1.

General Overview of Production Planning and

Control (PPC)
Production Planning:
Production Planning is a managerial function which is mainly concerned with the following important issues:
❑ What production facilities are required?
❑ How these production facilities should be laid down in the space available for production? And
❑ How they should be used to produce the desired products at the desired rate of production?

❖ Broadly speaking, production planning is concerned with two main aspects: (i) routing or planning work tasks (ii) layout or spatial relationship
between the resources.
❖ Production planning is dynamic in nature and always remains in fluid state as plans may have to be changed according to the changes in
circumstances.

Production Control:

Production control is a mechanism to monitor the execution of the plans.

It has several important functions:
❖ Making sure that production operations are started at planned places and planned times.
❖ Observing progress of the operations and recording improperly.
❖ Analyzing the recorded data with the plans and measuring the deviations.
❖ Taking immediate corrective actions to minimize the negative impact of deviations from the plans.
❖ Feeding back the recorded information to the planning section in order to improve future plans.
 1. General Overview of Production Planning and
Control (PPC)
Objectives and benefits of planning
❖ Minimize costs / maximize profits
❖ Maximize customer service
❖ Minimize inventory investment
❖ Minimize changes in production rates
❖ Minimize changes in work-force levels
❖ Maximize the utilization of plant and equipment
 o Product design is the process of creating and developing a
Roles of the production planning and control department (s) product, including its aesthetics, functionality, usability and
ergonomics. No matter the type of product design you have in
mind, the process consists of several key stages.

o Working with engineering teams to develop product

prototypes that match the customer's requirements or industry
standard is essential in product design.
o To ensure all requirements are met, the product designer has to
work on visualizing ideas, sketches or illustrations, building
physical models for user testing or working with CAD programs
to illustrate 3D designs.

o Product development is a multi-stage process of creating,

designing and bringing new products to the market.
o It can refer to the development of physical products, such as
consumer goods or industrial products, or digital products
development, such as software or mobile applications.

o Successful product development requires collaboration

between different teams, including product management,
design, engineering, marketing and sales, among others.
o The goal is to create products that are functional, user-friendly
and meet the needs of the target market.

o The product development process consists of activities such as

materials selection, tooling and manufacturing processes, safety
assessments, cost analyses, life-cycle management and usability
studies.
Key differences between product design and product development
Product design and product development are often seen as two sides of the same coin as they contribute to the process of bringing a new product to
market. Both roles overlap each other, but they have their own distinct set of challenges in bringing a new product to market:
❑ Product design focuses on creating the aesthetic elements of the product, such as its shape, size, color and texture, while product development is
primarily concerned with ensuring its functionality and usability.

❑ Product design involves creating sketches or prototypes from which to work from, but product development requires detailed technical drawings and
specifications for each element of the finished item.

❑ The designing process often includes testing the product on users or through surveys; product development, on the other hand, involves extensive
prototyping and rigorous quality assurance procedures.

❑ When it comes to the end user experience, design helps convey brand messaging while developing facilitates optimum performance capabilities.

❑ In terms of cost-effectiveness, product design can help reduce unnecessary costs by streamlining the manufacturing processes, while proper
development makes products more cost-effective due to better use of resources such as time and materials.

❑ From a scalability point of view, product design helps make products easily scalable for upgradation or customization purposes, while development
helps ensure that production is increased without compromising on quality standards.

❑ Both processes require different kinds of skill sets: designers need creative thinking abilities while developers need technical knowledge and
analytical skills.
 Stages of product design
The product design process involves a wide range of tasks before the product is ready to be launched on the market for consumers to purchase:

Executing the user Specifications

Brainstorming Defining the product Prototyping Sketching
research compilation

Getting the samples

Testing the samples
ready

Stages of product development

The product development process differs from one industry to the next, but it essentially comes down to:

Idea generation Market research Planning Prototyping Sourcing Estimating costs

Testing the samples Marketing

 Why is product design important?
Businesses that invest in design can achieve much in return. Looking at the bigger picture, product design is essential to business success as it:
❑ Reduces development costs
❑ Enhances brand identity and recognition
❑ Helps identify customer needs and preferences
❑ Creates competitive advantage over competitors
❑ Attract new customers while retaining existing ones
❑ Allows companies to respond quickly to market changes
❑ Reduces time and effort required for product development cycles
❑ Provides feedback on product development from the users’ perspective
❑ Creates opportunities for collaboration with partners and affiliates in the marketplace
❑ Increases user satisfaction rates by creating easy-to-use and aesthetically pleasing products

Why is product development important?

