MOB unit 2- Module 1 notes continue

There are two primary categories of forecasting: quantitative and qualitative.

Quantitative Methods

When producing accurate forecasts, business leaders typically turn

to quantitative forecasts, or assumptions about the future based on historical
data.

Moving Average
Moving average involves taking the average—or weighted average—of previous
periods⁠ to forecast the future. This method involves more closely examining a
business‘s high or low demands, so it‘s often beneficial for short-term
forecasting. For example, you can use it to forecast next month‘s sales by
averaging the previous quarter.

Moving average forecasting can help estimate several metrics. While it‘s most
commonly applied to future stock prices, it‘s also used to estimate future
revenue.

To calculate a moving average, use the following formula:

A1 + A2 + A3 … / N

Formula breakdown:

A = Average for a period

N = Total number of periods

Using weighted averages to emphasize recent periods can increase the accuracy
of moving average forecasts.

Qualitative Methods

When it comes to forecasting, numbers don't always tell the whole story. There
are additional factors that influence performance and can't be
quantified. Qualitative forecasting relies on experts‘ knowledge and experience
to predict performance rather than historical numerical data.
These forecasting methods are often called into question, as they're more
subjective than quantitative methods. Yet, they can provide valuable insight
into forecasts and account for factors that can‘t be predicted using historical
data.

Delphi Method
The Delphi method of forecasting involves consulting experts who analyze
market conditions to predict a company's performance.

A facilitator reaches out to those experts with questionnaires, requesting

forecasts of business performance based on their experience and knowledge.
The facilitator then compiles their analyses and sends them to other experts for
comments. The goal is to continue circulating them until a consensus is
reached.

Jury of Executive Opinion:

In this method of forecasting, the management may bring together top

executives of different functional areas of the enterprise such as production,
finance, sales, purchasing, personnel, etc., supplies them with the
necessary information relating to the product for which the forecast has to
be made, gets their views and on this basis arrives at a figure.

Panel of Executive Opinion:

It is also called as a jury-of-expert-opinion approach. It consists of

combining and averaging top management‘s views about the future event. In
this approach, generally the executives from different areas such as sales,
production, finance, purchasing are brought together. Thus, a varied range
of management viewpoints can be considered. Forecasts can be prepared
quickly without elaborate data.

Consumer Survey

Another type of qualitative forecast is the consumer survey. In this

approach, the forecaster can poll, in person or by questionnaire, customers
or clients about expected future behaviour. For example- people can be
asked about their probable future purchases of cars. This method is
effective if the right people are sampled in enough numbers. It asks a set of
―experts‖—consumers or potential consumers—what they will do.
Sales Force Composite Definition
It is a forecasting method used to forecast the sales by adding up individual
sales agents forecasts for sales in their respective sales territories. It is a
bottom-up approach which companies use to forecast more accurately. Sales
agents have the most direct interaction with the customers and provide many
valuable insights which help the companies boost their sales.
Using the sales force composite forecast the company not only forecasts for the
market as a whole but it also has numbers for individual areas and territories.

Capacity Planning

Capacity planning is all about figuring out how much work your organization
can handle, whether producing goods or delivering services, to meet the
demands of your customers.

Capacity planning is a strategic process that aligns an organization‘s available

resources with its projected demand.

It involves a comprehensive analysis of an organization‘s workforce, tools, and

production capabilities to ensure that the right resources are available at the
right time to meet customer requirements.

Why is Capacity Planning Important for Businesses?

Effective capacity planning can have a transformative impact on an

organization‘s success.

Where customer expectations are constantly evolving, and market conditions

are subject to rapid change, the ability to align resources with demand is no
longer a luxury but a necessity for survival and growth.

Calculating Capacity Utilisation

 Capacity utilisation is measure of the level to which a
businesses assets are being used to produce output
 It compares current output to the maximum possible output a
business can produce using all of its assets and is expressed as a
percentage
 Capacity utilisation is calculated using the formula
Worked Example

Lola Bakery produces specialist Indian and Bangladeshi breads which are sold
to restaurants in the West Midlands. Batch production is used in the factory to
manufacture the range of breads and the factory can produce a maximum of
68,400 units per month.

In May factory output was 51,420 units.

Calculate Lola Bakery’s capacity utilisation in May. (2)

Step 1 - Divide the Current Output by the Maximum Output

(1 mark)

Step 2 - Multiple the outcome by 100 to obtain the percentage capacity

utilisation

0.75 x 100

= 75% (2 marks for the correct answer)

Lola Bakery produces specialist Indian and Bangladeshi breads which are sold
to restaurants in the West Midlands. Batch production is used in the factory to
manufacture the range of breads and the factory can produce a maximum of
68,400 units per month.

In August, capacity utilisation increased to 92%.

Calculate the number of units produced by Lola Bakery in August. (2)

Step 1 - convert 92% to a decimal

92% = 0.92 (1 mark)

Step 2 - Find 92% of the maximum output using the decimal

0.92 x 68,400

= 62,928 units (2 marks for the correct answer)

Ways of Improving Capacity Utilisation
 Achieving an optimum level of capacity utilisation is a key production
objective
 A business has several options available to improve its capacity
utilisation
Ways of improving capacity utilisation

 Increasing the level of capacity utilisation results in lower unit costs

 In some cases, increasing demand and thus output is the most
suitable way to increase capacity utilisation
o E.g. reducing selling prices or offering short-term price
promotion can increase demand
o If competitors go out of business, demand should pick up, which
will improve capacity utilisation without the need for further
promotion
 Reducing its overall capacity will improve the level of capacity
utilisation
o Capacity can be reduced by selling capital equipment or reducing
staff numbers

Design capacity refers to the maximum output or production capability of a

system, facility, or process under ideal conditions. This concept is crucial for
organizations as it sets a benchmark for what can be achieved when
everything functions optimally, including equipment, labor, and processes.
Understanding design capacity helps businesses effectively plan resources
and manage operations to meet demand while minimizing costs.

