straighten-up), Seiton (put things to order) Seiso (clean-up), Seiketsu (personal cleanliness), and Seitsuke (discipline). The 3 Mu stand for Muda (waste), Muri (strain), and Mura (discrepancy). These 5S help in improving the workplace while removal of 3 Mu helps in reducing waste and losses. All these terms are Japanese words, whose English meanings and other implications are further explained in Section 32.10.

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

Ensure top Management Commitment

479

Start

Repea with new process

Is flume a known problem area? Yes Is In formation on process available

Select a process for improvement pareto-analysis

No

Collect data/ information on process—Check sheets, etc.

Does a flow chart exit?

No

Draw flowchart

Yes Examine process flowchart

Collect more information/ data on process as required

Apply 5S • Seiri • Sefton • Seiso

1 Present data effectively

• Seiketsu

• Histograms • Scatter diagrams • Pareto-analysis, etc,

• Sellsoke Remove 3 Mu • khan • Mori • Mura

1 •

i

Analyses for causes of. problems or waste • Pareto-analysis • Cause and effect • Brainstorming • Imaginecring • Control charts, etc.

Replan process

Implement and maintain new process

Figure 32.13

Build and maintain Quality manual

Strategy for process improvement

480

INDUSTRIAL ENGINEERING AND MANAGEMENT

32.9 QUALITY COST

It is the cost in ensuring and assuring quality as well as loss incurred when quality is not achieved. Various components of cost of quality assurance may be classified into four categories of prevention cost, appraisal cost, internal failure cost and external failure cost (Table 32.2). Table 32.2 Costs of quality assurance (Compiled from Cavett 1968, Adam and Evertt-1998) Prevention Costs

Appraisal Costs

• Quality planning

• Incoming Inspection

• QC administration and systems planning

• Testing • Inspection in process

• Quality related training

• Quality audits

• Inspection of incoming, inprocess and final product

• Incoming test and laboratory tests

• Processes planning

• Checking labor • Laboratory or other

• Design review • Quality data analysis • Procurement planning • Market research • Vendor surveys • Reliability studies

• System development • Quality measurement and control equipment • Product qualification • Qualification of material

measurement service

Internal Failure Cost External Failure Costs Rejections

• Recall

• Scrap at full shop cost • Rework at full shop cost

• Complaint handling • Goodwill loss

• Failures analysis • Scrap and rework, fault of vendor

• Bad publicity • Field maintenance and product service

• Material procurement • Factory contact

• Returned material processing and repair

engineering .

• Fall in market share

• Setup for test and inspection

• Machine down

• Test and inspection material

• QC investigations of failures

• Outside endorsements for certification

• Material review activity

• Maintenance and calibration work

• Repair and trouble shooting

• Product engineering review and shipping release

• Excess inventory

• Warranty costs

• Replacement inventories. • Low employee morale • Strained distributor relations

• Field testing • Field testing

l'ilanagement of quality-cost is useful in improving the performance of a TQM system (Figure 32.14) This is achieved by planned effort to eliminate these costs. The Figures 32.15 to 32.17 show the variation of prevention cost, appraisal cost and failure cost at different levels of targeted quality. Wnen these costs are combined in a system, the pattern of total cost of quality at different quality level is U-shaped (Figure 32.18). It is important to note that a particular level of quality gives minimum total cost for quality. Around the optimal quality level, the total quality curve is flatter. (Recall, the EOQ curve in the Chapter of Inventory Control). Therefore, it is not necessary to find-out the exact level of quality for minimum total cost. Through, experience and iterations, the shop-floor may determine this level and operate around this level. Exact quantitative estimate of different quality costs are practically difficult to obtain. This is due to many subjective components of cost (refer Table 32.2). Industry, therefore learns to operate at the desired level of quality through experience only. Figure 32.19 shows a cost and value curve with respect to different levels of quality. As quality target is improved, the cost to produce increases. Value of product for customer also increases. These two curves cross each other at two points. The quality level, at which the margin between value and cost is maximum, is the desired level of quality

481

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

target. Same as Figure 32.18, around this target, the margin is quite stabilized. Hence exact estimate of quality level is not very nnportant. Intuitive or guess, which is based on experience works well in many real life situations. Through gradual modifications during practice, industries can arrive at the target quality level. Organisation's present cost structure and profitability

By using Return on funds employed or similar ratios

Identify all elements of quality costs

Plan to reduce quality costs

In marketing design specification, production, planning, purchasing

Plan for achievements. Provide funds for it

• Increase productivity • Reduce costs • Better deliveries

Devices and establish methods processes technolbgy and testing

Figure 32.14 Improving performance through quality costs

Prevention Costs

Low

High Quality level

Figure 32.15 Prevention Cost

Appraisal Costs

Low

High Quality level

Figure 32.16 Appraisal Costs

Build system to monitor achievements

Design the system for a accountability by all ' employees

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Failure Costs 0

Low

I ligh Quality level

Low

Figure 32.17 Failure Costs

High

Quality level

Figure 32.18 Total Quality Costs

Best value for mon

Low

High Quality level

Figure 32.19 Costs and Values of Qualities 32.10 ELEMENTS OF TQM

(i) Customer Satisfaction: It is the ultimate goal in TOM and thus forms the focal element in TOM journey. The term, "customers" in TOM includes chain of customers right from the supplier to

the external customer. Each process and each element in quality chain must ensure that it leads to customer satisfaction. Figure 32.20 shows some elements of quality, that help in the measurement of customer satisfaction in a TQM movement. Customer satisfaction has several dimensions, for example: • fitness for use • reliability-which governs the life aspect of quality • value for money spend by customer • after-sales service and support to the customer • good packaging

TOTAL QUALITY MANAGEMENT

483

(TQM) AND CONTINUOUS IMPROVEMENT

a

Reliability Performance Fucntionality Product Range

Quality of Communications Quality of consulting Quality of Offering Flexibility

i ►

O

O Availability Quality of Delivery Service Quality of Order handling Contractual Terms

Reaction Time Reparing Quality Diagnosis Information, support

Figure 32.20 Customer SatisfactionvEvaluation • customer right to correct information and training • maintainability of the product/services • variety in product/services • speed of service (quick response time) • civility of service at all levels • good image of the company and customer confidence in the organization based on past performance. (ii) Right first time: TQM adopts the policy of zero defect or no error. This requires a culture of "right first time"—type. There is no scope of rework and rejections. The effort is to make a rigorous application EPDCA—helix which means: Evaluate -4 Plan —> DO ---> Check —> Act. (iii) Corporate Culture: It must be people-based rather than equipment based. (iv) Education: Education means formal instructions which encourage teamwork and urge for improvement and commitment towards quality. (v) Continuous Improvement (Kaizen): TQM strives for ever-better quality. It never accepts the status quo. By comparing with • world-class organisation and by identifying customer's need, a basis for long-term continuous improvement evolves. This is achieved by bridging the gap between "ASIS" situation to a "TO-BE" situation. Kaizen means improvement (ongoing improvement) involving everyone-top management, managers and workers. Kaizen is everybody's business. Kaizen is the Japanese way of life. So, it is no surprise that TQM has succeeded in Japan via Kaizen-inputs. The most important difference between Japanese and Western Management concepts is that Japanese Kaizen and its process-oriented way of thinking verses the West's innovation and result-oriented thinking. Kaizen involves removal of 3Mus at different check points. These Japanese-Mus are: Muda (means, waste), Muri (means, strain) and Mura (means, discrepancy). These Mus should gradually be removed at different levels of man-power, technique, method, time, facilities, jigs and tools, material, production volume, inventory, place and way of thinking. Kaizen also involves the application of 5S for improvement. These are: Seiri (means, straightenup), Seiton (means, put things in order), Seiso (means, clean-up), Seiketsu (means, personal cleanliness) and Seitsuke (means, discipline). Seiri is applicable for WIP, tools, unused machines, defective products, etc. Seiton and Seiso is for place of work, Sieketsu is for personal habit, and Seitsuke is for cultural discipline (Figures 32.21 and 32.22).

484

INDUSTRIAL ENGINEERING AND MANAGEMENT

KAIZEN CKECK POINT (REMOVE 3 MU)

KAIZEN-5S MOVEMENT APPLY 5S without fail for improvement

• Muth: • Mari

Seiri means:

• Mura

Straighten up

Remove 3 MU in • Man-power • Technique • Method •

Aluda

• Time

(Waste)

• Facilities

Aluri

• Jigs and tools

Seim.. means: Put Things In order

(Strain) Mara

• Materials

• Work-in-process • Unnetesary date [11ca l !e di ection Unused machinery • Unused skill • pefective products • System flows • Papers and documents Differentiate between the necessary and the unnecessary: Discard the unnecessary

(Deserepaney)

• • • •

A place for everything Put every things in its place Proper documentation and entry Avoid searching things

• Production Volume Seiso means:

• Inventory

Clean up

• Place

• Keep the work-place clean • Green and cosy look of work-place

711

• Way of thinking Seiketsu means Personal Cleanliness

• Make it a habit to be clean and tidy : starting with your own personal appearance 1

Sesitsuke means: Descipline

Figure

• Follow procedures in the system

32.21 KAIZEN

(vi) Benchmarking: rt is an effort to find the best performer in a specific area and to identify gaps in the present situation by comparing with the benchmark performer. (vii) Top Management Commitment and Involvement: It is necessary that the top management commits and stays involved in product quality. It is weapon to capture market share and achieving product quality. (viii) Customer Involvement: Customer expectations drive the TQM system. The product quality which the customer expects, must be deployed in the product design and product performance. (ix) Design Products for Quality: Customer expectation decides the basic• attributes of product. Quality is what customer wants. This can happen through good performance, reliability, and service features. (x) Design Processes for Quality: All the processes and workers form a system of production. These should be designed for a quality that customers want. (xi) Control Processes for Quality: The production processes should .be controlled to ensure quality in items that are produced.

TOTAL QUALITY MANAGEMENT

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485

.Voice of the Customers

Voice of the Process

People

Materials

Equip meat

Environment

Me hods

Finance

The way we work/Blending of Resources

Knowledge

>, `;' (-1 Deming Cycle Kaizen

O Identifying changing Needs and Expectations

O

cf,

Innovation Internal Customer

E a. E

Statistical Methods and QC-tools

Products or Services Customers

-r

Figure 32.22 Continuous

improvement model

(xii) Building Teams of Empowered Employees: Employees must be empowered to produce and service for perfect quality. They drive the TQM movement. (xiii) Goals and Performance Measurement: TQM advocates measurement and celebration of achievement. It calls for the elimination of arbitrary goals without method. Employees must be encouraged to measure their performance, and should look at the benchmark and improve. (xiv) Develop Experts: TQM focuses on constant training and education. This leads to a culture of developing experts in areas. Through education, training, encouragement and involvement, experts are the catalyst to trigger improvements on a continual basis. (xv) Systematic Approach: TQM can succeed only with a systematic approach to manage the TQM movement. TQM requires a carefully planned and fully integrated strategy, which is driven from the mission. Regular planning proper leadership and motivation, demonstrative top-management commitment and involvement, team work, kaizen, quality circle, etc. are to be implemented more systematically to achieve TQM goal of continuous improvement and customer delight. (xvi) Customer-supplier Relationships: TQM demands for training the people to understand the customersupplier relationships. The commitment to customer needs should start from the top of the organisation. The concept of internal customers and suppliers should be appreciated and used. The organisation should work in a mode which is conducive for customer satisfaction. (xvii) Total Cost Consideration: TQM must focus of total cost and not on the price of products or services. Continuous improvement will bring improvements in product, servicF and performance. Continuously improvements bring down the total cost of doing business.

486

INDUSTRIAL ENGINEERING AND MANAGEMENT

Vision

Environment

and Mission statement

Marketing

• Top management commitment Benchmarking

• Effective leadership • Policy deployment

• QC tools • Quality team • Process team

Customer Satisfaction

• Implementation of quality plan

Needs/ Expectations of users

• ISO-Certification • Quality audit

Continuous Improvement Kaizen

‘

Process-Control and Quality Assurance (with corrective actions)

Figure 32.23 System Transformation Process

System Evaluation QC Tools

in

TQM

(xviii)Supervision and Training: TQM advocates for adoption of modem methods of supervision and training. The focus is not to criticize mistakes. Praise efforts and achievements. Recognize achievements of all. We should provide the right environment to excel.

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

487

(xix) Better Communications and Quality Circle: TQM advocates for elimination of barriers between departments by improving communications. This would improve integration of the process. It will help in building team-work, without which TQM is certain to collapse. Better communication and openness is needed for inviting suggestions for undergoing improvement. Quality circle, in which workers participate to find solution to their work-related problems, is effective in identifying and solving problems: 32.11 SEVEN QC TOOLS FOR IMPROVEMENT

There are seven tools that are used in the quality improvement process (Figure 32.24). These tools are useful in the identification of problem and establishment of measures for the improvements. These tools are: 1. Scatter diagram 2. Check sheets 3. Graph and charts 4. Histrograms 5. Pareto-diagram 6. Cause-effect Diagram, and 7. Control chart. We will briefly discuss these tools. Process Identification

Process Analysis

Pareto-chart Cause and effect diagram

Histogram Scatterniagram Control Chart

Run chart and Graph

Figure 32.24 Tools for continuous improvement

1. Scatter Diagram: It is prepared by plotting paired set of data such as temperature •,nd elongation, Porosity and insulation, etc against each other on a X and Y axes (Figure 32.25). Method of Use: It is used to collect paired set of data on causes and 'effects, and use scatter diagrams to check the correlation between the set of data. It must be used for a sufficiently large data set, say 40 or more. 2. Check Sheets: These ate forms specially prepared to enable data to be collected simply by making checkmarks (Figure 32.26). Method of Use: It is used for tallying the occurances of the defects or causes being addressed and graphing or charting directly. Check-sheets are to be designed only after a full clarity about the objective is known.

INDUSTRIAL ENGINEERING AND MANAGEMENT

Rel iability o f product

488

NM.

Temperature Figure 32.25

Scatter diagram showing a negative correlation between two variables A

Nif

A-Itf

13

-1-111

II

III

jtif D

E

-1-tti Nil

4411

Ali

I

Ntf

,ifif

Thr

W

III

• Simplifies data collection or analysis. • Helpful in spoting problem areas by frequency, location, type of cause Figure 32.26

Example of check-sheet

3. Graphs and Charts: These are the diagrams for plotting data and showing statistical breakdowns with relationship between different quantities (Figure 32.27). Method, of Use: These are used for organised set of observations. Line-graph may be used to know trend, bar and pie charts for comparing quanties and showing relative proportions.

nn Bar grapl

•

•' •

•

•

• • • •

Broken line graph

Triang c graph

A 13

111 III Pictorial graph,

Dot graph Figure 32.27

Different types of graphs

Area graph

489

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

4. Histogram: It is prepared by dividing the data-range into sub-groups and counting the number of (Points in each sub-groups. The number of points (which is also called as frequency) are then plotted as a height on the diagram (Figure 32.28). 100

90

80

70

60

s) 50

40

30

20

I0

0

I

-5 10 15 20 25 30 35 40 45 50 55 60 65 70 —>

Figure 32.28

Frequency distribution histogram for breakdown times

Method of Use: For different resources such as machine, men, material etc. separate but stratified histogram may be prepared. These may be examined to understand the relationship between shapes of distribution and the specifications. This requires reasonably large data-set for plotting. 5. Pareto-Diagram: It is a diagram on which undesirable events or costs associated with items such as quality, productivity, cost, safety, etc. are stratified according to their causes or manifestations. It is then plotted in order of importance (Figure 32.29). Method of Use: This illustrates the most serious causes of quality-failure among large number of causes. Relative proportion of these causes is also known. 6. Cause-effect Diagram (Ishikawa Diagram): It is also called as Fish-Bone-diagram, as it is shaped like the bones of a fish. It systematically summarizes the relationships between quality characteristics, defects, etc and their causes (Figure 32.30). Method of Use: It is very useful for identifying the factors that affect the characteristics, sorting out the relationships between these causes and the results, and depicting these systematically. It must be prepared after through brain-storming, and gathering the opinion of as many people as possible in order to identify all the relevant factors (or causes).

90 Cumulative percentage 110

(40%. 80%)

c 70

V%) °,3') c.)2 e)

60

50 N E .7D c 40 o 6"c, as

0

co t%

30

a.

20

V e)

10

V

(.1

ul

C)

R 0

10

20

30

40

50

60

80

70

90

100

Figure 32.29 Pareto-diagram

Distribution in Supply-chain

Third party?

Quantity

Who Picks?

Stock Locations

Global Locations?

Safety Stocks

Stock Classification

Who Distributes? Damage Free Shipments

Speed of Delivery Reliability of Delivery

Price and product range

Timeliness

Speed of dealing with Emergency order

Reduced Number of echelons Quality of Information Sisteni Ease of Placing Orders

Strong Supplier Links

Catalogue Format

Reduced in transit times

Order Receiving Places

Entire Supply chain

Reduced Packaging

Accuracy of Forecasting

Improved Customer Service Levels

Reduced Lead Times

Delivery in Supply-Chain

Improved Delivery Method

Stria Turns

What stage of stock

Who Picks?

Customer Expectations and Needs

Inventory managements

Stockholding

Orders

Reputation

Delivery Time Flexibility Reliability

Availability After market in Supply-Chain

Response to Enquiries Prompt Handling of Complaints Confidence in Promises Prices

Customer Service

Figure 32.30 An Ishikawa diagram highlighting aftermarket supply-chain measures of performance

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

491

7. Control Charts: It is a plot of a characteristic value against time. These characteristics may be variables like length diameter, etc. or attributes such as number of defects on sheets, porosity, blow-holes, etc. •(Figure 32.31).

Upper control limit

Central I.ine (average)

Period —>

Lower control limit

• Helps in reducing the process variability • Performance monitoring over time • Out-of-control and a particular trend is immediately known • Helps in deciding the quality of outcoming samples of a lot

Figure 32.31 A typical control chart

Method of Use: It is used to check variation, occurrence of defects, process-deviation form plans, undesirable trends or cycles. It is also useful in identifying if the process is in control. For variables X and R charts are used while for attributes p and c charts are used. 32.12 IMPLEMENTATION OF TQM

The implementation of TQM must involve the followings: 1. Involvement of all, from worker to top executive. 2. Management commitment must be evidently demonstrative. 3. Document what you do (quality manual); then do what you had documented (follow the quality manual). 4. Effective strategic planning and information management must be introduced. 5. Mission and vision statement must be written and displayed every-where. These must be the guiding rules to all employees. 6. People satisfaction should be the first priority. A satisfied person is motivated to do work in a better way. 7. Identification of problem should be the way of life so that problem-solving may be undertaken as a route of continuous improvement. Use lshikawa diagram, quality circle, brain-storming, suggestionbox scheme, etc. to identify and solve problems. 8. Long-term needs, rather than short-term needs must be given more emphasis to derive major benefits. 9. All employees should be committed to adhere to systems and procedures so that a quality culture is a regular affair. 10. Motivational scheme, regular training and educational scheme should be a regular affair to sustain interest in TQM endeavour. 32.13 ISO 9000

ISO is the International Organisation for Standardization, which is headquartered in Geneva, Switzerland ISO 9000 is a set of written standards, laying down a quality system. The basic elements of system is

492

INDUSTRIAL ENGINEERING AND MANAGEMENT

defined through ISO-documentation. ISO ensures a uniform system, which is universally recognized. Through a disciplined documentation of process, which ISO offers, a customer focused quality system can be maintained. ISO 9001 is for quality assurance in de, Ignidevelopment, production, installation and service. ISO is a popular term, which has been linked with organisations looking for excellence in quality. ISO 9000 is a set of international standards for quality management systems. Companies that meet these standards can receive ISO 9000 registration from approved accredited registrars. Many customers are demanding to their suppliers to achieve ISO 9000 certification. ISO 9002 is for production, installation, and servicing. ISO 9001 includes all the elements of ISO 9001, and adds product design as additional component. ISO 9000 consists of a series of five international standards for "quality management" (Table 32.3). This is not specific to anyone industry. . Table 32.3 ISO Series

ISO 9000 ISO 9001 ISO 9002 ISO 9003 ISO 9004

ISO Description Description

It is considered as a road map for use of the other standards in the series. It defines the five key quality terms in the ISO terminology. • It specifies a model when two parties require the demonstration of a supplier's capability to design, produce, install, and service a product. It specifies a model for quality assurance in production and installation. It is a model for quality assurance in final inspection and testing. It provides quality management guidelines for developing and implementing a quality system and in determining the extent to which every element is applicable.

32.13.1 ISO 9000 vs TQM

ISO-9000 is a set of standards and focuses on documents. It ignores human element. On the contrary, TQM focuses on developing human elements (Table 32.4). Table 32.4 ISO 9000 vs TQM ISO 9000 Focus On:

• Certification • Product conforms to specification • Audits and checks • Key processes • Quality system • External trust • Visibility of capability prior to delivery • Maintenance of what is documented • An asst,iince to external customers that a quality system is being pursued

TOM Focus On:

• Customer delight and satisfaction • Total organisation including 'invisible' and `visible' resources • Total Quality Management • Internal and external trust • Leadership • Internal customer • Human factor • Flexibility and change management • Top management commitment • Continuous improvement

For an ISO certified company, it is not necessary that it is following the essentials of TQM. ISO only certifies that whatever is followed is being documented. The certification body does not share responsibility

TOTAL QUALITY MANAGEMENT

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493

that processes are perfectly ordered and everything is OK. In fact, it is wrong to say that an ISO company is a TQM company. As a matter of fact, TQM is not a specific state (or stage) which can be achieved by obtaining ISO. TQM is a continuous journey towards excellence (Figure 32.32). It means that ISO9000 does not transfer the onus of ensuring quality to the certifier. This is because ISO certification makes no assurance about the quality of the final product. Strategic weapon (Premium value)

Self-Assessment

Business Be,:ft Market driven (Beat the competitor)

Continuous Improvement • (measurements)

Customer Driven (Delight the customer)

Participation, Tools and "Fechniques

Phase Conformance to (maul.), (Do it right first time)

ISO

ONO edification

Time -->

Figure 32.32 Role of

ISO in

TQM Journey

It is important to note that TQM and ISO 9000 Standard are not in opposition. One is supporting Ale other. The ISO-9000 standard establishes the principles for a management system which will improve a company's performance. It provides basic building block for moving towards TQM. TQM is a much bigger concept than ISO. It is a way of life or an approach, which is percolated so that a company is better managed. A quality system such vs ISO can do the followings: 1. Discover what is being done ' 2. 'Write down what is being done 3. Justify what is being done 4. Do why t have been written 5. Record what is the consistency between things that are written and followed 6. Review what is being done (problem identification) 7. Revise (if necessary), all problem/improvement areas 8. Start• all over again and incorporate improvements again and again. 32.13.2 Basic Steps in Gaining ISO 9001 Registration

One can start by deciding if registration pertains to one of the ISO 9000 standards (ISO 9001, ISO 9002 or ISO 9003). To determine this, we have to consider: • The-need for registration in market and industry segment. • Benefits that organization gain by having a formal quaJity system. • Registration being asked by an important customer or the parent company.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

• The amount of effort required to comply will require assessing the maturity of the quality system. • The organization readiness in using detailed procedure documents. • Executive management regular reviews reports of defects and customer complaints. • The • training needs known for each job position. • If quality system is absent or immature, it will require much more effort to become compliant. The design and implementation of the quality system to comply with the requirements of ISO 9001 will typically require the following activities: • systematically documenting what you do and how you do, which incorporate writing the quality manual, describing the present quality system at every level, • describe how most work in the organization gets carried out by writing the procedure document, • creating a system to control distribution and re-issue of documents, • as a first, quality measure in TQM, design and implement a corrective and preventive action system to prevent problems from recurring, • as a growth strategy, identify training needs for most 'positions in the organization, • as a measure to establish standards, calibrate measurement and test equipment for standardisation, • as a measure to educate people, train the people in the organization on the operation of the quality system, • as a measure to ensure quality, plan and conduct internal quality audits, • as a measure to march a head in TQM, attend to the other requirements of the standard that the organization does not now comply with. ISO 9000 focuses on a principle: "document what you do, and do what you document." It also, relies on audits to provide assurance that the' system is meeting the standard. An audit involves inspection of the documents that make quality system. The organization must carry out scheduled and planned internal audits of the quality system. Internal audit is to ensure that quality system is being pursued and organisation is committed to procedures and documents. In ISO 9000 certification, a "thi►d party registration agency" is accredited to issue a certificate for ISO 9000 standard. Registration requirement includes a "pre-assessment" which is then followed by a "registration audit" At both the preassessment and the registration audit, are comprehensive audit of the organization is performed. This certificate typically expires after sometimes say three years. Surveillance audits at six months intervals are needed to maintain the continuity the certificate. ISO certification is not a one time activity. It requires continuous pursuation and adherence to the procedures (Figure 32.33). 32.13.3 ISO 14000 Standard .

The ISO 14000 standard is related to the quality system with environment concerns. ISO 14001 is standard entitled "Environmental Management Systems-Specification": There is no formal relationship with the ISO 9000 family of documents. A central element of the ISO 14001 standard is the "Environmental Policy" which is defined by top management. The environmental policy is carried out by the organization to ensure the "environmental protection and related policy". 32.13.4 Copies of an ISO Standard may be Obtained from the Following Addresses

American National Standards Institute 11 . East 42nd St. New York, NY 10036 (USA) Phone: 1-212-64274900, Fax: 1-212-302-1286

TOTAL QUALITY MANAGEMENT (TQM) AND CONTINUOUS IMPROVEMENT

495

O

Road Map to ISO 9000 Registration : In 18 Months

• Registration assessment

O Practices

Correct documented 1 re-assessment deficiencies and Correct • implemented deficiencies 70-80% Choose registrar management Revise for cutilication review O quality • Practices Constitute manual Intial visity Begin Documented and train: documentatio • Continue Get feedand management audits by Analyze implemented bock from represcnta- Internal audits internal processes registror tives, Steering team O First round of groups Circulate Document Top management Corrective internal audits fedback in upgrade decision and actions Communicate the depts. process commitment to mire Define area Management Demonstrate commitment + Develop Strategic plan

workfore Define and traits audit teams

Involve all employees in sharing this vision

for upgrade and improvement Setup documentation teams in each areas

Create initial draft of quality manual

Get the internal feedback by your employees

Registration Coatinous itnprovement, Continued Internal audits corrective actions management reviews and surveillance audits.

review

Implement procedures and instructions Continue internal audits and corrective actions

ISO 9000 Standard overview training

Consulting doeventation working sess on ,How to prepare a quality mat ual for ISO 9002 irdninng

Consulting strategic plan ,rievqlopt sent .

111 Consulting review documentatiOn

Consulting quality audits

Implementing Ilse ISO 9000 standards training Quality systeirt auditor ra ring

Quality system lead assessor training

3

Figure 32.33

7 Time (in Months)

10

13

16

18

Roadmap to ISO 9000 (Based on: 'NWW.iS0 easy.org; Rothery, 1993:) Mazumdar, 1996;

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Man):' of the documents related to standards in the ISO 9000 family can be obtained from:

American Society for Quality ASQC Quality Press 611 East Wisconsin Avenue PO Box 3005 Milwaukee, Wl 53201-3005 (USA) Ernail: asqc.01g

32:13.5 Standards Make up of the ISO 9000 Family There are many standards which make up the ISO 9000 family. These standards are constantly being added and revised. Some standards are: ISO 9000-1: 1_944 Quality management and quality assurance standards-Fart 1: Guidelines for

selection and use. ISO 9000-2: 1993 Quality management and quality assurance standards-Part 2: Generic guidelines · fur the application of ISO 900/, ISO 9002 and ISO 9003. ISO 9000-3:.1991 Quality maitagement and quality assurance standards-Part 3: Guidelines for the application of ISO 900 I lo the development, supply and maintenance of software. ISO 9000-4: 1993 Quality management and quality, assurance standards-Part 4: .i) Reliability X = e- Xl

Time Figure 34.3

Reliability and Unreliability Curves

Survival curve = N,e-xt

Time Figure 34.4

Failure and Survival Curve

The unreliability function, Q, is the one minus reliability function (Figure 34.3). If No is initial number of components, the failure curve is No (1 - ex` ) and components, which survive after time t are (Figure 34.4): NS = No e-xf . Note that sum of these two curves at any point of time is N0, i.e., initial number of components. Similarly, the sum of reliability and unreliability functions at any time is unity. 34.3 BATH TUB CURVE

Bath tub curve describes the variation of failure rate of components during their life-time. It is also called as: life-characteristic curve, or lambda characteristic curve. The life cycle of the component is dividend into three zones. In each zone, the failure mode is generally different (Table 34.1). In the initial phase, failure rate decreases sharply. This is a phase of infant mortality phase. Region (to to ti) in the Figure 34.5 represents this phase. This is a phase when failure occurs because of initial product defect due to poor quality, inherent defects, manufacturing defects, etc. This period is normally the warranty period to the customers, when due to defect in product (or, raw material, etc.) the failure takes place. Second phase (ti to t2) is the phase of useful life. The failure pattern exhibits a constant failure rate, which is generally random. This zone consists of failure due to random changes in operating conditions. Failure of tube light, failure of shock-absorber of scooter due to sudden bump on a road, etc., are the cases of random failures, which occur just by chance during their operation. It is not due to material defect or due to overage reasons. Third phase (12 to 13) is the phase of wear-out failure. In this phase, the rate of failure increases, sharply over a period of time. This region is due to wear and tear, fatigue and creep or overage of the product. It is advantageous to use preventive maintenance in this phase, as the cause of failure is not random but age. In the phase of useful life (ti to /2), it is important to note that failure is due to unforeseen reasons or random causes. Many industries in this phase go for replacement maintenance. When the component fails, then the replacement is advisable for products, which are not very critical to human life and/or production system.

RELIABILITY

543

Failure rate

Decreasing failure curve

Increasing failure rate

Initial failure

Constant failure rate

Early Life

Random failure (Useful

Life)

-•-

Wearout failure

13

(2

Figure 34.5 Bath-Tub Curve Table 34.1 Phases in Bath-Tub Curve

Phase

Other names

Decreasing failure rate

Infant mortality, Ourn-in, Early failure

Constant failure rate

Random failures, Useful life, Stressrelated failures

Increasing failure rate

Wear-out failure

Causes Normally related to manufacturing defects and quality assurance problems. Incorrect assembly, imperfect alignment, defects in weld or joint or connection or wiring, dirt, impurities, crack, coating may be reason. This may be due to some substandard items containing microscopic flaws that have been passed through the final inspection of the product. Generally, this is due to repeated use of the item. Sometimes, it is due to overloading or over-stress ;during use. It may be due to random causes, which may be stochastic. However, the failure-rate is almost I constant. Generally, to over-use corrosion, wear, breakdown breakdown of insulation, shrinkages, fatigues, creep, etc.

34.4 THE EXPECTED LIFE OF A SYSTEM Let t is the random variable for the time a failure takes place. This has a continuous density function. The expected life of the system is:

E (t) = f t f (t)dt

...(34.6)

Since cumulative failure functions:

F (t) = f f (t) dt differentiating both sides:

— dt F (t) = f (t) t.

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544

or,

f (t)

-d d —t [1 — R(t)] = -R(t) d dt

...(34.7)

(r) — — R(t) dt

i.e.,

0,

I d E (t) = t[— — R (t)idt dt ' o

Thus,

=— ft d [R (0] o

Integrating RHS in parts by using rule; iudv = uv — Svdu E (t) = —{[t R(t)]o — .1 R (t)dt o

When t —> co; R (1) = 0; due to finite life of the system: [t R (or = 0 Thus, expected life of a system: E(t)= f R (t)dt

...(34.8)

This is also called as mean-life of the system. 34,5 FAILURE RATE AND HAZARD FUNCTION Let us analyse the failure of a system in a given time interval, which is between times ti and 12. For the interval [ti , t2] the probability of failure is expressed by an unreliability function as (Figure 34.6): 12 J

rl

f (e)

(2 f(t)dt = f f (t)dt — ff . (t) dt 0

0

where, f (t) is the failure function. In terms of reliability function, it is expressed as:

Ti me (1) —f— Figure 34.6 Failure function

(2 f (t) dt = F (t2 ) — F (11 ) r, = [1 — R (t,)] — [1 — R (ti )]

...(34.9) Here, F (t) is unreliability function and is the integration of failure density function. Reliability function is complementary to unreliability function and thus equal to one minus the unreliability function. The rate at which failure will occur in a certain interval of time [t i , t2] is known as failure rate for that period. In other words: = R (t1 ) — R (t,)

545

RELIABILITY

Failure rate It is the probability that a failure .per unit time occurs in the interval given ,that a failure has not occurred prior to the beginning of this interval. Failure rate =

R(ti )- R 02 ) (t 2 - ti ) R (ti )

If, t., is (t + At); and ti

Failure rate =

=

1, then

R (I) - R (t + At)

...(34.10)

At R(t)

In the above expression, the rate is expressed as failure per unit time. However, in real situations, this may also be expressed in kilometers, revolutions, etc. Hazard Function: h(t) It is the limiting value of failure rate as the interval approaches zero. Thus,

h (t) = lim Lit-o

1

R (t) - R (t + At) At . R (1)

lim

R (t) - R (t + At)

R (t) et-w

1

[ d R(t) ]

...(34.11)

dt

R(t)

Since;

At

F (t)= 1 - R (t)

Differentiating both sides gives; d F(t) = - — R (t) dt dt

./0)

-7

or

d f (t) = - — R(t) dt

Using Equation (34.11)

t+At,

h (t) = R

[f (t)]

—

Figure 34.7 Failure Function

fit) Or,

h(t)=

f (t) R (t)

...(34.12)

Thus, hazard rate is the ratio of failure rate and reliability. The product of h (t) and At represents the probability that a device, which has survived till an age of '1', will fail in the small interval [t, t + At ] (Figure 38.8). •

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546

t+Ai 'rime (I) — Figure 34.8 Hazard

Function

34.6 COMPONENT RELIABILITY FROM TEST DATA

Let us consider a population of it identical-items whose failure distribution function is F (t). Consider Ns (t) as a random variable, which represents the number of surviving items at time '1'. Since a component may fail or survive (i.e., there are only two possibilities), Ns (t) will have a bionomical distribution such as:

[R (IA" [1- R (IAN' n!(N-n)! where, n = 0, 1, 2, 3, ....N. We can find the expected value of Ns (t) as E [Ns (t)] = N. R (t) = (t) where, N (t) = average number of serving items. P[Ns (t) = N] =

Thus,

R (t) = Nor)

...(34.13)

Therefore, the reliability of the system at any time t is the average fraction of successfully serving units at time t. Now, since F (t) = 1 - R (t)

=1 Also,

f (I)

N (t) N - A 7(t)

F(t) =

Al ( 1)] N

1

= - N- N(t) dt =-

N

= lim Ai-40

Fl(t)

+

lira

At

1V°-

+ At)

N(At)

Failure density function is normalised in the above expressing in terms of the size of the initial population (N) of the working items. Sometimes, it is desirable to normalise it with respect to the average

547

RELIABILITY

number of successfully functioning items, i.e., items. which are surviving at time 't'. In the previous expression, replacing N with N(t), which is the number of surviving items at time I; we get, N(t) -

h (t) = lim

+ At)

N(At) At Multiplying and dividing by N: N [N (t)- N (t + At) (t) = of m NN (t) (At)

At -)0

=

N lim N(t) or-->o

•

N(t)

(t) =

N (At)

• f(t) f(t)

=

Thus;

+ At)

R (t) f (t)

...(34.14)

R(t)

This is same as Expression (34.12), which was derived earlier. Example 34.1 A car manufacturer conducts fifty reliability tests for the drive shaft-failure of his car. The failure is defined when the drives-shaft started producing excessive noise. The test results are as follows:

Interval (Km) Number of failures

0-20,000 20

20,000-40,000 12

40,000-60,000 8

60,000-80,000 6

80,00-1,00,000 4

Estimate the hazard function, failure density function and reliability function. Solution Interval (km)

Number of failures

Component Surviving N (t)

0 to 20,000 20,000 to 40,000 40,000 to 60,000 60,000 to 80,000 80,000 to 1,00,000

20 12 8 6 4

50 — 20 = 30 30 — 12 = 18 18 — 8 = 10 10 — 6 = 4 4—4= 0

In this example, each data is grouped in a class-interval of 20,000 km. Let,

N (t) = Number of surviving units at time t. N = Total number of original units = 50. t = Time or its equivalent unit, which in this case is 20,000 km.

