economics of multi shifts

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7Economic s. o f M u ltish tfts

Many large-sized plants operate on a rnultishift basis- In someplants multishift operation is 8. normal OT regular feature. In other cases.shift working is adopted as a temporary measure to meet some .. ariableorseasonal demand. The problem of shift operation also arises in non-manufacturing or service systems characterised by": temporary variations indemand. In a" service concern it is not possible to store output forfuture sales. Therefore, whenever demand i ! l exceptionally high it has tobe satisfied immediately through overtime or multi-shift operations.

LeDgth orProduction Rnn

Production run refers to a period of uninterrupted production opera-fiens. The length of production run depends largely on the scale and typDof production. On one extreme longest possible production TUns arcneeded in giant mass production units during [he use of high cost and h:gbtoutput plants. Fullest possible utilisation of fixed costs is essential foreconiornieal operation of such plants. At the other extreme. tiny job orderworksbops may make us c of very short production runs 8lI very little f ixed .factors are involved. However . it is always desirable to make maximumuse of fixed factors through reasonably long production runs. Full timolong runs may not be feasible in all cases.

Shift Working

Shift working involves scheduling manpower to maximise efficiency.Generally, the nature of work docs not vary materially between shifts.Therefore. one shift may be considered as duplication of the previous shift.Machines and equipment do not change and it is only the employees who

are changed from one shift to another.

Shift working is one way of securing the longest possible run ofcapital equipment. Wben multishift system is used. the process cancontinue over periods much longer than the normal working day. Multi-

shift system is very commonly used i n cont inuous -p roce ss industries likeChemicals. metal. manufacturing, brick production, etc, In such iadustrres,

round the clock production is essential because stoppage in processresults in" damage to equipment and heavy costs,



2'26 i'llODUCTION ECONOMICS

Many service industries like hospitals. fire service. police. airlines,also make use of shift vorking, Book printing. newspaper. etc., are

other examples of shift system.

Advantages. Shift working offers the following benefits :

(i) Optimum we of capilal' asaeta.• Shift working enables maximumutilisation of machinery, equipment, building and other fixed assets. Workis restricted to normal working hours without overtime. Capital costsper unit of output, can be reduced through intensive utilisation of expensiveQpital-.cquiptUeQt. Whca . Ihc. flcilltics are used round. t~e clock cost ofcapital is reduced. In addition to saving of capital cost, shift working redu-ces capital investment, Less capital is required to produce a given output.

(ii) R ep la t:e mem o f capital. Speedier amortization of capital equ_ip-ment and its more rapid replacement becomes possible. Shift-workingresults in faster turnover of funds for this purpose. Quick replacementhelps in maintaining a higher average standard of equipment which inturn means fewer breakdowns and higher efficiency of operations.

Disadvantages. Shift-working suffers from the following drawbacks:

(i) Obs"Ze8cenu. When equjpment is used 24 hours a day and for7 days a week, there is greater wear and tear. This requires more rapidreplacement. However, greater use does not affect obsolescence very much.

(ii) Complezity o f management. Management faces a great diffi-culty in scheduling workers and In.attracdng sufficient number of employees(or unpopular shifts. To some 'extent, this problem can be solved byrotating workers between s~fts so that th~ burden is fairly dist ributed.However, resistance to Inconvenient hours still continues.

(iii) H £gh tfX Jge bilt. Shift wor-king results in a large increase intotal cost of labour. Cost ofsupervision also increases. Special incentives.may have to be used ton-hose. working in unpopular <thifts. In addition.there m9 be extra costs of recruiting and tt'aining additional workers.

(iv) Limil'4 demand. Shift working and its economies can be

obtained only when the demand in the market is sufficient to ~~oIb thevolume of output. Therefore, before resorting to shift working, manage-ment must make a demand forecast.

Suitability. ~\ift working is appropriate under following conditions:

(i) When the capital output ratio is high or highly expensive capitalequipment is being used. In both the caBOS e a : P i t t U . Costs are nigh.

(ii) Rate of absolescence is high and maximum possible usc ofcapital equipment lias to be made Detore Itbecomes obsolete.

(iii) Cost of lalwur is low eilher due to capital-intensive technology

or because wage rates are low.(i!l) Rate of depreciation depends on time (e.g., in buildings) rather

than on the intensity of use (e .g .• high speed cutting tools) .



a:CON()~ OF +,ULTIIIJIIJITS 2'27

(v) More intensiv ... use of capital makes room for new technological

avenues.

(vi) Workers and trade unions do not oppose shift workingand nosubstantial increase in wages is required for. shift working.

Shift working may be desirable for two reasons-(a) technological,and (b) economic. In case of continuous process industries, shiftworking is necessary 00 technological groundj- But. in coal miningand jute manufacturtng, hltge sums of investment has to be made innially.Therefore, economically it is necessary to adopt shift working. In certainindustries like automobiles, shift working is desirable in departmentswhich use exceptionally expensive equipment. In certain seasons, work

shifts are used to meet oeak demand.

• In advanced countries, teal earnings are high and people are relw:t-ant to work in shifts except at very high wages. In such countries, shiftworking is confined to highly capital-intensive indnsiries or. in continuousprocess where technological reasons make it essential. But in developingcountries like India. there are solid reasons for shift working. Capital isscarce and labour cheap and. therefore. round the clock use of capital isdesirable. In such countries shift working does not involve substantialincrease in labour COSts due to low wage·rates and abundant supply oflabour willing to work at odd hours,

In multi shift system, more labour is used with the same amount of

capital. Such substitution of capital for labour reduces the capital output- ratio, This is desirable in India on account of its bigh capital output

ratio.

Shift Working and Costs

The effect of shift working on the cost of operations depends uponthe nature and type of industry. Shift working tends to reduce cost incapital-intensive industries like steel. chemicals, oil refiring, mining, etc.

In these indu.st~jes huge. in.vestment in building~ and eq~ipment. is requi~.As a result capital costs per worker are very high. 8hlft working helps mlowering investment costs per worker. But in labour-intensive industries.investment per worker is low. In such cases, increase in wage bill morethan offset the reduction in capital costs and, therefore, shift working mayDot be economical.

During short period of peak demand, it is not possible to create addi-tional capacity. Therefore. shift working is helpful in meeting extrademand. Before introducing shift working. management should evaluatethe effect of multishift system OD d ifferent types of costs, e.g., direct labour.supervision, maintenance. ancillary services. welfare facilities, power anddepreciation. Demand prospects, availability of labour and wage ratesshould also be considered. A proper cost-benefit analysis should bemade.

Once a firm has decided to introduce shift working, the next problemis to decide the number of shifts to be used. This will depend upon the



PJ,ODUcnON iCONOMIC&

number of working hours and other factors. Assuming that market islarge enough to absorb entire output. the 24 hours divided by workinghOUTS (say, 8) will give the number of shifts (say, 3). But various otherfactors are involved. e.g.• investment costs, extra wages pe r shift, effect onscrap, and productivity ratios in second and third shifts, increase in super-vision, etc. These factors do not remain constant from one shift to another.In some concerns, three shifu (morning, day and night) arc used whilein others only two shifts (day and night) are used.

Shift working may also involve Problems of in-plant houses forworkers. additional canteen or other facilities. change in lighting andpower arrangements, extra accident preyention or safety devices. etc.

Bettis. R.I.

Farther ReadiDgs

BtI/J'inetJ8 Economic.! lor Engineers, New York; Me-

Graw Hill. 1980

M adem Production. Management, New Delhi:Wiley Eastern 1986

Man ag er ia l E 'Y I1 &omic s. New York: Addison:

Wesley, 1980

~YanagerialEconomies, New Delhi: Heritage, 1983

Buffa, Elwood S :

Graham P

Reekie, W.O. :and J. C. Crook :

REVIEW Q.UESTIONS

1. Explain the merits and demerits of shift wc..f ldng. How shift

working influences costs of production '1

2. Write a short note on the length of production run.

. .



8Economics of Product Mix

Concept or Product

A product is often thought of as a physical object or a commoditycreated to satisfy tbe needs of a customer. However. from the consumer'sviewpoint product has a much wider connotation. It is really the rightto own and use a bundle of need satisfactions. To the user product isnot simply 3. tangible thing bat a bundle of expectations. In fact. a pro-duct is a set of tangible and intangible attributes. including physicalobjects (shape, size. colour. package. etc.), services (credit. home delivery.guarantee, prestige) and amenities which are offered to the buyer for.satisfaction of needs.

A product canbedescribed in two different ways:

(i) P h Y l 1 i c a 1 . descriptiOl~. A product can most easily be describedby its physical characteristics. We all know what is a ball pen, a watchor a radio. However. each of these products is composed of a largenumber of components. Each component is a product in its own rightand it may have several applications. For example. a radio transformercan be used in electric motors. In its physical description" a product issimply a set of components.

Physical description does not convey the full meaning of a productfor two reasons. First. the same product can be applied to different uses.

For example. a steel sheet may be used in tubes. untensils, etc. Secondly.the same product may have different designs. shapes, etc. For example,a radio may be made of wood or plastic, it may contain valves or trans-istors. Metal, plastic, etc. may serve as perfect substitutes in manyproducts. Therefore, physical appearance alone is not sufficient and adescription of the product's function becomes necessary.

(ii) Func ti on al d ea cr ip ti tm . Functionally. a product can be des-eribed in terms of the needs or wants it satisfies. However. in practiceit is ver- difficult to define the precise function of a product. The sameproduct may have different functions and the same function can often becarried out by different products. It is not easy to specify the order of

priority. For example, a T.V. set may be defined as a means of enter-tainment. But it can also be a means of education or even a statussymbol. It is difficult to identify which is the most important function



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2'30 PRODUCTION ECONOMICS

Cor the customer. In case of industrial products (t.g.• a lathe) there canbe several uses and precise description may be difficult.

What is Produ.ct Mix ?

. Big businessfirms generally produce several products at the sametime .. ~uch multiple products create the problem of deciding the relativequanbtJes (ratios) of different products in the total output. Such mixof products is called product mix. Product- mix may be defined as theentire range or variety of products offered by an enterprise for sale.]~ may consist of related or allied products or entirely unrelated anddifferent assortment of products. Product mix should be distinguishedfrom product line which implies a class of similar or related products. For

example. detergents. vanaspati, toiletry constitute the product mix ofHindustan Lever Limited. '

Product mix has depth as well as brer.dth, De~In. of a product mixconsists of assortment of sizes, styles. designs, colour schemes, qualityranges, package types. etc. for oach product. Breadth of product mixrefers to the number of product lines offered by the com~ to itscustomers. For example. lifebuoy, Lux. Rexona, Liril, etc. constitutethe depth of Hindustan Lever's product lme, Its breadth, on the otherhand, consists of Dalda, bathing soaps, sunlight detergents; talcum.powder. shampoo, Lever baby food. etc, The basic objective indeciding the product mix is to maximise returns to the enterprise by

selecting the best product mix within the capacity and resources of theenterprise. A judiciously sele-cted product mix is helpful in increasingthe profitability of the enterprise.

