UNIT - 2

OPERATIONS MANAGEMENT, MARKETING MANAGEMENT

Syllabus:-

Operations Management: Principles and Types of Plant Layout - Methods of Production

(Job, batch and Mass Production), Work Study - Statistical Quality Control- Deming‘s
contribution to Quality. Material Management - Objectives - Inventory-Functions - Types,
Inventory Techniques - EOQ-ABC Analysis - Purchase Procedure and Stores Management -
Marketing Management - Concept - Meaning - Nature-Functions of Marketing - Marketing
Mix - Channels of Distribution-Advertisement and Sales Promotion –Marketing Strategies
based on Product Life Cycle.
Plant Location

Introduction and meaning:

Plant location refers to the choice of region and the selection on of a particular site for setting up
a business or factory. But the choice is made only after considering cost and benefits of different
alternative sites. It is a strategic decision that cannot be changed once taken. If at all changed
only at considerable loss, the location should be selected as per its own requirements and
circumstances. Each individual plant is a case in itself. Businessman should try to make an
attempt for optimum or ideal location.

Factors Affecting the Plant Location:

When the location of an industrial unit is preplanned, several factors are taken into consideration
and carefully analyzed because the location once chosen cannot be changed often as frequent
changes in location leads to losses. The main factors, which influence the choice of location, are
as follows:

A. Primary factors

1. Nearness to market

2. Nearness to supply of materials

3. Availability of labour
4. Transportation and Communication facilities

5. Availability of power and fuel

6. Supply of capital

B. Secondary factors

1. Natural factors

2. Government incentives

3. Historical and religious factors

4. Initial start and goodwill

5. Financial and other aids

6. Facilities

7. Amenities of particular site

8. Climate

9. Availability of Water

10. Political factors

11. Miscellaneous factors

Primary factors:

1. Nearness to Market: If the plant is located close to the market the cost of transportation
can be minimized. This also helps the producers to have direct knowledge of the
requirements of the customers.
2. Nearness to supply of raw materials: As far as possible the site selected should be near
the source of raw materials, so that the cost of transportation can be minimized and
storing cost can be reduced due to shorter lead time
3. Availability of labour: Availability of right kind of labour force in required number at
reasonable rates is also a deciding factor in selection of site
4. Transport and Communication facilities: Generally, industries have a tendency to locate
the industrial units near the railway station, highway or port areas.

5. Availability of power and fuel: Coal, electricity, oil and natural gas are the important
sources of power in the industries. Power shortage leads to tremendous losses due to
 stoppage of machinery. Ex. Tata iron and steel industry is established near the coalmines
of Bihar.

6. Supply of Capital: Large scale production, mechanization and big industries require large
amounts of capital for a long period. ‘’ Finance is the life blood of an industry ‘’. The
place where financial institutions are ready to assist the industry becomes an industrial
hub. Cities like Mumbai, Pune are the centers of industries, because they enjoy better
credit facilities. Certain states in our country provide easy loans on subsidized rates,
machinery, built-up sheds, etc., to attract industries.

Secondary factors:

7. Natural factors: Land, water, climate are some important natural factors that play an
important role in plant location in case of industries like cotton, sugar and jute.

8. Government incentives: The government by giving certain incentives like tax exemptions,
price subsidies etc, may bring about the development of industries in backward areas thus
resulting in the regional balancing of industries.

9. Historical and Religious factors: Some industries grow because of the historical and religious
factors of those cities.

10. Initial start and goodwill: Once an industry is started, other industries also develop at that
place. Government rest ructions play a negative role in the location decision. Industries are not
permitted to be started or expanded in certain developed urban areas therefore some industries
get located at a place because some industrialists start the industry at that place at an early stage.

11.Financial and other aids: For the development of back ward regions central as well as state
government provide certain incentives and facilities such as cash subsides, concession, financial
assistance, land, power and other facilities at cheaper rates, tax concession etc.

12. Facilities: Factors like an enterprising spirit, innovation, technical know-how and an
industrious nature of policy and a favourable government policy create a favourable atmosphere
for the purpose of the establishment of industries.

13Amenities of site: Amenities of a particular site like the level of ground, the nature of
vegetation and location of allied activities have some influence in determining industrial
location. The social amenities include suitable housing and medical facilities serve as an
attraction to the labourers.
14. Climatic conditions: Climatic conditions largely affect certain production processes and also
the efficiency of the employees.

Ex. Textile mills require moist climate that’s why these plant located at Mumbai and
Ahmadabad.

15. Availability of water: Water is used in industries for processing as in paper in chemical
industries, for generation of power in hydroelectric power, plants and also require for drinking
and sanitary purpose also.

16. Miscellaneous:

* Sufficient supply and proper disposal of water

* Availability of fire-fighting facilities

* Availability of recreational. Medical and educational facilities

* Attitudes of the community

* Aspirations of the

people Also consider to locate the

site.

PLANT LAYOUT

Meaning and Definition

After deciding the proper site for locating an industrial unit, next important point to be
considered by an entrepreneur is to decide about the appropriate layout for the plant. Plant layout
is primarily concerned with the internal set up of an enterprise in a proper manner.

It is concerned with the orderly and proper arrangement and use of available resources
viz., men, money, machines, materials and methods of production inside the factory. A well
designed plant layout is concerned with maximum and effective utilization of available resources
at minimum operating costs.

Definitions

“Plant layout is the arrangement of machines, work areas and service areas within a factory”. —
George R. Terry

“Any arrangement of machines and facilities is layout”. —F.G. Moore

Objectives of Plant layout:
A good plant layout tries to attain the following objectives:

1. To minimize the cost of material handling

2. To avoid industrial accidents

3. To eliminate bottlenecks through balancing of plant capacities

4. To increase material turnover through shorter operating cycles

5. To utilize the cubic area of the factory effectively

6. To eliminate, improve or confine objectionable operations

7. To increase the returns on the investments to the maximum extent by effective utilization of
installed capacity

8. To utilize man-power resources effectively through elimination of idle time

9. To eliminate physical efforts required of operative workers

10. To provide better working conditions for the employees like lighting, ventilation

11. To maintain decency and orderliness inside the plant area

12. To provide better customer services through cheaper and better product supplies.

Advantages of a good plant layout:

Plant layout is the overall arrangement of the production process, storeroom, stockroom, and
tool-room, material handling equipment, racks and sub stores, employee services and all other
accessories required for facilitating the production in the factory.

As it encompasses production and service facilities and provides for the most effective
utilization of the men, materials and machines constituting the process, it is a

Master blue print for coordinating all operations performed inside the factory. According to
Moore, ‘’ A good layout is one which allows materials rapidly and directly for processing. This
reduces transport handling, clerical and other costs down per unit, space requirements idle
machine and idle man time.

Symptoms of a Bad Layout:

A poor or badly planned layout will generally show the following symptoms:
1. Congestion of machines, materials, parts, assemblies and even workers

2. Excessive amount of work in process

3. Poor utilization of available space

4. Long material flow lines

5. Some machines heavily loaded and some remaining idle for long periods

6. Delays in delivery

7. Excessive mental or physical strain on workers

8. Difficult to supervise and control properly

Layout Design Procedure:

The requirement of materials is central to all planning. The plan as a whole is made fist and
details are added afterwards. The following are the steps involved in any layout plan.

1. The first step involves the determination of objectives and limitations.

2. The second step involves the collection of the input data and study of various activities
involved in the process.

3. Next step is drawing a relationship diagram after determining the flow of materials and
activity relationship. This step helps in getting a space relationship diagram.

4. In this step the space relationship diagram is modified by taking into consideration various
factors and practical limitations.

5. As a result of modifications several alternative layouts emerge and the best among them is
evaluated and selected.

TYPES OF PLANT LAYOUT OR SYSTEMS OF PLANT LAYOUT

The pattern of plant layout is basically decided by the relationship between the number of
products and the production quantity. Plant layout is a specialized process. The major systems of
plant layout are:

*Product layout (Line layout)

* Functional layout (Process layout)

* Fixed layout (Static layout)

* Combined layout (Group or Cellular layout)

1. Product or Line Layout:

If all the processing equipment and machines are arranged according to the sequence of
operations of the product, the layout is called product type of layout. In this type of layout, only
one product of one type of products is produced in an operating area. This product must be
standardized and produced in large quantities in order to justify the product layout.

The raw material is supplied at one end of the line and goes from one operation to the next quite
rapidly with a minimum work in process, storage and material handling.

Product layout

Advantages:

1. It is ideally suitable for a standard product where production requirement is high

2. It avoids bottlenecks

3. Better production control can be achieved

4. It requires less floor space compared to functional layout

5. Less skilled workers will serve the purpose

6. Production time is reduced

7. Smooth and continuous work flow

8. Effective control over production, quality, production planning and control

9. Reduction in material handling cost due to straight-line production flow

Disadvantages:

1. There is no flexibility of work

2. It is quite expensive as machines have to be special purpose machines

3. Expansion of this layout is difficult

4. It is difficult to increase production beyond the capacities of the production lines

5. Failure of even one machine leads to shutdown of the complete production line

6. Since there are no separate department for various types of work, specialization in supervision
is also difficult

7. Any change in product requires re-balancing the line

2. Process or Functional Layout:

The process layout is particularly useful where low volume of production is needed. If the
products are not standardized, the process layout is lower desirable, because it has creator
process flexibility than other. In this type of layout, the machines and not arranged according to
the sequence of operations but are arranged according to the nature or type of the operations.
This layout is commonly suitable for non repetitive jobs.

Same type of operation facilities are grouped together such as lathes will be placed at one
place; all the drill machines are at another place and so on.