Hence, for the first interval, t = 20,000 km. R (t) = R (20, 000) =

N(t) N

= 30 = 0.6 50

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548

R(t)- R(t - At) A7(0) - R(20,000)

h

=

R(t) At

50 (20, 000)

(0)(20, 000)

-

50 - 30

= 0.2 x 10-4 f (t) = h (t) R(t) = 0.6 x 0.2 x 10-4 = 0.12 x 10 4

For the second interval, R (t) =

18

= 0.36; h (t)=

50

30 -18 30(20,000) =

0.2 x 10-4

Similarly, other values are calculated and presented below:

20,000 40,000 60,000 80,000 1,00,000

N (t)

R (t)

h (t) x 10-4

f (t) x 10-4

30 18 10 4 0

0.6 0.36 0.2 0.08 0

0.20 0.20 0.22 0.30 0.50

0.12 0.072 0.044 0.024 0

34.7 CONSTANT HAZARD MODEL

Let us consider an exponential probability distribution and constant failure rate; Failure rate; f (t) = Xe-x' Reliability function,

R (t) = e ° f (t) (t) = — ,R(t)

then, hazard function,

= ke-xl

, =

Thus, for a constant failure rate, hazard rate is also constant and is equal to the failure rate. 34.7.1 Mean Time to Failure (MTTF)

Mean time to failure (MTTF) is:

MTTF = ft f (t) dt 0

[ -te-A' { = ft (Xe-xl ) dt = 0

1

IT

...(34.15)

Thus, MTTF is the reciprocal of constant hazard rate. It is generally used for non-repairable items, like bulb, fuse, etc. 34.7.2 Mean Time Between Failure (MTBF)

It is the average time of satisfactory operation of the system, which is also the ratio of test time and number of failures: 1 Total test time MTBF = = A, Number of failures during test MTBF is used when items are repairable. Higher the MTBF, higher would be system reliability.

549

RELIABILITY

Example 34.2 MTTF.

The failure rate of a mechanical watch is 0.0005 failures per hour Calculate in

•

Solution: Reliability function =e = failure rate = 0.0005 per hour

where,

1 = 2000 hour MTTF = 1 = X. 0.0005

Ans.

34.8 RELIABILITY OF A SERIES SYSTEM

In a series system, items are in series from a reliability -8-8- 43 point of view (Figure 34.9). This means that failure of any 0____ item will result in the system failure: Figure 34.9 Series System Let, Reliability of nth component in series = n = Number of components in series. Then, system reliability is the product of individual item's reliability. Thus, system reliability is: Rs = R I R, R3 ... For an exponential time-to-failure density: I1 RS = ...(34.16) I=I

[J

For an exponential time-to-failure density: R. (t)

= e-xis

Rs (t) =

ex,

n (=,

=

I

Since, R, (t) = R1 (t) R2 (f)... Taking loge each sides, we get; In RS (t) = In R I (t) + In R2 (t) + =

In I?, (t) i=1 Differentiating both sides, we get: d " d — In Rs (t) = In It; (t) dt i=i dt

-

Also, we know: J /,(x)dx

R (t)

e°

Taking loge both sides: In R (t) — Jh (x) dx

...(34.17)

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Differentiating both sides d — [ln R (0] = -h (t) dt d

h (t) =

...(34.18)

ln R (t)

dt

From Equations (34.17) and (34.18), we have: • - hs (t) =

(t),

1, (t) =E -hi (t)

or,

...(34.19)

1=1

Therefore, system hazard function 's the sum of component's hazard functions under the assumption of interdependence (i.e., series system), 'flespective of individual item's probability distribution function. Example 34.3

Find MTBF for a series system.

Solution: Since;

/15 (1) = E-h1 (t) i =1

For independence assumption: hi (t) = ki X,i= Constant

hs (t) =

i=i System reliability:

Rs (t) = e "

MTBF = SR, (t)dt

= fe-1141 dt - CI)

— EX;

— EX;

=

1- 0

— E X;

1 xi 1=1

34.9 RELIABILITY OF A PARALLEL SYSTEM

Parallel system constitutes independent parallel sub-systems, which may act as parallel, redundant or standby sub-systems (Figure 34.10). The requirement of a parallel system is such that at least one component should survive for the survival of the system. The parallel redundancy is used to increase the system reliability.

551

RELIABILITY

O

t.

r

Figure 34.10 Parallel System

The,probability that all components will fail would be the product of individual. components reliabilities.. Let, Qt = Unreliability of ith component Qs = Unreliability of the system Qs = 2Q2•••Q„=FIQ; is

1 -RS = [T n R, =1-11 1 (1- Ri )

or,

...(34.20)

1=1

For a time dependent situation: RS

_

(t) i.1

as, R, (t) =1- e - X, 1; where ? i is the failure rate of the ith component. 34.9.1 Mean-Time Between-Failure (MTBF)

Let us consider a two component parallel system. For this, Rs (t)= [1- Ri (t)] [1- R,(t)]'

= R1 (t) + R2 (t) - R1(t) R,(t) = exo + e-x2' - e-Ao e x2' = CAI'

+ co MTBF = fRs (t)dt o ,

- e ()•1+x2)`

CO

CO

= erxi` dt + fe-x't dt 0

+A2)'

dt

0

0

[.e xo '

(x1

-x -a

e -

'

C

oLI-Fx2y X.2' )1:

1

1

1

xi

x2

xl + x2

552

when,

INDUSTRIAL ENGINEERING AND MANAGEMENT

X1 =12 = X (identical cases) 1 1=- -1=3 MTBF = - + -+ — X X 2k X 2X 2k - 1.5IX Thus, MTBF of a redundant system is 1.5 times MTBF of two individual parallel components.

34.9.2 A Three Unit Parallel System

+ e-x2' + e-x`i -e-(xi +).2)1 - C(Xi ±X3)1 - e--(X'+X1)1 + e-(x1+A.2+x3)`

RS (t) =

MTBF = 5 R (t) o

1 1 1 1 1 1 —+ —+ 1 X3 (Xi +X2) (Xi +X3) (X., +X3) (XI +X2 + l3 ) X1 X2

If XI =X2 =A'2 =X Similarly, the derivation may be extended for n parallel units: 1 " 1 MTBF = - y • _

...(34.21)

i=i

1 1[ 1 1 MTBF = - 1 + - + - + + k 2 3

or,

Example 34.4

0

Find the system reliability of the following system:

B

0

If reliability of each unit is 0.4, find the system reliability.

Solution: Reliability of three parallel units A, B and C is: R1 --- [1 - (1 - RA )(1- RB )(1- Rc )] Reliability of two parallel units 0 and E is: R2 = [1 - (1 -RD) (1 - RE)] Reliability of two parallel units G and H is: R3 = [1 - (1 (1 - RH)] Therefore, system reliability is the series system consisting of R I , R2, RF and R3, which is: Rs = [1 - (1 - RA) (1 - RB) (1 - Re)] [1-(1 -RD) (1 - RE)]1?E* [1- (R) (1 - RH)] If reliability of each individual item is 0.4, i.e., R1 = 0.4 RS = [ 1 - (0.6) (0.6) (0.6)] [1 - (0.6) (0.6)] 0.4 [1 - (0.6) (0.6)] = 0.128. 34.10 SOFTWARE RELIABILITY

Some of the most complex systems Man has built are in software. In recent years many hardware functions have been replaced by software and thus software has become a critical part of many systems. Starting from fighter aircraft to household electronic items software plays a major role. Typical examples from the most common applications include the software controlled fuel injection system of the automobile [whose performance is vastly superior to the best carburetor] and the automobile

RELIABILITY

553

braking system incorporating anti-skid and traction control functions. Software is the core element of today's automobile and medical industries.. A growing proportion of the systems operate in real time. The operational effects of failure are large and critical. For example a breakdown of airline reservations, train reservations, banking and many other services can bring the day to day activities to a stand still. The failure of a software controlled braking system in an automobile can -be disastrous. For systems such as air traffic control, space shuttle, fighter aircraft and automated missiles, the software makes a very crucial contribution to the success of the mission. Software cannot be seen or touched, but it is essential to applicationk such as those described above. It is necessary that the reliability of software be measured and evaluated, as it is in hardware. There are fundamental differences between the methods used for the reliability analysis of software and hardware. The design fault in software is the main cause of its failure whereas physical deterioration causes hardware failure. Software generally becomes more reliable over time because of successive changes made with experience (however it might become obsolete as the technology changes). Failure of software is a departure of its results from the requirement. A failure occurs when the user perceives that the program ceases to deliver the expected service. The terms errors, faults and failures are often used interchangeably, but do have different meanings. In software, an error is usually a programmer action or omission that results in a fault. A fault, also referred to as bug, is a software defect that causes a failure, and a failure is the unacceptable departure of a program operation from the program requirements. When measuring reliability, we are usually measuring only defects found and defects fixed. If the objective is to fully measure reliability, we need to address prevention as well as investigate the development, starting from the requirements phase to the finally developed programs. Errors in the software are introduced during various stages, mainly during: • Requirements definition • Design • Program development • Operation/maintenance. Thus, any measure of software reliability must start with the core of the issue, operational software error counts and the rate at which they occur; that is the software failure rate. (Koss 1998). Software failures are not caused by physical environmental wear. The failures occur without any warning. The main source of software failure comes from requirement and specification error rather than from machine code error or design error. Unlike hardware reliability software reliability cannot be improved by redundancy (i.e. producing identical code). However, it is possible to provide redundancy by producing independent versions of software to improve the reliability, which is the basis for many fault tolerant architectures. The software reliability is defined with respect to time and it is generally with respect to execution time. The execution time for _a software system is the CPU time that is actually spent by the computer in executing the software. 34.11 SOFTWARE RELIABILITY METRICS

In order to build reliable software the focus must be on comprehensive requirements and a comprehensive testing plan, ensuring all requirements are tested. Importance also should be given for the maintenance of software since there will be a "useful life" phase where sustaining the engineering effort will be needed. Therefore to prevent the errors in the software we must: Start with the requirements; ensure that the software is developed in accordance with the requirement specifications. Ensure that the code developed can easily support the engineering efforts without infusing additional errors. Plan a good comprehensive test program to verify all functionalities stated in the requirement specifications.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

34.11.1 Requirement Reliability Metrics

Requirements form the basis for software design, code development and test program. It is critical that the requirements are written such that they are clear and there is no misinterpretation between the developer and the client. For high reliability software, the requirements must be structured, complete and easy to apply. There are standards like IEEE, DOD and NASA, which give some guidelines for writing the requirements in a structured way. There are several aids to evaluate the quality of the written requirement docunient. These automated requirement measurements scan the text through the lines and phrases and look for specific words and phrases. For example, the weak phrases like 'shall', 'may' which lead to ambiguity will be identified for their frecikiency of occurrences. More of such terms lead to more choices for the developer to use his discretion. The Automated Requirements Measurement (ARM) software developed by SATC (Software Assurance Technology Centre), NASA is one such aid for evaluating the quality of the requirement document. Seven measures are taken for determining the quality of the requirement specification document. They are: 1.Lines of text measure the size of the document. 2. Imperatives-words and phrases that ascertain the requirements. The number of imperatives is used as a base requirements count. 3. Continuances-phrases that follow an imperative and introduce the specifications or requirements at a lower level, for a supplemental requirement count. 4. Directives-requirements supported in terms of figures, tables and notes. 5. Weak phrases- words and phrases which are bound to cause uncertainty and leave room for multiple interpretation measure of ambiguity. 6. Incomplete statements- statements that have TBD (to be defined) or TBS (to be supplied). 7. Options-words that give the developer latitude in satisfying the specifications but can be ambiguous. A tool alone cannot certainly assess the correctness of the requirements specified in the document. However, it can assess how well the document is written. For example, the count on 5, 6 and 7 clearly would tell how much the developed software can deviate from the requirements the customer bears in his mind as the need. Obviously the acceptance test plan and test will be based on what is contained in the requirement document. The tool is described as an aid to evaluate the document. However, one can read the document and have several reviews with the customer so that the ambiguity is brought to zero. 34.11.2 Design and Code Reliability Metrics

The code can be analysed for the structure and architecture to identify possible error-prone modules based on complexity, size and modularity. In general more complex modules are-more difficult to understand and have higher probability of defects than less complex modules. Thus, The complexity has a direct impact on overall quality and specifically on maintainability. Hence there should be a way to measure the complexity. One way to compute the complexity is to count the number of linearly independent test paths. The size of the software is the count on the number of executable lines of code as defined by a' language dependent delimiter. The combination of size and complexity can be used to evaluate the design and code reliability. Obviously the modules with higher size and complexity are prone to be less reliable. Modules with small size and high complexity are also at a reliability risk because they tend to be very short code that is difficult to change or modify. Although these metrics can be applied to object oriented code, additional metrics are used by SATC (Rosenberg et. al. 2005).

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34.11.3 Testing Reliability Metrics Testing of reliability metrics can be divided into two parts. The first part is to evaluate the test plan. Testing is the main factor which determines the software reliability. The test simulation for various real world application environments should be planned. Thus it is essential that we evaluate the test plan so that it caters to the testing of all the functionalities specified in the requirements. We have to ensure that each requirement is tested at least once. This should really reduce the number of errors due to lack of expected functionality. The second part is the evaluation of number of errors and the rate at which they occur. Application of estimation techniques discussed in the next section can be applied. The time to failure data collected can be used to evaluate the reliability of the software. The testing and fixing should be repeated till we attain a satisfactory reliability. In the process one may have to modify the test plans also. Thus the two parts go hand in hand iteratively. The reliability calculated after every corrective action can be used to measure the reliability growth of the software which ultimately tells us the level of maturity of the software development. REVIEW QUESTIONS 34.1 What do you understand by reliability? Why is it important to analyze the reliability of the manufacturing system? 34.2 Define the following terms and give example to explain them: (a) Reliability. (b) Maintainability. (c) MTBF. (d) MTTF. (e) Failure rate.

(f) Hazard function.

34.3 Establish a relationship among reliability, failure rate and MTBF. 34.4 What is a bath-tub-curve? Explain the reasons for its particular shape. 34.5 Show that the expected life of a system is the integration of its reliability function. 34.6 Show that the hazard function is the ratio of failure rate and reliability function of the system. 34.7 A particular automobile component is tested for its reliability. For this, hundred failure tests are conducted. Estimate and plot the hazard function, reliability function and failure density function for the following test results: Failure Interval 0-15,000 15,000-30,0001 30,000-45,000 45,000-60,000 60,000-75,00.0 75,000-85,000 85,000-100,000 (in km of runs) Number of failures 30

18

12

10

10

18

12

34.8 Show that the MTTF is reciprocal of a constant hazard rate for an exponential probability distribution for failure rate. 34.9 How is reliability of, many components attached in series/parallel related? Explain with examples.

REFERENCES I. Abbott, W.R., 1968, "Repair versus Replacement of Failed Components". Journal of Industrial Engineering 19 (January 1968) 21-23. 2. Catun, V.M. and Mihalache, A.N., 1989, Reliability Fundathentals, Amsterdam, Elseyier.

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556 3. Dhillon, B.S., 1981, Reliability Engineering, Wiley, New York.

4. General Electric Company. Users' Guide to Preventive Maintenance Planning and Scheduling (FAME-Facilities Maintenance Engineering). New York: General Electric Company, 1973. 5. Govil, A.K., 1983, Reliability Engineering, Tata McGraw Hill, New Delhi. 6. Green, A.E, 1972, Reliability Technology, Wiley International, London.. 7. Hardy, S.T., and Krajewski L.S., 1975, "A Simulation of Interactive Maintenance Decision." Decision Science 6 (January) 92-105. 8. Higgins; Lindley R, 1977 Maintenance Engineering Handbook, 3rd ed. New York: McGraw-Hill. 9. IBM, General Information Manual: Preventive Maintenance and Cost Control. Poughkeepsie, NY: IBM 10. IBM, Plant Maintenance Management System. IBM Publication No. E20-0124-0. White Plains. NY: IBM. Data Processing Division. 11. Ireson, W.G., 1970, Reliability Handbook Holt Rinehart and Winston, New York. 12. Kapur, K.C. and Lamberson, L.R., 1977, Reliability in Engineering Design, John Wiley, New York. 13. Lewise, R, 1970, In Introduction to Reliability Engineering, McGraw Hill, London. 14. Locks, M.O.; 1973, Reliability, Maintainability, Availability Assessment, Hayden, Rochelle Park, New Jersey. 15. Mann, Lawrence, Jr. 1983, Maintenance Management, rev. ed. Lexington. MA: Lexington Books. ;6. Mann, N.R., 1974, Methods for Statistical Analysis of Reliability and Life Data, Wiley, New York. 17. Misra, K.B., 1993, New Trends in System Reliability Evaluation, Elsevier Science Publisher, Amsterdam. 18. Nixon, F., 1971, Managing to Achieve Quality and Reliability, McGraw Hill, London. ' 19. O'Connor, P.D.T., 1991, Practical Reliability Engineering, John Wiley & Sons, Inc., New York. 20. Peebles, P.Z., 1980, Probability Random Variables and Random Variable Principles, ISE McGraw Hill. 21. Pieruschka, E., 1963, Principles of Reliability Prentice Hall, New Jersey. ' 22. Polovko, A.M., 1968, Fundamental of Reliability Theory, Academic Press, New York. 23. Roberts, N., 1964, Mathematical Methods in Reliability Engineering: McGraw Hill, New York. 24. Sherwin, D.J. 1990, "Inspect or Monitor". Engineering Costs and Production Economics, 18 (January) 223-31. 25. Shooman, M.L., 1968, Probabilistic Reliability, McGraw Hill, New York. 26. Smith, D.J., 1973, Maintainability Engineering, Wiley, New Jersey. 27. Tillman, F.A., 1980, Optimization of Systems Reliability, Marecl Dekker, New York. 28. Tobias, P.A. and Trindake, D.C., 1986, Applied Reliability, Von Noster and Reinhold, New York. 29. Tombari, H. 1982, "Designing a Maintenance Management System." Production and Inventory Management, 23, No. 4 (Fourth Quarter) 139-47. 30. Turban, Efraim. 1969, "The Complete Computerized Maintenance System."Journal of Industrial Engineering, 1 (March), 20-27. 31. Usher, J.S., 1993, "Case Study: Reliability models and Misconceptions", Quality Engineering, 6 (2). 32. Wilkinson, John J., 1968, "How to Manage Maintenance." Harvard Business Review, 46 (March-April), • 191-205. 33. Wireman, Terry, 1984, Preventive Maintenance. Englewood Cliffs. NJ: eRston Publishing.

5 BENCHMARKING

35.1 INTRODUCTION Nature has given us the ability to learn by observing others. Children do it naturally. They learn to walk, speak and respond to situations by observing others. In business, learning develops through many routes. One of those is benchmarking. What is benchmarking? Why is this buzzword so much in circulation? And, how does benchmarking affect the process of improvement in the system? We will look into these aspects in this Chapter. First let us understand, what is benchmarking? Benchmarking is finding and implementing best practices that lead to superior performances of an organisation (Camp 1995). The first book on benchmarking is by Camp (1989): Benchmarking: The Search for indust►y best practices, that leads to superior pe► formance. This work is based for a project by Dr. Robert Camp at Xerox in 1983, which transformed Xerox from a virtual dead entity to market leader. Since then benchmarking has captured the attention of many industries, researchers and consultants. Benchmarking philosophy has roots in Japan, where it is called as dantotsu, which means: striving to be the best. Dantotsu was used in Japan since World War II (Taiichi, 1990). Western world adopted it through the experiences of Xerox, which benchmarked (compared) its practices with Japanese firm, Fuji-Xerox, and other Japanese competitors in 1979. Xerox (in USA) was making photocopier at a cost which was more than the selling price (cost + profit + market expenses) of its Japanese counterparts. Through a series of benchmarking efforts, Xerox could reduce its production cost and become marketleader. Now, benchmarking has evolved as a search for the industry's best practices which leads to superior performance. A more comprehensive definition is: Benchmarking is a systematic and continuous measurement process; a process of continuously measuring and comparing an organisation's business process against business leaders anywhere in the world to gain information which will help the organisation to take action to improve its performance. —Pla►using (1992)

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35.2 TERMS USED IN BENCHMARKING

During the course of the development of benchmarking as a formal management tool, many associated terminologies have emerged. Some common terminologies and their definitions are as follows: 1. Activity: Benchmarking activity involves a series of transactions that translate inputs into outputs using resources in response to abusiness requirement. Thus, sequences of activities in logical combinations form processes. . 2. Benchmark: Benchmark is the measured, "best-in-clas achievement; a reference or measurement standard for comparison; denotes the performance level, recognized as the standard of excellence for a specific business practice. 3. Benchmarking: Benchmarking is the process of identifying,.leaming, and adapting outstanding practices and processes from any organization, anywhere in the world, to help an organization improve its performance. Benchmarking gathers the tacit knowledge—the know-how, judgments, and enablersthat explicit knowledge often misses. —APQC definition. 4. Benchmarking gap: It is the measurable difference in performance identified through comparison between the benchmark for a particular activity and other companies. It provides in the comparison the measured leadership advantage of the benchmark organization over other organizations. Gapanalysis is an approach to know what needs to be done. 5. Best-in-class: It is the outstanding process performance within an industry. This is used as synonyms to best practice and best-of-breed. 6. Best practice: It indicates superior performance within an activity, regardless of industry, leadership, management or operation approaches, or methods that lead to exceptional performance; a relative term usually indicating innovative or interesting business practices that have been identified during a particular benchmarking study as contributing to improved performance at the leading organization. There is no single best practice because one best is not best for everyone. Every organization is different in some way—they have different missions, ,culture, environments, and technologies. What is meant by best are those practices that have been shown to produce superior results: selected by a systematic process; and judged as exemplary, good, or successfully rated. Best practices are then adapted to• fit a particular organization. 7. Capability mapping: It is needed to know what is possible. It provides an analysis of the business infrastructure of an organization to determine unique abilities and potential. Its assessment is useful at the planning stage of benchmarking. 8. Core competencies: These are strategic business capabilities that provide a company with a marketplace advantage. Organisations try to build up on their core-competencies. 9. Critical success factors: These are quantitative measures for effectiveness, economy, and efficiency. They indicate those few areas where satisfactory performance is essential for a business to succeed. Thus, these are characteristics, conditions, or variables that have a direct influence on a customer's satisfaction with a specific business process. They provide the set of things that must be done right if a vision is to be achieved. It is very useful for understanding the business. 10. Enabler: Enablers are the processes, practices or method that facilitate the implementation of a best practice and help to meet a critical success factor. The enablers help to understand and analyse the reasons behind the performance indicated by a benchmark. 11. Functional benchmarking: It is the proces1 benchmarking that compares a particular business benchmarking function at two or more companies. It may be used to identify better processes elsewhere; but in related industries.

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12. Generic benchmarking: It is a benchmarking that compares a particular business function or process at two or more companies independent of their industries. It may be used to identify better practices elsewhere, but in unrelated organisations. 13. Global benchmarking: It is used to define the benchmarking in a global perspective. 14. Goals: Goals are the numerical target value or observed performance that indicates the strategic direction of an organization. These provide a route to achieve better performance. 15. Internal benchmarking: It is a benchmarking that is performed within an organization by comparing similar business units or business process. It may be used to identify better practices within the organisation. 16. Milestone: Milestone is the planned and achievable performance level of the system. It is used to mark a significant point in development of the improvement or change. 17. Process benchmarking: It is intended to focus on the measurement of some, selected discrete processes, and their performance and functionality against a map of those organizations that are excellent in these processes. 18. Process owners: They are the individuals, who exercise the management, leadership plus possession or control over a process. 19. Project sponsor: He is the individual, who provides the main financial support for a benchmarking project. He is needed to an individual, who plans and carries out a project or activity. He assuines the responsibility for a project till it ends. 20. Recalibration: It is the process of readjusting the calibration of a measure of performance. It is used to standardize by determining the deviation from a measure against a standard. 21. Reengineering: Refer Chapter 36 for details. It is the radical redesign of business processes, organizational structures, management system, and values of an organization to achieve breakthroughs in business performance. It is also a change mechanism in a business system which assumes "clean-slate" approach. 22. Reverse engineering: It provides a way for the comparison of the product characteristics, functionality, and performance with similar products made by competitors. 23. Strategic alliance: It is aimed at the strategic bond or connection between organization with common interests. It provides an association to further the common interests of its participants. Generally used to improve the performance through synergy. 24. Strategic benchmarking: It is a type of benchmarking between strategic partners of the business. It provides the route of the systematic business process evaluation of different alternatives, implementing strategies, and improving performance by understanding and adapting successful strategies. It focuses on external partners, who participate in an ongoing strategic alliance and change process. 25. Strategic planning: It provides the road map to gain competitive advantage by achieving goals that define business objectives for achieving critical success factors. Its focus is long-term and aligned to vision of the business. 26. Total quality: This is also a change process through gradual and continuous improvement. Refer Chapter 32 for detail. It is a customer-focused management philosophy that seeks continuous improvement in business processes using leadership, commitment, process improvement, analytical tools and teamwork that encompasses the participation of all employees. 27. Vision: It is the achievable dream of what an organization wants to do and where it wants to go. Vision-staternent provides the mind-set, through which orgainsation must bend all the efforts, planning and achievements.

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Leading pe'rformance on a process, independent of industry, function or geographical location, as recognized using process benchmarking for comparison to other world contenders.

28. World-class:

35.3 PROCESS OF BENCHMARKING

The definition of benchmarking by Planning (1992), quoted earlier, is developed by the International Benchmarking Clearing House (IBC) Design committee (US). It is based on a consensus of 100 companies and answers questions like, how to perform benchmarking, with whom comparison is to be made, etc. Benchmarking is different from traditional competitive analysis. While competitive analysis focuses on output, benchmarking focuses on-key processes within a business. Benchmarking attempts to determine few critical success factors of the business. After analysing these processes, gaps are identified with respect to the benchmarked business. This helps in recognising the improvements and innovations, which are followed in the best practice organisations. Thereafter, strategically a series of activities will follow that will transform the organisation (or process) from an "AS-IS" situation (i.e., the way the system exists now) into a "TO-BE" situation (i.e., the way the system should be in future). The complete process of benclunarking is illustrated in Figure 35.1. The comparison of AS-IS scenario and TO-BE (or, worldclass practices) scenario will be helpful in identifying the gaps that need to be bridged for superior performances. The performance or improvement must be measured on a regular basis to establish the success of benchmarking endeavour. I. Establish the need for Benchmarking.

Develop "AS-IS" Model.

2. Identify the function(s) to be benchmarked.

3. Select the superior perfonner(s) (Competitive/non-competitive). Compare AS-IS and TO-BE.

4. Collect data and analyse for pinpointing Dips in perfon0aned, process and practices.

5. Set performance goals for improving and surpassing the best in class.

0. Identify the gaps and Devise way to bridge it.

Figure 35.1

7. Implement plan to bridge the gaps and monitor results.

Process of Benchmarking

35.4 TYPES OF BENCHMARKING

Benchmarking is classified on the basis of the type of partner selected for the benchmarking. The partnering team (or organization/group/system/process) may be from the same company or from different organisation. Based on the approaches, benchmarking is classified as (Figure 35.2). (i) Internal Benchmarking,

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561

, (ii) Competitive Benchmarking, (iii) Functional Benchmarking, (iv) Generic or Best Practice Benchmarking, (v) Reverse Engineering. Benchmarking

Internal Benckmarking Performance comparison of units or departments within one organisation —Camp (1989)

Competitive Benckmarking • Product-oriented comparison with processes involved —Watson ('I993)

-11111•1111111111111111M111111111191M —11111=111•1111101•11•111MIIMa

Rine ional 13eneki larking Comparison of particular business functions at two or more organisations —Watson (1993)

Generic (Best Practice) Benckmarking Comparison of allbfunctions business functions operations with those of best in class —Zairi (1993)

—11MMINIMI111111111.•

Figure 35.2 Classification of Benchmarking

35.4.1 Internal Benchmarking It is performed within one organisation by comparing the practiCes and performance of similar business units or business processes located at same or different places. This approach is the most accessible one as the comparison is conducted between similar operations in other parts of the same company. Camp (1989), Zairi (1992) and Watson (1993) defined it as "performance comparison of units or departments within one organization". In the internal benchmarking, there is no problem of confidentiality and, therefore, it should be attempted first before embarking on any other' type of benchmarking. Advantages 1. It uses similar language, mechanism, system, culture, mind-set and top-management support. 2. There is considerable ease in the access to data. 3. There are no problems in establishing communication between units. 4. The process does not involve confidentiality problem in accessing data. 5. The returns of benchmarking efforts are relatively quick. . 6. The approach is relatively silent, low profile, and a low threat affair. 7. It provides a test bed for quicker improvement. 8. Along with transfer of data, expert services from the benchmarked unit are easily available. Disadvantages 1. It lacks external focus and may foster complacency and lack of seriousness. 2. Internal weaknesses, such as cultural problem, leadership problem, etc., tend to remain unaltered. 3. The results are generally marginal or just adequate improvements are visible.

35.4.2 Competitive Benchmarking This involves the investigation of competitors services, processes, practices, styles, and products. Reverse engineering, which involves unfolding processes from end product to raw material (reverse of production

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process), may be one way to involve into competitive benchmarking. Camp (1989) defines it as direct product competitor benchmarking looking at processes and products. Zairi (1992) defines it as comparing specific models or functions with competitors. Watson (1993) defines it as product-oriented comparison with processes involved. The return from this approach may be substantial but it may be quite difficult to collect data for this. Advantages 1. It provides similar structure and constraints in the benchmarked company. 2. Accessibility of data is more difficult as compared to internal benchmarking but easier than the best practice benclunarking. 3. Threats are relatively less. 4. Confidence in the decision makers mind due to similarity with competitors. 5. The disadvantage in internal benchmarking is the chance of complacency and arrogance. This is overcome in this approach. Disadvantages 1. It is difficult to convince the competitors for sharing data. 2. Many constraints, such as legal, ethical and trade secrets prevent the success. 3. It restricts the, creativity in the process of improvement. 35.4.3 Functional Benchmarking It is the application of process benchmarking that compares a particular business function in two or more organisations (Lerna and Price, 1995). Camp (1989) defines it as specific function comparison with best practice while Zairi (1992) defines it as comparison of specific function with best in industry and best in class. Watson (1993) defines it as a comparison of particular business functions at two or more organisations. Advantages 1. Higher chances, of breakthrough as the functions are similar and comparison is with best in class. 2. Moderately sensitive to ethical/political reservation due to similar functions. 3. Widens the perspective of the corporate. 4. There are very high chances of stimulating changes. 5. Similar functions provide opportunity to map the world class on a much easier way. Disadvantages 1. Due to similar functions sometimes data accessibility is less. 2. Activity becomes high profile due to involvement of best in class. 3. There is greater ramification for change. 4. Expectations are far more. 35.4.4 Best Practice Benchmarking In this, We consider the practices of identified leaders, irrespective of the business sector, where benchmarking is performed against very specific activities. This approach initiates great opportunities for companies to collaborate and exchange information as it can only be advantageous to both parties.

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Key feature of Benchmark Company (Best practice) • Any organisation, regardless of sector, location or activity • Must be the best practice company in own. Advantages

1. The possibility of• breakthrough achievements are tremendous. 2. It is less sensitise to either ethical or political reservations. 3. It may widen the perspective of the company. 4. It is more useful for stimulating change. 5. Due to lack of competitor among the two companies, easy to exchange information as compared to external benchmarking in similar sector. Disadvantages

1. There is greater ramification for change. 2. As compared to internal benchmarking, the access of information is difficult. 3. It is a high profile activity due to involvement of world class (best practice) corporate. 4. High expectation for change. 35.5 PROCESS OF BENCHMARKING

The process of benchmarking is not standardised. The Deming cycle of "Plan -+ Do —> Check Act (PDCA) has been used by Watson (1993) to model benchmarking (Figure 35.3). Xerox has adopted a model shown in Figure 35.4. It is a ten-step procedure, which incorporates all the four stages of Deming cycle. Adapting improving and implementing

Planning the study

Analysing the data

Conduct the research •

Figure 35.3 Benchmarking Process Compared to Deming Cycle (according to Watson 1993)

The role of qliality awards, such as Malcolm Baldrige Award (USA) and European Quality Awards are far more effective in evolving benchmark partners. All prize winners have to undertake to share their knowledge with other companies of that nation. Therefore, quality award winning companies provide a framework against which progress and/or achievements catibe mapped. The gaps may also be identified. For example, European Quality Award model provides a 50%-50% weightage to both enabler features and result features (Figure 35.5). The role of different elements of the TQM in the process of benchmarking has been 'identified by many authors. Chandra (1993) has presented a model for TQM (Figure 35.6). In this, customer focus, employee involvement, continuous improvement, and innovative leadership are the key ekments. When

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these elements of the benchmarking companies are compared, the organizations can identify gaps in the process/system. This will result into action phase to bridge the gaps. Table 35.1 gives the focal issues in identifying gaps in benchmarking.

F

. Identify benchmarking subject.

Planning

2. Identify henehmarking partners. 3a. Determine data collection methodology. 3h. Collect data. 4. Determine current competitive gap.

