Production Management Sem Iv

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PRODUCTION MANAGEMENT IMP QUES AND ANSWERS

Semester-IV.

Production management: Q. 1.

What is production management? Explain its scope. Production management is a branch of management which is related to production function. Production may be referred to as the process concerned with the conversion of inputs (raw materials, machinery, information, manpower and other functions of production) into output (semi finished and finished goods and services) with the help of certain processes (planning, scheduling and controlling etc.) while management is the process of exploitation of these factors of production in the order to achieve the desired result. Thus production management is the management which by scientific planning and regulation sets into motion the part of an enterprise to which it has been entrusted, the task of actual transformation of inputs into outputs. The scope of production management includes the following : Scope of Production Management : 1. Production Planning 2. Production Control 3. Quality Control 4. Method Analysis 5. Inventory Control 6. Plant layout and Material Handling 7. Work Measurement 8. Other Functions 1.

Production Planning : Production Planning is the main concern of the Production management. It facilitates the supply of goods at a proper time to execute the order received by the company. It also helps control over e production process. The functions of productions planning involves e decision when, what, how and why to produce goods. 2. Production Control : Production control mean to control the production by taking steps to utilize the various factors of production in an efficient manner so that the goods are produced at the lowest possible cost and according to the requirements and satisfaction of the customers and goods are supplied to them on deliver dates in the ordered quantity. 3. Quality Control : Quality control means to maintain a specific quality of the product. Steps should be taken to produce the goods according to the specifications and to minimise the amount of defective work. The defective work should be sorted out and sold separately. Test is conducted to examine and check if the quality of the product is as per specifications. 4. Method Analysis : There may be so many alternatives for manufacturing a product. As because all alternatives do not work equally, some may be more economical than others. A important part of production management is to study the various alternatives and analyse them in right perspective in order to choose the best one. The activity of choosing best alternative is called method analysis. Method analysis improves the productivity of the concern and minimises of the cost of production. 5. Inventory Control : Production management also includes the work to control the cost of production by reducing the wastage of man and material. £o care must be taken that best use of materials is done. For this purpose, determination of economic lot size, economic order quantity, reorder levels, etc. is required so that the problems of over and under stock of material may not arise. This involves the physical and financial control of material. 6. Plant layout and Materials Handling: Plant layout is an arrangement of machines and equipment in such a manner so as to YASH

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maintain the flow of production without any stoppage. An efficient plant layout aims at efficient material handling which in turn reduces wastage of man and material and helps in reducing the cost of production. Production management sees to it that efficient handling systems and plant layout are designed and developed. 7. Work Measurement : One of the main parts of production management is to control and reduce the labour cost per unit. At different levels of production, the labour cost per unit differs. Here work measurement is necessary. By work measurement methods we mean the level of performance of work by a worker. If a worker works below the level fixed by work measurement technique, his performance must be improved through positive or negative incentives. Time and motion studies are used as work-measurement techniques. 8. Other Functions : Apart from the above the scope of Production management also includes functions like engineering economies, cost control, maximising the labour efficiency, standardisation and storage, price analysis, wage incentive to workers etc. Q. 2.

Define production and describe its characteristics. Among all the functional areas of management, production is considered to be a very important in any industrial organisation. "Production is the process by which, raw materials and other inputs are converted into finished products with the help of factors of production like land, labour, raw material and capital". The major characteristics of production are as under : Characteristics of production 1. Creation Of Utility 2. Utilisation of Resources 3. Process 4. Value Addition 5. Use of Machines 6. Tangible and intangible goods and services 1.

Creation of Utility : Production is an activity by way of which an industrial product (raw materials) is converted into a consumer product (final product). Thus production is a process which creates utility. For e.g. cloth has more utility then raw cotton from which it is made. 2. Utilisation of resources : Raw material is converted into finished goods with the help of resources. These resources include the factors of production namely, man, material, money and land. These four factors of production are combined together .to prepare finished product. 3. Process : Production is a process by way of which a jaw material is converted into a finished product. Thus production has many processes involved before it gets converted into a finished, ready to use product. For e.g. for making final cloth raw cotton goes through processes like spinning, weaving, dyeing and finishing. 4. Value addition : When ever a raw material is converted into a finished product some value is added to it and its utility increases. For e.g. pencil has more value then the raw material from which it is made.

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Use of Machines : With need for large scale production and competition increasing day by day and science developing, use of machines has become a very important part of production. Now a day's there is hardly any process of production which does not make use of machinery. 6. Tangible and Intangible goods and services : Production does not only mean creation of tangible goods but also includes intangible services. For e.g. production would include creation of physical goods like cloth, furniture and also services like lawyer, doctor etc. The production of today presents certain characteristics which make it look totally different from what it was during the past. Specifically, today's production system is characterised by basically four features: 1. Manufacturing as Competitive Advantage : In the past production was considered like any other function off management. When demand was high and production capacities were not enough, the concern was to somehow gather inputs and use them to produce goods which would be grabbed by the potential market. But today, with the competition increasing production system offers vast scope to gain a competitive edge and firms intend to exploit the potential. Total Quality Management (TQM) Flexible Manufacturing Systems (FMS) Computer Integrated Manufacturing (CIM) and many more are used by companies to gain competitive advantage. 2. Service Orientation : The service sector is gaining greater importance now a day's. The production system, therefore, needs to be organised, keeping in mind the needs of today's service sector. The entire manufacturing needs to be prepared to serve:  Intangible services  Constant interaction with customers  Small volumes of production to meet local demands.  Need to locate facilities to serve local markets. Hence we see a great increase of presence of professionals on the production side, instead of technicians and engineers. 3. Social awareness : Starting from the industrial revolution till the 20th century, production system was dominated by smokestacks. These smokestacks represented industrial establishments which ejected smoke, industrial waste, polluting the environment around. However protective labour legislation, environmental movement and gradual-emergence of knowledge have bough total change in the production system. Today's factories are nicely designed, are environmental friendly. Going to factory everyday is no more a bad experience; it is like enjoying work -with health environment. 4. Small has become beautiful : Now-a-days, we find small and tiny manufacturing units sprouting everywhere. Increasing flexible manufacturing system and similar developments have made economies of scale outdate and giant organisation irrelevant. In the place of giant organisations, tiny units owned and managed by family members, started just a couple of years back and are doing great business. Q. 3.

