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Functions of Materials Management: Scope & Objectives

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What is Materials Management?

Materials Management is the function responsible for the planning, sourcing, purchasing, moving, storing, and controlling of materials in an optimum manner. It ensures that the organization has the right material, at the right time, in the right quantity, at the right place, and at the right price.

It covers the entire lifecycle of material flow—from the purchase of raw materials to the distribution of the finished product.

Key Definition:

“Materials management is the planning, directing, controlling, and coordinating of all those activities concerned with material and inventory requirements, from the point of their inception to their introduction into the manufacturing process.”

Objectives of Materials Management

The objectives are generally divided into two categories: Primary (direct goals) and Secondary (indirect benefits).

1. Primary Objectives

  • Low Prices: To obtain materials at the lowest possible operating cost.1

  • High Inventory Turnover: To ensure capital is not blocked in idle stock.

  • Continuity of Supply: To prevent production stoppages due to lack of materials.

  • Consistency of Quality: To ensure the final product meets standards.2

  • Low Payroll Costs: To keep the cost of the materials department low.

2. Secondary Objectives

  • Favorable Supplier Relations: Building long-term trust with vendors.3

  • New Materials & Products: discovering cheaper or better substitutes.

  • Good Records: Maintaining accurate data for audits and decision-making.

  • Standardization: Reducing the variety of items to simplify storage and purchase.4

     

Main Functions of Materials Management

Materials Management is a broad umbrella that covers several specialized functions.5

1. Material Planning & Control

This is the “Brain” of the system.

  • Forecasting: Estimating the quantity of materials required based on production schedules.6

  • Budgeting: Preparing a ‘Materials Budget’ to ensure finance is available.

  • Scheduling: Determining when the materials are needed to align with production targets.7

2. Purchasing (Procurement)

This function acts as the bridge between the company and the external suppliers.

  • Selection of Source: Identifying reliable suppliers (Vendor Development).

  • Price Negotiation: Getting the best deal without compromising quality.

  • Placement of Order: Issuing the Purchase Order (PO).

  • Follow-up: Ensuring timely delivery.9

The Purchasing Procedure:

The Purchasing Procedure

 

3. Stores Management (Store-keeping)

Once materials arrive, they must be kept safe until needed.

  • Receiving: Unloading and checking the physical condition of goods.

  • Custody: Preserving materials in bins/racks to prevent theft, damage, or deterioration.

  • Issuance: Releasing materials to production departments only against authorized “Material Requisition Notes”.

  • Layout: Designing the store for easy movement (First-In, First-Out).

4. Inventory Control

This function balances the cost of holding stock vs.10 the cost of running out of stock.

  • Setting Levels: Determining Minimum Level, Maximum Level, and Reorder Level.

  • Techniques: Using methods like EOQ (Economic Order Quantity) and ABC Analysis to minimize total inventory costs.

5. Standardization & Simplification

  • Standardization: Setting specific standards (size, quality, shape) for materials to ensure uniformity.

  • Simplification: Reducing the variety of items used to eliminate waste and complexity.11

     

Integrated Materials Management

In traditional setups, Purchasing, Stores, and Planning often operated as separate islands, leading to conflict (e.g., Purchasing buying cheap materials that Production hates).

The Concept:

Integrated Materials Management brings all material-related functions (Planning, Purchasing, Stores, Inventory, Transport) under one single authority (usually a Materials Manager).

Benefits of Integration:

  1. Better Accountability: One department is responsible for the flow.12

  2. Cost Reduction: Centralized buying and optimized inventory reduce costs.

  3. Faster Coordination: Eliminates inter-departmental conflicts.13

  4. Better Data: A unified view of stock levels and requirements.

Conclusion

Materials Management is not just about buying and storing; it is about optimizing resources.By effectively managing materials, a firm can significantly reduce its working capital and improve its final profitability. For a production manager, materials management is as vital as managing men and machines.

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Quality Management: TQM, ISO 9000 & Control Charts

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What is Quality? 

Quality is not just about “good” or “bad.” In operations management, it is defined as the ability of a product or service to meet or exceed customer expectations.

  • Juran’s Definition: “Fitness for use.” (Does it do what it’s supposed to do?)

  • Crosby’s Definition: “Conformance to requirements.” (Did we build it exactly as designed?)

The 4 Stages of Quality Evolution

It is crucial to understand how quality management has evolved.

  1. Inspection: The act of measuring, examining, or testing a product after it is made. It is reactive. You find the defect and fix it (or scrap it).

  2. Quality Control (QC): Operational techniques to fulfill quality requirements. It focuses on identifying defects during production.

  3. Quality Assurance (QA): Planned activities to provide confidence that quality requirements will be fulfilled. It focuses on preventing defects through good processes.

  4. Total Quality Management (TQM): A management philosophy where everyone in the organization (from CEO to janitor) is responsible for quality.

Total Quality Management (TQM)

TQM is a holistic approach to long-term success through customer satisfaction. It integrates all organizational functions (Marketing, Finance, Design, Engineering, Production) to focus on meeting customer needs.

Core Principles:

  • Customer Focus: The customer determines the level of quality.

  • Total Employee Involvement: All employees participate in working toward common goals.

  • Continuous Improvement: Quality is a journey, not a destination.

Deming’s 14 Points (Simple and Short)

  1. Create constancy of purpose
    Always focus on improving products and services for long-term success.

  2. Adopt the new philosophy
    Accept modern quality practices and commit to continuous improvement.

  3. Cease dependence on inspection
    Don’t rely only on inspection; build quality into the process from the beginning.

  4. Stop choosing suppliers based on lowest price
    Select suppliers based on quality and long-term relationships, not just low cost.

  5. Improve constantly and forever
    Always keep improving processes, products, and services.

  6. Institute training on the job
    Train employees properly so they can do their work efficiently.

  7. Institute leadership
    Managers should guide, support, and help workers—not just supervise.

  8. Drive out fear
    Create a safe environment where employees can speak freely and suggest improvements.

  9. Break down barriers between departments
    All departments should work together as a team, not compete with each other.

  10. Eliminate slogans and targets
    Do not blame workers with slogans or posters; improve the system instead.

  11. Eliminate numerical quotas
    Stop setting unrealistic numerical targets; focus on quality and methods.

  12. Remove barriers that prevent pride in work
    Ensure employees can take pride in their work—fix poor systems and tools.