Layout design plays a crucial role in the efficiency and effectiveness of Layout
planning has numerous implications in both manufacturing and service firms.
Proper layout designing has significant impact on making an organization
competitive and improving its productivity. Layout planning is a strategic
decision as type of layout selection depends on company‘s objective of its type
of operation selected for production of products or services. A company selects
mass production system if its objective is to beat its competition by producing
low cost products whereas batch production system is predominantly chosen if
objective is to provide customized and high quality products or services. The
characteristics of both types of operation system influence designing of layout.
It should be noted here that selection of type of layout depends on strategic
objectives of a company whereas design of layout is governed by type of
production system that is associated with such objectives. For instance, a
profit oriented company providing customized products would provide high
variety of products but would produce each variety at low volume. So most
appropriate system of production in such case would be batch production
system. This in turn would decide type of layout that company would select
which fulfills criteria of batch production system. Similarly, cost oriented
company providing low variety of products at high volume would opt for mass
production system. Layout design for such system would be entirely different
than in case of batch production system. More practically, majority of
company‘s whether in service or manufacturing sphere asks for a hybrid of
both kind of operating systems. For instance, in a car assembly plant all cars
of similar kind are being assembled in mass production systems and they are
 painted in batches involving batch operation system. In such cases hybrid
layout is adopted which involves characteristics of both operating systems.

Following are the type of layouts discussed depending on type of production

systems:

16.3.1 PROCESS LAYOUT

A company would adopt a process layout for its operations if it is involved in

manufacturing of low- volume, high variety category of products. A process
layout groups workstations or departments according to function. For example,
in a retail store all grocery functions are arranged at one place and not
segregated. Most of service organizations such as banking, retail stores,
apparel stores, wedding dinner etc. adopt process layout. These organizations
provide variety of services and volume of each kind of service is small. Demand
levels for one particular kind of product or service is too low. Thus
management does not have inclination to allocate dedicated human or capital
resources.

Specifically, following are the characteristics of a process layout:

 Volume of product or service produced is low.

 Variety of product or service produced is high.
 General purpose equipment which can perform variety of operations is
generally used.
 Layout is flexible as it is less vulnerable to change in product mix. In a process
layout same resources can be used to produce different products or services.
For example, in retail store grocery department can be replaced by any other
department without hindering activities of other departments.
 Equipment utilization is higher as same resource is
utilized for production of different products. As demand for one type of
product is low so when one machine gets free from producing that product it
can be used to manufacture other products.
 Employee skill set is varied and high. For example, in a bank an employee can
be used to provide different services. Same employee can be used for cash
deposit and also for creating fixed deposits depending on the demand of each
kind of service. Thus, skill set of employees‘ increases as they become
proficient in carrying out different services.
 A process layout comes with following disadvantages:

 Productive time is lost in changing resources for production of different

products or services. For example, suppose a general purpose machine has a
capacity of producing 1000 units in an 8 hr. shift. Company gets an order of
manufacturing 400 units of product A and 600 units of product B. Now the
machine might not be able to produce all 1000 units in specified time of 8 hr.
shift. Some productive time might be lost in changing or setting the machine
for production of product B after manufacturing product A.
 The flow of resources is jumbled making movement of material handling
equipment costly and time consuming. For example, a customer ‗A‘ visiting a
retail store whose layout is shown in 16.3.1.1 might follow a path of kids ——-
grocery —– books (as shown in red color arrows) and then exit whereas another
customer ‗B‘ might follow apparels —– vegetables ——– books —— (as shown in
green color arrows) and then exit. The point is every customer might follow
different paths thus making movement of man and handling material (in this
case carts) jumbled. This can also lead to obstruction as customers might find
movement hindered making movement as time consuming process.

 More skilled labor is required resulting in higher cost as employees are engaged
in different activities. For example, Indian IT industry works on projects. IT
companies get projects from all type of sectors like banking, automobile,
finance etc. so employees of such companies need to have varied skill set to
work on different projects.
 Time gap or lag in production is higher. Because of loss of productive time in
changeover of machines and labor processing rate tends to be slower leading in
loss of production.
 Work in progress inventory is high needing greater storage space. Process
layout is based on features of batch shop production system which asks for
general purpose machines i.e. same machine is used to produce variety of
products. So, if a machine is processing raw material into finished good of one
kind of product then raw material of other product has to wait for processing.
This causes increase in work in process inventory occupying essential storage
space.
 Designing of Process Layout

Thus, to meet the challenges of process layout following are few aspects that
need to consider in designing of work centers based on process layout:

 The distance between departments should be as short as possible for avoiding

long distance movement of materials
 The departments should be in sequence of operations
 The arrangement should be convenient for inspection and supervision

These aspects have been discussed in following illustration.

Illustration: Suppose there are three departments 1, 2 and 3 which have to

located at given three locations A, B and C. Now, by using proper layout design
techniques it has to be found that which department should be assigned to
which location and how these departments need to be arranged. Following
information is given:

Workflow between departments i.e.

Distance between locations
travel distance between two
departments

A and B = 20 meters 1 and 3 = 170

B and C = 30 meters 2 and 3 = 100

A and C = 40 meters 1 and 2 = 30

Step 1: A and B locations are closest to each other and workflow between
departments 1 and 3 is maximum so 1 and 3 departments should be assigned
to locations A and B or B and A.
Step 2: 2 and 3 have higher work flow than 1 and 2 so these two
departments should be closer than 1 and 2. Also B and C are located closer to
each other than A and C. So, 1 should be assigned to A, 2 should be assigned
to C and 3 should be assigned to B as shown in Fig. 16.3.1.2
 16.3.2 PRODUCT LAYOUT

A firm would adopt a product layout for its operations if manufacturing of its
products is based on mass production system. Such a system is characterized
by high volume and very low variety of products. As high volume of products is
required so operations are continuous and repetitive. Car assembly, car
washing, computer manufacturing and other manufacturing operations
predominantly use product layout. It is important to emphasize that services
predominantly use batch production system and thus inclined to adopt process
layout for its operations whereas manufacturing firms use mass production
system and so adopt product layout for its operations.