Explain the various types of production process. Production means creation of utility and the framework within which the creation of utility can occur is termed as 'production system'. At one end of system are inputs and at the other

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end output. Input and output are linked by certain processes or operations or activities imparting value to the inputs. These processes, operations or activities may be called production systems. The nature of production system differs from company to company or from plant to plant in the same concern. We can well classify these manufacturing processes into two groups -(1) Continuous Production system and, (2) Intermittent production system. Types of Production Process : 1. Continuous Production System (a) Mass Production System (b) Process Production System 2. Intermittent Production System (a) Job Production (b) Batch Production 1. Continuous Production System : Continuous production situations are those where facilities are standardized as to routing and flow since the raw material or inputs are standardized. Therefore, a standard set of processes and sequences of processes are adopted. Such processes are adopted by concerns which produce goods or services continuously by putting them through a series of successive connected operations in anticipation of customer demand rather than in response to customer orders. Examples of industries using such technology are petroleum, chemicals, steel and sugar industry. Continuous industries may be classified into (a) analytical and (b) synthetically industries. An analytical industry like oil industry breaks up the raw material into several parts also with its process of production. But, a synthetical industry like current industry uses several raw materials, mixes them up and manufacture a product through the process of production. We can classify the continuous industries into (i) Mass production system and (ii) Process production system. (a) Mass Production System : This system of production is used by concerns where manufacturing is carried on continuously in anticipation of demand though demand of the product may not be uniform throughout the year. Standardisation is the keynote of mass production. Standardised raw materials and machines are used to produce a standardised products through standardized process of production. Under this production system a big volume of a limited variety of products is manufactured. In order to maintain a continuous flow of production the layout of the plant and machinery is arranged in conformity with the sequence of operations needed for manufacturing a particular product. This system may also be called "Flow Production System" because of flow of production is maintained. Under this system the layout of plant is to be changed immediately if sequence of operations is changed. (b) Process Production System : This system is an extended form of mass production where production is carried on continuously through a uniform predetermined sequence of operations. Generally under this system finished product of one process is used in the next process as a raw material till the last process. Process production calls for the setting up of automatic machines and equipment as far as possible. Large industries like petroleum refining, heavy chemical industries generally use this system of production. Under this system, generally one principal raw material is transformed into several products at different stages*of operations. For e.g. crude oil is processed into kerosene, gasoline and other products.

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2.

Intermittent Production System : Intermittent production system situations are those where the facilities must be flexible enough to handle a wide variety of products and sizes or where the basic nature of activity imposes change of important characteristics the input. Under this system no single sequence of operations is appropriate and therefore standardized materials or machine cannot be used. Under this type of manufacturing, I production is done in lots rather than on a continuous flow basis. It is done more often on the basis of customer orders. The chief characteristics of intermittent industries are that components are made for inventory but they are combined differently for different customers. The finished product is heterogeneous but within a range of standardized options assembled, by the producers. Since production is partly for stock and partly for customer demand, there are problems to be met in scheduling, forecasting, control and coordination. (a) Job Production : In this system, goods are produced according to orders of the customers. Continuous demand of such items is not assured and therefore production is done only when the orders for the manufacturing of items are produced from the customers. As the need of each customer differs the materials, plants, and equipment to be used also differ and therefore each product is a class by itself and constitutes a distinct and separate job for production purposes. In some instances, there is no hope for repetition of orders for exactly the same item, job production calls for an adjustment of tools and equipment in working is out each individual job. (b) Batch Production : Under this system, the manufacturing is done in batches or groups ; or lots either on the basis of customer's order or with a hope of a continuous demand of the product. Under this system, medium scale production is warranted. In batch production, machines and equipment are made available for the next batch as soon as the production of first batch is completed. The best example of this type of production system is chemical industry where different medicines are produced in batches.

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PRODUCTION PLANNING AND CONTROL Q. 4.

Discuss the meaning and stages of Production control. According to William Voris "Production control is defined as the task of coordinating manufacturing activities in accordance with manufacturing plans so that pre conceived schedules can be attained with minimum economy and efficiency". The main purpose of production control is to produce the goods and services by the best and cheapest methods at a minimum cost but ensuring the require quality at the right time in the required quantity. The five stages of production control are as follows : Stages of Production Control : 1. Routing 2. Scheduling 3. Loading 4. Dispatching 5. Follow up 1.

