INDUSTRIAL MANAGEMENT

UNIT-1

INTRODUCTION TO MANAGEMENT
Management is a universal phenomenon. It is a very popular and widely used term. All
organizations - business, political, cultural or social are involved in management because it is
the management which helps and directs the various efforts towards a definite purpose.

Definition: “Management is knowing exactly what you want men to do and then seeing
that they do it the best and cheapest ways”.
F.W.Taylor
“Management is an art of getting things done through and with the people in formally
organized groups. It is an art of creating an environment in which people can perform and
individuals and can co-operate towards attainment of group goals”.
Koontz and O‟Donell

Nature of Management: The study and application of management techniques in

managing the affairs of the organization have changed its nature over the period of time.

Multidisciplinary: Management is basically multidisciplinary. This implies that, although

management has been developed as a separate discipline, it draws knowledge and concepts
from various disciplines. It draws freely ideas and concepts from such disciplines as
psychology, sociology, anthropology, economics, ecology, statistics, operations research,
etc. Management integrates the ideas and concepts taken from these disciplines and present
newer concepts which can be put into practice for managing the organization.
Dynamic nature of principle: Based on integration and supported by practical
evidences, management h a s f o r m e d c e r t a i n principles. However, these principles
are flexible in nature and change with the changes in the environment in which an
organization exists.
Relative, not absolute principles: Management principles are relative, not absolute, and
they should be applied according to the need of the organization. Each organization may
be different from others. The difference may exist because of time, place, socio-cultural
factors, etc.
Management - Science or Art: There is a controversy whether management is science or
art. However, management is both a science and art.
Management as profession: Management has been regarded as profession by many while
many have suggested that it has not achieved the status of a profession.

Characteristics of Management:
Management is an activity concerned with guiding human and physical resources such
that organizational goals can be achieved. Nature of management can be highlighted as: -

1. Management is Goal-Oriented: The success of any management activity is assessed by its

achievement of the predetermined goals or objective. Management is a purposeful activity.
It is a tool which helps use of human & physical resources to fulfill the pre- determined
goals. For example, the goal of an enterprise is maximum consumer satisfaction by
producing quality goods and at reasonable prices. This can be achieved by employing
efficient persons and making better use of scarce resources.
 2. Management integrates Human, Physical and Financial Resources: In an organization,
human beings work with non-human resources like machines. Materials, financial assets,
buildings etc. Management integrates human efforts to those resources. It brings harmony
among the human, physical and financial resources.
3. Management is Continuous: Management is an ongoing process. It involves continuous
handling of problems and issues. It is concerned with identifying the problem and taking
appropriate steps to solve it. E.g. the target of a company is maximum production. For
achieving this target various policies have to be framed but this is not the end. Marketing
and Advertising is also to be done. For this policies have to be again framed. Hence this is
an ongoing process.
4. Management is all Pervasive: Management is required in all types of organizations
whether it is political, social, cultural or business because it helps and directs various efforts
towards a definite purpose. Thus clubs, hospitals, political parties, colleges, hospitals,
business firms all require management. When ever more than one person is engaged in
working for a common goal, management is necessary. Whether it is a small business firm
which may be engaged in trading or a large firm like Tata Iron & Steel, management is
required everywhere irrespective of size or type of activity.
5. Management is a Group Activity: Management is very much less concerned with
individual‟s efforts. It is more concerned with groups. It involves the use of group effort to
achieve predetermined goal of management of ABC & Co. is good refers to a group of
persons managing the enterprise.

FUNCTIONS OF MANAGEMENT

According to Henry Fayol, “To manage is to forecast and plan, to organize, to command, & to
control”. Whereas Luther Gullick has given a keyword ‟POSDCORB‟ where P stands for
Planning, O for Organizing, S for Staffing, D for Directing, Co for Co-ordination, R for
reporting & B for Budgeting. But the most widely accepted are functions of management
given by KOONTZ and O‟DONNEL i.e. Planning, Organizing, Staffing, Directing and
Controlling.

.
1. Planning

It is the basic function of management. It deals with chalking out a future course of action
& deciding in advance the most appropriate course of actions for achievement of pre-
determined goals. According to KOONTZ, “Planning is deciding in advance - what to do,
when to do & how to do. It bridges the gap from where we are & where we want to be”. A
plan is a future course of actions. It is an exercise in problem solving & decision making.
Planning is determination of courses of action to achieve desired goals. Thus, planning is a
systematic thinking about ways & means for accomplishment of pre-determined goals.
Planning is necessary to ensure proper utilization of human & non-human resources. It is
all pervasive, it is an intellectual activity and it also helps in avoiding confusion,
uncertainties, risks, wastages etc.

2. Organizing

It is the process of bringing together physical, financial and human resources and developing
productive relationship amongst them for achievement of organizational goals. According
to Henry Fayol, “To organize a business is to provide it with everything useful or its
functioning i.e. raw material, tools, capital and personnel‟s”. To organize a business
involves determining & providing human and non-human resources to the organizational
structure. Organizing as a process involves:

Identification of activities.
Classification of grouping of activities.
Assignment of duties.
Delegation of authority and creation of responsibility.
Coordinating authority and responsibility relationships.
3. Staffing

It is the function of manning the organization structure and keeping it manned. Staffing has
assumed greater importance in the recent years due to advancement of technology, increase
in size of business, complexity of human behavior etc. The main purpose o staffing is to put
right man on right job i.e. square pegs in square holes and round pegs in round holes.
According to Kootz & O‟Donell, “Managerial function of staffing involves manning the
organization structure through proper and effective selection, appraisal & development of
personnel to fill the roles designed un the structure”. Staffing involves:

Manpower Planning (estimating man power in terms of searching,

choose the person and giving the right place).
Recruitment, Selection & Placement.
Training & Development.
Remuneration.
Performance Appraisal.
Promotions & Transfer.
4. Directing

It is that part of managerial function which actuates the organizational methods to work
efficiently for achievement of organizational purposes. It is considered life-spark of the
enterprise which sets it in motion the action of people because planning, organizing and
staffing are the mere preparations for doing the work. Direction is that inert-personnel aspect
of management which deals directly with influencing, guiding, supervising, motivating sub-
ordinate for the achievement of organizational goals. Direction has following elements:

Supervision
Motivation
Leadership
Communication

Supervision- implies overseeing the work of subordinates by their superiors. It is the act of
watching & directing work & workers.

Motivation- means inspiring, stimulating or encouraging the sub-ordinates with zeal to work.
Positive, negative, monetary, non-monetary incentives may be used for this purpose.

Leadership- may be defined as a process by which manager guides and influences the
work of subordinates in desired direction.

Communications- is the process of passing information, experience, opinion etc from one
person to another. It is a bridge of understanding.

5. Controlling

It implies measurement of accomplishment against the standards and correction of

deviation if any to ensure achievement of organizational goals. The purpose of controlling
is to ensure that everything occurs in conformities with the standards. An efficient system
of control helps to predict deviations before they actually occur. According to Theo
Haimann, “Controlling is the process of checking whether or not proper progress is being
made towards the objectives and goals and acting if necessary, to correct any deviation”.
According to Koontz & O‟Donell “Controlling is the measurement & correction of
performance activities of subordinates in order to make sure that the enterprise objectives
and plans desired to obtain them as being accomplished”. Therefore controlling has
following steps:

a) Establishment of standard performance.

b) Measurement of actual performance.
c) Comparison of actual performance with the standards and finding out deviation if
any.
d) Corrective action.
 Levels of Management

The term “Levels of Management‟ refers to a line of demarcation between various

managerial positions in an organization. The number of levels in management increases
when the size of the business and work force increases and vice versa. The level of
management determines a chain of command, the amount of authority & status enjoyed
by any managerial position. The levels of management can be classified in three broad
categories:

1. Top level / Administrative level

2. Middle level / Executory
3. Low level / Supervisory / Operative / First-line managers

Managers at all these levels perform different functions. The role of managers at all the
three levels is discussed below:

LEVELS OF MANAGEMENT

1. Top Level of Management

It consists of board of directors, chief executive or managing director. The top

management is the ultimate source of authority and it manages goals and policies for an
enterprise. It devotes more time on planning and coordinating functions.

The role of the top management can be summarized as follows -

a. Top management lays down the objectives and broad policies of the
enterprise.
b. It issues necessary instructions for preparation of department
budgets, procedures, schedules etc.
c. It prepares strategic plans & policies for the enterprise.
d. It appoints the executive for middle level i.e. departmental managers.
e. It controls & coordinates the activities of all the departments.
f. It is also responsible for maintaining a contact with the outside world.
g. It provides guidance and direction.
h. The top management is also responsible towards the shareholders
for the performance of the enterprise.
2. Middle Level of Management

The branch managers and departmental managers constitute middle level. They are
responsible to the top management for the functioning of their department. They devote
more time to organizational and directional functions. In small organization, there is
only one layer of middle level of management but in big enterprises, there may be senior
and junior middle level management. Their role can be emphasized as -

a. They execute the plans of the organization in accordance with the

policies and directives of the top management.
b. They make plans for the sub-units of the organization.
c. They participate in employment & training of lower level management.
d. They interpret and explain policies from top level management to
lower level.
e. They are responsible for coordinating the activities within the division
or department.
f. It also sends important reports and other important data to top level
management.
g. They evaluate performance of junior managers.
h. They are also responsible for inspiring lower level managers towards
better performance.
3. Lower Level of Management

Lower level is also known as supervisory / operative level of management. It consists

of supervisors, foreman, section officers, superintendent etc. According to R.C. Davis,
“Supervisory management refers to those executives whose work has to be largely with
personal oversight and direction of operative employees”. In other words, they are
concerned with direction and controlling function of management. Their activities
include -

a) Assigning of jobs and tasks to various workers.

b) They guide and instruct workers for day to day activities.
c) They are responsible for the quality as well as quantity of production.
d) They are also entrusted with the responsibility of maintaining good
relation in the organization.
e) They communicate workers problems, suggestions, and
recommendatory appeals etc to the higher level and higher level
goals and objectives to the workers.
f) They help to solve the grievances of the workers.
g) They supervise & guide the sub-ordinates.
h) They are responsible for providing training to the workers.
i) They arrange necessary materials, machines, tools etc for getting the
things done.
j) They prepare periodical reports about the performance of the workers.
k) They ensure discipline in the enterprise.
l) They motivate workers.
m) They are the image builders of the enterprise because they are in
direct contact with the workers.
Taylor’s Scientific Management: The utility of scientific methods to problems of
management was first introduced by F.W.Taylor

Definition: Scientific management may be defined as the “Art of knowing exactly what
is to be done and the best way of doing it”.
Scientific management is the result of applying scientific knowledge and
scientific methods to the various aspects of management and the problems that arise
from them.

