Industrial Management 9789350432860, 9789350242513

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INDUSTRIAL MANAGEMENT M. E. Thukaram Rao M.Com., M.Phil.

Head, Dept. of Commerce, Sri Sathya Sai Institute of Higher Learning, Whitefield Campus, Bangalore.

Hal GfIimalaya GpublishingGfIouse MUMBAI • DELHI • NAGPUR • BANGALORE • HYDERABAD

© Author No part ofihis book shall be reproduced, reprinted or translated for any purpose whatsoever without prior pennission of the author and Publisher in writing.

ISBN

: 978-93-5024-251-3

Revised Edition :

Published by

Branch Offices : Delhi

Nagpur

Bangalore

Hyderabad :

Printed by

2010

Mrs. Meena Pandey for HIMALAYA PUBLISHING HOUSE, "Ramdoot", Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004. Phones: 23860170 & 23863863, Fax: 022-23877178 Email: [email protected] Website: www.himpub.com "Pooja Apartments", 4-B, Murari Lal Street, Ansari Road, Darya Ganj, New Delhi - 110 002. Phone: 23270392,Fax: 011-23256286 Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018. Phone: 2721216, Telefax: 0712-2721215 No. 1611 (Old 1211), 1st Floor, Next to Hotel Highlands, Madhava Nagar, Race Course Road, Bangalore - 560 001. Phones: 22281541 & 22385461, Fax: 080-22286611 No. 2-2-1 16712H, 1st Floor, Near Railway Bridge, Tilak Nagar, Main Road, Hyderabad - 500 044. Phone: 55501745,Fax:040-27560041 Bhave Private Ltd. 242, Belasis Road, Nagpada, Mumbai - 400 008.

CONTENTS 1.

Current Economic Scenario and Industrial Development

1 - 59

2.

Principles of Management

3.

Wages and Incentives

196 - 222

4.

Financial Management

223 - 275

5.

Quality Control and Statistical Quality Control

276 - 296

6.

Production, Planning and Control

297 - 320

7.

Work Study

321 - 359

~.

Industrial Psychology

360 - 372

9.

Industrial Relations

373 - 403

Stores Purchase, Inventory and Personnel Management

404 - 497

11.

Safety and Maintenance Management

498 - 527

12.

Pollution Control and Management

528 - 544

13.

Productivity

545 - 556

14.

Entrepreneurship Development

557 - 566

10.

60 - 195

"This page is Intentionally Left Blank"

CHAPTER 1

CURRENT ECONOMIC SCENARIO AND INDUSTRIAL DEVELOPMENT 1.1 Classification of Businessiindustrial Enterprises. 1.2 Size of a BusinesslIndustry. 1.3 Status of Industrial Development. 1.4 Essential Features of Current Economic Reforms. 1.5 Current Scenario of Industrial Development.

1.0 Introduction The term industry connotes different things to different people. For a manufacturer it implies the various processes involved in manufacturing a product. For a historian, it signifies the evolutionary stages of mechanisation in the production process. For an economist, it amounts to the distribution of income which the industry earns to the various factors of production. For a politician it stands for framing legislation governing various aspects of an industry. For an entrepreneur, setting up an industry is an opportunity for earning profit and ren.dering tangible service to the social community. For an employee, industry amounts to a source of earning his livelihood. For a manager, industry constitutes a how-to-do-it challenge. He is interested in creating something new and in knowing how-to-do better. For a customer, an industry is a source of getting most of the products required for day-to-day living. For an environmentalist, an industry is a threatening place as·it endangers the living beings by means of polluting the atmosphere.

Industrial Management

2

Functionally, by industry we mean a place where raw materials are converted into finished goods efficiently and economically. Efficiency in production is measured by the quantity and quality of goods produced and economy in production is measured by the minimum cost at which goods are produced. Quite often the term "factory" is used to denote an industry. But there is a difference between the two terms. The term factory is used in a narrow sense, whereas the term industry is used in a broad sense. Industry includes all the factories engaged in the production of similar products. For example, by sugar industry, we mean all the factories which are engaged in the production of sugar.

DEFINITION AND CHARACTERISTICS OF AN INDUSTRY According to Franklin E. Folts (Introduction to Industrial Management) an industry is defined as a "place where the means of production, namely, plant and equipment, labour and management are utilised to convert raw materials into products which have greater value in use than the original raw materials." The following are the characteristic features of an industry: (1) It

is a place or premises where production of goods and services takes place.

(2) An industry is a conglomeration of number of factors of production such as raw materials, plant and machineries, labour and management. (3) In an industry, production is carried out with power driven machines. In a modern industry, production is also undertaken by automatic machines. (4) An industry consists of number of departments and several stages are involved in production before final products emerge out. (5) Production of goods on large scale is a distinctive feature of a modern industry. (6) An industry produces goods of uniform quality because they are produced with highly specialised machines. (7) An industry is characterised by division of labour or specialisation both in production and management.

Current Economic Scenario and Industrial Deveopment

3

(8) An industry always tends to increase the size of its establishment. (9) In modern days, an industry adopts extensive use of advanced scientific principles in technical and organisational areas.

1.1 CLASSIFICATION OF BUSINESSI INDUSTRIAL ENTERPRISES The first step that is involved in the formation of an industrial organisation is to decide upon the ownership of the organisation. Ownership of an industry is represented by the right of an individual or group of people to acquire a legal title to the assets to earn profit from such assets and also to control them. The form of organisation influences the success of the industry initially and in later operations. The right to acquire, use and dispose of the property of industry lies in the ha~ds of private individuals or group of individuals in the private sector or in government or other organisations in the public sector. From the point of view of ownership of industry, the proprietorship, partnership, joint-stock company and cooperative societies are the main types of organisation.

Factors to be Considered in Starting an Industrial Organisation The establishment of an, industrial organisation must satisfy certain criteria in order to constitute an ideal organisation. An industrialist must, therefore, consider all such factors so as to derive the maximum benefit from the industry. These factors are as follows:

(1) Ease of Formation. The formation of various types of organisations often poses problems. While some organisations can be formed with-ease, others may take not only more time but are also highly expensive. Therefore, the factor that is to be considered is the relative-ease with which an industry can be started. (2) Financing the Industry. Setting up of a large-sized industry requires a large amount of capital when compared to a small-sized industry. Therefore it must be ensured that the required amount of capital is made available initially and in the course of running the industry. In addition to raising the capital, it must also be ensured that a fair return is possible on the investment of capital.

4

Industrial Management

(3) Limited Liability. An industrialist will always prefer limited liability from the point of view of risk involved. The principle of limited liability implies that the industrialist will be held responsible only for the unpaid part of the capital in the event of winding up of the industry. Once he pays the full amount of capital, his liability to pay further owing to losses incurred by the industry will cease. (4) Management and Control. As a rule, control over the industry and its management must be with the industrialist. This is possible only in the lower form of organisation such as a proprietorship or partnership firm. In higher forms of organisation such as joint-stock companies, management and control are separated from ownership. As far as possible, the industrialist must associate with management so as to carry out the functions of the industry efficiently. (5) Flexibility of Operation. A good form of industrial organisation must be capable of adapting itself to changing situations without much difficulty. The reason is, today industrial activities are no longer static but dynamic in nature. It is only when the industry lends itself to change depending upon the changing environment that it can succeed and attain its objects. (6) Continued Existence. The duration of the industry should not be interrupted by any event. Instead it must enjoy continued existence over a long period of time. Perpetual existence is very essential to achieve long-term plans of the industry and also to get a steady rate of return on the capital invested. (7) Maintain Business Secrets. In these days of industrial competition, it is absolutely essential to maintain the secrets of the industry. Any leakage of information will enable the competitors to enter the field of industry which may cause a substantial loss of market share and consequently, loss of income. (8) Freedom from Government Regulation. In the present-day business world, the government is playing an important role in the functioning of industries. The excessive degree of control exercised by government affects the smooth functioning of an industry. With limited freedom it becomes very difficult to run industrial establishments e(ficiently. Government regulation is excessive, particularly in large-sized business establishments when compared to small-sized business.

Current Economic-Scenario and Industrial Development

5

(9) Tax Liability. The burden of tax is one of the important factors which must be considered at the time of choosing the form of the ownership of an industry. The burden oftax is light on small-sized industries, while it is heavy on larged-sized industries. (10) Scope of Operation. This refers to the volume of business and the size of the market area served. Obviously, for a small-scale operation, a lower form of organisation is selected as compared to a higher form of organisation which involves large-scale operations. 1. SOLE PROPRJETORSmP This form of organisation is known by other names such as individual proprietorship, sole ownership and individual enterprise. It is owned and controlled by a single individual. The proprietor invests his own capital, skill and intelligence and he receives all the profits and assumes all the risks of ownership. When the activities of the industry increase, he can take th~ assistance of employees or his own family members. This form oforganisation is the oldest and the most natural form ofindustial ownership. The industrialist carries out the functions of the industry exclusively by and for himself. He is the supreme judge of all.matters pertaining to it as he decides on his own accord. He has unlimited freedom in selecting the type ofindustry depending upon his likes and dislikes. This form of organisation is well suited in the following circumstances: (a) Where the size of industry is small; (b) Where the capital to be invested is small; (c) Which requires personal attention to customers and employees; (d) Where the risk involved is less; and (e) Where it is within the reach of the industrialist to control and manage. Characteristics of Sole Proprietorship (1) Individual Ownership. The individual entrepreneur constitutes the sole owner of the industry as it is he who contributes the capital and other assets. Although in some cases he can borrow funds from his friends, relatives and financial institutions, the ownership still lies with him. (2) No Separate Entity ofBusiness. The law does not make any distinction between the sole proprietor and his industry. In other words, the proprietor and his industry are considered to be- one and the same. (3) Unlimited Liability. From the above characteristic, it is pbvious that the liability of sole proprietorship is unlimited. In case:-

6

Industrial Management

the assets of the industry are not sufficient to pay off the liabilities, the private property of the sole proprietor is attached for paying the debts. (4) Individual Management and Control. The sole proprietor undertakes to manage and control the affairs ofhis business. As there is no one to consult, he will take quick decisions in all matters. In fact, he plays the role of a promoter, financier and manager. In case of need he takes the assistance of a paid employee. (5) Sole Enjoyer of Profit. The sole proprietor derives the complete benefit of profit arising out of his business. Similarly, he also bears the risk of loss arising out of change in demand and increa'se in competition etc. (6) Free from Government Regulation. A sole proprietor need not comply with the legal formalities at the time of formation of the business. Wherever it is necessary, he has to obtain a licence from a competent authority which is not difficult when compared to other forms of organisation. Advantages of Sole Proprietorship (1) Easy Formation. The formation of this form of organisation is the easiest, when compared to other forms oforganisation. The only requirement is that he must be competent to enter into a contract and must have a desire and resources to start the business. (2) Maintaining the Secrets of Business. Secrecy is of vital importance for the success of any business and a sole proprietor is in an eminent position to keep his affairs to himself. He need not publish his accounts and is not bound to furnish particulars of his business to others. This enables him to maintain utmost secrecy in all matters relating to his business. (3) Prompt Decision. Decision-making is one of the important functions of eV,ery industrialist. The decisions to be taken in a business relates to credit policy, sales promotion, production programmes, inventory control etc. A sole proprietor being the supreme judge and master ofhis business makes prompt decisions and thereby takes advantage of a favourable situation. (4) Flexibility. A modern business functions in an environment which keeps changing frequently. For the success of the business it is necessary to make necessary changes depending upon the changing environment. A sole proprietor being constantly in touch with the business and its operation can adjust his business so as to meet the needs of changing environment. (5) Direct Motivation. The efforts of a sole proprietor has a direct relationship with the rewards of the business. The greater the efforts made by him, -the higher the reward he will derive. Further, the entire profit belongs to him as there is no one to share it with.

Current Economic Scenario and Industrial Development

7

(6) Personal Relations with Customel's";.a.nd Employees. The sole proprietor comes into close contact with his customers who are limited in number. This enables him to know the tastes and preferences of his customers and cater to their needs. He also maintains close touch with his employees because of the small number of employees. This enables him to supervise and exercise better control over them and maintain a cordial relationship with them. (7) Self-Employment. This form of organisation offers a way of life for securing means of livelihood for those who want to earn independently. This provides in excellent opportunity for self-employment to persons of small means with business skill and professional drive. (8) Social Advantages ofSole Proprietorship. In addition to the above advantages, this form of organisation is useful to society in respect of the following: (a) Promotes Independent Living. This form of organisation is most suitable for those entrepreneurs who would not like to serve others. It provides an opportunity to utilise their skill, capacity and ability to enjoy freedom of action. This makes them to take pride in owning, managing and controlling the business in the capacity of a master and manager which gives him complete satisfaction. (b) Generation of Social Values. This form of organisation enab1es the sole proprietor to cultivate social values such as selfdependence, self-determination, a sense of responsibility, initiative, prompt dealings in business which are of great social importance. (c) Avoids Concentration of Economic Power. As a sole proprietorship business is carried on relatively on a small scale, it permits a large number of people to share the ownership of the business. This avoids concentration of economic power in the hands of a few. Disadvantages (1) Limited Capital. The amount of capital that is at the command of a sole proprietor is limited. The amount ofloan that can be raised is also limited as it depends upon his creditworthiness. When the business is to be expanded the proprietor will find it difficult to do so for want of more capital. (2) Limited Management Ability. Today's business is becoming more complex demanding better management and specialisation. But in this form of organisation the sole proprietor performs all the functions of purchase. production, financing and marketing, attending to customers. This will overburden him and come in the way of smooth running of business and its expansion. (3) Unlimited Liability. The liability of a sole proprietor is unlimited. This means his private property can be used to payoff the

8

Industrial Managern.e7li

debts of the business, ifit has less of assets. Thus, he will lose not only the capital originally contributed to the business but also his other personal property. (4) Uncertainty of Continuity. The sole proprietorship business is not considered as a separate entity. Consequently, any uncertain event such as prolonged illness, insolvency, insanity or death puts an end to the life of the business. This deprives the customers in deriving the benefits from this form of business. (5) Lack of Confidence. As the sole proprietor is not obliged to publish his accounts, people will not repose their confidence in this form of organisation. They will naturally hesitate to invest their savings in such undertakings. (6) Sharing of Entire Loss. If unfortunately the business is subject to loss, the entire risk of loss is to be borne by the sole proprietor himself. 2. PARTNERSHIP FIRM The second stage in the evolution of industrial organisation is the partnership firm. This form of organisation eliminates some of the disadvantages ofthe sole proprietorship such as limited capital, absence of specialisation and limited managerial ability. This form of organisation may be formed either by cOIlverting the sole proprieto-rship organisation into a partnership or by newly forming a partnership business. Definition of Partnership Section 4 of the Indian Partnership Act, 1932 defines a partnership as "the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all." According to Haney, a partnership is "the relation existing between persons competent to make contracts, who agree to carryon a lawful business in common with a view to private gain." The persons who enter into partnership voluntarily are known as partners and collectively as a firm. The name under which the partnership business is carried on is known as the firm name. Characteristic Features (1) Plurality of Persons. The minimum number of persons to form a partnership business is two. The maximum is restricted to ten in the case of a partnership organisation carrying on banking business and twenty in the case of a trading and manufacturing business. (2) Mutual Agreement. This form of organisation is established by a contractual agreement entered into by all the partners. So any person who does not qualify to enter into a contract cannot join a partnership business.

9

Current Economic Scenario and Industrial Development

(3) Lawful Business. The contractual agreement entered into by the partners must be for a lawful purpose. An agreement by two dacoits to commit a theft. and to share the loot is not a lawful partnership business. (4) Sharing ofPro/its. One of the tests applied to know whether a business is a partnership business or not is sharing of profit by the partn-ers. It is immaterial whether a partner takes an active part in the business. But sharing of profit must be the criterion to call a person a partner. (5) Collective Management. Unlike the sole proprietorship form of organisation, where the business is managed by one individual, in a partnership organisation, it is managed by most of the partners if not all of them. (6) Non-transferability of Interest. A partner in a partnership business cannot transfer his interest (ownership) unless consent to it is given by the other partners. However, if a partner does not like to continue with the partnership organisation, he can retire on his own and thus get back his capital from the firm. (7) Unlimited Liability. The liability of partners in a firm is unlimited as in the case of the sole proprietorship organisation. (8) Duality of Role. The partners in a firm play two roles, viz., principal and agent. As regards outsiders such as suppliers, customers etc., the role of every partner is thatofa principal. As between the partners themselves, they assume the role of agents. (9) Utmost Good Faith. The partnership business is formed on the basis of faith which each partner reposes in others. Without mutual understanding among partners, it is very difficult to run this type of organisation. (10) Taxation. As in the case of an individual, the income of a partnership is taxed on a slab system. As the income of the firm increases, the tax also rises and vice versa. Types of Partnership The types of partnership are classified on the basis of liability and duration. This is shown below: Types of Partnership I

On the basis of liability of partners ! I I General Limited partnership partnership

I

On the basis of duration offirm i I I Partnership Particular at will partnership

10

Industrial Management

On the basis of liability of partners, a partnership may be classified into two types. They are as follows : (a) General Partnership. In this type of partnership, the liability of all the partners is unlimited. The J ndian Partnership Act recognises only general partnership. (b) Limited Partnership. This type of partnership is found in Western countries. The features of a limited partnership can be summarised as under: (i) This partnership consists of two types of partners, viz., general partners and special partners. The liability of general partners is unlimited and that of special partners is limited. (ii) Special partners usually do not take part in the management of the business. (iii) The death, insolvency or insanity of a special partner does not lead to the dissolution of the firm. (iv) The special partner cannot withdraw any part of capital contributed by him. Ifhe does so, his liability on the portion so withdrawn becomes unlimited. (v) A limited partnership must necessarily be registered under the law. On the basis ofthe duration of partnership business, they may be classified into two types. They are as follows: (a) Partnership At Will. When a partnership business is carried on for an indefinite period, it is known as partnership at will. It is so called because it is dissolved at the will of the partners. (b) Particular Partnership. When a partnership is formed for a definite period or for achieving a particular purpose, it is known as particular partnership. Such partnership is dissolved after the expiry of the duration or after attaining the purpose for which it was formed. Partnership Deed As mentioned earlier a partnership firm comes into existence by the mutual agreement of all the partners. Such agreement may be oral or in a written form. The written agreement signed by all the partners is known as "partnership deed" or "Articles of partnership. " It is always safe to go in for a written agreement as it facilitates settlement of disputes among partners. A p'artnership deed usually contains the following particulars: (1) The name ofthe firm along with the names and addresses of partners. (2) The nature of business (i.e. trading, manufacturing, banking) to be carried on by the firm.

Current Economic Scenario and Industrial Development

(3) (4) (5) (6)

11

The amo\.J.nt of capital contributed by each·bartner. Duration of firm, if any. The profit-sharing ratio of partners. The amount that can be withdrawn from the flTm and the rate of interest thereon. (7) The rate of interest allowed on the partners' capital. (8) Amount of salary, commission, brokerage etc. payable to the partners. (9) The terms and conditions of admission or retirement of partners. (10) The allotment of duties and responsibilities among partners. (11) Mode of settlement of accounts at the time of retirement or death of a partner. (12) Contribution ofloans by the partners and the rate ofinterest payable thereon. (13) Method of valuation of goodwill at the time of admission, retirement or death of partners. (14) Maintenance of accounts. (15) Arbitration clause for settlement of disputes. (16) Procedure for dissolution of firm. Registration of Firm Registration of a partnership firm is not compulsory in India. But an unregistered firm suffers from certain disabilities. These disabilities are: (i) It cannot sue its partners; (ii) It cannot enforce its claim against third parties in a court oflaw; (iii) Partners of un registered firm cannot enforce their claims against one another. These disabilities force the partnership to register compulsorily. Registration can be made at the time of formation or at a later stage of the business. Whenever a partnership firm is to be registered, a prescribed application form duly filled in with the following particulars is to be submitted to the Registrar of partnership firm along with a prescribed fee: (1) The name of the firm; (2) The place or places where business is carried on by the firm; (3) The names and addresses of all the partners and the date of joining the firm; (4) Date of commencement of the firm; and (5) Duration of partnership.

12

Industrial Management

Advantages of Partnership (1) Easy to Form. When compared to other organisations which involve an association of persons, it is very easy to form a partnership firm. It does not involve any legal formalities to be fulfilled. Registration of the firm is also not compulsory and even if it is desired it is simple. (2) Large Amount of Capital. As the number of partners is more than one, it is possible to pool a larger amount of capital in this form of organisation. This enables the firm to carryon the business on a relatively large scale with economies arising out of it. (3) Flexibility in Operation. Changes in the activities of a firm can be brought about easily by mutual agreement of partners. A partnership deed can also be changed without much difficulty so as to enable the business to incorporate the necessary changes. It does not require the permission of government or any other agency. (4) Balanced JudgeTrU!nt. The decisions in a partnership firm are taken by the joint consultation of all the partners. Any problem that is to be decided is viewed from various angles before it is decided upon. This results in balanced decision-making. (5) Division of Labour. A partnership firm usually has many partners who are talented in different activities. Some partners are good at maintaining accounts, while some others in handling purchases, sales, financing etc. (6) Divided Risk. Whenever a partnership firm incurs any losses, it will be shared by all the partners in the agreed ratios. Thus, the burden of bearing the loss is shifted to all the partners rather than it being borne by one individual as in the case of a sole proprietorship. (7) Management and Control. The management and control of a firm lies in the hands of partners. This enables the partners to manage more enthusiastically and by hard work. Disadvantges (1) Instability. The success of a partnership business depends upon the mutual confidence of the partners. Whenever any differences arise among partners, they give rise to the dissolution of the firm. Similarly, retirement, death, insolvency or insanityofany of the partners leads to the dissolution of the firm. (2) Non-transferability of Interest. A partner in a partnership does not enjoy the privilege of transferring his interest to others without the consent of other partners. In times offinancial difficulty, a partner cannot take adavantage of transferring his ownership to others in return for money consideration.

Current Economic Scenario and Industrial Development

13

(3) Unlimited Liability. The liability of partners in a partnership organisation is unlimited and is both joint and several. This means, if the assets of the firm are not sufficient to pay off the debts, the creditor can either collect the debt from all the partners collectively or from each partner individually, depending upon the resources at the command of the partners. This discourages partners from undertaking new ventures or expansion of the firm. (4) Mutual Conflicts. Whenever any differences arise among partners, they lead to loss of trust and confidence. This may cause misunderstanding, thereby resulting in conflicts a nd disputes. Thus, a business that should be carried on smoothly will be conducted with friction and non-eo-operation among partners thereby putting an end to the partnership business. (5) Lack of Public Confidence. As a partnership business is controlled by only the partners themselves, it is not bound to publish its accounts or to furnish any returns to the government. So public do not enjoy confidence in a partnership if they want to provide any fixed deposits or other types of loans. 3. JOINT-STOCK COMPANIES Ajoint-stock company form of organisation was evolved with a view to overcome some of the disadvantages of the partnership such as lack of continuity, unlimited liability etc. and to meet the requirements of modern business such as large capital, professional managers, carrying on business on a large scale and so on. Haney has defined a joint-stock company as "a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership. A company may be defined as an artificial person recognised by law with a distinct name, a common seal, a common capital comprising transferable shares of fixed value, carrying limited liability and having a perpetual succession. Characteristics of Company Form of Organisation (1) Separate Legal Entity. A company is considered to be quite distinct from its members. In the eyes oflaw, it is a separate entity with a corporate status. Thus it can sue others and be sued by others. It cannot be seen or touched but its existence can be felt. (2) Limited liability. The liability of a shareholder is limited to the extent of amount remaining unpaid on shares held by him. This means, once he pays the whole amount on shares, he cannot be asked to bring further amount from his private property to meet losses and to payoff debts.

14

Industrial Management

(3) Perpetual existence. The company has perpetual succession as one of its distinctive features. It means the life of a company is independent ofthe life of its shareholders. Being a legal person, it will not die like a natural person. It is brought into existence by law and its life can be put to an end only by law. (4) Common seal. As a company is an artificial person it cannot speak or sign documents on its own. To facilitate entering into contract with outsiders, the company's common seal is affixed on all documents and to serve the purpose of evidence, two directors of company will sign such documents on behalf of the company. (5) Management and control. Unlike other forms of organisations discussed earlier wherein the business is controlled by the owners themselves, in a company form of organisation management is carried on by a group of elected representatives of shareholders. Although shareholders are the owners of the share capital of the company, they do not take direct part in the management of a company. (6) Transferability of shares. Shareholders of a public limited company are free to transfer their shares to anyone who is willing to buy them. By this process a shareholder can get back the value of his shares when he is in financial need. (7) Number ofMembers. The minimum number of members required to form a private limited company is two and seven in a public limited company. Whereas fifty members are fixed as the upper limit for a private limited company, there is no limit to the maximum number for a public limited company. (8) Accounts and Audit. The accounts and audit are to be maintained compulsorily in all companies. The accounts are to be prepared according to the requirements of the Companies Act and audited by an auditor of the company. (9) Excessive Government Control. A company is subject to 'excessive government control. They have to comply with various provisions of different Acts enacted by the Government. '!bey mustJllso furnish various particulars to Government and other government agencies from time to time. Types of Companies Companies can be classified into various types on the following

basis: (1) On the Basis ofIncorporation. Companies are classified into three types according to this basis. They are: . (a) Chartered Companies. Chartered companies are established by the issue of a special charter by the head of a country. Such companies are not very popular in modem days. Some examples of

Current Economic Scenario and Industrial Development

15

this type of companies are East India Company, Bank of England, Chartered Bank of Australia etc. (6) Statutory Companies. Statutory companies are formed by passing a special Act in Parliament. The functions of such companies are governed by the Act which brings them into existence. Some examples of such companies in India are the Reserve Bank of India, State Bank of India, etc. (c) Registered Companies. Registered companies are brought into existence by registering them under the Companies Act of 1956. A large number of companies formed in the country belong to this category. (2) On the Basis of Liability of Shareholders: Companies are classified into three types under this basis: (a) Companies with limited liability. The liability of shareholders of such companies is limited. Once the shareholders pay the full value of the share capital, they cannot be asked to contribute more to the company, even if the company fails. (b) Companies limited by guarantee. These companies are formed to promote certain activities such as art, science, sports, religion, cultural activities and so on. Under this type, the members give a guarantee to pay a certain sum of money if the company finds shorj;age of funds at the time of liquidation. (c) Unlimited liability companies. The liability of shareholders in these companies is unlimited as in the case of a partnership firm. Such companies are not found in the country today. (3) On the basis of public interest: According to this basis, companies are classified into three types: (a) Private Limited Company. The Companies Act of 1956, defines a private limited company as a company which by its Articles (i) restricts the rights of its members to transfer their shares in the company; (ii) limits the number of its members to fifty, excluding its present or past employees who are mem bers ofthe company; and (iii) prohibits any invitation to subscription ofits shares and debentures from the general public. (b) Public Limited Company. The Companies Act defines a public company as one which is not a private company. In other words, the members of a public company can freely transfer their shares. There is no upper limit to the maximum number and a public company can issue prospectus to public for subscription to its shares and debentures. (c) Government Company. A government company is one in which not less than 51% of the share capital is held by the Central Government or the State Government or partly by the Central Government or partly by the State Government.

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Industrial Management

(4) On the basis of Nationality: According to this basis companies are classified into the following two types: (a) National Companies. A national company is one which is incorporated within the boundaries of a nation. (b) Foreign Companies. A foreign company is a company which is incorporated outside India but carries on business in India through an agent. Formation of Companies (1) Promotion. The persons who take initiative in forming a joint-stock company are known as promoters. They conceive an idea to form the organisation, investigate the proposal and assembles all the requirements needed to bring the company into existence. They enter into a contract on behalf of the proposed company with others; such contracts are called preliminary contracts. (2) Incorporation. The procedure involved in registering the company with the Registrar of Joint Stock Companies is known as incorporation of a company. Before a company is incorporated, a prescribed blank application form supplied by the Registrar of Joint Stock Companies has to be filled in by the promoters. Along with this form, the following documents are to be submitted to the Registrar of Joint Stock Companies: (a) Memorandum of Association which includes the constitution and objectives of the company. (b) Articles of Association which contain the rules and regulations for internal management. (c) A written declaration by the Directors to become directors of that company and to act as such. (d) A written declaration by an advocate or Chartered Accountant certifying that the requirements of the Act have been complied with relating to registration. The Registrar shall go through the application and all the above-mentioned documents. Ifhe is satisfied with the contents as well as the registration fee paid, he will record in his register the name of the company. He will prepare a certificate known as Certificate ofIncorporation which bears the seal of his office and his signature. The Certificate ofIncorporation can be regarded as a birth certificate of the company. On its receipt a private limited company can start functioning. But a public limited company has to pass through two more stages discussed below. (3) Capital Subscription. At this stage the company takes the necessary steps to raise share capital by preparing and issuing a prospectus. Where the public do not come forward to subscribe to the

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shares, it undertakes to underwrite such shares. When the share money is collected, the company allots shares to the applicants. (4) Obtaining Certifu:ate of Commencement of Business. A Certificate of Commencement of Business is issued by the Registrar ofJoint Stock Companies. It is only after the receipt of this certificate can a company start functioning. For obtaining this certificate the following documents must be submitted to the Registrar: (a) A certificate declaring the collection of minimum subscription amount. Minimum subscription represents 5% of the nominal capital of the company. (b) A declaration that qualification share is subscribed to by every director. . (c) A declaration to the effect that no money is to repaid to the applicant by reason of failure to apply for or to obtain permission for shares to be dealt on any recognised stock exchange. (d) A statutory declaration either by one of the Directors or the Secretary that the above conditions have been complied with. Advantages of Joint-stock Company Form of Organisation (1) Availability of large amount of capital. A company is in a position to raise It large amount of capital by the issue of shares and debentures. It can also borrow funds from specialised financial institutions. (2) Economies of large-scale operation. As the activities of a company are undertaken on a large scale, it can derive economies in the areas of purchasing, production, marketing etc. (3) Transferability of shares. A shareholder can transfer his shares if he is not interested in the ownership of the company by selling it to others who are interested in such shares. (4) Limited liability. As the liability of shareholders is limited it gives them more courage to invest more of their savings in the capital of the company. (5) Diffused Risk. Whenever a company incurs any losses, it will be shared by all the shareholders, thereby reducing the burden of shareholders. (6) Stability. The life of the company is independent of the life of its shareholders. Even if all but one shareholder die, or become insolvent or insane, the company will not be liquidated. Members may come and members may go but the company will go on foreve.r. (7) Efficient Management. A company is managed by professional and well-paid managers. Naturally, they manage the affairs of

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Industrial Management

the company efficiently. The advantages ofdivision oflabouris available Wthe company form of organisation. (8) Social advantages. Some oftha social advantages of a jointstock company are as follows: (a) It offers employment opportunities to many people. (b) It produces and distributes goods which otherwise would have been imported. (c) It encourages saving habit and thereby induces the public to invest in the share capital of the company. (d) By publishing its accounts, it increases the confidence of the public in it.

Disadvantages (1) Diffl.Culty in formation. A company form of organisation involves too many legal formalities in its formation and functioning. It has to furnish a number of reports to the Registrar from time to time. (2) Oligarchic Management. The affairs of a company are managed by a group ofdirectors but not by the shareholders. It is said that the shareholders do nothing, know nothing and get nothing in a company form of organisation. (3) Lack ofpersonal motivation. In a company form of organisation, there is no direct motivation between the hard efforts and the benefit derived. The income generated by the efforts of employees belong to the shareholders. Hence very often the employees will not take much interest in their work. (4) Delay in Decision-making. Decisions are made in a meeting which involve more time as it requires advance intimation to all the members of the Board of Directors. Even in a meeting, decisionmaking involves more time as it takes time to-come to a consensus among the directors. (5) ReckleBB Speculation. The easy transferability of shares has resulted in rampant speculation on the stock exchange. This speculation degenerates into gambling if it is not controlled which is harmful to the society. (6) Social disadvantages of Joint Stock Companies. The social disadvantages of a joint-stock company are as fonows: (a) The company may misuse the share capital as it is a separate legal entity. As shareholders are not involved in the management ofa company, it is not possible for them to know how their money is utilised by the company. (b) The company form of organisation will result in the concentration of wealth and power in the hands of a few people.

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(c) It leads to monopoly and whatever prices that are fixed by the company have to be paid by the customers. Raisin, of Capital by a Company A company mainly raises its capital by the issue of shares and debentures. (a) Issue of Shares. A company raises its share capital by the issue of shares. Share capital is also known as owned capital. The share capital of a joint-stock company is divided into small denominations known as shares. Each share has a nominal face value. The capital raised by the issue of shares is used to acquire fIXed assets of the company.

Types of Shares (1) Equity Shares. Equity shares are also known as ordinary shares. The holders of equity shares stand last in the payment of dividend and repayment of capital at the time of winding up of the company. As they stand last in sharing the dividend, their share will be more because they get all the dividend that is left. over after paying the other types of shareholders. At the same time, they will be the losers because at the time of liquidation of the company if no assets. are available for distribution among the equity shareholders, they go without receiving their share of capital invested. The advantages of issuing equity shares are as follows: From the point of view of company (a) The company gets finance without offering any security to the equity shareholders. (b) It is available on a long-term basis. (c) There is no obligation to pay dividend by the company when it does not earn any profit. (d) Raising of more amount of equity share capital facilitates further raising of capital by the issue of debentures. From the point of view of investors (a) Investors get a high rate of dividend. (b) Appreciation in the valuation of shares will increase the value of their shares. (c) Investors can sell their shares if they are not interested in the shares of a company. Demerits of Equity Shares (a) The company may not get the benefits of trading on equity. (b) It may lead to overcapitalisation and this will have its disadvantages.

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Industrial MantJlfe1flent

(2) Preference Shares. The holders of preference shares enjoy two advantages over equity shareholders in respect of payment of dividend and repayment of share capital at the time of liquidation of the company. The dividend rate is fIXed on preference shares. The following are the different types ofpreference shares issued by companies: (a) Participating and Non-participating Preference Shares. A participating preference shareholder will share the surplus profit left over after paying equity shareholders, whereas non-participating shareholders do not enjoy this privilege of sharing the surplus profit. (b) Redeemable and Irredeemable Preference Shares. The redeemable preference shareholders will get back their share capital during the life time of the company, whereas the irredeemable preference shareholders will get their share capital only after the liquidation of the company. (c) Cumulative and Non-cumulative Preference Shares. The cumulative preference shareholders will get their arrears of dividend for those years in which they did not receive their dividend. The noncumulative preference shareholders will not enjoy this privilege ofreceiving arrears of dividend for the years during which the company did not declare a dividend. Adavantages of Preference shares: (a) From the point of view of the company, the burden to pay the dividend is less as it has to pay only a fixed rate of dividend. (b) The company need not offer any security while raising preference shares. (c) It facilitates trading on equity. (d) It is best suited to cautious investors who want to earn a higher income but who prefer to take very less risk. (e) Preference shares can be redeemed in times of availability of excess capital. Disadvantages (a) The preference shares carry only restricted voting rights. (b) Preference shares are more costly to finance when compared to debentures. (3) Debentures. When the company exhausts all the share capital, it can raise further amount of funds by issuing debenture capital. The term "debenture" represents a document issued by a company under its seal, acknowledging the debt due by it to the holders of debentures. Evelyn Thomas defines debenture as "a document under the company's seal which provides for the payment of the principal sum and interest thereon at regular intervals which is

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usually secured by a fixed or floating charge on the company's property and which acknowledges loan of the company." The following are the important features of debentures: (a) They carry a fixed rate of interest. (b) Payment of interest is obligatory whether a company earns profit or not. (c) Debentures are usually repaid during the life time of the company. (d) Security is mostly offered at the time of raising debenture capital. (e) Debentureholders constitute creditors of the company. (£) Debentureholders do not carry voting rights. Types of Debentures (a) Registered and Bearer Debentures. When the names and other particulars of debentureholders are recorded in a "Register of Debentureholders", it is known as Registered debentures. A Registered debentureholder can transfer his debentures only after fulfIlling the procedure laid down in the Articles of Association. In the case of bearer debentures no such register is maintained for recording the names and other particulars. They can be transferred by mere delivery without any intimation to the company. (b) Secured and Unsecured Debentures. When any security is offered to the debentureholders at the time of obtaining debenture capital, it is known as secured debentures. When no such security is offered, it is known as unsecured debentures. (c) Redeemable and Irredeemable Debentures. Redeemable det-p.ntures are repaid during the life time of the company whereas irrt.deemable debentures are repayable only when the company goes into liquidation. (d) Convertible and Non-convertible Debentures. Debentures which are convertible into equity shares after a given period of time instead ofredeeming them is known as convertible debentures. Those debentures which are not convertible into equity shares but are either retained as debenture capital or repaid, they are termed nonconvertible debentures. Advantages (a) Debentures are issued without the right to control the affairs of the company. (b) They facilitate the company to trade on equity. (c) Rate of interest is fixed which is less than the rate of dividend payable on preference shares.

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IndlUltrial Ma.n.agement

(d) This is more suitable for cautious investors who prefer a stable rate of return on their investment. (e) Debentures can be redeemed when excess capital is available. Disadvantages (a) It involves offering of a security to debentureholders. (b) Payment of interest to debentureholders is obligatory. (c) Debentureholders cannot control the affairs of the company. 4. CO-OPERATIVE ORGANISATION The earlier discussed forms of organisation aim at making the maximum amount of profit even at the cost of exploiting the customers. With a view to eliminating such exploitation by the capitalist forms of organisation, a cooperative form of organisation is set up. The main purpose of this form of organisation is to render service but not to earn profit. ·The International Labour Office defines a cooperative organisation as "an association of persons, usually 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 such undertaking." Characteristic Features of a Co-operative Organisation (a) Voluntary Association. It is an association of persons belonging to a particular community. Under this type of organisation nobody is compelled to become member and at the same time, no one is denied the right of becoming a member of the society. No distinction is made between caste, creed, sex, religion ofthe persons while admitting to the membership of the society. (b) Finance. The capital of a society is raised by the issue of shares. But the share capital is much less when compared to a jointstock company. (e) Management and Control. The affairs of a co-operative society is managed by the elected representatives of members who are known as a committee of management. (d) Disposal of Surplus. The surplus amount of revenue is not fully distributed as profit to the members of the society. It transfers 25% of its revenue to a general reserve and 10% for general welfare of the locality in which the society is functioning. The balance is distributed as profit to its members. (e) State Control. A cooperative society is governed by the Cooperative Societies Act, 1912. Besides, the co-operative form of

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oFpnisation is governed by the Co-operative Societies Acts as are enacted by the various State Governments. In addition to this, the society has to submit various documents to the Registrar of Cooperative Societies. (f) Service Motto. When compared to other forms of organisation, a co-operative form of organisation is formed to render service to its members but not to earn profit. (g) Corporate Status. A cooperative society assumes a distinct legal status after it comes into existence. That is to say, the members are considered to be quite separate from the society although they are the owners of the share capital of the society. (h) Tax Exemption. A co-operative society is exempted from paying tax to the government because it encourages the formation of a large number of societies. (i) Number of members. The minimum number of persons required to form a society is ten and there is no limit to the maximum. (j) Maintenance of Accounts and Audit. A cooperative society has to compulsorily maintain its accounts and they are to be audited by the auditor of co-operative societies. Types of Co-operatives (a) Co-operative Credit Societies. These societies are formed to promote the saving habit among members and to provide credit to needy persons at a reasonable rate of interest. (b) Consumers' Co-operative Societies. These societies are formed to provide good quality of goods at reasonable prices. By eliminating middlemen, it is possible to sell the goods at lower prices. (c) Producers' Co-operative Societies. These societies are established to provide the required raw materials, tools and equipments to their members to enable them to manufacture goods at a lower cost. Goods produced by the members are sold to the society at specified rates and',the society in turn sells the same in the market at the prevailing market prices. The profit earned by the society is distributed among the 'members at the agreed rules. (d) Co-operative Marketing Societies. These societies are formed to sell the produce of the members in the market at a reasonable price. The societies carry out the functions of standardisation, grading, packing etc. in respect of goods delivered to them by the members. The profits earned by the societies are distributed to their members according to the quantity and value of goods delivered by them to the societies. (e) Co-operative Housing Societies. These societies are formed to provide residential accommodation to members either on ownership basis or at reasonable rent.

