Production and Operation Management
A1] a] Definition of Production:
Production is any process or procedure developed to transform a set of inputs like men , materials, capital, information and energy into specified set of outputs like finished products and services in proper quantity and quality, thus achieving the objectives of an enterprise. The essence of production is the creation of goods and services may be by the transformation of raw material or by assembling so many parts. Production in every day life can be seen in factories, offices, hospitals etc.
Production System: A production system is the design process by which elements are transformed into useful products. A process is an organized procedure for accomplishing the conversion of inputs into outputs.
Factors of Production: The factors of production are:
- Land and other natural resources.
- Labour (human efforts).
- Capital (factory, building, machinery, tools, raw materials).
b] Types of Production:
i) Job Production: This is the manufacture of products to meet specific customer requirements of special orders. It is normally concerned with special projects, models, prototypes, special machinery or equipment to perform specialised and specific tasks, components or assemblies to provide replacements for parts in existing machinery etc. large turbo generation, large engines, boilers, processing equipment, material handling machines, ship building and many other manufacturing are of the job production group.
Three types of job production can be defined according to the regularity of manufacture:
· A small number of pieces produced only one.
· A small number of pieces produced intermittently when the need arises.
· A small number of pieces produced periodically at known time intervals.
When the order is to be executed only once, there is little scope of improvement of production techniques by introducing intricate method studies, special tolls or jigs and fixtures unless the technical requirements justify it.
Advantages:
a) It is the only method which can meet the individual requirements.
b) There is no managerial problem, because of very less number of workers.
c) There is less risk of loss to the factory adopting this kind of production.
d) Because of flexibility, there is no chance of failure of factory due to the reduction of demand.
Limitations:
a) There is no scope of commercial economy.
b) As the purchase of raw material is less hence cost of raw materials may be slightly more.
The best example is Carpentry, Fabrication shops and machine shops
ii) Continuous Production: Continuous Production is the specialised manufacture of identical articles on which the equipment is fully engaged. Continuous production is normally associated with large quantities and with high rate of demand while in the job and batch classes the rate of production normally exceeds the rate of demand, continuous production is justified only when its rate can by sustained by the market. Here full advantage should be taken of repetitive operations in the design of production auxiliary aids, such as special tools, fixtures, positioners, feeders and material handling systems, inspection devices and weighing and packing equipment.
Two types of continuous can be defined:
· Mass production.
· Flow production.
The difference between the two types is mainly in the kind of product and its relation to the plant. On mass production, a large number of identical articles are produced but in spite of advanced mechanization and tooling, the equipment used need not be specially designed for this type of articles alone. Both plant and equipment are flexible enough to deal with other products, involving the same production processes. If management decides, that a certain line should be discontinued, the machinery can be switched to produce another article, and such a change in policy will usually not involve major modifications in plant layout, although changes in footing may quite substantial.
In flow production, the plant, its equipments and layout have been primarily designed to manufacture the product in question. Flexibility in the selection of products for manufacture is possible with minor modifications in layout or design of models.
Production planning and control in continuous is usually not similar than the job or batch production. Extensive effort is required for detailed planning before production starts, but both scheduling and control need not usually be elaborate. The output is either limited by available capacity or regulated within given limits to conform the production targets based on periodic sales forecasts.
This process is followed in most oil and gas industries and petrochemical and processing factories like automobiles, dairy products, textile manufactures etc.
iii) Batch Production: This type of production is generally adopted in medium size enterprises. Batch production is a stage in between job production and mass production.
Batch production is bigger in scale than the job production while it is smaller than that of mass production. Batch production requires more machines than that of job production and fewer machines than that of mass production. In batch production, some of the machines are of one purpose and remaining is for general purpose.
As in this type of production two or more type of products are manufactured in batches at regular intervals, therefore this is known as batch production. In this type of production different products are manufactured in batches, and stacked and then sold on receipt of orders.
Batch production is common in bakeries and in the manufacture of sports shoes, pharmaceutical ingredients, inks, paints and adhesives.
A2] a] Product Life Cycle:
The product life cycle derives from the fact that a product’s sales volume and sales revenue follow a typical pattern of five phase cycle. The life cycle is a fact of existence for every product. It is similar to the human life cycle. The length of the life cycle, the duration of each phase and the shape of the curve vary widely for different products. But in every instance, absolescence or decay eventually occurs when the need disappears or a better, cheaper and more convenient product may suit the same need or a competitive product due to superior marketing strategy suddenly gains a decisive advantage.
The PLC concept is very useful. It helps a marketer in preplanning the entry of a new product in a market, in prolonging the profitable stage, in meeting competition and in long term decision on investment on products.
The PLC indicates that product is born or introduced, grows, attains maturity in a particular market and then sooner or later it is found to enter its declining stage i.e. decay in its sales and ultimate death.
