Production management.

In the words of Mr.,
E.L.Brech:
“Production Management is
the process of effective
planning and regulating the
operations of that section of
an enterprise which is
responsible for the actual
transformation of materials
into finished products.”

"Production management
deals with decision-making
related to production
processes so that the resulting
goods or service is produced
according to specification, in
the amount and by the
schedule demanded and at
minimum cost."
PRODUCTION MANAGEMENT BY
“ELWOOD SPENCER BUFFA”

OBJECTIVE OF PRODUCTION
MANAGEMENT
 To produce the desired product or
specified product by specified methods
so that the optimal utilization of
available resources is met with.
 It is responsible to produce the desired
product, which has marketability at the
cheapest price by proper planning, the
manpower, material and processes.
 Production management must see that it
will deliver right goods of right quantity
at right place and at right price.
 When the above objective is achieved,
we say that we have effective
Production Management system

Material
Management
Cost
control
Operational
Management

Material management
requires maintenance of a
sufficient inventory in
manufacturing firm..
An adequate inventory of
items must be required to
ensure their continuous flow
in manufacturing process to
meet production and
customer demands.
NEED OF
INVENTORY:

OBJECTIVES OF
INVENTORY CONTROL
• Protection against fluctuations in
demand
• Better use of men, machines and
material
• Protection against fluctuations in
output;
• Control of stock volume
• Control of stock distribution.

Inventory is a
stock of
materials which
are used to
facilitate
production.

ACTIVITIES OF INVENTORY CONTROL
Planning the inventories
Receiving and inspection of inventories
Storing and issuing the inventories
Recording the receipt and issues of inventories
Physical verification of inventories
Follow-up function
Material standardization and substitution.

Tools of inventory control
ABCconcept
Inventory
turnover
basedorder
Reorder
quantitylevel
Determinatio
n of
economic
order
quantity
(EOQ)
Money
limitationon
purchase
order
Justin time
inventory
control

ABC CONCEPTS
The ABC classification process is an analysis of a range of
objects, such as finished products ,items lying in inventory or
customers into three categories. It's a system of categorization,
with similarities to Pareto analysis, and the method usually
categorizes inventory into three classes with each class having
a different management control associated :
A - outstandingly important; B - of average importance; C -
relatively unimportant as a basis for a control scheme. Each
category can and sometimes should be handled in a different
way, with more attention being devoted to category A, less to B,
and still less to C.

Many managers exercise a power of control over the volume of
purchases by placing a money limitation on the purchase order.
But in this method issuance of multiple small orders for
material purchase in the long run is more costly for the
organization. This method is not commonly employed in
pharmaceutical management.
MONEY LIMITATION ON PURCHASE
ORDER:

INVENTORY TURNOVER
 It is the number of times the inventory must
be replaced during a given period of time,
typically a year. It is one of the most
commonly used ratio in inventory
management
 Inventory turnover = COGS / AAIV
 The Cost of Goods Sold (COGS), sometimes
referred to as cost of revenue, is the annual
cost for a company to deliver goods sold to
customers. However, this cost includes
neither the selling nor the administrative
expenses. The Average aggregate inventory
value (AAIV) is the value of all items held in
inventory for the company, valued at cost.

The three levers to improve turnover main are:
• Sourcing, by choosing new suppliers that offer shorter lead
time, or by *negotiating* shorter lead time with existing
suppliers.
 Service level, by tuning the acceptable frequency of stock-
outs (zero stock-out is not a reasonable option for most
industries).
 Forecasting, by refining the accuracy of the demand
forecasts, so that safety stock can be lowered without
increasing stock-outs
LEVERS TO IMPROVE TURNOVER

A LOW TURNOVER RATE CAN INDICATE

Economic order quantity (EOQ)
“It is the order quantity that minimizes the total inventory holding
costs and ordering costs. It is one of the oldest classical production
scheduling models”
EOQ applies only when demand for a product is constant over the
year and each new order is delivered in full when inventory
reaches zero. There is a fixed cost for each order placed

A reorder point is the inventory unit quantity on hand that triggers
the purchase of a predetermined amount of replenishment
inventory.
RECORDER QUANTITY LEVEL:

• Just in time (JIT) inventory
“a management system in which materials
or products are produced or acquired only
as demand requires”
This approach to managing inventory has become
increasingly popular in the early 21st century as
suppliers and retailers collaborate to try to
control inventory costs while still meeting
customer demands.

one of the important elements of cost of product or unit. It
constitutes a substantial proportion of the total cost of production.
For material cost control purposes,
It is very essential to know the important aspects of material,
material control and material purchase control
MATERIALS COST