Analysis 5. Project future performance. 6. Communicate findings and gain acceptance. Integration 7. Establish functional goals. 8. Develop action plans. Action

9 Implement plans and monitor progress. 10. Recalibrate benckmark. Maturity attained, Ledership position attained, Practice fully integrated into Process

Figure 35.4 Xerox Benchmarking Model (according to Karsnia 1991, Camp 1989)

PeOple management 9%

Leadership 10%

Policy and strategy 8%

Resources 9%

Enablers 50%

People satisfaction 9%

Processes 14%

Customer satisfaction 20%,

--t

Impact on society 6%

Results 50%

Figure 35.5 European Quality Award Model (1993)

Business results 15%

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BEN CHMARK ING

Reliability enhnaced Product and service quality increased

Index °Coverall satisfaction higher

On-time delivery achieved Errors or defects minimised

Customers satisfaction increased

, rm, Customers retained Complaints reduced

Leadership for continuous impro ,ernent

Competitiveness increased

Market share improved Pi Mils increase

Costs reduced Cycle time shorter Employee turnover reduced

Quality Systems and employee inyolvement

Organisation benefits increase

Employee satisfaction higher Sa let), and health . improved Productivity increased

Figure 35.6

Total-Quality-Management Model (according to Chandra, 1993) Table 35,1

Issue

Focal Issues in Identifying Gaps. Explanation

Example

Core Competencies

Strategic business capabilities which provide market place advantage

Key business Process

Influencing process for external custmor's perception of business

• Quality of product development • Effective availability of customer service

Critical Success factors

Quantitative measurement for effectiveness, economy and efficiency of business

• Mean time between failure (MTBF), • Inventory turnover ratio

Fast-track product development, giving rapid time from the design to production

35.5.1 Different Phases in Benchmarking Process As identified by Karsnia, (1991), Camp (1989), and Lewis and Naim (1995), different phases of benchmarking process are as follows:

Phase 1: Planning Phase 1 What should be benchmarked: The company has to decide what is to be

benchmarked. Any activity that can bt measured can also be benchmarked. For this, we should identify areas that could make significant improvement to customer service since customer satisfaction is vital to the success of any company. Each benchmark has to be aimed at contributing to customer satisfaction or profit through improved performance. Therefore, anything: process or performance, enabler or result, service or production can be benchmarked provided it can be measured.

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2. Whom to benchmark against: It is necessary to decide which companies have some world class practices. However, problem is actually in the identification of these companies, i.e., who is the best? For this, identify competitors of your processes or operations, followed by a search for similar practice in dissimilar industries. Asa rule; customers can provide useful information as to who they think have the best practice. As an alternate, many consultancy associations have up-to-date surveys on the best practices. Therefore, the best-in-class against which the benchmarking is done may be either in same type of industry or it may be a totally different type of industry. 3. Data collection methods: It is a crucial step in benchmarking. Information may be available through many sources. For identifying best practice companies, bench measures should be used before deciding on benchmarking. The bench measitring process should be seen as a prerequisite towards best practice benchmarking as it involves measuring success against a number of companies in order to identify "who" is the best practice (Lewis & Naim, 1993). Therefore, proper methodology for exact data collection is a prerequisite to a successful benchmarking process. Phase 2: Analysis Phase 1. Determine current performance levels: A successful•benchmarking process should pin-point the levels that can be achieved. It is essential to have a clear understanding of company's present performance in order to be in a position to identify any gaps. This may be done on evaluating some performance measures. 2. Project future performance levels: The future performance level depends on the gaps. The performance levels of the "best practice" companies should be quantified and compared with current performance. The gap should be positive if we are interested in benchmarking. This means, we should be lacking in some aspects for being suitable for undertaking a benchmarking project. The area in, which the gap is largest, identifies the area requiring the most improvements in order to achieve a leading edge. As an additional use, benchmarking is useful in measuring and monitoring the process over a ,period of time. This means, benchmarking can be an improvement tool, which may be dynamic in nature. Phase 3: Integration phase 1. Communicate benchmark findings: Proper communication is very essential in benchmarking. The findings should be reported to all employees within the company in order to gain acceptance. This is to gain confidence about new ideas. The change is most likely to be accepted, if the benefits are explained to the employees. A vision of the future state of the company must be circulated. 2. Establish functional goals: Most of the previous goals should be revised during benchmarking so as to set new standards for excepted performance. This is based on best practice performance. The Ta-be position of the company should determine new goals. Phase 4: Action Phase 1. Develop action plans: New action-plans are needed in benchmarking. Carefully design all the specific plans for implementation and continuous assessment of any achievements. 2. Implement actions: New action plans should be put into action. Put all modifications of the actions into practice. Ensure they reach the new standards by monitoring the progress. It requires firm commitment from top management. 3. Recalibrate benchmarks: For future use, we should continue to benchmark, so that company can keep up with improvements and make the change. It should be proactive rather than reactive. Benchmarking is successful, if it is pursued over a period of time. Recalibration is needed till the level of desired performance is achieved.

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Phase 5: Maturity Phase Maturity is achieved when all best practices are implemented and benchmarking is adopted as a way of life. This stage is the turn-around stage, when the status of the best practice is achieved. 35.6 BENEFITS OF BENCHMARKING Benchmarking offers a pathway to change. Many success stories have been reported. For example, Xerox had following achievements (Bendel!, et. al. 1993): • Reduction in inventory by two-thirds • Increase in engineering drawing per person by double • Improved marketing productivity by one-third • Reduced service labour cost by 30% • Improve distribution productivity by 8-10%. A report by Massachusetts Institute of Technology has emphasised that most successful firms in US shared an emphasis on competitive benchmarking (First, 1991). Many multinationals, such as AT & T, Ford, IBM, Kodak, Motorola, Xerox, Du Pont, etc., have reported major improvements throughbenchmarking. Lewis & Naim (1995) have presented an input-output diagram, highlighting some of the potential benefits attainable from benchmarking (Figure 35.7).

Input Dissatisfaction with business as usual

Better understanding of competitors Fewer complaints and more satisfied customers

New competition

B

Customer demands

E N

Political change

Strong reputation within market Increased profits and sales turnover

C H

Cost savings

Understand your key processes

M A

Credibility

Identify best practice companies

R K

Awareness of competitors

New leadership

_r

Identify gaps in performance Objective comparisons

N

Leading edge' status Proactive Closed performance gaps Set new goals, ahead of competition

New insights •

Continuous improvement

Critical performance measure

Motivation Increased competitiveness

Figure 35.7 An input-output diagram highlighting some of the potential benefits of benchmarking (Modified from Lewis and Naim, 1993)

Any organization can benefit from benchmarking because it provides many leverages: • It prevents reinventing the wheel (Why invest the time and costs when someone else may have done it already—and often better, cheaper, and faster?). A lot of money is saved in devising ways to improve. • It accelerates change and restructuring by: • Using tested and proven practices, as best-in-class will be using proven practices.

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• Convincing top management and others who can see that it works, and • Overcoming inertia and compliancy and creating a sense of urgency when gaps are revealed. • It leads to ideas from situations outside the organisation, by looking for ways to improve outside industry. It is an approach of looking beyond. • It forces organizations to look into, analyze and adopt the present process, which often leads to improvement in and of itself. • It makes implementation more acceptable with commitment because of involvement of process owners. Despite reported benefits from benchmarking, two factors which must be considered by a company in adopting this are: (i) Cost of benchmarking study: Normally it should not be high. (ii) Time Scale involved: Normally it should be 6 to 10 months.

REVIEW QUESTIONS 35.1 What do you understand by benchmarking? 35.2 Explain the process of benchmarking. Is it effective in bringing organisational changes? 35.3 What are the different types of benchmarking? 35.4 How does the TQM award model help in the process of benchmarking? Explain. 35.5 Explain the.different phases of benchmarking. How are gaps identified and used in the process of benchmarking? 35.6 Explain the benefits of benchmarking. 35.7 Make a web search on internet and locate the benchmarking case-studies of IBM/Xerox/Motorola/DuPont/ Kodak or other industries. Explain the lessons learnt through these studies.

REFERENCES 1. Bendell, T., Kelly, J., Merry, T., and Sims, F., 1993. Quality: Measuring and Monitoring, Century Business. 2. Burati, J.L., Matthews, M.F., and Kalidindi, S.N., 1992, "Quality management organizations and techniques." J. Constr. Engrg. and Mgmt., ASCE, 118 (1), 113-28. 3. Camp, Robert C., 1989, Benchmarking: The search for Industry Best Practices That Lead to Superior Performance, ASQC Quality Press, Wis?onsin, Codling, Sylvia, 1995. Best Practice Benchmarking, Gower, Aldershot. 4. Chandra, M., 1993, "Total quality management in management development." J. Mgmt. Develop., Bradford, U.K., 12 (7), 19-31. 5. Costanzo, L., 1993, "Benchmarking: Top of the class? Engineering, 233 (8)." 27. 6. "First find your bench." 1991. The Economist, 319 (7706), 72. 7. International standard: Quality assurance standards, guidelines for selection and use 1987, Int. Organization for standardization, Geneva, Switzerland. 8. Karlof, B., and Ostblom. S., 1993, Benchmarking.• A signpost to excellence in quality and productivity. John Wiley & Sons. 9. Karsnia, A.L., 1991, "Towards world class development: Benchmarking to improve project management practices." Seminar Proc., Project Management Institute, Dallas. Tex., 1-9.

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10.Lake, G.D., and Ulrich, D., 1992, "Introduction to exemplary practices." 31 (1/2), 1-7.

Human Resource Mgmt.,

11.Lemas, N.M., and Price. A.D.F., 1995, Benchmarking: Performance improvement towards competitive advantage, Journal of Management in Engineering, II (I), 28-37. 12.Lewis, J.C. and Nairn, M.M., 1995. Control, 6 (3), 258-269. 13.Macdonald, J., 1993,

Bencluilarking of aftermqrket supply chain, Production Planning and

TQM: Does it always work?

Technical Communications, Letchworth. U.K.

14.Main, M., 1992, "How to steal the best ideas around." 15."Now for quality Comparisons." 1992,

Mgmt. Today,

Fortune Int.,

126 (8), 86-89.

London, U.K. Aug., 80.

16.Pengelly, R., 1993, "Quality and the consultant—Who needs BS5750?" 17.Pender, R., 1993, "Partnering for profit."

Total quality Magazine,

Prof. Engrg.,

Feb., 10-11.

Bradford. U.K., Oct., 13-16.

18. Planning, organizing and managing Benchmarking activities: User's guide.

1992, Am. Productivity and quality

Ctr., Houseton., Tex. 19.Prahalad, C.K. and Hamel, G, 1990, "The Core Competence of the Corporation", May/June 1990.

Harvard Business Review,

20. Shetty, Y.K., 1993, "Aiming high: Competitive benchmarking for superior performance." Oxford, U.K., 26 (1), 39-44.

Long Range Ping.,

21. Singh, K.D., and Evans, R.P., 1993, "Effective Benchmarking: Taking the effect approach", Industrial Engg., 25 (2), 22/65-66. 22. A survey of customers needs. 1993, Int. Benchmarking Ctr., U.K. Taiichi, 0..(1990). Toyota production system: Beyond large scale production: Productivity Press; Cambridge, Mass.

23. SWeeney, M.J., 1992, Benchniarking for Startegic manufacturing management, working Paper No. SWP 43/92, Cranfield School of Management, Cranfield, Bedfordshire. 24. Walleck, Steven A., O'Halloran, J. David and Leader, Charles A., "Benchmarking World clasi Performance", The McKinsey Quarterly, No. 1991 pp. 3-23. 25. Watson, G, 1993,

Strategic Benchmarking,

Wiele, Chichester.

26. Watson, GH., 1993, Strategies Benchmarking. How to rule your company's performance against the world's best. John Wiley and Sons, Inc., London, England. 27. Zairi, M. 1992, "Competitive benchmarking: An executive guide for technical Communications Ltd., Letchworh. U.K.

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IMPORTANT NOTES

36 BUSINESS REENGINEERING

36.1 INTRODUCTION Business reengineering, process redesign, organisation restructuring, or business process reengineering (BPR), are some of the commonly used terms for same connotation in recent years. For our purpose, we will treat these terms as synonyms. Business Process Reengineering (BPR) is closely associated with the implementation of ERP and for that matter in the use of information technology (IT) in the enterprise. Now, let us understand the following: • What is BPR? • How is BPR different from other related approaches for change, such as continuous improvement and 'bench marking? • What are reengineering approaches? • How to model a reengineering project? • What is the relation between ERP/IT and BP? • Why does BPR project fail and what can • be done about it? 36.1.1 Definition of Reengineering Hammer (1990) published an article in Harvard Business Review as: Reengineering work: Don't Automate, Obliterate and later Hammer and Champy (1993) published the famous book Reengineering the Corporation: A Manifesto for Business Revolution. These publications formed the starting point of one of the most popular and talked about management intervention of late 1990s. BPR is defined as follows: Reengineering is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical measures of performance, such as cost, quality, service and speed. —Hammer and Champ (1993) The important key terms to be tidied in this definition are radical, redesign, fundamental, process, dramatic, and rethinking. Let us understand what these terms mean. (Adopted from author's book on: Enterprise Resource Planning, Galgotia Publications, New Delhi).

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36.1.2 Radical

Hammer and Champy (1993) have explained this in their approach for BPR BR, as it advocates about reinvention, while disregarding all existing structures and procedures, and inventing completely new ways of accomplishing work. Therefore, BPR is not a process, which incorporates continuous improvement (as advocated in Total Quality Management—TQM). There must be something quite different and new in an approach for BPR. 36.1.3 Redesign

The enterprise needs to be rebuilt through new rules, new methods and new relationships. For example, use of information technology (IT) or the integration' of enterprise through ERP calls for new design of enterprise procedures, reporting system, hierarchy and control, organisational role, accessibility and use of information and ultimately the decision making process. Hammer (1990) says, "Reengineering" triggers changes of many kinds, not just of the business process itself, job designs, organizational structures, management system-anything associated with the process-must be refashioned in an integrated way. In other words, reengineering is a tremendous effort that mandates changes in many areas of the organization." 36.1.4 Fundamental

In BPR, we start with a question which challenges every assumption, every reason, every logics and every activity. We pose a straightforward question; why do we do: what we do? And why it should be continued the way it is being followed today? For example, the economic order quantity for the requisition of an assembly is 450 parts per order from supplier X. Then BPR approach could be: "Why can't we go for Just-In-Time (JIT) supply? What prevents us from doing so and how to overcome?" The crux of the whole approach is that nothing is for granted and therefore should not be accepted as sacred. Time, competition customer need, enterprise outlook, introduction of new technology and information framework (such as ERP), etc., are some of the valid reasons for which old practices become obsolete. For bringing changes, something fundamentally different may be looked for. 36.1.5 Process

Process is defined as a collection of activities that take one or more kinds of input and create an output that is of value•to the customer. Due to considerable success of the division of labour in an organisation, people become more concentrated on the tasks performed around them. Clear understanding of each and every process, its implications and interaction with other processes, and effectiveness of IT on the performance of each of the processes are prerequisites to the successful implementation of BPR in any enterprise. 36.1.6 Dramatic

Dramatic means: not a marginal one. In BPR, we need to have higher magnitude of improvement and, not a slight turn of events. Therefore, BPR is fJcused on completely different approach, which can bring about higher magnitude of -improvement in the performance of the enterprise. In the context of ERP, where cost of implementing an ERP system is very high, the improvements have to be very substantial* to cope up with the investment burdens. If in case, the goal is limited to marginal Improvement in the performance,..:hen instead, the route of TQM or continuous improvement is recomrr.ended. Hammer and Champy (1992) have pointed, "Reengineering isn't about making marginal or incremental improvements, but about achieving quantum leap in performance." 36.1.7 Rethinking

There are traditions, continuity and precedences' in the enterprise. Major deviations are absent in dayto-day activities. However, BPR stresses the need to explore the alternatives. It asks for rethinking and not sticking to the old and conventional approaches. Rethinking is aimed at changing guards, changing for something quite different and dramatic in results. Now, we will look into BPR with some other angles.

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BUSINESS REENGINEERING 36.2. OTHER WAYS TO LOOK AT BPR

Besides Hammer and Champy (1993), many have approached to the concept of BPR in slightly different ways. Despite this, the core concept of BPR is same everywhere. We propose seven Rs: realisation (of change), requirement (of change), rethink (about processes), redesign (old ways), retool (for new ways to perform), reorchestrate (the system to gear up for change), and reevaluate (everything, that has been changed). These seven Rs. are useful in bringing transformational changes in the system (Figure 36.1). Manganelli and Klein (1994) define BPR as the rapid and radical redesign of strategic, value-added business processes, and the systems, policies, and organizational structures that support them-to optimize the work-flows and productivity in an organization. They offer a definition that focuses on optimizing work-flow and productivity in an organization. Other ways of looking at BPR are as follows.

Technical system

Management System

• Work Processes • Job Design • Production Planning • Tools and Techniques • Decision Making • Control of Processes

• Systems • Mission and Vision • Leadership • Motivation and morale • Value • Policies • Procedure and rule • Role and Organisation

Ree igincering plans and Transformation • New Approaches • Deployment of innovations • Radical changes and paradigm shill • Dramatic-fast change mechanism

Social System • • • • • • •

Team Values Creativity , Partnership Reward Structure Peer group

Figure 36.1

Behavioural System • • • • • •

Attitude Perceptions Behavior Habits Traditions Religion

0 her System • • • • • •

Legal Governments Globalisation Liberalisation Privatisation Environmental

Transformation Map of Reengineering

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It is the•analysis and design of work flows and processes within and between organizations. —Davenport and Short (1990) The job of BPR is to rip the guts out of an organisation and reassemble them in the context —Hammer (1990) of today's changing business world. BPR is the critical analysis and radical redesign of existing business processes to achieve breakthrough improvements in performance measures. —Teng, et. al. (1994) Reengineering is the radical redesign of the business policies and practices within an organization in order to streamline an operation and adapt it to existing market realities. —Bob smith (1994) As a prescription to the management looking for BPR, Hammer and Champy (1992) point out, "To reinvent their companies, managers must throw out their own notions about how business should be organized and run. They must abandon the organisational and operational principles and procedures they are now using and create entirely new ones." Twenty Enterprise Redesign Principles • Integrate processes in the supply-chain and the enterprise. • Organise work around the outcomes, not tasks. • Explore and harness technology. • Extensive use of Information Technology (IT). • Give direct access to customer. • Control through feedback, policies and practices. • Enable interdependent arid simultaneous work. • Ensure decision-making power to workers at places where the work is performed and build control into the process. • Redesign and rebuild feedback channel. • Have those, who use the output of the process to perform the process. • Subsume information processing work into the real work that produces the information. .• Treat geographically-dispersed resources as though they were centralised (IT has 2 key role here) • Link parallel activities instead of integrating their results. • Capture information once and at source (ERP has a key role here). • Combine several jobs into one. • Perform steps in processes in a natural order, and attempt doing several jobs simultaneously. • Perform work where it makes most sense, including at the customers' sites. Work may be shifted across organisational boundary. • Control and checks, and non-value-added work are minimal. • Use hybrid centralized/decentralized operations. • Create business alliances, if needed.

Figure 36.2 Enterprise Redesign Principles [Andrews and Stalick (1994): Hammer (1990); Hammer and Champy (1993) Shankar and Jaiswal (1999)] kr

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36.3 COMMON MYTHS ABOUT BPR (TABLE 36.1) BPR is with us as a management concept since early 1990s. It is still a reasonably misunderstood concept in our corporate world. Sometimes, it is equated with downsizing, Client/Serves computing, ERP, ABC, etc., and all have added confusion to it. We will first try to dispel some, of the common myths identified by CSC Index, Inc. on the basis of a survey of 600 large North American and European firms in 1994 and findings of Devenport and Stoddar (1994) with 200 companies and 35 reengineering initiatives.

Table 36.1 Common Myths and Reality about BPR Myth

I. Reengineering is nothing but downsizing.

2. The ambitious goals set in BPR are not safe, therefore, modest goals should be set. 3. Most BPR efforts fail to deliver goods.

Reality

Reduction of labour or downsizing has been a minor outcome of reengineering. Restructuring and redesign are the focus in BPR. Involvement of integration through information technology is one of the reasons for layoffs and job reduction. Modest or lower goals are not safe strategies in BPR. Based on the surveys, those who aimed higher have a better record of attaining BPR objectives. Based on surveys, few BPR efforts have failed. But three-fourth of those aiming for cycle-time reduction and most of those aiming for costreduction have succeeded in their BPR effort. Many ERP implementations have succeeded when BPR is adopted to reengineer the enterprise. It is rare to find full scale, successful ERP implementation without BPR inputs.

4. Reengineering is a fad. It is on the way out.

On the contrary, BPR is gaining popularity in recent years. Alongwith industrialised nations, developing nations like ours are fast adopting to the changed norms and BPR. The trend is likely to continue.

5. Reengineering is reorganizing, delaying, or flattening an organisation

When we go for reengineering, the focus is not the structure, but the processes and their organisation linkages in the enterprise. Flatter organisation after many reengineering efforts is due to associated IT inputs during BPR: It lessens the need to delegate in the organisation. Software reengineering focusses efforts at using modern technologies to restructure obsolete information system. BPR, however, is concerned with many disciplines other than software for similar purposes.

6. Reengineering is a process achieved through software reengineering. 7. ERP is a reengineering process.

Reengineering is a planned effort, which may follow, proceed or go along with ERP implementation. The reengineering is needed so as to match with ERP package and/or to utilise this opportunity for redesigning the enterprise.

8. Reengineering is an improvement program like TQM and benchmarking.

Reengineering is fundamentally different from Total Quality Management (TQM) and bench-marking. While, TQM focusses on marginal but continuous improvements, bench-marking is an improvement through imitation and inspiration of best practices in the other or same enterprise. Reengineering, however, is a process of radical and Ac fundamental change. According to Hammer and Champ (1993), " reengineering seeks breakthroughs, not by enhancing existing processes, but by discarding them and replacing them with entirely new ones."

36.3.1 Process Improvement vs Process Innovation Total Quality Management (TQM) is the process, which demands for continuous, incremental improvement in the process and practices of the enterprise. Business Process Reengineering (BPR), on the other hand,

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calls for radical, periodic and break-through in changes, which are fundamentally different than existing processes and practices of the enterprise. The detailed differentiation is given in Table 36.2. Table 36.2

Process Improvement (TQM) versus Process Innovation (BPR)

Factors

Improvement (TQM)

Innovation (BPR)

I. Level of Change & Objective

Incremental, Continual, Gradual

Radical, Break through, Periodic, Abrupt, Volatile

2. Starting Point

Existing Process

Clean Slate

3. Frequency of Change

One-time/Continuous

One-time

4. Time Required

Short

Long

5. Participation/Orientation

Bottom-Up

Top-Down

6. Typical Scope

Narrow, within functions, Broad, cross-functional

Wider

7. Risk

Moderate

High

8. Primary Enabler

Statistical Control

Information Technology

9. Type of Changes

Cultural

Cultural/Structural

10. Customer Focus

Very Good

Essential

11. Continuous Improvement

Essential

None

12. Training

Universal

Significant

13. Use of Teams

Frequent

Marginal

14. Integration of overall process

Marginal

Central and Significant.

IS. Expected Improvement

Medium

Very high

16. Sources of Leadership

Managers or associates close to the business

Often managed by outsiders

17. Case for action

Assumed to be necessary

Compelling

18. Senior Management involvement

Important up front

Intensive throughout

19. Role of Information Technology

Incidental

Cornerstone

20. Involvement

From Few to Everyone

A few champions

21. Orientation

People

Technology, Information

22. Focus

Processes

Profit

23. Investment

Low initially, high to -sustain

High initially, less later

(Kaizen)

Source: Compiled from: Gulden and Ewers (1991), Devenport (1993), Mohanty (.1997), Turban, et.al. (1996)

Shankar and Jaiswal (1999). 36.4 THE 7 RS. OF REENGINEERING

Reengineering requires efforts for dramatic improvement in the performance of the enterprise, which is through radical changes in the system. Reengineering may be brought by discontinuous thinking, breaking from conventions and routine framework. Therefore, a new paradigm shift in the approach to, run the

.

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BUSINESS REENGINEERINO

enterprise is needed which may be brought through re-architecturing of the enterprise. Reengineering is not downsizing or only automation. It involves "redefining and rethinking everything". To incorporate reengineering, six peripheral and one central Rs, are needed. (Figure 36.3) These are: (I) Reorchestrate as the central theme for all activities, and (II) Realization, Requirement, Rethink, Redesign, Retool, and Revaluate as the six peripheral themes. 0040114 PP, It I NO wileo

Rethink

Requirements *C'tistomers • Suppliers •Product •Services • Process ()wilier *Training

*Technologies •System *Structure *Procedures *Rules . •Processes *Conventions

Redesign

Weldon *Optimize Process *Total Process *Total System IEliminate Waste

•Leadership • Relics and Values • Culture

Realization

\

•Strength • Weakness I Threat •Opportunity I Need • •Choi lunges

• Accountancy •Communication •Incentives *Celebrations Success

Reevaluate

4116, •Performance

Retool *Technologies and System *Delivery System *Transformation Methods *Planning and (Intro'

• Results *Mai • ShorVi-ong.term aelneVeMenbi •Morale cadurship

C=RS AT PUMP! IBRY Idt AT Tnn TUB

Figur. 30,3 lio@nglmerIng Wheel 36,4.1 Noorchestrate Reorcheetration forms the central theme or hub of the reengineering effort. Its purpose is to bring about organisational change necessary for reengineering, This can be, achieved through: (a) Transforming organisation fl.om traditional hierarchical organisation to network.based organization (b) Reengineering of few (one or two) cross.ilmetional organisational.prOcesses

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Key Principles of Reorchestration 1. Develop proactive, visible and passionate leadership. 2. Change accountability to support new process. 3. Reengineering effort should be in line with new or retained beliefs and values of the organisation. 4. Develop incentives for reengineering effort. 5. Ensure job security and redeployment of work-force after reengineering. 6. Plan training to sustain post-reengineering scenario. 7. Reengineering effort should be treated with zeal and a mission. 8. Involve everybody and especially top management to ensure full commitment. 9. Reengineering process should heavily be clubbed with open communication among top management, other employees and consultants for reducing chances of mistrust, confusion and passiveness. 10. During reengineering process, many things are fluid, ambiguous or tentative. Everybody must be trained to accept this transition. 11. New rules for employee's empowerment have to be derived. Any obstacle in the path of reengineering has to be removed by total commitment for change and innovation. 12. Celebrate any success in the path of the reengineering effort. It is important because reengineering effort is always associated with some failures and fine tunings. 36.4.2 Realization Realization is the first step of reengineering. It involves probing questions like, "Why do we do this the way we are doing it now?" "Why do we do what we do now?" "What can be done to change this situation?" etc. Probing into present may result in the realization that radical and dramatic improvement is needed. This realization is the trigger-point for reengineering process. Realization starts with a careful SWOT analysis: Table 36.3 SWOT analysis for Realization Phase

SWOT Analysis for Realization

S

Strength

Analyse the internal Strengths of the enterprise.

W 0

Weakness

Analyse the internal Weaknesses of the enterprise.

Opportunity

Analyse the Opportunity in the emerging areas of Market/technology/1T or adoption of ERP; and/or BPR measures.

T

Threat

Analyse the external Threat by environment/ competitors/emerging technologies.

Realization is the attainment of the glimpse for a new visions related to the need for transformation. It is the start of a challenging journey of reengineering. 36.4.3 Requirements Requirement analysis is the second phase of the reengineering process. It involves aligning the mission, vision, values and key requirements of the enterprise to satisfy and exceed the customer's expectation. Unlike common in traditional enterprises, this phase should be proactive to satisfy and exceed the customer's requirements. Reengineering efforts must not start without the requirement analysis for customers, products, services, process owners, and suppliers.

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36.4.4 Rethink

Rethinking is the critical examination of all the current and existing conditions of the enterprise. It has a special focus on the process weaknesses and variations. The critical analysis of the outdated procedure policies, structures, technologies, methods and work-habits has to be done at this stage. This would form the basis for the transformation process in reengineering. 36.4.5 Redesign

For any reengineering effort, redesign of the enterprise has to be meticulously planned. The effort in reengineering is focussed on cross-functional activities of ambitious nature. The redesign should involve on breaking conventional rules and breakthrough thinking. Redesign should be shaped around visionary goals for the enterprise. It can be effective with supports from information technology. ERP, as one of the strategies, related to IT, facilitates in deciding the framework for redesign. Turban, et. al. (1996) have identified twelve "—ing" -words that help in deciding the move towards changes in basics of enterprise, (Table 36.4). Table 36.4 Twelve Moves (—ing-words) in Redesign S. No.

Moves in Redesign

1.

Challenging

• Hold nothing scared • Scrutinize current practice.

For example, challenge the warehousing practice by material planning through JIT.

2.

Eliminating

Eliminate unnecessary processes. • Eliminate unnecessary control.

Develop single vendor, who is highly reliable in quality and, thus, eliminate inspection of subassemblies from vendor.

3.

Flattening

• Eliminate hierarchy in the management.

More responsive with better teamwork flattens organisation.

4.

Simplifying

• Simplify the customer relationship. • Simplify the vendor relationship. • Simplify processing and information flow in supply chain.

The supply-chain is more effectively managed once the simplification and ease in information-flow is incorporated in its different links.

5.

Empowering

• Empower "intelligent" nodes in the supply-chain of the enterprise. • Use IT to achieve empowerment.

One point processing of customer complaint (single window-type) and immediate action for redressal may be inbuilt through compete IT support.

6.

Standardizing

• Build uniformity in dealing with similar problems such as customer service.

For each vendor, one single account number and standardised procedure for payment of shipment may improve the performance of the value chain.

Explanation

Example

(Contd....)

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Moves In Redesign Paralleling

8.

Partnering

9.

Informing

10.

Monitoring

I I.

Outsourcing

12.

Pre-scheduling

Explanation • Information, fed at any point of the system, is processed in parallel at many locations for different purposes. • Form strategic alliances with different supply chains,

• Share information film a common source ' • Build strong information links. • Information itself is the link in the seamless integration of the enterprise. • Continuous tracking of performance measures • Use feedback extensively and make it available at all points of the enterprise • Use different en►erprises to perform few specific function of your organization • Select specialist enterprise for function which is outsourced, • Schedule activities In advance and let It be known to all concerned.

Example With every sale, the customer da►a are used by market research, distributor, product development and planning for different purposes. Credit Card Company, bank (finance) and car dealer form strategic alliance for the sale and loan of car. For dealer as well as financer, it is a win-win strategy. The most attractive feature of all ERP solutions is the seamless integration of enterprise with instant sharing of information among.

Dealer of the car monitors the customer preference regarding model and colour of the car, This information may be fed to all employees in the enterprise for better preparedness. Maruti company is outstanding many parts, such us steering, tyres. etc., to other specialist firms.

A refrigerator company planned to devote more time in product-development during lean period of production. It is conveyed to the operations•munuger, so that he can contribute substantially when time comes.

38.4.6 Retool The purpose of retooling is to ensure that the evolving enterprise would become more responsive to the reengineering effort, This is necessary to minimize the inflexibility after the BPR point, Retooling needs a clear understanding of the current practices of information processing and handling of all databases. An assessment of app►nprfritw, Support and appropriate network of hardware, technology and procedure is the prime objective of retooling. The retool phase involves the evaluation and adaptation of more competitive systems, such as technologies, required to improve production or service work processes, in order for the retooling effort to be adequate. ---Rdosomwan, J.A. (1996) Retooling is not a casual or quick-fix process. It involves cared marketing and documenting (Table 36.5) the characteristics of the process for new tools (such as RP), technologies, programs and services (Shandler, D,, 1996),

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Table 36.5 Retooling of Enterprise Traditional Enterprise Perspective In RETOOLING

Reengineering Enterprise Effort In RETOOLING

• It is a piecemeal effort. • It is an on-demand process.

• It is a comprehensive effort. • The focus Is on the evaluation and adaptation ofa more competitive system, and set of procedure. • The concern for creative ideal processes and systems is more.

• The concern for creating ideal process and systems is.less.

38.4.7 Reevaluate Re-evaluation is the final phase of reengineering. It involves the reevaluation of the entire process to ensure that once the redesign and retooling efforts are over, the evolved process has attained the requisitioned objectives. Re-evaluation of results should be on the basis of same performance indicators, These performance indicators must specify the improvements in the core-competencies of the enterprise,

Reutigineuring Thant Process Map Process OWflerh

i

Redesign

piugnosIs

Retool

Reoreheatrate

AS=IS Process Understanding Weukneai In Current Design Targets nu New Design

Process Design Breakthroughs Detailed Process Designs Identification or Bust Design Revaluate

Transition

Transition Strategy Pilot Implementation Rollout and Institutionalise Nur@ 30,4 Sketch of Concurrent fieengineerIng Approach (Modified form Bheekeren end Leung, 1NY: Shenker end Jelowel, 1000)

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Key Point "When you start to re-engineer processes, better have customers and suppliers on the team, because without them you will have a very small scope for BPR, which offers no strategic —Prof Michael Earl, London Business School value." In the revaluation stage, the focus should be on the entire process and, thus, enterprise as a whole. A sketch of concurrent reengineering approach is presented in Figure 36.4 (modified from Bhaskaran and Leung, 1997), which represents all the aspects of a reengineering process. The seven Rs of reengineering help the reengineering process in many ways. Once realization is sensed, the requirement and rethinking process start for the mobilization of reengineering team, process-mapping and process-owners. Efforts for reorchestration, redesign, retooling and diagnosis of the current practices (AS-IS) concurrently start. This gives rise to new breakthrough or TO-BE enterprise with major transformations. The changes, thus brought about, are implemented after detailed designs of new processes. During the transition-phase of major changes, the system is revaluated on different performance measures. Once, benefits are established at this level, transition strategy is freezed by top management Pilot implementations are undertaken. Concurrently, whole changes are made known and implemented. New methods are formalised and efforts are made for the acceptability. 36.5 HOW TO MINIMIZE FAILURE OF BPR PROJECTS?

There are large number of cases where BPR projects have failed. The main reasons for failure and the ways to minimize failure are given in the Table 36.6 below (Bashein et. al, 1994; King, 1994). Table 36.6

Failure of BPR Efforts

Reasons for Failure of BPR

• • • • • •

Lack of sustained management commitment Lack of focussed leadership Unrealistic scope and expectations Resistance to change

Unprepardness of the enterprise A Do-It-to-Me attitude • Cost-cutting focus • Narrow technical focus • Lack of IT/ERP support • Unsound financial conditions • Too many project, under way • Fear and Lack of optimism • Animosity towards IT/ERP specialists • Overemphasis as tactical aspects and strategic issues being compromised

How to Minimize BPR Failures

• • • •

Senior management commitment and sponsorship Realistic expectations Empowerment Collaborative workers and team work

• • • •

Strategic context of growth and expansion Shared vision Sound management practices Effective communication, regular briefings, and meetings for the removal of mental blocks through discussions • 'Sufficient budget

• Do something smaller first. • Conduct transformation session of HRD to evaluate resistance to change. • Get HRD and IT people involved. • Celebrate even a smaller success or achievement. • Identify trade-off between processes. • Identify new market and opportunities. • Redefine process structure and assumptions.

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BUSINESS REENGINEERING

36.6 BPR AND IT

Business process reengineering and information technology (IT) are closely related. Hammer (1990) considers IT as the key enabler of BPR which he perceives as "radical change". IT helps in challenging the assumptions inherent in the enterprise and its work processes that have existed since long. Hammer (1993) stated, "A company that cannot change the way it thinks about IT cannot reengineer." Manganetti and Klein (1994) observed that the appropriate methodologies of reengineering should feature both empowerment of human resources and the use of IT as the prime enabler of radical changes. Figure 36.5 gives a flowchart of process redesign and role of IT in this. The heart of reengineering is the focus on discontinuous thinking and breaking away from old rules and fundamental assumptions regarding processes. Most of these rules and presumptions are based on existing technologies, people organisational goals, information attributes, such as: availability, timeliness, clarity, preciseness, absence of vagueness updating and retrieval potentials. Therefore, IT, in a client/server environment, could play important role in the redesign of all that is existing now. Mostly, all ERP systems are based on the network model of client/server architecture. Davenport and Short (1990) have contended that BPR requires taking a broader view of both IT and business activity, and of the relationship between them., IT should be viewed as more than an automating or mechanising force to fundamentally reshape the way business is done. . Develop Business Vision and Process Objectives • Prioritize Objectives and Set Stretch Targets such as: Cost reduction, Time reduction, Output quality improvement, Quality of work life, Empowerment, etc.