Specifically, following are the characteristics of a product layout:

 Product layout involves production of high volume and low-variety of goods.

 Equipment required to manufacture such high quantities are specialized in
nature. Such machinery is equipped to perform only one kind of operation at a
very fast rate.

 Productive time is not lost in changing operations. As only one kind of product
is produced so machines or other resources are dedicated for only one kind of
job. There is no need to stop operations of a particular machine for changeover
resulting in high production and almost nil wastage of production time.
 Flow of products is streamline and not jumbled as was in process layout. As
machines are arranged in a sequence depending on the process of production
so all the raw material would flow according to a set flow. This results in a very
streamlined flow of material. For instance, in car washing example all cars
would move according to the process i.e. washing—–rinsing—–drying. No car
can skip or change the flow of operation.
 Work in progress inventory is low so there is no wastage of storage space.
Dedication of resources in a particular flow determines which machine,
material and labor is required for which operation. So, material keeps on
moving on a conveyor belt from one operation to other without stopping in
between the machines.
 Employee skill set is most of the time low and entails lower costs as compared
to employees involved in batch shop production system. An employee is
required to operate only one kind of machine or he/she indulges in very few
types of operations thus, limiting his/her skill set. But as he/she is involved in
doing one kind of job repetitively so he/she becomes proficient in that job. Also
time taken to carry out that job would be less as worker has become efficient in
performing such a job. This is required in product layout as high volume of
units needs to be produced which asks for efficient operations at less time.
 Material handling cost is also low in product layout
 A product layout comes with following disadvantages:

 Layout is fixed. Product layout is also called as assembly line layout as

machines are arranged in a sequential format. The format is dictated by the
process of production. In car washing example, rinsing cannot be carried out
before washing so resources for rinsing would only be placed and used after
washing operation. Thus a product layout is not flexible to changes.
 Equipment utilization is low as compared to process layout. In a product layout
which is based on mass production system special purpose machines are
installed to manufacture very few types of products. So, if demand for such
products falls then these resources cannot be utilized to manufacture or
produce other products. Also, if one machine goes out of order then it would
affect entire assembly line. For example, if machine operating rinsing function
breaks down then drying machine cannot operate its operation as no car would
reach its work centre.
 Equipment used is capital intensive i.e. cost of special purpose equipment is
very high. To fulfill high demand production rate has to be very high so special
purpose machines are used in mass production system. To incur such huge
costs machines and other resources need to run continuously resulting in
lower per unit cost of product. Whereas in process layout which is governed by
batch production system general purpose machines produce at low volumes
thus, increasing cost of services being delivered.

Designing of Product Layout

A product layout is also termed as assembly line layout because of

arrangement of workstations in a sequence. The product moves from one
station to other in a dedicated fashion until its completion. Little inventory gets
build up between workstations. No workstation should sit idle. A workstation
should receive the product for processing after it has processed previous
product. Now, it is quite possible that each operation might not use same time.
For example in car washing example, washing and drying might require only 2
minutes per car whereas rinsing might require 4 minutes per car
Now for instance a car ‗A‘ enters the assembly line and gets washed in 2
minutes. Machine 2 will get a product for processing after 2 minutes and
machine 3 will get ‗A‘ for drying after 6 minutes. By the time car ‗A‘ gets
rinsed which takes 4 minutes in the same time two more cars gets washed. So,
in this case there would be pile up of inventory after machine 1 making such a
line an unbalanced line. Thus, in a product layout activities cannot be grouped
together as they are not similar i.e. washing and drying are not similar. Also,
drying can be carried out only after rinsing. To remove such bottlenecks and
for proper designing of product layout where there is efficient usage of
resources line balancing technique is applied. The mathematical illustration of
this technique is not discussed in this module.

FIXED POSITION LAYOUT

In process and product layout product used to move from one machine to
another. All resources such as labor, tools and machinery used to be fixed. But
in cases of production of heavy products such as aircraft, ships etc. it is the
product which is fixed and all resources such as labor, tools and machinery
moves towards the product. Fixed position layout is the only possible option in
cases of manufacturing of such heavy products.
 Costs

Fixed Costs are costs that do not vary with output produced or sold in the
short run. They are incurred even when the output is 0 and will remain the
same in the short run. In the long-run they may change. Also known
as overhead costs.
E.g.: rent, even if production has not started, the firm still has to pay the rent.
Variable Costs are costs that directly vary with the output produced or sold.
E.g.: material costs and wage rates that are only paid according to the output
produced.
TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
TOTAL COST = AVERAGE COST * OUTPUT
AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT
A business can use these cost data to make different decisions. Some examples
are: setting prices (if the average cost of one unit is $3, then the price would
be set at $4 to make a profit of $1 on each unit), deciding whether to stop
production (if the total cost exceeds the total revenue, a loss is being made,
and so the production might be stopped), deciding on the best
location (locations with the cheaper costs will be chosen) etc.
Scale of production

As output increases, a firm‘s average cost decreases.