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Advantages (1) Ease of Formation. Unlike a joint-stock company, a cooperative society is easy to form. It is neither expensive nor timeconsuming when compared to a company form of organisation. (2) Democratic Management. The society is managed by the elected representatives of its members. The committee of management is elected on the principle of "one-man one-vote." (3) Limited Liability. The liability of members in a co-operative society is limited. They cannot be asked to contribute any money if the society incurs any losses. (4) Scope ofInternal Finance. As the co-operative society transfers a minimum of25% of its earning towards the general reserve, it can be used to expand the activities of the society. (5) Continuity. As the co-operative soCiety is a distinct entity separate from its members, its life is not affected by the death, insolvency or insanity of its members. (6) Co-operation from Members. In a co-operative form of organisation, members voluntarily offer their services in performing the various activities such as accounting, purchasing, sales etc. (7) State Assistance. Very often the government provides assistance in respect of purchasing machineries on hire-purchase system, loan facilities, tax exemption etc. (8) No Credit Dealings. As a matter of principle, a sO'Ciety deals only on cash basis but not on credit basis. The questioO'-of incurring bad debts does not arise in this form of organisation. (9) Better Services. A co-operative offers better services to its members as for example the goods supplied are of a better quality and at reasonable prices. The unethical practices such as adulteration and blackmarketing are not possible in a co-operative form of organisation. Disadvantages (1) Limited amount of. capital. The amount of capital at the disposal of a co-operative society is very less because of the small denomination of the shares. With a small amount of capital, the volume of business carried out is also small. (2) Inefficient Management. As a society is managed by low-paid employees, it is not managed very efficiently. Further, in most cases, it is managed by members themselves who may lack business acumen. (3) Lack of Secrecy. The business secrets cannot be maintained beeause of numerous members dealing with the business. Further; the publication of its accounts reveals all the particulars of profit and its financial position to outsiders.

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(4) Slackness in business. The society does not function all throughtout the day. Sometimes, it works only for a ew hours in a day. Further, absence of competition makes it a weak form of 9rganisation. 5. PUBLIC SECTOR With the advent of the concept of socialistic pattern of society, Government is urged to playa dominant role in the industrialisation of the country. The Government has also realised its responsibility, paid much attention to the starting of public sector enterprises, with the following objectives: (a) To ensure rapid industrialisation (b) To minimise regional imbalances (c) To reduce concentration of economic power in a few hands, and (d) To create socio-economic infrastructure. The term Public Sector means State Capitalism. In other words, the undertakings will be fully owned by the Central Government or jointly by the Central and State Government or Governments or majority of the interest will vest in Government. A public sector can be organised into any of the three forms.

(A) DEPARTMENTAL UNDERTAKINGS Departmental undertakings represent the oldest form of organising and managing public enterprises. This form of organisation makes no distinction between traditional functions of the Government and Public enterprises. Under this form of organisation, business activities of public enterprises are conducted under the overall control of department of the Government. The department is entrusted to the Government officials having the necessary executive powers. Characteristics of Departmental Undertakings The following are the basic characteristics of departmental undertakings: (1) Public enterprise so organised operates as one of the several departments of the Government working under a particular ministry. (2) The department is controlled and managed by Government official acting as the executive head of the department, but subject to direct ministerial control.

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Industrial Management

(3) The minister at the top is responsible to the parliament for its overall working and operating results. (4) Public enterprises organised as departmental undertaking is financed out of annual appropriation from the Treasury as incorporated in the general budget of the Government. Similarly, earnings of the enterprise are paid into the Government treasury. (5) The departmental undertaking is a part of the Government machinery and is thus subject to same budget, accounting and audit controls and procedures as are applicable to other Government revenues and expenditures. (6) The enterprise so organised is manned by civil servants who are subject to civil service rules. (7) A departmental undertaking is not a separate entity. It is part of the Government machinery and thus enjoys certain legal immunities. Thus, no suit can be filed against departmental undertaking without prior consent of the Government. Railways, Postal and Telephone Services, Broadcasting and Ordnance factories are the major examples of manufacturing units organised on the pattern of Government department. Merits (a) Departmental undertakings ensure more effective control over public enterprises. Control is more direct and centralised in this form of organisation of public enterprises. Accountability of the enterprise to the parliament through the Ministry concerned is complete and cannot be avoided. (b) Employees of the departmental undertakings are civil servants working under the control of the Ministry. Thus, such employees are likely to be more loyal and responsible. (c) Misuse of public money is more effectively checked. Expenditure and incomes of departmental undertakings are subject to rigid accounting, audit and budget procedures and control. (d) Revenues of the departmental undertakings form part of the treasury and thus can be used to finance other developmental activities of the Government.

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Demerits (a) lack of flexibility is one of the serious problems faced by departmental undertakings. Officers responsible for management of public enterprises so organised have to operate under strict accounting and audit procedures. Recruitment, selection and remuneration of personnel is also governed by rules and proceduf'(.s with regard to personnel matters. (b) Lack of initiative is anoth~r drawback of departmental undertakings. All details of public enterprise so organised are subject to very minute scrutiny and debate both inside and outside the parliament. This kills initiative on the part of departmental managers. (c) Civil servants responsible for management of departmental undertakings lack business acumen. They are better qualified and temperamentally better suited to run Government activities than to manage and control business enterprise. (d) Red-tapism and delays are glaring drawbacks of departmental undertakings. Administrative formalities are too many and so rigid that prompt decision making is initially impossible. (e) Departmental undertakings also suffer from lack of stability in their policies. Change of political party in power or change of minister may cause change in existing policies of the undertakings. (f) Civil servants and bureaucrats manning departmental undertakings do not show reasonable courtesy to consumers and the public. (B)

PUBLIC CORPORATION

Public corporation or statutory corporation is another important form of organisation for public enterprises. Public corporation is established by special act of legislative body. It is defined as a body corporate established by special act of parliament or legislative assembly. The Act creating it describes the powers, duties, scope, and innovatives of the enterprise. Being a corporate entity, public corporation enjoys a perpetual succession and has a common seal.

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Industrial Management

Characteristic Features of Public Corporation (a) Public corporation is brought into existence by special Act of parliament or state legislature. The Act creating it defines the rights, duties, and immunities of public corporations. (b) Unlike departmental undertaking, public corporation is a separate corporate entity with perpetual succession and common seal. It can enter into contracts in its own name. It can sue and be sued. Special permission of the Government is not required to file a suit against the public corporation. (c) Public corporation is wholly owned by the state. It means that the capital of public corporation is wholly or mostly subscribed by the Government. (d) Being a legal person public corporation is managed by Board of Directors who are nominated by Government. (e) Public corporation enjoys greater administrative autonomy. It is generally free from political and parliamentary interference. (f) Public corporation is free to manage its finances. In addition to funds provided by the Government, public corporation can also raise funds from the market by way of loans as permitted by the Act under which it is incorporated. (g) Employees of the public corporation are not civil servants. The corporation as a public enterprise frames its own rules, procedures and policy regarding personnel matters . .(h) Public corporations runs its operations consistent with business considerations. It is often required to justify its operations by earning reasonable profits. (i) In spite of autonomy in administrative, financial and personnel matters, public corporation is still accountable to parliament. The annual report on its working and audited accounts are required to be presented to parliament. Merits (a) Public corporation enjoys flexibility and initiative in its working. (b) Public corporation does not suffer from the evils of redtapism and strict adherence to rigid rules and procedures.

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The result is that it can take prompt decisions and initiate quick action for efficiently managing its affairs. (c) Financial autonomy· provides financial flexibility. State ownership and resulting public confidence allow public corporation to raise funds at relatively cheaper rates. (d) Since public corporation enjoys freedom within limits with regard to selection, remuneration and other personnel matters, it can offer competitive and favourable terms of employment to attract intelligent, promising and professional personnel to manage its affairs more efficiently. . (e) The Government may nominate representatives of different interest groups on the board of directors of public corporation and thus safeguard their interests and protect them from exploitation. (f) Public corporation operates on the principles of promoting public interest and not for maximisation of profits by following certain unwarranted trade practices. Thus, this form of organisation ensures working of the undertaking on business principles consistent with public interest. It is for this reason that Herbent Morr;ison describes public corporation as "a combination of public ownership, public accountability and business management for public ends." Demerits (a) In a number of cases public corporations do not work under competitive environment and are not shaken by fear of losses because these are made good by Government subsidies. The result is that commercial principles are overlooked in their working. (b) Autonomy of public corporations prompts top level managerial personnel to indulge in undesirable practices and thus abuse autonomy of the enterprises. (c) Government Company: According to Indian Companies Act 1956, a Government company means any company in which not less than 51% of the paid-up share capital is held by the Central Government or by any State Government or Governments or partly by the Central Government and partly by one or more of the State Governments and includes a company which is a subsidiary of Government company as thus defined.

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Industrial Management

Characteristic Features of a Government Company (a) Unlike Departmental undertaking or public corporation, Government Company is formed under Indian Companies Act 1956. It is like forming any other company in the private sector. (b) A large percentage of share capital is held by the Government, either Central or State. (c) Government company is a body corporate with perpetual succession and common seal. It can make agreements, acquire property in its name and sue or be sued. Employees of Government company are not civil servants. (d) Government company is free from strict procedures and rigidities as in the case with departmental undertakings. (e) Being a separate legal entity created under Companies Act, Government Company functions independently and operates with administrative and financial autonomy. (f) Government company is subject to ministerial control. The minister concerned may issue necessary directions and seek any information from the company.. Advantages (a) Government company enjoys more initiative and freedom in managing affairs of the enterprise. It is relatively more free from time-consuming regulation. (b) It enjoys maximum flexibility in carrying on its operations. Within the provisions of Articles and Memorandum of Association, and Company Law, a Goyernment company is free to make any changes in its activities. If any of the provisions of Companies Act create problems in efficient and smooth management of the enterprise, the Government, through notification in the official Gazette may exempt the company from application of such provisions. (c) A Government company is highly suitable to establish business enterprises in collaboration with foreign investors. Thus, managerial skill and technical know-how of private sector can be successfully collaborated with the public enterprise when organised as a government company. (d) Government company enjoys financial autonomy and can thus operate on commercial basis.

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Disadvantages (a) Autonomy of Government company is more in name than a practical reality. This happens because Government being the sole or major shareholder in the company can dictate its terms. Appointment of directors is at the mercy of political leaders representing party in power. Thus, the enterprise is not free from political interference. (b) For a number of matters, powers of the Board of Directors of Government company are subject to approval of the concerned ministry. This tends to curtail freedom of Government company. (c) Parliamentary control over public enterprises organised as Government company is ineffective. Placing annual report on working of the enterprise in both the Houses of parliament is too inadequate to provide for effective parliamentary control over Government company. (d) Government company creates constitutional responsibility of a state enterprise. Since Government is practically the sole shareholder in Government company provisions of Companies Act are more or less a fiction in relation to public enterprises so organised.

6. JOINT VENTURE A joint venture is a temporary partnership between two or more persons to undertake a particular business and to share the profit or loss arising therefrom. Whenever a businessman feels shortage of either funds or business skill or whenever he wishes to spread the risk involved in an isolated transaction, joins hands with other businessman. Such transaction may relate to construction or contract business, purchase and sale of properties and stocks of liquidated companies, underwriting the shares of joint stock companies etc. Joint Ventures can be started by co-venturers belonging to the same country or different countries. Features of Joint Ventures (1) Two or more individuals or business organisations join together for a venture. There is an agreement between them. (2) Generally they do not have a firm name. (3) Their relation comes to an end on completion of the venture.

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Industrial Management

(4) Profit' or loss is shared between the co-venturers in the agreed ratio. Differences between Joint Venture and Partnership Firm (1) A partnership has a firm name, whereas a joint venture

has no firm name. (2) Partnership is for longer duration, whereas joint venture is for a short duration. (3) There is a limit on maximum number in a partnership firm, whereas there is no such upper limit in a Joint venture. (4)' In a partnership, accounts are finalised at the end of each year. In a joint venture accounts are finalised at the end of a venture. Joint Ventures Abroad Joint ventures are undertaken when the Indian Government and the Government of the foreign state come together and identify areas wherein the two can mutually help each other to benefit mutually. The areas where such joint ventures could be undertaken are identified through the trade and industry delegations of the two countries. The technological and scientific advances in India place it in a favourable position to negotiate setting up Joint venture abroad. Such ventures provide an outlet for the transfer of Indian technology and expertise and yield valuable foreign exchange.

Benefits of Joint Ventures 1. With the liberalisation and globalisation of Indian Economy, Joint Ventures constitute a major method to foster and promote economic cooperation. Economic cooperation through Joint ventures can help in achieving a greater specialisation and diversification of productive network. 2. It helps in expansion of international trade based on competitive and absolute advantage resulting in welfare benefits in terms of higher income among nations. 3. Establishment of Joint ventures also helps the investing country. Besides enabling it to earn foreign exchange by way of dividends, royalties, technical know-how fees it is an important instrument of export promotion.

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1.2 SIZE OF A BUSINESSJINDUSTRY Meaning of Size of a Business or Industrial Unit The size of a business unit refers to the scale of its organisation and operations. Since the efficiency and profitability of a concern depends among other things on its size, it is one of the decisions made by an entrepreneur establishing a new enterprise. There are two options before an entrepreneur as regards the size of business with which he can start a business, viz., small size and large size. It is always better to start a small sized business initially and expand into large sized business eventually. However, the industrial revolution definitely put a premium on large size. The new inventions under the revolution made necessary for goods to be produced on a mass scale. This could be done through firms and plants of large size. In this connection, Sargent Florence observes "There are logical reasons for supposing that granting the advantages of mechanic and human speciaJisation, large scale production results in maximum efficiency." This is because of a number of economies, viz., economy in production, marketing, finance, management etc. will arise from large-scale operation. Large-scale Industries Large-scale industries are industries which have huge capital investment of crores of rupees and carry on production on a largescale on modern lines. Examples of large-scale industries are iron & steel, ship-building, sugar, cotton textiles, jute, heavy engineering, machine tools, fertilizers, cement, automobiles, aircraft, heavy electricals, coal-mining, petro-chemicals, electronic goods etc. Medium-sized Industries These are the industries which fall in-between large-scale and medium-scale industries. In other words, those industries which can neither be classified as large-scale nor small-scale industries are classified into medium-sized industries. Small-scale Industries Small-scale industries can be defined either from the point of view of the number of workers employed or from the point of view of the capital investment on plant and machinery. From the point of view of the number of workers employed a small-scale industry can be defined as an industry which employs less than 50 workers, when power is used, or less than 100 workers, when power is not used. This definition is not popular these days. The most widely

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Industrial Management

accepted definition is from the point of view of capital investment on plant and machinery. According to the latest definition given by Government of India, the small-scale industry is one which has a capital investment on plant and machinery not exceeding Rs. 60 lakhs. Small-scale industries can be further classified into the following types:

(a)

Cottage Industries

Cottage industries or village industries are industries which are carried on by artisans and craftsmen in their own cottages with the assistance of their family members. These industries use simple tools and local resources and produce traditional goods for local markets. These industries in India are mainly concentrated in rural areas. Examples of cottage industries are toy-making, coirmaking, basket-making, carpet-making, rope-making, wood-work, pottery, hand-loom weaving etc. (b) Agro-Industry Agro-industry is an industry which is related to agriculture. They include (i) industries which obtain their raw materials from agriculture, e.g., sugar industry, oil mill, Jute industry, tobacco industry (ii) industries which produce the requirements of agriculture, e.g., industries making farm machines, tools and implements, industry producing pesticides and insecticide and (iii) activities which are related to agriculture, e.g., dairy industry, poultry-farming, sericulture, etc.

(c) Ancillary Industry Ancillary industries are industries which manufacture the spare parts, components etc., required by the large industries. As per the revised definition given by the Government ancillary industries are industries which have a capital investment on plant and machinery not exceeding Rs. 751akhs and produce spare parts, components etc., required by the large industries.

1.3 STATUS OF INDUSTRIAL DEVELOPMENT PRIOR TO CURRENT ECONOMIC REFORMS The status of industrial development prior to current economic reforms may be summarised under the following points: (1) Manufacturing industries contributed negligible percentage

of the total national income of the country.

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(2) The employment opportunities generated by the industries were very meagre. (3) New type of industries involving modem technology such as electronics, drugs and pharmaceuticals, heavy electricals, heavy engineering etc. were not found in large numbers in private sector. (4) There were many consumer goods industries like sugar, cotton textiles, jute etc. Even these consumer goods industries were not large in number. (5) Cottage and small-scale industries received high priority when compared to large-scale industries. (6) The amount of capital invested in the industries were from our own country. Foreign capital investment was not that encouraging. (7) The domestic industrial production was not sufficient for the people of India. So, the country had to depend upon imports from other countries. (8) Because of lack of modem technology, the quality of the products was not good compared to the products of other countries. (9) Because of rigid control and Government interference, the industries did not receive much encouragement all over the country. (10) Because of restrictions imposed by the Government and for lack of competitiveness, the market for goods was confined to our country. (11) There was lopsided development of industries. There was imbalance between consumer goods and capital goods industries. The number of consumer goods industries was far greater than that of capital goods industries. (12) Infrastructural facilities such as transport, communication, power supply was inadequate for the proper functioning of the industries.

1.4 ESSENTIAL FEATURES OF CURRENT ECONOMIC REFORMS Need for the New Economic Reforms Indian Economy has been facing one or another type of crisis during 5 year plan. Sometimes there was food crisis on account of unprecedented drought, or energy crisis, or depression in industry

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or hyper-inflation, or balance of payments crisis etc. In spite of several limitations and constraints the Government managed to overcome these crisis. But to believe that it has finally resolved a particular crisis was a folly on the part of the Government. These crisis went on mixing up with each other and resulted into a grave economic crisis, also known as "Macro-Economic Imbalance." Economic crisis is identified in three forms, viz., (a) fiscal crisis, (b) inflationary crisis and (c) balance of payment crisis. (a) Fiscal Crisis: Fiscal crisis refers to disequilibrium between the revenue resources of the Government and its expenditure. One could see the fiscal crisis emerging from the third year of the Seventh Plan. The actual deficit financing during the 7th Plan was Rs. 38228 crores as against a stipulated level of Rs. 14,000 crores. Fiscal crisis could be seen as mounting fiscal deficit of the government. In 1999-2000, the fiscal deficit was 5.5,% of the GDP, while in 1990-91 it was only 3.3%. (b) Inflationary Crisis: While rising prices is an essential feature of a developing economy, they create difficult problems for the economy, particularly when the level of per capita income is low and there are wide disparities in the distribution of income and wealth. However owing to recession prevailing all over the world, the inflation rate has come to a very low level (5.5% in the first of 2003). (c) Balance of Payment Crisis: The balance of payment crisis had also started at the beginning of the 7th Plan. The 7th Plan had estimated a balance of payments deficit of Rs. 20,000 crores, but the actual deficit was Rs. 38,079 crores. The main reason for the balance of payment deficit is the deficit in the balance of trade. The Gulf-war aggravated the balance of payment crisis. The growth rate of Indian exports was showing a declining trend. NRI remittances had declined considerably and the most serious problem was the fall in India's credibility in the international market. The various aspects of Economic reforms are: (1) Globalisation of Economy and Trade Globalisation means different things to different people. To some it means selling in the world market, to some others it means drawing ideas from the global arena and to yet others it means a standardisation of processes and products. Globalisation refers to

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the process of integration of the world into one huge market. Such unification calls for removal of all trade barriers among countries. According to OECD (organisation for Economic Co-operation and Development) "Globalisation of industry refers to the transborder operations of firms undertaken to organise their development, production, marketing and financing activities." At the company level globalisation means two things: (a) The company undertakes to manufacture in different localities around the world. (b) It also means ability to compete in domestic market with foreign competitors. In popular sense globalisation refers mainly to multiplant operations. A company which has gone global is called a multinational company or a transnational company. Such a company takes the benefit of foreign technology, foreign capital, foreign market and foreign raw material.

Features of a Global Company (1) It is a Conglomerate of multiple units located in different parts of the globe but all linked by common ownership. (2) Multiple units draw a common pool of resources such as money, credit, information, patent, trade names and controls system. (3) The units respond to some common strategy. Implications for Indian Industry Globalisation has several implications for Indian industries. For a long time, Indian industries exhibited such characteristics as high cost, low productivity, outdated machinery, outdated technology, inferior quality, high sickness and very low competitive spirit. With all these, industrialists were still making money because of protected environment. But environment in future will not be the same owing to economic reforms and globalisation. The present day business is oriented towards such concepts as competitiveness, efficiency, profitability, technology upgradation, foreign capital etc. globalisation shall herald the following challenges to our industry. (1) Customer satisfaction has been the greatest of the casualities in our country. This cannot continue. The manager must think of offering quality goods at reasonable prices to the customer. (2) Attitude of Indian businessmal'l must change. He must loo~ beyond the boundaries of the country and set up own enterprises or 'partnerships with other companies in overseas market.

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(3) Improve the quality of products to international standards. Global standards, quality certification and testing are a must. (4) The companies must resort to total quality management. (5) Globalisation means more markets for our products. We must seize the opportunity and export our products on a large scale. (6) With the increase in foreign investment from 40% to 51%, the Indian business must exploit this opportunity. Hindrances to Globalisation The Indian business suffers from a number of problems in respect of globalisation of business. These problems are as follows: (1) Government policy and procedures: Government policy and procedures in India are among the most complex, confusing and cumbersome in the world. Even after the much publicised liberalisation, they do not present a very conducive situation. (2) High Cost: High cost of many vital inputs and other factors like raw materials and components, power, finance, etc. tend to reduce the international competitiveness of the Indian business. (3) Poor Infrastructure: Infrastructure in India is generally inadequate and inefficient and therefore very costly. This is a serious problem affecting the growth as well as competitiveness.

(4) Obsolescence: The technology employed, mode and style of operation etc., are in general, obsolete and these seriously affect the competitiveness. (5) Resistance to change: There are several socio-political factors which resist change and this comes in the way of modernisation, rationalisation and efficiency improvement. Technological modernisation is resisted due to fear of unemployment. The extent of excess labour employed by the Indian Industry is alarming. Because of this labour productivity is very low and this in some cases more than offsets the advantages of cheap labour. (6) Poor quality image: Due to various reasons, the quality of many Indian products is poor. Even when the quality is good, the poor quality image India has becomes a handicap. (7) Small Size: Because of the small size and the low level of resources, in many cases Indian firms are not able to compete with

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the giants of other countries. Even the largest of the Indian companies are small compared to the multinational giants. (8) Growing Competition: The competition is growing not only from the firms in the developed countries but also from the developing country firms. Indeed, the growing competition from the developing country firms is a serious challenge to India's international business. (9) Trade barriers: Although the tariff barriers to trade have been progressively reduced because of GATTIWTO, the non-tariff barriers have been increasing, partially in the developed countries.

Factors Favouring Globalisation Though there are several obstacles to India's globalisation, there are also a number of favourable factors for globalisation of Indian business. They are as follows: (a) Human Resources: Besides low cost of labour, there are several other aspects of human resources to Indian's favour. India has one of the largest pool of scientific and technical manpower. The number of management graduates is also increasing. It is widely recognised that given the right environment, Indian Scientists and technical personnel can do excellently. (b) Growing Entrepreneurship: Many of the established industries are planning to go international in a big way. Added to this is the considerable growth of new and dynamic entrepreneurs who could make a significant contribution to the globalisation of Indian business. (c) Niche Markets: There are many marketing opportunities abroad present in the form of market niches. Several Indian companies have become very successful by niche marketing. (d) NRls: The large number of non-resident Indians who are resourceful - in terms of capital, skill, experience, exposure, ideas - is an asset which can contribute to the Globalisation of Indian business. (e) Economic liberalisation: The economic liberalisation in India is an encouraging factor of globalisation. The delicensing of industries, removal of restriction on growth, opening up of industries earlier reserved for the public sector, import liberalisation, liberalisation of policy towards foreign capital and technology etc. could encourage globalisation of Indian business.

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(fJ Competition: The growing competition, both from within the country and abroad, provokes many Indian companies to look to foreign markets seriously to improve their competitive position and to increase the business.

(2)

Free Flow of Capital and Technology Foreign investment is viewed as a means for transfer of technology. Foreign investment is allowed where it is accompanied by transfer of technology needed by the country and in export oriented ventures. The normal ceiling for foreign investment is 40% of the total equity capital. However, in certain cases the upper limit can be relaxed. For example, for wholly export oriented units even 100% foreign equity can be considered. Investment by Non-resident Indians With the twin objectives of developing the Indian economy and also providing"for a reasonable rate of return on investments by non-resident Indians, the Government has extended certain special facilities to non-resident Indians on a repatriable (act of compensating for loss) as well as non-repatriable basis. According to this scheme, non-resident Indians can invest upto 74% of the equity capital with full benefits of repatriation in priority industries. In other industries, investment can be made provided 60% of output is exported (75% in the case of industries reserved for small-scale industries). Forms of Foreign Investment (a) Investment in Government Securities or Units: Nonresidents of Indian origin are permitted to invest in Government Securities, National Savings Certificates and Units of the Unit Trust of India by remittance from abroad or out of funds held in non-resident external account. Interest or dividends on securities or units on such investment can be credited to the non-resident external accounts freely.

(b) Investment in Industry: Non-resident of Indian origin can invest in new issue of public or private companies engaged in any business (except real estate business) upto 100% ofthe issued capital without any obligation to associate resident Indian participation in equity capital at any time. This can be made either through stock exchange or direct deposits with companies. (c) Investment in electronic industry: The Government ofIndia has introduced a new scheme under which non-residents of Indian

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origin who are retaining for settlement and are desirous of setting up specified electronic industries in India are given a number of facilities, provided they have a minimum of 20% share in equity capital of the company. (d) Fresh Investment in Companies: Non-residents of Indian origin as well as companies and other corporate bodies owned to the extent of atleast 60% by the non-residents of Indian origin, can invest in the new issues of new and existing companies upto 50% of the total capital issued. Investment in companies, other than through the issue of prospectus is restricted to 40 lakhs. (e) Portfolio Investment: Non-residents ofIndian origin as well as companies and other corporate bodies owned to the extent of atleast 60% by the non-residents of Indian origin can make portfolio investment in shares quoted on stock exchanges in India with full benefits of repatriation of capital invested and income earned thereon, provided the shares are purchased through stock exchange. (/) Investment in Priority Sector and Export-oriented Units: Non-residents of Indian origin as well as companies and other corporate bodies owned atleast 60% by non-residents of Indian origin can invest upto 74% with full repatriation benefit of capital invested and income earned thereon, in any of the priority industries including hotel industry.

(g) Investment in Free Trade Zones: Two free trade zones, one at Kandla and other at Santa Cruz, provide vast opportunities for investment by non-residents of Indian origin. (h) Acquisition of Immovable property: Non-residents ofIndian nationality can acquire immovable property in India without any permission of the RBI. They are normally allowed to acquire only one such property for residential purpose. (3) Transfer of Technology Transfer of Technology between firms in different countries is an important means of globalisation. Transfer of Technology to a company's subsidiary in other countries is also a means of earning and transferring royalty income from the foreign country to the parent company. Broadly, there are two forms of transfer of technology, viz., internalised and externalised forms of technology transfer. Internalised forms refer to investment associated transfer of technology, where control lies with the technology transferor.

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Externalised forms refer to all other forms, such as joint ventures with local control, licensing strategic alliances and international subcontracting.

Levels of Transfer of Technology There are four levels of Transfer of technology. They are as follows: (a) Operational level: At the bottom level are the simplest ones, needed for operating a given plant; these involve basic manufacturing skills, as well as some more demanding quality control, maintenance and procurement skills. (b) Duplicative level: At the intermediate level are duplicative skills, which include the investment capabilities needed to expand capacity and to purchase and integrate foreign technologies. (c) Adaptive level: At this technological self-reliance level, imported technologies are adapted and improved and design skills for more complex engineering learned. (d) Innovative level: This level is characterised by innovative skills, based on formal R&D, that are needed to keep pace with technological frontiers or to generate new technologies. Channels of Technology Flow The most important channels for the flow of technology are foreign investment and Technology Licence Agreements and Joint Ventures. (a) Foreign Investment: Traditionally, the flow of technology to developing countries has been an integral part of direct foreign investment. Multinational corporations and other firms have resorted to foreign direct investment for a variety of reasons like protection and development of foreign markets, utilisation of local resources (in the host country) including cheap labour, overcoming or lessening of the impact of tariff restriction and tax laws. The flow of sophisticated technology, in particular, has thus been associated with direct investment. (b) Technology Licence Agreement and Joint Ventures: Technology transfer has been taking place on a significant scale through licensing agreements and joint ventures. There has been a fairly rapid growth of joint ventures, encouraged by Government restrictions on foreign investment and foreign trade. When foreign capital participation on joint ventures is below 50%, technological agreements assume considerable significance.

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Methods of Technology Transfer Transfer of technology takes a variety of forms depending on the type, nature, and extent of technological assistance required. The following are the important methods of technology transfer: (a) Employment of Technical Expert or Training: Fairly simple and unpatented manufacturing techniques/processes can be transferred by importing the requisite training to suitable personnel. Alternatively, such technology can be acquired by employing foreign technical experts. (b) Contracts for Supply of Machinery and Equipment: Contracts for supply of machinery and equipment, which normally provide for the transfer of operational technology pertaining to such equipment, is often quite adequate for manufacturing purposes not only in small-scale projects but also in a number of large scale industries where the nature of technology is not particularly complex. (c) Licensing Agreements: Licensing agreements, under which the licensor enters into an agreement with a licensee in another country to use the technical expertise of the former, is an important means for the transfer of technology. Licensing agreements are usually entered into when foreign direct investment, is not possible or desirable. (d) Turnkey Contracts: Transfer of complex technology often takes place through turnkey project contracts, which include the supply of such services as design, creation, commissioning or supervision of a system or a facility to the client, apart from supply of goods. (4) Favourable Import.Export Policies (1997·2002) Trade Policy reforms embodied in the Exim Policies (ExportImport Policies) since 1992 have sought to address the tasks of phasing out various impediments to trade and providing an environment conducive for increased exports. The Exim Policy 19972002 while building upon the gains made earlier continued the process of trade liberalisation and procedural simplification. In light of the slowdown in exports during the current year, various measures were announced in August and September 1998: (a) In order to ensure export competitiveness, exports under all export promotion schemes were exempted from the applicability of the Special Additional Duty (SAD) of 4% introduced in the Union Budget for 1998-99. Similarly,

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SAD is taken into account for establishing duty drawback rates. (b) The scope of Export promotion capital goods scheme at zero duty has been extended further to certain specified bio-technologies and small-scale engineering industry. (c) Manufacturer-exporters with unblemished record have been permitted to furnish a legal undertaking instead of bank guarantees against import of duty-free raw materials. (d) Reduction in interest rate on preshipment and postshipment export credit in rupees from 11% to 9%. (e) Payment of interest on dues to exporters for delays in duty drawback/refund of duty beyond 2 months. (f) Simplification of bond-furnishing procedure for exporters. (g) Promotional measures/procedural changes like extension of tax holiday for export-oriented units to 10 years, subcontracting facility for Domestic Tariff Area (DTA) and permission to set up private software technology parks. (h) Hotels, travel agents, tour operators and tourist transport operators have been made eligible for recognition as Export House/Trading House/Star Trading House/Super Star Trading House on earning free foreign exchange at a lower threshold limit. (5) Free Market Conditions For a smooth functioning of an industry the products manufactured by it requires efficient marketing both in India and abroad. Free marketing is a term used to indicate where there are no restrictions in marketing the products with a view to create free market conditions. The New Trade Policy was formulated in July 1991 to bring about sweeping changes in the existing trade scenario of the country. It makes a radical departure from the past system of controlled trade by giving a strong market-orientation to the trading in imports and exports. There are three important features envisaged in the new trade policy. They are as follows: (a) Priority for Exports: The policy is set for making exports a prominent aspect in the new strategy of managing balance of payments and through it influencing the growth of the economy. This is as compared to the strategy of import-substitution which has so far dominated the scene. Now imports will be dependent upon the availability of foreign exchange earned largely from exports.

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Limiting Imports: The new trade policy aims at limiting imports to the availability of foreign exchange earned through exports. The imports are linked with and limited to the availability of foreign exchange at the market rate. The new trade policy also has restricted imports freely as was so before. For this reason the new trade policy aims at the production of import-substitutes which can be efficiently produced. (b) Market Orientation of Trade: The second feature of new Trade Policy is to conduct trade in terms of market prices and its profitability is to be determined by market prices and market related gains or losses. This feature is the outcome of liberalisation and removal of many control measures and restrictions imposed on exports and imports. For this reason, licence need not be obtained for importing materials which can be used for production in order to export them.

Another aspect of marketisation of the trading activities is the easing of the rules and reduction of paper work required for dealing with the Government. Thus, Government interference in the export trade is minimised. To reduce delays, the time limit has been set for the clearance of applications wherever they are involved. Procedures have also been simplified to ensure quick customs clearance.

(c) Self balancing mechanism: The new trade policy provide an equilibrating system, whereby trade in goods and services get equated. This helps in avoiding the balance of payments deficit. The self-balancing mechanism has been provided in three stages. The underlying principle is that imports should be allowed to the extent foreign exchange, earned through exports is available at the market rate of exchange. The first to be mentioned is the Exim Scrips Scheme, which was introduced in August 1991 and abolished in early 1992. Under this scheme, the exporters were entitled to sell 30% of the foreign exchange earned by them in the market. The importers could buy this foreign exchange at the market rate to finance those imports which were permitted by the Government. In this way the importers got linked to and were limited by foreign exchange made available in the market. This has the balancing property in so far as a part of the imports was limited to the size of foreign exchange made available in the market.

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In the second stage, a new scheme, called partial convertible rupee system was introduced in early 1992 and abolished in March 1993. This scheme replaced the Exim Scrips Scheme. This scheme, like the first scheme retained its essential element, namely, the link between exports and imports. Under this system all receipts from foreign trade were, as before continued to be surrendered to the authorised dealers. 60% of these was paid in rupees at the market rate and the 40% at the official rate. The Government would use 40% of foreign exchange, thus received for meeting the specific import need of its department, for import of essential commodities and for meeting partly the needs of licensed imports. The third stage is termed as fully convertible rupee system which was introduced in March 1993. The entire foreign exchange earned by the exporter are now converted into rupees at the market rate. All imports at present are required to be financed by the purchase of foreign currency at the market rate. This limits the value of imports to the value of foreign exchange available at the market rate. As such- the system provides a balancing mechanism whereby imports and exports are balanced. (6) Reforms in Banking and Financial Institutions The Indian financial system has grown over the years and banking system has shown greater resilience and expanded its infrastructure at a fast pace; meeting, in the process social goals. Notwithstanding the tremendous gains brought about by nationalisation of banks profitability, capital adequacy and the financial position of public sector banks have fallen well below international standards. Among .the factors which have exerted financial pressure on all banks, the following deserve particular mention: (a) A large volume of bank resources has been statutorily pre-empted for investment in Government and other securities. While these are safe assets, their yield has not been remunerative. (b) Banks have been required to lend a substantial portion of their credit to designated priority sectors at subsidised rates of interest. In addition, the administrative and default costs associated with such lending have been very high. (c) Some of the branch expansion required by the banks was not economically viable.

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(d) Profitability ranked low in the goals set for bank managements. This prevented banks from building up adequate capital and reserves through internal accruals, while budgetary pressures prevented adequate capital subscription by the Government. (e) Deterioration in the quality of the loan portfolio, resulting in accumulation of a large proportion of non-performing assets. In order to revitalise the banking system, the financial sector reforms have stressed the following priority areas: (a) Removing the external constraints operating on the profitability of banks. (b) Improving the financial health of banks and introducing greater transparency in their balance sheets and (c) Injecting a greater element of competitiveness in the system. Narasimham Committee Report on the Financial Sector The Narasimham Committee which was set up to consider all relevant aspects of the structure, organisation, functions and procedures of the financial system submitted its report in November 1991. The Report, besides taking a close look at the banking and financial system in India has come out with several suggestions and recommendations. The major recommendations of the Narasimham Committee Report are as follows: (a) Reputed banks may enhance capital through public issues. (b) No bar on entry of new private sector banks. (c) Four-tier banking sector. (d) Abolition of dual control. (e) Depoliticisation of chief executive's appointment. (£) Lowering Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR). (g) Phasing out concessional interest rates. (h) New system for provision of debts. (i) Transparent balance sheets. (j) Special tribunal for recovery of dues. (k) Scrapping of branch licensing. (l) No further nationalisation of banks.

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(m) RBI should be more liberal in allowing foreign banks to open branches. Some of the above-mentioned financial sector reforms are explained below:

Financial Strengthening of the Banks This includes the following: (a) Transparency in statement of accounts: Transparency in statement of accounts was one of the first reform measures introduced in 1991. This has been done to provide a realistic picture of the financial position of banks. The major objectives behind the transparency norms are as follows: (i) To overcome the process of window dressing of the final accounts by the banks in India. (ii) Banks the world over have already moved towards greater transparency in their financial operations either on their (lwn or under legal compulsion. These banks expect their l~ldian counterparts to open up by disclosing more details about their financial health in view of the globalisation of the Indian banking industry. (iii) The balance sheet and profit and loss account published should contain important details of their working to facilitate fuller and more meaningful analysis. (iv) To bring to light, such aspects as adherence to international norms of capital adequacy and provisioning. A new format has been devised and the banks have been asked to adopt this for the year ended 1991-92. The new format provides for greater disclosure under income, expenditure, assets and liabilities of banks. (b) Capital Adequacy: Capital adequacy, also known as the Bank for International Settlement (BIS) standards, is the ratio of the capital to risk weighted assets. The BIS norm of capital adequacy of 8 per cent of the risk weighted assets, is aimed at maintaining unimpaired capital and has been widely accepted by most developing countries. Inadequacy of capital compared to the scale of risk exposure is a major problem affecting all public sector banks in India. (1)

2 As per the norms prescribed by the Reserve Bank of India, 7 banks having foreign operations were to achieve a capital adequacy of 8% as at the end of March 1994 and for all other Indian banks

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this target was fixed at 4%. The fundamental objectives for fixing capital adequacy target is two fold: (i) It serves

to strengthen the soundness and stability of the banking system. (ii) Its application to the banks in different countries will diminish the existing source of competitive inequality among the international banks. (c) Income recognition, asset classification and provisioning: Capital adequacy can be measured only after required provisions have been made, since provisions not covered by operating profits are a charge against capital and resources. Thus, a proper system of income recognition and provisioning is fundamental to the preservation of the strength and stability of the banking system. A proper asset classification will, however, have to precede this exercise. While the objective for proper asset classification, is to ensure a uniform and consistent application of norms, the objective for income recognition is to improve the recovery process. Provisioning is to be made on classification of assets into four different categories, viz., standard assets, sub-standard assets, doubtful assets and loss assets. In order to classify the assets into these four categories, it is essential to know whether or not the asset is a performing asset. (d) Improving Loan recovery: Non-performing assets lie at the core of the financial problems of the banks. Hence, efforts to improve recovery must have high priority for improving the recovery. It is incumbent on the legal system to be more effective such that banks are allowed to exercise the remedies available to them in cases of default and to realise the value of collateral security pledged to them. (e) Profitability: There is a need for a big increase in profitability of public sector banks. This must come from initiating various measures relating to reduction of overheads, improved margins, improved asset quality and increased non-fund business. The best route to higher earnings is through improvement in the net interest margin expressed as a percentage of working funds which has shown a declining trend in the recent years. Therefore, banks should aim for improving the margin through effective deployment of high quality earning assets, a judicious mix of liabilities and good yields. In order to enable the banks to improve

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Industrial Management

their profitability, various new vistas f;uch as lease financing, hire purchase, factoring and custodial services have been opened up for the banking industry. (2) Organis~tional Restructuring (a) Restructuring of banks: The Narasimham Committee suggested the restructuring of banks on the following broad pattern: (i) Three or four large banks which could be international in character. (ii) Eight to ten national banks with network of branches throughout the country. (iii) Local banks whose operations would be generally confined to a specific region. (iv) Rural banks (including RRB's) whose operations would confine to the rural areas and whose business would be predominantly financing of agriculture and allied activities. (b) memorandum of understanding (AIOU): The reforms introduced in the financial sector since 1992 have altered the course of the working of public sector banks. The MOD for banks consists of two parts: Part one deals with the performance obligations and quantitative commitments required from the bank. ~art two concerns the preparation of policy documents covering liability management, investment management, loan policy, recovery management, capital expenditure and human resources development and organisational issues relating to the organisation structure, inspection and suspension, rationalisation of branch network and customer service. (c) Branch rationalisation: The RBI, through communication in October 1992, liberalised the branch licensing policy, unviable extension counters were permitted to be closed. at the discretion of banks. Banks continue to have freedom in closing/swapping of their stray and unremunerative branches other than rural branches. The objectives of branch rationalisation are as follows:

(i) To lay greater emphasis on market segmentation approach. (ii) To not only reduce non-performing assets but also make the branches more viable. (iii) To inject greater competitiveness in the banking industry.

