Unit-I1: Industrial Engineering and Management (PME504H)

Unit-II
Planning and Control

Production, Planning and Control (PPC)-An Introduction

The conversion of customers‟ order to a finished product needs generally the organization
and planning of the manufacturing process. The overall objective of any organization is
to improve its profitability through productivity i.e. by giving various inputs such as
6M‟s so as to achieve the desired O/P or results in terms of quality, time and place
through planning, coordination and control of production activities that transforms the
raw material into finished products.
Thus, PPC is one of the most important areas of industrial management. PPC is
concerned with basically the two important function of production.
1. Production Planning, and
2. Production Control
PPC department works with many industrial engineering techniques for issuing directives
to the production department for issues such as:
 What to produce?
 How much to produce?
 When to produce?
 What resources/means are needed in producing it?
 How to coordinate different resources of the system? and
 How to control the deviation from plan such as meeting a due date of production
etc.
Some functional domains of PPC are: forecasting; material requirement planning (MRP);
inventory control; production planning; process planning; estimating; machine loading
scheduling; quality control; purchasing; dispatching etc.
The main purpose of PPC is related to direction and regulating the systematic and
smooth flow of goods and services in the entire production unit to meet the desired
objectives of customer service, high productivity, on-time delivery, efficient production
system, quality etc.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Thus, PPC may be defined as follows:

 The direction and coordination of firms‟ resources towards attaining the pre-fixed
or pre-specified goals in most efficient and economical manner.
 PPC means:
o A complete plan;
o A follow-up procedure (to check the plan and control it);
o A means to regulate the mechanism to meet requirement;
o A procedure to employ right quantity and right type of personal at right
place.
Production Planning (PP)
PP is concerned with the planning of various inputs (6M‟s) for a given period of time so
that the customer could get the right quality of product at right place, price and in time. It
may be understood by saying that preparing the scheme in advance before the actual
work is started. PP is thus, a pre-production activity, which involves arrangement of
facilities and design of the production system. The I/P to the PP is sales commitments (or
sales forecast) in terms of quantity, delivery dates, price, quality and tolerances. It
analyses all the problems likely to arise in manufacture and decides in advance how these
difficulties can be overcome.
PP may be done as:
- Long term planning-Strategic planning-normally more than an years‟ time;
- Medium term planning- Aggregate planning- up to an years‟ time; and
- Short term planning- Routine planning- Monthly or weekly.
PP alone is not sufficient to achieve the objective of any organization.
Production Control (PC)
It measures the actual performance of production units and taking remedial action if
needed so that the production actually achieved is not less than the target or standard set
in advance. That means the supervision of all the relevant operations with the help of
control mechanism that feedback the process of the work.
Controlling is made by comparing the actual performance with the present
standards (plan) and deviations are analyzed. The correct action is taken so as to achieve
the target or goal set as per plan by using control techniques.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Some of the factors that affect the performance and create deviations are:
 Non-availability of material (due to shortage etc.)
 Plant, equipment, and machine breakdown
 Lack of coordination and communication between organization/departments
 Changes in demand and rush orders
 Absenteeism of workers
Need of PPC
The present techno-economic scenario of India emphasize on competitiveness in
manufacturing. To be in global competition, Indian industries have to streamline the
production activities and attain the maximum utilization of firms‟ resources to enhance
the productivity. PPC acts as a brain of the production system. PPC is needed to achieve:
i. Effective utilization of firms‟ resources.
ii. To achieve production objectives with respect to quality, quantity, cost and on-
time delivery.
iii. To obtain un-interrupted production flow in order to meet customers varied
demand
iv. To help the company to supply good quality products to its customers on the
continuous basis at competitive rates.
Objectives of PPC
The major objectives of PPC can be stated as:
1. Systematic planning of production activities to achieve the highest efficiency in
production of goods/services.
2. It is used to establish target and check the deviation by comparing on some
performance measure.
3. Elimination of bottleneck.
4. Smooth flow of material.
5. Forecasting of demand.
6. To produce in right quantity and quality at right time.
7. Scheduling production activities to meet delivery schedule.
8. Quality management.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