  13. Institute education and self-improvement
    Encourage continuous learning and skill development.

  14. Put everyone to work for transformation
    Quality is everyone’s responsibility. Involve the entire organization in improvement.

The Cost of Quality (COQ)

Quality is free, but poor quality costs money. The “Cost of Quality” isn’t the price of creating a good product; it’s the cost incurred because quality might exist (or fail).

1. Prevention Costs (Investments): Money spent to prevent defects from occurring.

  • Examples: Training employees, quality planning, preventive maintenance.

2. Appraisal Costs (Checking): Money spent to detect defects.

  • Examples: Inspection, testing, auditing, equipment calibration.

3. Internal Failure Costs (Found Inside): Costs of defects found before the product reaches the customer.

  • Examples: Scrap (throwing it away), rework (fixing it), re-testing.

4. External Failure Costs (Found Outside): Costs of defects found after the customer receives the product. This is the most dangerous cost.

    • Examples: Warranty claims, product returns, lawsuits, lost brand reputation.

Getty Images

Quality Standards: ISO 9000

ISO 9000 is a series of international standards for quality management systems.

  • What it does: It certifies that a company has a consistent process for ensuring quality. It doesn’t guarantee the product is “good,” but it guarantees the company follows its own quality rules consistently.

  • Key Principles: Customer focus, Leadership, Process approach, and Continuous improvement.

Statistical Quality Control (SQC)

You cannot inspect every single screw in a factory making millions of screws. Instead, we use Statistics.

1. Sampling Inspection

Instead of checking 100% of items (which is costly and time-consuming), we check a small random sample.

  • Acceptance Sampling: Inspecting a random sample of goods (incoming raw materials or outgoing finished goods) to decide whether to accept or reject the entire lot.

2. Control Charts

These are graphical tools used to determine if a process is stable (“in control”) or unstable (“out of control”).

A. Charts for Variables (Measurable Data)

Used for things you can measure (Length, Weight, Temperature).

  • $\bar{X}$-Chart (Mean Chart): Tracks the average value (central tendency). Example: Is the average weight of the chips packet 50g?

  • R-Chart (Range Chart): Tracks the variability. Example: Are the packets varying too much (40g to 60g)?

B. Charts for Attributes (Countable Data)

Used for things you just count (Good/Bad, Pass/Fail).

  • p-Chart: Tracks the proportion (percentage) of defective items. Example: 5% of bulbs are broken.

  • c-Chart: Tracks the number of defects per unit. Example: 3 scratches on a car door.

Six Sigma (The Zero Defect Goal)

Six Sigma is a data-driven methodology to eliminate defects.

  • Statistical Meaning: Achieving “Six Sigma” means having less than 3.4 defects per million opportunities. It is near perfection.

The DMAIC Methodology:

Used to improve existing processes.

    1. Define the problem.

    2. Measure the current performance.

    3. Analyze the data to find root causes.

    4. Improve the process.

    5. Control the new process to sustain results.

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Work Study: Method Study, Time Study & Motion Economy

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What is Work Study? (Concept & Definition)

Work Study is a generic term for techniques (Method Study and Work Measurement) used to examine human work in all its contexts. Its goal is to systematically investigate all factors affecting the efficiency and economy of a situation to effect improvement.

In simple terms, it is the analysis of a job to find the best way to do it (Method) and the standard time required to complete it (Time).

History & Pioneers:

  • F.W. Taylor (Scientific Management): Known as the father of Time Study. He focused on “A definite task, a definite time, and a definite method.”

  • Frank & Lillian Gilbreth: The pioneers of Motion Study. They analyzed body movements (bricklaying) to reduce fatigue and waste.

Objectives of Work Study:

  1. Simplify Work: Make the job easier and safer for the worker.

  2. Standardization: Set standard methods and times for production planning.

  3. Cost Reduction: Eliminate wasteful activities to lower manufacturing costs.

  4. Productivity: Increase output with the same resources.

The Two Techniques of Work Study

Work Study is composed of two complementary techniques:

1. Method Study (Motion Study)

  • Definition: The systematic recording and critical examination of existing and proposed ways of doing work to develop easier and more effective methods.

  • Goal: To improve the process and layout.

  • Key Steps (SREDIM):

    1. Select the job.

    2. Record the facts (using charts).

    3. Examine the facts critically (Why is this done? Who does it?).

    4. Develop the new method.

    5. Install the method.

    6. Maintain the method.

2. Time Study (Work Measurement)

  • Definition: The application of techniques to establish the time for a qualified worker to carry out a specified job at a defined level of performance.

  • Goal: To set Standard Time for incentive schemes and scheduling.

Recording Techniques: Process Charts

To analyze a method, we must first record it visually. We use symbols (Circle=Operation, Square=Inspection, Arrow=Transport, D=Delay, Triangle=Storage).

Types of Charts:

  1. Operation Process Chart: Shows only the main operations and inspections. Used for a bird’s-eye view.

  2. Flow Process Chart: A detailed chart showing all events (transport, delays, etc.).

    • Man Type: Records what the worker does.

    • Material Type: Records what happens to the material.

    • Equipment Type: Records how the equipment is used.

  3. Flow Diagram: A scale drawing of the work area showing the path of movement. It helps spot long distances and backtracking.

Principles of Motion Economy

Developed by the Gilbreths, these are rules to design efficient work methods to minimize fatigue.

Key Principles:

  • Use of Human Body: Both hands should begin and end motions together. Hands should not be idle at the same time. Motions should be smooth and continuous (curved), not jerky (zigzag).

  • Arrangement of Workplace: Tools and materials should have a fixed place (pre-positioned). Gravity feed bins should be used to deliver materials close to the point of use.

  • Design of Tools: Combine tools where possible (e.g., a hammer with a screwdriver end). Tools should be designed to use the strongest muscles (palm grip vs. finger grip).

Calculating Standard Time (Solved Numerical)

This is a crucial part of Time Study. You cannot just use the stopwatch time because workers work at different speeds.