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(d) Managerial and Institutional Strengthen~ng: This includes the following: Managerial aspects: The changes in organisational cultl,lre needed for successful recovery of the banks are inextricably linked to the management of their human resources. Thus the Human Resources Development Policies should aim to define the organisational practices that articulate the management's concern towards the development and well being of the employees. It should attempt to provide to the employees adequate opportunities to (i) maximise job involvement and satisfaction. (ii) make career options in tune with the educational background, work experience and aptitudes. (iii) enrich personal experience and acquire a variety of job skills by lateral movements in scale. (iv) draw up individual career-progression plans within the ambit of the career paths defined by the management. (e) Technology upgradation: Computerisation of the banking operations has become an indispensable tool for improvement in customer service, the institution and operation of better control system, greater efficiency in information technology, removal of work and settlement of the work environment for employees. These are essential requirements to function effectively and profitably in the increasingly complex and competitive environment which is fast developing in the financial services segment of the economy. Currently, banks are being urged to draw up a well-defined, time-bound programme of computerisation. (f) Customer Service: The basic tenet of any service industry lies in customer satisfaction and this is all the more so in banking. Poor customer service reflects a variety of factors: insufficient managerial attention to service issues, poor motivation, over staffing and inadequate technology. In fact, a high and consistent level of customer service not only projects the quality of the bank but also the overall managerial strength of the bank.

1.5 CURRENT SCENARIO OF INDUSTRIAL DEVELOPMENT The current scenario of industrial development can be discussed under the following headings:

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New Industrial Policy, 1991 The Government on July 24, 1991 presented to parliament the new Industrial policy statements 1991, giving a new thrust to Industrial development by liberalising industrial development by liberalising industrial licensing and almost scrapping the "licencepermit raj." Objectives (a) Self-reliance through greater stability to pay for imports through our foreign exchange earnings. (b) Encourage entrepreneurship and development of indigenous technology. (c) Spread of industrialisation in backward areas. (d) Encouragement to foreign investment technological collaboration. (e) Open all manufacturing activity to competition, except the strategic industries. (f) Sustained growth in productivity and employment. Features of the New Industrial Policy (a) Industrial licensing will henceforth be abolished for all industries, except 18 industries which will continue to be subject to compulsory licensing for reasons related to security and strategic concerns, social reasons, articles of elitist consumption etc. Industries for which licensing will be compulsory include coal, petroleum, sugar, distillers, oil, cigarettes manufacturing, motor cars, paper and newsprint, industrial explosives, drugs and pharmaceuticals. (b) In order to attract foreign capital investment in high priority industries requiring large investment and advanced technology, it has been decided to provide approval for direct foreign investment upto 51% foreign equity in such industries. (c) The Government will encourage foreign trading companies to assist in marketing country's exports. (d) With a view to injecting the desired level of technological dynamism in Indian industry, Government will provide automatic approval for technology agreements related to high priority industries within specified parameters. Similar facilities will be available to other industries as well if such agreements do not require the expenditure of foreign exchange. (1)

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(e) Measures to make public enterprises more growth oriented: Priority areas for the growth of public enterprises will include: (i) essential infrastructure goods and services (ii) exploration and exploitation of oil resources (iii) technology development and (iv) manufacturing of products where strategic consideration predominate such as defence equipments. (f) The MRTP Act was amended to remove the threshold limits of assets in respect ofMRTP companies and dominant undertakings. This eliminated three equipment of prior approval of central Government for establishment of new undertakings, expansion of undertakings, merger, amalgamation and takeover and appointment of directors under certain circumstances. The MRTP Act is repeated now. (g) All existing registration schemes will be abolished. Entrepreneurs will henceforth only be required to file an information memorandum of new projects and substantial expansion.

(h) In locations other than cities of more than 1 million population there will be no requirement of obtaining approval from the Central Government, except for industries subject to compulsory licensing. In respect of cities with population lesser than 1 million, industries other than those of a non-polluting nature such as electronics, computer and printing will be located outside 25 kms of the perisphery, except in prior designated areas.

Quality and Competition Locally and Globally The success of industries depend upon the quality of goods produced by them. In India the certification of goods produced in conformity with relevant Indian standards began when the Indian Standards Institution Certification Marks Act 1952 was passed. The Bureau of Indian Standards Act 1986 has superseded the above Act, and now the Bureau has been vested with powers for operation of certification marks scheme. BIS certification marks scheme has been voluntary in character all these years. However, for items concerning health and safety of consumers and for those of mass consumption, the Government of India has made BIS certification mandatory under various statutory measures such as the Essential Commodities Act, Prevention of Food Adulteration Act. There are also a few other organisations in the country engaged in the certification activity such as Agmark, lSI mark etc. In safeguarding the consumer interests, standard organisations all over the world play a significant role by specifying optimum (2)

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level of quality, safety and performance of various products and also the methods of practical evaluation. Adherence to these standards by manufacturers brings about a healthy competition among the manufactures and provides the consumers with quality products and services. The consumer will not be able to feel the benefit of standardisation until such standards are widely implemented and goods of day-to-day needs conforming to the national standards are readily available. To promote international trade, the operation of international certification through ISO 9000 has become a major instrument. The decision of a private firm to invest or to carry on business in any country depends on the competitiveness of the country. The overall competitiveness of an economy is determined by the following factors: (a) Openness: This factor measures openness to foreign trade and investment, openness to direc~ foreign investment and financial flows, exchange rate policy and ease of exporting. (b) Government: This factor measures the role of the state in the economy. This include the overall burden of Government expenditure, fiscal deficits, rates of public savings, tax rates and the overall competence of the civil service. (c) Finance: Finance measures how efficiently the financial intermediaries channel savings into productive investment, the level of competition in financial markets, the perceived stability and solvency of key financial institutions, levels of national saving and investment, and credit ratings given by outside observers.

(d) Infrastructure: This factor measures the quality of roads, railways, ports, telecommunications, cost of air transportation and overall infrastructure investment. (e) Technology: This factor measures computer usage, the spread of new technologies, the ability of the economy to absorb new technologies and the level and quality of research and development. (f) Management: Management measures overall management, quality, marketing, staff training and motivation, practices, efficiency of compensation schemes and the quality of internal financial control systems. (g) Labour: This factor measures the efficiency and competitiveness of the domestic labour market. It combines a

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measure of the level of a country's labour costs relative to international norms, together with measures of labour market efficiency, the level of basic education and skills, and the extent of distortionary labour taxes.

(h) Institutions: This factor measures the extent of business competition, the quality of legal institutions and practices, the extent of corruption and vulnerability to organised crime. (3) Opening up of New and Wide Range of Opportunities Indian industries can move towards globalisation by different strategies such as developing exports, foreign investments including joint ventures and acquisitions strategic alliance, licensing and franchising etc. (a) Exporting is one of the important ways of globalis~tion. With the economic liberalisation, an environment for globalisation of Indian exports, is slowly emerging. Broadly there are three strategies to increase the export earnings, viz., (i) Increase the average unit value realisation (ii) Increase the quantity of exports (iii) Export new products. For identifying new products for exports there are two important courses: (i) Explore the export opportunity for products currently produced in India (ii) Identify products with good demand abroad which can be competitively produced and supplied by India. An important export opportunity for India and other developing countries is provided by the vacation of certain industries or market segments by the developed country firms due to various reasons like environmental consideration, lack of competitiveness, declining industry attractiveness etc. For example, the developed countries are phasing out production of a wide range of chemicals owing to increased expenditure on overheads and high labour costs. (b) Mergers and Acquisitions; Mergers and Acquisitions (M & As) are very important market entry as well as growth strategy. M & As have certain advantages. It may be used to acquire new technology. M & As would have the effect of eliminating or reducing competition. One great advantage of M & As in some cases is that it provides instant access to markets and distribution network. (c) Joint Ventures: Joint venturing is a very important foreign market entry and growth strategy employed by Indian firms. It is an important route taken by pharmaceutical firms like Ranbaxy, Lupin, etc. The liberalisation policy towards foreign investment by Indian firms alongwith the new economic environment seems to

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have given joint ventures a boost. Not only the number of joint ventures is increasing but also the number of countries and industries in the map of Indian Joint ventures is expanding.

(d) Strategic Alliance: Strategic alliance provides enormous scope for the Indian business to enter or expand the international business. This is particularly important for technology acquisition and overseas marketing. Alliance is indeed an important international marketing strategy employed by several Indian firms. (e) Licensing and Franchising: Licensing and franchising, which involve minimal commitment of resource and effort on the part of the international marketer, are easy ways of entering the international market. Many Indian firms can use licensing or franchising for the overseas market; particularly the developing countries. For example, Ranbaxy has licensing arrangement in countries like Indonesia and Jordan. (4) Upgradation/Modernisation of Technology Technology means scientific knowledge for the manufacture of a product or rendering of a service. Science and Technology has made a phenomenal impact the world over in shaping the lifestyle of the common man. Planning for science and technology is mainly achieved by preparing plans for the following three sectors: (i) Plans for the six scientific departments, viz., science a'nd technology, scientific and industrial research, biotechnology, ocean development, space and atomic energy; (ii) Planning for science and technology component of more than 30 individual socio-economic departments which include organisations like the Indian Council of Medical Research, the Indian Council of Agricultural Research, Departments of Communications, Electronics, Non-conventional Energy Sourc~s, Irrigation, industry etc. and (iii) A separate science and technology sector in the plans of the states and union territories. There are two distinct components of technological progress. One is the element that is "embodied" in the original machinery and equipments and the second is the "disembodied" components which is subsequently added by innovation in the recipient country in the field of production, management, marketing, raw-materials etc. known as technology transfer. There is evidence to show that the rate of technological progress could be stepped up by the disembodied component even with existing technology.

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Technology upgradation may be explained as a resource which comprises knowledge, skill and means for using and controlling the factors of production to produce, maintain and distribute goods and services for which there is an economic and social demand. The technology upgradation or modernisation can be grouped under the following categories: . (a) Projects: Foreign direct investment, turn-key construction and co-production. (b) Contractors and Development: Licensing of patents, trademarks, management and equipment, maintenance. (c) Research and Development: Location of R&D operations in foreign countries. (d) Personnel exchanges: Development assistance under bilateral and multilateral and programmes, employment of foreign technicians. (e) Conferences: Professional and scientific meetings, academic, preferences, technical societies and trade association. (f) Teaching and Training: Foreign study in regular undergraduate and graduate programme, internal training programme of business firm etc. (g) Others: Transfer through international tender invitations, acquisition of companies, etc. (5) Access to Global Market Indian industries now have ready access to global market owing to the following reasons: (a) Liberalisation measures taken by the Government. (b) Free flow of capital and technology. (c) Improvement in transportation and communication. (d) Quality consciousness and quality goods certified by competent authority. (e) Establishment of Multinational Corporations. (f) Elimination of trade barriers which permit the free flow of goods across national boundaries.

Industrial Management

58 QUESTIONS Simple Questions

I. Answer 'the following questions in about three sentences (a) Mention any four forms of industrial organisations set up under private ownership, (b) Define a partnership, (c) Define a joint stock company. (d) Define a cooperative society. (e) Distinguish between general partnership and particular partnership. (f) What do you mean by public sector? (g) Mention the various forms of organising public sector. (h) Whp.t do you mean by size of a business? (i) What.do you mean by a large-scale industry? (j) What is an agro-based industry? (k) What do you mean by college industry? (1) What is an agro-based industry? (m) What do you mean by an ancillary industry? (n) What do you mean by Globalisation? (0) State the features of Global company. (p) What do you mean by capital adeq l:1CY norm?

II. Short Answer Questions (a) Explain the factors to be considered while starting an industrial organisation. (b) Explain the characteristics of a sole proprietorship form of business organisation. (c) Explain the characteristic features of partnership firm. (d) Explain the different types of partnership. (e) What is a partnership deed? State its contents. (f) Write a note on registration of partnership firm. (g) Explain the characteristics of a Joint Stock Company. (h) Explain different types of Companies. (i) Explain the steps involved in the formation of a Joint Stock Company. (j) State the different types of shares issued by a company. (k) Define Debentures. Explain different types of debentures issued by a company.

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0) Explain the characteristic features of a co-operative society. (m) Explain different types of co-operative societies.

III. Long Answer Questions

(a) "One man control is the best." Explain this statement in the height of advantages and disadvantages of a sole trading concern. (b) Explain the advantages and disadvantages of partnership firm. (c) Explain the advantages and disadvantages of a Joint Stock Company. (d) Explain the advantages and disadvantages of a cooperative society. (e) State the features, merits and demerits of a departmental undertaking. (D State the features, merits and demerits of a public corporation. (g) State the features, merits and demerits of a Government company. (h) Explain the essential aspects of current economic reforms. (i) Explain the current scenario of industries development in India. QQI.J

CHAPTER 2

PRINCIPLES OF MANAGEMENT

2.1 Introduction - Terminology Used. 2.2 Functions of Manager. 2.3 Planning. 2.4 Organisation. 2.5 Direction. 2.6 Controlling.

2.1 INTRODUCTION Management means many things to many people. There is no dearth of people who consider management as "to command others." To many others, management is nothing more than checking the clerical work and putting signature here and there. Trade unions consider management as an exploiting set of people. Members of the Board of Directors may look at it in terms of the meetings they attend and the resolutions they pass. Management students join the issue by equating management with a course of study open to a selected few. Management is all these and much more. Theo Haimann in his book "Personnel Management", has used the word "Management" in three different senses, viz., (a) as a

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noun (b) as a process and (c) as a discipline. Firstly, as a noun the term 'management' is often used in referring to the group of managerial personnel of an enterprise. In this sense, the Board of Directors of a company, the governing council of an educational institute, the Board of Trustees of a Trust make up the management of their respective organisations. Secondly, management as a process refers to the act of planning, organising, staffing, directing, supervising and controlling. All these activities are known as functions of management. Thirdly, management as a discipline refers to the principles and practice of management. For example, when we say that a degree in management secures a bright job opportunity, it is used to connote a subject. Though used in a variety of ways, the term "management" is mainly used in the sense of process. Persons who discharge managerial functions are usually designated as "Managers", "Executives" or "Administrators."

Definition and Characteristics of Management Several authorities in Management have defined "management" covering different aspects of management. A few important definitions are discussed below: (1) According to Louis A. Allen "Management is what management does." This definition emphasises the sum total of the different steps involved in management. By far the most important functions of management are: (a) formulation of policy (b) Implementation of policy and (c) exercising administrative control over the plans. (2) James Lundy in his book "Effective Industrial Management" defines management as a task of planning, coordinating, motivating and controlling the efforts of others towards a specific objective. It involves the combining of the traditional factors of production in an optimum manner, paying due attention, of course, to the particular goals of organisation. This definition stressed upon the important function of management giving due importance to motivating the employees in order to secure their co-operation and in getting the work done. It also involves proper utilisation of various factors of production such as land, labour, and capital towards the attainment of the objectives of the organisation. (3) According to the American society of engineers ~Manage­ ment is the art and science of organising and directing human efforts

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applied to control the focus and utilise the materials of nature for the benefit of man." This definition lays emphasis on ensuring maximum efficiency in the use of physical and human resources of an undertaking. Proper utilisation of resources to get the maximum benefit has been the main aim of human society. Though economists regard men, money, and materials to be important inputs, today management is considered to be one of the most essential requirements for the success of any enterprise. It is the Manager who takes all the steps to utilise the resources in -the best possible manner to transform them into useful articles which benefit the people. (4) A comprehensive definition of management was given by academic people from various business schools in the united states in mid-1940s. This was to enable the businessmen to accept and practise and the academicians to teach the subject of management. The definition reads thus: "Management is guiding human and physical resources into dynamic organisation units that attain their objective to the satisfaction of those served and with a high degree of morale and a sence of attainment on the part of those rendering the services." According to this definition, management firstly involves guiding human and physical resources. A manager must balance between these two resources. Secondly, the dynamic nature of the organisation is brought out in this definition. Industrial organisations operate in an ever-changing environment because technology changes, market changes, products and services change; people change and therefore, industrial organisation must also change. These organisations which readily adapt to changes in the environment are said to be dynamic. Attainment of objectives is the third part of the definition. A manager must know what is to be achieved by the employees. When no objectives are set, there cannot be successful management. Thus, getting these objectives accomplished is the purpose ofmanagement. The fourth aspect of the definition is the satisfaction of the consumers by the organisation. Unless customers are satisfied, the existence of an organisation is a Sheer Waste. The last part of the definition relates to the high degree of morale and satisfaction on the part of those rendering the services, i.e., the members of an organisation. The kind of satisfaction they derive from. their work has an impact on the achievement of goals of the organisation. The satisfaction of employees is reflected in the

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quality of the product they produce. Here morale serves as a measure of satisfaction. Thus looking after welfare of employees is the prime concern of management.

Characteristics of Management The following are the important characteristics of Management: (1) Management is an

art as well as a science

Management is both an art and a science as it has the features of art and science. It is considered as an art as it requires ability and skill for all managers to discharge managerial functions. It is regarded as a science as it is based on rules and laws which are more or less universal in nature.

(2) It is a continuing process Management is a continuous process which is concerned with organising the activities of persons, coordinating their efforts and motivating them. It is also concerned with the planning and decisionmaking process in the organisation. Staffing, directing, communication are the other important elements of the management process.

(3) It is a social process AI!, management deals directly with employees, it is considered as a social process. According to E.F.L. Brech "it is the pervasiveness of human element that gives management its special character a social process."

(4) It consists of group efforts Management deals with group efforts but not individual effort. It is only through group efforts that management can achieve its goals.

(5) It is meant to achieve predetermined objectives Management of every organisation sets the goals before it in order to attain them. According to George Terry, effective management is extremely difficult to attain without definite objectives.

(6) Management is a distinct entity The Managerial skills is considered to be a quite different skill as in the case of a specialist. So also the knowledge and practice of management is somewhat different from other disciplines. In.-other words, everybody cannot discharge the managerial functions efficiently.

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(7) Management is needed at all levels The Management process is all-pervasive right from the top level management to the lower level management. The supervisor at the lower level of management also performs the same managerial functions as are performed by an executive at the top level. (8) It is a profession Management is now considered as a distinct profession. This is so because it involves specific skills and techniques and adheres to a code of ethics. Importance of Management Modern industry cannot function effectively without a good management. Every organisation is interested in maximising the returns and an efficient management at the top alone can ensure it. The need for management or its importance can be studied under the following headings: (1)

Management meets the challenge of change

In recent years the challenge of change has become intense and critical. The complexities of modern business can be overcome only by scientific management. (2) Effective utilisation of the seven 'M's There are seven 'M's in industries, viz., Men, Materials, Money Management, Machines, Methods and Market. Management stands at the top of all these 'M's. It determines and controls all other factors of industry. Good management produces good industry by creating a vital, dynamic and life-giving force in the organisation. Management directs the organisation. Just as the mind directs and controls the body to fulfill its desires, management directs and controls the organisation to achieve desired results. (3) Integrates various interests In the group efforts, there are various interest groups and they put pressure over other groups for their maximum share in the total output. Management balances these pressures and integrates the various interests. (4) Provides innovation Management provides new ideas in organisations and visions to the organisation and necessary life for better and greater performance.

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(6) Provides coordination and establishes team spirit Management coordinates the activities of the different departments of an enterprise and establishes team-spirit amongst the personel.

(6) Tackles business problems Good management serves as a friend, philosopher and guide in tackling business problems. It provides a tool for doing a task in best way.

(7) A tool of personality development Management is not the directing things but the development of men. It makes the personality of the people and attempts to raise their efficiency and productivity.

2.2 FUNCTIONS OF MANAGEMENT OR MANAGER The important functions of Management are as follows:

(1) Planning Planning is defined as deciding in advance what is to be done, how and when it is to be done. It is the first and foremost function of management on which all other functions are based upon. It involves projecting the future course of action of the entire organisation as well as every department of an industry. It bridges the gap between the present and the future. It is an intellectual process and signifies the use of rational approach to solution of the problem. Planning function has assumed more interest as it is found in almost all forms of organisation, including government. It permeates all levels of management and every manager in the hierarchy of management will plan the functions within the limits of -his authority. The process of planning involves the following steps: (a) The objectives and targets to be achieved are to be determined and defined. It must be in quantified terms. (b) Collection and classification of information relating to the objectives. (c) Searching alternative courses of action. (d) The alternatives are compared in terms of objectives, feasibility and consequences.

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(e) Selection of best course of action which yields maximum benefit. (f) Establishment of (i) policies that will help achieve objec-

tives (ii) the programmes that a manager will carry out (iii) the procedure that will be utilised by the manager (iv) the time schedule that a manager will have to meet and (v) the budgeting considerations that will be involved. (2) Organisation Organisation is the process of coordinating the physical resources, human resources and monetary resources. In the words of Koontz and O'Donnel, organising consists of conscious co-ordination of people towards a desired goal. The function of organising involves the following: (a) Division of work into various components or activities. (b) Grouping of activities logically into various positions. (c) Assigning these activities to the subordinates. (d) Defining the responsibilities and delegation of authority for carrying out the assigned duties. (e) Establishing relationship between superior and subordinates. (f) Coordinating all activities and authority relations through-

out the organisation. (3) Staffing

Staffing function is concerned with the provision of the right person, at the right time in the right place, and in the right number required. According to Koontz and O'Donnel every enterprise should pay the utmost attention to the quality of its people, especially the managers. Staffing function is concerned with this aspect of man" agement. It is a continuous function, as in the case of new industries, it has to fill the vacancies arising out of the establishment of new industry. In the case of existing industries, the vacancies missing on account of retirement, death and discharge of employees need to be filled. Staffing function involves the following activities: (a) Recruitment and selection (b) Training and development (c) Remuneration of employees and (d) Performance appraisal.

Principles of Management (4)

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Direction

This function of management is concerned with guiding the subordinates by the superior to achieve the common goals of the industry. This can be undertaken through teaching, counselling and issuing, orders. In the words of William Newman, the process of direction is concerned with how an executive issues instructions to his subordinates and otherwise indicates what it is that should be done. According to Earl P. Strong, directing consists of two elements, viz., instructing people in what they are to do and ordering to do it. It can, therefore, be said that directing the subordinates embraces three essential activities. They are: (a) issuing orders and instructions. (b) guiding and counselling the subordinates in their work to improve their performance and (c) supervising the work of subordinates to ensure that it conforms to plans. (5)

Communication

Communication means the process of passing on information or ideas or thoughts to others. According to Megginson Communication is the chain of understanding that integrates the members of an organisation from top to bottom, bottom to top and laterally. A manager has to communicate with various people interested in the organisation such as employees, customers, suppliers, shareholders, and the general public. While communicating, the subject matter of communication must be made very clear so as to avoid confusion and ambiguity on the part of the receiver. So also whenever the industry brings about any changes within the organisation, the same must be communicated to the employees and their consent obtained. (6)

Motivation

Motivation is that function of management by which the employees are stimulated to work hard by satisfying their needs, desires and wishes. It creates enthusiasm and encouragement for the employees to work willingly for the achievement of common goals. The Encyclopedia of Management has defined "motivation" as "the degree of readiness of an organism to pursue some designated goal and implies the determination of the nature and locus of the forces inducing the degree of readiness." One best way of motivating employees is to treat them fairly. The recognition of services of the employees and appreciating them is the second method of motivating them. Thirdly, payment of financial and non-financial incentives serves as a strong motivation for employees. Good leadership also serves as a motivating factor. A good motivating system must take

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68

into account economical, physical, social and psychological needs of employees as a whole.

(7) Coordination Modem business deals with a large number of persons working at different levels and performing a variety of functions. To achieve the objectives of an enterprise it is necessary to synchronise the work at each level. Coordination is concerned with the unification, integration and harmonising of the different activities of the organisation. According to M.P.Follet, the coordination function begins right from the planning stage in order to integrate the master plan and the plans of each department. Such integration is sought to bring about a balance between human resources and physical resources. Coordination embraces all functions of management. At the staffing stage, coordination is achieved by balancing the skill and abilities of workers with the jobs to be assigned to them. As regards the directing function, its very purpose is to achieve coordination by ensuring harmonious and smoother performance of duties. At the controlling stage coordination is achieved by ensuring that each individual and department performs the allotted task with the desired efficiency so that the enterprise as a whole functions smoothly.

(8) Decision-Making Decision-making as one of the functions of management is concerned with choosing the best course of action from among the alternatives. It involves the following elements: (a) To discover the problem involved in the organisation. (b) The manager must try to analyse what exactly is the problem. He must look into the problem and pierce through it to find out the origin and its degree of gravity or importance. A complex problem must be broken down and problems tangled with each other must be isolated from each other. (c) The next step involves setting up of objectives which the manager would like to achieve by solving the problem. Objectives are the end towards which the manager directs his decision-making. (d) The manager must collect all the relevant information. (e) To discover and develop alternative courses of action which are in the nature of potential and possible solutions to the

Principles of Management

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decision problems. The availability of alternatives provide an opportunity for the manager to make a choice. (f) The next step in decision-making involves evaluating the'

alternative course of action. (g) To make a final choice from amongst the various alternative courses. While making the final choice, the manager is guided by the organisational policies, strategies, previous decisions etc. (h) The last stage relates to implementing the decision for which the manager has to make the necessary structural, administrative and logistic managements.

(9) Controlling Controlling is a function intended to ensure and make possible the performance of planned activities and to achieve the predetermined goals and results. To control means to focus attention on moving ahead and shaping the pace and pattern of future events, to make things happen to some results, to remove obstacles and to gain command over the forces of uncertainty and complexity. Control function involves monitoring the activity and measuring results against the pre-established standard, analysing and correcting deviations as necessary and maintaining the system. The basic purpose of control is the achievement of enterprise goals. They serve as the steering wheel to steer the organistion and various sub systems within it on the right track and to negotiate their way through the turbulent environment. Control also serves the purpose of making efficient use of scarce and valuable resources which the enterprises deploy.

(10) Other Functions Among the other functions the following are the most important ones:

(a) Representation as a Separate Management Function This is considered as one of the modern functions of management. This function is performed in relation to outsiders such as government officials, trade union leaders, financial institutions and other business undertakings. Sometimes, within the organisation, the manager may have to represent his department in committee meetings. Looking at this and its impact upon the corporate image, it sounds appealing to include representation as a separate function of management.

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Industrial Management

(b) Innovation as a Function of Management

The business environment keeps on changing from time to time. So a Manager cannot continue to manage the some way as he has been doing it in the past. To improve the efficiency and to compete successfully, a manager should constantly engage himself in the task of innovating, i.e., introducing new changes. In this sense, management is a creative rather than an adaptive process. Innovation can be introduced by developing new ideas, adapting ideas from other fields to the business, combining old ideas with new ones or even by making the subordinates develop entirely new ideas. MANAGEMENT AS AN ART

Management is an art in the sense that it calls for ability and skill to translate scientific management knowledge into meaningful practice. The art of management consist in understanding the diverse managerial and organisational situations and in applying relevant management concepts and methods to the practical realities of such managerial situation. Managers need a wide range of conceptual and other skills. They have to be intensly action- oriented and purposeful. They have to be free from abstract philosophical adventurism. At every stage managers have to decide, design, and do things by creating order from chaos. Managers have also to be dynamic, ever creative and innovative in their thinking and approaches to various managerial problems. They must use judgemental skills under situations that are uncertain and complex. Since they do face many problems where science of management provides little clues they must rely on their intuition, experience and inner voice to act pragmatically. MANAGEMENT AS A SCIENCE

Science means an organised and systematised body of knowledge based on research and observation, capable of universal application, under given conditions and its structttral elements have a cause-and-effect relationship. Examples of science discipline are physics, chemistry, mathematics etc. Since .Second Wmid War, physicians, mathematicians, engineers, statisticians, accountantans etc., have been studying problems of industry and providing quantitative bases for correct managerial decisions. Thus, a status of a science has been claimed for management. But the claim of management to be called a science cannot be fully accepted for reasons such as the following: (a) Its laws cannot be stated in precise quantitative terms; at best they are only statement of tendencies.

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(b) It cannot predict with certainty future behaviour. (c) It cannot always demonstrate validity ofits principles with the help of experiments. It is true that these limitations are essentially due to the fact that management like other social science, deal with living, complex men in dynamic environment and situation. At the present stage of development, it is not possible for management scientists to explain clearly why and how a human being behaves in a particular way, and to say with confidence that he will behave in the same way in future. It is because of the obvious limitations that management cannot claim to have the status of Natural Sciences. However, with the increasing use of the methods of these sciences it can claim to be scientific in its approach and therefore may be regarded as a social science like economics and sociology. Management is both an Art and Science Management is a combination of Art and Science. Empiricists and early practisioners, claimed that management is the art and practice of getting things done; realizing a goal through men and limited material resources in dynamic situations. There are some elements of truth in both these approaches, but neither appears to be wholly true. The claims of management to be called a science has not been fully accepted as it cannot always demonstrate the validity of its principles with the help of experiments. Its laws cannot be stated in precise quantitative terms, nor can it predict future behaviour with certainty. These limitations are essentially due to the fact that management is somewhat more similar to the social sciences which deal with human beings with all their complexities, living in a dynamic environment. It is now generally recognised that a manager must have a thorough knowledge of the management theory. This knowledge helps him greatly in understanding his problems and in developing a right solution just as a medical practioner with his theoritial knowledge of anatomy, physiology and chemistry is in a far better position than a quake to diagnose illness of his patients. We may conclude by stating that management has many elements of an art, on the other hand, there is now a large body of theoretical systematised knowledge available to guide practising managers making management somewhat similar to a 'natural science. Furthermore, practising managers generally follow scientific methods in studying their problems and developing solutions.

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MANAGEMENT AS A PROFESSION The attributes of a profession are as follows: (i) a large body of theoritical knowledge, core principles, techniques and skills. (ii) satisfactory arrangement for imparting theoritical knowledge and practical experience. (iii) prescription of the qualifications required by an individual who can claim to have such knowledge and skills. (iv) existence of national or independent regulatory body competent to prescribe qualifications for admission to new entrents to conduct examinations, award diplomas or degrees etc. (v) ability to use the knowledge and skills in a particular problem are within the field. (vi) acceptance by and large of some standard norms and conventions by all people in the profession. (vii) observance of some professional ethics by the individuals. (viii) a scope for creating posts of consultants for that skill. Furthermore the profession of management rests on a few key factors. (a) knowledge of the nature of management and its basic processes. (b) identification of the skills required to apply those processes. (c) recognition that these are tools available for application of these skills. (d) determination of the qualifications required by an individual manager. (e) specific continuing programmes of management development. When the claims are considered against this background, it would appear that at present, management is a developing profession. MANAGEMENT, ADMINISTRATION, ORGANISATION The three concepts, Management, administration, and organisation one often used interchangeably to mean one and the same thing. But they connote different meanings when they are used in their strict sence. Oliver Sheldon, in his book "The .Philosophy of Management", has given the best definitions of these three terms. According to Sheldon, administration is the function in an industry concerned with the determination of the corporate policy, the coordination of finance, production and distribution, the settlement

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Principles of Management

of the compass of the organisation, and the ultimate control of the executive. Management proper is the function in industry concerned with the execution of policy, within the limits set by the administration and the employment of the organisation for the particular objects set before it. Organisation is the process of so combing the work which individuals or groups have to perform with the faculties necessary for its execution, that the duties so formed, provide positive and coordinated application of the available effort. While administration defines the goal, management strives towards it. Organisation is the machine of the management in its achievement of the ends determined by the administration. Difference between Administration and Management Points of Differences

Administration

Management

(1) Policy Determina- It is concerned with It is concerned with tion policy making and de-. execution of policies. termination of goals to be achieved. (2) Natureoffunction Its functions legislative.

are Its functions are executive and largely governing.

(3) Direction of Human efforts

It is not directly con- It is concerned with cerned with direction of direction of human human efforts. efforts.

(4) Managerial level

It relates to Apex or top It relates to middle level managlment. and lower level management.

(5) Ability and skill It needs administrative It needs technical required

ability.

ability.

(6) Expansion of functions

Its functions expand at Its function contract upperlevelandcontract at upper level and at lower level. expand at lower level.

(7) Application

It is mostly used in Gov- It is mostly used in ernment and public business and industrial private sectors. sector.

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Industrial Management

UNIVERSALITY CONCEPT OF MANAGEMENT The principles of management are not only applicable to business organisation, but they can also be applied to social, political, religious and other organisations with the same degree of clarity and success. The universality of these principles has been established beyond doubt as they are being applied to any kind of organisation wherever there is the co-ordinated effort of human beings. Management is co-ordinate and co-extensive with the direction of economic efforts to a desired goal. The situation in which the management process is relevant and called for is thus ubiquitous and universal. It has been observed that whatever the situation and whatever the level of management the process of management comprises certain elements or functions which are common. Thus if there is a goal there must be a direction and leadership towards reaching the goal. If there are constrained economic resources, there has to be planning for setting priorities, and the mechanism that balance and optimise the use ofthe constrained resources in two way vector, viz., (a) a quantitative optimisation to ensure that there is no usage or efficiency failure and (b) a qualitative optimisation to which there is no frittering away of misdirected efforts. To achieve these common aims of management, a general theory of management and a set of common principles have to be evolved. This is the basis of the universality of management concepts and principles.

MANAGERlALSHILLS The following skills are to be developed by managers: (1) Conceptual skills

These refer to the ability to think in abstract terms to form images and ideas to visualise and understand the future and to discuss relationship and interactions among the elements of a system and changes therein. The skills are useful in making plans, policies, strategies etc.

(2) Analytical skills These include the ability to proceed in a logical, step by step, and systematic manner, to examine the various aspects of specific issues and to understand complex characteristics of a phenomenon. The skills are needed for problem solving and decision-making, to evaluate performance.

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(3) Administrative skills These refer to the ability of getting things through implementation of decisions and plans, mobilising and organising resources and efforts and coordinating the different activities.

(4) Behavioural skills These skills pertain to understanding people, interacting with them, motivating them, counselling the employees, providing leadership to them, etc.

(5) Technical skills These relate to job knowledge and expertise ability to apply methods and techniques to specific work settings.

Duties and Responsibilities of General Manager The general manager is a person who has the overall charge of the affairs of an Industry. His jurisdiction pervades the whole industry within the frame of the policies determined by the Board. All the departmental managers are responsible to the general manager and he is responsible to the Board of Directors. The general manager is responsible for ensuring the smooth running of the industry and to see that the policies laid down by the Board are carried out and objectives attained. In order to function efficiently, he must seek the full cooperation of all his subordinates. As regards qualities, the general manager should have a sympathetic attitude in general and at the same time, should be a strict disciplinarian. He should encourage initiative on the part of his subordinates. He must be capable of making quick and prompt decisions with a view to solve the problem on hand. He should be thoroughly conversant with the technical process. He should have a wide commercial and financial knowledge and experience to deal with the problem arising in the industry. As an economic adviser, he is expected to find out the best and the cheapest way of production and distribution of the industry's products. From this point of view, he must exercise a close control over different costs. He should watch the progress of the sales of the industry's products, market fluctuations in prices and trends of demand in general for similar products. The duties of a general manager can be outlined under the following headings.

(1) Duties relating to Guidance and Direction (a) The general manager interprets the policies decided upon by the Board of Directors for the benefit of the rest of the organisation:

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This is done by framing instructions in accordance with the general and specific policies laid down by the ijoard of Directors. (b) To issue instructions in pursuance of the policies and ensuring that they are carried out. (c) To give ruling where the proposed plans or activities deviate from the approved policies or instructions.

(2) Duties of Coordination (a) To ensure effective coordination throughout the organisations and to provide appropriate facilities to the executives directly under him. (b) To define the responsibilities and functions of the various member of the organisation and to provide adequate means for ensuring smooth relations between the execution and the personnel.

(3) Duties of Review and Control (a) To maintain continuous control and supervision over the activities of the organisation through meetings with executives and reports received from them. (b) To prepare control reports and to collect data regarding current operations for submission to the Board of DirectOrs.

(4) Miscellaneous Duties (a) To maintain contact with government departments, trade associlrtions, trade unions and other bodies having a bearing on the framing and execution of policies and plans. (b) To provide for the training of executives and others in the organisation. (c) To evaluate the needs of the company and advise on expansion, acquisition or alteration or adjustment necessary for stability and growth of the industry (d) To devise org~sation structure and define the authority and responsibility of each department executive for implementing the board's policies.

Duties and Responsibilities of Administrative Manager The administrative Manager is a person who looks after the routine industrial work and keeps the industry in'order. According to William V. Wilmot, if an industry lacks the services of a faithful

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administrative manager, it will go bankrupt, because it cannot deliver the goods. His duties are as follows: (1) Planning

(A) To Forecast requirements (i) To forecast personnel, machine, material, space, financial

and other requirements of the industry. (ii) To prepare estimates on such matters as cost of work,

delivery dates. (B) To keep abreast (i) To keep abreast of developments in the field of management and technical areas. (C) To establish organisation (i) To ensure that each subordinate has a clear cut responsibility to a single superior only. (ii) To delegate responsibility to the greatest possible extent in order to get decisions made as close to the point of operation as possible. (iii) To designate one subordinate to act in the absence of an

executive. (D) To establish internal control (i) To ensure optimum utilisation of men, machines and materials. (iii To develop procedures, standards, methods, internal controls and subjects. (2) Executing (A) To integrate activities (i) To disseminate all possible general information, plans and policies to departmental managers. (ii) To direct, motivate integrate and coordinate all personnel

of the organisation. (iii) To ensure safety. (iv) To approve all authorisation as prescribed by his position. (v) To maintain and protect industry's assets.

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Industrial Management

(B) To Coordinate his activities with others

(i) To promote management "by exception" whenever possible. (ii) To coordinate his activity with those of other departments

not under his control.

(C) To Promote sound human relations (i) To build positive human relations. To promote team spirit and feeling of loyalty and "belongingness" among employees. (ii) To direct the selection, hiring, evaluating, transforming,

promoting, disciplining, training, developing and discharging of personnel.

(3) To Review performance (A) To review performance (i) To review and evaluate continuously the performance of all the personnel.

(B) To improve performance (i) To develop among the personnel the habit of self-criticism, to improve their jobs, to transmit suggestions and to make suitable recommendations.