While selecting the best mix of products for an enterprise, manage-ment must COnsider the following factors:

[, The demand forecast for each product.

2. The relative return from each product.

3. The resource requirements of each product.

Demand Forecast

The estimated demand for a product determines the maximum

amount of its output. Every business firm needs to make a forecastof sales before deciding the quantity to be produced. A proper demandor sales forecast helps in preparing appropriate production schedules so asto avoid overstocking and delays in meeting demand. In the long run.demand forecasts facilitate capacity planning. Several methods can beused for forecasting demand. Before introducing a new product in themarket, it is always desirable to first forecast its demand. For example.Ponds India Ltd. made extensive forecasts of demand before introducingtheir toothpaste in the market. Effeaive sales forcasting on .the nationalscale is one of the factors in the successful launching of Ponds tooth-paste. Forecasting demand for new products is important for two rea-sons. First, when a businessman wants to introduce new products for

diversification and growth. he needs an estimate of lik.ely demand.Secondly, every product has a life span and a. firm has to go in for newproduct when old products decay and die out.



ECONOMICS OF -PllODUCT MIX 2'31

Demaml Illterrelationshipli

. The demand for some products is interrelated positively or nega-tively, Positively, demand for one product (say, socks) increases withincrease in the demand for another product (sa}. shoes}. Such productsare known as complementary producl8r On the other hand. in case of,qub8titute products increase in the demand for one product results in a fallin the demand for another product, e.g., tea and cold drinks. Demandinterrelationships are influenced by random and seasonal fluctuations indemand.

Some products face seasonal fluctuations in demand. For example,iee-erearrr, fans, coolers, ere., are much more in demand during summer

than in winter. In the off-season months, the plant and equipment re-main partly unutilised. In order to avoid this wastage of resources, afirm may undertake production of other products which have peakdemand in different seasons. For example, a fan manufacturer may duringwinter undertake production and sale of room beaters. This will providecost effectiveness in production.

In case of random or unsystematic fluctuations in demand, changesin demand cannot be anticipated accurately. Consequently, manage-ment may be unable to make effective adjustments and for some timeTesOurceS may remain idle. However, a combination (mix)_ of productscan be designed to minimise costs associated with idle resources. For

example, the management knows that demand for A product falls with arise in demand for B product but the time of rise and fall cannot bepredicted. In such a case, the firm should produce both the products sothat resources can be transferred from one product to another as perdemand fluctuations.

Supply InteneladollShipa

There may be interrelations no hips between products from the supplyside also. Some firms combine production of two or more products whichuse the-same basic raw materials or its by-products. For example, many

vanaspati manufacturers produce washing soapto

make profitable use ofleft over waste of vanaspati, Similarly, a sugar mill may add another pro-

duct to make use of molasses.

Relative Return from Products

A multi-product firm cannot expect all its products to earn, thesame profit. Some products yield higher profit margin th~n others. Thecontri bution of a product to the total profits of th~ .firm IS ~nown as Itscontribution margin. 1t is the return from one additional unit of output.Some products have higher marginal returns than others. For example,a five star hotel may earn higher on the sale of liquor th~ on food.

Moreover, the profit margin of any product does no~ remain constantover time. Changes in profit margins (~ue to changes. III~emand, compe-tition, substitutes, etc.) lead to changes Inproduct-mix (Ill the form of



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2·32 PR,ODUcnON ECONOMICS

addiTlg Dew products. improving old products, dropping losing products.

etc)Improvement in products is necessary to ensure that products do

not become obsolete or out of fashion. Product improvements also help tomeet competition and to maintain or - increase the profits. It may beprofitable to drop or delete a product which has gone out of fashion andlost its market. Deletion of products causing loss or involving dispro-portionate use of resources will release resources which cz,a be mere profit-ably employed in other products. In some cases, emergence of bettersubstitutes may warrant dropping or improving old products.

Resource Constraints

Resource capacity limitations put an upper limit on the output ofa product. In the short run, the resourcesare fixed and the objective isto make most profitable use. Therefore, an optimum mix of productsmust be designed to maximise-total profits from the overall operations.The guiding factors in this regard are relative. contributions of differentproducts, demand and supply interrelationship as described above.

Use of Linear PrograD1m.ing inProduct~,m.ixDecisions

Linear programming is all optimisation technique. It specifieshow to use limited resources of a business to maximise profits or to

minimise cost. For exarople,a manager has a given amount of resources(man hours, machine hours, materials, etc.). He can use linear pro-gramming to decide the most profitable combination of alternative usesof resources.

Generally, a business firm has limited productive capacity whichcan be-used to manufacture a range of products. Different products havedifferent unit costs, different prices and. therefore, different unit profits.The man8.fctial decision in such a situation is aimed at determining theproduct rmx which will give maximum profits.

ExaDIple: Suppose, a fan manufacturer manufactures two kinds of

fans-ceiIing and table fans. Production operations involved are sub-assembly and final assembly. The capacity is 100 ceiling or 50 tablefans and 50 ceiling and 100 table fans respectively in two operations. Ifthe profit per unit is Rs. SO and Rs, 45 respectively, determine theoptimum product mix.

Solution: Taking 0 as· ceiling fan and T as table fan, and P asprofit margin per unit, the objective function wiil be :

maximise Z=500,...45T

subject tv capacity, constraints

(i) Sub-assembly (a ) B ~ lOOO+OT(b ) S"';;;: OO..L50T

(ii) Final assembly (a) F ~ soo+or(b) F - c 00+ lOOT



ECoNOMICS OF PRODUCT MIX

Let us construct a graph now :

The combinations of ceiling and table fans in sub-assembly areindicated by AB. Similarly, CD indicates combinations in case of fnalassembly. The feasibility region common to both the capacities is UAED.The firm must produce within this feasible region.

'I'

Fig. S·l. Product Mix Decision

The profit pet unit is Rs, 50 and Rs, 45 respectively for ceiling andtable fans. So join 50 of ceiling (X) with 45 of table (Y). Now movethis isoprofit line parallel upwards till it becomes tangent at one of thecorners of the feasibility region (i.e .• point E). This is the optimumpoint. At this level, the product mix is as follows :

ceiling fans=70

table fans=65

Linear programming is based on the following assumptions:

(a) There is perfect competition in the market so tbat demand IS

fully elastic and price charged for all units is the same.

(b ) Machine capacities and demands made by each product on eachmachine are fixed.

(e) Each additional unit of output is obtained at the same extracost, i.e., there are no economies of scale.

(d ) The fum is using multipurpose plant, i.e., different productscan be produced in the same plant.

These assumptions do not hold good in practice, However. linearprogramming helps to simplify the problem and solve it even when thenumber of variables is large.

2'33-



Farther ReadiDp

E.:oMrki .c Theory .and Operali01!8 Analy8is,New Delhi: Prentice Hall of India. 1985

Blair R.D. and L.W. Kenny: MiCf'o-Economic8 for Manageriaf Decision-making, New York: McGraw Hill. 1982

Lapin L : Quantitative Methods [or B'U.8iness Decisions,

Harcourt Brace and Jovanovich, 1985

Wilson J.H. and S.G. Dan: Managerial Economics, New York: Harper

and Row, 1984.

Baumel, William J :

REVIEW Q.UESTIONS

] . What is a product 7 Give physical and functional descriptionsof a product.

2. Define 'product-mix'. How will you decide the product-mixofa fum '/

3. Explain the factors to be considered in determining the product-mix of a manufacturing unit.



9Product Planning

Wha-: iii Product PlanniDg '1

In order to maximise his sales revenue and profits, a business firmrn~Ht continuously adjust ansi adapt its products and service; to th ....changing requirements of customers, From time to time, it may haveto design and develop new products. Product planning is the processof searching ideas for new ,products, screening them systematically,converting them into tangible products and introducing the ne:product in the market. It also involves the formation of product ponciesand strategies. Product planning include, improvements in existingproducts as wel l as deletion of unprofitable or marginal products, It

also encompasses product design and engineering which is also ~n~product development. Product planning comprises all activities

starting with the' conception of product idea and ending up with fullscale introduction of the product in the market. It is a complex processrequiring effective coordination between different departments of thefirm. It is intimately related with technical operations of the organisa-tion, particularly with engineering. research and development depart-ments.

Any product has two broad objectives-immediate objectives andultimate objectives. Immediate objectives include satisfaction ofimmediate needs of consumers, increasing sates, utilising idle plantcapacity, etc. Permanent or ultimate objectives -consist of reduction inproduction costs, 'crCa\ion of brand loyatly, monopolising the market,

etc.

S,ignificance and OOjectlo

Product planning and development is a vital function due to severalseasens. First" every product has a limited life span and needsirop~vomeat or, r(,!piaceroent.after some time. SCIJOnd1y,n~~. fashionsand preferen~s of coasumers undergo changes nequislng adjusJments inproducts. ThirdllY. new technology \lIeates. opportunities for t~6 designand development of better products, t'roouct planning and developmentfacilitate the profitability and growth 01 business. Development ofnew products enables a business to face competitive pressures and todriversify risks. Product is the most important constituent of marketingmix. Finding and meeting the needs of. customers is the key element

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2'36 PR.ODUCTION ECO~OMICS

in a sucessful marketing strategy. New product development has becomeall the more important in the modem world characterised by techuologi-

cal change and market dynamics. New product development bringsopportunities but also involves heavy commitment of finance. technologyand even emotional attachment. New product decisions are necessaryas well as costly. Many new products fail causing ruin to businessfirms. .

Product development is a continuous and dynamic function. Conti-nuous adjustments and improvements in the product are necessary tominimise costs of production and to maximise sales.

High rate of product obsolescence requires product innovation fre-quently. At the same time. cost and time scales have increased. In

sO!Deproducts. the gestation period is very long. sometimes longer thanthe. bfe of the product. As a result the role of R&D expert has becomevery important. He needs to be in touch with sales persons and actuplend users. Successful technological innovation involves great resources aswell as great risks. Product innovatoss face spectacular successes aswell as disastrous failures.

Most of the new product ideas do not become actual products.Many new products achieve limited acceptance in the market. This isso because firms very often are reluctant to move away from tried andtested products.

Thus, product planning is required for the following reasons :

(i) to replace obsolete products;

(ii) to maintain and increase the. growth rate/sales revenue of thefirm ;

(iii) to utilise spare capacity;

,ill) to employ surplus funds or borrowing capacity; and

(tl) to diversify risks and face competition.

Product Planning Process

The process of product planning consists of a sequence of six distinctstages as described below:

1.· Exploration. Product planning begins with the generationand formulation of ideas or concepts for new products. The productideas may. come from sates persons who are in constant touch with thoneeds and desires of consumers. Middlemen. research W Id developmentdepartment, trade and technical journals. consumers, trade associations.chambers of commerce, government agencies. research laboratories andexecutives can be other fruitful sources of product ideas. New ideasmay also emerge from individual innovators, suggestion schemes, market-ing research, cost studies, service organisations, etc. At this stage.

the products of competitors. bstitutes and allied products should alsobe considered.