Formula for standard time:

 

 

Exam Numerical Example:

An observer records the time for a welding operation as 20 minutes. The observer rates the worker’s performance as 120% (faster than normal). The company policy gives a 15% allowance for fatigue and personal needs. Calculate Standard Time.

Solution:

 

An observer records the time for a welding operation as 20 minutes. The observer rates the worker's performance as 120% (faster than normal). The company policy gives a 15% allowance for fatigue and personal needs. Calculate Standard Time.

 
 

What are Allowances?

Workers are not machines. They need breaks. Standard time includes these “Allowances”:

  1. Relaxation Allowance:

    • Personal Needs: Water, washroom (approx 5-7%).

    • Fatigue: Rest from physical or mental strain (heavy lifting, eye strain).

  2. Contingency Allowance: For small, unavoidable delays (e.g., tool sharpening).

  3. Policy Allowance: Extra time given by management (e.g., for union negotiations or new learners).

Work Study & Productivity

Work Study is the most direct tool to increase productivity.

  • Relationship:

    • Productivity = Output / Input.

    • Work Study reduces the Input (Time, Effort, Waste) to produce the same or more Output.

  • Role: It eliminates ineffective time (bad design, bad layout) and sets fair standards, ensuring resources (Men, Machine, Material) are used effectively.

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7 Stages of New Product Development & 4 Stages of Product Life Cycle

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What is New Product Development (NPD)?

New Product Development (NPD) involves the complete process of bringing a new product to market. It is not just about invention; it is about innovation—introducing something new or modifying an existing product to open up new markets.

Why is it important?

  • Survival: Companies cannot rely on the same products forever. Competitors will steal market share.

  • Profitability: New products drive growth and profit.

  • Consumer Needs: Customers are becoming selective. Innovation satisfies evolving needs.

  • Resource Optimization: Proper planning ensures natural and human resources are not wasted on failed products.

The 7 Stages of New Product Development Process

Developing a new product is a risky and expensive journey. To minimize failure, companies follow a systematic 7-step process:

  1. Idea Generation: The starting point. Ideas come from customers, competitors, company sales force, or R&D. Brainstorming is a key tool here.

  2. Idea Screening: Filtering ideas to spot good ones and drop poor ones ASAP. Ideas are checked against company objectives, resources, and market potential.

  3. Concept Development & Testing: Turning the idea into a concrete “product concept.” This concept is tested with a group of target consumers to gauge their reaction before actual design begins.

  4. Business Analysis: A detailed financial review. The company projects future sales, costs, and profits to see if the product is commercially viable.

  5. Product Development: The concept is finally turned into a physical product (prototype) by engineers. A tentative marketing strategy (price, packaging) is also designed.

  6. Market Testing: Introducing the product in a small, selected market to test consumer response and the marketing mix. It reduces the risk of a full-scale flop.

  7. Commercialization: The final launch. The product is introduced to the entire target market with full-scale production and marketing.

Why Do New Products Fail?

Despite rigorous testing, many products (like Hima Peas or Parle’s Big Bite) fail.

Common reasons include:

  • Product Defects: Poor design or quality.

  • Distribution Issues: Inappropriate channels or lack of availability.

  • Promotional Failure: Wrong message or target audience.

  • Pricing Errors: Too high (overestimating value) or too low.

  • Competitive Reaction: Aggressive counter-strategies by rivals.

The Product Life Cycle (PLC)

Like living beings, products have a life cycle. They are born, they grow, they mature, and they die.

The product life cycle describes the four stages a product goes through—Introduction, Growth, Maturity, and Decline—from launch to decreasing sales.

The 4 Stages of PLC:

    1. Introduction:

      • Characteristics: Low sales, high cost per customer, negative or low profits.

      • Strategy: Create awareness and trial. Use heavy promotion. Pricing can be Skimming (High price) or Penetration (Low price).

    2. Growth:

      • Characteristics: Rapidly rising sales, rising profits, early adopters buy. Competitors enter the market.

      • Strategy: Maximize market share. Improve product quality, add new features, and expand distribution.

    3. Maturity:

      • Characteristics: Sales peak and slow down (saturation). Profits stabilize or decline due to competition.

      • Strategy: Defend market share.

        • Market Modification: Find new users.

        • Product Modification: Improve features/style.

        • Marketing Mix Modification: Lower prices, aggressive sales promotion.

    4. Decline:

      • Characteristics: Sales fall, profits drop. Customers move to better substitutes.

      • Strategy: Reduce expenditure (milk the brand) or phase out the product (abandonment).

Credit: Shutterstock

Techniques of Product Development

To ensure product success, companies use specific techniques during development:

  1. Standardization: Setting uniform standards for a product to ensure consistency and quality (e.g., standard sizes for screws).

  2. Simplification: Eliminating unnecessary varieties or complexity to reduce cost and streamline production.

  3. Specialization: Focusing on a specific product line or feature where the company has expertise.

  4. Conjoint Analysis: A statistical technique used in market research to determine how people value different attributes (feature, function, benefits) that make up an individual product or service.

  5. Automation: Using technology to streamline the manufacturing process for speed and precision.

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Productivity: Concept, Measurement & Factors

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What is Productivity?

Productivity is a quantitative measure of the efficiency of production. It is the relationship between the output generated by a system and the input provided to create this output.

In simple terms: It is not just about producing more (that’s production); it is about producing more with less (that’s productivity).

Formula:

that's productivity Formula:

Concept:

  • It signifies how well resources are utilized.

  • Improving productivity means:

    1. Producing more output with the same input.

    2. Producing the same output with less input.

    3. Increasing the output to maximum extent while slight increase in input.

Difference: Production vs. Productivity

  • Production is the absolute volume of output (e.g., “We made 1000 cars”).

  • Productivity is the efficiency ratio (e.g., “We made 10 cars per worker”). High production does not guarantee high productivity if you wasted huge resources to get there.

Types of Productivity Measurement

Productivity means how efficiently a company converts inputs (labor, materials, capital, energy) into output.
There are 4 main types of productivity measurements based on which inputs are considered.

1. Single-Factor Productivity Measurement (Partial Productivity)

Simple Meaning:
This measures productivity using only one input at a time—such as labor, materials, or capital.
It shows how well a company uses one specific resource.