Economies of scale are the factors that lead to a reduction in average costs as
a business increases in size. The five economies of scale are:
 Purchasing economies: For large output, a large amount of components have
to be bought. This will give them some bulk-buying discounts that reduce costs
 Marketing economies: Larger businesses will be able to afford its own vehicles
to distribute goods and advertise on paper and TV. They can cut down on
marketing labour costs. The advertising rates costs also do not rise as much as
the size of the advertisement ordered by the business. Average costs will thus
reduce.
 Financial economies: Bank managers will be more willing to lend money to
large businesses as they are more likely to be able to pay off the loan than
small businesses. Thus they will be charged a low rate of interest on their
borrowings, reducing average costs.
 Managerial economies: Large businesses may be able to afford to hire
specialist managers who are very efficient and can reduce the business‘ costs.
 Technical economies: Large businesses can afford to buy large machinery
such as a flow production line that can produce a large output and reduce
average costs.
 Diseconomies of scale are the factors that lead to an increase the average
costs of a business as it grows beyond a certain size. They are:
 Poor communication: as a business grows large, more departments and
managers and employees will be added and communication can get difficult.
Messages may be inaccurate and slow to receive, leading to lower efficiency and
higher average costs in the business.
 Low morale: when there are lots of workers in the business and they have
non-contact with their senior managers, the workers may feel unimportant and
not valued by management. This would lead to inefficiency and higher average
costs.
 Slow decision-making: As a business grows larger, its chain of command will
get longer. Communication will get very slow and so any decision-making will
also take time, since all employees and departments may need to be consulted
with.
Businesses are now dividing themselves into small units that can control
themselves and communicate more effectively, to avoid any diseconomies from
arising.

Break-even

Break-even level of output is the output that needs to be produced and sold in
order to start making a profit. So, the break-even output is the output at
which total revenue equals total costs (neither a profit nor loss is made, all
costs are covered).
A break-even chart can be drawn, that shows the costs and revenues of a
business across different levels of output and the output needed to break even.

Example:
In the chart below, costs and revenues are being calculated over the output of
2000 units.
The fixed costs is 5000 across all output (since it is fixed!).
The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at
output 2000- so you just draw a straight line from $0 to $6000.
The total costs will then start from the point where fixed cost starts and be
parallel to the variable costs (since T.C.= F.C.+V.C. You can manually calculate
the total cost at output 2000: ($6000+$5000=$11000).
The price per unit is $8 so the total revenue is $16000 at output 2000.
Now the break-even point can be calculated at the point where total revenue
and total cost equals– at an output of 1000. (In order to find the sales revenue
at output 1000, just do $8*1000= $8000. The business needs to make $8000
in sales revenue to start making a profit).
 Advantages of break-even charts:
 Managers can look at the graph to find out the profit or loss at each level of
output
 Managers can change the costs and revenues and redraw the graph to see how
that would affect profit and loss, for example, if the selling price is increased or
variable cost is reduced.
 The break-even chart can also help calculate the safety margin- the amount by
which sales exceed break-even point. In the above graph, if the business
decided to sell 2000 units, their margin of safety would be 1000 units. In sales
terms, the margin of safety would be 1000*8 = $8000. They are $8000 safe
from making a loss.
Margin of Safety (units) = Units being produced and sold – Break-even
output
Limitations of break-even charts:
 They are constructed assuming that all units being produced are sold. In
practice, there are always inventory of finished goods. Not everything produced
is sold off.
 Fixed costs may not always be fixed if the scale of production changes. If
more output is to be produced, an additional factory or machinery may be
needed that increases fixed costs.
 Break-even charts assume that costs can always be drawn using straight
lines. Costs may increase or decrease due to various reasons. If more output is
produced, workers may be given an overtime wage that increases the variable
cost per unit and cause the variable cost line to steep upwards.

Break-even can also be calculated without drawing a chart. A formula can be

used:

Break-even level of production =Total fixed costs/ Contribution per unit

Contribution = Selling price – Variable cost per unit (this is the value
added/contributed to the product when sold)
In the above example, the contribution is $8 -$3 =$5, so the break-even level
is:
$5000/$5 = 1000 units!

, employee safety, and customer satisfaction. Different types of

operationTBREAKEVEN ANALYSIS

Contribution per unit Contribution per unit: the difference between the selling
price of an item and its unit variable cost. Contribution per item is found by
subtracting the variable costs of making an item from its selling price.

Contribution per unit = selling price per unit – unit variable costs Example:

Calculate the contribution made where selling price is £30 and unit variable
cost is £20.

Contribution per unit = selling price per unit – unit variable costs = £30 ‐ £20 =
£10 Contribution pays off fixed costs.

Once fixed costs are met, each item sold makes a contribution to profit.
Example: if each item costs £20 to make, excluding fixed costs, and sells for
£30, then there is £10 surplus to put towards paying off fixed costs.

Once all fixed costs are met, £10 profit is made on every item sold. Break even
point Break even: the minimum level of units that must be sold for revenue to
cover total costs exactly The break even level of output = fixed
costs/contribution per unit Example: Eg if fixed costs are £10,000 and each
unit contributes £10 then the break even output level = £10,000/£10= 1,000.
1,000 items must be sold for total costs to be covered and neither a profit or
loss made Profit = contribution – fixed costs Example: Fixed costs: £10,000. Per
unit contribution: £10. Calculate profit made selling 800 and 1,400 a) 800
units contribute 800 x £10 = £8,000. Fixed costs = £10,000. A £2,000 loss is
made b) 1,400 units contribute 1,400 x £10 = £14,000. Fixed costs = £10,000.
A £4,000 profit is made his essay will analyze various layout strategies and
discuss their suitability for different types of oAbsorption costing is linking all
production costs to the cost unit to calculate a full cost per unit of inventories.
This costing method treats all production costs as costs of the product
regardless of fixed cost or variance cost. It is sometimes called the full costing
method because it includes all costs to get a cost unit. Those costs include
direct costs, variable overhead costs, and fixed overhead costs.

Absorption Costing Formula:

In absorption costing,

Unit Costs of Product = Direct Cost + Production Overhead Cost

 Inventory Management
Inventory/stock: includes all the raw materials, semi-finished and finished
products that are on the shelves or in storage.

 Inventory management is necessary for operations to ensure efficient and

effective control and monitoring of stock.
 A business needs to have adequate stock on hand in order to keep
customers happy by having products available in the store.
 Shortages in stock may mean loss of valued customers who may turn to
competitors to satisfy their needs.