Principles of Scientific Management: Taylor through his principles of scientific

management initiated a system in which there would be an effective and fruitful
coordination and cooperation between the management and the workers.

Replace Thumb rules by

guide lines

Taylor‟s Scientific System improvement

Management

Collection data
decision making
Principles of Scientific Management

1. Development of Science for each part of men’s job (replacement of rule of thumb)
a. This principle suggests that work assigned to any employee should be observed,
analyzed with respect to each and every element and part and time involved in it.
b. This means replacement of odd rule of thumb by the use of method of enquiry,
investigation, data collection, analysis and framing of rules.
c. Under scientific management, decisions are made on the basis of facts and by the
application of scientific decisions.
2. Scientific Selection, Training & Development of Workers
a. There should be scientifically designed procedure for the selection of workers.
b. Physical, mental & other requirement should be specified for each and every job.
c. Workers should be selected & trained to make them fit for the job.
d. The management has to provide opportunities for development of workers having
better capabilities.
e. According to Taylor efforts should be made to develop each employee to his greatest
level and efficiency & prosperity.
3. Co-operation between Management & workers or Harmony not discord
a. Taylor believed in co-operation and not individualism.
b. It is only through co-operation that the goals of the enterprise can be achieved
efficiently.
c. There should be no conflict between managers & workers.
d. Taylor believed that interest of employer & employees should be fully harmonized so
as to secure mutually understanding relations between them.
4. Division of Responsibility
a. This principle determines the concrete nature of roles to be played by different level of
managers & workers.
b. The management should assume the responsibility of planning the work whereas
workers should be concerned with execution of task.
c. Thus planning is to be separated from execution.
5. Mental Revolution
a. The workers and managers should have a complete change of outlook towards their
mutual relation and work effort.
b. It requires that management should create suitable working condition and solve all
problems scientifically.
c. Similarly workers should attend their jobs with utmost attention, devotion and
carefulness. They should not waste the resources of enterprise.
d. Handsome remuneration should be provided to workers to boost up their moral.
e. It will create a sense of belongingness among worker.
f. They will be disciplined, loyal and sincere in fulfilling the task assigned to them.
g. There will be more production and economical growth at a faster rate.
6. Maximum Prosperity for Employer & Employees
a. The aim of scientific management is to see maximum prosperity for employer and
employees.
b. It is important only when there is opportunity for each worker to attain his highest
efficiency.
 c. Maximum output & optimum utilization of resources will bring higher profits for the
employer & better wages for the workers.
d. There should be maximum output in place of restricted output.
e. Both managers & workers should be paid handsomely.

Principle of Management by Exception: Taylor suggested that only major or significant

deviations between the actual performance and standard performance should be brought to the
notice of top management. Top management should pay more attention to those areas of work
where standards and procedures could not be established and where there is a significant
variation between standard performance and actual performance.

Administrative Management Theory (Henry Fayol and Others):

Henry Fayol is called as father of Modern Management
He established the pattern of management and the pyramidal form of organization. He
pointed out that technical ability is more dominating on the lower level of management
managerial ability is more important on the higher level of management.

There are 14 Principles of Management described by Henry Fayol.

1. Division of work
a. Henri Fayol has stressed on the specialization of jobs.
b. He recommended that work of all kinds must be divided & subdivided and allotted to
various persons according to their expertise in a particular area.
c. Subdivision of work makes it simpler and results in efficiency.
d. It also helps the individual in acquiring speed, accuracy in his performance.
e. Specialization leads to efficiency & economy in spheres of business.
2. Authority & Responsibility
a. Authority & responsibility are co-existing.
b. If authority is given to a person, he should also be made responsible.
c. In a same way, if anyone is made responsible for any job, he should also have concerned
authority.
d. Authority refers to the right of superiors to get exactness from their sub-ordinates whereas
responsibility means obligation for the performance of the job assigned.
e. There should be a balance between the two i.e. they must go hand in hand.
f. Authority without responsibility leads to irresponsible behavior whereas responsibility
without authority makes the person ineffective.
3. Discipline
a. According to Fayol, “Discipline means sincerity, obedience, respect of authority &
observance of rules and regulations of the enterprise”.
b. This principle applies that subordinate should respect their superiors and obey their order.
c. It is an important requisite for smooth running of the enterprise.
d. Discipline is not only required on path of subordinates but also on the part of
management.
e. Discipline can be enforced if -

- There are good superiors at all levels.

- There are clear & fair agreements with workers.
- Sanctions (punishments) are judiciously applied
 4. Unity of Command
a. A sub-ordinate should receive orders and be accountable to one and only one boss at a
time.
b. In other words, a sub-ordinate should not receive instructions from more than one person
because -

- It undermines authority
- Weakens discipline
- Divides loyalty
- Creates confusion
- Delays and chaos
- Escaping responsibilities
- Duplication of work
- Overlapping of efforts

c. Therefore, dual sub-ordination should be avoided unless and until it is absolutely essential.

d. Unity of command provides the enterprise a disciplined, stable & orderly existence.
e. It creates harmonious relationship between superiors and sub-ordinates.
5. Unity of Direction

a) Fayol advocates one head one plan which means that there should be one plan for a group of
activities having similar objectives.
b) Related activities should be grouped together. There should be one plan of action for them and
they should be under the charge of a particular manager.
c) According to this principle, efforts of all the members of the organization should be directed
towards common goal.
d) Without unity of direction, unity of action cannot be achieved.
e) In fact, unity of command is not possible without unity of direction.

Basis Unity of command Unity of direction

It implies that a sub-ordinate should

Meaning receive orders It means one head, one plan for a
& instructions from only one boss. group of activities having similar
objectives.
It is related to the functioning of
Nature personnel’s. It is related to the functioning of
departments or organization as a
whole.
It is necessary for fixing responsibility of
Necessity each It is necessary for sound
subordinates. organization.

Advantag
e It avoids conflicts, confusion & chaos.
It avoids duplication of efforts and
wastage of resources.

Result It leads to better superior sub-ordinate It leads to smooth running of the

relationship. enterprise.
Therefore it is obvious that they are different from each other but they are dependent on each other
i.e. unity of direction is a pre-requisite for unity of command. But it does not automatically comes
from the unity of direction.

6. Sub-Ordination of Individual Interest to General Interest

a. An organization is much bigger than the individual it constitutes therefore interest of the
undertaking should prevail in all circumstances.
b. As far as possible, reconciliation should be achieved between individual and group
interests.
c. But in case of conflict, individual must sacrifice for bigger interests.
d. In order to achieve this attitude, it is essential that -

- Employees should be honest & sincere.

- Proper & regular supervision of work.
- Reconciliation of mutual differences and clashes by mutual agreement. For
example, for change of location of plant, for change of profit sharing ratio, etc.

7. Remuneration

a) The quantum and method of remuneration to be paid to the workers should be fair,
reasonable, satisfactory & rewarding of the efforts.
b) As far as possible it should accord satisfaction to both employer and the employees.
c) Wages should be determined on the basis of cost of living, work assigned, financial
position of the business, wage rate prevailing etc.
d) Logical & appropriate wage rates and methods of their payment reduce tension &
differences between workers & management creates harmonious relationship and
pleasing atmosphere of work.

Fayol also recommended provision of other benefits such as free education, medical &
resident Equity

a. Equity means combination of fairness, kindness & justice.

b. The employees should be treated with kindness & equity if devotion is
expected of them.
c. It implies that managers should be fair and impartial while dealing with the
subordinates.
d. They should give similar treatment to people of similar position.
e. They should not discriminate with respect to age, caste, sex, religion,
relation etc.
f. Equity is essential to create and maintain cordial relations between the
managers and sub-ordinate.
g. But equity does not mean total absence of harshness.
h. Fayol was of opinion that, “at times force and harshness might become
necessary for the sake of equity”.
 8. Centralization & De-Centralization
1. Centralization means concentration of authority at the top level. In other
words, centralization is a situation in which top management retains most of the decision making
authority.

2. Decentralization means disposal of decision making authority to all the levels

of the organization. In other words, sharing authority downwards is
decentralization.
3. According to Fayol, “Degree of centralization or decentralization depends
on no. of factors like size of business, experience of superiors, dependability
& ability of subordinates etc.
4. Anything which increases the role of subordinate is decentralization &
anything which decreases it is centralization.
5. Fayol suggested that absolute centralization or decentralization is not feasible.
An organization should strike to achieve a lot between the two.
9. Scalar Chain
1. Fayol defines scalar chain as ’The chain of superiors ranging from the
ultimate authority to the lowest”.
2. Every orders, instructions, messages, requests, explanation etc. has to
pass through Scalar chain.
3. But, for the sake of convenience & urgency, this path can be cut shirt
and this short cut is known as Gang Plank.
4. A Gang Plank is a temporary arrangement between two different points
to facilitate quick & easy communication as explained below:

In the figure given, if D has to communicate with G he will first send the communication upwards
with the help of C, B to A and then downwards with the help of E and F to G which will take quite
some time and by that time, it may not be worth therefore a gang plank has been developed between
the two.

10. Order
1. This principle is concerned with proper & systematic arrangement of things and people.
2. Arrangement of things is called material order and placement of people is called social order.
 3. Material order- There should be safe, appropriate and specific place for every article and every
place to be effectively used for specific activity and commodity.
4. Social order- Selection and appointment of most suitable person on the suitable job. There
should be a specific place for everyone and everyone should have a specific place so that they can easily be
contacted whenever need arises.

11. Equity

a. Equity means combination of fairness, kindness & justice.

b. The employees should be treated with kindness & equity if devotion is expected of them.
c. It implies that managers should be fair and impartial while dealing with the subordinates.
d. They should give similar treatment to people of similar position.
e. They should not discriminate with respect to age, caste, sex, religion, relation etc.
f. Equity is essential to create and maintain cordial relations between the managers and sub-
ordinate.
g. But equity does not mean total absence of harshness.
h. Fayol was of opinion that, “at times force and harshness might become necessary for the sake
of equity

12. Stability of Tenure

a) Fayol emphasized that employees should not be moved frequently from one job position to
another i.e. the period of service in a job should be fixed.
b) Therefore employees should be appointed after keeping in view principles of recruitment &
selection but once they are appointed their services should be served.
c) According to Fayol. “Time is required for an employee to get used to a new work & succeed
to doing it well but if he is removed before that he will not be able to render worthwhile
services”.
d) As a result, the time, effort and money spent on training the worker will go waste.
e) Stability of job creates team spirit and a sense of belongingness among workers which
ultimately increase the quality as well as quantity of work.