 Materials: The term 'materials' refers to all
commodities or components which are consumed
in the process of manufacture. The materials may
be classified into Direct Materials and Indirect
Materials.
 Direct Materials: Direct Materials form part of
the finished products. They can be easily
identified with a particular cost unit. For
example, cotton used in textile mills, timber used
in furniture industries.
 Indirect Materials: Indirect materials indirectly
used for conversion from raw materials into
finished products. They cannot be easily
identified with a particular cost unit. For
example, spare parts, tools, nails, lubrications etc

CLASSIFICATION
 Materials are further classified on the basis of
the nature which have to be used such as:
 Raw Materials, e.g., rubber, timber, steel etc.
 Components, e.g., instruments
 Consumable stores, e.g., cotton waste, brushes
 Maintenance Materials, e.g., spare parts
 Tools, e.g., jigs and fixtures

The systematic control over the
procurement, storage and usage of
materials so as to maintain an even
flow of materials and at the same time
avoiding excessive investment in
inventories.
From the above definition we can
derive the following important aspects:
 To ensure the smooth flow of
production without interruptions.
 Prevention of excessive investments
in materials stock.
MATERIALS CONTROL

FUNCTIONS OF MATERIALS CONTROL

 To receive materials and store them properly.
 To ensure proper production and preservation of
materials.
 To make sure proper classification and codification of
materials.
 To provide proper information to the management about
stock of materials.
 To ensure good housekeeping and effective material
handlings.
 To assist in verification and provision of supporting
information for effective purchase action.

 To minimize obsolescence of materials adopted through
effective control measures.
 To ensure the optimum investment in materials to avoid
overstocking or under stocking of materials.
 To maintain proper records about materials, receipts,
issues and balances.
 To issue materials as per specifications.
 To make sure of the availability of all types of
materials.
 To ensure proper utilization of floor space.

EFFECTIVE MATERIALS CONTROL IS REQUIRED
 Systematic planning for requirement of
materials.
 Essentials for co-ordination and co-operation
among different departments.
 Fixing of stock level is essential for avoiding
overstocking.
 Hoor space is required for smooth handling of
materials.
 A Textbook of Financial Cost and Management
Accounting
 Proper filing system should be adopted.
 Proper codification and classification of
materials as per specifications.
 Perpetual inventory system should be adopted
for verification of materials in stock.

The following are the advantages of materials control :
 It ensures continuous flow of production.
 There is maximum utilization of stores resources.
 It facilitates economy of buying.
 It ensures optimum investments in inventories.
 There is possibility of reduction of loss of theft, leakage,
obsolescence etc.
 It minimizes cost of materials during purchase, storage and
issue of materials.
 It facilitates effective information system to management.
ADVANTAGES OF MATERIALS CONTROL

MATERIALS PURCHASE CONTROL
Materials Purchase is one of the important
functions of stores department. The basic
objectives of the material purchasing is to
ensure continuous supply of raw materials to
production and maximum reduction of cost
product.
In other words, the chief aim of purchasing is
to ensure, not only to procure the raw
materials at the lowest price but to reduce the
cost of the finished product. In order to
achieve the above said objectives the
following aspects and procedure should be
adapted.

Labor cost is the second important
element of cost production. Wages,
salaries and other forms of
remunerations represent a major portion
of the total cost of a product or
services.
 The growth and profitability of the
concern depends upon proper
utilization of human resources or
labour forces which in turn needs
proper accounting and control of
cost. Thus, control of labour cost is
a very significant issue from the
viewpoint of management
LABOR COST

Any labour cost that is specially incurred for or can be readily
charged to or identified with a specific job, contract, work
order or any other unit of cost is termed as direct labour cost.
Wages for supervision, wages for foremen, wages for labours
who are actually engaged in operation or process are the
examples of direct labour cost.
DIRECT LABOUR COST:

Indirect labour is for work in general. The importance of the
distinction lies in the fact that whereas direct labour can be
identified with and charged to the job, indirect labour cannot be so
charged and has, therefore to be treated as part of the factory
overheads to be included in the cost of production.
INDIRECT LABOUR COST:

Control of labour cost is a significant influence on the growth,
profitability and cost of production. Labour cost may become
unduly high rate due to inefficiency of labour, ineffective
supervision, ideal time, unusual overtime work etc.
The primary objectives of the management therefore is to
efficiently utilize the labour as economically as possible.
CONTROL OF LABOUR COST

In order to achieve the effective utilization of manpower resources,
the management has to apply proper system of labour cost
control.
The labour cost control may be determined on the basis of
establishment of standard of efficiency and comparison of actuals
with standards.
TECHNIQUES OF LABOR COST
CONTROL

