Module-I

Industrial engineering

The expectations of the customer are on the rise and manufacturers have to design, and produce goods
in as much variety as possible to attend the demands of the customers. Thus, there is a challenge before the
industries to manufacture goods of right quantity and quality and at the right time and at minimum cost for their
survival and growth. This demands an increase in productive efficiency of the organization. Industrial
engineering pays a vital role in increasing the productivity. Various industrial engineering techniques are used to
analyze and improve the work methods, to eliminate waste, proper allocation and utilization of resources.
Industrial engineering can be defined as a profession in which a knowledge of mathematical and
natural sciences gained by study, experience and practice is applied with judgment to develop the ways to utilize
economically the materials and other natural resources and forces of nature for the benefit of mankind.
American Institute of Industrial Engineers (AIIE) has defined Industrial Engineering as ‘Industrial
engineering is concerned with the design, improvement and installation of integrated system of men, materials
and equipment'. It draws upon specialized knowledge and skills in the mathematical, physical sciences together
with the principles and methods of engineering analysis and design to specify, predict and evaluate the results to
be obtained from such systems.
The prime objective of industrial engineering is to increase the productivity by eliminating waste and
non-value adding (unproductive) operations and improving the effective utilization of resources.

Evolution of modern concepts in industrial engineering

The history of industrial engineering is considered to start with the industrial revolution in the
eighteenth century which began in England during the mid-eighteenth century. From Britain, the industrial
revolution spread gradually throughout Europe and to the United States. Industrial revolution is the name given
the movement in which machines changed people's way of life as well as their methods of manufacture.
The industrial revolution occupied the eighteenth and nineteenth centuries. It was a time of sweeping
technological changes, most of them developed by engineers. A primary aspect of the Industrial revolution is
that machine power replaced human and animal power. For example, steam engines were developed to pump
water from mines, replacing human or animal powered pumps. Also, during the industrial revolution, the field
of engineering continued a transition from application of rules of thumb to application of the growing body of
knowledge of science and math. During the industrial revolution, familiar engineering disciplines (particularly
civil engineering and mechanical engineering) began to emerge as identifiable specializations.
During the late nineteenth century, the momentum for the development of industrial engineering was
primarily provided by engineers/managers in the United States. Frederick Taylor, Frank Gilbreth and
Harrington Emerson where the major contributors to the industrial engineering discipline. Fredrick Winslow
Taylor is most often considered as the father of industrial engineering. Taylors' work covered topics such as the
organization of work by management, worker selection, training, and additional compensation for those
individuals that could meet the standard as developed by the company through his methods.
Taylor is also considered to be the father of scientific management because he was a pioneer in improving
methods and establishing the incentive system for workers with the benefit of higher productivity to the owners
and higher wages for the workers.

Frank Bunker Gilbreth and his wife Dr.Lillian M.Gilbreth worked on understanding fatigue, skill development,
motion studies, as well as time studies. Harrington Emerson, an American Engineer devoted his attention to
efficiency in industry. He was the first to use the term 'efficiency engineering' to describe his brand of
consulting. He called his philosophy 'The gospel of efficiency'. According to him, "efficiency means that the
right thing is done in the right manner, by the right man, at the right place, in the right time". Through meetings
of the American Society of Mechanical Engineers (ASME), he became personally acquainted with the
pioneering work of Frederick W. Taylor and worked on the methodology for standardizing work and
remunerating workers in accordance with productivity.
The modern industrial engineering techniques had their origin during the period between 1940 and
 1946. The development of the techniques as listed below took place during that time.
1. Value engineering,
2. Operations research,
3. Ergonomics or human engineering,
4. System analysis,
5. Advances in IT and computer packages,
6. Mathematical and statistical tools, etc.
Thus, industrial engineering has taken a firm position in the organization and it is contributing
maximum towards increasing productivity and efficiency in particular and quality of work-life in general.

Applications of industrial engineering

Industrial engineering is engineering approach to the detailed analysis of the use and cost of the
resources of an organization. The main resources are men, money, materials, equipment and machinery.
Industrial engineer carries out analysis in order to achieve the objectives (to increase productivity or profits,
etc.) and policies of the organization. Industrial engineer is engaged in the design of a system and his function is
primarily that of management. Area of operation of industrial engineers in a manufacturing enterprise includes
fields such as method study, work measurement, incentives, and plant layout.
In the early days, industrial engineering was largely time study oriented. By the years passed, the
dynamic nature of modern industrial engineering serve all levels of managements in problem solving are
applicable in almost every kind of organization viz., banks, hospitals, government at all levels, transportation,
construction, ware-housing, manufacturing, etc. Thus, industrial engineering covers a broad cross section of
business, industry and institution. It is a valuable tool of management. It is a means of raising the productivity of
a plant by the reorganization of work, a method which normally involves little or no capital expenditure on
facilities and equipments. It is a tool which can be applied everywhere. It can be used with success wherever
work is done or plant is operated, not only in production shops but also in offices, stores, laboratories and
service industries such as wholesale and retail distribution centre and restaurants and on farms.

Functions of an industrial engineer

Industrial engineering activities span the entire enterprise. Industrial engineering plays an important
role in any organization during the formation of a new company, and in its operations. Many developed
countries have realized the importance of industrial engineering to meet the demand of material goods at a
competitive price. Industrial engineering covers various aspects of productivity and human environment.
Industrial engineering functions can be grouped in different ways to suit an organization's need. The major
groupings, which provide a profile of its involvement, are given below.
1. Methods study – Method study is also known as method analysis. Method study is a systematic technique of
observing, recording with certain scientific tools and critically evaluating and examining the present methods of
doing a job or task, so as to develop improved, simpler, cheaper and more effective methods. Method study is
aimed at developing the simplest work methods and establishing the one best way of doing work (standard
method). The scope of method study includes all types of work processes, working environment, tools and
equipment to perform the job.
2. Performing a motion study – Every job can be broken down into its' fundamental work elements. Gilbreth
found that there are seventeen of these motions. The time to complete each motion does not change. Jobs can be
studied visually or through the assistance of a camera for micro-motion studies.
3. Performing a time study – This function is also called as work measurement. Without a standard, the company
will find it hard to estimate lead-time on their products. Times vary greatly when the employee does not know
what the expectation of company is. In order to correct this problem, the IE develop a fair standard expectation
for each operation. A good time study will take into account the unavoidable delays, fatigue, and to an extent,
outside interferences. Time for wasteful steps, such as searching for tools, will not be included in the final
standard. The expectation is that the workplace will be designed to accommodate the work and will be free from
this type of waste.
4. Production planning and control – For a company with different equipment used to manufacture a variety of
products, it is necessary that the equipment is not idle too much of the time or that there are no delays in
 shipments. A critical balance must be maintained to utilize resources such as labor, material and equipment to
their optimum potential. This branch is responsible for this task. The related functions involve capacity
planning, production scheduling and shop loading, inventory control, material requirement planning, material
movement, etc.
5. Human resources – Realizing that the most important resource in a workplace is the worker, it is necessary that
he be treated on an equitable basis. Human resource is that branch of industrial engineering that deals with the
labor requirements. The activities includes job description and classification, wage and salary survey and
payment structure, incentive plans and payment, manpower analysis, etc.
6. Establishing the performance standards – Establishing the performance standards as per the standard
methods. Developing performance standards tell the workers how well they have to do the work.
7. Statistical Quality Control (SQC) – The quality of a product or a service given is always a major factor for
any buyer conscious of spending his money wisely. A supplier who is concerned with the survival and growth of
his business is also equally interested in achieving and maintaining high quality standards. One method of
achieving this can be by a hundred percent inspection on the products manufactured. However, this is not
practical in most instances, and hence other innovative techniques are essential. Realizing the probability of
rejection is a chance event in a controlled environment, industrial engineering has resorted to mathematical and
statistical methods to achieve a high degree of quality in production. The activities in this group include process
control, correlation and regression analysis, control charts, testing of hypothesis, etc. In general, this field
requires extensive use of mathematics, and statistics.
8. Quality – The quality of the material can affect all parts of the system. Poor quality material often introduces
excessive amounts of rework into each of the processes. A typical job for an IE would be to work with the
quality department to set up a Quality Management system (QMS).
9. Design of inventory control – Since inventory is capital that cannot be converted until finished and purchased
by a consumer, it should be kept to a minimal. Industrial engineers designs inventory and determine the
economic lot size for production.
10. Developing standard training programmes – This function involves developing standard training
programmes for various levels in the organization.
11. Facilities planning and materials handling – Sound selection of site and developing an optimal layout is
necessary for the smooth flow of work. It is the duty of the industrial engineer to systematically plan and
execute an optimal layout of machineries so that materials movement can be carried out eliminating unnecessary
movements.
12. Value analysis – Value analysis ensures that no unnecessary costs are built into the product and it tries to
provide the required functions at the minimum cost. Hence helps to enhance the worth of the product.
13. Job evaluation – A technique used to determine the relative worth of jobs of the organization to aid in matching
jobs and personnel and to evolve sound wage policy.