9. To ensure flexibility in production system to accommodate changes and

uncertainty.
10. Optimizes the use of resources for minimum overall production cost.
11. Stable production system, with least chaos, confusion, and undue hurry.
12. To coordinate labor, machines and equipment in most effective and economic
manner.
Structure of PPC or organization of PPC

Pre-planning Planning Control

(Macro-level) (Micro-level)
Product design Planning resources Dispatching
(6M‟s)
Process design Process planning
Inspecting
(Routing)
Flow design (Layout) Scheduling
Expediting
Forecasting demand Estimating
Work station design
Evaluation

Feedback

Figure 1: Structure of PPC

Elements of PPC and their concept
Routing (Process Planning): is concerned with selection of path or route which the raw
material should follow to get transformed into finished product. It fixes the path of travel
and give due consideration during layout. Further, it decides the set-up time and process
time for each operation.
Scheduling: is concerned with preparation of m/c loads, fixation of starting and
completion dates for each of the operations and coordination with sales department
regarding delivery dates. Scheduling is the assignment of work to the facility with the
specification of times and sequence in which the work is to be done. The facility may be
manpower, machine or both. It deals with orders and machines, it determines which order

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

will be taken up, on which machine, in which department, at what time and by which
operator.
Dispatching: it is the process of setting production activities in motion through release of
orders and instructions. It authorizes the start of production activities by releasing
materials, components, tools, fixtures etc to the operator.
Expediting: means chasing intensively the bottleneck areas causing delays/interruptions
in carrying out smooth production and taking appropriate action from time to time and
keeping the concerned authorities well informed about the progress of planned targets.
Comparison Between Production Planning (PP) and Production Control (PC)

PP PC
1.It is a pre-production activity. 1.It will be in action when production
2.Planning involves the collection, activity begins.
maintenance and analysis of data w.r.t. 2.Control is concerned with communication
time standards, materials and their of these information and producing reports
specification, machines and their process like o/p report, productivity, rejection rate
capabilities. etc.
3.It is useful to anticipate the problems and 3.It involves in taking corrective steps in case
devising remedial measure in case the of error to match actual performance
problem arises. against the planned performance.
4.It is a centralized activity and includes 4.It is a widespread activity. Includes
functions like material control, tool functions such as dispatching,
control, process planning and control. programming and inspection.
5.It sees that all the necessary resources are 5.It keeps track of activities and sees whether
available to make the production at right everything is going as per schedule or not.
quality and time.

PERT/CPM
In order to plan, control and schedule large projects in the fields of construction,
maintenance, fabrication and any other areas, there are various tools or techniques for
managing them. These techniques minimize the bottlenecks, delays and interruptions.
Some of them are:
i. Bar Chart
ii. Run Out Approach
iii. Gantt Chart
iv. Network Diagram
The network techniques are called by various names such as:

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

a. PERT
b. CPM
c. UNETICS
d. LESS
e. TOPS
f. SCANS
However, two most important network techniques emerged out to be are:
a. PERT
b. CPM
The above network analysis techniques are powerful tool for planning, scheduling and
controlling of projects and minimize total project cost and time with effective utilization
of resources with minimum delays and interruption during implementation of the project.
Basically, PERT and CPM are the scheduling techniques which are used to plan,
schedule and control a project consisting of number of inter-related activities.
PERT
PERT stands for “Program Evaluation and Review Technique”. In 1959, Booz, Allen and
Hamilton and US Navy‟s special project office presented PERT for the Polaris Missile
project. PERT system uses a network diagram consisting of events which must be
established to reach project objectives. PERT is mainly concerned with events and it is
thus, event-oriented system. PERT takes into account the uncertainty of activity times. It
is a probabilistic model with uncertainty in activity duration. PERT makes use of three
estimates of time:
i. Optimistic time (to)
ii. Most likely time (tm)
iii. Pessimistic time (tp)
Optimistic time (to): is the shortest possible time, if everything goes perfectly without any
complications. It is an estimate of minimum possible time to complete the activity under
ideal condition.
Pessimistic time (tp): is the longest time taking into consideration all odds. This is the
time estimate if everything goes wrong.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Most likely time (tm): is the best estimate of the activity time. It lies between the
optimistic and pessimistic time estimates. These three times (to, tm, tp) are combined to
give expected time (te) for an activity. This expected time is given by:
t o  4t m  t p
te 
6
PERT Applications
i. For long range planning.
ii. Advertising planning and marketing programs.
iii. Defense projects.
iv. R&D products.
v. Installation of machinery.
vi. Construction programs.
vii. Designing and manufacturing prototype products.
CPM
CPM stands for “Critical Path Method”. In CPM network project consists of a number of
operations called activities. The CPM networks are often referred to as activity oriented
system. Kelly and Walker (1959) developed CPM. It was applied to a variety of areas
such as construction of building, dam, factory, missile, rockets etc. In CPM the activity
times are known with certainty. For each activity earliest start time (EST) and latest start
times (LST) are computed. The path with the longest time sequence is called Critical
Path. The length of critical path determines the minimum time in which the entire project
can be completed. The activities on the critical path are called “Critical Activities”.
CPM Applications
i. Building a new bridge across river.
ii. Construction of multi-storied building.
iii. Extension of a factory building.
iv. Overhauling of a diesel engine.
v. Manufacture of a new car.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Difference Between CPM and PERT