Process layout

Advantages:
1. It involves a high degree of flexibility as any product with any design, as long as it requires
the available process, can be manufactured with the same layout

2. Reduces investment as machines are used for general purpose

3. Greater flexibility in production is achieved

4. Capacity enhancement in different production lines can be easily achieved

5. Better utilization of men and machinery

6. Machine breakdown can be effectively prevented by shifting the work to other machines

7. Variety in different job orders make the work more interesting for the workers

8. Workers in one section are not affected by the nature of the operations carried out in another
section

Disadvantages:

1. Efficient material handling is difficult to practice in process layout

2. It is quite expensive as machines have to be special purpose machines

3. Expansion of this layout is difficult

4. It requires more floor space than the product layout

5. High cost of supervision

6. It is difficult to control the production activities

7. Completion of same product takes more time

3. Fixed Position Layout:

This type of layout is the least important for today’s manufacturing industries. In this type of
layout the major component remain in a fixed location, other materials, parts, tools, machinery,
man power and other supporting equipment’s are brought to this location.

The major component or body of the product remain in a fixed position because it is too
heavy or too big and as such it is economical and convenient to bring the necessary tools and
equipment’s to work place along with the man power. This type of layout is used in the
manufacture of boilers, hydraulic and steam turbines and ships etc.
Advantages Offered by Fixed Position Layout:
1. Material movement is reduced

2. Capital investment is minimized.

3. The task is usually done by gang of operators, hence continuity of operations is ensured

4. Production centers are independent of each other. Hence, effective planning and loading
can be made. Thus total production cost will be reduced.

5. It offers greater flexibility and allows change in product design, product mix and
production volume.

Limitations of Fixed Position Layout:

1. Highly skilled man power is required.

2. Movement of machines equipment’s to production centre may be time consuming.

3. Complicated fixtures may be required for positioning of jobs and tools. This may increase
the cost of production.

4. Combination Type of Layout:

This type of layout combines the advantages of both product and process layouts. A combination
layout is possible where an item is being made in different types and sizes. In such cases
machinery is arranged in a process layout but the process grouping is arranged in a sequence to
manufacture various types and sizes of products. In this case it is important to note that, no
matter the product varies in size and type but the sequence of operations remain same or similar.
This type of layout is also useful when a number of items are produced in same sequence but
none of the items are to be produced in bulk and thus no items justifies for an individual and
independent line.

Advantages:

1. Less work-in-process
2. Reduces handling costs

3. Improves or enhances production control

4. Increases the responsibility of workers

Disadvantages:

1. Reduces the manufacturing flexibility

2. Increases the idle time of machines

3. Require huge capital expenditure

4. Machines cannot be replaced easily

5. Cellular or group layout: It is special type of functional layout in which the facilities are
clubbed together into cells. This is suitable for systems designed to use the concepts, principles
and approaches of „group technology‟. Such a layout offers the advantages of mass production
with high degree of automation even if the numbers of products are more with flexible
requirement. In such a system the facilities are group in to cells which are able to perform
similar type of functions for a group of products.

\
 Lathe Lathe Hardening

Tempering

Milling Milling

Testing
Drilling Grinding

Shaper Drilling Packing

Boring
Milling

Drillin Forging Inspection

g

6. Job Shop Layout: It is a layout for a very general flexible system that is processing job
production, the preparation of such a layout is dependent on the analysis of the possible
populations of orders and is a relatively, complex affair.

Factors influencing plant layout:

1. Management policy: Management has to decide on many matters e.g. nature and quality of
products, size of the plant, integration of production process, plans for expansion, amount of
inventory in stock, employee facilities
2. Manufacturing process: The type of manufacturing process e.g. synthetic/analytical,
continuous/intermittent and repetitive/non-repetitive, will govern the type of plant layout.
3. Nature of product: Small and light products can be moved easily to the machines, whereas for
heavy and bulky products the machines may have to be moved.
4. Type of equipment: The use of single purpose and multi-purpose machine substantially
affects the plant layout. Similarly, noisy and vibrating machines require special attention in the
plant layout decision.
5. Types of buildings: The plant layout in a single storey building will be different from that in a
multi storey building. The covered areas, the number of storey’s, elevators and stairs, parking and
storage area all affect the layout.
6. Availability of total floor area: The allocation of space for machines, work- benches, sub-
store aisles etc., is made on the basis of the available floor area use of overhead space is made in
case of shortage of space.
7. Arrangement of materials handling equipment: Provide sufficient aisles for free movement of
material handling equipment such as hand truck, fork truck etc. Servicefacilities: The layout of
factory must include proper service facilities required for the comfort and welfare of workers.
These include canteen, lockers, drinking water, first aid etc.
8. Possibility of future expansion: Plant layout is made in the light of future
requirement and installations of additional activities.

Principles of plant layout:

Principle of integration: The best layout is one which integrates the men, materials, machinery,
supporting activities and any other such a factors that results in the best compromise

Principle of minimum movement: The number of movement of workers and materials and the
distance moved should be minimized. The materials should be transported in bulk rather than in
small amounts.

Principle of smooth and continue flow: It states that bottlenecks, congestion

points and bulk tracking should be removed by proper line balancing techniques. Principle of
cubic space: Space of a room, it the ceiling height is also utilized, more materials can be
accommodated in the same space.

Principle of satisfaction of safety: Working places-safe, well-ventilated and free from dust,
noise fumes, odors and other hazardous conditions, help to increase the efficiency of the
workers and improve their morale.

Principle of flexibility: It means the best layout in one which can be adopted and re- arranged at a
minimum cost with least inconvenience.

METHODS OF PRODUCTION

Some of the most important types of production are: (i) Job Production (ii) Batch production and
(iii) Mass or flow production!

A production manager will have to choose most appropriate method for his enterprise.
Production methods may be broadly classified as Job Production, Batch production and Mass or
Flow Production.

Job production: In this system, goods are produced according to the orders with this method;
individual requirements of the consumers can be met. Each job order stands alone and is not
likely to be repeated. This type of production has a lot of flexibility of operation and hence
general purpose machines are required. Factories adopting this type of production are generally
small in size.

Advantages:
1. It is the only method, which can meet the individual requirement.
2. There is no managerial problem, because of very less number of workers, and small size of
concern.
3. Such type of production requires less money and is easy to start.

Disadvantages:
1. There is no scope for continuous production and demand
2. As the purchase of raw materials is less, hence cost of raw materials per unit will be slightly
more.
3. For handling different type of jobs, only skilled and intelligent workers are needed, thus
labour cost increases.

Batch production: This type of production is generally adopted in medium size enterprise.
Batch production is in between job production and mass production. Batch production is bigger
in scale than the job production. While it is smaller than that of mass production, batch
production requires more machines than job production and fewer machines that the of mass
production.

Advantages:
1. While comparing with mass production it requires less capital
2. Comparing with job production, it is more advantageous commercially.
3. If demand for one product decrease then production, for another product may be increased,
thus the risk of loss is very less.

Disadvantages:
1. Comparing with mass production cost of scales and advertisement per unit is more
2. Raw materials to be purchased are in less quantity than that in mass production;
 Therefore it is slightly costlier than that of mass production because less quantity
discount is available.

Mass production: This method of production is used by concerns where manufacturing is

carried on continuously in anticipation of demand though demand of the product may not be
uniform through the year. In mass production, simplification and standardization of products are
made with the help of specialized (one purpose) machine, articles of standardized nature can
easily and economically be produced on a large scale. There is a small difference between mass
production and continuous production. This is mainly in the kind of product and its relation to
the plant. In mass production plant and equipment are flexible enough to deal with other
products, involving same production process. Where as in continuous or process production only
standardized product in a sequence produced.
Advantages:
1. A smooth flow of materials from one work station to the next in logical order.
2. Since the work from one process is fed directly into the next, small in process inventories
result
3. Total production time per unit short
4. Simple production planning control system is possible
5. Little skill is usually required by operations at the production line; hence training is simple,
short and inexpensive.

Disadvantages:
1. A breakdown of one machine may lead to a complete stoppage of the line that follows the
machine. Hence maintenance and repair is challenging job.
2. Since the product dictates the layout, changes in product design may require major changes in
the layout.
3. Generally high investment is required owing to the specialized nature of the machines and
their possible duplication in the line.

WORK STUDY

Work study is one of the most important management techniques which are employed to
improve the activities in the production. The main objective of work study is to assist the
management in the optimum use of the human and material resources.
Definition: Work study refers to the method study and work measurement, which are used to
examine human work in all its contexts by systematically investigating into all factors affecting
its efficiency and economy to bring forth the desired improvement.
Method Study:

Method study is the systematic recording and critical examination of existing

and proposed ways of doing work, as a means of developing and applying
easier and more effective methods and reducing cost. It is also called motion
study.
Method study is used in order to affect solutions to a variety of production problems. Such as
work place layout, equipment design, product/process design, worker fatigue and so on. The
basic procedure of method study procedure is illustrated in this figure.

Basic procedure for Method study:

1. Select: The task to which the method study principles are to be applied is to be identified
and the underlying objectives, such as saving the costs, increasing productivity or
eliminating unnecessary motions by the worker, and so on, are to be specified.
2. Record: The correct process of doing the job has to be recorded. While doing so, every
detail, however small it may be, has to be identified. Where the process is too long,
involving many stages of production, inspection or transportation, the present process of
doing the job is recorded sufficiently, together with all the relevant information, using the
process chart symbols.
3. Examine: The recorded events are to be critically examined in a sequence, even ti the
extent of questioning the very purpose of an activity.
4. Develop and Define: Based on the recorded data, the alternative methods of doing te
same job more effecively are to be identified and evaluated. From these alternatives the
best one is selected and developed to suit the requirements.
5. Install: The new method so developed is to be installedin a phased manner. As a part of
installation, adequate planning of schedules and deployment of resources should be taken
care of. Once the method is adopted, the workers have to be retained, the equipment has
to be provided, and the method has to be tested in order to seek improvement.
6. Maintain: It should be ensured that the method is used in the manner intended.
Complaints and improvements in productivity should be registered. From time to time it
should be monitored. The progress has to be reviewed in the light of the experiences of
the opersting and concerned staff.
Work Measurement:

Work measurement also called time study, establishes the time taken by a qualified worker to
complete a specified job at a defined level of performance. These techniques are used to answer
the questions – how long? And when?

