ENGINEERING MANAGEMENT

Prepared by-Mr. Basweshwar S. Jirwankar
Module 1:
Evolution of Management Thought
1.1 Scientific- Human Behavior
Behavioral sciences explore the cognitive processes within organisms and the behavioral
interactions between organisms in the natural world. It involves the systematic analysis and
investigation of human and animal behavior through the study of the past, controlled and
naturalistic observation of the present, and disciplined scientific experimentation and modeling. It
attempts to accomplish legitimate, objective conclusions through rigorous formulations and
observation.
Examples of behavioral sciences-
 Psychology,
 Psychobiology,
 Anthropology,
 Cognitive science.
Generally, behavior science deals primarily with human action and often seeks to
generalize about human behavior as it relates to society.
System Approach
 Human resources approach.
This approach recognizes the fact that people are the central resource in any organization
and that they should be developed towards higher levels of competency, creativity, and
fulfillment. [E.g. The supportive approach contrasts with the traditional management
approach.]
 Contingency approach.
The contingency approach (sometimes called the situational approach) is based on the
premise that methods or behaviors which work effectively in one situation fail in another.
[For example; Organization Development (OD) programs, way work brilliantly in one
situation but fail miserably in another situation.]
 Productivity approach.
Productivity which is the ratio of output to input is a measure of an organization’s
effectiveness. It also reveals the manager’s efficiency in optimizing resource utilization.
[For example, if better organizational behavior can improve job satisfaction, a human
output or benefit occurs.]
 Systems approach.
This approach gives managers a way of looking at the organization as a whole, whole, person,
whole group, and the whole social system.
1.2 Introduction to Elements of Systems – A system is a combination of parts or components, which
work together to control a task or activity. All systems have inputs, a process, and outputs.

1.3 Contributions by Taylor, Frank And Lillion, Gilbreth, Henry Fayol, Elton Mayo, Mcgregor
(Theory X and Theory Y), H. L. Gantt, Maslow
Gantt charts, and their modern equivalent, program evaluation and review technique (PERT) charts are
graphic management tools, providing visual methods of scheduling both time and resources for work
projects.
Henry Gantt management theory incorporates the record of the work that has been done, balanced with
the work that still needs to be completed.
According to Gantt theory, a Gantt chart is a bar chart showing the progression of time through the phases
of a project. The charts can be simple or complex, depending on the needs of the project manager and the
team. As you are deciding on how to manage a project, consider the following:
1. The management theory of Henry Gantt dictates the use of both resources and time when
evaluating projects. Considering this, how many people will be needed to complete the project?
2. Henry Gantt scientific management is a theory that incorporates benchmarks in a project as a
way to complete the project efficiently. What are the milestones and their deadlines in your
project?
3. How much time is needed to meet each of the milestone deadlines?

Module 2:
Functions of Management
2.1 Planning – Nature and Purpose of Planning,
 Planning involves selecting missions and objectives and the actions to achieve them; it requires
decision making, which is choosing from among alternative future courses of action.
 Planning is thus taken as the foundation for future activities. Newman has thus defined it as,
“Planning is deciding in advance what is to be done; that is a plan is a projected course of action.”
 So, planning can be thought of as deciding on a future course of action. It may also be treated as a
process of thinking before doing.
 Management has to plan for long-range and short-range future direction by looking ahead into the
future, by estimating and evaluating the future behavior of the relevant environment and by
determining the enterprise’s own desired role.
 Planning involves determining various types and volumes of physical and other resources to be
acquired from outside, to allocate these resources in an efficient manner among competing claims
and to make arrangement for systematic conversion of these resources into useful outputs.
 As it is clear from the above discussion, plans have two basic components: goals and action
statements.
The nature of planning can be understood by examining its four major aspects. They are;
 It is a contribution to objectives,
 It is primacy among the manager’s tasks.
 It is pervasiveness, and
 The efficiency of resulting plans.
There are many types of the plan;
1. Hierarchical Plans-
These plans are drawn at three major hierarchical levels, namely, the institutional, the
managerial and the technical core. The plans for these three levels are;
 Strategic plan
 Administrative or Intermediate plan

 Operational Plans can also be categorized according to frequency or
repetitiveness of use.
2. Standing Plans-
Standing plans are drawn to cover issues that managers face repeatedly. Such a standing plan
may be called standard operating procedure (SOP). Generally, five types of standing plans are
used;
 Mission or purpose
 Strategy
 Policies
 Rules
 Procedures
3. Single-use Plans-
Single-use plans are prepared for single or unique situations or problems and are normally
discarded or replaced after one use. Generally, four types of single-use plans are used. These
are;
 Objectives or Goals
 Programs
 Projects
 Budgets
4. Contingency Plans-
Contingency plans are made to deal with situations that might crop up if these assumptions
turn out to be wrong. Thus contingency planning is the development of alternative courses of
action to be taken if events disrupt a planned course of action.
2.2 Strategies and Policies,
A Strategy is a special plan made to achieve a market position and to reach the organizational goals and
objectives, but Policy refers to a set of rules made by the organization for rational decision making. Many
people have confusion regarding the two terms, but they are not alike. You should know that policies are
subordinate to strategy. Here, in this article we made an attempt to point out the important differences
between Strategy and Policy.
Definition of Strategy
Strategy is a game plan, chosen to achieve the organizational objectives, gain customer’s trust, and attain
competitive advantage and to acquire a market position.
It is a combination of well thought intent and actions which lead to the organization towards its desired
position or destination.
It is a unified and integrated plan made to achieve the basic objectives of the enterprise like:
 Effectiveness
 Handling events and problems
 Taking advantage of opportunities
 Full resource utilization
 Coping with threats

Strategy is a combination of flexibly designed corporate moves, through which an organization can
compete with its rivals successfully. The following are the features of the Strategy:
 It should be formulated from the top level management, however, sub-strategies can be made by
middle level management.
 It should have a long range perspective.
 It should be dynamic in nature.
 The main purpose is to overcome from uncertain situations.
 It should be made in such a way, to make the best possible use of scarce resources.
Definition of Policy
The policy is also regarded as a mini – mission statement, is a set of principles and rules which directs the
decisions of the organization.
 Policies are framed by the top level management of the organization to serve as a guideline for
operational decision making.
 It is helpful in highlighting the rules, value and beliefs of the organization. In addition to this, it
acts as a basis for guiding the actions.
 Policies are designed, by taking opinion and general view of a number of people in the organization
regarding any situation. They are made from the past experience and basic understanding. In this
way, the people who comes under the range of such policy will completely agree upon its
implementation.
 Policies helps the management of an organization to determine what is to be done, in a particular
situation. These have to be consistently applied over a long period of time to avoid discrepancies
and overlapping.
The following are the major differences between strategy and policy
 Strategy is the best plan opted from a number of plans, in order to achieve the organizational goals
and objectives. Policy is a set of common rules and regulations, which forms as a base to take day
to day decisions.
 Strategy is a plan of action while the policy is a principle of action.
 Strategies can be modified as per the situation, so they are dynamic in nature. Conversely, Policies
are uniform in nature, however relaxations can be made for unexpected situations.
 Strategies are concentrated toward actions, whereas Policies are decision oriented.
 Strategies are always framed by the top management but sub strategies are formulated at the middle
level. In contrast to Policy, they are, in general made by the top management.
 Strategies deals with external environmental factors. On the other hand, Policies are made for
internal environment of business.
2.3 Management by Objectives,
Management by objectives at its core is the process of employers/supervisors attempting to manage their
subordinates by introducing a set of specific goals that both the employee and the company strive to
achieve in the near future, and working to meet those goals accordingly.
Five steps:
 Review organizational goal
 Set worker objective
 Monitor progress