Routing : Routing means to decide the route or path over which an item would travel during the course of manufacturing. It includes the planning of where and by whom work shall be done and in what sequence so that production can be done in an efficiently and in cheapest and best sequence of operations. Spriegal and Lansburg have defined the term routing as "Routing includes the planning of where and by whom work shall be done, the determination of the path that work shall follow and the necessary sequence of operations. It forms the basis for most of the scheduling and dispatching techniques of planning". In the words of H.N.Broom, "Routing has been defined as fixing the path, i.e. the sequence of labour operations which a factory order will follow through the process". Objects of Routing : The prime object of routing is to determine the most feasible sequence of operations which is most economical and efficient for the organisation. Efficient routing permits the best utilisation of physical and human resources employed in production. The persons who are assigned the task of routing should be thoroughly familiar with all the operations and the machines and equipment in the plant so that they can establish the route which will ensure the maximum utilisation of plant, men and materials, economy in cost of production etc. the following advantages can be expected from a well designed routing:  It reduces cost of production by omitting the unnecessary operations.  Efforts are made in designing the route so as to minimise the time to be taken in the production process.  It is an important tool of production control.  Maximum utilisation of physical and human resources is possible. It reduces the idle time of man and machine.  In the last, an effective routing helps in increasing production, improving the quality of the product. The management can get the advantages of specialisation through this technique. 2. Scheduling : Scheduling is the next important function of production planning and control after Routing. It decides the starting and the completion timing for each of the operations with a YASH

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view to engage every machine and operator of the system for the maximum possible time and without imposing unnecessary burden over them. In the words of Kimball and Kimball, Scheduling is the determination of the time that should be required to perform each operation and also the time that should be required to perform the entire series of routed. Similarly Spriegal and Lansburth define scheduling as "Scheduling involves establishing the amount of work to be done and the time when each element of the work will start or the order of the work. A thorough examination of the above definition, it is clear that the scheduling technique is an important technique of determining the starting and the completion timing of each operation and that of the total manufacturing process so that the man and machine can be utilised to the maximum. Objectives of Scheduling are :  To prevent unbalanced use of time among work centres and departments.  To utilise labour such that the output is produced within established lead time or cycle time so as to deliver the products in time and complete production at minimum total cost. 3. Loading : Loading means loading work centre and deciding, which jobs to be given to which work centre or machine. Loading is the process of If converting operation schedules into practice. Machine loading is the process of assigning specific jobs to machines, men or work centres ? based on relative priorities and capacity utilisation. A machine loading chart is prepared showing the panned utilization of men and machines by allocating the jobs to machines or workers as per priority sequencing established at the time of scheduling. Loading ensures maximum possible utilisation of productive facilities and avoids bottlenecks in production. It is important to avoid either overloading or under loading the facilities, work centres or machines to ensure maximum utilisation of resources. 4. Dispatching : Dispatching may be defined as setting production activities in motion through the release of orders and instructions in link with the previously planned time schedules and routings. Dispatching also provides a means for comparing actual progress with planned production progress. Dispatching functions includes:  Providing for movement of raw material from stores to the first operation and from one operation to the next operations are carried out.  Collecting tools, jigs and fixtures from tools stores and issuing them to the user department-or worker.  Issuing job orders authorizing operations in accordance with dates and times as indicated in schedules or machine loading charts.  Obtaining inspection schedules and issuing them to the inspection section.  Internal materials handling and movement of materials to the inspection are after completing the operations, moving the materials to the next operations centre after inspection, and movement of completed parts to holding stores.  Returning jigs and fixtures and tools to stores after use. 5. Follow-up : Follow up ensures that work is done as per the plan and delivery schedules are met or not. Follow- up includes activities such as status reporting, attending to problems in production and removing the same, controlling any variations from planned performance YASH

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level, following up and monitoring progress of work through all stages of production, co-ordinating which purchase, stores, tool room and maintenance departments and making changes in the production plans and re plan if required. Need for follow up arises due to the following: Delay in supply of materials Excessive absenteeism Changes in design specifications. Changes in delivery schedules initiated by customers. Break down of machines or tools, jigs and fixtures. Errors in design drawing and process plan. Q- 5.

What is production planning? Explain functions of Production planning. According to Alford and Beaty "Production planning and control comprise the planning, routing, scheduling, despatching and follow up function in the productive process, as organised that the movement of materials performance and machines and operations of labour, however, subdivided are directed and co-ordinated as to quantity, quality, time and place. It is adopting as business principle the old saying plan our work and work your plan." -Production planning and control encompasses the following areas : Functions of Production Planning 1. Materials 2. Methods 3. Machines and Equipments 4. Manpower 5. Routing 6. Estimating 7. Loading and Scheduling 8. Dispatching 9. Expediting 10. Inspection 11. Evaluating 12. Cost Control 1.

Materials : Planning for procurement of materials, components and spare parts in the right quantities and specifications at the right time from the right source at the right price. Purchasing, storage, inventory control, standardisation, variety reduction, value analysis and inspection are the other activities associated with materials. 2. Methods : Choosing the best method of processing from several alternatives. It also includes determining the best sequence of operations and planning from tooling and utilization of plant and equipments, machines etc. 3. Machines and Equipments : Manufacturing methods are related to production facilities available in the production system. It involves facilities planning, capacity planning, allocation and utilization of plant and equipments, machines etc. It also involves equipment replacement policy, maintenance policy and maintenance schedules, tools manufacture and maintenance of tools etc. YASH

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4.

Manpower : Planning for manpower i.e. for labour, supervisors, managerial having the right skills and knowledge. 5. Routing : Determining the route path for the movement of manufacturing lot through the factory. Which work will follow and the sequence of various operations is determined in advance so that a minimum of handling, transportation, storage and deterioration through exposure may be managed. The aim of routing is to determine the most appropriate sequence of operations and it permits the best utilisation of physical human resources in production. It is first and the foremost function of production planning and control because other functions depend on routing. 6. Estimating : Establishing operation times leading to fixing of performance standard of both workers and machines. 7. Loading and Scheduling : Loading deals with the amount of work assigned to machines or a worker. The person concerned with this loading functions must be up to date in keeping all the records of the workload and capacity of each machine and shop. The total time required to complete the workload is computed by multiplying the unit operation time given to standard process sheet by the number of parts planned for the work station. It results in tabulated list or chart showing the planned utilisation of machines in the plant. The chart helps in assessing the spare capacity. Scheduling determines when the various operations are to be performed and consists of various assignment of starting and completion time for various operations to be performed. Scheduling and routing should be integrated. Both are interdependent to do the work. 8. Dispatching : Dispatching is concerned with the setting of productive activities in motion through release of orders and' instructions in accordance with the pre-detefmined timings as given in operation sheet, route card and loading schedules. It is official authorisation and information of movement of different machines, materials, beginning of work, beginning and completion time, recording the progress of all operations, making of necessary adjustments in relation with instructions given and movement of work in accordance with routing schedule. 9. Expediting : Means the work of follow up which is done after the dispatching function. It keeps a close link with scheduling in order to provide an efficient feed - back and instant reviews of targets and schedules. 10. Inspection : This function is related to maintenance of quality in production and of evaluating the efficiency of the processes, methods and labour so that improvement can be made to achieve the quality standards set by product design. 11. Evaluating : The objective of evaluating is to improve performance. Performance of machines, labour, processes is evaluated to improve the same in future.