Roles of an industrial engineer

The different roles an industrial engineer may need to take on are : –
1. Adviser/Consultant for interpretation of data, review, etc.
2. Analyst to analyze a problem to obtain insights.
3. Liaison agent to interface between company and customer/user.
4. Motivator to provide stimulus/skills.
5. Decision-maker to select a preference from alternatives.
6. Designer/Planner to produce solutions, specifications.
7. Expert to provide high level knowledge, experience, skills
8. Coordinator/Integrator to achieve the defined goals.
9. Project Manager to operate, supervise, evaluate projects.
10. Trainer/Educator in the skills and knowledge of industrial engineering.
11. Negotiator/Conflict manager for proper workplace relations.

Typical focus areas of industrial engineering

The typical focus areas of industrial engineering include the following fields.
1. Project management -manufacturing, production and distribution
2. Productivity, methods and process engineering
3. Quality measurement and improvement
4. Ergonomics/Human factors
5. Financial engineering

Production

Input Transformation
Process
Output
Labour
Material Product planning
Equipment Process planning
Goods and
Capital Production control
services
Management Maintenance

Inventory levels
Sales volume
Labour efficiency

Feedback

Production is the sequence of technical processes requiring either directly or indirectly the mental and
physical skill of craftsman and consists of changing the shape, size and properties of materials, and ultimately
converting them into useful articles. Some examples of production are manufacturing custom-made products
like constructing flats, manufacturing standardized products like, car, motor cycle, television, etc. Production
system of an organization is that part, which produces products of that organization. At one end of the
production system are the inputs and at the other end outputs. Input and output are linked by certain operations
or process or activities imparting value to the inputs. The processes, operations or activities may be called
production system. The nature of production system may differ from company to company or from plant to
plant in the same firm. A typical production system comprises of three main components inputs,
transformation process and output. A simplified production system is shown in the figure.

Product design process

The product design process is the transformation of an idea, needs, or requirements by consumers or
the marketplace at large, into a product that satisfies these needs. The process of developing new products varies
between companies, and even between products within the same company. Product design process generally
follows the following sequence.

Conception

Acceptance

Execution

Translation

Pre-Production
1. Conception – This is the most important step of the design activity and it provides the basis for subsequent
actions. During this stage, the needs of the target market are identified, competitive products are reviewed, draft
product specifications are defined, a product concept is selected, an economic analysis is done, and the
development project is outlined. As a result of the product conception process, certain specified information
such as technical requirements, product performance, appearance requirements, etc., will be made available.
2. Acceptance – At this stage the new product viability is investigated and draft specifications are evaluated. The
draft specifications will have to satisfy requirements such as customer requirements, manufacturing
requirements for products etc. The draft specification is then accepted, rejected or modified based on the
resources available in the organization and feasibility studies.
3. Execution – In this stage, a working model (a prototype)as per the accepted specification is made. It is often
impossible to take into account all details during the preliminary design stage. Therefore, only after the
completion of a working prototype will provide additional information related to product design parameters.
Also, testing of the model is carried out to evaluate the performance of the product developed.
4. Translation – In this stage, all relevant information such as material specifications, drawings, manufacturing
data and tooling requirements are finalized and final product design is made and approved for the actual
manufacturing process.
5. Pre-production – The main objective of this stage is to summarize all details of the manufacturing process, and
particularly in the case of large-scale production requirements, to carry out a pilot test conducted under real
production conditions. The new product should be tested to customer specifications with equipment that will be
used in the actual manufacturing process. This test should be undertaken prior to the start of the main production
operation in order to identify any further faults or problems. As a result of the pre-production testing procedure,
all products, materials, equipment, and labor specifications should be summarized and finally approved prior to
commencement of the actual manufacturing process.

Factors affecting product design

Many factors influence the design of a product; some are listed below.
1. Marketing aspects–
Customer requirements have great influence over the way a product is designed and developed. Organization
has to be in close touch with the target market to identify the requirement and to estimate the demand of the
product. It is easy to estimate the demand for the existing product. But if the product is entirely new and is
offered to the market first time, a detailed market survey is to be carried out to estimate the demand for the
product. As a product is designed, it is normal for potential customers to be questioned about the type of product
or design that they prefer. For example, when designing a mobile phone, changes in design should be made
according to the likes and dislikes of targeted customers.

Customer
requirements

Functional
Aesthetic Aspect Aspects

PRODUCT
DESIGN

Manufacturability Operational
Aspects

Reliability

2. Functional aspects –The number of functions a product has to perform will inevitably affect its design. Once
the marketing feasibility is established for the proposed product, i.e., a sufficient demand exists for the product,
 the functional scope of the product is to be carefully analyzed and the functions are to be defined properly. The
functional objectives are to be fixed with respect to the product such as the various functions and cost
considerations.
3. Operational aspects – Once the functions expected to be serviced by the product are established then, the
operational aspects of the products are to be determined. The product is not only expected to perform its
functions satisfactorily, but it should be easy to handle and operate at the customers end. The product is used at
different operational conditions and the customers vary with respect to skills and knowledge. Designers should
take into consideration of the requirement of customers and make the product adaptable to various operating
conditions.
4. Durability and dependability –Durability refers to the duration of the active life of the product under given
working conditions. Quality of the product is directly proportional to the quality of inputs (materials, men, etc.)
and the process of manufacture. Thus, it is a function of cost. Depending upon the managements’ product
policy, a compromise is to be made between quality and cost. To be in competition, the organizations have to
give better quality products at reasonable price. Due consideration should be given to various aspects of quality
measures, safety and maintenance aspects.
5. Aesthetic aspect – Aesthetic aspect refers to the ‘external look good’ aspect of the product and is concerned
with molding the final shape around the basic skeleton. Aesthetic aspects help the selling function of the product
by attracting the customers and creating the first impression about the product. For consumer, good aesthetics is
the dominant factor in creating the demand for the product. Styling becomes an important factor in product
design in situations such as changes in fashion and taste, evolution of form and introduction of new ideas to
quickly outdate the old ones.