Fig 1: Product Life Cycle showing the sales of a product
The Product Life Cycle (PLC) describes the stages a new product idea goes through from beginning to end. The PLC is divided into five major stages:
1. Product Development
2. Market Introduction
3. Market Growth
4. Market Maturity
5. Sales Decline
Fig 2: Product Life Cycle showing the annual sales and annual profit of a product
Product Development Stage
The Product Development stage begins when the company finds and develops a new product idea. This involves translating trends in the macroenvironment, taking diverse pieces of information, and incorporating them into a product concept. Product concept typically undergoes several iterations, involving considerable time and money, before they are exposed to target consumers via test markets. Concepts that survive test market scrutiny are ready for market introduction. “Time to market”, or the amount of development time necessary to move from product concept to finished product, can be critical, especially when competitors are working on the similar product. Forward thinking marketing mangers are using interactive concept testing via the internet to obtain faster feedback from target customers and to shorten their product development timetables. During the product development stage, sales are zero and profits are negative (i.e. anticipated future profits are being invested in product development)
Market Introduction Stage
At the Introduction (or development) Stage market size and growth is slight. It is possible that substantial research and development costs have been incurred in getting the product to this stage. In addition, marketing costs may be high in order to test the market, undergo launch promotion and set up distribution channels. It is highly unlikely that companies will make profits on products at the Introduction Stage. Products at this stage have to be carefully monitored to ensure that they start to grow. Otherwise, the best option may be to withdraw or end the product.
Market Growth Stage
The Growth Stage is characterized by rapid growth in sales and profits. Profits arise due to an increase in output (economies of scale) and possibly better prices. At this stage, it is cheaper for businesses to invest in increasing their market share as well as enjoying the overall growth of the market. Accordingly, significant promotional resources are traditionally invested in products that are firmly in the Growth Stage.
Market Maturity Stage
The Maturity Stage is, perhaps, the most common stage for all markets. it is in this stage that competition is most intense as companies fight to maintain their market share. Here, both marketing and finance become key activities. Marketing spend has to be monitored carefully, since any significant moves are likely to be copied by competitors. The Maturity Stage is the time when most profit is earned by the market as a whole. Any expenditure on research and development is likely to be restricted to product modification and improvement and perhaps to improve production efficiency and quality.
Sales Decline Stage
In the Decline Stage, the market is shrinking, reducing the overall amount of profit that can be shared amongst the remaining competitors. At this stage, great care has to be taken to manage the product carefully. It may be possible to take out some production cost, to transfer production to a cheaper facility, sell the product into other, cheaper markets. Care should be taken to control the amount of stocks of the product. Ultimately, depending on whether the product remains profitable, a company may decide to end the product.
b] Set out below are some suggested examples of products that are currently at different stages of the product life-cycle:
DEVELOPMENT | INTRODUCTION | GROWTH | MATURITY | DECLINE |
Iris-based personal identity cards | Fourth generation mobile phones | I-Pads | Personal Computers | Typewriters |
All-in-one racing skin-suits | E-conferencing | 3D TV | Credit cards | Black and White TV |
3D Video Cameras | I-Phones | Cheque books | Shell Suits |
A3] Introduction:
The term plant layout is used in broad sense to include factory layout and machine layout. A plant layout refers to the arrangement of machinery, equipments and other industrial facilities – such as receiving and shipping departments, tool rooms, maintenance rooms, employee amenities etc. for the purpose of achieving the quickest and smoothest production of the lest cost.
A more simple, clear and comprehensive definition is given by Knowles and Thomson said that plant layout involves:
1) Planning and arranging manufacturing machinery, equipment and services for the first time in completely new plants.
2) The improvements in layouts already in use in order to introduce new methods and improvements in manufacturing procedures.
Definition:
According to K.G. Lockyer, “the disposition of the various parts of a plant along with all the equipment used therein is known as the plant layout, which should be designed to enable the plant to function most effectively”.
According to Mallick and Gaudreau, in their book Plant Layout – Planning and Practice “A floor plant for determining and arranging the desired machinery and equipment of plant, in one best place, to permit the quickest flow of materials at the lowest cost and with the least amount of handling in processing the product from the receipt of raw materials to the shipment of finished products.”
Sansonetti and Mallick, in their book, Factory Management, define plant layout as “Placing the right equipment, coupled with the right method, in the right place, to permit the processing of a product unit in the most effective manner, through the shortest possible time.”
In the words of John A. Shubin “Plant layout is the arrangement and location of production machinery, work centers and auxiliary facilities and activities (inspection, handling of materials, storage and shipping) for the purpose of achieving efficiency in manufacturing products or supplying customer services.”
According to James L. Lundy, plant layout ideally involves the allocation of space and the arrangement of equipment in such a manner that overall costs are minimized.
Factors Influencing Plant Layout:
There are four important factors which affect the layout of the plant. These are:
- Location of the factory.
- Manufacturing process.
- Type of product.
- Managerial policies.
Location of the factory:
The pattern of plant layout that is to be designed is determined by the general location and specific site of the factory. Certain localities will have more advantage by way of supply of labour, proximity to market, and availability of raw materials and so on than other localities. The size, shape and topography of the sit will affect the construction of factory building, which in turn affects the location of various departments and the general layout of machines.