 Evaluation
 Give reward
The principle of MBO is for employees to have a clear understanding of their roles and the responsibilities
expected of them, so they can understand how their activities relate to the achievement of the
organization's goals. MBO also places importance on fulfilling the personal goals of each employee.
Proponents argue that benefits of MBO include:
 Motivation – Involving employees in the whole process of goal setting and increasing employee
empowerment. This increases employee job satisfaction and commitment.
 Better communication and coordination – Frequent reviews and interactions between superiors
and subordinates help to maintain harmonious relationships within the organization and also to
solve problems.
 Clarity of goals- Subordinates tend to have a higher commitment to objectives they set for
themselves than those imposed on them by another person.
 Managers can ensure that objectives of the subordinates are linked to the organization's objectives.
 Common goal for whole organization means it is a unifying, directive principle of management.
2.4 Formal and Informal Organization,
Basis For
Comparison
Formal Organization Informal Organization
Meaning
An organization type in which the
job of each member is clearly
defined, whose authority,
responsibility and accountability
are fixed is formal organization.
An organization formed within the
formal organization as a network of
interpersonal relationship, when
people interact with each other, is
known as informal communication.
Creation Deliberately by top management. Spontaneously by members.
Purpose
To fulfill, the ultimate objective of
the organization.
To satisfy their social and
psychological needs.
Nature Stable, it continues for a long time. Not stable
Communication Official communication Grapevine
Control
mechanism
Rules and Regulations Norms, values and beliefs
Focus on Work performance Interpersonal relationship
Authority
Members are bound by hierarchical
structure.
All members are equal.
Size Large Small

2.5 Centralization, Decentralization Line,
Basis For
Comparison
Centralization Decentralization
Meaning
The retention of powers and
authority with respect to planning
and decisions, with the top
management, is known as
Centralization.
The dissemination of authority,
responsibility and accountability to
the various management levels, is
known as Decentralization.
Involves
Systematic and consistent
reservation of authority.
Systematic dispersal of authority.
Communication
Flow
Vertical Open and Free
Decision Making Slow Comparatively faster
Advantage Proper coordination and Leadership Sharing of burden and responsibility
Power of decision
making
Lies with the top management. Multiple persons have the power of
decision making.
Implemented
when
Inadequate control over the
organization
Considerable control over the
organization
Best suited for Small sized organization Large sized organization
2.6 Line and Staff,
Content: Centralization Vs Decentralization
 Comparison Chart
 Definition
 Key Differences
 Conclusion
2.7 Functional Organization,
An organization with a functional structure is divided based on functional areas, such as IT, finance, or
marketing.
Key Points
 A functional organization is a common type of organizational structure in which the organization
is divided into smaller groups based on specialized functional areas, such as IT, finance, or
marketing.

 Functional departmentalization arguably allows for greater operational efficiency because
employees with shared skills and knowledge are grouped together by function.
 A disadvantage of this type of structure is that the different functional groups may not
communicate with one another, potentially decreasing flexibility and innovation. A recent trend
aimed at combating this disadvantage is the use of teams that cross traditional departmental lines.
Key Terms
 Silo: In business, a unit or department within which communication and collaboration occurs
vertically, with limited cooperation outside the unit.
 Departmentalization: The organization of something into groups according to function, geographic
location, etc.
2.8 Principles of Site Layout,
 Site layout plans are prepared by contractors as part of their mobilization activities before work on
site commences.
 They are a crucial part of construction management, as sites can be very complex places involving
the co-ordination and movement of large quantities of materials as well as high-value products,
plant and people. Effectively and accurately laying out a site can help ensure that the works are
undertaken efficiently and safely.
 Careful sizing and positioning of temporary facilities can help reduce travel times, congestion,
waiting times, and so on, and help to make the site a more effective workplace with better worker
morale.
Site layout planning involves four basic processes:
 Identifying the site facilities that will be required.
 Determining the sizes, and other constraints of those facilities.
 Establishing the inter-relationships between the facilities.
 Optimizing the layout of the facilities on the site.
Site layout plans might include locations for and sizes of:
 Zones for particular activities.
 Cranes (including radii and capacities).
 Site offices.
 Welfare facilities.
 Off-loading, temporary storage and storage areas.
 Sub-contractor facilities.
 Car parking.
 Emergency routes and muster points.
 Access, entrances, security and access controls, temporary roads and separate pedestrian routes.
 Vehicle wheel washing facilities.
 Waste management and recycling areas.
 Site hoardings and existing boundaries.
 Protection for trees, existing buildings, neighboring buildings, and so on.
 Signage.

 Temporary services (including electrical power, lighting, water distribution, drainage, information
and communications technology, site security systems, and so on)
 Temporary works (such as propping solutions to retained structures, sheet piling details, and so
on).
 Areas for the construction of mock-ups for testing.
 Fabrication facilities.
2.9 Leading and Directing,
DIRECTING is said to be a process in which the managers instruct, guide and oversee the performance
of the workers to achieve predetermined goals. Directing is said to be the heart of management process.
Planning, organizing, staffing have got no importance if direction function does not take place.
 Directing initiates action and it is from here actual work starts. Direction is said to be consisting
of human factors. In simple words, it can be described as providing guidance to workers is doing
work. In field of management, direction is said to be all those activities which are designed to
encourage the subordinates to work effectively and efficiently.
 According to Human, “Directing consists of process or technique by which instruction can be
issued and operations can be carried out as originally planned” Therefore, Directing is the function
of guiding, inspiring, overseeing and instructing people towards accomplishment of organizational
goals.
"Activating deals with the steps a manager takes to get sub-ordinates and others to carry out plans".
 Directing means giving instructions, guiding, counselling, motivating and leading the staff in an
organization in doing work to achieve Organizational goals.
 Directing is a key managerial function to be performed by the manager along with planning,
organizing, staffing and controlling. From top executive to supervisor performs the function of
directing and it takes place accordingly wherever superior – subordinate relations exist.
 Directing is a continuous process initiated at top level and flows to the bottom through
organizational hierarchy.
2.10 Controlling And Coordination (Introduction Only),
Co-ordination is the unification, integration, synchronization of the efforts of group members so as to
provide unity of action in the pursuit of common goals.
 It is a hidden force which binds all the other functions of management.
 According to Mooney and Reelay, “Co-ordination is orderly arrangement of group efforts to
provide unity of action in the pursuit of common goals”.
 According to Charles Worth, “Co-ordination is the integration of several parts into an orderly hole
to achieve the purpose of understanding”.
Management seeks to achieve co-ordination through its basic functions of planning, organizing, staffing,
directing and controlling. That is why, co-ordination is not a separate function of management because
achieving of harmony between individuals efforts towards achievement of group goals is a key to success
of management.
 Co-ordination is the essence of management and is implicit and inherent in all functions of
management.