Essential

Function
Compact Repairability

REQUIREMENTS
OF GOOD Reliability
Simplicity PRODUCT
DESIGN

Productibility Aesthetics
Durability

requirements of a good product design

Major or essential requirements of a good product design are depicted in the figure. Now let's discuss each
essential requirement of a good product design.
1. Function – The product must be designed in such a way that it optimally performs the main task or function for
which it is purchased by a buyer. In other words, the product must satisfy the needs and wants of the consumer.
For e.g., function of an AC is to provide cooling of a room. So, AC must be designed in such a way that it can
cool a room as fast as technologically possible. If it doesn't meet basic expectations, the consumers won't buy it.
2. Repairability – The product must be designed in such a way that it can be easily repaired whenever necessary
during a malfunction. The product repairs must be done quickly that too at a low repair cost. Consumers usually
don't buy those costly products, which are either very expensive to repair maintain or those who take a longer
time and more money for repairing.
3. Reliability – Reliability means dependability on a product. Consumers prefer to purchase and use often those
products which perform their main function or task optimally for a longer period without any annoying
malfunctions, breakdowns or failures. In short, a product must perform quite well and give trouble-free service
for a decent amount of time. It must not need constant repairs and/or frequent maintenances. It is so, since
repairs often turn costly and are very time consuming. Reliability is crucial for consumer durables and office
equipments. A reliable product gains consumers' trust, loyalty and this creates its goodwill in the competitive
market. Therefore, reliability is an important factor to be kept in mind while designing a product.
4. Manufacturability – The product must be designed in such a way that it can be produced in large quantities
with ease at a minimum production cost. The production department must be able to produce the product easily,
quickly, in required quantities and at a low production cost. The production process must not be very complex,
and it must not require costly machines to produce the product.
5. Aesthetics – Aesthetics must be kept in mind while designing a product. It refers to, how the product looks,
feels, sounds, tastes or smells. That is, the product must look, feel, sound, taste or smell very good. It must be
attractive, compact and convenient to use. Its packaging must also be made graphically appealing and colorful.
If this aspect is not considered, product will fail in the market. This factor is very important, especially in case a
product is designed for and targeted to the young generation that is emerging with a modern mindset and current
trends.
6. Durability – Durability refers to the life of a product. A durable product performs flawlessly for a longer
period. It is a sign of a good-quality product. Consumers want their products to have a longer life. They do not
want to replace their products repeatedly. This factor is very crucial for costly products like televisions, cars, so
on. Therefore, durability is another important requirement that must be kept in mind while designing a product.
7. Simplicity – The design of the product must be very simple. The simpler a design, the easier, it is to produce
and use (handle). Simple products are also economical and reliable. The product must have the least number of
operations without affecting its functionality.
8. Compact – The product must be small; it must occupy less space, and must have lower weight. In other words,
it must be very compact. The company must try to make its products as small as possible. Today, everything is
turning smaller. Big sized cell phones are now out of fashion. In the 1950s, computers were as huge as spacious
rooms. However, today we have laptops and palmtop computers. Most products can be made compact. Still, this
cannot be done for all products. In case of televisions, it is just the opposite. Today people want bigger
televisions. Similarly, there is a limit on small size.

Production procedure
Production procedure starts with the customer and ends up with satisfying the needs of the customer by
delivering the required products. Production procedure cycle is discussed below.
1. Sales forecast phase – The manufacturing cycle is triggered by the forecast of customer demand and current
product availability in the manufacturer’s finished- goods warehouse. The marketing or sales department after a
thorough analysis and market research comes out with details like acceptability of the product by customers,
consumer’s reactions to new modifications and designs. Based upon the analysis of the data, sales department
prepares a sales forecast.
2. Production planning activity phase – The production budget is prepared by the finance department in
consultation with production department. The engineering department is instructed to prepare drawing,
specifications or to check and modify the existing ones if needed. The management reviews the sales forecast
and the budget to take decision regarding quantities to be produced. Once the production quantities for each
product are finalized, the manufacturer must decide on the precise production sequence. Production planning
activity begins as soon as the technical information is received from the engineering department. The production
planning activity results in a schedule of production. The inventory levels are checked in order to initiate
procurement activity of materials. Make or buy decision is then made. The production planning section supplies
the complete data on production schedule to the dispatching section.
3. Production phase – During the manufacturing phase of the process, the manufacturer produces to the
production schedule. The manner in which this activity is accomplished varies greatly across companies.
4. Dispatching phase – When the product is completely made, then finished product is shipped to the customer,
retailer, distributor, or finished-product warehouse after inspection. The objective of the shipping process is to
ship the product by the promised due date while meeting quality requirements and keeping costs down.
Thus, the production procedure requires the coordinated effort of all the functional departments of the
organization.

Productivity
Productivity refers to the physical relation between the quality produced (output) and the quantity of
resource used in the course of production (input). Output implies production while input means land, labour,
capital, management, etc. Productivity is an overall measure of the ability to produce a good or service. More
specifically, productivity is the measure of how specified resources are managed to accomplish timely
objectives as stated in terms of quantity and quality. Productivity may also be defined as an index that measures
output (goods and services) relative to the input (labor, materials, energy, etc., used to produce the output).
Thus, productivity can be defined as the ratio between output and input.

Output
Productivity =
Input
Hence, there are two major ways to increase productivity; increase the numerator (output) or decrease
the denominator (input). It is the concept that guides the management of production systems and measures its
success. It is an indicator of how well the factors of production (land, capital, labour and energy) are utilized.
Increase in production may or may not be an indicator of increase in productivity.
Higher productivity means producing more from a given amount of input or producing a given amount
with minimum level of inputs. In other words the more the output from one worker or one machine (or a piece
of equipment) per day per shift, the higher is the productivity. Higher productivity is not to be taken in sense of
higher workloads or faster machines alone but, it is always elimination of waste of all type of labour (time and
skill) machine time, capital, and material management, etc.

Objective of productivity measurement

1. To study the performance of the system.
2. To compare with different systems.
3. To compare actual productivity with desired productivity.

Comparison of production and productivity

Productivity and production are two different terms and carry entirely different meanings. Production is
the manufacturing of desired products with the help of inputs (raw material and utilities), machines, method, and
manpower. Productivity is the manufacturing of desired products with the optimal utilization of inputs(raw
 material and utilities), machines, method, and manpower.
The difference between both is the optimal utilization of all available resources. Production refers to
the quantity of the product. Productivity is the efficiency of production. Production can be increased by
increasing the inputs without any improvement in their effective utilization. Improvement in productivity
increases production without increases in the inputs. Higher production does not necessarily improve
productivity. Higher productivity brings down the cost of production thus, improving profitability, for the same
sale price.

Benefits of productivity measurement

1. Higher profit – Higher productivity enables the company to produce more output. This results in more profit to
it. This profit can be used for expansion and other activities.
2. Employee’s welfare – Higher productivity brings more profit to the company. This profit can be used to
provide better facilities and working conditions to the employees. So, it results in welfare of the employees.
3. Better return – Company gets better return on investment due to higher productivity. So, they pay a better
dividend (share of profit) to the shareholders. The market price of the share will also increase.
4. Nice relations – Higher productivity results in nice relations between the management and the employees. Good
working conditions, facilities and incentives motivate employees to give their best to the organization.
5. Customer satisfaction – Higher productivity results in better customer satisfaction. This is because customers
are provided with good-quality products at low prices. Satisfaction of customers will result in their loyalty
towards the company.
6. Good credit rating – Higher productivity results in a good credit rating by financial institutions. This will
enable the company to get cheap funds from the market to meet working and fixed capital requirements.
7. Goodwill – Due to higher productivity, the company will have a good corporate image (goodwill) in the minds
of social entities. This includes, shareholders, government, suppliers, financial institutions, customers, etc.
8. Low labour turnover – Higher productivity enables the company to provide better facilities and working
conditions to the employees. This will make the employees loyal. Hence, employee turnover and absenteeism
will reduce.

Purchasing
In any industry purchase means buying of equipments, materials, tools, parts etc., required for the
industry. The importance of the purchase function varies with nature and size of industry.
In small industry, this function is performed by works manager and in large manufacturing concern;
this function is done by a separate department. The moment a buyer places an order he commits a substantial
portion of the finance of the corporation which affects the working capital and cash flow position. He is a highly
responsible person who meets various salesmen and thus can be considered to have been contributing to the
public relations efforts of the company. Thus, the buyer can make or mar the company's image by his excellent
or poor relations with the vendors.
Purchasing plays a crucial role in the materials management because it is concerned from input stage
up to the consumption in manufacturing. Purchasing functions as a monitor, clearing house and a pipe line to
supply materials needed for production. The purchase department is called upon to purchase the right type of
goods, at the right time, from the right suppliers, and at right prices.