Basic outline of Work Measurement procedure

Procedure for Work Measurement:

1. Select: The work to be studied and determine the objectives of the study

2. Record: All the relevant data relating to circumstances in which the work is being done,
the methods to be used breakdown the job into its elements
3. Examine: The recorded data and the detailed breakdown critically to
ensure the most effective method and motions are being used and that
unproductive elements are separated from productive elements.
4. Measure: The time required to complete each element using the appropriate work
measurement techniques and calculate the time required to complete the work cycle
which is known as basic time.
5.Compile: The standard time for the operation or work place, in case of stop watch time
study the various allowances to cover relation, personal needs etc. are added to the basic
time to estimate the standard time.
Techniques of work measurement:

a) Time study
b) Synthesis from standard data
c) Predetermined Motion Time System (PMTS)
d)Analytical estimating
e) Work Sampling

Time study: It is defined as the art of observing and recording the

time required to do each detailed element of all industrial operation.
A) Time measuring devices:
1) Stop Watch 2) Motion picture camera 3) Time recording machine 4)
Electronic timer.
1) Stop Watch:

i) Decimal minute stop watch: In this type of watch the movements is started and stopped
by moving the slide ―A‖, forward and backward respectively are complete revolution of
large hand represents 1 minute and since the dial is divided into 100 parts reading to within
0.01 minutes can be obtained. Every time the large hand make one revolution the small hand
will register 1 minute and is able to register up to 30 minutes.
ii. Decimal hour stop watch: The dial in this watch is divided into 100 parts. The needle
completes 10 revolutions in one hour. The least count in this watch is 0.001 hours. The small
dial of this watch is divided into 30 equal spaces (representing 0.01 hour) and the small
needle makes 31/3 revolutions in one hour.
2. Motion picture camera: Every element of the operation involving motion of the workers
is made into film through motion picture camera when this film is run at a slow speed
through a projector; the time of each element is recorded using a stopwatch.
3. Time recording machine: A moving tape is run is this machine at a uniform velocity of 10
inches/minutes with the help of electric motor. The machine has two keys: one key, when
pressed, indicates starting of an operation, and the other key used to take a print on the
scaled tape at the end of elements.
4. Electronic timer: The timing of starting and ending of an operation of an element is
automatically recorded through electronic timers.
 Procedure for conducting time study: For conducting time study average workers and
average machines are selected. This study is conducted by the time study expert, who
should be familiar with all the information related to the job and the conditions in which
it is being done.
Time study is performed in the following stages.

A) Analysis of work B) Standardization of methods C) Making time

Analysis of work: It includes all the tasks performed by the workers, not just the effective
work. In the end, time required for job preparation, cleaning of machine, etc. should also be
included.
Standardization of methods: Related to materials, equipment, tools, working conditions to
ensure an acceptable method which is easy, safe and the fastest.
Making time study: Time study is done on a printed time study record sheet, which is fixed on a
board known as time study board. On one corner, a stopwatch is placed.

STATISTICAL QUALITY CONTROL

Introduction: Quality is the determining factor the success of any product or service large
resources are committed in every organization to ensure quality
Definition: It is defined as customer satisfaction in general and fitness for use in particular.
Both the external consumer who buy the product and services and the internal consumers
that is, all divisions or departments of the business organization are equally interested in the
quality.
Statistical quality control: The process of applying statistical principles to solve the problem
of controlling the quality control of a product or service is called statistical quality control.
Quality elements: a) Quality design b) Quality conformance

a) Quality design: Quality of design refers to product feature such as performance,

reliability durability, ease of use, serviceability
b) Quality conformance: Quality conformance means whether the product meets the
given quality specification or not
Inspection: The process of measuring the output and comparing it to check whether it meets
the given specified requirements or not, is called inspection.
Inspection Methods: The following are the methods of inspection based on merits

1) Incoming inspection: In this method, the quality of the goods and services arriving
into the organization is inspected. This ensures that the material suppliers adhere to the
given specifications with this defective material cannot enter into the production process.
This focuses on the vendor‘s quality and ability to supply acceptable raw materials.
2) Critical point inspection: Inspecting at the critical points of a product manufacture
gives valuable insight into the completely functional process. At the points of manufacture
that involve high costs or which offer no possibility for repair or rework, inspection is
crucial further operation depend on these results critical point inspection helps to drop the
defective production, and thereby, facilitate avoiding unnecessary further expenditure on
them.
3) Process inspection: This is also called patrolling inspection or floor inspection or
roving inspection. Here the inspector goes around the manufacturing points in the shop
floor to inspect the goods produced on random sample basis from time totime.
4) Fixed inspection: It provides for a centralized and independent where work is
brought for inspection from time to time. This method is followed where the inspection
equipment cannot be moved to the points of productions.
5) Final inspection: This is centralized inspection making use of special equipment. This
certifies the quality of the goods before they are shipped.

Elements of statistical Quality Control: The technique under SQC can be divided in to
two parts a) Process control b) Acceptance sampling

a) Process control: Process control is a technique of ensuring the quality of the

products during the manufacturing process itself. If a process consistently produces items
with acceptable or tolerable range of specification. It is said to be statically under control.
Process control is achieved through control charts. Process control aims to control and
maintain the quality of the products in the manufacturing process.
Statistical control charts: A control chart compares graphically the process performance
data to compute statistical control limits. These control limits act as limit lines on the chart
control chats are the tools to determine whether the process is under control or not.
The quality of the production process may be affected by chance
cause or assignable cause.
Chance cause: such causes, which may or may not affect the manufacturing process are
called chance cause, chance cause cannot even be identified. It is not possible to always
maintain the given specification.
Assignable Cause: Assignable causes affect the quality of the production process. These
causes can be identified and specified. Causes such as change in the labour shift, power
fluctuations, or excessive tool wear are said to be assignable causes as they affect the
quality of manufacturing process in different ways.
Process capability: Process capability refers to the ability to achieve measurable results
from a combination of machines, tools, methods, materials and people engaged in
production.
Confidence limits and control limit:

Confidence limit: It indicate the range of confidence level. A confidence level refers to
the probability that the value of measurement or parameter, such as length of screw, is
correct.
Ex: If a component is required with measurement of 50 mm. across, then the buy
accept all components measuring between 48 mm and 52 mm across, considering a five
percent confidence level.
Control limit: Control limits are found in the control charts. There are two control
limits 1) Upper control limit (UCL) and 2) Lower control limit (LCL). These are
determined based on the principles of normal distribution.

Control charts for variables: A variable is one whose quality measurement changes
from unit to unit. The quality of these variables is measured in terms of hardness,
thickness, length, and so on. The control charts for variables are drawn using the
principles of normal distribution. There are two types of control charts for variables X
bar and R chart.
X and R Chart: The X chart is used to show the process variations based on the average
measurement of samples collected. It shows more light on diagnosing quality problem when
read along with R chart. It shows the erratic or cyclic shifts in the manufacturing process. It
can also focus on when to take a remedial measure to set right the quality problems.
However, collecting data about all the variables involves a large amount of time and
resources.
The R chart is based on the range of the items in the given ample. It
highlights the changes in the process variability. It is a good measure of spread
or range. It shows better results when read along with the X bar chart.
 R bar is the average of sample ranges (Ranges is the difference between the maximum
variable and minimum variable)

Control charts for attributes: The quality of attributes can be determined on the
basis of ‗Yes‘or ‗No‘, ‗Go‘or ‗No go‘. In other words, in case of a mirror glass, even
if there is one scratch it is not considered to be a quality mirror, in such a case quality
is decided base on whether the mirror has any scratch or not.
The control charts for attributes are ‗C‘chart and ‗P‘charts

‗C‘Chart: ‗C‘chart is use where there a number defects per unit. This control charts controls the
number of defects per unit. Here the sample size should be constant. This calculates as below.

‗P‘Chart: ‗P‘Chart is used where there is data about the number of defectives per sample. It is
also called fraction defective chart or percentage defectives chart. Here each item is classified
on ‗go or no go basis that is good or bad. Hence if the sample size is larger, the results could be
better.
UCL =
LCL =
Total no. of
defective found
 Where average defective ( p ) =
Total no. of pieces inspected

Acceptance Sampling: Acceptance sampling is a technique of deciding whether to accept the

whole lot or not based on the number of defectives from a random drawn sample.
It is widely use in buying food products, such as rice, wheat etc. Before buying the random
samples drawn from the bags of say rice are tested. If the quality of sample drawn looks good or
free from defects then according to the requirement the entire bag or part of it can be brought
The process of acceptance sampling through operating characteristic curve (OCC)

Operating characteristic curve (OCC): The graphical relationship between percentage

defective in the lots being submitted for inspection and the probability acceptance is termed as

―operating characteristic of a particular sampling plan‖

It gives a clear picture about the probability of acceptance of lot for various values of percent
defectives in the lot. The probability of acceptance of a lot is high for low values of actual
percentage decrease and it is low for high values of actual percentage defectives.
Construction of OC curve: To develop a sampling plan for acceptance sampling, an appropriate

O.C curve must be selected to construct an OC curve an agreement has to be reached between
the producer and the consumer on the following four points.
1) Acceptable quality level (AQL): This is the maximum proportion of defectives that will
make the lot definitely acceptable.
2) Lot tolerance percentage defective (LTPD): This is the maximum proportion of
defectives that will make the lot definitely unacceptable.
3) Producers risk (α): This is the risk, the producer is willing to take that lots of the
quality level AQL will be rejected, even though, they are acceptable usually α = 5%
4) Consumer risk (β): This is the risk, the consumer is willing to take that lots of the quality level
LTPD will be accepted, even though, they are actually unacceptable usually β = 10%.

Sampling plans: Based on the number of samples drawn for taking accept/ reject decisions, the
sampling methods are used. There are four methods of acceptance samplings.
1) Single sampling plan: A lot is accepted or rejected on the basis of a single sample drawn from
thatcost

2) Double sampling plan: If it is not possible to decide the fate of the lot on the basis of first
sample, a second sample is drawn and the decision is taken on the basis of the combined results of
first and second sample.
3) Multiple sampling plan: A lot is accepted or rejected based upon the result obtained from
several samples (of parts) drawn from the lot.
4) Sequential sampling plan: (Item by item analysis)

Sequential sampling involves increasing the sample size by one part at a time till the
sample becomes large enough and contains sufficient number of defectives to decide intelligently
 whether to accept or reject the lot.