I

-.

Identify Processes to be Redesigned • Identify Critical or Bottleneck I rocess, which are in conflict with business vision, and prioritize them in order of agency for the redesign.

Understand and Measure Existing Processes • Identify Current Problems and Set Baseline for avoiding the repetition of old mistakes and for incorporating improvements.

I

I

i I Identify ERP/IT/e-business Levers • Brainstorm New Process Approaches and capabilities of ERP/IT/e-buiness

Design and Build a Prototype of the Process • Implement Organizational and Technical Aspects for interactive refinements, quick delivery of results and thC involvement and satisfaction of customers.

Figure

36.5

Five Steps in Process Redesign (based on Davenport and Short, 1990)

36.7 RECURSIVE RELATIONSHIP OR ERP/IT/E-BUSINESS AND BPR

IT/ERP/e-business has tremendous role to play in BPR. BPR requires taking a broader view of both IT and business activity and relationships between them (Figure 36.6). ERP/IT/e-business has to be viewed

584

INDUSTRIAL ENGINEERING AND MANAGEMENT

as more-than one automating or mechanising force: to fundamentally reshape the way business is done (Davenport and Short, 1990), Both BPR and ERP/IT/e-business have a unique relationship, which is recursive (Malhotra, 1998), When we adopt ERP/IT/e-business, its capabilities should support processes of the enterprise. How can ERP/IT/e-business Support Business Processes?

ERP/IT/e.business Nimbililies

Business process Reengineuring

How can Business Processes heThinsibrmed Using ERP/IT/e.businves?

Figure 35,6 The Recursive Relationship between ERP/IT/e-buelness Capabilities and Business Process Redesign Reengineering In a same way, the capabilities and outcome of the processes of the enterprise should be in terms of the capabilities ERP/IT/e-business can provide, This is termed as broadened recursive view of ERP/1T/ e-business and BPR, This view heralds en era of new industrial engineering (Davenport and Short, 1990),

REVIEW QUESTIONS 36.1 What Is business process reengineering? How is BPR different from other related approaches such as continuous Improvement and benchmarking?

36,2 What are the seven Re of reengineering7 explain them, 36,3 Explain the transformation aspects of reengineering, 36.4 Mot and explain the different redesign principles of an enterprise,

36.5 Comment on the following statements: (I) Reengineering is nothing but downsizing. (ii) Reengineering is a W. It is on the way.out. OM Most BPR efforts fall to deliver goods. (iv)BPR is a risky venture. (v) BRP. and e-buminess are the reengineering processes. (vi)The ambitious Seals set In BPR are not saib,

(vii)Reengineering is like TQM and benchmarking. (viii)IT is an enabler to reengineering.

585

BUSINESS REENGINEERING 36.6 Differentiate between TQM and reengineering. 36.7 What are twelve moves in redesign? Explain. 36.8 Explain the concurrent approaches of reengineering. 36.9 What are the main reasons of failure of BPR projects? How can such failures be minimized? 36.10 What' is the role of IT in rcci

ring? Explain the recursive relationship between IT and BPR.

REFERENCES I. Bashein, B.J., Markus, M.L., and Riley, P., 1994 Spring, "Pre-conditions for BPR Success; And How to prevent Failures," Information System Management, 11 (2), pp. 7-13. 2. Bhaskaran, K. and Leung, Y.T., 1997, "Manufacturing Supply Chain modeling and reengineering", Sadhana, 22(2), April, 165-87. 3. Davenport, T.H. and Short, J.E., 1990, Summer, "The New Industrial Engineering: Information Technology . and Business Process Redesign," Sloan Management Review, pp. 11-27. 4. Davenport T.H., 1993, Process Innovation, Harvard Business School Press, Boston, M.A. 5. Davenport, T.1-1., 1994, "Reengineering: Business Change of Mythic Proportions?" MIS Quarterly, July, PP. 121-27. 6. Davenport T.H. and Beers, M.C., 1995, "Managing InformatiOn About Processes," Journal of Management Information Systems, 12 (1), pp. 57-80. 7. David, K.C. and Henry, J.J., 1995, Best Practices in Reengineering: What Works and What Doesn't in the Reengineering Process, McGraw-Hill, New York, pp. 3-6. 8. Earl, M.J., Sampler, J.L. and Short, J.E., 1995, "Strategies for Business Process Reengineering: Evidence from field Studies," Journal of Management Information Systems, 12 (4), pp. 31-56. 9. Edosomwan, J.A., 1996, Organisational transformation and process reengineering, Delray Beach, FL: St. Lucie Press. 10. Grover, V., Jeong, S.R., Kettinger, W.L. and Teng, J.T.C., 1995, "The .Implementation of Business ProcesS Reengineering," Journal of Management Information Systems, 12(1), pp. 109-144. 11. Hammer, M., 1990, "Reengineering Work: Don't Automate, Obliterate," Harvard Business Review, July-August, pp. 104-12. 12. Hammer, M. and Champy, J., 1993,• Reengineering the Corporation: A Manifesto for Business Evolution, Nicholas Brealcy, London. 13. Kettinger, W.J. and Grover, V., 1995, "Special Section: Toward a Theory of Business Process Change Management," Journal of Management Information Systems, 12 (1 ), pp. 9-30. 14. King, W.R., 1994 Spring, "Process Reengineering: The Strategic Dimensions," Information System Management; 11 (2), pp. 71-73. 15. Manganelli, R.L. and Klein, M.M., 1994, The . Reengineering Handbook: A Step-by-step Guide-to Business Transformation, Amacomi New York, pp. 7-8. 16. Malhotra, Y., 1998, "Business Process Redesign" IEEE Engineering Management Review, 27-30. 17. Mohanty, R.P., 1997, "What do we need to know about BPR" IE Journal, December, Volume XXVI (12)., 20-29.

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18. Ng, JKC, Ip, W, and Tee, TC, 1999, "A paradigm for ERP and BPR integration," International Journal of Production Research, 37 (9), 2093-2108. 19. Robert, G, 1996, Beyond ERP and MRP II. IIE Solution, September, 32-35. 20. Stoddard, D.B. and Jarvenpaa S.L., 1995, "Business Process Redesign: Tactics for Managing Radical Change," Journal of Management Information System, 12 (I), pp. 81-107. 21. Schonberger, R., 1986, World Class Manufacturing. The Free Press, London. 22. Smith, Bob, 1994, January, "Business Process Reengineering, More than a Buzzword," HR Focus. 23. Shandler, D., 1996, Reengineering the training function, Delray Beach. FL: St. Lucie Press. 24. Shankar, R. and Jaiswal, S., 1999, Enterprise Resource Planning, Galgotia Publications: New Delhi. 25. Tapscott, D. and Caston, A., 1993, Paradigm Shift: The New Promise of Information Technology, McGrawHill, New York. 26. Turban, E., McLean E. and Wetherbl, L., 1996, Information Technology for Management, John Wiley & Sons, Inc., New York. 27. Venkatraman, N., 1994, "IT-enabled business transformation: from automation to business scope redefinition". Sloan Management Review, Winter, 73-87. 28. Wight, 0., 1993, The Executive's Guide to Successful MRPII, revised edn, Oliver Wight Publications, Vermont, p. 1 . 29. William, 0.T., Jacques B., IAN G.M. and Colette, R., 1991, Information Systems Methodology—A Framework for Understanding, Addison-Wesley, Nottingham, U.K., Chapter 8, p. 181. 30. Zhang, H.C. and Alting, L., 1991, "Trends in integrated manufacturing". Manufacturing Review, 4, 173-81.

37 PRINCIPLES OF MANAGEMENT

37.1 INTRODUCTION Management is an area of extensive research and application. Koontz defines it as an area that consists of getting things done with and through others. A manager is one, who accomplishes the group objectives by directing the efforts of others. Management is guiding human and physical resources into a dynamic, hard-hitting organisation until that attains its objectives to the satisfaction of those served, and with a high degree of morale and sense of attainment on the part of those rendering the service. —Lawrence A. Appley Urwick defines management as the art of directing human activities. Management is treated as the art and science of making decisions. It is the process of relating resources to goal accomplishment. Many other views on management exist in literature. Some are: • It is the process of getting things done well-performance, productivity and profitabilitywise. • It is the art of coordinating resources: men, machine, material, money, market, information and even knowledge. • It is the process of planning organising, staffing, leading and influencing people, and controlling (Figure 37.1). • It is the art and science of organising and directing human efforts applied to control forces and utilise the material of nature for the benefits of mankind. (—ASME) • Management is the complex of continuously coordinated activity by means of which any undertaking or any administration or any other service, public or private, conducts its business. (—I.L.O.) • Management is the process or form of work that involves the guidance or direction of a group of people toward organisational goals or objectives. (—Rue & Byars) Thus, there is no single definition of management. In general, management is the process of effective accomplishment of tasks through others.

• Other variables in the environment

• Markel

• Suppliers

• Knowledge

• Technology

• Information

• Economy

• Customers

• Government

• Management

• Employees

Input

Figure 37.1

• Reward and recognition

• Communication

• Technology adoption

• Organizational development

• Management of change

• Resolving conflicts

• Operations management

• ERP

• Group dynamics and behaviour • Leadership and motivation

• Information technology (IT)

• Control process and techniques

Controlling Organizational Operations and Resources

• Understanding needs and motivation

• Understanding human behaviour

Leading and Influencing the Personnel

Boundary of Organisation

• Delegation and decentralization

• Span of control

• Departmentalization

• Retaining the employees

.Job and person matching

.Training and development

• Recruitment

• Manpower

Organizing and Staffing the Structure

Feedback into the System

Management viewed as a Transformation Process of the Enterprise Deviations as

• Long term and medium term forecasting

• Decision-making process

• Portfolio management

• Strategic planning

• Enterprise Vission Mission

• Type of planning and plans

Planning the Enterprise Direction

Managerial Transformation Process

Boundary of Organisation

• Continuous improvement

• Increase in core competencies

• Knowledge-base creation

• Customer satisfaction

• Employee satisfaction

• Growth

• Survival of firm

• Services

• Final products of quality

• High profitability

- Better productivity

• High performance

Output

cn

02 CO

/N31130VNVAI ONVONIN33NION3 1VIN/8fI0NI

589

PRINCIPLES OF MANAGEMENT

37.2 PRINCIPLES OF MANAGEMENT

Management has evolved through experience and research during last many years. Different regions on the globe evolved different approaches to handle situations. Some early practices of management are given in Table 37.1. Table 37.1 Early Management Practices Management approach

Regions

Period 3000-2400 BC

Sumerians

Development of written records; one of the'oldest written law by Akkadian ruler, Ur-Nammu

3000-1000 BC

Egyptians

Pioneered in national government, full civilization, building and roads and other infrastructure: Full planning involved

2700-500 BC

Babylonian ,

Oldest and complete set of rules by Hammurabi, an Amorite ruler

1000-200 pc

Greeks

Functional local government, democracy and government

800 BC-500 AD

Roman

Roman Republic with Senate and councils

1500 Bc-1300 AD

Chinese

Good government, cultural empowerment, flourishing science and arts

450-1500 AD

Venetians

Laws related to commerce, highly dominant commerce through sea

During recent times, many modern and systematic approaches have evolved for the management. Some are given in Table 37.2. Table 37.2 Recent Perspective on Management Period began

Perspective on (about)

Developed by

Focus on Theory

1890

Classical (or, scientific) management

Internal, Rational, Job content

Taylor, Gilbreths, Gantt, Barnes

1930

Human relation approach

Internal, Humanistic

Elton Mayo, Robert Blake, Hezberg, McGrager

1940

Quantitative, Decision science approach

Internal, Rational, Modeling

Feller, Dantzis, Ackoff

1920

Behavioural approach

Humanistic, Team

Maslow, Lickert Aggyris

1940

Universal management

Structure, Rules

Foyol, Holder, Urwick, Koontz, Drucker

1950

Systems theory

Internal, External,

Fiedler,

1970

Contingency theory

Huministic,

Forester

1980

Japanese management

Rational

37.3 APPROACHES OF MANAGEMENT THOUGHTS

Management has evolved through many research and experimental evidences. Some approaches of management principles are as follows.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

37.3.1 Scientific Management F.W. Taylor (1856-1915) At Midvale steel Co., Taylor was involved with developing One best way of doing work. His focus was on maximisation of worker productivity. His approach includes: • Develop one best way of doing things. • Standardise the method. • Select the worker, best suited to perform the task. • Train them in most efficient way for performing the task. Taylor defined four principles of management: 1. Develop a science for each element of an individual work, thus replacing rule-of-thumb method. 2. Scientifically select, train, teach and develop a worker. 3. Cooperate with workers to ensure work in accordance with management principles. 4. Divide responsibility between management and labour: Management plans, organises and controls. Management takes over all work for which it is better fitted than workers. Taylor's principle has some offshoots: 1. Enforced worker discipline gives more output. 2. Management should not expect extraordinary work with ordinary days wages (Wage incentives were Taylor's idea). Taylor's work was followed by many others—Henray Gantt, Gilberth, etc. Many subfields like: time study, motion study, work study, operations research, industrial engineering, etc., evolved. Criticisim to Scientific Management 1. Fails to appreciate the social context of work and higher needs of workers. 2. Managers called it unwarranted interference in managerial prerogatives. 3. Workers resisted it. In Taylor's testimony in 1912, he said that unions are really not needed. 4. Fails to acknowledge the variance among individuals. 5. Fails to recognize the ideas and suggestions of workers. 37.3.2 Fayol's Principles Fayol suggested fourteen principles of management. These are listed in Table 37.3 below. Table 37.3

Fayol's Fourteen General Principles of Management

1. Division of work: Division of work aims at producing more and better work with the same effort. It is accomplished through reduction in the number of tasks to which attention and effort must be directed. 2. Authority and responsibility: Authority means the right to give orders. Responsibility is associated with authority. Whenever authority is exercised, responsibility arises simultaneously. 3. Discipline: Discipline means following rules, obedience and respect for the agreements between the firm and its employees. Discipline also involves sanctions judiciously applied in the organisation. 4. Unity of command: Employee should receive orders from one superior only. 5. Unity of direction: Each group of activities should have one objective and should be unified by having one plan and one head. 6. Subordination of individual interest to general interest: The interest of one employee or group of employees should not take precedence over that of the company or broader organization. (Contd...)

PRINCIPLES OF MANAGEMENT

591

7. Remuneration: To maintain the loyalty and support of workers, all employees must receive a fair wage for services rendered in the organisation. ,8. Scalar chain: The scalar chain is the chain from top management ranging from the ultimate authority to the lowest ranks. Communication follows this chain. 9. Order: Everything should be in right place at right time. 10. Stability of tenure of personnel: High turnover increases inefficiency. A manager who stays for long is always preferred. 11. Centralization: Centralization is the degree to which subordinates are involved in the decision-making. It belongs to the natural order of things. Proper proportion of centralization is needed for each situation. 12. Equity: It is the kindness and fairness to subordinates. 13. Initiative: This means allowing to originate and carry out plans to ensure its success.

14.Esprit de corps:

This means team spirit, harmony and unity within the organisation.

Based on: Fayol, H., 1949, General and Industrial Administration (NY: Pitman), pp 20-41.

37.3.3. Human Relations Approach

The Hawthrone plant of Western Electric in Cicero, Illinois, US was studied in 1924. Issues related to physical illumination and worker efficiency were the focus. Elton Mayo from Harvard University analyzed and reviewed the observation. Behavioural science and human relation thinking started the new management movement.' Psychological factors and human needs were considered as the issues that determined why people worked. The issues related to social factors and informal group were given due importance in management. Some results were: 1. Whenevet changes in working conditions were made, both good and bad, output increased. 2. In every department, the supervisor played a different role. 3. A number of employees expressed a dislike for close, coordinated supervision. Maslow proposed a hierarchy of five types of needs that determine the motivation to work. These needs are: 1. Physiological needs: Such as hunger, thirst, etc. 2. Safety and security needs 3. Social needs: Such as belongings, group recognition, etc. 4. Esteem needs 5. Self-actualization needs. Human beings work to satisfy their unfulfilled needs that are highest in the need hierarchy. 37.3.4 Management Science and Quantitative Approach

Since the World War II, Operations Research and quantitative techniques overshadowed the management scene. Optimization of resources was the key word since then. New technological tools, transportation and communication, modeling, analysis and mathematical techniques were used to solve managerial problems. Some shift towards optimum production/operations management and information system (MIS) were observed in later phase. 37.3.5. Systems Theory It is a collective association of interrelated and interdependent parts. Organisations are treated as systems

of divisions, departments, and specialized activity. Decisions are taken with a considefation of entire organisation.

592

INDUSTRIAL ENGINEERING AND MANAGEMENT

37.3.6 Contingency Management

The contingency approach advocates a leadership behaviour that should be adaptive to accommodate different situations. There is no one best of doing a particular task, as advocated by Taylor in scientific management. Leaders should be assigned to situations that best fit their leadership style. The contingency theory is based on situation analysis. 37.4 ROLE OF MANAGEMENT

Managers' role is to get things done. Based on Mintzberg (1973), one can identify three roles for managers (Figure 97.2). Formal Authority and Status

Interpersonal Role • Monitor •Disseminator • Spokesman

Interpersonal Role • Figurehead • Leader • Liaison

Knowledge leadership Role • Knowledge learn builder Sustaining and maintaing knowledge

Decisional Role • Entrepreneur • Disturbance Ilandler • Resource Allocator •Negotiator

Change handler Role •Continuous Improvement Support • Benchmarking leader • Reengincering leader

Figure 37.2 Roles of Manager modified and enlarged in scope from: Henry Mintzber, 1973, The Nature of

Managerial work, Harper & Row Pub., NY, pp. 93-94]

37.4.1 Interpersonal Role

(a) Figurehead: It means symbolic-head. His activities include ceremony, status requests and solicitations. (b) Leader: It means, responsible for motivating and activating the subordinates. His activities include responsibility for staffing, training, subordinate's team building, etc. (c) Liaison: It means, maintaining a self-developed network of outside contacts and information. His activities include interactions with outsiders, responding to mails, external board work, etc. 37.4.2

Informational Roles

(a) Monitor: This means, seeking and receiving a wide variety of special information to develop a thorough understanding of organisation and environment. He acts as the nerve centre of internal and external information. His activities include receiving information and creating a knowledgebase. (b) Disseminator: This means, transmission of outside information to his subordinates. His role includes filtering, clarifying, interpreting and integrating different information so that value-added knowledge emerges for organisational use. His activities also support verbal communication with subordinates' review meeting, etc. (c) Spokesperson: This means transmitting information to outsiders on the behalf of the organisation ,or department that he heads. He serves as an expert to clarify the organisational plan, policies, actions and results. His activities include handling mails and contacts with outsiders. 37.4.3 Decisional Roles

(a) Entrepreneur: This means, searching the organisation and its environment for opportunities and initiating the "improvement (or change) process" to bring about transformation. This involves designing

PRINCIPLES OF MANAGEMENT

593

and completing projects for changes, leading to improvements. His actions involve strategy formulation, change-management, team-building and project handling. (b) Disturbance Handler: This means responsibility related to corrective actions when organisation faces sudden, unexpected disturbances. His actions include review .and rectification of the crisis. (c) Resource Allocator: This means responsibility related to the allocation of resources of the organisation among all concerned people or departments. His actions involve scheduling, budgeting, allocation of duties to subordinates, authorization, etc. (d) Negotiator: This means representing the organisation at major negotiations. His actions include bringing advantage to the organisation during the process of negotiation. During recent years, the organisations are undergoing major changes. Managers' roles have also widened due to the advent of IT and its impact on the way things are managed. We observe that the managers have additional role as Knowledge Leader. Thus, in our opinion, the fourth role is. 37.4.4 Knowledge Leadership Role

(a) Knowledge Team Builder: This means that the managers should create teams that have expertise in certain areas. This is done through regular updating of knowledge through seminar, journal, internetsearch and adoption of technology. His activities include finding right people, who can share same expertise in building knowledge-base. (b) Sustaining and Maintaining Knowledge: This is related to knowledge management. His activities include documenting and sharing the expertise among group members. If an individual leaves the organisation, the knowledge should stay with other members of the group. Managers' role has also diversified to the area of change-management.' Change meant for improvement is the key-mantra these days. There are three modes of change in the organisation: continuous improvement, benchmarking and reengineering. This we have identified as • the fifth role for the contemporary managers. 37.4.5 Change Handler

(a) Continuous Improvement Supporter: This means the route of marginal or gradual improvement. It is the path which TQM also advocates. Managers' role is to develop a quality culture and teambuilding. Problems are identified and solved for small but gradual improvement. The role of the manager is to tell everybody that there exists a better way of doing the thing which we are doing now. (b) Benchmarking Leader: Benchmarking involves identifying "best-practices" or world-class performers in your area and identification of gap between world-class and your organisation. This gap is bridged through systematic planning and leadership. Manager's actions involve identification of benchmark, building teams to make changes and evaluation of performance during the change. (c) Reengineering Leader: Reengineering is the total, radical redesign of the system. Managers have a great role to play as they have to prepare resources (including subordinates) for a total transformation. Unlike continuous improvement, which is gradual, and benchmarking, which is moderate, reengineering is dramatic transformation and thus requires careful handling of situation and resources. The risks are higher in reengineering. Therefore, its management is more difficult as compared to other two change processes. 37.5 FUNCTIONS OF MANAGEMENT

Management is the form of work that managers perform. Their main functions are: planning, organising, motivating and controlling.

INDUSTRIAL ENGINEERING AND MANAGEMENT

594 37.5.1 PLANNING

This involves advance decisions related to what, when, why, how and who—types of questions. It involves: • Self-audit as a means to determine the present status • Survey of environment around organization • Specification of goals and objectives and means to achieve the goals and objectives • Deciding policies, procedures, standards and anticipated course of future actions • Forecasting the future • Deciding resources to achieve the forecast • Revision of plans and adjustments in case of changes in situations • Coordination of processes involving planning. Thus, we can summarize planning as: Planning function of a manager includes those activities that lead to the definition of ends and the determination of appropriate means to achieve the defined end. —Gibson et. al. (1976) 37.5.2 Organising

Organising is related to grouping activities, assigning activities, staffing, delegating authority, etc., to carry out activities and determining the bases and criteria to group and measure the job and its related performance. Organising involves those activities of the management that are performed to translate the required activities of plans into a structure of task, authority and responsibility. Organising is therefore focussed on a structure or activities of framework that relate people, task, resources, and performance with the organisational goals. The sub-functions of organising include: • Defining the nature and content of each job in the organization • Determining the bases for grouping the jobs together • Deciding the size of groups • Delegating authority to wiped managers. 37.5.3 Motivating and Directing

This pertains to directing or channeling the behaviour of subordinates towards the goal. It is for stimulating the organisation to undertake actions along the plan. The major ingredients for directing are leading, coordination, communication, influencing and team work. Motivating and directing are channeling the organisational behaviour towards attainment of corporate goals. It involves: • Communication and explanation of objectives to the subordinates • Assigning the ,performance standards • Helping the subordinates through proper guidance and personal touch to meet the standard of performance • Reward for superior performance: both financially and none-financially (like appreciation letter, etc.) • Fair play in praise and censuring the employees

595

PRINCIPLES OF MANAGEMENT

• Management of change through proper communication and building confidence among different layers of management and workerg. • Coordination throughout directing and motivating process. 37.5.4 Controlling Controlling is related to measuring the performance against goal, determining the causes of deviations from goals, and taking corrective actions for the improvement in situations. It is for assuring performance as per plan with minimum deviations during the accomplishment of the target of performance. Controlling is the management function that includes activities which managers undertake to assure ,that the actual outcomes are consistent with the planned outcomes. —Gibson et. al. (1976) Controlling involves three things: (a) Standard of, performance (b) Information related to gaps in standard and attained performance (c) Corrective actions to bridge the .identified gaps. Therefore, during the control function, a manager does the followings: • Monitoring of results and comparing with the standards that are set during planning phase. • Decide on the causes of deviations • Corrective action to arrest deviations • Revis0 and adjustments of control methods in the situations of changes • Coordination of control processes. In the Figure 37.3, the four managerial functions are shown as an integrated link of management process. Control function is useful for: (a) short-range corrections through better directing, (b) moderate corrections through reengineering or benchmarking, and (c) long-term corrections through redefinition of goals and new planning endeavour. Planning Setting goals and objettives, and identifying all ways and methods to achieve the goals

Designing jobs, roles, structure and system to achieve the goals

Directing

Controlling

Leading and motivating people for the attainment olgoals

Monitoring the deviations from plan and ths'evaluating the levels of attainment of goals

Use Training and Development, Team Building (Immediate-on going correction)

Modify jobs, Reengineer Organisation, Benchmark Processes (Modarate Correction)

Redefine goals with new planning endeavour (Long-Term Correction) Figure 37.3 The Management Process as an integration of Manager's Functions

,

596

INDUSTRIAL ENGINEERING AND MANAGEMENT

37.6 LEVELS OF MANAGEMENT

In an organisation, the management is clearly segmented into three distinct layers. These layers are: top management, middle management and lower (operating) management. Under the operating managers, different workers are attached for, the attainment of goals. Management layers are shown in Figure 37.4.

Chairman, President, Vice President

Top Management

I lead of Departments, Divisional I-leads

Middle Management

First Line Supervisor, Foreman

Lower Management

Operating Personnel Workers Span

Figure 37.4

Management Levels in an Organisation

The activities of different levels of management are different in proportions. For example, top management is more focussed on planning strategic issues but less involved in directing function. On the contrary, lower management is more focussed on directing and less on planning (Figure 37.5). The skill needed for different levels of management is also different (Figure 37.6). While less technical and personnel skill is needed at top, more of these skills are needed for lower management. On the contrary, more conceptual and decision-making skills are needed at top as compared to lower management. For TQM efforts more commitment is needed at top level while more effort in team-building is needed by lower management. Middle management should facilitate the continuous improvement (Figure 37.7). Planning Top Management / / Middle Management

./

// Organising

Lower Management

Figure 37.5

// / ,

i

1

1 I 1

1 1 I I ‘ \

I ‘ 0

/

/

/•

t I

It Controlling I I I I 1 Motivating 1 & 1 1 Directing t

50% Percentage of time spent in particular function of management

100%

Percentage of Time Spent by each level of Management

Level of Management

597

PRINCIPLES OF MANAGEMENT

Top Management

Middle Management

Level of Management

Lower Management 50%

0

100%

Percentage of time spent -4

Figure 37.6 Skill needed at various management levels

Support and Commitment Top Management

Motivator. Reviewer • and Trainer

Middle Management

Lower Management

Suggestions; TQM mindset Implementation and Team Building

Level of Management

11111111 0

5(1%

100%

Percentage of time spent —>

Figure 37.7 TQM effort needed at each levels of Management

37.7 MANAGEMENT: SCIENCE OR ARTS

Management is both science and arts. Though it is not a perfect art as music or painting. Similarly, it is not a perfect science as physical or chemical science. Art is bringing about of desired result through application of skill. The management evolves for the application to a specific situation. Intuition and creativity are often the key ingredients of successful managers. Science, on the other hand, is a systematic body of knowledge acquired by mankind through observation, experiments and intelligence, which may be verified by researchers. Many theories of management have evolved through experimentation and the results are well structured. Examples are leadership and motivation theory. Many areas of Operations Management such as forecasting, production planning and control, inventory management, etc., are more towards science. Thus, management is both science and arts. Generally, it is the situation which determines the orientation towards science or art.

INDUSTRIAL ENGINEERING AND MANAGEMENT

598

REVIEW QUESTIONS 37.1 Define and explain the term, management.' Write a brief note on the evolution of management thought. 37.2 Discuss the contribution of Taylor and examine its relevance in the present day business. 37.3 Discuss the Henri Fayol's principle of management. 37.4 Explain the roles of management. 37.5 Explain the different functions of management.

REFERENCES 1. Albers, Henri H., 1974, Piinciples'of Management: A Modern Approach, John Wiley & Sons, Inc., New York. 2. Bass, B., 1960, Leadership, Psychology and Organisational Behaviour, Harper, New York. 3. Beer, S., 1972, Brain of the Firm, Allen Lane, The Penguin Press, London. •4. Burns, T. and Stalker, G.M., 1961, The Management of Innovation, Tavistock, London. 5. Diebold, J., 1965, Focus on Automation, British Institute of Management, London. 6. Drucker, P., 1971, Drucker on Management, Management Publications Ltd, for the British Institute of Management, London. 7. Fayol, H., 1949, General and Industrial Administration, Pitman, London. 8. Fiedler, F., 1971, Leadership, General Learning Press, New York. 9. Follett, Mary P., 1949, Freedom and Coordination, Management Publications Trust, London. 10. George, C.S., 1968, The History of Management Thought, Prentice Hall, Englewood Cliffs, New Jersey. 11. Gouldner, A.W., 1954, Patterns of Industrial Bureaucracy, The Free Press, Glencoe, Ill. 12. Herzberg, F.J., 1959, The Motivation to Work, Wiley, New York. 13. Jay, A., 1967, Management' and Machiavelli, Hodder & Stoughton, London. 14. Kotler, P., 1976, Marketing Management, Prentice Hall, Englewood Cliffs, New Jersey. 15. Lawrence, P.R. and Lorsch, J.W., 1976, Organisation and Environment, Harvard Business School, Cambridge, MA. 16. Levitt, T., 1969, The Marketing Mode, McGraw-Hill, New York. 17. Liked, R., 1969, New Patterns of Management, McGraw-Hill, New York. 18. Lupton, T., 1963, On the Shop Floor, Pergamon• Press, Oxford. 19. McClelland, D.C. and Winter, D.G, 1969, Motivating Economic Achievement, Free Press, New York. 20. March, J.G. and Simon, H.A., 1958, Organisations, Wiley, New York. 21. Maslow, A., 1954, Motivation and Personality, Harper & Row, New York. 22. Massie, Joseph L., 1963, Essentials of Management, Prentice Hall of India Pvt. Ltd., New Delhi. 23. Mayo, GE., 1933, The Human Problems of an Industrial Civilization, Harvard Business School, Boston, MA. 24. McGregor, Douglas, 1960, The Human Side of Enterprise, McGraw-Hill Book Company, New York.

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25. Mintzberg. H., 1973, The Nature of Managerial Work, Harper & Row, New York. 26. Parkinson, C., 1957, Northcote, Parkinson's Law, John Murray, London. 27. Pigors, P. and Myers, C.A., 1969, Personnel Administration, McGraw-Hill, New York. 28. Pollard, Harold R., 1974, Development in Management Thought, Heineman, London. 29. Rice, A.K., 1963, The Enterprise and its Environment, Tavistock, London. 30. Rue L.W. and Byars, L.L., 1977, Management, Theory and' Application. (Illinois, Richard D. Irwin, Inc). 31. Robert B., 1977, The Management of Business and Public Organizations, McGraw-Hill Book Co., New York. 32. Scanlon, Burt K., 1973, Principles of Management and Organisation Behaviour, John Wiley & Sons, Inc., New York. 33. Stewart, R., 1985, The Reality of Management, Heinemann, London. 34. Stoner J., Freeman R.E., and Gilbert D.R. (Jr.), 1998, Management, Prentice Halt of India, New Delhi. 35. Taylor, F.W., 1911, Principles of Scientific Management, Harper and Brothers, New York. 36. Townsend, R., 1970, Up The Organisation, Michael Joseph, London. 37. Trist, E.L., Higgin, G.W., 1963, Murray, H. and Pollock, A.B., Organisational Choice, Tavistock, London. 38. Urwick, L., 1944, The Elements of Administration, Harper and Brothers, New York. 39. Walker, C.R. and Guest, R.H., 1952, The Man on The Assembly Line, Harvard University Press, Cambridge, MA. 40. Weiner, N., 1948, Cybernetics, Wiley, New York. 41. Woodward, J., 1965, Industrial Organisation, Theory and Practice, Oxford University Press, Oxford.

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IMPORTANT NOTES

38 ORGANISATION

38.1 INTRODUCTION Let us first define the organisation. Definitions 1. Organisation is a rational coordination of the activities of a number of people to achieve some common, explicit goal through division of labour and function and through hierarchy of authority and responsibility. 2. It is the grouping of activities necessary to attain enterprise objectives and assignment of each grouping to a manager with authority necessary to supervise it. —Koontz and O'Donnell 3. Organisation is the process of identifying and grouping work to be performed, defining and delegating responsibility and authority, and establishing relationships for the purpose of enabling people to —Allen work most effectively together in accomplishing objectives 4. Organisation is a system, having an established structure and conscious planning, in which people work and deal with one another in a coordinated and cooperative manner for the accomplishment of recognized goals. Organisation is thus: (i) a system (ii) established structure (iii) people work and deal with each other in coordinated and cooperative way. (iv) grouping of work (v) established relationship for authority and delegation (vi) attainment of common goal of the enterprise (vii) internal structure for performance (viii) definition of functional role of each personnel and outline of his responsibility for business performance (ix) a constituent of: (a) division of labour, (b) identification of the source of authority, and (c) establishment of enterprise relationship.

INDUSTRIAL ENGINEERING AND MANAGEMENT

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38.2 PRINCIPLES OF SOUND ORGANISATION

There are some general guiding principles, including their influence, which help to form a good organisation (Figure 38.1). These principles are: 1. Principle of Organisational Objective: It should be same, consistent, defined and clear. It should aim at achieving high production with customer focus, growth and survival. At the core, there should be unity of objective.

Division of labour and specialization

Leads to

Leads to

Hierarchy Span of control Influences

Leads to

Leads to

Delegation of Authority

are related

Decentralisation.

Influences Unity of command

Departmentation • Jobs Influences

Figure 38.1

• Area • Section • Department • Division

Influence of Different Principles of Organisation

2. Principle of Division of Work and Specialization: Every unit or person of an organisation is assigned to a specif►c task and accomplishment. For this, there is a need to focus on specialization and assignment of specific work to individuals. 3. Principle of Parity of Respo►tsibility and Authority: Responsibility is the obligation on the part of a person towards the boss for completing the assigned task. It is also called as accountability, A person at a higher position in the organisation exercises authority or power over his subordinates for getting the task done. Authority is vested in the superior of the organisation so as to extract work from subordinates. Therefore, authority is always associated with responsibility to get things done. There should be a balance between authority and responsibility.