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12.

Cost Control : Manufacturing cost is controlled by wastage reduction, value analysis, inventory control and efficient utilization of all resources. In short production planning and control functions are concerned with decision making regarding:  What to produce - Product planning and development, including product design  How to produce - Process planning, material handling, tool planning etc.  Where to produce - facilities planning, capacity planning and sub-contracting planning.  When to produce - production scheduling and machine loading.  Who will produce - Manpower planning  How much to produce - Planning for quantity, economic batch size etc.

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Inventory management: Q.1.

Ans.

Point out the needs to hold inventories. What are its types? or Explain the objectives of inventory management. Inventory means physical and tangible usable resource like materials. Hence the stock can taken as inventory but the term inventory is much more comprehensive term. It is a1 usable resource but it is an idle resource. Hence its efficient and effective management is essential. Inventory means stock of goods kept in business either for sale or for being utilised in the production process. Inventories are thus one of the major elements which help the firm in achieving the expected level of sales. Thus inventory is compassed of assets that will be sold of in future in the normal course of business operation. Definition of Inventories: As per definition given by the International Accounting Standards committee, "Inventory is tangible property (a) held for sale in the ordinary course of business; (b) in the process of production of such sale; or (c) to be consumed in the production of goods or services for sale." In short inventories are stocks of die product of a firm and its components which make up the product. Inventories can be classify into the following five categories. These can be called the different forms of inventories, (i) Raw materials (ii) Work-in-progress (iii) Finished goods (iv) Stores and supplies and (v) Other miscellaneous goods. (1)

Raw materials: Raw materials are those basic materials i.e. inputs that are converted into finished product through the manufacturing process i. g. Cotton bales in the textile mill.

(2)

Work-in-progress: These are semi finished products. These are materials which require more work before they become finished products for sale.

(3)

Finished goods: These are the completed products which are ready for sale. In a manufacturing firm these are the final output of production. The stock of finished goods provides a buffer between production and market.

(4)

Stores and supplies: Besides the above types of inventories there is a forth type of inventory which is known as stores and supplies. These include variety of goods like fuel, cleaning, materials, lubricants, chemicals etc. These include spare parts also.

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(5)

PRODUCTION MANAGEMENT IMP QUES AND ANSWERS

Semester-IV.

Miscellaneous items: These include all the items which are not include in the above mentioned categories. Waste products like tiny parts, cuttings, pieces, press mud, etc., are included in this, category. Each of the above mentioned type of inventory is extremely essential, so that business operations go on smoothly. For facilitating production stocks of raw-materials and work in process is extremely essential. While for smoothly marketing operation and sales stock of finished goods is quiet essential. Thus inventory act as a buffer between the production and consumption of goods.

Que: The Need to Hold Inventory (Purpose / Benefits of Holding Inventories): Every business enterprise maintains certain level of inventories even thought it involves blocking of finis's funds and the cost of storage and handling. Business enterprise maintains certain level of inventories for facilitating uninterrupted production and smooth miming of business. If the firms does riot maintain inventory it will have to make immediate purchase after receiving orders. It means loss of time and delays in executing orders might sometimes loose valuable customers and business. Also for reducing ordering costs and availing quantity discounts etc., a firms is required to hold inventories. Generally there are three main motives or purposes for holding inventory by a firm.  The Transaction Motive: The transaction motive for holding inventories emphasizes to facilitate smooth production and sales operations. Its aim is to satisfy the expected level of activities of the firm. A firm should maintain proper stock of raw-materials for a continuous supply to the factory so that continuous production becomes possible. There is a always a time lag between demand and supply of materials. It is not always possible to bet raw materials whenever it is required. The receipt of materials may be delayed due to strike, lock-outs, short supply or transport disruption. Hence it is necessary for the firm to maintain sufficient stock of raw materials for uninterrupted production. Sometimes for getting the benefits of quantity discounts and anticipated price rise necessitate purchasing and holding stock of raw material inventories. The firm may purchase raw materials in bulk quantity than required for the production, to obtain quantity discounts of bulk purchasing. Sometimes the firm may purchase raw materials in large quantity in anticipation of price rise. Production cycle also requires stock of inventory. Production cycle means time-lag between introductions of raw material being converted into finished products. Till production cycle completes stock of work in progress is to be maintained. Hence efficient firms always try to make production cycle smaller by adopting latest and improved production techniques. Production and sales are not instantaneous. Hence stock of finished goods has to be maintained. It is not possible to produce goods immediately when they are demanded by YASH