W. EDWARDS DEMING’S 14 POINTS FOR TOTAL QUALITY MANAGEMENT

Deming’s 14 Points on Quality Management, or the Deming Model of Quality Management, a

core concept on implementing total quality management (TQM), is a set of management
practices to help companies increase their quality and productivity .

Deming's 14 Points for Total Quality Management

W. EDWARDS DEMING’S 14 POINTS

1. Create constancy of purpose for improving products and services.

2. Adopt the new philosophy.
3. Cease dependence on inspection to achieve quality.
4. End the practice of awarding business on price alone; instead, minimize total cost by working
with a single supplier.
5. Improve constantly and forever every process for planning, production and service.
6. Institute training on the job.
7. Adopt and institute leadership.
8. Drive out fear.
9. Break down barriers between staff areas.
10. Eliminate slogans, exhortations and targets for the workforce.
11. Eliminate numerical quotas for the workforce and numerical goals for management.
12. Remove barriers that rob people of pride of workmanship, and eliminate the annual rating or
merit system.
13. Institute a vigorous program of education and self-improvement for everyone.
14. Put everybody in the company to work accomplishing the transformation.

These total quality management principles can be put into place by any organization to more
effectively implement total quality management. As a total quality management philosophy, Dr.
Deming’s work is foundational to TQM and its successor, quality management systems.

MATERIALS MANAGEMENT AND MARKETING MANAGEMENT

INVENTORY CONTROL
INVENTORY: Inventory is ‘’An asset comprised of all materials , supplies, finished goods or
goods in some stage of processing that are owned by a company , whether located physically in
the premises of that company, in transit or in the hands of a distributor who has them in
consignment’’.

INVENTORY CONTROL: Inventory control is the system by which inventory is managed.

Inventory control may be defined ‘’ as the systematic location, storage and recording of goods in
such a way that desired degree of service can be made to the operating shops at minimum
ultimate cost ‘’.

PURPOSE OF INVENTORY: The following are the reasons for holding inventory,

1. To facilitate production operations, inventories are required and they are held to act as
buffer between one operation and another.
2. Inventories of raw-materials and components are held for consumption during the period
between recognition of need and its fulfilment. This period is called ‘’LEAD TIME’’,
consequently longer the lead time the greater will be the level of inventory.
3. Inventories are also held as a precaution for increased lead times.
4. There is a speculation element in holding the inventory to meet the contingencies like
price rise ,shortages and during certain period of time.
5. To meet seasonal demands.

OBJECTIVES OF INVENTORY CONTROL: The following are the main objectives of

inventory control

1. To support the production departments with materials of the right quality in the right
quantity, at the right time and the right price and from the right supplier.
2. To reduce financial investments in inventories.
3. To avoid accumulation of work in process.
4. To provide good customer service
5. To maximize the service levels to the operating departments.
6. To cope with perishable materials.
7. To maintain adequate inventories at the required sales outlets to meet the market needs
promptly , thus, avoiding both excessive stocks or shortages at any given time.
8. To contribute directly to the overall profitability of the enterprise.
9. To make economic purchases.

ADVANTAGES OF INVENTORY CONTROL: The following are the specific advantages of

inventory control
 1. Introduction of a proper inventory control system helps in keeping the investment in the
inventories as low as possible.
2. Ensure availability of material by providing adequate protection against uncertainties of
supplies and consumption of materials.
3. Allows full advantage of economics of bulk purchase and transportation .
4. Reduces changes of going out of stock.
5. Leads to reduction in inventory levels.
6. Releases more of capital for other operations.
7. Increases profitability of operations.
8. Provide adequate service.
9. Advantage of price discounts by bulk purchasing.
10. Inventory control ensures safety against certain contingencies like strikes at supplier’s
plant.
11. Efficiency of production and control can be increased if the inventories are available in
the stock room.
12. Procurement of raw materials in advance facilitates the pre-operation seasoning required
by some raw materials.
13. Provides flexibility to allow changes in production lines due to changes in demand.
14. The inventory control helps in replacing in production lines due to changes in demand.
15. It reduces loss due to obsolescence, deterioration spoilage, pilferage etc.,
16. It helps in calculating cost of materials used for financial calculations
17. It ensures proper distribution , timely supply classification of materials, as A,B,C items
etc.

DISADVANTAGES OF HAVING EXCESS INVENTORIES:

1. Locking up of working capital.

2. More storage space is required.
3. High insurance charges.
4. High taxes.
5. Greater handling and distribution cost.
6. High cost of recording and up keeping.
7. Deterioration in quality.
8. Chances of pilferage.
9. Evaporation of alcoholic materials.
10. Results in unproductive ‘tied up’ capital for the

enterprise. It will result in to stuck out resulting into

1. Production stoppages
 2. Idle machine capacity
3. Idle labour
4. Burden of fixed over heads
5. Failure to meet delivery orders resulting into loss of goodwill.

FUNCTIONS OF INVENTORY CONTROL: Following are the most important functions of

inventory control

1. Ensure availability of raw materials continuously without interrupting the production

process and avoid built up of stock levels.
2. Management of stores effectively: this includes layout, storing media ( bins, shelves and
open space etc.,), utilization of storage space, receiving and issuing procedures etc.
3. Stock control system: physical verification , records, ordering policies and procedures for
the purchase of goods.
4. Protecting the inventory from loses due to improper handling or storing of goods and
unauthorized removal from stores.
5. Pricing all materials supplied to the shops so as to estimate material cost.

MAJOR ACTIVITIES OF INVENTORY CONTROL:

The inventory control is mainly concerned with the following activities.

1. PLANNING THE INVENTORIES: -- Based on the production schedule prepared from

the sales forecasting and customer orders periodic requirements of inventories are
planned in advance.
2. PROCUREMENT OF INVENTORIES: -- The incoming materials are received, verified
with the purchase order and packing slip and are inspected to the verification of quality.
3. RECEIVING AND INSPECTION OF INVENTORIES: -- The incoming materials are
received, verified with the purchase order and packing slip and are inspected to the
verification of quality.
4. STORING AND ISSUING THE INVENTORIES:--The inventories procured in advance
are stored till they are required by the production department. The stored inventories are
issued to the respective production departments against the authorized material
requirements.
5. CODING OF THE RECEIVED INVENTORIES: -- The received inventories are coded
so that they are readily accessible and can be issued readily.
6. RECORDING THE RECEIPTS AND ISSUE OF INVENTORIES: -- Inventories are
properly recorded in the bin card and attached to each bin and in the stock ledger. At the
 end of each transaction, the entries are made in the keeping or issuing columns and the
balance is stroked.
7. PHYSICAL VERIFICATION OF INVENTORIES: -- At the end of specified
period the physical quantities of inventories of verified with the book balance and
the discrepancies are ascertained. The discrepancies are analyzed and the reasons
for the inventory losses are located.
8. FOLLOW-UP FUNCTION:-- Inventory control also the analysis of excessive usage of
inventories and finds out the reasons for such excessive consumption.
9. MATERIAL STANDARDISATION AND SUBSTITUTION: -- Inventory control also
aims to standardize the materials and to search for cheaper substitutes.
10. CLASSIFICATION OF INVENTORY: -- Inventory control classifies the inventory into
A, B and C according to their priority thus exercising the control and removing the
obsolete inventory accordingly.

COSTS IN INVENTORY

Inventories cost money. The cost factor must be considered while taking any decision regarding
inventories. Inventory cost includes ordering cost, carrying cost, out of stock or shortage cost
and capacity cost. Each of these comprises several elements. They are:

1. ORDERING COST:--
A. Cost of placing an order with a vendor of materials:
(1) Preparing a purchase order
(2) Processing payments
(3) Receiving and inspecting the materials
B. Ordering from the plant:
(1) Machine set-up
(2) Start-up scrap generated from getting a production run started
2. CARRYING COSTS:--
A. Costs connected directly with materials:
(1) Obsolescence
(2) Deterioration
(3) Pilferage
B. Financial costs:
(1) Taxes
(2) Insurance
(3) Storage
(4) Interest

3. OUT-OF-STOCK COSTS:--
 A. Back ordering
B. Last sales

4. CAPACITY COSTS:--
A. Overtime payments when capacity is too small
B. Lay-offs and idle time when capacity is too large.

Materials management also called as inventory management. ‘’Materials management is a total

concept involving an organizational structure unifying into a simple responsibility of the
systematic flow and control of materials from identification of the need through customer
delivery’’. It includes the material functions like planning, scheduling, buying, moving and
distributing.

Materials management is a body of knowledge which helps the manager in improving

productivity of capital by reducing material cost, preventing large amounts of capital being
locked up for long periods than it is necessary. Thus the importance of material management lies
in the fact that any contribution made in reducing materials cost will help in improving the
profitability and the rate of return on the capital invested.

SCOPE AND IMPORTANCE

A survey conducted by the Directorate of Industrial Statistics during 1954-57 showed that the
average material cost is 64 percent of the total cost. Thus only 36 percent costs are for wages and
salaries, overhead and profit etc. In some industries it cost up to 70 percent. These figures
themselves show the importance of materials management.

Management of material is crucial in organizations for their success, because the cost of
purchasing, storing, transporting materials account for over half of the product’s cost. Improving
productivity is essential in order to retain in competition and this involves driving down the cost
of all aspects of production. Since there is maximum scope of cost reduction in the area of
materials, it was seen that higher productivity is achieves by management of materials
effectively. Production and operations managers are working hard to determine and develop
better ways of managing materials.