Objectives of purchasing
The primary objectives of purchasing are to buy materials of proper quantity and quality in proper time
and at the cheapest cost. The objective is not only to procure the raw materials at the lowest price but to reduce
the cost of the final product. Apart from this, there are other objectives, which are described as follows.
1. To avail the materials, suppliers and equipments at the minimum possible costs – These are the inputs in
the manufacturing operations. The minimization of the input cost increases the productivity and resultantly the
profitability of the operations.
2. To ensure the continuous flow of production – To ensure the continuous flow of production through
continuous supply of raw materials, components, tools, etc., with repair and maintenance service.
3. To increase the asset turnover – The investment in the inventories should be kept to minimum in relation to
the volume of sales. This will increase the turnover of the assets and thus, the profitability of the company.
4. Source of supply – The main objective of the purchasing department is to select, develop and maintain the
supply of materials. The selection of proper source of supply is always necessary to achieve this.
5. To develop an alternative source of supply – Exploration of alternative sources of supply of materials
increases the bargaining ability of the buyer, minimization of cost and increases the ability to meet the
emergencies.
6. To establish and maintain the good relations with the suppliers – Maintenance of good relations with the
supplier helps in evolving a favorable image in the business circles. Such relations are beneficial to the buyer in
terms of changing the reasonable price, preferential allocation of material in case of material shortages, etc.
7. To achieve maximum integration with other department of the company – The purchase function is related
with production department for specifications and flow of material, engineering department for the purchase of
tools, equipments and machines, marketing department for the forecasts of sales and its impact on procurement
of materials, financial department for the purpose of maintaining levels of materials and estimating the working
capital required, personnel department for the purpose of manning and developing the personnel of purchase
department and maintaining good vendor relationship.
8. Effective and efficient purchasing system – Investment in the materials should be minimum and full
utilization of them is necessary. Proper classification and inventory control helps in material productivity.
9. To train and develop the personnel – Purchasing department is manned with varied types of personnel. The
company should try to build the imaginative employee force through training and development.
10. Efficient record keeping and management reporting – Paper processing is inherent in the purchase function.
Such paper processing should be standardized so that record keeping can be facilitated. Periodic reporting to the
management about the purchase activities justifies the independent existence of the department.

Functions of purchasing
In order to fulfill these objectives, the functions of the purchase department can be summarized as
follows.
1. To receive purchase requirements and requisitions from various departments
2. To select the materials to be purchased on priority
3. To select the source of supply
4. To decide the purchasing policy and procedures
5. To prepare specifications and obtain tenders and quotations of materials
6. To purchase the proper quantity at proper time
7. To purchase good quality of materials at cheapest rate
8. To get deliveries at proper place within the prescribed time
9. To check and inspect the materials
10. To make the prompt payments and co-operate

Parameters of purchasing/Factors of purchasing

The success of any manufacturing activity is largely dependent on the procurement of raw materials of
right quality, in the right quantities, from right source, at the right time and at right price popularly known as ten
‘R’s’ of the art of efficient purchasing. They are described as the basic principles of purchasing.
1. Right price – It is the primary concern of any manufacturing organization to get an item at the right price. But
right price need not be the lowest price.
2. Right quality – Right quality implies that quality should be available, measurable and understandable as far as
practicable.
3. Right time – For determining the right time, the purchase manager should have lead time information for all
products. Lead time is the total time elapsed between the recognition of the need of an item till the item arrives
and is provided for use.
4. Right source – The source from which the material is procured should be dependable and capable of supplying
items of uniform quality.
5. Right quantity – Concepts, such as, economic order quantity, economic purchase quantity, fixed period and
fixed quantity systems, will serve as broad guidelines. But the buyer has to use his knowledge, experience and
common sense to determine the quantity to be purchased.
6. Right attitude – Developing the right attitude too, is necessary.
7. Right contracts – The buyer has to adopt separate policies and procedures for capital and consumer items. He
should be able to distinguish between indigenous and international purchasing procedures.
8. Right material – Right type of material required for the production is an important parameter in purchasing.
Techniques, such as, value analysis will enable the buyer to locate the right material.
9. Right transportation – Right mode of transportation have to be identified as this forms a critical segment in the
cost profile of an item.
10. Right place of delivery – Specifying the right place of delivery, like head office or works, would often
minimize the handling and transportation cost.

Purchasing procedure
Purchasing procedure consists of the following steps as indicated in the figure.

1. Need 7. Maintenance
6. Payment
Recognition of records

8. Maintenance
2. Selection of
5. Receiving of Vender
suplier
Relations

3. Placing the
4. Follow up
order

1. Recognition of the need –

The initiation of procedure starts with the recognition of the need by the needy section. The demand is lodged
with the purchase department in the prescribed purchase requisition form forwarded by the authorized person
either directly or through the stores department. The purchase requisition clearly specifies the details such as
specification of materials, quality and quantity, suggested supplier, etc.
2. The selection of the supplier – The process ofsources and short listing out of the identified sources. The
information about the supplier is made available from sources such as trade directories, advertisement in trade
journals, direct mailing, suggestions from business associates, trade fair, etc. Identification of more sources
helps in selecting better and economical supplier. It should be noted that the low bidder is not always the best
bidder. When everything except price is equal, the low bidder should be selected. The important considerations
in the selection are the price, ability to supply the required quantity, maintenance of quality standards, etc.
3. Placing the order – Once the supplier is selected the next step is to place the purchase order. Purchase order is
a letter sent to the supplier asking to supply the said material. Copies of purchase order are prepared by the
purchase section and each copy is separately signed by the purchase officer. Out these copies, one copy each is
sent to store-keeper, supplier, accounts section, inspection department and to the department placing the
requisition and one copy is retained by the purchase department for record.
4. Follow-up of the order – Follow-up procedure should be employed wherever the costs and risks resulting from
the delayed deliveries of materials are greater than the cost of follow up procedure. The follow-up procedure
tries to see that the purchase order is confirmed by the supplier and the delivery is promised.
5. Receiving and inspection of the materials – The receiving department receives the materials supplied by the
vendor. The quantity are verified and tallied with the purchase order. The receipt of the materials is recorded on
the specially designed receiving slips or forms which also specify the name of the vendor and the purchase order
number. The purchase deportment is informed immediately about the receipt of the materials. Usually a copy of
the receiving slip is sent to the purchase department.
6. Payment of the invoice – When the goods are received in satisfactory condition, the invoice is checked before
it is approved for the payment. The invoice is checked to see that the goods were duly authorized to purchase,
 they were properly ordered, they are priced as per the agreed terms, the quantity and quality confirm to the
order, the calculations are arithmetically correct, etc.
7. Maintenance of the records – In the industrial firms, most of the purchases are repeat orders and hence the past
records serve as a good guide for the future action. They are very useful for deciding the timings of the
purchases and in selecting the best source of the supply.
8. Maintenance of vendor relations – The quantum and frequency of the transactions with the same key suppliers
provide a platform for the purchase department to establish and maintain good relations with them. Good
relations develop mutual trust and confidence in the course of the time which is beneficial to both the panics.
The efficiency of the purchase department can be measured by the amount of the goodwill it has with its
suppliers.