ORGANISATION

603

4. Principle of Functional Definition: Each employee must be assigned specific task, role, relationship and job-related activities. What is expected of him, must be defined in the organisation. 5. Principle of Scalar Chain: Scalar chain, chain of command or line of authority, means that there should be a continuous line of authority (or scalar chain) from top of the organisational pyramid to the lower levels. The chain provides a superior-subordinate relationship. Levels above in the is useful chain are superiors while lower levels in the scalar chain are subordinates. Scalar ch in the delegation of authority down the chain. It is also useful in maintaining effective communication between different layers of the organisation. 6. Principle of Unity of Command: Unity of command means that there should be only one source of authority for each subordinate. This also means: one subordinate-one boss. The principle of unity of command is important for maintaining discipline and for fixing responsibility for the result. 7. Principle of Balance: All the techniques and values of the organisation must be effectively balanced. Many issues have divergent focus in organisation. These are: line vs. staff; centralisation vs. decentralisation, unity of command vs. specialization, vertical hierarchy vs. span of control, etc. Proper balance between these issues must be maintained. 8. Principle of Flexibility: Flexibility means adaptability to change. This is needed due to uncertainty, scope for diversification and growth, new opportunity, and competitive forces in the environment. Organisation-design should have some in-built flexibility to withstand the red-tapisrn, excessive control, complicated procedure, etc. 9. Principle of Delegation: Authority need to be delegated in the organisation. Delegation is for empowering the subordinates to achieve results. 10. Principle of Efficiency: Organisation structure should be useful in achieving the optimum utilisation of resources at least cost and least effort. Considering system view of the organisation (which is input-processing-output framework), the maximization of output and minimization of inputs will improve the efficiency. 11. Principle of Continuity: Continuity means survival and existence despite turbulence in market forces. Therefore, the organisation must look at long-term goals rather than mere profit-making and shortterms goals. 12. Principle of Cooperation: Cooperation means involvement as a team and solving the functional goal of the organisation as one unit. This can be achieved by evolving a proper, code of conduct, rule of business, conflict resolution mechanism and cooperation. 13. Principle of Coordination: There are many functions, such as marketing, finance, HRD, etc., in an organisation. Different groups have different priorities and local level objectives. Proper coordination is needed to work in one direction and for achieving the overall (global) corporate goals. Proper communication, meetings, news-letters, etc., are helpful to achieve this. 14. Principle of Span of Control: Any superior can handle only limited numbers of subordinates. Narrow span of control is useful for complex jobs while wider span of control is useful for routine \ type of jobs. By span of control, we mean how many subordinates a manager (or, superior) can handle. The span of control may be determined on the basis of many criteria, such as: • Capacity and the ability of superior • Capability and the skill of subordinate • Nature and importance of work to be supervised

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• Clarity of plans and responsibility • Level of decentralisation, etc. Graicunas defined three types of relationships between superior and subordinates: (i) direct single relationship among all the subordinates (ii) direct group relationship (iii) cross-relationship. These relationships increase dramatically as the number of subordinates increases. With 5 subordinates, it is 100; while with 6, it is 222. With 10 subordinates, the total relationships are 5210, which are difficult to handle effectively (Table 38.1). Therefore, not more than six subordinates are recommended for a common type of organisation. Table 38.1 Potential relationship in span of control (Grauciunas formula)

No. of Subordinates (n)

No. of relationships n(-21 + n —1 2

I

1

2 3 4 5 6 7

6 18 44 100 222 490

8 9 10 11 12 13 14

1080 2376 5210 11,374 24,708 53,404 1,14,872

15 16 17 18 19 20

2,45,974 5,24,534 11,14,329 23,59,612 49,81,090 1,04,86,154

(More than one crore)

38.3 ORGANISATION STRUCTURE

Organisation structure is the system of job-positioning, role-assignments, authority-definition and superiorsubordinate relationship. It is the network of jobs, roles and organisational relationships for achieving the goals of the organisation. The structure is generally a pyramid structure in which there are fewer positions as we move up in the hierarchy.

605

ORGANISATION

Organisation structure is so designed that at horizontal levels, different specializations of tasks are separated. Vertical hierarchy is due to structure for control and maintenance of authority. It also facilitates superior-subordinate relationship. The lateral relationship is for better coordination among different functional groups (Figure 38.2). (a) Divide Tasks as per Specialization •

Organisational Task

Leads to Division or Departmentalization

(b) Vertical structure for control

Leads to hierarchy and positions (superior-subordinate relationship)

r

(c) Lateral and Hybrid Relatiosnhips for coordination (Leads to formal structure)

(±1 Figure 38.2 Why Organisation Structure? 38.4 ORGANISATION DESIGN

The organisation's structure has basically two main objectives: Firstly, it facilitates the flow of information within the organisation so as to reduce uncertainty in decision making. Therefore, the first purpose of the organisation design would be to facilitate the collection of information that managers need for decision making. Second objective of organisation design is to achieve effective coordination in an integrated way. The structure should integrate organisational behaviour across the different parts of the organisation so that it is effectively coordinated. Organisational design is, thus, the allocation of resources and people to a specified mission or purpose and the structuring of these resources to achieve the mission. It should fit in its environment and should provide the information and coordination needed for the management of resources. 38.4.1 Functional Approach

In this approach, different people are organised in such a way that they work together in grOups to form departments. The focus is common skill and synchronised work activities, such as marketing, engineering maintenance, accounting, etc. This is the most commonly adopted form of organisation structure. In same aspects, it exists in most organisations. A key characteristic of functional organisation is specialization by functional area (Figure 38.3).

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606

President Administrative Assistant

Director of engineering

Executive Vice president

r

‘ice-president

Vice-president Manufacturing

Vice-president Controller

[

Accounting

— Fabrication*

Purchasing

— Assembly Toolmaking

01 Sales • Engineering Service Directory

Director of Research

— Sales* — Marketing — Service

— Design*

— Production Engg.

— Electrochemical Research

—Quality control

— Testing

—Engg. Admn.

— R and D

—Product Development*

— Advertising

— Maintenance — Electrical — Testing Sales

—Automation

* Member of task-fare Figure 38.3 Functional Organisation with Task-force Marked as asterik

Characteristics of Functional Organisation: Organisational Function

Accomplished in Functional Organisation

1. Goal 2. Influence 3. Promotion 4. Budgeting 5. Reward

Functional subgoal emphasized Functional head By special function By department or function For special capability

Strengths of Functional Organisation 1. Best in stable environment 2. Colleagueship for technical specialists 3. Supports in-depth skill development 4. Specialists free from administrative work 5. Simple decision network 6. Enforces efficient use of resources leading to economies of scale 7. Foster in-depth skill specialization and development 8. Better career progress within functional departments 9. The coordination • within functions is improved 10. Technical problem solving is of better quality

607

ORGANISATION

Weaknesses of Functional Organisation 1. Slow response time 2. Bottleneck caused by sequential tasks 3. Decisions pile at top 4. If multiproduct organisation, chances of product priority conflict 5. Poor inter-unit coordination 6. Stability paid for in less innovations 7. Restricted view of whole 8. Relatively poor communication across functional departments 9. Generally slow response to external changes, lagging innovation 10. Delays due to decisions concentrated at top of hierarchy 11.Difficult to pinpoint responsibility for problems 12. Generally very limited, general management—training for employees. 38.4,2 Functional Approach with Lateral Relationship By lateral relationship, we mean overlay or overlap of teams, task-force, managers, liaison personnel, specialists or staff across a formally designed structure, which is basically functional in which employees are grouped together by common skills. This approach is useful to exploit the potential of high quality coordination group across different functions of the organisation (Figure 38.4).

I HRD

Operations

Accounts

: Formal structure (Functional) : Lateral Relationship Figure 38.4 Functional Structure with Lateral Relationship

Strengths of Functional Organisation with Lateral Relationship 1. It possesses major strengths of functional organization 2. Relatively open and reduced barrier among different departments 3. Quick response system fosters quick decisions

INDUSTRIAL ENGINEERING AND MANAGEMENT

608

4. High enthusiasm, employee participation and greater morale 5. Team work helps quality movements. Limitations of Functional Organisation with Lateral Relationship 1.Conflicts due to dual loyalties 2. Too much of meetings 3. Decentralisation is unplanned. 38.4.3 Divisional Approach of Organisation Structure

This approach is focused on grouping the activities together into few separate, but self-contained, divisions, that are based on common product, geographigical regions, program, demography, etc. For example, same food-processing company may have three separate divisions for biscuits, bread and milk products, respectively. Departmentalisation encourages specialization and focused skill-building (Figure 38.5).

11112"111

— Produc (Biscuit) Di% ison I

Marketing

l'roduct (Milk-product) division 3

Prod let (Bread) Division 2

Marketing

A/c

HRD

Marketing

Figure 38.5 Divisional Approach (Productwise)

Characteristics of Divisional Organization Organisational Functions

I. Goal 2. Influence 3. Promotion 4. Budgeting 5. Reward

Accomplishment in Decentralised Organisation

Special product, territory, sex, etc. Product project head By product/territory, etc., management By division' and programme For integrative capability

Strength of Divisional Organisation 1. Development of general management skills 2. Suited to fast change and flexibility 3. High product, project or programme visibility 4. Full time task orientation (i.e., Rs. Schedule, Profit) 5. Task responsibility, and contact points clear to customers or clients; foster concern for customer needs. 6. Processes multiple task in parallel, easy to cross functional line; better coordination in function.

60E'

ORGANISATION

Weaknesses of Divisional Organisation 1. Innovation/growth restricted to existing project areas 2 Tough to allocate pooled resources (i.e., computer lab., etc.), thus duplication of resources 3. Shared functions hard to coordinate 4: Deterioration of in depth competence: hard to attract technical specialists 5. Possible internal task conflicts or priority conflicts may neglect high level of integration required in organization 6. Less top management control 7. Competition for corporate resources. 38.4.4 Hybrid Approach of Organisation Structure Hybrid approach is a combination of functional and divisional structure of the organisation. For certain tasks, all the employees with identical skills are grouped together into a single department for remaining tasks, the divisional structure is maintained so as to exploit the potential of diversified special skills for producing different products, projects or demography, etc. (Figure 38.6).

I IRD

Division 2

Division I

Operation

Accounts

Marketing

Operation

Accounts I I Marketing

I

Figure 38.6 Hybrid Structure of Organisation

Strengths of Hybrid Organisation 1.Strengths of both functional and division structure are exploited 2. Coordination among different divisions is easy 3. Proper alignment of corporate as well as division goal is possible 4. Better efficiency, inter-division migration and cross-culture learning 5. More flexible structure compared to functional or divisional structures. Weaknesses of Hybrid Structure 1. There is excessive overload on the administration 2. Corporate staff size is big and centralised

610

INDUSTRIAL ENGINEERING AND MANAGEMENT

3. Without proper MIS (management information system), the system . is not very effective 4. Chances of conflict between division and headquarters. 38.4.5 Matrix Approach of Organisation Structure

In this approach, both the functional and divisional chain of command are implemented simultaneously so that both of these overlay each other in different departments. Each reports to two bosses, which means that there are two chains of command (Figure 38.7). Aerospace Group Manager

(Matrix Groups) ,

Ain)lanc "A" project manager

Production

IEngineering

Production Personnel

Engineering Personnel

I

I

Production Personnel

Accounting

Material Personnel

Accounting Personnel

-

T

F Missile "Z" project manager

Material

Engineering Personnel

Material Personnel •

Accounting Personnel J

Figure 38.7 Functional Organisation with Matrix Structure

The matrix structure is particularly useful when organisation wants to focus resources on producing one or two or few particular products or projects. Characteristics of matrix Organisation Organisational Functions

1. Goal 2. Influence 3. Promotion 4. Budgeting 5. Reward

Accomplishment

• • • • •

Emphasis in product/market Matrix manager and functional head By function or into matrix managers By matrix organisation project By special functional skill and performance

Strengths of Matrix Organisation 1. Full time focus of personnel on project of matrix. 2. Matrix manager is coordinator of functions for single project. 3. Reduces information requirements, as focus is a single product/market. 4. Specialized technical skills to the product/market. 5. Fleitible structure, development of functional and general skills. 6. Helps in the development of both general and functional skills. 7. Enlarged tasks are available for every body. 8. Helps in promoting interdisciplinary co-operations and sharing of expertise.

611

ORGANISATION

Weaknesses of Matrix Organisation 1. Costly to maintain personnel pool of staff matrix. 2. Participants experience dual authority of matrix manager and functional area manager. 3. Little interchange with functional groups outside the matrix; so there may be duplication of efforts. 4. Participants of matrix need to have good interpersonal skill in order for it to work. 5. Frusturation and confusion due to dual chain of command 6. Too much. of meetings and discussions 7. Power is generally dominated by .one side of the matrix. The strategic objectives of the organisation play an important role in deciding the structure. The strategic objectives such as: efficiency stability and retrenchment are better served in functional structure. Divisional structure, on the other extreme, scores better on strategic objectives such as innovation, flexibility and responsiveness (Figure 38.8). //

Z.

1..7

Objectives • Innovation Z • Responsiveness 7 • Flexibility

Strategic Objectives 1' Objectives • Stability • Efficiency • Retrenchment

d , ,

Organisation Structure -4

Functional

N . Functional with Lateral Relations

Hybrid

Matrix

Divisional

Figure 38.8 Suitability of Different Organisational Structure with Varying Levels of Objectives

38.5 TYPE OF ORGANISATIONAL STRUCTURE AND RELATIONSHIP The relationship in the organisation structure is as follows: (i) Line structure. (ii) Line and staff structure. (iii) Functional structure. 38.5.1 Line Structure This is the oldest and most conventional type of relationship, which is also called as scalar or military type. This is simple and represents a military organisation, wheie relationships are based on relative rank, authority and responsibility rather than the activity or operations that an individual performs. Immediate supervisor is the, boss. Authority flows downwards while responsibility flows upwards. The relationships are more at vertical levels. NO service or support units are possible in an ideal line-type structure. The principle of unity of command is strictly followed (Figure 38.9).

INDUSTRIAL ENGINEERING AND MANAGEMENT

612

Board of Director

President

Vice-president Operations

Vice-president Marketig

Manager shop-Boor

Flow of Resposibility (Up the line)

Vice president Finance

Vice-president HRD

Flow of Authority (Down the line)

Deputy manager

Assistant Manager

Supervisor

Worker

Worker

Worker

Figure 38.9 Line Structure

Advantages of Line Organisation 1. It is simple: easy to understand and implement, and less complicated. 2. It is flexible: easy to expand or easy to prune. 3. Clear division of authority and responsibility. 4. Clear channel of communication. 5. Speedy action and fast decision making. 6. Better discipline possible due to unity of command. 7. Better in-house training and development. 8. Low operational cost. 9. Useful in executive developments at top levels. 10. Less confusion as One boss for one subordinate rule. Limitations of Line Structure

1. It neglects specialization. 2. Key executives are overburdened. 3. Encourages dictatorial leadership and less group efforts. 4. Line managers lack expertise in all areas such as HRD, accounts, industrial engineering, MIS, etc. Thus, they are not very effective. 5. Lot of public grievances.

613

ORGANISATION

6. Less motivated work-force. 7. No cross-functional training and migration is often frustrating. 8. Routine jobs are often boring. 9. Ignores human values, personal needs and group dynamics. 10. Due to lack of specialists, wastages are more. Quality movement also suffers. Suitability of Line Structure • Small organisations, engaged in simple business • Automated and continuous production industries like textile, pharma, paper, chemical, etc. • Military or places where very high discipline is needed. 38.5.2 Line and Staff Structure Staff authority is used to support the line authority. Line authorities are more involved .in the core activities of the business. They have little time to analyze all information for many decisions. They do not have expertise in all technical areas. Staffs are specialists, who help line authority in discharging their duties. For example, a production manager (a line authority) does not have enough time and experience to handle labour relation problems. Staffs (who are specialists) help them in doing so. Line and staff organisations have both line and staff executives. Line executives are assisted by staff specialists in R and D, planning, distribution, quality, legal, audit, public relations, etc. The job of staff is mainly advisory and guidance. Line executives maintain the supervisory power and control over the execution of work (Figure 38.10). Board of Director

President

Vice-president Marketing

Vice-president Operations

Manager Marketing

Manager Operations

Vice-President Finance

Manager Finance

Vice-president H RD

—

-11 Training Accouniting

Market Research Audit Sales Promotion

Deputy Manager Marketing

Product Development

Recruitment

—

IDeputy Manager Operation

Legend : — Line Authority — — • Staff Relationship

Figure 38.10 Line and Staff Organisations

Credit and collection

614

INDUSTRIAL ENGINEERING AND MANAGEMENT

Advantages of Line and Staff Structure 1.Line managers are assisted with expert advice of staff personnel. 2. Line executives are relieved of work over-load. 3. Better quality of decision making due to expert advice from staff. 4. Less wastages and higher productivity. 5. Professional work culture. 6. Efficiency and knowledge-base of line managers. 7. R and D and other developments are encouraged. Limitations of Line and Staff Structure 1. Organisation structure and relationships are more complicated. 2. Organisation may suffer due to poor coordination. 3. Increased cost due to experts being hired as staff. 4. Staffs do not enjoy functional authority so they do not assume responsibility for performance. 5. Chances of conflicts between line and staff as staff being specialist and expert may ignore the organisational authority of line managers. 6. Different perceptions of line and staff may complicate decisions. Suitability • Medium and large companies • Professionally managed company. 38.5.3 Functional Organisation In this, line executives receive orders from immediate line superior (boss) and from one or more specialists, such as personnel manager, marketing head, financial controller, etc. Specialists or staff, though in limited way, aid and direct the line executives. At the top level of the organisation, functional divisions of the organisation in HRD, finance, production, marketing, etc., are very common. The issues related to wages, promotion, etc., for any employee of the organisation are handled by HRD. Taylor recommended functional organisation at the lower level of the organisation also. His approach.of functional organisation consists of number of specialists to assist a worker in the discharge of duty. Taylor experimented this at the Bethlehem Steel Company where he was working. In functional organisation, activities are grouped into different departments (divisions) on the basis of each functional area. Functional head is free to exercise the final authority in the matter related to his area. Thus, unity of command is over-ruled, as more than one superior may pass orders to an employee (Figure 38.11). Advantages of Functional Organisation 1. Use of specialist makes the organisation a more professionally managed system. 2. Line executives relieved from specialised decisions. 3. Decision-making is faster, as functional role is vested in the functional head of department and not in the immediate superior. 4. Better consistency in all 'activities due to specialised activity of functional groups. . 5. More R & D, less wastages, less accident, less breakdown, better TQM efforts, more effective quality circles, etc., due to functional staff. 6. Economy of scale, due to dedicated functional groups.

615

ORGANISATION

Board of Director

President

Vice-president marketing

Vice-president: Operations

Vice-president IIKD

Vice president Finance

Manager Supervisor I

III

•I

I

I

Figure 38.11 Functional Organisation Limitations of Functional Organisation 1. Complexity in relationships, due to multiplicity of commands. 2. Difficult to maintain discipline, due to more than one supervisors. 3. Conflicts, due to divided loyalities. 4. Difficulties in coordination of all units by a functional head. 5. If functional head exceeds the limits of his role, it may lead to problems for every supervisor to control the activities of subordinates. 6. Sometimes, it is difficult to fix the responsibility for any mistake. 7. Sometimes, confusion arises among workers due to dual commands. Suitability: Functional organisation, in its form as proposed by Taylor, has been criticised by many authors. This is due to violation in unity of command. Secondly, the conflicts and priority-gap between functional head and department boss result in poor achievements of the organisational goals. In the modified form, the functional organisation is used but the original concept of Taylor's system is obsolete. REVIEW QUESTIONS 38.1 Differentiate among the following structures of the organisation: (a) Line type organisation (b) Line and staff organisation (c) Functional organisation. 38.2 Discuss ,the advantages, limitations and suitability of line and line-staff organisations. 38.3 Why is purely functional organisation rarely used? Discuss. 38.4 Define organisation. How is organisation chart useful in management? 38.5 Explain the following: (a) Unity of command (b) Span of control (c) Scalar chain. 38.6 Differentiate between authority and responsibility. How are they related to each other?

616

INDUSTRIAL ENGINEERING AND MANAGEMENT

REFERENCES 1. Brinckloe W., Coughlin M.T., 1979, Managing Organisation, Glencoe Press, London. 2. Jackson J.M., Morgan C.P., Paolillo JGP, 1986, Organisation Theory, Prentice Hall Inc. 3. Jarillo J.C., 1994, Strategic networks: Creating the Boarderless Organisation, Butter worth, Heineman, Oxford. 4. Mainiero L.A., Tromley C.L., 1994, Developing Managerial Skill in Organisational Behaviour, Prentice Hall, Inc. 5. Peter F. Drucker, 1988, "The coming of new organization". Harvard Business Review, Jan.—Feb. 1988 pp. 45-6. 6. Puckey V)., 1970, Organisation in Business Management, Hutchins, London. 7. Robert Duncan, 1979, "What is the right organisation structure"? Organisational Dynamics, American Management Association, New York. 8. Ralph D. Stacey, 1990, Strategic Management for 1990's, Kogan Pages, London. 9. Sherlekar S.A. and Patil S.G., 1991, Industrial Management, Himalaya Pub. House, Bombay. 10. Saraf V.K., 1991, Trends in Management, Anmol Pub., Delhi. 11. Woodwards J., 1965 hidustrial Organisation—Theory & Practice, Oxford Univ. Press, New York.

39 PROJECT MANAGEMENT AND CPM/PERT

39.1 INTRODUCTION There are many ways to translate the corporate objectives into plans for achieving these objectives. The routine approach, which most organisations follow, is to translate the corporate objectives into primary, routine responsibilities of the functional managers. An alternate way is—to undertake projects within the scope of the business. In this approach, people from different functions, different locations, etc., of the organisation are involved for achieving results that are difficult for one department. For example, a temporary construction work may call for a project team in which members of divergent skills from different departments are associated. Such specialists associate themselves to form a project team. Project is thus a temporary assignment, special in nature and outside the, purview of normal activities. Key Point Project: Project is a collection of some linked activities that are performed in an organised manner with well-known start and finish points, to achieve some specific results that fulfill the needs of an organisation as derived from the existing business plan and opportunity for achieving synergy of diversified functional expertise of the organisation. Project Management Institute (PMI) has defined project as "A temporary endeavour undertaken to create a unique product or service." Thus, project is a combination of interrelated activities that must be executed in a defined order for completing the entire task. We have studied Gantt Chart earlier. Gantt Chart is one of the first scientific techniques for project planning and scheduling. Later Critical Path Method (CPM) and Program Evaluation and Review Technique (PERT) evolved for the same purpose. Project management is the domain that deals with planning, organising, staffing, controlling and directing a project for its effective execution. Our discussion in this chapter is however limited to techniques such as CPM and PERT for project management. 39.2 CRITICAL PATH METHOD (CPM) Kelley and Walker (1959) developed CPM for project planning and scheduling. Later, it was applied to a variety of applications such as, construction of building dam, factory, missile, rockets, etc.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

39.2.1 Assumptions in CPM 1. All time estimates are assumed to be deterministically known for every activity of the project. 2. The precedence relationship is known for all the activities. 3. CPM can be represented as directed graph in which the time (or cost) estimates are deterministic and the longest path of the network is the 'indicator of project duration (also called as critical path). 39.2.2. Principles Involved in CPM Any activity of a project can be completed within a particular time with incurrence of some cost. If we want to do it in lesser time, generally more cost is involved. For example, suppose building a house takes six months' time and the cost for construction is Rs. 10 lakh. If we want to do it in three months' time, different cost (may be more than 10 lakh) would be needed. In CPM, we consider an estimate for all the activities over a range of cost levels. A range of project duration may be determined for corresponding range of project cost. CPM may also be used for establishing a minimum cost project planning. 39.3 METHODOLOGY OF CRITICAL PATH ANALYSIS (CPA) Critical path is the path on the network of project activities which takes longest time from start to finish. The way by which we construct and analyse CPM or PERT network, the analysis is called -as critical path analysis (CPA). A general methodology for CPA is as follows: Step 1: Break the project in terms of specific activities and/or events. Find the time of each activity. In CPM, it is a deterministic estimate, while in PERT it is a probabilistic, three time estimate. Step 2: Establish the interdependence and sequence of specific activities (also called as precedence relationship). Step 3: Prepare the network of activities and/or events. Step 4: 'Assign time-estimates and/or cost-estimates to all the activities of the network. Step 5: Identify longest path (timewise) on the network. It is the critical path of the network. The project completion takes time equal to critical path time.. Step 6: Determine slack (or float) for, each activity, not contained on the critical path. Step 7: Use regular monitoring, evaluation and control of the progress of the project by replanning, rescheduling and relocation of resources (such as money, manpower, etc.). We have seen in Step 5 that the critical path determines the project completion time. If the project time needs to be compressed, we have to focus on activities on critical path. Similarly, if any activity of the critical path gets delayed by tx time, then the total project will be delayed by tx time. Same is not true for activities, not lying on critical path. This is due to slack (or float) associated with them. This offers flexibility in scheduling the resources. From time to time, some resources from non-critical activities may be diverted to the critical activity. 39.3.1 Advantages of Critical Path Analysis (CPM and PERT) 1. Gives comprehensive view of the project on the network of activities (and events). 2. Time scheduling is effective due to the precedence (sequential and concurrent) relationship of different activities. 3. Critical path determines the focal activities for which no tolerance in terms of delays is desirable. 4. Better and closer control of the project due to breaking down of activities.

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5. The approach is helpful in identifying activities from which some resources may be diverted to critical activities for the expedition of the project. 6. The analysis adopts the principle of management of exception, which means that corrective actions are rarely needed (in exceptional cases). Otherwise, the performance is maintained as per plans. 7. The analysis requires regular review of the situations. A delay may need relocation of resources or sometimes, crashing ( i-expedition) of the network is needed. 39.4 TERMINOLOGY IN PROJECT MANAGEMENT

1. Activity: Distinct part of a project, involving some work, whose completion requires some amount of time. Examples of activity are: drilling a hole, starting a bus, issuing the work order, floating a tender, etc. 2. Activity Duration: It is the physical time required to complete an activity. In CPM, it is the best estimate of the time to complete an activity. In PERT, it is the expected' time or average time to complete an activity. 3. Critical Activity: This activity has no room for schedule deviation. In case of deviation or slips, the entire project completion will slip. An activity with zero slack is also same. 4. Critical Path: The sequence or chain of critical activities for the project constitutes critical path. It is the longest duration path through the network. 5. CPM: Project management technique that is used when activity times are deterministic (Critical Path Method). 6. Crashing: The process of reducing an activity time by adding fresh resources and hence usually increasing cost. Crashing is needed for finishing the task before estimated time. 7. Crash Cost: Cost associated with an activity when it is completed in the possible time (crash time), which 'is lesser than the expected or normal time. 8. Dummy Activity: An activity that consumes no time but shows precedence among activities. It is useful for proper representation in the network. 9. Earliest Finish (EF) Time: The earliest time that an activity can finish, from the beginning of the project. 10. Earliest Start (ES) Time: The earliest time that an activity can start, from the beginning of the project. 11. Event: It is the beginning, completion -point, or milestone accomplishment within the project. An activity begins and ends with events. An event triggers an activity of the project. 12. Expected Activity Time: The average activity time that is used in the project scheduling. 13. Free Slack (float): The length of time up to which an activity can be delayed for channeling resources or readjustments, without affecting the starts of the succeeding activities. 14. Immediate Predecessor: An activity, which should immediately precede the activity under consideration. 15. Latest Finish (LF) Time: It is the latest time that an activity can finish, from the beginning of the project, without causing a delay in the completion of the project. 16. Latest Start (LS) Time: It is the lateSt time that an activity can start, from the beginning of the' project, without causing a delay in the completion of the project. 17. Most Likely Time (c): It is the time for completing an activity that is the best estimate; under the given conditions (used in PERT).

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18. Normal Cost: Cost associated with an activity when it is completed in normal time. 19. Optimistic Time (to): It is the time for completing an activity if everything in the project goes well (used in PERT). 20. Pessimistic Time (tp): It is the time for completing an activity if everything in the project goes wrong (used in PERT). 21. Predecessor Activity: An activity that must occur before another activity in the project which is decided on precedence relationship. 22. Project: Set of activities which are interrelated with each other and are to be organised for a common goal or objective during a specified timeframe. 23. Project Network: A visual representation of the interdependence between different activities of a project which are normally associated with a time-wise sequencing. 24. PERT: It is the project management technique used when activity times are probabilistic. (Program Evaluation and Review Technique). 25. Resource Allocation Methods: Allocation of resources to the activities so that project completion • time is as small as possible and resources are well utilized. 26. Slack: It is the amount of time that an activity or a group of activities can delay in getting completed without causing a delay in the completion of the project. An activity having slack cannot be critical activity. 27. Successor Activity: It is the activity that must occur after another activity (which is predecessor). 28. Total Slack (Float): The time up to which an activity can be delayed without affecting the start of the succeeding activities. 29. Updating: It involves some revision of the project schedule after partial completion with revised information. 30. Variance: It is the measure of the deviation of the time distribution for an activity. 39.5 SYMBOLS USED IN NETWORK PLANNING (i) Activity by -+ (arrow): There is no restriction on the size and slope of the arrow. Time of the activity starts from tail and ends at the head of the arrow. Each activity takes some time and/ or other resource. (ii) Dummy activity - - —> (broken arrow): Dummy activity is not a normal activity. It is used for satisfying some logic pertaining to the start of next activity and satisfying the relationship and dependencies of the activities. Dummy activity consumes no time. We will see it in far greater detail in Section 39.7 later. (iii) Event 0 (circle or node): Events are represented by nodes. Event takes no time but it connects two or more activities. (iv) Subdivision of Event or .1

or

or

E

The node of each event is subdivided into three units: N, E and L as shown above. Here: N: Event/node number E: Earliest start time for the next activity

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L: Latest start time for the next activity if the overall project completion is to be achieved in the scheduled time. 39.6 COMMON FLAWS IN NETWORK

There are some logical errors in the network construction. These must be avoided. These traps are: looping, dangling, and duplication. (a) Looping: Avoid by keeping the time-flow from left to right. ,

L4oping of activities n, p and q

(b) Dangling: Avoid this by ensuring all events, except the first and last, to have at least one precedence and one successive activity. 11

Dangling or activities p

(c) Duplicate activities: Avoid duplicate activities.

ni

0

Eliminate either ,/ or

This happens when two activities (say n and o) have same head-node (say, node 2) and same tail node (say, node 1). As a remedial measure, one can use dummy activity or, the two duplicate activities may be combined. 39.7 USE OF DUMMY ACTIVITIES AND/OR DUMMY NODES Dummy activities are those activities, which consume no time. However, these are added in the network to satisfy the precedence relationships. Similar is the case for dummy nodes. Example 39.1 Task Precedence Task

A

B

C A

D B

E C, D

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Solution: The network is drawn below. The activity A is followed by C, while activity B is followed by D. The problem comes for activity E as its precedence activity is both C and D. This situation can be handled as follows: (a) Use dummy activity (4-5), which takes no time to complete

A

(' 0

0

Dummy activity

(b) Alternatively, (combine nodes)

(c) Alternatively, (use dummy node)

E

Dummy node (5)

Example 39.2 Solution: The network is not correct in (a) and (b) below. However, in (c) below, the network is correctly drawn: Task Precedence Task

A

(a) Incorrect as violates precedence of D

B

C

D

A

B

(b) Incorrect as causes looping as well as violates the precedence of C and D

E A, B

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dIP

Use of two dummy activities and one dummy node 5 is shown in Figure (c) above. It satisfies the precedence relation.

Example 39.3 Task Precedence Task

A B

A, C

A,

Solution: The activities A and B are the starting activities as these have no precedence activity. E is after activity A. Since activity D is after two activities A and C, hence it can start only after A and C are over. To ensure this, head of activities A and C are joined by a dummy activity (2-4). Now, activity D is easily marked. Activity F follows D and E:

k

39.8 RULES FOR CONSTRUCTING NETWORK DIAGRAM (FIGURE 39.1) 1. Prepare a list of all activities required to complete the project. Decide their time relationship. Represent each activity by only one arrow. Length of the arrow is insignificant. 2. Determine the precedence relationship (logical order) of all activities. Fot this, use these three questions for each activity: (i) Which activity precedes this activity? The answer would give a list of activities, which must be completed before the start of activity under consideration. (ii) Which activity follows this activity? The answer would give a list of activities, which cannot start before completion of the activity under consideration. (iii) Which activity should take place simultaneously with this activity? The answer would give a list of activities, 'Which should be worked on the same time, while the activity under consideration is being performed. Decide about dummy activities, if any (for this, refer section on dummy activity). 3. Draw the arrow diagram foi the network on the basis of precedence relationship. Encircle the starting and finishing of the activities. Call this event or node. 4. Number each node as' per Fulkerson rule (for this, refer Section 39.9 on "numbering of nodes") 5. Check the correctness of the number, using following guidelines: (i) Number at the head of any arrow is always greater than the node number at its tail. (ii) No node is numbered until its all preceding events are numbered. (iii) There is only one starting and one finishing node.

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(iv) All activities are uniquely represented by one starting and one finishing event. (v) There is no duplicate number for a number. Network Representation

Interpretation of the Network Representatation

Activity in must he corn;

activity n can begin (in precedes n).

Activities n and p should occur concurrently. Activity in must be completed before either activity n or p can begin.(n and p are the successors of in).

3.

Activities in and n can occur concurrently. Activity p cannot begin until both in and n are completed (p is succesor of both in and n).

Activities m and n, p and q can occur concurrently, as well as activities in and n, both, must he completed before either activity p or q

Activity in must be completed before activity n can begin activity, p must be completed before activity q can begin. I however, activity sequence path ni-n is independent of path p-q.

Activity m must he completed before either activity n or p can being. Activities n and p must both be convicted before activity q can begin. The broken arrow is dummy activity. Dummy activity has zero duration. It covers precedence relationships only.

G.

ni

Activities in and n, p and q can occur concurrently. Activities in and n must be completed before activity p can begin. Activity n must he completed before activity q can begin. The broken arrow is a dummy activity. Dummy activities have zero time duration. These cover precedence relationships only.

Figure 39.1

Network Representations with elaboration.

39.9 NUMBERING OF .EVENTS IN NETWORK '(FULKERSON RULE)

For numbering the events on a network, D.R. Fulkerson provided the following scheme (Figure 39.2): (i) Start with the initial-event, which has arrow(s) coming out of it and none entering it. Number it "1". In any network, there would be only one initial event. (ii) Delete all arrows coming out (emerging) of the event already numbered. This will create at least one more initial-event. (iii) Number these new events as "2, 3 ..:". (iv) Repeat step (ii) till no arrow emerging from an event is obtained. •

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- Select initial-event (having no entering arrow)

Count: a=1 Number initial-event as I

Delete all arr ms coming out of already numbered events

Identify new initial-event(s)

Advance Count n = n +

Number initial-event as (n + I

Are all initialevcnts exhausted

No

Yes

No

Yes Stop

Figure 39.2 Flow chart for Numbering Events in a Network Using Fulkerson Rule

39.10 AON VS AOA APPROACHES FOR DIAGRAMMING The precedence relationship of a project is diagrammed by using any of these two approaches (Figure 39.3): AOA: Activity on Arc (or, arrow) approach AON: Activity on Node approach The AOA approach uses arc to represent the activities of the project, and the nodes of the network to represent events. Event consumes no time or resource. At any event, one or more activities are completed and/or one or more activities are started. Therefore, it is the state of transition between activities. We will be following AOA approach in this Chapter.