The importance of an efficient materials management system in an organization

1. Cost of materials is higher than other inputs put together i.e., machinery labour, power.,
2. Materials having significant impact on reducing costs and improving profits
3. Improving returns on investment depends on the effective utilization of materials and
keeping down the capital invested in the form of inventory of materials, because they are
treated as a major part of current asset.
 4. Materials enhance product value
5. Quality of materials lead to quality of products
6. Materials management involve purchasing, transport ting, storing, inventory control etc.
7. Availability of right materials in right quantity, at the right time, at the right price from
the right source of supply will increase efficiency of a firm.
8. Procurement and preservations of scarce materials ease future

operations. FUNCTIONS OF MATERIALS MANAGEMENT

Following are the main functions included under the direction and control of materials manager.

1. Materials planning and programming

2. Purchasing of materials
3. Receiving of materials
4. Inspection of materials
5. Classification , codification and standardization in stores
6. Storage of materials
7. Issuing of materials
8. Maintenance of proper inventory records

OBJECTIVES OF MATERIALS

MANAGEMENT

1. To minimize the cost of materials

2. To reduce investment in stock through inventor control
3. To procure raw materials of desired quality when required at lowest possible cost of the
concern
4. To purchase, receive, transport and store materials effectively and reduce the related costs
5. To trace new sources of supply and develop cordial relations with them to ensure
continuous material supply.
6. To cut down costs through simplification, standardization etc.,
7. To modify paper work procedure in order to minimize delays in procuring the materials
8. To study the pros and cons of making or buying from outside
9. To prepare the materials budget and forecast the prices of materials
10. To suggest alternative materials and improve the quality of the end-product
11. To conduct studies in areas such as quality , consumption and cost of materials in order
to minimize cost of production
12. To train personnel in the field of material management in order to increase operational
efficiency.

CENTRALISED VS. DECENTRALSED PURCHASING

 CENTRALISED PURCHASING: -- centralized purchasing means entrusting the function of
purchasing the materials, plants, tools, equipments, furniture etc. To one person or
department for and on behalf of all departments irrespective of its place in the organization.

DECENTRALISED PURCHASING: -- Decentralized purchasing, on the other hand, permits

different plants or branches or departments to make their own purchases according to their
requirements. If there is one plant is located at one place, centralized purchasing is better.

It has the following advantages:

1. Highly skilled official can be appointed

2. Avoids duplication of purchasing
3. More attention by heads of department of departmental work
4. Economic of large scale buying can be obtained
5. Better control over purchases.

Disadvantages of centralized purchasing:

1. Delay in producing of materials

2. Wrong purchases are possible
3. Not suitable in some industries
4. No advantages of local resources

Organization structure Centralized purchasing and stores

Organization structure Decentralized purchasing and stores

 ECONOMIC ORDER QUANTITY

Inventory control basically deals with two basic issues. (1) When to order and (2) how much to
order. The problem of ‘when to order’ is decided by prescribing the reorder level of each of the
inventory item. The other incidental issue is ‘how much to order’ i.e., what should be the size of
each order is decided on the basis of economic order quantity.

EOQ is an important technique of inventory control. It prescribes the size of the order at
which the ordering cost and inventory carrying cost will be minimum. The ordering cost consists
of the cost of paper work for placing an order like use of paper, typing, posting, filing up,
receiving etc., ordering cost is more or less fixed and it is ascertained on per order basis.

The other side of the scene is the inventory carrying costs. When the inventories are
stored, it involves following types of costs:

1. Inventory cost due to locking up of funds

2. Cost of storage space and

3. Cost of insurance and taxes

The ordering cost and the carrying cost is mutually exclusive. If the annual requirements
are met by placing a single large order, the ordering cost will be less due to single order. But as
the single order will be for huge quantity, the average stock holding would be very high resulting
into greater carrying cost. The relationship of ordering cost and carrying cost is as under:
The technique of EOQ strikes a balance between the ordering cost and the carrying cost. It
devices such a quantity of each order at which the total ordering cost and carrying cost would be
minimum. As both these costs are mutually exclusive the total of both costs will be minimum at
a point where ordering cost equates carrying cost.

Graphical representation of EOQ

From the figure it can be seen that B indicates the size of order where

(1) The total ordering cost and carrying cost i.e., A+B is at minimum. Any deviation from point
B to left hand side will increase ordering cost and reduce carrying cost resulting into greater cost.
If the deviation is made on right hand side from point B, it will result into increase in carrying
cost and reduction in ordering cost with high total cost.

(2) At point B, the ordering cost and carrying cost equates each other. Thus, B is economic
ordering quantity where the total ordering cost and carrying cost tend to be minimum.

Assumptions for calculating Economic Order Quantity:

1. It is assumed that demand rate is uniform.

2. Lead time is zero.

3. Production is instantaneous.

4. There is no shortage of supplies.

5. Consumption of inventory is constant.

Economic Order Quantity Formula:

The economic order quantity phenomenon can also be explained mathematically with the help of
a formula. The formula is derived as under:

Let us define the economic order quantity variables as

below. A = Annual Demand

S = Size of each order

O = Ordering cost per order

C = Carrying cost per unit

Step – 1: Find out total ordering cost per year.

Total ordering cost per year = Number of orders placed per year x Ordering cost per year

Step – 2: Find out the total carrying cost per year.

Total carrying cost per year = Average inventory level x Carrying cost per year

Step – 3: Determine Economic Order Quantity.

EOQ is one where the total ordering cost is equal to total carrying cost

Benefits of EOQ:
EOQ technique is highly useful in as much it answers the question of how much to order and in
so doing establishes the frequency with which orders are placed. EOQ is applicable to both
single items and to any group of stock items with singular holding and procurement costs. Its use
causes the sum of the two costs to be lower than under any other system of replenishment.

Limitations of EOQ:

The EOQ can be determined only if the assumed conditions are in operation. But in real life
situations, none of these conditions are found to be operating. Lead time vary, rate of usage, unit
price and carrying costs are never constant. Moreover, companies often find it profitable to take
advantage of quantity discounts. Finally safety is needed to prevent the occurrence of stock out
contingencies due to delayed deliveries as well as higher than assumed rate of usage. The use of
EOQ is also limited by the difficulty of estimating ordering and carrying costs. Nevertheless, the
model serves a useful purpose as an approximation of real-life situations. Understanding of the
machines of the model and its limitations also helps in determining economic lot size of
manufactured as well as purchased items in real life situations.

ABC ANALYSIS

ABC analysis is a basic management tool, which enables top management to place the efforts
where the results will be greatest. This technique is popularly known as ‘Always Better Control’
and has universal applications. This technique tries to analyze the distribution of any
characteristic by money value of importance in order to determine priority. Here all items of the
inventory are listed in the order of descending values, showing quantity held and their
corresponding value. Then, the inventory is divided into 3 categories – A, B and C, based on
their respective value. The following procedure is suggested for developing an ABC Analysis:

1. Identify all the items used in an industry.

2. List all the items as per their value.

3. Count the number of high valued, medium and low valued items.

4. Find the percentage of high, medium and low valued items.

5. Select top 10% of all items which have highest rupee and designated them as ‘A’.

6. Select next 20% of all items which have next highest rupee and designated as ‘B’.

7. 70% of all items designated them as ‘C’ items.

Relationship between percentage of items and percentage of value of consumption

‘A’ category comprises of inventory, which is very costly and valuable. Normally, 70% of the
funds tied up in such costly stocks, which would be around 10% of the total volume of stocks.
Because the stocks in this category are very costly, these require strict monitoring on a day-to-
day basis.

‘B’ category comprises of inventory, which is less costly. 20% of the funds are tied up in
such stocks and this account for over 20% of the total volume of stocks. These items require
monitoring on a weekly basis.

‘C’ category consists of such stocks, which are of least cost. Volume-wise, they form
70% of the total stocks but volume-wise, they do not cost more than 10% of the investment in
the stocks. This category of stocks can be monitored on a monthly or bi-monthly basis.

The following table summarizes the concept of ABC Analysis

Category Value (%) Volume (%) Desired degree of

control
A 70 10 strict
B 20 20 moderate
C 10 70 low

Advantages of ABC Analysis:

This approach helps the material manager to exercise selective control and focus attention only
on a few items while dealing with lakhs of items. By controlling ‘A’ items and doing proper
analysis , obsolete stocks can be identified.
1. It helps to rationalize the number of orders and reduce average inventory

2. It gives a deeper cost perspective to management and enables them to decide upon priorities in
improvement or cost reduction programme

3. Time and energy wasted by making improvements in ‘C’ class items is prevented

4. It results in relaxed control and less emphasis put on ‘C’ items which represent the bulk of the
inventory items.

Limitations:

1. In order to be fully effective, ABC analysis should be carried out with standardization and
codification.

2. ABC analysis indicates nothing about the profitability or criticality. Importance is given to an
item on the basis of its consumption value and not on criticality. Hence such classification can
lead to overlooking the need for spare parts, whose criticality is higher but consumption value is
low.

3. ABC analysis should be reviewed periodically so that changes in price and consumption are
taken into account.

PURCHASE PROCEDURE

When we produce any product, investment in raw material is of 50% to 60% of the total cost of
product. So, it is very necessary to buy the raw material at low cost. If we reduce the 10% cost of
buying of raw material, it means, we have increased our 10% profit. Purchase department will
make full planning of his purchase. Everything should be planned. What to buy, when to buy
and how to buy? By using following material purchase procedure, you can reduce your cost of
buying any material.

1. Classification of Material

In the first step of purchasing procedure, purchase department will classify all the its material
according to the nature of material. For example, we can classify our material with following
way.

a) Raw material

b) Machine and Equipment

c) Tool
d) Other Material

2. Recognition of Need

Purchase department studies the purchase requisition which it gets from different department.
Purchase requisition is the document which shows the demand of material of any department. It
makes the list of important material requirement. Suppose, C material is very limited, purchase
department will buy C material first instead of buying other material.

3. Specification of Required Material

Every department will make the specification of required material. This will be helpful for
purchase department to identify that material. Because some material are of technical
configuration, so, its detail should be given to purchase department. For things should be
included in it.

i) Date

ii) Identification

iii) Originating Department

iv) Account to be Charged

v) Complete Description relating to quality and quantity of material desired

vi) Other Special Information

vii ) Date on which material is required for use

viii) Signature of issuing authority of requisition

We also say purchase requisition as purchase requirement list or purchase indent.

