Industrial

Organisation
and
Management

Wanyama B. N.

HARRISON OTIENO AMKOA

Copyright © 2008
TABLE OF CONTENTS
1 THE WHAT AND WHY OF MANAGEMENT......................................................................................................................... 7
1.1 What is Management? ............................................................................................................................................................ 7
1.2 Definition of Management ....................................................................................................................................................... 7
1.3 Importance of Management to Business (Key Points) .......................................................................................................... 7
1.4 The Science and Art of Management ..................................................................................................................................... 8
1.5 Need for Management Study .................................................................................................................................................. 8
2 EVOLUTION OF MANAGEMENT ....................................................................................................................................... 10
2.1 Historical Perspective............................................................................................................................................................ 10
2.2 Fredrick W. Taylor (1856-1915) – Scientific Management .................................................................................................. 10
2.3 Henri L. Gantt (1861 – 1919) ................................................................................................................................................ 11
2.4 Frank Gibreth (1868-1944) and Lilian Gibreth (1889 – 1972) ............................................................................................. 11
2.5 Henri Fayol (1841-1925) ....................................................................................................................................................... 11
2.6 Fayol‘s Principles of Organizational Structure ..................................................................................................................... 12
2.7 G. Elton Mayo (1880-1949) .................................................................................................................................................. 13
2.8 Mary Parker Follett (1868-1933)........................................................................................................................................... 13
2.9 Peter F. Drucker .................................................................................................................................................................... 14
3 APPROACHES TO MANAGEMENT ................................................................................................................................... 15
3.1 Scientific Management .......................................................................................................................................................... 15
3.2 Human Relations Approach .................................................................................................................................................. 15
3.3 The Systems Approach ......................................................................................................................................................... 16
3.4 The Empirical or Case Approach.......................................................................................................................................... 16
3.5 Decision Theory..................................................................................................................................................................... 16
3.6 The Managerial Roles Approach .......................................................................................................................................... 16
3.7 The Contingency or Situation Approach .............................................................................................................................. 17
3.8 The Management Science Approach ................................................................................................................................... 17
4 LEVELS OF MANAGEMENT............................................................................................................................................... 18
4.1 Definition ................................................................................................................................................................................ 18
4.2 Top-Level Management ........................................................................................................................................................ 18
4.3 Middle-Level Management.................................................................................................................................................... 18
4.4 First-Level Management ....................................................................................................................................................... 18
4.5 Managerial Skills ................................................................................................................................................................... 19
5 PLANNING ............................................................................................................................................................................ 20
5.1 Planning ................................................................................................................................................................................. 20
5.2 Principles of Good Plans....................................................................................................................................................... 20
5.3 Efficiency and Effectiveness of Plans................................................................................................................................... 20
5.4 Types of Plans ....................................................................................................................................................................... 20
5.5 Classification of Plans ........................................................................................................................................................... 22
5.6 Steps in Planning .................................................................................................................................................................. 23
5.7 Application of Planning Steps in Preparing for College (Example) ..................................................................................... 24
5.8 Management by Objectives (MBO) ...................................................................................................................................... 25
6 ORGANISING ....................................................................................................................................................................... 27
6.1 Organizing Function – Why it is necessary .......................................................................................................................... 27
6.2 Organizational Structure ....................................................................................................................................................... 27
6.3 Types of Formal Organization Structures ............................................................................................................................ 28
6.4 Line Organization Structure .................................................................................................................................................. 28
6.5 Line and Staff Organization .................................................................................................................................................. 28
6.6 Matrix Organization Structure ............................................................................................................................................... 30
6.7 Committee Organization ....................................................................................................................................................... 31
6.8 Strategic Business Units (SBUs) .......................................................................................................................................... 32
6.9 Organizational Levels and the Span of Management ......................................................................................................... 32
6.10 Informal Organizations .......................................................................................................................................................... 32

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6.11 Grapevine .............................................................................................................................................................................. 33
6.12 Synergy .................................................................................................................................................................................. 33
6.13 Power, Authority and Responsibility ..................................................................................................................................... 33
6.14 Kinds of Authority .................................................................................................................................................................. 34
6.15 Delegation.............................................................................................................................................................................. 34
6.16 Departmentation .................................................................................................................................................................... 34
6.17 Patterns of Departmentation ................................................................................................................................................. 35
7 DIRECTING ........................................................................................................................................................................... 36
7.1 Leadership ............................................................................................................................................................................. 36
7.2 Leadership Behaviour and Styles ......................................................................................................................................... 36
7.3 Administration, Ruling and Leading...................................................................................................................................... 37
7.4 Qualities of a Leader ............................................................................................................................................................. 37
7.5 Co-ordination ......................................................................................................................................................................... 38
7.6 Techniques of Co-ordination................................................................................................................................................. 38
7.7 Motivation .............................................................................................................................................................................. 39
7.8 Strategies of Motivation ........................................................................................................................................................ 43
7.9 Behavioural Science – Nature of the Human Resource ...................................................................................................... 45
7.10 Importance of Human Relations ........................................................................................................................................... 45
7.11 Summary of Motivation ......................................................................................................................................................... 45
7.12 The Carrot and the Stick ....................................................................................................................................................... 46
8 CONTROLING ...................................................................................................................................................................... 47
8.1 Basic Steps for Control ......................................................................................................................................................... 47
9 PRODUCTION ...................................................................................................................................................................... 51
9.1 Divisions of Production.......................................................................................................................................................... 51
9.2 Stages in Production ............................................................................................................................................................. 51
9.3 Types of Production .............................................................................................................................................................. 52
9.4 Production Planning and Control .......................................................................................................................................... 52
9.5 Activities of the Planning Function........................................................................................................................................ 53
9.6 Activities of the Control Function .......................................................................................................................................... 53
9.7 Documents Used in Production Planning and Control ........................................................................................................ 54
10 PRODUCT DESIGN .............................................................................................................................................................. 55
11 PRODUCT DEVELOPMENT ................................................................................................................................................ 57
11.1 Tools of Product Development ............................................................................................................................................. 57
12 LOCATION OF THE PLANT ................................................................................................................................................ 60
13 PLANT LAYOUT................................................................................................................................................................... 62
13.1 Objectives of Plant Layout .................................................................................................................................................... 62
13.2 Advantages of Plant Layout .................................................................................................................................................. 62
13.3 Types of Layout ..................................................................................................................................................................... 63
13.4 Choice of Plant Layout .......................................................................................................................................................... 64
14 PLANT AND EQUIPMENT MAINTENANCE ...................................................................................................................... 65
14.1 Importance of Maintenance .................................................................................................................................................. 65
14.2 Effects of Poor Maintenance................................................................................................................................................. 65
14.3 Control of Maintenance Work ............................................................................................................................................... 65
14.4 Maintenance Policies ............................................................................................................................................................ 65
14.5 Duties of Maintenance .......................................................................................................................................................... 66
14.6 Types of Maintenance ........................................................................................................................................................... 67
15 HEALTH AND SAFETY AT WORK ..................................................................................................................................... 70
15.1 Economic Effects ................................................................................................................................................................... 70
15.2 Prevention of Accidents ........................................................................................................................................................ 70
15.3 Fire Prevention and Control .................................................................................................................................................. 70
16 PROJECT MANAGEMENT .................................................................................................................................................. 72

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16.1 Project Manager .................................................................................................................................................................... 72
16.2 Project Life Cycle .................................................................................................................................................................. 72
16.3 Work Breakdown Structure ................................................................................................................................................... 73
16.4 Critical Path Analysis (CPA) ................................................................................................................................................. 73
16.5 Program Evaluation and Review Technique (PERT) .......................................................................................................... 82
16.6 Gantt Charts .......................................................................................................................................................................... 84
17 WORK STUDY ...................................................................................................................................................................... 87
17.1 Objectives of Work Study...................................................................................................................................................... 87
17.2 Method Study ........................................................................................................................................................................ 87
17.3 Work Measurement ............................................................................................................................................................... 89
18 QUALITY CONTROL............................................................................................................................................................ 95
18.1 Determination of Quality ....................................................................................................................................................... 95
18.2 Consequences of Poor Quality ............................................................................................................................................. 95
18.3 Quality Assurance (QA) ........................................................................................................................................................ 96
18.4 Quality Control (QC) .............................................................................................................................................................. 96
18.5 Determination of Quality Level.............................................................................................................................................. 97
18.6 Quality Control and Assurance ............................................................................................................................................. 97
18.7 Inspection .............................................................................................................................................................................. 98
18.8 Sampling .............................................................................................................................................................................. 100
18.9 The Operating Characteristic (OC) Curve .......................................................................................................................... 104
18.10 Statistical Process Control .................................................................................................................................................. 109
18.11 Control Charts ..................................................................................................................................................................... 111
18.12 Product/Service Life Cycle .................................................................................................................................................. 121
19 MATERIALS MANAGEMENT............................................................................................................................................ 122
19.1 Purchasing and Supply ....................................................................................................................................................... 122
19.2 Types of purchasing organization....................................................................................................................................... 123
19.3 Stores Keeping .................................................................................................................................................................... 124
19.4 Definition of Terms (Glossary) ............................................................................................................................................ 125
19.5 Inventory Management ....................................................................................................................................................... 126
19.6 Inventory Control ................................................................................................................................................................. 126
20 ECONOMICS ...................................................................................................................................................................... 133
20.1 Introduction .......................................................................................................................................................................... 133
20.2 Scope of Economics ........................................................................................................................................................... 133
20.3 Economic Laws ................................................................................................................................................................... 134
20.4 Economic Terms ................................................................................................................................................................. 134
20.5 Opportunity Cost ................................................................................................................................................................. 135
20.6 Utility .................................................................................................................................................................................... 135
20.7 Scarcity ................................................................................................................................................................................ 135
20.8 Choice .................................................................................................................................................................................. 136
20.9 Wants ................................................................................................................................................................................... 136
20.10 Economic System................................................................................................................................................................ 136
21 DEMAND ............................................................................................................................................................................. 138
21.1 Law of Demand ................................................................................................................................................................... 138
21.2 Extension and Contraction of Demand .............................................................................................................................. 139
21.3 Rise and fall in Demand ...................................................................................................................................................... 139
21.4 Factors of Change in Demand ............................................................................................................................................ 140
21.5 Abnormal Demand .............................................................................................................................................................. 140
21.6 Types of Demand ................................................................................................................................................................ 140
21.7 Elasticity of Demand ........................................................................................................................................................... 140
22 SUPPLY............................................................................................................................................................................... 145
22.1 Law of Supply ...................................................................................................................................................................... 145
22.2 Types of Supply ................................................................................................................................................................... 145
22.3 Extension and Contraction of Supply ................................................................................................................................. 146

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22.4 Rise and Fall in Supply ....................................................................................................................................................... 146
22.5 Abnormal Supply Curves .................................................................................................................................................... 146
22.6 Elasticity of Supply .............................................................................................................................................................. 146
22.7 Price Determination ............................................................................................................................................................. 147
23 MARKET STRUCTURES ................................................................................................................................................... 149
23.1 Essentials of a Market ......................................................................................................................................................... 149
23.2 Functions of a Market.......................................................................................................................................................... 149
23.3 Types of Markets ................................................................................................................................................................. 149
23.4 Extent of a Market ............................................................................................................................................................... 151
24 PRODUCTION .................................................................................................................................................................... 152
24.1 Direct Production ................................................................................................................................................................. 152
24.2 Indirect Production .............................................................................................................................................................. 152
24.3 Levels of Production ............................................................................................................................................................ 152
24.4 Factors of Production .......................................................................................................................................................... 152
24.5 Mobility of Labour ................................................................................................................................................................ 153
24.6 Division of Labour................................................................................................................................................................ 153
24.7 Demand for Labour ............................................................................................................................................................. 154
24.8 The supply of Labour .......................................................................................................................................................... 154
24.9 Capital .................................................................................................................................................................................. 155
24.10 Organization or Entrepreneurship ...................................................................................................................................... 155
25 MONEY ................................................................................................................................................................................ 157
25.1 Characteristics of Money .................................................................................................................................................... 157
25.2 Functions of Money ............................................................................................................................................................. 157
25.3 Types of Money ................................................................................................................................................................... 157
25.4 Money Supply ...................................................................................................................................................................... 158
25.5 Transactions ........................................................................................................................................................................ 158
26 BANKING ............................................................................................................................................................................ 159
26.1 Types of Banks .................................................................................................................................................................... 159
26.2 Commercial Banks .............................................................................................................................................................. 160
26.3 None Bank Financial Intermediaries and Specialized Financial Institution ...................................................................... 161
26.4 Types of Accounts ............................................................................................................................................................... 161
26.5 Cheques............................................................................................................................................................................... 162
26.6 Credit Transfer..................................................................................................................................................................... 163
26.7 Standing Orders .................................................................................................................................................................. 163
26.8 Bank Draft ............................................................................................................................................................................ 163
26.9 Traveller‘s Cheque .............................................................................................................................................................. 163
26.10 Credit Cards......................................................................................................................................................................... 163
26.11 Clearing House .................................................................................................................................................................... 163
26.12 Credit Creation .................................................................................................................................................................... 163
27 INTERNATIONAL TRADE ................................................................................................................................................. 164
27.1 Bi-lateral and Multi-lateral Trade ........................................................................................................................................ 164
27.2 Restrictions on International Trade .................................................................................................................................... 164
27.3 Improving Exports ............................................................................................................................................................... 164
27.4 Visible and Invisible Trade .................................................................................................................................................. 165
27.5 Balance of Trade ................................................................................................................................................................. 165
27.6 Balance of Payments .......................................................................................................................................................... 165
27.7 Intermediaries in Import Trade............................................................................................................................................ 165
27.8 Channels of Export Trade in East Africa ............................................................................................................................ 165
27.9 Terms of Sale ...................................................................................................................................................................... 165
27.10 Documents in International Trade ...................................................................................................................................... 166
27.11 Bonded Warehouse............................................................................................................................................................. 166
27.12 Problems in International Trade ......................................................................................................................................... 166
27.13 Common Market .................................................................................................................................................................. 166

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28 OFFICE ADMINISTRATION .............................................................................................................................................. 168
28.1 The Office ............................................................................................................................................................................ 168
28.2 Office Layout ....................................................................................................................................................................... 168
28.3 Office Orderlies.................................................................................................................................................................... 170
28.4 Duties Performed by Other Office Staff .............................................................................................................................. 171
29 FORMS OF BUSINESS ORGANIZATIONS ..................................................................................................................... 173
29.1 The Sole Trader................................................................................................................................................................... 173
29.2 Partnership .......................................................................................................................................................................... 174
29.3 Joint Stock Companies ....................................................................................................................................................... 176
29.4 Private Companies .............................................................................................................................................................. 177
29.5 Comparison of Memorandum and Articles of Association ................................................................................................ 178
29.6 Public Companies ............................................................................................................................................................... 178
29.7 Shares.................................................................................................................................................................................. 180
29.8 Share Capital of a Company ............................................................................................................................................... 180
29.9 Debentures .......................................................................................................................................................................... 181
29.10 Winding Up (or Liquidation) ................................................................................................................................................ 181
30 CONTRACTS ...................................................................................................................................................................... 183
30.1 Formation of the Contract ................................................................................................................................................... 183
30.2 Terms of a Contract............................................................................................................................................................. 185
30.3 Void Contracts ..................................................................................................................................................................... 186
30.4 Voidable Contracts .............................................................................................................................................................. 186
30.5 Discharge of Contracts........................................................................................................................................................ 187
30.6 Remedies............................................................................................................................................................................. 188
30.7 Types of Contracts .............................................................................................................................................................. 189
30.8 Contracts for the Sale of Goods ......................................................................................................................................... 189
31 TENDERING AND ESTIMATING IN BUILDING TRADES .............................................................................................. 191
31.1 Tenders ................................................................................................................................................................................ 191
31.2 Methods of Obtaining Tenders ........................................................................................................................................... 191
31.3 Tendering Arrangements .................................................................................................................................................... 192
31.4 Conditions of Tender ........................................................................................................................................................... 194
31.5 Contract Documents ........................................................................................................................................................... 194
31.6 Estimating ............................................................................................................................................................................ 195
31.7 General Terminology........................................................................................................................................................... 197
31.8 Tender Policy....................................................................................................................................................................... 197
31.9 Distinction between an Estimate and a Tender ................................................................................................................. 198

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 Section 1

PRINCIPLES
OF
MANAGEMENT

Wanyama B. N. 6
1 THE WHAT AND WHY OF MANAGEMENT

1.1 What is Management?

Management is an activity process, composed of some basic functions, for getting the objectives of any enterprise accomplished
through and with the efforts of its personnel. Wherever and whenever objectives are to be achieved through organized and co-
operative endeavour, management becomes essential for directing and unifying group efforts towards a common purpose. As
human aims and beliefs are mostly realized through the establishment of diverse institutions in our society, management is
universally needed for operating all such organizations. A little reflection will make it clear that our present day society has
become a pluralistic society, that is, a society of multifarious institutions. Management, viewed as a functional concept is of
equal necessity to the educational, religious, charitable, social security, welfare, health care and other non-business institutions
as it is required for business organizations. Furthermore, the greatest and most comprehensive of our social organizations, viz,
the government, of all types, needs management as such as others require perhaps more than all other social organizations.
That the government requires a management process has been aptly pointed out in the statement; A government without good
management is a house built on sand. Put in short, management is an essential accompaniment of all social organizations and it
is to be found everywhere as a distinct, separate and dominant activity. The nature and significance of the activity do not change
even if it is called administration in some social institutions and management in others.

1.2 Definition of Management

Management may be simply defined as, the art of getting things done through other people. In a wider and broader context
however, management may be regarded as the art of distributing resources optimally throughout an organization, creating an
organizational structure to determine personnel relationships and maintaining the systems for checking any unwanted behaviour
so as to ensure that the organization objectives are fulfilled.

From the definition above we see that management is the only activating element of any enterprise for getting things done
through its personnel. The task of management is to provide dynamic leadership that combines the productive but passive
resources into a fruitful organization. Not only does it adapt itself to existing opportunities, restrictions, and pressures, but
exercise a positive influence as well to make the future events favourable for the enterprise. With a view to getting the expected
results and seeing that things happen as they should, management has to become a creator of the economy rather than its
creature. Management forges ahead through innovations in operating situation and the adoption of farsighted planning. It
visualizes the future, initiates changes and achieves the purpose of any enterprise under highly dynamic conditions. As an
activity process, management plans the future course of action, organizes people and their work, directs the operation and
controls the performance and thus ensures the accomplishment of enterprise objectives. Adaptations and innovations permeate
through each of these phases of the management process.

1.3 Importance of Management to Business (Key Points)

(a) Management acts as a creative and invigorating force in the organization, ie, it creates a result that is a bigger whole
than the sum total of efforts put in by the group. It adds a real plus value to the operation of any enterprise by enlisting
a little extra value out of each person.
(b) Management provides new ideas, imaginations and visions to the group working and integrates its efforts in such a
manner as to account for better results.
(c) It ensures a smooth flow of work in the organization by focusing on strong points, neutralizing weak links, overcoming
difficulties and establishing a team spirit. That is, management aims at making the human strengths more productive
and effective by way of eliminating human weaknesses. It strives to secure maximum results by the use of minimum
resources.

Finally remember, no ideology, no ‗ism‘, no political theory can win a greater output with less effort from a given complex of
human and material resources except sound management. And it is on such greater output, that a higher standard of life, more
leisure, and more amenities for all must necessarily be founded. Briefly, the well being of the society is largely dependent upon
the quality of management prevailing in all social organizations.

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1.4 The Science and Art of Management
In the past, management theory was quite limited and this made some people to believe that management is an art, but not a
science. To explain this duality in relationship, the science of management can be compared in a befitting manner with the
medical science. A surgeon or a physician without knowledge of medical science becomes a ‗witch doctor‘ or a ‗quack‘. On the
other hand, no amount of reading text books on medical science will make a man a good surgeon or good physician. To collect
the best things of both worlds the theoretical knowledge must be supplemented and perfected by practical knowledge. To be
precise both theory and practice are equally important and there is nothing to choose between them so far as the process of
learning is concerned. As in the case of medicine and surgery, management is to be regarded both as an art and a science.