Inventory management is the supervision of a company’s inventory,

including the processes for producing, ordering, storing, and selling
products in the market. This includes managing the warehousing and
processing of raw materials, components, and finished products.Process
Layout:
Process layout arranges similar machines or equipment together based on
their The importance of an inventory control system

Inventory management impacts production, warehouse costs, and order

fulfillment. Effective inventory management helps contain costs and ensure
businesses have the correct stock. It also cuts down on excess inventory.

Benefits of inventory management

Efficient inventory management can streamline a business's production and

fulfillment processes. Some benefits of an inventory management strategy
include:
 Lower costs and save money
 Prevent overspending on warehouse storage
 Minimize storage needs
 Reduce losses to improve cash flow
 Forecast sales trends
 Satisfy customers with timely deliveries

Inventory management challenges

The main challenges in inventory management are keeping too much inventory
that the company cannot sell, lacking the inventory to fulfill orders that come in,
and not tracking inventory correctly. Other challenges include:
 Poor or outdated processes and inventory management systems
 Changes in customer demand as needs and desires change
 Difficulty navigating a warehouse to locate specific products

 Just in time (JIT)

Just-in-time (JIT) inventory management aims to maximize efficiency and lower

costs by coordinating inventory arrival with the start of production. The goal of
this method is to keep as little inventory on hand as possible while still meeting
a high production volume level for the product's demand. To have a successful
JIT inventory business, you‘ll need proper forecasting of needs and close
relationships with dependable suppliers.

Benefits:
 Reduces waste on unnecessary stock
 Lowers costs by avoiding having unused goods
 Avoids having more storage space for inventory than necessary

Economic order quantity (EOQ)

Economic order quantity (EOQ) is a formula used to calculate the optimal order
size to meet demand and stay within budget. EOQ is useful for any business,
large or small, that manages inventory. The goal is to reduce over-ordering and
waste, lower the cost of storage, and maximize quantity discounts offered by
vendors.

Benefits:
 Minimizes storage and holding costs
 Helps maintain inventory levels that match customer demand
 Provides specific numbers for how much inventory to hold

functions. This layout is suitable for industries with diverse products, low-
volume production, or customized products. Process layout allows flexibility
and easy modification of the production line to accommodate changes in The
EOQ formula is a straightforward equation that helps calculate the most cost-
effective order quantity that minimizes both ordering and holding costs. The
formula is as follows:

EOQ = square root of: (2SD) / H

Where:

 D = Demand (units per year)

 S = Ordering cost per year
 H = Holding cost per unit per year
How to Calculate for Economic Order Quantity (EOQ)

Now, let‘s break down the steps involved in calculating EOQ:

 Determine Demand (D): The first step is to identify the annual demand
for the product. This can be done by analyzing historical sales data or
forecasting future demand based on market trends and customer
behavior.

 Identify Ordering Cost (S): Ordering costs include expenses related to

the process of placing and receiving an order. This may encompass
administrative costs, shipping fees, and any other costs associated with
procurement. It‘s essential to accurately quantify these costs for the
calculation.

 Calculate Holding Cost (H): Holding costs are the expenses associated
with storing and maintaining inventory. This includes warehousing
expenses, insurance, and the opportunity cost of tying up capital in
inventory. Determine the holding cost per unit per year for accurate EOQ
calculations.

 Apply the EOQ Formula: Once you have the values for demand (D),
ordering cost per order (S), and holding cost per unit per year (H), plug
these values into the EOQ formula to calculate the Economic Order
Quantity (EOQ). EOQ = square root of: (2SD) / H

 Interpret the results: The calculated EOQ represents the optimal order
quantity that minimizes the total costs associated with ordering and
holding inventory. This quantity indicates how much a business should
order to meet demand while keeping costs at their lowest.

 Review and adjust: Inventory management is a dynamic process, and

market conditions may change. Regularly review and reassess your EOQ
calculations to ensure they align with current demand patterns, costs,
and business objectives.
Economic Order Quantity Examples

Here are a few examples illustrating how to calculate EOQ in different

scenarios:

Example 1: Basic EOQ Calculation

Let‘s say a company sells widgets. They have determined that the annual
demand for widgets is 10,000 units. The cost to place an order (ordering cost)
is $50, and the cost to hold one unit of inventory for a year (holding cost) is $2.

Now, we can calculate the Economic Order Quantity:

EOQ = square root of: (2SD) / H

Where:

 D = Annual demand (10,000 units)

 S = Ordering cost per order ($50)
 H = Holding cost per unit per year ($2)

Plugging in the values:

EOQ = square root of: 2 (50 x 10,000) / 2

EOQ = square root of: 1,000,000 / 2

EOQ = square root of: 500,000

EOQ = 707.1

So, the Economic Order Quantity for this company would be approximately
707 units per order.

Example 2: EOQ with Different Holding Costs

Let‘s say a bookstore orders books from a publisher. The annual demand is
5,000 books. The ordering cost is $30 per order, and the holding cost per book
per year is $1.50.

Now, we can calculate the Economic Order Quantity:

EOQ = square root of: (2SD) / H

Where:
  D = 5,000 books
 S = $30
 H = $1.50

Plugging in the values:

EOQ = square root of: 2 (30 x 5,000) / 1.50

EOQ = square root of: 300,000 / 1.5

EOQ = square root of: 200,000

EOQ = 447.2

So, the optimal order quantity is approximately 447 books.

Example 3: EOQ with Quantity Discounts

Let‘s say a manufacturer needs 20,000 units of a component per year. The
ordering cost is $100 per order, and the holding cost per unit per year is $0.50.
However, the supplier offers a discount if the manufacturer orders more than
1,000 units at a time, reducing the cost per unit from $10 to $9.50.