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The AON approach uses the concept that nodes represent activities, while arc (or arrow) represents the precedence relationship between different activities: AON (Activity oriented)

AOA (Event Oriented)

0 i

0

0 B

0

C

(a)

0 ' Apw

(b)

0

—0

lb

.

0

0

B

TO

Activity Relationships .4 precedes B. Activity B precedes C.

A and B must be completed belbre C can start

0

B A

B

3

(c)

B and C cannot begin until A has • been completed.

A

.

C

A

C and D cannot begin until both A B

and /3 have been completed.

D

(d)

C 0 A B

2

(e)

Dummy activity 4 D G

0A

q D

2

5

0

0

0

0

0

0

C cannot begin until both A and B. have been completed. D cannot begin until B is completed.

0

Dummy • activity

B and C cannot begin until A is completed. D cannot begin until both a and C have been completed.

Figure 39.3 AOA and AON Approaches to Activity Relationship Example 39.4 Consider the project of starting a new branch office of.a company. The company wants to sell a new product through this branch. Various activities are listed below. Draw the network and decide the critical path.

Activity A

B C D

E

Description

Decide site and organise office. Hire personnel. Train personnel. Explore advertising agents. Plan advertisers meeting and decide product features.

Predecessor activity

Time (week)

—

5

A B

4

A ' D

7 2 4 (Contd..)

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627

CPM/PERT Description

Predecessor activity

lime (week)

10

F

Conduct advertising, campaign.

D

G H

Finalize product and packaging.

G

2

Setup plant and packaging unit.

G

10

H, J

6

Produce initial product (Test). J

Order stock from vendors.

K L

Finalize deals.

M

13 9

Finalise sale to dealers.

A C, K

Transport stock to dealers.

F,L

5

3

Solution: Using precedence relationship the network is drawn in Figure 39.4. E = 11

L = 19 Notations : E=2

L=3

H(10) E = 13

L=13

E(4)

Activity code • Activity time

• E : Earliest starting time L : Latest completion time ® Event # 8 —11.- Critical path Alternative critical path ==ic

Figure 39.4 Network of Example 39.4

Deciding Critical Path of the Network: When the time estimate of each activity is known and network is constructed, it is necessary to calculate the project duration and the critical path. We need to know the earliest expected time (of an event) as a measure from the start of the project, and latest allowable completion time (of an event) as a measure from end of the project. Calculation of Earliest Expected Time of an Event: Start from the starting event. Earliest expected (EE) time for the first event (i.e., node 1) is zero, as the starting time is zero. For the next events, the activity times are the summation for each possible path, leading from the starting event to the given event. The largest sum is the earliest expected time for that event. For example, the earliest expected completion time for event 2 is 5 weeks. This is the sum of EE time for event 1 plus activity time for activity A. Similarly EE time for events 2, 8, 9, 5 and 3 are calculated. Now, there are conflicts at events 4, 6 and 10. This is because of two or more activities, coming into the nodes (events) 4, 6 and 10 respectively. To resolve this, the earliest expected time for node joining activities, i and j, is calculated as:

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where; For example, For Node 4 :

EE1 = Max {EE, + EE = Earliest expected time for activity i (predecessor) i,. = Expected completion time for activity i, j EE4 = Max {(EE2 + 9), (EE3 + 7)} = Max {(5 + 9), (9 + 7)) = max {14, 16) = 16

For Node 6 :

EE6 = Max {(E1 + 13), (EE5 + 10)1

= Max 1(0 + 13), (2 + 10)) = 13 For Node 7 : EE7 = Max {(EE4 + 3), (EE6 + 6)} = Max {(16 + 3), (13 + 6)) = 19 For Node 10 : EE10 = Max {(EE + 10), (EE7 + 5)) = Max {(11 + 10), (19 +. 5)) = 24. Calculation of Latest Allowable Completion Time (L) of an Event: This is the time at which an event can occur without delaying the scheduled completion date of the project, if all succeeding events are completed as per plan. We use backward pass or backward calculation from the finishing point of the network. For the last event, take the latest allowable time (L) same as earliest expected completion time (E). For the event prior to the last event, the latest completion time is calculated by subtracting the last activity time from the latest completion time of the last event, i.e., (24 — 0) = 24. In a similar way, the L for events 9, 8; 7, 4, 3; 6 and 5 are calculated by subtracting the activity time from the latest completion time of the previous node (in backward pass). However, there are conflicts at nodes 2 (as there are three simultaneously occurring previous nodes 8, 4 and 3) and node 1 (as three previous nodes 2, 6 and 5). To resolve this, use the following relationship: where;

L.= Min {LJ — L.} Y L.= Latest allowable event completion time for the successor event j tii = Expected completion time of activity (i,

For example (Refer to Figure 39.4 of the network): For Node 2:

L2 = Min {(L8 — 2); (L4 — 9); (L3 — 4)1 = Min {(10 — 2); (16 — 9); (9 — 4)) = Min {(8, 7, 5) = 5

For Node 1:

L i = Min {(L2 — 5); (L6 — 13); (L5 — 2)1 = Min {(5 — 5); (13 — 13); (3 — 2)) =0

Identification of the Critical Path We use, following rules to find the critical path: (i) On critical path; for each activity (i, j) the E and L are same at the head and tail of the activity, i.e., E. = Li and Ei = L (ii) (E.) — E.) = (L — Li) =

(iii) (L — Ej) = (Li —

= constant

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End Thus, critical path is: start —> A -+ C —> L —› Al An alternative critical path also exists: start — J —› I —> M —› End General Methodology in CPM For a detailed analysis, we use the following time estimates • for each activity (1, j): ESo = Earliest starting time for activity (i, j) LSI, = Latest starting time for activity (i, j) EFI, = Earliest finishing time for activity (i, j) LF„, = Latest finishing time for activity (i, j) t,. = Duration of the activity (i, j) Methodology Use Forward pass (i.e., Start from the beginning activity) (i) Set the ES for the initial activity equal to the start time of the project (set it eqi.ti to zero). (ii) For each subsequent activity: = Max {EF for all immediate predecessor of (i, j)}

EFL = ESI, + tu Now, use backward pass (i.e., start from the end activity): (iii) Set the latest finish time for all the terminal (last) activities equal to the scheduled completion time of the project. The scheduled completion time (T) of the project is the earliest occurrence time for the last or completion event, i.e.,

(iv) Since,

T = Max {EF for all terminal activity} LFu = Min {LS for all immediate successors of (i, j)} LS1 = LFu — TF„, = MM (LF — td.

Example 39.5 For an activity 2-3, the activity time is 5 days. The event 2 can start at the earliest on the 9th day while event 3 can earliest start on 17th day; If event 3 has latest finish time of 24th day, what is the lotest start time of event 2? Solution:

LS23 = MM {LF23 — /23} = MM {24 — 5} EF23 = 17 LF23 = 24

Es23= 9

LS-,3 = 19 123 = 5

39.11 FLOAT OR SLACK Float or slack is defined as the amount of time an activity can be delayed without affecting the duration of the project. On a critical path, the float is zero. Before we learn how to calculate float, let us define the four varieties of times for an activity: Earliest Start Time (E A: This is the earliest occurrence time for the event from which the activityarrow originates. We call it (ES), for node i of activity i — j.

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1111 Earliest Finish Time (EF).: This is the earliest start time for the event from which the activity arrow originates [(ES);] plus the duration for the activity: (EF)i= (ES); +

Latest Finishing Time (LF)i: This is the latest occurrence time for the node at which the activity arrow terminates. Latest Start Time (LS)i : This is the latest finish time for the node at which the activity arrow terminates [(LF)J] minus the duration for the activity: (LS)i = (LF)i —

There are three measures of float: (i) Total float (ii) Free float, and (iii) Independent float. (i) Total Float: It is the maximum time, which is available to complete an activity minus the actual time which the activity takes: Total Float = [(LF)i — (ES)i] — = [(LF)i — tu] — (ES); = (LS); — (ES)i

The above expression gives us a very simple approach to find total float. At any node (event), subtract the two values already mentioned. The value of total float helps the managers to decide as to when the non-critical activity is undertaken. To meet the contingencies like machine breakdown, labour absentism, etc., total float works as buffer time for managers. Example 39.6 ES; = 9 (LS); = 14

(EF); = 20 (/./)1 = 24 126

=10

Total float for this activity 2 — 6 is (14 — 9) = 5. (ii) Free Float: This is based on the possibility that all events occur at their earliest time. It is a situation when the project is organised on earliest time to give the best possible chances of completion on time. = (Earliest = Finish time — Earliest Starting time — Activity duration) Free Float = REF)i — (ES)i] — = (EF)/ — (CES)i + tu] = (EF), — Earliest finish time for i = j.

Example 39.7 For the example given under total float example, the free float for activity 2 = 6 is = (20 — 9) — 10 = 1. (iii) Independent Float: It is important when the network of the project runs on earliest time. If an activity reaches the next stage at the latest time, independent float will indicate if the considered activity (which is just next) will reach at the next stage so as to allow the following activity to begin at the earliest time: Independent Float = '(EF)J — (LS); tu.

CPM/PERT

PROJECT MANAGEMENT AND

Example 39.8 2 — 6 is

631

For the example given under total float example, the independent float for activity

= (20 — 14) — 10 = —4 which is taken as zero as negative float is unacceptable. 39.12 ILLUSTRATION OF FLOATS (FIGURE 39.5) E = 21

6

L= 26

31

0 0

12

Event (2)

f

1

rzs = 8

Earliest Time Scale

Event (5)

Float for activity 2-5

1

Latest

Earliest

Latest

4

5

6

7

8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

I

I

I

I

I

I

I

I

125 = 8 I

Total Float = 12

/,5=8

Free Float = 7 /25

8

Figure 39.5

1

Independent Float = 2

Concept of Floats

In the above network, earliest start and latest start for all the activities are mentioned at the top of each event in the circle. For the calculation of floats, let us take activity 2 — 5 as an illustration. Event 2 has earliest start time equal to 6. When activity (2 — 5) time of 8 days is added to it, we reach to (6 + 8) or 14 day. From the latest time of event 5 (26 day), it is (26 — 14) = 12 days short. Thus, total float is 12 days. Therefore, if event 2 starts at its earliest time and event 5 finishes at its latest time, then the time remaining as buffer (after subtracting the activity time of activity 2 — 5) is the total float of activity 2 — 5. If event 2 starts at the earliest time (equal to 6 day) and event 5 starts at the earliest time (equal to 21 day), then the buffer time obtained by subtracting the activity time is (21 — 6 — 8) or, 7 days. This is the free-float of the activity 2 — 5. When, event 2 starts at its latest time and event 5 starts at its earliest time, then the buffer-time is (21 — 11 — 8) or, 2 days. This is the independent float of activity 2 — 5. Example 39.9

(CPM).

The precedence relationship for nine activities is given below. Find critical path and different floats/ slack: Activity Duration Precedence

A 9

B 9

C 10

D 4 A

E 7 B

F

G 3 8 C D, E, F

H 1 7 0 C G, H

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: The network is drawn as follows:

Activity

Duration

i —)

t ij

1—2 , 1—3 1—4 2— 5 3— 5 4— 5 5— 6 4—6 6— 8

9 9 10 4 7 3 7 6 0

Start Time

Finish Time

ES LS (LFi —5)

EF

LF (ES, +y

9 9 10 13 16 13 23 16 23

12 9 13 16 16 16 23 23 23

0 0 0 9 9 10 16 10 23

3 0 3 12 9 13 16 17 23

Total Float

Slack of.

Free Float

(LFi — ES, — tii) = TF

Head Event Si

(TF — Si) = FF

3 0 3 3 0 3 0 7 0

3 0 3 0 0 0 0 0 0

0 0 0 3 0 3 0 7 0

Independeht Float ' • Tail Event (FF — Si) = IF Si Slack

0 0 0 0 0 3 0 3 0

0 0 0 0 0 0 0 4 0

The critical path (i.e., path which takes longest time of 23 days) is 1 — 3 — 5 — 6 — 8. 39.13 PROGRAM EVALUATION AND REVIEW TECHNIQUE (PERT) PERT appeared around same time when CPM evolved. In 1959, Booz, Allen and Hamilton, and U.S. Navy's Special project office presented PERT for the Polaris Missile project. An immediate impact of PERT was due to the fact that this project got completed in about two years ahead of the original schedule. PERT incorporates probabilistic time-estimates for each activity. It employs Beta-distribution for the time-estimates. The procedure for making the network and determining the critical path is same as CPM (and it is outlined in Section 39.3 under the heading of critical path analysis). However, there is a specific calculation approach for finding the most expected time for every activity and for finding the measure of certainty in meeting this estimate. 39.13.1 Time Estimate in PERT PERT allows uncertainty in the estimates for time of each activity. There are three time estimates in PERT. These are: • Optimistic time (t.) • Pessimistic time (tn) • Most likely time (tni). Optimistic time for an activity is that estimate for the completion of the activity which happens when every best thing happens to facilitate the execution. Thus, when everything goes well, the estimate

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is optimistic time. On the other extreme, when every thing goes worst, the duration of time-estimate is the pessimistic time. Most likely time is in between the optimistic and pessimistic times. Under normal circumstances, this is the probable time in which an activity is completed. In PERT, it is assumed that the three time estimates are random variables, distributed as Beta-distribution. The probability of most likely time is four times that of either of the remaining two. Mathematically, the expected time (to) for an actiN is related with the three time estimates as follows: le =

to + 4tio + to 6

Once, expected time (to) is known from the three time estimates, the algorithm for network calculations is similar to CPM approach. The variance ( Vie) and standard deviation (ate) for the activity are: to — to Vte

6 t p — to 6

As the range of estimate in optimistic and pessimistic time increases, the variation in the estimate also increases. Example 39.10 For an activity, the estimates for optimistic, pessimistic and most likely times are 2, 12 and 5 days respectively Calculate the expected time and variance of this activity. Solution: Assuming Beta-distribution for the time estimates, the expected time (to) and variance for this activity ( Vie) are: 2 + 4 x 5+12 = 5.67 days 6 2 (12 — 2) = 2.7 6 Exampli39.11

PERT.

Consider a project for which the time estimates are given in the table below. Construct the PERT network. What is the critical path? Find the probability of completing the project before 23 days. Activity

Estimated times (days) Most Optimistic (to)

Most Likely (to)

Most Pessimistic (to)

I—2

2

5

8

1—3

1

2—3 2—4 2—6

0 2 5

4 0 4 7

7 0 6 12 (Contd.-)

634

INDUSTRIAL ENGINEERING AND MANAGEMENT

Activity

Estimated times (days) Most Optimistic (to)

Most Likely (to,)

Most Pessimistic (ta) 10

3—4

3

5

3—5

6

9

4—5

3 4

10

4—6

2

6 5

5—6

2

6

6

8

Solution: Let us first calculate the estimated average expected time and variance of each activity Activity

Estimated Time (days) (t,) (t (to) ,

Expected Time (te) to +4tm +t p

Variance p —to )2

6

1—2 1—3 2—3

2 1 0

5 4 0

8 7 0

5 4 0

2— 4

2

4

6

4

2—6

5

7

12

7.5

3—4

3

5

10

5.5

3—5 4 —,5 4—6

3 4' 2

6 6 5

9 10 8

6 6.33 5

5—6

•2

6

6

6

1 I 0 16 36 49 36 49 36 1 1 1 16 36

4

The network is drawn below. The critical path is shown by thick line arrow: 5 5

6

16.83 16.83

5

Critical path 1-2-3-4-5-6

20.83 20.83

Critical path 1-2-3-4-5-6 Total expected project completion time = 20.83 days.

PROJECT MANAGEMENT AND

635

CPM/PERT

Total variance along critical path 49 16 v7.2 1 + 0 + — + 1 + — =3.8 36 36 Probability that the project will be over by 23 days: p (T


dj Otherwise Equal to Zero

J5 J4 J3 J2 J1

2 7 3 5 '4

3 10 8 7 6

0+2=2 2+7=9 9+3=12 12+5=17 17+4=21

0 0 12-8=4 17-7=10 21 — 6 = 15

643

SCHEDULING

= 2 + 9 + 12 + 17 + 21 = 61 days 6 = 51 = 12.2 days

Total flow time Mean flow time

= 4 + 10 + 15 = 29 days 29 Average lateness of job = — = 5.8 days. 5 (v) Random Schedule Rule: Take any job randomly. The rule, gives priority of jobs in a random J5 J2. order. Let the random selection of job be: J4 -4 J3 -3 J1 Total lateness of job

Job Sequence (0

Processing Time (Days) (p,)

Due-date (Days From Hence) (d,)

Flow Time (Days) F, = (Fil + pi )

Lateness of •Job Li = (F, — d,) if Fi > d, Otherwise Equal to Zero

J4 J3

7 3

10 8

0+7=7

0

J1 J5

4 2

6 3 7

7 + 3 = 10 10 +4=14

10 - 8 = 2 14 - 6 = 8

14+2=16 16+5=21

21 - 7 = 14

J2

5

Total flow time Mean flow time Total lateness of job

16 - 3 = 13

= 7 + 10 + 14 + 16 + 21 = 68 days 8 = 6 = 13.6 days 5 = 2 + 8 + 13 + 14 = 37 days

— = 7.4 days. Average lateness of job = 37 5 (vt) Slack Time Remaining (STR) Rule: STR is calculated as the difference between the times remaining before the due-date minus remaining processing time. Job Sequence (0

Processing Time (Days) (Pt )

Due-date (Days From Hence) (d,)

F, = (Ft r + p,)

Lateness of Job d,) if Fi > d, Otherwise Equal to Zero

J5

2

3

0+2=2

0

J1

4

6

2+4=6

J2

5 7 2

6+5=11 11 + 7 = 18

0 11 - 7 = 4

J4 J3

7 10

18 - 10 = 8

8

18+2=20

20 - 8 = 12

Total flow time

Flow Time (Days)

= 2 + 6 + 11 + 18 + 20 = 57 days 57 = — = 11.4 days Mean flow time 5 Total lateness of job = 4 + 8 + 12 = 24 days 24 Average lateness of job = — = 4.8 days. 5

L, = (F,

INDUSTRIAL ENGINEERING AND MANAGEMENT

644 Comparison of Sequencing Rules (For the Given Problem)

Average Lateness

Average Time to Complete Jobs (Days)

Total Flow Time to Complete Jobs (Days)

Rule

FCFS

65

13

6.6

SPT

51

10.2

4.2

D-Date

54

10.8

42

LCFS

61

12.2

5.8

Random

68

13.6

7.4

STR

57

11.4

4.8

It is observed that SPT sequencing rule (for single machine and many jobs) performs better than other rules in minimizing total flow time, average flow time, and average lateness of jobs. It may be noted that this observation is valid for any "n job-one machine" (nil) scheduling problem. 40.3 GANTT CHART

The Gantt Chart is a very useful graphical tool for representing a production schedule. A common production schedule involves a large number of jobs that have to be processed on a number of production facilities, such as machine testing, etc. Gantt Chart contains time On its one axis. The status and scheduling of jobs on a time scale is schematically represented. This gives a clear pictorial representation of relationship among different production-related activities of a firm on a time horizon. Gantt Chart is equally suited for any other non-production activity, where the work is similar to a project involving many activities. 40.3.1 How to Prepare a Gantt Chart?

The Gantt Chart consists of two axes. On X-axis, generally, time is represented. This may be in the units of years, months, weeks, days, hours or minutes. On Y-axis, various activities or tasks, machinecentres or facilities are represented. Example 40.2 Let us consider two machines and six jobs. The processing time (in hour) for each job is given below. Assume that process-sequence such that machine A I is need before M2. We have to draw a Gantt Charted: Job

J1

J2

J3

J4

J5

J6

Machine A4,

3

5

4

7

1

3

M,

2

6

2

I

4

6

Machine

The Gantt Chart is as shown in Figure 40.2. The project, consisting of six jobs on two machines, is scheduled in such a way that processing on the first machine should be over before processing on the second machine is undertaken. This is due to sequence-of-operations requirements. For the sequencing rule of FCFS, the Gantt Chart is shown in Figure 40.2. For the SPT rule, the Gantt Chart is shown in Figure 40.3. The methodology is quite simple and already explained in Chapter 10.

645

SCHEDULING

Project Completion Time = 30 Days Legend J5 Machine M I

J3

J2

JI

12

J5

.13 J4

I

I

I

1

J6

20

14 16 17

5

Idle Time

20 23

J2

Machine M2

Processing Jo

J4

1

24

30

I

1

1

I

I

I

I

6 9 12 15 18 21 24 27 30 33 36 39 Time Gantt Chart on First-come-first served Basis

Figure 40.2

In Figure 40.2 the sequencing rule is first-coin-first-served. Therefore, the jobs are sequenced as J1 —> J2 —> J3 -4 J4 —> J5 —> J6. Till job J1 is processed on machine M1, the other machine M2 is idle. It cannot process other jobs in this period due to sequence-of-operation constraint. As soon as J1 is released from Ml, it goes on M2. Now, processing of J1 on M2 is over at 5th hour. But, J2 will be free from machine M1 after processing at 8th hour. Hence, machine M2 will remain idle from, the time when J1 is over on M2 (i.e., 5th hour) to the earliest possible loading time (i.e., 8th hour) on M2. Similarly, all other jobs are scheduled on Gantt Chart. In Figure 40.3, the sequencing rule is SPT. Therefore, the jobs are sequenced as: J5 ---> J1 J6 -4 J3 -4 J2 ---> J4. Idle and processing time on 1 and 2 are shown on the Gantt Charts. Project Completion Time 24 Days Legend J5 Machine M1

n Processing J6

J1 4

1

J3 7

1

I

23

J2

13 15 16

5 7

I

J3

I

I

Idle Time

J4 16

11

J6

J5 JI

Machine M2

J2

I

J4 22 23 24

I

I

I

I

1

3 6 9 12 15 18 21 24 27 30 Time (in hour) Figure 40.3

Gantt Chart on Shortest Processing Time (SPT) Sequence on Machine M,

40.4 JOHNSON'S RULE FOR OPTIMAL SEQUENCE OF N JOBS 'ON 2 MACHINE

Johnson's rule gives us the unique methodology to determine the optimal sequence of n jobs on 2 machines (n/2 sequencing problem). As far as Gantt Chart is concerned, one can notice that it gives a relationship

646

INDUSTRIAL ENGINEERING AND MANAGEMENT

among different activities in a production process in terms of their completion time. However, Gantt Chart does not provide an optimal sequence of jobs. The principle behind Johnson's rule of n/2 sequencing problem is minimization of total elapsed time by the n jobs. Following steps are followed: Problem Content: We have n jobs that are to be processed on a 2 parallel machines. The processing time of all jobi (ti,) is known. Here, i denotes jobs and j denotes machines. For n/2 problem, i = 1, 2, ..., n, and j = 1, 2. The problem is to sequence the jobs on both the machines so that the total elapsed time (T) is minimized. Solution: Steps (Johnson's. Rule) Step 1: Select the minimum processing time, tip among all the available values of processing times.

In case, two operations contain least processing time, break the tie arbitrarily and select anyone of them. Step 2: Look at the following five situations and take the decision accordingly (Table 40.1). Table 40.1

Five situations and Related Decisions In Johnson's Rule Decision in Johnson's Rule

Situation

1. Minimum processing time is on first machine (say, M1 ) for the pth job

Place pth job in the beginning of the sequence.

2. Minimum processing time is on second machine (say, M2) for the gth job

Place gth job at the end of the sequence.

3. Processing time of two jobs, one on machine A41 and other on machine M2, is equal and both are minimum, i.e., tpl =

Place pth job at the beginning of the sequence and gth job at the end of the sequence

4. Two jobs are having least processing time on machine 1, i.e., there is a tie on Mi .

Sequence any of the two jobs in tie as first and place it at the beginning of sequence. Second job of the tie is to be placed next.

5. "I'wo jobs are having least processing time on machine 2; i.e., there is a tie on M2.

Sequence any of the two jobs in tie as the last and place it at the end of the sequence. Second job of the tie is to be placed before the first one.

Step 3: Remove the jobs, already sequenced in Step 2, and proceed with the remaining jobs. Repeat Step 1 and 2 till all jobs are sequenced. The entire algorithm is presented in a flow-chart in Figure 40.4. Example 40.3 illustrates the application of Johnson's Rule. Example 40.3 Processing time (in minute) of six jobs on two machines are given below. Use Johnson's rule to schedule these jobs. J6

Job

J1

J2

J3

J4

J5

Machine MI Machine M,

4

6 8

7

8

9

1

6

10

5

I

3

Solution: Minimum processing time of 1 mM is for J3 on

Place J6 at the first and J3 at the end of the sequence.

M2

and J6 on. M1.

647

SCHEDULING

Input: Processing time for each job i on machine 1 : ti I Processing time for cac fjob i on machine 2 :

• Arrange in in descending order. • Arrange in descending order.

• Select smallest of 'in ;and ph). • In case of tie, select any one arbitrarily.

smallest from Machine I,

i.e. til list

Place concerned job,-i. in the beginning or as close to the beginning of job sequence as possible

Place concerned job, i, at the end or as close to the end of the job sequence as possible

Delete the jobs, i, already placed in the sequence

Figure 40.4 Flow Chart of Johnson's Algorithm J3

J6

Now, remove J3 and J6 from the consideration. We have the following jobs: J1

J2

J4

Machine M1

4

6

8

9

M2

5

8

3

6

Job

Machine

J5

Out of all the remaining processing times, J4 on M2 is least and equal to 3 minutes. So, place it at the last of the sequence. It is in the last because of being least processing time on M2 and not on Mi.

648

INDUSTRIAL ENGINEERING AND MANAGEMENT

After eliminating J4 from the above list, we have J1, J2 and J5. Out of all remaining processing times, J1 on M1 is least and is equal to 4 min. Therefore, place this job at the beginning of the list. After placing J4 at the end and J1 in the beginning we have the following sequence: J6

J1

J4

J3

Now, the remaining jobs are J2 and J5. Looking at their processing times, it is observed that the least time is 6 min. for J2 on M1 and J5 on M,. Therefore, place J2 at the beginning of left-most slot of sequence and J5 at the right-most slot of the sequence. The optimal sequence is J6, J1, J2, J5, J4 and J3: J6

J1

J2

J4

J5

J3

Analysis of Result: The present sequence is analyzed for time on machines as follows: Job

Machine 1

Machine 2

Time in

Time out

•Time in

Time out

J6

0

1

J1

1

5

II

16

J2

5

II

16

24

J5

I I -a-.

. 20

24

30

J4

20.--

28

30

33

J3

28.•••'••

35

35**

36

I*

II

* Processing time for J6 on M2 is I min and its processing on M, is over only after 1 min. Therefore, only after I min, next job J1 will start on A41 and J6 will go on M2. ** Job J3 will start on M, only after 35 min as its out-time on M, is 35 min. In all other cases, the jobs are waiting to be loaded on M2 (except J6 and J3). (a) Idle time for machine 1 = (Total elapsed time) — (Total busy time for machine 1) 6

= T —Etil =

36 — 35 = 1 min.

i=1 7 .0 J6

JI

J2

.15

J4

J3

r/

_

MI

.

v ;7

4 0

J6

J1

J2

I

I

i

I

I

I

3

6

9

12

15

18

21

J5

J4

aJ3

I

i

i

1

24

27

30

33

Time -> Figure 40.5

Scheduling of Six Jobs on 2 Machines (Example 40.3)

36

M2

649

SCHEDULING

(b) Idle time for machine 2 6

= - Eta = 36 - (5 + 8 + 1 + 3 + 6 + 10)

i=i = 36 — 33 = 3 min. 40.5 PROCESS n JOBS ON

\CHINES (n/3 PROBLEM) AND JACKSON ALGORITHM

For a special n jobs and 3 machines problem, Jackson provided an extension of Johnson's algorithm. For this, let tii be the processing time of job i on machine j. Here, i = 1, 2, ... ti, and j = 1, 2, 3. At least one of the following conditions must be satisfied before we can use this algorithm: (i) Minimum {t11} > Maximum {t12}. (ii) Minimum {ti3} > Maximum {tie}. Step 1: Take two hypothetical machines R and S. The processing time on R and S is calculated as follows: tiR — tii + ti2 tis = ti2 +

Step 2: Use Johnson's algorithm to schedule jobs on machines R and S with tiR and tis. Example 40.4 Six jobs are to be processed on three machines. The processing time is as follows. Find the optimal schedule so that the total elapsed time is minimized. Job

J1

J2

J3

J4

J5

J6

MI

10

3

5

4

2

I

M,

2

4

6

3

1

2

M3

8

6

7

9

7

7

Solution: Check for necessary conditions: Min

=1

Max {tie} = 6 Min {ti3} = 6. Now, since Min {ti3) > Max {to); and, Min {tii} > Max {tie ) are satisfied, the Jackson's algorithm may be used. Now, let us frame two hypothetical machines R and S on which the processing times are: Job

tiR =1/1 l iS =

J1

J2

J3

J4

la

12

7

11

7

1i3

10

10

11

12

'

J5

J6

3

3

8

9

Using Johnson's algorithm the optimum sequence for two machines R and S and six jobs is: J5

J6

J2

J4

J3

J1

INDUSTRIAL ENGINEERING AND MANAGEMENT

650 The time calculations are as follows: Job

M1

M2

Time in

Time out

Time in

Time out

Time in

Time out

0 2 3 6 10 15

2 3 6 10 15 25

2 3 6 10 15 25

3 5 10 13 21 27

3 10 17 23 32 39

10 17 23 32 39 47

J5

J6 J2 J4 J3 J1

Idle Time

J6

J2

J5

J4

23

6

MI

J1

J3 15

10

21

25

Idle Time J2

J5 J6 23

56

J4 10

21

13 15

25 27

J2

J6 10

3

M2

J3

17

J3

J4 23

J1

I M3

39

32

Idle time 0

5

10

15

20

25

30

35

I 40

I

45 47 50

Time (in minutes) Figure 40.6 Gantt Chart for

n13 Problems of Examples 40.4

Calculation of Machine Idle Time: Idle time for machine 1 (M1) = 47 — 25 = 22 min. Idle time for machine 2 (M2) = (2 — 0) + (6 — 5) + (15 — 13) + (25 — 21) + (47 — 27) = 2 + 1 + 2 + 4 + 20 = 29 min. Idle time for machine 3 (M3) = (3 — 0) = 3 min. 40.6 PROCESSING OF 2 JOBS ON M MACHINE (21M) PROBLEM

Let there be two jobs: J1 and J2. Each job is to be processed on tn machines: M I , M2, ..., Mm. There are two different sequences, one each for each job. It is not permissible to have alternative sequences. Only one job can be performed at a time on the two machines. The processing time is known and is deterministic. The problem is to find the sequence of processing so as to minimize the total elapsed time in the system. Technique: Graphical method is used to solve this problem. It can be illustrated with an example.

651

SCHEDULING

Example 40.5 Two jobs J1 and J2 are to be processed on five machines MI, M2, ..., M5. The processing time and job sequences are as follows: Job 1: Machine Sequence Processing Time

M,

2

5

kr,

M, 6

Mj 6

M4 6

MS

Ma

M5 3

M, 7

7

Job 2: Machine Sequence Processing Time

5

4

Find the total minimum elapsed time using graphical approach. Solution: Step 1: On a graph paper, represent processing times of jobs J1 and J2 on X- and Y-axes, respectively. Step 2: For every point of new machine on X- and Y-axes, draw vertical/horizontd1 lines. Step 3: Shade the common area for each machines (Figure 40.7). Idle Time for J2 (= 3 min)

4, 25

1 M2

20 M5 15 M4

_1_

L

10

Idle Time for J1 ( = 14 min)

Idle Y i Time I for J2 ( = 14 min) !

MI

t M3 ill

5

1...L114... M2

I

10 M3

15

20 M4

25 M5 H

30

Job I

Figure 40.7

Graphical Solution of (2/5) Problem for Example 40.5

Step 4: Start from origin. Draw a line in phases of diagonally (at 45°), horizontally and vertically. The only condition to be avoided is to cross a shaded area by the diagonal line. The line moving horizontally (i.e., along jobl) means that J1 is processed and J2 is idle; while line moving vertically means that J2 is processed and JI is idle. A diagonal line means that both Jland J2 are processed.

652

INDUSTRIAL ENGINEERING AND MANAGEMENT

The shaded portion is avoided to be crossed by diagonal line, because at any time both J1 and J2 cannot be processed on the same machine. Step 5: Note the idle time for each job from graph. Calculation of Elapsed Time Processing time + Idle Time For Job 1: Elapsed time = (2 + 5 + 6 + 6 + 7) + (5) = 26 + 5 = 31 min. For Job 2: Elapsed time = (5 + 6 + 4 + 3 + 7) + (3 + 3) = 25 + 6 = 31 min.

Elapsed time

Example 40.6 Use Hodgen's algorithm to schedule five jobs for which the processing time (ti) and due-date (di) are as follows: Task . (i) ti

d.

5 2 15

4 6 12

3

2 3 8

1 5 5

/0

Solution:' Using EDD Rule Task (i)

1

ti (Given)

5

Ci

5

4 3

Processing time of ith job

6

1

(0 + 5) = 5 (5 + 3) = 8 (8+ 1) = 9

di (Given)

5

8

10

Li= (C—d1), if positive, or = 0; if negative

0

0

0 (as negative is unacceptable

(9 +6)= 15 (15 + 2)= 17

Due date of ith job

15

12

Completion time of ith job

(15 — 12)=3 (17 — 15)= 2

Lateness of ith job

Steps: Hodgen Algorithm (step explained below). Step 1: Identify first job which is late = 4th job. Step 2: Form a string of jobs upto first late job. 3 3

5

4

String of job Processing time

1

Step 3: Identify in this string the job of maximum processing time = Job 4 with maximum Processing time = job 4. Step 4: Remove this job from string of jobs and put in the new late job in the string and repeat Steps 1 to 4. ti (Given)

5

1

2

3

5

3

1

2

C,

5

8

9

11

d. (Given)

5

8

10

15

0

0

0

0

L, = (C, — di ),

if

positive, or = 0; if negative

653

SCHEDULING

Step 5: Since at this stage there is no late job, we will stop. Hence solution is: Task (i) ti Ci di Li Example 40.7

1 5 5 5 0

3 1 9 10 0

2 3 8 8• 0

i

4 6 17 12 (17 — 12) = 5

5 2 II 15 0

Use Johnson's algorithm to schedule six jobs and two machines:

Task 1 2 3 4 5 ,6

Time on Machine B 14 6 2 9 3 4

Time on Machine A 10 12 6 2 4 1

Solution: Using Johnson's rule: 1. Select task with least processing time in the string of the given jobs. If it is on machine A, place at the left-end otherwise on right-end. # Job/Task —>

6

4

1

2

5

3

Gantt Chart

M/C A

2

Idle

I3

25

29

35

39

Idle

5

M/C

14

28

34

3 37 39

'rime (Days)

2. Remove that task from string and apply rule again. 3. Repeat steps 1 — 2 till all jobs are over. Sequencing is as follows as per Johnson's rule. Example 40.8

Use Jackson's extension of Johnson's rule to schedule five jobs on three machines. Processing Time

Job

M/C A

M/C B

M/C A

1 2 3 4 5

6 9 10 12 8

2 3 5 6 2

4 2 1 3 2

654

INDUSTRIAL ENGINEERING AND MANAGEMENT

Solution: Since machine B is dominated by machine A: as maximum processing time of machine B (= 6) is less than or equal to the minimum processing time on machine A (= 6). Hence, above problem is converted to fit into 2 machine n job as follows: Processing Time Job

MX I (A + B)

M/C II (B + C)

1

8

6

2

12

5

3

15

6

4

l8

,9

5

10

4

Using Johnson's rule the optimal sequence is: 4

# Job/Task

3

1

2

5

Gantt Chart M/C A

1

4 0

1 5

10 12

15

2

3 18 20

25

Time

5

28 30

3

M/C 0

12

18 20

28 30 33 35 37

18

5 40

47

1 1

4 0

45 1 1

2

1 Time —> 1

M/C

40

35 37

•

21

25

33 34

2

5

40 42

47 49

Time Make Span in 49 unit of Time

REVIEW QUESTIONS 40.1.