Manufacturing Process:
The manufacturing processes involved in a factory determine the type of plant layout that is to be designed. For a careful analysis of layout, manufacturing process can be grouped into following:
i) Synthetic Process: A synthetic process is one which combines various inputs as in the case of cement, soap, medicine or assembling various parts as in case of refrigerators, TVs, to manufacture a finished product.
ii) Analytic Process: An analytic process is one that starts with a basic raw material and splits it down into various constituent products. Oil refining which yields petrol, diesel, bitumen, kerosene etc is a good example of this process.
iii) Intermittent Process: An intermittent process is one in which work is completed in various stages at various workshops in the factory. This process can be found in scooter, car, and aeroplane manufacturing plants.
iv) Repetitive Process: this type of process is found in plants manufacturing standard products which are manufactured on a large scale in anticipation of demand from the customers. The production process here consists of operations which are to be repeated in the same way for obtaining the finished products such as drugs, soaps etc.
v) Non-repetitive Process: This type of process is seen in the manufacturing of non standard products which are under taken for production on receiving an order from customers. The final product depends on the specifications of the customers and as such, the same sequences of operation are not used for all manufacturing orders such as carpentry, tailoring etc.
The above classification of manufacturing processes should not be treated as a standard one. In practice, we come across a combination of some of these processes.
The layout of plant differs in all above cases. For example, in the continuous manufacturing process, the arrangement of plant and machineries is such that there is a definite sequence in the flow of materials and semi-finished products from one machine to other machines. But this is not the case in the intermittent production process.
Type of Product:
The physical and chemical constituents of the product, its design, its size, its form etc. would decide the pattern of plant layout. Further, the simplicity or complexity of the product in terms of production, whether it is a luxury or an ordinary product, whether it is costly or cheap, solid or liquid and the quantities of manufacture also determine the type of layout. Further, the products requiring similar processes require different types of layout. For example, radios and cars require assembly processes, yet the layout is different in those two cases.
Managerial Policies:
The layout of plant often depends upon the policies of management. The policies which govern the layout are: the quality of products, the size of plant and the degree of its integration, the extent of flexibility of plant desired, plans for expansion, the amount of stock to be carried in the store room and the type of facilities to be provided to the employees.
b] Types of Plant Layout:
There are four types of plant layout. They are:
- Product or Line Layout:
In a product layout of machines, the entire stress is on the product. All the machines required in the processing of the product are brought together in the production department and are installed according to the sequence of operations. Product layout is intended to effect an orderly and logical arrangement of productive facilities that will be consistent with large production volume. Under this type of layout, materials and semi-finished products move in a predetermined channel of operation thus involving a lesser manufacturing cycle time. This layout permits the forward flow of materials to the fabrication of the component parts to the finishing stage and then to the dispatching center.
Product layout can be arranged in any one of the following four types:
- Straight-line Type: Under this type of product layout, the machines are arranged in a straight line in the sequence of operations. These machines are installed as near as possible because the output of one machine becomes the input of the next machine.
- U-shaped Product Layout: This is a more compact layout than the straight-line layout. This type of layout economizes floor space and allows closer supervision than the straight-line type.
- Circular layout: In this type of layout, machines are arranged in the form of a circle. The operations can be carried on inside or outside the circle. If production is carried on outside the circle, the inner portion of the circle can be used for storing the finished goods.
- Odd-angle Product Layout: In this type of layout, there is no fixed pattern of arranging the machines but is designed to suit the available space. Nevertheless, the sequence of operation is strictly maintained under this type of layout.
Product layout is used when (a) A large quantity of products is to be produced; (b) The design of the product is more or less standardized and (c) The demand for the product is the steady. This type of layout is adopted in continuous processing industries such as cement, sugar, paper etc. and in the assembly type of industries such as TV’s, scooters, refrigerators etc.
Advantages:
a) Less production time: Under this type of layout, a definite sequence of operation is planned in advance and in an orderly way. Following this, the raw materials and semi-finished products move from one machine to another automatically without interruption, until they are converted into finished products. This reduces the time of manufacturing process.
b) Less material handling cost: Under this type of layout, the route travelled by the materials is short. The use of mechanical handling equipments enables the minimizing of the material handling cost.
c) Effective production control: As product layout involves predetermination of routes along which materials and work in progress are to move, the fixation of timing for starting and finishing the work, providing of all equipments well in advance, it becomes comparatively easy to exercise control over production. Further, there is no back-tracking or deviation of processes from the scheduled path and time.
d) Effective utilisation of space: Owing to the systematic arrangement of plant and equipment, the use of mechanical handling devices and quick flow of material from one machine to another, the available space is effectively used by not crowding with all tools, materials and work in process.
e) Effective inspection: As the goods produced are of a standard type and as all the production processes are integrated, inspection work is reduced and efficiency of inspection increases on account of the repetitive nature of work.
f) Less work in process: Since production is continuous and uninterrupted, work in progress is always kept at the minimum. It reduces congestion of goods in production processing.
Disadvantages:
a) It lacks flexibility: As this type of layout is designed to manufacture only one type of product, any changes in the product requiring different arrangement cannot be effected easily. Thus it lacks flexibility in adjustment.
b) Danger in stoppage of production: Any breakdown in one of the machines leads to the stoppage in production because the operations of the succeeding machines are dependent on the preceding machine.
c) Heavy investment in machines: Heavy investment in machines is to be made on account of duplication. When more than one product line is in operation, a separate machine performing the same operation is to be provided for each line product.
d) Less operating capacity of employees: An employee cannot operate more than one machine as different machines are meant for different operations.