Selection of suppliers
Selection of the right supplier is the responsibility of the purchase department. It can contribute
substantially to the fundamental objectives of the business enterprise. Different strategies are required for
acquiring different types of materials. The selection of supplier for standardized products will differ from non-
standardized products. Following factors are considered for the selection of suppliers.
1. Sources of supplier – The best buying is possible only when the decision maker is familiar with all possible
sources of supply and their respective terms and conditions. The purchase department should try to locate the
appropriate sources of the supplier of various types of materials. This is known as ‘survey stage’. A survey will
help in developing the possible sources of supply:
a) Specialized trade directories.
b) Assistance of professional bodies or consultants.
c) The buyer's guide or purchase hand book.
d) The manufacturer's or distributor's catalogue.
e) Advertisements in dailies and trade journals.
f) Trade fair exhibitions.
2. Development of approved list of suppliers – The survey stage highlights the existence of the source. A
business inquiry is made with the appropriate supplier. It is known as 'inquiry stage'. In this, a short listing is
made out of the given sources of suppliers in terms of production facilities and capacity, financial standing,
product quality, possibility of timely supply, technical competence, manufacturing efficiency, general business
policies followed, standing in the industry, competitive attitude, and interest in buying orders, etc.
3. Evaluation and selection of the supplier – The purchase policy and procedure differ according to the type of
items to be purchased. Hence, evolution and selection of the supplier differ accordingly. In the 'Purchasing
Handbook' edited by Aljian, it has been described that the following variables to be considered while evaluating
the quotations of the suppliers.
a) Cost factors – Price, transportation cost, installation cost if any, tooling and other operations cost, sales tax and
excise duty, terms of payment and cash discount are considered in cost factor.
b) Delivery – Routing and FOB (Freight On Board) terms are important in determining the point at which the title
to the goods passes from vendor to the buyer and the responsibility for the payment of the payment charges.
c) Design and specification factors – Specification compliance, specification deviations, specification
advantages, important dimensions and weights are considered in line with the demonstration of sample,
experience of other users, after sale services, etc.
d) Legal factors – Legal factors include warranty, cancellation provision, patent protection, public liability, federal
laws and reputation compliance.
4. Vendor rating – The evaluation of supplier or vendor rating provides valuable information which help in
improving the quality of the decision. In the vendor rating four basic aspects are considered viz., quality,
service, price and delivery. How much weight should be given to each of these factors is a matter of judgment
and is decided according to the specific need of the organization. Following methods are suggested following
methods for evaluating the performance of past suppliers.
a) Categorical plan – Under this method, the members of the buying staff like quality control department,
manufacturing department, etc., are required to assess the performance of each supplier. The rating sheets are
provided with the record of the supplier, their product and the list of factors for the evaluation purposes. This is
 a very simple and inexpensive method. However, it is not precise. Its quality heavily depends on the experience
and ability of the buyer to judge the situation. As compared to other methods, the degree of subjective judgment
is very high as rating is based on personal judgment and the vague impressions of the buyer. Such ratings are
used for the future guidance.
b) Weighted-point method – The weighted-point method provides the quantitative data for each factor of
evaluation. The weights are assigned to each factor of evaluation according to the need of the organization, e.g.
a company decides the three factors to be considered-quality, price and timely delivery. It assigns the relative
weight to each of these factors as under
Quality ......... 50 points
Price ......... 30 points
Timely delivery ......... 20 points
The evaluation of each supplier is made in accordance with the aforesaid factors and weights.
c) Quality rating – The quality of the materials is judged on the basis of the degree of acceptance and rejections.
For the purpose of comparison, the percentage degree of acceptance will be calculated in relation to the total lots
received. Price rating is done on the basis of net price charged by the supplier. Timely delivery rating will be
done comparing with the average delivery schedule of the supplier.

Buying techniques / purchasing methods

The following purchasing methods are generally followed.
1. Market purchasing – When purchases are made in accordance with the condition of the market, to take
advantage of price fluctuations rather than to meet immediate needs or for a specified future period, the method
is known as market purchasing. Market purchasing can take full advantage of price changes. The purchase plan
is shaped on the basis of price fluctuations. In a rising market, bulk buying is made, while in a falling market,
hand-to-mouth purchasing is made. In bulk purchasing, large quantity of purchase is made for the future.
Discounts and concessions are enjoyed when the bulk purchase is made. In hand to mouth, no purchase is made
until a need arises and buying quantity meets only the current need. This method applies basically to meet
emergency requirements. The advantage of this purchasing is that there is no much blockage of capital, less
carrying cost and less wastage.
2. Contract purchasing – The required stocks of goods are purchased under contract for a fairly long period with
fixed suppliers. The buyer can get continuous supply of goods at a fixed price. This requires minimum record
keeping and storekeeping. Limited capital will be locked up at a time. However, under contract purchasing, the
buyer cannot get the benefit of favorable change in the prices, e.g. when prices are falling, be cannot get goods
cheaper under this method. This method is useful when prices are stable, and not liable to wide fluctuations.
3. Forward purchasing – Purchase in advance for a specified future period, particularly when an organized
physical as well as future markets for commodities. The period for which purchase is made will be fixed by a
production schedule.
4. Group purchase – A buying group of stores, institutions or even manufacturers may make joint purchases at
very reasonable prices. In the retail field, group buying or cooperative purchasing is very common. Group
purchases would offer better selection of merchandise, quantity discounts, favorable prices; they also bring
about economy in express of procurement.
5. Purchase through commission agents - When supplies are procured from foreign manufacturers or from a
distant market or from organized wholesale markets, there are two alternatives. There can be own permanent
buying office to make all purchases in a distant market or can send their own buyers to such markets for
securing supplies. This method is very costly. There is another alternative, i.e., to appoint commission agents or
middlemen who possess expert knowledge and local contacts in that market.
6. Speculative purchasing – Speculative purchasing is buying in excess of needs. Speculative purchasing is done
purely from the point of view of taking advantage of a rise in price of the commodity. The intention of
speculative purchasing is not to buy for the internal consumption, but to resell the commodity at a later date
when the prices have gone up and to make profit. Market purchasing cannot be termed as speculative
purchasing, as market purchasing conforms to production schedule or demand in the manufacturing plant.

Tender vs quotation
 Tender and quotation have become very common words that people use in daily lives. Tender is a word
that we hear in connection with bids invited by government departments for completion of public works and
projects. Big companies float tenders to search contractors who can get the work done in a short time and at a
desired quality level. There are many similarities in tender and quotation though there are differences also that
require them to be used correctly in different contexts. Let us take a closer look.
1. Tender – Tender means an invitation to offer for an item/items or work. All Public Sector purchases/contracts
in India, over a certain value has to be publicly notified. Tender is a very important way of procuring goods and
services for a company, especially a public sector company. In fact, tender is a document that lays down the
terms and conditions of the offer; the work required to be done that in an acceptable quality is also spelt out in
the document. The company is the buyer in this case and suppliers and contractors are the sellers as they provide
their bids in sealed envelopes describing their offer price and the manner in which they propose to complete the
work. Tendering is the interest shown by bidders as they make bids or offers in response to invitations set out by
companies in the form of advertisements in newspapers.
2. Quotation – Quotation can be considered as a formal document submitted by interested parties in response to an
invitation called tender by companies. Quotations received by a company that has floated a tender allow it to
come to a conclusion as to which of the bidders is the right party to supply the product or complete the work. A
request for quotation has become a standard business practice whereby suppliers are invited to bid for products
and services.
Tender is the formal process of asking suppliers to bid on the products and services required by a
company. Quotation is the response of the bidders where they quote their price for the goods and services.
Quotation also refers to the estimate that people ask from professionals for jobs that they require done. Tenders
are more formal than quotations.

Centralized vs. decentralized purchasing

In centralized purchasing, one purchase department or its single authority will be authorized and
made responsible to make all types of purchases of all the departments. Requisitions are supplied from all the
departments to a centralized purchase system. This type of purchasing is suitable to industries having single
plant or number of plants in nearby location, which are manufacturing similar products at various plants, needs
bulk purchase of few items. The purchase procedure is same and will be followed in long run.
Decentralized or localized purchasing permits every individual department to make purchases of its
own requirements of materials and is responsible to make its deliveries. In industries having plants at different
locations and manufacturing varieties of products cannot have centralized purchasing. These types of industries
require different types of materials and have lot of changes in purchasing policies and procedures. The
decentralized type of purchasing system will be suitable to them.
The advantage of centralized purchasing will be the disadvantage of centralized purchasing which are
discussed underneath.