Science is a systematized body of knowledge pertaining to an area of study and contains some general truths explaining some
past events or phenomena. In other words, the science of management provides a body of principles or laws for guidance in the
solution of specific management problems and in the future. On the other hand the art of management deals with the application
of skill and effort for producing desirable results or situations in specific cases. The art of management, to be effective must be
grounded in the knowledge of principles. Fundamental principles always react upon the art and shape the ways of doing specific
things. That is, the art and science are interrelated and complementary and with every increase in the knowledge of science, the
art is bound to be improved. The science and art of management are thus interwoven and overlapping in nature.

1.5 Need for Management Study

Knowledge of the basic principles and techniques of management can have a tremendous impact upon its practice, clarifying
and improving it. A number of reasons can be cited justifying the study of management principles and their application in ou r
working environment.

(a) To increase efficiency, reduce waste and costs

When management principles can be developed, proved and used, management efficiency will inevitably improve. The
manager with the knowledge so gained can be more effective by using extra guidelines to help solve problems, without
engaging in the risky practice of trial by error.

Only fundamentals can be learned from experiences and transferred to new situations. No two management situations are
all exactly alike and one cannot assume that the exact techniques applicable in one situation will necessarily work in
another. Application of management principles ensure that a manager distils experience and seeks out and recognizes the
fundamental casual relationships in different circumstances.

From knowledge so gained, a manager can see the need for using the best possible method of doing work, under the
prevailing conditions, ensuring that the resources are utilized as efficiently as possible, with minimal waste, in terms of
materials, labour and time spent. The net effect would be to reduce the production cost of any given activity, the gains
saved, being channeled to other pressing or more deserving activities.

(b) To crystallize the nature of management

Lack of understanding of the concepts, principles and techniques of management makes it difficult to analyse the
managerial job and to train managers. Fundamentals act as a checklist of the meaning of management. Without them, the
training of managers depends upon haphazard trial and error.
From time to time, organizations experience structural problems which seriously affect their profitability and productivity.
Where they were once market leaders, they find they are tailing rivals whom they used to easily beat or they find that the
customer loyalty that they thought they commanded in the market is not ‗so loyal‘ and they have to struggle to achieve even
minimal sales revenue. These and many other problems that companies experience in their lifetime, require that a deep
analysis of the situations be made so that some of these irritating problems are solved once and for all. An analysis can
only be made on the basis of some body of organized knowledge, that is, management science.

(c) Adaptable to changing situations

Fundamentals gained from management study result into a better appreciation of the dynamics involved in the working

Wanyama B. N. 8
 environment and as a consequence one is better placed to tackle new problems than if he or she was not aware of the
fundamentals. If you are a well-organized person you are better suited to solving a crisis situation than one who is not
organized at all. This is because you are already used to certain things as a matter of routine and this helps greatly in
smoothing one over the rough and tumble of crisis. Not so for one who is not organized. Because he or she is not used to
any particular routine, there is no method in the approach to solving the looming crisis. Instead there is a haphazard or
chaotic response, which makes the problem even worse. Therein lies the difference between one who uses management
sciences and practice to solve every day management problems and one who does not. The first one quickly overcomes
the obstacle ahead and goes to meet other challenges, while the other never solves the problem that confronts him or her
and remains forever stuck there and does not grow at all beyond those situations.

(d) Acquisition of self-improvement culture

Knowledge of management fundamentals brings into sharp focus the need to strive for perfection in all that we engage in, if
we hope to improve our economic welfare, and at the same time satisfy our inner desires of achievement or
accomplishment to be better than others, to wish to excel in whatever undertaking that one is involved in, is fuelled by the
understanding of the dynamics involved in the growth process of any entity. The better endowed a society is with
management knowledge, the better people realize the need to continually improve themselves, if they wish to remain
competitive in relation to others.

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2 EVOLUTION OF MANAGEMENT

2.1 Historical Perspective

The practice of management is as old as the history of human co-operation. Wherever co-operative endeavors have been
required in the past, management has been practiced as an art. All that time it was found that management as a subject of study
and research, had been completely neglected mainly because of a number of factors.

First it was taken to be a fixed pattern of job in most cases so as to take its own cause. It was believed to be an activity , which
could be learned in an empirical manner only, i.e., by guesswork, hunch, intuition or trial and error.

Secondly management was believed to be a mechanical job for the assemblage of resources, and no distinction was seen
between human resource and material resource. To them, material resources, particularly capital was the most important factor
for improving the productive results of an enterprise to the utter neglect of human resources; that they cannot be developed
beyond their more or less fixed rated capacity and that their productivity is entirely dependent upon the manner in which they are
utilized by human beings. It is noteworthy that modern economists have come to realize the importance of human resource such
that the foundation of management theory today has been laid on the recognition of the fact that human beings of all the
resources are capable of the maximum growth and development. It has now become the province of management theory are
capable of the maximum growth and development. It has now become the province of management theory to demonstrate
realistically that the economic and industrial development of a country is largely dependent upon the rate of ‗brain formation‘ and
‗skill formation‘, not the rate of ‗capital formation‘.

Third, political science, which is concerned with the activities of the government, did not pay adequate attention to the problem of
administration until recent years. Like the early economists, they too were preoccupied with policy-making functions of the
government at the national and international levels. And in any case the earlier government was not as complicated as today.
The maintenance of law and order was the only function at the beginning and the assumption of the economic functions by the
government has an origin in recent history. Finally, business was looked upon as an inglorious career up to the late 19 th century.
As a result, the educated class, independent thinkers and research scholars shunned it. All that time businessmen were taugh t
by other social scientists that management could not be regarded as a separate discipline capable of formal study, analysis and
appraisal. But to improve knowledge in a particular field, the only basis available in our civilized society is to study, analyze and
appraise the activities pertinent to the subject. Unfortunately, this approach was not applied for the solution of business
problems. The business horizon was darkened further by the ‗practical man fallacy‘. It was believed by many practical
businessmen (even today it is believed by some) that the management process consisted of some hidden tricks, inner clues and
mysterious practices that could ‗be mastered only through apprenticeship‘. Accordingly, it was held that management, as a
subject matter of study was not amenable to principles.

The logic of events and the complexities of business, however, compelled the businessmen to search for a theory of
management that would help them to keep pace with the progress of time. The old tricks were found to be completely
inadequate to cope with the changing circumstances particularly those, which were introduced by technological developments.
The expanding size of the business brought the problem of human relations to the forefront of the organization. To make the
human efforts effective, a complete battery of new techniques had to be developed. The introduction of new factors like the
extensive use of specialization, the separation of ownership from management in the publicly held company, the regulatory
measures of the government and the growth of labour union ship offered a serious challenge to businessmen in their task of
management. The empirical knowledge and traditional skill were found to be of no help under the new setting. Consequently, it
impelled the progressive leaders in the field of business to make a thorough analysis of the management process. Towards the
beginning of the 20th century, an insight into the problem of management was gained when it was realized that the management
process was made up of some basic functions, regardless of the spheres or areas of social organizations.

Some of the contributors to the development of management thought are:

2.2 Fredrick W. Taylor (1856-1915) – Scientific Management

Taylor is one of the principal architects of scientific management. He was from a middle class background and worked his way
to a high position in an American steel firm. Most of his work was involved in experiments to find the ‗best method‘ of doing jobs
and had more principles of factory or production management than general principles of management.

Wanyama B. N. 10
To improve the productive efficiency of industrial concerns, he was pre-occupied with machines and their operators. With this
end in view he developed time and motion study, which was regarded as the ‗cornerstone of scientific management‘.

The central theme in his work was the advocacy for separation of planning functions from doing functions, management taking
more and more thinking functions from workers so as to make their work purely mechanical through the formulation of rules, laws
and formulas. His insistence on the application of scientific methods to managerial problems and his analytical search for best
methods or ―one best way of doing jobs‖, are the principle contribution to management theory. He also developed some ideas
on selection, training, compensation and discipline of workers, which have some fair degree of validity.

Supporters of Taylor in this school of scientific management have been H.L Gantt (1861-1919), F. Gilbreth (1868-1924) and
H.Emmerson (1853-1931), all of whom have played a complimentary role in promoting this school of thought.

The fundamental principles that Taylor saw underlying the scientific approach to management may be summarized as follows:

(a) Replacing rules of thumb with scientifically organized knowledge.

(b) Obtaining harmony in group action rather than discord
(c) Achieving co-operation of human beings, rather than chaotic individualism.
(d) Working for maximum output, rather than restricted output.
(e) Developing all workers to the fullest extent possible for their company‘s highest prosperity.

2.3 Henri L. Gantt (1861 – 1919)

Gantt, a mechanical engineer like Taylor, joined him in the same company and did a lot in promoting Taylor‘s scientific
management methods.
Gantt is best known for his development of graphic methods of describing plans and making possible better managerial control.
He emphasized the importance of time, as well as cost in planning and controlling work, which led eventually to the famous Gantt
chart widely used today as a planning tool and a forerunner of PERT.

2.4 Frank Gibreth (1868-1944) and Lilian Gibreth (1889 – 1972)

The ideas of Taylor were also strongly supported and developed by the husband and wife team of Frank and Lilian Gibreth.
Frank gave up going to university to become an apprentice brick layer at the age of 17 in 1885; He rose to the position of chief
superintendent of a building contracting firm 10 years later and became a building contractor on his own shortly thereafter.
During this period and quite independently of Taylor‘s work, he became interested in waste motions in work; by reducing the
number of bricklaying motions from 18 to 5, he made possible the doubling of bricklayer‘s productivity with no greater
expenditure of effort.

In operating his system of motion study, he identified seventeen basic elements of job motions, and any motion can be broken
down into all or some of these elements. He created a flow process chart, which facilitates the study of complete operations and
not just a single task.

In undertaking his work, Frank was greatly aided by his wife, Lilian. She was one of the earliest industrial psychologists in which
she received her PhD in 1915. After her husband‘s death in 1924, she carried on his consulting business and was widely
acclaimed as the ‗First lady of management‘ throughout her long life. She attempted to apply psychological concepts to the
practice of scientific management that she presented in her book ‗Psychology of management‘, published in 1914.

2.5 Henri Fayol (1841-1925)

Fayol is regarded as the real father of management science. After graduating himself as a mining engineer in France in 1860, he
immediately joined a local mining company as its engineer and rose to the position of M.D in 1888, because of his conspicuous
ability. He took over when the company was on the verge of collapse. Under his leadership of over 30 years the company came
out as one of the largest coal and iron combines in the country with exceptionally strong financial position.
As a successful industrialist, he had the opportunity to search for sound management principles and attempted to develop a
science of administration for management. He believed that there was a universal science of management, applicable to every
field, commerce, industry, politics, religion, work or philanthropy.

He found that activities of an industrial undertaking could be divided into six groups.

Wanyama B. N. 11
 (a) Technical (production)
(b) Commercial (buying, selling and exchanging)
(c) Financial (search for, and optimum use of capital)
(d) Security, (protection of property and persons)
(e) Accounting (Collecting and analyzing data and helping to control the use of resources)
(f) Managerial (planning, organization, command, co-ordination and control).

Pointing out that these activities exist in business of every size, Fayol observed that the first five were well known, and
consequently he devoted most of his book to an analysis of the sixth.

Fayol observed that while the most important ability for a worker is technical, the relative importance of managerial ability
increases as one goes up the scalar chain, becoming the most important skill for top-level executives. On the basis of this
conclusion, Fayol recognized a widespread need for principles of management and for management teaching. He held that
managerial ability should be acquired, as technical ability is, first in school and later in the workshop.

2.6 Fayol’s Principles of Organizational Structure

Fayol‘s second major contribution to the development of organization and management theory was to codify a set of 14 universal
principles, which could be applied to any organization.

(a) Division of Labour (or work)

The object of division of labour is to derive the benefits from the principle of specialization considered necessary in the
efficient use of labour. It applies to all kinds of work, managerial as well as technical.

(b) Authority and Responsibility

Fayol found authority and responsibility to be related. He saw authority as a combination of official power deriving from the
manager‘s position of office, and personal power consisting of a combination of intelligence, experience, moral values, past
services, etc; while responsibility is an obligation to use authority to see duties are performed.

(c) Discipline
Defining discipline as respect for agreements, which are directed at achieving obedience, application, energy and outward
marks of respect, Fayol declared that discipline requires good supervisors at all levels, clean and fair agreements and
judicious application of penalties and sanctions.

(d) Unity of Command

This means that employees should receive orders from one superior only. Dual command wreaks havoc in all concerns,
―since authority is undermined, discipline is in jeopardy, order disturbed and stability threatened‖.

(e) Unity of Direction

According to this principle, the accomplishment of a group of activities having the same objectives, there should be one
head and one plan. ―A body with two heads is in the social as in the animal sphere a monster, and has difficulty in
surviving‖.

(f) Subordination of Individual to General Interest

Common interest must prevail over individual interest, i.e., when the two are found to differ, management must reconcile them.

(g) Emuneration of Personnel

As the price of services rendered, remuneration and methods of payment should be fair and afford the maximum possible
satisfaction to employees and employers.
(h) Centralization
―Everything which goes to increase the importance of the subordinate‘s role is decentralization; everything which goes to
reduce it is centralization. The question of centralization or decentralization holds the key to the effective utilization of all
faculties of the personnel. Individual circumstances will determine the degree that will give the overall yield.

(i) Scalar Chain

It is the chain of superiors or the line of authority from the highest executive to the lowest one for the purpose of

Wanyama B. N. 12
 communication. The need for swift action should be reconciled with due regard to the line of authority by using ―gang plank‖
or direct contact.

(j) Order
This is a principle of organization relating to things and persons. Material order requires ―a place for everything and
everything in its place‖ and social order demands the engagement of ―the right man in the right place‖.

(k) Equity
Loyalty and devotion should be elicited from personnel by a combination of kindness and justice on the part of managers
when dealing with subordinates. The application of equity requires much good sense, experience and good nature with a
view to securing devotion and loyalty from employees.

(l) Stability of Tenure

Stability of tenure is essential to get an employee accustomed to doing a new work and to enable him in performing it well;
unnecessary turnover is found to be both the cause and effect of bad management.

(m) Initiative
This is conceived of as the thinking out and execution of a plan at personal instigation and which as a result increases zeal
and energy on the part of human beings. Since it is one of the ‗keenest satisfaction for an intelligent man or woman to
experience‘, Fayol exhorts managers to ‗sacrifice personal vanity‘ in order to permit subordinates to exercise it.

(n) Espirit de Corps

This is the principle that in union there is strength, emphasizing the need for teamwork and the importance of
communication in obtaining it.

2.7 G. Elton Mayo (1880-1949)

Many people regard Mayo as the creator of the modern ideas on human relations. He led a team from Havard University, which
co-operated with the Western Electric Company of Chicago in the period 1927 to 1936. This research now known as the
Hawthorne Experiments because of the fact that they were conducted in the Hawthorne works of the company were published in
the latter 30‘s and throughout the 40‘s.

Working with test groups, in their research, they sought to establish the effect the change in physical conditions, such as
illumination, rest periods, length of work days and incentive pay systems were having on workers and their productivities. These
changes did not seem to explain changes in productivity.

They found, in general, that the improvement in productivity was due to such social factors as morale, satisfactory
interrelationships between members of a work group ( a ‗sense of belonging‘), and effective management – a kind of managing
that would understand human behaviour, and serve it through such interpersonal skills as motivating, counseling, leading and
communicating.

In conclusion, the Hawthorne study established that human beings are the most important and influential input for securing a
greater output in any concern.

2.8 Mary Parker Follett (1868-1933)

Follett also made valuable contributions through books and papers on group dynamics, human relations and authority exercise in
an earlier period, some of which bear a striking similarity to the Hawthorne experiments published in a subsequent period.
She pointed out that any human group has a life of its own which is something more than the sum of the individual lives
composing it and that the individual‘s thoughts and actions are always moulded by the group influence. In all co-operative
endeavors, the group adds a plus value when properly directed. Conflicts between persons or between groups stem from
differences that can be as avenue towards and a vehicle of progress when such differences are integrated rather than
compromised or suppressed under domination.

Exercise of authority is involved in leadership, control as well as in the execution of decisions and orders. In all such situations,
the employee acceptance of authority would be satisfactory provided ―law of the situation‖ is explained through the systematic
presentation of facts.

Wanyama B. N. 13
Briefly, instead of imposing power over people, the use of authority and the task of order giving should be depersonalized.

2.9 Peter F. Drucker

Drucker is one of the most prolific writers on general management, who has written on a variety of management topics. Among
the contributions he has made are his books, Practice of Management 1954, Managing for results 1964, People Performance
1977 and Management, Tasks, Responsibilities and Practice 1979.

He came up with the concept of Management by Objectives (MBO), which has been the subject of much discussion among
Managers and scholars since 1954. He also emphasizes the importance of effectiveness over efficiency (i.e. the ability to
choose appropriate objectives or means to achieve an objective). In this respect he comments; ―The pertinent question is not
how to do things right, but how to find the right things to do, and to concentrate resources and efforts on them.‖

To be able to survive, a firm must earn sufficient profits to sell services or products, of a certain quality at a competitive price.
Drucker stresses that survival depends upon the ability to cover costs of staying in business.

He considers objectives are important in every area where performance and results directly affect the survival and prosperity of a
business. He identified eight key result areas which must be carefully selected and quantified.

These are – market standing; innovation; productivity; physical and financial resources; profitability, manager performance and
development; worker performance and attitude; and public responsibility; To these, two others have become of strategic
importance; service and quality.

Wanyama B. N. 14
3 APPROACHES TO MANAGEMENT

3.1 Scientific Management

The concept of scientific management as propounded by Taylor and Fayol, places a lot of emphasis on the output of the
production processes, as opposed to other activities of the organization. The organization is pre-occupied with increasing unit
output of the products it produces or improving and increasing the services offered to its clients, with a view of maximizing on the
revenue collected. Scientific management then, is a production geared system and all other aspects of it should be understoo d
from this perspective.

The pre-occupation with the results of production means that other areas of organizational activities may not receive full and
appropriate attention. So, scientific management does not pursue with a lot of vigour issues relating to comfort and satisfaction
of workers, or issues of environmental concern, which may arise as a result of the activities of the company. These are only
given attention in as much as they affect the production output of the organization, so that workers can only be accommodated
during a strike action because, the cost of not doing so, may be too much for the company to bear. Environmental issues are
also addressed when it is not expedient to ignore them, i.e. when there is public outcry about the harmful effects of factory
emissions or if the government insists on some action to be taken on complaints of this nature. So, in a nutshell, we could say
that scientific management is about maximizing output, increasing profits with minimal consequences to the organization.

3.2 Human Relations Approach

Concurrent with the development of scientific management by Taylor and Fayol, a considerable amount of thinking and research
were being devoted to looking at people as products of group behaviour. This is sometimes called the ‗social man‖ approach to
management. Generally regarded as the fathers of organization theory or the social systems approach to management, were
three outstanding scholars. One of these was the German intellectual Max Weber, whose empirical (i.e. based on observation or
experiment) analyses of church, government, the military and business led him to the belief that hierarchy, authority and
bureaucracy (including clear rules, definition of tasks and discipline) lie at the foundation of all social organizations.

Another was the French scholar Emile Durkhem, whose analyses and subsequent writings emphasized the idea that groups,
through establishing their values and norms, control human conduct in any social organization.

The third was the Italian Vilfredo Pareto, who in a series of lectures and books between 1896 and 1917 earned the right to be
called the father of the social systems approach. Pareto viewed society as an intricate cluster of interdependent units or
elements that is a social system with many sub systems. Among his many ideas was the tendency of social systems to seek
equilibrium upon being disturbed by outside or inside influence. His thesis was that social attitudes or sentiments function to
cause the system to seek equilibrium when disturbed by these forces. He also saw that it was the task of the elite (the ruling
class) in any society to provide the leadership to maintain the social system.

The human relations school of thought seeks to address one area in scientific management that is not given adequate attention,
that is, the human element in the production process. Scientific management leads to increased production levels and profits by
improved material and labour utilization schemes as a result of application of scientific methods. But in the process of achieving
these improvements, needs of the human labour force that are not directly related to production tend to be forgotten, with
disastrous consequences to the organization. Many organizations that operate under the concept of scientific management tend
to be insensitive to personal needs of their workers. In fact, many hold the view that your personal problems are just that – yours
-the organization has nothing to do with them, and that the contract between you and it, is the payment of services rendered after
a stipulated time period. There is an unwritten understanding that a worker should manage his or her problems without affecting
his or her performance at work. But the reality on the ground indicates otherwise. Most workers do carry their problems to work,
and sometimes, these may be such that an individual worker cannot be able to solve, given certain considerations such as
finance, time etc. It then becomes necessary for the organization to intervene; otherwise the worker in trouble may not settle
down on the job until it is solved. Here is where the human relations school of thought enters. This school holds the view that
the needs of workers should be taken into account along with other important considerations, such as production output and
profit.