13. Initiative

a) Workers should be encouraged to take initiative in the work assigned to them.

b) It means eagerness to initiate actions without being asked to do so.
c) Fayol advised that management should provide opportunity to its employees to
suggest ideas, experiences& new method of work.
d) It helps in developing an atmosphere of trust and understanding.
e) People then enjoy working in the organization because it adds to their zeal and energy.
f) To suggest improvement in formulation & implementation of place.
g) They can be encouraged with the help of monetary & non-monetary incentives.

a) Espirit De’ Corps (can be achieved through unity of command)

b) It refers to team spirit i.e. harmony in the work groups and mutual understanding
among the members.
c) Spirit De‟ Corps inspires workers to work harder.
d) Fayol cautioned the managers against dividing the employees into competing groups
because it might damage the moral of the workers and interest of the undertaking in the
long run.
e) To inculcate Espirit De‟ Corps following steps should be undertaken –
 1. There should be proper co-ordination of work at all levels
2. Subordinates should be encouraged to develop informal relations among
themselves.
3. Efforts should be made to create enthusiasm and keenness among subordinates
so that they can work to the maximum ability.
4. Efficient employees should be rewarded and those who are not up to the mark
should be given a chance to improve their performance.
5. Subordinates should be made conscious of that whatever they are doing is of
great importance to the business & society.

f) He also cautioned against the more use of Britain communication to the subordinates
i.e. face to face communication should be developed. The managers should infuse team
spirit & belongingness. There should be no place for misunderstanding. People then
enjoy working in the organization & offer their best towards the organization.

MOTIVATION

Motivation is the word derived from the word ‟motive‟ which means needs, desires, wants or
drives within the individuals. It is the process of stimulating people to actions to accomplish the
goals. In the work goal context the psychological factors stimulating the people‟s behaviour can be
-desire for money

success
recognition
job-satisfaction
team work, etc

One of the most important functions of management is to create willingness amongst the employees to
perform in the best of their abilities. Therefore the role of a leader is to arouse interest in performance
of employees in their jobs. The process of motivation consists of three stages:-

1. A felt need or drive

2. A stimulus in which needs have to be aroused
3. When needs are satisfied, the satisfaction or accomplishment of goals.

Therefore, we can say that motivation is a psychological phenomenon which means needs and wants
of the individuals have to be tackled by framing an incentive plan.
 1. Maslow’s Hierarchy of Needs Theory

Abraham Maslow is well renowned for proposing the Hierarchy of Needs Theory in 1943. This theory
is a classical depiction of human motivation. This theory is based on the assumption that there is a hierarchy
of five needs within each individual. The urgency of these needs varies. These five needs are as follows-

According to Maslow, individuals are motivated by unsatisfied needs. As each of these needs is
significantly satisfied, it drives and forces the next need to emerge. Maslow grouped the five needs into
two categories - Higher-order needs and Lower-order needs. The physiological and the safety needs
constituted the lower-order needs. These lower-order needs are mainly satisfied

externally. The social, esteem, and self-actualization needs constituted the higher-order needs. These
higher-order needs are generally satisfied internally, i.e., within an individual.

1. Physiological needs- These are the

basic needs of air, water, food,
clothing and shelter. In other words,
physiological needs are the needs
for basic amenities of life.
2. Safety needs- Safety needs include
physical, environmental and
emotional safety and protection.
For instance- Job security, financial
security, protection from animals,
family security, health security, etc.
3. Social needs- Social needs include
tbheelonn eg eindgnfoe rssl,oavned, farfiefencdtsihoinp ,. care, FIGURE: Maslow’s Need Hierarchy Model
4. Esteem needs- Esteem needs are of
two types: internal esteem needs
(self- respect, confidence,
competence, achievement and
freedom) and external esteem needs
(recognition, power, status,
attention and admiration).
5. Self-actualization need- This
include the urge to become what
you are capable of becoming / what
you have the potential to become. It
includes the need for growth and
self-contentment. It also includes
desire for gaining more knowledge,
social- service, creativity and being
aesthetic. The self- actualization
needs are never fully satiable. As
an individual grows
 psychologically, opportunities keep
cropping up to continue growing.

Implications of Maslow’s Hierarchy of Needs Theory for Managers

As far as the physiological needs are concerned, the managers should give employees appropriat salaries to
purchase the basic necessities of life. Breaks and eating opportunities should be given t employees.
As far as the safety needs are concerned, the managers should provide the employees job security, saf and
hygienic work environment, and retirement benefits so as to retain them.
As far as social needs are concerned, the management should encourage teamwork and organize socia
events.
As far as esteem needs are concerned, the managers can appreciate and reward employees on
accomplishing and exceeding their targets. The management can give the deserved employee higher jo
rank / position in the organization.
As far as self-actualization needs are concerned, the managers can give the employees challenging job in
which the employees‟ skills and competencies are fully utilized. Moreover, growth opportunities can be given
to them so that they can reach the peak.
The managers must identify the need level at which the employee is existing and then those needs can
be utilized as push for motivation.
Limitations of Maslow’s Theory

It is essential to note that not all employees are governed by same set of needs. Different individuals
may be driven by different needs at same point of time. It is always the most powerful unsatisfied
need that motivates an individual.
The theory is not empirically supported.
The theory is not applicable in case of starving artist as even if the artist‟s basic needs are not
satisfied, he will still strive for recognition and achievement.

Theory X and Theory Y

In 1960, Douglas McGregor formulated Theory X and Theory Y suggesting two aspects of human
behaviour at work, or in other words, two different views of individuals (employees): one of which is
negative, called as Theory X and the other is positive, so called as Theory Y. According to McGregor, the
perception of managers on the nature of individuals is based on various assumptions.

Assumptions of Theory X

An average employee intrinsically does not like work and tries to escape it whenever possible.
Since the employee does not want to work, he must be persuaded, compelled, or warned with
punishment so as to achieve organizational goals. A close supervision is required on part of
managers. The managers adopt a more dictatorial style.
Many employees rank job security on top, and they have little or no aspiration/ ambition.
 Employees generally dislike responsibilities.
Employees resist change.
An average employee needs formal direction.

Assumptions of Theory Y

Employees can perceive their job as relaxing and normal. They exercise their physical and
mental efforts in an inherent manner in their jobs.
Employees may not require only threat, external control and coercion to work, but they can use
self-direction and self-control if they are dedicated and sincere to achieve the organizational
objectives.
If the job is rewarding and satisfying, then it will result in employees‟ loyalty and
commitment to organization.
An average employee can learn to admit and recognize the responsibility. In fact, he can even
learn to obtain responsibility.

The employees have skills and capabilities. Their logical capabilities should be fully utilized.
In other words, the creativity, resourcefulness and innovative potentiality of the employees can
be utilized to solve organizational problems.

Thus, we can say that Theory X presents a pessimistic view of employees‟ nature and behaviour at
work, while Theory Y presents an optimistic view of the employees‟ nature and behaviour at work. If
correlate it with Maslow‟s theory, we can say that Theory X is based on the assumption that the
employees emphasize on the physiological needs and the safety needs; while Theory X is based on the
assumption that the social needs, esteem needs and the self-actualization needs dominate the employees.

McGregor views Theory Y to be more valid and reasonable than Theory X. Thus, he encouraged
cordial team relations, responsible and stimulating jobs, and participation of all in decision-making
process.

Implications of Theory X and Theory Y

Quite a few organizations use Theory X today. Theory X encourages use of tight control and supervision
It implies that employees are reluctant to organizational changes. Thus, it does not encourage innovation
Many organizations are using Theory Y techniques. Theory Y implies that the managers should creat
and encourage a work environment which provides opportunities to employees to take initiative and
self direction. Employees should be given opportunities to contribute to organizational well-being.
Theory encourages decentralization of authority, teamwork and participative decision making in an
organization Theory Y searches and discovers the ways in which an employee can make significant
contributions i an organization. It harmonizes and matches employees‟ needs and aspirations with
organizational need and aspirations.
 System Approach to Management:

Following are the important features of systems approach to management thought:

1. System approach considers the organisation as a dynamic and inter-related set of parts. Each
part represents a department or a sub-system. Each department has its sub-system. Continuous
and effective interaction of sub-systems helps to attain goals of the larger system. Thus, every
sub-system is a system and has sub-systems which together make an organisation a set of
mutually dependent parts and their sub-parts.

2. It considers the impact of both near and distant future on organisational activities.
Organisations constantly respond to changes in the internal and external environmental
conditions. They also act as market leaders in the dynamic, competitive environment.

3. System approach integrates goals of different parts of the organisation (sub-systems or

departments) with the organisation as a whole. It also integrates goals of the organisation with goals of the
environment or society in which it operates. Integration of goals maintains equilibrium or balance and
enables organisations to grow in the dynamic environment.

4. It synthesizes knowledge of different fields of study such as biology, sociology, psychology,

information systems, economics etc. As business organisation deals with different components
of society, it makes best use of different fields of study to improve interaction with its
counterparts.

5. System approach enables organisations to frame policies that promote business objectives
and social objectives. Business operates in the social system and social values, culture, beliefs
and ethics are important constituents of business operations.

Evaluation of System Approach:

The system approach has the following merits:

1. System approach provides a holistic view of the organisations and emphasises on their
adaptive nature. It increases organisation‟s adaptability to environmental changes. The
organisation is studied as a whole and not through its parts. This enables it to adapt to the needs
of the environment. Decisions are made keeping in mind organisation-environment interface.

2. It analyses the system at different levels and inter-relates and integrates it into a unified set
of direction. Starting from individual goals, it focuses on overall organisational goals,
synthesizes the two and converges them into global economy.

3. System approach provides a framework for effective interaction of parts of the organisation
in a specific arrangement for attainment of its goals. It does not focus on one part of the
organisation.

4. It considers the impact of environment on the organisation and vice versa. Interaction of
external environment with the internal environment is the most significant contribution of
systems theory.

System approach, thus, analyses the organisation as an adaptive and dynamic entity.
5. System approach synthesizes the classical and behavioural theories into a broader
framework to solve managerial problems.

It, thus, focuses on organisations as multi-dimensional in nature.

Limitations of System Approach:

1. Critics of this theory claim this as a theoretical approach to management. The way an
organisation actually works and solves problems (by applying different techniques and
methods) has no appeal in the theory.