Product development is an important part of any business’s success and involves the complete lifecycle of a product, from ideation and research to launch
and marketing. As such, it is essential as it helps businesses:
❑ Encourage creativity and collaboration among team members
❑ Identify new opportunities in the market and stay competitive
❑ Boost revenue by introducing value-added services
❑ Stay ahead of the competition
❑ Enable efficient market entry
❑ Build customer loyalty
❑ Refine their products
Production system
It refers to methods, procedures, or arrangements which includes all functions required to accumulate (gather) the inputs, process or reprocess the inputs
and deliver the marketable output (goods). It can as well be defined as a transformation system in which a saleable product or service is created by
working upon a set of inputs. Inputs are usually in the form of men, machine, money, materials etc. Production systems are usually classified on the basis
of the following:

❖ Type of product
❖ Type of production line
❖ Rate of production
❖ Equipment used etc.
They are broadly classified into three categories:
➢ Job shop production
➢ Batch production
➢ Mass production

1. Job shop Production

In this system, products are made to satisfy a specific order. However, that order may be produced only once or at irregular time intervals as and
when new order arrives or at regular time intervals to satisfy a continuous demand.
The following are the important characteristics of job shop type production system:
➢ Machines and methods employed should be general purpose as product changes are quite frequent.
➢ Planning and control system should be flexible enough to deal with the frequent changes in product requirements.
➢ Man power should be skilled enough to deal with changing work conditions.
➢ Schedules are actually nonexistent in this system as no definite data is available on the product.
➢ In process inventory will usually be high as accurate plans and schedules do not exist. Product cost is normally high because of high material and
labor costs.
➢ Grouping of machines is done on functional basis (i.e. as lathe section, milling section etc.). This system is very flexible as management has to
manufacture varying product types.
➢ Material handling systems are also flexible to meet changing product requirements.
2. Batch Production
Batch production is the manufacture of a number of identical articles either to meet a specific order or to meet a continuous demand. Batch can be
manufactured either-only once or repeatedly at irregular time intervals as and when demand arise or repeatedly at regular time intervals to satisfy a
continuous demand.
The following are the important characteristics of batch type production system:
➢ As final product is somewhat standard and manufactured in batches, economy of scale can be availed to some extent.
➢ Machines are grouped on functional basis similar to the job shop manufacturing.
➢ Semi-automatic, special purpose automatic machines are generally used to take advantage of the similarity among the products.
➢ Labor should be skilled enough to work upon different product batches.
➢ In process inventory is usually high owing to the type of layout and material handling policies adopted.
➢ Semi-automatic material handling systems are most appropriate in conjunction with the semi-automatic machines.

3. Mass Production
In mass production, same type of product is manufactured to meet the continuous demand of the product. Usually demand of the product is very
high and market is going to sustain same demand for sufficiently long time.
The following are the important characteristics of mass production system:
➢ As same product is manufactured for sufficiently long time, machines can be laid down in order of processing sequence.
➢ Product type layout is most appropriate for mass production system.
➢ Standard methods and machines are used during part manufacture.
➢ Most of the equipment are semi-automatic or automatic in nature.
➢ Material handling is also automatic (such as conveyors).
➢ Semi-skilled workers are normally employed as most of the facilities are automatic.
➢ As product flows along a pre-defined line, planning and control of the system is much easier. Cost of production is low owing to the high rate
of production.
➢ In process inventories are low as production scheduling is simple and can be implemented with ease.
PRODUCT DESIGN
Product design is a strategic decision as the image and profit earning capacity of a small firm depends largely on product design. Once the product to be
produced is decided by the entrepreneur, the next step is to prepare its design. Product design consists of form and function.
❖ The form designing includes decisions regarding its shape, size, color and appearance of the product.
❖ The functional design involves the working conditions of the product.
❖ Once a product is designed, it prevails for a long time therefore various factors are to be considered before designing it. These factors are listed
below: -
❑ Standardization ❑ Sustainability
❑ Reliability ❑ Product simplification
NOTE: The product design should be dictated by the market demand. It is
❑ Maintainability ❑ Quality Commensuration with cost
an important decision and therefore the entrepreneur should pay due effort,
❑ Servicing ❑ Product value
time, energy and attention in order to get the best results.
❑ Reproducibility ❑ Consumer quality
❑ Needs and tastes of consumers.
TYPES OF PRODUCTION
Broadly one can think of three types of production systems which are mentioned here under: -
(a) Continuous production
(b) Job or unit production
(c) Intermittent production
Continuous production:
It refers to the production of standardized products with a standard set of process and operation sequence in anticipation of demand. It is also
known as mass flow production or assembly line production. This system ensures less work in process inventory and high product quality but
involves large investment in machinery and equipment. The system is suitable in big plants involving large volume and small variety of output
e.g. oil refineries, reform cement manufacturing etc.