2. Process or Functional Layout:
Process layout refers to the arrangements of a group of machines performing the same type of functions in the various departments of the factory. Thus, the grinding machines of various types in a factory may be grouped in one department. All grinding operations for various products will be undertaken by the department. Similarly, welding machines, drilling machines, cutting machines etc. are arranged in different departments and respective welding, drilling and cutting operations are performed in such departments. The areas assigned for each group are so arranged that it will be convenient for majority of products to follow the easiest path of flow. Whenever any operation (say cutting) is to be performed on a product, it will be allowed to move into that department. Later on, it will be transferred to the next department where the second operation (say drilling) is to be carried out and in this way; the product will pass from one department to another until all the operations on it are carried out.
This type of layout is used under the following circumstances:
1. When the goods to be manufactured depend upon customers, specifications as in the case of furniture making.
2. Where a variety of products are manufactured.
3. Where the manufacturing time varies from operation to operation.
4. Where the demand for products from customers is not regular.
5. In the case of assembly type of industries.
Advantages:
a) Lower capital investment: Here, the investment in capital equipment is lower because there is less duplication of equipment. When four machines working half the time are required in manufacturing four products in the product layout, two machines will be sufficient in the process layout.
b) Greater flexibility: Under this type of layout, frequent changes in operations and their order can be made without distributing the existing layout. For example, six different products can floe in six different ways (as shown in the previous diagram) without causing disruption in other departments.
c) No disruption in work schedule: Each department has a number of related machines; the breakdown in one machine will not disrupt the production process. This is so because work from one machine can be transferred to other machines.
d) Scope of expansion: it is possible for expanding the departments by installing new machines for better operations.
e) Full utilisation of machines: as a machine is not for manufacturing any particular product, there is a greater degree of machine utilisation. Even if a particular product is not manufactured for any reason, still the machine can be kept engaged in manufacturing other products.
f) Better supervision: The supervisor will acquire greater knowledge of the problem solving techniques connected with one type of process performed. Such specialised knowledge is necessary when there is diversification of products manufactured in a factory.
Disadvantages:
a) Difficulty in production control: Since the production is undertaken in different departments, it is difficult to lay down definite routing scheduling and controlling techniques.
b) Difficulty in material handling: As the routes travelled by the products are longer, material handling costs will be higher.
c) More floor area: This type of layout occupies more space as it involves provision of different departments, store room, passages and other service facilities.
d) Involves more time in production: Under this type of layout, the production time is more due to travel of materials from one department to another and holdups at various stages of production.
e) Accumulation of semi-finished goods: Heavy accumulation of semi finished products is observed with the passage of time for want of necessary instructions, transit delays and holdups for inspection. Further, where goods are to be produced in batches, it leads to the piling up of goods until the last unit in the batch is completed.
3. Combination of Product and Process Layout:
In practice, the adoption of a pure product layout or a pure process layout is rarely seen, as it is not possible to adopt either of these in isolation. So we come across a combination of product and process layout which is widely practiced, especially in factories which are engaged in repetitive processes manufacturing standard products. This is on account of deriving the maximum benefits accruing from both product and process layouts, thereby overcoming the disadvantages of these layouts. In the words of Keith and Gubellini (in their book Business Management), “Many business firms finds it to their economic advantage to apply both the approaches as a solution to their production problems”. A combined layout is a compromise between product layout and process layout.
A combined layout is possible where an item is being made in different types and sizes. In such cases, machines are arranged in a process layout and the process grouping (i.e. a number of machines performing related activities) is then arranged in a sequence to manufacture various types of products.
4. Fixed Position Layout or Static Product Layout:
In this type of layout, the materials and major components remain in a fixed location. The required tools, machineries, men and supporting equipments are brought to this location. This type of layout is preferred because the production raw material is too heavy or too big and such it is not economical and convenient to move it to the factory. Instead, the required men and machines are moved to the fixed work place and the work is executed there. This type of layout is used in manufacturing aircrafts, ships and heavy machines etc.
Advantages:
a) Handling of heavy materials is eliminated.
b) Quality of output is ensured because the responsibility can be fixed on the group of employees who execute the work.
c) Maximum flexibility is possible in this type of layout.
Disadvantages:
It involves the movement of men and machines to the work place which may be time consuming.
A4] Meaning and Definition:
Material handling occurs whenever a material is moved, may be in a manufacturing, distributing or office environment. Material handling also occurs during preparation for shipment, transportation may be by sea, air or land and moving materials in and out of carriers.
International Material Management Society has defined it as an art and science involving the movements, packaging and storing of substances in any form.
A more comprehensive definition is given by Raymond A. Kulwiec – “material handling is a system or combination of methods, facilities, labour and equipment for moving, packaging and storing the materials to meet specific objectives.”