First, calculate the EOQ without considering the discount:

EOQ = square root of: (2SD) / H

Where:

 D = 20,000 units
 S = $100
 H = $0.50

Plugging in the values:

EOQ = square root of: 2 (100 x 20,000) / 0.50

EOQ = square root of: 4,000,000 / 0.5

EOQ = square root of: 8,000,000

EOQ = 2828.4

Since 2,828 units exceed the 1,000 unit threshold for the discount, we need to
compare the total cost with and without the discount.
Without Discount:

Total Cost = (D/Q) S + (Q/2) H + DP

where P is the price per unit ($10) and Q is the order quantity.

Total Cost = (20000/2828.4) 100 + (2828.4/2) 0.50 + 20000 x 10

Total Cost = 707.1 x 100 + 1414.2 x 0.50 + 200000

Total Cost = 70710 + 707.1 + 200000

Total Cost = 270417.1

Without Discount:

If ordering 1,000 units per order:

Total Cost = (D/Q) S + (Q/2) H + D (P’)

where P’ is the discounted price per unit ($9.50) and Q is 1,000 units.

Total Cost = (20000/1000) 100 + (1000/2) 0.50 + 20000 x 9.50

Total Cost = 20 x 100 + 500 x 0.50 + 190000

Total Cost = 2000 + 250 + 190000

Total Cost = 192250

Since the total cost with the discount ($192,250) is less than the total cost
without the discount ($270,417.1), the manufacturer should order 1,000 units
per order to benefit from the discount.

These examples illustrate how EOQ helps businesses determine the most cost-
effective order quantity to minimize inventory costs.

product designs. It also promotes specialized skills and expertise among

workers as they become proficient in specific areas of production. However,
process layout can lead to

increased material handling costs and longer travel distances, which may
result in inefficiency for high-volume production operations.
 PLean production is a process of production in which all forms of wastage are
eliminated to pull down the financial costs of wastage (wastage of raw
materials, human effort, time and energy) to achieve greater production
efficiency.
Features of lean production
 Waste minimization – All the business processes or techniques of
production that lead to wastage or do not add value to the products, are
removed.
 ‘Right first time’ approach – Business aims to produce zero defect
products in the very first attempt by testing and checking the quality and
condition of resources prior to production.
 Flexibility – Resources must be adaptable to the changing needs of the
business.
 Continuous improvement – The production efficiency is increased on
account of continuous improvement.
 Supply chain management (SCM) – It is vital for the business to manage
the supply chain and the partners involved in order to avoid any mistakes
and maintain the efficiency of production.
Methods of lean production
Kaizen

 Kaizen is a Japanese word for the philosophy of continuous improvement.

Kaizen is made up of two words, ‗Kai‘ which means change and ‗Zen‘ which
means better. Hence, Kaizen means ‗changing for the better‘.
 There are small groups of employees who identify and manage the small
changes (that aim at continuous change) and improvements in the
processes, strategies or activities of the organization and not one-off large
improvements (people in the organization resist large changes).
 Kaizen aims at quality (products) management to improve the productivity
efficiency.
Just-in-time (JIT)

 JIT is a stock control method in which the stock is delivered as and when
the requirement arises.
 JIT is a Japanese management philosophy that was developed by Taiichi
Ohno (Toyota executive).
 The buffer stock (the predetermined level of stock that is kept as a
precautionary measure for contingencies) is not required to be kept under
this stock control system.

 Lean Production

Lean production refers to the various techniques a firm can adopt to reduce
wastage and increase efficiency/productivity.

The seven types of wastage that can occur in a firm:

 Overproduction– producing goods before they have been ordered by

customers. This results in too much output and so high inventory costs
 Waiting– when goods are not being moved or processed in any way, then waste
is occurring
 Transportation-moving goods around unnecessarily is simply wasting time.
They also risk damage during movement
 Unnecessary inventory-too much inventory takes up valuable space and
incurs cost
 Motion-unnecessary moving about of employees and operation of machinery is
a waste of time and cost respectively.
 Over-processing-using complex machinery and equipment to perform simple
tasks may be unnecessary and is a waste of time, effort and money
 Defects– any fault in equipment can halt production and waste valuable time.
Goods can also turn out to be faulty and need to be fixed- taking up more
money and time
By avoiding such wastage, a firm can benefit in many ways

 less storage of raw materials, components and finished goods- less money and
time tied up in inventory
 quicker production of goods and services
 no need to repair faulty goods- leads to good customer satisfaction
 ultimately, costs will lower, which helps reduce prices, making the business
more competitive and earn higher profits as well
Now, how to implement lean production? The different methods are:

 Kaizen: it‘s a Japanese term meaning ‗continuous improvement‘. It aims to

increase efficiency and reduce wastage by getting workers to get together in
small groups and discuss problems and suggest solutions. Since they‘re the
ones directly involved in production they will know best to identify issues.
When kaizen is implemented, the factory floor, for example, is rearranged
by re-positioning machinery and equipment so that production can flow
 smoothly through the factory in the least possible time.

Benefits:


 increased productivity
 reduced amount of space needed for production
 improved factory layout may allow some jobs to be combined, so freeing
up employees to do other jobs in the factory
 Just-in-Time inventory control: this techniques eliminates the need to hold
any kind of inventory by ensuring that supplies arrive just in time they are
needed for production. The making of any parts is done just in time to be used
in the next stage of production and finished goods are made just in time they
are needed for delivery to the customer/shop. The firm will need very reliable
suppliers and an efficient system for reordering supplies.
Benefits:Reduces cost of holding inventory
 Warehouse space is not needed any more, so more space is available for
other uses
 Finished goods are immediately sold off, so cash flows in quickly
 Cell Production: the production line is divided into separate, self-contained
units each making a part of the finished good. This works because it improves
worker morale when they are put into teams and concentrate on one part
alone.
Methods of Production

 Job Production: products are made specifically to order, customized for each
customer. Eg: wedding cakes, made-to-measure suits, films etc.
Advantages:Most suitable for one-off products and personal services
 The product meets the exact requirement of the customer
  Workers will have more varied jobs as each order is different, improving
morale
 very flexible method of production

Disadvantages:Skilled labour will often be required which is expensive
 Costs are higher for job production firms because they are usually labour-
intensive
 Production often takes a long time
 Since they are made to order, any errors may be expensive to fix
 Materials may have to be specially purchased for different orders, which is
expensive

 Batch Production: similar products are made in batches or blocks. A small

quantity of one product is made, then a small quantity of another. Eg: cookies,
building houses of the same design etc.
Advantages:Flexible way of working- production can be easily switched between
products
 Gives some variety to workers
 More variety means more consumer choice
 Even if one product‘s machinery breaks down, other products can still be
made

Disadvantages:Can be expensive since finished and semi-finished goods will
need moving about
 Machines have to be reset between production batches which delays
production
 Lots of raw materials will be needed for different product batches, which can
be expensive.