Job or Unit production: - It involves production as per customer's specification each batch or order consists of a small lot of identical products
and is different from other batches. The system requires comparatively smaller investment in machines and equipment. It is flexible and can be
adapted to changes in product design and order size without much inconvenience. This system is most suitable where heterogeneous products
are produced against specific orders.
Intermittent Production:
Under this system the goods are produced partly for inventory and partly for customer's orders. E.g. components are made for inventory but they are
combined differently for different customers. Automobile plants, printing presses, electrical goods plant are examples of this type of manufacturing.
 2. FORECASTING

o The growing competition, frequent changes in customer's demand and the trend towards automation, demand that decisions in business should not
be based purely on guesses rather on a careful analysis of data concerning the future course of events.
o More time and attention should be given to the future than to the past, and the question 'what is likely to happen?' should take precedence over 'what
has happened?' though no attempt to answer the first can be made without the facts and figures being available to answer the second.
o When estimates of future conditions are made on a systematic basis, the process is called forecasting and the figure or statement thus obtained is
defined as forecast.
❑ In a world where future is not known with certainty, virtually every business and economic decision rests upon a forecast of future conditions.
❑ Forecasting aims at reducing the area of uncertainty that surrounds management decision-making with respect to costs, profit, sales, production,
pricing, capital investment, and so forth.
❑ If the future were known with certainty, forecasting would be unnecessary. But uncertainty does exist, future outcomes are rarely assured and,
therefore, organized system of forecasting is necessary.
❑ The following are the main functions of forecasting:
1. The creation of plans of action.
2. The general use of forecasting is to be found in monitoring the continuing progress of plans based on forecasts.
3. The forecast provides a warning system of the critical factors to be monitored regularly because they might drastically affect the performance of the
plan.
➢ It is important to note that the objective of business forecasting is not to determine a curve or series of figures that will tell exactly what will happen,
say, a year in advance, but it is to make analysis based on definite statistical data, which will enable an executive to take advantage of future
conditions to a greater extent than he could do without them.
➢ In forecasting one should note that it is impossible to forecast the future precisely and there always must be some range of error allowed for in the
forecast.
 FORECASTING FUNDAMENTALS
Forecast: A prediction, projection, or estimate of some future activity, event, or occurrence. Types of Forecasts are:
❑ Economic forecasts. Predict a variety of economic indicators, like money supply, inflation rates, interest rates, etc.
❑ Technological forecasts. Predict rates of technological progress and innovation.
❑ Demand forecasts. Predict the future demand for a company’s products or services.

TYPES OF FORECASTING METHODS

Qualitative methods:
These types of forecasting methods are based on judgments, opinions, intuition, emotions, or personal experiences and are subjective in nature. They do
not rely on any rigorous mathematical computations
Quantitative methods:
These types of forecasting methods are based on mathematical (quantitative) models, and are objective in nature. They rely heavily on mathematical
computations.

Qualitative methods

Sales Delphi method

Executive opinion Market survey
Approach in which each Approach in which
Approach in which a Approach that uses interviews
salesperson estimates consensus agreement is
group of managers meet and surveys to gather opinions
sales in his or her region reached
 Quantitative methods

Time-series models
Time series models look at past patterns of data and
Associate models
attempt to predict the future based upon the
Associative models, often called casual models assume that the
underlying patterns contained within those data.
variable being forecasted is related to other variables in the
These days deep learning, especially Long Short
environment.
Term Memory (LSTM) is widely used for time series
prediction

➢ Some of the time series models include:

 DECOMPOSITION OF A TIME SERIES
Patterns that may be present in a time series

Trend: Data exhibit a steady growth or decline over time.

Seasonality: Data exhibit upward and downward swings in a short to

intermediate time frame (most notably during a year).
Cycles: Data exhibit upward and downward swings in over a very long time
frame.

Random variations: Erratic and unpredictable variation in the data over

time with no discernable pattern.