That if we consider the sum totals of the needs of the worker and help him or her to satisfy them, he or she is better disposed
psychologically to work for the organization. Thus the problems of the worker are the problems of the organization. To this end
the organization strives to ensure that the environment surrounding the worker is conducive to working, as much as it can mak e

Wanyama B. N. 15
it so. So organizations that provide housing, transport to and from work, medical schemes, education for children, company cars
and many other similar fringe benefits ascribe to this philosophy and in doing so expect that workers will be grateful and
reciprocate by applying themselves fully in their jobs. The human relations approach is a people based management system
that incorporates the needs of workers to those of production and as a result synthesizes a more sensitive system.

3.3 The Systems Approach

A system is essentially a set of things interconnected, or interdependent, so as to form a complex unit. A system may be
biological e.g. a human body, or theoretical as in a set of concepts, principles, theory and techniques, in an area such as
managing. All systems except the universe interact with and are influenced by their environments, although we define
boundaries for them so that we can see them more clearly and analyze them.

An organization can be likened to a system –a system that consists of machines, materials and their needs, human labour in all
its forms and the surrounding environment which shapes the policies and affects the activities of the organization. Thus, when
managers plan, they have to take into account such external variables as markets, technology, social forces, laws and
regulations. When they design an organizational system to provide an environment for performance, they cannot help but be
influenced by the behaviour patterns people bring to their jobs from the environment external to an enterprise.

Systems management is a departure from the one factor concept, where we are solely concerned with one main consideration in
management, e.g. production output as in scientific management or human concerns as in human relations, and instead we
adopt a multifactoral approach that is geared towards taking into account all aspects of a situation before making a decision. For
example, before deciding on adopting a new production process, a manager must first find out the views of the workers, how it
will affect production levels, and any other considerations both internal and external likely to have an impact on the process.
Current management practice is system, because it is now apparent that, decisions that are made without considering all the
facts have always to be revisited with all the attendant consequences. So it is quite fashionable, nowadays, to talk of economic
systems, political systems, control systems, etc, where issues are dealt with from a holistic rather than a narrow point of view.

3.4 The Empirical or Case Approach

This analyses management by studying experience, usually through cases. It is based on the belief that through the study of
managers‘ successes and mistakes in individual cases, and of their attempts to solve specific problems, students and
practitioners will somehow come to know how to manage effectively in similar situations.

This type of approach is commonly applied in the management of the judicial process since many court cases may have a lot of
similarities in terms of logic, and what was decided for one situation may still apply in another. However, this approach is limited
in application as no two management situations are exactly alike and rarely would a solution that was applied in one instance;
work in another, without modification.

3.5 Decision Theory

The decision theory approach to management is based on the belief that since managers make decisions, we must concentrate
on the decision making process. This then builds theory around decision-making selection from among possible alternatives of a
course of action. Decision theorists concentrate primarily on the making of decisions, on the persons or organized groups
making decisions and on the analysis of the decision process.

The decision theory approach assumes that the decision making process is the most important function in management and if
we improve on this activity, then we shall improve on the way we manage. We can achieve this through studying the whole
process of decision making from analysis to synthesis to implementation and then to recycling. From the fundamentals so
gained, one can then be able to impart this information to others and train them to be better decision takers. However, since
management is not just about taking decisions, an attempt to improve the overall aspect of managing by tackling only one area is
bound to have only a limited impact. Its effectiveness is increased if it is applied in conjunction with other approaches.

3.6 The Managerial Roles Approach

Essentially, this approach is to observe what managers do and from such observations come to the conclusions as to what
managerial activities or roles are. By systematically studying the activities of chief executives in a variety of organizations,
Professor Henry Mintzberg of M‘cGill University, came to the conclusion that executives do not act out of the classical

Wanyama B. N. 16
classifications of managerial activities or functions-planning, organizing, coordinating and controlling, instead, they engage in a
variety of other activities. From his research and from others, Mintzberg came to the conclusion that managers really fill a series
of ten roles.

(a) Interpersonal Roles

(i) The figurehead role (performing ceremonial and social duties, as the organization‘s representative)
(ii) The leader role
(iii) The liaison role (particularly with outsiders)

(b) Informational Roles

(i) The recipient role (receiving information about the operation of an enterprise)
(ii) The disseminator role (passing information to subordinates)
(iii) The spokesperson role (transmitting information outside the organization)

(c) Decision Roles

(i) The entrepreneurial role
(ii) The disturbance handler role
(iii) The resource allocation role
(iv) The negotiator role (dealing with various persons and groups of persons)

Despite Mintzberg‘s arguments, these roles fall under the main functions of management, e.g., the resource allocation and
entrepreneurial roles are part of planning, while the rest are part of leading.

3.7 The Contingency or Situation Approach

Essentially this approach emphasizes the fact that what managers do in practice, depends upon a given set of circumstances (a
contingency or a situation). According to some scholars, contingency theory takes into account not only given situations but also
influence of given solutions on behavior patterns of an enterprise. For example, an organization structured along the lines of
operating functions such as finance, engineering, production and marketing, might be most suitable for a given situation,
however, managers using this approach should consider that it may foster patterns of group loyalty to the function rather than to
the company.

3.8 The Management Science Approach

This school sees managing as primarily an exercise in mathematical processes, concepts, symbols and models. The primary
focus of this school is the mathematical model. Through this device, problems can be expressed in terms of basic relationships
and, where a goal is sought, the model can often be expressed in terms of suggesting a decision as to the best thing to do.

This approach usually involves the use of computer programs, where all the parameters defining a particular problem are
identified and fed to the computer. The computer would then analyze the problem using various mathematical models and
analyses like linear programming, critical-path scheduling, inventory models, information models, simulation, etc, by considering
all the facts together and then come up with a list of possible workable solutions, from which the most agreeable to the situation
at hand would then be selected. This approach is most applicable in an environment where variable factors affecting a situation
are many, with complicated inter-relationships which may not be sufficiently analyzed without the use of computers. Such is the
situation for large multi-national organizations with vast interests spread all over the world, or economies with very large
capacities like the US, Japan and EEC. These are of sizes such that the effect of a single factor or several factors may not be
easily visualized from a manual perspective, hence the use of computers to define complex situations.

Wanyama B. N. 17
4 LEVELS OF MANAGEMENT

4.1 Definition
A manager is anybody who performs the basic functions of management, i.e. planning, organizing, directing and controlling in an
organization. Thus the functions of managers can be sharply distinguished from those of non-managers. The scope of authority
held varies from one organization to another and the types of problems dealt with may be considerably different. Though all
managers carry out managerial functions, the time spent on each function differs according to level or hierarchy.

Fig. 4.1 below shows the three distinctive levels of management in organizations, approximate relative time spent for each
function, and relative skill application for each level.

ign
Top-

s
and de
level

Technical skills
ControllIng
PlannIng

Ing
Managers

DIrectIng

Human skills

skills
Middle-level
nIz

ptional
Managers
ga

Conce
Or

First-level
Managers

Levels of Management Approximate relative time Relative skill application

spent for each function
Fig 4.1

4.2 Top-Level Management

The board of directors and the chief executive constitute the top management of a company. Functions of top management
include:

To make an outline of planning through the formulation of basic objectives and policies of the company.
To determine the basic pattern of the company‘s organization structure.
To arrange for effective co-ordination of all activities.
To make staffing of departmental and other important executives.
To prepare overall budgets and programs for short-range and long-range operations.
To exercise overall control in respect of all operations.
To ensure continuity of the company through modernization and innovation of material resources and the executive
development of human resources.
To maintain public relations with all outside parties for improving the company‘s image and protecting its interests.

4.3 Middle-Level Management

Middle level management is found to exist between top management and supervisory management. Divisional, departmental
and sectional managers constitute middle level management and its functions include:

To develop derivative objectives and policies and to prescribe procedures and methods in different areas.
To prepare departmental budgets and programs in the context of overall planning.
To execute plans through orders, instructions and advice.
To exercise control in different areas through the application of quality and cost standards.
To effect co-ordination between top management and supervising management.

4.4 First-Level Management

Supervisory management is the lowest level of management and superintendents, foremen and inspectors constitute it.
There are six important functions of supervisory management.

Wanyama B. N. 18
 To supervise the actual operations through guidance, checking and overseeing.
To translate the plan into actions through the provision of facilities and resources and the creation of favourable work
environment.
To exercise control over the work in progress through application of quality and time standards.
To send information and progress reports to higher management.
To motivate the personnel for improving productivity of the company.
To put all the managerial orders, instructions, policies and programs into action and to make higher managerial
accomplishments.

4.5 Managerial Skills

Robert L. Katz in his research identified three kinds of skills essential for managers, the importance of which depends upon a
manager‘s rank in the organization. To these may be added a fourth, very important one, the ability to design solutions.

(a) Technical skill

This is the knowledge of and proficiency in activities involving methods, processes and procedures. Thus it involves
working with tools and specific techniques. For example, mechanics work with tools and then supervisors should have the
ability to teach them how to use these tools. Similarly, accountants apply specific techniques in doing their job.

(b) Human skill

This is the ability to work with people. It is co-operative effort; it is team work; it is the creation of an environment in which
people feel secure and free to express their opinions.

(c) Conceptual skill

This is the ability to see the ‗big picture‘, to recognize significant elements in a situation and to understand the relationships
among the elements.

(d) Design skill

This is the ability to solve problems in a way that will benefit the enterprise. To be effective, particularly at upper
organizational levels, managers must be able to do more than see a problem. They must have, in addition, the skill of a
good design engineer in working out a practical solution to a problem. If managers merely see the problem and become
―problem watchers‖, they will fail. Managers must also have that valuable skill of being able to design a workable solution to
the problem in the light of the realities they face.

In relative terms, human skills and technical skills are more important at the supervisor level, where more manager-subordinate
interactions occur. Conceptual skills are usually critical at this level.

At the middle-management level, the need for technical skills decreases; human skills are still essential but conceptual skills gain
in importance. At the top management level, conceptual and design abilities and human skills are especially valuable, but there
is relatively little need for technical abilities.
It is assumed, especially in large companies, that chief executives can utilize the technical abilities of their subordinates. In
smaller firms however technical experience may still be quite important.

Wanyama B. N. 19
5 PLANNING
The functions of management or managers provide a useful structure for organizing management knowledge. Whatever new
ideas, research findings or techniques, they can always be placed in the four classifications below.
Planning
Organizing
Directing
Controlling

5.1 Planning
Planning is the selecting of missions and objectives and the actions to achieve them. It requires decision making, i.e. choosing
future courses of action from among alternatives. Planning bridges the gap from where we are to where we want to go. It makes
it possible for things to occur that would not otherwise happen. Although we can seldom predict the future and although factors
beyond our control may interfere with the best laid plans, unless we plan we are leaving events to chance.

There are various types of plans, ranging from overall purposes and objectives to the most detailed actions to be taken, such as
ordering a special stainless steel bolt for an instrument or hiring and training workers for an assembly line. No real plan exists
until a decision – a commitment of human or material resources has been made. Before a decision is made, all that exists is a
planning study, an analysis, or a proposal; there is no real plan.

Plans thus provide a rational approach to achieving pre-selected objectives.

5.2 Principles of Good Plans

(a) Plans should be based upon clearly defined objectives and make use of all available information.
(b) Plans should consider factors in the environment that will help or hinder the organization in reaching its goals.
(c) They should take account of the existing organization and provide for control so that performance can be checked
with established standards.
(d) They should be precise, practicable and simple to understand and operate.
(e) They should be flexible, to ensure that if circumstances necessitate change, this can be effected without
disrupting the plan.

5.3 Efficiency and Effectiveness of Plans

Good plans are supposed to be both effective and efficient. The effectiveness of a plan is a measure of the degree to which it
achieves the purpose or objectives, i.e. the degree to which it enhances the attainment of objectives.

The efficiency of a plan, on the other hand, refers to its contribution to the purpose and objectives, offset by the costs and other
factors required to formulate and operate it. Thus plans are efficient if they achieve their purpose at a reasonable cost, w hen
cost is measured not only in terms of time or money or production but also in the degree of individual and group satisfaction.

5.4 Types of Plans

Considering that a plan is any future course of action, there are eight courses or types of plans:

Purpose or missions
Objectives or goals
Strategies
Policies
Procedures
Rules
Programs
Budgets

Wanyama B. N. 20
5.4.1 Purposes or Missions
A purpose is the main role or basic function society defines for an enterprise or agency or any part of it e.g. the purpose o f a
business generally is the production and distribution of goods and services; that of courts is the interpretation of laws and their
application, that of a university is teaching and research while that of technical colleges is to impart vocational knowledge and
skills.
A mission is a narrower form of purpose, which is unique to a particular organization. Thus, while a business, for example, may
have a social purpose of producing and distributing goods and services, it can accomplish this by fulfilling a mission of producing
certain line of products. The missions of an oil company, like Exxon, are to search for oil, and to produce, refine, and market
petroleum and a wide variety of petroleum products, from diesel fuel to chemicals. The mission of Kimberly Clark (known for
Kleenex trade mark) regards its business mission as the production of and sale of paper and paper products.

5.4.2 Objectives or Goals

They are those ends towards which activity is aimed. They represent not only the end point of planning but also the end towards
which organizing, staffing, leading and controlling is aimed. Enterprise objectives are the basic plan of the firm, which with
limited companies is set out in the objectives clause, which is part of the Memorandum of Association. Within the enterprise, a
department may also have its own objectives. Its goals naturally contribute to the attainment of enterprise objectives, but the two
sets of goals may be entirely different, e.g. an objective of a business may be to make a certain profit by producing a given line of
home entertainment equipment, while the goal of the manufacturing department might be to produce the required number of
television sets of a given design and quality at a given cost. The two objectives are consistent, but they differ in that the
manufacturing department alone cannot ensure the accomplishment of the company‘s objectives.

5.4.3 Strategies
Strategies are broad programs of activities to achieve organization objectives. They are a guide as to how resources are to be
deployed to achieve the objectives. They furnish a framework for guiding thinking and action, i.e. strategies are action
commitments through which the mission of the enterprise is realized, e.g, a company has to decide what kind of business it is
going to be in. Is it transportation or a railroad company? Is it a container or a paper box manufacturer? The firm also has to
decide on its growth goal and its desired profitability. A strategy might include such major policies as marketing directly other
than through distributors, or concentrating on proprietary products, or have a full line of a particular brand.

5.4.4 Policies
These are general statements or understandings that guide or channel thinking in decision-making. Policies define an area
within which a decision is to be made and ensure that the decision will be consistent with, and contribute to an objective.
Policies exist at all levels of the organization and range from major company policies through major department policies to minor
policies applicable to the smallest segment of the organization. They may be related to functions such as the design of a new
product to meet a specified competition.

There are many types of policies. Examples include policies of hiring only university-trained engineers, encouraging employee
suggestions for improved cooperation, promoting from within, conforming strictly to a high standard of business ethics, selecting
competitive prices and insisting on fixed rates than cost-plus pricing.

5.4.5 Procedures
These are plans that establish a required method of handling future activities. They are chronological sequences of required
actions. They are guides to action rather than to thinking and they detail the exact manner in which certain activities must be
accomplished.

Procedures often cut across department lines. For example, in a manufacturing company the procedures for handling orders will
almost certainly involve the sales department (for the original order), the finance department (for acknowledgement of receipt of
funds and for customer credit approval), the accounting department (for recording the transaction), the production department
(for the order to produce goods or authority to release them from stock), and the traffic department (for determination of sh ipping
means and route).

There is a definite relationship between procedures and policies, e.g. company policy may grant employees leaves; procedures
established to implement this policy would provide for scheduling leaves to avoid disruption of work, setting methods and rates of

Wanyama B. N. 21
leave pay, maintaining records to assure each employee of leave and spelling out the means for applying for leave.

5.4.6 Rules
Rules spell out specific required actions or non-actions, allowing no discretion. They are usually the simplest type of plan.

There is often confusion between rules and policies or procedures. Rules, unlike procedures guide action without specifying a
time sequence. In fact, a procedure might be looked upon as a sequence of rules. A rule, however, may or may not be part of a
procedure. For example, ‗no smoking‘ is a rule quite unrelated to any procedure; but a procedure governing the handling of
orders may incorporate the rule that all orders must be confirmed the day they are received. This rule allows no deviation from a
tested course of action and in no way interferes with the rest of the procedure for handling orders.

Similarly rules should be distinguished from policies. The purpose of policies is to guide decision making by marking off areas in
which managers can use their directions. Although rules also serve as guides they allow no discretion in their application. In
policy application, people may use their own thinking and judgment. Rules and procedures, by their very nature are designed to
replace thinking; they are used when we do not want people in an organization to use their discretion.

5.4.7 Programs
Programs are a complex mix of goals, policies, procedures, rules, task assignments, steps to be taken, resources to be
employed and other elements necessary to carry out a given course of action; they are ordinarily supported by budgets. They
may be as major as an airlines program to acquire a $400 million fleet of jets or a five-year program to improve the status and
quality of its thousands of supervisors. Or they may be as minor as a program formulated by a single supervisor to improve the
morale of workers in the parts manufacturing department of a farm machinery company.

A primary program may call for many supporting programs. In the case of the airline mentioned above, the program for investing
in new jobs involving many millions of dollars for the purchase of the air crafts and the necessary spare parts, requires many
supporting programs if the investment is to be properly used. A program for the maintenance and operating bases with spare
parts and components must be developed in detail. Special maintenance facilities must be prepared and maintenance personnel
trained. Pilot and flight engineers must also be trained, and if the new jets mean a net addition to flying hours, flight personnel
must be recruited. Flight schedules must be revised and ground station personnel trained to handle the new airplanes and their
schedules as service is expanded to new cities in the airlines‘ system. Advertising programs must give the adequate publicity to
the new service. Plans to finance the aircraft and provide for insurance cover must be developed.

These and other programs must be devised and implemented before any new aircrafts are received and placed in service.
Furthermore, all these programs call for co-ordination and timing, since the failure of any of these networks of supporting plans
means delay for the major program and unnecessary costs and loss of profits. Some programs, particularly those involving the
hiring and training of personnel, can be accomplished too soon as well as too late; needless expense results from employees
being available and trained before their services are required.

5.4.8 Budgets
A budget is a statement of expected results expressed in numerical terms. It may be referred to as a ‗numberiz ed‘ program. A
budget may be expressed in financial terms, in terms of labour-hours, units of products, or machine hours, or in any other
numerically measurable terms. It may deal with operations as the expense budget does; it may reflect capital outlays, as the
capital expenditures budget does; or it may show cash flow, as the cash budget does.
Making a budget is clearly planning. The budget is the fundamental planning instrument in many companies. A budget forces a
company to make in advance, whether for a week or for 5 years, a numerical compilation of expected cash flow, expenses,
revenues, capital outlays, labour, or machine-hour utilization. The budget is necessary for control, but it cannot serve as a
sensible standard of control unless it reflects plans.

5.5 Classification of Plans

Planning provides a future course of action. Such a course of action may involve either repetitive or non-repetitive operation as
well as short term or long-term operation. According to the nature and use of planning, different plans can be divided into three
groups:

Basic plans

Wanyama B. N. 22
 Standing plans
Master plans

5.5.1 Basic Plans

Objectives and strategies are basic plans that are necessary for all types of planning and operations. The entire planning activity
is geared into action through their formulation. They have predominant importance not only in planning, but they have a unique
role in other managerial work of organizing, directing and controlling.

5.5.2 Standing Plans

Standing plans that include policies, procedures and methods have applications only in repetitive action; whether it involves long
term or short-term operations. To ensure consistency of executive behaviour and managerial action, standing plans provide a
ready guide to action for solving recurring problems. Standing plans have no use unless similar problems appear in the
organization again and again. For non-repetitive operations, special problems are faced in each case and they are to be solved
in a different way.

5.5.3 Master Plans

Programs are master plans that indicate the complete course of action along with timing and strategy considerations. All plans
are meshed together in an orderly way under planning for mapping out the course of action. Programs are applicable to both
repetitive and non-repetitive operations. As non-repetitive operation does not require standing plans, some special
considerations arise in programming for such operations.