 Flow Production: large quantities of products are produced in a continuous

process on the production line. Eg: a soft drinks factory.
Advantages:There is a high output of standardized (identical) products
 Costs are low in the long run and so prices can be kept low
 Can benefit from economies of scale in purchasing
 Automated production lines can run 24×7
 Goods are produced quickly and cheaply
 Capital-intensive production, so reduced labour costs and increases
efficiency

Disadvantages:A very boring system for the workers, leads to low job
satisfaction and motivation
 Lots of raw materials and finished goods need to be held in inventory- this is
expensive
  Capital cost of setting up the flow line is very high
 If one machinery breaks down, entire production will be affected

Factors that affect which production method to use:

 The nature of the product: Whether it is a personal, customized-to-order
product, in which case job production will be used. If it is a standard product,
then flow production will be used
 The size of the market: For a large market, flow production will be required.
Small local and niche markets may make use of batch and flow production.
Goods that are highly demanded but not in very large quantities, batch
production is most suitable.
 The nature of demand: If there is a fair and steady demand for the product, it
would be more suitable to run a production line for the product. For less
frequent demand, batch and job will be appropriate.
 The size of the business: Small firms with little capital access will not
produce using large automated production lines, but will use batch and job
production.
Technology and Production

 Automation: equipment used in the factory is controlled by computers to

carry out mechanical processes, such as spray painting a car body.
 Mechanization: production is done by machines but is operated by people
 CAD (computer aided designing): a computer software that draws items being
designed more quickly and allows them to be rotated, zoomed in and viewed
from all angles.
 CAM (computer aided manufacturing): computers monitor the production
process and controls machines and robots-similar to automation
 CIM (computer integrated manufacturing): the integration of CAD and CAM.
The computers that design the product using CAD is connected to the CAM
software to directly produce the physical design.
 EPOS (electronic point-of-sale): used at checkouts/tills where operator scans
the bar-code of each item bought by the customer individually. The item details
and price appear on screen and are printed in the receipt. They can also
automatically update and reorder stock as items are bought.
 EFTPOS (electronic funds transfer at point-of-sale): the electronic cash register
at the till will be connected to the retailer‘s main computer and different banks.
When the customer swipes the debit card at the till, information is read by the
scanner and an amount is withdrawn from the customer‘s bank account (after
the PIN is entered).
Advantages of technology in production
 Greater productivity
 Greater job satisfaction among workers as boring, routine jobs are done by
machines
 Better quality products
 Quicker communication and less paperwork
 More accurate demand levels are forecast since computer monitor inventory
levels
 New products can be introduced as new production methods are introduced
Disadvantages of technology in production
 Unemployment rises as machines and computers replace human labour
 Expensive to set up
 New technology quickly becomes outdated and frequent updating of systems
will be needed- this is expensive and time-consuming.
 Employees may take time to adjust to new technology or even resist it as their
work practices change.

Quality management has three main components- quality control, quality

assurance and quality improvement. Quality management is focused not only
on quality, but also on the meanstoachieve quality and sustain total quality
management is the organisation-wide man agement of quality. It consists of
planning, organising, directing, controling and assuring quality
Quality management is the act of overseeing all activities and tasks that must
be accomplished to maintain a desired level of excellence. This includes the
determination of a quality policy, creating and implementing quality planning
and assurance, and quality control and quality improvement. It is also referred
to as total quality management (TQM).

Quality is a measure of the achievement of an organisation in terms of

customer satisfac tion. It means everything that an organisation does, in the
eyes of the customers. It is the excellence that is better than a minimum
standard. Some of the important definitions of the concept quality are as
follow: Joseph M Juran said ―Quality is fitness for use or purpose‖. ISO
9000:2000 defines ―Quality is the degree to which a set of inherent
characteristics fulfills requirements
Quality Circle: Quality circle can be described as a small group of employees of
the same work area, doing similar work, that meets voluntarily and regularly to
identify, analyse and resolve work re lated problems. Every members of the
circle participating in the activities, utilizing problem solving techniques to
achieve control or improvement in the work area and also help and mutual
development in the process. The concept of Quality circle is based on ―respect
for the human individual‖ as against the traditional assumption based on
suspicion and mistrust between management and its employees. Quality circle
built mutual trust and create greater understanding between and the workers.
Cooperation is the key element in its operation.
Concept of Quality Circle: The quality circle was first developed in Japan,
during 1960s and later it became popular elsewhere. The concept is based on
the recognition of the value of the employees.
• The concept of Quality Circle is central to TQM and it ensures staff
participation in full measure towards achieving the targeted goals of the
organisation
• AQualitycircle is a small group of people which meets regularly for solving
problems
• They are helpful in developing team spirit in the organisation as well as lead
to im proved organisational culture
• These circles improve communication within the organisation and also act as
motiva tion to employees of the organisation
• They are the best examples of participative management in organisations.
They pro mote job involvement of employees.
• They are helpful in bringing leadership qualities in the employees • It can
also be used as a human resource development technique. ISO 9000
• It is tool for improvement and improves professional image of the organisation
where it is implemented • The ISO series comprise 9000, 9001, 9002, 9003 and
9004.
• The ISO series does not lay down the goals and objectives; it rather provides a
frame work, methodsandstructure for organisations to adopt quality systems. It
is applicable to any type of organisation. Wecan say that training and
teamwork is very important for TQM. Commitment and personal involvement of
the top managers is very essential for the successful imple mentation of TQM.
It is the management process for improving all the functions in the
organisation. It supports meeting customer requirements through continous
improve ment. Customer satisfaction is given the highest priority in TQM.
Internal monitoring is very essential for TQM implementation.
Quality Assurance: Quality assurance refers to activities or steps under taken
before and during the process of reaching the outputs/products. It is proactive
and anticipatory. Generally standards and pro cedures are clearly defined in
advance and the personnel are trained to be able to meet them. Its concern is
to prevent faults occurring in the first place. Quality is designed into the pro
cess to attempt to ensure that the output is produced to a pre-set
criteria/norms. In simple words, Quality assurance means to provide the
necessary confidence to the cus tomers as well as to top management that all
concerned are carrying out their job effectively and that the product quality is
as per customer‘s satisfaction with economy. Quality products can be produced
only when all the departments fully participate and cooperate.