Common Types:

  • Labor Productivity = Output / Labor Hours

  • Material Productivity = Output / Material Used or Cost

  • Capital Productivity = Output / Capital Invested

Example:
A factory produces 500 units in 100 labor hours.
Labor Productivity = 500 / 100 = 5 units per labor hour.

2. Multi-Factor Productivity Measurement (MFP)

Simple Meaning:
This measures productivity using two or more inputs together, but not all inputs.
Usually includes labor + materials, or labor + capital.

Formula:
Multi-Factor Productivity = Output / (Labor + Materials)
(or any combination of two or more inputs)

Example:
Output = 1000 units
Labor cost = 2000
Material cost = 3000
MFP = 1000 / (2000 + 3000) = 1000 / 5000 = 0.20 units per rupee

3. Total Factor Productivity Measurement (TFP)

Simple Meaning:
This measures productivity using Labor + Capital only.
It excludes materials and energy.
It shows how well the core factors labor and machinery are performing.

Formula:
TFP = Net Output / (Labor + Capital Inputs)

Total Factor Productivity (TFP) formula
 

Example:
Net Output = 800 units
Labor cost = 2000
Capital cost = 3000
TFP = 800 / (2000 + 3000) = 800 / 5000 = 0.16 units per rupee

4. Total Productivity Measurement

Simple Meaning:
This is the broadest and most complete measure.
It includes all inputs: Labor + Material + Capital + Energy + Other expenses.
It shows the complete efficiency of the organization.

Formula:
Total Productivity = Total Output / (Labor + Material + Capital + Energy + Other Inputs)

Example:
Total Output = 5000 units
Total Input Cost = 10,000
Total Productivity = 5000 / 10,000 = 0.50 units per rupee

Factors Affecting Productivity

Productivity is influenced by a mix of factors, some you can control and some you cannot.

A. Internal Factors (Controllable)

These are within the control of the management.

  • Hard Factors:

    • Product: Design simplification and standardization.

    • Plant & Equipment: Proper maintenance and layout.

    • Technology: Automation and computerization.

  • Soft Factors:

    • People: Motivation, training, and attitude of workers.

    • Management: Leadership style and resource allocation.

    • Work Methods: Using method study to eliminate wasteful movements.

B. External Factors (Uncontrollable)

These are outside the firm’s control but must be adapted to.

    • Structural Adjustments: Economic shifts and demographic changes.

    • Natural Resources: Availability of manpower, land, and energy.

    • Government & Infrastructure: Taxes, laws, transport, and communication facilities.

Shutterstock

Productivity Improvement Techniques

How can a manager increase productivity?

  1. Technology-Based: implementing CAD/CAM, robotics, and energy-efficient machinery.

  2. Employee-Based: Financial incentives, job enrichment, and training.

  3. Material-Based: Inventory control (JIT – Just in Time), Material Requirement Planning (MRP), and waste reduction.

  4. Process-Based: Improving the layout and workflow to reduce travel time.

  5. Management-Based: Better planning, communication, and setting clear goals (MBO).

Productivity & Quality Relationship:

They are best friends. High quality leads to high productivity because “doing it right the first time” reduces rework, scrap, and wasted effort. Poor quality increases costs and lowers true productivity.

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Production Planning and Control (PPC) in-depth

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What is Production Planning & Control (PPC)?

Production Planning and Control (PPC) is the “brain” of the manufacturing system. It coordinates all manufacturing activities to ensure that products are produced efficiently.

Definition:

“Production planning is the determination, acquisition, and arrangement of all facilities necessary for future production of products.” — Ray Wild

Meaning:

  • Planning: Deciding in advance what to produce, when to produce, where to produce, and how to produce. It involves estimating requirements for men, materials, and machines.

  • Control: Ensuring that execution matches the plan. If there are deviations (e.g., machine breakdown), control mechanisms take corrective action to bring production back on track.

Need for PPC:

  • Effective utilization of resources.

  • To achieve production targets (Quality, Quantity, Time, Cost).

  • To ensure uninterrupted production flow.

The 3 Phases of PPC

PPC operates in three distinct phases:

  1. Planning Phase: This is the thinking stage.

    • Prior Planning: Forecasting demand, designing the product, and aggregate planning.

    • Active Planning: Process planning, routing, material planning, and scheduling.

  2. Action Phase: This is the execution stage.

    • Dispatching: Issuing orders to start production.

  3. Control Phase: This is the monitoring stage.

    • Progress Reporting: Collecting data on work done.

    • Corrective Action: Adjusting schedules or capacity to fix deviations.

Steps / Activities of PPC (Functions of PPC)

The main functions of PPC are often remembered as Routing, Loading, Scheduling, Dispatching, and Follow-up.

1. Routing (The “Where” & “How”)

Routing determines the path or route that work will follow from raw material to finished product.

  • It defines the sequence of operations.

  • It decides which machine and which department will do the work.

  • Goal: To find the most economical path.

2. Scheduling (The “When”)

Scheduling determines the time for each operation. It prescribes when work starts and when it ends.

  • Master Schedule: The overall plan for the factory (e.g., 1000 cars this month).

  • Detailed Schedule: The daily plan for each machine (e.g., Machine A does welding from 9 AM to 11 AM).

  • Types:

    • Forward Scheduling: Starts as soon as possible (Good for rush orders).

    • Backward Scheduling: Starts as late as possible to meet a due date (Reduces inventory cost).

3. Loading (The “Who” & “How Much”)

Loading is assigning work to specific machines or work centers.

  • It balances the workload.

  • It ensures no machine is overloaded or idle.

  • It matches the job requirements with machine capability.

4. Dispatching (The “Action”)

Dispatching is the transition from planning to action. It authorizes the start of actual production.

  • Activities:

    • Assigning work to specific machines/men.

    • Issuing materials from stores.

    • Issuing tools and fixtures.

    • Releasing work orders and time tickets.

5. Follow-up / Expediting (The “Control”)

This is the control tool that keeps a close watch on the progress of the work.

  • It checks if work is moving according to the schedule.

  • It identifies bottlenecks (delays) and takes corrective action.

  • It is the logical step after dispatching.