2. Relationship amongst parts of the organisation is emphasised upon but the exact nature of
inter-dependence is not defined.

3. Exact relationship between internal and external environment of the organisation is also not
defined.
For example, it specifies that change in economic policies necessitates change in internal
policies of the organisation but what changes are required to match the changes in economic
environment is not talked about.

4. System approach fails to provide uniform approach to management. Management practices

change with changes in environmental variables. No standard set of principles apply to all types
of organisations.

It has added nothing new to the study of management. Even before this approach was
introduced, managerial decisions were taken keeping in mind the environmental variables. No
specific decision-making techniques are offered to deal with specific problems.

5. It fails to provide concepts that apply to all types of organisations. The small organisations
are less adaptive to environmental variables than large organisations. The theory assumes that
most of the organisations are big, complex and open systems. It, thus, fails to provide a unified
theory.

Herzberg’s Two-factors Theory:

In 1959, Frederick Herzberg, a behavioural scientist proposed a two-factor theory or the

motivator-hygiene theory. According to Herzberg, there are some job factors that result in
satisfaction while there are other job factors that prevent dissatisfaction. According to
Herzberg, the opposite of “Satisfaction” is “No satisfaction” and the opposite of
“Dissatisfaction” is “No Dissatisfaction”
“Herzberg called these factors as „dissatisfiers‟ and not motivators, by this he means
their presence or existence does not motivate in the sense of yielding satisfaction, but their
absence would result in dissatisfaction. These are also referred to as „hygiene‟ factors.
In the second group are the „satisfiers‟ in the sense that they are motivators, which are
related to „Job content‟. He included the factors of achievement, recognition, challenge work,
advancement and growth in the job. He says that their presence will yield feelings of
satisfactory or no satisfaction, but not dissatisfaction.
 FIGURE: Herzberg’s view of satisfaction and dissatisfaction

Herzberg classified these job factors into two categories-

a. Hygiene factors- Hygiene factors are those job factors which are essential for existence of
motivation at workplace. These do not lead to positive satisfaction for long-term. But if
these factors are absent / if these factors are non-existant at workplace, then they lead to
dissatisfaction. In other words, hygiene factors are those factors which when
adequate/reasonable in a job, pacify the employees and do not make them dissatisfied. These
factors are extrinsic to work. Hygiene factors are also called as dissatisfiers or
maintenance factors as they are required to avoid dissatisfaction. These factors describe
the job environment/scenario. The hygiene factors symbolized the physiological needs
which the individuals wanted and expected to be fulfilled. Hygiene factors include:

Pay - The pay or salary structure should be appropriate and reasonable. It must
be equal and competitive to those in the same industry in the same domain.
Company Policies and administrative policies - The company policies should
not be too rigid. They should be fair and clear. It should include flexible
working hours, dress code, breaks, vacation, etc.
Fringe benefits - The employees should be offered health care plans
(mediclaim), benefits for the family members, employee help programmes,
etc.
Physical Working conditions - The working conditions should be safe, clean
and hygienic. The work equipments should be updated and well-maintained.
Status - The employees‟ status within the organization should be familiar
and retained.
Interpersonal relations - The relationship of the employees with his peers,
superiors and subordinates should be appropriate and acceptable. There
should be no conflict or humiliation element present.
Job Security - The organization must provide job security to the employees.

b. Motivational factors- According to Herzberg, the hygiene factors cannot be regarded as

motivators. The motivational factors yield positive satisfaction. These factors are inherent
to work. These factors motivate the employees for a superior performance. These factors
 are called satisfiers. These are factors involved in performing the job. Employees find these
factors intrinsically rewarding. The motivators symbolized the psychological needs that
were perceived as an additional benefit. Motivational factors include:
Recognition - The employees should be praised and recognized for their
accomplishments by the managers.
Sense of achievement - The employees must have a sense of achievement. This
depends on the job. There must be a fruit of some sort in the job.
Growth and promotional opportunities - There must be growth and advancement
opportunities in an organization to motivate the employees to perform well.
Responsibility - The employees must hold themselves responsible for the work. The
managers should give them ownership of the work. They should minimize control
but retain accountability.
Meaningfulness of the work - The work itself should be meaningful, interesting
and challenging for the employee to perform and to get motivated.

Limitations of Two-Factor Theory

The two factor theory is not free from limitations:

1. The two-factor theory overlooks situational variables.

2. Herzberg assumed a correlation between satisfaction and productivity. But the
research conducted by Herzberg stressed upon satisfaction and ignored productivity.
3. The theory‟s reliability is uncertain. Analysis has to be made by the raters. The raters
may spoil the findings by analyzing same response in different manner.
4. No comprehensive measure of satisfaction was used. An employee may find his job
acceptable despite the fact that he may hate/object part of his job.
5. The two factor theory is not free from bias as it is based on the natural reaction of
employees when they are enquired the sources of satisfaction and dissatisfaction at
work. They will blame dissatisfaction on the external factors such as salary structure,
company policies and peer relationship. Also, the employees will give credit to
themselves for the satisfaction factor at work.
6. The theory ignores blue-collar workers. Despite these limitations, Herzberg‟s Two-
Factor theory is acceptable broadly.

Implications of Two-Factor Theory

The Two-Factor theory implies that the managers must stress upon guaranteeing the
adequacy of the hygiene factors to avoid employee dissatisfaction. Also, the managers must
make sure that the work is stimulating and rewarding so that the employees are motivated
to work and perform harder and better. This theory emphasize upon job- enrichment so as
to motivate the employees. The job must utilize the employee‟s skills and competencies to
the maximum. Focusing on the motivational factors can improve work-quality

Leadership and Leadership Styles:

Leadership is a process by which an executive can direct, guide and influence the behavior and
work of others towards accomplishment of specific goals in a given situation. Leadership is the
ability of a manager to induce the subordinates to work with confidence and zeal.
Leadership is the potential to influence behaviour of others. It is also defined as the capacity to
influence a group towards the realization of a goal. Leaders are required to develop future
visions, and to motivate the organizational members to want to achieve the visions.
According to Keith Davis, “Leadership is the ability to persuade others to seek defined
objectives enthusiastically. It is the human factor which binds a group together and motivates
it towards goals.”
Characteristics of Leadership
It is a inter-personal process in which a manager is into influencing and guiding workers
towards attainment of goals.
It denotes a few qualities to be present in a person which includes intelligence, maturity and
personality.
It is a group process. It involves two or more people interacting with each other.
A leader is involved in shaping and moulding the behaviour of the group towards
accomplishment of organizational goals.
Leadership is situation bound. There is no best style of leadership. It all depends upon
tackling with the situations.

All leaders do not possess same attitude or same perspective. As discussed earlier, few leaders
adopt the carrot approach and a few adopt the stick approach. Thus, all of the leaders do not get
the things done in the same manner. Their style varies. The leadership style varies with the kind
of people the leader interacts and deals with. A perfect/standard leadership style is one which
assists a leader in getting the best out of the people who follow him.

Some of the important leadership styles are as follows:

1. Autocratic leadership style: In this style of leadership, a leader has complete

command and hold over their employees/team. The team cannot put forward their
views even if they are best for the team‟s or organizational interests. They cannot
criticize or question the leader‟s way of getting things done. The leader himself gets
the things done. The advantage of this style is that it leads to speedy decision-making
and greater productivity under leader‟s supervision. Drawbacks of this leadership style
are that it leads to greater employee absenteeism and turnover. This leadership style
works only when the leader is the best in performing or when the job is monotonous,
unskilled and routine in nature or where the project is short-term and risky.

2. Democrative/Participative leadership style: The leaders invite and encourage the

team members to play an important role in decision-making process, though the
ultimate decision-making power rests with the leader. The leader guides the employees
on what to perform and how to perform, while the employees communicate to the
leader their experience and the suggestions if any. The advantages of this leadership
style are that it leads to satisfied, motivated and more skilled employees. It leads to an
optimistic work environment and also encourages creativity. This leadership style has
the only drawback that it is time-consuming.

3. Bureaucratic leadership style: Here the leaders strictly adhere to the organizational
rules and policies. Also, they make sure that the employees/team also strictly follows
the rules and procedures. Promotions take place on the basis of employees‟ ability to
adhere to organizational rules. This leadership style gradually develops over time. This
leadership style is more suitable when safe work conditions and quality are required.
But this leadership style discourages creativity and does not make employees self-
contented.
 4. The Laissez Faire Leadership Style: Here, the leader totally trusts their
employees/team to perform the job themselves. He just concentrates on the intellectual/rational aspect
of his work and does not focus on the management aspect of his work. The team/employees are
welcomed to share their views and provide suggestions which are best for organizational interests. This
leadership style works only when the employees are skilled, loyal, experienced and intellectual.
.
Social Responsibility of Management:
Social responsibility refers to the process with includes several activities from
providing safe products and services to giving apportion of the company‟s profits to welfare
organizations.

Responsibility towards shareholders: The business enterprise has the responsibility to provide fair
return on capital to the shareholders. The firm must provide them regular, accurate, and full
information about the working of enterprise in order to fulfill and encourage their interest in the
affairs of the company.
Responsibility towards consumers: The management has to provide quality products and services
to the customers at reasonable prices. It should consider customer suggestions and also plan it
services more effectively through consumer satisfaction survey.
Responsibility towards employees: Good working conditions motivate workers to contribute their
best it is the responsibility of the management recognize their unions and respect their right to
associate with a union of their choices.
Responsibility towards creditors: The business has to repay the loans it has taken from the
financial institutions as per the repayment schedule also it should inform the creditors about the
developments in the company from time-to-time.
Responsibility towards Government: The business firm has to pay its taxes and be fair

in its endeavours. It should also support the government in community development projects.
Responsibility towards competitors: The business firm should always maintain the highest ethical
standards and maintain cordial relations with each of the competitors, which is a critical and
sensitive segment.
Responsibility towards public: Business units have tremendous responsibility towards the general
public to support the cause of community development. Most of the companies maintain public
relations departments exclusively to maintain good relations with the community.
 UNIT II
Designing an Organisation structure