(C) To report performance (i) To render a periodic account of progress to the general manager. LEVELS OF MANAGEMENT The various levels of management in an industry can be divided into five categories. They are as follows: (1) Top Management (2) Upper Middle Management (3) Middle Management (4) Lower-level Management (5) Operative-level Management These levels of management can be depicted in the following chart:

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Principles of Management

Organisation chart showing the five levels of management Board of Directors (Top Level Management)

Management Director

Works Manager

salet Manager

~

!

Branch or Regional Sales Manager

Superintendents

saIl Supervisors

Foremen

1

1

1

Salesman

Workmen

I

Financial Controller

!

Accountants

!

Assistant Accountant

~

Clerks

(Upper Middle MaI\agement) (Middle Management) (Lower Level Management) (Operative Management)

(1) Top Management The top management consists of the Board of Directors and the Managing Directors, who is also the chief executive. In some large industries, there can also be some principal administrative officers such as Manager or Secretary. Whereas the directors meet occasionally, the Manager or Secretary works continuously to solve the dayto-day problems of the industry. The duties of the top management have been very clearly laid down by R.T. Livingston, in his book "The Engineering ofOrganisation and Management." These duties are listed below:

I. Decision-making (A) Planning (1)

Setting of goals: (a) What, how much, at what price, when and where.

(2) Mechanisms (a)

pr~ess.

(b) structural organisation and coordination. (c) Appointment of key personnel.

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Industrial Management

(B) Policy (i)

Definition, either general or specific.

(ii) Interpretation.

(C) Implementation (i) Release of authority. (ii)

I~tegration.

(D) Financial (i) Selection of type of funds to be secured. (ii) Distribution of profit. II. Judicial (a) Comparison (1)

Comparison of accomplishment with goals.

(B) Evaluation (i)

Evaluation of accomplishment with cost.

(ii) Evaluation of alternatives with the possibilities.

(C) Counsel (i)

In place of decision or command.

(2) Upper Middle Management This level of management consists of departmental managers who are responsible for executive functions such as sales, production, research, finance and accounting. The following are the functions performed by the upper middle management. (a) Establishment of an organisation structure within the industry. (b) Employment of the required number of employees. (c) Designing of operating policies and operating routines. (d) Assigning of specific duties to each individual. (e) Allocation of funds to various functions involved in the department.

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(3) Middle Management The middle management consists of junior managers of the industry such as superintendents, general foreman, regional sales managers and so on. The functions performed by the middle management are as follows: (a) To cooperate with each other to make smooth functioning of the industry. (b) To achieve coordination between the different points of the organisation. (c) To train subordinates for future needs. (d) To build a company spirit so that goods can be manufactured with joint effort.

(4) Lower Level Management This is also called the supervisory level of management. It is above the operatives but below the middle management. In large industries, supervisory management may consist of three levels; senior supervisors, intermediate supervisors and front line supervisors. The functions of the supervisory management are: (a) Supervision of workmen. (b) Drawing of materials and tools from the store-room for the department. (c) Planning, scheduling and assigning work to each worker. (d) Maintenance of quality, safe operating conditions, case of the machines and all the other equipments. (e) Arranging for the required production. (f) The keeping of records in perfect condition.

(g) Improving working conditions of the workers. (h) Developing morale and team spirit, administering in centres, controlling absenteeism, improving production methods etc.

(5) Operative Level Management This level of management includes the operatives or workmen who are concerned with the manufacturing of goods. The operatives are responsible for their own acts as they perform the required work on the machines and with the tools supplied by the foreman. The

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Industrial Management

degree to which an operative is expected to use judgement and decision in the performance of his task is dependent on his grade of employment. The higher the skill, the greater the responsibility for independent judgement and decision on the part of the worker.

RECENT TRENDS IN MANAGEMENT Some of the recent trends in management are highlighted here as under: (1) Increased Degree of professionalisation The managers of today are more conscious of continuously updating their skills and knowledge through participation in various seminars and executive development programmes. (2) Increased use of information technology The use of computerised information systems has become very common nowadays among the managers in their attempt to gain better understanding of the alternative courses of action available to them as well as to find out better solutions to the various organisation problems. (3) Changing organisation structure In order to effectively tackle the growing size and complexities and meet the changing needs of the business, the use of flexible organisation structure like matrix and project organisations is made. (4) Emergence of situation approach Following the basic principles of contingency or situation approach (discussed in the next chapter) the managers of today feel that instead of searching for one best way to organise under all conditions, it is better to examine the functioning of organisation in relation to the needs of its members and the external process facing them. Accordingly managerial plans, decisions and actions are chalked out to appropriately meet the demands of a specific situation. (5) Emphasis on Human factor More and more attention is being accorded to properly managing the human relations in work situation and effectively motivating the subordinates to achieve desired performance on their part.

SCOPE OF INDUSTRIAL MANAGEMENT The scope of any subject indicates the sphere of its study. As regards the scope of industrial management is concerned, it has a

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wide scope. The following aspects are found to fall under the purview of industrial management: (1)

Industrial planning.

(4) Materials management.

(2) Industrial organisation. (5) Labour administration. (3) Industrial management. (6) Industrial control. These elements are discussed below: (1)

Industrial planning

Whenever an idea of starting an industry is conceived by an industrialist, he has to plan the formative aspects of an industry. This involves determining the place of incorporation and selection of a suitable site to construct an industrial building. The industrial building must be .constructed so as to provide better working conditions to the employees. So this involves provision of adequate physical facilities within the industry for lighting, ventilation, airconditioning, sanitation etc. Planning must also be done for proper maintenance of plant, machineries and other equipments. Finally, industrial security is to be provided for men, materials, machineries and finished goods. All these aspects go to ensure smooth flow of production in industry. (2)

Industrial Organisation

The term industrial organisation is used both in broad and narrow sense. In its broad sense it implies the arrangement of all the factors of production such as raw materials, labourers, machines, money and management required by an industry. Having procured these factors, necessary efforts are made to utilise them to the fullest extent possible so as to maximise the production. In its narrow sense, industrial organisation is concerned with setting up the internal organisation structure of the industry. In modem days the structure of industry is becoming more and more complex, owing to increase in the size of industries, the ever increasing application of scientific method of production, and diversity in the production process are found. It is highly impossible for an individual to perform all the functions in an industry. So, in order to improve efficiency, the functions to be performed are identified into various categories. Then these functions are entrusted to various persons by means of fixing responsibilities for them. Finally, the persons to whom duties are assigned are made accountable to their immediate superior. Thus, a sense of awareness is created in the minds of persons for discharging their duties satisfactorily. The internal organisation of

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an industry helps in coordinating the efforts of all employees which is very essential for the successful conduct of operations in an industry. (3) Industrial Management

Industrial Management is mainly concerned with the transformation of the policies into actions. This requires the performance of certain important functions such as planning, of the various aspects in the industry, directing various activities, motivating the employees 80 as to increase their efficiency, communication of various reports to all levels of management, staffing the industry with the required personnel, making decisions among alternative proposals, providing leadership ability in order to guide the subordinates, coordinating the efforts of people and lastly controlling the efficiency of operations ofthe industry. In order to perform all these functions, various levels of management, such as top level, middle level and bottom level management can be created. With the'network of all the above functions it is possible to attain the objectives of industry. (4)

Materials Management

Materials Management is concerned with controlling the kind, amount, location, movement and timing of the various commodities used and produced by the factory. Materials costs constitute a substantial portion of the capital invested in the tactories and thus demand a continuing and considerable attention from its management. Many factory failures are the direct outgrowth of excessive inventories. Too much materials cause idle funds, storage and obsolescence problems. On the other hand, if the materials are not adequate to meet the needs of the operating and distribution segments of the factory, efficiency suffers and costs increase. Effective control of materials embraces four phases, namely: (1) procurement of materials, i.e., purchases (2) external transportation, i.e., receiving, traffic, and shipping (3) internal transportation, i.e., material handling, and (4) inventory control, i.e., storekeeping. (5) Labour Administration

The importance of human labouJ; cannot be underestimated in spite of the fact that machines have come to occupy a predominant place in industries. Labour Administration is concerned with the scientific recruitment and selection of required number of employees with different types of skills. This is followed by training of employees to acquire perfection in their respective field of work. The formwa-

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85

tion of promotional and transfer policy is an essential aspect oflabour administration. The implementation of a particular system of wage payment has a direct bearing upon the efficiency of employees. Assessment of the performance of em ployees through job evaluation and merit rating techniques considerably improve the productivity of industry. The provision of safety, health and welfare facilities enhances the morale of employees. The study oflabour turnover and psychology of employees enables restricting the change in labour force thereby retaining the experienced workers within the industry. Workers' participation in management. enables to solve the labour probll'ms in a more amicable way. Thus labour administration deals with various aspects of labour with a view to utilise the available labour factor to the fullest extent possible. (6) Industrial Control Control is one of the important functions of factory management. The managerial functions of control consists a comparison of the actual performance with the planned performance with tht> object of discovering whether everything is proceeding according to plans and if not whv? Control is an essential feature of all factories. Effective contr~l of men, materials, machines, and money is essential for the proper running of any factory. In order to measure performance and to adjust to the changing environment, the efforts of individuals must be channelised in the desired directions. Control is necessary to ascertain the deviations and to guide the development uf the firm towards the chosen goals. The important types of control in an industry are; (a) administrative control (b) financial control (c) produdion control (d) quality control and (e) quantity control. Earlier Contributions to Management Management in one or the other form has existed in every part of the world since the dawn of civilisation. Evidence of the welIrecognised principles of management is to be found in the organisation of public life in ancient Greece, the organisation of the Roman catholic church, Military organisation and by cameralists. (1) Management in ancient days Ancient Greek literature points to the existence of administrative apparatus like councils, courts and boards of military personnel to manage the affairs of the state. Socrates was among the first look upon management as something different from a m.ere technical knowledge and skills. The success of the Roman Empire depends on the ability of the rulers to or~anise their forces according to the scalar principle, neatly defining the area of authority and responsibility of each official.

U;

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Industrial Management

(2) Roman Catholic Church The Roman Catholic Church was one of the most effective formal organisation in the history of the western civilisation. The church had a set of well defined objectives and an effective and efficient organisation set up to achieve them. Division of work based on specialisation and employment of staff officers to aid and advise the line managers, were some of the striking features of the management of the Roman Catholic Church.

(3) Military organisations Military organisations also contributed in their own simplistic way to the development of managerial practices though there was little use of theory in it. Even so, their techniques of authority relationships between individuals and groups of individuals, direction, motivation and communication, underwent considerable improvement over the years. Of late, military organisations have also experimented, quite successfully, with the staff principle according to which persons with specialised knowledge are appointed to aid and advise the field (line) officers.

(4) The Cameralists Contribution to management theory was also made by a group of German and Austrian administrators and thinkers, collectively called as the cameralists, who believed in organisation of material wealth to make the state strong. The cameralists felt that to achieve this objective the state needed to adopt the same techniques as an individual.

Contributions to Scientific Management Scientific management means studying the problems according to scientific principles and methods, eliminating guess, setting each man a proper task and allowing suitable rewards for the accomplishment of these tasks. When this is done, increased efficiency is bound to follow. The following are the important contributions to scientific management:

(a) F.W. Taylor - The Father of Scientific Management Having worked in a number of factories and having carefully observed what was going on, Taylor had come to the conclusion that the main cause of the general inefficiency and waste in factories was ignorance on the part of both men and management. He, therefore, went about observing, collecting facts, making experiments,

Principks of MtuUJIlement

87

formulating generalisations and demonstrating their applications to the problems of the shop floor. Taylor then postulated his scheme of scientific management. The salient features of which are as follows: (1) Establishment of a separate department for production planning. This step would relieve the foreman of that responsibility and enable him to concentrate on supervision of production.

(2) Introduction of the principle of specialisation. (3) Systematic Selection and Training of workers. Taylor demonstrated how the right men, selected for the job of shovelling, and trained in the self method of performing that job, could give a consistently much higher rate of output. (4) Use of the Technique of time study: Taylor himself developed the technique of time study with the help of a stop-watch for calculating standard time and standard output for each job. This helped the management to fix fair wages for a fair output and thereby eliminate most of the wage disputes. (5) Use of Technique of Motion study for the determination of the best method of performing each job, based on eliminating unnecessary motion and thereby reducing fatigue. (6) Taylor introduced the Differential system of wage payment as a part of scientific management. He believed that a more efficient worker should be paid at a higher rate, and a less efficient worker, at a: lower rate. (7) The other important contribution of Taylor to scientific management is standardisation of tools and production process. He knew that if the management wanted the workers to accept standard piece rates, it must provide standard tools and equipments to all the workers. (b) Harrington Emerson

Emerson's major publications are Efficiency as a Basis for Operation and Wages (1911) and Twelve Principles of Efficiency (1913). A major portion of his latter book is devoted to a description and illustration of his principles of efficiency which are: (i) Clearly defined ideal (ii) Commonsense (iii) Competent counsel (iv) Discipline (v) The fair deal (vi) Reliable, immediate, adequate and permanent rewards (vii) Dispatching (viii) Standards and schedules (ix) Standardised operations (x) Standardised conditions (xi) Written standard practice instructions and (xii) Efficiency reward.

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(c) Henry L. Gantt Gantt's major pUblications are Works, Wages and Profit (1911), Industrial Leadership (1916), Organising for Work (1919). A selection of some of the most lasting and useful contributions to management thought from Gantt are as follows: . (i) Man is goal oriented: The most effective method of stimulating interest in people is to set a task and an objective. This concept provided the basis for his task and bonus plan. (ii) Training is the responsibility of management: It is management's responsibility because it can increase productivity. (iii) Task-setting is essential: It is superior to driving or urging man to more strenuous toil without any well-measured standards of how much work is reasonable under the conditions present.

(iv) Authority and Responsibility: The authority to issue an order involves the responsibility of seeing that it is properly executed. (v) Planning and control: These provide proper methods which result in proper results. This concept is the basis for the principle of the Gantt charts for which Gantt is best remembered. (d) Alexander H. Church

Alexander H. Church's most influential book is The Science and Practice of Management (1914). He was ~e first to analyse the basic functions essential to any manufacturing activity. His organic functions of management are as follows: (i) Design of products. (ii) Equipment, which provides physical conditions. (iii) Control, which specifies duties, and also orders and in-

structions. (iv) Comparison, which measures, records, and compares. (vi) Operations, which imply job performance. Church's principles to be applied to the organic functions are: (a) Experience must be systematically accumulated, standardised and applied; (b) Efforts must be economically regulated and (c) Personal effectiveness must be promoted.

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(e) Frank B. Gilbreth Frank B. Gilbreth's major publications are Contract System (1908), Bricklaying System (1909) Motion Study (1911) and Primer of Scientific Management (1912). Applied Motion study was written by him with Lillion Gilbreth in 1917. His contributions to manufacturing management are in the area of motion and time study. He stated that "The aim of motion study is to find and perpetuate the scheme of perfection. Motion study was explained by him as having three stages: (i) discovering and classifying the best practice (ii) deducing the laws and (c) applying the laws to standardised practice, either for the purpose of increasing output or decreasing laws of labour or both. Gilbreth devised a system of dividing work into its most elementary components which are called "Therbligs." His goal was the development of methods of least waste. (f)

Charles Babbage

h Father of Computer; Charles Babbage was a leading British Mathematician who served as a professor of Mathematics in Cambridge University. His important contributions to the management thought are as follows: (i) Division of labour: In his masterpiece work on The Economy of Machinery and Manufacture, Babbage explained the benefits arising out of specialisation. (ii) Use of Science and Mathematics: He advocated the practice of scientific method of production instead of the traditional manufacturing process. (iii) Emphasis on Cost Reduction: He suggested that every effort must be made to reduce cost by adopting new and improved methods of production. (iv) Invention of a "Difference Engine" : He invented this machine which is useful in calculating interest, insurance premium

etc. (g) James Watt and Mathew Robinson Boulton James Watt, the Junior and Mathew R. Boulton were the sons of the inventors of steam engine. Their contributions to management are as follows: (i) planned machine layout in industries (ii) production planning

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(iii) use of records to calculate cost of production and profit (iv) Training and development programming for workers (v) Work study and payment by results. (h) Robert Owen - Father of Modern Personnel Management

Robert Owen was an industrialists managing a textile mill in Scotland. He conducted several experiments a:nd came to the conclusion that the working conditions were highly unsatisfactory. In the course of managing the industry, he (a) raised the age of working children (b) reduced the hours of work (c) provided meals to employees (d) established stores to make available all necessities of employees and (e) housing facilities to employees. FAYOVS CONTRIBUTIONS Henry Fayol who is considered as the Father of Principles of Management, was a French industrialist. His contributions to management science could be classified under four headings. They are as follows:

(a) Classification of industrial activities To increase the efficiency of an industry, he felt it necessary

to sub-divide all industrial activities into the following sub-groups: (i) Technical activities (production); (ii) commercial activities (buying and selling); (iii) financing activities (search for and optimum use of capital); (iv) security activities (protection of property and personnel); (v) accounting activities (stock taking, preparation of Balance sheet and statistics) and (vi) managerial activities (planning, orga:nising, commariding, co-ordinating and controlling).

(b) Qualities of an Efficient Manager

The following are the qualities which, according to Fayol, would make a person an efficient manager: (i) physical (health, vigour, vitality); (ii) mental (ability to understand and learn, judgement and adaptability); (iii) moral (energy, firmness, willingness to accept responsibility, initiative, loyalty and dignity); (iv) educational (general acquaintance with matters not belonging exclusively to the function performed; (v) technical (peculiar to the function) and (vi) experience (from the work proper).

(c) Principles of Management Fayol emaciated the 14 principles of management which must be compulsorily used regardless of changing and special conditions. These principles are as foUows:

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(i) Division of work The object of this principle is to produce more and to produce better results.

(ii) Authority and Responsibility Authority refers to the right to command and the power to make oneself obeyed. According to Fayol responsibility is a corollary to authority. It is an essential counterpart and whatsoever authority is exercised, responsibility arises. (iii) Discipline

The essence of discipline is obedience, correct attitude and outward mark of respect within the limits fixed by the agreement between a concern and its employees.

(iv) Unity of CotiuDarid This principle suggests that an employee must receive orders from one superior only. Otherwise, it will lead to conflict, confusion and disorderliness.

(v) Unity of Direction According to this principle, "There should be one head and one plan," for a group of activities having the same objective. Then only all efforts could be directed towards the common goal.

(vi) Subordination of Individual interest to general interest According to this principle, the interest of a group should supersede that of the individual. This can be ensured by setting a good example by the superior, a fair agreement between the superior and subordinate and constant supervision.

(vii) Remuneration of personnel This principle emphasises the payment offair wages to the full satisfaction of employees.

(viii) Centralisation According to this principle, "the management has to decide the extent of authority that can be retained by it so that less important tasks could be delegated to lower and middle level managers to perform."

Industri4l Management

92 (ix) Scalar Chain

This principle refers t.o the superior-subordinate relationship in an organisation. All orders and communications should flow through this route of scalar chain. (x) Order According to this principle, there must. be a place for everything and everything must be in its appropriate place. Similarly, there must be an appointed place for each employee and every employee must be in his appointed place. (xi) Equity This principle attaches importance to equity of treatment to all the employees. (xii) Stability of Tenure of Personnel According to this principle, sufficient time must be given to employees to settle down in their work and adjust. to the work requirement. Too many transfers and an excessive labour turnover will interfere with the stability of work and are responsible for delayed production. (xiii) Initiative Under this principle, the employees must. be given an opportunity to express their ideas so as to make them feel more important in an organisation. This will help in increasing their skills and in their active participation in the organisational activities. (xiv) Esprit De Corps This principle means union is strength. It encourages team work based on harmony and unity to achieve organisational goals. (d) Elements of Management Fayol's elements can be regarded as functions of management. These elements or functions as advocated by Fayol are: (i) planning (li) organising (iii) commanding (iv) coordinating (v) controlling.

MODERN CONTRIBUTIONS Among the modem contributions to Management the following assume more important place:

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(1) L. P. Alford

Alford formulated his principles of manufacturing management and his statement of some 50 "laws of management" may be classified into 8 groups: the original presentation was of the American Society of Mechanical Engineers. These are: (i) Organisation and Leadership (ii) Specialisation and Standardisation (iii) Production Planning and Control (iv) Material Control and Handling (v) Product Inspection and Quality Control (vi) Individual Productivity (vii) Wages and Wage Payment (viii) Safety and Maintenance These principles, by their nature, cannot obviously have the exactitude of physical laws but they undoubtedly help managers in their tasks.

(2) Hugo Munsterberg Munsterberg published his book Psychology and Industrial Efficiency in which he made a strong plea for better understanding and applications of psychology. He proposed among other things, that the role of psychologists in industry should be: (a) to help in ascertaining whether the person is best fitted for a job (b) to determine the psychological conditions under which the best output per man could be achieved and (c) to produce the influence on the human mind desired in the interest of management.

(3) George Elton Mayo Elton Mayo was an Australian who was a professor of Industrial Research at the Harvard school of Business. He became famous on account of the Hawthorne experiments which had a significant impact on management thought. These experiments were conducted in the Hawthorne Plant of Western Electric Company in Chicago from 1927 to 1932. The study involved three phases, viz. (a) Test room studies, the objective of which was to assess the effects of a

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94

single variable upon performance of employees; (b) Interview studies which were concerned with improving the attitude of employee and were psychological in nature; and (c) Observation studies which were concerned with knowing the factors influencing the informal organisation of work group and were sociological in nature. The conclusion of Hawthorne studies can be enumerated as under: (a) The performance and productivity of workers are not entirely based upon physical and environmental factors. (b) Employees' needs cannot be satisfied by mere payment of better wages and salaries. (c) The performance of employees can be improved by duly recognising their importance as employees. Other factors contributing to the productivity of employees are security and morale. (d) The social informal group has more impact over the attitude of workers towards work performance. (e) Workers respond to work situation and social relation is an important component of work situation. (f)

Workers' complaints go to show their dissatisfaction whenever they are ignored or derecognised.

(4) Marry P. Follett

According to Follett, the basic problem of every organisation, economic or social, was harmonising and co-ordinating the group effort to ensure the most efficient effort towards completing a task. Therefore, she, suggested that the manager should try to develop power "with people" rather than power "over people" and for this she recommended "De-personalising an order" and making it the "law of the situation." Hence, her approach was essentially psychological, i.e., to study the problem of business organisation, problems of power, authority, conflicts and control from the point of view of the individual.

(5) Chester I. Barnard The important contributions of Chester I. Barnard can be summarized as under: (a) Designing the formal and informal organisation structure.

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(b) The recognition of communication as an important function of management. (c) Motivation as an inducement to better performance of work. (d) Decision-making as one of the essential executive functions. (e) Moral responsibility and morality of organisation are outstanding contributions of Barnard.

(6) Abraham Maslow Prof. Maslow put forth, in his famous book "Motivation and Personality" published in 1954, his theory of the hierarchy needs. According to him, human needs can be arranged in the form of a hierarchy starting in an ascending order from the lowest needs to the highest, viz. (i) physiological, (ii) safety, (iii) affiliation, (iv) esteem and (v) self-actualisation. Further, according to Maslow, satisfied need ceases to be a motivator.

(7) Douglas McGregor McGregor is noted for his "Theory X" and "Theory Y," which he presented in his book The Human Side of Enterprise. He was a behavioural scientist and his central concern was the application of behavioural science research to the practice of management and the direction of organisation. (8) Kurt Lewin

Among the behavioural scientists, Kurt Lewin is well-known for his concept of field theory and the technique of group dynamics. His field theory is regarded as the clearest explanation of how motivation depends on organisational climate. It starts from his celebrated formula: B = f (P, E) which implies that human Behaviour (B) is a function of Person (P) and his Environment (E).

(9) Chris Argyris Prof. Argyris while at the Yale University, made a study of industrial organisations to determine the effect of management practices on individual behaviour and personal growth within an organisation. According to him, changes take place in an individual as he moves from infancy (immaturity) to adulthood (maturity). There are seven such changes which may be viewed as being in a continuum.

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(10) Peter Drucker Peter Drucker outshines all the contemporary management thinkers. Drucker has a rich and varied experience and background in sociology, psychology, law and journalism. His contributions can be analysed under the following six heads:

(a) Nature of Management Drucker emphasized creative and innovative management development of new ideas, combining old and new ideas, adaptation of new ideas from other fields or even to act as catalyst and encourage others to carry out innovation. He treated management both as a discipline and as a profession, i.e., management is a practice rather than a science. Hence Drucker can be placed in the empirical school of management. Drucker is also a proponent of management as a profession being independent of ownership. He is also of the opinion that managers should not only be equipped with concepts, tools, and techniques, but that they must also be good practioners.

(b) Managerial Function According to Drucker, management is the organ of its institution. It has no functions in itself and no existence in itself. Drucker feel management through the following three functions: (i) Enabling the institutions to make its contributions; for the specific purpose and mission; (ii) Making work productive and the worker achieving; and (iii) Managing social impacts and social responsibility.

(c) Organisation Structure Drucker has postulated the following three structural requirements of the enterprise. (i) It must be organised for business performance; (ii) It should contain the least possible number of management levels; and (iii) It must make possible the training and testing of tomorrows top managers giving responsibility to the managers while they are young.

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(d) Federalism Drucker advocates federal decentralisation which is similar to Sloan's concept of centralised control in decentralised structure. Drucker felt and emphasised that decentalisation goes far beyond delegation. It creates a new contribution and a new ordering' principal.

(e) Management of Objective (MBO) MBO, which is a major contribution by Drucker, was introduced in 1954. The concept of MBO includes a method of planning, setting standard, appraisal of performance and motivation. It rests on a concept of human action, human behaviour and human motivation. (f) Futurity

Drucker was all along concerned with the futurity of decision. Whether new technological development may be absorbed by the society without adverse and negative effects, is a matter of great concern to Drucker. As it is almost impossible to foresee the shape of things to come, people can only try to understand the nature of discontinuities in historical perspective.

SCHOOLS OF MANAGEMENT THOUGHT Several schools of thought in management have evolved over a period of time depending on the learnings and philosophy of the exponents. The various schools of Management thought are as follows:

(1) The Empirical School Exponents of this School of Management Thought emphasize the importance of a study of the experiences of successful managers or a study of mistakes made in management. They claim that such a study would provide a better understanding of the most effective way of managing an enterprise. Exponents at times stress the need for study and analysis of cases. However, management is not like a law based on precedent. The future situations in which management will have to take decisions vary materially from the previous experiences. Interestingly enough, Earnest Dale, whilst claiming to find "so little practical value" in the principles defined by universalists, himself generalises from his own studies of management practioners. In fact, later he comes out with a book entitled Management: Theory and Practice.

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(2) The Human Behaviour School Exponents of .this school of management stress on the importance of the behaviour of human beings and of treating people as human beings. They emphasise the utility of human relations practices covering topics such as leadership, communication and motivation. Management's study must be centered on interpersonal relations as, in their definition, managing involves, "getting things done with and through people." This school of thought is often referred to in various ways such as the human relations or the behavioural science approach. It concentrates on the "people" aspect of management with heavy orientation to social psychology with stress on satisfying psychological behaviour of groups. Some exponents consider management as leadership. The influence of environment and constraints on behaviour are also recognised. This school has thus made significant contributions by providing an insight into human behaviour. However, it would be an exaggeration to consider leadership or even the field of human behaviour as encompassing the whole area of management.

(3) The Social System School The social system school views management as a social system or a system of cultural inter-relationships. Its thinking is sociologically oriented aimed at identifying various social groups with the fundamental faith in the need to solve the biological, physical and social limitations of man and his environment through co-operation. This school of thought has made its contribution by stressing the need for understanding organisation relationships, group reactions and the influence of the informal organisations.

(4) The Decision Theory School Exponents of this school of thought emphasise the decision making aspects of management. As the job of managing is mostly concerned with taking right decisions, this school adopts, as its central focus, the decision and a study of the decision process basically the selection the right course of action from possible alternatives.

(5) The Mathematical School Evolving from the Decision Theory School, the mathematical school provides a quantitative basis for decision-making and views management as a system of mathematical models and processes. They contend that decision-making is a logical process and it can be expressed in terms of mathematical symbols or models. This school

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has contributed materially in recent years providing tools or techniques such as linear programming, simulation and queueing theory as an aid to management decision-making which is getting more complex in larger organisations where managers have to consider a large number of variables. However, to look upon it as more than a tool or aid, is an exaggeration of emphasis. (6) Systems Management School The latest approach is to look upon Management as a system or as "an organised whole" made up of sub-systems integrated into a unity or orderly totality. For example, the human body can be looked upon as a system, being a resultant of other sub-systems such as the nervous system, the circulators system, and the digestive system. The systems approach aims at cutting across departmental lines. Its exponents talk in terms of input, output and feedback and the need for an integrated approach. The advent of computers as an aid in decision-making has assisted in popularising the system's approach to management. (7) The Management Process School Finally, the operational or management process school at times referred to as the classical school, fathered by Henry Fayol, emphasised that management is an operational process and can best be studied through an analysis of the Managerial functions. Its exponents view the management processes as the performance of certain activities or basic management functions. This process can basically be divided into five functions, viz. (1) planning (2) organising (3) staffing (4) motivating and (5) controlling although different authors use different words to describe these functions or divisions. For example, Koontz and O'Donnel divide the process into planning, organising, staffing, and controlling and George Terry prefers the word "activating" to motivating. VARIOUS APPROACHES TO MANAGEMENT There are various approaches developed to the study of Management. The following are the important ones: (1)

Contingency Approach

The basic theme of the contingency viewpoint is that each organisation is unique, each management decision situation is unique. The uniqueness and complexity of each situation is to be understood and tackled in an appropriate manner. The way 'of tackling any situation and its success is contingent upon the

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peculiarities and behaviours of the variables within that situation. Just as each situation is unique, the way of tackling it should also be unique. Decisions or actions have to be situation-adaptive and situation specific. The nature of the situation determines the' applicability of the methods for dealing with it. There is a best way of doing things which is universally valid and applicable for all situations, irrespective of their peculiarities and differences. Contingency viewpoint is practically useful in many respects. The effectiveness of any form of departmentation, for instance, depends not only on its inherent attributes but also on the nature and behaviour of the organisational situation. Similarly, as regards choice of supervisory or leadership styles, anyone particular style (say democratic style) may not produce the desired results in some situations. Instead, autocratic, strong-arm approach may be more appropriate in such a case to the extent that it fits into the situational needs and realities. The effectiveness of different techniques of motivation is also contingent on the nature of the different needs and expectations ot people for whom they are meant. Hence, the choice should be based on analysis of these considerations. (2) Human Relations Approach

The human relations approach as a reaction to the scientific management approach began to gain momentum in USA in 1920. It became popular in 1930s and continue to hold sway. Human relations approach has placed the human factor on a high pedestal in organisations. The basic philosophy of this approach can be enumerated under the following points: (a) Human organisations are psycho-soCial systems, which should recognise the self-respect and dignity of its employees and workers. (b) It is through employees that an organisation works and hence their needs, feelings and viewpoints should be understood and accommodated. (c) Employees are not only interested in money but also in such tangible things as recognition, appreciation, warmth in treatment, participation and the like. (d) Employees basically want to work, contribute to the goals ofthe organisation and are capable of assuming responsibility. It is the responsibility of management to mobilise the willing co-operation of employees and workers by establishing friendly relations,

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meeting their emotional, psychological and social needs by injecting feeling of belongingness and involvement. (e) Manager should move with employees and communicate with them without feelings of ego and superiority complex. This reduces social distance and establishes a one big happy family. (f) There should be no scope for conflicts and misunderstanding

between members of the organisation. (g) Efforts should be made to ensure a high degree of satisfaction, motivation, morale and sense of security through warm supervisory styles and informal managerial approaches. (3) Management Science Approach Management Science or Operation Research, is, in essence, an attempt to provide more exact methods of decision-making through quantitatively evaluating decision models. It attempts to replace verbal, descriptive analyses of problems with models, symbols and quantification. Thus, the primary focus of this approach is the decision-making through model building. Since, through this device, relationships and, where a given goal is sought, the model can be expressed in terms which optimise that goal. The management science approach makes the following assumptions about organisations and management: (a) Business organisations are predominantly economic-technical systems. (b) They are primarily organised for achievement of specific, objective and measurable economic goals. (c) Organisational activity has to focus on achievement of goals in an optimal fashion. (d) Management is a logical process of making decisions on planning and controlling enterprise operations. (e) Management should make organisational decision through a process of scientific, logical, rational, and formal reasoning, backed by quantification. (4) Systems Approach According to systems approach, an organisation is a purposive system and consisting of a set of points, functions, processes, or subsystems. All these points or sub-systems are functionally related to each other in some way; they are inter-dependent and interacting

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sub-systems. They are tied together and linked together into an integrated and organic whole through goals, authority flows, resources flows, information flows and so on.

(5) Behavioural Science Approach The behavioural science is concerned with the understanding of human behaviour, and for this it has adopted the scientific method. It includes psychology which seeks to study individual behaviour, sociology which studies group behaviour and Anthropology which studies the influence of physical, biological, and cultural factors on human behaviour. This approach seeks an understanding of organisational behaviour with the help of scientific and empirical research. Based on these studies, it has been able to develop verifiable and pragmatic propositions about human behaviour in organisations. It offers these as guidelines to practising managers in decisions and actions affecting the organisational personnel. This approach has formulated the following propositions (a) organisations are techno-economic, and social units. (b) individuals differ in their attitudes, perceptions, abilities, needs and values, and these change over a period of time. '(c) conflicts in organisations between individuals and between the management and the employees are inevitable, and to some extent, they are necessary for progress. (d) interpersonal behaviour 'in organisation is influenced by a variety of factors.

Evolution Of Industrial Management The application of principles of management to industries dates back to 1886. In the year 1903; F.W.Taylor presented before the American society of mechanical engineers his historic paper on "shop management" in which he crystalised the scientific principles that industry so badly needed. Although Taylor's system was never widely adopted in its original details, his procedures and techniques literally changed the make up of American industries. In 1900, the principles of Henry Fayol, were adopted in industries. Fayol's knowledge of the managerial process was deep and penetrating. He observed that while technical ability is most important to the worker, managerial ability becomes more and more important as one moves up the ladder of managerial hierarchy. Fayol concentrated more on the job of managing director, i.e., administration point of the industry. During the First World War, several new development were brought about. The greatest of these developments was the introduction of better methods of dealing with workers. Earlier, all the

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of employees had been done by foremen and head of the department concerned. Now industries set up personnel department with a view to eliminate waste in industry which was widely sought both by management and labour. Psychological tests were widely introduced as "better management." The efficiency engineers, chiefly Henry L. Gantt and Frank B. Gilberth devised new methods, namely, motion study to eliminate wasteful and unproductive movement of workers. The 1920s were an era of growth in personnel, material handling, production design, budgeting, and increased mechanisation to save human labour. The Second World War brought about tremendous expansion in automation and use of atomic energy in industries. The computers are used on a largescale today. Management is now relying upon the mathematician to aid the top executive in reaching proper decision. Apart from this, nowadays we find the stimulation of the whole production process in industries using this technique, alternative proposals might be simulated and the most desirable ones selected without undertaking the actual production. In near future lies the possibility of a completely automated manufacturing in industries. 2.3 PLANNING

Introduction Planning is a primary function of management. It refers to the determination of a course of action to achieve a desired result. Planning concentrates in advance, what to do, how to do it, when to do it and who is to do it. Planning bridges the gap from where we are to where we want to go. Planning function of management precedes all other managerial functions. Without setting goals to be reached and line of actions to be followed, there is nothing to organise, to direct or to control. Planning atually is the foundation of management. The vital supporting column upon planning, organising, activating and controlling and all these combine together to make up the bridge of process of management.

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Planning governs the survival, progress and prosperity of any organisation in a competitive and everchanging environment. It is really a continuous process to keep the organisation as a going concern and other functions are also performed simultaneously.

Definition and Nature of Planning Koontz and O'Donnell defined planning as "an intellectual process, the conscious determination of courses of action, the basing on decisions on purpose, acts and considered estimates." In the words ofG. E. Milward, "Management is the process and the agency through which the execution of policy is planned and su pervised." On the basis of the above definitions, the nature of planning can be enumerated. (1)

planning is very closely associated with the goals or objectives of the organisation. The goals may be expressed or implied. However, well-defined goals lead to efficiency in planning.

(2) planning' is mainly concerned with looking ahead of the future. Forecasting provides the necessary raw material for correct planning. (3) planning involves in the selection of the best alternative. (4) planning is required at all"levels of management. However, its scope and importance increase at successively higher levels. (5) planning is an inter-dependent process. It coordinates the activities of various departments, sections and sub-sections. (6) planning is flexible as it is based on future conditions which too are dynamic. (7) planning is a continuous and unending process. (8) planning governs the survival, growth and prosperity of any organisation. .

Characteristics Features of Planning The following are the characteristics of planning: (1) "Choosing" is at the root ofplanning: The need for care and caution in making one's choice would arise only when there are

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several objects to choose from. If there is only one thing to take or do, there can be no question of a choice. In every sphere of business there are alternative courses of action for everything. Therefore, picking out the best from among a number of alternatives becomes important. Without planning, a business would be a rolling stone. It cannot have much chance of succeeding in any field. (2) Planning is a thinking process: Planning denotes logical thinking and decision-making. It involves decisions as to (a) What is to be done? (b) How it is to be done? (c) When it is to be done? (d) By whom it is to be done? Decisions in respect of these can be made only when the manager has the gift of foresight and vision, backed by knowledge of relevant facts as also of enough experience. (3) Planning is pervasive: An element of planning can be seen behind every human activity in any society or organisation. Planning function is involved in all forms of organisation irrespective of its objects. (4) Accomplishment of enterprise objectives: An organisation employs a number of persons and each of them has his own personality and attitude. As such, there are bound to be differences about the enterprise objectives and the ways to accomplish them. Planning focuses action on enterprise objectives. It points to action which might be costly or useless. (5) Primacy of Planning: Unless it is known in advance what work is to be done, and how and when it is to be done, there can be no preparation towards doing it. Problems regarding organisation staffing, direction and control can be sorted out only after objectives have been planned.

(6) Planning is all-embracing: Planning can deliver the goods only when it is undertaken by all those whose job involves decision-making of one kind or another. In fact planning is the guide to decision-making. Thus whether it is the chief executive or a foreman on the shop floor, all managers have to do some amount of planning.

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m Planning is an integrated process: Planning involves selection of concrete objectives and formulation of sound policies, programmes and procedures and strategies for their accomplishment. For the accomplishment of an important task, all the present facts and the future possibilities have to be taken into account. Importance of Planning The importance of planning can be studied under the following: (1) Planning offsets future uncertainty and change:

Future is uncertain and full of changes. Both these elements make planning a necessity. Planning brings a higher degree of certainty, rationality and order into the organisation. (2) Planning helps management by objectives: The first element of planning is setting the goals and objectives for the organisation as a whole and all its components. This gives a sense of direction to the working of the organisation and saves it from going astray or drifting about aimlessly. (3) Planning offers better coordination: Planning helps the management in the coordination proeess also. As Koontz and O'Donnel say "plans are selected courses along which the management desires to coordinate group actions." The well developed objectives, policies, programmes and procedures help in coordination. It avoids duplication of work and inter-department conflicts also. (4) Planning leads to Economy in operation: Planning is the only way to realise the business objectives at cheapest and the best. It paves the way for proper utilisation of company resources. (5) Planning helps control: Planning is always a pre-requisite for controlling. No control can be exercised without planning. Planning, is forward looking and control as backward looking. (6) Planning encourages innovations and creativity: Planning is basically the deciding function of management. It promotes innovative and creative thinking among the managers because many new ideas come to the mind of a manager when he is planning.