Tools of Control in PPC

To ensure production stays on track, managers use various tools and techniques:

  1. Dispatching: The primary tool to start work. Without a dispatch order, nothing moves.

  2. Inspection: Checking quality at various stages to prevent wastage.

  3. Expediting (Progressing): Tracking the job’s physical movement to ensure it meets the deadline.

  4. Gantt Charts: Visual charts used to track scheduled vs. actual progress.

VISULA REPRESENATION OF HOW A GANTT CHART LOOKS LIKE

5. Control Boards: Visual boards on the shop floor showing machine status (Running/Idle/Breakdown).
VISULA REPRESENATION OF HOW A CONTROL PANEL LOOKS LIKE

Aggregate Planning & MPS

    • Aggregate Planning: Intermediate planning (3 to 12 months) that balances demand with capacity by varying workforce size, inventory, or overtime.

    • Master Production Schedule (MPS): A detailed plan that breaks down the aggregate plan into specific end items (e.g., “Produce 50 Red Cars in Week 1”). It drives the Material Requirement Planning (MRP).

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Plant Location & Layout: Factors & Types

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What is Plant Location?

Plant Location refers to the strategic decision of choosing the best geographical site for setting up a business or factory. It is a long-term decision that cannot be easily changed.

The Goal (Ideal Location): An ideal location is one where the cost of the product is kept to a minimum, with a large market share, the least risk, and the maximum social gain. It is the place of maximum net advantage.

Factors Affecting Plant Location (Locational Analysis)

When choosing a site, entrepreneurs must analyze various factors:

1. Primary Factors:

  • Availability of Raw Materials: Being close to raw materials reduces transport costs (crucial for sugar or cement industries).

  • Access to Market: Being close to customers ensures quick delivery and lower distribution costs.

  • Labor Availability: Access to skilled and unskilled workers at reasonable wages.

  • Transport Facilities: Connectivity via road, rail, air, or sea.

  • Power and Fuel: Reliable supply of electricity and water.

2. Secondary Factors:

  • Climatic Conditions: (e.g., Textile industries prefer humid climates).

  • Government Policies: Tax holidays, subsidies, or zoning laws.

  • Infrastructure: Banking, communication, and drainage facilities.

What is Plant Layout?

Plant Layout involves the physical arrangement of machines, equipment, workstations, and service facilities within the factory.

Objectives:

  • Minimize material handling costs.

  • Utilize space effectively.

  • Ensure employee safety.

  • Facilitate a smooth flow of work (from raw material to finished product).

     

Types of Plant Layout

There are four main types of layouts used in manufacturing:

1. Product Layout (Line Layout)

Concept: Machines are arranged in a straight line according to the sequence of operations. The product moves from one station to the next until completion.

    • Suitability: Mass production of standardized goods (e.g., Cars, Mobile Phones, Cement).

    • Pros: Fast production, low material handling cost.

    • Cons: If one machine breaks, the whole line stops. Less flexible.

Getty Images

2. Process Layout (Functional Layout)

Concept: Machines of a similar type are grouped together in separate departments (e.g., All Drilling machines in one room, all Welding machines in another). The product travels to different departments based on its needs.

    • Suitability: Job order production, custom-made products (e.g., Furniture, Auto Repair Shop).

    • Pros: High flexibility, easy to handle breakdowns.

    • Cons: High material handling cost (backtracking), longer production time.

Shutterstock

3. Fixed Position Layout (Static Layout)

Concept: The product remains stationary (fixed) because it is too heavy or bulky to move. Men, machines, and materials are brought to the product.

  • Suitability: Making huge things (e.g., Ships, Aircraft, Buildings, Dams).

  • Pros: Minimal movement of the major product.

  • Cons: Requires huge space and complex scheduling of workers.

4. Combined (Hybrid) Layout

Concept: A mix of the above types. For example, a factory might use a Process Layout to manufacture individual parts and a Product Layout to assemble them into the final unit. This is common in modern industries.

Assembly Line Balancing

A critical concept in Product Layout is Line Balancing.

  • Definition: It is the process of assigning tasks to workstations so that the time taken at each station is approximately the same.

  • Goal: To minimize idle time. If Station A takes 2 minutes and Station B takes 5 minutes, Station B becomes a bottleneck, slowing down the whole line. Balancing ensures smooth flow.

 Service Layouts

Layouts are not just for factories.

  • Retail Layouts: Designed to maximize customer exposure to products (e.g., Supermarkets place essentials at the back so you walk past everything else).

  • Office Layouts: Designed for efficient information flow and employee comfort.

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Production & Operations Management: Concepts, Scope and Production Manager Functions & Responsibilities

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What is Production & Operations Management?

Production is the conversion of inputs into outputs. It involves transforming resources (Men, Machines, Materials, Money, Methods, and Management – the 6 Ms) into finished goods or services.

Operations Management (OM) is broader.

It simply means managing everything that helps a company produce goods or deliver services.

  • It takes care of all the resources needed to make products or provide services.

  • It controls the entire conversion process — where inputs (like materials, machines, labor) are turned into outputs (goods or services).

Key Definition:

“Operations Management is the management of an organization’s productive resources or its production system, which converts inputs into the organization’s products and services.”

Examples:

  • Making physical products → Manufacturing companies

  • Providing services → Banks, hospitals, hotels, etc.

In short: OM manages how a company’s products or services are created and delivered in the most efficient way.

Production vs. Operations (Simple Explanation)

In this subject, we will often use the word “production” in place of “operations.”

Why?

Because in Operations Management, production management and operations management are almost the same thing.
Both focus on:

  • Managing resources

  • Improving processes

  • Producing goods

  • Delivering services

So, we can use the terms interchangeably.

Important Note

If you study the objectives or functions of production, you can also write the same points for the objectives or functions of operations, because they mean the same in this subject.

In short:
Production = Operations for this course, and their functions/objectives are the same.

The Transformation Process

Production is like a system where something goes in, gets changed, and comes out as a finished product or service.

1. Inputs (What we use)

These are the things needed to start the work:

  • Men – People/workers

  • Machines – Equipment

  • Materials – Raw items

  • Money – Funds required

  • Methods – How the work is done

  • Management – People who plan and control the work

2. Transformation Process (What happens inside)

This is the actual working or converting activity, such as:

  • Cutting

  • Mixing

  • Assembling

  • Cooking

  • Serving

Basically, turning inputs into final products or services.