Why is scheduling important on the shop-floor?

40.2. What are the different priority rules in scheduling? What priority rule will you use in your study time for the major examination? Consider that you have five exams, to cover, how many alternative schedules exist? 40.3. Consider seven jobs that are processed on two operations: X and Y. The job is processed in sequence so that Y should follow X. Determine the optimal order in which the jobs should be sequenced. Also draw the Gantt Chart. Job Processing Time on X Processing T il ne on Y

I 4 7

2 2

6

3 1 2

4 6 3

5 7 7

6 8 5

7 9 6

655

SCHEDULING

40.4. Five jobs arrive at a processing station one-after-another. The processing time and due-date are as follows. Use different sequencing rules to find: (a) total flow time, (b) mean flow time and (c) lateness of job. Job in the sequence of arrival

J1

J2

J3

J4

J5

Processing Time (days)

3

4

2

6

1

Due Date (days hence)

5

6

7

9

2

REFERENCES 1. Baker, K.R., 1974, introduction to Sequencing and Scheduling, John Wiley, New York. 2. Baker, K.R., 1984, "The Effects of Input Control in a Simple Scheduling Model," Journal of Operation Management 4, No. 2, 99-112. 3. Bedworth, D.D. and Bailey J.E., 1982, Integrated Production Control Systems, John Wiley, New York. 4. Blackstone, J.H.,• Phillips D.T. and Hogg GL., 1982. "A State of the Art Survey of Dispatching Rules for , Manufacturing Job Shop Operations", International Journal of Production Research, Vol. 20, No. 1. 5. Campbell, H.G, Dudek R.A., and Smith M.L., 1970, "Scheduling A Heuristic Algorithm for the n Job, m Machine Sequencing Problem", Management Science, Vol. 16, No. 11 (pp. 630-37). 6. Clark, Wallace., 1992, The Gantt Chart:• A Working Tool of Management, Ronald Press, New York. 7. Conwey, R.W., Maxwell W.L., and Miller L.W., 1967, Theory of Scheduling, Addison-Wesley, Reading, Mass. 8. Day, James, E., and Michael P. Hottenstein, 1970, "Review of Sequencing Research", Naval Research Logistics Quarterly 27, 11-39. 9. Elsayed, E.A., and Boucher TO., 1985, Analysis and Control of Production Systems, Prentice Hall, EnglewoodCliffs. 10. Fox, R.E., 1982, "OPT—An Answer for America—Part IV," Inventories & Production 3, No. 2. II. Hershauer, James C., and Ronals J. Ebert, 1975, "Search and Simulation Selection of a Job-Shop Sequencing Rule," Management Science 21, 833-843. 12. Jocobs, R., 1983, "The OPT Scheduling System: A Review of a New Production Scheduling System," Production and Inventory Management, 24, 47-5 I. 13. Jacobs, F.R., 1984, "OPT Uncovered: Many Production Planning and Scheduling Concepts can be Applied With or Without the Software," Industrial Engineering, 32-41. 14. Johnson, S.M., 1954, "Optimal Two-and Three-stage Production ScheUules with Setup Times Included," Naval Research Logistics Quarterly, .Vol. I No. I, (pp. 61-68). 15. Mcleavy, D.W., and Narasimhan S.L., 1985, Production Planning and Inventory Control. Boston: Allyn & Bacon. 16. Moore, J.M., 1968, "Sequencing n jobs on One Machine to Minimise the Number of Tardy Jobs," Management Science, Vol. 17, No. 1. 17.. Muhlemann, A.P., Lockett A.G. and Farn C.K., 1982, "Job Shop Scheduling Heuristics and Frequency of Scheduling", International Journal of Production Research. Vol. 20.

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18. Muth, J.F. and Thompson G.L. (ed.), 1963, Industrial Scheduling, Prentice Hall Englewood-Cliffs. 19. Stinson J.P. and Smith A.W., 1982, "A Heuristic Programming Procedure for Sequencing the Static Flow Shop", International Journal of Production Research Vol. 20, No. 6. 20. Vollmann, T.E., Berry W.L., and Whybark D.C., 1988, Manufacturing Planning and Control Systems, 2nd ed. Homewood, Richard D. Irwin. 21. Weeks, J.K., and Fryer, J.S. 1977, "A Methodology for Assigning Minimum Cost Due-Dates," Management Science 23, No.8, 872-81. 22. Wilkerson, L.J. and Irwin J.D., 1971, "An Improved Method of Scheduling Independent Tasks", AIM Transactions, Vol. 3, No. 3.

WAITING LINES: QUEUING MODELS

41.1 INTRODUCTION Waiting lines are the most common phenomenon in our daily life. It affects people, who need service at a number of places. These places, where one has to wait in queue are: doctor's clinic, bank counters, railway reservation counter, telephone booth, etc. In manufacturing industry, queue or waiting line is common in situations when machines have to wait for repair; semi-finished item waiting in batches to be loaded on a machine; machine waiting for operator or tool, etc. At airport, many times aeroplanes have to wait for permission for take-off till a runway becomes free. Some applications of waiting line problem are given in Table 41.1. 41.2 ISSUES INVOLVED IN WAITING LINE The most important issue in waiting line problem is to decide the best level of service that the organisation should provide. For example, to cope up with the railway reservation queue, how many counters must be opened? If the counters are too less, there will be very long queue, resulting in long waiting time. This results in dissatisfaction among the customers. However, if the service counters are too many the counters may remain unoccupied for quite some time. This would result in loss to the service organisation. An important issue to understand in queuing problem is about arrival pattern. Generally, the arrival of customers is random, which may be governed by a probability distribution. Besides this, the arrival may also be governed by hours of a day, season, days of month, etc. For example, the arrival at-railway reservation booth is more at morning hours as compared to afternoon. Similarly, longer queues may be observed at rail reservation counters when summer vacation are or puja vacation are due. The management may open more or less service counters, depending upon the arrival; but each extra counter means additional cost in running this service. Use of computers in processing data and updating files at the service counter is now very common. The reason is simple. Computer is very fast, accurate, programmable, good in storage and retrieval features for data, and consistent. A reduced and dependable service time is what customer and management want. The key issue in waiting line is to provide a compromise between good' service (by less service time) and less cost in running the service points. Figure 41.1 illustrates that the total expected cost of service, which is the sum of providing service and cost of waiting time, is minimum at certain service level. This service level should be optional service level.

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Table 41.1 Some Applications of Waiting Line Problem S. No.

Waiting Line

Arrival

Application Area

Service Facility

Factory

Material/tools

In-process inventory (WIP)

Work stations

2.

Assembly line

Sub-assemblies

WIP

Employees currently processing the WIP

3.

Machine maintenance

Repair tools & equipment

Machines needing repair

Maintenance crew

4.

Airport

Plane

Planes ready to fly

Runway

5.

Bank

Customer

Deposit/withdrawal

Bank employee & computer Interviewers

1.

6.

Walk-in interview

Job seekers

Applicants

7.

Phone exchange

Dialed number

Caller

Switchboard

8.

Govt. office

Files

Backlog files

Clerks

9.

Postal employees

Post office

Letters

Mailbox

10.

Executive note

Dictation note

Letters to be typed

Secretary

11.

Grocery shop

Customers

Customer on the counter

Checkout clerks and bag packers Traffic signals crossing

12.

Traffic light

Vehicles

Vehicles in line

13.

Car service station

Cars

Unserviced cars

Service facilities

14.

Railways

Passengers

Waiting passengers on platform/waiting room

Trains

15.

Tool crib

Mechanics

Waiting mechanics

Store keeper

16.

Hospital

Patients

Sick people

Doctor & operation facility

•

Total expected cost ,

~

\

S. Cost of service facility Cost of using service facility Cost of waiting time

Level of service capacity Figure 41.1 Waiting line cost and service levels 41.3 CHARACTERISTICS OF A QUEUING MODEL

A queuing model may be looked for four basic characteristics: (i) Arrival characteristics (or input source or calling population) (ii) Queue or the waiting line itself (iii) Service facility (or service machanism), and (iv) Customer behaviour.

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WAITING LINES: QUEUING MODELS

A schematic framework of queuing system is shown in Figure 41.2.

Queue Input source (Calling population)

Served customer

Service system Queuing discipline

L Queuing system

Customer deciding to enter into the system

Figure 41.2

Queue Representation

41.3.1 Arrival Characteristics

The calling population or input source of a queuing system has three major features. These are: (i) size of input source, (ii) arrival pattern for joining the queue and (iii) the behaviour of arrivals (Figure 41.3). (i) Size of Input Source: The size of input source may be considered either limited (finite) or unlimited (infinite). When the arrival to a system at any given time is only a very small fraction of potential arrivals, the input calling population is considered infinite. Otherwise, when the arrivals at any time are not considerably small proportion of potential arrivals, the calling population is termed as finite population. The railway reservation system, the airlines reservation system, tax/ toll booth on highways, supermarket counters, telephone booth, etc., are examples of infinite queue. (ii) Arrival Pattern at the System: Arrival at a service counter may be scheduled; else it would he random. A professor gives appointment to his students to come at the interval of half-an hour for Potential Customers or Populations

Patient

Finite Single

Batch Controllable

Uncontrollable

Uniform

Poisson

Figure 41.3 Characteristic of population

Random

Exponential

Other

Impatient

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660

guidance in the subject. This is a scheduled arrival. But, in common, most arrivals in a service system are random. This is when each arrival is independent of its previous arrivals. The exact prediction of any arrival in random system is not possible. It may be governed by a probability distribution. Mostly, the number of arrivals per unit time (rate of arrival) is estimated by. Poisson distribution. The probability distribution of the inter-arrival times, which is the time between two consecutive arrivals, may also be governed by a probability distribution. For a given arrival rate ( ), a discrete Poisson distribution is given by: kx P (x) = for x = 0, 1, 2, 3,... x! where, P (x): Probability of x arrival x : Number arrivals per unit time A, : Average arrival rate 1/X : Mean time between arrivals or inter-arrival time. It can be shown mathematically that the probability distribution of inter-arri-val time is governed by the exponential distribution when the probability distribution of number of arrivals is Poisson distribution (Figure 41.4 and 41.5). The corresponding exponential distribution for inter-arrival time is given by: P (t) = Xe—XI 0.300.250.20— Probability 0.15— T 0.10 0.05

771 0

I

2

Figure 41.4

7

8

Poisson distribution for arrival time

Probability of service taking longer than 1 minutes

P(I)=eUt for

i

= Average service rate (per minute) = Service time

1

Figure 41.5

Exponential distribution for service times

9

661

WAITING LINES: QUEUING MODELS

(iii) Customer attitude, which may be patient or impatient (iv) Number of waiting lines that are allowed.

41.4 QUEUE CHARACTERISTICS The queue may be considered to be limited when its length cannot exceed a certain number. It may be unlimited or infinite otherwise. Another characteristic of a queue is its discipline. Queue discipline is the rule by which customers waiting in queue would receive service. These rules may be: FIFO: First-In-First-Out LIFO: Last-In-First-Out SIRO : Service-In-Random-Order, etc. For example, in a railway reservation counter, the customer, who enters first in queue, will receive service prior to other customers joining this queue later. This is a FIFO system.

41.5 SERVICE CHARACTERISTICS Service system may vary depending upon the number of service channels, number of servers, number .of phases, etc. A single channel server has one server. A three-phase service means that once an arrival enters the service, it is served at three stations (or phases) (Figures 41.6 to 41.9). System Queue

Arrival

Figure 41.6

Lt

Service Facility onm

Departure after service

Single channel, single phase system

System Queue

Arrival

Departure after service

Figure 41.7

Single channel, multiphase (3-phase) system

r

Arrival

Departure after Service

Figure 41.8

Multichannel, single phase system

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Service Facility (S1 )

Service facility (S3)

Service Facility (Si)

SerVice Facility (S4)

Arrival

Departure after service

Figure 41.9 Multichannel, multiphase System 41.6 CUSTOMER BEHAVIOUR

In a queuing model, the behaviour of customer is an important feature. Following three situations may arise: (i) Balking of Queue: Some customers decide not to join the queue due to their observation related to the long length of queue, insufficient waiting space or improper care while customers are in queue. This is balking. Balking, thus, pertains to the discouragement of customer for not joining an improper or inconvenient queue. (ii) Reneging of Queue: Reneging pertains to impatient customers. After being in queue for some time, few customers become impatient and may leave the queue. This phenomenon is called as reneging of queue. (iii) Jockeying of Queue: Jockeying is a phenomenon, in which customers move from one queue to another queue with a hope that they will receive quicker service in the new position., Attitude or behaviour of customers is important as balking and reneging represent less of customer. In many service queues, the management may provide some entertainment, like TV/Video, music, etc., so that once a potential customer is around, he may not opt to leave the queue. 44.7 KENDALL NOTATIONS

Kendall (1951) proposed a set of notations for queuing models. This is widely used in literature. The common pattern of notations of a queuing model is given by: (alb1c):(dle) where, a: Probability distribution of the inter-arrival time b : Probability distribution of the service time c: Number of servers in the queuing model d: Maximum allowed customers in the system e: Queue discipline. In a queuing model notation, M is traditionally indicative of exponential distribution. Therefore, (M/M/1): (co/FIFO) indicates a queuing model when the inter-arrival time and service time are distributed exponential with distribution (equivalent to this: M stands for Poisson arrivals and departures). There is one server, the permissible number of customers in the system are infinite and the service discipline is first-in-first-out (FIFO). 41.8 SINGLE-LINE-SINGLE-SERVER MODEL

Queuing models may be formulated on the basis of some fundamental assumptions related to following five features: • Arrival process,

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WAITING LINES: QUEUING MODELS

• Queue configuration, • Queue discipline, • Service discipline, and • Service facility. Let us understand the M/111/1 model first. Following set of assumptions is needed: 1. Arrival Process: The arrival is through infinite population with no control or restriction. Arrivals are random, independent and follow Poisson distribution. The arrival process is stationary and in single unit (rather than batches). 2. Queue Configuration: The queue length is unrestricted and there is a single queue. 3.' Queue Discipline: Customers are patient. 4. Service Discipline: First-Come-First-Serve (FCFS). 5. Service Facility: There is one server, whose service times are distributed as per exponential distribution. Service is continuously provided without any prejudice or breakdown, and all service parameters are state independent. Relevance of This Model: Despite being simple, this model provides the basis for many other complicated situations. It provides insight and helps in planning process. Waiting line for ticket window for a movie, line near the tool crib for checking out tools, railway reservation window, etc., are some dir6ct applications of this model. Operating Characteristics: It is the measure of performance of a waiting line application. How well the model performs, may be known by evaluating the operating characteristics of the queue. We analyze the steady state of the queue, when the queue has stabilized after initial transient stage. Similarly, we do not consider the last or shutting down stage of the service. There are two major parameters in waiting line: Arrival rate (X) and service rate (.1.). They follow Poisson and exponential probability distribution, respectively. When arrival rate (X) is less than service rate (u.), i.e., traffic density ( p = — -X is less than one, we may have a real waiting line situation, µ because otherwise there would be an infinitely long queue and steady state would never be achieved. Following are the lists of parameters: X a Mean arrival rate in units per period IA -=-: Mean service rate in units per period X p _--7.. — —.. Traffic intensity 11 n .-. Number of units in the system w = Random variate for time spent in the system. Following are the lists of operating characteristics, which may be derived for steady state situation and for p < 1: Queue Related Operating Characteristics I. Average line length or expected number of units in queue, xz L = = PX q 1-1 (P. — X) (II — A.)

...(41.1)

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2. Average waiting time or expected time in queue,

Le

P p. — X X System Related Operating Characteristics 1. Average line length or expected number of units in the system, L5 = Lq + units being served Rig

2

pX. + = P(µ — X) • P 1-t — 2. Average waiting time or expected time in the system, Ls 1 WS = = X X 3. Utilization of service facility, X

U

X

=p

...(41.2)

...(41.3)

...(41.4)

...(41.5)

4. Expected number of units in queue for busy system, =n — 5. Expected time in queue for busy system, 1 Wb —

Lb =

...(41.6)

.441.7)

Probabilities Related Operating Characteristics 1. Probability of no unit in the system (i.e., system is idle), Po = 1 — p 2. Probability of system being occupied or busy, P(n > 0)= 1 — Po = p 3. Probability of n units in the system, Pn = Po p" (Geometric distribution) 4. Probability density function for time spent in the system, f (w)= (µ — X) e-(1")"' w > 0 5. Variance of number of units in the system,

...(41.8) ...(41.9) ...(41.10) ...(41.11)

V1,

...(41.12)

V= 1 s ([1— V

...(41.13)

(P 202 6. Variance of time in the system,

Example 41.1 Arrival of machinists at a tool crib are considered to be distributed as Poisson distribution with an' average rate of 7 per how: The service time at the tool crib is exponentially distributed with mean of 4 minutes. (a) What is the probability that a machinist arriving at the tool crib will have to wait?

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WAITING LINES: QUEUING MODELS

(b) What is the average number of machinists at the tool crib? (c) The company made a policy decision that it will install a second crib if a machinist has to wait at least five minutes before being served. What should be additional flow of machinist to the tool crib to justify a second tool crib? Solution: Given

X = 7 per hour = 2— = 0.117 machinist per minute 60 1 = — per min = 0.25 machinist per minute 4 0. 117 = 0.467 p=X1.1 0.25 (a) Probability of no machinists in the queue, Po

= 0.533

Hence, probability of at least one machinist in queue = 1 — Po = 1 — 0.533 = 0.467. The probability that a machinist has to wait would be the case when there is at least one machinist already present in the queue, which is 0.467. X, 0.117 (b) = = 0.875 Machinist. — 0.25 — 0.117 (c) Let the new arrival rate is XI when the average waiting time is 5 minutes, Since

0.25 (0.25 — XI ) or, 0.3125 — 1.25 or,

= XI 0.3125 = = 0.1389 per minute 2.25 = 0.1389 x . 60 = 8.33 machinists per hour.

Example 41.2 At a telephone booth, arrivals are assumed to follow Poisson distribution with average time of 10 minutes between two calls. The average length of a telephone call is 4 minutes and it is assumed to be exponentially distributed. Find: (a) Average number of calls (customers) in the system. (b) Average number of calls waiting to be served. (c) Average time a call spends: in the system. (d) Average waiting time of a call before being served. (e) Fraction of time .during which booth is empty. (f) Probability of at least one customer in the booth. (g) Probability of more than three calls in the system. Solution: Given:

X = 10 = 0.1

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INDUSTRIAL ENGINEERING AND MANAGEMENT

1 = — = 0.25 4 4 p=X — = — = 0.4 Traffic intensity, 1.t 10 X. 0.1 (a) Ls = = 0.667 1.1— X 0.25 — 0.1 = (0.1)2 = 0.267 0.1 — X) 0.25 (0.25 — 0.1) 1 1 (c) Ws — — X — 0.25 — 0.1 = 6.67 0.4 (10 Wq = 11. — X = 0.25 — 0.1 = 2.67

(b) LW=

(e) P0 =1—p=1-0.4 = 0.6 (f) Pn (n > 0) =1—P0 =1— 0.6 = 0.4 (g) Pn (n > 3) = 1 — (Po + + P2 ) = 1 — ( Po + Po p + p2 ) =1—P0 (1+ p + p2 )=1— 0.6 (1+ 0.4 + 0.16) = 0.064. Example 41.3 A repair shop is manned by a single worker Customers arrive at the rate of 30 per hour lime required to provide service is exponentially distributed with mean of 100 seconds. Find the mean waiting time of a customem; needing repair facility in the queue. Solution: Given; X = 30 per hour 60 x 60 = 36 customer per hour. 100 Mean waiting time of a customer in the queue, 30 W= = = 0.139 hour (p. — X) 36 (36 — 30) =

= 8.33 minutes. 41.9 MODEL II (M/M/1: N/FIFO)

In this model, the capacity of the queue is limited to N rather than infinity as in earlier model. For this model, 1—p

forX#µ

P0 = 1 p" 1 for N +1 P (n > 0) = 1 — P0 = P0 pn for ti

...(41.14) =

N

...(41.15) ...(41.16)

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WAITING LINES: QUEUING MODELS

1-p

(N + 1) p" 1— pN+1

for X. # ...(41.17) for A. = p.

N

...(41.18)

Lq = L5 — (1 Lb =

W=

L

....(41.19)

q

— Po L 2L(1— PN )

+

1

...(41.20) ...(41.21)

Wq =W5 - 1 Wb =

...(41.22) 1— po When N is co, i.e., the queue length may be infinite, the simplified relations are given in the earlier model. 41.10 MODEL II (M/11/1/C: oo /FIFO) 41.10.1 Multiple Channel Queuing Model

In this model, more than one server is assumed to provide service. Each service station is assumed to provide same type of service and is equipped with similar facility for service. The waiting line breaks into shorter lines, one each for each service station (Figure 41.10). t

Service

Ouu In

Figure 41.10

Multiple channel queue

There may be two situations: (a) Number of parallel service stations (C) is greater than or equal to number of customers in the system (n): i.e., C>n For this situation, there will be no queue and thus the mean service rate will be equal to (n µ). (b) Case when C < n, queue will be formed. For this situation, the utilization factor is given by the probability that a service channel is being used (pr ). This is the ratio of average arrival rate (A.) and maximum service rate of all the C channels, which is C times pt. Thus,

(i)

=— 1.1C

. 441.23)

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INDUSTRIAL ENGINEERING AND MANAGEMENT

(ii) Probability of n units in the multichannel system (for n < C), P

0.Sn5_(C —1)

Po

n!

...(41.24)

Probability of n units in the multichannel system (for n> C), ( Pn=

...(41.25)

p

C!C("-`)

(iii) Probability that a service station is idle or waiting for customer = Probability that at least C customers are present in the system, xy IA( IA

P (n C) =

(c — 1)! (pc — x,)

...(41.26)

x po

(iv) Probability of no customer in the system, 1

...(41.27)

Po = V 1 ( n!

1 ( XI c [IC

4. µ)1 [C

x

(v)

L = I (C

...(41.29)

Ls w

q

...(41.28)

— 1) (1.1C — 202 PO

ws (viii)

[IC — XI

1 x

...(41.30) ...(41.31)

Example 41.4 A commercial bank has three tellers counter for its customers. The services at these tellers are exponentially distributed with mean of 5 minutes per_customer. The arrival of customers is Poisson distributed with mean arrival rate of 36 per how: Analyse the system. Solution: Given: k = 36 per hour 60 = — = 12 per hour 5 =X _ 36 = j IA 12 C = 4 tellers

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WAITING LINES: QUEUING MODELS

1 Po = ix i) µC —X]

14- [C!

...(41.27) 14. (X) 4. 1(X)2 + 1M3 4.

20.1)

[

601)

1 (XII µC [4!U.1) µC — ?

1 1 0)4 ( 12 X 4 )] [i 4. 3 + 1 (3)2 _ 1 (3)3 ] .4 12x 4 —36 2 6 L 24 1 = 0.0377. 1+ 3 + 4.5 + 4.5 + 4.5 + 13.5 (ii) Average number of customers in the queue, X X1.1(— L= q

(C —1)! (µC — X)2

Po

36 (36) (12) ( — )4 12 x 0.0377 (4 —1)![(12)4 — 36)12 =1.53 (iii) Average number of customers in the system, Ls = Lq + = 1.530 + 3 = 4.53

IA (iv) Average time, which a customer waits in queue, jc X 14— 1-1 W = Po (C —1)!(µC — X)2 12 (3)4 (4 —1)!(12 x 4 — 36)2

0.0377

= 0.0424 hour = 2.54 minutes. (v) Average time a customer spends in system, =

+ —1 1-t

1 = 0.0424 + — = 0.1257 hour = 7.54 minutes. 12 (vi) Number of hours the tellers' are busy during the 6-day week, Utilizaton factor, pc =

!AC

=

36 = 0.75 12 x 4

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INDUSTRIAL ENGINEERING AND MANAGEMENT

Hence, if the bank works for 6 days on 6 hours daily basis, the teller is busy for 75% of time; i.e., 0.75 x 6 x 6 = 27 hours per week. (vii) Expected number of tellers idle at any p.oint of time. For this, let us find the probability of no customer (P0), probability of one customer (Pi ), probability of two customers (P2) and probability of three customers (P3): Po = 0.0377 (already found earlier)

j, as

PII = n! PI

= 77 1 (36 )0..0377 = 0.1131 1! 12 =

(36 2 0.0377 = 0.1696 2! 12

P = 1 (36 3 —3-1 . 12

3 0.0377

= 0.1696.

Now, when there is no customer, all the four tellers are idle. When there is one customer,, one teller is occupied while three are idle. Similarly, for two customers, two tellers are idle and for three customers, one teller is idle. Thus, expected number of idle tellers = Po (4) + P1 (3) + P2 (2) + P3 (1) = 0.0377 x 4 + 0.1131 x 3 + 0.1696 x 2 + 0.1696 = 0.9989. Thus, on the average 0.9989 or one teller will remain idle at any point of time.

REVIEW QUESTIONS 41.1 Why is the waiting line model important in industrial engineering? Give some examples of waiting line applications. 41.2 Explain the different characteristics of queuing model. How does the customer behaviour effect a queue? 41.3 Explain the Kendall notations for a queuing model. 41.4

(a) For a railway marshalling yard, it is observed that the goods train arrives at a rate of 30 trains per day and the service time for the train is 36 minutes. Assume that the inter-arrival time follows exponential distribution and service time is distributed as exponential distribution. Find: (i) Expected queue size (ii) Probability that the queue size exceeds 10. (b) What will happen, if due to rush season, the arrival of trains increases to 33 per day? [Ans: (a) 3 trains, 0.06; (b) 5 twins, 0.2].

41.5 For a single server queue with Poission's arrival exponential service, the mean arrival rate is 3 calling units

per hour and expected service time is 0.25 hour. The maximum permissible number of calling units in the systems is two. Find the steady-state probability distribution of the number of calling units in the system. Also find expected number in the system. [Ans: pn = 0.43 (0.75)"; Po = 0.431, LS = 0.81].

WAITING LINES: QUEUING MODELS

671

41.6 Two girls are deputed on a sales counter of a super market. Service time for each customer is exponential with mean of 4 minutes and arrival of customer is a Poisson function with mean of 10 per hour. Calculate: (a) Probability of having to wait for service (b) Expected ideal time for a sales girl (c) Expected length of waiting time. [Ans: 0.17; 67%; 4.5 minutes]. 41.7 A factory has a tool crib where mechanics come to check out special tools needed for the completion of a particular task' assignment to them. A study is made of the time between arrivals and of the time required for service. Both distributors are found to be adequately described by the negative exponential. The average time between arrivals was found to be 50 seconds. Determine the waiting line length, waiting time and the percent of the' idle time of the attendant. If the attendant is paid Rs. 2/- per hour and the mechanics are paid Rs. 4/- per hour, what policy or service should be established? What cost function should be minimised? When will a multi-channel single phase situation arise? [IAS Mains. Exam; 1995]

REFERENCES 1. Budnick,•F.S., Mc Leavey, D. and Mojena, R., 1996, Principles of Operations Research for Management and Ed., Richard D. Irwin Inc. Illinois. 2. Cooper, R.B., 1980, Introduction to Queuing Theory, 2nd Edn., Elsevier-North Hulland New York. 3. Gupta, M.P. and Sharma, J.K., 1995, Operations Research for Management. National Publishing House, New Delhi. 4. Hiller, F.S. and Lieberman GJ., 1974, Introduction to Operations Research, 2nd Ed., San Francisco, HoldenDay, Inc. 5. Levin, R., and Kirkpatrick, 1975, Quantitative Approaches to Management, McGraw Hill. New York. 6. Moore, P.M., 1958, Queue. Inventories and Maintenance, John Wiley & Sons, New York. 7. Ozan T., 1986, Applied Programming for Engineering and Production Management. Prentice Hall, New Jersey. 8. Rao, S.S., 1978, Optimization—Theory and Applications, Wiley Eastern, New Delhi. • 9. Rao, K.V., 1986, Management Science. McGraw Hill, Singapore. 10. Saaty, T.L., 1961, Elements of Queuing Theory with Applications, McGraw Hill, New York. I1. Seisaini, M.A., Yaspan, A. and Friedman, L., 1959, Operations Research: Methods and Problems, New York. 12. Shogan A.W., 1990, Management Science. Prentice Hall. 13. Taha, H.A., 1971, Operations Research: An introduction. McMillian Publications Co. Inc., New York. 14. Wagner, H.B., 1975, Principles of OR, NJ, Prentice Hall.

672

INDUSTRIAL ENGINEERING AND MANAGEMENT

IMPORTANT NOTES

SIMULATION

42.1 INTRODUCTION Simulation is a widely used quantitative procedure in which a process is described by a model of reality and then a series of organized experiments are conducted to predict the behaviour of the model over a period of time. Simulation is, thus, the laboratory experimentation of reality for determining the effect of a number of alternative policies without disturbing the real system. A laboratory imitation of the reality is at the core of the simulation process. Simulation is the use of quantitative system model that has the designed characteristics of reality in order to produce the essence of actual operation by developing a series of organized experiments to predict the behaviours of the process over a period of time. .1•11•Iri

CISE

El

To understand the process of simulation, let us understand the process of testing the design of an aeroplane. The aerodynamics of aircraft movement in air is not only very complex but it is critical to human life. For testing, a common practice is to use a wind-tunnel. High speed wind is flown through a wind-tunnel and a model aircraft is kept in front of tunnel. The effect of various forces, like drag and lift, are measured to ascertain the type of physical simulation. In mathematical simulation, quantitative models are designed to perform a series of large number of experiments. 42.1.1 Purpose of Simulation 1. Many situations are difficult to be modeled into conventional mathematical models such as linear programming, integer programming, etc. Sometimes, the approximation of real life parameters may not be desirable. In these cases, simulation is an effective way to model and analyse the situations. 2. Simulation may 13:'; cost effective as compared to real experimentation. 3. Sometimes, the observation of real system is impossible, as it is not yet implemented. The analysis of a manufacturing-system design through simulation is widely used before implementing the actual system. 4. Simulation provides modeling flexibility. Various parameters may be changed and various combinations of parameters may be evaluated. 5. Simulation provides the ease in modeling the system.

INDUSTRIAL ENGINEERING AND MANAGEMENT

674

6. Simulation provides a faster mode of evaluating the system. Many computer-based simulation models can evaluate the performance of the system in few hours. For the real life observations, many years are needed. 7. Simulation may be designed to have the graphic capability and on-screen display potential. For example, in few simulation packages of manufacturing system such as QUEST, WITNESS, etc., the colour of a machine changes as soon as there is a failure of machines. This gives an immediate indication to the observer regarding the status of the system. 8. Simulation is normally associated with large observations over a period of time. Many inputs to the system may contain a statistical distribution. For example, arrival of parts to a machine may be treated as coming from a normal distribution. Simulation may have the capability to analyse the results in the statistical terms. 9. Simulation is a useful way to draw customer attention about the system performance. It also provides customer support. 10. Sometimes, the operation and observation of the system in a particular situation may be too dangerous or disruptive. In these cases, simulation is a good way to analyse the system's behaviour. 11. Many times, simulation may be the only way to. solve. In such situations, use of mathematical model or real life system is just impossible. 12. Simulation is useful to judge the system's behaviour in a controlled environment. This, is important when effect of changes in few parameters needs to be observed. 13. Simulation provides a better understanding of the system. 14. Simulation is a useful teaching ,tool when there is a time limitation for working on a real system for many years and cost of procuring and handling the real system is too high. 15. Simulation is helpful in giving new insights of a complex system with facility to undertake wide experimentation in relatively lesser time. Wide experience may be developed in lab setting. 42.1.2 Limitations of Simulation

1. Generally simulation models are not precise and exact replication of reality. It is, therefore, not an optimizing tool. It is a descriptive tool. 2. Simulation requires large number of experimentations or runs under a given set of conditions. Any deviation in these conditions may not justify the simulation results. Therefore, each simulation model provides a unique solution. 3. With increase in parameters, simulation becomes very complex to the model. 4. An effective simulation model is very expensive to develop. For example, if we develop a corporate planning model or selection of an FMS system, it may take years to develop a reasonable model. 5. Management has to generate all the options, constraints and conditions, which are necessary to evaluation. Simulation does not generate any condition on itsown. For example, different sequencing rules for a job-shop scheduling, such as earliest due-date, shortest processing time etc. have to be specified by the management in selecting the best option. This also requires the logic behind these rules and their implications on the system-model. 42.2 MONTE CARLO SIMULATION

Monte Carlo simulation is useful when same elements of a , stein, such as arrival of parts to a machine, etc., exhibit a chance factor in their behavior. Experimentation on probability distribution for these elements is done through random sampling. Following five steps are followed in the Monte Carlo simulation:

675

SIMULATION

Procedure of Monte Carlo Simulation 1. Decide the probability distribution of important variables for the stochastic process. 2. Calculate the cumulative probability distributing for each variable in Step 1. 3. Decide an interval of random numbers for each variable. 4. Generate random numbers. 5. Simulate a series of trials and determine simulated value of the actual random variables 42.3 STEPS IN SIMULATION The general steps in a simulation process are: 1. Define the system and identify the problem, which is intended for simulation. 2. Formulate the model for this system/problem. 3. Test the model; compare the behaviour of the model with the actual problem and its environment. 4. Identify and collect the data needed to test the model. If needed, decide the randonmess of the input parameter. Also select the random number generator, if needed. Decide number of experiments, period of run and methodology. 5. Run the simulation. Repeat for a nunter of experiments or, for a period of time. 6. Analyse the simulation results, obtained in the simulation runs. • If required, modify the simulation model and repeat the runs. This may be needed, if same inconsistency is observed. 7. Validate the simulation. This is needed for increasing the chances that the inferences and conclusions drawn about the real system are closer to reality and are also valid. Table 42.1 Random Number Table 1581922396

2068577984

8262130892

8374856049

4637567488

0928105582

7295088579

9586111652

7055508767

6472382934

4112077556

3440672486

1882412963

0684012006

0933147914

7457477468

5435810788

9670852913

1291265730

4890031305

0099520858

3090908872

2039593181

5973470495

9776135501

7245174840

2275698645

8416549348

4676463101

2229367983

6749420382

4832630032

5670984959

5432114610

2966095680

5503161011

7413686599

1198656795

0414294470

0140121598

7164238934

7666127259

5263097712

5133648980

4011966963

3593969525

0272759769

0385998136

9999089966

7544056852

4192054466

0700014629

5169439659

8408705169

1074373131

9697426117

6488888550

4031652526

8123543276

0927534537

2007950579

9564268448

3457416988

1531027886

7016633739

4584768758

2389278610

3859431781

3643768456

4141314518

3840145867

9120831830

7228561652

1267173884

4020651657

0190453442

4800088084

1165628559

5407921254

3768932478 (Cont d...)