Organization is form of organizing which is a part of management process Organization defied as

collectivity of people for achieving common objectives

“Organization means the determination and assignment of duties to people, and also
the establishment and the maintenance of authority relationships among these grouped
activities it is the structural frame work with in which the various efforts are coordinated
and related to each other”.
Definitions: “Organization are collectivities of people that have been established for the
pursuit of relatively specific objectives on a more or less continuous basis”.
William Scott
“Organization is the form of every human association for the attainment of
a common purpose”.
Mooney and Reilly
“Organization involves the grouping of activities necessary to accomplish
goals and plans assignment and these activities to appropriate departments and positions
to appropriate departments and positions for authority delegation and coordination”.
Koontz and O‟Donnell
Organization is used in the following ways with or without prefix or suffix
1. as entity
2. as group of people
3. as structure
4. as process
Process of Organization:
Determination of objectives, strategies, plans and policies: Objectives should be clear and
precise, because the entire organization is to be built around the objectives of the
enterprises.
Determination of activities: Determine activities needed to execute these plans and policies
and accomplish the objectives. The work load is broken into component activities that are
to be performed by all the employees. The activities are so split to determine the job which
can be performed by an individual.
Separation and grouping of activities: To attain the benefits of specialization and division
of labour, every company, will separate its activities on the basis of primary functions like
finance, engineering, purchasing, production, sales and industrial relations. All the similar
or directly related activities are grouped together in the form of departments.
Delegation of authority: Authority is necessary for the performance of the job and therefore
authority is delegated to the subordinates for enabling them to carry out their work
smoothly and efficiently.
Delegation of responsibility: Responsibility may be described as the obligation and
accountability for the performance of delegated duties. A superior is always accountable
for the acts of his subordinate. Therefore, responsibility always flows from subordinates to
superiors.
Establish inter-relationships: The grouped activities are placed in the overall organization
structure at appropriate level. It is necessary to integrate or the these groups of activities
through.
a) Authority relationship horizontally, vertically and diagonally
b) Organized information or communication system i.e., with the help of
effective coordination and communication.
Providing physical facilities and proper environment: Physical facilities means provide
machinery, tools equipments, infrastructure etc, environment means provide proper
lighting, ventilation, heating, cooling arrangement at the work place, reasonable hors of
work, safety devices, job security etc

Principles of Organization:
Principle of unity of objectives: An organization structure is effective if is enables
individuals to contribute to entire objectives.
Principle of co-ordination: The aim of the objective can be achieved it proper co- ordination
exists for efferent activities
Principles of organizational efficiency: An organization is efficient it is structured to aid
the accomplishment of enterprise objective with a minimum of unsought consequences or
costs.
Span of management principle: In each managerial position, there is a limit to the number
of persons an individual can effectively manage but the exact number will depend on the
impact of underlying variables.
Scalar principle: The clearer the line of authority from the ultimate management position
in an enterprise to every subordinate position, the clearer will be the responsibility for
decision making the more effective will be organization communication.
Principle of delegation by results expected: Authority delegated to all individual managers
should be adequate enough to ensure their ability to accomplish the results expected.
Principle of responsibility: The responsibility of subordinates to their superiors for
performance is absolute, and superiors can not escape responsibility for the organization
activity of their subordinates.
Principle of parity of authority and responsibility: The responsibility for actions can not be
greater than that implied by the authority delegated, not should it be less.
Principle of unity command: The more complete an individual‟s reporting relationships to
a single superior, the smaller the problem of conflicting instructions and the greater the
feeling of personal responsibility for results.
Authority level principle: Maintenance of intended delegation requires that decisions with
in the authority of individual managers should be made by them and not be referred upward
in the organization structure.

Principle of balance: The application of principles or technique must be balanced to

ensure the over all effectiveness of the structure in meeting enterprise objectives.
Principle of flexibility: the more that provisions are made for building flexibility in to an
organization structure can fulfill its purpose.
Principle of leadership facilitation: The more an organization structure and its delegations
of authority enable managers to design and maintain an environment for performance, the
more they will help the leadership abilities of those managers.
 Design of Organization structure: The main objective of an organization structure is to
ensure that efforts of all the people working in various sections are co-ordinate and
integrated for achieving the task in the most efficient effective way with minimum
consumption of resources i.e. economical ways
1) Formal organization structure 2) Informal organization structure
Formal organization structure: According to classical theorists the formal organization
is built an four pillars
1) Division of labour
2) Scalar functional processes
3) Structure
4) Span of control
Definition: An organization is formal when the activities of two or more persons are
consciously coordinated towards common objectives.
Informal organization: Informal organization arises spontaneously based on friendship or
some common interest and not based on rules, regulation and procedures. It is developed
by the employees themselves and not by the formal authority.
Definition: Informal organization brings cohesiveness to a formal organization, it brings to
the members of formal organization a feeling of belonging of status, of self-respect and of
gregarious satisfaction.

Comparison between formal and informal organization:

Basis of comparison Formal Informal

Formation Planned & deliberated Spontaneous
Purpose Well-set goals Social interaction
Structure Well structured Un structured
Focus Positions Persons
Nature Official Unofficial
Leadership Superior Any one
Source of power Delegated Given by group
Guidelines for behaviour Rules procedures Group norms
Source of control Rewards/Punishment Sanctions

Type of organization: On the basis of authority relationships organization classified

as follows
1. Line organization or Military organization or Scalar organization
2. Functional organization
3. Line and Staff organization
4. Project organization
 5. Committee organization
6. Matrix organization

1. Line organization:

Manager

Vertical directions
and instructions
Engineer

Foreman

Supervisor

Where efforts of large number of people have to be controlled and discipline is of

prime importance line type organization structure will serve the purpose. This is also one
of the oldest structures. However, in present conditions this type of structure has lost the
applicability. In line structure ten lines of instruction, directing is vertical. This means in
this type boss is always right and his orders are to be obeyed at any cost.

Merits:
Simplicity: Line organization is very simple to establish and can be easily understand by
the employees
Discipline: Since each position is subject to control by its immediate superior position,
often the maintenance of discipline is easy unity of command and unity of direction foster
discipline among the people in the organization.
Co-ordination: The hierarchy in management helps in achieving effective coordination
Effective communication: There will be a direct link between superior and his
subordinate; both can communicate properly among himself or herself.

Economical: Line organization is easy to operate and less expensive

Unity of command: In line organization every person is under the command of one boss
only.
Prompt decision: Only one person is in charge of one division or department. This enables
manager to take quick decisions.
Over all development of the managers: The departmental head has to look after all the
activities of his department; therefore, it encourages the development of all round managers
at the higher level of authority.
 Demerits:
Undue reliance: The success of the enterprise depends upon the caliber and ability of few
departmental heads, loss of one or two capable men may put the organization in difficulties.
Personnel limitations: In this type of organization an individual executive is suppose to
discharge different types of duties. He cannot do justice to all different activities because
he cannot be specialized in all the trades.
Overload of work: Departmental heads are overloaded with various routine jobs hence they
can not spare time for important managerial functions like planning, development
budgeting etc.
Dictatorial way: In line organization, too much authorities centre on line executive.
Hence it encourages dictatorial way of working.
Duplication of work: Conflicting policies of different departments result in duplication of
work.
Unsuitable for large concerns: It is limited to small concerns
General interest of enterprise may be over looked: Departments may work for their self-
interest and may sacrifice the general interest of the enterprise.
Scope of favourism: As the departmental heads has the supreme authority, there is chance
of favourism.

2. Functional organization: This structure most widely used, in the medium and large
organizations having limited number of products.
This was introduced by F.W.Taylor and is logical extension of the division of labour
cover departments as well as men. In this authority is delegated to an individual or
department to control specified processes, policies or other matter relating to activities
under taken by persons in other departments.

Marketin
In this system planning is separated from performance since the direction of work is divided
by various function in the factory. It has been found that this type of structure becomes
ineffective when the work of departments and individuals increases in variety and
complexity.
Merits:
Separation of work: In functional organization, work has been separated from routine work.
The specialist has been given the authority and responsibility for supervision and
administration pertaining to their field of specialization unnecessary over loading of
responsibilities is thus avoided.
Specialization: Specialization and skilled supervisory attention is given to workers the
result is increase in rate of production and improved quality of work. Narrow range with
high depth: The narrow range of activities enable the functional expert to developing in
depth understanding in his particular area of activity
Ease in selection and training: Functional organization is based upon expert knowledge.
The availability of guidance through experts makes it possible to train the workers properly
in comparatively short span of time.
Reduction in prime cost: Since for every operation expert guidance is there, wastage of
material is reduced and thus helps to reduce prime cost.
Scope of growth and development of business: This type of organization presents ample
scope for the growth and development of business.
Demerits:
Indispline: Since the workers receive instructions from number of specialist it leads to
confusion to whom they should follow. Therefore, it is difficult to maintain discipline
Shifting of responsibility: It is difficult for the top management to locate responsibility for
the unsatisfactory work every body tries to shift responsibility on others for the faults and
failure.
Kills the initiative of workers: As the specialized guidance is available to the workers the
workers will not be using their talents and skills therefore their initiative cannot be utilized.
Overlapping of authority: The sphere of authority tends to overlap and gives rise to friction
between the persons of equal rank.
Lack of co-ordination between functions: except the function in which he is specialized
 he is absolutely indifferent to other functions. Therefore, there is a lack of coordination of
function and efforts.

3. Line and Staff Organization: Line and Staff organization is the in which the
line heads are assisted by specialist staff.
If the firm is of large size, manager cannot give careful attention to every aspect of
management. They are busy with ordinary task of production and selling. Hence staff is
deputed to do the work of investigation, research, recording, and advising to managers.
Thus the staff brings advising to managers. Thus the staff brings specialization by assisting
the line officers.
“Line” means - Operating
“Staff” means - Service

Production Manager Marketing Manager

Production Engineer Sales Officer

Foreman Sales Supervisor

Workers Sales Man

Merits:
Planned specialization: The line and staff structure is based upon the principle of
specialization. The line managers are responsible for operations contributing directly to the
achievement of organizational objectives where as staff people are there to provide expert
advice on the matters of their concerns.
Quality decisions: Decisions come after careful consideration and thought each expert
gives his advise in the area of his specialization which is reflected in the decisions.
Prospect for personal growth: Prospect for efficient personal to grow in the organization
not only that, it also offers opportunity for concentrating in a particular area, there by
increasing personal efficiency
Less wastage: There will be less wastage of material.
Training ground for personnel: It provides training ground to the personnel in two ways.
First, since everybody is expected to concentrate on one field, one‟s training needs can
easily be identified. Second, the staff with expert knowledge provides opportunities to the
line managers for adopting rational multi- dimensional approach towards a problem.
Demerits:
Chances of Misinterpretation: Although the expert advice is available, yet it reaches the
workers through line supervisors. The line officers may fail to understand the meaning of
advice and there is always a risk of misunderstanding and misinterpretation.
Chances of friction: There are bound to be occasions when the line and staff may differ in
opinion may resent in conflict of interests and prevents harmonious relations between the
two.
Ineffective Staff in the absence of authority: The staff has no authority to execute their own
advice. Their advice is not a binding on the line officers. Therefore the advice given by
specialist may be ignored by line heads.
Expensive: The overhead cost of the product increases because of high salaried specialized
staff.
Loss of initiative by line executives: If is they start depending too much on staff may loose
their initiative drive and ingenuity.
4. Project Organization: A project organization is a special case where common service like
finance, purchase etc. are organized at the functional level. But project resources are allocated to
the project manager. Since the business responsibility rests with the project manager, necessary
authority is given to him with the requisite resources. This type of organization structure helps in
making decisions for project control in terms of cost, resource and time. In a project organization
some of the functions are corporate responsibility and some of them are project manager‟s
responsibility.