3. Outputs (What comes out)

  • Goods → Things produced (tables, phones, clothes)

  • Services → Work done for customers (banking, healthcare, teaching)

4. Feedback / Control (Checking and improving)

This step is about monitoring the process:

  • Are products good quality?

  • Are we working efficiently?

If something is wrong, we adjust the process to improve.

Systems View of Operations Management

 

Difference: Production Management vs. Operations Management

While often used interchangeably, there is a distinct difference in scope:

Basis Production Management Operations Management
Scope Narrower. Focuses mainly on manufacturing goods.( It do focus on services but main focus is on goods) Broader. Focuses on both manufacturing goods and delivering services.
Output Tangible goods (Cars, Soaps, Phones). Tangible goods + Intangible services (Banking, Consulting, IT Support).
Timeframe Often project-based with a completion date (e.g., building a dam). Ongoing and continuous (e.g., managing daily IT support).
Example A factory manager ensuring 500 cars are assembled. An operations manager ensuring a call center runs smoothly 24/7.

Analogy: Production Management is like building a house (a project with an end). Operations Management is like running a hotel (a daily, ongoing process of service delivery).

Scope of Production Management

The scope of production management is vast and can be divided into two main categories.

1. Designing the Production System

Product Design
Deciding what product to make and how it should look or function.

Facility Location
Choosing where the factory or plant should be built.

Plant Layout
Organizing machines, departments, and work areas in the best way for smooth workflow.

Material Handling
Planning how materials will move inside the factory (trolleys, conveyors, forklifts, etc.).

2. Analysis and Control of Production

Production Planning
Deciding when work will be done and what resources are needed.

Production Control
Making sure work is done on time and checking progress regularly.

Inventory Control
Managing raw materials, work-in-progress, and finished goods to avoid shortage or excess.

Quality Control
Checking products to ensure they meet quality standards.

If you add the following 3 more points, the scope becomes Operations Management:

1. Service Operations Management

Operations Management also covers services like hospitals, banks, hotels, education, transport, and IT services.

2. Supply Chain Management

It includes purchasing, vendor management, logistics, warehousing, transportation, and distribution.

3. Operations Strategy and Continuous Improvement

It focuses on long-term planning, technology decisions, Lean practices, Six Sigma, and continuous improvement.

Interface with Other Functions

Production cannot work in isolation. It interfaces with:

  • Marketing: To know what to produce based on customer needs and when to deliver.

  • Finance: For capital to buy machines and budget for costs.

  • Human Resources (HR): For hiring skilled labor and training.

  • Design/Engineering: For product specifications and new product development.

Who is a Production Manager?

A Production Manager is the person responsible for planning, coordinating, and controlling the manufacturing processes. They ensure that goods and services are produced efficiently, at the right cost, right quality, and right time.

They are the bridge between the strategic goals of the company and the actual operational output on the factory floor.

Functions of Production Management

Production management functions are viewed as a continuous management process involving three key activities:

1. Planning

This involves establishing a course of action for the future.

  • Product Planning: Deciding on the product mix.

  • Facility Planning: Designing the layout and location.

  • Process Planning: Designing the conversion process (how inputs become outputs).

2. Organizing

This involves establishing a structure of tasks and authority.

  • Assigning authority and responsibility to supervisors and workers.

  • Creating an organizational structure that supports efficient production.

3. Controlling

This ensures that actual performance matches the planned performance.

  • Quality Control: Checking for defects.

  • Cost Control: Keeping production costs within budget.

  • Schedule Control: Ensuring delivery deadlines are met.

     

Key Roles & Responsibilities of a Production Manager

The Production Manager wears many hats. Their key responsibilities include:

  1. Forecasting: Predicting future demand to plan production schedules.

  2. Order Management: Processing production orders and issuing instructions to the shop floor.

  3. Maintenance: Ensuring machines and equipment are maintained to prevent breakdowns.

  4. Inventory Management: Managing stock levels of raw materials to ensure production never stops due to shortages.

  5. Quality Assurance: Implementing quality checks to minimize rejections and waste.

  6. Cost Reduction: Constantly looking for ways to produce more with less (minimizing wastage, optimizing manpower).

  7. Team Leadership: Motivating the workforce and handling labor issues on the floor.

     

Objectives of Production Management

The ultimate goal is to produce quality goods and services at the right price and right time. This is achieved through:

  • Optimal Resource Use: Maximizing the utility of men, machines, and materials.

  • Minimizing Wastage: Reducing scrap and idle time.

  • Productivity: Improving the ratio of Output to Input.

  • Customer Confidence: delivering reliable products consistently.

Automation in Production

A modern Production Manager must also manage Automation.

  • Definition: Automation is the self-controlling operation of machinery that reduces or dispenses with human control.

  • Role: It increases speed and precision but requires the manager to oversee technical maintenance and workforce upskilling.

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Inventory Management: Techniques, EOQ & ABC Analysis

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What is Inventory Management? 

Inventory Management is the systematic approach to sourcing, storing, and selling inventory—both raw materials (inputs) and finished goods (products). In business, inventory is considered a necessary evil: too much ties up capital, but too little leads to lost sales.

Types of Inventory

Inventory in a business can be grouped into two main types: Direct Inventory and Indirect Inventory.

1. Direct Inventory

Direct inventory includes all items that are directly used to produce the final product.
These items become a physical part of the finished good.

Examples:

  • Direct raw materials (wood for furniture, steel for cars, cloth for shirts)

  • Direct components (tires in a bike, chips in a mobile phone)

  • Work-in-progress (partially manufactured goods)

  • Finished goods (ready for sale)

Meaning:
Direct inventory affects the cost of production directly.

2. Indirect Inventory

Indirect inventory includes materials that are not part of the final product, but are required to support production.

Examples:

  • Lubricants, oils, and coolants

  • Cleaning supplies

  • Machine tools and spare parts

  • Safety equipment (gloves, helmets)

  • Office supplies used in the factory

  • Indirect materials for maintenance

Meaning:
Indirect inventory supports production but does not become a part of the finished product.