Illustration of time series decomposition

Hypothetical pattern of historical demand Note: A time series of demand may have constant, trend, or seasonal
pattern or combinations of these patterns. The forecaster tries to
1. Dependent versus Independent Demand
understand the reasons for such changes, such as:
❑ Demand of an item is termed as independent when it remains
❑ Changes that have occurred as a result of general tendency of the data
unaffected by the demand for any other item.
to increase or decrease, known as secular movements.
❑ On the other hand, when the demand of one item is linked to the
❑ Changes that have taken place during a period of 12 months as a result
demand for another item, demand is termed as dependent.
in changes in climate, weather conditions, festivals etc. are called
❑ It is important to mention that only independent demand needs
seasonal changes.
forecasting.
❑ Changes that have taken place as a result of booms and depressions
❑ Dependent demand can be derived from the demand of independent
are called as cyclical variations.
item to which it is linked.
❑ Changes that have taken place as a result of such forces that could not
2. Business Time Series be predicted (like flood, earthquake etc.) are called irregular or erratic
The first step in making a forecast consists of gathering information from variations.
the past. One should collect statistical data recorded at successive
intervals of time. Such a data is usually referred to as time series. Analysts
plot demand data on a time scale, study the plot and look for consistent
shapes and patterns.
Quantitative Approaches of Forecasting
Most of the quantitative techniques calculate demand forecast as an average from the past demand. The following are the important demand forecasting
techniques.
❖ Simple average method: A simple average of demands occurring in all previous time periods is taken as the demand forecast for the next time period
in this method. Here is an example,
An XYZ television supplier found a demand of 200 sets in July, 225 sets in August and 245 sets in September. Find the demand forecast for the month of
October using simple average method.
Solution: The average demand for the month of October is
Simple moving average (SMA) method:
In this method, the average of the demands from several of the most recent periods is taken as the demand forecast for the next time period. The
number of past periods to be used in calculations is selected in the beginning and is kept constant (such as 3-period moving average)

Find out the demand forecast for the month of July using five-period moving average & three-period moving
average using simple moving average method.
 Implementation of SMA in excel
Open excel. Let's assume we have a series of sales data for a product over 12 months in cells B2:B13.
1.First, select a cell where you want to display the moving average. Let's say you want to display it starting from cell C4
(after three months. i.e when the moving average window is given as three months)

2. In cell C4, enter the formula for the simple moving average. The formula for a simple moving average with a window
size of, say, 3 months is:

3. Drag this formula down to fill the cells C5:C13. Excel will automatically adjust the cell references accordingly, so the
moving average will be calculated for each successive window of 3 months.
Implementation of SMA in excel
Weighted moving average method:
In this method, unequal weights are assigned to the past demand data while calculating simple moving average as the demand forecast for next time
period. Usually most recent data is assigned the highest weight factor

Example: The manager of a restaurant wants to make decision on inventory and overall cost. He wants to forecast demand for some of the items
based on weighted moving average method. For the past three months he experienced a demand for pizzas as follows:

Find the demand for the month of January by assuming suitable weights to demand data.

In excel:
Let's assume we have a series of sales data for a product over 12 months in cells B2:B13, and we want to calculate a weighted moving average with
weights of 0.3, 0.5, and 0.2 for the most recent, second most recent, and third most recent months, respectively.
1.First, select a cell where you want to display the weighted moving average. Let's say you want to display it starting from cell C4.
2.In cell C4, enter the formula for the weighted moving average. Use the dollar sign to fix the weights. The formula for a weighted moving average with
the specified weights would be:
3. Drag this formula down to fill the cells C5:C13. Excel will automatically adjust the cell references accordingly, so the weighted moving average will
be calculated for each successive row (As shown above).
Exponential smoothing method:
In this method, weights are assigned in exponential order. The weights decrease exponentially from most recent demand data to older demand data
Example: One of the two wheeler manufacturing company experienced irregular but usually increasing demand for three products. The demand was
found to be 420 bikes for June and 440 bikes for July. They use a forecasting method which takes average of past year to forecast future demand. Using
the simple average method demand forecast for June is found as 320 bikes. Use a smoothing coefficient of 0.7 to weigh the recent demand and find the
demand forecast for August.
In excel:
Let's assume we have a series of sales data for a product over 12 months in cells B2:B13, and
we want to calculate the exponential smoothing forecast with a smoothing parameter (alpha) of
0.3.
1.First, select a cell where you want to display the forecast. Let's say you want to display it
starting from cell C3.
2.In cell C2, enter the initial forecast value. This could be the first observed value in your data, or
an initial estimate. Let's assume we take the value from the first observation in cell B2 (say B2).
3.In cell C3, enter the formula for the exponential smoothing forecast. Put a dollar sign to fix the
alpha (constant). The formula for exponential smoothing with a smoothing parameter (alpha) of
0.3 would be:

Drag this formula down to fill the cells B4:B13. Excel will automatically adjust the cell references
accordingly, so the exponential smoothing forecast will be calculated for each successive row.
Regression analysis method:
In this method, past demand data is used to establish a functional relationship between two variables. One variable is known or assumed to be known;
and used to forecast the value of other unknown variable (i.e.demand).
Farewell Corporation manufactures Integrated Circuit boards(I.C board) for electronics devices. The planning department knows that the sales of their
client goods depends on how much they spend on advertising, on account of which they receive in advance of expenditure. The planning department
wish to find out the relationship between their clients advertising and sales, so as to find demand for I.C board. The money spend by the client on
advertising and sales (in dollar) is given for different periods in following table :
Error in Forecasting
Error in forecasting is nothing but the numeric difference in the forecasted demand and actual demand. MAD (Mean Absolute Deviation) and Bias are
two measures that are used to assess the accuracy of the forecasted demand. It may be noted that MAD expresses the magnitude but not the direction
of the error.
 Key take aways about forecasting and further examples
Here are the fundamental concepts and methods used in forecasting:

Time Series Analysis:

Time series analysis is a common method for forecasting that involves analyzing historical data to identify patterns and trends over time. This approach
assumes that future behavior is influenced by past behavior. Techniques such as moving averages, exponential smoothing, and autoregressive
integrated moving average (ARIMA) models are commonly used in time series analysis.

Causal Methods:
Causal methods of forecasting involve identifying and analyzing the cause-and-effect relationships between various factors and the variable being
forecasted. These methods use regression analysis or other statistical techniques to forecast based on the relationship between the variable being
forecasted and other relevant variables, such as economic indicators, demographic factors, or marketing expenditures.

Judgmental Methods:
Judgmental methods rely on the expertise and judgment of individuals or groups to make forecasts. These methods are often used when historical data
is limited or unreliable, or when there are significant changes in the environment that cannot be captured by quantitative models. Techniques such as
expert opinion, Delphi method, and scenario planning fall under this category.

Machine Learning and Artificial Intelligence:

With advancements in technology, machine learning and artificial intelligence (AI) techniques are increasingly being used for forecasting. These methods
involve training algorithms on historical data to identify patterns and make predictions. Techniques such as neural networks, support vector machines, and
random forests are commonly used in machine learning-based forecasting.
Ensemble Methods:
Ensemble methods combine forecasts from multiple models or sources to improve forecast accuracy. By aggregating forecasts from different models or
experts, ensemble methods can often produce more accurate forecasts than any individual model or method alone. Techniques such as averaging,
weighting, and combining forecasts using machine learning algorithms are examples of ensemble methods.
Forecast Evaluation and Validation:
Regardless of the forecasting method used, it is essential to evaluate the accuracy and reliability of forecasts. Forecast evaluation involves
comparing forecasted values to actual outcomes to assess performance and identify areas for improvement. Techniques such as mean absolute
error (MAE), mean squared error (MSE), and forecast error decomposition are commonly used for forecast evaluation.
 3. INVENTORY
The amount of material, a company has in stock at a specific time is known as inventory or in terms of money it can be defined as the total capital
investment over all the materials stocked in the company at any specific time. Inventory may be in the form of,
❑ raw material inventory
❑ in process inventory
❑ finished goods inventory
❑ spare parts inventory
❑ office stationary etc.
❖ As a lot of money is engaged in the inventories along with their high carrying costs, companies cannot afford to have any money tied in excess
inventories. Any excessive investment in inventories may prove to be a serious drag on the successful working of an organization. Thus there is a
need to manage our inventories more effectively to free the excessive amount of capital engaged in the materials.
Why Inventories?
Inventories are needed because demand and supply can not be matched for physical and economical reasons. There are several other reasons for
carrying inventories in any organization.
➢ To safe guard against the uncertainties in price fluctuations, supply conditions, demand conditions, lead times, transport contingencies etc.
➢ To reduce machine idle times by providing enough in-process inventories at appropriate locations.
➢ To take advantages of quantity discounts, economy of scale in transportation etc.
➢ To decouple operations i.e. to make one operation's supply independent of another's supply. This helps in minimizing the impact of break downs,
shortages etc. on the performance of the downstream operations. Moreover operations can be scheduled independent of each other if operations
are decoupled.
➢ To reduce the material handling cost of semi-finished products by moving them in large quantities between operations.
➢ To reduce clerical cost associated with order preparation, order procurement etc.