Material handling involves the movements of materials, manually or mechanically in batches or one item at a time within the plant. The movement may be horizontal, vertical or combination of both.
b] Selection of Material Handling Equipment:
A wide variety of material handling equipments is in the market; some equipment is for general purpose use and others are of special purpose use. The choice of particular equipment depends upon the specific requirements or the condition of an industry. Naturally, the best equipment will be one which permits smooth and continuous production flow, involves less accidents, reduces production cycle time, promotes better working conditions, incurs less fatigue to the operators and bring down the total material handling costs.
The following factors may be considered while selecting a material handling equipment:
a) Materials to be moved: The size of material, its shape, weight, delicacy, nature (solid, liquid or gas) and its chances of getting damaged during handling etc. should be considered.
b) Plant buildings and layout: Widths of aisles, inequality in floor levels, width of the doors, height of the ceiling, strength of floor and walls, pillars etc. to a great extent influence the choice of a material handling equipment.
c) Type of Production Machines: Different machines have different outputs per unit time. The material handling equipment should be able to handle the maximum output.
d) Type of material flow pattern: A vertical flow pattern will require elevators, conveyors, pipes etc. whereas as horizontal flow pattern will need trucks, overhead bridge, cranes etc.
e) Type of production: The type of production affects to a large extent the selection of the material handling equipments.
f) Costs of material handling equipment.
g) Handling costs.
h) Life of the equipment.
i) Amount of care and maintenance required for the material handling equipment.
c] Activity areas of Material Handling:
For effective materials handling, materials handling engineer must look after handling work in different areas, some of them are:
· Packaging and packing of raw material for the industry.
· Loading and transportation to the plant.
· Unloading activities.
· Receiving, storage and issue of materials for production.
· In process handling.
· In process storage.
· Work place handling.
· Inter departmental handling.
· Intra departmental handling.
· Intra plant handling.
· Warehousing.
· Loading and transportation to customers/distributors/dealers place.
A5] a] Introduction:
Any forecast can be termed as an indicator of what is likely to happen in a specified future time frame in a particular field. Therefore, the demand forecast indicates as to much of a particular product is likely to be sold in a specified future period in a specified market at specified price.
Accurate demand forecasting is essential for business house to enable it to produce the required quantity at the right time. Further, it makes the arrangement in advance for raw materials, equipment, labour etc. some firms manufacture on the order basis but in general firm produces the material in advance to meet the future demand.
Forecasting means estimation of quantity, type and quality of future work e.g. sales. For any manufacturing concern it is very necessary to assess the market trends sufficiently in advance.
b] Methods of Forecasting:
- Survey of Buyer’s Views:
This is direct method for making forecasting for short term, in which the customers are asked what they are thinking to buy in near future say, in the coming year. Inn this method all the burden is with consumers which may misjudge or mislead or may be uncertain about the quantity to be purchased by them in the near future. The limitations of this method are as follows:
a) Consumer’s buying intentions are irregular.
b) When consumers have to select between different alternatives, they are unable to foresee their choices.
c) Buyers may be anxious for purchasing the product but due to certain limitations they may be unable to purchase them.
- Collective Opinion or Sales Force Polling:
In this method forecasting depends upon the salesman’s estimation for their respective areas, because the salesmen are closest to the customers, hence can estimate more properly about the consumers’ reaction about the product and their future requirements. All the estimates of salesmen are consolidated to know the total estimate of the sales. This final estimates then goes through sever checking to avoid undue imagination which is done many times by the salesman.
The revised estimates are then again examined in the light of factors like expected change in design, change in prices, advertisements, competition, future changes like, purchasing power of local people, employment, population etc.
This method of collective opinion takes advantages of collective wisdom of salesmen, senior executives like production manager, sales manager, marketing officials and managers.
Merits:
a) This method is simple and requires no statistical technique.
b) The forecasts are based on the knowledge of salesmen, who are directly responsible for the sales.
c) In practice, this method is much useful in case of new products.
Demerits:
a) This method is useful only for short-term forecasting.
b) As the Forecasting is dependent upon the salesmen’s estimation and if sales quota are fixed then they, in general under estimate the forecast.
c) As salesman have no knowledge about the economic changes, the estimate by them is not so correct many times.
3. Trend Projections:
Well established firms which have considerable data sales, these data are arranged in a chronological order, known as ‘time series’ are analysed before making the forecasts. There is a common method known as ‘Project the trend’. In this method the trend line is projected by some statistical method, generally, by least square method.
A real challenge for forecaster comes when there is turning point i.e., when management will change or reverse its sales or production altogether. Many analysts have thus, given much thought before making forecasting to these turning points. There are four factors generally responsible for turning points viz.:
a) Trend.
b) Seasonal Variation.
c) Cyclical Fluctuation.
d) Irregular or Random Force.
4. Economic Indicators:
In this method the forecasting is dependent upon certain economic indicators, which are generally published by central statistical organisations under the national income estimates. Some of these indicators are:
a) Personal income for the demand of customers’ goods.
b) Agricultural income for the demand of agricultural inputs, implements etc.
c) Construction contracts sanctioned for demand of building materials.
d) Registration of automobiles for the demand of accessories, petrol etc.
The forecasting is done with the help of least square equations:
This method has some limitations, likewise:
a) Appropriate indicator is difficult to find out.
b) For newer products, no past data are available.