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the customers. Hence stock of finished goods is to be maintained for supplying finished goods on a regular basis. Due to sudden demands from customers stock of finished goods are to be maintained  Precautionary Motive : This motive necessitates the holding of inventories for meeting unexpected changes in demand and supplies of materials. This motive is to guard against the actual level of activity is different than participated. The firm may hold inventories as a precaution against risk of sudden unforeseen change in demand and supply forces and other factors like transport strike. In seasonal business adequate supply of finished goods are to be maintained for meeting the peek demand. If we do not supply the goods when demanded by the customers, we might loose the valuable customers.  Speculative Motive : The speculative motive influence to keep more or less inventory for taking advantage of price fluctuations; or to take discount on bulk purchases. This motive might induce a firm to purchase a large quantity of inventory than normal in anticipation of making abnormal profits. In inflationary times the firm may purchase rawmaterials in advance for getting the benefit of low prices. Sometimes in expectation of excise duty being charged in budget the firm may purchase raw materials in large bulk is the example of speculative motive. Objectives of Inventory Management: The primary objective of efficient inventory management is maximisation of wealth of business and its owners. In this context the firm is faced with the problem of meeting the two conflicting needs. • •

To maintain a large size of inventory for efficient and smooth production and sales operation. To maintain a minimum investment in inventories to maximise profitability.

Both excessive and inadequate inventories are harmful. The firm should operate within these two danger points. The objective of inventory management should be to decide and maintain optimum level of inventory investment. The optimum level of inventory will be between the two danger points of excessive and inadequate inventories. The firm must try to remove the situation of over investment or under investment in inventories. The main dangers of over investment are as under: (1) Unnecessary blocking-up of firm's funds and therefore loss of profit. (2) Excessive carrying costs, and (3) Risk of liquidity or risk of loss due to fall in value in future. The excessive level of inventories unnecessarily tie-up the funds of the firm-Hence it cannot be utilised for any other purpose. This way it involves an opportunity cost. The carrying costs like costs of storage, handling, insurance, recording and inspection also increases proportionately with the increase in the volume of inventory. These costs will adversely affect the firm's profitability.

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If excessive inventories are maintained for a long period it will increase the chances of loss of liquidity. It might not be possible to sell inventories in time and at proper value. It will be difficult to sell raw-materials if holding period increases. If might prove to be advantageous in exceptional circumstances to hold stock of raw materials e.g. In conditions of scarcity and inflation it is possible. It is some what difficult to sell work in progress. Similarly in might be difficult to sell finished goods i time lengthens. Due to downward shifts in market and seasonal factors finished goods might be sold at low prices. Excessive inventory creates the danger of physical deterioration of inventories. Certain raw materials or goods might deteriorate with the passage of time or it may deteriorate due to mishandling and improper storage faculties. The management can control these factors; hence unnecessary investment in inventories can be curtailed. The firm should always avoid a situation of underinvestment in inventories. It is also dangerous. The main dangers of under- investment in inventories are as under: (1) Frequent production hold - ups ; (2) Failure to supply finished goods to customers in time. Inadequate raw materials and work-in-progress inventories will create frequent production interruptions. If the finished goods inventories are insufficient to meet the regular demand of customers, they might be shifted to competitors. This will be the permanent loss to the firm. The aim of inventory management should be to remove excessive and inadequate levels of inventories. The firm should always avoid a situation of over investment and under investment in inventories and maintain proper inventory for the smooth production and sales operations. Efforts should be made to put an order for raw materials at the right time with right source to get the right quantity at the right price and quality. Requirements of Effective Inventory: An effective inventory management should take the following measures (1) To facilitate uninterrupted production ensure a continuous supply of raw materials: (2) In the situation of short supply sufficient stocks of raw materials should be maintained and also anticipate the price changes; (3) For smooth sates operation and efficient customer service sufficient finished goods inventory should, be maintained; (4) The cost of carrying inventory and time should be minimised; (5) Investment in inventories must be controlled and it must be kept at an optimum level. QUE : What are ordering and carrying costs? Explain the status in the economic ordering quantity.

Or Explain the following with respect to inventory management : (ii) Reorder level (ROL) (iii) Economic ordering quantity (EOQ) Ans.

One operating objective of inventory management is to minimise cost. To achieve this,

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optimum level of inventory should be maintained by the firm. Sufficient inventories should be maintained neither excessive nor inadequate. Efficiently controlled inventories make the firm flexible. Inefficient inventory control results in unbalanced inventory and inflexibility the firm may be sometimes out of stock and sometimes may pile up necessary stocks. These increase the level of investment and make the firm unprofitable. Determination of the quantity for which the order should be placed is one of the important problems concerned with efficient inventory management. Economic order quantity refers to the size of the order which gives maximum economic in purchasing any item or raw material or finished product. It is fixed mainly after taking into account the following costs (A) Ordering costs (B) Carrying costs. These costs are an important element of the optimum level of inventory decisions (A)

Ordering Costs :Such costs are also known as acquisition or setup costs. This category of costs is associated with the acquisition or ordering of inventory. Firms have to place order with suppliers to replenish inventory of raw materials. The expenses involved are referred to as ordering costs. Apart from placing orders outside, any expenditure involved in acquiring materials from the stores is also a part of the operating cost. They include costs involved in (i) preparing a purchase order or requisition form and (ii) receiving, inspecting and recording goods received to ensure both quantity and quality. The cost of acquiring materials consists of clerical costs and costs of stationary fixed per order placed, irrespective of the amount of the order. The larger the orders place or the more frequent the acquisition inventory made, the higher are such costs. From a different perspective, the larger the inventory, the fewer the acquisitions, the smaller the ordering costs. The acquisitions costs are inversely related to the size they decline with the level of inventory. Thus, such costs can be minimised by placing fewer orders for a larger amount. But, acquisition of a larger quantity would increase, the cost associated with the maintenance of inventory i.e. carrying costs (B) Carrying Costs :The costs which are incurred for holding a given level of inventory is called carrying cost. They are involved in maintaining or carrying inventory. The costs of holding inventory may be divided into two categories:Those that arise due to storing the inventory. The main components of this category of carrying costs are (1) storage costs i.e. tax, depreciation, insurance, maintenance of the building, utilities and senatorial services (2) insurance of inventory against fire and theft (3J deterioration in inventory because of pilferage, fire, technical obsolescence, style obsolescence and price decline (4) serving cost, such as labour for handling inventory, clerical and accounting costs. The opportunity cost of funds. This consist of expenses in raising funds (interest on capital) to finance the acquisition in inventory. If funds were not locked up in inventory, they would have earned a return. This is the opportunity cost of funds or the financial cost component of the cost. The carrying costs move in direct proportion to inventory size. To keep inventory and YASH