PERT CPM
i. It is event oriented. i. It is activity oriented.
ii. It uses a probabilistic times. ii. It is used when the activity times are
iii. Three time estimates to, tm, tp are used. deterministic.
iv. It emphasizes on shortening project iii. One time estimate.
execution time. iv. It emphasizes on optimizing resource
v. It is a control device. allocation and minimizing overall cost for a
vi. Use of dummy activities is required. given project.
vii. Suitable in defense projects, R&D where v. It is a planning device.
activity time cannot be predicted. vi. Use of dummy activities is not necessary.
vii. Suitable for problems in industrial plant
maintenance, civil construction projects etc.

Terminology Related With CPM and PERT

i. Event: An event represents the start or the completion of an activity. The beginning
and end points of an activity are events. It is also known as junction. It is represented
by circle and event number. An event consumes neither time nor resource.
ii. Activity: Every project consists of number of job operations or tasks which are called
activities which consumes times and resources. Each activity has a definite start and
end point. Activity is represented by an arrow in network diagram. It is marked with
time above the event. Example: Machining a component is an activity; Start
machining is an event; Machining completed is an event.

A (4) A A

Start Activity Finish B B

(Tail Event) (Head Event) Merge Event Burst Event

iii. Network: It is a graphical representation of the project and it consists of series of

activities arranged in logical sequence and show interrelationship between the
activities (Figure 2).

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

3
B, t2 D, t4
A, t1 Dummy F, t6
1 2 5 6
C, t3 E, t5
4

Figure 2: Network Diagram

iv. Predecessor and Successor Activities: All those activities which must be completed
before starting the activity under consideration are called predecessor activities. All
the activities which have to follow the activity under consideration are called its
successor activities.
In above figure: activities 2-3 & 2-4 are immediate successor to activity 1-2.
Activities 1-2, 2-3 are predecessor to activity 3-5.
Activity Immediate Predecessor Successor
A - B, C
B A D
C A E
D B F
E C F
F D, E -

v. Path: An unbroken chain of activities between two events is called a path. Example:
In above figure, path A-B-D-F connects events 1 & 6.
vi. Dummy Activity: When two activities start at the same instant of time and do not
consume time or resource. It is used to maintain the logical sequence. It is indicated
by a dotted line. P R
2
A
1
Q S B C

3 4
Dummy Activities

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Problems
Problem 1: Construct the network from the information given below:
Activity Immediate Predecessor Activity Time
(Weeks)
A - 6
B - 10
C - 14
D C 6
E A, B 14
F E, D 6
G D 4
H F, G 4

Problem 2: The activity details and their predecessors are given below along with their
activity times. Construct the network diagram.
Activity Immediate Predecessor Activity Time
(Weeks)
A - 4
B A 3
C A 2
D B 5
E B 3
F C, D 4
G E, F 3
Problem 3: Construct the network diagram.
Task A B C D E
Precedence Task - - A B C, D
Problem 4: Construct the network diagram.
Task A B C D E Home
Precedence Task - - A B A, B Assignment

Problem 5: Construct the network diagram.