INDUSTRIAL ENGINEERING AND MANAGEMENT

676 6766554338

5585265145

5089052204

9780623691

•2194448096

6315116284

9172824179

5544814339

0016943666

3828538786

3908771938

4035554324

0840126299

4942059208

1475623997

5570024586

9324732596

1186563397 .

4425143189

3216653251

2999997185

0135968938

7678931194

1351031403

6002561840

7864375912

8383237368

1892857070

2323673751

3188881718

7065492027

6349104233

3382569662

4579426926

1513082455

0654683246

4765104877

8149224168

5468631609

6474393896

7830555058

5255147182

3519287786

2481675649

8907598697

7626984369

4725370390

9641916289

5049082870

7463807244

4785048453

3646121751

8436077768

2928794356

9956043516

4627791048

5765558107

8762592043

6185670830

6363845920

9376470693

0441608934

8749472723

2202271078

5897002653

1227991661

7936797054

9527542791

4711871173

8300978148

5582095589

5535798279

4764439855

6279247618

4446895088

4959397698

1056981450

8416606706

8234013222

6426813469

1824779358

1333750468

9434074212

5273692238

5902177065

7041092295

5726289716

3420847871

1820481234

0318831723

3555104281

0903099163

6827824899

6383872737

5901682626

9717595534

1634107293

8521057472

1471300754

3044151557

5571564123

7344613447

1129117244

3208461091

1699403490

4674262892

2809456764

5806554509

8224980942

5738031833

8461228715

0746980892

9285305274

6331989646

8764467686

1838538678

3049068967

6955157269

5482964330

2161984904

1834182305

6203476893

5932802079

3445280195

3694915658

1884227732

2923727501

8044389132

4611203081

6072112445

6791857341

6696243386

2219599137

3193884236

8224729718

3007929946

4031562749

5570757297

6273785046

1455329704

6085440624

2875556938

5496629750

4841817356

1443167141

7005051056

3496332071

5054070890

7303867953

6255811190

9846413446

8306646692

0661684251

8875127201

6251533454

0625457703

4229164694

7321363715

7051128285

1108568072

5457593922

9751499574

1799906380

1989141062

5594364247

4076486653

8950826528

4934582002

4071187742

1456207629

(Simulation of a Waiting Line or Queuing System). A service station has one service channel. Based on the observations, following information is derived: Mean arrival rate = 6.2 min. . Mean service time = 5.5 min. Example 42.1'

677

SIMULATION

Probability distributions of arrival and service times are: Arrival (min)

Probability

Service Time (min)

3 4 5 6 7 8

0.4 0.2/ 0.35 0.25 0.11 0.04

3 4 5 6 7

Probability 0.1 0.2 0.4 0.25. 0.05

Simulate the queuing system.

Solution: Probability distributions for arrival and service times are as follows: Inter-arrival Time t (min)

Cumdlative Probability, r=1

Probability (Pi )

E( Pt)

1=1

0.04 0.21 0.35 0.25 0.11 0.04

4 5 6 7 8

0.4 0.25 0.60 0.85 0.96 1.00

Service Time t (min)

Probability

Cumulative Probability

(P1 )

.E(Pt)

3 4 5 6

0.1 0.2 0.4 0.25 0.05

1=1

7

0.1 0.3 0.7 0.95 1.0

1.0

0.8 Cumulative Probability of inter-arrival time (min)

0.6 0.5 0.2

3

4

5 6 Inter-arrival Time (min)

7

8

Figure 42.1 Cumulative Probability Distribution of Inter-arrival Time

678

INDUSTRIAL ENGINEERING AND MANAGEMENT

1.0

0.8

0.6 Cumulative Probability of Service Time

0.5

0.2

3

6

7

Service Time (min)

Figure 42.2 Cumulative Probability Distribution of Service Time

Next step is to assign a tag to the random numbers. (a) Assigning random numbers to inter-arrival time: •

Cumulative Probability Value for Inter-arrival Time

Assigned Random Number

Inter-arrival time (min)

0.04 0.25 0.60 0.85 0.96 1.00

00 to 03 04 to 24 25 to 59` 60 to 84 85 to 95 95 to 99

3 4 5 6 7 8.

(b) Assigning random numbers to Service time: Cumulative Probability Value for Service Time

0.1 0.3 0.7 0.95 1.0

Assigned Random Number

Service time (min)

00 to 09 10 to 29 30 to 69 70 to 94 95 to 99

3 4 5 6 7

Let us assume now that the waiting time problem starts at 8 AM and continues for 20 arrivals. An arrival is served immediately if the server is free; otherwise, it waits in a queue. The queue discipline is: first-come-first-served basis. Now, we have to select a series of random numbers. For this Table 42.1 may be referred. Any two digits in a row are selected. Two digits, just below this row, are selected (i.e., in the same column).

679

SIMULATION

These are the first two random numbers. The process is repeated till total number of observations are exhausted. Since both inter-arrival time and service time are determined by random numbers, we select two series of random numbers. Select two Random Numbers

t_.....

Schedule the First Arrival

Schedule the Start of Service

Schedule the Completion of First Service

Advance C'lock to Next Event

Arrival

Record Service Completion time

Select R. No.

Schedule Next Arrival _Yes

No

Yes

Print

Stop Record Arrival Time in Waiting Line

Select R.No.

Select R. No. Schedule Service Schedule Service Start Time

Record Service completion Time

Figure 42.3

Flow Chart of a Waiting Line Simulation

INDUSTRIAL ENGINEERING AND MANAGEMENT

680

Table 42.2

Arrival Random Inter-arrival Number Number Time (min)

Worksheet for Simulation of the Queuing Problem Arrival Time

Service Random Service Starts at Number Time (min)

Service Waiting Time Queue Length Ends For at (min) For Sever Customer

05

4

8.04

8.04

20

4

8.08

2

09

4

8.08

8.08

72

6

8.14

3

41 '

5

8.13

8.14

34

5

8.19

4

74

6

8.19

8.19

54

5

8.24

1 1

1

0.04

0.01

5

00

3

8.22

8.24

30

5

8.29

0.02

6

72

6

8.28

8.29

22

4

8.33

0.02

7

67

6

8.34

8.34

48

5

8.39

8

55

5

8.39

8.39

74

6

8.45

-

9

71

7

8.46

8.46

76

6

8.52

0.01

10

35

5

8.51

8.52

02

3

8.54

-

11

41

5

8.56

8.56

07

3

8.59

0.02

12

96

8

9.04

9.04

64

.5

9.09

0.05

13

20

4

9.08

9.09

95

7

9.16

-

14

45

5

9.13

9.16

23

4

0.01

1

-

0.01

1

0.01

1

9.20

0.03

I I

15

38

5

9.18

9.20

91

6

9.26

0.02

16

01

3

9.21•

9.26

48

5

9.31

0.05

1

17

67

6

9.27

9.31

55

5

9.36

0.05

1

18

63

6

9.33

9.36

91

6

9.42

0.03

1

19

39

5

9.38

9.42

40

.5

9.47

0.04

1

20

55

5

9.43

9.47

93

6

9.53

0.04

I

Total

101

0.33

12

Average waiting

time of customer before service Customer waiting time Number of arrivals

0.33 = 0.0165 min = lsecond 20 Average length of waiting line =

Number of customers in queue Number of arrivals 12 = - = 0.6 20 01 Total service time Average service time = = .1- 5.05 min . Number of arrivals 20

0.13

681

SIMULATION

Average idle time for the server Total waiting time of server Number of arrivals 0.13 x 60 = 0.39 second 20 Average time, a customer spends in the system = Average service time + Average waiting time = 5.05 + 0.0165 = -5.0665 min. =

42.4 SUMMARY Simulation is a very effective approach for the design or analysis of industrial system or plant and processes or services. It is more effective for situations that do not support modeling through optimization or other conventional tools for analysis. Many softwares are available in market for simulation of a large-size system.

42.5 GENERAL PURPOSE SIMULATION SYSTEM (GPSS) GPSS is a simulation language which stands for General Purpose Simulation System. It mainly deals with non-standard queueing system. In reality, one may come across many sub-systems of business organizations or public systems, which can be modeled as queueing systems. But the difficulty of using high-level languages is that they take longer development time for many real-life systems. GPSS simulation language is aimed at providing subroutines for each and every module of any queueing system. These subroutines are called as blocks in GPSS (Table 42.3). The generalized sequence of items in each block is as represented below. Table 42.3 Name of the Block

Basic Set of GPSS Blocks Purpose

Generate

It introduces customers (transactions) into the system (i.e., computation of CAT).

Queue and Depart

The Queue block adds customers into the queue and depart block removes customers from the queue, and the usage of these two Blocks updates the following: CTU, TLCQ and QL. These two blocks pertain to single-server model. The Seize block checks the status of the server and if the server is free, the incoming customer of the first customer in the queue or the customer with higher priority is selected for service. The release block makes the server free as soon as the service on the present customer is over. These two blocks jointly update the following: ST, SCT and CST.

Seize and Release

Storage, Enter and Leave

These three blocks are jointly used under parallel servers situation. The Storage block defines the number of servers (C). The Enter block is equivalent to the seize block in single-server model, and the Leave block is equivalent to the release block in the single-server model. These blocks will update the folloing: ST, SCT(I), CST and MSCT.

Terminate Transfer Blocks

This block removes the customers (transactions) from the system. There are different types of Transfer blocks. These blocks are used to transfer transactions (customers) to non-sequential blocks based on certain conditions.

682

INDUSTRIAL ENGINEERING AND MANAGEMENT

Generate Block: This block can be thought of a door through which the customers. A GPSS program can have any number of Generate blocks. The symbol for the GENERATE block is as shown in Figure 42.4. The syntax for the, Generate block is: Generate A, B, C, D, E.

Generate A, B, C, D, E

Figure 42.4

Generate

block

Table 42.4 GPSS Operand

A

Default value

Significance

Operand

Zero

Average inter-arrival time

B

Half of the range over which the inter-arrival time is uniformly distributed

Zero

C

Offset interval

This open not used

D

Limit count (maximum number of transactions allowed into the system)

Infinite

E

Priority level (higher the number, higher the priority)

Zero

Table 42.5 Generate Block Illustration Example

Generate 40, 5, 7, 500, 1

Explanation

Mean inter-arrival time = 40 Half of the range = 5 Off-set interval = 7 Maximum number of transactions allowed = 500 Priority of the customers = I

Generate 30, 8, 2,

Mean inter-arriaval time = 30 Half of the range = 8 Off-set interval = 0 Maximum number of transactions allowed = infinite Priority of the customers = 2

• Queue and Depart blocks: Queue block allows the transaction that is entering in it. Later, it checks the server status. If the server is busy, the transaction is held in this block itself; otherwise, the Depart block moves the transaction into the next Seize/Enter block. In this process, the necessary data for computing the statistics on the queue will be updated. The symbols for Queue and Depart blocks are shown in Figures 42.5 (a) and (b) respectively. The details of the operands of the above two blocks are summarized in Table 42.6.

683

SIMULATION

(a) Que ie block

(b) Depart block

Figure 42.5 Symbol of Queue and Depart block Table 42.6 Operands of Queue and Depart Block Queue

Operand

Significance

Default value

A

Name of the queue

Error

B

Size of the bulk arrival (quantum of increase in the queue content)

1

A

Name of the queue

Error

B

Size of the bulk of transactions moving out of the queue (quantum of decrease in the queue content).

1

Syntax: Queue A, B Depart

Syntax: Depart A, B

Terminate Block: Whenever a transaction moves into a Terminate block, it is removed from the system. The Terminate block always accepts incoming transactions. A GPSS program can have any number of Terminate blocks. The symbol which is used to represent the Terminate block is shown in Figure 42.6.

Figure 42.6 , Symbol of Terminate block.

The Terminate block has only 'A' operand and it represents the value by which the termination counter is to be decreased whenever a transaction passes through it. Also, this is called as termination counter decrement. The default value of this operand is 1. The syntax of this block is: Terminate A: In addition to removing transactions from the model, the Terminate counter helps to control the simulation run time with the help of Start command as shown below. The following GPSS programming segment is known as timer segment. The Start command is to initiate the simulation run and its argument (operand) carries the initial value of the termination counter. The simulation run will be stopped whenever the value of this counter is reduced to zero.

684

INDUSTRIAL ENGINEERING AND MANAGEMENT

Generate 400 Terminate I Start 1: As per the above timer segment, at exactly 400 minutes, a transaction will be introduced into the model. When it passes through Terminate block, the termination counter (argument of Start) will be decreased by the value of the Terminate block (1) As a result, the termination counter value (argument of Start) will be reduced to zero and hence the simulation will be shutdown at 400 minutes. Seize and Release blocks. Seize and Release blocks are used to fetch/engage and then release/disengage a server (facility), respectively. The entry of the incoming transaction into the Seize block is only conditional. This is equivalent to asking: Is SCT = BIG? If the facility is free, then the incoming transaction will move into the Seize block and immediately it will enter into Advance block where the amount of service time and related details are updated. So, the stay-over time of the transaction in the Seize block is just a point of time. If the facility is not free, the transaction will be held in the previous block and it waits for its turn. The details of waiting will be updated in the Queue and Depart pair of blocks. The Release block sets the facility free and it acts as a bridge to transfer the transaction to some block beyond its location. So, the transactions which are attempting to enter the Release block are always accepted into it and immediately they are moved into some succeeding blocks. The symbols used for Seize and Release blocks are shown in Figures 42.7 (a) and (b), respectively and operands in Table 42.7.

(a) Seize block

(b Release block

Figure 42.7 Symbols for Seize and Release blocks Table 42.7 Operands of Seize and Release Block

Seize Release

Operand

A A

Significance

Name of the facility of be seized Name of the facility to be released

Default value

Error Error

Advance Block: The Advance block computes the service time and updates related details for.. computing percentage utilization of the facility. This block always accepts incoming transactions. The symbol used for the Advance block is shown in Figure 42.8. Advance A, B

Figure 42.8 Symbol of Advance block

685

SIMULATION

Enter, Leave and Storage Blocks: Consider the case of a banking system with two or more counters providing service in parallel. Under this situation, Enter, Leave and Storage blocks are jointly used to manage data on facilities. The Enter block and Leave block of the parallel servers model SIC similar to the Seize block and Release block of the single server model, respectively. The Storage block defines the number of the facility and the name of the facility which is used in the. Mter and Leave blocks. les 42.9 (a) and (b), The block diagrams' of the Enter block and the Leave block are shown in respectively.

04 Leave block

(a Enter block

Figure 42.9 Symbol of Enter and Leave block Table 42.9 Operands of Enter and Leave Block

Enter

Default value

Significance

Operand

Error

' Name of the facility

A

to be seized Leave

Error

Name of the facility to be released

A

The details of the operands of the above blocks are summarized in Table 42.9. REVIEW QUESTIONS 42.1 What is simulation? Explain its purpose. List different advantages and limitations of simulation. 42.2 Why is simulation needed? When should it be used? Is it an optimization tool? Give reasons. 42.3 What is Monte Carlo Simulation? Explain the procedure involved. 42.4 What is the general methodology of simulation? Why is it necessary to use random numbers in simulation? 42.5 Simulate a waiting line with mean arrival rate of 6 minutes and mean service time of 5 minutes. The probability distribution for arrival and service time is, observed to follow the following patterns: Arrival Time (min.) Probability

Service Time (min.) Probability

3

4

5

6

7

8

0.02 ,

0.2

0.4

0.3

0.I

0.08

3

4

5

6

7

0.1

0.2

0.4

0.28

0.02

•

686

INDUSTRIAL ENGINEERING AND MANAGEMENT

42.6. Simulate an inventory control system, for which the demand and lead time probability distributions are given below: Demand per Week (In thousand) Probability

(1 Time (Weeks) Probability

0

1

2

3

0.1

0.4

0.3

0.2

2

3

4

0.25

0.4

0.35

The cost of placing the orders is Rs. 50 per order while carrying cost is Rs. 2.1 per thousand items. The inventory policy that needs to be simulated states that whenever the inventory level touches or falls below 2000 items, the order is placed for the number of items that equal the difference between the present inventory level and maximum replenishment level of 4000 items. Assume opening balance of 2500 items in-stock; allow no back-orders; place order at the beginning of the week following the drop in inventory level to the reorder point. Specify any other assumptions that you incorporate in the simulation.

REFERENCES 1. Bleuel, W.H., 1975, "Management Science's Impact on Service Strategy", Interfaces, Vol. 6, No. 1, Part 2, pp. 4-12. 2. Boulden, James B., 1975, Computer-Assisted Planning Systems. McGraw-Hill, New York. 3. Christy, D.P., and Watson HI, 1983, "The Application of Simulation: A Survey of Industry Practice". Interfaces, Vol. 13, No. 5, pp. 47-52. 4. Davis, Otto A., and Frederick H. Rueter, "A Simulation of Municipal Zoning Decisions", Management Science. Vol. 19, No. 4, Part 2, pp. 39-77. 5. Ernshoff, J.R., and R.L., 1970, Season. Design and Use of Computer Simulation Models, MacMillan, New York. 6. Fourre, James P., 1970, Quantitative Business Planning TechniqueS. American Management Association, Inc., New York. 7. Gibbs, GI., 1974, Handbook of Games and Simulation Exercises, Sage Publications, Beverly Hills, Calif. 8. Huinburg, Morris, 197Q, Statistical Analysis for Decision Making, Harcourt, Brace, New York. 9. Hillier, F.S., and Lieberman GS., 1975, Introduction to Operations Research, 2nd Ed., Holden-Day, San Franscisco. 10. Jennings, John B., 1973, "Blood Bank Inventory Control", Management Science, Vol. 19, No. 6 (February), pp. 637-645. 11. Kiviat, P.J., Villaneuva R., and Markowitz H.M., 1969, The Simscript II Programming Language, PrenticeHall, Englewood Cliffs, New Jersey. 12. Law, A.M., and Kelton W.O., 1991, Simulation Modeling and Analysis. 2nd Ed., McGraw Hill, New York. 13. Meier, Robert C., William T Newell, E:n d Harold L. Pazer, 1969, Simulation in Business and Economics, Prentice-Hall, Englewood Cliffs, New Jersey.

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14. Naylor, Thomas H., and Hosrt Schauland, 1977, "A Survey of Users of Corporate Planning Models", Management Science, Vol. 22, No. 9 (May), pp. 927-37. 15. Naylor, T.H., et. al. 1966, Computer Simulation Techniques, John Wiley & Sons, New York. 16. Schreiber, Thomas J., 1974, Simulation Using GPSS. Wiley, New York. 17. Soloman, S.L.,, 1983, Simulation of Waiting Lines, Prentice-Hall, Englewood Cliffs. New Jersey. 18. Watson, H.J., 1981, Computer Simulation in Business, John Wiley & Sons, New York. 19. Watson, Hugh J., 1973, "Simulating Human Decision Making", Journal of Systems Management, Vol. 24, No. 5 (May), pp. 24-27, 20. Wheelwright, Steven C, and Spyros G. Makridakis, 1972, Computer-Aided Modeling for Managers, AddisonWesley, Reading, Mass.

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IMPORTANT NOTES

43 INDUSTRIAL ENGINEERING: , BEGINNING OF A NEW DAWN

43.1 INTRODUCTION The chapter which is titled 'Industrial Engineering: Begining of a New Dawn' is deliberate. As a discipline, Industrial Engineering is at the hub of transition. At the onset of twenty first century, industrial engineers are facing a lot many new challenges than ever before. This is mainly because of two reasons. Firstly, there is a sudden transformation in the business/service scenario due to emergence of information-technology (IT) inputs. Many old rules and terminologies of previous years are giving ways to new IT-enabled business paradigms. We will have a closer look on IT-enabled business later in this chapter. Another reason that has been causing transition is related to the emergence of new strategies to handle the business. Flexibility, agility, quick-response-manufacturing, lead time reduction, customer-focus, ERP, e-business (e-biz), life cycle costing, customization of product/services, globalization of business, setup-time reduction, uncertainty and fluctuations in environmental forces and focus on core competencies, are just a few indicative terms that will dominate the industrial engineering scene in days-to-come.

43.2 Changing Faces of Industrial Engineering (IE) Information Technology (IT) is transforming the way people work, communicate, and learn. This transformation has motivated us to probe important questions about how people and organisations will operate as IT: • blurs the boundaries organisations, markets, industries and communities • changes the nature of work, coordination and production • shrinks the barriers of space, time, complexity, flexibility, reuse and agility • redefines the notion of intelligence and knowledge • expends the conventional role of computer aided business-activities beyond the sole purview of software or hardware experts. There are quite a few articles, regularly appearing in the contemporary journals about the changes needed in Industrial Engineering (IE) curriculum. For example, Kuo and Deuermeyer (1998), Buzacott (1984), Roy (1967), etc. provide some insights into things that are changing in IE curriculum. The classical IE definition by IIE in 1955 was challenged in Roy's report and Buzzacot's paper.

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INDUSTRIAL ENGINEERING AND MANAGEMENT

HE in 1955 about IE (Traditional one) Industrial engineering is concerned with the design, improvement, and installation of integrated systems of men, materials, and equipment. It draws upon specialized knowledge and skill in the mathematical, physical, and social sciences together with the principles and methods of engineering analysis and design, to specify, predict, and evaluate the results to be obtained from such systems. R.H. Roy's report in 1967 about IE The objective of IE education is to prepare the students in the quantitative, economic, and behavioral ingredients and processes of analysis and synthesis in design and decision making. Industrial Engineering, in recent years, is far lacking in developing newer concepts, though it is quick to adopt many concepts and changes in modern manufacturing processes. Some of these areas that have developed outside the academic domain of IE are (Kuo and Deumermeyer, 1988): • Pull system, JIT • Single-item processing • Continuous improvement • Bottleneck management • Supply chain • "Jonah" programs of Goldratt (Theory of constraints) • Deemphasis on cost accounting • Taguchi method, etc. More recently, many developments have appeared in industrial scene due to the fast changing IT sector. Many "dot-corn" companies have appeared. The business paradigm is in 'the lane of a major change. This is due to- e-factors such as: e-business, e-education, e-learning, e-biz, ERP, e-com, e-payment, etc. The business, through the internet, will-open-up newer definition and scope of supply-chain that is now more attractive due to features that are web-enabled. The learning in IE must incorporate the e-culture such as: • ERP • e-biz • e-learning • e-commerce • e-procurement • e-payment and e-banking • e-care (for customer, employee and business partner) • e-marketing (personalized marketing for customer). Automation and evolving shift in manufacturing strategy have further created a scope for defining the new IE-curriculum, that incorporates issues such as: • Flexibility • Agility

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INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN

• Time-based competition • Competitiveness • Low cost/price • Quality, features and reliability for customer satisfaction ° • Volume change and uncertainty and delivery • Product development, customization, etc. • Integration issues: Supply chain, value chains, ERP • Automation, FMS, Computer Integrated Manufacturing, cellular manufacturing • Lean production, JIT, etc. • IT-enabled business: e-commerce • Customer relationship Management (CRM) in the web-enabled business, etc. At Texas University, USA in A&M IE Dept. in 1994, new role industrial engineer. (Kuo and Deuermeyer, 1998) was defined as follows: New 'Role of Industrial Engineer (1994) The industrial engineer plans, designs, implements, and improves systems consisting of a network of processes through which objects or information flow and undergo transformation. These activities are undertaken for the long-term benefit of the firm or organization. The new role of Industrial Engineer is due to three recently evolved industrial expectations: 1. Changes in traditional manufacturing system (Table 43.1). First fifteen items in this Table are from Kuo and Deuermeyer, 1999. 2. Changes due to evolution of interne (Table 43.2). 3. Need of Industrial Engineer to assume the role of change agent (Figure 43.1). Table 43.1

Differences between Traditional and world-class and IT-enabled manufacturing

Issues

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World-class and IT-enabled

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Focus Flexibility and agility Organizational Lot sizes

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Set-up times Quality focus Product development Supervision Information system Inventory Push pull Vendor 1E role Accounting

Internal Low Functional hierarchical Long runs, economic order quantity (EOQ) High Factory inspection Fragmented Directive Accounting-driven Fewer than three times Push Many (adversarial) Traditional Centralized

S. No.

Low Prevention, total quality Integrated Working team leader Business needs-driven More than 10 turns (Towards JIT) Pull Few partnerships yet closely connected Change agent Activity based (Contd...)

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INDUSTRIAL ENGINEERING AND MANAGEMENT

S. No.

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15. 16. 17. 18.

Subjects Task Manager Functional departments Presence IT role Payment Expertise of managers in related area Decision making Processes Organisation Production Customer Thinking Focus Market Catalogue 1E Main role Driver

More mechanical-oriented Task specialization Individual expertise Optimize individual function of organisation Local, shop-floor Insignificant Cash/checks Manufacturing management

Technology and software driven Task integration Cross functional team Optimize the entire organisation and external as one unit (supply chain) Global partnership Highly dominating with e-commerce Cashless, e-banking, on-line negotiation IT-managenient

Hierarchical Linear, sequential processes Functional organizations Mass production Customer as target Supply side thinking Focus on efficiency Mass marketing via advertisement Paper catalogue Management control Driven by machinery

Done in field Non-linear, parallel processes Networked organizations Mass customizations Customer as partner 'Demand side thinking Focus on effectiveness Target 1 : I interactive marketing in web Electronic catalogue Management coordination Driven by computers, network, e-business

19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33.

Table 43.2 Evolution of the Internet (1969L2000) 1969: The Defense Department of USA commissions ARPANET to research computer networking. Later in the year, the first nodes of the'system go on-line at UCLA Stanford Research Institute (SRI) and the University of Utah. 1971 : Fifteen individual nodes of ARPANET go on-line thus, joining, 23 computers. 1972: Operators create the first email program to send and receive messages across the network. Norway and England become the first international connections to ARPANET. 1975 : Usenet newsgroups are established between Duke University and University of North Carolina in USA. 1982 : The Transmission Control Protocol and Internet Protocol (TCP/IP) are approved as the communications standard for ARPANET. This leads to the first definition of an "Internet" as a connected set of network using TCP/IP. 1983 : Desktop workstations come into being. 1984 : Number of computers on ARPANET breaks 1,000. 1986 : The National Science Foundation at USA creates the NSFNet backbone on ARPANET(56 KB), and establishes five supercomputing centers to provide high-speed computing power for all users. Cleveland Freenet comes on-line and offers free, public access. 1987 : Number of computers on ARPANET breaks 10,000. 1988 : First business begins to connect to the system for research purposes. 1989 : Number of computers on ARPANET breaks 1,00,000. First email relay begins between a commercial online service (CompuServe) and the ARPANET through Ohio State University. 1990: ARPANET creases to exist. The network is now officially referred to as the Internet. (Contd..)

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INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN

1991 : WAIS and gopher/Internet search and navigation tools, are released by Thinking Machines Corporation and the University of Minnesota, respectively. 1992 : World Wide Web, a hyperlinked interface to the Internet, is released by a Swiss research network. Number of computers on the Internet breaks one million. NFSNet relaxes its restriction on commercial network traffic. By the end of the year, half of all Internet traffic is commercial in nature. First audio multicast (March), and video multicast (November) real-time broadcast of video and audio via computers connected to the Internet. 1993 : Stephen King becomes the first author to publish a short story on the Internet. First books about using the Internet for business appear. Business and media take an interest in the Internet as the number of users climbs above 14 million. Mosaic, graphical WWW browsing software, is released. Use of the Web proliferates by more than 30,000 percent. 1994 : U.S. Congress brings its Internet server on-line. Shopping malls, advertising, and mass marketing surface on-line. 1995 : • IBM, Microsoft and Oracle join Sun in proclaiming their "grand strategy" for network computing. • In August, VSNL, begins to give internet connections in India. 1998 : Sabeer Bhatia sells Hotmail.com for $100 million to Microsoft. • International venture capital firms starts financing the start-up in India. 1999 : • Many business firms puts paper for e-com ventures in India. • Internet Service Providers (ISP) business is opened for private sectors in India. More than 175 firms apply. • More than 23,000 India-centric sites on horizon. • Internet users crosses one million in India. • Software export exceeds Rs. 10,000 Cr. in India. 2000: US President visits to India. IT hype gets momentum.

Continuous Improvement

Figure 43.1

Industrial Engineer as a change agent

The overall impact of the transition is visible on industrial sectors. Organisations are getting redefined in many ways. Structure-wise, these are flatter and less hierarchical in an information-intensive age. Objective-

INDUSTRIAL ENGINEERING AND MANAGEMENT

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wise, these are adopting to new work-culture due to globalization, liberalization and flexibility, Industrial Engineering has to play a major a role in the process of transformation (see Figure 43.1). The three key-routes of transformation are: • Continuous Improvement: Gradual, TQM-route • Benchmarking: Best-in-class route • Reengineering: Radical, fundamental, dramatic change-route. 43.3 SOME CONTEMPORARY TRENDS 43.3.1 Organisation Trend

1. Network, information intensive 2. Knowledge management: key issue 3. Virtual organisation and management through web-enabled network 4. Large business 20 years hence will resemble a hospital or symphony orchestra more than a typical manufacturing company (Drucker 1988): • Cross-functional teams of knowledge specialists. • Decision making in the field. • Parallel rather than sequential processes. • Management role is to coordinate, not control. • Focus on effectiveness (meeting customer needs) than efficiency. • Greater role of information and IT. • Unpredictable environment, shorter product cycles. • Global markets and suppliers. Keys to success: New thinking, new processes, new behaviours! • Extended enterprise: integrated value chain. • A "win-win" combination of key players along the supply chaim. • Dynamically integrates supply and demand streams. • Optimizes value and cost across the entire chain. • Creates new value propositions for customers innovative business models. • Frequent reorganisations and not exceptionally stable structure • Supply Chain: All activities involved in sourcing, producing, distributing and delivering products from raw materials to end-users. • Value Chain: All internal and external processes that add value to a product or service (Michael Porter, 1985). • Integrated Value Chain: An integration and enhancement of all internal and external processes to increase product value to customers (Figure 43.2). • New Business Ecosystem: An interacting community of business partners under a single, leveraged brand to reach customers via the internet.

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1. Connectivity is cheap, universal. 2. Dynamic two way interaction supported by the web. 3. Greater quality with lower price; many products are free (computers are given free by many e-biz companies in western world). 4. Ramp growth of internet. 5. New portals, efficient search engine. 6. In-built expert software on net (BOTS) and intelligent agents that capture user's behaviour related to preferences, etc. 7. Low fixed costs; rampant competition. 8. Fast spread of new technology. 9. Digital convergence of product, platform and network. 10. Interfaces on web is very personalized. 11. Secure transactions on net. 12. Data mining/OLAP/Data-warehousing. 13. Web-based standardisation of business processes. 14. Electronic-data interchange (EDI) is the norm. 15. Image technology is an operational necessity. 16. Digital signature and fire-wall for security on net. 17. Distributed work but linked through information/IT network.

696

INDUSTRIAL ENGINEERING AND MANAGEMENT

18. 19. ·20. 21. 22. 23.

Location independent work-sites. Standardisation in electronic business. Easy integration of back office and database and core-business/manufacturing. Automation on shop-floor, Robotics, etc. Computer integrated/flexible manufacturing. Business is integrated from supplies to customer.

43.3.3 Other Trends

1. Customized production (rater than mass production) · 2. Global sourcing (rather local purchase) 3. Agile manufacturing with flexibility 4. Extranet 5. Integrated logistics 6. Customer relationship management, CRM (rather than custo·mer seryice) · 7. Vendor managed inventory 8. Build to order (rather than build to stock) 9. Value chain integration (rather than supply chain manag�ment) 10. Demand planning (rat_her than forecasting) 11. Strategic partners (rather than vendors) 12. Demand-based inventory control (rather than warehouse management) 13. Online electronic catalog (rather than annual catalog)· 14. Data mining (rather than customer research) 15. Use innovation as competitive advantage (leverage human capital) 16. Deliver value to _customer tltro�gh product/service differentiation 17. Build· customer loyalty and CRM 18..Knowledge management (rather than MIS) 19. Leverage information and technology 20. Exploit: .Innovation-knowledge-integration-speed-CRM. -IBM's e-Business Strategy: New Role Model • Four Goals ar� identified (transform, enhance, help, educate): • to help IBM transform itself for the e-business era. � to enhance business unit's effectiveness in using Internet/intranet, both internally and with customers. • to help customers conduct e-bus.iness with IBM. • to educate customers on e-bus_iness potential and help them transform for the new economy. • Key initiatives that will follow are: • e-commerce: Sell goods/services via the web • e-care (for customers, employees, and business partners): Online customer support, decision support, ·operational ·processes, communication, etc. CRM is the key here • e-procurement: Streamline and improve the tendering process • e-marketing: Personalized marketing for customers.

· 697

INDUSTRIAL ENGINEERING: BEGINNING OF A NEW DAWN

43·.4 WHAT IS THE FUTURE FOR' INDUSTRIAL ENGINEERING (IE}? · Industrial Engineering will undergo some changes in years to come. This will be mainly because of emerging expectations, such as: (a) Change agent (for both manufactur;ng and services) (b) New business scenario with web-enabled business (e-biz) (c) Integration, such as: supply chain, value chain, integrated value chain, new business ecosystem and ERP (d) High automation, computer integrated_ and flexible manufacturing (e) Knowledge management (/) Data mining (rather than conventional way of customer· research) (g) 1Customer Relation. Management as one of the focal issues in e-biz (h) New Product development, quality function deployment and mass customization. 43.5 SUMMARY It is; therefore, important for the key personnel in IE to adopt the changes in autoMation, computerization and e-biz model. It is expected that Industrial Engineering will adopt more and more IT-enabled, customer­ specific, integrated and eco-fr��ndly models to manage manuf�cturing and se..:Vices. REVIEW QUESTIONS\\ 43.1 What is the role of industrial engineer in new, information intensive business?

. 43.2 Select one computer-b�sed 'technology, give all overview of the technology and describe the current trends for the technology that is relevant for Industrial Engineers.

....

43.3 Select an emerging technology and evaluate if in terms of the different dimensions of technology success.

43.4 Why is it important to· understand the trends in an emerging technology?

43.S Describe some of the changes taking place ih t1'e telecommunications industry and how these • changes will

impact the introduction of new technologies.

·

43.6 It has been stated that the US is best at creativity, Japan excels at innovation and India excels in both.

Do you agree or disagree? Justify your answer. Be sure to define, compare and contrast creativity and innovation.

43.7 What can an organization do to provide a creative environment for Industrial Engineer? Give some specific examples.

43.8 R�ad the following and suggest the role of Industrial EngineJr (if any):

of aeroplane (a) All aerospace company ' which wants to modify the desiJn of the next generation ' · to be • more efficient (,b) A large, information technology company which has been producing hardware and software since the 80's (c) An automobile manufacturer who wants to remain competitive by offering an }nnovative .product (d) Managing a group of senior technologist (typically 50 years of age or older) (e) A university which wishes to improve its recruiting and reienti