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carrying costs, low. Inventories should be purchased in small lot sizes very frequently. This is in conflict with the minimization of ordering costs which decrease with increase in inventory size. Therefore, to determine the optimum size of inventory a trade-off between carrying costs and ordering costs should be reached. The optimum inventory size is commonly referred to as Economic Order Quantity. It is that order size at which annual total costs of ordering and holding are minimum. The economic order quantity may be defined as that level of inventory order that minimizes the total cost associated with inventory management.

Write notes ABC analysis in inventory management. Ans. A. B. C. Analysis In Inventory Management:Q.3.

The A. B. C. system is a widely used classification technique to identify various items of inventory for purposes of inventory control. This technique is based on the principle of management by exception of "Selective Control." It is based on the assumption that a firm should not exercise the same degree of control on all items of inventory. It should rather keep greater control over those items which are more costly as compared to those items which are less costly. On the basis of the cost involved, the various inventory items are, according to this system, categorized in to three classes A, B, & C Categories. 'A' may include more costly items, while category 'B' may consists of less costly items and category "C" of the least costly items. Such an analysis of inventory is known as A. B. C. analysis. This technique of inventory control is also known as "Stock Control" according to value method or always better control method or proportional value analysis method. The following example will illustrate the technique. Group Percentage of items Percentage of cost: A 13 70 B 30 20 C 55 10 The items included in group. A involve the largest investment. All types of inventory control i. c. purchase, stores and issue are to be strictly applied in case of the items of A group. B group consist of items of inventory which involve relatively small investment although the number of items is fairly large. These deserve minimum attention. Items of category C may considered as "free issue' items and even normal accounting procedure may be dispensed with. However stock should be kept under some observation and order for these materials may be given in bulk. B group stands midway. It deserves less attention than A but more than C. It can be controlled by employing less sophisticated techniques. In case of items of category, ordinary stores routine should be observed, but rules regarding levels of stock may not be so strictly adhered to as these in category ‘A’. The advantages of this system are as follows: (1)It ensures strict control on costly items in which a large amount of capital has been invested. (2)It helps in developing a scientific method of controlling inventories. Clerical costs are reduced and stock is maintained at optimum level. (3)It helps in achieving the main objective' of inventory control at minimum cost. The stock turnover rate can be maintained at comparatively higher level through scientific control of inventories. YASH

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The system ABC suffers from a serious [imitations. The system analysis the items according to their value and not according to their importance in the production process. Il may therefore, sometimes create difficult problems. For example, an item inventory may be very inexpensive, under the A 3 C system it would be classified C category. But, it may be very critical to the production process and may not be easily available. Il deserves the special attention of management. Bui in items of the ABC frame work it would be included in the category which requires least attention. Hence the system of ABC analysis should be used with caution. Q.4. Ans.

Define safety stock. How can safety stock be computed? The usage of inventory cannot be perfectly forecast; generally it fluctuates over a period of time. In particular, at certain points of time the demand may exceed the anticipated level. Similarly, the receipt of inventory from the suppliers may delayed beyond the expected lead time. The delay may arise from strikes, Hoods, transportation and other bottlenecks, and so on. Thus, a firm would come across situations in which the actual usage of inventory is higher than the anticipated level and / or the delivery of the inventory from the suppliers is delayed. The effect of increased usage and / or slower delivery would be a shortage of inventory. That is the firm would face a stock - out situation. This in turn / would disrupt the production schedule and alternate the customers. The firm would, therefore, be well advised to keep a sufficient safety, margin by having additional inventory to fight against stock out situations. Such stocks are called safety stocks. This would act as a buffer or cushion against a possible shortage of inventory caused either by increased usage or delayed delivery of inventory. The safety stock may be defined, as the minimum additional inventory to serve as safety margin or buffer or cushion to meet an unanticipated increase in usage resulting from an unusually high demand and / or uncontrollable late receipt of incoming inventory. How cab safety stock be computed? The safety stock involves two types of costs; (i) stock out, and (iii) carrying costs; the job of the financial manager is to determine the appropriate level of safety stack on the basis of trade-off between these two types of conflicting costs. The term stock out costs refers to the cost associated with the shortage of inventory. It is in fact, an opportunity cost in the sense that due to the shortage^ of inventory the firm would be deprived of certain benefits. The denial of these benefits which would otherwise be available to the firm are the stock-out costs. The first, and the most obvious, of these costs is the loss of profits, which She firm could have earned from increased sales. if there was no shortage of inventory. Another category stock-out costs is the damage to the relationship with the other customers. Owing to, shortage of inventory the firm would not be able to meet the customer's requirements and the latter may turn to the firm's competitors. This type of cost cannot be easily and most precisely quantified. Last the shortage of inventory may disrupt the production schedule of the firm. The carrying costs are the costs associated with the maintenance of inventory. They include opportunity cost of funds invested in inventories, insurance, taxes, storage costs and cost of deterioration and obsolescence. Since the firm is required, to maintain additional inventory,