 

Scope of Inventory Management

Inventory management covers all activities related to planning, controlling, and monitoring inventory. The scope includes:

1. Determining Inventory Levels
Deciding how much stock to keep so production runs smoothly without excess.

2. Setting Reorder Levels
Fixing the point at which a new order should be placed.

3. Selecting Inventory Control Techniques
Using methods like EOQ, ABC analysis, JIT, ROP, and Inventory Valuation Methods.

4. Managing Different Types of Inventory
Raw materials, work-in-progress (WIP), finished goods, and indirect materials.

5. Coordinating with Suppliers
Ensuring timely delivery, maintaining lead time, and building supplier relationships.

6. Avoiding Stockouts and Overstocking
Maintaining balance to prevent production stoppages or unnecessary storage costs.

7. Monitoring Inventory Performance
Using tools like Inventory Turnover Ratio to measure efficiency.

Key Objectives of Inventory Management

Operational Objectives

  • Ensure continuous flow of materials.

  • Prevent stockouts that can stop production.

  • Maintain smooth scheduling and production planning.

Financial Objectives

  • Minimize investment in inventory.

  • Reduce carrying (holding) costs.

  • Lower the total cost of inventory.

The Two Main Costs to Balance

1. Ordering Costs
Cost of placing an order: transportation, inspection, paperwork, and handling.
Ordering cost decreases when ordering large quantities less often.

2. Carrying (Holding) Costs
Cost of storing inventory: rent, insurance, deterioration, obsolescence, and theft.
Holding cost increases when inventory is stored in large quantities.

Goal of Inventory Management:
Minimize Total Inventory Cost
(Total Inventory Cost = Ordering Cost + Carrying Cost)

Importance of Inventory Management

1. Ensures Uninterrupted Production
Prevents delays caused by shortage of materials.

2. Reduces Overall Costs
Controls ordering and holding costs, improving profitability.

3. Improves Customer Satisfaction
Ensures products are available when customers need them.

4. Better Use of Warehouse Space
Avoids excess stock and makes storage more efficient.

5. Helps in Accurate Financial Reporting
Proper valuation affects profit, cost of goods sold, and the balance sheet.

6. Enhances Supplier Relations
Timely orders and clear planning lead to stronger supply chain coordination.

7. Supports Decision Making
Data on stock movement helps managers improve forecasting and production planning.

Techniques of Inventory Control

Managers use several techniques and mathematical models to maintain the right amount of inventory and avoid shortage or excess.

1. Economic Order Quantity (EOQ)

Concept:
EOQ helps find the ideal order size that minimizes both ordering cost and carrying cost.

Formula:

Economic Order Quantity (EOQ), formula of eoq

  • A = Annual Usage/Demand (units)

  • O = Ordering Cost per order

  • C = Carrying Cost per unit per year

Example: If Annual Demand = 2000 units, Ordering Cost = ₹50, Carrying Cost = ₹25.

If Annual Demand = 2000 units, Ordering Cost = ₹50, Carrying Cost = ₹25.

2. Reorder Point (ROP) & Safety Stock

Concept: When should you place the next order? You don’t wait until stock hits zero. You order when stock reaches the Reorder Level.

Formula:

Reorder Point (ROP) & Safety Stock Concept: When should you place the next order? You don't wait until stock hits zero. You order when stock reaches the Reorder Level.

  • Lead Time: The time taken by the supplier to deliver goods after receiving the order.

  • Safety Stock (Buffer Stock): Extra stock kept to protect against stockouts during emergencies.

3. ABC Analysis (Always Better Control)

Concept: Not all inventory items are equally important. This technique classifies items based on their usage value to prioritize control. It follows the Pareto Principle (80/20 rule).

    • A-Items (High Value): 70-80% of total value, but only 10-20% of quantity. Action: Strict control, low safety stock, frequent ordering.

    • B-Items (Moderate Value): 15-20% value, 30% quantity. Action: Moderate control.

    • C-Items (Low Value): 5-10% value, 50% quantity. Action: Loose control, bulk ordering (e.g., nuts and bolts).

Shutterstock

4. Just-in-Time (JIT) Inventory Technique

Concept:
Materials arrive only when needed, keeping inventory as low as possible.

Benefits:
Low storage cost
Less waste
Better quality control

5. Inventory Turnover Ratio

Concept:
Shows how quickly inventory is sold and replaced.

Formula:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Higher ratio = Fast movement
Lower ratio = Slow movement or overstocking

6. Inventory Valuation Methods (FIFO, LIFO, Weighted Average)

Concept:
Inventory valuation helps calculate Cost of Goods Sold and Closing Stock.
Three common methods are used:

FIFO (First In, First Out):
Goods purchased first are sold first.
Used for perishable items like food and medicine.
Gives higher closing stock value during rising prices.

LIFO (Last In, First Out):
Goods purchased last are sold first.
Matches current costs with current revenue.
Gives lower closing stock value during rising prices.
(Not used in India for financial reporting.)

Weighted Average Cost:
All units are valued at the average cost of total units available.
Useful for uniform items like chemicals, grains, fuel, etc.

Purchasing Methods: Centralized vs. Decentralized

How a company buys materials affects its efficiency.

FeatureCentralized PurchasingDecentralized Purchasing
DefinitionOne central Head Office buys for all branches/plants.Each branch/department buys its own materials independently.
PriceLow: Bulk buying gets heavy discounts.High: Smaller orders mean higher prices.
ControlHigh: Uniform policies and better control.Low: Harder to monitor total spend.
SpeedSlow: Can be bureaucratic and delay delivery.Fast: Quick response to local needs.
SuitabilityOrganizations with similar needs across units.Geographically separated units with diverse needs.

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Cost of Capital: Concept, Nature, Classification & Computation | All Important Numerical

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Cost of Capital: Concept & Nature

Cost of Capital is a central concept in financial management.1 It acts as the bridge between investment decisions (where to put money) and financing decisions (where to get money).2

 
 

 

Definition:

It is the minimum rate of return that a firm must earn on its investments to maintain the market value of its shares.

Three Perspectives on Cost of Capital:

  1. Investor’s View: It is the measurement of the sacrifice made by the investor.3 (e.g., If an investor puts money in your company instead of a bank offering 7%, their cost is that 7% opportunity loss).