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Types of Plans Planning consists of several individual plans or component parts. From its objectives, an organisation develops standing plans and single-use plans. Standing plans lead to the development of policies, procedures and rules. Single use plans produce programmes, budgets, strategy etc. The relationship of standing plans and single use plans can be understood with the help of the following chart. Types of plans Standing plans

Objectives Policies Procedures Rules Methods

Single use plans

Programmes Budgets Projects Strategies

A. Standing Plans

These are permanent plans. They are used repeatedly and include the following: (1) Objectives: Objectives provide the basic foundation upon which the structure of plans is built. To guide and unify the efforts of employees in a desired direction, the management must set its objectives. The objectives must be defined in clear terms. It is only clearly defined objectives that will enable a management to effectively plan policies, procedures, methods, strategies and so on. (2) Policies: General statements that guide decision-making are called "policies." They define the boundaries within which decisions can be made by the subordinates. They direct decisions towards the accomplishment of objectives. The basic purpose of policies is to secure a consistency of purpose and avoid decisions which are based on expediency. Policies may be either written statements or oral understanding in general terms governing actions in repetitive situations. Policies help in the realisation of business objectives very much. (3) Procedures: Procedures indicate the specific manner in which a certain activity is to be performed. Where policies lay down the broad area of actions, the procedure determines the sequence of definite acts.

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(4) Methods: Method deal with the best way in which a particular task is to be performed. Thus a method is more detailed than a procedure. Whereas a procedure shows a series of steps to be taken, a method is only concerned with a single operation.

(5) Rules: Rules are specific statements of what mayor may not be done. The only discretion left to the manager is whether or not to apply the rule. The development and communication of rules provide ways of informing the organisational members exactly what the boundaries of acceptable behaviour are. Thus a rule is different from a procedure.

B. Single Use Plans Single use plans are designed to accomplish specific objectives, usually within a relatively short period. Budgets, programmes, and projects are examples of such plans. They are as follows: (1) Budgets: A budget is a plan which covers the course for industrial activities for a future period to achieve the prescribed objectives and to provide the desired profits for operation. It may be stated in time, materials, money or in any other unit. Money budgets are very common. Budgets serve two purposes, i.e., planning as well as control. (2) Programme: A programme is a sequence of activities designed to implement policies and accomplish objectives. They are developed under the umbrella of organisation goals. Programmes may be major or a minor one. Expansion programmes, training programmes, management development programmes are some examples of major programmes. Replacement of a particular machine, trahling a few operators for a new machine are minor programmes.

(3) Projects: A project may be called a specific programme. So it has some characteristics of programming and some characteristics of strategy. Construction of a new plant and marketing a new product are some examples of projects.

(4) Strategy: A strategy is also a special kind of plan formulated basically to meet the challenge of special circumstances. They are actually counter-plans. For example, strategy can be planned to face the excessive competition in marketing field - choice of a strategy depends on a number of factors like available resources, urgency of achieving an objective, external atmosphere, temperament of the concerned executives.

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Steps in Planning The following are important steps in the process of planning:

(1) Determination of objectives: The first step in planning is to determine the enterprise objectives. These objectives set the pattern of the proposed course of action and shape the future policies. The objectives should be for the organisation as a whole and then it must be broken down into departmental, sectional and individual objectives. Objectives must be specific, clear and informative. (2) Establishment of Planning premises: The second step in planning is to establish planning premises. Premises are planning . assumptions, the future setting in which planning takes place. Thus it is a forecast of those business conditions under which a plan is to operate. (3) Determination of Alternative courses: The third step in planning i~ to search for and examine alternative courses of action. There is hardly a plan for which a number of alternatives cannot be found out. In industries, there exist a number o( alternative courses of action for achieving the desired objectives. All possible alternatives should be found out for their comparative and analytical evaluation. (4) Evaluation of Alternatives and Selection of a course of Action: The next step is the evaluation of alternative course of action and finding a suitable and best course of action. All the possible alternatives should be compared and evaluated in the light of premises and, goals. (5) Preparation of Derivative plans: The next step in the planning process is to formulate the derivative plans in support of the basic plan. There are sub-plans or departmental plans. The basic plan prepared for the whole enterprise cannot be effectively operated in the absence of such sub-plans. So, within the framework of a primary or basic plan, derivated plans are devoted in each area of the business to integrate objectives with a network of policies, programmes, procedures, etc.

(6) Timing and sequence of operation: Timing is an essential consideration in planning. After developing the plan, sub-plans, the starting and finishing period should be fixed for each plan. Scheduling is very useful not only in sales and production areas but in other functional areas also. (7) Securing participation of employees: The execution of a successful plan depends to a large extent upon the loyalty and

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sincerity of the subordinates. It can be secured only when their proper participation is secured. Plans must be communicated, explained and consulted with them thoroughly. Such participation improves the quality of planning and involvement of subordinates in it.

(8) Considering the strategy: Strategy has a significant contribution towards the execution of a plan. So consideration of different strategies becomes an integral part of the planning process. A multiple strategy should be planned and followed for the success of planning. (9) Providing follow-up to the proposed course of Action: Ultimately, a provision for follow-up measures should be made for the time when a plan is put into action. In the context of current problems and situations, necessary adjustment in plans becomes imperative. So necessary provision should be made for it beforehand. Advantages of Planning Successful planning confers positive and all-round benefits to the organisation such as the following:

(1) Economy of time and effort: As planned activities are subjected to a careful scrutiny, unnecessary activities are eliminated and only essential activities are undertaken to accomplish the specific work. Thus, overall time and effort for the planned activity is reduced to the minimum. (2) Maximum utilisation of Resources: As planning involves tacking stock of all available resources including human resources, it reveals hidden resources which might have hitherto remained unutilised. This makes maximum utilisation of resources possible.

(3) Planning compels managers to visualise the complete picture about the future: This is valuable as it enables them to see important relationships to gain a fuller understanding of each activity and to appreciate the basis on which their managerial actions are planned. (4) Planning provides a basis for control: Planning involves not determining objectives and fixing the time for starting and finishing each activity but also lays down sub-goals to be achieved at different points of time; during the entire plan period. This enables management to compare actual performance with what has been planned, thus providing a basis for control. o~y

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(5) It sets enterprise goals in their proper perspective. (6) It gives meaning and content to the time-horizon in the enterprise life. It compels fore thought - global in the wider socioeconomic environment and internal within the enterprise management. (7) It provides the tempo and gives the direction to the management process. Limitations of Planning (1) A plan is formulated on the basis of certain assumptions about future developments. Its usefulness, will largely depend on subsequent correctness of these assumptions. If the actual condition under which the plan has to be implemented are significantly different from those which had been assumed, much of the efforts which has gone into making the plan would be wasted.

(2) Critics of planning also argue that the resources spent on planning could better be spent in actually performing the physical work to be done and it is, therefore, a waste to spend them on planning. The answer to this is that expenditure of resources on many unplanned activities might well prove entirely unproductive and, to prevent this, planning is essential. (3) Managers have often complained that a clearly formulated plan forces them into a Straight Jacket, and leaves no room for their initiative. Though there may be some element of truth in this view, it must be pointed out that no plans can be drawn in all their details and most ofthem generally do provide for some degree of flexibility, to facilitate necessary adjustments due to changes in conditions. Management by Objectives The techniques of M.B.O. was first used by Peter Drucker in 1954. Under this technique, the manager and subordinates togethel" agree upon the targets, the type of activities, the time schedule for using as a criterion for evaluating the performance of subordinates. According to George Odiorne, M.B.O. is a process whereby the superior and the subordinates of an organisation jointly identify its common goals, define each individual major area of responsibility in terms of results expected of them and use these measures as guides for operating the unit and assessing the contribution of each of its members. The important areas where objectives are to be set according to Drucker~:

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(1) Market standing (2) Innovation (3) Productivity (4) Physical and financial resources (5) Profitability (6) Managerial performance and development (7) Workers' performance and (8) Attitude and public responsibility.

Steps involved in M.B.O. Joseph M. Putti in his book Management - A Functional Approach enumerates the steps involved in M.B.O. as under: The subordinate writes down his major areas of responsibility, discusses them with his superior and reaches an agreement. (1)

(2) The subordinate sets objectives in each one of the major areas of responsibility and reviews them with his superior. The superior's guidance is essential in sizing up these objectives. Once again an agreement is reached on the objectives. (3) The subordinate goes back and tries to put them into practice. (4) The subordinate reviews the progress towards these objectives with his superior on a quarterly basis. During these meetings, objectives and plans are revised and updated as required. (5) At the end of the given period, the subordinate submits in brief report of his accomplishments with comments on the variance between results actually achieved and the results expected. (6) The superior and subordinate discuss the self-appraisal of the subordinate. The reason for goals not being achieved are explored at this meeting. (7) AB a final step, a new set of objectives is established for the following year along with recommendations for improvement, if any required.

Advantages of M.B.O. (1) It enables the individuals to know

what is expected of them.

(2) It helps in drafting plans and helps in achieving them. (3) It improves communication between the superior and subordinates. (4) It enables individuals to be aware of the goals of the organisation. (5) It makes the evaluation process more equitable by focussing on specific accomplishment.

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(6) It enables subordinates to know how far they have progressed in achieving the goals of the organisation.

Forecasting Forecasting is an important step in planning. It refers to that process of predicting, projecting, and eliminating some specific future events and conditions (internal and external) in the organisation. It is a systematic appraisal of the future, viz., its behaviour, trends and likely changes so far as they are relevant to the functioning of the industries. Forecasting is an important tool of proViding the intellectual basis and information inputs for undertaking the formulation of meaningful plans. Since the future by definition is uncertain, forecasting is unlikely to be accurate always. The future does not always behave as we would expect it to. It may be possible to improve the realiability of estimates and predictions by application of more scientific and sophisticated forecasting techniques but there is no reason for over optimism in this regard. Many events in the future may turn out to be significantly off the line of forecasts. Despite its limitations, forecasting cannot be dispensed with as a technique of generating information about future. That is why, most companies go for investing substantial money in forecasting. Planning is to be based on proper and reliable information on the past, present and likely future position of the organisation. Forecasting is intended to generate information on the future - the conditions likely to prevail and their likely implications for the performance of the organisation. Intelligent, systematic and scientific forecasting is an attempt at understanding the state of uncertainty and complexity of some of the variables of the future. It may be noted that the forecasting does not render the future conditions less complex and uncertain. It only strengthens the sense of confidence and competence of managers, while making current decision on commitments of scarce resources and valuable efforts in the future. It enables managers to make informed jUdgements. The only alternative to forecasting is drifting into the unknown future with closed eyes, which is more hazardous.

Importance of Forecasting in Planning One of the steps in planning in forecasting. It provides the intellectual basis and information inputs for understanding the formulation of meaningful plans. It also enables the manager to make planning premises, estimates and judgements on the

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implications of future events and behaviour of variables. Managers make planning premises on the basis of information they generate by forecasting. Thus, forecasting precedes the formulation of planning premises. In this sense formulation of planning premises may be regarded as one of the stages in planning. For an industrial enterprise there are several aspects of future which can be the subject matter of forecasting depending upon the size and nature of the enterprise. They relate to future conditions in economy, general price situation, growth of economy, changes in its structure, conditions in the industry in which the enterprise operates or wishes to operate, likely demand and competitive trends, availability of inputs, manpower, changes in technology, government policies etc. The time span of forecasting can range from a few months to a number of years depending upon the range and size of operation of the enterprise as also the nature of industry. Effective forecasting helps in reducing the influence of chance events and luck apart from enlarging the freedom of action for the enterprise make conscious choice as part of the planning process. However, it should be kept in mind that forecasting is not planning. The former is confined to the task of predicting tpe probable future conditions, while planning is concerned with designing the desired future conditions and making the need efforts to ensure that they will materialise.

Techniques of Forecasting A wide range of techniques have been developed for forecasting as explained below:

(1) Time series analysis: Time series refers to numerical observations of a variable at successive intervals over a period of time. Time series of a variable for a fairly long period of time in the past can be used to project or to extrapolate its future behaviour on the assumption that history repeats itself. There are four components in a time series - trend, seasonal, cyclical and erratic fluctuations. (2) Econometric techniques: These techniques are useful for determining and estimating the functional relationship of dependence and interdependence among two or more variables. Simple regression, multiple regression and simultaneous equations syste_m are some of the econometric methods of forecasting.

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(3) Barometric techniques: The behaviour of certain economic or business variables can have an important effect on some other variables. There are three types of indicators; lead indicators; lag indicators and concurrent or coincident indicators. An overall index of behaviour of a set of indicators, known as "diffusion index" is prepared as the basis of forecasting the future in regard to the phenomenon under study. (4) Input-output techniques: There are important relationships among the various activities within a system whether it is as large as an economy or as small as an enterprise. One such relationship is called input-output relationship. Input-output tables can be prepared in a matrix form for various large or small activity systems and can be used for forecasting purposes. (5) Survey techniques: First hand data on the behaviour of certain desired variables can be obtained through selective surveys by means of questionnaires and interviews. The data so collected can be processed and analysed for purpose of testing some predetermined hypothesis and making predictions and future estimates of the behaviour of the variables under study. Surveys are of two types: complete enumeration or central and sample survey.

Decision-Making The life of a manager is a perpetual choice making activity. Executives at all levels work on decisions constantly. Management decisions are consciously or unconsciously made in an industry every day. According to Peter Drucker "Whatever a manager does, he does through decision-making." In the words of John McDonald "The business executive is by profession a deci~ion-maker. Uncertainty is his opponent, overcoming it is his mission. Whether the outcome is a consequence of luck or of wisdom,. the moment of decision is without doubt the most creative event in the life of the executive." Decision-making permeates all management activities. Hence, it is sometimes described as the total task of manager or "The heart of managing."

Definition and Characteristics of Decision-making Decision-making is a mental process. It is a process of selecting the best alternative for doing a work. Thus it is a particular course of action chosen by a decision··maker as the most effective alternative for achieving his goals. According to McFarland "a decision is an act of choice .wherein an executive forms a conclusion about what must not be

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done in a given situation. A decision represent a course of behaviour chosen from a number of possible alternatives." In the words of Haynes and Massie, "a decision is a course of action which is consciously chosen for achieving a desired result." The characteristics of decision-making are as follows: is a process of identifying and considering a number of alternatives which are available.

(1) It

(2) The alternatives are compared with one another with

respect to their merits and demerits or suitability and nonsuitability. (3)

After considering the pros and cons, the most desirable alternative is selected.

(4) The alternative so chosen is then transformed into action. (5)

There is a follow-up of the decision and if necessary, corrective measures are taken. STEPS INVOLVED IN DECISION·MAKING

The various steps involved ~ the decision-making process are as under: (1) The manager must begin with discovering or locating unsatisfactory areas or forming the problem situated in his environment through his perpetual and inquisitive skills. (2) After discovering the problem, the manager must try to analyse what exactly is the problem. He must look into the problem and pierce through it to find out the origin and its degree of importance. (3) The next step involves setting the objectives which the manager wo~.like to achieve by solving the problem. Objectives i}re the ends towards which the manager directs his decisionmaking.

(4) Next, the manager must collect the relevant information to provide him the knowledge for analysing the complexity and uncertainty associated with the problem and the alternative changes of action. (5) The manager then tries to discover and develop alternative courses of action which are in the nature of potential and possible solutions ~ the decision problem and which provide an opportunity for the manager to make a choice.

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(6) The next stage involves evaluating the alternative of action by reference to certain objective criteria. The expected outcomes or values of alternative courses of action have to be intimated through forecasting and other devices. (7) The manager then makes the final choice from amongst the various alternative courses on the basis of organisational policies, strategies, previous decisions etc. (8) The last stage relates to implementing the decision for which necessary structural administrative and logistic arrangements are to be made by the manager for translating the decisions into effective action and outcomes. TYPES OF DECISIONS Decisions are of the following types: (1) Programmed and non-programmed decisions: Programmed decisions refer to decisions made on problems and situations by reference to a pre-determined act of procedures, precedents, techniques and rules. These decisions are made with respect to familiar routine recurring problems which are amenable for structural solution by application of known and well defined operating procedures and processes.

On the other hand non-programmed decisions are those which are made on situations and problems which are novel and nonrepetitive and about which not much knowledge and information are available. They are non-programmed in the sense that they are made not by reference to any predetermined guidelines, standard operating procedures, precedents and rules but by application of managerial intelligence experience, judgement and vision to tackling problems and situations which arise infrequently and about which not much is known. (2) Strategic and Tactical decisions: Strategic decisions are made at the top level of organisation to handle problems critical to the survival and success of the organisation. They have a vital impact on the direction and functioning of the organisation. Much analysis and judgement go into making strategic decisions. On the other hand tactical decisions, also known as operational decisions are made to implement strategic decisions. A single strategic decision calls for a series of tactical decisions which are of a relatively structural nature. Tactical decisions are relatively short step like spot solutions to break down strategic decisions into

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implementable packages. Besides, they are more specific and functional and are made in a relatively cleaned setting; the information about such decisions is easily available. The distinction between strategic decision and tactical decision can be understood by the following example: Decision on mobilisation of military resources and efforts and an overall deployment of troops to win a war are strategic decisions. Decisions on winning a battle are tactical decisions.

Decisions made under conditions of Certainty, Risk and Uncertainty The environment in which decision-making is done and decisions are implemented can be described along the following lines: (1) Certainty: In an environment characteristed by certainty, full information is available on all the factors relevant to the problem and its solution. Information is also regarded as reasonably reliable and easy to get and is not too expensive. In such a setting, the manager can have full knowledge about the future, about the alternatives and their outcomes. He is therefore, in a position to choose the best alternative. Another meaning of the state of certainty is that the manager considers only a few factors which are known and about which information is available. He ignores the other factors as involvement for his problem.

(2) Risk: In this situation, the manager is in a position to get only some information about his decision situation. But he is not completely sure of the availability or the reliability of information. Though he may be able to develop alternative courses of action, he is less than definite about their outcomes. In other words, the expected results are not deterministic but only probabilistic because the future conditions cannot be predicted with accuracy in the absence of full information. With the help of the available information and his own experience, the manager can assign probabilities to the likelihood of occurrence of future events bearing on his decisions.

(3) Uncertainty: Under conditions of uncertainty, the manager faces a situation in which information is neither available nor reliable. Everything is in a state of flux, several random forces operate in the environment which make it unpredictable. The variables change fast; their interaction is complex and the manager has no means of getting a grasp of them. The manager cannot have any idea about the outcomes of the alternative course of action Ol"

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their probabilities. Even so, he has to tackle the situation, create some order out of chaos and make his decision by using his judgement and experience. In the real world, the decision environment of the manager may have all the three elements discussed above.

MODERN TECHNIQUES FOR MAKING PROGRAMMED DECISIONS The following are the various modem techniques used for making programmed decisions: (1) Linear programming: It is the technique for optimisation of an objective function under given resources and constraints. The technique is helpful under conditions of certainty.

(2) Probability Decision Theory: The basic premise of this theory is that the behaviour of the future is probabilitistic and not deterministic. With the help of this theory only pay-oifmatrices and "Decision trees" are constructed. (3) Game Theory: It is useful for the decision-maker under conditions of competitive rivalry or conflict. There are two-person, three-person and four-person games as also zero-sum and non-zero games. (4) Queing Theory: The technique is designed to find solution to waiting line problems for personnel, equipment or service under conditions of irregular demand. Public transport systems, hospitals and big departmental stores are some of the possible users 'of this technique. (5) Simulation: It is a technique for obscuring the behaviour of a system under several alternative conditions in an artificial setting. The likely behaviour of events are evaluated in a simulated setting. (6) Network Technique: There are two .powerful network techniques - Critical Path Method (CPM) and Programme Evaluation and Review Technique (PERT) which are useful for project planning and control.

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2.4 ORGANISATION

Introduction The term "organisation:" is used in a dynamic as well as a statlc sense. In its dynamic sense, organisation refers to the function of management which is necessary for bringing people together so as to achieve the object of an undertaking. This may well be called "the process of organising." In its static sense, "organisation" refers to the structure of relationship among positions and jobs which is built up for the realisation of the common objectives of a firm. In this sense, organisation serves as a means to achieve the ends of the firm.

Definition of Oraanisation Kimball and Kimball, in their book, Principles of Industrial Organisation, define "organisation" as "the duties of designating the departments and personnel that a" to carry on the work, defining the functions and specifying the relations that are to exist between departments and individuals." According to Oliver Sheldon (The Philosophy of Management), "Organisation is the process of so combining the work which individuals or groups have to perform with the facilities necessary for its execution, that the duties so performed provide the best channels for the efficient, systematic, positive and coordinated application of the avai\able effort." From the above definition, it is clear that organisation concerns itself with combining and coordinating individuals as well as group activities in an enterprise. Organisation integrates the various jobs of the enterprise into an effective operating system to provide for accomplishing the firm's objective. A comprehensive definition of organisation is given by Louis A. Allen in his book, Management and Organisation. According to Allen, "Organisation is the process of identifying and grouping the work to be performed, defining and delegating responsibility and authority and establishing relationships for the purpose of enabling people to work most effectively together in accomplishing objectives." Scope of Organisation Organising is the process of determining and establishing a structure or system of authority and activity relationships among the

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resources being used to meet the factory's objectives. The scope of organisation includes: (l)The human resources who utilise the physical resources of the company to achieve its objectives. (2) The respective positions they occupy and the functions they perform. (3) The range of authority and responsibility they individually excercise. (4) The framework offormal and informal relationships through which they deal and communicate with one another. (5)The mechanisms through which they operate and coordinate their activities in the enterprise.

It is upon the basis of persons, physical resources, positions, authority, contacts, operations, communications and coordination that work is carried on successful1y. Purpose of Organisation Organisation serves two Important purposes. Firstly, it serves as a plan of sub-functions. It defines the relationships between the sub-functions so as to coordinate the efforts of people in the accomplishment of the overall task effectively and efficiently. The objectives place more emphasis on the job content, definition, analysis and relationships of the organisation structure. Secondly, organisation serves as a pattern of ways in which a nuniber- of people relate themselves to each other in the planned systematic accomplishment of a complexity of tasks. This objective tends to emphasise on th~ personal relationships and human element to a grea~r extent. But the common purpose of establishing an organisation is.to enable the human resources to work'more effectively as a unit. In the words of Voivh and Wren (Principles of Managem;nt), "To cohtribute his best, every employee needs to know what he is expected to do, who his superior is, and what his relationship is to other employees, and other parts of the organisation. A proper combination of resource inputs and a soundly conceived organisational structure are requfred to achieve increased productivity and synergy." A sound organisation tends to alleviate certain types of personnel problems such as (1) duplication of effort, (2) unbalanced workload, (3) defining training needs, (4) dormant programmes and (5) lack of coordination.

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The Process of Organisation Organisation is one of the important functions of management. To organise is to coordinate, harmonise or analyse in a logical order the various functions of a f~tory. This function includes making a rational division of work into groups of activities and tying together the positions which represent"the group of activities so as to achieve a rational and orderly structure for accomplishing a task. The steps involved in the process of organising are as follows: (l).Determination of objectives. The first step in organising is to decide the objectives as organisations are built around objectives. Here, the objective to be accomplished is to be clearly noted. It may be profit, sales, or a certain volume of production. (2) Enu meration of activities. lIere the total job will be divided into essential activities. Such activities are purchasing, finance, sales, accounting, personnel etc. The process of organising relates to all these activities. (3) Classification of activities. Here the activities are to be grouped according to their nature and common purpose. They are .required to be adjusted to the resources available. For example, activities related to personnel departme~t can be classified into a number of activities such as recruitment and selection, induction and training etc. (4) Fitting individuals into functions. Once the activities are enumerated and classified, the next step is to fix suitable and wellqualified persons.to perform these activities. Each person in the group will be given a specific part of the job for operation and he will be held responsible for the same. (5) Assignment ofauthority for action. Each member ofth~ group will be given a specific responsibility in relation to authority assigned. In an organisational sense, authority is the right of one person to require another to pelform certain duties. This authority may have one or more of the following aspects:(1) It may be formal, i.e., conferred by law or delegated within the organisation. (ii) It may be functional, bet'ause it is based on special knowledge or skill.

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and a soundly conceived organisational structure are required to achieve increased productivity and synergy." A sound organisation tends to alleviate certain types of personnel problems such as (1) duplication of effort, (2) unbalanced workload, (3) defining training needs, (4) dormant programmes and (5) lack of coordination. The Process of Organisation Organisation is one ofthe important functions of management. To organise is to coordinate, harmonise or analyse in a logical order the various functions of a factory. This function includes making a rational division of work into groups of activities and tying together the positions which represent the group of activities so as to achieve a rational and orderly structure for accomplishing a task. The steps involved in the process of organising are as follows: (1).Determination of objectives. The first step in organising is to decide the objectives as organisations are built around objectives. Here, the objective to be accomplished is to be clearly noted. It may be profit, sales, or a certain volume of production. (2) Enumeration of activities. Here the total job will be divided into essential activities. Such activities are purchasing, finance, sales, accounting, personnel etc. The process of organising relates to all these activities. (3) Classification of activities. Here the activities are to be grouped according to their nature and common purpose. They are required to be adjusted to the resources available. For example, activities related to personnel departmen,t can be classified into a number of activities such as recruitment nnd selection, induction and training etc. (4) Fitting individuals into functions. Once the activities are enumerated and classified, the next step is to fix suitable and wellqualified persons to perform these activities. Each person in the group will be given a specific part of the job for operation and he will be held responsible for the same. (5) Assignment ofauthority for action. Each member of the group will be given a specific responsibility in relation to authority assigned. In an organisational sense, authority is the right of one person to require another to perform certain duties. This authority may have one or more of the fol1owing aspects:(i) It may be formal, i.e., conferred by law or delegated within the organisation. (ij) It may be functional, because it is based on special knowledge or skill.

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IndfJ.Btrial MtVUlB61TU!nt (iii) It may be personal, i.e. accorded because of seniority, popu-

larity, or outstanding qualities of leadership. Responsibility in an organisational sense, is accountability for the performance of assigned duties. It is a moral attribute that is possessed by some to a greater extent than by others. The duties allotted to an individual are the activities he is required to perform because ofthe place he occupies in the organisation. These duties or activities are coordinated to accomplish the objectives of the enterprise. Principles of Organisation (1) Principle ofobjective: According to this principle, all f)rganisations and each part of an organisation should be the expression of a purpose, either explicit or implied. According to Alford and Beatty, each part and sub-division of the organisation should be the expression of a definite purpose in harmony with the objective of the undertaking. (2) Principle of authority and responsibility. According to this principle, responsibility for the execution of work must be accompanied by the authority to control and direct the means of doing the work. In the words ofF.W.Taylor, formal authority and responsibility must be coterminous and co-equal. This principle is sometimes called the principle of correspondence. (3) Principle of ultimate authority of supervision. According to this principle, the responsibility of a higher authority for the acts of his subordinates is absolute. (4) Principle of scalar chain. According to this principle, a clear line of formal authority must run from the top to the bottom of an organisation for control. According to Mooney and Reiley, there must be a clear line offormal authority running from the top to the bottom of every organisation. (5) Principle of span of control. According to this principle, the number of subordinates reporting to a .superior should preferably be limited to six at the executive level. In the words of Graicunas, no superior can supervise directly the work of more than five or at the most six subordinates whose works interlock. (6) Principle ofexception. According to this principle, managerial efficiency is greatly increased by concentrating attention upon those executive matters which are questions of policy or are variation from routine, plan or standard. (7) Principle of assignment of duties or specialisation of function. According to this principle, the work of every person in the organisa-

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tion should be confined, as far as possible, to the performance of a single leading function. (8) Principle of definition. The duties, authority, responsibility and relations of everyone in the organisation structure should be clearly and completely spelt out in writing. (9) Principle of Homogeneity. According to this principle, an organisation, to be efficient and to operate without friction, should bring together only duties and activities which are similar or related to each other. (10) Principle of Organisation Effectiveness. According to this principle, the final test of a factory organisation is smoQth and frictionless operation. Ten Commandements of a Good Organisation The Ten Commandments of a good organisation were formulated by M.C. Rorty, President of the American Management Association, in 1934. In 1941, AMA issued these Commandments in a commemorative form: (a) Definitive and clear-cut responsibilities should be assigned to each executive, manager, supervisor and foreman. (b) Responsibility should always be coupled with corresponding authority. (c) No change should be made in the scope or responsibility of a position without a definite understanding to that effect on the part of all persons concerned. (d) No executive or employee, occupying a single position in the organisation, should be subject to definite orders from more than one source. (e) Orders should never be given to subordinates over the head of a responsible executive. Rather than do this, the officer in question should be supplanted. (f) Criticisms of subordinates should be made privately. In no case should a subordinate be criticised in the presence of an executive or employee of equal or lower rank. (g) No dispute or difference between the executives or employees as to authority or responsibility should be considered too trivial for prompt and careful adjudication. (h) Promotions, wage changes, and disciplinary action should always be approved by the executive immediately superior to the one directly responsible. (i) No executive or employee should be assistant to and, at the same time, a critic of the person he is assistant to.

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(j) Any -executive whose work is subject to regular inspection should be given the assistance and facilities necessary to enable him to maintain an independent check of the quality of his work.

Importance of Organisation A well-conceived and developed organisation structure will immensely benefit the superiors and subordinates in a factory _A good organisation structure will not only enable the achievement of objectives more easily and quickly but also the physical operation of the organisation will be greatly enhanced. The importance of organisation is outlined under the following: (1) Organisation establishes responsibility and prevents "buckpassing". (2) It provides for easier communication. (3) It eliminates jurisdictional disputes between individuals. (4) It helps in developing executive ability. (5) It aids in equitable distribution of work functions and/or personel supervision. (6) It aids in measuring a person's performance against his charges and responsibility. (7) It permits expansion and contraction without seriously disrupting the structure. (8) In times of change, it affords movement in the direction of the "ideal" organisation. (9) It prepares for clear cooperation and higher morale. (10) It points out dead-end jobs. (11) It delineates avenues of promotion. (12) It prevents duplication of work. (13) It makes growth possible with adequate control and without literally killing top executives through overwork. (14) It aids in wages and salary administration through forced job analysis and description. Types of Organisation A well-developed organisation structure consists of different levels of management, with well-defined duties and responsibilities. An organisation structure will provide the framework in which the management will function effectively. A good organisation structure helps in a satisfactory distribution of authority and responsibility among the members of an enterprise. The important types of organisation are: (1) Line organisation, (2) Line and staff organisation, (3) Functional organisation and (4) Committee organisation.

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Line Organisation The line organisation is the simplest and oldest form of organ isation. This is also known as the "military" or ''hierachical" or "scalar" or "traditional" type. The organisation. structure here is similar to that in an army organisation and hence the name "military type". This type of organisation is based on the exact-division of duties, full delegation of authority and discipline. The line is the backbQne of this type of organisation, "that is formed by a series of delegation from the top to the bottom ofthe organisation structure". This can be , illustrate.d by Fig. 2.1. Board of Directors

I

Chief Execu tive

I I Foreman I Workers

Production Manager

Fig. 2.1 . Chain of Command

From Fig. 2.1 it is clear that the board of directors delegates to the chief executive the responsibilities for managing the factory. The chief executive reserves overall responsibility and authority for managing the factory, but he delegates the day-to-day routine work to his subordinates who redelegate it to the successive lower levels. In the above figure,the chief executive has delegated his responsibility to the prodllction manager, who in turn delegates certain work to the foreman. This lower management, i.e. foreman, then assigns the work to the workers. The line officers of a factory are those who are to accomplish the factory's primary objectives. Thus, in a factory, the line officers are usually the production manager, sales manager, financial manager, transport manager and so on. Fig 15.2 is illustrative of this typical line organisation. From Fig. 2.2 it is clear that orders are passed down from the chief executive. On receiving the authority by the Sales Manager, Plant Manager and Financial Manager from the chief executive, these line officers in turn delegate authority to their respective supervisors. Thus, the Sales Manager may delegate certain selling authority to the Assistant Sales Manager, who in turn may delegate authority to sales supervisors. In this way, orders to sell eventually reach the salesman who will then undertake to push the sales.

Industrial Management

128 Chief Execu tive I

Sales Manager

J

Assistant Sales Manager

!

Sales Su pcrvisors

J

Salemen

I

Production Manager

~

I

Financial Manager

Su perin ten dent

+ Treasurer

!

Clerks

Foreman

1

t

Workers Fig. 2.2 Typical Line Organisation

Requirement of Command. Henry Fayol, the French industrialist, laid down the requirements of command for the functioning of a line organisation as follows: (1) There must be a thorough knowledge ofthe working force. (2) Incompetence must be eliminated. (3) There must be sound knowledge ofthe agreements between the management and its employees. (4) Those in authority must set a good example to the work force. (5) The organisation must be periodically examined with the help of charts. Features of Line Organisation (1) AuthQrityflows from the top to the bottom of the organisation structure step by step, as a result ofthe downward delegation of the authority. (2) No subordinate will act without the authority delegated to him from his immediate superior. (3) Each subordinate is responsible to his immediate superior for the duties discharged by him. (4) Decisions are made at the top level management which are converted into orders and passed on to the lower level management by successive level of management . . (5) A direct relationship between the superior and the subordinate is established under this type of organisation. While authority comes down from the superior, responsibility goes up from the subordinate. This means that as authority is exercised by the superior over his immediate subordinate, the latter is entirely responsible to his immediate superior for the perform ante of work entrusted to him by the former.

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The line type of organisation is su~cessful in the following cases: (l) Small-scale industries with a relatively smaner number of subordinates. (2) Routine type of concerns where the same type of product is being produced without any complicated processes so that there could be rigid control exercised by the departmental bosses over their subordinates. (3) Continuous type of industries like soap and other industries. (4) Industries where automatic machinery is installed so that the supervisor ofthe departmental head need not exercise undue care and judgement but can manage with the usual instructions to his subordinates. Advantages (1) Direct relationship. The existence of direct relationship of authority and responsibility makes every member ofthe organisation know his exact position, to whom he is responsible and who his immediate superior is. This renders the performance of work easy and smooth. (2) Fixation of responsibility. The responsibility to discharge a certain duty is fixed to a certain subordinate, so that he might be held responsible for any deficiency in work. (3) Simiplicity in operation. The fixation of authority and responsibility among the members of the organisation renders the operation of work simple and intelligible. (4) Sense of discipline. The direct relationship of authority and responsibility creates a sense of discipline in the organisation. Each subordinate is compelled to be faithful and loyal to his immediate superior. Discipline is thus the result of a single-man control over the subordinate which aids improvement in quality and quantity of production. It helps in maintining a sense of purpose in every department ofthe organisation, besides rendering the working ofthe organisation very effective. (5) Definite lines of authority. The duties and responsibilities of each and every superior and subordi'1ate is clearly laid down under this type of organisation. So the chances of confusion and misunderstanding and conflicts do not arise in this type of organisation. (6) Flexibility in action. The superior in each section has the authority to take effective steps to deal with particular situations in his section, as they crop up, without the need to consult any other executive in this respect. This freedom or flexibility in action would be helpful in dealing promptly with a situation of emergency.

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(7) Coordination ofeffort. There will be effective coordination in the entire organisation, because of the overall control exercised by the administrators in all the departments and because of the coritrol over the activities of each department being exercised by the head of the department concerned. This in tum creates unification in the entire organisation and enables it to achieve its objectives. (8) Direct communication. The direct relationship between the superiors and subordinates at different levels results in direct communication which is essential for the quick performance of work. (9) Economical. As this type of organisation is simple in nature without involving any specialists, the cost of setting up this organisation is very little. Disadvantages (1) Overburdens the head of department. As the plan of action and control of each department are the responsibility of the head of the department, it is possible that he may be overburdened with work. Most of his time and energy will be required for the supervision ofthe department, rendering him inefficient gradually. Besides, he will have little time and energy to devote to the improvement of the department. (2) Encourages autocracy, Excessive power and control of each department being vested in the departmental head may make him autocratic in decision-making without taking into account the views of his assistants. This may lead to lack of cooperation from them which is essential for effective functioning of each department. (3) Lack of specialisation. Under this type of organisation, the departmental manager is expected to look after all the functions such as planning, decision-making, execution and control. The organisation thus suffers from lack of specialised skill of experts. A modern factory is so complex that it ,is extremely difficult for one person to carry out all the activities by himself. (4) Lack of scope for development of skill and efficiency of the subordinates. The dictatorial rule ofthe departmental heads may not permit the subordinates to express their opinions in respect of the methods of improvement in work and in tum will curb the development of their skill, intelligence and efficiency. (5) Difficulty in securing capable executives. The retirement, resignation, or death of capable executives may cripple the entire organisation as such men may not be available for the organisation even in the long run. (6) Difficulty to run large organisation. This type of organisation is not successful where there are complexities in the nature of

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manufacture ana where the industrial unit is large. It may be difficult to obtain competent executives for the different departments of a large organisation, which may affect the quality of work. (7) Lack of cooperation and coordination among departmental heads. Under this type of organisation, each departmental head concentrates on his own departmental activity without bothering about the other departments. Lack of cooperation among departmental heads results in overall inefficiency in the factories. Line and Staff Organisation This type oforganisation consists of the addition of staff specialists to the simple line organisation previously discussed. Harrington Emerson was the first man to introduce this type of organisation. The term "staff' in this tyPe of organisation refers to helpers or specialists who enable the line officers to work most effectively. They are supporters who provide service and advice to the line officers. The individuals who constitute the staff in a factory are experts who have no line authority but whose function is largely advisory. Theil' authority arises from their superior knowledge of a particular function of the enterprise. Although they do not have the power to command the line officer, their advice is generally adhered to because of their status in the organisation. The line officers maintain descipline and stability and the staff officers provide expert information to the line officers. The duties of staff officers are as follows: (a) Conduct research in the areas of technical, operating or managerial problems. (b) Determination and recommendation ofthe various standards of performance. (c) Keeping of records and statistics on the above activities as a measuring rod of performance. (d) Advise and aid in carrying out plans and programmes. Line and staff control makes a clear distinction between doing and thinking, i.e. between getting work done in the line department and analysing, testing, researching, investigating and recording activities of the staff departments. It permits specialisation in the desired spheres of function but at the same time, maintains the integrity of the principle of undivided responsibility and authority throughout the line organisation. Types of staff officers. The staff officers comprise of four types. They are: (1) personal staff, (2) general staff, (3) specialised staff and (4) operating service staff.