 A manager can be compared to an orchestra conductor since both of them have to create rhythm
and unity in the activities of group members.
 Co-ordination is an integral element or ingredient of all the managerial functions as discussed
below: -
 Co-ordination through Planning - Planning facilitates co-ordination by integrating the
various plans through mutual discussion, exchange of ideas. e.g. - co-ordination between
finance budget and purchases budget.
 Co-ordination through Organizing - Mooney considers co-ordination as the very essence
of organizing. In fact when a manager groups and assigns various activities to subordinates,
and when he creates department’s co-ordination uppermost in his mind.
 Co-ordination through Staffing - A manager should bear in mind that the right no. of
personnel in various positions with right type of education and skills are taken which will
ensure right men on the right job.
 Co-ordination through Directing - The purpose of giving orders, instructions & guidance
to the subordinates is served only when there is a harmony between superiors &
subordinates.
 Co-ordination through Controlling - Manager ensures that there should be co-ordination
between actual performance & standard performance to achieve organizational goals.
2.11 Communication Process,
The Communication is a two-way process wherein the message in the form of ideas, thoughts, feelings,
opinions is transmitted between two or more persons with the intent of creating a shared understanding.
 Simply, an act of conveying intended information and understanding from one person to another
is called as communication.
 The term communication is derived from the Latin word “Communis” which means to share.
 Effective communication is when the message conveyed by the sender is understood by the
receiver in exactly the same way as it was intended.
Communication Process
The communication is a dynamic process that begins with the conceptualizing of ideas by the sender who
then transmits the message through a channel to the receiver, who in turn gives the feedback in the form
of some message or signal within the given time frame. Thus, there are seven major elements of
communication process:
 Sender: The sender or the communicator is the person who initiates the conversation and has
conceptualized the idea that he intends to convey it to others.

 Encoding: The sender begins with the encoding
process wherein he uses certain words or non-
verbal methods such as symbols, signs, body
gestures, etc. to translate the information into a
message. The sender’s knowledge, skills,
perception, background, competencies, etc. has a
great impact on the success of the message.
 Message: Once the encoding is finished, the
sender gets the message that he intends to convey.
The message can be written, oral, symbolic or
non-verbal such as body gestures, silence, sighs,
sounds, etc. or any other signal that triggers the
response of a receiver.
 Communication Channel: The Sender chooses the medium through which he wants to convey
his message to the recipient. It must be selected carefully in order to make the message effective
and correctly interpreted by the recipient. The choice of medium depends on the interpersonal
relationships between the sender and the receiver and also on the urgency of the message being
sent. Oral, virtual, written, sound, gesture, etc. are some of the commonly used communication
mediums.
 Receiver: The receiver is the person for whom the message is intended or targeted. He tries to
comprehend it in the best possible manner such that the communication objective is attained. The
degree to which the receiver decodes the message depends on his knowledge of the subject matter,
experience, trust and relationship with the sender.
 Decoding: Here, the receiver interprets the sender’s message and tries to understand it in the best
possible manner. An effective communication occurs only if the receiver understands the message
in exactly the same way as it was intended by the sender.
 Feedback: The Feedback is the final step of the process that ensures the receiver has received the
message and interpreted it correctly as it was intended by the sender. It increases the effectiveness
of the communication as it permits the sender to know the efficacy of his message. The response
of the receiver can be verbal or non-verbal.
2.12 Motivation
Motivation is literally the desire to act and move toward a goal. It's the difference between waking up
before dawn to pound the pavement and lazing around the house all day.
 It's the crucial element in setting and attaining one's objectives—and research shows you can
influence your own levels of motivation and self-control.
 Motivation might be extrinsic, whereby a person is inspired by outside forces—other people or
things that transpire.
 Motivation might be intrinsic, whereby the inspiration comes from within a person.
 High achievers, who have outsized stores of motivation, readily feed their needs of a meaningful
life.
 The needs encompass physiological requirements, social connection, ego, and fulfillment.
Physiological needs—sustenance, shelter, safety, physical health—are most important.

 Also crucial is the need for social connection and acceptance.
 Ego is another area that requires attention, an individual must have confidence, status, recognition,
and respect. And the last is fulfillment, whereby the individual realizes his potential and deepest
desires.
 Motivation plays a big part in every one of these areas.

Module 3:
Decision Making
3.1 Importance of Decision Making,
Management is essentially a bundle of decision-making process. Decision making is a process of selecting
the best course of action from among many alternatives.
 The managers of an enterprise are responsible for making decisions and ascertaining that the
decisions made are carried out in accordance with defined objectives or goals.
 It is useful for the successful operation of organizational activities.
 All the managerial functions such as planning, organizing, directing and controlling are determined
by the decision.
 The following points describes the significance of decision making in the organization.
 It helps to make the best decisions.
 It is also one of the important functions of management.
 Without other management functions such as planning, Organizing, directing, controlling, staffing
can't be conducted because in this managerial function decision is very important.
3.2 Steps in Decision Making,
Decision making is the
process of making
choices by identifying a
decision, gathering
information, and
assessing alternative
resolutions.
Using a step-by-step
decision-making
process can help you
make more deliberate,
thoughtful decisions by
organizing relevant
information and
defining alternatives.
This approach increases
the chances that you
will choose the most
satisfying alternative possible.
Step 1: Identify the decision
You realize that you need to make a decision. Try to clearly define the nature of the decision you must
make. This first step is very important.
Step 2: Gather relevant information

Collect some pertinent information before you make your decision: what information is needed, the best
sources of information, and how to get it. This step involves both internal and external “work.” Some
information is internal: you’ll seek it through a process of self-assessment. Other information is external:
you’ll find it online, in books, from other people, and from other sources.
Step 3: Identify the alternatives
As you collect information, you will probably identify several possible paths of action, or alternatives.
You can also use your imagination and additional information to construct new alternatives. In this step,
you will list all possible and desirable alternatives.
Step 4: Weigh the evidence
Draw on your information and emotions to imagine what it would be like if you carried out each of the
alternatives to the end. Evaluate whether the need identified in Step 1 would be met or resolved through
the use of each alternative. As you go through this difficult internal process, you’ll begin to favor certain
alternatives: those that seem to have a higher potential for reaching your goal. Finally, place the
alternatives in a priority order, based upon your own value system.
Step 5: Choose among alternatives
Once you have weighed all the evidence, you are ready to select the alternative that seems to be best one
for you. You may even choose a combination of alternatives. Your choice in Step 5 may very likely be
the same or similar to the alternative you placed at the top of your list at the end of Step 4.
Step 6: Take action
You’re now ready to take some positive action by beginning to implement the alternative you chose in
Step 5.
Step 7: Review your decision & its consequences
In this final step, consider the results of your decision and evaluate whether or not it has resolved the need
you identified in Step 1. If the decision has not met the identified need, you may want to repeat certain
steps of the process to make a new decision. For example, you might want to gather more detailed or
somewhat different information or explore additional alternatives.
3.3 Analysis of Decision,
Decision analysis (DA) is a systematic, quantitative and visual approach to addressing and evaluating
important choices confronted by businesses.
 Decision analysis utilizes a variety of tools to evaluate all relevant information to aid in the
decision making process and incorporates aspects of psychology, management techniques and
training, and economics.
 It is often used to assess decisions that are made in the context of multiple variables and which
have many possible outcomes or objectives.
 It can be used by individuals or groups attempting to make a decision related to risk management,
capital investments and strategic business decisions.
 A graphical representation of alternatives and possible solutions, as well as challenges and
uncertainties, can be created on a decision tree or influence diagram.
 More sophisticated computer models have also been developed to aid in the decision analysis
process.
3.4 Decision under Certainty,