     

     

  2. Firm’s View: It is the minimum required rate of return needed to justify the use of funds.4

     

     

  3. Capital Expenditure View: It is the hurdle rate or cut-off rate used to discount future cash flows in capital budgeting.

The Equation of Cost:

Symbolically, Cost of Capital ($K_o$) comprises three components:

 

$$K_o = r_j + b + f$$

  • $r_j$: The risk-free cost of the specific type of financing.5

     

     

  • $b$: The business risk premium.

  • $f$: The financial risk premium.

🎯 Significance of Cost of Capital

Why is this calculation so critical?

  1. Designing Optimal Capital Structure: It helps managers determine the most economical mix of Debt and Equity.6 The goal is to minimize the overall cost of capital ($K_o$) to maximize the firm’s value.

     

     

  2. Investment Evaluation (Capital Budgeting): It serves as the financial standard.

    • In Net Present Value (NPV), cash flows are discounted using the Cost of Capital.7

       

       

    • In Internal Rate of Return (IRR), a project is accepted only if $IRR > Cost of Capital$.

  3. Financial Performance Appraisal: It is used to judge top management. If the actual profitability of a project is higher than the Cost of Capital, performance is satisfactory.

📊 Classification of Costs

Financial management distinguishes between several types of costs:

  1. Marginal Cost: The additional cost incurred to raise an additional unit of capital. This is crucial for new investment decisions.

  2. Average Cost (WACC): The weighted average of the costs of various sources (Equity, Debt, etc.). This is the acceptance criteria for the firm as a whole.

  3. Specific Cost: The cost associated with a specific source (e.g., $K_e$ for Equity, $K_d$ for Debt).

  4. Historic vs. Future Cost: Historic costs are based on past book values, while Future costs are estimated for upcoming fund-raising.

  5. Explicit Cost: The discount rate that equates the present value of cash inflows (funds raised) with cash outflows (interest/dividends).

  6. Implicit Cost (Opportunity Cost): The cost of the opportunity foregone.8

     

     

    • Example: Retained Earnings. The cost is not zero; it is the return shareholders could have earned if the money had been distributed to them instead of retained.

🧮 Computation of Specific Costs

A firm raises capital from different sources, and each has a different “price tag.”9

 

 

1. Cost of Debt ($K_d$)

Debt is generally the cheapest source of finance because interest is tax-deductible.10

 

 

A. Cost of Irredeemable (Perpetual) Debt:

  • Pre-Tax Cost:

     

    $$K_{di} = \frac{I}{NP}$$

  • Post-Tax Cost:

     

    $$K_d = \frac{I (1 – t)}{NP}$$

     

    (Where $I$ = Interest, $t$ = Tax Rate, $NP$ = Net Proceeds from issue)

B. Cost of Redeemable Debt:

If the debt must be repaid after ‘N’ years, we use a formula that considers interest payments plus the repayment of principal.

 

$$K_d = \frac{I(1-t) + \frac{RV – NP}{N}}{\frac{RV + NP}{2}}$$

 

(Where $RV$ = Redeemable Value, $N$ = Number of years)

2. Cost of Preference Shares ($K_p$)

Preference shareholders receive a fixed dividend.11 Unlike debt interest, these dividends are not tax-deductible.

 

 

A. Cost of Irredeemable Preference Shares:

 

$$K_p = \frac{D}{NP}$$

 

(Where $D$ = Annual Dividend, $NP$ = Net Proceeds)

If Dividend Tax applies: $K_p = \frac{D(1 + D_t)}{NP}$

B. Cost of Redeemable Preference Shares:

Similar to redeemable debt, this formula accounts for the repayment of capital.

 

$$K_p = \frac{D + \frac{RV – NP}{N}}{\frac{RV + NP}{2}}$$

3. Cost of Equity ($K_e$)

This is the most difficult to measure because equity shareholders are not promised a fixed return. It is the minimum return they expect to keep the share price unchanged.

Approaches to Calculate $K_e$:

A. Dividend Capitalization Approach (D/P):

Appropriate when investors primarily look for dividends.

 

$$K_e = \frac{D}{MP}$$

 

(Where $MP$ = Current Market Price)

B. Earnings Capitalization Approach (E/P):

Appropriate when investors focus on the company’s earning power (EPS), regardless of whether it is distributed or retained.

 

$$K_e = \frac{EPS}{MP}$$

C. Dividend + Growth Approach (Gordon Model):

Most widely used. It assumes dividends will grow at a constant rate ($g$).

 

$$K_e = \frac{D_1}{MP} + g$$

 

(Where $D_1$ = Expected Dividend next year)

D. Bond Yield + Risk Premium Approach:

Since equity is riskier than debt, investors demand a premium.

 

$$K_e = \text{Yield on Long-term Bonds} + \text{Risk Premium}$$

E. Cost of Retained Earnings ($K_{re}$):

Often considered the same as Cost of Equity ($K_e$), but adjusted for personal taxes and brokerage if applicable.

 

$$K_{re} = K_e (1 – T_i) (1 – T_b)$$

⚖️ Weighted Average Cost of Capital (WACC)

A firm rarely uses just one source. WACC is the composite cost of all sources combined.12

 

 

The Calculation Process:

  1. Calculate Specific Costs: Find 13$K_e, K_d, K_p$.14

     

     

  2. Assign Weights: Determine the proportion of each source in the total capital.

    • Book Value Weights: Based on the balance sheet values. (Easy to calculate but may not reflect economic reality).

    • Market Value Weights: Based on current trading prices.15 (Theoretically superior as it reflects the current economic value).

       

       

  3. Multiply & Sum: Multiply each specific cost by its weight and sum them up.

Formula:

 

$$WACC (K_o) = (K_d \times W_d) + (K_p \times W_p) + (K_e \times W_e)$$

Factors Affecting WACC

  • Controllable Factors:

    • Capital Structure: Changing the Debt/Equity ratio changes the risk and cost.16

       

       

    • Dividend Policy: Retaining earnings is cheaper than issuing new shares (no floatation costs).17

       

       

  • Uncontrollable Factors:

    • Tax Rates: Higher corporate tax makes debt cheaper (due to tax shield).

    • Interest Rates: Market rate fluctuations affect the cost of debt.

    • Market Risk Premium: Investor sentiment affects the cost of equity

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