Plans can however be classified in various other ways. In terms of jurisdictions, plans may be company wide (overall) or
subsidiary (derivative) in nature. In terms of scope, plans may be either detailed or broad in character. In terms of enterprise
functions, may relate to production, sales or other activities.

5.6 Steps in Planning

The following are practical steps for general application in planning, whether the managers are dealing with major programs,
such as acquisition of a plant or a fleet of jets or the development of a product, or with minor plans, which are usually simpler and
therefore some of the steps would be more easily accomplished. In practice, managers must study the feasibility of possible
courses of action at each stage. The steps are as listed below:

Being aware of opportunities

Setting objectives or goals
Developing planning premises
Determining alternative courses
Evaluating alternative courses
Choosing an alternative
Formulating supporting (derivative) plans
Numberizing plans by making budgets

5.6.1 Being Aware of Opportunities

‗Opportunities‘ are actually ‗problems‘, i.e, a state of disorder or confusion and a need for a solution to achieve a given goal is
what is constructively regarded as an opportunity.

An awareness of opportunities in the external environment as well as within the organization is the real starting point in planning.
Managers should take a preliminary look at possible future opportunities and see them clearly and completely, know where they
stand in light of strengths and weaknesses, understanding what problems they need to solve and why, and know what they
expect to gain. Setting realistic objectives depends on this awareness. Planning requires a realistic diagnosis of the opportunity
situation.

5.6.2 Establishing Objectives

The second step in planning is to establish objectives for the entire enterprise and then for each subordinate work unit. This is

Wanyama B. N. 23
done for the long term as well as the short-term range. Objectives specify the expected results and indicate the end points of
what is to be done, where the primary emphasis is to be placed, and what is to be accomplished by the network of strategies,
policies, procedures, rules, budgets and programs.

Enterprise objectives give directions to the major plans, which by reflecting these objectives define the objective of every major
department. Major department objectives, in turn, control the objectives of the subordinate departments and so on down the line.
Thus objectives form a hierarchy.

5.6.3 Developing Premises

These are the assumptions about the environment in which the plan is to be carried out. It is essential to establish, circulate, and
obtain agreement to utilize critical planning premises such as forecasts, applicable basic policies and existing company plans.

Forecasting is important in previewing. It seeks to answer questions such as, what kind of markets will there be? What volume
of sales? What prices? What products? What technical developments? What costs? What wage rates? What tax rates and
policies? What new plants? What policies with respect to dividends? What political or social environment? How will expansion
be financed? What are the long-term plans?

There are a number of sources to draw from when preparing forecasts. They include economic survey publications,
business/academic publications, bank publications, etc

5.6.4 Determining Alternative Courses

The fourth step in planning is to search for and examine alternative courses of action, especially those not immediately apparent.
When alternatives are found, they have to be reduced so that the most promising possibilities may be analyzed.

5.6.5 Selecting a Course

This is the point at which the plan is adopted, i.e. the real point of decision-making. Occasionally, an analysis and evaluation of
alternative courses will disclose that two or more courses are advisable, and the manager may decide to follow several course s
rather than one.

5.6.6 Formulating Derivative Plans

When a decision is made, planning is seldom complete, and a seventh step is indicated. Derivative plans are almost invariably
required to support the basic plan.

5.6.7 Numerating Plans by Budgeting

After decisions are made and plans are set, the final step in giving them meaning, as was indicated in the discussion of types of
plans, is to numerize them by converting them into budgets. The overall budgets of an enterprise represent the sum total of
income and expenses, with resultant profit or surplus, and the budgets of major balance sheet items such as cash and capital
expenditures. Each department or program of a business or some other enterprise can have its own budgets, usually of
expenses and capital expenditures, which tie into the overall budget.

If done well, budgets become a means of adding together the various plans and also set important standards against which
planning progress can be measured.

5.7 Application of Planning Steps in Preparing for College (Example)

Consider how high school students could probably follow the planning steps to some degree when planning for college
education. First, they are aware of opportunities to attend college and the opportunities derived from a college education. They
set objectives in a variety of areas, such as the area of study and the completion of the degree within 4 years or diploma in 3
years. They also develop panning premises. Thus, they may make the assumption that scholarships/loans are available or that
they may have to work while attending college or get their parents/guardians to pay their fees. Some students may assume that
they want to attend a local college while others may want to study abroad. In each situation, there are usually several
alternatives available that should then be carefully evaluated. Thus, students may assess the advantages and disadvantages of
applying for admission at different colleges. After receiving several acceptance letters, the students have to select the
appropriate college. This is an important decision point. After making a choice, they need to formulate derivative plans, which

Wanyama B. N. 24
may include selecting housing, moving to the college hostels or renting a private room near the college. Then the students need
to numberize their plans by converting them into budgets, which may include tuition, transport and housing costs, clothing and
entertainment expenses, and so on.

These steps do not follow the same sequence. For example, when evaluating the alternative courses, one may have to go back
and make new assumptions for the alternatives, or one may develop different courses of action on the basis of different
assumptions. One course may be based on the assumption of obtaining a scholarship, another course on the premise that one
has to work through college. Clearly, then, planning is not a linear process but a re-iterative one.

5.8 Management by Objectives (MBO)

MBO is a performance-based approach to management using, wherever possible objective standards of measurement. The
basis of the system is that every manager is given a clear idea of the results expected. A detailed job description and targets
required are agreed with the superior. Appraisal is made by comparing results with targets.

Fundamentally, management achieves objectives through people. If therefore the objectives of people could be linked with those
of management a harmony of objectives would result to benefit all. It has a participative connotation and is based on the
assumption that managers will be more effective and will be more committed to objectives if they are themselves involved in
establishing them.

It also presupposes that they work in an organization that encourages self control and self development.

Stages in management by objectives are:

(a) Top management sets preliminary objectives in terms of what is perceived to be the purpose or mission and the more
important goals of the enterprise. The objectives are set for variable periods, some for shorter periods such as a
quarter, a year, others for longer period such as five years, etc as is appropriate in given circumstances. This is done
in view of the company‘s strengths and weaknesses in light of available opportunities and threats.
(b) The organization structure is then analyzed and set with a view to define the relationship between expected results and
the responsibility for attaining them, i.e. to define the subordinate managers‘ roles.
(c) The superior then proceeds to work with subordinates in setting their objectives. He guides them in terms of what they
can accomplish, in what time and with what resources. He ensures that the goals they set are realistic and supportive
of upper level objectives, consistent with the goals of other managers in other functions and with the longer this
objectives and interests of the company. In setting the objectives the performance standards are also set, which will
serve as measures of accomplishment.
(d) Performance is then evaluated against the performance standards, primarily by the subordinates themselves. This has
the effect of encouraging self appraisal and self development with the result that emphasis is on performance rather
than on personality.

5.8.1 Benefits or Advantages of MBO

(a) Motivation – the manager, acting as a coach, elicits the active involvement of subordinates in the appraisal process,
which leads to commitment and creates an environment for motivation.
(b) Improved managing-MBO forces managers to think about planning for results, rather than merely planning activities
or work. It also requires that managers think of the way they will accomplish results, the organization and personnel
they will need to do so and the resources and assistance they will require. Having a clear set of goals also leads to
better control, all of which results in greatly improved management.
(c) Clarifies organizational roles - MBO forces managers to clarify organizational roles and structure by building
positions around the key results expected from people occupying them.
(d) Encourages personnel commitment - One of the great advantages of MBO is that it encourages people to commit
themselves to their goals. No longer are people just doing work, following instructions and waiting for guidelines and
decisions. They are now individuals with clearly defined purposes. Having an opportunity to put theirs ideas into
planning programs, understanding their areas of discretion and having obtained positive help from their supervisors are
the elements that make for a feeling of commitment.
(e) Development of effective controls - Since MBO sparks more effective planning, it also aids in developing effective
controls. Control involves measuring results and taking action to correct deviations from plans in order to ensure that
goals are reached. A clear set of verifiable goals is the best guide to control.

Wanyama B. N. 25
5.8.2 Weaknesses or Disadvantages of MBO
(a) Failure to teach the philosophy of MBO – subordinate managers have to be trained and coached for working under
a philosophy of MBO. They in turn must explain to subordinates what it is, how it works, why it is being done, what part
it will play in appraising performance and how participants can benefit.
(b) Failure to give guidelines to goal setter – MBO like any other planning cannot work unless managers are provided
with proper guidelines for goal setting on their part by way of disseminating the planning premises and imparting
knowledge of the network of company objectives and policies.
(c) Difficulty of setting goals – The possibility of setting easy goals by managers in quantitative terms only without caring
for their qualitative aspects should guarded against.
(d) Emphasis on short-run goals – The tendency to overlook long-run objectives and to put emphasis on short-run
objectives is to be checked on the part of managers.
(e) Danger of inflexibility – As changes in top-level objectives call for a corresponding change in lower-level objectives
inflexibility in objectives may be introduced by the failure to revise lower-level objectives.
(f) Difficulty to set measurable objectives for staff groups – It is not easy to set measurable objectives for staff
groups who only exist to help the line achieve its ends.

Wanyama B. N. 26
6 ORGANISING
It is part of managing that involves establishing an internal structure of roles for people to fill in an organization. It is intentional in
the sense of making sure that all the tasks necessary to accomplish goals are assigned and, it is hoped, assigned to people who
can do them best.

Consider an example in as simple group effort as setting up camp on a fishing expedition. Everyone could do anything he or she
wanted, but activity would also most certainly be more effective and certain tasks would be less likely to be left undone if one or
two persons were given the job of gathering firewood, others the assignment of getting water, others the task of starting a fire,
others the job of cooking, etc.

6.1 Organizing Function – Why it is necessary

It is often said that good people can make any organization pattern work. Some even assert that vagueness in organization is a
good thing in that it forces teamwork, since people know that they must cooperate to get anything done. However, there can be
no doubt that good people and those who want to cooperate will work together most effectively if they know the parts they are to
play in any team operation and the way their roles relate to one another. This is as true in business or government as it is in
football or in a symphony orchestra. Designing and maintaining these systems of roles is basically the managerial function of
organizing.

6.2 Organizational Structure

The organization structure consists of a group of people working together to attain the desired set objectives of a given
organization. People in an organization do not start working together automatically unless they are provided with some
mechanism in the organization structure. It reveals who has authority over whom in the organization. It provides an invisible
framework to integrate all the people working together towards common goals. The organizational structure provides an
environment within which leadership qualities can be practiced and nurtured, as well as proving to be an indispensable tool of co-
ordination in an organization.

An organization structure is a system of well defined jobs, each bearing a definite measure of authority, responsibility and
accountability to enable people within a given enterprise to work more effectively together in accomplishing their own as well as
organizational goals and objectives. In the organization structure, the work that each individual does is part of a larger p attern of
inter-relationships that permeates throughout the organization. These, set up boundaries and pathways that must be followed to
achieve the individual as well as organizational objectives.

Each member of the organization is supposed to react toward the others, not in personal terms of like or dislike, but in terms of
the functions they have to perform and the place they occupy on the organization hierarchy.

6.2.1 Merits of Formal Organization Structure

(a) It is deliberately planned; it is more predictable.
(b) It facilitates laying down of objectives and policies.
(c) It has an unlimited scope for expansion.
(d) There are clear-cut bounds of jurisdiction
(e) The standards of performance can be established precisely and with exactness.

6.2.2 Weakness of Formal Organizational Structure

(a) Co-ordination of activities and communication tend to become sources of problems depending on who is looking at
what.
(b) If there is poor co-ordination and workers social contact is curtailed, these circumstances create a vicious circle of
grievances which test severely the organizational bonds created by the organizational structure.
(c) Problems due to conflict between staff and line organization is another difficulty encountered in formal organizations

Wanyama B. N. 27
6.3 Types of Formal Organization Structures
Following are some of the formal organization structures:
Line organization
Line and staff organization
Functional organization
Matrix organization
Committee Organization
Strategic Business Units (SBUs)

6.4 Line Organization Structure

In this type of organization structure, the positions having authority, responsibility and accountability for achieving objectives are
analyzed in a chain that also indicates the direction of communication and command. Line managers have a clearly defined role
to play in the organization that requires understanding of the nature of line authority. Fig. 6.1 shows a typical line
organization chart.

Board of Directors

General Manager

Plant Manager 1 Plant Manager 2

Plant Supdt Marketing Supdt Plant Supdt Maintenance

Foreman Foreman Office Supdt Accountant

Operation Staff Operation Staff Clerical Staff Clerical Staff

(f)

Fig 6.1 Line Organization Chart

6.4.1 Advantages of Line Organization

(a) The division of authority is very precise
(b) Quick decision-making is fostered or made possible.
(c) Discipline is more easily maintained. Buck-passing is eliminated and accountability is effective.

6.4.2 Disadvantages of Line Organization

(a) Executives tend to become overloaded with too many duties and management members may be difficult to replace.
(b) Everyone clings to his duties or areas of responsibility. People in positions of authority find it difficult to delegate tas ks
to their juniors or subordinates.
(c) Full benefits of division of labour and of specialization are not realized.
(d) Communication channels possible are insufficient.
(e) Large and complex enterprises cannot adopt this system.

6.5 Line and Staff Organization

In this type of organization, along with line positions, there are positions created primarily for the purpose of specialized advice,
and services to various units of the organization. Line functions are those that have direct impact on the accomplishment of the
objectives of the enterprise while staff functions are those that help the line persons work most effectively in accomplishing the
objectives. To that extent most people classify production and sales (and sometimes finance) as line functions and purchasing,
accounting, personnel, plant maintenance, work study, quality control and industrial relations as staff functions. Authority flows in

Wanyama B. N. 28
vertical line downwards and in addition to this there are experts or specialists in charge of particular functions. Line authority
remains the avenue for command or performance of the work and follows the scalar principle. It consists of the authority
relationships between line managers. Generally speaking, most staff managers do not exercise their staff authority along the
channels of line authority but rather to the line authority. The staff assistant assists the executive to whom he is allocated but
has no executive authority of his own and acts on behalf of his superior. A typical line and staff organization structure is shown in
Fig 6.2 below:

Managing Director

General Manager

Personnel Manager Production Manager Finance Manager Material Manager Marketing Manager

Industrial Engineer Production Supdt Accountant Cost Account

Foreman Foreman

Operators Operators

Fig 6.2 Line and Staff Organization Chart

6.5.1 Distinction between Line and Staff

In modern business, the problems confronting the manager at all levels are so varied and complex that he cannot possibly be a
master of them all. Specialist assistance can be provided best by highly trained and experienced consultants or by agencies that
have staff relationships to the organization as a whole. Staff offers advisory service and line do the work. A staff man cannot
give orders to a line officer. Staff prescribes the method and line follows the procedure.

6.5.2 Functional Organization

Functional authority is the right that is delegated to an individual or a department to control specified processes, practices,
policies, or other matters relating to activities undertaken by persons in other departments. The whole task of management and
direction of subordinate is divided according to the type of work involved. An organization that is organized along the lines of its
major activities is referred as a functional one.

The concept is related to staff because in both staff and functional, use is made of specialized personnel in making decisions
involving detailed and complex work activities. But to distinguish functional and staff organization structures, we can say that,
staff structures in many organizations are mainly advisory in nature, while functional structures although being also advisory,
posses some limited authority in the performance of the function. Functional authority is not restricted to managers of a
particular type of a department. It may be exercised by service and staff department heads because they are usually composed
of specialists whose knowledge becomes the basis for functional controls.

Functional relations arise when a specialist contributes a service to the line managers, who are the organization executives. This
specialist is often called a ‗function‘ officer and he has responsibility to see that his special activities are effectively carried out
throughout the organization. He advises ‗line‘ colleagues and is responsible for assisting line managers.

Wanyama B. N. 29
 Managing Director

Human Relations Purchasing Public Relations

Controller
Manager Manager Manager

Manager Manager Manager

Western Division Central Division Eastern Division

Normal line relationship

Delegation of functional authority from line authority of the MD

Fig 6.3 Functional Organizational Structure

6.5.3 Advantages Functional Organizational

(a) Enables benefits of specialization to be achieved.
(b) Workers have a higher degree of efficiency.
(c) It is easier to design for specific jobs and job environment.

6.5.4 Disadvantages Functional Organizational

(a) Weakness in discipline because workers have to work under different bosses.
(b) Lack of co-ordination due to division and sub-division of work.
(c) Conflicts among workers in different sections of departments.

6.6 Matrix Organization Structure

The basis of matrix or grid organization is the combining of functional and project or product patterns of departmentation in the
same organization structure. As shown in fig 6.4, there are functional managers in charge of their specialized areas and an
overlay of project managers responsible for the end product. It is dictated by the need to establish responsibility for ensuring end
results, i.e. the final product. Project managers define what has to be done; functional managers determine how to do it. T he
project manager must integrate the work of functional departments and the project teams. Members of the project team agree to
accept the authority of the project manager during the tenure of the project.

This kind of organization occurs frequently in engineering projects such as bridge building in construction industry, designing and
launching of weather satellite in aerospace field, installation of an electronic data processing system, and other fields such as in
marketing (e.g. planning and executing an advertising campaign for a major new product), management consulting firms in which
professional experts work together on a project etc. The matrix organization attempts to merge traditional line authority fo r
decision making with project-oriented, multi-disciplinary, team-based approach.

Wanyama B. N. 30
 MATRIX ORGANIZATIONAL STRUCTURE

Chief Executive

Production Finance Marketing Materials and

Personnel
Procurement

Product Finance Marketing Materials Personnel

Project A
(Manager)
Group Group Group Group Group

Product Finance Marketing Materials Materials

Project B
(Manager)
Group Group Group Group Group

Product Finance Marketing Materials Materials

Project C
(Manager)
Group Group Group Group Group

Fig 6.4 Matrix Organization Structure

6.6.1 Advantages of Matrix Organization

(a) Offers better control of project as it is oriented toward end results.
(b) Results into high morale of staff as professional identification is maintained.
(c) Lowers program costs which results into higher profit margins.
(d) It pin-points product-profit responsibility
(e) It enables shorter project development time
(f) Aids the development of managers, as the work includes wider responsibilities.

6.6.2 Disadvantages of Matrix Organization

(a) A state of conflict in organization authority exists between functional and project managers.
(b) Has more complex internal operations.
(c) Possibility of unity of command exists.
(d) Lower staff utilization.
(e) Requires manager effective in human relations.

6.7 Committee Organization

A committee is a group of persons to whom, as a group, some matter is committed. It may be established to make
recommendations on a problem largely because the CEO or department head does not wish to take full responsibility for making
a decision. Some committees undertake management functions, e.g. policy making; others do not, e.g. operating committees.
Some make decisions, others deliberate but do not decide, some have authority to make recommendations to a superior and
others are formed purely to receive information without recommending or deciding.

Ad hoc committees are usually temporary, as they are created for a specific purpose, or to solve short-range problems, rather
than administrative purposes. If they are established as part of the organization structure, with specifically delegated duties and
authority, they are called formal committees.

Examples of committees are budget committees, cost reduction committees, joint consultation committees, etc.

6.7.1 Factors Influencing the Success of a Committee:

(a) It should be representative of all interests.
(b) It should have a chairman respected by the group, who can integrate committee deliberations and handle the group
firmly and fairly.
(c) Suitable subjects should be chosen for group action and make precise proposals by agenda; any reports should be

Wanyama B. N. 31
 circulated prior to the meeting.
(d) Should have clear-cut terms of reference.
(e) Should have minutes circulated and approved.
(f) Should be worth the cost of its operation.

6.7.2 Advantages of Committees

(a) Actions and ideas of related company units are coordinated.
(b) Communications are improved.
(c) Judgments and executive talents are pooled and full use is made of specialization.
(d) Responsibilities for decisions are shared, rather than borne by a person.

6.7.3 Disadvantage of Committees

(a) They are often a waste of time or resources, especially if there are unsatisfactory compromises, or delay by a few
members.
(b) Executives may hide behind committee decisions and avoid responsibility for their individual actions.

6.8 Strategic Business Units (SBUs)

These are distinct little businesses set up as units in a larger company to ensure that certain products or product line is promoted
and handled as though it were an independent business. The essence of it is to give the product the same attention as it would if
it were developed, produced and marketed by an independent company.

Each SBU should have its own manager appointed with responsibility for guiding and promoting the product from the research,
production, packaging and marketing and with bottom line responsibility for its profitability.

To be called an SBU, a business unit must meet the following criteria:

(a) Have its own mission, distinct from other SBUs.