4. Inviting Tenders and Quotations

For saving money and placing the order to best vendor, purchase department will invite the
quotations and tenders. This work can be done through offline and online advertising.
Tender may be open, limited, oral.

a) Opening of Tenders

Tender is opening at a specific date, time and at specific place.

b) Preparation of Summary of Quotations

After receiving the tenders from different seller, a comparative statement is made in which prices
and conditions are compared. Best vendor will be selected for supply.

5. Selection of Source

There is the big source of suppliers. But purchase department has to be limited this on the basis
of following point.

a) On the basis of financial resource: Purchase department will see his pocket before
selecting the source.
b) Service after buying : Purchase department will choose that supplier which provide the
service after buying.
c) On the basis of sample : Purchase department will get the sample for selecting the source
of supplier.

6. Placing of Order

When the tender and source of supplier is selected, purchase department places his purchase
order. Purchase order is the written agreement in which purchaser and sellers will bind its terms
and condition. Purchaser will be responsible the price of material. Seller is responsible for
supplying the material.

7. Follow Up Service

After placing the order, purchase officer will send the reminder. He can also get the written
promise from vendor for supplying goods at a specific time.

8. Receipt and Checking of Invoice

It is the duty of accountant to receipt and checking of invoice. He will compare it with
the original copy of purchase order. If there is any mistake, he will inform the purchase
department. Only after confirmation from purchase department, payment will be made
by cashier.

9. Receipt and Checking of Goods

After getting goods, purchase department will check the quality and quantity of material which
has been mentioned in the purchase order. With this, we see whether everything is OK or not.
After this receipt material's report will be made. With this, technical inspection is also necessary.

10. Completion of Record

To record relating to purchase is done by accounts department. If there are VAT and excise
obligations, accounts department will complete.

STORES MANAGEMENT:
It deals with planning, coordination and control of variousactivities pertaining or
effective efficient and economic storage and store keeping.

Store: Generally, un worked material is known as store Storage: The

store room is the place where stores are housed

Storage: Storage is meant holding in custody all kinds of stores and materials semi-
processed and fully processed products.

Store Keeping: It may be defined as that aspect of materials control concerned with
physical storage of goods

Functions of stores:

1. To receive raw materials, semi-finished or purchased items from vendors andto

check them for identification.

2. To receive parts and components which has been processed in the factory?

3. To make a record of material receipt and current status of material in the store

4. To maintain positioning of materials in the store.

5. To maintain stock safety and in good condition to ensure that they do not
suffer from damage

6. Issuing the items/materials to operational personnel

7. Making a record of receipt and issue slips

8. To avoid illegal attics in store areas.

9. To plan for optimum utilization of space.

10. cooperating to full extent which purchasing, manufacturing and production

planning and control departments.

Stores Records:

Material requisition note: Whenever the materials are required by a

department/section, this form has to be filled in. This note provides information about
the job number, description of the items required in terms of number. The head of the
department/section should authorize it. Whenever the materials are issued, the
receiving person should sign the note.

This is to be entered in the materials issued record, which is to be signed bythe

storekeeper.

Purchase order: The purchasing officer will release the purchase order. The following
is the format of a purchase order. Here, we find Vivek enterprises placing a purchase
order on Business Solutions Ltd., for the following materials. The terms and
conditions of the purchase order such as delivery, payment, and other have to be
mentioned clearly.

Invoice: Invoice is a statement sent by the seller to the buyer mentioning the
particulars of the goods supplied, net amount payable for the goods, and the terms and
conditions governing the sale. It is very important document because it shows the net
amount payable by the buyer after all the discounts and the taxes, ifany.

Goods received note: The goods received note furnishes the particulars of the
suppliers, purchase order number, purchase requisition number, and the job for which
the goods are received. These details are to be certified by a competent authority. On
this basis, the accounts department initiates the process of payment for the goods
received.

Goods returned note: Sometimes, a part or whole of the goods received may not be of
acceptable quality, and hence, these have to be returned to the supplier. In this
context, the goods received note is prepared. This is also called the „debit note‟
because the suppliers or creditors‟ account has to be debited by the amount mentioned
in this debit note for the goods returned.

Stores ledger account: This is maintained to provide the details of the quantity, price
and amount of the receipts, issues, and balance of stocks on a day-to-day basis. At
any given time, the physical quantity of stocks should match with the balance as per
the stores ledger account. A separate account is maintained for each type of the
material in the stores. It should necessarily mention the method such as FIFO or
LIFO, followed to value the issues of stocks. It is a valuable tool for the costing
department in exercising stores control. It facilitates the valuation of stock from time
to time.

Bin card: Bin card is the slip or tag attached to the bin where the goods are stocked.
Whenever the materials are received or issued, an entry is made on the bin card. The
purpose of bin card is to reveal the particulars of the quantities received, issued, and
available as on a given date at a glance. Where separate bins are maintained for each
item of the store, each bin will have a tag hung to it.

MARKETING MANAGEMENT

Marketing – Definition:

Marketing is the process of identifying the customer requirements and satisfying them
efficiently and effectively. According to ‘’American Marketing Association’’, ‘’Marketing is
an organizational function and a set of processes for creating, communicating and delivering
value to customers and for managing customer relationships in ways that benefit the
organization and its state holders’’.

Marketing can also be defined as a perpetuation of social processes through which

‘’individuals and groups obtain what they need and want through creating, offering, and freely
exchanging products and services of value with others’’.

Objectives of Marketing:

Objectives of Marketing are as follows:

1. To maximize profits and minimize losses by developing an intelligent appreciation of the

modern marketing practices and the influences in the marketing situations.

2. To maintain constructive and co-operative relationships with customers based on business

dealings of the highest integrity, delivery of high quality products and dependable service.

3. To recognize the need and take positive action where indicated to absolute present products
and be ready with successor products.

4. To develop and sell complete packing system to strengthen total influence on the market.
5. To organize marketing services to provide maximum assistances to marketing management,
maximum support to field selling at the lowest reasonable cost.

6. To provide guiding policies regarding marketing producers and their implementation.

7. To study marketing problems according to circumstances and to suggest solutions.

8. To enable successful distribution of agricultural products, minerals and manufactured goods

and

9. To enable managers to assess and decide a particular course of action.

Marketing functions:

Specialized activities which are performed in the marketing of goods and services are called ‘’
Marketing functions’’. Marketing function is an act by which original product and the final
consumers are linked together. The functions of marketing are ‘’eyes and ears’’ of the business.
Marketing functions are performed by the manufacturer and all middlemen. Marketing functions
have been classified by different marketing experts in different ways. But the most acceptable
and meaningful classification is given by clark and clark which is shown in the following chart.

Marketing Functions

Functions of Exchange

These functions from the cornerstone for any marketing activity goods are produced for
satisfying human wants. This is of achieved only when goods finally reach the hands of
consumers. The process of the passing of goods into the consumers hand is called functions of
exchange. These functions include the following.
1. Buying and Assembling:-

Buying and assembling of raw-material and goods are important functions of marketing.

Buying is the first step in the process of marketing. Raw materials are purchased for use in
manufacturing by the manufacturing enterprise and goods are purchased for re-sale purpose by
the trading enterprises. In both the cases, the marketing department has to play an important role

Assembling is different from buying. It begins after the goods have already been purchased.
Assembling facilities transportation and storage.

2. Selling: - Selling is the heart of marketing. The purpose of all marketing activities is to sell the
goods or services. Selling enables an enterprise to satisfy the need of the customer and there by
achieve its objectives. Selling is the process of finding the consumer, creating demand and
transferring the goods for value.

3. Pricing: - Pricing is also an important function which is closely related to selling. Pricing
policy directly affects the sales and profitability of the concern. The pricing policy may be cost
based, demand based and it varies one to the other.

4. Advertising: - Advertising is nothing but a paid from of non-personal presentation of ideas,

goods or services by an identified sponsor. In the present day business advertisement has become
an inseparable part of business activities, as it affects the whole marketing strategy of the firm.

5. Sales promotion: - Sale promotion refers to all those marketing activities other than
advertising, personal selling and publicity that stimulate consumer purchasing and dealer
effectiveness. Consumer promotional activities may be in home promotional schemes such as
samples, demonstration, coupons etc., dealers promotional activities include discount on
purchases, display and advertisement allowance, prizes and gifts etc.,

Functions of physical supply: - These functions relate to the process of transporting the goods
from the place of seller to the place of the buyer. The functions include the following.

1. Transportation: - Transportation involves the carrying of goods and people from one place to
another. It is an integral part of the process of marketing. It helps in assembling and dispersing
the goods. It links together the producer and consumer who are located at different places. By
carrying the goods to such where there are needed, it creates place utility.

2. Storage or Warehousing:- Storage refers to the holding and preservation of goods till they
are dispatched to the buyers. Generally there is a time gap between the production and
consumption of goods. By bringing the gap between production and consumption, storage
creates time utility.
Facilitating functions:- These functions make the marketing process easy. These functions
include the following.

1. Financing: - Finance is the life blood of business. Value of goods is expressed in money and it
is denoted by price to be paid by a buyer to a seller. Without finance, the whole marketing
activity may come to a standstill. Therefore, for exchange of goods and services and for any
other marketing activities finance is a vital aspect.

2. Risk taking: - One of the important functions of marketing management is risk-bearing. In a

marketing activity uncertainty is bound to exist. This uncertainty may result in the form of either
loss or profit. Some of the risks may be avoided by taking insurance coverage.

3. Marketing information: - This is a recent function added to marketing. Marketing

information is a vital resource in business for taking marketing decisions. Marketing executives
are expected to know the trends in market demand, supply, prices and related market
information. If the form is equipped with latest market information, risk of loss can be reduced.
Modern means of communications such as computer based marketing information system can be
adopted for adequate, up-to-date, reliable and timely information.

4. Marketing research: - The systematic gathering and analysis of information relevant to a

problem in marketing is known as ‘’marketing research’’. It includes demand analysis, sales
forecasting and research connected with actual and potential buyer’s present and future products.