Inventory Costs
In order to control inventories appropriately, one has to consider all cost elements that are associated with the inventories. There are four such cost
elements, which do affect cost of inventory.
❖ Unit cost: it is usually the purchase price of the item under consideration. If unit cost is related with the purchase quantity, it is called as discount
price.
❖ Procurement costs: This includes the cost of order preparation, tender placement, cost of postages, telephone costs, receiving costs, set up cost
etc.
 INVENTORY
Carrying costs: This represents the cost of maintaining inventories in the plant. It includes the cost of insurance, security, warehouse rent, taxes, interest
on capital engaged, spoilage, breakage etc.
Stockout costs: This represents the cost of loss of demand due to shortage in supplies. This includes cost of loss of profit, loss of customer, loss of
goodwill, penalty etc.
If one year planning horizon is used, the total annual cost of inventory can be expressed as: Total annual inventory cost = Cost of items + Annual
procurement cost + Annual carrying cost + Stockout cost
Variables in Inventory Models S = Procurement cost (per order)
D = Total annual demand (in units) C = Cost of the individual item (cost per unit)
Q = Quantity ordered (in units) I = Carrying cost per unit carried (as a percentage of unit cost C)
Q* = Optimal order quantity (in units) K = Stockout cost per unit out of stock
R = Reorder point (in units) P = Production rate or delivery rate TC* = Minimum total annual inventory costs
R* = Optimal reorder point (in units) dl = Demand per unit time during lead time
L = Lead time Dl = Total demand during lead time
TC = Total annual inventory costs
 INVENTORY
The objective of inventory management team is to minimize the total annual inventory cost. A simplified graphical presentation in which cost of items,
procurement cost and carrying cost are depicted is shown in Figure 1 . It can be seen that large values of order quantity Q result in large carrying cost.
Similarly, when order quantity Q is large, fewer orders will be placed and procurement cost will decrease accordingly. The total cost curve indicates that
the minimum cost point lies at the intersection of carrying cost and procurement cost curves.
Inventory Operating Doctrine
When managing inventories, operations manager has to make two important
decisions:
▪ When to reorder the stock (i.e. time to reorder or reorder point)
▪ How much stock to reorder (i.e. order quantity)
Reorder point is usually a predetermined inventory level, which signals the
operations manager to start the procurement process for the next order.
Order quantity is the order size.
Inventory Modelling
This is a quantitative approach for deriving the minimum cost model for the
inventory problem in hand.
Economic Order Quantity (EOQ) Model
This model is applied when the objective is to minimize the total annual cost of
inventory in the organization. Economic order quantity is that size of the order
which helps in attaining the above set objective. EOQ model is applicable under
the following conditions.
❑ Demand per year is deterministic in nature
❑ Planning period is one year
❑ Lead time is zero or constant and deterministic in nature
❑ Replenishment of items is instantaneous
❑ Demand/consumption rate is uniform and known in advance
❑ No stockout condition exist in the organization
INVENTORY
 INVENTORY
The graphical representation of the EOQ model is shown in Figure 2 .
Example on EOQ:
ABC manufacturers produces 1,25,000 oil seals each year to satisfy the requirement of
their client. They order the metal for the bushing in lot of 30,000 units. It cost them $40
to place the order. The unit cost of bushing is $0.12 and the estimated carrying cost is
25% unit cost. Find out the economic order quantity? What percentage of increases or
decrease in order quantity is required so that the ordered quantity is Economic order
quantity ?

Economic Production Quantity (EPQ) Model

In EOQ model, supply was instantaneous, which may not
be the case in all industrial applications. If supply of items
is gradual to satisfy a continuous demand, then supply line
will be depicted by a slanted line (Figure 3 ). Figure 3 :
Economic Production Quantity Model (EPQ Model)
 INVENTORY

Economic Production Quantity (EPQ) Model In this situation, when the order is placed, the supplier begins producing the units and
supplies them continuously. While new units are added to inventory, other units are
In EOQ model, supply was instantaneous, which may not
being used. Thus, if delivery rate (P) > demand rate (D), the net result will be a net
be the case in all industrial applications. If supply of items
increase in the inventory level. The slope of replenishment line will thus be (P-D).
is gradual to satisfy a continuous demand, then supply line
Similarly the slope of demand line will be (-D). The average inventory carried per year is
will be depicted by a slanted line (Figure 3 ). Figure 3 :
Economic Production Quantity Model (EPQ Model)
 INVENTORY

Example about Economic Production Quantity (EPQ) Model

The XYZ Company produces wheat flour as one of their product. The wheat flour is produced in the pack of 1kg. The demand for wheat flour is 40,000
packs/year & the production rate is 50,000 packs/year. Wheat flour 1kg pack cost $0.50 each to make. The Procurement cost is $5. The carrying cost is
high because the product gets spoiled in few week times span. It is nearly 50 percent of cost of one pack. Find out the operating doctrine.