A condition of certainty exists when the decision-maker knows with reasonable certainty what the
alternatives are, what conditions are associated with each alternative, and the outcome of each alternative.
 Under conditions of certainty, accurate, measurable, and reliable information on which to base
decisions is available.
 The cause and effect relationships are known and the future is highly predictable under conditions
of certainty.
 Such conditions exist in case of routine and repetitive decisions concerning the day-to-day
operations of the business.
3.5 Uncertainty and Decision under Risk,
Most significant decisions made in today’s complex environment are formulated under a state of
uncertainty.
 Conditions of uncertainty exist when the future environment is unpredictable and everything is in
a state of flux.
 The decision-maker is not aware of all available alternatives, the risks associated with each, and
the consequences of each alternative or their probabilities.
 The manager does not possess complete information about the alternatives and whatever
information is available, may not be completely reliable.
 In the face of such uncertainty, managers need to make certain assumptions about the situation in
order to provide a reasonable framework for decision-making.
 They have to depend upon their judgment and experience for making decisions.
 When a manager lacks perfect information or whenever an information asymmetry exists, risk
arises.
 Under a state of risk, the decision maker has incomplete information about available alternatives
but has a good idea of the probability of outcomes for each alternative.
 While making decisions under a state of risk, managers must determine the probability associated
with each alternative on the basis of the available information and his experience.
3.6 Criterion of Optimism and Regret,
Optimism is a form of positive thinking that includes the belief that you are responsible for your own
happiness, and that more good things than bad will continue to happen to you.
 Optimists believe that bad or negative events are rare occurrences and that it is not their fault when
something bad happens but is due to something external.
 Regret is a negative conscious and emotional reaction to one's personal decision-making, a choice
resulting in action or inaction.
 Regret is related to perceived opportunity.
 Its intensity varies over time after the decision, in regard to action versus inaction, and in regard
to self-control at a particular age.
 The self-recrimination which comes with regret is thought to spur corrective action and adaptation.
 In Western societies adults have the highest regrets regarding choices of their education.
3.7 Sensitivity of Criteria and Decision under Conflict,
Sensibility analysis is sometimes called ‘what if’ analysis.

 Sensitivity analysis, as a technique, attempts to make the strategist more aware of the ‘states of
nature’ (i.e., different variables as indicated above) and of their impacts on business situations.
 Recognizing the fact that each individual strategist brings his or her own unique set of values,
orientations, and altitudes to the decision-making process, sensitivity analysis examines a
particular set of alternatives with reference to certain evaluation criteria.
 These criteria may relate to varying degrees of optimism or pessimism about the future or a given
individual’s ability or willingness to risk losses.
Procedural Steps in Sensitivity Analysis:
1. Identify the basic underlying factors (e.g., quantity sold, unit selling price, life of project, project
cost, annual cash flow, etc.)
2. Establish a relationship between the basic underlying factors (illustrated above) and net present
value (or some other criterion of importance).
3. Estimate the range of variation and the most likely value of each of the basic underlying factors.
4. Study the impact on net present value of variations in the basic variables (only one factor is
varied at a time).
3.8 Expected Monitory
This technique is an important part of risk management, and is usually used in medium, large, and complex
projects.
 Expected monetary value is used in the Perform Quantitative Risks Analysis process, and is one
of the few techniques in the PMBOK Guide which involves mathematical calculations.
 Because of this many aspirants leave this topic and try to avoid the whole concept.
 Expected monetary value (EMV) is a statistical technique in risk management that is used to
quantify the risks, which in turn, assists the project manager to calculate the contingency reserve.
“Expected monetary value analysis is a statistical concept that calculates the average outcomes
when the future includes the scenarios that may or may not happen.”
 It helps in calculating the amount required to manage all identified risks.
 It helps in selecting the choice which involves less money to manage the risks.
 To calculate the expected monetary value of an event you must have the probability and the impact
should it occur.
Expected Monetary Value (EMV) = Probability * Impact
3.9 Value
Value or values may refer to:
 Value (ethics) it may be described as treating actions themselves as abstract objects, putting value
to them
 Values (Western philosophy) expands the notion of value beyond that of ethics, but limited to
Western sources
 Social imaginary is the set of values, institutions, laws, and symbols common to a particular social
group
 Value (economics), a measure of the benefit that may be gained from goods or service
 Theory of value (economics), the study of the concept of economic value
 Value (marketing), the difference between a customer's evaluation of benefits and costs

 Value investing, an investment paradigm.
3.10 Decision Tree
A decision tree is a decision support tool that uses a tree-like model of decisions and their possible
consequences, including chance event outcomes, resource costs, and utility. It is one way to display an
algorithm that only contains conditional control statements.
 Decision trees are commonly used in operations research, specifically in decision analysis, to help
identify a strategy most likely to reach a goal, but are also a popular tool in machine learning.
 A decision tree is a flowchart-like structure in which each internal node represents a "test" on an
attribute (e.g. whether a coin flip comes up heads or tails), each branch represents the outcome of
the test, and each leaf node
represents a class label (decision
taken after computing all
attributes).
 The paths from root to leaf
represent classification rules.
 In decision analysis, a decision
tree and the closely related
influence diagram are used as a
visual and analytical decision
support tool, where the expected
values (or expected utility) of
competing alternatives are
calculated.
A decision tree consists of three types of
nodes:
 Decision nodes – typically
represented by squares
 Chance nodes – typically
represented by circles
 End nodes – typically
represented by triangles
3.11 Theory Of Games (Dominance Pure and Mixed Strategy)
In the game theory, different players adopt different types of strategies on the basis of the outcome, which
is obtained by adopting the strategy.
For instance, the player may adopt a single strategy every time as it provides him/her maximum outcome
or he/she can adopt multiple strategies.
Apart from this, a player may also adopt a strategy that provides him/her minimum loss. Therefore on the
basis of outcome, the strategies of the game theory are classified as pure and mixed strategies, dominant
and dominated strategies, minimax strategy, and maximin strategy.