Managing Director

Design Erection Commissioning

Design Erection Commissioning

Merits:
1. This calls for quick divisions
2. Organizing all functional
3. Proper coordination of work of different departments

1. It tends to increase the problems of control for top management

2. It is special case of product organization
3. The organization may get disintegrated with increasing focus on departments

5. Committee Organization: A committee is formed when two or more persons are

appointed to work as a team to arrive at a decision on the matters referred to it. It is intended
to utilize the knowledge, skills, and experiences of all the
 concerned parties. Particularly, in large organizations, problems are too big to be handled
by one single expert.

Executive Council Academic senate

Finance Committee Board of studies

Merits:

1. It pools up the organizational resources in terms of knowledge skills and

experiences.
2. It represents all interested groups and thus, facilitates group decision.
3. It yields good results if the committee are headed by taskmaster like chairman and
time bound in terms of decision-making.
4. It minimizes the fear of too much authority vested in one person
5. It motivates all the concerned or effected groups to participate.

1. Responsibility of decisions cannot be fixed on a particular person.

2. It calls for high degree of coordination.
3. It involved high cost in terms of time and money.
6. Matrix Organization: This is also called as project orgnisation it is a
combination of all relationships in the organization in vertical, horizontal and
diagonal. It is mostly used in complex projects. It provides a high degree of
operational freedom, flexibility and adoptability for both the line and staff
managers in performing their respective roles. The main objective of matrix
organization is to secure a higher degree of coordination than what is possible
from the conventional organizational structure as the line and staff.
 MD

Manufacturing Finance Personnel Materials

Product Production Finance Personnel Materials

Manager - A Manager - A Manager - A Manager - A Manager - A

Product Production
Manager - B Manager - B Finance Personnel Materials
Manager - B Manager - B Manager - B

Merits:
1. It offers operational freedom and flexibility
2. It seeks to optimize the utilization of resources
3. It focuses on results
4. It maintains professional identity
5. It holds employees responsible for management of resources
Demerits:
1. It calls for greater degree of coordination
2. It violates unity of command principle
3. It may be difficult to define authority and responsibility precisely
4. Employees may find it frustrating to work with two bosses
 MODERN TRENDS IN ORGANISATIONAL STRUCTURE DESIGNS:
Organizations in the recent times have been gearing themselves to suit to the
growing demands from their stakeholders in terms of responsiveness, flexibility, agility,
adaptability etc. In this process, they are following organic structure, which are more agile,
flexible and adaptable to the changing circumstances. Virtual organizations, cellular
organizations, team structure, boundaryless organization and inverted pyramid and
different forms of organic structure that are widely seen among most of the sun-rise sectors
such as financial services, Information Technology (IT) and IT enabled services. These
structures have been contributing to the organic growth of the organization.
The focus of organic structures is to do away with those activities which do not
directly contribute to the growth of the organization and focus only on those activities
which directly lead the organization for the achievement of the given goals. These are
discussed below:
1. Virtual Organisation:
Virtual organizations facilitate competitiveness particularly when these
organizations are part of the global economy. Here, there can be alliances and partnerships
with other organizations almost all over world. It is a flexible organization structure that
removes the traditional boundaries. It allows easy reassignment and reallocation of
resources to take quick advantage of shifting opportunities in global markets. To avoid
disintegration and to attain the effective needed focus, the lead virtual organizations must
have a shared vision,, strong brand and high trust culture.
The virtual organization is a temporary network of companies that come together
quickly to exploit fast changing opportunities. Virtual organizations appear to be bigger
than traditional organizations. As virtual organizing required a strong information
technology
(IT) platform, The boundaries that traditionally separate a firm form its suppliers,
customers and even competitors are largely eliminated, temporarily and in respect to a
given transaction or business purpose. Virtual organizations
 come into being „as needed‟ when alliances are called into action to meet specific
operating needs and objectives. When the task is complete, the alliances rests until next
called into action. Each partner in the alliance contributes to the virtual organization what
it is best as-its core competence.
2. Cellular Organization:
Organizations structured around the units/cells that complete the entire assembly
process are called cellular organizations. In the modern organizations, cellular
organizations have been replacing the continuous line or linear production process system.
In cellular organizations, workers manufacture total product or sub-assemblies in teams
(cells). Every team (cell) of workers has the responsibility to improve or maintain the
quality and quantity of its products. Each team is free to recognize itself to improve
performance and product quality. These cells comprise self-managed teams. They monitor
themselves and also correct where necessary on their own. Cellular organizations are
characterized by much smaller staff all over the organization with middle management
positions reduced and lean management members at the top. It is both a lean and flat
structure.
3. Team Structure:
A structure in which the entire organization is made up of work groups or teams is known
as team structure. Team structures are both permanent and temporary in nature as situation
demands. Traditional organizations are characterized by vertical structures and modern
organizations are identified by the horizontal i.e., team structures. „We report to each other‟
is the main feature of team structure. It leads to boundary less organsiation in a borderless
world. In team structures, we find cross-functional teams meant for improving lateral
relations, solving problem, completing special projects and accomplishing routine tasks. A
cross- functional team comprises members from different functional departments such as
marketing, finance, HR, production etc. Project teams are convened for a particular task or
project and these get dissolved once task is completed. The intention here is to quickly
bring together the people with the needed talents and focus their efforts intensely to solve
a problem or take advantage of a special
opportunity. Here employees are more involved and empowered because of reduced
barriers among functional areas. Sometimes, when there is pressure on teams to perform
and there is no clear chain of command, team structure fails to deliver results.

4. Boundaryless Organization:
At the name indicates, a boundary less organization eliminates internal boundaries among
subsystems and external boundaries with external environment. It is a combination of team
and network structures with the addition of temporariness. Such type of organization
structure is characterized by spontaneous teamwork and communication. This replaces
formal chain of command. It is a dynamic organization structure wherein organizational
needs are met through a judicious mix of outsourcing contracts and alliances as and when
needed. The key features of boundary less organization include knowledge-sharing,
absence of hierarchy and bureaucracy, empowerment voluntary participation of expert
members, technology utilization and temporariness. The focus is on mustering necessary
talent and competencies required for the achievement of a task without any bureaucratic
restrictions. Creativity, quality, timeliness, increase in speed and flexibility are the benefits
the boundary less organization yields. It also reduces inefficiencies. The boundary less
organization is highly flexible and responsive. These draw on talent wherever it is found.
Sometimes, they are ineffective due to problems in communication.
5. Inverted Pyramid:
This is an alternative to the traditional chain of command. This is a structure, which is
narrow at the top and wide at the base. It includes a few levels of management. For instance,
sales people and sales support staff sit on the top as the key decision makers for all the
issues related to sales and dealing with the customers. Since the sales staffs are in touch
with the customer and aware of the requirements of the customers, they are given all the
freedom to follow their own best judgment at all levels.

Departmentation: On the basis activity or departmentation

Industrialisation has created problems, which are complex in nature. It created a
necessity of large-scale industries to meet the increased demand. In large scale, industries
there are large number of employees. For the sake of efficient supervision and control, the
factory/enterprise is divided into different
departments. Each department is entrusted with a particular function for carrying
out particular activity each departmental head is expected to control and supervise
the work in his department.
Definition: The process of dividing the work and then grouping them into units and
submits or departments for the purpose of administration.
Method of Departmentation:
By function: It is divided into primary function to be performed such as, finance,
marketing, production, personnel etc. each function separate departments
By product: All activities related to a particular product line may be grouped
together. This basis of departmentation has become increasingly important,
especially for complex organizations producing different types of products.
By process: In this method, the manufacturing activity are sub divided on the basis
of their process of production, similar machines such as all laths, milling machines,
grinding machines, milling machine etc. are grouped into separate section, such as
lathe department, milling department, drilling department.
By geographical region: This method may be adopted when the enterprise produces
and sells in the wide market, often in international markets.
 UNIT – 3

PLANT MANAGEMENT

Plant location: Plant location is a strategic decision several factors influence this decision. The
main objective of any business is to optimize its cost and revenue that is, minimize its costs and
maximize its returns.
The degree of significance for the selection of location for any enterprise mainly depends
on its size and nature large scale industries requiring huge amount of investment there are many
considerations other than the local demand in the selection proper plant location these plants cannot
be easily shifted to other place and an error of judgment in the selection of site can be vary expensive
to the organization. However, small-scale industry mainly selects the site where in accordance with
its capacity; the local market is available for its products. It can easily shift to other place when
there is any change in the market.
Factors affecting plant location:

1. Nearness to Market: If the plant is located close to the market the cost of transportation can be
minimized. This also helps the producers to have direct knowledge of the requirements of the
customers.
2. Nearness to supply of raw materials: As far as possible the site selected should be near the
source of raw materials, so that the cost of transportation can be minimized and storing cost
can be reduced due to shorter lead time.
3. Availability of labour: Availability of right kind of labour force in required number at
reasonable rates is also a deciding factor in selection of site
4. Transport and communication facilities: Generally, industries have a tendency to locate the
industrial units near the railway station, highway or port areas. Availability of power and
fuel: Coal, electricity, oil and natural gas are the important sources of power in the
industries.
Ex: Tata iron and steel industry is established near the coalmines of Bihar. Climatic conditions:
Climatic conditions largely affect certain production processes and also the efficiency of the
employees.
Ex: Textile mills require moist climate that why these plant located at Mumbai and
Ahmedabad.
5. Availability of water: Water is used in industries for processing as in paper in chemical
industries, for generation of power in hydroelectric power, plants and also required for
drinking sanitary purpose also.
6. Ancillary industries: Many industries such as processing and assembly industries are
not producing al the parts of their product but purchase some of the parts from ancillary
industries producing it.
7. Financial and other aids: For the development of backward regions central as well as
state government provide certain incentives and facilities such as cash- subsides,
concession financial assistance, land, power and other facilities at cheaper rates, tax
concession etc.
Plant Layout:

A technique of locating machines, processes and plant services within the factory in order
to secure the greatest possible output of high quality at the lowest possible total cost of
production

Type of plant layout:

1. Product or line layout: This type of layout is developed for product-focused systems.
In this type of layout only one product, or one type of product, is produced in a given
area. In case of product being assembled, this type of layout is popularly known as an
assembly line layout.
The work centers are organized in the sequence of appearance. The raw material
centre at one end of the line and goes from one operation to another rapidly with
minimum of work-in-process storage and material handling

Raw
Cutting Turning Milling Grinding Painting Inspect packing
Material finished
goods
2. Process or Functional layout: This type of layout is developed for process focused
systems. The processing units are organized by functions into departments on the
assumption that certain skills and facilities are available in each department similar
equipments and operations are grouped together, e.g., milling, foundry, drilling, plating,
heat treatment etc.
The use of process-focused systems is very wide in both manufacture and

other service facilities such as hospitals, large offices, municipal services, etc.