roduct Layout:
Product layout, also known as assembly-line layout, arranges production
processes in a sequential order to achieve high-volume, standardized
production. This layout is ideal for industries with mass production of identical
products, such as automotive manufacturing or electronics assembly. Product
layout promotes efficiency through a continuous flow of production, minimal
material handling, and reduced work-in-progress inventory. However, product
layout lacks flexibility and is less adaptable to changes in product design or
production requirements.

Cellular Layout:
Cellular layout organizes workstations into small, self-contained production
units called cells. Each cell is responsible for a specific set of tasks or
processes, promoting teamwork and shared responsibility among workers.
Cellular layout is suitable for operations that require a high degree of
customization, quick changeovers, and a focus on lean manufacturing
principles. By creating smaller production units, cellular layout improves
communication, coordination, and quality control within the production
process. However, implementing cellular layout may require significant
planning and coordination to ensure smooth workflow and optimized
productivity.

Critical path analysis ("CPA") is a widely-used project management tool that

uses network analysis to help project managers to handle complex and time-
sensitive operations.

Introduction

Many larger businesses get involved in projects that are complex and involve
significant investment and risk. As the complexity and risk increases it
becomes even more necessary to identify the relationships between the
activities involved and to work out the most efficient way of completing the
project.

The essential technique for using CPA is to construct a model of the project
that includes the following:

 A list of all activities required to complete the project

 The time (duration) that each activity will take to completion
 The dependencies between the activities

Using this information, CPA calculates:

 The longest path of planned activities to the end of the project

 The earliest and latest that each activity can start and finish without
making the project longer
This process determines which activities are "critical" (i.e., on the longest path)
and which have "total float" (i.e. can be delayed without making the project
longer).

In project management, a critical path is:

The sequence of project activities which add up to the longest overall

duration

The critical path determines the shortest time possible to complete the project.

Any delay of an activity on the critical path directly impacts the planned project
completion date (i.e. there is no float on the critical path).

Illustration of CPA

Here is worked example to illustrate how the critical path for a project is
determined.

Conventions in drawing the network

The main components of a network analysis are summarised below:

Example network diagram

Consider the following series of activities in a business planning to launch a

new product:
Laid out in the correct sequence of activities, the network diagram would look
like this before we calculate the EST and LFT for each activity:

The next step is to calculate the EST for each activity.

For example:

The EST for task B is 2 months – the time taken to conduct market research
(task A)

To calculate the EST for task C, we add the 2 months for task A to the 4
months for designing the product concept (task B) = 6 months

The remaining ESTs can then be added to the network diagram:

 The LFTs show the latest time an activity must be completed by to avoid a
delay to the project. LFTs are calculated by looking right to left on the network
diagram. So:

Evaluating CPA

The main advantages and disadvantages of a business using CPA can be

summarised as follows:

Advantages of CPA

 Most importantly – helps reduce the risk and costs of complex projects
 Encourages careful assessment of the requirements of each activity in a
project
 Help spot which activities have some slack ("float") and could therefore
transfer some resources = better allocation of resources
 A decision-making tool and a planning tool – all in one!
 Provides managers with a useful overview of a complex project
 Links well with other aspects of business planning, including cash flow
forecasting and budgeting

Disadvantages of CPA

 Reliability of CPA largely based on accurate estimates and assumptions made

 CPA does not guarantee the success of a project – that still needs to be
managed properly
 Resources may not actually be as flexible as management hope when they
come to address the network float
 Too many activities may the network diagram too complicated. Activities might
themselves have to be broken down into mini-projects
A decision tree is a mathematical model used to help managers make
decisions.

 A decision tree uses estimates and probabilities to calculate likely

outcomes.
 A decision tree helps to decide whether the net gain from a decision is
worthwhile.

A decision tree is a simple model for supervised classi cation. It is used for
classifying a single discrete target feature. Each internal node performs a
Boolean test on an input feature (in general, a test may have more than two
options, but these can be converted to a series of Boolean tests). The edges are
labeled with the values of that input feature. Each leaf node speci es a value for
the target feature

In a decision tree:

 Nodes: Nodes represent decision points or events where choices are

made or outcomes occur. There are different types of nodes:
 Root Node: The starting point of the tree, representing the initial
decision or question.
 Internal Nodes: Intermediate nodes that represent decisions or events
leading to further branches.
 Leaf Nodes (Terminal Nodes): End points of the tree that represent
final outcomes or decisions.
 Branches: Branches connect nodes and represent possible choices or
outcomes. Each branch represents a decision or event that leads to
different paths in the decision-making process.
 Decision Rules: Decision rules are used to determine which branch to
follow at each decision point. These rules are based on the attributes
or features of the data being analyzed and are typically represented as
conditions or criteria.
 Outcomes: Outcomes are represented at the leaf nodes of the decision
tree and describe the possible results or conclusions of the decision-
making process