Module 4:
Operations Research
4.1 Linear Programming,
Optimization is the way of life. We all have finite resources and time and we want to make the most of
them. From using your time productively to solving supply chain problems for your company – everything
uses optimization.
 It is also a very interesting topic – it starts with simple problems, but can get very complex.
 For example, sharing a chocolate between siblings is a simple optimization problem. We don’t
think in mathematical term while solving it.
 On the other hand devising inventory and warehousing strategy for an e-tailer can be very complex.
Millions of SKUs with different popularity in different regions to be delivered in defined time and
resources – you see what I mean!
 Linear programming (LP) is one of the simplest ways to perform optimization.
 It helps you solve some very complex optimization problems by making a few simplifying
assumptions.
 As an analyst you are bound to come across applications and problems to be solved by Linear
Programming.
 For some reason, LP doesn’t get as much attention as it deserves while learning data science.
 So, I thought let me do justice to this awesome technique.
 I decided to write an article which explains Linear programming in simple English.
 I have kept the content as simple as possible. The idea is to get you started and excited about Linear
Programming.
 Linear programming is a widely used field of optimization for several reasons.
 Many practical problems in operations research can be expressed as linear programming problems.
 Certain special cases of linear programming, such as network flow problems and multicommodity
flow problems are considered important enough to have generated much research on specialized
algorithms for their solution.
 A number of algorithms for other types of optimization problems work by solving LP problems as
sub-problems. Historically, ideas from linear programming have inspired many of the central
concepts of optimization theory, such as duality, decomposition, and the importance of convexity
and its generalizations.
 Likewise, linear programming was heavily used in the early formation of microeconomics and it
is currently utilized in company management, such as planning, production, transportation,
technology and other issues.
 Although the modern management issues are ever-changing, most companies would like to
maximize profits and minimize costs with limited resources. Therefore, many issues can be
characterized as linear programming problems.
4.2 Simple L-P Model,
Linear programming (LP) is one of the simplest ways to perform optimization.
 It helps you solve some very complex optimization problems by making a few simplifying
assumptions.

 As an analyst you are bound to come across applications and problems to be solved by Linear
Programming.
 For some reason, LP doesn’t get as much attention as it deserves while learning data science.
 So, I thought let me do justice to this awesome technique.
 I decided to write an article which explains Linear programming in simple English.
 I have kept the content as simple as possible.
 The idea is to get you started and excited about Linear Programming.
4.3 Simplex Method - Duality,
Simplex method, Standard technique in linear programming for solving an optimization problem, typically
one involving a function and several constraints expressed as inequalities.
 The inequalities define a polygonal region (see polygon), and the solution is typically at one of the
vertices.
 The simplex method is a systematic procedure for testing the vertices as possible solutions.
4.4 Sensitivity Analysis,
Sensitivity analysis is the study of how the uncertainty in the output of a mathematical model or system
(numerical or otherwise) can be apportioned to different sources of uncertainty in its inputs.
 A related practice is uncertainty analysis, which has a greater focus on uncertainty quantification
and propagation of uncertainty; ideally, uncertainty and sensitivity analysis should be run in
tandem.
 The process of recalculating outcomes under alternative assumptions to determine the impact of a
variable under sensitivity analysis can be useful for a range of purposes, including:
 Testing the robustness of the results of a model or system in the presence of uncertainty.
 Increased understanding of the relationships between input and output variables in a system or
model.
 Uncertainty reduction, through the identification of model inputs that cause significant uncertainty
in the output and should therefore be the focus of attention in order to increase robustness (perhaps
by further research).
 Searching for errors in the model (by encountering unexpected relationships between inputs and
outputs).

 Model simplification – fixing model inputs that have no effect on the output, or identifying and
removing redundant parts of the model structure.
 Enhancing communication from modelers to decision makers (e.g. by making recommendations
more credible, understandable, compelling or persuasive).
 Finding regions in the space of input factors for which the model output is either maximum or
minimum or meets some optimum criterion (see optimization and Monte Carlo filtering).
 In case of calibrating models with large number of parameters, a primary sensitivity test can ease
the calibration stage by focusing on the sensitive parameters. Not knowing the sensitivity of
parameters can result in time being uselessly spent on non-sensitive ones.
 To seek to identify important connections between observations, model inputs, and predictions or
forecasts, leading to the development of better models.
4.5 Application of Linear Programming in Transportation and Assignment Models
Transportation and assignment models are special purpose algorithms of the linear programming. The
simplex method of Linear Programming Problems (LPP) proves to be inefficient is certain situations like
determining optimum assignment of jobs to persons, supply of materials from several supply points to
several destinations and the like.
 More effective solution models have been evolved and these are called assignment and
transportation models.
 The transportation model is concerned with selecting the routes between supply and demand points
in order to minimize costs of transportation subject to constraints of supply at any supply point
and demand at any demand point.
 Assume a company has 4 manufacturing plants with different capacity levels, and 5 regional
distribution centers. 4 x 5 = 20 routes are possible.
 Given the transportation costs per load of each of 20 routes between the manufacturing (supply)
plants and the regional distribution (demand) centers, and supply and demand constraints, how
many loads can be transported through different routes so as to minimize transportation costs?
 The answer to this question is obtained easily through the transportation algorithm.
Similarly, how are we to assign different jobs to different persons/machines, given cost of job completion
for each pair of job machine/person? The objective is minimizing total cost. This is best solved through
assignment algorithm.
Transportation model is used in the following:
 To decide the transportation of new materials from various centres to different manufacturing
plants. In the case of multi-plant company this is highly useful.
 To decide the transportation of finished goods from different manufacturing plants to the different
distribution centres. For a multi-plant-multi-market company this is useful.
 To decide the transportation of finished goods from different manufacturing plants to the different
distribution centres. For a multi-plant-multi-market company this is useful. These two are the
uses of transportation model. The objective is minimizing transportation cost.
Assignment model is used in the following:
 To decide the assignment of jobs to persons/machines, the assignment model is used.

 To decide the route a traveling executive has to adopt (dealing with the order in which he/she has
to visit different places).
 To decide the order in which different activities performed on one and the same facility be taken
up.
 In the case of transportation model, the supply quantity may be less or more than the demand.
Similarly the assignment model, the number of jobs may be equal to, less or more than the number
of machines/persons available.
 In all these cases the simplex method of LPP can be adopted, but transportation and assignment
models are more effective, less time consuming and easier than the LPP.

Module 5:
Simulation Studies
5.1 Monte-Carlo Simulation,
Monte Carlo simulation, or probability simulation, is a technique used to understand the impact of risk
and uncertainty in financial, project management, cost, and other forecasting models.
 When you have a range of values as a result, you are beginning to understand the risk and
uncertainty in the model.
 The key feature of a Monte Carlo simulation is that it can tell you – based on how you create the
ranges of estimates – how likely the resulting outcomes are.
 In a Monte Carlo simulation, a random value is selected for each of the tasks, based on the range
of estimates.
 The model is calculated based on this random value.
 The result of the model is recorded, and the process is repeated.
 A typical Monte Carlo simulation calculates the model hundreds or thousands of times, each time
using different randomly-selected values.
When the simulation is complete, we have a large number of results from the model, each based on random
input values. These results are used to describe the likelihood, or probability, of reaching various results
in the model.
5.2 Queuing or Waiting Line Theory (Simple Problems),
Queuing theory deals with problems which involve queuing (or waiting).
Typical examples might be:
Banks/supermarkets - waiting for service
Computers - waiting for a response
Failure situations - waiting for a failure to occur e.g. in a piece of machinery
Public transport - waiting for a train or a bus
 As we know queues are a common every-day experience.
 Queues form because resources are limited.
 In fact it makes economic sense to have queues.
 For example how many supermarket tills you would need to avoid queuing?
 How many buses or trains would be needed if queues were to be avoided/eliminated?
In designing queueing systems we need to aim for a balance between service to customers (short queues
implying many servers) and economic considerations (not too many servers).
In essence all queuing systems can be broken down into individual sub-systems consisting of entities
queuing for some activity (as shown below).
Typically we can talk of this individual sub-system as dealing with customers queuing for service. To
analyze this sub-system we need information relating to:

Arrival process:
 How customers arrive e.g. singly or in groups (batch or bulk arrivals)
 How the arrivals are distributed in time (e.g. what is the probability distribution of time between
successive arrivals (the interarrival time distribution))
 Whether there is a finite population of customers or (effectively) an infinite number
 The simplest arrival process is one where we have completely regular arrivals (i.e. the same
constant time interval between successive arrivals). A Poisson stream of arrivals corresponds to
arrivals at random. In a Poisson stream successive customers arrive after intervals which
independently are exponentially distributed. The Poisson stream is important as it is a convenient
mathematical model of many real life queuing systems and is described by a single parameter - the
average arrival rate. Other important arrival processes are scheduled arrivals; batch arrivals; and
time dependent arrival rates (i.e. the arrival rate varies according to the time of day).
Service mechanism:
 A description of the resources needed for service to begin
 How long the service will take (the service time distribution)
 The number of servers available
 Whether the servers are in series (each server has a separate queue) or in parallel (one queue for
all servers)
 Whether preemption is allowed (a server can stop processing a customer to deal with another
"emergency" customer)
 Assuming that the service times for customers are independent and do not depend upon the arrival
process is common. Another common assumption about service times is that they are exponentially
distributed.
Queue characteristics:
How, from the set of customers waiting for service, do we choose the one to be served next (e.g. FIFO
(first-in first-out) - also known as FCFS (first-come first served); LIFO (last-in first-out); randomly) (this
is often called the queue discipline)
Do we have?
 Balking (customers deciding not to join the queue if it is too long)
 Reneging (customers leave the queue if they have waited too long for service)
 Jockeying (customers switch between queues if they think they will get served faster by so doing)
 A queue of finite capacity or (effectively) of infinite capacity
Changing the queue discipline (the rule by which we select the next customer to be served) can
often reduce congestion. Often the queue discipline "choose the customer with the lowest service time"
results in the smallest value for the time (on average) a customer spends queuing.
5.3 Dynamic Programming,
Dynamic Programming is a method for solving a complex problem by breaking it down into a collection
of simpler sub problems, solving each of those sub problems just once, and storing their solutions using a
memory-based data structure (array, map, etc).
 Each of the sub problem solutions is indexed in some way, typically based on the values of its
input parameters, so as to facilitate its lookup.

 So the next time the same sub problem occurs, instead of recomposing its solution, one simply
looks up the previously computed solution, thereby saving computation time.
 This technique of storing solutions to sub problems instead of recomposing them is called
memorization.
5.4 Introduction to Emerging
Emerging technologies are technologies that are perceived as capable of changing the status quo. These
technologies are generally new but include older technologies that are still controversial and relatively
undeveloped in potential, such as preimplantation genetic diagnosis and gene therapy which date to 1989
and 1990 respectively.
 Emerging technologies are characterized by radical novelty, relatively fast growth, coherence,
prominent impact, and uncertainty and ambiguity.
 In other words, an emerging technology can be defined as "a radically novel and relatively fast
growing technology characterized by a certain degree of coherence persisting over time and with
the potential to exert a considerable impact on the socio-economic domain(s) which is observed in
terms of the composition of actors, institutions and patterns of interactions among those, along
with the associated knowledge production processes.
 Its most prominent impact, however, lies in the future and so in the emergence phase is still
somewhat uncertain and ambiguous."
 Emerging technologies include a variety of technologies such as educational technology,
information technology, nanotechnology, biotechnology, cognitive science, psych technology,
robotics, and artificial intelligence.
 New technological fields may result from the technological convergence of different systems
evolving towards similar goals. Convergence brings previously separate technologies such as
voice (and telephony features), data (and productivity applications) and video together so that they
share resources and interact with each other, creating new efficiencies.
 Emerging technologies are those technical innovations which represent progressive developments
within a field for competitive advantage; converging technologies represent previously distinct
fields which are in some way moving towards stronger inter-connection and similar goals.
However, the opinion on the degree of the impact, status and economic viability of several
emerging and converging technologies.
5.5 Optimization Techniques
The classical optimization techniques are useful in finding the optimum solution or unconstrained maxima
or minima of continuous and differentiable functions.
 These are analytical methods and make use of differential calculus in locating the optimum
solution.
 The classical methods have limited scope in practical applications as some of them involve
objective functions which are not continuous and/or differentiable.
 Yet, the study of these classical techniques of optimization form a basis for developing most of
the numerical techniques that have evolved into advanced techniques more suitable to today’s
practical problems.

 These methods assume that the function is differentiable twice with respect to the design variables
and the derivatives are continuous.
 Three main types of problems can be handled by the classical optimization techniques:
– Single variable functions
– Multivariable functions with no constraints,
– Multivariable functions with both equality and inequality constraints. In problems with
 Equality constraints the Lagrange multiplier method can be used. If the problem has inequality
constraints, the Kuhn-Tucker conditions can be used to identify the optimum solution.

Module 6:
Material Management
6.1 Material Management
(i) ‘Materials Management’ is a term used to connote “controlling the kind, amount, location, movement
and timing of various commodities used in production by industrial enterprises”.
(ii) Materials Management is the planning, directing, controlling and coordinating those activities which
are concerned with materials and inventory requirements, from the point of their inception to their
introduction into the manufacturing process.
It begins with the determination of materials quality and quantity and ends with its issuance to production
to meet customer’s demand as per schedule and at the lowest cost.
(iii) Materials Management is a basic function of the business that adds value directly to the product itself
(iv) Materials Management embraces all activities concerned with materials except those directly
concerned with designing or manufacturing the product.
(v) Materials Management deals with controlling and regulating the flow of material in relation to changes
in variables like demand, prices, availability, quality, delivery schedules etc.
Thus, material management is an important function of an organization covering various aspects
of input process, i.e., it deals with raw materials, procurement of machines and other equipment’s
necessary for the production process and spare parts for the maintenance of the plant. Thus in a production
process materials management can be considered as a preliminary to transformation process.
It involves planning and programming for the procurement of material and capital goods of desired
quality and specification at reasonable price and at the required time.
It is also concerned with market exploration for the items to be purchased to have up to date
information, stores and stock control, inspection of the material received in the enterprise, transportation
and material handling operations related to materials and many other functions. In the words of Bethel,
“Its responsibility end when the correct finished product in proper condition and quantity passes to the
consumer.”
Objectives of Materials Management:
Materials management contributes to survival and profits of an enterprise by providing adequate supply
of materials at the lowest possible costs.
The fundamental objectives of materials management activities can be:
(i) Material Selection: Correct specification of material and components is determined. Also the
material requirement in agreement with sales programme are assessed. This can be done by
analysing the requisition order of the buying department. With this standardisation one may have
lower cost and the task of procurement, replacement etc. may be easier.
(ii) Low operating costs: It should endeavor to keep the operating costs low and increase the profits
without making any concessions in quality.
(iii) Receiving and controlling material safely and in good condition.
(iv) Issue material upon receipt of appropriate authority.
(v) Identification of surplus stocks and taking appropriate measures to produce it.
The outcome of all these objectives can be listed as given below:
(i) Regular uninterrupted supply of raw-materials to ensure continuity of production.
(ii) By providing economy in purchasing and minimizing waste it leads to higher productivity.