Foundry Turning Drilling Heat Inspection

treatment

Raw Finished

Materials Goods

Product - A
Product – B

3. Cellular or group layout: It is special type of functional layout in which the facilities
are clubbed together into cells. This is suitable for systems designed to use
the concepts, principles and approaches of „group technology‟. Such a layout offers the
advantages of mass production with high degree of automation even if the numbers of
products are more with flexible requirement. In such a system the facilities are group
in to cells which are able to perform similar type of functions for a group of
products.
 Lathe Lathe Hardening

Tempering

Milling Milling

Testing
Drilling Grinding

Shaper Drilling Packing

Boring
Milling

Drilling Forging Inspection

AB C D

4. Job Shop Layout: It is a layout for a very general flexible system that is
processing job production, The preparation of such a layout is dependent on the
analysis of the possible populations of orders and is a relatively, complex affair.

5. Project or Fixed position Layout: This is the layout for project type systems in
which the major component is kept at a fixed position and all other materials,
components, tools machines, work etc. are brought and assembly or fabrication is
carried out. This type of layout is now not used very commonly as the machines
required for manufacturing work are big and complicated. The fixed position
layout is used only when it is difficult to move the major component and
fabrication is to be carried out. Ex: production of ships.

Handling Equipment Machine – 1 Machine – 2

Main
Assembly

Tools

Worker – 1 Worker – 2
Factors influencing plant layout:

1. Management policy: Management has to decide on many matters e.g. nature and quality
of products, size of the plant, integration of production process, plans for expansion,
amount of inventory in stock, employee facilities
2. Manufacturing process: The type of manufacturing process e.g. synthetic/analytical,
continuous/intermittent and repetitive/non-repetitive, will govern the type of plant
layout.
3. Nature of product: Small and light products can be moved easily to the machines,
whereas for heavy and bulky products the machines may have to be moved.
4. Type of equipment: The use of single purpose and multi-purpose machine substantially
affects the plant layout. Similarly, noisy and vibrating machines require special
attention in the plant layout decision.
5. Types of buildings: The plant layout in a single storey building will be different from
that in a multi storey building. The covered areas, the number of storey‟s, elevators and
stairs, parking and storage area all affect the layout.
6. Availability of total floor area: The allocation of space for machines, work-benches,
sub-store aisles etc., is made on the basis of the available floor area use of overhead
space is made in case of shortage of space.
7. Arrangement of materials handing equipment: Provide sufficient aisles for free
movement of material handling equipment such as hand truck, fork truck etc.
Service facilities: The layout of factory must include proper service facilities
required for the comfort and welfare of workers. These include canteen, lockers,
drinking water, first aid etc.
8. Possibility of future expansion: Plant layout is made in the light of future requirement
and installations of additional activities.

Principles of plant layout:

Principle of integration: The best layout is one which integrates the men, materials,
machinery, supporting activities and any other such a factors that results in the best
compromise.
Principle of minimum movement: The number of movement of workers and materials and
the distance moved should be minimized. The materials should be transported in bulk rather
than in small amounts.
Principle of smooth and continue flow: It states that bottlenecks, congestion points and
bulk tracking should be removed by proper line balancing techniques. Principle of cubic
space: Space of a room, it the ceiling height is also utilized, more materials can be
accommodated in the same space.
Principle of satisfaction of safety: Working places-safe, well-ventilated and free from dust,
noise fumes, odors and other hazardous conditions, help to increase the efficiency of the
workers and improve their morale.
Principle of flexibility: It means the best layout in one which can be adopted and re-
arranged at a minimum cost with least inconvenience.
Productivity:

Definition: Productivity is defined as the rate at which the goods and services are
produced.
It refers to the relationship between the inputs and the output. It is calculated as a
ratio between the amount produced and the amount of resources (land, labour, capital,
technology etc.) used in the course of production in other words

Output
Productivity =
Input

And also defined productivity as human efforts to produce more and more with less and
less inputs of resources as a result of which the benefits of production are distributed among
maximum number of people.

Method of Production:

1. Job production: In this system, goods are produced according to the orders with this
method, individual requirements of the consumers can be met. Each job order stands
alone and is not likely to be repeated. This type of production has a lot of
flexibility of operation and hence general purpose machines are required. Factories
adopting this type of production, are generally small in size.

1. It is the only method, which can meet the individual requirement.

2. There is no managerial problem, because of very less number of workers, and

small size of concern.
3. Such type of production requires less money and is easy to start.
Disadvantages:
1. There is no scope for continuous production and demand

2. As the purchase of raw materials is less, hence cost of raw materials per unit will
be slightly more.
3. For handling different type of jobs, only skilled and intelligent workers are
needed, thus labour cost increases.

2. Batch production: This type of production is generally adopted in medium size

enterprise. Batch production is in between job production and mass production. Batch
production is bigger in scale than the job production. While it is smaller than that of mass
production, batch production requires more machines than job production and fewer
machines that the of mass production.
Advantages:

1. While comparing with mass production it requires less capital

2. Comparing with job production, it is more advantageous commercially.

3. If demand for one product decrease then production, for another product may be
increased, thus the risk of loss is very less.
Disadvantages:

1. Comparing with mass production cost of scales and advertisement per unit is
more
2. Raw materials to be purchased are in less quantity than that in mass production;
therefore it is slightly costlier than that of mass production because less quantity
discount is available.

3. Mass production: This method 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 through the year.
In mass production, simplification and standardization of products are made
with the help of specialized (one purpose) machine, articles of standardized nature
can easily and economically be produced on a large scale.
There is a small difference between mass production and continuous production.
This is mainly in the kind of product and its relation to the plant. In mass production plant
and equipment are flexible enough to deal with other products, involving same production
process. Where as in continuous or process production only standardized product in a
sequence produced. In this method layout and requirement of additional tools and
equipment

Advantages:

1. A smooth flow of materials from one work station to the next in logical order.
2. Since the work from one process is fed directly into the next, small in process
inventories result
3. Total production time per unit short
4. Simple production planning control system are possible
5. Little skill is usually required by operations at the production line, hence training
is simple, short and inexpensive.

Disadvantages:

1. A breakdown of one machine may lead to a complete stoppage of the line that
follows the machine. Hence maintenance and repair is challenging job.
2. Since the product dictates the layout, changes in product design may require major
changes in the layout.
3. Generally high investment are required owing to the specialized nature of the
machines and their possible duplication in the line
Total Quality Management: It is term first coined by the U.S Naval air systems command to
describer, its Japanese-style management approach to quality improvement. It is a
management approach to long-term success through customer satisfaction.

In a TQM effort, all members of an organization participate in improving processes, products,

services and the culture in which they work
Six Sigma: Six sigma is a set of practices developed by Motorola to
systematically improve processes by eliminating defects. A defect is defined as non-
conformity of a product or service to its specifications.

Six Sigma refers to the ability of highly capable processes to produce output
within specification. In particular processes that operate with Six Sigma quality produce
at defect level below 3.4 defects per million opportunities.

The statistical representation of six sigma quantitatively how a process is

performing. To achieve six sigma, a process must not produce more than 3.4 defects per
million opportunities. A six sigma defect is defined as anything outside of customer
specification. A six sigma opportunity is then the total quantity of chances for a defect.

Definition: Six Sigma at any organizations simply means a measure of quality that strives
for near perfection. Six sigma is a disciplined, data-driven approach and methodology
for eliminating defects in any process from manufacturing to transactional and from
product to service.
Just – In – Time (JIT): When components arrive as and when required in a manufacturing operating
by workers. It is called just-in-time.

Some we would at a stroke eliminate any inventory of parts, they would simply arrive just-in-time.
Similarly we could produce finished goods just-in-time to be handed to a customer who wants them. So
at conceptual extremes. JIT has no need for inventory or stock, either of raw materials or work in
progress or finished goods.

Supply Chain Management: It is the process of planning, implementing and controlling the operations
of the supply chain as efficiently as possible supply chain management spans all movement and storage
of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of
consumption.
 MATERIALS MANAGEMENT

Definition of Materials: Materials refer to inputs into the production process, most of
which are embodied in the finished goods being manufactured. It may be raw materials,
work-in-progress, finished goods, spare parts and components, operating supplies such
as lubricating oil, cleaning materials, and others, required for maintenance and repairs.

Definition on Material Management: Material management deals with controlling

and regulating the flow of materials in relation to changes in variables like demand,
prices, availability, quality, delivery schedules etc.

Objects of materials management:

1. Minimization of materials cost s

2. To reduce inventory for use in production process and to develop high

inventory turnover ratios.

3. To procure materials of desired quality when required, at lowest possible

overall cost of the country.

4. To reduce paper work procedure in order to minimize delays in procuring

materials.

5. To note changes in market conditions and other factors affecting the concern.

Material
Inventory
Purchasing handing
control

6. The purchase, receive, transport, store materials efficiently

7. To reduce cost, through simplification, standardization, value analysis etc.

8. To conduct studies in new areas e.g., equality consumption and cost of

materials so as to minimize cost of product
Function of Materials Management:

1. Materials planning and programming

2. Purchasing materials inspection of materials

3. Inspection of Materials

4. Classification, codification and standardization in stores

5. Storage of materials

6. Issuing of materials

7. Maintence of proper inventory records

8. Materials receiving

Inventory: It defined as a comprehensive list of movable items which are required for
manufacturing the products and to maintain the plant facilities in working conditions.