PR.ODUCT PLANNtNO 2'37

2 Screening. This stage involves a preliminary comparison andevaluation of product ideas to select the most promising idea whichwarrants further consideration. A large number of ideas may be

available. It is necessary to eliminate the ideas which have no potential.Careful screening helps to avoid wastage of time and resources inimpracticable or uneconomical ideas.

A clear understanding of company objectives and facilities isessential for successful screening. This will help to reject the ideas whichare inconsistent with the strategy and resources of the enterprise. In

recent years, leading companies have developed specific criteria forscreening. Such criteria consist of (a) profitability requirements over aperiod of time; (b ) annual value of production; ( G ) unit profitmargin; ( I l ) new capital required; (e ) use of existing distributionnetwork, etc.

3. Dete-iled Business Analysis. Those ideas and concepts whichsurvive the screening stage are put to rigorous economic evaluation.The technical and economic factors involved in the ideas are analysedinj'sufficient detail to judge the commercial viability and technicalfeasibility. A statement of expected costs, sales and profits over a periodof time is prepared. Business analysis ~ay also involve some preliminarytesting and analytical studies which is known as concept testing.

Business analysis is made to answer the following questions. :

(a) Is the product idea technically feasible 1

(b) Is there au adequate market demand?(c ) Is it necessary to obtain patent right?

( I l ) What is the raw material position 1

(e) Will machinery be imported?

(f) Are the production facilities suitable?

(g ) How much will it cost to produce and sell 7

4. Deve!opDumt. At this stage, a design or specification of theproduct is prepared. The product idea is given a practica.l shape in theform of a working model or prototype. The idea on paper is convertedinto a physical product. The prototype is tested in the laboratory toensure that it meets all technical specifications.

5. Test Marketing. A sample of the product is then tested ina selected market to find but the reactions or responses of consumers,The working model or prototype is produced in a limited quantity andit is tested in the market before starting full scale production. On thebasis of the feedback from cousumers, necessary improvements (redesign-mg) are made in the product, Test marketing is a vital phase of productdevelopment as' it helps to "tie up the loose ends" before launching tbeproduct in the market.

6. Co m.m.erd allS2.U on. In thls final stage, the product is actuallyintroduced in the market on a full scale. The pricing, channels and



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Pllorn1CIJ1ON ECONOJ.lle

promotional methods are fiuali.sed. The product is fully i.ntergrated into-the company's normal operations aad it DO longer remains a new

product.

Essentials of Successful Product Planniug -

The prerequisites of successful product development are as follows:

(i) A sound system for generating and rewarding useful ideas fornew products.

(ii) A competent R&D setup to determine and solve the problems

involved in' product design.

(;'i) A competent engineering department to give practical shape to -the idea. -

(tv) A production department oriented to new and improvedproducts.

(tI) A marketing department ready to face the challenge of makingnew products.a success.

(m ) A service unit capable of providing prompt and efficient aftersales service.

Criteria for Evaluating New Products

While assessing the probability of success of a new product, thefollowing factors should be considered:

(i) Consumer acceptance-market opportunity.

(ii) Cost-price ratie of the p-roduct.

(iii) Manufacturing capability"

(i~) Distribution network.

( t o ) Quality requirements.

( f)~) Patent position,

(vii) Impact on sales of other products.

(tJiii) By-product possibilities.

(ix) Technical feasibility.

(x ) R8_W materials position.

Care.ul assessment of these factors is essential because failure of aproduct results in considerable loss of money, time, and effort. A lot ofdata has- to be collected and analysed to minimise guesswork and hunch.Too much logic and whims should be avoided. The former results in over-caution while the latter involves taking undue risk.

Hazards in Product Development

Yroduct qevelopment process is beset with several hazards :

(1) New product development is a time-consuming and expensiveprocess. A preliminary screening and a thorough business analysis involve

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,aDDUCT PLANrm-ta

much expenditure of time and effort. It is essential-to ensure t b . a J : good

concepts get serious consideration and non-viable ideas are eljminatedbefore they cost money.

(2) The product idea may be excellent but the resultant producemay not be commercially viable. This may happen when R&D is out

of control in a technology- based industry.

(3) A product idea originating in the laboratory requires rigoroustesting for commercial viability. Simiiarly,an idea generated bycommercial side, needs R&D analysis for technical feasibility. In tl10

absence of close coordination between technical and commercial sides,product development becomes unsuccessful,

(4) When the production techniques lag behind R&D, the pilotmodels cannot be produced on a mass scale.

(5) Many good products fail commercially because they are too farahead of their times or they are not appreciated. For example. manyart or off beat films do not achieve commercial success.

Profitability P:rojections for New Ps-oducrs

Several projection techniques have been developed to estimate therelative volume OT profitabil.ty of a new product. Some' of these techni-ques are described below:

(i) Indices. The U.S. Industrial Research Institute has developed asimple index to measure the net monetary return from a product. Thisindex is as follows :

I=PXNc

where

Ts tands for index of relative worth

P is overall probability of commercial viability

N Stands for estimated net return for 5-year period

C is estimated future research cost.

Another project value index has been developed by Du PontCorporation of U.S.A.

PV[= crsx~CSXAVxPxvLTPC

where,

PVl=Project value index

CTS=Chances for technical suecess

CCS=Chances for commercial success

AV=Anoual sales volume



PRODUCTION ECONOMI~

"=Profit per unit

L=Life of product in years

TPC=Total project cost

(ii) Point systeID. This system was developed by Walter T. Blake ofU.S.A. It involves the use of weighted factors.' Under this system, threefactors are used. Chances of success are rated from poor (2) to good (I 0).Annual payoff is rated from 2 to 20 and cash position intwo years is ratedfrom 2 to 10. Payoff is defined as the total cost divided by annual earningswhile cash position is: t (gross earnings .over a decade-total investmentin R & 0). One point each is assigned to ten miscellaneous factors, e.g.,good raw materials position. Point system can be used to measure aproduct against minimum acceptable score or to compare two proposed

products.(iii) Graphs. Yale Brozen has developed a system based on grapM

and charts. Under this method, a chart is prepared for each product'scontribution to the total sales of the company. Graphs are also pre-pared for gross margins, on each product. When the graph for a productbegins to drop, steps arc taken to improve the product or to develop newproduct in its place.

(itl) Prodnct PrGfiles. The Dewey and Almy Chemical Co. of U.S.Ahas developed tbe analytical technique of preparing a series of productprofiles on the basis of stability. growth, marketability, financial andpositional factors of a product. For each factor in a profile, the new

product idea is rated on a scale consisting of vay good, good, fair, poor,very poor.

The New Products Committee of the company analyses the productidea with the belp of product profiles. It then prepares a report suggest-~g to top management.

AU tbese techniques are an aid to executive judgment in newproduct development Managers also have to use their jmagination,foresight and market knowledge in developing successful products. .Noformula is infallible and the aim should be to minimise time and cost.The ultimate test of a product is its acceptance by consumers. Rate of

return on investment is the true indicator of the profitability of a aewproduct.

Product Strategy

Product strategy and in innovation.s are vital ingredients in productplanning and development. While formulating product strategy.management should start with a definition of the product. The productdefinition should cover not simply its physical design and functions butall the product factors that contribute to customer satisfaction. Forexample, a housewife purchasing a washing machine is not buying justa set of drum, heater, nuts and bolts. She is also buying the brand

prestige, warranty. home delivery and a measure of comfort. The waya company views its products has important implications for its entiremarketing efforts.



P&ODUCT PUNNING 2'41

After defining the product, management should develop prod~objectives keeping in view the overall corporate objectives. Then pohcydecisions are made regarding package and' brand n~me.. Package hasboth functional and aesthetic values. It serves as an Identification maskand provides the sensory appeal for sale. Brand name and ~ade ma;uhelp to identify the product and' provide legal protection agamstimitation.

rroduct Life Cycle

Like human beings. products also have a life cycle. They pall

through many stages in their life cycle. These stages are given below'!

I

I I

n\SALE'

1 : . - 1 R[VEHU£I !:: CUll""

I ~ I ~I- I·:j

1 ~ ~o

. . . . zli : i :0 ~It:a ..

~Ic o~z

a: : I.~, !r. . . -I..J

. . .,

< II

TJ.E ('I'UIIII

Fig.9·1. product Life Cycle,

1. Inh'oduulon. In the first stage, tl;1eproduct is introduced in u..market: It has to prove its worth and find a market. This is a vt:rfdifficult stage and many products like infants do not survive this stag.Generally, the price and advertising expenditure is high and sal.cs arc low.Aa a result profits are VC'/iy low and there may even be a loss. .

2. fhowth. As the product gains widespread acceptance;."rise at a rapid rate. Advertising expenditure goes down and distnbutionnetwork increases. Consequently, profits rise. This is the period. ·o fgeneral acceptability, breakthrough and rapid growth.

3. M cUurity. At thi s stage, the product beco mes wen -established,High sales and profits attract competition. The product ismade available illa variety of forms to meet different requirements. high promotion expend-iure is incurred to meet competitive pressures. The market gets saturated,This is the appopriate time for making improvements. in the product or todevelop new products.

4. Duline. In the final stage, the original product dies out. anddisappears from the market. Changes inconsumer tastes and introduo-

~--.----------.-~-----



P.l.ODDcnoN ECONO¥KI:

ti~n 0f better substitutes render the origi.nal product obsolete. Sales andpronts decline rapidly.

The above stages in product life cycle can be illustrated with ancmmple. The fountain-pen was introduced in the last quarter of the19th century. In the first stage, it was considered a luxury. With theiPT~d ?~universal education, its growth was rapid. During the SecondWOTla Var, the fountain-pen reached the maturity stage. Since then itscJc.cline has been rapid. In mass markets the ball pen replaced the Ioun-tam-pen .

. The ball pen was priced Rs, S to 10 when it first entered the market.Within a decade it became a runaway success. Now the price has droppedto Re. 1. -

Similarly, electric bulb replaced kerosene 12m? transistor replaced-.a.lve radio and colour T.V. is replacing black and w.ti.iteT.V. .

Product Line Decisions

A multi-product firm cannot expect all its products to earn the sameprofit. Some products give high profit margins while others yield low profitmargins. Moreover, the profit margin. of any product undergoes achange due to changes in demand. competition, etc. Therefore, a businessfirm is faced with . the problems of adding new products, improving oldproducts, dropping obsolete products, etc. These problems are product linedecisions. The objective here is to develop an optimum (best) product

line within the framework of corporate objectives and strategies.

Adding New Prorlucl. Before taking the decision to add a newproduct, the firm has to determine the likely contribution of the proposedproduct to overheads and profits. For this purpose, the additionalrevenue and cost of the product ha . .·e t o be estimated. There arc severalother considerations, It may bedesirable to iatroducte a new product ifpre:sen~ product line il unable to absorb the plant capacity fully. :Sut.~hfl,",c!ementai revenue from ne. product must b i l l greater than incrementalcosts.