Advantages of centralized purchasing

1. The duplication in purchasing or excessive purchasing is avoided since only one person or department makes all
the purchases.
2. Engineering and production department are relieved to devote their time in purchasing activities and can spare
more time in better and higher production.

Disadvantages of centralized purchasing

1. Wrong or inaccurate quantity of materials may be purchased because of misunderstanding. Sometimes
substandard materials are purchased.
2. Centralized purchasing causes delays as various departments send their requisitions to one centralized place for
scrutinizing indents and other purchase documents it takes time to place orders. Direct purchases are quick.
3. The industries having their plants located at different remote places or companies having large network of their
sales will have to plan their purchases by individual plants.

Breakeven point (BEP)

 The concept of ‘Break Even Point’ is extremely important for decision making in various areas. This
concept is based on the behavior of costs, i.e., fixed cost and variable costs. Fixed costs are those costs that
remain constant irrespective of the changes in the volume of production. On the other hand, variable costs are
the costs that vary with the level of production.
The Break Even Point (BEP) is that point sales volume where total revenues and total expenses are
equal. It is point of zero profit, i.e., stage of no profit and no loss. Production level below the break-even-point
will result into loss while production above break-even point will result in profits.

In the Break Even Chart, on the horizontal axis, production and sales volume is shown while on the
vertical axis, sales and costs in amount are shown. Notice that thetotal revenue line begins at the origin and rises
with a slope equal to the selling price per unit. The total cost line intercepts the vertical axis at a point equal to
total fixed costs and rises with a slope equal to the variable cost per unit. When the total revenue line lies below
the total cost line, a loss region is defined. Similarly, when the total revenue line lies above the total cost line, a
profit region is defined. The point where the total revenue line and the total cost line intersect is the break-even
point.

If F = Fixed Costs, which are independent on quantity produced

v = Variable Cost per unit
s = Selling Price per unit
Q = Quantity (Volume of output)

Total Costs (TC) = Fixed Cost + Variable Cost = (F +( v X Q))

Sales Revenue (SR) = Selling price per unit × Quantity = s X Q
The point of intersection of total cost line and the sales revenue is the Breakeven Point
i.e., at Break-Even Point, Total Cost (TC) = Sales Revenue (SR)
F + (v X Q) = (s X Q)
F = Q (s - v)

∴ Break Even Point in units, Q =

F
units
s−v
Total sales revenue = No. of units sold X Selling price of an unit
Total sales revenue- [Fixed cost + Variable cost] = Profit/Loss

No. of units sold X Selling price of an unit – [F + (v X No.of units sold)] =Profit/Loss
1. At BEP, profit will be 0,
2. When the no. of units sold is less than BEP, there will be loss and
3. When the no. of units sold is greater than BEP, there will be profit.

Assumptions of Break Even Point

 The concept of breakeven point is based on the following assumptions.
1. Production and sales are the same, which means that as much as is produced is sold out in the market. Thus,
there is no inventory remaining at the end.
2. Fixed cost remains same irrespective of the production volume.
3. Variable cost varies with the production. It changes in the same proportion that of the production. Hence, it has
a linear relationship with the production.
4. Selling price per unit remains same irrespective of the quantity sold.

Margin of safety – Margin of safety is the number of sales units by which actual sales can fall below planned
sales without resulting in a loss or margin of safety is how much output or sales level can fall before a business
reaches its breakeven point.
Margin of safety in units = Excess of sales in units - BEP
A high margin of safety would mean that even with a lean period, where sales go down, the company
would not come in loss area. A small margin of safety means a small reduction in sale would take company to
cross BEP and come in red zone.

Advantages of BEP analysis

1. It explains the relationship between cost, production volume and returns.
2. It indicates the lowest amount of business activity necessary to prevent losses.

Disadvantages of BEP analysis

1. The graph assumes that all the goods produced are sold.
2. In calculation of BEP, fixed costs is assumed to be constant irrespective of production. But, fixed costs will
change if the scale of production is changed.

Problems :
1. The financial details of a company are as below. Variable cost per unit is Rs.30, Selling price per unit is Rs.40,
Fixed expenses are Rs.1,00,000. Calculate 1). The break-even units 2). Margin of safety considering the actual
sales as 15000 units 3). The selling price per unit, if BEP is brought down to 8000 units

Solution :
Given, Variable cost/ unit, v = Rs.30, Selling price per unit, s = Rs.40 and Fixed expense, F = Rs.1,00,000
F 100000
1). We have, Break Even Point in units, Q= = = 10000
s−v 40−30
2). Margin of safety =Excess sales in units- BEP=15000 - 10000=5000units
The margin of safety is 5000 units. If there is any unfavorable business condition such as labour problem, the
company can stand firm and continue discussions as long as volume of production does not fall below 10000
units. Once it reaches the BEP, it is advisable for the firm to reach an understanding.

100000
3). If BEP is brought down to 8000 units, i.e., Q= 8000 =
s−30
100000
Selling price, s = +30 = Rs. 42.5
8000

3.11 Make or Buy decisions

The make-or-buy decision is the act of making a strategic choice between producing an item internally (in-
house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as
outsourcing. Make-or-buy analysis is conducted at the strategic and operational level. Production of all parts and
components of main equipment is uneconomical and infeasible in most of the cases. The make and buy
decisions are based on several important factors involving both economic factors and non economic factors.
These factors are labor, materials, production facilities, machines and capital, etc. The Break Even Analysis is
 one of the methods which are used to make this decision. The decision can be to produce part more
economically in the organization or to purchase it from outside supplier at a cheaper price than production cost.

Factors influencing make or buy decision

1. Volume of production – In most of the cases, if the volume of production is high, it is economical to make the
product.
2. Cost analysis – Cost analysis refers to the determination of costs to make an item as well as to buy the item.
Analysis of the two costs helps to take the decision whether to make or buy. A lower fixed cost favors the
decision to make and higher fixed cost the buy decision.
3. Utilization of production capacity – The organization which has created large production capacity favor the
decision to make.
4. Availability of manpower – Availability of skilled and competent manpower favors make decision.

Problems :
1. A Television company wants to decide whether to manufacture color picture tubes or purchase them from
suppliers. The price of picture tube is Rs. 2000 to purchase from supplier. If the company will manufacture it,
then following costs will be required. Fixed cost will be Rs.12 lakhs and variable cost will be Rs. 1000 per
picture tube. Give the make or buy decision to Board of Directors of the company for the following cases.
a) The average sales of TV sets in a year are around 1000.
b) The sales are likely to be increased to 2000 by reducing the price of TV sets by 10%.

Solution :
Given, Fixed cost (F) = Rs.1200000, Variable cost (v)= Rs.1000/picture tube, Price of picture tube (s)= Rs. 2000
Let, ‘Q’ be the no. of units to be manufactured/bought.
Total cost in manufacturing the picture tube = Fixed Cost+ Variable Cost = 1200000 + Q X 1000
Total cost in purchasing the picture tube = Q X 2000
At BEP, cost of buying and manufacturing will be the same.
F 1200000
i.e., BEP in units, Q = = =1200 units
( s−v ) 2000−1000
Cost of manufacturing 1000 picture tubes = Fixed Cost + Variable Cost
1200000+ 1000 X 1000 =2200000
Cost in purchasing 1000 picture tubes =1000 X 2000 =2000000

Hence, if sales are 1000 TV sets, it is better to purchase picture tubes from supplier as BEP is, 1200.
Price of TV can be reduced by 10%, only by reducing the variable cost of picture tube by 10% by some means
as reducing the supplier price is not in the company’s limits. The cost of picture tube by reducing its variable
cost by 10% will be,1000X 0.9 = 900 .
F 1200000
BEP in units, Q = = =1091units
( s−v ) 2000−900
 If sales will increase to 2000 TV sets, picture tubes can be profitably manufactured by the company.