5. Judgemental Approach:
Management may have to use its own judgement when:
1) Analysis of time series and trend projections is not feasible because of wide fluctuations in sales or because of anticipated changes in trend.
2) Use of regression method is not possible because of lack of historical data or because of managements’ liability to predict or even identify causal factors. Even when statistical methods are used, it might be desirable to supplement them by use of judgement for the following reasons:
a) Even the most sophisticated statistical methods cannot incorporate all the potential factors affecting demand as, for example, a major technological breakthrough is product or process design.
b) For industrial products, demand may be concentrated in a small number of buyers. If management anticipates loss or addition of a new such large buyers, it could be taken into account only through judgemental approach.
c) Statistical forecasters are more reliable for large levels of aggregations.
Thus while it may be possible to forecast the total national demand more or less accurately, it may be more difficult to accurately forecast demand by sales territory, sizes and models. In such cases there is no alternative but to depend upon judgement for developing more detailed forecasts.
A6] Plant Location Factors:
- Selection of Region:
Selection of a region calls for information of a more general nature. Information about the locality is of general nature which may be obtained from the following sources:
a. Ministry of Industrial Development
b. National Council of applied Economics Research
c. Indian Federation of Chamber of Commerce
d. Department of Industry in State Governments.
The following factors determine the selection of a region:
1. Availability of Raw Materials: Raw materials for the purpose of plant location can be broadly classified into two categories, namely, (1) ubiquities, i.e. existing everywhere, like clay, water etc. and (2) localized materials such as minerals, timber, coal, sugarcane etc. which are available only in certain places. Localized materials can be further subdivided into pure materials and gross materials. Pure materials add to the weight of the finished product and therefore, factories using pure materials are located near the markets. Some examples of pure materials are cotton, raw wool, raw silk etc. Gross materials are those which lose their weight in the process of their transformation into finished goods. Examples of gross materials are sugarcane, iron ore, limestone etc. Factories requiring gross materials are located near the sources of raw materials. This is because bulky raw material would be expensive to be carried to distant areas. Thus, this is the main reason why early location of most of iron and steel industries in Orissa and Bihar , sugar cane factories in U.P. and textile mills in Maharastra were undertaken near the source of the raw materials. Further, location of factories near the source of raw materials ensures continuity of production.
Nearness to raw materials is especially important in the case of heavy and bulky materials of small value as in the case of coal. In the words of Spriegel and Lansburgh, “Nearness to the source of raw materials is of special importance when the material is bulky in relation to its value and when the volume and weight are greatly reduced during its processing.”
Again, if the raw materials are perishable, proximity to supply of raw materials is an advantage. Examples of such factories are fruit canning, fish canning etc.
In the case of imported materials, it is necessary to locate factories near the ports to take advantage of the low cost of raw material due to cheaper sea transport charges. In the USA
2. Nearness to Fuel and Power: Nearness to cheap fuel and power is the second decisive factor in plant location. In the olden days, coal for generating steam, oil and natural gas constituted the chief sources of power. Therefore, during the 19th century, most of the factories were located near the coal mines where the coal could be transported cheaply and conveniently. But in the 20th century, electricity assumed great importance as a source of power. This is because of its relative cheapness, ease in handling, cleanliness, flexibility and ease in transmitting over long distances. Still it is necessary to ensure the phase, voltage, frequency, rates, regularity; special discounts allowed are suitable to the factory. Availability of electricity has been one of the main reasons for the development of many few industries in suburban and rural areas. In India
a) Thermal power
b) Hydroelectric power
c) Nuclear power
d) Solar power
Technologists are exploring the possibility of obtaining power from wind and sea waves.
3. Transport: Transport as a factor will influence plant location in the following ways: Firstly, transport facility are necessary for getting raw materials to the place of manufacture and secondly, for transporting finished goods to the place of consumption, thirdly, transpiration facilities are essential for carrying employees to the factory and sales representatives to the customers.
According to James Lundy, the ideal plant from the point of view of transportation is one which is centrally located and directly connected by water, rail, road and air facilities. For a factory which has to distribute large volume of goods, water transport is suitable as it is a cheap mode of transport. Rail transport is economical for long distances. Road transport includes trucks which are suitable for transportation of goods over short distances. Airways are useful for emergency distribution of spare parts, for products of relatively high value and if the product is of a perishable nature.
The factors to be considered in choosing a particular mode of transport are cost, dependability, time required to transport finished goods, prompts availability, shift in the market and speed.
4. Market: Market technically means a place where particular products are sold. The location of the plant near the market is influenced by the following factors:
a. It reduces the cost of transporting finished goods and also advertisement expenses. So goods can be sold at cheaper rates.
b. Nearness of market enables us to study the whims and fancies, tastes and habits, likes of customers and thus adjust production according to the demand of the customers.
c. It enables us to render prompt and quick services to customers.
d. It enables us to provide after sales services to the customers who complain about the product.
e. It is possible to execute replacement orders without delay.
f. When goods manufactured are of perishable nature or susceptible to spoilage, it is desirable that the plant is established adjacent to the market to enable quick delivery of such products.
g. In the case of production of fragile goods such as glass and ceramics, nearness of the plant to the market will reduce costs due to breakage.