Task A B C D E F
Precedence Task - - B A, C A D, E
Problem 6: Construct the network diagram.
Operation Pre-operation Post Operation
A None C
B None D
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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

C A E
D B E
E C, D None
Problem 7: A small scale industrial unit consists of six activities as given below:
Activity Time in Days Pre-operation
A 5 None
B 6 A
C 5 B
D 4 A
E 3 D
F 4 C, E
Draw network diagram

Break Even Analysis

Introduction
Break-even analysis establishes the relationship among the factors affecting profits. It
indicates at what level the cost and revenue are in equilibrium. It directly attention to total
revenue and total cost. It implies that at some point in the operation, total revenue equals
total cost. The point at which revenue and costs are equal is called “Break-even Point
(BEP)”. The break-even point is therefore, the volume of output at which neither a profit
is made nor a loss is incurred. Break-even analysis helps in solving following types of
problems:
 What volume of sales will be necessary to cover return on capital employed.
 To find the price of an article to give desired profit.
 To determine variable cost per unit.
Break-even Chart (BEC)
BEC is very useful means of solving industrial problems. Here cost and income are
plotted against production volume as shown in Figure 2. The income line makes an angle
“θ” with total cost line called angle of incidence. The point where total cost curve cuts the
income line is the break-even point at which the company‟s earnings are just sufficient to
cover the expenses. Below this production volume, the company will be running in loss
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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

and beyond it, profit can be made. BEP depends upon fixed cost and variable cost.
Therefore, BEC is graphical representation of the relationship between costs and revenue
at a given time.

Sales Revenue
Income or Expenses (in Rupees)

BEP Profit

Total Cost
θ
Variable Cost

Fixed Cost
Loss
Margin-of-Safety

Units of Output/Volume of Production

Figure 2: Break-even Chart

Calculation of BEP
Let Break-even Point is denoted by BEP (in Units)---Quantity Produced and Sold.
Variable Cost is denoted by VC (in Rupees/unit)
Fixed Cost is denoted by FC (in Rupees), and
Selling Price is denoted by SP (in Rupees/unit)
Therefore, Total income or revenue after selling BEP (units) = SP×BEP (units)----1
Total cost of producing BEP (units) (TC) = FC +VC per unit
TC =FC + VC× BEP (units)-----2
But, at BEP, total cost equals total income, that is Equation 1= Equation 2
SP×BEP = FC + VC× BEP
FC
BEP= -----3 (In terms of physical units)
SP  VC
Also,

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

FC  SP FC
BEP =  -----4 (In terms of Rupees of Sales Revenue)
SP  VC VC
1
SP
Also, SP-VC=Contribution
FC FC
Therefore, BEP =  ------5
SP  VC Contribution
Margin of Safety (M/S): is the distance between BEP and the output being produced. A
large margin indicates that the business can earn profit if there is reduction in output.
Sales  SalesatBEP
Margin of Safety (M/S) =  100 -------6
Sales
Angle of Incidence (θ): This is an angle at which the sales line cuts the total cost line. The
management aims at large angle of incidence because large angle of incidence indicates a
high profit rate. A narrow angle will show that even fixed overheads are absorbed and
relatively low rate of return.
Methods of Lowering BEP
1. Reduce the FC.
2. Reduce the VC.
3. Increase the slope of income line.
Effect of Increase or Decrease in FC and VC on BEP (see Figure 3)
An increase in FC increases TC and shifts BEP towards right hand side. It shows increase
in FC reduces profit and M/S. Similarly, an increase in VC also increases TC and shifts
BEP towards right side. Hence, profit decreases for the same output. Therefore, decrease
in FC and VC decreases in TC and shifts BEP towards left side and increases profit.
Effect of Increase or Decrease in SP on BEP
Increase in SP increases sales income (SI) and shifts BEP towards left side and hence
increases profit. Similarly, decrease in SP decreases SI and shifts the BEP towards right
side and hence decreases profit (Figure 4).
Figure 3 Figure 4
Sales Sales 1 Sales2
1‟ TC‟
TC TC
1 1
FC‟ 1‟
FC FC