The management applies various techniques for the effective
control of labour costs as under:
(1) Scientific method of production planning.
(2) Use of labour budgets.
(3) Establishment of labour standards.
(4) Proper system of labour performance report.
(5) Effective system of job evaluation and job analysis.
(6) Devise a proper system of control over ideal time and unusual
overtime work.
(7) Establish a fair and equitable remuneration system.
(8) Effective cost accounting system

 Indirect costs associated with employees, over and above gross
compensation or payroll costs. Typical costs associated with the
burden rate include payroll taxes, worker's compensation and
health insurance, paid time off, training and travel expenses,
vacation and sick leave, pension contributions and other benefits.
 The burden rate provides a truer
 picture of total labor costs than
 payroll costs alone
BURDEN RATE

 It is an area of management concerned with overseeing,
designing, and controlling the process of production and
redesigning business operations in the production
of goods or services.
 It involves the responsibility of ensuring that business operations
are efficient in terms of using as few resources as needed,
and effective in terms of meeting customer requirements
WHAT IS OPERATION MANAGEMENT

Forecasting helps managers and businesses develop meaningful
plans and reduce uncertainty of events in the future. Managers
want to match supply with demand; therefore, it is essential for
them to forecast how much space they need for supply to each
demand.
Two important aspects associated with forecasting are
the expected level of demand and the forecast's degree of
accuracy
FORECASTING

 Two general approaches to forecasting are qualitative and
quantitative.
 There are three types of forecasting techniques:
 Judgmental forecasts
 Time-series forecasts
 Associative models

 Managers should recognize the broader effects capacity decisions
have on the entire organization.

 Process Selection is basically the way goods or services are
made or delivered, which influences numerous aspects of an
organization, including capacity planning, layout of facilities,
equipment and design of work systems.
 Process selection is primarily used during the planning of new
products or services that is subject to technological advances and
competition.
 Process selection is dependent on the company's process strategy,
which has two main components: capital intensity and process
flexibility

 Capital Intensity is simply the combination of equipment and
labor that an organization uses to accomplish some objective.
 Process Flexibility is as its name implies: how well a system
can be adjusted to meet changes in processing requirements that
are interdependent on variables such as product or service
design, volume of production, and technology

 Transportation model
 The transportation model uses the principle of 'transplanting'
something, like taking a whole from one place and inserting it in
another without change. First it assumes that to disturb or change
the idea being transported in any way will damage and reduce it
somehow.
o It also assumes that it is possible to take an idea from one
person's mind into another person's so that the two people will
then understand in exactly the same way

Quality refers to the ability of a product or service to
consistently meet or exceed customer requirements or
expectations.
 Different customers will have different expectations, so a
working definition of quality is customer-dependent

 There are several costs associated with quality:
 Appraisal costs - costs of activities designed to ensure quality or uncover
defects
 Prevention costs - costs of prevention defects from occurring
 Failure costs - Costs caused by defective parts or products or by faulty
services
 Internal failures - failures discovered during production
 External failures - failures discovered after delivery to the customer
 Return on quality (ROQ) - an approach that evaluates the financial return
of investments in quality

Quality control is a process that evaluates output relative to
a standard and takes corrective action when output doesn't meet
these predetermined standards.
 Therefore, quality control in relation to
 customers would be the continuous act
 of making sure products, designed and
 manufactured, are produced to meet and
 exceed the needs of customers

o The purpose of quality control is to make sure that certain
processes are performing up to a company's set standards.
o The statistical process control tries to correct processes that are
not in line with the predetermined limits. Lastly, process
capability studies the output standards to make sure they are up
to specifications.

 Some key issues are where to inspect and how to
inspect:
 Inspections can be considered an appraisal technique that
compares goods or services to a standard.
 Inspection should not be eliminated because it is a vital aspect
of quality control and service operations

Inspection can occur at 3 points:
1. Before production - to make sure inputs are acceptable
(involves acceptance sampling procedures)
2. During production - to make sure conversion of inputs
into outputs is proceeding in acceptable manner (involves process
control)
3. After production - to make final verification of goods
(involves acceptance sampling procedures)

Accomplishment of firm's objectives
Reputation, Goodwill and Image
Helps to introduce new products
Supports other functional areas
Helps to face competition
Optimum utilization of resources
Minimizes cost of production
Expansion of the firm
IMPORTANCE OF PRODUCTION
MANAGEMENT

Higher standard of living
Generates employment
Improves quality and reduces cost
Spread effect
Creates utility
Boosts economy
IMPORTANCE OF PRODUCTION
MANAGEMENT TO CUSTOMERS AND
SOCIETY

Production management.

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