In case a better substitute is already available in the market. the pro-

,posed product should oot be: iritroduc¢. Itilnocessary to examine all~e· alternative opportunities before making the ·final decision. Anotherfactor to be considered is the POSSI ble impact of the new product 00 the

existing products. If the new product is a substitute of the old product,it will compete within the existing products. III case t~c new productis complementary to the existing ones, it ' W i l l contribute more to theoverhead and profits o f the firms. Moreover. m&nagement should considerwhether it has the necessary know-how and skill to produce and distributethe new product.

Development of a new product involves a heavy comraitment In. financial and technological terms. The mortality rate of new productsis very high. II! many industries the cost of developing a new productis so great that one failure may lead to complete" ruin of the enterprisb.



raDDYC1' .PLAJQ(()iG

Ibu •• dev~lopmentof a . ne.., pro!1uct opens up new opportuaittcs iLIld d

Ufe same trme'poses threats to the survival of the f irm.Dropping Old Products

Deletion of unprofitable or margina! products is an import8.l'd.Jement in product strategy. Once a product h:1Scompleted its useful lifecycle it may be a drag ' on . th e company s resources. It may, therefore, bedesirable to abandon it. A periodic review of all products should be:made so that necessary remedial action may be planned in advance. Theprocess of replacing an obsolete product by :l. new one should begin beforeits actual decline. The costs of sustaining an . obsolete product are usuallyvery high. If the new product is not developed in time the firm faces the

risk of leaving gaps in its product line. It is also possible that it may loseits established markets to rival products.

Before dropping an old product its effect on the rest of the productline should be considered. Very often one product advertises the other.c.g., Maggie Noodles and Maggie sauce'>. It is nossible that dropping.11 product may leave a gap in. the product line which cannot be filled.immediately by a new product. In such a case, it may be a wiser courseto make improvements in the old product instead of dropping it immedia-tely or altogether.

Sometimes, dropping an existing product becomes very difficult duG I

to emotional OT financial constraints. The existing products serve as tbebread and butter of a firm's profit. Even then very often comparativelylittle attention is paid to these products so Iong as they appear to bl)doing well. In the mid of their life cycle, many products are left to thoday-to-day attention of product managers.

Further. Readings

Buck, C.H.

Kotler, Philip,

Product De.sign and Development, London: Pet.gamon Press, 1983

.J!tma;]erial Economic.Y, New Delhi: Tata MeGra ...Hill. 1986

l J . 1 {Ir ke ti1 ![J Deoi ll ion 'mak ing , New York: HoltRinehart & Winston, 1981

}'undamenta~~ of Markelin], Tokyo: McGraw HiltKogakusha, 1985

OpeNfif).'~' MJ.na1e;,.mt, New York : Harper a :Row, 1984

Dean. Joel

Stanton, William J

TeIlier, Richard

REVIEW Q.UESnONS

1. What is product planning? Describe its significance in modCfBindustry.



PRODUCTION EOONOMICII

1. Discuss the basic steps in the planning and development of a newproduct. [ IOWA I nle l', June 1986J

3. How will you evaluate new products? Discuss the essentials o . rsuccessful product planning. .

4. Explain different types of product line decisions.

S. Explain the concept of 'product life cycle'. What is its utmty inproduct planning ?

6. Write notes on the following :

(a) Hazards iQ . product development

(b ) Product strategy

(c ) Dropping old products.



10Economics of Plant Layout

Meaning of Layout

Layout refers to the arrangement of"facilities in a particular workstation, Itmay be plant layout, office layout or retail store layout.

Plant layout implies the physical arrangemeot of machines. equip-ment and other industrial facilities on the factory floor in such manner thatthey may be handled efficiently. Itmay be defined as a technique of loca-ing machines. processes and plant services within the factory so as toachieve the right quantity and quality of output at the lowest possible costof manufacturing. As a floor plan of production facilities, plant layout'indicates the space allotted for material movement. storage and all

supporting facilities for overall economy in. production. it involves ajudicious arrangement of production facilities so that work flows inas direct a path as possible.

According to Riggs. the overall objective of plant layout is "to designa physical arrangement that most economically meets the required outputquantity and quality". An optimum layout would permit an uninterruptedflow of work through the factory. It ensures best possible utilisation ofmachines. workers and space. A plant layout study is required to createan arrangement that will minimise unit production costs. Such a studyinvolves a careful analysis of all factors affecting layout. Plant layoutis an important decision as it represents a long-term commitment. It is

also important because it affect the flow of materials and processes,labour efficiency. supervision and control, use of equipment. use of space,expansion possibilities. etc. Plant layout covers not only the initial layoutof machines and other facilities but encompasses revision or improve-ments in existing layout in the light of changes in the methods and tech~niques of production.

Objectives of Layout

The various objectives of a good plant layout are as follows:

(1) to minimise handling and transportation of materials

(2) to ensure economic utilisation of available floor space(3) to minimise work-in-progress inventory by eliminating bottle.

necks



, ..ODUCTION ICONOYtc:S

(4) to ensure cfficienct control CTCl' the various processes fIfproduction

(5) to maximise convenience and safety of workers(6) to obtain more efficien'8 utilisation: of machinery. equipment an'

other facilities

(7) to minimise cost of production.

The basic objective of layout is to develop a production system thatmeets requirements of quantity and quality in the most economical way.

Advantages of Good Layout

An efficient plant layout facilitates the best possible use of plant,

equipment, materials, labour and space. Some of the main benefits of 8.good layout are as follows :

(i) economical use of production. storage and service space.

(ii) reduction in material handling cost and the amount of work inprogress due to minimum movement of materials between

processes.

(iii) efficient utilisation of machinery and labour by avoiding delays

and bottlenecks.

(iv) effective planning, supervision and control of manufacturing

operations.

(II) higher safety and improved work conditions for workers.

(m) lesser capital investment in plant, equipment; tooling andother physical facilities.

(ttii) reduction in installation and maintenance costs due to efficientrouting of services.

(viii) improvement in the production process as a whole on accountof less energy consumption. less inspection costs, less fatigueand high worker morale.

(ix) improvement in the quality of output.

Sym:ptOIDSof Poor Layout

(I) Delays and work stoppages in manufacturing process.

(2) Slow movement of materials through the plant.

(3\ Accumulation of work-in-progress between processes.

(4) High materials handling and transportation costs.

(5) Congested aisles, work stations and stock rooms.

(6) Unconveniently located service units.

(7) Underutilisation of machines and workers, i.e., too muchwaiting or idle time.



~DV.lCJ 0., l'LAX!.X.. YOU!'

(8) Lack of flexibility .and difficulty in produetioll planniQS .. 4control.

'l'fPH of Plant Layout

There arc four broad categories of plant layout.

1. Product layout.

:i. Process layout.

3. Fixed Position layout.

4. Group layout.

Product or Line Layout

In product layout, machines and equipment are arranged in thosequence of the manufacturing operations required for the product.. Thematerials move from one work station to another sequentially withoutany backtracking or deviation of material. It is called line layoutbecause machines are arranged is a straight line. The raw materials arefed at one end and taken out as the finished product on the other. It isa grouping of machines in one sequence. A product layout may assumea straight line shape, a Ll-shape or a circular shape. A straight linetype of product layout is given below:

PROOU eT LAT HE~A'

G R I N O ~ " R

P~OI; lUCT

rt

Fig. 10'1. Product Layout showing movement of two products.

Advantages. Product layout offers the following benefits:

(a) low cost of material handling due to straight and short pathand elimination of backtracking,

(b ) smooth and uninterrupted operations free from bottlenecks.

(c) continuous flow of work permits mechanisedjhandling ofmaterials.

(d ) lesser investment in inventory and work-in-progress.

(e ) special purpose equipment can be operated by semi-skilled.labour.

(f) optimum use of floor space and less congestion of work in theprocess.



(g) shorter processing time or quicker output.

(A) simple and effective inspection of work and simplified produc--

tion control.

(i) lower cost of manufacturing per unit.

Disadvantages. Product layout suffers from the following draw·backs :

(i) High initial capital investment in special purpose machines.

(ii) Heavy overhead charges.

(iii) Breakdown of one machine results in serious work stoppage ofthe entire line of machines.

(iv) less flexibility of operations as layout cannot be adapted tothe manufacture of any other type of product. Fluctuationsin rate of production will increase manufacturing cost. Evena minor change in machine arrangement requires a completechange in layout.

Suitability. Product layout is useful under the following coadi-lions :

(a) Mass production of standardised products.

(b ) Simple and repetitive manufacturing processes,

(e ) Operation time for different processes is more or less equal.(d) Reasonably stable demand for product.

(e) Interchangeability of parts.

(f) Continuous supply of materials.

Large automobile assembly plants. feed-processing chains andcontinuous process industries are examples where line layout is useful.For instance. "a multiple-spindle automatic screw machine successfullyindexes the work from one matching position to another so that severaloperations are performed in a continuous flow of material WIthin the

machine.To conclude, line layout best suits those industries which manu-

facture a large volume of standard products involving repetitive processes.In these industries, line layout reduces inventory handling andsupervision costs.

PrQcess or Functional Layout

In this type of layout, machines of similar type are located togetheraccording to their function. Products move between the groups ofequipments in order of the operations required. For example, all the

lathe machines are placed in the lathe department. all the drillingmachines in the drilling department, all the welding equipment in weldin,department and so on.



acoNOMICS OF PLANT LAYOUT

Pl.ANI'"

CCD

. . . . . . .~ ~ ~------~~+-----~~r'~~~~-c---1cO

00

a: a:~~

ASSEMBLYI iFig. 10'2. Process Layout showing movement of two products.

Advantages. Process layout has the following merits:

(a) Lower initial capital investment is required in machines andequipment. There is higher degree of machine utilisation as amachine is not tied to a single product.

(b ) Overhead costs are relatively low.

(c ) Change in product design and volume can be more easilyadapted to the output of a variety of products.

(d ) Breakdown of one machine does not result in complete work

stoppage.

( e ) Supervision can be more effective and specialised.

(f) There is greater flexibility andscope for expansion.

( g ) Setup and maintenance costs are low-

. Disadvantages. Process layout suffers from the following limita-tions :

(i) Material handling costs are high due to backtracking.

(ii) More skilled labour is required resulting in higher labour cost.

(iii) Processing time or timelag in production is higher.

(iv) Work-inprogress inventory is high requiring greater storagespace.

(v ) More frequent inspection is needed resulting in costly super-vision. As the work has to pass through different departments,it is quite difficult to definitely trace the final responsibility forthe finished product.

(vi) Production planning and control becomes difficult.

Suita~ility. Process layout is useful when:(a) Products are not standardised.



PI.ODUCfION ICONOWgs

(b ) Quantity produced IS small.

(e ) There are frequent changes i1 1 design and style of product.

(d) Job shop type of work is done.( e ) Machines arc very expensive.

Thus. functioaai layout is suitable in job-order plants involving non-

tepelitivc precesses.

Fu;ed Positim;l L;lyo'Uot

In this type of layout. the major product being produced is fixedat a location. Equipment. labour and components are moved to thatlocatio!'. This layout is used wheu the materials being processed arelarge, \C'-J hea l'and difficult to move. Shipbuilding, k comouve manu-

ufactunn g, wagon building. aircraft man ufacturi ng, etc., ell' ~loy fixedposition layout. All facilities are brought and arranged around onework centre. Fig. 10'3. shows a fixed position layout.