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Operations
Sales Forecasting
The plans for future cannot be made without forecasting events. Forecasting plays a
crucial role in the development of plans for future. Every firm is keen to know the
expected demand for its products, how much of a given product it could sell in a give
time, whether the sales would increase or decrease from the current levels and by how
much, what should be the size of the order and safety stocks etc. This knowledge is
required by the firm for its survival and growth. Without this, it cannot plan any of its
production and other activities. It forms the basis for the requirements of raw materials,
machines, men (work force), capital etc. Thus, the starting point of all decision related to
production strategy is the “Sales Forecast” for a specified period.
Definitions
- Forecasting means prediction and is defined as a technique of translating past
experience into prediction of things to come. It involves estimating the level of
demand for a product on the basis of factors that generated the demand in the past
months.
- Sales forecast is the task of projecting the future sales of the firm. It indicates how
much of a product is likely to be sold during a specified period in specified
market, at specified prices.
- An estimate of sales in physical units for a specified future period under proposed
marketing plan or program.
Types of Forecasting
There are three types of forecasting:
i. Short-term/range forecasting.
ii. Medium-term/range forecasting.
iii. Long-term/range forecasting.
i. Short-term Forecasting: The forecasting which covers a period of three (03)
months, six (06) months or one (01) year is generally called a short-term
forecasting. Forecasting is done only for a short period when the demand
fluctuates from one month to another month. There is very less scope of judgment
in short range forecast and therefore, past data are mainly projected into future.
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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Applications:
- Used in immediate control of activities.
- Purchasing.
- Scheduling of job.
- Overtime decision.
- Machine maintenance etc.
ii. Medium-term Forecasting: is generally varied from 1-5 years. Here accuracy of
forecasting increases due to less uncertainty.
Applications:
- Sales planning and sales force decision.
- Production planning.
- Capital planning.
- Inventory planning.
- Enrolment of students in a college etc.
iii. Long-term Forecasting: This type of forecasting usually covers a period of 5 to 10
years or more. However, beyond 10 years, the future is assumed to be uncertain.
Applications:
- Ship building.
- Petroleum refinery.
- Generation of electricity.
- Plant location/layout.
- New product planning.
- R&D planning etc.
Benefits of Forecasting
Forecasting is useful due to following benefits:
- Effective handling of uncertainty.
- Better labor relations.
- Balanced work-load.
- Minimization in the fluctuation of production.
- Better use of production facilities.
- Better material management.

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 Unit-I1: Industrial Engineering and Management (PME504H)

- Better customer service.

- Better utilization of capital and resources.
Need of Sales Forecasting
1. Majority of activities of the industries depend upon the future sales.
2. Helps in decision making with respect to investment in plant and machinery, market
planning and program.
3. Helps the firms to decide which products are to be dropped which are to be added and
which one needs to be modified.
4. It forms the backbone of customer-oriented marketing like customers‟ taste,
preferences and needs.
5. Helps in determining sales target, product price, etc.
Limitations of Sales Forecasting
Sales forecasting can never be 100% accurate and reliable. The following are some
limitations:
1. Forecasting is based on assumptions and is subject to some guess work and
possibility of error is their.
2. Forecasting is based on past data but future may not be a copy of the past.
3. Changes in consumers‟ need, taste, fashion, style etc. may cause inaccuracy in
forecasting.
4. There may be lack of history in case of new product.
5. Short term forecasting is more accurate than long term forecasting and hence, its
usefulness is limited to short-term purpose.
Methods of Sales Forecasting
Important methods of sales forecasting are:
1. Jury method.
2. Analytical and Statistical method.
a. Single projection method.
b. Extrapolation method.
c. Exponential Smoothing.
d. Time series analysis.
e. Moving Average method.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

f. Regression analysis.
g. Least Square method.

Inventory Control
Definition of Inventory
Inventory generally refers to the material in stock. Inventories represent those items
which are either stocked for sale or they are in the process of manufacturing or they are in
the form of materials which are yet to be utilized.
Types of Inventories
Inventory can be of the following types:
1. Direct Inventories
2. Indirect Inventories
1. Direct Inventories: which plays a direct role in manufacturing of a product, like:
a. Raw Materials-examples: steels; copper; tin; lead; cotton; rubber;
forgings; castings; leather; wood; pipes; angles; frames; bars etc.
b. Work-Process (WIP) Inventories-examples: semi-finished goods at
various stages of manufacturing.
c. Purchased Parts-examples: ball bearings; screws; nuts; bolts; tyres;
which are purchased from outside suppliers.
d. Finished Good Inventories-examples: output of production process. These
are final product ready for dispatching to the customers.
e. Maintenance, Repair and Operating Stores- examples: machine spare
parts; oil; grease; furnace oil; gas etc.
2. Indirect Inventories: which help the raw materials to get converted into the
finished product and are not the integral part of finished products such as tools;
supplies like welding; soldering; lining; welder rods; abrasive materials; brushes;
oil; greases; kerosene oil; general office supplies like; candles; paper; tracing
paper; erasers; ledger; journals; registers; cash book etc.