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in excess of the normal usage, additional carrying costs are involved. The stock-out and the carrying costs are counterbalancing. The larger the safety stock, the larger the carrying costs and vice-versa. Conversely, the larger the safety stock, the smaller the stock-out costs. In other words, if the firm minimises the carrying costs, the stock-out costs are likely to rise: on the other hand, an attempt to rise the stock-out costs implies increased carrying costs. The object of the financial managers should be to have the lowest total cost (i.e. carrying cost plus stock-out cost) the safety stock with the minimum carrying and stock-out costs is the economic level which financial managers should aim at. In short, the appropriated level of safety stock should aim at. In short, the appropriate level of safety stock is determined by the trade-off between the stock out and the carrying costs. The level of safety stock can be calculated by applying the following formula. Safety stock = Average Usage X period of safety stock. For example, if the usage rate is 50 units per week, and firm wants to hold sufficient inventory for at least one week, of production the amount of safety stock will be 50 units.

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New Product Development Que: New Product Development Process Introducing new products on a consistent basis is important to the future success of many organizations, marketers in charge of product decisions often follow set procedures for bringing products to market. In the scientific area that may mean the establishment of ongoing laboratory research programs for discovering new products (e.g., medicines) while less scientific companies may pull together resources for product development on a less structured timetable. In this section we present a 7-step process comprising the key elements of new product development. While some companies may not follow a deliberate step-by-step approach, the steps are useful in showing the information input and decision making that must be done in order to successfully develop new products. The process also shows the importance market research plays in developing products. We should note that while the 7-step process works for most industries, it is less effective in developing radically new products. The main reason lies in the inability of the target market to provide sufficient feedback on advanced product concepts since they often find it difficult to understand radically different ideas. So while many of these steps are used to research breakthrough ideas, the marketer should exercise caution when interpreting the results.

Step 1. IDEA GENERATION The first step of new product development requires gathering ideas to be evaluated as potential product options. For many companies idea generation is an ongoing process with contributions from inside and outside the organization. Many market research techniques are used to encourage ideas including: running focus groups with consumers, channel members, and the company’s sales force; encouraging customer comments and suggestions via toll-free telephone numbers and website forms; and gaining insight on competitive product developments through secondary data sources. One important research technique used to generate ideas is brainstorming where open-minded, creative thinkers from inside and outside the company gather and share ideas. The dynamic nature of group members floating ideas, where one idea often sparks another idea, can yield a wide range of possible products that can be further pursued.

Step 2. SCREENING In Step 2 the ideas generated in Step 1 are critically evaluated by company personnel to isolate the most attractive options. Depending on the number of ideas, screening may be done in rounds with the first round involving company executives judging the feasibility of ideas while successive rounds may utilize more advanced research techniques. As the ideas are whittled down to a few attractive options, rough estimates are made of an idea’s potential in terms of sales, production costs, profit potential, and competitors’ response if the product is introduced. Acceptable ideas move on to the next step.

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Step 3. CONCEPT DEVELOPMENT AND TESTING With a few ideas in hand the marketer now attempts to obtain initial feedback from customers, distributors and its own employees. Generally, focus groups are convened where the ideas are presented to a group, often in the form of concept board presentations (i.e., storyboards) and not in actual working form. For instance, customers may be shown a concept board displaying drawings of a product idea or even an advertisement featuring the product. In some cases focus groups are exposed to a mock-up of the ideas, which is a physical but generally non-functional version of product idea. During focus groups with customers the marketer seeks information that may include: likes and dislike of the concept; level of interest in purchasing the product; frequency of purchase (used to help forecast demand); and price points to determine how much customers are willing to spend to acquire the product.

Step 4. BUSINESS ANALYSIS At this point in the new product development process the marketer has reduced a potentially large number of ideas down to one or two options. Now in Step 4 the process becomes very dependent on market research as efforts are made to analyze the viability of the product ideas. (Note, in many cases the product has not been produced and still remains only an idea.) The key objective at this stage is to obtain useful forecasts of market size (e.g., overall demand), operational costs (e.g., production costs) and financial projections (e.g., sales and profits). Additionally, the organization must determine if the product will fit within the company’s overall mission and strategy. Much effort is directed at both internal research, such as discussions with production and purchasing personnel, and external marketing research, such as customer and distributor surveys, secondary research, and competitor analysis.

Step 5. PRODUCT AND MARKETING MIX DEVELOPMENT Ideas passing through business analysis are given serious consideration for development. Companies direct their research and development teams to construct an initial design or prototype of the idea. Marketers also begin to construct a marketing plan for the product. Once the prototype is ready the marketer seeks customer input. However, unlike the concept testing stage where customers were only exposed to the idea, in this step the customer gets to experience the real product as well as other aspects of the marketing mix, such as advertising, pricing, and distribution options (e.g., retail store, direct from company, etc.). Favorable customer reaction helps solidify the marketer’s decision to introduce the product and also provides other valuable information such as estimated purchase rates and understanding how the product will be used by the customer. Reaction that is less favorable may suggest the need for adjustments to elements of the marketing mix. Once these are made the marketer may again have the customer test the product. In addition to gaining customer feedback, this step is used to gauge the feasibility of large-scale, cost effective production for manufactured products.