(b) Have definable group of competitors.
(c) Prepare its own integrative plans, fairly distinct from those of other SBUs.
(d) Manage its resources in key areas, and
(e) Have proper size – neither too large nor too small.

The major benefit of utilizing SBU organization is to provide assurance that a product will not get ―lost‖ among other products
(usually those with bigger sales and profits) in a large company. It preserves the attention and energies of a manager and staff
whose job it is to guide and promote the product or product line.

6.9 Organizational Levels and the Span of Management

While the purpose of organizing is to make human co-operation effective, the reason for levels of organization is the limitation of
the span of management, i.e., there is a limit to the number of persons a manager can supervise effectively even though this limit
varies depending on situations.

In choosing the span, it must be decided how many subordinates a superior can manage. In practice, it has been found that 4 to
8 subordinates at the higher levels of organization and 8 to 15 or more at the lower levels. The number is higher at the lower
levels because what is delegated is responsibility for the performance of specific tasks and not for the supervision of others.

6.10 Informal Organizations

This could be defined as any joint personal activity without conscious joint purpose, even though contributing to joint results.
They generally appear as a natural process in the work environment with a view to satisfying the need for social contact. Th us,
the informal relationships established in the group of people fellowshipping together at lunchtime may aid in the achievement of
organizational goals. It is much easier to ask for help on an organization problem from someone you know personally, even if he
or she may be in a different department, than from someone you know only as a name on an organization chart.

Wanyama B. N. 32
More recently informal organization has been defined as ―a network of personal and social relations not established or required
by the formal organization but arising spontaneously as people associate with one another‖.

Thus informal organization relationships not appearing on an organization chart may include, the lunch time fellowshippers, the
machine shop group, the morning coffee regulars, kinship, etc.

A manager should be aware of the presence and influence of non-formal organizations to the enterprise. He could use them as
channels of communication and moulders of employee morale by recognizing and taking full advantage of them. They facilitate
administration, encourage sound balanced growth and diversification, provide for the best use of human beings and stimulate
creativity for overall growth. Informal organization gives adequate support to the formal organization structure by supplying
individual and social satisfactions to members of the organization.

6.10.1 Benefits of Informal Organization

(a) The informal organizations provide good channels of communication (grapevine) between management and the
workers, which is good for motivating employees and removing the void in communication.
(b) It provides the means of satisfying social needs, removes monotony and boredom and makes the job enjoyable.
(c) It maintains certain standards of conduct with reference to work performance which is either favorable or unfavorable
to management, made effective through the boycott or ridicule of offending members.
(d) The informal organization can lighten the workload of the formal managers through supplying job tips, training new-
comers or helping in other ways.
(e) Where standards of the informal groups are supportive of the organization‘s goals they can be of great assistance to
management in improving productivity. For this reason, intelligent managers nurture the growth of these groups and
participate in them for understanding human problems and taking remedial actions.
(f) It can alleviate deficiencies in communication, motivation, job satisfaction and personal contentment in formal
organization.

6.11 Grapevine
This is an informal group working in the role of communications. It is one of the most significant information relationships, almost
supplementing formal organization. This relationship is generally quite structureless but comes to life when members of informal
organization who know one another well enough pass on information in some way connected with the enterprise. In the typical
enterprise, members deriving both material security and status from it, the desire for information concerning the organization and
its people, is strong enough so that such information is rapidly transmitted between persons who know and trust one another.

The grapevine thrives on information not openly available to the group, whether because it is regarded as confidential, because
formal lines of communication are inadequate to disperse it, or because it is of the kind that would never be formally disclosed.

Since all informal organizations serve essential human communication, the grapevine is inevitable and valuable. The intelligent
top managers would probably be wise to feed it with accurate information since it is very effective for quick communication.

6.12 Synergy
As seen above, managers, being aware of the existence of informal organization within the formal organization, could take
advantage of their existence and end up with a firm whose performance is greater than it would have been without the informal
organization. It is generally called 2 + 2 = 5 effect, to denote that the firm has a combined performance that is greater than the
sum of its parts. If the recognition of the informal organization does not add to performance, then there is no synergy.

6.13 Power, Authority and Responsibility

Power is the ability of individuals or groups to induce or influence the beliefs or actions of other persons or groups.
There are many types of power:

(a) Legitimate power arises from one‘s position, whereby a ―position‖ is accepted by people as being ―legitimate‖; the power of
knowledge which comes from the expertness of a person or a group such as Lawyers, Doctors, Professors etc.
(b) Referent power is influence that people or groups may exercise because people believe in them and their ideas like was
the case with Martin Luther King.

Wanyama B. N. 33
(c) Reward power arises from the ability of some people to grant rewards, e.g. a university professor can grant or withhold
high grades. Similarly a purchasing agent might be able to exercise considerable influence through their ability to expedite
or delay a much-needed spare part.
(d) Coercive power normally arises from legitimate power; it is the power to punish, whether by firing a subordinate or
withholding a merit increase.

Power is a much broader concept than authority.

Authority in an organization is the right arising out of one‘s position to exercise discretion in making decisions affecting others. It
is one type of power, but power in an organization setting i.e. power of position or legitimate power. Authority emanates in a
company from shareholders to the board of directors and down the scalar chain.

Responsibility on the other hand is an obligation to use authority to see duties are performed. It is also an obligation to perform
owed to a person‘s superior.

Accountability is concerned with the fact that each person who is given authority and responsibility must recognize that the
executive above him will judge the quality of his performance.

By accepting authority, a person denotes his acceptance of responsibility and accountability. The person who is delegating
requires subordinates to allow their performance to be reviewed and evaluated and holds them accountable for results.

6.14 Kinds of Authority

(a) Formal authority is conferred by law and delegated within an organization.
(b) Functional authority is based upon specialized knowledge.
(c) Personal authority is based upon seniority or leadership.

6.15 Delegation
One person in an enterprise cannot do all the tasks necessary for accomplishing a group purpose, just as it is impossible, as an
enterprise grows, for one person to exercise all the authority for making decisions. Similarly, there is a limit to the number of
persons managers can effectively supervise and make decisions for. Once this limit has been passed, authority must be
delegated to subordinates who will make decisions within the area of their assigned duties.

Delegation is a process whereby a superior gives a subordinate discretion to make decisions. It is authority, which is delegated.
In effect, it means entrusting some part of the work of management to subordinates.

The process of delegation involves the following steps:

(a) Determining the results expected from a position.
(b) Assigning tasks to the position.
(c) Delegating authority for accomplishment of tasks.
(d) Holding the person in that position responsible for the accomplishment of the tasks.

In practice, it is impossible to split this process, because a person cannot be expected to accomplish goals without being given
authority to achieve them, just as is delegating authority without knowing the end results for which it will be used. Moreov er,
since the superior‘s responsibility cannot be delegated, a boss must hold subordinates responsible for completing their
assignments.

6.16 Departmentation
This is the process of dividing activities into units and sub-units. The term is not confined to the creation of such units as those
called departments only, but designates a distinct area, division or branch of an organization over which a manager has authority
for the performance of specified activities. Dividing up work calls for an identification of total activities into units and sub units.

In some enterprises, departmental terminology is loosely applied; in others, especially large ones, a stricter terminology indicates
hierarchical relationships. Thus, a Vice President may head a division; a director, a department; a manager, a branch; and a

Wanyama B. N. 34
chief, a section.

6.17 Patterns of Departmentation

Departmentation may be effected by the following methods:

(a) By Functions
Important enterprise functions provide the usual basis for classifying activities into departments. Manufacturing, marketing,
finance, personnel, accounting, purchasing and engineering are the typical functions of an industrial enterprise, and the
departments may be established on the basis of such functions.

(b) By Product
Products manufactured may be adopted for division as well as for subdivision purposes. When there are several product
lines and each product line consists of a variety of items, functions classification fails to give a balanced emphasis on each
product. For the sake of expansion and development of their products, many large sized enterprises have created more or
less autonomous, self-sufficient product divisions based either on one single product or on a group of related products. A
gigantic structure with separate product lines is usually laid on this pattern of departmentation, which is technically called
divisionalization. Apart from this use, products or services may be made the basis for dividing activities by a departmental
store, a banking concern and an insurance company. Again, manufacturing and marketing departments may sub-divide
their activities on the basis of products.

(c) By Territories
This is common in enterprises that operate over wide geographical areas. In this case activities in a given area or territor y
are grouped and assigned to a manager. They are made self-contained divisions of the organization. Apart from this
divisionalization, the marketing activities are very often subdivided on basis of geographical areas.

(d) By Customers
This is grouping activities so that they reflect a primary interest in customers. Customers become the key to the way
activities are grouped when each of the different things an enterprise does for them is managed by one departmental head.
Examples are the industrial sales department of a wholesaler that also sells to retailers; also the corporate manager of an
internet access company is another example.

(e) By Process
Manufacturing activities may be sub-divided on the basis of their processes of production. Similar machines are grouped
into separate sections that are utilized for a distinct operation of the job. For example, lathe machines, drill machines,
grinding machines and milling machines are placed in each distinct unit. In office work also, it could be the filing
department, mail-handling department, duplicating department, etc.

(f) By Simple Numbers

This is achieved by tolling off persons who perform the same duties and putting them under the supervision of a manager.
The essential fact is not what these people do, where they work, or what they work with; it is that the success of the
undertaking depends only on the number of people involved in it.

It used to be an important method in the organization of tribes, clans and armies.

Wanyama B. N. 35
7 DIRECTING
This is a function of human relations and motivation. Different writers could denote this function variously, such as, command,
leadership, motivation, and execution or actuating.

Directing is the sum total of managerial effort that is applied for guiding and inspiring the personnel to make better
accomplishments of the jobs allotted to them in the organization. It is concerned with securing the fullest co-operation of
personnel for the realization of collective purposes or economic objectives towards enterprise goals.

It involves guiding and supervising subordinates. These subordinates must be oriented (trained) into the undertakings, ways,
guided towards improved performance and motivated to work effectively towards enterprise goals.

The managerial functions of planning and organizing are preparations for work performance in an enterprise. The real work
begins with the directing function that is exclusively concerned with human beings of the enterprise.

Favourable conditions must exist both within and without the enterprise for enabling the employees to develop a co-operative
attitude to achieve the desired goals. Needs, desires and aspirations of the personnel are to be taken into consideration for
creating the will to work in them. Employees, as human beings, are subject to perception, beliefs and emotions which prevent
them from working to their full measures of support and energy, workers must be assured of having personal and social
satisfactions from the operating activity.

Also workers identify themselves with some social groups that emerge as informal organization in the enterprise. As members of
the informal group, workers always expect the furtherance of group interests. That is to say, the worker‘s ability and willingness
to perform are influenced by their motivation.

The guidance, the inspiration, the leadership of these men and women is what constitutes the real core responsibilities of
management that is directing.

7.1 Leadership
Leadership is the art or process of influencing people so that they will strive willingly and enthusiastically towards the
achievement of group goals. Leaders act to help a group attain objectives through the maximum application of its capabilities.
They do not stand behind a group to push or prod; they place themselves before the group as they facilitate progress and insp ire
the group to accomplish organizational goals.

7.2 Leadership Behaviour and Styles

Leadership styles may be classified on the basis of how leaders use their authority. In this regard they may be seen as appl ying
three basic styles:

(a) Autocratic or Despotic

This is a leader who commands and expects compliance, is dogmatic and positive and leads by the ability to withhold or
give rewards and punishment. There is some variation in this leadership. Some autocrats are seen as ―benevolent
autocrats‖. Although they listen considerably to their followers‘ opinions before making a decision, the decision is their own.
They may be willing to hear and consider subordinates‘ ideas and concerns, but when a decision is to be made, they may
be more autocratic than benevolent.

(b) Democratic or Participative

This is a leader who consults with subordinates on proposed actions and decisions and encourages participation from them.
These leaders range from the person who does not take action without subordinates‘ concurrence to the one who makes
decisions but consults with subordinates before doing so.

A variation of the participative leader is the person who is supportive. Leaders in this category may look upon their task as
not only consulting with followers and carefully considering their opinions but also doing all they can to support subordinates
in accomplishing their duties.

Wanyama B. N. 36
 Such a leader may gain considerable knowledge and a better commitment on the part of persons involved by consulting
with subordinates. This is true in developing verifiable objectives under system of managing by objectives.

(c) Free rein or Liaises faire

Here, the leader uses his or her power very little, if at all, giving subordinates a big degree of independence in their
operations. Such leaders depend largely on subordinates to set their own goals and the means of achieving them, and they
see their role as one of aiding the operations of followers by furnishing them with information and acting primarily as a
contact with the group‘s external environment.

The use of any style will depend on the situation. A manager may be highly autocratic in an emergency; one can hardly
imagine a fire chief holding a long meeting with the crew to consider the best way of fighting a fire or the principal of a
college holding a meeting with his staff when students are rioting and stoning everybody in sight. The manager will first
make a decision and make consultations later when the situation has cooled. Managers may also be autocratic when they
alone have the answers to certain questions.

On the other hand a manager dealing with a group of research scientists may give them free rein in developing their
enquiries and experiments. But the same manager may be quite autocratic in enforcing a rule stipulating that employees
wear a protective covering when handling certain potentially dangerous chemicals.

7.3 Administration, Ruling and Leading

Often confusion arises in the use of these terms on one side and management on the other side.

The term administration is used to refer to the higher level of the management group who determine major aims and policies or
simply the determination of major aims and policies. Thus administration is that part of management process concerned with the
institution and carrying out of procedures, by which the program is laid down and communicated, and the progress of activities is
regulated and checked against targets and plans. Consider the example of public corporations (e.g., the Kenya Power and
Lighting Company). The Government lays out broad policies that must be carried out by the corporation such as Rural
Electrification; the KPLC Board must work out detailed policies and procedures for carrying out the program and in so doing they
are administering. In a narrower sense, it is controlling the day to day running of an enterprise.

Ruling refers to a style of management where the managers look at the workers as subjects to only take orders and carry them
out. Communication only comes from the rulers to the subjects who are there only to be seen but not heard. This kind of
management is common in pre-civilized societies.

Leading on the other hand is defined as the art or process of influencing people so that they will strive willingly and
enthusiastically toward the achievement of group goals.

What this means is that, ideally, people should be encouraged to develop not only willingness to work but also willingness to
work with zeal (i.e., ardour, earnestness, and intensity in the execution of work) and confidence (reflecting experience and
technical ability). The leader acts to help a group attain objectives through the maximum application of its capabilities. They do
not stand behind a group to push or prod; they place themselves before the group as they facilitate progress and inspire the
group to accomplish organization goals.

7.4 Qualities of a Leader

The following factors have been identified as essential for successful business leadership:

1) Trust in subordinates is the foundation for delegating authority. A manager gets things done through people.
2) Leaders can provide a vision for the enterprise and inspire others to commit themselves to this vision.
3) Leaders must take command in times of crisis. Even those who subscribe to participative management realize that at
critical times they have to take charge. Taking risks is a part of a business i.e. not careless risks but calculated ones.
Probably those who have never failed (who played it safe) may not have managed well.
4) Leaders need to be very competent in their fields in order to command the respect of employees.
5) A top executive surrounded by ‗yes-sayers‘ will get an incorrect view of what is really going on within and outside the
organization. Thus executives should invite differing views.

Wanyama B. N. 37
 6) Effective leaders see and understand the big picture. They simplify complex situations and problems, so that they can
be understood.

7.5 Co-ordination
Co-ordination is the integration, synchronization or harmonization of individual and group effort towards the accomplishment of
common objectives. To ensure harmonious and smooth working of an enterprise with a number of its divisions, departments or
units, the activities in all areas are required to be pooled together, unified and blended so as to give them a commonness of
purpose – spirit de corps. It implies the avoidance of all splintering efforts that may destroy the unity of action through either
cross-purpose working or inter-personal conflicts.

7.6 Techniques of Co-ordination

The following are some of the techniques used in achieving co-ordination:
Managerial functions
Communication
Committees
Staff meetings
Programs
Conferences

7.6.1 Communication
Communication is the means through which people in organization exchange information regarding the operation of an
enterprise. It is the interchange of ideas, facts and emotions by two or more persons by the use of a memorandum, a computer,
the telephone, a telegram or television. Standing plans like policies and procedures as well as standing orders and instructions
communicate the expected pattern of behaviour required for co-ordination action.

7.6.2 Managerial functions

As managerial functions are designed to get things done through the efforts of other personnel, they hold the key to co-
ordination. Because of checking, observation and guidance involved in overseeing, supervision aids much in developing
coordinated effort. Leadership provides individual motivation and persuades the group to have an identity of interest and outlook
in group efforts. Departmentation arranges for necessary correlation and inter-connection of activities in an analytical manner.
By assigning duties and granting authority to different positions in the spheres of delegation, the component units and positions
are bound together by way of clarifying objectives and defining authority for each of them.

7.6.3 Staff meetings

Staff meetings are useful, particularly if they are informal. An example is yearly meetings to discuss the company‘s position and
previous year‘s results. In addition regular monthly meetings of, for example, first line supervisors can be held. An agenda is
preferable and these meetings should:

(a) Give a sense of unity to the work of the organization.

(b) Provide an opportunity for the subordinates to question superiors and provide a forum of discussion.
(c) Inform staff of new developments and problems.

7.6.4 Conferences
These are meetings for discussion or an exchange of views. They are another method of making group discussions. They aid
free discussion and help to improve understanding of company matters and this ‗face to face‘ communication is an important
factor in effective co-ordination.

7.6.5 Programs
Programs are instruments of co-ordination, i.e. a timetable, a production program, enable results to be compared with standards
and actions to be taken where necessary. These programs register and communicate decisions, and hence allow them to be
delegated.

Wanyama B. N. 38
7.6.6 Committees
A committee is a group of persons to whom, as a group, some matters is committed. It may be established to make
recommendations on a problem largely because the CEO or department head does not wish to take full responsibility for making
a decision. Bonus committees, which may decide on the amount and the distribution of bonuses for outstanding managers, are
an example. Major financial and capital investment policies are also often developed by committees, partly because of
unwillingness to give a single individual complete authority to make such important decisions.

Thus committees aid co-ordination in the following ways:

(a) Pool resources to solve problems.

(b) Co-ordinate overlapping and conflicting functions.
(c) Ensure prior consultation and lead to greater acceptance of decisions.
(d) Enable executives to be trained.

7.7 Motivation
A large part of manager‘s task is getting things done through people and yet if you look at a group of persons who are performing
the same job, you will note that some do better than others. This is true whether the group consists of secretaries, clerks,
technicians, salesmen or managers. Further more, if you have some quantitative measure of their contributions to the
organization, you will probably find that the best person in each group is contributing two, five or perhaps ten times what the
poorest is contributing. These observations raise a question of psychological interest - what are the causes of these differences
in performance?

One answer that has been given is that these differences reflect varying abilities or skills on the part of the individual worker.
People have different amounts and kinds of experiences, and vary in the degree to which they posses the necessary intellectual
and other endowments to learn from these experiences.

The assumption has led to a number of different strategies on the part of organizations for improving worker performance. It has
led for example to an attempt to select workers for a particular job who have the abilities or skills which are necessary for its
performance. It has also led to an emphasis on training, which is a systematic attempt on the part of the organization to develop
the necessary abilities or skills on the part of workers. Finally, it has led to changes in the content of jobs to make it consistent
with the existing abilities or skills and labour force.

There is, however, another assumption which can be made about the origin of differences in the performance among people
doing the same kind of work, and this assumption leads to different organizational strategies for improving job performances. The
assumption is that differences in performance among people doing the same kind of work reflect differences in the way they are
induced to work to the best of their ability, i.e., their motivation. Motivation refers to the way urges, aspirations, drives and needs
of human beings direct or control or explain their behaviour. At any given time people vary in the extent to which they are willing
to direct their energies towards the attainment of organizational objectives.

Practically, both of these statements are true. In other words, performance of a person on a job is considered as a function of two
variables. One of these refers to the ability of the individual to perform the job, and the second refers to his or her motivation to
use this ability or skill in the actual performance of the job. Again it is found out that performance is not equal to the su m of an
individual ability and motivation, but rather to the product of these two variables. Increasing the motivation of persons high in
ability will lead to a greater increase in performance than increasing the motivation of persons low in ability. Similarly, there is
more to be gained from increasing the ability of individuals who are high in motivation than individuals who are low in motivation.

Many theories about people have been advanced by psychologists, which have contributed to various management decisions in
the work place. Some of these can be considered.