Inventory Control

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

Inventory control means making the desired item of required quality and in required
quantity, available to various departments when needed. Too much inventory creates a
problem of their storage, huge investment and maintenance of stored items from
deterioration, damage etc. while low inventories lead to chances of stoppage of
production, increases in overheads and disruption in production schedules and delivery
promises. Therefore, optimum amount of inventory should be maintained in the stores.
This is called as “Inventory Control”.
It may also be defined as “the scientific method of finding how mush stock should
be maintained in order to meet the production demands and be able to provide right type
of material at right time in the right quantities and at competitive prices”.
Objectives of Inventory Control
1. To ensure adequate supply of products to customer and avoid storages as far as
possible.
2. To make sure that financial investment in inventories is minimized.
3. Efficient purchasing, storing, consumption and accounting for materials are
important objectives.
4. To maintain timely record of inventories of all the items and to maintain the
stock within the desired limits.
5. To provide a reserve stock for various in lead times of delivery of materials.
Need for Inventories
1. To ensure against delays in deliveries.
2. To allow for possible increase in output.
3. Maintain smooth and efficient production flow.
4. To keep better customer relations.
5. To take advantage of quantity discounts (purchasing in stocks).
6. To utilize the advantage of price fluctuations.
7. To ensure against scarcity of materials in the market.
8. Better utilization of men and machinery (idleness=0).

Terminologies Used in Inventory Control

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 Unit-I1: Industrial Engineering and Management (PME504H)

i. Order Cycle: The time period between two successive orders is called “Order
Cycle”.
ii. Lead Time: The length of time between placing an order and receipt of items is
called “Lead Time”.
iii. Safety Stock: It is also called buffer stock or minimum stock. It is the stock or
inventory needed to account for delays in material supply and to account for
sudden increase in demand due to rush orders.
iv. Re-order Point: It is pre-known that it takes days between initiating the order
and receiving the required quantity. Therefore, when the quantity reaches point
„B‟ purchase requisition is initiated. So that at point „C‟ the order material may
be reached and again the total quantity shoots up to its maximum value that is at
point „A‟. Point „B‟ is called “Re-order Point”.

A EOQ
Q
u
a
n
t B Q
i
t Q/2
y
C
Time (in Days)

Re-order point
Figure 1: Re-order Point

Economic Ordering Quantity (Purchase) (EOQ) OR Economic Batch

Quantity (EBQ)
If a number of components to be produced is very large, they cannot be produced in one
batch, for such conditions it is required to find out how many pieces (or components)
should be produced in one batch so that it is most economical and this batch size is
known as “Economic Batch or Order Quantity”.
Lot size of Production for Minimum Cost (EOQ/EBQ)
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 Unit-I1: Industrial Engineering and Management (PME504H)

In determining the „EOQ‟ it is assumed that the cost of managing the inventory consists
of two parts that is:
a. Inventory carrying cost/Storage cost.
b. Procurement cost/Ordering cost.

Total Cost
Cost (a)
C
o
s
t

p
e
r

P
i Cost (b)
e
c
e
EOQ
Batch Size/Order Quantity
Figure 2: Cost versus Batch size

a. Inventory Carrying Cost/Storage Cost: also known as holding cost are the cost for
maintaining the stores in the firm. They increase with the batch size/lot size such as:
- Working capital, investment in materials, labors etc.
- Cost of handling and storing materials, building rent.
- Salaries of personal and related storage expanses.
- Cost of insurance, deterioration, spoilage etc.
- Special tax to be paid etc.
b. Procurement Cost/Ordering Cost: it is the cost of placing an order. They decrease
with the batch size. It consist of:
- Cost of setting up machines.
- Cost of preparing paper work.
- Cost of receiving quotations.
- Processing purchase requisition.
- Receiving materials and then inspecting it etc.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