. . AT lR IALS

LABOUR

EQUIPMENT

SH I P 8!A .D I HG

Y A R D

1 l1 I

'HASHEDPRODUCT {SHU>I

Fig. 10'3. Fixed Position Layout,

Group or Com.bi.lled Layout

In most industrial establishments, plants are rarely laid out in eitherpure form and a combination of product or process layout is used. It

is possible to have both types of layout in an efficiently combined formif the products manufactured are somewhat Similar and not complex.Group layout is a combined form of product layout and process layout.

In certain batch production industries a variety of products are assembled.Product layout is employed for mass production of common components,

In addition, process layout is used for assembling the standard com-ponents in batches of products. For example. in soap manufacturingplants, the machinery for manufacturing soaps is laid out in a straight line.But ancillary facilities like heating, power house, glycerine plant ~ndwater treatment plant are arranged on a functional basis. Thus, it IS ablending of productbased and process-oriented layouts. There are depart-meats like grinding and welding for certain processes. However. thereis a continuous flow of the product in tne process departments. Thus, acombination that produces the desired volume of products at the minimumcost per unit is selected,

Drnamics ofPbnt LayoP.

Plant layout is a dynamic rather than a static affair. A greatamount of details and data are involved and Deed to be coordinated.



BOCINmccs OP PL.o\NT LAYOUT

Th~ introduction of new machines and equipment is quite common.Adequate: and timely care must be exercised to incorporate changes andde'velopments. Development of new machines or equipment. impro -e-

ments in manufacturing process, changes in materials handling devices,ete., all require revision of pia at layout. Any revision in layout must bemade only when the savings resulting from revision exceed the costsinvolved in such revision.

Revision in plant layout may become necessary on account of thefollowing reasons :

< , i ~ increase in the output of the existing products.

(H) introduction of a new product and diversification.

(iii) technological advancements in machinery, materials, processes,product design, fuel. and energy.

(it!) deficiencies in the layout unnoticed by the layout engineer inthe beginning.

Factors Affecting Plant Layout

The following factors should be considered wbjle planning tholayout of a plant :

1. Plaut location. Plant layout is intimately connected withplant location. As a matter of fact the size and shape of the site and its

topography inf'uence the general pattern of layout. Plant site also in-fluences the type of building, mode of transport and the scope of es-pansion which in turn influences layout. Plant layout IS generally a

c( mpToml.se be tween thcidei}1 layout and the limitations of plant siteand buliding. A decision 10 ~elocate offers an opportunity to ImproAit.the arrangement of faoititles and services. Thus, plant layout is consi-ederably affected by both the specific site and the general location.

2. Nature of product. Standardised products require a 'product'Iayollt ...hereas custom- made products may need process layout. A fixedposition layout would be required for heavy and bulky products, Productsinvolving hazardous and dangerons operatious would require isolation

of processes. Similarly. value, fragility, volume and quality of productare important considerations in plant layout.

. 3. Type uf industry. The nature and type of production process. e x e r t s considerable influence on plant layout. Generally, product layoutis more appropriate in continuous process industry, whereas intermittentproduction requires process layout. The sequence of operations shouldalso be taken into consideration. Perhaps no one factor influences plantlayout as much as- the nature of the productive process involved. Asynthetic process requires a line layout so that various materials andparts merge into the completed assembly in a flow. On the other hand.

~ analytic process takes the form of a tree as it starts out with a singlematerial and spreads out into a variety of resultant materials. A con--diti 0ning process requires a layout to accommodate lot or batch manu-



2·52 PRODUCTION ECONOMlC&

facture. Insuch a layout the material undergoes no merging or separa-

tion but it is simply subjected to physical conditioning as it flows i1 1separate lots through the variety of operations and processes.

Thus. the layout designer should keep in mind the type of industrj

and the nature of the manufacturing process while planning a layout.

4. Plant environment. In planning factory layout. heat. light.noise. ventilation and other aspects of plant climate should be given dueconsideration. For example. paint shops and plating sections should bolocated on an outside wall so that dangerous fumes may be removedthrough proper ventilation. Type of machines. materials and equipmentused also exercise considerable influence on plant location.

S. Spatial requirements. The spatial needs for mach inell.material handling equipment and available floor space are importantinfluences on plant location. Spatial requirements also depend upon theposition and needs of workers. Employee facilities and safety should beduly considered. .

6. Repairs and maintenance. Machines and equipment shouldnot be fixed so close to each other that it may create problems ia

repairs, maintenance and replacement. Access to machine parts forrepairs and maintenance should be provided.

7. Balance. Proper balance between processes helps to avoid.bottlenecks. The arrangement of machine capacity should be such_to ensure a uniform flow of work. At the same time the layout shouldbe designed in such a manner that there is minimum possible movementof materials and men.

8. MalUlgement policy. Management policies regarding size .quality, employee facilities and delivery schedules should be considered.while deciding plant layout. For example, size (demand forecast) willdetermine the size of work stations. Need for flexibility should also beconsidered. The layout designer must have a complete understandingof management policies that have a bearing on plant layout.

Layou.t Engineering

(Procedure for plant layout)

Designing the layout of a plant is a specialised task and should ~carried out systematically. A systematic approach (procedure) to plantlayout consists of tho following steps :

1. Decide the specific objectives of plant layout to be achieved.

2. Study all the factors affecting the plant layout. e.g.• material.

tist, current and future output targets, components to be bought

from outside, stock policy and storage requirements, number and typeof equipment. manpower needs, processing times, shape of finished;product. These requirements can be determined by analysing the natureof the product to be manufactured.

.~. . . . . . . . . . . . .----~~~ -



5CO'NOMICS OP PLANT LAYOUT

3. Prepare suitable flow charts, models, process charts, machinedata cards, templates, diagrams, etc., for the proposed layout scheme.

4. Determine routing, space requirement for each work station.service departments, employee facilities, etc.

S. Draw building speclficat'ons to fit the requirements of thelayout.

6. Prepare a floor plan indicating location of doors, windows• .stairways, lifts and other facilities.

7. Prepare a draft (tentative) layout indicating the sequence ofoperations. Templates or models are used to determine space require-ment for each piece of equipment.

8. Give a trial run to the tentative layout. Recheck proposed.layout with engineering. manufacturing, and other departments.

9. Prepare detailed layout drawings after consultation with linemanagement. Process charts and flow diagrams may be used toprepare detailed layout drawings.

10. Draw up a work schedule for installation.

Principles (Eslienuals) of Plant Layout

While designing the layout of a plant. the following principles

ihould be followed :(i) Pnncipk of Minimum movemem. As far as possible materiall

and labour should be moved over minimum distances.

(ii) Pf'iflcipleof j loto. The work areas should be arranged accord-m l to the sequence of operations so that there is a continuous fiow o rmaterials without backtracking or congestion. The layout should allowfor easy movement of materials without interruptions or delays. As faras possible movement of materials should be continuous.

(iii) Pf'incjple. of / J p a c e . All avariable cubic space should be effec-tively used both horizontally and vertically.

(iv) Pf'inGipli of safety. Due consideration should be givcn to the

safety and convenience of workers. There should be built-in provisioafor the safety and comfort of employees,

(v) Pf'i1lciple oj jltzibil1ty. Layout should be so designed thatproduction facilities can easily be rearranged when. it becomes necessaryin future on account of expansion or technological changes.

(vi) Pf'inviple oj interdependence. Interdependent operations andprocesses should be located in close proximity to each other. For ex-

ample. materials should be stored near the area of requirement. transport,etc. This will minimise product travel



PI.ODUCTION' ECONOmdi

(di) Prtn~ip!e of overall integration. All the plant facilities andservices should be fully h. egrated into a single operating unit 50 as to

maximise efficiency and minimise costs of production.(viii) Principle of mtnirmm. invealment. The layout should yield

."avings in fixed capital investment through optimum utilisation of availa-tile facilities.

Layout of a plant is an expensive affair. Due care is required in1he installation of plant and equipment. Management must rememberthat plant layout is not an end in itself but is a means to achieve a smoothlow of materials. A sound layout must ensure

(a ) steady and uninterrupted flow of work

(b) absence of congested traffic(c ) full utilisation of capacity

(cI) flexibility to meet technological changes and increase in pro-duction requirements

( e ) easy control of production

(J) effective supervision

(q ) low cost of manufacturing

10 addition to the location of production equipment and workcentres, the locat ion of plant services (receiving, shipping, warehousing,

maintenance, tool cribs) and employee services \parking. cafeteria, lockerfoams, toil ets, medical, recreation faci lities, etc.). The main considera-tion in locating plant services is the overall material flow patterns. Inlocating employee facilities the guiding factor is convenience and accesss-bility to employees.

Tools of the Layont Eupeer

<Graphic Techniques of Layout)

The following visual aids are available for designing the layout of aplant:

L Flow Dia.graln,_ It is a diagram showing the sequence ofoperations or the flow of materials in the manufacturing process. It iJa sketch of the floor plan used to analyse tbe effectiveness of the arrange-ment of production facilities. It depicts the phyica1 movement of matenalsthrough the plant.

2. Machine Tool Record Card. This card contains illustrationsof the equrpment and provides information about capacity. space, powerneeds, handling devices, etc. It is also known as maenine data card.

3. Process Chart. Yarious types of process charts are used torecord the movements of materials, labour operation, product iUSI-ectioD,

etc. Flow process chart, operation process chart. travel chart are the maintypes of process charts used in designing plant layout. These charts have'been explained in detail in Chapter 28.



ECONOMICS OF PLANT LAYOUT 2'SS

4. Templates. The templates are tw(HlIlDCnslonal solid.re-

presentations of machines or equipment. They arc fixed to a plan drawingand moved around the d.rawing to explain various layout possibilities. Atemplate is a pattern or virtual picture of the layout. It is a flat piece pre-pared by cutting plastic block or metal. Templates are arranged on thefactory floor to prepare a draft layout. Two-dimensional templates areused for storage areas, aisleways, etc. A template snows the area oeenpi- _

ed by a machine or equipment. It serves as a gauge or guide in mechani-cal work.

DENISON

Fig. 10·4. Two-dimensional Templates.

5. Scale Models. These models are small replicas ofmachinesand equipment. These three-dimensional models indicate the productionprocess on a small scale. Miniature scale models are tiny figures ofmachines and men. Models are constructed from eardboad, wood. ah=tmetal or plastic ..These are used for complex layouts involving costly initialinvestments, They are scale reproduction of different items of equipmentsuch as storage, fixtures. racks, benches. stairs, elevators. handling devices.etc. They are helpful in determining the space required by equipmentitems and in detecting weaknesses for revision of plans.

[ f f i ) , A j j j •& '

~.ijFig 10·S. Three-dimensional Modeb




Charts, templates and models serve the following purposes :

(a) The layout design can be visualised in a compact form,

(b) Backtracking and unnecessary handling of materials are madeevident.