7.7.1 Douglas M. M’gregor

McGregor grouped people into two types: Theory X and Theory Y. He made the following assumptions about them:

(d) Theory X
This involves the traditional approach to workers and assumed that:

Wanyama B. N. 39
 (a) The average man is by nature indolent or lazy, he or she works as little as possible.
(b) He/she lacks ambition, dislikes responsibility, prefers to be led.
(c) He/she is inherently self centred and indifferent to organizational needs.
(d) He/she is by nature resistant to change.
(e) He/she is gullible, not very bright, the ready dupe of the charlatan and the demagogue.

(e) Theory Y
In contrast to Theory X, Theory Y assumes that:

(a) People are active, resourceful and imaginative.

(b) People have a psychological need to work.
(c) Through the exercise of self-direction and self control, they want to make achievement and to assume responsibility.
(d) The proper conditions for achievement and responsibility on the part of workers are free-form organization, permissive
management and participatory democracy wherein people become free from the fetters of management.

These two sets of assumptions obviously are fundamentally different. Theory X is pessimistic, static, and rigid. Control is
primarily external. That is imposed on the subordinate by the superior. In contrast, Theory Y is optimistic, dynamic, and flexible,
with an emphasis on self-direction and the integration of individual needs with organizational demands. However these being
assumptions, need to be tested against reality as they are neither prescriptions nor suggestions for managerial strategies. They
don‘t imply ‗hard‘ or ‗soft‘ management but rather call on an effective manager to recognize the dignity and capabilities as well as
the limitations of people and adjust behaviour as demanded by the situation.

7.7.2 Maslow’s Hierarchy of Needs

According to A.H. Maslow, man is a wanting animal with a hierarchy of needs. As soon as one of his needs is satisfied, another
appears in its place. This process is unending, it continues from birth to death. Man‘s needs are organized in series of levels – a
hierarchy of importance as shown in fig 7.1.

5. Self-actualization
Realising one’s
4. Esteem potential for
continued
Achievement, self-development
3. Social self-confidence,
status, respect,
To belong, recognition by
2. Safety associate with, others
Protection be accepted by
others
1. Physiological against danger

Hunger, thirst

Fig 7.1 Maslow’s Hierarchy of Needs

(f) Physiological and Safety Needs

At the very lowest of levels, but prominent in importance are his physiological needs. Physiological needs are what the body
needs to survive - food, sexual desire, sleep, rest, thirst, etc. Unless the circumstances are unusual, his needs for love, for
status, for recognition are inoperative when his stomach has been empty for a while. But when he eats regularly and
adequately, hunger ceases to be an important need. The same is true of other physiological needs of man – for rest,
exercise, shelter, protection from the enemies, etc.

One important observation to note is that a satisfied need is not a motivator of behaviour. It is a fact which is regularly
ignored in the conventional approach to the management of people. As an example, consider your own need for air.
Except when you are deprived of it, it has no appreciable motivating effect upon to dominate man‘s behaviour – to motivate
him. These are called safety needs.

(g) Safety Needs

These are needs for protection against danger, threat, deprivation, etc. If a man is in a dependent relationship where he
fears arbitrary deprivation, his greatest need is for guarantees, for protection, and for security.

Wanyama B. N. 40
 Since all employees from the lowest to the top are in a dependent relationship with their employer, safety needs may
assume considerable importance. Arbitrary management actions, behaviour which arouses uncertainty with respect to
continued employment, unpredictable administration of policy – these can be powerful motivators of the safety needs in the
employment relationship at every level from worker to vice president.

(h) Social Needs

When man‘s physiological needs are satisfied and he is no longer fearful about his physical welfare, his social needs
become important motivators of his behaviour – needs for belonging, for association, for acceptance by his fellows or
colleagues, for giving and receiving friendship and love. When man‘s social needs – and perhaps his safety needs too –
are thus thwarted, he behaves in ways which tend to defeat organizational objectives. He becomes resistant, antagonistic
and un-cooperative.

(i) Ego Needs

Above the social needs – in the sense that they do not become motivators until lower needs are reasonably satisfied – are
needs of great significance to management and to man himself. They are the egoistic needs, and they are of two kinds:
Those that relate to one‘s self esteem – needs for self confidence, for independence, for achievement, for competence
and for knowledge.
Those needs that relate to one‘s reputation – needs for status, for recognition, for appreciation and for the deserved
respect of one‘s fellows. Unlike the lower needs, these are rarely satisfied.

Man seeks indefinitely for more satisfaction of these needs once they have become important to him. But they do not
appear in any significant way until physiological, safety and social needs are all reasonably satisfied. It is sad to note that
conventional methods of organizing work, particularly in mass production industries give little head to these aspects of
human motivation.

(j) Self-fulfilment Needs

Finally, the peak as it were, on the hierarchy of man‘s needs, are what we call the needs for self actualization or self-
fulfilment. These are the needs for realizing one‘s own potentialities, for continued self development, and for being creative
in the broadest sense of that term.

The specific form that these needs take, will of course vary greatly from person to person. In one individual it may be
expressed maternally, as the desire to be an ideal mother, in another, athletically, in still another, aesthetically as in the
painting of pictures, and another, inventively as in the creation of new contraptions.

The clear emergence of these needs rests upon prior satisfaction of the physiological, safety, love and esteem needs. We
shall call people who are satisfied in these needs basically satisfied people and it is from these that we may expect the
fullest and healthiest creativeness.

7.7.3 Hygiene Theory (F.Herzberg)

In the late 1950s, Fredrick Herzberg conducted research interviews with two hundred engineers and accountants. The research
endeavour was designed to test the concept that man has two sets of needs:
(a) His lower order needs to avoid loss of life, hunger, pain and other deprivations.
(b) His higher needs to grow psychologically – knowing more, seeing more relationships in what one knows, creativity,
being effective in vague situations, maintaining individuality in the face of group pressures, and real growth through self
improvement.
The interviews asked the above workers to tell of events in the course of their employment that cause them to feel a marked
improvement in job satisfaction and also about those situations that caused a substantial reduction in job satisfaction.

When the results of the research were analyzed, the researchers, found that one group of factors accounted for high levels of job
satisfaction. These were labelled motivators because they seemed to be effective in motivating the individuals to superior
performance and effort. These factors were achievement, recognition, work itself, responsibility and advancement. All these
satisfiers related to the job content.

Another group of factors, labelled hygienic or maintenance factors focused on discontent with work situation. However, these
factors were seldom mentioned by the respondents as causing positive job satisfaction. These factors referred primarily to the

Wanyama B. N. 41
job context or environment. These factors were company policy and administration, supervision, salary, interpersonal relations
and working conditions.

The hygienic or maintenance factors provide an essential base on which to build upon the motivating factors. If employee
wages, fringe benefits, working conditions, eating facilities, job rights and status systems are inadequate, they will feel uneasy
and discontent. They may complain openly about job conditions and company policies; they may be antagonistic toward the
company. However, it does not mean that once the maintenance factors have been taken care of, the people or workers will
necessarily work any harder.

The Herzberg theory is similar to Maslow‘s hierarchy in that the hygiene factors are related to the higher priority physiological,
security and social needs, while the motivators correspond to the esteem, ego and self actualization needs. The Maslow
hierarchy proposes a continuous, rather than disconnected, sequencing of felt needs, whereas the Herzberg theory would not
require hygienic factors to be provided as a prerequisite to satisfaction on the job. There is widespread agreement that
satisfaction will be higher when both motivational and hygienic factors are well taken care of.

There is also evidence that when both are reasonably well met by organizations, the motivators are more powerful sources of
satisfactions. When they are not well met, hygienic factors are the more powerful source (of satisfaction), thus tending to
substantiate the Maslow hierarchical concept. Research has also indicated that older employees as well as blue collar workers
tend to value hygienic factors more highly than do younger ones or white collar workers.

7.7.4 Chris Agyris – Mature Human Being

Though the human being may be created at birth with all the Maslow‘s needs and theory Y potential embedded in latent form,
Chris Agyris emphasized on the point that development from that point on is naturally in the direction of maturation through which
the person will develop to achieve good mental health. At the immature – infant end of this continuum there are these seven
characteristics:

Being passive
Being dependent
Being unaware of self
Being subordinate
Possessing a short time perspective
Having casual and shallow interests
Being capable of behaving in only a few ways

On the other hand, natural movement with maturation would be toward behaviour characterized by increasing activity,
independence, an awareness of and control of self, aspiring to occupy an equal or superior position, having long term
perspectives, developing deeper interests and capable of behaving in many ways to satisfy needs.

Organizations need human resources to fill positions necessary to achieve organizational objectives. Though one might contend
that mature personnel are a prime necessity, Argyris argues that many organizations are structured and managed in such a way
that immature, infant behaviour is required for retention and succeed. Employees are asked to submit to orders, plans, policies,
procedures, and rules as given. They are asked to work in an environment where they have little control over their lives, ar e
expected to be passive and dependent upon authority and are asked to use a few skin surface abilities.

Faced with the incongruity (inconsistencies) of organizational demands against the needs of a mature human being, the
employee will engage in one or more of the following activities:
Escape
Attack
Adapt
One can escape by quitting the job, being absent frequently, or gaining promotion to higher positions where there is more
freedom and autonomy. One can attack by practicing malicious obedience, organizing slow downs or forming a labour union.
The unhealthiest activity, according to Agyris is to apathetically accept and adapt to infantile situations. This paints a rather
gloomy picture of organizational requirements that will lead to widespread psychological failure for organizational members.
Both McGregor and Agyris suggest that industrial organizations are doing serious harm to human beings through management
based on assumptions of employee immaturity and irresponsibility.

Wanyama B. N. 42
On the reverse side is the question of whether all employees are mature as defined by Agyris or theory Y as defined by
McGregor. A lot of importance has been attached to these concepts when dealing with more highly educated professional,
technical and managerial white collar employees. But, whether these concepts apply to rank and file blue collar employees in
arguable. Security may mean more to the industrial worker than to the highly educated professional. The former often values
the freedom of thought permitted by a structured, repetitive, simple task that may be boring to others.

It should be apparent that most conditions are neither as bad as behaviourists contend nor as good as traditionalists claim. We
are always operating in the gray area of optimizing multiple values under conditions of uncertainty. Not all personnel are theory
Y types, despite arguments concerning how they got that way. Not all organizations demand total obedience on narrowly
defined tasks. But certainly, not all organizations have examined their structures and management approaches to determine
where some alterations could produce a better fusion between organizational and human values.

7.8 Strategies of Motivation

The question of what motivates workers to perform effectively is not an easy one to answer. Many aspects are as yet unexplored
and there are many other alternative ways of characterizing and organizing what is known about the relationship between
motivation and management. One way of conceptualizing different approaches is in terms of assumptions which they make
about human motivation and the implications of these assumptions for managerial practice. Looking at the problem in this way,
there appears to be three major approaches of strategies for stimulating motivation:
paternalistic management
scientific management
participative management

7.8.1 Paternalistic Management

The first of these strategies is paternalistic in nature. It assumes that people will be motivated to perform their jobs effectively to
the extent to which they are satisfied with these jobs. The more one rewards the workers, the harder they will work. The grea ter
the extent to which an employee‘s needs are satisfied, the greater the extent to which he will respond, presumably with gratitude
or loyalty, by producing effectively on that job.

The essence of this approach is to make the organization a source of important rewards for which the only qualification is
membership in the organization. In other words, the rewards which are utilized in this approach might be termed unconditional
rewards in the sense that the amount of rewards that any individual receives is not dependent in any clear cut way on how he
behaves within the organization, but rather on the fact that he is a member of that organization.

Some of the practices which are used in organizations and are consistent with this approach are the various fringe benefits
offered, e.g. pension plans, group insurance, subsidized education, recreation programmes, comfortable working conditions
(transport to and from work), etc.

Also qualifying as instruments of paternalistic approach are high wage levels, across the board wage increases, job security and
predictable promotion patterns.

This approach has some implications for the relationship between manager and his subordinates. If the manager were to apply
this approach to the fullest extent, he would seek to arrange the conditions of work so that people would feel comfortable, happy
and secure. His primary goal would be to see to it that his subordinates are able to get the things they need for their jobs, and he
would assume that as a consequence of this support, the subordinates would display enthusiasm and loyalty in their jobs.

Studies undertaken on employee satisfaction and performance on the job do not bear assumptions inherent in the paternalistic
approach. The evidence indicates that these unconditional rewards have undoubtedly been effective in helping companies to
attract and hold people.

However there is little evidence to suggest that the incentives adopted in the paternalistic approach have any direct effect on
worker productivity or performance. The distinction which is necessary here is that between person‘s satisfaction with the job
and his motivation to perform effectively in that job. It was once assumed that these two things went hand in hand. However , a
large number of research studies show that no consistent or meaningful relationship between them.

Wanyama B. N. 43
Effective performers are just as likely to be dissatisfied with their jobs as they are satisfied and ineffective performers just as
likely to be satisfied with them as they are dissatisfied. However, a consistent negative relationship has been observed between
job satisfaction and turnover. In other words, people who are satisfied with their jobs are likely to leave the organization than
people who are dissatisfied.

Hence we can say that the paternalistic approach operates primarily on job satisfaction and indirectly on people‘s decision about
how they would produce while in the organization.

7.8.2 Scientific Management

The second approach or strategy for motivating people within organizations is based on the assumption that a person will be
motivated to work if rewards and penalties are tied directly to his performance, thus are conditional rather than unconditional.

The clearest example of the use of rewards as a means of motivating performance may be found in individual wage incentives.
It is also manifest in such practices as promoting individuals on the basis of their merit and in recognizing and rewarding people
for special accomplishments. In addition, penalties are typically made contingent upon falling below some minimal standard of
performance. Examples of this would include warnings, reprimands or even dismissals for violating rules and procedures. (The
assumptions underlying this strategy are what McGregor calls theory X to management).

The methodology of this approach constitutes an external control system. It is necessary to define the standards to be used in
the allocation of the rewards and penalties in as objective or measurable a fashion as possible. These standards may be
formulated in terms of the methods used by the individual when carrying out his job or in the results which he achieves.

It is also necessary to monitor the behaviour of the individual to observe the extent to which these standards are attained o r
adhered to. The final ingredient of the system is the consistent allocation of the rewards and penalties based on observations of
performance.

This approach to motivation, rests on a substantial foundation of psychological research and theory—the law of effects or the
principle of reinforcement. In a nutshell this principle states that if a person undertakes an action and this action is followed by a
reward, the probability that the action will be repeated is increased. On the other hand, if the person undertakes an action which
is ignored or followed by a punishment, that behaviour is less likely to be repeated. Research has provided support for thes e
propositions in a large number of different situations.

But on a more practical level, there appear to be significant limitations on an approach to motivation which is based exclusively
on external control. These limitations are more apparent in some situations than in others, but they seriously weaken the
universal applicability of an approach to motivation based solely on externally induced rewards and or penalties, i.e. carrot and
stick.

One of the limitations stems from the kinds of rewards and penalties which can be utilized by such an approach. From the
analysis of human needs by Abraham Maslow, it is found out that there are exceedingly large number of outcomes which are
potentially gratifying to human beings, only a few of which are under direct managerial control. It is particularly difficult for the
external control system to encompass the higher order needs for esteem and self actualization. In addition, it is evident that
certain rewards and penalties relevant to social needs are under the control of the informal organization and these sanctions may
work in opposition to the formal control system.

The second limitations to the external control system stems from its reliance on some reasonably objective method of measuring
or assessing performance. This is clearly possible in many rank and file positions in production or in sales, but it becomes
increasingly difficult as one moves to positions of staff or managerial nature. The interdependence of positions frequently makes
it difficult or impossible to trace results to the efforts of one individual. In addition, events in the environment of the organization,
such as adverse market conditions or labour disputes, weaken the relationship between the behaviour of the incumbent and the
measurable results of his performance.

7.8.3 Participative Management

The third type of management approach is referred to as participative management which assumes that individuals can derive
satisfaction from doing an effective job per se. They can become ego involved with their jobs, emotionally committed to doing
them well and take pride from evidence that they are effective in furthering the objectives of the company. The assumptions

Wanyama B. N. 44
underlying a participative approach to management are more completely documented by McGregor, when he talks about theory
Y.

Key elements of participative management are:

(a) Planning and doing are completely integrated. In essences, the discretionary component of jobs is enlarged and the
programmed component is reduced. One is given broad goals or objectives and is free to determine for himself or
herself, how these are to be achieved. The basic assumption is that if a person has freedom in determining how he will
do his job, then he will regard his job as more a challenge than if he or she is told exactly what to do and when to do it.
(b) Reduction in the use of authority as a means of control. In essence the superior or manager plays a helping role rather
than an authoritative one. He is there as a resource for his subordinates to use, but resists imposing his ideas on his
subordinates concerning how their jobs should be done. To quote McGregor, ―the manager is a teacher, a consultant,
a colleague but very rarely a boss.‖
(c) More reliance on the utilization of work groups as problem solving and decision making units. On matters affecting the
entire unit, the supervisor does not make decisions autocratically and issue orders to subordinates, but rather meets
with them and encourages them to participate with him in finding solutions to these problems. This opportunity to
participate in decision making process is assumed, with considerable justification, to create involvement or
commitment on the part of subordinates and enhance identification with corporate goals and objectives.
(d) There is little mention of either compensation or promotion. Incentives for effective performance are in the task or job
itself or in the individual‘s relationship with members of his working team.
(e) The emphasis is on creating conditions under which effective performance can be a goal rather than a means to the
attainment of some other goal and the philosophy is one of self regulation rather than organizational control.
(f) There are indications that participative management may be more applicable to some organizational conditions than to
others. It seems to be less influential at lower levels in organizations where the nature of technology permits little
discretion in how a job is done. It has been more influential at higher organizational levels and in research and
development functions where problems are complex and roles are continually changing in response to altered
demands.
(g) Since the emphasis on internal control and self regulation in participative management assumes a particular set of
needs or motives to be characteristic of man – most notably those at the higher end of Maslow‘s hierarchy – it is
possible that the effectiveness of participative management may also depend on the strength of these motives among
the people to be managed. Maslow has speculated that the principles of participative management are most useful
when managing persons with strong needs for self actualization and are primarily applicable in the more highly
developed societies.

7.9 Behavioural Science – Nature of the Human Resource

Traditional concepts of management had it that once an employee has been hired, his skill and ability to do the job assigned
developed, the manner and amount of monetary compensation determined, the management‘s task was essentially over and the
employee was supposed to deliver from here henceforth barring any physical disabilities in the course of one‘s employment.

But, in recent years, there has been a growing recognition of the need for particular efforts in dealing with the attitude of an
employee. It is not enough that one is able to work; one must be willing to work.

7.10 Importance of Human Relations

For an organization to achieve most of its objectives there must be a reasonable merger of the individual and organizational
needs. When the needs of human beings meet the needs of the organization, conflict often occurs. Human relations as a
management activity involves the integration of the human resource (as individuals and groups) with the organization and coping
with the inevitable conflicts that ensue. The goal is towards effecting a reasonable integration leading to productive and c reative
collaboration towards mutual objectives. The manager will therefore require knowledge and skill in such underlying disciplines
as psychology, sociology, anthropology and ethnology in attempting to understand and cope with problems of human relations.