These two costs that is (a) and (b) are plotted and the total cost curve is determined by
adding (a) and (b) cost curves graphically as shown in Figure 2. The EOQ is obtained by
the quantity whose procurement cost is equal to the inventory carrying cost and that batch
is most economical batch that is at cost (a)=cost (b), we have EOQ/EBQ.
In order to find out EOQ/EBQ, mathematically, there are certain assumptions:
- Demand is constant and is known.
- Lead time of stock is zero.
- Price of materials is fixed, no discount.
If a model is made for above assumptions that model is called as Basic Ordering Model
or Basic Inventory Model.
EOQ is determined as follows:
Let,
Q----Economic Batch Quantity.
R----Annual requirement or total items consumed per year.
S----Preparation and set-up cost, each time a new batch is started or procurement cost per
order.
C---Constant cost per piece (material, labor and overheads).
I---Inventory carrying charge rate per year (it is between 0.1 & 0.25).
Q
Therefore, Average inventory in a year =
2
Q
Value of average inventory in a year = C
2
Q
Cost of carrying inventory per year =  C  I ------------------------1
2
AnnualRe quirement R
Number of set-ups required during a year = 
BatchSize Q
R
Cost of set-ups per year =  S ------------------------------------------2
Q
Therefore, total cost „T‟ is obtained by adding equations 1 & 2, we get,
QCI RS
T=  ---------------------------------------------------------------3
2 Q
For minimum total cost „Tmin‟,
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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

dT
 0 , differentiating equation 3 with respect to „Q‟, we get,
dQ
dT CI RS
  0
dQ 2 Q2

CI RS 2 RS
 2 or Q2 =
2 Q CI

2 RS
Hence, Q = --------This is the required batch size of production for minimum cost.
CI

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

ADDITIONAL NOTES

EXAMPLES OF PRODUCTION PLANNING IN DIFFERENT INDUSTRIES:

MANUFACTURING INDUSTRY:
 Master Production Scheduling (MPS): Creating a schedule that outlines the quantity and
timing of finished goods to be produced over a specific period.
 Material Requirement Planning (MRP): Calculating the raw materials and components
needed to fulfill the production schedule and ensuring their availability.
 Capacity Planning: Determining the capacity of production facilities to meet demand and
adjusting production rates accordingly.
 Workforce Planning: Planning the required number of workers and their skills to match
production needs.
 Quality Control Planning: Implementing quality assurance measures throughout the
production process to maintain product quality.

FOOD INDUSTRY:
 Batch Planning: Planning the production of food items in batches to optimize resource usage
and minimize waste.
 Shelf Life Management: Ensuring products are produced and delivered in a way that
maintains their freshness and adheres to expiration dates.
 Demand Forecasting: Analyzing historical data and market trends to predict future demand
for various food products.
 Inventory Management: Managing raw materials and finished goods inventory levels to
meet demand while minimizing holding costs.

CONSTRUCTION INDUSTRY:
 Project Scheduling: Creating detailed schedules for various construction activities to ensure
timely completion of projects.
 Resource Allocation: Allocating equipment, materials, and labor to different construction
projects based on their requirements and priorities.
 Logistics Planning: Coordinating the transportation of construction materials to the job site
efficiently.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

 Safety Planning: Implementing safety protocols and ensuring compliance with safety
regulations throughout the construction process.

SERVICE INDUSTRY (e.g., Call Centers):

 Workforce Management: Determining the number of customer service representatives
required to handle incoming calls based on historical call volume and forecasted demand.
 Shift Planning: Scheduling shifts and breaks for employees to ensure continuous service
coverage.
 Performance Monitoring: Tracking key performance indicators (KPIs) to identify areas of
improvement in service delivery.
 Training Planning: Planning and providing training to employees to enhance their skills and
efficiency.