Ergonomics
Ergonomics is derived from two Greek words, ergon, meaning work and enomos, meaning laws. It is
the study of the effects of work system on workers and it aims at fitting the work to the men to increase their
efficiency, comfort and satisfaction. So it is the study of the man in relation to his work. In USA and other
countries it is called by the name ‘human engineering’ or ‘human factors engineering’.
Ergonomics is concerned with designing and improving the workplace, workstation, tools,
equipment, job design, psychological environment and procedures of work in order to limit fatigue
discomfort and injuries, while efficiently achieving personal and organizational goals. Ergonomics is aimed at
improving the design of jobs and workstations that have unsafe qualities or have caused injury. A successful
ergonomics program utilizes the skills of many disciplines, including engineering, psychology, medical, safety,
management and the employees or associates. The practice of ergonomics has two primary objectives to
enhancing workplace health, safety, and work design issues. These are to enhance performance and productivity
and prevent fatigue and injury.
The various disciplines that have influence on human factors are:-

1.Engineering : Design of work system suitable to worker.

2.Physiology : Study of man and his working environment.
3.Anatomy : Study of body dimensions and relations for work design.
4.Psychology : Study of adaptive behavior and skills of people.
5.Industrial hygiene : Occupational hazards and workers health.

Objectives of human engineering

Human engineering (ergonomics) has two broader objectives.
1. To enhance the efficiency and effectiveness with which the activities (work) is carried out so as to increase the
convenience of use, reduced errors and increase in productivity.
2. To enhance certain desirable human values including safety reduced stress and fatigue and improved quality of
life. Thus, in general the scope and objective of ergonomics is 'designing for human use and optimizing working
and living conditions'. Thus human factors (ergonomics) discover and apply information about human behavior,
abilities and limitations and other characteristics to the design of tools, machines, systems, tasks, jobs and
environment for productive, safe, comfortable and effective human use.

Ergonomics and productivity

Ergonomics aims at providing comfort and improved working conditions so as to channelize the
energy, skills of the workers into constructive productive work. This accounts for increased productivity, safety
and reduces the fatigue. This helps to increase the plant utilization.

Man-machine system
The fundamental concept in human engineering is the system. A system is composed of human,
machines and other things that work together (or interact) to accomplish a goal which these components could
not produce independently.
The man-machine system is a combination of one or more human beings and one or machine
interacting to bring about, from given inputs, some desired output.
The three broad categories of systems are as follows.
1. Manual system – A manual system consists of hand tools and other aids which are coupled by human operator
who controls the operation. Operator uses his own physical energy as the power source.
2. Mechanical system – These systems are semi-automatic in nature which consists of integrated physical part
such as machine tools. Power is typically provided machine and operator function is mainly to control by the use
of controlling devices.
3. Automated system – When the system is fully operated, it performs all operational functions without human
intervention. Automated system require human to install, programme, re-porgramme and maintain the system.
 A simple man machine system is shown in the figure.
Man machine system is a closed loop system. The man will receive certain information from the
machine either from dials, displays, etc., designed for that purpose or by observation of machine itself. He will
process this information and make decisions on what action to take and manipulate controls or attend machine in
some other way so as to affect its behavior in the required manner. Environmental factors will have an influence
on the working of the system.

Aspects of man- machine system

Except for the automated system, the man machine system must include human as an operator and
system with machine and operator forms a closed loop system. A typical man-machine control loop is shown in
the figure.
Various elements of man-machine control loop are discussed below.
1. Display element – Displays are necessary extensions to man’s senses and provide information needed by the
operators in making decisions and in effecting control responses.
2. Decision element – The information from the display element is passed on to the nervous system of the operator
which acts as the decision element. The information so obtained is processed by the nervous system and arrive
at a decision in relation to the required performance.

3. Decision communication channel – The decision made by the nervous system is communicated to mechanical
leverage system of the human bone and muscular system which makes the decision communication channel.
4. Control communication channel – A control is any device which regulates the action of a machine. Typical
control device includes wheels, levers, pedals, control knobs, push buttons, etc.
The contact between the operator and the machine takes place at two channel only, i.e., display
communication channel and control communication channel. A poor design of display and control may cause an
error in the system. Hence, the displays and controls must be designed ergonomically.
 Workplace design
The ideal design of any work place should begin with operator in mind. The design should ensure that
the operator will have adequate and comfortable posture that he can see what he must see and he can operate his
control in effective manner.
If the work place is not adapted to his dimensions and to his typical human characteristics, he will not
be able to perform his work with maximum efficiency. Improper design of work place will prevent the worker to
carry out the work effectively and may result in injuries, strain or fatigue, a reduction in quality/output, etc.
Determination of workplace requirements will involve the examination of the following elements which
constitute the work cycle.
1. Dimensions of the working surface – Dimensions of the working surface should be designed in such a way
that the operator can access the tool/job without exerting much effort.
2. Dimensions of the working envelop – Operator not only performs the jobs in horizontal places, but also is done
above and below the horizontal plane. To determine the location of where controls are to be placed, it is
necessary to visualize the complex three dimensional envelop of the space surrounding the operator.
3. Workplace height – The correct working height depends on the nature of the task being done. Many manual
tasks are performed when the work is at elbow height. If the job requires close observation, it will be necessary
to raise the work above the elbow height and bring it closer to the eye.
4. Selection of chairs –Many production workers spend entire day sitting at a workplace. The chair they are sitting
along with the foot rest is one of the important elements of work place design.

Value engineering
The origin of value engineering technology as we know today can be traced back to the World War II
efforts to maintain and increase the production of all items against the scarcity of many inputs. Lawrence Delos
Miles of the General Electric Company, USA, developed a formal methodology in which the functions of
products were determined and through team-oriented creative techniques changes were made in the products to
lower their cost without affecting their utility and quality. This programme called value analysis by Miles was
implemented in GEC in 1947. In 1954, US Navy Bureau of Ships adopted this concept to cost reduction in the
design process and called it value engineering. In 1959 the Society of American Value Engineers (SAVE) was
founded in Washington DC, USA . In India, value engineering is now a well recognized programme actively
followed in many public and private sector concerns. A professional society, the Indian Value Engineering
Society (INVEST) was founded in 1977.
Value Engineering (VE) is the process of improving the value of a product at every stage of the
product life cycle. A product or service is generally considered to have good value if it has the appropriate
performance and cost.

Types of values
Value, in any value investigation refers to economic value of a product or service which it’s self may
be classified into four types. They are discussed below.
1. Cost value – Cost value is the total cost of material, labour and other elements of cost that have to be incurred to
produce an item or to provide a service. It gives the basic worth of the product or service. Other types of values
are added to it to get its full value.
2. Use value – It is also known as the function value. The use value is equal to the value of the functions,
performed. Therefore, it is the price paid by the buyer (buyer's view) or the cost incurred by the manufacturer
(manufacturer's view) in order to ensure that the product performs its intended functions efficiently. The use
value is the fundamental form of economic value. An item without use value can have neither exchange value
nor esteem value.
3. Esteem value – It involves the qualities and appearance of a product (like a TV set) which attract people and
create a desire in them to possess the product. Therefore, esteem value is the price paid by the buyer or the cost
incurred by the manufacturer beyond the use value. Esteem values is the customer’s emotional regard for the
item. This is provided by the properties, features and attractiveness which make one to yearn for its possession.
4. Exchange value – It is the measure of all the properties, qualities and features of the product which make the
product possible of being traded for another product or for money. Exchange value refers to the extent that the
 additional amount paid guarantees the resale or exchange at any point of time. Example of this is the purchase of
a particular brand of scooter by paying 3 to 4 thousand rupees more than the competitors brand as its gives a
feeling that it can be sold at a reasonable price when needed.
The concept of use value and esteem value can be made clear with the following example. Consider a
luxury car and a basic small car having engine. From a use point of view, both cars conduct the same function -
they both offer safe economical travel (use value), but the luxury car has a greater esteem value. The difference
between a gold-plated ball pen and a disposable pen is another example. However, use value and the price paid
for a product are rarely the same; the difference is actually the esteem value, so even though the disposable pen
is priced at X the use value may be far less.
The performance of a product is the measure of its functional features and properties that make it
suitable for a specific purpose. Mere performance in its absolute form is not enough. Performance and cost must
be interwoven. Desired performance at the least cost must be achieved by selecting appropriate materials and
manufacturing operations.
There are many factors which contribute towards the value like durability, reliability, aesthetics,
timeliness, etc. Therefore, the value of the product is the ratio of performance (utility) and other requirements to
cost. Thus, value can be written as:-