Step 6. MARKET TESTING Products surviving to Step 6 are ready to be tested as real products. In some cases the marketer accepts what was learned from concept testing and skips over market testing to launch the idea as a fully marketed product. But other companies may seek more input from a larger YASH

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group before moving to commercialization. The most common type of market testing makes the product available to a selective small segment of the target market (e.g., one city), which is exposed to the full marketing effort as they would be to any product they could purchase. In some cases, especially with consumer products sold at retail stores, the marketer must work hard to get the product into the test market by convincing distributors to agree to purchase and place the product on their store shelves. In more controlled test markets distributors may be paid a fee if they agree to place the product on their shelves to allow for testing. Another form of market testing found with consumer products is even more controlled with customers recruited to a “laboratory” store where they are given shopping instructions. Product interest can then be measured based on customer’s shopping response. Finally, there are several high-tech approaches to market testing including virtual reality and computer simulations. With virtual reality testing customers are exposed to a computer-projected environment, such as a store, and are asked to locate and select products. With computer simulations customers may not be directly involved at all. Instead certain variables are entered into a sophisticated computer program and estimates of a target market’s response are calculated.

Step 7. COMMERCIALIZATION If market testing displays promising results the product is ready to be introduced to a wider market. Some firms introduce or roll-out the product in waves with parts of the market receiving the product on different schedules. This allows the company to ramp up production in a more controlled way and to fine tune the marketing mix as the product is distributed to new areas.

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Que: Consumer adoption process: In market there are several products with similar function. Consumers go with certain product to fulfill their needs. By several exercise and trial consumer select the requisite product. To come to a decision of using certain product regularly after several study, observation and trial of the new product is known as product adoption. Product adoption is concerned with the way new consumers learn about new product and decide to become its regular user. It is a psychological process to come to a decision of using certain new product by a new consumer regularly. The above mentioned points related to the steps of product adoption are explained below: 1. Product awareness The first step of the product adoption is to be aware of product. Basically consumers (individual or organizational) are aware of product introduction in the market via various means of communication, such as television, newspapers, business magazine, internet etc. People become aware of quality, features, utility, price etc of the product to adopt. 2. Product Interest: If the awareness or information of the product existence, if consumer is interested in the product he/she starts to collect the information related to the product. Consumer becomes interested about product quality, features, utility and price. 3. Product Evaluation: After the collection of the information about the product, the information gathered is evaluated by the consumers. Consumers checks whether the product quality, features, utility and price of the product satisfactory or not? 4. Product trial: In the fourth step of the product adoption, consumer makes trial of the product in small amount. They make the use of the product in small quantity or they may make test use of the product. 5. Product adoption: After the trial of the product if the consumer is satisfied he/she will adopt the product and use the product regularly even in the future.

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Product-mix Que: Product-mix At the heart of a great brand is a great product. Product is a key element in the market offering. One of the major management aspect involved in product policy is the decision concerning product-mix. Product-mix is very important now-a-days, since most of the manufacturers are diversifying their products. The product policy decisions are made of these different levels: product mix, product items & product lines. These 3-in–one elements make the product effective. Product mix: Product mix is the list of all products offered for sale by a company. According to Philip kotler a product mix or product assortment is the set of all products & items a particular seller offers for sale. A product mix consists of various product lines. EXAMPLE: The consumer product portfolio of NIRMA Ltd. Consists of: fabric-care products, personal-care products, food products etc. in each of these categories, the company has different brands & variants. The product-mix is 4 dimensioned, as a company’s product mix contains width, length, depth & consistency. Let’s discuss these 4 fold dimensions: I. The width: The width of product mix refers to how many different product lines in the company carries. The word width refers to the extent of different product lines in the product mix offered by an organization. II. The depth: The word depth applies to the number of product items offered by an organization within a particular product line. It means the variants offered of each product in the line. EXAMPLE: Lux comes in 2 sizes & 4 fragrances, so it has a depth of 2×4=8 III. The length: The length of the product mix refers to the total number of items in the mix. We can calculate the average length of a line by dividing the total length by number of lines. EXAMPLE: If there are 30 items in a product mix & 10 product lines, then average length of a line: 3o÷10= 3 items. IV. The consistency: Consistency refers to the close relationship of various product lines either to their end use or to production requirements or to distribution channels or to other variables. EXAMPLE: HUL product lines are consistence in the sense they all are consumer goods & go through the same distribution lines. Another example of Bajaj electrical, all its products falls under the category of “Electronic Appliances”.

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But TATA’S product lines are not consistent as it manufactures heavy machineries, softwares, telecommunication, consumer goods etc. here the different product lines have no relationship in between them. Thus an optimal product-mix is required by all organizations, which helps the company for attracting, retaining & growing customers & establishing a high reputation for it self. Product-mix strategies: To be successful in marketing, producers & middlemen need carefully planned strategies for managing their product mixes. The major product mix decisions are:

I: positioning, ii: expansion, iii: alternations & iv: contraction. a) Product positioning: It means positioning in relation to a competitor. It involves in developing the image in the minds of the customer that the product is superior to its competitors. In positioning the important strategies are: I. Attribute positioning: In this way of positioning, the benefits that customers get in using the product are highlighted. II. Competitive positioning: In this strategy the firm establishes its product next to the leader & trying to uproot in a specific tangible variable. III. Lifestyle positioning: A product may be positioned as a life style component. For example: Many of today’s kitchen appliances like microwave ovens etc. are positioned like this. b) Product mix expansion: Product mix expansion is done by increasing the depth within a particular line or number of lines a company offers to customers. When company adds a similar item to an existing product line with the same brand name, this is called line extension. Thus line extension is a way to expand the product mix. The main reason for line extension may be that the firm wants to appeal to more market segments by offering a wider range of choices for a particular product. Another way to expand product mix is mix extension. It is a strategy to add new product line to company’s present assortment. c) Product mix alternation: Product alternation means an act of improving an established product. This is more profitable & less risky than developing a completely new product. For example: A product may be redesigned to be available in separate styles for girls & boys. d) Product mix contraction: This strategy is carried out by eliminating an entire line or by simplifying the assortment within the line. The main aim of product contraction strategy is higher profit from fewer products. YASH

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