(c) Long distances between operations are revealed.

(d) Rearrangement and improvements are made possible.

Most firms prefer templates rather than models in planning layout.One reason for this is that templates are cheaper than models. Secondly,templates enable a firm to store its plant layout boards with greater ease.When the layout of sections has been completed. the boards can bestacked or placed on individual shelves. This is not possible in caseof'three-dimeasional models. Greater storage space is required due to

the height of the models. Thirdly, a template layout can be easily 're-

produced in the form of a blueprint for record and instruction pur-poses. Three-dimensional layouts cannot be reproduced in the form of hlue-prints. Fourthly. templates give additional detail showing the outline ofthe machine itself with dotted lines indicating miximum table movements.Lastly. templates have dimensional accuracy and flexibility in use.

Some firms prefer models to templates because three-dimensionallayouts permit easier visualisation of the final result. This is particularlyimportant where visualising of height is necessary.

Computerised Techniques for Layout1

Over the years, computer programmes have been developed to guidethe layout engineer in planning the best possible layout. Some of thewidely used programmes in plant layout are given below :

1. CORELAP (Computerised Relationship Layout Planning). Inthis technique the most related departments are located close to eachother. Then other activities are added progressively on the basis of re-lated closeness. desired and in required size until all Iacilities/activitlesare arranged. It is used to perfect the layout design.

2. GRAFT (Computerised Relative Allocation of Facilities Tech-

nique). This technique is used to determine desirable spatial arrangementof production departments in order to minimise the total materials handl-ing cost. Data relating to inter-departmental flow per unit of time, unitload. material handling cost per unit distance, initial block programme arefed int 0 CRAFT. .The computer proc .s- cs these data untiIt can find noimprovements in location and then prints out a block type layout of thelocation of each of the activities or departments.

CRAFT can handle 40 departments or activity centres and canconsider the exchange in location of three departments simultaneously.It is applicable for overall loc~ion of majo! activities as well as more

I. Based 011 James M. Apple: PlanilJ.Ji'.{I.utan d Materials Handling; Wiley,1982, p. 328,



"

ECONOMICS OF PLANT LAYOUr _2'S1

detailed departmental locations within activities. The CRAFT programme

is also applicable to a wide variety of non-manufacturil;1g si~a~ons.e.g., hospital design, warehouse layout, etc. It can also be applied toequipment design problems where manufacturing costs may vary with thelocation of components.

3. ALDEP (Automated Layout Design P~ogramme). This pro-gramme selects at random and locates the first activity. Subsequentactivities-facilities, in required size, are selected and placed according tocloseness desired or at random if no significant xlationships atefound. Alternative layouts are generated and compared;

4. PLA..""ffiT (Computerised Plant Layout and Evaluation Techni-

que). Under this programme the "penalty" cost associated with separat- ~ing departments are computed on the basis of interdepartment flow data.Three heuristic algorithms are used for generating alternative configura-tions to be manually evaluated and adjusted.

5. COFAD (Computerised Facilities Design). This techniquecombines CRAFT·based layouts with materials handling" selection based

on various criteria.

6. CAN-Q. (Computer Analysis of Network of Queues). Thisprogramme is designed for analysing the work f iQw in a production. sys-tem. It is said to be quite easy to use, very efficient and sufficiently

versatile to handle virtually any kind of production system.

Further Readings

Asian Producttvtty Organisation; P"oducti(J'r1.Engine.er ing, Manila: APO.1981

Buffa Elwogd S:" Oper a ti on s Mana g ement , New Delhi:

Wiley Eastern, 1986

Plant Layout- Fc~or8, P r in ci pl es a .n tlTechnique3, Illinois : "Richard D. Irwin,

1979.

Read, ~ddel R :

Lockyear, Ke ith :

Moore, J~mes M :

P ro du ction M ana gem en t,Pitman, 198 t.

Plant LayO'ltt and Design.

Plant Layout, NeV I D e l hi :Hall of India, 1986

REVmW QUESTIONS

London:

Shubin John A and H. Madeheim, Prentice

1. What is plant layout 'I Discuss the objectives and advantagesof a good layout.

2. Describe product layout and discuss its merits and demerits.

3. Explain the advantages and limitations of process layout.



PRODUCTION ECONOMICS

4. What are the principles for planning the layout of a newfactory? [lOW A (I nter ), June 1986]

5. Explain the factors to be considered in deciding the layout ofa plant?

6. Write notes on the following :

{a ) Symptoms of poor layout

., (b ) Fixed Position layout

(c ) Group layout

(d) Layout engineering

(e ) Tools of layout engineering

(J) Process Layout [IOWA Inkr, June 1987]

7. Distinguish between product layout and process layout. Underwhat conditions each type of layout is appropriate?

8. Describe some of the computerised techniques used in designingplant layout.



1 1E fficiency in Mater ials Handling

The manufacturing process requires frequent loading, unloading,

transfer and movement of materials through the various stages. Theterm materials is used here in its wider sense to include raw maierials,parts, sub-assemblies and semi-finished goods. Materials handling in-cludes all such movements of materials from the receipt of raw materialsto the shipment of finished products.

Meaumg

Materials handling is the art and science of moving, packing andstoring of materials ill any form. It involves the preparation, placing andpositioning of materials to facilitate their movement and storage. Inother words, materials handling is a system comprising the transfer,

movement, warehousing, inprocess handling and shipping operations. Itis an interdependent cycle wherein materials are handled several times.

Significance

Materials handling is an essential part of every manufacturing ope-ration. It consumes the major share of the time involved in an operation.The cost of materials handling generally accounts for 20 to 50 per cent ofthe total cost of converting the raw materials into the finished product.The cost of materials handling consist of (a) the cost of owning andmaintaining equipment, and (b ) the cost of operating the system.

The handling of materials influences the eff ic iency and cost of manu-facturing. Materials handling is an important area for reducing costs,increasing productivity and improving cash Bow. Manufacturing is largelythe story of 'materials in motion'.

Materials handling adds to the cost of the product. Therefore.reduction in materials handling costs will make the product more compe-utive. The materials handling system should be so designed as to maxi-mise e f fi ci e ncy and minimise cost. E ve ry m ove me nt of materials adds tocost and, therefore, materials handling strategy should be to eliminate asmuch movement as possible. In addition to th e elimination of unneces-sary movement, the essential movements should be mechanised so as toincrease efficiency.

----------,



2'60. PRODUCTION ECONOMICS

Efficient handling of materials results in several tangible. and in-

tangible benefits. According to H.A. Harding, "impr.ovements In han~-

ling can mean faster production, higher plant capacrty, lower stock Inprocess, and less damage to product in all stages. It can force other

improvements in production methods and materials".

Objectives

The design .. cost and operation of material handling ~yste~ ~epcndlargely upon the objectives for materials handling. The mam objectives of

materials handling system are as follows :

(i) Reduction in manufacturing time

(ii) Reduction in the labour cost of handling materials

(iii) Better utilisation of shopfloor and warehouse

(Dl) Improvement in the quality of product

(tI) Reduction in breakdowns and work stoppages

(vi) Increase in employee safety and comfort

(ft,) Better control of flow of materials.

Materials Handling and Plant Layout

Materials handling and plant layout are complementary to eachother. Materials handling system helps to determine storage areas,

production flows, aisle widths. space between equipments, in-processmaterials handling. At the same time, plant layout determines the speedand efficiency of movements of materials from one operation to another.The pattern or flow of materials in a plant influences material handlingcosts and it should be planned for the layout as a whole.

Principles

The following principles should be followed in the development andoperation of an effective materials handling system:

(1) The number and frequency of movements should be minimised.

The best handling is 'DO handling". As this is not possible the objectiveshould be 'minimum handling'. A n types of handling and rehandlingshould be minimised.

. (2) The time and distance involved in handling ShOTuld be mini-mised wherever possible ..

(3) Whenever possible flow line and gravity should be used tomove materials ..

(4) The handling should as far as possible be combined with theproduction equipment.

(5) Materials should be deposited as near to the point of use aspossible.

--~---------------~-.-----~----.---.-----------------~---.



EFFICIENCY IN MATElUi.Ls HANDLING 2·61

(6) Continuous and straight line.movement is more efficient than.irregular movement.

. (7) Materials handling equipment should be simple and consistent

with the_nature of materials .and speed of movement. For example.fo~ rnovmg materials over inclined planes. gravity rollers are more appro-pnate than powered conveyers.

(8) rued routes should be established for all handling devices.

(9) Utilisation of handling equipment should be kept as high aspossible. _

(10) Materials handling system should be flexible so as to accom-modate changes in products, plant layout, volume of output. etc.

Ef.6ciency ittHandling Materials

The efficiencyof the materials handling system is judged by the costsof 'handling materials. Materials handling costs can be classified intothe following categories :

1. V Ib our C oat: C a ) direct labour. (b ) purchasing. (e ) maintenance,

2. Space C oat: (a ) Storage, (b ) production, (e ) offices, (d ) gang-ways.

3. Handling equipmenl: (a) interest Oncapital. (b ) depreciation.

(e ) maintenance.

4. Storage UJU~: '(a) bins, (b) racks. (e) pallets. etc.

Reduction in these costs (increase in efficiency) of materials handlingis the primary objective of management. Efficiency in materials handliDgalso means minimisation of-

(l) Bottlenecks and breakdowns

(it) Misuse of space

(iii) Underutilisation of labour

(ill) Poor customer service(tI) Breakage and spoilage of materials.

There is tremendous scope for cost savings in materials handling.Efficient handling also helps to increase production, reduction in fatigue,better employee safety and improvment in working conditions. The follow-ing steps may be taken to improve efficiency in materials handling.

1. Mecha nis m ion. Use of mechanical devices helps to reducecosts of handling materials. But cost savings should be large enough tocover the cost of owning and maintaining the handling equipment. Carefulassessment of return is necessary as the investment may be high.

PRODUCTiON ECONOMJ.CS



2. Belter Systems Duign. Methods study is helpful in improvingplant layout and materials handling 'system. Proper selection and arrange-ment of physi~ facilities reduces the num ber and frequency of movements.

3. Effective Organisation BlrtJdure. An efficient organisational

setup facilitates coordination between production people. materials staffand controller sections. .

Careful and mechanical handling of materials, use of existing handlingfacilities and faster picking up of materials also help to improve efficiency.

Material. Handling Devices

A large number of tools and techniques are used for handlingmaterials. The device and method of handling depend upon the type ofmaterials. quantity and frequency of handling and the distance involved.Some of the major materials handling devices are given below.

1. ContJeyors •.A conveyor moves materials between two fixed points.'It creates a relatively fixed route, Conveyors are employed primarily incontinuous manufacturing where the loads are uniform and materials movefrom one work station to another specific work station. The rate ofmovement and location are fixed and materials can move continuously.Conveyors can.bypass cross traffic.

Conveyors can be of several kinds. e .g .• belt. roller. wheel, chute,apron, slot. 'trolley, screw, bracket, pneumatic. Belt conveyor is used tofeed materials continuously to inaccessible points. e - a . , feeding coal and

iron in a steel plant., Once put on the belt. materials are taken to ther- machine automatically as the belt is'continuously moving.