Material Requirements Planning

❑ It was discussed in demand forecasting that in the dependent demand situation, if
the demand for an item is known, the demand for other related items can be
deduced. For example, if the demand of an automobile is known, the demand of its
sub assemblies and sub components can easily be deduced. For dependent
demand situations, normal reactive inventory control systems (i.e. EOQ etc.) are
not suitable because they result in high inventory costs and unreliable delivery
schedules.
❑ More recently, managers have realized that inventory planning systems (such as
materials requirements planning) are better suited for dependent demand items.
MRP is a simple system of calculating arithmetically the requirements of the input
MRP Objectives materials at different points of time based on actual production plan.
MRP has several objectives, such as: ❑ MRP can also be defined as a planning and scheduling system to meet time-
▪ Reduction in Inventory Cost: By providing the right quantity phased materials requirements for production operations. MRP always tries to
of material at right time to meet master production meet the delivery schedule of end products as specified in the master production
schedule, MRP tries to avoid the cost of excessive schedule.
inventory.
▪ Meeting Delivery Schedule: By minimizing the delays in materials procurement, production decision making, MRP helps avoid
delays in production thereby meeting delivery schedules more consistently.
▪ Improved Performance: By stream lining the production operations and minimizing the unplanned interruptions, MRP focuses
on having all components available at right place in right quantity at right time.
 INVENTORY
MRP System A simple sketch of an MRP system is shown in figure 1. It can be seen from the figure that an MRP system has three major input
components: Master Production Schedule (MPS):
MPS is designed to meet the market demand (both the firm
orders and forecasted demand) in future in the taken
planning horizon. MPS mainly depicts the detailed delivery
schedule of the end products. However, orders for
replacement components can also be included in it to make
it more comprehensive.

Bill of Materials (BOM) File:

BOM represents the product structure. It encompasses
information about all sub components needed, their
quantity, and their sequence of buildup in the end product.
Information about the work centers performing buildup
operations is also included in it.

Inventory Status File:

Inventory status file keeps an up-to-date record of each
item in the inventory. Information such as, item
identification number, quantity on hand, safety stock level,
quantity already allocated and the procurement lead time of
After getting input from these sources, MRP logic processes the available information each item is recorded in this file.
and gives information about the following:
Planned Orders Receipts: This is the order quantity of an item that is planned to be ordered so that it is received at the beginning of the period under
consideration to meet the net requirements of that period. This order has not yet been placed and will be placed in future.
Planned Order Release: This is the order quantity of an item that is planned to be ordered in the planned time period for this order that will ensure that
the item is received when needed. Planned order release is determined by offsetting the planned order receipt by procurement lead time of that item.
Order Rescheduling: This highlight the need of any expediting, de-expediting, and cancellation of open orders etc. in case of unexpected situations.
 PROJECT MANAGEMENT
Critical Path Method (CPM)
Project Management
A project is a well defined task which has a definable beginning and a definable end and requires one or more resources for the completion of its
constituent activities, which are interrelated and which must be accomplished to achieve the objectives of the project.
• Project management is evolved to coordinate and control all project activities in an efficient and cost effective manner. The salient features of a
project are:
❖ A project has identifiable beginning and end points.
❖ Each project can be broken down into a number of identifiable activities which will consume time and other resources during their completion.
❖ A project is scheduled to be completed by a target date.
❖ A project is usually large and complex and has many interrelated activities.
❖ The execution of the project activities is always subjected to some uncertainties and risks.

Network Techniques
The network techniques of project management have developed in an evolutionary way in many years. Up to the end of 18th century, the decision
making in general and project management in particular was intuitive and depended primarily on managerial capabilities, experience, judgment
and academic background of the managers.
It was only in the early of 1900's that the pioneers of scientific management, started developing the scientific management techniques. The
forerunner to network techniques, the Gantt chart was developed, during world war I, by Henry L Gantt, for the purpose of production scheduling.
An example of Gantt chart is shown in Figure 1.
 4. PROJECT MANAGEMENT
Critical Path Method (CPM)
The Gantt Chart

which was used as an important tool in both the project and production scheduling. The bar charts, then developed into milestone charts ( Figure 3 ),
and next into network techniques (such as CPM and PERT).
 PROJECT MANAGEMENT
Network Construction
Critical Path Method (CPM) A network is the graphical representation of the project
The Mile Stone Chart activities arranged in a logical sequence and depicting all
the interrelationships among them. A network consists of
activities and events.