(iii) To minimize storage and stock control costs.
(iv) By minimizing cost of production to increase profits.
(v) To purchase items of best quality at the most competitive price.
Organization of Materials Management Department:
To facilitate planning, direction, control and co-ordination of various activities related to material in an
enterprise there should be a separate department of materials management. The organizational structure
of the department can be.
There can be more sub-sections of the department but in general, materials manager controls the four
major sections and is responsible for reporting to the president of the organization.
6.1.1 Purchasing Principles,
Some of the major principles of purchasing are:
1. Right Quality:
The term right quality refers to a suitability of an item for the purpose it is required. For producing the
goods of best quality, the best grade of raw material may be the right quality whereas for producing items
of medium quality, the average lowest grade may be the right quality.
 The quality of the item is called as grades. It can be measured by physical tests, chemical analysis
or by any other methods depending upon the nature of a product.
 The use of standard specification, brand name or trade name helps in purchasing the squired
qualities of materials. ‘The quality must be built into the product’.
 It is the duty of the purchasing department to ensure that materials are purchased from those
suppliers.
 For creating goodwill, right production, standardisation, elimination of waste and for better results,
right quality purchases are very essential.
 Quality for different materials is decided by the concerned departments.
 In case of workshop equipment, the decision is taken by the plant engineer and for stationery it is
the user department. However, purchase department may question the requirements of the different
departments on the basis of its experience and suggest various alternatives.
 The inspection department must verify whether the goods supplied are in accordance with the order
placed.
 Thus, the right quality is the suitability of items purchased for a given purpose. The best quality of
materials purchased need not be the right quality.
2. Right Quantity:

Materials purchased should be of right quantity.
 The right quantity is the quantity that may be purchased at a time with the minimum total cost and
which obviates shortage of materials.
 Ensuring and maintaining a regular flow of materials for carrying the production activity is the
vital aim of any purchase organization.
 Excess purchases should be avoided, it results in overstocking and capital is unnecessarily blocked
and inventory carrying cost goes up.
3. Right Time:
The time at which the purchases are to be made is of vital importance.
 In case of items used regularly, right time means the time when the stock reaches the minimum
level.
 The reorder level of material is fixed for each item under the principle of right time.
 Action for the purchase of new supplies should be immediately initiated, when the material reaches
the reorder level.
 Reorder level for each type of material is calculated by applying the following formula.
 Reorder level = Maximum Consumption x Maximum Reorder Period.
 The materials control department sends the purchase requisition to be purchase department for the
purchase of materials.
 In case materials are required for special jobs, the Purchase Department ensures that the materials
are delivered in time.
Another important factor to be considered is the delivery of materials from stores to production
departments. Any under delay in supplying the materials on different jobs delays the production.
4. Right Source:
Selecting the right source for the purchase of materials is an important consideration in the purchase
procedure.
 The right source for the procurement of materials is that supplier who can supply the material of
right quality as ordered, in right quantity as ordered, at a right time at which the materials were
required to be supplied, at an agreed price with the supplier, who is in a position to honor the
commitment without much follow- up, who has necessary financial resources and adequate man-
power to handle the order and who is well established with higher reputation and proven business
integrity.
 The source of material should be located within a reasonable distance from the buyer’s
organization.
 This will minimise the delivery delays, higher transportation charges and improve the personal
contact between the buyer and the supplier and enable better after-sales service etc.
 As far as possible the middlemen and brokers should be avoided in the purchase of materials.
 A direct liaison should be established with the supplier.
 It would be helpful in improving the quality of the material in future.
 While selecting the supplier certain factors must be kept in mind, viz., location of the supplier,
warehousing facilities available with the supplier, relations of the employers with the labour, credit

worthiness of the supplier, size of the supplier’s firm and quality control observed by the employer
etc.
 A personal visit to prospective supplier’s premises will be helpful in assessing the capabilities of
the supplier.
5. Right Price:
Determination of right price is a difficult task. It is the main object of any organization to procure the
material items at the right price. It is that price which brings the best ultimate value of the money invested
in purchasing the materials.
 Deciding the right price of a product depends on variety of factors, viz.; quality, delivery time and
ultimate life of the material, demand and supply curve, extent of competition, government
restrictions, after sales services, discount offered, and terms of purchase etc.
 It may be pointed out here that the determination of proper price depends not only on market
knowledge but also a clear understanding of the pricing process.
 The buyer should keep in touch himself with the above mentioned factors in the process of
determination of price.
 He must consider that whether a proposed item to be purchased represents the best value for money
or not.
 This is known as “value analysis”. The prevailing market prices also provide basis for the price
determination. There should be negotiation between the purchase department and the suppliers for
the determination of proper price.
6. Right Place:
Besides obtaining the materials of the right quality and quantity from the right source at the right price, it
should be ensured that the materials are available at the right place.
 Transportation and material handling costs are greatly affected by the selection of the right place
from where the materials are to be acquired.
 For minimizing these costs, selection of right place for the acquisition of material is of utmost
importance.
 If local as well as outside supplier fulfills these conditions, the former should be preferred.
 The above mentioned principles of purchasing can be summed up as the six R’s of purchasing.
 These are also known as the “essentials” to be followed by the purchasing executive.
6.1.2 Stores,
 An establishment where merchandise is sold, usually on a retail basis.
 A grocery: We need bread and milk from the store.
 A stall, room, floor, or building housing or suitable for housing a retail business.
 A supply or stock of something, especially one for future use.
 Stores, supplies of food, clothing, or other requisites, as for a household, inn, or naval or military
forces.
 Chiefly. A storehouse or warehouse, Quantity, especially great quantity; abundance, or plenty:
 A rich store of grain.
6.1.3 Coding System Function,