5. Standardization and grading: - Standardization means determining basic limits to different

classes of products. It involves establishing measures for different grades of a product. Standards
may be established on the basis of size, color, appearance, strength, shape etc. Standard conveys
the idea of uniform quality.

Grading refers to sorting of products into different lots, each of which has substantially
same characteristics with respect to quality. Grading helps the buyers to select the most suitable
product for their use.

6. Packaging: - Packaging is an act of designing and producing the package for a product.
Package is a container in which a product is enclosed. In modern marketing, packaging performs
a number of functions, such as protecting products from spoilage, deterioration, helps brand
identification, helps product handling and communicating the product information etc.,

7. Branding: - Branding is a sub-function of selling. In competitive economy, a number of

producers the same type of goods. Every producer tries to identify his goods from those of the
competitors by using a brand. A brand is defined as a name, term, symbol or design which is
intended to identify the goods of one seller and to differentiate them from those of its
competitors. Branding means identifying goods with a brand name.
 Thus marketing is a varied and complex process involving several functions and
activities concerned with the creation of time, place and possession utilities. Production is
meaningful only when subsequent marketing functions are performed most effectively and
efficiently.

DIFFERENCE BETWEEN MARKETING AND SELLING

Selling:- selling is an indispensable part of marketing. The purpose of all marketing activities is
to sell the products of the firm. Selling enables the firm to achieve its objectives by satisfying the
needs to the customers. Selling means finding the customers and transferring them the goods for
value. It is the process whereby goods finally go to the customers to meet their needs and wants.

Selling has become a very complicated function of marketing these days. There are a
large number of substitutes available in the market, and there is severe competition in the market.
A firm has to devise such a marketing strategy that enables it to sell its products. It has to keep in
touch with the buyers to inform them the goods, and get orders from them. Thus, selling is an
important function of marketing.

Marketing:- Marketing is much wider than selling and much more dynamic. Marketing means a
total system of interacting business activities designed to plan, price, promote and distribute want
satisfaction products and services to the present and potential customer. Marketing is the process
comprising of all those activities that are related to the free flow of goods and services from the
point of production to the point of consumption. It is a gigantic machinery to move the goods and
services by creating utilities of place, time and ownership. Marketing consists of serving and
satisfying the needs of customers.

Distinction between Marketing and Selling:

Very often these two terms selling and marketing are synonymously used, but they actually
differ in their meaning. In the words of Edward G. Koch, the difference between selling and
marketing is more than semantic exercise. Selling focuses on the needs of seller, while marketing
on the needs of consumer. Selling means moving the products, while marketing means obtaining
the customers. The difference between selling and marketing may be summarized as below:

Selling Marketing
1. Selling focuses on the needs of the seller to 1. Marketing focuses on the needs of the
convert his products into profits. It starts with purchaser. It starts with the buyer.
the seller.
2. It refers to moving the products from 2. It refers to obtaining the consumers to
outlets. move the goods. It starts out with the
customer, his needs, values, habits, feelings
and hopes.
3. It gives supreme importance to the 3. It gives unique importance to the
product. customer.
4. It emphasis on corporate objectives. It 4. It emphasis on consumer satisfaction. It
views business as a ‘’goods producing views business as a ‘’customer satisfying
process’’. process’’.
5. It aims at short-term objectives as it is only 5. It aims at long-term objectives as t has
a tactical and routine activity. strategic implications. It is purposeful
directed towards the broaded and long-range
objectives like growth, customer loyalty,
innovation and leadership, survival and so
on.
6. It aims at customer-oriented selling efforts. 6. It aims at market-oriented selling efforts.
7. It gives top priority to sales volume and 7. It gives top priority to profitable volume of
maximization of profits. sales and market share at fair and reasonable
prices.
8. Sellers convenience dominates the 8. Buyer determines the shape of
formulation of the ‘’marketing-mix’’. ‘’marketing-mix’’ should taken.
9. Selling activities are organized and 9. Marketing policies and strategies are
directed by marketing department. directed by the top management.
10. Selling philosophy considers all 10. The marketing philosophy differentiates
customers as a homogeneous mass with groups of customers in terms of their several
relatively static needs, wants, tastes and distinct characteristic customers are viewed
buying habits. with respect.

MARKETING MIX

Marketing-mix –Meaning:-

The identification of demand and supply involves various functions of marketing and the
combination of these functions is known as Marketing-MIX. There are literally dozens of
marketing mix tools but Mc Cathes popularised a 4 factor classification of these tools called the
4 p’s which constitute the core of a company’s marketing system, the product, the price structure,
the promotions activities and the place (distribution system).

The elements of the marketing mix:

1. Product mix 2. Price mix 3. Promotion mix 4. Place mix

1. Product mix:- The word ‘’Product Mix’’ is used to describe the assortment of different
product types and their varieties. In addition, different tangible and intangible features of the
product also form the product mix. A firm may be producing many types of products and in
different varieties. For example: Hindustan Machine Tools (HMT) consists of diverse range of
products. Such as machine tools, tractors, watches, printing machinery and electric lamps and the
group of all these products are called product-mix.

Product is anything that is offered to the market for sale at a price. It can be physical product like
toothpaste or a service like transportation, education, insurance, healthcare, entertainment,
repairs, etc. The physical product can be further subdivided into two, as follows:

Types of products:

Consumer products:- Goods bought by individual households without requiring further

processing are known as consumer goods. These can be further categorised as:

 Durable goods: Which survive many uses and relatively long life (e.g., refrigerators, fans,
watches etc.)
 Non-durable goods: Which are consumed in one or a few uses and last a relatively short
period (e.g., soft drinks, soaps, bread, etc.)
 Convenience goods: Which are frequently purchased with minimum of efforts in
deciding (e.g., newspapers, tooth brushes, etc.)
 Shopping goods: Which are bought after comparison at the retail outlets (e.g., garments,
furniture, etc.)
 Speciality goods: Which have unique features and therefore, require special purchasing
efforts (e.g., sporting equipments, cars, etc.)

Industrial products:- Industrial products are goods, which are sold to other business firms, either
for their own consumption or for producing other goods. They can be either capital goods-
machines and plants, or raw materials and parts.
2. Price mix:- Price-mix refers to the decisions relating to the price charged for the product,
service or idea. Price means the money value that the customer has to pay in exchange for a
period. Generally, marketers pay attention to the following factors before fixing the price of a
product.

Target customers: How much they will buy at various

processes Cost: How much it costs to produce and market the

product

Competition: Intense competition may indicate a low price and vice versa

Discounts and allowances: How much of the price could be allowed as incentives to dealers and
customers in the form of discounts and the profit margin to be maintained.

Producing Pricing:

Pricing decisions are extremely important as they greatly influence the profitability of a firm.
Moreover, price is perhaps that handiest tool available to a firm to adopt its marketing strategy to
changes in demand, cost, and competitive situations. Many factors, both economic and non-
economic, influence the pricing decisions. These are:

Cost, Demand, Competition, Government regulations, Behaviour of the consumer, and

Objectives of the enterprise.

Pricing Methods: There are several methods of pricing a product/service. An enterprise can adopt
any one of these methods depending upon the above-mentioned economic and non-economic
factors. The important pricing methods are:
1. Mark-up or Cost plus Pricing: Under this method, total cost is added up, both fixed and
variable, and cost per unit is found. Then a margin of profit is added to determine the selling
price.

2. Perceived Value Pricing: According to this, the product is priced on the basis of the buyer’s
perceptions of value of product rather than the cost of production.

3. Going Rate Pricing: In this case, an enterprise basis its price largely on competitor’s price. The
smaller firms always tend to fallow the leader and price their product more or less equal to the
price of the leading product. This is most popular method of pricing and ensures competition.

4. Odd Pricing: Setting the price at extreme higher end of a particular lower price range instead
of beginning of the next price range. The best example can be taken is Bata Pricing (e.g., pricing
at Rs. 299.95 instead of Rs. 300.00)

5. Discriminating Pricing: Pricing the same product two different levels is known as
discriminating pricing. Under certain conditions firms adopt this method of pricing.

6. Promotional Pricing: Provision of cash rebates, sales discounts, special event rebates, low-
interest financing, free coupons, offering gifts and prizes, etc. Come under promotional pricing.

7. Skimming Pricing: Price heavily in the initial period of product launching and gradually
reducing the same is known as skimming pricing. This is generally applied in case of products,
which are subject to obsolete in a short period, eg. Computer software.

8. Penetrating Pricing: Charging low price initially and once the product is accepted by the
market, increasing the same gradually is known as penetrating price. Many products are
generally based on this method of pricing.

3. Promotion Mix:- Promotion mix refers to the activities relating to promotion of the product,
service or idea. It consists of all activities aimed at encouraging and motivating the consumers to
buy the product. The various elements of the promotional mix are:

1. Advertising: Advertising consists of all the activities involved in presenting product

information to customers. The product message is communicated through media (newspapers,
radio, television, etc.) and is paid for by the seller.

2. Sales Promotion: It is the method of increasing the sales through displays, demonstrations,
contexts, coupons etc. Sales promotion activities aim at supporting personal selling and
advertising efforts.

3. Personal selling: Personal selling is the face to face communication between a seller and a
buyer. Some contacts are made with the customers by company sales representative. These
representatives assist and persuade a prospective buyer to buy a product in a face to face
situation.

4. Publicity: Publicity refers to the mention of a company brand or product in trade journals,
newspapers, radio etc. Which is not paid for? Publicity is a relatively minor form of promotion
because the manufacturer has no control over what the media will mention.

4. Place or Physical distribution mix: - Place or physical distribution mix refers to the activities
that are involved in transferring ownership to consumers and to make products or services
available at the right time and place. Distribution mix consists of two things.

a) Physical distribution and

b) Channels of distribution

Physical distribution includes all those activities involved in moving products or services from
producer to consumer.

The channels of distribution are those routes through which goods move from the producer to the
consumer. Here, the marketing manager has to decide whether the firm should sell through
middlemen or directly to customers.