7.11 Summary of Motivation

There are four organic functions of management – planning, organizing, directing and controlling. Ordinarily, although the
personnel manager is expected to be competent in organizing, he or she should be similarly competent in the function of
direction or leading (motivating).
The separation and development of the management function of direction is the result of an increasing appreciation of the pow er

Wanyama B. N. 45
of organizational members. We cannot assume that the existence of good plans and excellent organization will result in an
automatic undertaking of assigned tasks, thereby leaving the manager with only the responsibility of controlling the activity that
takes place or develops. There is the need to get organization members to go to work willingly and enthusiastically. This is no
mean task for management to achieve and it has been compounded by such factors as:
Increasing educational level of employees
Greater utilization of professional personnel
Advancing technology
The power of labour organizations

It is a task that can be more important than planning, organizing and controlling. Motivation is basically concerned with fulfilling
the human needs of employees. But as it is often the case with most things human, these cannot be particularly categorized to
individuals or groups or even to situations. There are no easy assumptions concerning what employees really want from the
organization. However, these can be categorized as follows:
(a) Pay-This want helps in satisfying physiological, security and egoistic needs.
(b) Security of job-Because of threats from technological change, this want issues from the social need of gregariousness
and acceptance. Management can aid the process by carefully planned and executed induction programs, provision of
means to socialize through rest periods and recreational programs and formation of work teams through proper work
station layouts and human related work procedures.
(c) Credit for work done-This want issues from the egotistical classification of needs and can be supplied by management
through verbal praise of excellent work, monetary rewards for suggestions and public recognition through awards,
release in employee newspaper and the likes.
(d) A meaningful job-This want issues from both the need for recognition and the drive toward self realization and
achievement. This is a very difficult want to supply; particularly in large organizations having minute divisions of work and
mechanically paced assembly lines.
(e) Opportunity to advance-Not all employees want to advance. Some feel the social needs more strongly than the
egoistic needs. However, most employees like to know that the opportunity is there.
(f) Comfortable, safe and attractive working-The want for good working conditions also rests upon multiple needs. Safe
working conditions issue from security needs. The specific attributes, such as desks and rugs, constitute symbols of
status denoting a hierarchy of importance.
(g) Competent and fair leadership-The want of good leadership can issue from physiological and security needs. Good
leadership helps to assure that the organization and its jobs will continue to exist. In addition, the ego demands that one
respects persons from whom orders and directions are to be received. It is very frustrating to be subjected personally to
a command from an individual who is deemed unworthy and incompetent.
(h) Reasonable orders and directions- The order is the official communication of organization requirements. In general, it
should be related to the requirements of the situation, capable of being executed, complete but not unnecessarily
detailed, clear and concise, and given in a manner that stimulates acceptance. Unreasonable orders that are incapable
of accomplishments serve only to increase insecurity and frustration. Unreasonable orders that work contrary to the best
interests of the organization may lead to a form of malicious obedience; the employees take great delight in following
them to the letter in the hope of harming the superior who merits little respect.
(i) A socially relevant organization The trend toward greater social expectations of private organizations has an impact
upon such an organization‘s employee‘s expectations. This want issues from human needs of self esteem and levies a
highly challenging responsibility upon the organization‘s management.

7.12 The Carrot and the Stick

This metaphor relates to the use of rewards and penalties in order to induce behaviour. It comes from the old story that make a
donkey move, one must put a carrot in front or jab him with a stick from behind.

For centuries, and up to today, reward and punishment are still considered motivators. Often the ‗carrot‘ is money in the form of
pay or bonuses. Even though money is not the only motivating force, it has been and will continue to be an important one. The
‗stick‘, in the form of fear – fear of loss of job, loss of income, reduction of bonus, demotion, or some other penalty, has been and
continues to be a strong motivator. The problem with the ‗stick‘ is that often it gives rise to defensive or retaliatory behaviour,
such as union organization, poor-quality work, executive indifference, failure to take risks in decision making, etc. It also explains
why many subordinates are ‗yes-sayers‘, simply agreeing with their superiors rather than using their considered judgment.

Wanyama B. N. 46
8 CONTROLING
It is the measurement and correction of the performance of subordinates to make sure that the objectives of the enterprise an d
the plans devised to attain them are accomplished efficiently and economically. It is concerned with securing good individual
performance and organizational performance.

Plans guide managers in the use of resources to accomplish specific goals, and then activities are checked to determine whether
they conform to the plans.

Control is a fundamental function of all managers at every level in the organization. Thus the primary responsibility for the
exercise of control rests in every manager charged with the execution of plans.

8.1 Basic Steps for Control

The basic control process, whenever it is found and whatever is being controlled, be it cash, office procedures, moral, product
quality, etc, it involves three steps:

Setting standards
Measuring performance against standards.
Correcting deviations from standards.

8.1.1 Setting Standards

Standards are by definition, established criteria of desired performance. They are the selected points in an entire program at
which measures of performance are made so that managers can receive signals about how things are going and thus do not
have to watch every step in the execution of plans.

There are many types of standards used in business for control purposes:
(a) Physical Standards
Non-monetary measurements common at operating level, where materials are used, labour is employed, services are
rendered and goods are produced. They reflect quantities such as labour-hours per unit of output, kilograms of fuel per
horsepower produced, tone-kilometres of freight traffic carried, units of production per machine-hour, etc.
(b) Cost Standards
These are monetary measurements common at the operating level. They attach monetary values to specific aspect of
operations such as direct and indirect cost per unit produced, labour cost per unit per hour, material cost per unit, machine-
hour cost, etc.
(c) Capital Standards
They arise from the application of monetary measurements to physical items. They have to do with the capital invested in
the firm rather than with the operating costs and are therefore primarily related to the balance sheet rather than to the
income statement.
(d) Revenue Standards
These arise from attaching monetary values to sales. They may include such standards as revenue per bus passenger-
mile, average sale per customer, and sales per capital in a given market area.
(e) Program Standards
The major objectives such as the development of new products, or improving the quality of sales force is normally broken
down in groups of activities, i.e. programs which provide a guide to check against actual performance by periodical reviews.
In appraising programs such as following the development of new products, used as well as other factors such as timing
used as objective.
(f) Intangible Standards
These are standards not expressed in either physical or monetary measurements. They mainly concern areas where
human relations count in performance such as whether the advertising program meets both short and long-term objectives;
whether the public relations program is successful; whether supervisors are loyal to the company‘s objectives or not;
whether the office staff is alert or not, etc. Management control over such interpersonal relationships are based on

Wanyama B. N. 47
 considered judgment, trial and error and sheer hunch.
(g) Goals as Standards
Where, apart from the quantitative goals already considered, qualitative goals can be used as standards. For example, if
the program of a district sales office is spelled out to include such elements as training sales people in accordance with a
plan with specific characteristics, the plan and its characteristics themselves furnish standards that tend to become the
objective and therefore ―tangible‖.
(h) Strategic plans as Standards
Strategic planning involves deciding upon the major goals of an organization and policies to be used to achieve them.
These strategic plans require strategic control which comprises monitoring at strategic control points. These evaluation at
these points could be used for modifying the organizational strategy and for organizational change.

8.1.2 Measurement of Performance

Actual results of performance are evaluated against the desired results. This means the measurement of actual performance
and the comparison between planned and the actual performances.

If standards are appropriately drawn and if means are available for determining exactly what subordinates are doing, approval of
actual or expected performance is easily done. As the work proceeds from stage to stage towards accomplishment, the work
progress is reviewed so as to make necessary adjustments for improving final results.

Care is taken not to use feedback from the output of a system being used as a means of control. Such data is historical and out
of date and too late to allow for corrective action. It is more effective to use most up-to-date information for forecasting and so
programs can be changed quickly. This requires devising a system that can tell management the problems that will occur if
action is not taken now. This feed forward control systems, is that they monitor inputs into a process to see if they are as
planned. So if they are not as planned, either the inputs or the process can be changed to enable the desired results to be
obtained.

Management, therefore, should decide on those input variables that materially influence key inputs.

8.1.3 Taking Corrective Actions

Measurement and evaluation of performance, detection of deficiencies and deviations, and preparation of control reports should
lead to managerial action for correcting existing weaknesses and mistakes. Corrective actions are more appropriate for work in
progress rather than completed work. Evaluation of final results on the completion of the work helps in planning and organizing
for future operations only. Review of work progress gives an opportunity to managers for bringing the actual performance back
into line or for holding it into line with desired results. With a view to conforming actual performance to desired performance,
however, the control information must be promptly channelled back to responsible managers for enabling them to take necessary
corrective action.
The nature of corrective action varies from case depending upon the specific reasons for deviation from the standard. Some
deviations from the standard are accepted by management because of inaccuracies in standard, imperfection in measurements
or changes in operating conditions. In other cases deviation may arise from faulty production planning, defective equipment, or
from inefficiency of operators. Inefficiency of operators in turn may arise from a number of factors like bad selection of
personnel, inadequate training, poor motivation, and inappropriate supervision, lack of discipline, unsatisfactory work assignment
for unfavourable working conditions. Collective action calls for removal or adjustment of causative factors with a view to putting
the performance on the proper truck.

In some cases, however, corrective action is taken on the basis of predictions. For example, a fall in sales may be predicted
from customer enquiries; a breakdown of the machine may be predicted from its vibration; or a strike may be predicted from th e
extent of employee grievances. On the basis of these predictions, corrective actions may be taken as a corrective measure.

Managers may correct deviations by redrawing their plans or by modifying their goals. They may also correct by better selection
and training of subordinates, or by that ultimate re-staffing measure, firing (down-sizing). They may also correct through better
leading.

Wanyama B. N. 48
 Section 2

PRODUCTION

MANAGEMENT

Wanyama B. N. 49
Introduction to Production Management
Previously, the field of production management almost exclusively dwelt on manufacturing management, with a heavy emphasis
on the methods and techniques used in operating a factory, i.e., production of goods. All this however has changed in recent
years. The scope of production management has changed considerably with production concepts and techniques being applied
to a wide range of activities and situations outside manufacturing. They are now used in services such as health care, food
service, recreation, banking, hotel management, retail sales, education, transportation and government. This broadened scope
has given the field the new name, production and operations management, or simply, operations management, a term which
reflects the diverse nature of activities to which its concepts and techniques are applied. To most users though, production
management still refers to the management of production of goods, while operations management refers to management of
services despite the convergence.

This twin relationship of production management can be explained by looking at one example from each side of the divide:

First, consider a bicycle factory. This might be primarily an assembly operation; buying components such as frames, tyres,
wheels, gears and other items from suppliers, and then assembling bicycles. The factory might also do some of the fabrication
work itself, such as forming frames, making the gears and chains, and buying mainly raw materials and a few parts and materials
such as paint, nuts and bolts and tyres. Among the key management tasks in either case are scheduling production, deciding
which components to make and which to buy, ordering parts and materials, deciding on the style of bicycle to produce and how
many, purchasing new equipment to replace that which is old or warn out, maintaining equipment, motivating workers, and
ensuring that quality standards are met.

Now consider a purely service industry like an airline company. The system consists of airplanes, airport facilities, and
maintenance facilities, sometimes spread over a wide territory. Most of the activities performed by management and employees
fall into the realm of operations management:

Forecasting such things as weather and landing conditions, seat demand for flights, and the growth in air travel.
Capacity planning, essential for the airline to maintain the cash flow and make a reasonable profit. (Too few or too many planes,
or even the right number of planes but in the wrong places, will hurt profits)
Scheduling of planes for flights, and for routine maintenance; scheduling of pilots and flight attendants; scheduling of ground
crews, counter staff, and baggage handlers.
Managing inventory of such items as foods and beverages, first aid equipment, in-flight magazines, pillows, blankets, life
preservers, etc.
Assuring quality, essential in flying and maintenance operations, where the emphasis is on safety. It is also important in dealing
with customers at ticket counters, check-in, telephone reservations, and curb service, where the emphasis is on efficiency and
courtesy.
Employee motivation and training in all phases of operation. Location of facilities according to managers‘ decisions on which
cities to provide service for, where to locate maintenance facilities, and where to locate major and minor hubs.

Obviously, the two examples, a bicycle factory and an airline company are completely different types of operations. One is
primarily a producer of goods, the other a service operation. Nonetheless, these two operations have much in common. Both
involve scheduling of activities, selecting and maintaining equipment, management of inventories, satisfying quality standards,
and, above all, satisfying customers. In both systems, the success of the business depends on short and long-term planning.

Wanyama B. N. 50
9 PRODUCTION
Traditionally, production is the process of producing goods from raw materials. It embraces all the processes of manufacturing
goods plus all those activities, which help in the manufacture of the goods.

Thus business must be organized to produce effectively. In a small Jua Kali workshop one person may carry out several
functions while in a large firm each function may be carried out by separate individuals or teams.

9.1 Divisions of Production

PRODUCTION

Manufacturing Production Engineering Technical General Maintenance

Efficiency Services Production Services

Ergonomics Work Study Operational Research Planing Control

Goods Inwards Stores Planing

Fig 9.1 Divisions of production

The main divisions of production can be grouped into three:

(a) Manufacturing Functions – It is concerned with making the product.

(b) Ancillary Functions – These are activities necessary to support production but not directly engaged in manufacturing
the product. These include technical concerned with drawings, making of tools, etc, and general maintenance
concerned with keeping the machines in good working order.
(c) Advisory Functions – These act in advisory capacity, such as ergonomics, work-study, operational research and
inspection. They fall under production engineering on the chart.

9.2 Stages in Production

(a) Market Research – It probes the market in an attempt to ascertain the need for a new product.
(b) Production Research –Is carried out to provide information on which to base the design.
(c) Development Work – Is carried out to develop design how it should be most economically produced.
(d) Prototype Production – This goes hand in hand with design and is the producing of a few products. These are used
for experimental purposes.
(e) Pre-production – Is to produce a small number of items as samples and supply to the regular or selected customers
to give them comments and critics.
(f) Manufacturing – The product is then put into full production after the decision being done to the final figure. This will
take a lot of time for the operatives to learn the new assembly cycles in order to avoid a high number of rejects. The
goods then leave for the warehouse and it now becomes the responsibility of the sales organization.

Wanyama B. N. 51
9.3 Types of Production
(a) Job Production
This is the ‗special order‘ or ‗one off project‘ type. This type of production is the manufacture of a single complete unit by
an operator or group of operators. It is usually carried out by firms engaged on sub-contract work such as tool making,
machining, sub-assembly for larger firms concentrating on mass production. Jobs are carried out to the customer‘s
special requirements or specifications e.g., ship building, bridge building, dam construction, etc. Since the labour and
equipment must be flexible to accommodate the continually changing jobs, this type of production often leads to
inefficient utilization of labour and time.
(b) Batch Production
This is where items are required in a fixed quantity or batch to fulfil a special order. The items are completed in one run
and machines re-tooled for other jobs. Also when certain machines and processes supply a variety of products to certain
departments or lines, a batch of say 2 months work of product ‗A‘ is made and the machine is changed over to product
‗B‘.
(c) Process Production
It is where a product goes through a sequence of stages of production through different processing units. It is more
associated with automation where raw materials are fed at one end, automatically goes through the various processing
stages and the end product comes out at the other end. Plants associated with process production include motor vehicle
manufacture, cement, beer, sugar, fruit processing, etc.
(d) Mass Production
This is when production is organized on batch production basis. The batches follow each other continuously.
(e) Flow Production
When the products are required in a continuous supply, the production can be arranged to flow from one operation to the
next. It involves arranging machines in sequence to the product requirements so that by the time the product reaches the
last machine it is at the finishing stage.

9.4 Production Planning and Control

The planning section of this department is responsible for planning the products through the manufacturing stages, which include
the manufacturing of components, assembly, finishing and packing by deciding on how and where the production should be
carried out. It ensures efficient loading of the manufacturing department. It does so by ensuring optimum utilization of available
plant facilities and operating the plant at the highest possible efficiency.

Production control ensures that while the product is being manufactured, the programmed output is constantly maintained. It
ensures that there is coordinated flow of work that leads to the right quantity and quality before delivery date.

The objectives of production planning and control are:

(a) Meeting delivery dates

When a work order is placed for a given job, time is also given at which the job must be completed.
(b) Ensurety of smooth continuous production
This is to ensure work is evened out so that no machines are left idle while others are overloaded. Also ensures
continuous work progression.
(c) Use of manpower and equipments to the best advantage
With jobs in production all the time and operations evened out means that machines, equipment and manpower are put to
the best use. It avoids paying idle workers, holding up capital through idle machines and possible loss of reputation.
(d) Efficient use of raw materials
Through proper control raw materials are best utilized by preventing spoilage or scrapping. This is possible by inspecting
the work at definite intervals during manufacturing to ensure that the production is within tolerances.
(e) Prevention of bottlenecks in production
Hold ups or bottlenecks in production such as absence of a tool for drilling when required is prevented through production
planning where all tools required at a specified stage in production are listed.

Wanyama B. N. 52
9.5 Activities of the Planning Function
Generally the following are some of the responsibilities of the planning function of the production department:

(a) Transforming the requirements of the sales organization into instructions to the producing departments. On job and
batch production works orders and on flow production are usually in the form of program.
(b) Preparation of programs or schedules of production such as Gantt Charts, in order to provide the producing
departments with target levels of production.
(c) Keep the schedules updated by showing the actual progress against the planned output to highlight deficiencies and
deviations from the program.
(d) To liaise between sales and production departments to keep both sides supplied with up-to-date information, and to re-
schedule when planned output cannot be maintained or when increased output is required.
(e) Maintenance of stock records. These should be kept by the planning and control department rather than the
storekeeper in order that the former has all the information associated with production, progress and stocks of
materials in one control place.
(f) Placing of orders on the purchasing department and keeping records of these orders and delivery dates.

9.6 Activities of the Control Function

These entail the following:
(a) Ensures there is co-coordinated flow of work which leads to the right quantity and quality before delivery date.
(b) The right work is done.
(c) Deciding where the work is done.
(d) Deciding who should do what work.
(e) Deciding how work is done.
(f) Fix time for performance.
(g) Ensuring continuous inspection over quality.
(h) Instituting cost control.

The foregoing are also the functions of the production department or manager, though in addition the production manager does
the following:

(a) Prepares production budget for the cost accountant.

(b) Trains foremen, supervisors and ensures proper training of all other production staff.
(c) Plans for new facilities and recommends the purchase or replacement of capital equipment.
(d) Ensures availability of materials and their proper storage.
(e) Ensures that finished goods are properly packed and stored.
(f) Liaises with other departments concerned.
(g) May be on the Board of Directors.

The following are important elements in production planning and control:

(a) Routing-This is the determination of where each operation is to be performed.

(b) Scheduling-It is the setting of where to carry out the operation, when to start and when to complete. It makes use of
Gantt Charts.
(c) Loading-Assigning work to each section in the course of production so that it is finished in the given time.
(d) Dispatching-It is the authorizing of an operation on the shop floor.
(e) Progressing-It is ensuring that the work is carried out as planned i.e., the time table set by the scheduling section is
met.
(f) Follow up-Continuous follow up is done to ensure that proper interpretation of the jobs during production is done. This
is done through scheduled inspections.
(g) Corrective action-If any errors are detected during follow ups, corrective action is taken to avert possible spoilage that
could lead to losses. These errors in production could be due to wrong machine settings, bad tools, etc. This could
cause delays and people must be prepared to correct delays promptly. Re-planning is done occasionally thus
changing routes, schedules and loading so as to bring everything back to the planned rate of output.
(h) Line balancing-Where a product is complex, there are certainly a large number of possible sequences in which the
operations can be carried out. The choice of sequence affects:

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 The minimizing of synchronizing loss;
The maximizing of resource utilization.

The objective of line balancing is to ensure that all plant is equally loaded and manpower remains busy.

9.7 Documents Used in Production Planning and Control

(a) Work Order (Route Card)
This is the document required to authorize the factory or workshop to commence production on a batch. It contains
information such as code number and description of the product, quantity, job number and material required and a list of
operations and processes through which the product is to be routed together with the allowed times for each operation.
(b) Demand Note (Material Requisition)
This is the document used to draw materials from stores. It specifies the materials and quantities required and the
storekeeper enters the actual amount issued. A copy of this document is returned to the person requisitioning the goods
while a copy is passed to production planning and control for stock records to be adjusted.
(c) Control Sheet
Each batch of work goes into production from the first process or stage of operation with a control sheet so that at each
stage a record of scrap and good ones passed over to the next stage of operation are recorded. At the final process it is
used as an internal delivery note on which the finished parts are paid to the stores.
(d) Internal Delivery Note (IDN)
Sometimes a separate note is used to deliver finished products, components, or even excess material into the stores.
This is the work of the IDN. It is also known as return to stores note. Its function is opposite to that of the demand note.
(e) Progress or Move Note
This note is raised after the completion of each operation on a batch of work so that when it is forwarded to the
production planning and control department, informs them that the batch has progressed to the next operation.

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10 PRODUCT DESIGN
This is defined as the translation or conversion of knowledge and requirements into some form suitable and convenient for use or
manufacture. It encompasses both research – the discovery of novel techniques, ideas or systems, and development – the
improvement of existing techniques, ideas of systems, all of which require a lot of creativity. It includes preparation of drawings,
specifications, experimental and development efforts associated with that very product to be manufactured.

A design function lies between the marketing department and production function. Its purpose is mainly to take the needs of the
market as determined by the marketing department and translate them into such a form that they can be satisfied within the
operating unit. In its course of work the design team has to guard against bad design that can lead to escalation of cost.

There are five stages of design program in every project:

Conception
Acceptance
Execution
Translation
Pre-production

Stage 1 - Conception
This is the first and most important stage in the design program. Here a specification is drawn up in as much detail as possible
by the marketing department in close consultation with the design team.