5. Metereological conditions and Technology: Metereological conditions are an additional factor influencing the plant location. Before locating a plant, an idea should be had about the rainfall, heat, cold, fog, humidity etc. in the locality. It will facilitate in determining the influence of these elements on the processes to be carried out in the factory. Some industries require special climatic conditions as, for example, the cotton textiles favouring a humid climate, dry climate for flour mills etc. Therefore, such industries are located in areas like Pune, which do not have a damp climate. Climate partly determines the cost of erecting suitable building and providing heating and air conditioning. Climate affects the efficiency of workers to a considerable extent. In the words of Kimball and Kimball, “The effect of climate upon the efficiency in the case of working force required to work outdoors, as in case of quarries, constructional industries etc. cannot be minimized. A cool climate develops the best of industrial worker.”
Topography also exercises an important influence on location. A hilly and rocky region is unsuited for agro based industries. Further, topography of a particular region affects the cost of transportation which in turn influences the cost of production.
- Selection of Community:
Once the general are has been determined, the search for plant site leads to second step, the selection of particular locality. The selection of a community in the chosen region depends upon the following factors:
- Labour: As labor cost is an important component of total cost of production, priority should be given to that locality which is in the vicinity of adequate supply of labour. Depending upon the type of labour required, a factory will be located near the place of supply of the particular type of labour. If only skilled labourers are required, the factories are located near the urban areas where such labour is easily available. On the other hand, if semi skilled and unskilled labourers are needed, a factory can be located in rural areas where such labourers are largely available. A factory which employs both male and female labourers seeks a place for locating the factory where such type of labour is available without much difficulty. The supply of labour is characterized by certain characteristic features. These are:
· A stable labour force.
· The right type of labour,
· Adequate number of employees,
· Reasonable wage rates,
· Proper attitude towards work and
· Reliability of labour supply.
Kimball & Kimball wrote “The need of adequate supply of labour is obvious, but a number of considerations such as cost of living & the character of labour available as to both skill & temperament should be taken into account.” The need of management is to face less strikes or lockouts & to achieve lower labour cost per unit of production.
- Supplementary and Complementary Factories: The existence of supplementary and complementary factories has led to concentration of industries in particular region. For instance, in
- An industrial unit can secure materials to better advantage than anyone can do singly. Concentration of similar establishment helps to increase the variety of materials that can be offered by suppliers.
- The concentration of establishments of identical industries improves the labour market both for employer and employee.
- In specialised centers, banks become familiar with the requirements of the industry. The banks can gather full information about each and every industrial establishment and this will enable them to discount the commercial papers readily and more safety.
- A group of plants will attract a variety of repair plants such as foundries, machine shops, tool makers, factory store suppliers etc. Along with these, other supply houses will also establish themselves near the industrial area.
- A group of similar manufactures established in one place serves to perfect the local markets – reputation of each firm supplements that of others. It should also be noted that a firm enjoys prestige from the mere fact of location in the noted place.
- Lastly, division of labour is possible. The principle of division of labour may reach a high level of perfection and particularly, new enterprises will find no difficulty in getting skilled or specialised labour.
- Banking and Credit Institutions: For any industrial enterprise, the need for finance cannot be under estimated. As and when a factory grows in size, it requires more and more funds to meet capital expenditure and revenue expenditure. The possibility of raising finance in a locality certainly exerts locational pull. Therefore, the existence of banking institutions will exert influence over the location of plants. Further, a locality which is inhabited by people motivated with savings and investment habits also enables the factory to raise finance through the issue of shares, debentures, public deposits etc.
- Local Taxes and Insurance: The locality for setting up a new factory must be such that the taxes levied are reasonable. The common taxes collected from factories are octroi and license fees. Similarly, income tax, sales tax and property tax must be considered, as they vary in each area. Among insurance costs, fire insurance is the most important. Fire insurance premium depends on the quality of protection and prevention services available. Similarly, employee accident insurance premium must be considered. In case the taxes and insurance costs are high, factories must be located in other places where they are comparatively low.
- Water Supply: Water is used for processing the products, for drinking purpose, for sanitary purpose, for cooking, for waste disposal, for sprinkler system in case of fire. Depending on the nature of plant, water should be available in adequate quantity and of proper quality, i.e., clean and pure. The other factors to be considered in this connection are stability in the supply of water, problems leading to water pollution, mineral content of the water and last but not the least the cost of transporting the water if its is not readily available in locality.
- Momentum of Early Start: Factory owners are not always guided by purely economic considerations in deciding the location of their factories. Personal preferences and prejudices of these persons are equally important. It is well known that Mr. Ford started to manufacture motor cars in
- Historical Factors: Sometimes, plant locations are the result of historical events.
- Political Stability: The political situation in potential location should be considered while selecting a locality for establishing a factory. Even if other consideration demands a particular locality, knowledge of the political situation and legal prejudices can assist in taking a right decision.