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(1) Personal staff. The personal staff exists primarily at the upper levels of an organisation. The personal staffprovides a valuable service by handling much of the administrative work of his superior, by projecting his superior's ideas and wishes to others in the organisation. (2) General staff. While the personal staffis intended to aid his superior in a personal way, the general staffis more concerned with preparing plans. In large factories, divisions and departments are often so extensive that it becomes difficult for the departmental heads to concentrate their attention and cooperation on achieving the total organisational goal. The general staff is a medium through which diversified work of large segments ofthe organisation is coordinated in the planning process. (3) Specialised staff. The specialised staff serves in an advisory capacity for line activities based on its specialised knowledge. In helping planning function, the specialised staff may gather facts, study alternatives and develop plans and programmes for the line officers. In helping control function, they may advise on work standards, gather information on performance, and bring to the notice of the management the ~eviations between standards and actuals. (4) Operating service staff. Operating service staff and specialised staff have the common feature of serving the organisation as a whole. The operating service staff facilitates the operation of organisation by directly involving itself in it. Features of Line and Staff Organisation (1) In this organisation, we come across two types of officers, viz. line officers and staff officers. Line officers have the authority to get the work executed whereas the staff officers are experts who can offer only advice to the line officers. (2) The authority ofthe staff stems from their specialisation in the particular branches of knowledge. (3) The staff tenders advice to the line who is expected to adopt it in their practical work, although the staff does not have the power to command the line. Fig. 2.3 llustrates the line and staff organisations. From Fig. 2.3 we can see that at the level of General Manager, two staff officers, viz., Legal Adviser and Chief Accountant, offer advice to him. At the level of Production Manager, we have Production Engineer and Quality Control Inspector. At the level offoreman, the two Staff Officers are the supervisor and tool expert. The relation of each one of these staff officers is shown only at one level. However,

133

Principles of Management Board of Directors Legal Adviser

Ge~eral

I

Manager

Chief Accountant

'\

Production Engineer - - Production Manager --Quality Control InspElCtot Supervisors

I

Foreman

Tool Expert

\

Workers

Fig. 2.3 Line and Staff Organisation

advice from the Legal Adviser may be given not only to the General Manager, but also to any other line officer. Similarly, the Quality Control Inspector may advise not only the Production Manager but also the foreman. Similarly, the tool expert, whose primary responsibility is to advise the foreman, may also assist the worker. This indicates the cross-relationships existing in the line and staff organisation, which provide for more intimate contact between the two at all levels without breaking down lines of authority. Advantages (1) It is based upon specialisation within the organisation. (2) It b!"ings into the organisation expert knowledge which helps the line officers to solve many managerial problems and thus helps in maintaining overall efficiency and success of the entire organisation. (3) The division of duties into "doing" functions of the line and "thinking" functions of the staff helps in allowing the line to concentrate on its work and achieving proficiency in it with the aid of the staff, besides giving a good amount of flexibility to the organisation so that it can easily adjust itself to the changing circumstan~el through necessary changes effected in the staff. (4) It makes -possible the principle of undivided responsibility and authority, and at the same time, permits staff specialisation. (5) It provides more opportunity for advancement of able workers, as a greater variety of responsible jobs are available. (6) The economy and efficiency resulting from the advice of the staff will more than be compensated by the costs involved in the appointment of the staff. Disadvantages (1) There will be a lot of confusion as to the functions and positions of the line officers and staff officers in this type of organisation. So this calls for a clear indication of the duties and responsibiliti~ of the line and staff officers by charts and manuals. /

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(2) Since the staff officers lack authority to execute the auth oqty they may not have a sense of responsibility in tendering advice. (3) As the expert information and advice given by staff officers reach the workers through the lin~ officers, there is the possibility of misunderstanding and misinterpretation of the advice by the subordinates. (4) Often conflicts between the line and staffmay be created due to the inability to appreciate each other's views. Conflicts may also be due to (a) the transfer of certain duties from the line executives to the staff resulting in iIIwill between the two, (b) resentment on the part of line officers because th..ey have to take the advice ofthe staff which may appear to have an Qverriding authority over the former, (c) the staff may be given undue' importance by the management, with the result that the line officers may feel that they are ignored, (d) the staff may be anxious to get their advice implemented without taking into the account practical difficulties involved, (e) line officers sometimes may resent the activities of staff officers, feelingthat the prestige and influence ofline officers suffer due to the presence ofthe staff officers. Superiority of Line and Staff Organisation over Line Organisation Line organisation is the oldest, simplest, and most direct fonn of organisation. Here, the whole organisation is divided into different departments. Each department has a departmental head with powers, authority and responsibility of the whole department. The line of authority moves from the top to the bottom. The line ofresponsibilities flows from the bottom to the top. Thic:; type of organisation is now considered old and outdated. "Line and staff' organisation is an improvemt:nt over the line organisation. In fact, line and staff organisation is a combination of "line" and "functional" organisation. It has the advantages of both the types of organisation, thereby eliminating the demerits of both line and functional organisations. The following points suggest the superiority ofline and staff organisation over the purely line organisation: (l)-In the line organisation, control is concentrated in the hands ofline authorities but they are not supported or assisted by specialists or experts. The line bosses are overburdened with various duties and responsibilities. This disadvantage is removed in the line and staff organisation as experts are provided to give guidance and assistance to line officers. This gives relief to line officers as f,eir work is shared by experts. It eases the burden of the line executives which is not possible in a line type of organisation.

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(2) Line and staff organisation raises the overall efficiency ofthe business unit due to the services rendered by the experts to the officers. Such expert services are not provided under the line type of organisation and this adversely affects efficiency. (3) In line and staff organisation, the benefit of specialisation is available as specialists are appointed to guide and supervise aU activities. However, such specialisation is absent in the purely line organisation. (4) The decision-making process is made more quick, effective and accurate in a line and staff organisation. This is because of the services of experts. They offer assistance, expert opinion, alternative solutions to the line officers for finalising their decisions. This is not possible in the line organisation as the services of experts are not available and line officers have to take decisions on their own. (5) In the line organisation, there is too much concentration of control and authority. This leads to favouritism and delay in decisionmaking. In the line and staff organisation, there is decentralisation in decision-making, with suitable adjustments in the managerial process. This leads to co-operation and co-ordination in the work of the line executives and experts. This benefit is absent in a purely line organisation. (6) Line officers under the line organisation cannot function accurately and efficiently as the services of experts are not available to them. On the other hand, in the line and staff organisation. line officers are· provided with support from personal assistants and specialists. This enables them to work accurately. efficiently and with confidence. (7) In the Hne organisation, certain aspects like planning, .research, improvement in the systems,procedure, etc. are neglected due to the absence of experts and heavy burden of work on line officers. In the line and staff organisation, this disadvantage is removed as experts are appointed to look after these areas of management.

Functional Organisation This form of organisation was devised by F.W. Taylor in 1911 with a view to overcome the limitations of the line type, viz. getting sufficient number of trained and capable supervisors to direct production. Taylor proposed the concept offunctional foremen for industrial units. According to Taylor, "functional foremanship consists in so dividing the work of management that each man from the assistant superintend~ns up to the workers shall have as few functions as possible to perform. This system is based. on the principle of$pecialisation,so that men with special abilities to take up specific functions,

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are employed. In consequence, the workmen at the lowest level wiH come into contact with the different specialists· who are called functional foremen. In his writings, he states that a foreman must (a) be a good mechanist, (b) able to read drawings correctly, (c) plan the work of his department 'and see that it is properly prepared, (d) see to it that each t:Jlan turns out work of proper quality, (f) see that the men work steadily and fast, (g) see that the work flows through the work centres in the proper sequence, (h) supervise time-keeping and rate-setting, and (i) maintain discipline and adjust wages. Taylor discovered that the typical foreman of his day was loaded with much clerical duty as well as operating responsibility. He found it necessary to remove the planning function from the shop (i.e. produ.ction department), where they were performed at a low efficiency which hampered production and put it into the hands of men who are specialised in such work. Thus, production could be speeded up and costs radically lowered. So Taylor proposed the employment of eight different functional foremen, four of whom would be located in the planning section and the other four in the workshop. Those in charge of the planning department are (1) Route clerk, (2) Instruction card clerk, (3) Time and cost clerk, (4) Shop disciplinarian. Those dealing with the shop are: (a) Gang boss, (b) Speed boss, (c) Repair boss and (d) Inspector. (1) Route Clerk. The route clerk is responsible for determining the exact route through which the production process should pass so that the finished product is ready for delivery to the customer on the scheduled date. (2) InstruClwn cara clerk. 'l'he mstructIOn card. cierk is m charge of preparing instructions regarding each operation of the machine with reference to the special tools and fixtures to be used, and the proper speed to be employed in the operation of the different machines for a particular operation,-the methods to be employed, the time to be taken, etc. (3) Time and cost clerk. The time and cost clerk is responsible for collecting information relating to the time taken and the amount of work done by each worker which is required for calculating the pay due to him. (4) Shop Disciplinarian. The shop disciplinarian resembles the personnel manager in terms of responsibility and he is in charge of maintaining discipline and checking absenteeism on the part of the workers. (5) Gang Boss. The gang boss decides the setting up of tools and machines necessary for each operation and the instructions and training to be given to each worker.

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Principles of Management ..... _

i

(6) Speed Boss. The speed boss is in charge of prescribing the proper speed for each machine and the tools to be used by the workers. (7) Repair Boss. The repair boss looks after the maintenance of machines, tools and equipment so that they are in perfect working condition. (8) Inspector. The inspector is in-charge of maintaining a proper check on the standards of the finished products, including its quality. The functional type of organisation is illustrated as ir Fig. 2.4. Board of Directors

I Chief EXl.'Cutive

I

Production Manager I

Route Clcrk

I

.11'

I I Instruction T'lme Ian d D'ISClP 1- Gang Card Clerk Cost Clerk narian Boss

I

Speed Boss

I

I

Rcpair Inspector Boss

IWO;kcrs II . Fig. 2.4 Functional Organisation

Advantages (1) Specialisation 1S encouraged. It ensures greater division of labour and enables the factory to take advatage offunctional experts' service. (2) Effzciency is increased. It makes for higher degree of efficiency as the workers get instructions from experts in their respective fields. (3) Flexibility. It is a very flexible pattern of organisation. Any change in organisation can be made without disturbing the whole organisation. (4)Large-scale production. Itfacilitates mass production through specialisation and standardisation of operations. (5) Less buraen to the executives. This aims, at increased efficiency on the part of executives as they are required to perform a number oftasks which enables them to concentrate on them, unlike in the line organisation where each executive is ajack of all trades but a master of none. (6) Quality of the product is maintained. The quality of the product is maintained in this organisation, because the inspector undertakes to physically check and inspect the lot of goods manufactured. If there are any substandard products or defew. Conversely, if the factory has less capital, it will face financial problems.

Definitions of Budgetary Control According to F. H. Rowland and W. H.Barr, budgetary control is a "Tool of management used to plan, carry out and control the operations of the business." George R. Terry defines budget as "an estimate of future needs arranged according to an orderly basis, covering some or all the acti~ties of an enterpise for '1 definite period of time". lIt the words of C. L. Van Sickle, "A budgetary control system is a carefully worked out financial plan, including the procedure involved in its operations for conducting the various divisions of a business for the ultimate purpose of earning a profit". Budgetary control may best be defined as "a process of finding out what is being done and comparing actual results with the corresponding budget data in order to approve accomplishments or to remedy differences by either adjusting the budget estimates or correcting the causes of the differences". Purpose of Budget The financial budget presents a summary of anticipated receipts and disbursements for the budget period. Its purpose is to plan for the allocation of working capital as represented by the current assets of the enterprise. The purpose of a budget according to F. H. Rowland and Robert E. Knodel, is five-foid: 1. To clarify the programme. 2. To co-ordinate the activities of the various branches. 3. To measure efficiencY and simplify executive control. 4. To aid in financing the factory. 5. To inform interested parties entitled to have the information regarding factory plans upon which these programmes are predicted. Broadly speaking, there are three main purposes of a budget: (1) Planning. A budget is a plan of a factory expressed in financial terms.

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(2) Control. A budget is intended to serve as a means of con trol, a yardstick for measuring performance against predetermined targets and standards. A budget is a means towards an end and is not an end in itself. (3) Co-ordination. A budget is a constructive aid to all departments within an organisation in achieving their common goals. Characteristics of an Effective Budget The following are the important characteristics of a budget: (1) A budget is essentially meant. f(lr a given future period. For preparing the budget, past data may be utilised but its main purpose is to state the requirements or targets for the coming month or months. (2) It differs from objectives or policies because it sets down the requirements in exact numerical terms. It is based on definite expectations supported by realistic considerations rather than on abstract formulations of an ideal character. While objectives and policies are generally fixed for a longer period, a budget changes from period to period. (3) A good budget is flexible, i.e. it can be adopted to changing circumstances ofthe future. A budget should be such that it should be capable of revision when the plan is modified. (4) A good budget tries to secure maximum participation of the various departments within the organisation. Budget preparation and budget administration should not be confined to a single individual. (5) A budget being a fundamental control tool of an enterprise, it generally receives the attention and support of top management. Though a detailed budget for each section, department, division or plant is made by subordinate executives, the top management has to take an active interest in the task of budgeting and keep control over its execution. . 4.7 STEPS INVOLVED IN BUDGETARY AND BUDGET PREPARATION Sefore a budget is prepared, the management must establish the following prerequisites for successful budgeting: (1) A sound organisation structure with clearly defined lines of authority and responsibility; (2) Policies which clearly outline departmental and factory aims and serve as a basis for preparing budgets;

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(3) A system for adequate forecasting of sales, prices, costs and other trends which provide the information necessary for preparing budget; and (4) Cost records suitable for estimating departmental expenses, checking with past periods and comparing current performance with budgeted levels. Usually, a person is designated as a chief budget officer, who is responsible for the preparation of the complete budget. Most often, the controller or the assistant controller acts as a chief budget officer because of his knowledge of the activities of the factory and the finanCial figures associated with these activities. The chief budget officer serves as a co-ordinator between divisions or departments in budget preparation. Usually, the heads of these divisions, together with selected staff representatives, will serve as the budget commIttee of the factory. This committee receives and approves all forecasts, departmental or division budgets and periodic reports showing comparison of actual performance with planned budget.. The committee may receive budget forecast from the following: (a) Sales budget, which is the responsibility of the sales manager. (b) Production budget, which is the responsibility of the production manager. (c) General expenses budget, which is usually prepared by the different departmental managers. (d) Capital expenditure budget, which is usually prepared by a special sub-eommittee. (e) Working capital budget, which is prepared by the chief accountant. (f) Cash budget, which is also prepared by the chief accountant. It is likely that the original budget proposals submitted by the departmental heads need to be revised, and resubmitted, perhaps, a number of times before a complete and co-ordinated plan of operation for the following year is evolved by the budget committee. The method of preparing an operating budget, i.e. production budget, is as follows: (1) From the forecast of production figures, an estimate is made of the materials -content and total direct labour hours required for production.

.

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231

(2) From the total direct labour hours estimated above, (a) the direct labour force required for each department, (b) the supervisory labour necessary to control the direct labour in each department and (c) the ancillary labour required to support the work of each department are estimated. (3) From the above estimate, the service and control staff such as maintenance, quality, production control, design and development and managerial staff required to achieve the production forecast are estimated. (4) From the general objectives and policies of the factory, an estimate is made for any other indirect staff such as research and development officer or welfare officer who may be required to achieve the production target. (5) Calculation of general expenses such as rent, rates, insurance L tax. hea~ng, lighting.,. and so on_is made. (6) Xhen all the above are consolidated to estimate what the total espenditure will be during the financial period under review. (7) The difference between the total .revenue and the total expenditure is the profit which .should be achieved. (8) This profit when added to the estimated expenditure gives the operating or production budget for the financial year. 4.8 TYPES OF BUDGET There are various types of budgets. Rowland and Knodel have listed twenty-eight types ofbudget& which an average manufacturing concern requires to ensure complete budgetary control. The main types of budget are: 1. Expense Bl¢get. It is an estimate of the working or operating expenses of a factory for a given period. The expenses to be incurred are estimated by the analysis of past performance at various levels of production. The expense budget is prepared by the various dePartmental heads and submitted to the budget officer and after making proper adjustments, it is incorporated in the budget plan. The expense budget is" usually classified into indirect materials cost, indirect labour cost and miscellaneous expenses sueb. as taxes, insurance, depreciation etc. 2. Revenue Budget. It .shows the income or revenue expected from the sale of goods produced or purchased for resale and includes returns on investments. 3. Cash Budget. It is a statement of the anticipated receipts and expenditure for a given period along with the financial needs of the factory.

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It provides information on the probable profits to be realised during the budget period and assists the top management in making long-term plans for the success of the factory. 4. Capital Budget. This budget outlines the anticipated expenditure on plant, machinery, equipment and building, both additions and maintenance of those already in existence. Sometimes, this new capital is obtained by ploughing back of profit or by raising the debenture capital. 5. Sales Budget. It represents the 'plan of sales for a given period. It may be expressed in terms of quantity as so many units or in terms of value. When put in terms of money, it serves the purpose of a revenue budget. In order to exercise better control over sales, it is desirable to fix sa!es quotas for the cifterent territories and also for each and every salesman. Often a sales budget is also prepared to include selling expenses)n which case, it takes the name of selling expense budget. The selling expense budgest is prepared by forecast- ~. ingthe expenditure for advertising, warehousing, salesmen's salaries etc. on the basis of the past cost records. 6. Production Budget. It shows the volume of production to be undertaken in order to meet the requirements of customers and to maintain adequate stock of goods during the budget period. The production budget is prepared on the basis of sales demand, production capacity, and the cost of manufacturing. 7. Purchase Budget. Production budget serves as the basis for preparing the purchase budget. It shows the requirements of direct materials, both in terms of quantity and quality, to be purchased during a specific period. 8. Labour Budget. This type of budget indicates the types or skills of workmen and the numbers in each category required in a given period, The labour budget is used to assist the personal department in anticipating the need for various types of labour in estimating and controlling the factory cost and in stabilising and ~ucing the labour turnover. 9. Master Budget. This is the budget prepared for the factory as a whole. Each of the subsidiary budgets enters into and becomes a part of the master budget. 10. Flexible Budget. A flexible budget enables the management to maintain better control over expenditure when the production volume varies during the budget period. A flexible budget is a series of plans indicating the di'rect and indirect costs expected for various productive outputs. The flexible budget has been developed to obviate

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the need for making revisions in the budget each time the production volume changes during the fiscal year.

Operating the Budget Any budget, regardless of how carefully it may have been prepared, must be followed in operation if it is to achieve its full purpose .. Too frequently, the budget is prepared and then forgotten until it is too late to remedy or remove the factors that block the planned progress. Changes and variations should be brouglit to the attention ofthe budget committee as soon as possible in order that their effect may be anticipated and adjustrrtents made to counteract them. Each department or division is made responsible for the preparation as well as control of the budget. The various departments! divisions are then co-ordinated through the controller and a budget committee is estaulisnl,d fOI" the whole enterprise. For operating the budget._attention must be paid to: (1) Recording of Operations. Good budgetary control requIres a sound accounting procedure to be established that will provide a picture of actual operations in terms of sales, production, income, expenditure and so on. This enables the budget controller to keep a constant check on operations. (2) Operating reports. There are regular reports to be submitted to the budget controller showing comparison of actual and budgeted figures, and the reasons for variations. On the basis ofthese reports, the budget committee may recommend revisions in the budget.

Steps in Budgetary Control The following are the steps involved in budgetary control; 1. Preparation of the Budget. The process of preparing the budget has been already discussed in the earlier paragraphs. 2. Publishing the Budget. This implies informing each executive what is expected of him. The publishing of the budget is .most important, as no system is able to work unless the people concerned with it understand and are prepared to make it work. 3. Measuring the Results. This implies the measurement of actual results achieved in order to know whether they are as per plan or otherwise. 4. Comparing tM results with the Budget. The comparison of actual results \\;th the budget enables us to know the efficiency or otherwise of the activity. 5. Reporting the results of the above activity. This is done by means of budgetary control statements, which enable the budget

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officer to know whether the objectives set out in the budget are being fulfilled and if not, in which areas attention should be concentrated. 6. Correcting the unfavourable variances. Necessasry steps are then taken to avoid the occurrence of unfavourable variances. This is the function of the departmental manager or the supervisor. The budgetary control statements will assist as tools to the manager in correcting the unfavourable differences. 4.9 ADVANTAGES OF BUDGETARY CONTROL The important adva!1tages of budgetary control are as follows: ( 1) It helps the process of planning by reducing it to concrete numerical goals. Through the budgets, the executives know what they are to produce or sell, how much they can spend, how much income to expect and so on. (2) It provides an effective means by which t.op managenwnt tan delegate authority and responsibility without sncrifitill~~ its o\','ralJ eontrol. Limits for each department or division are laid down in the budget. (3) It keeps expenditure in check and- constantly reminds employees and management of the targets and goals to be achieved. It helps in the cautious utilisation of resources and promotion of efficiency. (4) As a control device, it supplies the means of checking resultsand comparing performance, of revealing weaknesses and making corrections. (5) The budget is not merely an instrument of planning but also a tool of co-ordination. It brings together the activities of various sections, departments and divisions in an overall perspective. (6) It helps in determining the policies of the factory. (7) It gives complete information in advance regarding the amount of capital needed for the budget period. . (8) It gives the idea of where executive action is required. (9) It aids in measuring performance of each department of the factory. (10) It promotes co-operatiGn among the different executives for determining future plans. (11) It acts as a control tool for administration. (12) It centralises management control. Limitations of Budgetary Control (1) .The budget is always based on estimates. The success or failure of'a l;mdget f to a large extent, depends upon the accuracy of

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estimates. The estimates cannot be accurately made in this dynamic world, although many statistical techniques are available. (2) To evolve a budgetary control system, normally, it takes several years as it has to be tried, improved and discarded, depending upon the changing circumstances. (3) The success of budgetary control depends upon the enthusiastic participation of all levels of management. But it is dificult to secure the wholehearted cooperation of all in a factory. (4) Budgeting is only a tool of management but it cannot replace management. (5) It may be difficult to install a system of budgetary control system in small factories owing to increased expenditure involved.

4.10 FINANCIAL ACCOUNTING

Introduction Business is one of the sources of earning income. Whenever a business is to be started, it requires investment 9f certain amount which is called as capital. With this amount of capital the businessman may deal either with trading business or manufacturing business. In a trading business he will buy goods at a lesser cost and will sell the same to others at a higher price. In the case of manufacturing business he has to buy raw materials and there are expenses in the form of wages and salaries, rent, power, insurance, tax, transport, postal and telegram expenses and so on in the course of production and distribution of goods. In a small sized business the transactions are simple and less in number. But in a large sized business, the transactions are enormous. These business transactions enable the businessman to know the results of his business which can be profit or loss for given period of time. In order to know the result of his business, a businessman has to remember all the transactions of his business. However, owing to lack of memory it is not possible for anybody to remember all the transactions over a period of time." This has given rise to maintenance of a set of accounting books in which business transactions are chronologically recorded. The systematic recording of business transactions enable the businessman to account for every transaction without missing any item. Such a system of maintenance of a set of accounting books to record business transactions is known as book keeping system.

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Industrial Management

Meaning of Book Keeping The art of recording business transactions in a systematic manner is termed as book keeping. It is the name given to a system which is concerned with recording and summarising business transactions accurately so as to know the true state of affairs of a business. Definition of Book Keeping R.N. Carter in his book on Advanced Accounting defines bookkeeping as the science and art of correctly recording in books of accounts all those business transactions that result in the transfer of money or money's worth. This definition reveals the following features of book keeping: (1) It is a Science Book keeping is a science as it represents systematised knowledge. It is based on a set of well defined principles which are followed throughout so that the reason for recording a transaction in a particular manner can be explained fully. (2) It is an Art Book keeping is an art as it deals with a system in which human skill and ability is involved in recording the business transactions according to principles of book keeping. (8) Money Consideration This implies recording of all transactions which can be expressed in terms of money. Kohler in his book "Dictionary for Accountants" defines book keeping as "the process of analysing, classifying, and recording transactions in accordance with preconceived plan." This definition brings forth the following three aspects of accounting: (a) Analysis: It refers to identifying various expenses incurred during a period of time. (b) Classification: It refers to grouping of like items of expenses into a common group. (c) Recording: It refers to entering transactions in the basic books and later on posting them into another set of book known as ledger. Scope of Book Keeping Book Keeping is concerned with two important steps involved in the procedure of accounting. They are: (1) recording of all business

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transactions in a book known as Journal and (ii) posting all recorded transactions into another book known as a ledger. Subsequently. the various accounts in the ledger are balanced to know the net effect of all transactions. In brief, the subject matter of book keeping includes preparation and maintenance of all records upto the stage of preparation of a statement known as trial balance. Definition of Accounting The American Accounting Association defines accounting as the process of identifying, measuring and communicating economic information to permit informed judgement and decisions by users of the information. This definition highlights the following aspects:" (a) Identifying the business transactions: Identification of transactions are useful for proper recording of them in books of accounting without missing any of the transactions. (b) Measurement of business performance: Measurement or evaluation of business performance is necessary to know the progress of business. (c) Communication of information: Communication of information relates to reporting the results of business to all those interested in the business. This enables them to judge the efficiency of the business and to take suitable decisions to improve the business. According to the American Institute of Certified Public Accountant's Terminology Committee "accounting is the art of recording, classifying and summarising in a significant manner and in term3 of money, transaction and events which are in part atleast of a financial characier and interpreting the results thereof. This definition emphasises the following aspects: (D It is an art. (ii) It involves recording transactions in a set of books (iii) Classifying which refers to grouping of transactions according to their similarities. (iv) Summarising the transactions facilitate easy understanding of result:!' by management of the business and other interested in the business. This step involves preparation of two important statements known as; (i) Trading and profit & loss account and (iii) Balance sheet.

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(v) Accounting is concerned with transactions capable of expressing in terms of money value. All business transactions of different nature are expressed in respect of money. Thus, all assets such as land and building, plant and machinery, stock of goods etc., when expressed in terms of money can give total value of business. The value of business can be compared with the value of another business. (vi) Only transactions of financial character are recorded in the books of accounts. For example, the good health of a general manager is very essential for the success of a. business. But this transaction is not recorded in accounting books. Similarly, co-operation of employee&, good working environment etc., are essential for the success of the business. But they are not recorded as they are not of a financial character. (vii) Interpreting the results helps in evaluating and in making a "rational judgement about the performance of business. For example, an accountant will estimate the advertising required for increasing the sales. Subsequently, he will judge whether the advertisement expenses yielded the desired sales. This will help him to decide whether the same amount of advertising expense results in the desired sales for the forthcoming years. Advantages Accounting information is useful to the following categories of persons: (A) To the Management of a Business (a) In evaluating various alternative proposals so as to take maximum benefit from the best alternative. (b) In deciding matters such as elimination of unprofitable activity, department or product, replacement of fixed assets, expansion of business etc. (c) Planning the various activities and planning of revenues and expenses and managing the finance in case of need. (d) Comparing various years' account to know the progress or deterioration of the business and take actions to improve the business. (e) Accounting information helps improving evidence in a court of law in case of legal action taken by others.

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(f) Accounting information helps in assessing the income-tax,

sales tax and property tax of the business. (g) Accounting information constitutes one of the basis for borrowing loans from external sources. (h) It helps to detect errors and frauds that have taken place in the business. (B) To the InvestorsAccounting provides information regarding: (a) Types of property owned by the business. (b) Sources and amount of earnings made or losses incurred by the business. (c) Particulars such as stock position, debts owed, debts due

etc. (d) Whether rate of earnings is high or low. (C) To the Employees It provides information to employees, so as to claim fair wages bonus and other welfare facilities. (D) To the Government· (a) Accounting information helps Government to extend subsidies and incentives and other exemptions to certain types of business. (b) The industrial progress can be known by the Government of the country. It can formulate industrial policies for further growth and development of industries. (c) It enables the Government to assess the income from the industrial sector. (d) It helps in amending various laws or enacting laws governing the functioning of business enterprises. (e) It helps the Government in deciding price control, wage fixation, excise duty, sales tax etc. (E) To the Consumers Customers are not overcharged as selling price is fixed on the total expenses incurred by adding a reasonable rate of profit. (F) To the Prospective Investors It helps the prospective investors in choosing the right type of investment depending upon the profit earning capacity of the business enterprises and the profit earned during past few years.

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(G) To the Creditors and Suppliers Creditors can decide the solvency positions of the business through the accounting information. Similarly, suppliers can also decide whether goods can be sold in future on credit basis. 4.11 DEFINITION OF TERMS In order to understand the subject matter of accounting discipline it is essential to acquaint with certain concepts and terms. Such terms are as follows: (a) Asse~

It refers to property owned or possessed by the businessman. Assets can be of the following types: (i) Fixed assets: Such assets are used for carrying on the business but not for immediate sales. Some examples of fixed assets are land and building, plant and machinery, furniture and fixtures etc. (ii) Current assets: These are the assets which are capable of converting into cash immediately without much difficulty, usually, within a period of one year. These are the assets which are used in the business in the normal course of running the business. Current assets change from period to period. Hence, they are also called as fluctuating assets. Examples of current assets are stock of materials, debtors, cash, bills receivables etc. (iii) Tangible assets: These are the assets which can be touched and felt. Examples of tangible a!;lsets are stock of materials, vehicles, buildings. (iv)Intangible assets: These assets cannot be touched but felt and they have money value to the business. Examples of intangible assets are goodwill, i.e., reputation of business, trademark, i.e., right to use trade mark of other business, patent right, i.e., right to use invention made by other business. (v) Wasting assets: These assets exhaust as they are continuously used. Mineral ore such as Iron ore, quarries etc. are common examples of Wasting assets. (vi) Liquid assets: These are a type of current assets, which are in the form of cash or readily convertible into cash. Examples of liquid assets are cash, Bills receivable etc. (vii) Fictitious assets: These refer to worthless assets. They cover expenses and losses which are shown for the sake of meeting

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legal requirements or for the technical purpose. Example of such assets are preliminary expenses, advertisement expenses. (b) Account It is a summary of various business transactions relating to particular person, asset; expense or income, for a given period of time. (c) Business Transaction It refers to an event which· involves transfer of money or money's worth between the proprietor of a business and others related to the business. Business transactions are of the following types: (i) Cash transaqtion: It is a type of business transaction which involves immediate payment or receipt of cash. (ii) Credit transaction: In a credit transaction the payment of cash is postponed to a later date. (iii) Non-cash transaction: This does not involve any payment or receipt of cash either immediately or at a later date. Examples of such transactions are depreciation on assets, bad debts written off, goods lost owing to occurrence of fire etc. (d) Books of Accounts This refers to a set of books in which business transactions are recorded. Two such books of accounts maintained by every business are (a) Journal and (b) Ledger. (e) Creditors

The person to whom the business owes money is known as creditor. Creditors are of two types. They are: (i) Trade Creditors: These are the people who sell goods on credit to the business. (ii) Loan Creditors: These are the people who lend to the business. (f) Carried Forward It is used to indicate the balance of an account of one page carried forward to the same account in the next page. (g) Carried Down It is used to indicate the balance of one period carried down to the same account in the next period.

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Industrial Management

Drawings It refers to the amount of cash or goods withdrawn by the proprietor for his personal use from the business. (i) Debtor A person who owes money to the business is known as debtor. Debtors may be of two types. They are: (i) Trade Debtors: He refers to a person who owes money on account of supply of goods to him on credit. (ii) Loan Debtor: He refers to a person who owes money to the business on account of loan given to him. (j) Debt The amount owed by a person to the business is known as a debt. A debt may be of three types. They are: (i) Good Debt: The debt which is recoverable in full is known. as a good debt. (iO Bad Debt: A debt which is not recoverable at all is known as bad debt. (iii) Doubtful Debt: A debt which is doubtful in its recovery is known as doubtful debt. (k) Debit It refers to left hand side of the account on which entries are posted. (l) Equity The term equity or more preferably owner's equity refers to the amount of capital invested in the business. (m) Expenditure The expense or cost incurred during the course of running the business is known as expenditure. (n) Entry It refers to recording of a business transaction in the books of accounts. It can be of two types. They are: (i) Journal entry: The entry recorded in the Journal is known as Journal entry. (ii) Ledger entry: The entry recorded in the Ledger is known as ledger entry. (h)

Financial Management (0)

Folio It refers to the page in a Journal or a Ledger.

(p)

Goods

243

The things or articles with which a business deals, i.e., buys and sells is known as goods. (q) Income The revenue earned by the business is known as income. (r)

Journal

(s)

It is a primary book in which transactions are recorded first. Liabilities

It refers to the amount due by the business to other person. Liabilities may be of the following types: (i) Current Liabilities: They represent short-term liabilities which are to be paid within a period of one year. (ii) Fixed Liabilities: They represent long-term liabilities payable after a long period of time. (t) Revenues It refers to the earnings of a business. (u) Stock It refers to unsold portion of goods for a given period. It may be of two types. They are: (i) Opening Stock: It refers to unsold stock at the beginning of the period. (ii) Closing Stock: It refers to unsold stock at the end of the period. (v) Solvent

It refers to a position where the assets of a business or a person exceeds its or his liabilities.

4.12 MAINTENANCE OF ACCOUNTS THROUGH JOURNAL Journal is a tabular record in which business transactions are analysed in terms of debits and credits and recorded in a chronological order prior to being transferred to the ledger accounts. Because transactions are initially recorded in the Journal it is also referred to as the books of original entry.

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Industrial Management

Journal Entry The record of each transaction in a Journal is called a Journal entry. Journalising The process of interpreting a transaction in terms of required debit and credit and recording it in the Journal is called "Journalising." Narration The statement written to explain a transaction is called "narration." Simple Journal Entry If a Journal entry contains only one debt and one credit it is called a simple Journal entry. The following entry is a simple Journal entry: Date

LF

Particulars Cash alc To sales (Being cash sales)

Dr.

Cr.

1,000

Dr.

1,000

Compound Journal EntryA Journal entry which includes more than one debit or more than one credit is called compound journal entry. A compound Journal entry is a combination of two or more simple journal entries. However, regardless of how many debits or credits are contained in a compound journal entry the total of the debit amounts must always equal to the total of the credit amounts. Example Paid Rajan Rs. 1000 and discount received Rs. 30 is Journalised as follows: Date

Particulars Rajan's alc Dr. To cash alc To Discount alc (Being amount paid and discount received)

LF

Dr.

Cr.

1,030 1,000 30

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Procedure involved in Journalising the Transactions The procedure for recording transactions in the journal are as follows: (1) The Date The year, month and date of the transaction are written in the date column. The year is recorded at the top of the date column of each Journal page. The month is written in the first line of the date column. Neither the month nor the year is repeated on the -page unless the month or year changes. The date of each transaction is recorded in the J ourna!. (2) Description The title of the account to be debited is recorded on left of the description column and traditionally recorded first. The abbreviation "Dr" is written after the name of the account debited. The title of the account to be credited is recorded on the line below the account debited and is indented, i.e., placed about an inch to the right of the date column. The abbreviation "To" is to be written before the .name of the account credited. The explanation of the transaction is recorded below the account credited. The explanation should be as brief as possible consistent with disclosure of all the information necessary to understand the transaction being recorded. (3) Amounts Debited and Credited The debit amount is recorded on the debit column opposite the little of the account debited. The credit amount is recorded in the credit column opposite the title of the account credited. (4) Writing Folio Number The ledger folio refers to page number of the ledger account to which debits and credits are transferred from the Journal. This column is not used at the time transactions are recorded in the Journal. When the debits and credits are later on transferred to ledger accounts the page number of the ledger account is recorded in this column to provide a convenient cross reference with the ledger. The steps in Journalising are enumerated below: (1) Every business transaction affects a minimum of 2 accounts. As a first step in Journalising identify the accounts involved in the transactions.

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Industrial Management

(2) Secondly, see the category of accounts to which these accounts belong, viz., personal account, real account, or nominal account. (3) Apply the relevant rules as to debit and credit and find out the accounts to be debited and credited. (4) Lastly, record the transactiQn in the Journal by means of an entry. The standard form of Journal is shown below: Journal Date

Description

LF

Debit

Problem 1 Journalise the following transactions: 2001 Apr.l Krishna Commercial Business with: Cash Goods 5 Bought furniture for cash 7 Bought machinery from Govind 8 Lent money to Ram @ 5% 15 Drew cash for personal use 18 Bought goods from Ravi 20 Sold goods for cash 25 Paid cash to Govind Received discount 28 Received cash from Ravi 30 Paid Salary to clerk

Credit

10,000 2,000 1,000 5,000 1,000 200 6,000 1,000 1,950 50 500 100

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Solution: Journal Entries Date

LF

Particulars

2001 Dr. Apr. 1 Cash ale Stock of goods ale To Capital ale (Being amount introduced into business) 5 Furniture ale To Cash ale (Being furniture purchased)

Dr.

Dr

Cr

1,000 2,000 12,000

1,000 1,000

7 Machinery ale

Dr. To Govind's ale . (Being machinery purchased on credit)

Dr. 8 Loan to Ram ale To Cash ale (Being amount lent to Ram at 5% interest)

5,000 5,000 1,000 1,000

Dr. 15 Drawings ale To Cash ale (Being cash drawn for personal use)

200

Dr. 18 Purchases ale To Ravi's ale (Being goods purchased on credit from Ravi)

6,000

20 Cash ale To sales ale (Being cash sales)

1,000

Dr.

200

6,000

1,000

Dr. 25 Govind's ale To Discount ale To cash ale (Being cash paid and discount received)

2,000 60 1,960

Dr. 28 Cash ale To Ravi's ale (Being cash received from Ravi)

500

30 Salary ale To cash ale (Being salary paid to 'clerk)

100

Dr.

600

100

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Industrial Management

Problem 2 Show how the following transactions appear in the Journals of Ram and Rahim. Ram bought goods from Rahim: Rs. 100. (2) Rahim bought goods for cash from Ram: Rs. 800. (3) Rahim received from Ram Rs. 500 and allowed him discount: Rs. 25. (4) Ram sold goods to Rahim: Rs. 700. (5) Rahim supplied goods worth Rs. 250 for Ram's domestic use. (6) Ram received Rs. 500 from Rahim for repairing the private car of Rahim. Solution (1)

In the Books of Ram

81. No l.

LF

Particulars Purchases alc Dr. To Rahim's alc (Being the goods purchased from Rahim on credit)

2. Cash ale

Dr.

Debit

100 100

800 800

To sales ale (Being gopds sold for cash) 3. Rahim's alc Dr. To discount alc To Cash ale (Being cash paid to Rahim and discount allowed by him)

525

4. Rahim's ale

700

Dr.

25 500

700

To sales ale (Being goods sold on credit)

5. Drawings ale

6.

Credit

Dr. To Rahim's ale (Being goods purchased on credit for domestic purpose)

250

Cash ale Dr. To Repairs ale (Being repairs charges received)

500

250

500

249

Financial Management In the Books of Rahim Journal Entries

LF Debit

81. No Particulars Ram's ale To sales ale (Being goods sold on credit)

l.

Dr.

100 100

2. Purchases ale Dr. To cash ale (Being goods purchased for eash)

800

3. Cash ale Dr. Dr. Discount ale To Rahim's ale (Being cash received from Ram and discount allowed)

500 25

Ram's ale Dr. To Sales ale (Being goods sold to Ram, on Credit)

4.

5. Drawings ale To cash ale (Being eash paid for personal expenses)

Credit

Dr.

800

525

250 250 500 500

Problem 3

Journalise the following transactions 2001: Jan.1 Started a business with Rs. 1,00,000: paid into Bank Rs.50,OOO. 2 Bought furniture for Rs. 9,000 4 Purchased goods from Mohan & Co. for Rs. 40,000 for cash. 5 7 8 10 11

Sold goods for Rs. 17,000 Paid telephone bill for the year Rs. 4,000 Purchased goods for Rs. 10,000 from Bir & Co. Paid for advertisement in Indian Express by cheque Rs. 1,600.Bought one typewriter for Rs. 7,500 from Universal Typewriter Co. on credit.

12 Sold goods to Bedi & Co. for Rs. 29,000. 14 Withdrew Rs. 3,500 from the bank for private use.

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Industrial Management

16 Sold goods to Omega & Co. for Rs. 6,500. 25 Received cash from Bedi & Co. Rs. 28,500 discount allowed Rs.500. 26 Cash deposited in Bank. Rs. 25,000. 31 Cheque issued for Rs. 5,000 in favour of landlord for Rent for January. 31 Paid salaries to staff Rs. 6,000. 31 Issued cheque for Rs. 9,500 in favour of Bir & Co. in full settlement of their account. Solution: Journal Entries Date

Particulars

LF

2001 Jan. 1 Cash ale To capital ale (Being capital brought in)

Dr.

Debit

1,00,000 1,00,000

1 Bank ale Dr. To cash ale (Being cash deposited in bank)

50,000

Dr.

9,000

2 Furniture ale To cash ale (Being furniture purchased)

50,000

9,000

4 Purchases ale Dr. To cash ale (Being goods purchased for cash)

40,000

5 Cash ale TC? Sales ale (Being goods sold for cash)

Dr.

17,000

7 Telephone charges ale To cash ale (Being telephone rent paid)

Dr.

8 Purchases ale To Bir & Co. ale (Being goods purchased on credit from Bir & Co.)

Dr.

,

Credit

40,000

17,000 4,000 4,000

10 Advertisement ale Dr. To Bank ale (Paid for credit in Indian Express)

10,000 10,000

1,600 1,600

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Financial Management 11 Office Equipment

Dr. To Universal Typewriter ale (Being typewriter purchased on credit from Universal Typewriter Co.)