" . , .2. Induslrial trucks. These are used to pick up and move materials

intermittently through different routes. In such cases unit loads are usedand distances are moderate, Industrial trucks are also useful for handlingmaterials of mixed size and weight. These trucks are powered by hand,electricity or gasoline. An industrial truck does not occupy space per-manently. Industrial trucks can be of different types, e.g., forklift trucks,platform trucks. straddle carriers, etc. A forklift truck is often used to pickup materials and arrange them vertically in storage.

3. Orane8. A crane is used for intermittent movement of materialsof different size and weight within a fixed area. It is more flexible than

a conveyor but not as flexible as industrial trucks. Cranes are usually ofthree types: jib crare, bridge crane and gantry crane. Jib crane is usedfor loading and unloading of work pieces on machines.

4. Hoist», A hoist is able to move materials vertically and.hori-zontallyin a limited area. It is used primarily when materials must beliftc,dprior to being moved from one point to another. For example. if apart is large or heavy, the operator may find it necessary to use a hoist forloading and unloading the machine. Then, a crane may be employed to

move the part to another work' station.



'EFFICIENCY LN MATERIALS HANDLING

Belt conveyor Spiral chuteork truck

Bridge crane '!ib crane Gantry crane

-~----""-"r.,...J_ _

Air hoist Eiectrle hoist amin hoist

Fig. 11'1. Materials handling equipment.

Cranes and hoists are able to ca.rryobjects through the overheadspace in the plant. As a result they utilise less floor space. They aregood means of positioning materials in a particular location. BUI a hoistis capable of serving only a limited area. Air hoist, electric hoist andchain heist are important types of hoists.

Classjfication of Materials Handling EquiplDent.

1. ConVtAJors. For moving 1ilIlir(lrm loads continuously from point

to point. over fixed paths




(a) Roller conveyor

(b) Belt conveyor

(0 ) Mobile conveyor;

(d ) Chutes;( e ) Trolley;

(f ) Monorails.

2. Cranes and Hoists. For moving materials in varying loads inter-mittently to any point within a fixed area.

(a) Bridge crane;

e b ) J ib crane;

(e ) Electric overhead crane;

(d ) Hoists-electric and pneumatic;

(6 ) Lifts;

(f) Jacks and Winches.

3. Industrial Trucks. For moving mixed or uniform loads inter-mittently over various paths with suitable surfaces:

(a) Forklift trucks;

(b ) Highway trucks;

(e) Crawlers J

(d ) Electric haulage trucks.

Choice .,f Materials Handling Equiptnent

The choice of materials handling equipment involves proper balancing'of produbtion problems, the capabilities of equipment available and thohuman factor involved. Production problems consist of the desired volumeof production. the type of material to be handled, and the nature of plantlayout. The skill, safety and attitudes of employees are important humanfactors which should be considered in selecting materials handlingequipment,

Within these considerations, the following factors should be kept inview while selecting materials handling equipment.

1. Cost. The purchase price, installation costs, labour costs, salvagevalue and depreciation charges affect the cost of equipment. Operatingcosts should not be high.

2. Load capacity, Equipment selected should have the adequatecapacity to carry the required load of materials.

3. Space requirement8. The space required to install and operatethe equipment is an important factor in selection.

4. Power requirements. The equipment should be such that it canbe operated with the available power.

5. Supervision required. Automatic equipment requires Iess super-vision than non-automatic equipment.

EFFICIENCY IN MATERIALS HANDLING 2'65



. 6. EalJe af maintenance. Equipment should be such that maintenanceIS easy and can be done at reasonable cost .

. 7. 8fJe~d. Rapidity of materials movement should be considered

subject to limits of the production process or plant safety .

. .8: Flexibility. As far as possible, the equipment should have theflexibility to handle more than one class of material. It should be adapt-able enough to meet the material handling requirements in terms of load.movement, etc.

Further Readings

Plant Layout and Materials Handling, New York!John Wiley & Sons, 1982.

: Management for BU8ineas and Industry. New Delhi:Prentice Hall of India, 1986.

Mayers. Raymond R : Production Management, New Delhi: Tata MeGraw Hill, 1984.

Apple James, M

George Claude. S

Maynard, H.B (ed ..) : Handbook of Modern Manufacturing Manage-·ment, New York: McGraw Hill Book Co.;

1985.•

Production Management Handbook. London: Gower

Press, 1983.

Walley. B.H.

REVIEW QUESTIONS

1. What is materials handling? Discuss its importance in efficientmanufacturing.

2. Describe _the interrelationship between plant layout ~dmaterials handling. How w iH you judge the efficiency of materialhandling ?

3. Explain the principles of an efficient material handling system.

4. State for what kind of material handling, the following devicesare used:

(a ) Fork-lift trucks;

(b ) Jib crane;

(c) Belt conveyor. (I.D.W.A. Inter, o«., 1986)

5. The design of a good material handling system should be guidedby certain principles. What are they?

(1 C.W.A. Inter, June 1986)

6. State for what kind of material handling the following devicesare used:




(a ) Pallet trucks;

(b ) Electric overhead travelling crane ;

(c) Roller table. (I.O.W.A. I'llUr. June 19811)7. (a ) State the main considerations to be made when planning

a good materials handling system.

(b ) Match the material handling equipment in column I with

the application in column II.

I

Forklift truck

Jib crane

II

move bulk material continuously.

move heavy loads over rectangular

area.move heavy loads within a circular

area.Belt conveyor

Electric overhead travellingmove loads down.

move palletised unit loads.(I.O.W.A. Inter, Dec. 1986)

8. State the suitable material handling devices used for the followingoperations :

(a ) Transferring heavy materials from one department to another.

(b ) Transferring heavy materials from one place to another in a bayof a heavy engineering plant.

( c ) Movement of work on an assembly line in a mass productionshop. (I.C.W.A. Inter, Junt 1987)

9. Under what conditions should the employment of:

(a) Cranes and hoists;

(b ) Power conveyors and lift trucks be considered 7

(Mysore M.B.A., 1984)

crane

Gravity chute



12Optimum Utilisation a/Multipurpose

Plants and Installed Capacity

Plants can broadly be of two types;1. Special purpose plant; and

2. Multipurpose plant.

A special purpose plant is one which can be used to mauufaetureonly a specific product or to perform certain specialised operations only.One the other hand, a multipurpose plant is versatile and it can beemployed in a variety of operations to manufacture multiple products. Incase of a special purpose plant, optimum utilisation may not be easybecause one commodity is produced on a limited scale due to market

constraints. There may very often be excess capacity. But if the plant ismultipurpose. new products may be added to exploit idle or excess capa-city. By absorbing excess capacity, a new product enables the firm toincrease its profits and to-cut down overhead costs per unit. Therefore.a multiproduct firm has a competitive advantage over a single-productfirm.

A manufacturing process usually involves a number of operationseach requiring different type of machinery and equipment. The sequenceof operations is determined by technology and management policy. In aspecial purpose machine tool, the sequence is permanently fixed. Mostof the plants are multipurpose plants, Therefore, management has toface the problem of sequencing. Maximum possible use of plant is alsorequired so as to obtain the economies of scale.

Installed Capacity

C~pacity refers to the maximum available amount of output that canbe obtained from the production process during a specified period of time.There are alternative methods for obtaining plant capacity so as tosupply the present level of demand economically. The costs of installedcapacity are fixed irrespective of sales volume. Therefore, seasonal andother fluctuations in sales create problems. Optimum utilisation of instal-

led capacity is essential to maximise cost effectiveness, Capacity is alsoknown as the hours of labour and machine time available.

-------- --.---.--- -------------- --------------_._-- - ---- - - ------------------- _ ._

2'68



The initial plant design usually specifies a certain capacity. Butfirms often modify their facilities to accommodate changes in business.For example, manufacturers regularly add new products to their product

hue. But additional capacity is available in increments say 20%. 40%,etc. Therefore, some idle capacity may arise for some period of t~e.Fo! operations purposes, capacity should be defined in terms of phYSi~UDitS o.rmanhours, In order to equalise the capacities of different equip-I!!e.n~sn the plant, the analyst must deal with the total production capa-bilities and actual production rates. - _

S y st em capac ity is the maximum output of a specific product that thetotal system of workers and machines is capable of producing. It isalways less than or equal to the design capacity of the individual compon-ents that makes up a production line. The capacity of a system is often

the capacity of the limiting machine or work group that constitutes anintegral part of the system. Design capacity may be limited due toimbalance of equipment or labour, the specific nature of a product mix.etc, In general, these system constraints are attributable to design, policy()r market considerations. .

The relationship between systems capacity and an individual com-ponent capacity is expressed as the·Po tent ia l u se fa ct or (PUF) which showshow effectively an individual component could be used if the system alwaysproduced at full capacity.

PUF= System capacityIndividual unit capacity

. Unfortunately few systems operate at their fulI system capacity. Thismefficieney arises.due to machine or worker performance. Work may beImproperly scheduled, the facilities inadequately staffed or an unexpectedbreakdown may result in inefficient use of equipment or workers. Therelationship between the actual output and the system capacity is knownBystem efficiency (SE).

SE= Actual outputSystem capacity

Excess Capacity

Generaliy, plant and equipment are indivisible in nature. In otherwords, they are not available in any desired size and there is a minimumSlZ~ .(capacity) of a plant. Moreover. plant and equipment are long-termfaCIIJt.lesand constitute the major part of production cost. It is not possibleto adjust fully and immediately the size of plant and machinery to day-to-day changes in sales and production. Therefore, excess (unutilised)c.apaclty may occur frequently. Mechanical indivisibilities like assemblylines and rolling mills are typical examples of excess capacity.

The excess capacity maya >edue to many reasons:(i) Seasonal. cyclical and other variations in demand

2'69



(ii) Actual demand for the existing production is lower than expec-ted by the firm when it created capacity

(iii) Secular shifts in tastes, habits of consumers or market condi-

tions.

Unexpected snifts or fluctuations in demand and technologicaldevelopments are the main causes of excess capacity. A plant is originallydesigned for a specific volume of output (anticipated demand). Whenthere is a sudden fall indemand, excess capacity'arises, Similarly, a plantmight be built on a large scale in anticipation of future needs. Until thefuture e. pectations materialise. there will be temporary excess capacity.Such excess capacity becomes chronic when total sales remain restricted(through industrial combinations) or additional units are established OD

account of temporarily high profits due to artificial pushing up of prices.

Excess capacity creates opportunities for expanding the product lineand thereby increasing profits. For, example. a printing press may utiliseexcess capacity (created by seasonal fall in demand) by producing. NewYear or Diwali cards. Alternatively, seasonal discounts may be offered toeven out demand. Such alternative ways may be more profitable thanaddition of new products where the excess capacity is very temporary.But when the demand for anyone product is insufficient to make full useof installed capacity a firm should produce multiple products. In this waythe firm can utilise a large plant and avail of the economies of scale.