CHANNELS OF DISTRIBUTION

A channel of distribution for a product is the route taken via the marketing institutions (agents,
brokers, wholesalers, retailers) by the title to the goods as they move from the producer to the
ultimate consumer or industrial user. A channel always includes both the producer and the final
consumer for the product, as well as all agents and merchant middlemen involved in the title
transfer.

The entire function of getting goods into the hands of the consumer is often referred to as
distribution. The term channel of distribution is used to denote the middlemen engaged in
moving goods from the place of production to the place of consumption. It is the channel through
which goods are move as smoothly as possible to the desired places.

Choice of Channels of Distribution:- (Functions of channels of distribution)

The choice of channels of distribution is an important marketing decision of an organization. The

following points are taken into the consideration while choosing channels of distribution.

1. The cost involved in the use of channel is included in price and the customer has to bear the
cost so proper decision should be taken.
2. Depending on the type of product.

3. Size and structure of manufacturing concern.

4. Company considerations which include reputation, financial resources, experience and

competence of management and the desire for control of channel.

5. The existing establishment network of distribution

6. Depending on type of distribution desired by manufacturer like extensive distribution,

selective distribution and exclusive distribution.

7. The profit criteria

Factors Affecting the Choice of Channels of Distribution:-

The following are the factors that affect the choice of a channel:

 The type, size, and nature of customer’s demand: If the customer wants small quantities,
long channels are preferred and vice versa.
 The nature of company’s business: Choose the channel according to the nature of
business activity such as agricultural products, industrial products, services, and so on.
 The type of product sold: The goods may be consumer goods(such as bread), consumer
durable goods(TV or refrigerator) or producer or industrial goods(engines, shock
absorbers, bearing) and others.
 The price of the unit of sale: If the price of one unit is as high as that of an aeroplane, the
producer can contact the consumer directly.
 The profit margins and mark-ups: These, together with the extent of the seller’s product
line, play a role in attracting distributors to handle the goods.
 Degree of competition: If the competition is intense, the manufacturer has to arrange for
even door-to-door selling or retail outlets such as automatic vending machines at
prominent, busy, and crowded places.

Major channels of distribution:-

There are several alternative channels of distribution to choose from. The proper selection of
a distribution channel depends on such factors as the nature of the product involved, market,
sales volume for each outlet, relative distribution costs, and how much of the marketing
function the manufacturer wants to assume. But the most frequently used channels are
Consumer Market and Industrial Market. In each channel, a manufacturer or producer may
use his own sales branches or personal to reach the next institution.
 Distribution of Consumer Goods:

Five channels are widely used in the marketing of consumer products. In each, the
manufacturer may in addition use sales branches or sales depots. Furthermore, whenever
wholesalers are used, goods may be distributed from one large wholesalers to several sub-
jobbers and then to retailers. The distribution channels are,

Manufacturer –> Consumer:

The shortest, simplest channel of distribution for consumer products is from the producer to
the consumer, with no middle men involved. The producer may sell house-to-house, or may
sell by mail. This is also called as ‘zero’ channel.

Manufacturer –> Retailer –> Consumer:

Many large retailers buy directly from manufacturers and agricultural producers. Also, some
manufacturers have established their own retail stores e.g., HMT, Bata Shoe Co., Jay
Engineering Company for the sale of Usha Sewing Machines and fans.

Manufacturer –> Wholesaler –> Retailer –> Consumer:

This is the ‘’traditional’’ Channel for consumer goods. Most of the consumer products where
sales volume is very high and which requires a large network to operate like that of soaps,
pastes, detergents, cosmetics etc.

Manufacturer –> Agent –> Retailer –> Consumer:

The tendency to adopt this type of distribution channel is an outcome of the manufacturers
inability to find wholesaler to handle his products on reasonable terms and conditions. For this
reason the manufacturer uses agents or brokers instead of wholesalers. E.g., Cement
manufacturer.

Manufacturer –> Agent –> Wholesaler –> Retailer –> Consumer:

Manufacturer of mass consumption goods having a nationwide market do not want to deal
directly with a large number of wholesalers. They appoint sole selling agents for various
geographical regions who in turn sell it retailer and finally retailer sells to consumers.

Distribution of Industrial Goods:

The channels used for distribution of industrial goods differ from those channels used for
consumer products because in case of industrial goods the industrial customer generally buys in
bulk based on his annual consumption and inventory policy. There are basically 4 types of
distribution channels which are found in the marketing of Industrial goods. The distribution
channels are,

Manufacturer –> User or Consumer:

This direct channel accounts for a greater money volume of industrial products than any other
distribution structure. Manufacturers of large installations, such as locomotives, generators, etc.,
usually sell directly to users.

Manufacturer –> Distributor –> Consumer:

Manufacturers of operating supplies and small accessory equipment frequently use industrial
distributor to reach their markets. Manufacturers, building materials, construction equipment,
and air-conditioning equipment make heavy use the industrial distributor.

Manufacturer –> Agent –> Consumer;

Firms without their own marketing departments find this is a desirable channel. Also, a company
which wants to introduce a new product may prefer to use agents rather than its own sales force.

Manufacturer –> Agent –> Distributor –> Consumer:

Manufacturers of new products use agents and the manufacturer does not have a sales network
for them. The advantage of using agents is that, it is less expensive and they have their own sales
department. Agents act as sales force between manufacturer and distributor.

PRODUCT LIFE CYCLE

A product is a physical good or service or more often, a combination of both. It is capable of

satisfying the buyer’s needs. It has certain tangible and intangible attributes that a seller offers to
a potential buyer. It is very interesting to observe the changes in the sales of the product or
service once it is launched. It is not necessary that it will have uniformity in case of every
product or service. In most of the cases, sales levels will grow up to a particular point of time,
and remain static at some level, beyond which the sales start declining particularly when a new
product that satisfies the customer’s needs better emerges.

The concept of product life cycle describes these common patterns of sales growth and
decline, which can be observed over the life time of a product.

Definitions:

Product life cycle has been defined by Philip Kotler as ‘’ an attempt to recognize distinct stages
the sales history of the product’’,

According to D.T.Kollat and J.F.Robenson, product life cycle is ‘’ a generalized model of

sales and profit trends for a product category over a period of time’’.

Key elements of product life-cycle:

The product life cycle is a concept that attempts to describe a products sales, profits, customers,
competitors and marketing emphasis from its beginning until it is removed from the market. The
concept was popularised by Theodore Levitt in 1965. The product life cycle concept has 3 key
elements. They are:

1. Products move through the cycle of introduction, growth, maturity and decline at different
speeds.

2. Both sales volumes and unit profits rise correspondingly in the growth stage, and fall
correspondingly after maturity stage. However, during the maturity stage, sales volume rises but
unit profits fall.

3. The functional emphasis required for successful product management change from stage to
stage on account of changes in the economics of profitability.

Stages of Product Life Cycle:

Every product or service has a defined life cycle with distinct stages. These stages include

1. Introduction 2. Growth stage 3. Maturity stage 4. Saturation stage 5. Decline stage.

1. Introduction:- This is the very first stage of the life cycle of a product. At this stage, the
product is introduced into the market. At this stage, there may not be a ready market for the
product. The product is made known to its potential consumers through various programmes of
advertisement. At this stage sales revenue begins to grow but the rate of growth is very slow.
Profits may not be there because of low sales volume and distribution costs. This stage is the
most risky stage and expensive as there is a high percentage of product failure in this period.
This stage is also called market pioneering stage.

2. Growth stage:- This is the second stage of product life cycle. In this stage the producer is
produced in sufficient quantity and put in the market without delay. The demand generally
continues to outpace the supply. The sales and profit curves rise often at a rapid rate.
Competitors enter in the market in large number and prices may come down slight sellers shift of
‘’ buy my brand’’ rather than ‘’try my product’’ promotional strategy. This stage is also called
market acceptance stage.

3. Maturity stage:- At this stage the customers like and prefer the product. Total volume of sales
goes or increasing but the rate of increase in the volume of sales declines. The reason of such
decline is the entrance of some new competitors into the market. At this stage, the expenditure of
the enterprise on advertising and sales promotion should be increased. So that the demand of
product may be maintained. At the same time, the price of the product should be reduced due to
the increase in competition. Consequently, the rate of profit of the enterprise declines. Low
prices, keener competition, rising costs, and declining profits are the features in this stage.

4. Saturation stage:- When the sales growth slows down to zero, such a stage is called
saturation. The size of the market does not increase beyond this stage. This stage continues till
substitutes of the product enter into the market. The production goes on increasing and the
competitors try to capture the market. Markets are highly segmented the cost of advertisement
and sales promotion increase and consequently the profits of the enterprise decrease.

5. Decline stage:- When sales of a product tend to fall, such a stage is called decline. In this
stage, the product loses its distinctiveness and dies out in terms of both sales and profit margins,
sales drop severely. The important reasons for the decline of the sales of the product are shifts in
consumer tastes, technology and increased domestic and foreign competition.
The product life of a product is depicted below:

Importance of product life cycle concept:

Importance of the study of product life cycle are:

1. Predictive tool:- Since a product has a predictive life pattern and the
problems likely to be encountered in different stage of product life cycle are
known, the management is pre-warned of the likely changes in the product
position. For ex. Behaviour patterns of sales, profits, dealers and
competitors in different stages are known.

2. Planning tool:- The study of product life cycle is an important tool in the
hands of management. The management is better placed to plan its strategy
in advance so as to fully exploit the product potential.

3. Control tool:- The study of product life cycle help in controlling the
marketing activities of the enterprise also. With the help of this study, the
marketing manager can make necessary arrangements to make the product
available according to the demand. Thus, the product life cycle study
serve as an important control tool.

4. Development of new products:- The study of product life cycle is very

helpful in the development of new products, and in the improvement of
existing product. This study helps the changes taking place in the need,
habits, tastes and attitudes of consumers. Keeping in view these changes,
necessary decisions may be taken for the improvement of existing products,
and development of new products.

Thus, the product life cycle concept is an important forecasting,

planning and control tool in the hands of marketers. It is a reliable aid in
modifying the marketing strategies. It is quite useful to the marketers in
various ways.