12 Bedi & Co. ale Dr. To Sales ale (Being goods sold to Bedi & Co. on credit) 14 Drawings ale To Bank ale

Dr.

16 Cash ale To Sales ale

Dr.

7,500 7,500

29,000 29,000

3,500 3,500 650 " 650

Dr. 25 Cash ale Discount ale Dr. To Bedi & Co. (Being cash received and discount allowed to Bedi & Co.)

28,500 500

26 Bank ale Dr. To cash ale (Being cash deposited into bank)

25,000

31 Rent ale To Bank ale (Being rent Cor January paid)

Dr.

5,000

31 Salaries ale To Cash ale (Being staff salaries paid)

Dr.

29,000

25,000

5,000

31 Bir &: Co. Dr. To Bank ale To Discount ale (Being cash paid to Bir &: Co. in Cull settlement and discount received).

6,000 6,000 10,000 9,500 500

LEDGER A ledger is a loose leaf book, file or other record containing individual accounts of a business used to classify transactions and determine their cumulative effect on the accounts. Need for Ledger Journal records all the transactions "in a chronological order as they occur. As the Journal contains numerous transactions it is not possible to ascertain the net effect. of transactions on each

252

Industrial Management

individual asset; liability, owner's equity revenue and expense account. For instance, there may be 100 or more transactions affecting cash spread throughout the journal. So to ascertain net change in cash all these effects is to be brought together in the cash account. This is accomplished through ledger. The focus of the ledger is on the individual accounts of the business. In this manner, we can show for each account the cumulative effect of all the transactions which affected that account.

Differences between a Journal and Ledger' The main points of distinction between a Journal and a Ledger are as follows: (1) Journal is the book of prime entry while ledger is the book of final entry. This is because all transactions are entered first in the journal and then are transferred to the appropriate accounts in the ledger. (2) Journal records transactions in a chronological order while ledger records transactions in an analytical order, i.e., the components of each transaction that affect individual asset, liability, owner's equity, revenue and expense account are grouped together. (3) The unit of organisation for the journal is the transaction. Whereas the unit of organisation for the ledger is the account. (4) The process of recording transactions in the journal is called Journalising. While the process of recording transactions in the ledger is called "Posting." Sub-Divisions of a Ledger A ledger is simply a group of accounts. Hence on the basis of accounts ledger may be sub-divided into three: (a) Debtors ledger: It is a section of the ledger containing accounts of trade debtors, i.e., persons to whom goods are sold on credit. (b) Creditors ledger: It is a section ofledger containing accounts of the trade creditors, i.e., persons from whom goods are purchased on credit. (c) Impersonal ledger or General ledger: It contains all the accounts that are not in the cash book, the creditors ledger and the debtors ledger. To be more specific it contains all other personal

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accounts (excluding those of trade debtors and trade creditors), accounts of assets, expenses revenues and similar accounts. A specimen of a ledger is shown below: Name of the Account

Cr.

Dr. Date

Particulars

LF Amt. Date

Particulars

LF

Amt.

Posting The process of transferring the Journal entry - debits and credits to their appropriate ledger accounts is referred to as posting. Each amount listed in the debit column of the Journal is posted by entering it on the debit side of an account in the ledger and each amount listed in the credit column of the Journal is posted to the credit side of a ledger account. Steps in Posting Process The mechanism of posting may vary somewhat with the preference of the individual. The following sequence is commonly followed: (a) Locate in the ledger the account named in the debit portion of the Journal entry. (b) Enter the date of the transaction in the ledger account. (c) Enter the name of the account to be debited in the particulars column. The word "To" is prefixed to the debit entries and the word "By" is written before the credit entries. (d) Enter in the debit column of the ledger account the amount of the debit as shown in the Journal. (e) Enter in the folio column ofthe ledger account the number of the Journal page from which the entry is posted.

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Industrial Management

The recording of the debit in the ledger account is now completed. Repeat the steps mentioned above for the credit portion of the Journal entry. Balancing of an Account The difference between the sum of the debit in an account and the sum of its credits at any particular time is the "Balancing of an account." The balance of an account is always known by the side which is greater. The process of ascertaining the difference is termed as balancing of an account. Debit Balance If the sum of the items on the debit side of an account exceeds those on the credit side then the difference is called "debit balance." Credit Balance If the sum of the credit of an account exceeds the sum of the debit, resulting balance is the credit balance. Balancing Figure Balancing figure is one which makes two sides of an account equal. If the total of 2 sides of an account are unequal, the difference is inserted on the side having the lesser total to make the two sides equal. The figure so inserted is known as the "balancing figure." Problem 4 Prepare the personal account of Srinivas from the following transactions 2002 Jan. 1 Debit balance of Srinivas alc 2 Sold goods on credit to Srinivas 6 Received from Srinivas Allowed him discount 10 Srinivas bought goods on credit 15 Received cash from Srinivas Allowed him discount 20 Purchased goods on credit from Srinivas 25 Paid cash to Srinivas 28 Returned goods to Srinivas 30 Paid cash to Srinivas in full settlement of his account

Rs. 1,000 5,400 6300 100 1,500 1,450 50 1,040 500 140 390

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Financial Management

Solution: Srinivas Ale Cr.

Dr. Date 2001 Jan 1 2 10 25 28

Particulars To To To To To

BId Sales ale Sales ale Cash ale Purchase returns ale 31 To Cash alc To Discount ale (Balancing figure)

Amt. Date

,

Particulars

2001 1,000 Jan. 6 By 5,400 By 1,500 15 By 500 By 20 By 140 390 10

8,940

Cash Discount Cash ale Discount Purchases Ale

Amt. 6,300 100 1,450 50 1,040

8,940

(5) Cash Book The most important and most repetitive transactions a business engages in are involving the receipt and disbursement of cash. The frequency of occurrence of cash transactions coupled with the nature of cash itself makes this asset the most difficult for a business to control. Therefore, it is convenient to have a separate "cash book" to record such transactions. All receipts of cash no matter the source and all disbursements of cash, no matter the reason should be recorded in this book. The chief objects of cash book are: (1) To have a permanent record of cash receipts and cash payments. (2) To ascertain the balance of cash in hand and at bank at any time and see that actual balance tallies with this. Cash book is both a Journal as well as a ledger. It is a book of original entry because all cash transactionr are fir ..t entered in the cash book and then posted on the concerned accounts in the ledger. It is also a ledger account as it is ruled like a ledger and only one type of transaction is recorded in it, i.e., receipt and payment of cash.

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Industrial Management

Types of Cash Book (1) Cash book with only cash column. (2) Cash book with cash and discount columns. (3) Cash book with cash, bank, and discount columns. These books are explained below: (1) Cash Book with Cash Column or Single Cash Book A single cash book or single column cash book is designed to record only receipt and payment of cash. A specimen form of simple cash book is given below: Cash Book Dr.

Cr.

Date

Particulars

LF Amt. Date

Particulars

LF Amt.

A simple cash book is ruled exactly like a ledger account with cash receipts being recorded on the debit side and payments on the credit side. The difference between the total of two sides on any day represents the amount of cash in hand. Since payments can never exceed receipts this cash book will always show a debit balance. Problem 5 Kidwai had Rs. 560 on hand on 31St March 2001. During the first week of April his cash transactions are as follows: Rs. 2002 Apr.2 2 2 3 4 5 5 6 7

Paid electricity bill Cash Sales Received from Rao Paid wages Conveyance charges Paid for Stationery Sale of old Material Paid single for repairs to furniture Cash sales Paid for purchases

163 250 410 600 16 75 110 45 275 480

Write up the cash book and ascertain the balance on hand.

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Financial Management

Solution: Cash Book Cr.

Dr. Date Particular

2001 Apr. 1 2 3 5

LF Amt. Date Particular 2001 560 ,Apr. 2 250 3 410 4 4 110 5 275 7 7

To To To To

Balance bid Sales alc Rao's alc Miscellaneous Income,8Jc 6 To Sales alc

By By By By By By By

Electricity alc Wages alc Travelling alc Stationery alc Repairs alc Purchases alc Balance c/d

'---

1,605

~F Amt.

163 600 16 75 45 460 226

1,605

Problem 6 Enter the following in Sri Shanbhag's Simple cash book and post them to the ledger: 2001 Apr. 1 8 15 20 22 28 30

Rs. 1500 320480 65 55

Balance of cash in hand Purchased goods for cash from 'X' Sold goods to 'Y' Received Commission Paid Commission Paid to Shantaram on account Paid Salary to office clerk and Office rent

715'

100 60

Solution: Cash Book Date

Particular

2001 Apr. 1 To Balance bid 15 To Sales ale 20 To Commission ale

LF

Amt.

Date

2001 1,500 Apr. 8 480 22 65 28 30 30 30

Particular

By By By By By By

Purchases ale Commission ale Shantaram ale Salaries ale Rent ale Balance c/d

LF Amt. 320 55 715 100 60 795 I---

2,045

2,045

Industrial.Managemsnt

258

Purchase Account

IBy Balance

Apr. SIBy cash

c/d

320

Sales Account

I

ITo Balance c/d

By Cash Account

480

Commission Account To Cash Account To Balance c/d

55

By Cash

65

10 .iij

65

Shantaram's ACICount ITo Cash Account

IBy Balance

7151

c/d

715

IBy Balance c/d

60

Office Rent Account ITo Cash Account

60

I

Salaries Account

I

IBy Balance

To Cash Account

c/d

100

(2)

Double Column Cash Book Double column cash book or cash book with discount and cash columns is designed to record along with cash receipts and cash payments, cash di~count allowed and cash received. The rolling is as follows: Cash Book Dr. Date

Cr. Particulars LF Discount Amt.

Date

Particulars LF Discount

Amt.

The double column cash book is divided into two sides; the left hand side or the debit side and the right hand side or the credit side. All cash receipts and discount allowed are entered on the

Financial Management

259

debit side, while cash payments and discounts received on the credit side in their respective columns.

Posting from Amount Column All items (except opening cash balance) appearing on the debit side of cash book must be posted to the credit side of respective ledger account as "By cash account." Similarly, all items appearing on the credit side of the cash book (except closing cash balance) must be posted to the debit side of the respective ledger account with words "To cash alc."

Posting from Discount Column It should be noted that discount columns of cash book are only memorandum columns ani' are not part of double entry system. They act as merely listing devices for discounts. So the procedure :or posting these items are slightly different. Each item of discount allowed appearing on the debit side of cash book is posted to the credit side of personal account as "By discount account." Similarly, each item of discount received appearing on the credit side of the cash book is posted to the debit side of personal account as "To discount account." And at the end of the period the discount columns are added separately. The total of discount column on the debit side of the cash book which represents discount allowed is posted to the debit of discount account in the general ledger with words "To sundry account". Similarly, the total of discount column on the credit side of the cash book which represents discount received is posted to the credit side of discount account in the general ledger with the words "To Sundry accounts" to complete the double entry.

Problem 7 Prepare a two column cash book from the following transactions of Mr. R.K. Gupta: 2001 Rs. Jan. 1 Cash in hand 4,000 2,000 6 Cash Purchases 10 Wages paid 40 11 Cash Sales 6,000 12 Cash received from Suresh 1,980 and Discount allowed 20 19 Cash paid to Munna 2,470 and discount received 30 27 Cash paid to Radha 400 28 Purchased goods for cash 2,070

Industrial Management

260

Cash Book Dr Date

Cr Particulars L.F. Discount Amount

2001 Jan. 1 To Balance bid Jan. 1 To Sales 12 To Suresh

20

20

Date Particulars

4,000 Jan. 6 6,000 10 1,980 19 27 28 31 11,980

By By By By By By

L.F. Discount

Purchases Wages Munna Radhey Purchased Balance c/d

Amount

30

2,000 40 2,470 400 2,070

30

11,980

Problem 8 From the following transactions compile a cash book with cash and discount columns: 2001 Jan. 1 5 8 9 10 11

15 21 25 25 29 31 31

Rs. Opening balance of cash 1,500 Paid to Ramgopal (Discount Received Rs.10) 290 Purchased goods from Ashok for cash 500 Purchased goods from Mahesh on credit 800 Paid' Mahesh 300 Received from Gupta 980 (Discount allowed Rs. 50) Cash Sales 500 Paid to Mohanlal (Discount allowed Rs. 25) 750 Paid wages 50 Paid rent 30 Purchased furniture from Dinesh for Rs. 500 Cash Paid 200 Paid to Naresh (Discount Rs. 20) 380 Received Commission 50

Solution: . Cash Book Date

Particulars

2eOl Jan.' 1 To 11 To 15 To 31 To

Balance bid Gupta Sales Commission

L.F.

Disc.

50

Amt.

2001 1,500 Jan 5 By Ramgopal 980 8 By Purchases 10 By Mahesh 500 50 21 By Mohanlal 25 By Wages ale 25 By Rent wc 29 By Furniture ale 31 By Naresh ale 31 By Balance c/d f---

50

Date Particulars

3,030

L.F.

Disc.

Amt.

290 500 300 25 750 50 30 200 - 20 280 530 I-30 3,030 10

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261

Problem 9 Rule the two column cash book (Discount account cash columns) and Record therein the following transactions:

2000 Feb. 1 Commenced, business with Rs. 10,000 in cash. 4 Opened current account in Bank of India and Deposited therein Rs. 6,000. 4 Purchased goods of Rs. 3,000 paid by cheque. 6 Received a cheque for Rs. 490 in settlement of Rs. 500 for goods sold. 7 Issued a cheque for Rs. 500 for furniture purchased. 8 Received a cheque for Rs. 490 in Settlement of Rs. 500 on account from Rangan. 9 Purchased goods for Rs. 500 and gave a cheque for the same. 11 Paid Krishna Rs. 225 in settlement of his account for Rs. 240 by Cheque. 15 Paid wages in cash Rs. 200. 18 Drew a cheque for personal use Rs. 400. 25 Drew a cheque for office use Rs. 250. 27 Paid salaries by cheque Rs. 500. 28 Paid electric charges in cash Rs. 15. 29 Paid cash in excess of Rs. 500 into Bank of India. Solution: Cash Book Date

Particulars

2000 Feb. 1 4 6 7 8 9 11 18 25 27

To To To To To To To To To To

Capital ale Bank ale Sales ale Bank ale Rangan's ale Bank ale Bank ale Bank ale Bank ale Bank ale

Disc.

10

Cash

Date Particulars

2000 10:000 Feb. 4 By Bank ale 4 By Purchases 3,000 5,000 6 By Bank ale 500 7 By Furniture ale 8 By Bank ale 490 500 9 By Purchases ale 225 11 By Krishna's ale 15 By Wages 400 250 18 By Drawings ale 500 28 By Electric charges ale 29 By Bank ale 29 By Balance c/d

Disc.

15

r----10

20,865

Cash

6,000 3,000 5,000 500 490 500 225 200 400 15 3,535 500

f-._-

15

20,865

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262

(3)

Three Column Cash Book A three column cash book or triple column cash book has separate columns for recording di!kount, cash and Bank ,transactions. The amount of cash paid or received is entered in the appropriate cash or Bank column. A third column is added to show all cash discounts received and allowed by the business. The ruling of a three column cash book is given below: Cash Book Date Particulars

Discount

Cash Bank Date

Particulars

Discount

Cash

Bank

POINTS TO BE CONSIDERED WHILE PREPARING THREE COLUMN CASH BOOK

(a)

Cash Deposits and Withdrawals Whenever a transaction relates to both cash and bank it is to be recorded on either side of the cash book. For example, cash withdrawn from bank for office use. The two accounts involved in this transaction are cash account and bank account. In the cash book on the debit side the amount will be put in the cash column against the words "To Bank." While on the credit side of the cash book the amount will be written in the bank column against the words "By cash." Such an accounting entry which is recorded on both the debit and credit side of the cash book is known as "contra entry." The term "contra" is a Latin phrase which means "opposite side" and indicates that the other aspect of the transaction can be found on the separate side. Since no listing in the ledger is required for such an entry as both the opposite side accounts (Cash account and bank account) involved appear in the cash book itselfthe letter 'C' is put in the ledger Folio column against such transaction. Similarly when cash is deposited into bank a contra entry is made. (b) Receipt of Cheques If a cheque is received and deposited into bank the same day, then it is debited directly to bank account. However, if a cheque

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received is- deposited on different dates, then the entry on receipt side will be debit cash and credit party and when the cheque' is deposited "debit bank and credit cash." The above two situations are illustrated below: (i) Cheque from 'N for Rs. 10,000 received on 10th January banked on the same day. This appears in the cash book as follows: Cash Book Cr.

Dr. Date

Particulars

Jan. 10 ToA

Disc.

-

Cash Bank Date Particulars

-

Disc.

Cash

Bank

10,000

(ii) Cheque from A for Rs. 10,000 received on 10th January is deposited into bank on 14th January. This will appear in the cash book as follows:

Cash Book Dr.

Cr

Date

Particulars

Jan. 10 Jan. 14

ToA To Cash (C)

Disc.

Cash Bank Date

Particulars

Jan. 14 By Bank (C)

10,000

Disc.

Cash

Bank

10,000

10,000

(c) Dishonour of Cheque Dishonour of Cheque means non-payment of cheque by the bank on being presented for payment. If a cheque received is deposited into bank is dishonored it should be credited in the bank column as "By concerned party account" to cancel the previous debit given. Again any discount that may have been allowed when the payment was received should also be written back if the cheque is dishonoured. Similar is the case when the business fails to honour cheques issued by it. The entry for both cheque issued and discount received are to be reversed. (d) Bank Charges Bank charges should be entered in the bank column on the debit side of the cash book as it reduces the balance at bank. (e) Direct Remittance from Customers If any customer remits directly into bank account it should be entered in the bank column on the debit side of the cash book.

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264

Problem 10 Enter the following transactions in a cash, bank and discount columns and balance the cash book. 2001 Jan. 1 1 2 3 4 5 5 12 15 18 20 22 25 30 31

Rs. 350 2,450 4,000 3,150 750 25 50 350 50 510 1,000 200 500 1,250 60 350 200 80

Cash balance Bank balance Cash received on Sale of Shares Paid into bank Paid to Alfred Discount allowed by him Paid wages by cash Received from balance Allowed him discount Sold goods for cash Bought goods for cash Cash withdrawn for personal expenses Paid into bank Received from Charles Allowed him discount Paid cheque for cash purchases Paid cheque for office use Paid. cheque for office rent

Solution: Cash Bank Cr

Dr -

DaU! Particulars

2001 Jan. 1 2 3 5 12 20 22 30

To To To To To To To To

LF. Dwc Cash Bank Date

Balance bid Investment at . Cash ale C Balan's ale Sales ale Cash C Charles ale Bank ale

Partl.Cuiars

2001 350 2,450 Jan. 3 By Bank ale 4 By Alfred ale 4,000 3,150 5 By Wages ale 15 By Purchases ale 50 350 510 18 By Drawings ale 20 By Bank ale 500 60 1,250 25 By Purchases 200 30 By Cash ale 30 By Rent ale 31 By Balance cld

LF Disc. Cash Bank

C 25

-

110 6,660 6,100

C C

3,150 750 50 1,000 200 500 350 200 80 1,010 5,470

25 6,660 6,100

Problem 11 Prepare a three column cash book of Sri Chandran from the following:

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Financial Management 2001 Jan. 1 Cash received from the sale of buildings 2 Paid into bank on opening act:ount 3 Paid Albert by Cheque Discount allowed by him 4 Paid Wages 8 Received from Balan by Cheque Allowed by him discount 10 Paid into bank Balan's cheque 15 Paid for stationery by cash 18 Bought goods for cash 20 Paid Madhavan by cheque Discount Allowed by him 21 Drew from the Bank 23 Drew from the bank for private expenses 24 Received from cash sales 25 Received from Raman Allowed him discount 27 Paid into Bank

Rs. 6,000 5,600 2,470 20 150 980 20 980 50 120 370 10 150 200 170 1,800 40 2,000

Solution: Cash Book Date Particular.

2001 Jan. 1 2 8 10 21 24 25 27

To To To To To To To To

Buildings ale Buildings ale Balan's ale Cash Bank ale Sales ale Remains ale Cash ale

LF Disc. Cash Bank Date 2001 Jan. 2 5,600 3 4 20 980 980 10 15 150 18 170 401,800 20 2,000 21 27 31 6,000

C C C C

Particulars

By By By By By By By By By By

Bank ale Alberts ale Wages ale Bank ale Stationery ale Purchases ale Madhavan's ale Cash Bank ale Balance ale

609,100 8,580

LF Disc. Cash Bank

5,600 2,470

20 150 980 50 120

C 10 C C

370 150 2,000 200 5,390

30 9,100 8,580

Problem 12 Rule the three column cash book of a Merchant and record therein the following transactions: 2001 Jan 1 2 7 10 14

Commenced business with Rs. 10,000 Paid into bank Rs. 8,000 Purchased goods by cheque Rs. 3,000 Paid rent Rs. 150 Purchased furniture by cheque Rs. 180

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15 Cash Safes Rs. 650 16 Gave Gopal a cheque for Rs. 970 (and he allowed discount Rs. 25) 18 Received from Narayan a Cheque for Rs. 1500 and he was allowed a discount of Rs. 30. 20 Paid into bank cheque received form Narayan. 25 Paid Wages Rs. 60 28 Drew for office use Rs. 400. 30 Received from Gopi Rs. 100 31 Withdrew for personal use by cheque Rs. 150

Solution: Cash Book Date Partil:uJars

2001 Jan. 1 2 15 18 20 28 30

To To To To To To To

Capital ale Cash ale Sales ale Narayan ale Cash ale Bank ale Gopi's ale

LF Disc

Cash Bank

2001 Jan. 2 8,000 7 650 10 30 1,500 12 1500 16 400 20 25 100 28 31 31 10,000

C C C

Date Partil:ulars

3012,650 9,500

By By By By By By By By By By

Bank ale Purchases ale Rent ale Furniture ale Gopal's ale Bank ale Wages ale Cash ale Drawings ale Balance c/d

LF Disc. Cash Bank

8,000

C

3,000 150 180 970

25 C

1,500 60

C

400 150 2,940 4.800 2512,650 9,500

Problem 13 Enter the following transactions in a cash book with cash, discount, and bank columns and balance the same. 2001 Jan. 1 Balance on hand Rs. 400 and at bank 2,000. 3 Paid Ramlal by cheque Rs. 950 in full settlement of his account for Rs. 1,000. 5 Purchased goods for cash Rs. 100. 5 Purchased goods and paid by cheque Rs. 30. 7 Withdrew cash from bank for office use Rs. 300 . 8 Paid wages Rs. 200. 10 Paid Modi by cheque Rs. 150. 15 Rajeev purchased goods from us for cash Rs. 1,000. 18 Received cheque from Murthy Rs. 320 in full Settlement of his account Rs. 350. 22 Paid Rs. 1,000 into bank. 25 Paid Gulam Rs. 175 in full settlement of his account Rs. 180. 31 Drew cheque for personal use Rs. 50.

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Solution: Cash Book Date Particulars 2001 Jan.1 7 15 18 22

(4)

To To To To To

Balance bid Bank ale Sales ale Murthy's ale Bank ale

LF Disc. CalJh Bank Date 2001 C

C

Particulars

400 2,000 Jan. 3 By Ramlal's ale 5 By Purchases ale 300 1,000 5 By Purchases ale 320 7 By Cash ale 30 1,000 8 By Wages ale lO By Modi's ale 22 By Bank ale 25 By Gulam's ale 31 By Drawings 31 By Balance cld 301,700 3,320

LF Disc Cash Bank 50

950 100 300 300

C

200 150 C

1,000 5 175 50 225 1,570 55 1,700 3,320

Petty Cash Book Petty cash refers to sum of money set aside for the payment of small and trival expenses such as postage, stamps, carriage, newspaper, stationery, travelling expenses etc. In most business there is a frequent need for the payment of relatively small amounts such as for postage, etc. It is not appropriate to write cheques for such small amounts and cash payments are made. However, such transactions may be quite numerous and recording them in the cash book would make it very unwieldy. As a record must be kept of all cash payments, it is normal to use a petty cash book to enter items of such small expenditure. The petty cash book is a subsidiary book which is used for recording minor expenses paid in cash. As a first step an estimate of the amount of cash needed for meeting relatively small amounts during a certain period such as a week, a fortnight or a month is made. A cheque is drawn for the amount and money obtained which is designated as petty cash fund is kept in charge of a specific employee (known as the petty cashier) who is authorised to disburse the funds according to restrictions as to maximum amount and purpose by filling out a petty cash voucher. The petty cash voucher shows the amount paid, the purpose of the expenditure, the date and the signature of the person receiving the money.

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Industrial Management

Methods of Writing Petty Cash Book Petty cash book may be either a (a) Simple petty cash book (b) Analytical or columnar petty cash book A simple petty cash book is quite similar to a cash book. All the amounts received towards the petty cash is entered on the debt side and expenses on the credit side in a chronological order. The most convenient way of maintaining the petty cash book is to follow the "columnar" or analytical form. It has two sides. The left hand side records receipt of cash for making petty cash expenses. The right hand side records payments and analysis of payments to show the expenditure on each class of expenses such as stationery, postage, travelling expenses etc. The totals of these analytical columns are posted to the debit of the concerned nominal accounts. This saves a lot of labour otherwise Involved in posting each item of petty expenses to the ledger individually Problem 14 Rule a petty cash book with four analysis column for postage and stationery, travelling expenses, carriage and office expenses and enter up the following transactions. The book is kept on impress system, the amount being Rs. 750 only. 2001 Jan. 4 4 4 4 5 5 5 6 6 8 9

Petty cash on hand Received cash to make up the imprest Paid bus fare Bought Stamps Paid bus fare Telegram charges paid Bought shorthand notebook for office Paid carriage on parcel Paid for repairs to typewriters Paid cart hire Paid office cleaner

Balance the petty cash on balance.

9th

Rs. 30 10

50 250 50 10 20 80 100

50

Jan. 2001 and bring down -the

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269

Solution: Analytical Petty Cash Book Amount Received

2,001 30 720

Date

Purliculaj's

Jan 4 4 4 4 5 5 5 6 8

To Balance bid To Bank By Bus fare By Stamps By Bus fare By Telegram Charges By Notebook for OffiCE By Carriage By Repairs to Typewriter 8 By Cart Hire 9 By Office Cleaner

Payment

10 50 250 50 10 20

750

Coolie & TravellCartage ing& Conveyance

Office Expenses

10 50 250 50 10 20

80 100 50 620

9 By Balance dd

Postage & Stationery

80 50

100 110

120

260

130

130

--750

Balance Sheet The financial statement designed to show a business entity's fmancial position - what it owns and what it owes - on a particular date is called a balance sheet. A balance sheet consists of a listing of the assets and liabilities of a business and owners capital. Procedure for Constructing a Balance Sheet (a) Identify and list all the assets of the business. (b) Identify and list capital and all liabilities of the business. (c) On the right hand side of the Balance sheet: Divide the assets into current and fixed. List the assets within each group in the order of liquidity, beginning with the most liquid asset, usually cash and ending with the least liquid asset, i.e., land. Cd) On the left hand side of the Balance sheet: First list the current liabilities under appropriate heading and total them. Next show the long-term liabilities, e.g., bank loans for over one year.

Industrial Management

270

Finally show the amount of capital. Add any profit and deduct drawings if any. (e) Total both sides of the Balance Sheet on the same line. (f) Ensure that totals agree. A specimen form of a Balance Sheet is shown below: Balance Sheet as on .•. Liabilities Current Liabilities: Bank overdraft Bills payable Sundry Creditors Outstanding expenses Fixed Liabilities: Loans Mortgages Capital: Opening Balance Add Net Profit Less: Drawings

Assets

xx xx xx xx xx xx xx

**

xx xx

Current Assets: Cash in hand Cash at Bank Sundry Debtors Less: Reserve for Doubtful Debts Bills Receivable Closing Stock Prepaid expenses Fixed Assets Furniture Less: Depreciation Plant & Machinery Less: Depreciation Land & Buildings Less: Depreciation Patents Goodwill

xx

xx xx xx [~

xx xx xx xx xx

I---

xx

xx xx

I---

xx

xx xx

t---

-

xx xx xx xx

Problem 15 For the year ended 30th Sept. 2002, MIs Prakash has earned a net profit of Rs. 13469. Other balances in their ledger are as under: Cash in hand Plant & Machinery Bills Payable Drawings Capital

3,600 8,500 2,800 2,400 15,000

Cash at Bank Sundry Debtors Sundry Creditors Stock on 30-9-2002

9,327 5,678 4,736 6,500 )

You are required to draw a balance sheet as on 30th Sept. 2002.

271

Financial Management

Solution: Balance Sheet as on 30·9·2002 Liabilities

Rs.

Capital Less: Drawings

15,000 2,400

Add: Net Profit

12,600 13,469

Sundry Creditors Bills payable

Assets

Rs.

Plant & Machinery Sundry Debtors Stock Cash at Bank Cash in hand

-

8,500 5,678 6,500 9,327 3,600

26,069 4,736 2,800 33,605

33,605

Problem 16 From the following Trial Balance draft the Balance Sheet of Aruna as on 31st Dec. 2002 Trial Balance as on 31·12·2002

Land & Buildings Goodwill Furniture & Fixture Bank overdraft Bills Receivable & Payable Delivery VlID Profit & Loss alc Stock of Stationery Sundry Debtors & Creditors Closing Stock· . Stock of goods sent on Consignment Advertising expenses elf Capital alc Cash in hand

Dr. 12,000 8,000 2,600 7,000 9,200

Cr.

10,000 4,900 9,170

360 3,750 4,500 3,760 2,500

5,920

23,980 300 53,970

53,970

Industrial Management

272

Solution: Balance Sheet as on

Liabilities Capital

Add: Profit Bank overdraft Sundry Creditors Bills Payable

31·U~·2002

Assets 23,980 9,170

---

33,150 10,000 5,920 4,900

Goodwill Land & Building Furniture & Fixture Delivery Van Sundry Debtors Bills Receivable Closing stock Stock of goods Sent on Consignment Stock of stationery Cash op. hand Advertisement Expenses elf

53,970

8,000 12,000 2,600 9,200 3,750 7,000 4,500 3,760 360 300 2,500 53,970

4.13 TRANSACTIONS WITH BANKS AND FINANCIAL UNITS To understand transactions relating to banks and other financial units require understanding of the following concepts: (a) Credit A credit refers to a facility under which a buyer buys goods and pays the value of such goods at a later stage. In other words a credit transaction does not involve payment of cash immediately instead it is postponed to a future period. A credit transaction is settled by means of credit instruments. Such as a promissory note, Bill of exchange, a cheque or a Bank Draft. (b) Payment Payment refers to settlement of account by the issue of a negotiable instrument. (c) Overdraft When a customer of a bank is allowed to draw money in excess of his credit balance lying in his account, he is said to have allowed a overdraft facility. Hence, the account of such a customer will show a debit balance. A businessman can have this arrangement with the bank to resort to temporary financial assistance. The bank may insist on some security against such facility. To avail the facility of overdraft, the person must have a current account 'with the bank.

Financial Management

273

(d) Current Account It is a type of deposit account which is opened by businessmen with a bank. Under this type of account there are no restrictions relating to withdrawal of each. Genera,lly, no interest is paid by the bank. on this type of account. (e) Security A security refers to something which a bank. insists from a borrower at the time of providing a loan. Where a person offers himself as a security, he is known as a surety or a guarantor. Some of the assets which are offered as a security by the borrowers are goods, land and building, shares and other securities, life insurance policy, gold, jewellery etc. When the loan is advanced on the basis of an asset it is known as collateral security. Collateral means "additional" and the securities offered by the borrower are called collateral because they are offered in addition to personal security of the borrower. 4.14 AUDITING AND MONITORING OF ACCOUNTS Auditing means verification of the accounts books and the relative documentary evidence by an independent qualified person in order to ascertain the accuracy of the figures appearing therein. The primary object of an audit is to establish, by an examination of books, vouchers, and other appropriate records, that the balance sheet, is properly drawn up, so as to exhibit a true and . fair view of the state of affairs of business and the profit & loss account for the period. In order to establish whether the accounts show a true and fair state of affairs, the auditors carry out a process of examination and verification of the accounts. In the process of such an examination of accounts certain frauds or errors may be detected. The primary object always is the establishment of the degree of reliability of the annual statement of accounts. An auditor, in order to satisfy himself about the accuracy of the books of accounts in order to report to management, must (a) Examine, the system of internal check. (b) Check the arithmetical accuracy of the books of accounts by the verification of posting, casting and balancing etc. (c) Verify the authenticity and validity of transactions entered into the books with the relevant supporting documents. (d) Ascertain that a proper distinction has been made between items of income and expenditure correspond to the accounting period.

274

Industrial Management

(e) Confirm the existence and value of assets and verify liabilities. (1) Verify whether all the statutory requirements as regards the book of accounts that should be maintained as well as the form in which the final accounts should be drawn up have been duly complied with. Advantages of an Audit The following are the chief advantages accruing from an audit: (1) Audited accounts are more readily accepted as a correct and authentic record of the transactions. (2) E1T9rs and frauds are detected and rectified in time. (3) A regular audit would exercise a great moral influence on the client's staff and thus prevent fraud and errors. The staff will also keep the books of accounts up-to-date. (4) An auditor possesses practical knowledge of business finance, tax laws, law relating to contracts. He is in a good position to advise on these matters and his opinion can be helpful to his clients. (5) An auditor acts as a trustee of the shareholder and safeguards their financial interest in the case of a Joint Stock company. Shareholders are assured that the accounts have been properly maintained and the directors and managers of the company have not taken any undue advantage of their position. -(6) Audited accounts are considered more reliable for taxation purposes, i.e., sales tax, income tax and other taxes. (7) Audited accounts are helpful in claiming reasonable compensation from the insurance company in respect of loss by fire, burglary etc. (8) Audited accounts facilitate the settlement of accounts between the partners at the time of retirement or death of a partner. (9) Audited accounts can be very useful whenever it is desired; (a) to secure a loan (b) to admit a partner (c) to sell the business. (10) Audit safeguards the interest of the workers because audited accounts are useful for settling trade dispute for higher wages or for payment of bonus to the workers.

Financial Management

275

The person who conducts audit is known· as the auditor. He makes a report to his appointing authority after careful examination of the accounting records and the accounting statements. In this report he expresses his opinion whether the statements of accounts are true and fair or not. Monitoring of Accounts It means supervision of accounts and the accounting system. In big business organisation, the maintenance of accounts are entrusted to clerks. It is the duty of chief accountant to supervise the preparation of accounts and its proper maintenance. Where mechanised accounting is followed, the chief accountant must supervise the mechani~ed accounting system which may also include preparation of cOJ;t accounts. QUESTIONS I. Simple Questions 1. What do you mean by financial plan? 2. Define working capital. 3. Distinguish between gross an net working capital. 4. Distinguish between permanent and variable working capital. 5. State any four objectives of working capital. 6. Define a Budget. 7. Define budgetary control. 8. Define book keeping. 9. Define accounting. 10. What is a Journal? 11. What do you mean by Journal entry? 12. What is journalising? 13. What is a ledger? 14. What do you mean by balancing of an account? 15. What is a balance sheet? 16. Define auditing. ll. Short Answer Questions 1. Explain the factors which govern working capital. 2. Explain the steps involved in preparing a budget. 3. Explain the types of budgets. 4. State the advantages and limitations of Budgetary control. 5. Explain the advantages of accounting.

QQQ

CHAPTER 5

QUALITY CONTROL AND STATISTICAL QUALITY CONTROL 5.1 Introduction to Quality Control. 5.2 Inspection. 5.3 Statistical Quality Control. 5.4 Acceptance Sampling. 5.5 Machine and Process Capability. 5.6 Control Charts.

5.1 INTRODUCTION TO QUAITY CONTROL The term quality is used to indicate a standard. From the manufacturers point of view quality may be defined as the sum total of a number of characteristics describable in a specification. In other words, the term "quality" does not carry with it the popular meaning of "best" in any absolute sense. A manufacturer views quality as "best for certain customer condition". The two customer conditions are; (a) the actual end use and (b) the selling price of the product. The term quality is attributed to the specification of dimensions, physical or chemical property, hardness, temperature, pressure or any other requirement of a prodUct. Quality control starts with the customer's specification which is undertaken through various aspects such as designing, research; scientific purchasing of raw materials, production planning, mechanical inspection, electrical testing, proper packing and ultimate delivery to customer. Quality control in a broad sense refers to the systematic control of these variables encountered in manufacturing process which effect the excellence of the .end product. The control of such variables is essential as reputation for uniformity and good quality output is a valuable asset to an industry.

Quality Control and Statistical Quality Control

277

Definition and Objectives of Quality Control Alford and Beatty have defined quality control as "the mechanism by which products are made to measure upto specifications determined from customers' demand and transformed into sales engineering and manufacturing requirements." In the words of Pharmaceutical Manufacturers Association of the USA, "Quality control is the organised effort employed by the company to provide and maintain in the final product the desired features, properties, and characteristics of identity. Purity, uniformity, potency and stability within established levels so that all merchandise shall meet professional requirement, legal standards as the management of a firm may adopt." Quality control is a statistical technique needed for systematic observation of size, form, quality, and workmanship and control of variables encountered in a manufacturing process that affect goodness of end product. The objectives of quality control are as follows: (1) To establish standards of quality which are acceptable to the customer and economical to maintain such standards. (2) To enable the setting and resetting of processes and machinery. It enables to know the performance of similar machines and operations. (3) To keep up the quality of product during manufacture by taking remedial steps. (4) To locate and identify the process faults and defects of products and thus to control the scrap and waste. (5) To take different measures to improve the standard quality of product. (6) To see that products oflower quality do not reach customers. (7) To enable reduction in operating cost by not producing defective goods. (8) To develop quality reputation which is of prime importance in selling consumer goods.

Importance of Quality Control Quality control plays a very important role in the process of manufacturing. The problem of production adoptation to customer

278

Industrial Manogement

requirement has become increasingly serious today. Management uses a wide range of tools in manufacturing goods that involve good workmanship, design, materials and other characteristics. These quality products encourage customers even to pay premium prices. This also leads to customer satisfacticin. If poor quality goods are supplied to customers they refuse to accept and instead go in for substitute products. This results in reduced sales. Helice the need for quality control. The importance of quality control can be highlighted under the following points: (a) It increases the profit earning capacity of the business. (b) It enables the industry to complete successfully. (c) It reduces cost of production. (d) It reduces operating losses by keeping scraps and wastes to a minimum. (e) It improves the product design. (1) It reduces product line bottlenecks.

(g) It improves employees' morale. (h) It enhances customers' satisfaction. (i) It increase the reputation of the industry.

Principles or Essentials of Quality Control There are three essentials of a good quality control: (1) Fixation of responsibility for manufacturing of quality product: The responsibility for quality control must be entrusted to someone or a group of persons best suited for the job. Otherwise it will lead to duplication and sometimes it amounts the old saying "everybody's business becomes nobody's business" and thus quality is severely damaged. (2) Setting up clear cut standards : Setting up standards becomes useful as it helps in increasing the variation of end products by comparing with predetermined standards. This adds to the excellence of the end product.

(3) Uniform application of standard of Measurement : A systematic routine must be followed up to see that the promise is backed by performance, i.e., the predetermined excellence of the

Quality Control and Statistical Quality Control

279

product is unaffected. According to W.C. Deming, "not how much product, but how much acceptable product is what counts."

Functions of Quality Control Department The functions of quality control department include the following: (1)

Advises on inspection and quality control policy formulated.

(2) Sets inspection standards in the light of design-engineering tolerances. (3) Prepares department budget requests and controls operating expenses. (4) Selects inspection points, including receiving room, department clearance and final inspections. (5) Selects inspection gauges and instruments and sees that maintenance keeps each in good working order at all times. (6) Collaborates with statisticians on choice of type of statistical qu~ity control charts to be used. (7) Collaborations with statification on designing efficient sampling plans and methods. (8) Issues damage reports. (9) Trains inspectors on duties, and in using inspection stand• ards.