EXAMPLES OF PRODUCTION CONTROL ACTIVITIES IN DIFFERENT

INDUSTRIES:

MANUFACTURING INDUSTRY:
 Shop Floor Monitoring: Using real-time data and sensors to monitor the progress of
manufacturing operations on the shop floor.
 Quality Control: Conducting inspections and tests at various stages of production to
maintain product quality and identify defects.
 Machine Maintenance: Scheduling and performing regular maintenance on production
machinery to prevent breakdowns and minimize downtime.
 Changeover Management: Efficiently managing the transition between different products or
product variants on a production line.
 Scrap and Waste Management: Tracking and minimizing waste and scrap materials
generated during the manufacturing process.

AGRICULTURE INDUSTRY:
 Crop Monitoring: Using remote sensing technologies and data analysis to monitor crop
growth and health.
 Irrigation Control: Regulating irrigation systems to optimize water usage and ensure proper
hydration of crops.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

 Pest and Disease Management: Implementing measures to control pests and diseases that
can affect crop yield.
 Harvest Planning: Scheduling and coordinating the harvest of crops at the optimal time to
maximize yield and quality.

SOFTWARE DEVELOPMENT:
 Version Control: Using version control systems to manage code changes, track revisions,
and collaborate effectively among development teams.
 Bug Tracking: Monitoring and managing software defects or bugs reported during
development and testing phases.
 Agile/Scrum Management: Utilizing agile project management methodologies to control
and adapt development tasks based on changing priorities and requirements.
 Continuous Integration/Continuous Deployment (CI/CD): Automating the process of
integrating code changes and deploying software updates to production environments.

SERVICE INDUSTRY (e.g., Hospitality):

 Reservation Management: Overseeing the reservation process to ensure optimal utilization
of available resources (rooms, tables, etc.).
 Staff Scheduling: Managing employee schedules to match service demands and maintain
optimal staffing levels.
 Queue Management: Regulating the flow of customers and managing waiting times to
enhance customer experience.
 Service Quality Control: Monitoring and maintaining service standards through customer
feedback and regular assessments.

EXAMPLES OF SALES FORECASTING IN THE MANUFACTURING INDUSTRY:

 Product Launch Forecasting: When a manufacturing company plans to launch a new
product, they use sales forecasting to estimate the demand for the new product in the market.
This helps in determining the initial production quantities, pricing strategies, and marketing
efforts.
 Seasonal Demand Forecasting: Manufacturers often experience seasonal variations in
demand for their products. By analyzing historical sales data, they can forecast the expected

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Diploma in Engineering (Mechanical), University Polytechnic, AMU
 Unit-I1: Industrial Engineering and Management (PME504H)

increase or decrease in demand during specific seasons or periods, allowing them to adjust
production schedules and inventory levels accordingly.
 Inventory Management Forecasting: Sales forecasting is crucial for effective inventory
management. Manufacturers use sales forecasts to estimate the quantity of raw materials and
components required to meet projected production demands and avoid stockouts or excess
inventory.
 Demand Planning for Supplier Management: Manufacturers may share sales forecasts
with their suppliers to ensure a steady supply of raw materials and components in line with
expected production needs. This helps maintain a smooth production process and build
stronger supplier relationships.
 Capacity Planning: Sales forecasts play a crucial role in capacity planning. Manufacturers
analyze forecasted sales to determine if they have sufficient production capacity to meet
demand or if they need to invest in expanding production facilities.
 Production Scheduling: Once sales forecasts are available, manufacturing companies use
them to create production schedules. This involves setting priorities, allocating resources, and
optimizing production processes to meet anticipated demand.
 Budgeting and Financial Planning: Sales forecasts are integral to budgeting and financial
planning. Manufacturers use sales projections to estimate revenues, expenses, and overall
profitability, helping them make informed financial decisions.
 Order Fulfillment Planning: Manufacturers need to ensure they can fulfill customer orders
on time. Sales forecasts assist in planning the production and delivery schedule to meet
customer requirements efficiently.
 Sales Territory Planning: For manufacturers with multiple sales territories or regions, sales
forecasts help in allocating resources and sales efforts appropriately. Sales teams can focus
their efforts on regions with higher forecasted demand.
 Risk Mitigation: Sales forecasting allows manufacturers to identify potential risks, such as
demand fluctuations or supply chain disruptions, and develop contingency plans to mitigate
the impact on production and operations.

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Diploma in Engineering (Mechanical), University Polytechnic, AMU