performance+other requirements
Value=
cost

Value can be increased either by increasing the utility for the same cost or by decreasing the cost for
the same utility.
Value engineering, value management, value control, value assurance, all means the same thing. The
definition given by the Society of American Value Engineers (SAVE) is:- “Value analysis is the systematic
application of recognized techniques which identify the function of a product or service, establish a monetary
value for the function, and provide the necessary function reliably at the lowest overall cost”.
Value engineering is a creative approach to ensure that functions of a product or service are provided at
minimum overall cost without sacrificing quality and reliability. Principle behind value engineering is that it is a
functionally oriented approach for improving product value by relating various elements of product worth to
their corresponding elements of cost.
Value engineering is applicable to all areas of economic activity; products, services, systems and
procedures in production, operation, purchase, design, packing, material handling and distribution departments.

Objectives of value engineering

1. The main objective of value engineering is not just cost reduction, but to improve its value by reducing cost.
2. Value analysis also considers time – a product may be of value if it is available at a certain point of time.
3. Save money or increase profit.
4. Ensure standardization.
5. Use cheaper and better materials.

Application of value engineering

Value engineering should be applied in case of occurrence of any of the following.
1. Introduction of new products.
2. Adverse rate of return on investment.
3. Reduction in sales.
4. Increase of cost of production.
5. Price reduction by competitors.
6. Consumer complaints on product performance.
7. Increase in cost of inputs.

Reasons for poor value

1. Lack of information, lack of creative ideas, misconceptions, reluctance to seek advice, etc.
2. Lack of time, lack of funds, etc.
3. Poor quality.
4. Risk of personal loss, lack of experience, habits and attitudes, etc.
5. Unrealistic requirements, changed circumstances, changing technology, poor communications, etc.
6. Politics.

Methods of increasing value of a function

1. Decrease the cost while ensuring the same level of performance.
2. Enhance the performance at the same cost.
3. Decrease the cost and increase the performance
4. Increase both performance and cost ensuring that performance increases more than the increment in the cost.

Advantages of value engineering

1. VE results in improved quality of the product.
2. VE promotes standardization leading to reduction in cost of production.
3. Simplification of the product is attempted in value analysis to obtain cost reduction.
4. Value engineering aims at meeting customers’ requirements thereby enhancing the value of the product.
5. When full value is ensured at reduced cost, it improves the profit margin as well as sales volume thereby
increasing profitability.
6. Spread of value engineering techniques and activities improves cost consciousness, quality awareness and
problem-solving culture of the organization.
7. A high customer orientation, focusing on those aspects of the product/service that better satisfy customer needs.
8. Cost reduction by eliminating functions that do not supply specific advantages to satisfy customer
requirements/needs.
9. Prevents over design of components.

Phases of value engineering

Phases in value engineering are also known as the value engineering job plan, which is a systematic
approach to value engineering studies. From the time of the value engineering job plan proposed by Miles, a
number of approaches have been proposed by different VE practitioners, which are all essentially similar. The
job plan used by Arthur E Mudge is a well-recognized approach and comprises seven phases.
1. General phase – During the general phase, the value engineering programme is initiated by organizing the task
force, identifying the decision maker, selecting the areas of effort, assigning specific tasks to each member of
the team and inspiring them for coordinated action. Throughout the application of the entire job plan, the
techniques of this phase must be carefully applied to create the right environment. The techniques associated
with this phase are :-
a) Use of good human relations
b) Inspire team work
c) Work on specifics - The difficult problems are identified and then by use of specific knowledge and technique,
they are easily solved.
d) Apply good business judgment
2. Information phase – The objective of the information phase is to gain an understanding of the problem and to
obtain relevant data including costs. The techniques of this phase are : –
a) Secure facts – The facts about the problem are to be found out and then solution is to be obtained. The
information is to be obtained from some source. The information can be collected in the information sheet.
b) Determine costs – The various costs are determined accurately in VE systematic approach and it is very
necessary.
3. Function phase – In the function analysis phase, the value engineering team defines the functions of the item
under study, classifies them and evaluates the functional relationships. When this analysis is complete necessary
and unnecessary functions will become visible. The techniques used are as follows.
a) Define function in two words – VE defines the function as ‘which makes a product work or sell’. Defining the
function establishes the relationship between function and cost.
b) Evaluate function relationship – The functional balance is that which makes the product work and sell most
effectively at the lowest total cost. For evaluation of the functions, numerical values are assigned to each
function and then they are compared.
4. Creation phase – The objective of the creation phase is to create ideas for alternative ways to accomplish the
essential functions and improve value. Creative thinking techniques like brain storming, mind mapping, attribute
listing, free association technique, etc., are used to generate a multitude of ideas on products, processes, and
methods so as to add value or reduce cost.
5. Evaluation phase – In the evaluation phase the generated ideas are evaluated to select the most promising
ideas, and subject these to a preliminary screening. The techniques associated with this phase are :-
a) Refine and combine ideas – The advantages and disadvantages of ideas are listed and on that basis they are
combined having advantages and others are eliminated.
b) Establish costs on all ideas – In refining process, relative cost on each idea or combination of idea is found out.
c) Develop function alternatives.
d) Compare the alternatives to find the one with the greatest value.
6. Investigation phase - The personal demands and requirements are fulfilled in the investigation phase. The
objectives of the investigation phase are to refine the partially developed ideas and to prepare a work plan to
convert the selected ideas into acceptable proposals. The techniques of this phase are:-
a) Use company and industry standards.
b) Consult vendors and specialists.
c) Use specialty products, processes and procedures.
In actual practice of the above phases, while the ideas are created, refined, evaluated and investigated, new
information may emerge. Then the phases of creation, evaluation and investigation are gone through again until
finally the lowest cost, most sound solution emerges.
7. Recommendation and follow up phase – In the recommendation and follow up phase, the value change
alternative selected is presented as a Value Engineering Change Plan (VECP) to the management for final
approval and implementation. The VECP must :-
a) Present facts and include all relevant data for decision making.
b) Give before and after comparisons of costs.
c) List advantages and disadvantages.
d) Have a detailed plan for implementation.
Well planned and evaluated team recommendation and final decisions will be approved for implementation
of the project by the authority as it is the outcome of all the seven phases of value engineering job plan
systematic approach.

Value analysis
Value analysis is an approach to improving the value of a product or process by understanding its constituent
components and their associated costs. It then seeks to find improvements to the components by either reducing
their cost or increasing the value of the functions. Function is defined as the purpose for which a material, a part,
a product or a service is required. Once the purpose of the product is identified, it becomes easier to suggest
alternative for achieving the same purpose. The fundamental principle of value analysis is this to analyze the
functional and other features and ensure that they are acquired with the lowest possible cost.
Difference between value engineering and value analysis

Value engineering and value analysis has the same meaning (to reduce unnecessary cost), though there
is difference between the two.

SL.No Value engineering Value analysis

Value engineering is applied to the Value analysis is applied to the
1 product at the design stage. So it is existing product. So it is a remedial
a preventive process process.
Ensures prevention of unnecessary Ensures elimination of unnecessary
2
cost. cost.
It requires specific technical It is worked out mostly with the
3
knowledge. help of knowledge and experience.
An existing product unites all the
different managers in a business,
It is always done by a specific
4 each with an opinion concerning the
product design engineer’s team.
ability to convert the design into a
‘saleable’ product.
The changes made by value
It may change the present stage of
5 engineering are executed at the
the product or operation.
initial stages only