Mechanism of Quality Control The mechanism of quality control comes from four basic tools. These are as follows: (1) Standards and specifications: Standards and specifications contribute to a great extent to the programme of quality control. In other words, standards and specifications must be determined to achieve successfully the objectives of quality control. A specification portrays precisely the characteristics possessed by the product.

Establishment of standard is the task of the quality engineers. However, quality standards and specifications should be determined in close co-operation with purchasing, sales, manufacturing and inspection departments because these departments have something to contribute and are closely inter-related with each other and the action of the one will affect the other. Quality standards are

Industrial Manage1rU!nt

280

netessary for comparison. Such standards should be carefully preserved. In the absence of such preservation the company will find the quality level of its product shifting as there is deterioration in physical standards or change through usage. Standards must be definite and self-explaining backed by appropriate drawings, specification sheets, blue prints, accurate formulae etc., so that there may not arise confusion as to what is actually required. Tolerances: Tolerances mean possible variation from a desired, nominal measurement embracing a specified quality variable. These tolerances permit the most economical production cost. Hence their importance. Such permissible variations must be taken into account while standards and specifications are being established. These variations are the permissible variations from the basic standard or the ideal criterion. The "zone of acceptability" has two limits (a) upper and (b) lower, and may be expressed as under.

4 ± 0.005. Here 0.005 indicates that variations or limits (permissible) may be either plus 0.005 or minus 0.005, as the case may be, from the basic criterion, i.e., 4. ----

Inspection: Inspection is the most common method of attaining standardisation, uniformity and quality of workmanship. Inspection acts as a diligent and intelligent guardian with stick of specified standards in its hand so that is may determine whether a given item fall within this zone of acceptability. If the said item does not fall within this zone, it will be rejected and corrective measures will be applied to see that the items in future conform to specified standards. Thus inspection is the art of applying tests, to observe whether a given item of product is within the specified \limits of variability. (2)

Inspection helps to control quality, reduces manufacturing costs, eliminates scrap losses and assignable causes of defective work, aids distribution, and thus contribuUfs to profit. In the absence of the technique of inspection defective goods will not be segregated and. thus customers will be deprived of getting goods of proper quality. Thus the inspection process embraces, for each quality characteristic: (a) Interpretation of the specified standard. (b) Measurement of the product in the light specification. (c) A judgement whether a given item of product falls within the specified limits of variability.

Quality Control and Statistical Quality Control

281

(d) Approval or rejection of the given item of product under inspection. (3) Statistical Quality Control : Statistical quality control makes use of statistical methods and principles which aim to assess not only the magnitude of "chance cause variation" but also detect assignable cause variation. Because of the detection of "assignable cause variations" by these statistical methods, it becomes possible for the control at various stages of production of a product. Statistical quality control includes the following two major tools: (a) Quality Control Charts: Control charts are pictorial means of presenting a mass of actual data so that their significance can be understood. A control chart may be defined as "A chronological (hour-by-hour, day-by-day) graphical comparison of actual productquality characteristics with limits reflecting the ability to produce as shown by past experience on the product characte ristic." Control charts for the purpose of statistical quality control may be applied for attributes or for variables. Quality control for attributes requires simply noting and recording the presence or absence of some quality characteristics by Inspectors. It simply determines whether a piece of product is satisfactory or defective. Quality control for variables requires measurement of product for each quality characteristics and keeping a record of each measurement clearly showing whether it falls within the zone of acceptability or tolerance. It is the analysis of this sort which is the backbone of control charts. (b) Acceptance Sampling: A sample means small part taken from a quantity to give an idea of the quality of the whole. Samples and sampling methods are vital aspects of statistics as used in quality control. "Sampling inspection" involves examination of less than 100% of the production. Acceptance sampling is a device of sampling that determines whether the lot in question is to be accepted or rejected. Thus, acceptance sampling throws light even in the uninspected residue of a lot. (4) Inspection Devices: Most of the instruments used for inspection are known as gauges. These gauges investigate the dimensional fitness of a mechanical element in relation to its predetermined dimensional standards. The more commonly used gauges are: fixed-sized gauges, micro-meter gauges, air gauges, combination gauges, chrome-plated gauges.

2B2

Industrial Managerrumt

Electronic inspectioon devices are becoming more popular in recent times. Such devices are used in testing and sorting of fruits, ill checking internal characteristics of products such as testing of smoke, heat, humidity, acidity etc. Electronic inspection devices readily reject faulty and defective articles. Factors Affecting Quality (a) Market Customer demand, his needs and purchasing power are the main determinants of quality level. (b) Men For designing quality and for production of quality goods right type of men with required knowledge are essential. (c) Money Increased competition, more mechanisation and lower profit margin have made scrap and rework losses very serious. Cost of maintenance and improvement of quality have increased to a great extent. (d) Management Without management's interest and active co-operation there can be no adequate quality. (e) Materials Due to production cost and quality requirement, it becomes necessary to work with wide variety of materials having tight s.pecification. (f) Machine and Method Manufacturing equipments have become more complex in order to meet high volume of production and high level of quality goods. These machines and technology are highly sensitive.

5.2 INSPECTION Inspection is the manufacturing function which judges production against established standards. It is both the instrument for quality measurement and a part of the activity of quality control, which however, is often organised as an independent function. Inspection may be defined thus: Inspection is the art of applying tests, preferably by the aid of measuring appliances, to observe whether a given item of product is within the specified limits of variability.

Quality Control and Statistical Quality Control

283

The objectives of inspection are: (1) To detect errors in manufacturing and trends toward poor

quality and report them to responsible officials in the producing departments so that action may be taken to prevent making units of product that are not acceptable, or a level of quality of product that is below t~an specified. (2) To protect the consumer from receiving a product that is below the quality level and limits specified, by sorting the good units or lots from those which are below standard, permitting only the good to pass inspection. (3) To compile information regarding the conformance of the product with specifications for the use of engineering, production, purchasing, quality control and other divisions responsible for quality performance., Functions of Inspection Department The functions of the inspection department may be outlined as follows: (1) Raw material inspection to determine ifthe incoming goods

(2)

(3)

(4) (5)

(6)

(7)

are physically and chemically in accordance with specification. Process inspection to determine if the part is correctly formed and dimensioned in accordance with specifications, free from defects in material, improper processing or accidental injury, and completely processed and finished .. Metallurgical and Metallographic inspection to determine if the metallic structure, hardness and other properties are as specified after the various processing operations have been performed. Purchase parts inspection to determine if purchased items conform to purchase specifications. Finished goods inspection to assure management that an excessive amount of goods below the predetermined quality specifications will not be delivered to customers. Tool inspection to determine if the patterns and tools which are purchased or made are capable of producing the parts in accordance with specifications. Periodic gauge and other measuring instrument inspection to make certain that this equipment is capable of giving the desired results, whenever used.

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Industrial Management

(8) Assembly department inspection to determine and report errors in design or manufacture that result in excess assembly time or poor performance. (9) Salvagin% operations in which poor work is reworked to eliminate the defects, converted to other uses, or converted to scrap material that will bring the best price when sold. (10) Complaints division, which receives reports on defective workmanship or material from the sales and service departments, investigates them and makes recommendations to the engineering or manufacturing departments to prevent future occurrences. Kinds of Inspection The various kinds of inspection are as follows: (1) Tool Inspection Tool inspection, as the term implies, is the application of inspection methods to tools, flXtures, jigs, and gauges in advance of the work of production. If tools are incorrect, the work will vary from the standards of quality established. Therefore, periodic inspection of all tools should be provided for, with particular attention to those points where wear and tear takes place. (2) First-piece Inspection First-piece inspection is based upon the importance of beginning a job right. If the first three or four pieces produced in a new lot are subject to inspection, the chances are that the tools are properly set and that ensuing pieces will be up to standard. (3) Working Inspection Working inspection implies that the Inspector shall check pieces at definite intervals, to make sure that they are being produced to specification. In this way, a continuous inspection of production is maintained so that a minimum of defective parts will be manufactured. (4) Operation Inspection Operation inspection is inspection at the completion of an operation, before the work in process passes along to a succeeding process or machine. Next to final inspection, it is the most commonly applied of the several kinds.

Quality Control and Statistical Quality Control

285

(5) Inspection by Sampling Inspection by sampling is less than 100% inspection, in which a certain proportion or percentage of pieces is taken from each lot, submitted to inspection, and the lot judged according to this sample. (6) Final Inspection Final inspection is concerned with inspection after an article has been completely finished and is ready to be sent to the storeroom or shipped to a customer. It is the step whereby the manufacturer has assurance that his product is meeting in all respects the established standards and will be satisfying to his customers when they receive it.

(7) Floor or Patrolling Inspection Floor or patrolling inspection takes place at or near the machines. It ranges from patrolling the shop and keeping an eye on the work in the machines to close inspection and careful measurement of the product where it is being produced. In continuous process industries, floor inspection is often conducted from an enclosed area in the line of work, the product flowing through this area as though it were one in the chain of machines. (8) Centralised Inspection When inspection is centralised the parts are transported to special areas where precision measuring devices maybe located, and where the inspectors may make the accurate measurements required without the many disturbances and interferences that occur in the production floor. The basic idea is the separation of inspection from manufacturing inspection room or crisis may each be located parallel to the flow of work through the shop and centrally with respect to the machine secured. Advantages of Inspection (1) It ensures whether quality of actual output confirms with standard quality specified. (2) It facilitates rectification of defective output. (3) Inspection process guarantees that the customer will receive the product of desired quality and not sub-standard goods. (4) It serves as a moral check on employees who undertake to ensure quality uf goods. (5) Inspection- facilitates good housekeeping.

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Industrial Management

Disadvantages (1) It involves increased cost of production owing to salary payable to inspectors. (2) It results in delay of delivery of goods. 5.3 Statistical Quality Control (SQC) The SQC involves the statistica) analysis of the inspection data, which is based on sampling and the principles involved in normal curve. In the field of quality control the problems susceptible of statistical analysis and those of standardisation, specification and inspection; thus it includes problems both of quality of design and quality of performance. The principal applications of the statistical method to quality control are the following: (a) To problems of quality of design: (i) To assist in determining the essential characteristics of vital raw materials and finished product. (ii) To determine to what extent variations in essential characteristics affect the value of a finished product. (b) To Problems of quality of conformance: (i) To compare different methods of measuring the essential characteristics of finished product. (ii) To determine whether significant variations in essential characteristics of finished product are due to variations in raw materials, or in manufacturing processes, or can be assigned to pure chance, within statistically determined limits of probability. 5.4 ACCEPTANCE SAMPLING A widely used statistical quality control technique used for inspection by the method of attributes is acceptance sampling. In the place of 100%, screening or sorting inspection, samples of a lot or process are selected and carefully. Generally inspected for defective pieces and the number of these found forms the basis for the acceptance or rejection of the entire lot. When rejected, the balance of the lot is sorted to separate the defective pieces from the acceptable ones. The operation of a sampling inspection plan involves taking the following steps in sequence: (a) Segregation of the product into inspection lots. (b) Selection of sample or samples from each lot.

Quality Control and Statistical Qua{ity Control

287

(c) Inspection of each item in the sample or samples to determine their quality. (d) Acceptance or rejection of each Inspection lot on the basis of the inspection of the sample or samples. Uses ~f Sampling Inspection in Industry (a) To ascertain the acceptability and quality of incoming raw material, component parts and finished product. (b) To ascertain the acceptability and quality of outgoing product. (c) To determine the acceptability of work-in-process, for further processing within the plant. (d) To improve and control the quality of the product. Acceptance Sampling Plans Three types of acceptance sampling plan are in general use; namely, single, double and sequential. The best known and most generally applicable are the Dodge and Roming Single and Double Sampling Inspection Tables. These have both been developed for each of two kinds of consumer protection: (i) Lot quality protection and (ii) average outgoing quality protection (AOQL). The four types of Tables developed by Dodge and Roming are (a) Single sampling lot tolerance tables (b) Double sampling lot tolerance tables (c) Single sampling AOQL tables (d) Double sampling AOQL tables. Dodge and Roming have outlined the single sampling inspection procedures as follows: (i) Inspect a sample of 'n' pieces. (ii) If the number of defects found in the sample does not exceed (c), accept the lot. (iii) If the number of defects found in the sample exceeds (c), inspect all the pieces in the remainder of the lot. (iv) Correct or replace all defective pieces found. Double Sampling In double sampling, lots are not always rejected when the acceptance criterion for the first sample is exceeded, but the decision is sometimes postponed until a second sample is taken and the acceptance criterion for the combined samples exceeded. The procedure outlined by Dodge and Roming is as follows:

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Industrial Management

(1) Inspect a first sample of n l pieces. (2) If the number of defects found in the first sample does not exceed C l , accept the lot. (3) If the number of defects found in the first sample exceeds C2 , inspect all the pieces in the remainder of the lot. (4) If the number of defects found in the first sample exceeds C 1 but does not exceed C2 inspect a Second sample n 2 pieces. (5) If the total number of defects found in the first and second samples combined does not exceed C2 , accept the lot. (6) If the total number of defects found in the first and second samples combined exceeds C2 , inspect the pieces in the remainder of the lot. (7) Correct or replace all defective pieces found. Sequential Sampling In addition to single and double sampling, there is also a type known as sequential sampling. Where single sampling is used, the decision to accept or reject a lot must be made after inspecting a Single Sample from the lot, and where double sampling is used, it may be necessary to take two samples. In sequential sampling, one, two, three or more samples may be required before it is possible to reach a decision to accept or reject the lot. 5.5 Machine and Process Capability The extent to which the capacity of a machine is utilised is known as machine capability. The actual capacity of machines cannot always be utilised as it depends upon factors such as demand for product, availability of raw materials, power supply, the extent of repairs and maintenance and so on. "Process capability" is a concept used to denote the maximum or best operation a process can perform under a given condition. Process capability is not always the same as predetermined. It varies owing to change in batch or other unavoidable causes such as inferior quality of materials, wrong set up of machine, change of machine operator etc. The intention of control is to minimise the effect of such factors and bring the actual variation as close to process capability as possible. Measures of Central Tendency Production process will be stable under controlled conditions and will concentrate around the two extremes. In other words, the

Quality Control and Statistical Quality Control

289

units prpduced will have sizes equal to or approximately close to the middle size. This phenomenon is known as central tendency. The measures of central tendency is one of statistical technique to know this phenomenon. There are various measures of central tendency, such as mean, median and mode. The most popular measure is mean which is obtained by dividing the sum of variables by the number of variables. Expressed in the form of formula: &x

x-- -N

Dispersion

A measure of dispersion is one that measures the extent to which there are differences between individual observations and some central value. In measuring the dispersion, we are interested in the amount of the variation or its degree but not in the direction. For example, a measure of 6 inches below the mean has just as much dispersion as a machine of 6 inches above the mean. The following are the important methods of studying dispersion: (a) The Range (b) The Quartile deviation (c) The Mean deviation (d) The Standard deviation (e) The Lorenz curve Frequency Distribution A frequency distribution refers to data classified on the basis of some variable that can be measured. Under this technique the units of products is arranged according to its measured dimensions and each time it occurs is plotted on a graph. Such a group is known as frequency distribution curve or a probability curve. This curve gives some indication about the quality .. Normal Curve If sufficiently sensitive measuring devices are used in inspection, variations will be found in everything produced even though the same methods, machines, tools and specifications are used in their manufacture. If measurements are made of a single quality characteristic of a large number of parts, the bulk of them will tend to conform closely to an average. This average should coincide with the desired quality standard, as established for the production of the item, if the process is producing the part at the

290

Industrial Management

quality level desired. Some of the parts will deviate from the average more than others and a few will be very different from it. If these measurements are tabl,llated by size groups, and the frequency of occurrence plotted for each group, a bell-shaped curve known as frequency distribution curve will result. Correction of Tolerances In case if the production process deviates from specified tolerance limits, the following corrective steps must be taken: (a) Check the design tolerance. (b) Where the tolerances are very close widen them without affecting quality of the product. (c) Make necessary changes in the production process. (d) Replace the old machines with new ones. Variation in Process In spite of automation process followed in a modern industry, we do come across variation jn production process which results in lack of uniformity in the finished goods. The quality control system aims at identifying whether such tolerance is in accordance with inherent variations or not. Variations in the process may be due to the following: (a) Chance variation: It takes place owing to natural cause owing to chance factor, some percentage of the variation takes place between any given pair of limits. (b) Assignable cause variation: It takes place owing to unnatural cause. veviation owing to this cause is greater than that specified limits. Such variations take place because of inferior quality of raw materials, engaging inexperienced employees, etc. Proc(>ss Capability Index The ratio of tolerance width and process capability which should be larger than 1 is known as process capability index. 5.6 CONTROL CHARTS A control chart is a statistical device used for the study and control of repetitive processes. A control chart is essentially a graphic device for presenting data so as to directly reveal the frequency and extent of variations from established standards or goals. A control chart consists of three horizontal lines: (a) A central line to indicate the desired standard or level of the process.

Quality Control and Statistical Quality Control

291

(b) Upper control limit (VCL). (c) Lower control limit. Types of Control Charts Control charts can be divided under two heads: (a) Control charts of variables. (b) Control charts of attributes. Variables are those quality characteristics of a product which are measurable and can be expressed in specific units of measurement such as diameter of TV valves which can be measured and expressed in centimeters etc.. Attributes are those product characteristics which are not amenable to measurement. Such characteristics can only be identified by their presence or absence from the product. Control chart relating to variables are of two types. They are as follows: (1) Control Chart for Averages To prepare a control chart for averages small samples of the product (usually 4,5 or 6 items) are taken from the production line at regular intervals in the order of production. These are carefully measured for the quality characteristics to be controlled, and the actual measurement recorded. The average value of the characteristic for each of these samples is calculated and plotted on graph paper. After sufficient samples have been taken, usually 30 or more, an average of the sample averages is' determined and this is plotted on the centre line. An upper and lower control limit is then determined from the formula. Control limits = x ± ~R Where, x = the average sample averages ~

= a factor, the value of which varies with the size of the

sample R = the average of the sample ranges For sample of 4, the value of ~ is 0.729 and for sample of 5, the value is 0.577" The range is the difference between the highest and the lowest value in each sample and the average range R" is the sum of the sample ranges divided by the number of samples. The danger limits are determined from the formula Danger limits

= x ± In ~R

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Industrial Management

Where n = Sample si~e When the sample size is 4, the danger limit is twice as far from the centre line as is the control limit. When the sample size is 5, the danger limit is 2.336 times as far from the centre line as the control limit. Control charts for averages show the variations in samples taken from a process in relation to the quality level being produced. This level mayor may not be the level desired. Where it is not, steps must be taken to alter the process so that the average quality result will be satisfactory. The upper and lower control limits are the guide to whether or not the process is under control. When a point falls outside of these limits; action is indicated to determine the cause and to eliminate it. (2) Control Chart for Range or 'R' Chart TheoR chart is used,to show the variability or dispension of the quality produced by a given process. R chart (or cr chart) is the companion chart to the x chart and both are usually required for adequate analysis of the production process under study. The R chart is generally presented alongwith the x chart. Process or Steps for x - R Charts: (1) Select the quality characteristics (variable) to be controlled such as length, width etc.

(2) Select an adequate number of sub-groups or samples of the component in question. Each sample should contain an appropriate number of units (i.e., subgroup size), let us take subgroup size as 5 and 25 sub-groups to be considered. The samples must be taken at successive intervals and the measurements should be recorded samplewise and as it is collected. (3) Compete average and range for each of the samples separately. (a) If the sample size is 5, the average is the arithmetic average of measurements of five pieces of the particular sample. The average is expressed by x = (Xl + x2 + xa + x4 +' x5 ) where Xl ~ Xa X4 X5 are the measurements. (b) The range is the difference between maximum and minimum values of five measurement of the particular sample. The range is expressed by R = Difference between maximum and minimum values.

293

Quality Control and Statistical Quality Control

_ (4) Compute \the grand average (x) and average of ranges (R) of the 25 samPles as follows: 1

X

= 25

(Xl

+ ~~ ... ~5)

Where x I.x2 ..... X25 are the averages of respective sample subgroups. 1

R

= 25

_

(R I + R2 + ... ~25)

Where RI R2 ... R25 are the ranges of respective sample subgroups. (5) Compute control limits based on the sample averages and ranges and draw the charts as follows: Average

x chart: Lower limit = X -

~R

=X Upper limit = x + ~R

Centre line

= D3R Centre line = R

Range (R) chart : Lower limit

Upper limit = D4R (6) Plot the average and range values for each sample on the control charts. Check whether all the points are within the control limits on both the charts. If any point fall outside the limits, then exclude that sample from the exercise and repeat the calculation from step No.4 and continue till all the samples considered for setting the control limits fall within the control limits. But during this process it should be checked that not more than 20% of the original samples are excluded. In the event of more than 20% samples getting rejected the whole exercise has to be performed with fresh set of data. (7) Use the control chart during production as a basis for control of the quality characteristic in question. (2) Control Charts for Attributes The various control charts used for attributes are as follqws: (a) C-chart The C-chart is designed to control the number of defects per unit. C-chart is used in situations wherein the opportunity for

294

Industrial Management

defects is large while the actual occurrences tends to be small. This happens, for example, if we count the number of imperfections in a piece of cloth, the number of air bubbles in a piece of glass etc. Let C stand for the number of defects counted in one unit of cloth (paper, roll of wire) and C for the mean of the defects counted in several (usually 25 or more) such units of cloth. The central line of the control chart for c is C and the 3-sigma control limits are:

UCL =

c + 3.JC

LCL =

c-

3.JC

This formula is based on a normal curve approximation to the poisson distribution. The use of the C-chart is appropriate if the opportunities for a defect in each production unit are infinite but the probability of a defect at any point is very small and is constant. Uses of C-chart The important applications of C-chart are given below: (i) The number of defects in a galvanised sheet or painted plate or enamelled surface of given area. (ii) The number of defects of all types in aircrafts, subassemblies or final assembly. (iii) Number of defects observed in a roll of paper, or sale of cloth etc. (b) P-chart The P-chart is designed to control the percentage or proportion of defectives per sample. Since the number of defectives (c) can be connected into a percentage expressed as a decimal fraction merely by dividing c by the sample size, the p-chart may be used in place of the c-chart. The p-chart has two advantages over the c-chart: (a) Expressing the defectives as a percentage or fraction of production is more meaningful and more generally understood than would be the statement of the number of defectives. The latter concept must be related in some way to the total number produced. (b) Where the size of the sample varies from sample to sample, the p-chart permits a more straight forward and less cultured presentation. The P-chart requires, that the division be made. This additional computation may be regarded as a disadvantage. The same basic data is used for both 'c' as well as 'p' chart. When the sample size remains constant from sample to sample,

Quality Control and Statistical Quality Control

295

the primary difference lies in the computation of the control limits. The c-chart control limits one set at a c plus or minus 3 standard deviation. The p-chart control limits set at p plus or minus 3 standard errors of the proportion. The steps involved in constructing p-chart are as follows: (a) Compute the average fraction defective (p) by dividing the numbers of defectives by the total number of units inspected. (b) On the chart draw a solid horizontal line to represent p. (c) Determine the upper and lower control limits. The upper and lower control limits are obtained by the average per cent defective plus and minus 3 times the standard error as follows:

VCL = P + 3Jnduced by an industrial enterprise. Material costs constitute a substantial portion of the capital invested in factories and thus demand continuing and considerable attention from its management. Many factory failures are due to the outgrowth of excessive inventories. Too much materials can cause idle funds, storage and obsolescence problems and marketing difficulties. On the other hand, ifthe materials are not adequate to meet the needs of the operating and

Stores Purchase, Inventory and Personnel Management

415

distribution segments of the enterprise, efficiency suffers, costs skyrocket, manufacturing delays become frequent and broken delivery promises become inevitable. Materials management is a continuous struggle between too much or too little of materials and too soon or too late availability of materials. Definition and Scope of Materials Management The American Production and Inventory Control Society defines "Materials Management" as "The grouping of management functions related to the complete cycle of material flow, from the purchase and internal control ofproduction 'TIaterials to the pla!}ning and control of work-in-process to the warehousing, shipping and distribution of the finished prodU'Ct. The grouping of all functions concerned with the flow of materials from planning for its procurement to their ultimate delivery to the customer is shown in Fig. 10.1_ Manufacturing

I

auPPI~r--_ _-./1 Work-in-Processl,.-_ _- - . / Customer

Supplior~ ~ola ~ ~uPplie/

MaterialFlow

~~ ~

'1 Work-in-Proc:ess 1/

"'''"....

\. Customer

Fig. 10.1 Materials Management Concept.

Scope of Materials Management 'Materials management embraces the following functions: (a) Planning. This function deals with the type, quantity, quality and time of purchasing th~ materials. (b) Obtaining. This function deals with obtaining the raw materials and component parts on time from the various sources. (c) Control. This function deals with the follow-up and ensuring of plans and schedules. It also includes expediting, record-keeping, data collection and feed-back of information. (d) Storing. This function deals with receiving, inspection, storing and issuing of raw materials required by the production departments. (e) Handling. This function deals with the movement', packaging, transfer, and delivery of materials from the time they are received until they are issued.

416

Industrial Management

(0 Distribution. This function deals with the distribution of finished goods, warehousing, packing and shipping to customers. (g) Transportation and Traffic Control. The external transportation of materials involves: (1) Shipping. Arrangement of goods for delivery to the customer. (2) Traffic. Transportation of both outgoing and incoming items. (3) Receiving. Acceptance of incoming articles. The above functions are the responsibility ofthe traffic manager. The everyday activities ofthe traffic department generaly include the preparation ofgoods for shipment, selection of carriers, handling of all matters pertaining to shipping, tariff and rates, weighing, marking, documenting and loading goods for shipment, inspecting goods recei v-ed and processing claims for damaged goods. There are several modes of transportation. The common and most frequently used ones are: (a) Water Transport provides a slow but inexpensive means of transport of large quantities of bulk material. (b) Railways provide the best means of transporting heavy or bulky goods to long distances. (c) Motor Truck. A convenient way of transporting over short distances, where door-to-door delivery may be required. (d) Airways. It is suitable for the transport of perishable or lighc material and where quick delivery is required. The factors affecting the choice of mode of transportation are speed, frequency, dependability, capability, availability and cost. Advantages of Materials Management A factory with a good materials management organisation will realise the following advantages: (1) Reduced procurement time. (2) Lesser shortages of materials. (3) Better delivery performance. (4) Reduction in material cost. (5) Prevention of excess loss of materials. (6) Strict and efficient control of 1'\1aterials. (7) Increase in labour utilisation.

Stores Purchase, Inventory and Personnel Management

417

(8) Better co-ordination and co-operation of personnel working in purchase, production, storeroom, distribution and traffic departments. Types of Materials Materials used in factories can be divided into the following classes: (1) Raw Materials. Raw materials comprise such items which must be purchased for converting them into finished goods. Sometimes, the finished product of one factory becomes the ra w material of another factory. Some of the examples of raw materials used in factories are metal bars, leather and hides, cloth, chemicals, etc. (2) Purchased Parts. This constitutes items used in the assembly of the products which are obtain-ed from outside sources. Some examples of purchased parts are bolts, nuts, screws, bearings and gears. (3) In· Process Material. Material used in the product upon which work has been performed to change its form, size or physical or chemical characteristics is known as in-process materials. Here, the value in terms of processing labour or other materials is added to what originally was a raw material, e.g., sand blasted and painted casting. (4) Finished Products. Fully completed goods inspected and ready for sale to a customer are known as finished products. (5) Supplies. Consumable materials used in the manufacturing process, which do not become a part of the product are known as supplies. Examples of supplies are: sand paper, oils, cotton waste. (6) Equipment Items. These are expendable parts of machines and other physical facilities. Examples of equipment items are fixtures, fittings, valves, fuses, lamps etc. Definition and Importance of Purchasing Definition of Purc~asing "Purchasing" may be defined as the procuring of materials, supplies, machines, tools and services requiree for the maintenance and operation-of a manufacturing plant. The objective of scientific purchasing is to procure materials at the (a) Right price. (b) Right quality. (c) Right contractual terms. (d) Right time. (e) Right source. (f) Right materials.

418

Industrial Management

(g) Right .place. (h) Right mode of transportation. (i) Right quantity. G) Right attitude.

Importance of Purchasing The importance of purchasing may be summarised as under: (1) Purchasing is a primary function and as such, it directly influences the total cost of production. The increased or decreased amount of profit earned in a factory is determained by efficient purchasing. (2) The purchase department ensures receipt of proper materials in sufficient quantities when needed to maintain production. It checks unnecessary or 'excessive investment of capital on the purchase of materials. (3) It is possible to discover new materials which may be used as a substitute for existing materia1. This is ensured by the purchase dep;:trtment by coming into dose contact with other factories. (4) By dIscovering a new substitute of material, it enables the factory to introduce new lines of product. (5) It helps in framing plans and policies relating to marketing, scheduling of production etc.

Organisation of Purchase Department The organisation structure of a purchase department depends upon the size, the relative importance of procurement and the availability of the personnel. But the purchase function is common to all factories. In large factories, an assistant purchase manager will direct the activities of his subordinates who specialise in particuiar Hnes such as chemicals, equipments, etc. In small factories, al1 the purchase functions are performed by a single individual. A typical organisation chart of a purchasing department is depicted in Fig.16.2. From this chart, it i~ clear that the purchase organisation includes the following sections: (1) Buying Section. The buying section is responsible for purchasing all types of materials required by the factory. But where the factory is very large, to assist the purchase manager, there can be assistant purchase manager;;. (2) Follow-up Section. This section is established to ensure quick supply of materials by the supplier. This is established as a separate section in large factories, but in small factories, the purchase manager does the work or directs it to be done by his subordinates.

BOARD OF DIRECTORS

~

GENERAL MANAGER ~

PURCHASI_MA_N_A_G_E_R______r -__________- .__________~ Buying Section

Follow-up Section

I

Vendor Follow-up

I

Stenographic Section

Expediting Delivery

Records & Filing Section

I

1

Correspondence

Order Writing

I

Requisition Purchase Order Receiving Report Invoice

•

I

Catalogue Price Ust

Studies of -Market Statistics

Reference Files

Sub-contract Section

rr~----~I-------TI------~I.------.I-------rl--------------)

Factory Supplies

Equipment

Hardware

Electrical Products

Office Sta~onery

Traffic Section

Sale of sawaged Material

Sawaged Material Record

I

Commodity Group

Purchase Research Section

Salvaged Material Disposal Section

PaCking of Material

.". 10.2 Purchase Organisation Chart

Raw materials

420

Industrial Management

(3) Invoice Section. Invoices are checked by invoice clerks in large factories and by the purchase manager in a smaJl factory. Sometimes, this work is done in the accounting department. (4) Stenographic Section. In large factories, work can be pooled together to minimise the number of stenographers. But in smaJl factory, a single stenographer will do the follow-up, invoice checking, stenographic work and filing. (5) Records and Filing Sections. Records and filing section is found only in large factories. In a small factory, the stenographer carries out this work. (6) Salvaged Materials Disposal Section. In large factories, records and sales of salvaged materials are under the direction of the purchase department. The purchase manager will se]] an the scrap and salvaged materials of the factory through this section. (7) Purchase Research Section. This is rarely found in factories but it can be set up in very big factories. (8) Tra/TicSection. Where incoming materials are larger than the outgoing goods, this section is set up under the purchase department. But when the outgoing goods are more than the incoming goods, it is set up under the' sales department. Centralisation and Decentralisation of Purchase Department The organisation of purchase department may be based on any of the following three systems: (1) Centralisation of Purchases Centralisation of purchases refers to the purchase of materials under one purchase manager. If the company has only one plant, then it has to invariably fonow centralisation of purchases. Where a company has many factories, certain factors are to be considered before centralising the purchases. These factors are geographical location of factories, similarity of products manufactured, types of materials, quantity of materials, location of suppliers, and other conditions peculiar to the industry. According to the National Association of Purchasing Management, a company having several plants in the same country manufacturing similar products, requiring the same general types of materials, should have centralised purchasing. Advantages of Centr8Iised Purchasing (1) The principle of undivided responsibility means that the purchase manager can be solely held responsible for inefficient purchasing.

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(2) It helps to maintain consistent buying policies such as terms of payment (Payment on Delivery, Cash On Delivery, Cash with Order), packing, marking etc. (3) It results in the economy of purcftase records. Further, it facilitates simplicity in compiling and consulting the .records. (4) It tends to reduce the inventories that must be carried and thus helps in having a low capital investment on materials. (5) Bulk purchasing results in the reduced price of materials on account of trade discount and cash discount facilities. (6) Free home delivery facility is available under centralised system owing to bulk purchases. (7) It relieves the departmental heads of the responsibility of procuring a variety of materials. (8) Specialised and expert knowledge on the purchasing problems connected with specific items of materials can be made available to aU the units. Disadvantages of Centralised Purchases (l)The benefits arisinKfrom localpurchases cannot be availed of. (2) This system of purchases leads to communication difficulties between certralised purchasing office and the plants. (3) Emergency purchases cannot be made under this system. (4) Delay in receiving, checking and approving the invoices as the central purchasing office has to receive all the reports and invoices from all the plants. (2) Decentralised Purchasing Under the decentralised purchasing system a separate purchase department is established in each plant to make purchases independently. Decentralised ~urchasingis applicable to those manufacturing concerns which operates several plants in different localities, manufacturing different products, and each plant requiring different types of materials. Each purchase department will have a purchase authority who enjoys the freedom of making purchases of materials required for his department. The purchasing authority in each department reports to the chief purchase officer, who establishes the general purchase policies and co-ordinate the purchasing functions in all plants. Advantages of Decentralised Purchases (a) Greater flexibility. If a centralised buyer is purchasing for a number ofplartts, he will find it difficult to react rapidly to changes in

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the requirements ofthe individual plants. But under the centralised system, the buyer can buy the required quantity and quality at a time when materials are required. (b) Close liaison. A local buyer will be in close contact with his own manufacturing unit. Therefore, he is in a position to make a scientific purchase of a11 kinds of materials. (c) Quick procurement of materials. The delay involved in centralised purchasing system wherein pooling of all the purchase requisitions and placing the orders and then supply of materials to each and every plant is avoided under this system. (3) Centralised-Decentralised System Companies which have more than one plant located in and around, adopt this system of purchasing. Though such factories produce different products, there are some materials which are common to all the plants.Under such circumstances, it is desirable to partially centralise and partially decentralise the purchase function. Under this system, it is necessary to make clear which type of materials are to be bought by the centralised buying officer and which type of mate rials by the departmental buying officer. For the succes~­ ful operation of this system of buying, the fol1owing requirements are essential: (a) The centralised purchase manager has to establish policies, procedures, record keeping methods and exercise centra: control and restrict the authority and range of buying of each decentralised purchase officer. (b) An decentralised purchases must be reported immediately to the central office. (c) The decentralised buying office must buy the materials for his plant only within the budgeted amount. (d) Approval of the central office must be obtained by the decentralised buying officer for special purchases and excess quantity purchases. (e) The plan should be flexible so that specific buying authorities can be reassigned as conditions change. Qualifications or Requisites of Purchase Manager (1) He must have considerable experience in buying and must be conversant with the purchasing techniques. (2) He must possess technical ability to decide upon the most suitable source and the required quality of materials. (3) He must know how to negotiate with the suppliers.

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(4) He should acquaint himself closely with the current quotations and source .of supply. (5) He should have practical knowledge of the finance and business methods. (6) He should have the knowledge of the materials which he is required to purchase and their specification, quality and quantity. (7) He should be honest and reliable. (8) He should be aware ofthe policy of management and financial resources of the factory and its impact on purchases. (9) He should have an uptodate knowledge of government policies regarding import and export restrictions and various duties a~d taxes on materials. (10) He should be well conversant with the econmic principles of demand, supply, price etc. (11) He should have a working knowledge ofthe laws relating to contracts, and Sale of Goods Act and such other Acts which have a bearing on the purchase of goods. (12) He should be aware of the market conditions and should have a complete knowledge of the market, sources of supply, price and purchase formalities. (13) He should maintain proper records and documents like catalogues, price lists, trade magazines, journals to assist him in locating the best market. Duties and Responsibilities of Purchase Manager The purchase department is headed by a competent auth~rit.y known as purchase manager. He occupies the position of upper middle management group and is directly responsible to the general manager. The purchase manager must possess a good personality, versatility and breadth of vision. He must be capable of making prompt decisions, have a balanced judgement and clear foresight. Duties of Purchase Manager (1) To formulate purchasing policies for his department to execute. (2) To locate and select the best source of supply for materials and services required. (3) To receive purchase requisitions from all the departments and know the exact quantity of material requirements. (4) To purchase the required quantity of materials at the lowest price and at the best possible terms.

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(5) To place purchase orders with the suppliers. (6) To follow up with suppliers so that delivery of materials is obtained at the proper time. (7) To make sure that materials received' from suppliers conform to the orders placed. (8) To verify and check the invoices and approve them for payment. (9) To secure adjustment on claims for goods received which are not in accordance with quality or quantity or which are damaged. (10) To maintain proper records for the efficient operation ofthe purchase department. (11) To keep constant touch with market conditions and try to secure the best quality of goods available. (12) To analyse the effects ofchanges in genera] business trends upon purchase plans. (13) To advise on prices for materials to. be used in new or modified designs. (14) To pr~pare and present all reports regarding the purchase of materials to the general manager. (15) To take part in inter-departmental conferences for planning formulation of policies or other purposes. Responsibilities of the Purchasing Manager (1) The purchase manager is responsible for purchasing the required quality of materials so that the finished product becomes acceptable to customers. (2) Organising and directing the purchase department. (3) Judicious utilisation of funds while purchasing various types of materials. (4) Timely purchase of materials so that production process is not interrupted. (5) Maintaining the factory's reputation for integrity and fair dealing. (6) Preparing the purchase budgets. (7) Engaging in research on new. materials, new tools etc. (8) Final check on all goods requisitioned, questioning need, quantity and quality specification.

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Purchasing Policies Purchase policy refers to guidelines on the basis ofwhich the purchase manager will carry out his duties. The formulation of purchase policies reduces the complex decision;; to be made by the purchase manager and ensures' a reasonable uniformity of action. The number and details of purchasing policies will vary with the organisation philosophy of the management. Some of the areas covered by the purchase policy are: (1) Price. As regards the selection of suppliers, the purchase manager can select that supplier who has quoted the lowest price for the supply of materials. (2) Firm Bidding. Under this policy, once the price of materials is mentioned in the quotation of the supplier, it is considered as final. If, however, the suppliler increases it subsequently, it should not be acc-epted by the purchase manager. For, ifthe policy of firm bidding is not strictly adhered to, the supplier is tempted to increase the price 011 one pretext or the other. (3) Reciprocity. This is a mutual agreement between two factory ~anagers wherein the goods of one factory is bought in return for the sale of goods to the other factory. This creates goodwill between the two factories. (4) Employee Purchases. Under this policy, the factory will buy goods to be resold to its employees at less than the retail price. (5) Acceptance of Gifts. It is natural in modem days that in order to increase the volume of sales, the supplilers offer gifts to the purchase manager. As a policy, accepting of such gifts by purchase managers may be restricted. Because such expensive gifts might create a condition wherein the purchase manager may accept substandard material from the suppliers. (6) Cancellation. Sometimes. it becomes necessary for a purchase manager to cancel an order previously placed. Under such circumstances, the supplier must be compensated for all the expenses incurred on the fulfilment of the contract. (7) Co-operative Purchasing. Factories producing similar products and established in the same locality may buy their material in cooperation with other buying firms, Such a policy results iR reduction in purchase cost and free home delivery service. (8) Speculative Purchases. Speculative purchases are resorted to when there is a steep fall in the prices of materials. So to takf' advantage of the fall in prices, materials may be purchased in bui~