A few points to be taken into consideration while codifying the items in the inventory are given below:
 Flexibility: A codification system, should last a long time to derive proper benefits from it. It is
not something which we change every quarter or every other year. Therefore, the long term
requirements of materials for the organization should be kept in mind while providing the digits
or alphabets for the items. Moreover, the codification system should not only have enough of
vacant spaces but should be flexible enough to suit the requirements of the long term future.
 Precision: The codification system should ensure a unique code for reach item.
A proper dictionary or vocabulary for the decoding should be made while installing a codification
system. The number of letters or digits should be the same for all items.
 Brevity: The total number of letters or numbers should not be too large so as it lose its immediate
meaning to the user of the material. 7-10 digits or spaces are adequate for many of the coding
systems. However, with a high degree of computerization one could have more digits.
 Comprehensiveness: While classifying and sub classifying the items for coding purposes, the
nature of the item, its specifications, its end use and the suppliers etc should all be comprehensively
taken into account; and therefore, for the codification system to work, prior consultations with the
concerned departments such as the operations department, purchasing department, engineering
department and finance department, etc should be absolutely necessary. The basis of classification
and sub classification should be understood and be approved by these user departments.
 Standardization: A good system of codification helps in the standardization of items in the
inventory. Standardization consists of reducing the variety of items stocked in the inventory to a
workable minimum, by fixing sizes, shapes, dimensions and other quality characteristics of the
item. For instance, paint may be bought from a number of suppliers in different sizes of containers
and different shades of color. All of these might blow up the inventory of paints considerably. The
same could be reduced if the number of suppliers is cut down, if the variety in the sizes of the
containers is reduced and if the number of shades of color is also reduced. There may not be a
good reason why the paint should be procured from so many different suppliers and in so many
different sizes. With standardization, the amount of inventory on paint can easily be cut down to
almost a quarter or even much less. In one of the recent exercises done in an Indian electrical
machinery manufacturing company (which mostly does job-shop type of work, i.e. manufactures
items on order), it was found that by means of conscious thinking they could standardize their
regular items and reduce the amount of inventory to almost 60%. Note that this reduction is being
done in a company dealing with make-to-order type of business; the potential for other kinds of
business can only be inferred from this experience.
6.1.4 Responsibilities,
A duty or obligation to satisfactorily perform or complete a task (assigned by someone, or created by one's
own promise or circumstances) that one must fulfill, and which has a consequent penalty for failure.
6.1.5 Record and Accounting.
Manual or computerized records of assets and liabilities, monetary transactions; various journals, ledgers,
and supporting documents (such as agreements, checks, invoices, vouchers), which an organization is
required to keep for certain number of years.
6.2 Inventory Control

 Inventory control or stock control can be broadly defined as "the activity of checking a shop’s
stock." However, a more focused definition takes into account the more science-based, methodical
practice of not only verifying a business' inventory but also focusing on the many related facets of
inventory management (such as forecasting future demand) "within an organization to meet the
demand placed upon that business economically."
 Other facets of inventory control include supply chain management, production control, financial
flexibility, and customer satisfaction.
 At the root of inventory control, however, is the inventory control problem, which involves
determining when to order, how much to order, and the logistics (where) of those decisions.
 An extension of inventory control is the inventory control system.
 This may come in the form of a technological system and its programmed software used for
managing various aspects of inventory problems, or it may refer to a methodology (which may
include the use of technological barriers) for handling loss prevention in a business.
6.2.1 Inventory Cost,
Inventory generally represents the largest portion of current assets on a company's balance sheet. As such,
the management of inventory flows can greatly influence the cost of carrying that inventory. Additionally,
the cost of inventory can have a direct impact on the cost of capital and future cash flows associated with
the firm.
 The cost of inventory includes all costs associated with holding or storing inventory for sale.
 These costs include the opportunity cost of the money used to purchase the inventory, the space in
which the inventory is stored, the cost of transportation or handling, and the cost of deterioration
and obsolescence.
 The opportunity cost of the money used depends on the source of funds – for example, if the money
tied up in inventory could be better used for financing an equity project, the cost of funds obtained
via internally generated activities is going to be lower than the cost of obtaining funds by issuing
equity. The space used to store inventory includes expenses such as rent, depreciation, insurance
and other charges associated with maintenance and operational controls such as security,
workplace accidents and permits.
 The cost of obsolescence can be seen in the average amount of write-offs a company has.
Perishable or trendy inventory may have a higher cost of obsolescence than non-perishable or
staple items.
6.2.2 EOQ Analysis,
Economic Order Quantity (EOQ) helps in determining the right quantity of materials to be ordered. It is
calculated by applying the following formula:
EOQ =
 A stands for annual consumption of material, C for cost of placing an order and S for Annual
Storage and carrying cost per unit.
 For deciding the amount of right quantity to be purchased, certain important factors must be
considered by the management.

 These are the nature of the manufacturing process, the nature of material to be used, prevailing
market conditions i.e., changes in the tastes and preferences of the people, cost of materials to be
purchased, cost of possession and storing capacity of the organization.
 Along with the economic order quantity, there are two more concepts, viz.; bulk order quantity
and arbitrary order quantity which needs to be understood.
 Bulk Order Quantity is the quantity which is larger than the economic order quantity. It combines
the ordering quantity of more than one order so as to round off to 3, 6 or 12 monthly requirements
and place a single order for the full requirements of a period under consideration.
 Bulk order quantity ensures various economies of price, lesser operational cost in the purchase
department. Inexpensive and slow moving items are generally purchased in bulk quantity.
 Arbitrary Order Quantity is the outcome of the weaknesses of economic order quantity and bulk
order quantity. Due to varying market conditions, it is not advisable to always strictly adhere to
the economic and bulk order quantities.
 Certain factors viz.; uncertain order from the market, uncertain financial position, uncertain
production schedule and uncertain lead time are responsible for the adoption of arbitrary order
quantity on the part of the purchase manager.
6.2.3 ABC Analysis,
ABC analysis is a method of analysis that divides the subject up into three categories: A, B and C.
Category A represents the most valuable products or customers that you have. These are the products that
contribute heavily to your overall profit without eating up too much of your resources. This category will
be the smallest category reserved exclusively for your biggest money makers.
For example, a software company might engineer different pieces of software, but one is a niche software
that can be sold at a significantly higher price than the others. That’s why it accounts for about 60% of the
overall revenue, although the company sells far less of these products compared to other software
categories. Hence, this specific software is a category A product.
Category B represents your middle of the road customers or products. Many wrongly approach this group
as those who contribute to the bottom line but aren’t significant enough to receive a lot of attention.
Yet, category B is all about potential. The members of this category can, with some encouragement, be
developed into category A items.
Category C is all about the hundreds of tiny transactions that are essential for profit but don’t individually
contribute much value to the company. This is the category where most of your products or customers
will live. It is also the category where you must try to automate sales as much as possible to drive down
overhead costs.
6.2.4 Safety Stocks
Safety stock is an additional quantity of an item held in inventory in order to reduce the risk that the item
will be out of stock. Safety stock acts as a buffer in case the sales of an item are greater than planned
and/or the supplier is unable to deliver additional units at the expected time.
 There are additional holding costs associated with safety stock. However, the holding costs could
be less than the cost of losing a customer if the customer's order cannot be filled.
 Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to
mitigate risk of stock outs (shortfall in raw material or packaging) caused by uncertainties in supply

and demand. Adequate safety stock levels permit business operations to proceed according to their
plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and
serves as an insurance against stock outs.
 Safety stock is an additional quantity of an item held in the inventory to reduce the risk that the
item will be out of stock. It acts as a buffer stock in case sales are greater than planned and/or the
supplier is unable to deliver the additional units at the expected time.
 With a new product, safety stock can be used as a strategic tool until the company can judge how
accurate its forecast is after the first few years, especially when it is used with a material
requirements planning (MRP) worksheet.
 The less accurate the forecast, the more safety stock is required to ensure a given level of service.
With an MRP worksheet, a company can judge how much it must produce to meet its forecasted
sales demand without relying on safety stock.
 However, a common strategy is to try to reduce the level of safety stock to help keep inventory
costs low once the product demand becomes more predictable.
 That can be extremely important for companies with a smaller financial cushion or those trying to
run on lean manufacturing, which is aimed towards eliminating waste throughout the production
process.

ENGINEERING MANAGEMENT

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