Inventory Control: The systematic location, storage and recording of goods in such a
way the desired degree of service can be made to the operating shops at minimum
ultimate cost.

Objectives of Inventory Control:

1. To support the production departments with materials of the right quality in the
right quantity, at the right time and the right price, and from the right supplier

2. To minimize investments in the materials by ensuring economies of storage

and ordering costs

3. To avoid accumulation of work in process

4. To ensure economy of costs by processing economic order quantities

5. To maintain adequate inventories at the required sales outlets to meet the market
needs promptly, thus avoiding both excessive stocks or shortages at any given
time

6. To contribute directly to the overall profitability of the enterprise

Functions of inventory control:

To develop policies, plans and standards essential to achieve the objectives

To build up a logical and workable plan of organization for doing the job satisfactory

To develop procedure and methods that will produce the desired results economically

To provide the necessary physical facilities

To maintain overall control by checking results and taking corrective actions.

ABC Analysis: ABC analysis is a technique of controlling inventories based on their

value and quantities. It is more remembered as an analysis for „Always Better
Control‟ of inventory. Here all items of the inventory are listed in the order of
descending values, showing quantity held and their corresponding value. Then, the
inventory is divided into three categories A, B and C based on their respective values.

100

90

Volume of 70
inventory (Rs.)

A B C

0 10 30 100

Volume of inventory (Units)

A – Refers to high value item

B – Refers to medium value item C

– Refers to low value item

A category comprises of inventory, which is very costly and valuable. Normally

70% of the funds are tied up in such costly stocks, which would be around 10% of the
total volume of stocks. Because the stocks in this category are very costly, these require
strict monitoring on a day-to-day basis.

B category comprises of inventory, which is less costly. Twenty percent of the

funds are tied up in such stocks and these accounts for over 20% of the volume of
stocks. These items require monitoring on a weekly or fortnightly basis.
 C category consists of such stocks, which are of least cost. Volume-wise, they
form 70% of the total stocks but value-wise, they do not cost more than 10% of the
investment in the stocks. This category of stocks can be monitored on a monthly or
bi-monthly basis.

The following table summarizes the concept of ABC analysis;

Desired Degree
Category Value (%) Volume (%)
of Control

A 70 10 STRICT

B 20 20 MODERATE

C 10 70 LOW

Economic Order Quantity (EOQ): Economic order quantity is defined that quantity of
materials, which can be ordered at one time to minimize the cost of ordering and carrying the
stocks. In other words, it refers to size of each order that keeps the total cost low.

Inventory costs: The inventory costs can be classified into two categories, 1)
Inventory ordering cost 2) Inventory carrying cost.

Carrying Cost
Annual Cost

Ordering Cost

Ordering Quantity

Inventory Ordering Costs (Co): The cost refer to the cost incurred to procure the
materials particularly in large organizations, these cost are significant. This is also
called as procurement cost.

Definition: It is the cost of placing an order from a vendor. This includes all costs
incurred from calling for quotation to the point at which the item is taken into stock.
Ex: Receiving quotations, Processing purchase requisition, Receiving materials and
then inspecting it , Follow up and expediting purchase order, Processing sellers invoice.

Ordering Cost

Ordering Cost

Ordering Quantity
 Inventory Carrying cost: Carrying cost which are also known as holding costs are the
costs incurred in maintaining the stores in the firm. They are based on average inventory and
consist of:

Ex: Storage cost includes: Rent for storage facilities, Salary of person and related
storage expenses, Cost of insurance, Cost of capital.

Annual Cost

Carrying Cost

Ordering Quantity

Determine EOQ:

Step1:

Total Ordering cost per year =

No. of orders placed per year x ordering cost per order

= (A/S) x O

A = Annual demand

S = Size of each order (units per order)

O = Ordering cost per order

Step2:

Total Carrying cost per year = Average inventory level x Carrying cost per year

= (S/2) x C

A = Annual demand

S = Size of each order (units per order)

C = Carrying cost per unit

Step3:

EOQ is one where the total ordering is equal to total carrying cost
A
S× O = S2 × C

2AO = S2 × C

2AO
S2 =
C
2AO
S=
C

Total Cost

Carrying Cost

Annual Cost

Ordering Cost
EOQ

Ordering Quantity

Where S is the Economic order quantity, A is the annual demand in units, O is the
ordering cost per order and C is the carrying cost per unit
Ex: A biscuit manufacturing company buys a lot bags of 10,000 bags wheat per
annum. The cost per bag is Rs.500 and ordering cost is Rs.400. The inventory
carrying cost is estimated at 10% of the price of the wheat determine EOQ and
number of orders required per year.

Solution:

Annual demand (A) = 10,000 bags

Ordering cost per order (O) = Rs.400

Carrying cost per unit (C) = 10% of Cost price

= 0.10 x 500 = Rs.50/-

2AO
EOQ =
C

2 ×10,000 × 400
=
50

= 1,60,000

EOQ = 400 bags

ANNUALDEMAND(UNITS)
The number of orders to be placed during the year =
EOQ
10,000
= 25 ORDERS
400

In the above case, the company has to place 25 orders to optimize its

ordering and carrying costs.

Method of pricing the materials issued:

It is necessary to value the stocks at the end of the accounting period. These are
different methods followed in different industries at different points of time for this
purpose. .
 The Methods are:

1. First in First out (FIFO)

2. Last in First out (LIFO)

3. Simple average price method

4. Weighted average price method

First in First Out (FIFO) : In this system, the materials first received are issued first
materials from the second lot are issued only, when first lot is exhausted and so on. The prices
of the materials are charged at the cost at which that lot was purchased.

Last in First out (LIFO): In this system, the materials first received are issued first
materials from the second lot are issued only when first lot is exhausted and so on. The
prices of the materials are charged at the cost at which that lot was purchased.

Simple average price method: In this method, the stock are issued at an average price.
The average price is determined by dividing the sum of the prices (at which the goods
are received) by the number of price available.

Weighted average price method: This method is an improvement over simple average
price. While calculating the average price, the quantities of each of the receipts are
considered. The weighted average price is calculated as given below:
(W1 × P1 ) + (W2 × P2 ) + (W3 × P3 )
Weighted average price =

W1 + W2 + W3

Where W1, W2, and W3 refer to the quantities of each of the three receipts and P1, P2,
and P3 are the prices of each of the receipts. Under this method, the quantity of each of
the receipts is called the weight. Hence, the average price so computed is called the
weighted average price. Weighted average is calculated after each time a purchase is
made.

Purchasing: It deals with investment, overheads dealing with other and also result in
server losses mass production industries that requires large purchasing for a continues
flow of materials, demand for an efficient purchase decision. It implies procurement of
raw materials machinery, service etc. needed for production and maintenance of the
concern.

It has several benefits in terms of reduced costs, higher inventory turnover,

buying the materials at the best prices, turnover, buying the materials at the best prices,
continues supplies, reduced lead time and so on.
Objectives:

1. To procure right material

2. To procure materials in desired quantities

3. To procure material of desired quality

4. Purchasing from reliable source

5. To pay less for materials purchased

6. To receive and deliver materials at right place and time.

1. Requisitioning purchases

2. Exploring sources of supply

3. Issuing of tenders and obtaining quotations

4. Opening of tenders and quotations and preparation of comparative statement

5. Negotiating over the purchase price and terms of supply

6. Placing purchase order

7. Receiving of materials along with the invoice

8. Checking inward invoice

9. Inspecting and testing materials

10. Forwarding the materials to stores

11. Checking invoice and passing of bills for payments

Stores Management: It deals with planning, coordination and control of various

activities pertaining or effective efficient and economic storage and store keeping.

Store: Generally, un worked material is known as store Storage: The

store room is the place where stores are housed

Storage: Storage is meant holding in custody all kinds of stores and materials
semi-processed and fully processed products.

Store Keeping: It may be defined as that aspect of materials control concerned

with physical storage of goods.
Functions of stores:

1. To receive raw materials, semi-finished or purchased items from vendors and

to check them for identification.

2. To receive parts and components which has been processed in the factory?

3. To make a record of material receipt and current status of material in the store

4. To maintain positioning of materials in the store.

5. To maintain stock safety and in good condition to ensure that they do not
suffer from damage

6. Issuing the items/materials to operational personnel

7. Making a record of receipt and issue slips

8. To avoid illegal attics in store areas.

9. To plan for optimum utilization of space.

10. Cooperating to full extent which purchasing, manufacturing and production

planning and control departments.

Stores Records:

Material requisition note: Whenever the materials are required by a department/section,

this form has to be filled in. This note provides information about the job number,
description of the items required in terms of number. The head of the
department/section should authorize it. Whenever the materials are issued, the
receiving person should sign the note.

This is to be entered in the materials issued record, which is to be signed by

the storekeeper.

Purchase order: The purchasing officer will release the purchase order. The following
is the format of a purchase order. Here, we find Vivek enterprises placing a purchase
order on Business Solutions Ltd., for the following materials. The terms and conditions
of the purchase order such as delivery, payment, and other have to be mentioned
clearly.

Invoice: Invoice is a statement sent by the seller to the buyer mentioning the particulars
of the goods supplied, net amount payable for the goods, and the
terms and conditions governing the sale. It is very important document because it
shows the net amount payable by the buyer after all the discounts and the taxes, if
any.

Goods received note: The goods received note furnishes the particulars of the
suppliers, purchase order number, purchase requisition number, and the job for
which the goods are received. These details are to be certified by a competent
authority. On this basis, the accounts department initiates the process of payment
for the goods received.

Goods returned note: Sometimes, a part or whole of the goods received may not be
of acceptable quality, and hence, these have to be returned to the supplier. In this
context, the goods received note is prepared. This is also called the „debit
note‟because the suppliers or creditors‟ account has to be debited by the
amount mentioned in this debit note for the goods returned.

Stores ledger account: This is maintained to provide the details of the quantity,
price and amount of the receipts, issues, and balance of stocks on a day-to-day basis.
At any given time, the physical quantity of stocks should match with the balance
as per the stores ledger account. A separate account is maintained for each type of
the material in the stores. It should necessarily mention the method such as FIFO
or LIFO, followed to value the issues of stocks. It is a valuable tool for the costing
department in exercising stores control. It facilitates the valuation of stock from
time to time.

Bin card: Bin card is the slip or tag attached to the bin where the goods are stocked.
Whenever the materials are received or issued, an entry is made on the bin card.
The purpose of bin card is to reveal the particulars of the quantities received,
issued, and available as on a given date at a glance. Where separate bins are
maintained for each