Activity
An activity is a physically identifiable part of a project,
which consumes both time and resources. Activity is
represented by an arrow in a network diagram ( Figure 4
). Figure 4: Activity

The head of an arrow represents the start of activity and

the tail of arrow represents its end. Activity description
and its estimated completion time are written along the
arrow. An activity in the network can be represented by a
number of ways: (i) by numbers of its head and tail
events (i.e. 10-20 etc.), and (ii) by a letter code (i.e. A, B
etc.). All those activities, which must be completed before
the start of activity under consideration, are called its
predecessor activities. All those activities, which have to
follow the activity under consideration, are called its
successor activities
 PROJECT MANAGEMENT
Critical Path Method (CPM) An activity, which is used to maintain the pre-defined precedence
relationship only during the construction of the project network, is called a
The activity precedence dummy activity. Dummy activity is represented by a dotted arrow and does
not consume any time and resource

An unbroken chain of activities between any two events is called a path.

Event
An event represents the accomplishment of some task. In a network diagram,
beginning and ending of an activity are represented as events. Each event is
represented as a node in a network diagram. An event does not consume any time
or resource. Each network diagram starts with an initial event and ends at a terminal
event. Each node is represented by a circle ( Figure 7)

and numbered by using the Fulkerson's Rule. Following steps are involved in the
numbering of the nodes:
❑ The initial event, which has all outgoing arrows and no incoming arrow, is
numbered as 1.
❑ Delete all the arrows coming out from the node just numbered (i.e. 1). This step
will create some more nodes (at least one) into initial events. Number these
events in ascending order (i.e. 2, 3 etc.).
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The Event
❑ Continue the process until the final or terminal node which has all arrows coming in, with no arrow going out, is numbered.
An illustration of Fulkerson's Rule of numbering the events is shown in Figure 8
As a recommendation, it must be noted that most of the
projects are liable for modifications, and hence there should be
a scope of adding more events and numbering them without
causing any inconsistency in the network. This is achieved by
skipping the numbers (i.e. 10, 20, 30…).
Rules for drawing network diagram Rule
1: Each activity is represented by one and only one
arrow in the network. Rule
2: No two activities can be identified by the same end
events (Figure 9)

Figure 9: Network Preparation

 PROJECT MANAGEMENT
Critical Path Method (CPM)
The Event
Rule 3: Precedence relationships among all activities must always be maintained.
Rule 4: Dummy activities can be used to maintain precedence relationships only when actually required. Their use should be minimized in the network
diagram ( Figure 10 ).
CPM and PERT
The CPM (critical path method) system of networking is used, when the
activity time estimates are deterministic in nature. For each activity, a single
value of time, required for its execution, is estimated. Time estimates can
easily be converted into cost data in this technique. CPM is an activity
oriented technique.

The PERT (Project Evaluation and Review Technique) technique is used,

when activity time estimates are stochastic in nature. For each activity, three
values of time (optimistic, most likely, pessimistic) are estimated. Optimistic
time (to) estimate is the shortest possible time required for the completion of
Rule 5: Looping among the activities must be avoided( Figure11 ).
activity. Most likely time (tm) estimate is the time required for the completion
of activity under normal circumstances. Pessimistic time (tp) estimate is the
longest possible time required for the completion of activity. In PERT β-
distribution is used to represent these three time estimates (Figure 12).
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
As PERT activities are full of uncertainties, times estimates can not easily be converted in to cost data. PERT is an event oriented technique. In PERT
expected time of an activity is determined by using the below given formula:

The variance of an activity can be calculated as:

Calculation of Time Estimates in CPM

In the project network given in figure on the right, activities and their
durations are specified at the activities. Find the critical path and the project
duration.
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
Calculations in Network Analysis
The following calculations are required in network analysis in order
to prepare a schedule of the project.
a. Total completion time of the project
b. Earliest time when each activity can start (i.e. earlist start time)
c. Earliest time when each activity can finish (i.e. earlist finished
time)
d. Latest time when each activity can be started without delaying
the project (i.e. latest start time)
e. Latest time when each activity can be finished without delaying
the project (i.e. latest finish time)
f. Float on each activity (i.e. time by which the completion of an
activity can be delayed without delaying the project)
g. Critical activity and critical path

The symbols used in the calculations are shown in table below.

 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
The calculations for the above taken example network are summarized below in the table
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
The calculations for the above taken example network are summarized below in the table
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
 PROJECT MANAGEMENT
Critical Path Method (CPM)
The CPM and PERT
PROJECT MANAGEMENT