- State Assistance: Assistance of Government to start industries in particular areas is one of the significant factors reckoned in plant location. In
· Feasibility study subsidy
· Investment subsidy
· Concession on term loans
· Concession on processing fee
· Concession on working capital loan
· Sales tax exemption to some extent
· Subsidy on electricity traffic
· Stamp duty exemption
The other incentives are:
· Allotment of land and sheds to entrepreneurs
· Technical guidance
· Raw materials
· Marketing facilities
- Selection of Plant Site:
This step involves the question of determining the exact site where the new plant has to be established within the selected locality. The following factors must be considered in selecting the exact site:
1. Price of Land: The price of land to a great extent determines the selection of a particular site. If the price of the land is unduly high, it involves investment of a large amount of fixed capital. Where there is no adequate capital available for the purchase of land, it can be acquired on a lease basis. But this again involves payment of high lease rent and taxes which may prove to be expensive and consequently, reduce the profits of the factory.
2. Type of Soil: Before deciding upon a site, the sub soil condition, especially its load bearing condition, should be properly determined. Analysis of the soil at different strata below the surface at various points on the proposed location should be carried out. This is necessary because sandy or soft soil may dampen deep foundations involving extra costs which more often than far outweigh initial cheapness.
3. Waste Disposal: It is one of the inherent features of all factories to generate waste and its safe disposal is essential as it endangers human and animal life. In certain factories, waste products are utilized by other factories. In such cases, the factories utilizing the waste products can be located near the source of such waste products. Industrial waste can take three different forms:
· Solid waste
· Liquid waste
· Gaseous waste
Solid waste requires acquisition of additional land space, as the waste can be dumped on such land. Liquid waste should be disposal of through sewerage connections in the factory areas. Gaseous waste must be led into high altitudes in the atmosphere by means of tall chimneys after specially rendering them harmless before its final disposal.
4. Expansion Potential: while selecting a site for the factory, one should look to the future and ascertain the chances of a possible expansion of the factory. It is advantageous to choose a site adjacent to which a land is bought for factory building in anticipation of expansion of the factory in future. Often, additional land can be obtained and sublet for a short period.
5. Availability of Commercial Services: Commercial services of every kind such as warehousing, repair workshops, insurances, legal service, accounting and auditing services must be available near the site selected for plant location. Security services such as police stations, fire stations are also equally important factors of plant location.
6. Communication: It is necessary to check the availability of postal and telephone communication facilities in the site selected for plant location.
7. Availability of Amenities: A location which provides good amenities outside the factory – hospitals, schools, clubs, cinema theatres, restaurants, community hall, shopping centers – are often more attractive to the staffs and employees than one which has none or a few.
8. Health of the Locality: It should be investigated if the proposed site is prone to any particular diseases. It should be fruitful to determine its causes. If the disease is due to local conditions, water, heat, rain, insects etc. and they are uncontrollable, then it is advised to abandon the site.
9. Statutory Conditions: Although a good plant site may be available for starting a factory, yet sometimes Government may prohibit the setting up of factories in some areas under MRTP Act and FERA.
10. Flood and Drought Conditions: If the site to be selected is on a river bank, it would be worthwhile to enquire whether or not the land was ever under floods, and to what height the flood water rose. If the enquires reveal that the land is frequently to high depth, the site should be abandoned. In the case of low floods, the plinth of the building and foundation of machinery are to be raised above the flood level in order to save them from flood damage. Similarly, the drought conditions should be carefully studied. The factory is to be assured of its water requirement even in the year of low rainfall. In case of ant doubt, the site is to be abandoned.
11. Right and Title of the Land: The right and title of the land should be thoroughly looked into by a competent person. No laxity should be shown in this respect. Any defect in the right and title of the land can drag the factory into prolonged and costly litigation. Unless a clean and clear title of the land without encumbrance is available, this site and location of factory should not be determined.
12. Good Scenery: The land selected should be in the midst of good scenery. Ebonezer Howard was dismayed at the ugliness and shocking state of industrial towns. In his book, Garden Cities of Tomorrow, he suggested that new town be built of limited sizes, each having enough industries to provide employment to their inhabitants. A good park with beautiful gardens in and around the factory attracts the attention of public at large.
13. Attitude of the People: Success of a factory depends very much on the attitude of the local people. Generally speaking, the attitude of the people must be co-operative and sympathetic. They must patronize the products manufactured by the factory.
14. Technological Know – How: the knowledge of various technologies should be available in the nearby source, so that delay in consultation will be reduced if any breakdown occurs in the plant. The factory should also be located near a consultation organisation so that future expansion problems and present difficulties can be discussed more often for the smooth running of the factory.
15. Existence of Religious and Social Institutions: The presence of religious and social institutions enables the employees of a factory to lead a value based life. This contributes a lot to industrial peace and avoids labour unrest in a factory.
From the foregoing observations, it is clear that plant location is a simple job. Plant location depends on a number of factors which are to be investigated thoroughly and extensively. But rarely do we come across the availability of all factors at one particular place. So a balance has to be struck among all these factors and it must be located so as to derive maximum benefit from all these factors.
Selection of Most Economic Site:
According to Kimball and Kimball, “The most advantageous location is that at which the cost of gathering material and fabricating it plus cost of distributing the finished product to the customer will be a minimum.”