Utilisation of Plant Capacity

The economic theory of the firm proposes that profit is maximisedwhen marginal revenue is equal to marginal cost. This theory can beemployed to explain the process of utilising optimally a multipurposeplant. Suppose, a firm has a multipurpose plant which is capable of pro-ducing two products X and Y. The marginal cost is the same for both theproducts. Suppose the marginal costs for the two products are MC:!: andMCllrespectively. If the firm produces only product X the marginal costand marginal revenue are not equal. Similarly, if only product Y is manu-factured the optimum stage is not reached.

Ifthe firm divides the installed capacity equally between the man~-

facture of the two products. marginal revenue of product X (MR:) IS

greater than its marginal cost (MCz). On the other hand. marginal reve-nue of product Y (MRlI)is less than its marginal cost (MC,.). Theref~Ic.the firm will benefit by increasing the output of product X and reducingthe output of product Y. The firm finds that if it utilises two-third of thecapacity to manufacture product X and one-third capacity for pr~d~ct Y.marginal costs and revenues of both the products are equal. This IS theoptimum stage.

Thus. optimum capacity utilisation takes place when.

MR~=MR.=MCr=MC.

The foregoing analysis can be further extended to cover moreproducts.

/

2'70



"PRODUCTION ECONOMICS

In any multiple operation, one common problem is that of assign-ing jobs to particular machines or equipment. The machine or equip-ment is capable of doing multiple jobs and the jobs can be carried out

simultaneously. The method used to assign jobs to the processes or workstations has to be selected carefully. The basic objective here should be to -minimise the total cost of doing all the jobs.

Before deciding the method of utilising excess capacity all availablealternatives should be examined. There is need to estimate the opportu-nity costs of alternative uses of the excess capacity. If the excess capacityis of a temporary nature it may be preferable to accept temporary excess.capacity than to introduge a new product. It may not be possible to

abandon the new product when demand for existing products expands.

Utilisation of EquipJDent

When general purpose machinery and equipment is used, optimumutilisation of installed capacity can be obtained by changing the nature ofthe product. For instance. a plant, manufacturing gents' garments may

switch over to the production of ladies' dresses when the demand forgents' garments falls. When changes in sales occur, quick and economi-cal expansion or reduction in the rate of output is an important advan-tage. Such flexibility can be obtained by reserving space for expansions.or oy employing construction and layout that can be obtained easily andquickly. Service facilities should also be so installed that they can be

adjusted quickly to changes in work loads.

Generally. a more flexible or general purpose plant has higher costs.than the specialised plant. But the former is much more flexible and itcan be utilised more effectively. With fluctuations in demand, specialisedequipment is likely to remain idle during particular seasons. Thus, in thelong run. general purpose plant has lower average costs particularly inindustries subject to considerable variations in sales and output rates.

The rate of equipment utilisation has a direct influence on unit costof production. Certain costs, e.g, depreciation, taxes, interest on invest-

ment and administration expenses remain the same irrespective of the extentof equipment utilisation. Therefore, the attempt should be always to

maintain cent per cent utilisation of plant and equipment. However, thismay not always be possible.

Optimum utilisation of installed capacity can also be secured byemploying a number of small and identical machines instead of one largemachine. Generally, capital-intensive plants are not '!Iery flexiblebecause the costs of durable inputs _remain constant irrespective of thevolume of output and sales, But labour-intensive plants remain flexibleby laying off workers when sales and output fall, Seasonal and short-term

flexibility of plant may be .maintained through changes in operating hoursper annum. SUch cost flexibility is preferred on account of seasonalvariations in demand.

OPTIMUM VTlLlSATION OF' MULTIPURP05E-ELANTS AND CAPACITY 2'71



Further Readings

Bua ine tJ8 Ecxn iomics lor Engimef'8, New

York: McGraw Hill Book Co: 1980

Miller, n.W. and M.K. Starr: Executive Decisions awl Operations Researm..

New Delhi : Prentice Hall of India. 1978

Maynard. John B. (Ed.) Handbook oj Incluatrial Engineering, NewYork: McGraw Hill Book Co. ; 1983

Bettes. R,I.

Vaughn, R.C. Introduction to Industrial Eng-ineen: 'TI{J,

New York:: McGraw Hill Book Co.,1 9 6 7

REVIEW QUESTIONS1. What is a multipurpose plant? How does it differ from a

"special purpose plant?

2. How will you ensure optimum utilisation of multipurposeplants?

3. Suppose there is unutilised capacity in your piant. ' Y b a t stepswould you take to make full utilisation of such capacity,?

4. Write notes on the following:

(a) Installed capacity(b ) Excess capacity

(0 ) Optimum utilisation of equipment,



13Maintenance-Preventive and Breakdown

Maintaining Facilities

Maintenance refers to the upkeep and protection o r plant, buildings,machinery and other fixed assets. Maintenance engineering is concernedwith keeping the physical facilities in good operating condition. Inthe initial stages the quantity and quality of output tends to be goodbecause plant and machinery is new. But after continuous use over aperiod of time .: machinery deteriorates due to wear and tear, stress andstrain. As a result. the quantity and quality of production goes down.The deterioration of plant and equipment may also lead to industrialaccidents and other losses ..

Losses Due toPoor Maintenance

In the absence of proper repairs and maintenance, the following

types of losses may arise:(!) LmcfT productivity. Deterioration of plant and equipment

results in frequent interruptions or breakdowns which in turn leads toproduction loss. Such loss is very high in capital-intensive and conti-nuous precess industries.

. (2) H ig her costs. Every interruption in production means cost ofIdle equipment and wages of idle labour. There is greater wastage ofmaterials and pans. Incompetent and inadequate maintenance results inincrease in unit cost of manufacturing.

(3) Poor produd quality. Undetected and uncontrolled wear and

tear of machinery results in deterioration of product quality. It is notpossible to maintain the standards of workmanship.

(4 ) D eJ jjlr uc liD 1~ o f e qu ip me nt. When the equipment is allowed to

deteriorate beyond repair. the life of machines is reduced. Overuse andcareless use of machines cause premature replacement of capital assets .. Indian industries suffer from an unduly high rate of depletion of capitalassets and a chronic waste of productiorr capaclty on account of inadequatemaintenance. Very often the need fur maintenance is not felt unnl themachine actually breaks down. Cost of maintenance is considered anunnecessary expense rather than an investment. Attempt is made to avoid

or postpone maintenance expenditure. Lack of proper maintenance prae-tices serves as a constraint in the economic development of the country.

/

MAINTENANCE-PREVENTIVE AND BREAKDOWN2·73

(4) Induced LOBS. Production loss in one plant leads to nega~ve



consequences for both the customers and suppliers. When a plant supphespoor quality intermediate goods additional processing is required 'or t~cquality of the final product deteriorates. Frequent breakdowns result mirregular deliveries. In order to ensure uninterrupted production in the

face of unstable supplies, the firm has to keep high stocks of intermediatecomponents and spare parts. This is an unnecessary locking up ofscarce capital and waste of resources.

(5) Di'~fJ~ti8Cd loss. When an ill-kept machine breaks down, . theplant switches over to an idle equipment to avoid disruption in productwn.In an industry where installed capacity is underutilised, this may give theimpression that excess capacity is being utilised. But ill reality there isdisguised poor maintenance. Similarly, the poor quality products may beeasily sold if there is a serious shortage of supply. In a seller's marketconsumers have to accept whatever quality is available at whatever time.

The deterioration in quality and delays in delivery are disguised.(6)' Poor customer relations. When the quality of product is poor

and delivery schedule is not maintained, relations with customers willdeteriorate. This will lead to a permanent fall in sales turnover and lossof market.

(7) Poor ~taff mo-rale. Employees lose enthusiasm and interest inwork, when the machine or equipment frequently breaks down.

T~e losses and waste caused by poor maintenance impair economicgrowth Indeveloping countries like India where the resources are limitedand industrial sector is comparatively small.

Objectives or Maintenance

The main objectives of plant maintenance are as follows :

(i) to safeguard investment by minimising the rate of wear andtear

(ii) to preserve and prolong the working life of plant and equip-ment

(iii) to keep all the productive assets in efficient working condition.

(iv) to minimise idle time and loss of production due to

maintenance

(v ) to maximise e:1idency and economy in production through opti-mum use of ~',lfacilities

(vi) to minimise iJ ustr j a! accidents through regular inspection andrepair of safety devices, etc.

(vii) to minimise maintenance COSI.S.

bnportance of Maintenance

Plant and equipment are jhe heart ,,:-a production system, There-

fore, proper maintenance of plant and equipment is essential for keeping

2'14 PllODUCTlON ECONOMlCS

them in good working condition. This ensures optimum utilisation- 0f



production facilities and resources. All production equipment is designedto give a predetermined quantity and quality of output. This objectivecan be realised only when the equipment is supported by proper mainten-ance. In the. absence of ti mely upkeep, even the best machine will u It i rna-

tely breakdown. Regular us e over a period of t ime causes wear and tear.Gears become loose. bolts lear .off. valves get choked. parts crack, pipesleak. lubrication dries. etc. Therefore. regular inspection. lubrication.repair, etc.• must be undertaken to maintain the reliabili ty and efficiency ofequipment ..

Proper maintenance helps to maximise production performanceby preventing breakdowns and by minimising the loss caused bybreakdowns. In a developing country like India maintenance hasspecial significance. The capital is' a scarce resource and its bestpossible use is essential. Moreover. the natural conditions like tropicalclimate. and extreme humidity require special upkeep of equipment.Proper maintenance results in better performance and laager life ofmachinery. It helps to improve reliability of plant and equipment.Maintenance is essential in all manufacturing concerns. because machinesbreak down. parts wear out and tools deteriorate.

Maintenance VB. Producti vity

Productivity of a plant depends upon effective and regular utilisationof production facilities. Proper maintenance of plant and equipmenthelps to raise productivity by minimising breakdowns and idle resources.Periodic checkup prevents avoidable interruptions in operations. Planned

overhauls and quick repairs of machinery result in better utilisation ofresources. Regular maintenance increases working life of machine andleads to greater utilisation of plant. Improved production economy resultsin lower unit costs. By minimising the rate of deterioration need for freshcapital to replace worn out machinery is reduced. The capital tbus savedcan be utilised for expansion of plant utilities andernployee services.

_"Typesof.Maintenance

The various types of maintenance may be classified into the follow-ing categories :

1. Breakdoum or Corred;fJeMaintenanu. Breakdown maintenancerefers to the repair work taken after the failure of a. machine or equipment.For example. a machine stops working because the belt gets torn, Repla-cement of the torn belt is a case of breakdown maintenance. The mate-rials. spares and labour required in such maintenance is provided inadvance. Breakdown maintenance is Correct ive Maintenance as it is under-taken to restore an equipment to an accepted standard. It involvesmainly the repair of defective equipment.

2 . P ref)f!1 Iti? ;eMaifdet1uflce. This is the maintenance work under-

taken to prevent the failure of a machine or plant. It is done before the

failure arises or prior to the equipment actually breaking down, It is

economics of multi shifts

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