The following minimum information should be given on a design specification:

(a) The technical or performance requirements, including requirements on quality and reliability.
(b) The appearance (aesthetics) or ‗styling‘ requirements. It should be attractive to the eyes.
(c) The intended selling price or production price, usually in the form of ‗price not to exceed.‘
(d) The date when manufacture must start.
(e) The probable quantity that will be required. This quantity can substantially affect the design and, as a consequence,
the first cost.
(f) The maximum cost of designing which can be accepted, since the final product must bear the cost of the design.
(g) Information concerning any special safety features required by current legislation.

Stage 2 - Acceptance
This is essentially a ‗back-room‘ function carried out in the design department by designers and draughts men. This is where the
draft specification laid down at conception is tested, subjected to calculation, model-making or such other activity as is
appropriate, and it is then accepted, rejected as impractical, or modified in conjunction with the sales department.

Stage 3 - Execution
A working model (or series of models is made based on the ideas drawn up at stage 2, and on general design consideration,
both theoretical and practical. The models should as far as possible conform to the specification and where this is not poss ible,
the differences should be known and their effects considered. Whilst cost considerations are not overlooked, the technical a nd
appearance (aesthetic) requirements are most important at this stage, and the models made should indicate clearly the feasibility
of the proposed design meeting the specification at all points.

Stage 4 - Translation
At this stage the teams responsible for the original work and the model manufacture, hand over their task to a development
team. The development team discusses at all stages the operating problems with the production departments. Detailed
estimates begin to be formed and maximum acceptable costs are assigned to various components, and where need be, some
parts are redesigned at this stage.
Work on preparing the final production information, summarizing all the design and developing efforts is then laid down.

Stage 5 - Pre-production
Once all the foregoing has been completed, it is desirable particularly in high volume productions, to carry out a pilot run under
production conditions. This consists of completely assembling a quantity of the product from parts made by the normal

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production method and using the same degree of skill in the operatives as will be found in the final manufacture.

Stage 6 – Final production

This is the start of manufacturing. The quantities to be produced would have already been determined.

In addition, tests to the customer specification are carried out, again using the equipment, which will be used in manufacture.
The tasks should be done at sometime before the start of production in order that any faults or weaknesses, which are shown up,
can be corrected.
Such a pre-production run will check:

Production information
Final tools
Production techniques and estimates
Specifications.

After such a run the production information can be considered to be final.

The following are the factors determining design of a product:

(a) Customers’ requirements and psychological effects-The product should be acceptable to the consumer and should
satisfy his needs. It should create a good impression.
(b) Functionality-The design should be able to perform the functions for which it is made to the complete satisfaction of
the consumer. Proper condition is needed in its appearance and service to the consumer.
(c) Material-The nature and quality of material available is of importance to the designer. Information regarding the
materials can be obtained from the industrial, scientific and technical journals as well as from other consumer journals.
(d) Facility to operators-The design must see that the operator is provided with all possible comforts and facilitate in
handling the operation. In other words the machines and tools to perform the operations, prescribed in the design
must be convenient and comfortable to handle.
(e) Work methods and equipments-The work method and equipment required to perform the operations specified in the
design are of great significance on the utility and viability of the design. The designer must be very innovative so as to
improve the work method.

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11 PRODUCT DEVELOPMENT
This is devising a product to meet the changing requirements of the market. It is a specialized activity, which may result in
creation of new products or modification in the production process to produce a new product.

It aims at the following:

Provision of goods, which the market demands.

To adjust with the variation in quantity required.
To charge the prices which the consumer is willing to pay.

11.1 Tools of Product Development

These are:
Standardization
Simplification
Specialization
Diversification
Automation

11.1.1 Standardization
Standardization refers to the fixation of standard size, quality, and shape, manufacturing process, weight etc. Standardization
becomes the basis of production, control operation and work as a catalyst directing and operating the working of a business
enterprise. It identifies and compares various products and systems and performances in an enterprise.

Standardization is an instrument to manufacture maximum products out of minimum variety of components by means of
minimum machines and tools. This reduces the working capital requirement and manufacturing costs. In factories/organizations
there is a standardization committee drawing its members from sales, engineering, production, purchasing, quality control and
inspection departments.

11.1.1.1 Advantages
(a) Eliminates wastage and reduces the cost of production.
(b) Production in large quantities can be planned.
(c) Service and maintenance costs are reduced.
(d) Encourages the manufacturer to produce products of new style, use and performance with an objective of generating
more customers.
(e) The value of standardized products lying in store or in transit can easily be evaluated for the purpose of advancing
loans.

11.1.1.2 Disadvantages
(a) Demoralizes workers so that the spirit of challenge and initiative vanishes with passage of time.
(b) During the initial process of product development where frequent improvement and changes may be necessary to
bring the product and the production process up to the standardization mark, may create obstacles in innovations.
(c) It is not advantageous for small-scale enterprises.

11.1.2 Simplification
It refers to the elimination of superfluous varieties or features, sizes, dimensions etc.

11.1.2.1 Advantages
(a) Eliminates surplus use of materials to provide economy in production process.
(b) Leads to more production, which consequently increases the inventory size, hence, avoidance of delay in supply.
(c) Less obsolescence of material and machinery.
(d) Due to simplification in operations, the efficiency of production process increases and this leads to more production.

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 (e) Human efforts become more productive due to scope of better training and learning facilities with simplified operation.
(f) Production planning and control operation becomes easy and simple.

11.1.3 Specialization
This implies expertise in some particular area or field. It is experienced that as the companies expand the range of their
products, the manufacturing system involves more operations for transforming inputs into outputs. This often results in an
increase in operating cost and decline in profit. The minimization of operations can lead to the use of expert knowledge, skill and
techniques in production system. Specialization simply refers to organization‘s ability to manufacture, a few products in which it
has experience/expert knowledge.

11.1.3.1 Advantages
(a) Leads to higher productivity.
(b) Leads to increase in output and reduction per unit cost of production.
(c) Leads to saving on purchase of raw materials and improves quality of the finished goods.

11.1.3.2 Disadvantages
(a) Less flexibility in adjustment to changing situation.
(b) It leads to monotony and boredom which may adversely affect efficiency.

11.1.4 Diversification
Diversification implies a policy of producing different types of products by an enterprise. Thus it is a reverse of simplification.
The concepts of diversification and simplification are associated with the nature of the industry e.g., In case of capital goods
industry simplification is more important as the customers give preference to economy, accuracy, and performance of the
product, where as in a consumer goods industry diversification leads to the production of a variety of goods in terms of style,
shape, colour, design etc. The establishments facing tough competition are forced to diversify their activities to capture the
market.

In general diversification can be adopted for the following purposes:

(a) Utilizing idle resources.
(b) Stabilizing sales
(c) To cope with demand functions
(d) For the survival of the organization.

Diversification can only take place when proper and extensive market analyses at different levels are done.

11.1.4.1 Advantages
(a) Increases the volume of business by increasing sales.
(b) The needs of a wider section of consumers are fulfilled.
(c) Uniform and balanced production program can be planned without any consideration of boom period.
(d) Elimination of wastage by producing by-products.

11.1.4.2 Disadvantages
(a) Due to increase in a number of operations, the production process becomes quite complicated and sometimes
expensive.
(b) Production planning and control operations become complicated and time-consuming requiring extra efforts.
(c) The size and the variety of items in the inventory increase the diversification, introducing more problems.
(d) Workers of different types of skills and expertise are required.

11.1.5 Automation
Automation is the use of machines and equipment for performing physical and mental operation in the production process. The
machines have sensing and control devices that enable them to operate automatically. Automation can range from factories that
are completely automated to a single automated operation.
In automation the machine and equipment required to perform various operations of the production process are sequentially

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arranged in order of the hierarchy of operation. In general, there are three types of automation:

1. Fixed automation- This one uses high-cost, specialized equipment for a fixed sequence of operations. It has the advantage
of low cost and high volume output, but costly in making any changes in either product or process. It is commonly used in mass
production industries such as cigarette manufacturing, beer bottling, and motor vehicle manufacture companies.

2. Programmable automation – This involves the use of high-cost, general-purpose equipment controlled by a computer
program that provides both the sequence of operations and specific details about each operation. The process is changed by
changing the computer program, and there is downtime while program changes are taking place.

This type of operation has the capability of economically producing a fairly wide variety of low-volume products in small batches.
Numerically controlled (N/C) machines (e.g. Lathe machines) and some robots are applications of programmable automation.
There are varieties of programmable automation:

Computer-aided manufacturing (CAM) refers to the use of computers in process control, ranging from robots to automated
quality.
Numerically controlled (N/C) are programmed to follow set of processing instructions based on mathematical relationships that
tell the machine the device such as a floppy disk, magnetic tape, or microprocessor. When individual machines have their own
computer controls a number of N/C machines, it is referred to as direct numerical Control (DNC)

3. Flexible automation – This is a variance of programmable automation which uses equipment that is more customized than
that of programmable automation. A key difference between the two is that flexible automation requires significantly less
changeover time. This permits almost continuous operation of equipment and product variety without the need to produce in
batches. There are two varieties of flexible automation:

A manufacturing cell consists of one or a small number of N/C machines that produce a family of similar parts. The machines
may be linked with automatic material handling devices.

A flexible manufacturing system is a group of machines that include supervisory computer control, automatic material
handling, and robots or other automatic processing equipment. Reprogrammable controllers enable these systems to produce a
variety of similar products. Systems may range from three or four machines to more than a dozen. They are designed to handle
intermittent processing requirements with some of the benefits of automation and some of the flexibility of individual or stand-
alone machines (e.g. N/C machines).

11.1.5.1 Advantages of automation

(a) Better quality goods and services.
(b) Reduction in direct labour force.
(c) Effective control of operations (Absence of human error).
(d) There is greater accuracy, more output and greater speed.
(e) Minimization of waste.
(f) Production planning and control is to be done in the beginning only.
(g) Working conditions can be improved greatly since much of the work follows an orderly path.
(h) Since the human efforts/inputs in the production process is minimized, the quality of the product is improved, since
human beings are more erratic than machines.

11.1.5.2 Disadvantages of automation

(a) Requires high capital investment
(b) High maintenance cost
(c) Highly skilled manpower is necessary
(d) Leads to unemployment
(e) Requires larger inventory
(f) Places restrictions on designing and construction of the building

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12 LOCATION OF THE PLANT
The choice of location of site follows an assessment of demand, size and input requirements and the effect upon the operation of
the unit, and upon the group as a whole if it is part of a geographically dispersed group. It is both equally important to new or
existing businesses. It is worth differentiating between the problems of location and of site: the location is the general area such
as a geographical region, and the site is the place chosen within the location. The decision on siting thus probably proceeds in
two stages; in the first the general area is chosen, and then a detailed survey of that area is carried out to find possible sites.
The sites are then ranked and one chosen.

Factors that will influence the choice of location:

(a) Availability of raw materials: This ensures regular supply of the materials and reduces production cost. The technical
and legal problems associated with raw materials can be reviewed and discussed from time to time.
(b) Proximity to potential markets: This allows the management to keep close touch with the changes in the market
environment and formulate its production policies accordingly. The transportation and other overheads are likely to
increase with the distance between plant and the market.
(c) Integration with other group companies: If the new plant is one of a number owned or operated by a single group of
companies it should be so situated that its work can be integrated with the work of associated units. This ensures that
the group be considered as an entity, not as a number of independent units.
(d) Availability of labour: Labour may be more readily available in some cases than in others. It is very rare today that a
location can be found which has approximately skilled and unskilled labour both readily available. The choice has to be
made between a location where skilled men exist but are not readily available and one where there is a supply of
unskilled labour.
(e) Availability of transport and communication: If the ratio of the product weight to its value is high, then more emphasis
should be given to the transportation cost. Goods intended for export indicate a location near a seaport or a large airport.
(f) Political situation: The political situation in potential locations should be considered. Even if other considerations
demand a particular location, knowledge of the political situation and local prejudices can assist in taking decisions.

The following factors will then be important in selecting the site:

Availability of services: There are five main services which need to be considered.
Gas
Electricity
Water
Drainage
Disposal of waste

Certain industries use considerable quantities of water – food preparation, laundries, and metal plating, etc, others use a great
deal of electricity for chemical processing, and so on. An assessment must be made of the requirements for these for as far
ahead as possible. Underestimating the needs of any of the services can prove to be extremely costly and inconvenient.

(a) Local government building and planning regulations: Proposed buildings should not infringe local regulations and by-
laws e.g., the construction of building heights and also any special regulations concerning the disposal of effluents.
(b) Availability of social amenities: A location which provides good external amenities such as shops, theatres, cinemas,
restaurants is often much more attractive to staff than one which is more remote. The other important amenity is
personnel transport, buses, and trains; hence some companies find this so vital that they provide special company buses.
(c) Site characteristics: The geology of the area has to be considered and also whether the sub-soil can support the loads
likely to be placed on it, but also whether the climatic conditions (humidity, temperature, and atmosphere) will adversely
affect manufacture.
(d) Accessibility: The movement of transport to and from a production unit – goods, visitors, and staff presents a problem
not only of easy access but also easy control. There is also need for emergency access e.g., fire fighting equipment or
ambulances, which, if impeded could endanger life and seriously affect the company.
(e) Environmental impact: Some production units may present potential dangers to the surrounding neighbourhood, for
example nuclear power stations and explosives factories are often considered dangerous. Location of such plants in

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 remote areas may be desirable.
(f) Expansion potential: It is most unwise to build to the limit of any site unless the long-range forecast indicates very
definitely that the initial building will never be required to increase in size. Therefore, adequate room for future expansion
should be allowed.
(g) Site cost: As a first check, the site cost is important, although it is necessary not to let immediate benefit jeopardize long
term plans.
(h) Special grants: Governments and local authorities often offer special grants, low-interest loans, low rentals and other
inducements in the hope of attracting industry to particular locations. As these are often areas with large reservoirs of
labour, such offers should be considered.

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13 PLANT LAYOUT
This is the method of allocating machines and equipment, various production processes and other necessary services involved
in the transformation process of a product with respect to the available space in the factory so as to perform various operations in
the most efficient and convenient manner, i.e., providing output of high quality at minimum cost. In simple terms plant layout is
an effort to arrange machines and equipment and other services within a pre-designed building-ensuring steady, smooth and
economical flow of materials.

The techniques employed in plant layout are more of a creative one though the normal work-study techniques must be
employed. A good layout results in comfort, convenience, safety, efficiency, compactness and profits; while a poor layout results
in congestion, waste, frustration and inefficiency.

13.1 Objectives of Plant Layout

(a) Proper and efficient utilization of available floor space.
(b) To ensure that work proceeds from one point to another inside the plant without any delay, i.e., to avoid congestion
and bottlenecks.
(c) Provision of better supervision and control of operations.
(d) Careful planning to avoid frequent changes in layout, which may result in undue increase on the cost of production.
(e) To meet the quality and the capacity requirement in the most economical manner.
(f) To provide minimum and efficient material handling system.
(g) To suggest improvement in production process and work method.
(h) To provide adequate safety and comfort to the workers.
(i) To provide safeguards against fire, moisture, theft and general deterioration.
(j) Provide maximum visibility for men and materials at all times.

It is important to note that attaining these objectives is difficult in practice but good skill and judgment can result in providing the
best possible layout for a system.

13.2 Advantages of Plant Layout

(a) To workers
Lesser process time and material handling.
More labour productivity.
More safety and security to workers.
Better working conditions resulting in improved efficiency.
A feeling of unity among employees due to unnecessary segregation.

(b) Cost of Manufacturing

Maintenance and replacement costs are reduced.
Losses due to waste and spoilage are minimized.
Improved quality of product due to reduction in handling, and safer and better methods of production

(c) Products Control and Supervision

Provides more space of production operations.
Labour supervision and production control is simplified.
Costs and efforts in supervision of production process are minimized.

In general, a good layout leads to efficient and optimum use of machines, labour and capital by minimizing per unit production
time and maintaining a proper balance between various production departments.

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13.3 Types of Layout
13.3.1 Line/Product Layout
Here machines are laid out to serve the needs of a product. It is assumed that materials are transformed into products through a
series of integrated operations (whose order cannot be changed) arranged in an orderly sequence. The position and order in the
sequence for a machine performing particular operation if fixed.

Once a machine is in line, it cannot perform any operation, which is not designed in the sequence of operation. It is commonly
used for continuous type of manufacturing system producing items of the same type on massive scale e.g., petroleum and
cigarette industries.

Manufacturing of a large quantity of standardized products is the primary prerequisite to the line production upon which the
product layout is based.

13.3.1.1 Advantages
(a) Ensures smooth and regular flow of materials.
(b) Provides economy in material and labour by minimizing waste.
(c) Short processing time – since travel, storage and inspection occur less frequently, time and opportunity for delay in
operations are minimized.
(d) Reduces material handling – direct channels of materials flow exist, short distances between operations leads to lesser
back tracking.
(e) Low cost of labour procurement and lesser training requirement.
(f) Lesser inspection.
(g) Floor area in more productively utilized.

13.3.1.2 Disadvantages
(a) Inflexible in nature.
(b) It is vulnerable to production line shut down.
(c) Some supervision is more difficult.
(d) Require heavy capital investment.

13.3.2 Process or Functional Layout

Under this system, all operations of similar nature are grouped together in the same department or part of the factory. Here,
machines performing same type of operations are installed at one place, e.g., all drilling machines are located at one place,
known as drilling section. This type of layout is most appropriate for intermittent (job or batch) type of manufacturing systems
where small quantities of a large range of products are to be manufactured e.g., machine parts, customer made goods, tools,
etc.

13.3.2.1 Advantages
(a) Appropriate in case of situations where output is required in small quantities with changing/varying specification.
(b) There is scope for more skilled labour as each section has experts.
(c) Each production unit of the system works independently and is not affected by the happenings of another section of the
plant.
(d) Machine breakdown does not disrupt production schedule.
(e) Low capital investment.
(f) The production facilities can be utilized to greater capacities with less duplication.
(g) Highly productive and profitable due to wider flexibility in production facilities. Each machine can perform a wide range
of similar operations.

13.3.2.2 Disadvantages
(a) More material handling- Lack of definite channels through which all work can flow, leads to too much movement of
semi-finished goods, from one place to another.
(b) Longer processing time- The speed of the various operations in the system is likely to be low as more time is required
for material handling, transport and inspection.

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 (c) Requires substantial production planning and control- The responsibility of production is divided among many
departmental supervisors making accountability for the work progress more difficult.
(d) Requires more floor space
(e) Inspection is more frequent and more costly-Strict departmental responsibility for the quality of the work done is the
main reason for thorough inspection in each department.
(f) Requires highly skilled labour.
(g) Requires buffer stock (Standby stock)

13.3.3 Stationary Layout

It is used in those situations where the semi-finished and finished goods are of such a big size and weight that their movement
from one place to another is not possible. Here, men, equipment and the raw materials are moved to a place where all the
manufacturing activities are carried out e.g., ship building, manufacturing of locomotives, job welding shops, construction of
dams, bridges, etc.

13.3.3.1 Advantages
(a) Simple and capable of frequent adjustments, both with respect to the process and product.
(b) Labourers and workers can be employed and remain busy throughout the process.

13.3.3.2 Disadvantages
(a) Since machines and equipment are transferred to some particular place, heavy and sophisticated equipment cannot be
used in such cases.
(b) Due to low efficiency of men and machines this layout is suitable only for some special type of projects and for the
production of small amount of items.

13.4 Choice of Plant Layout

When making a choice on the type of layout the following points should thus be considered:
(a) Nature of the products.
(b) Size of the output.
(c) Nature of the manufacturing system.
(d) The location of the output.
(e) Machines to be used.

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14 PLANT AND EQUIPMENT MAINTENANCE
Maintenance is the keeping of equipment, building and services of the plant in satisfactory repair and operating conditions. The
best machines will not work satisfactorily unless they are cared for. Effective maintenance is therefore a requisite to efficient
plant operation and uninterrupted production. Plant and building deteriorate because of a variety of reasons:

(a) The effects of weather, sun, rain, cold and wind.

(b) Machines and equipment are subject to tear and wear resulting from general use, vibration, fumes etc.
(c) Machines go out of adjustment not only as a result of use but also because of temperature changes, vibration, and
‗seasoning‘ of machine parts, setting roles, and a host of other causes.
(d) Time is a factor as corrosion forms in pipes and virtual parts, moisture seeps into electrical windings and breaks down
insulation, and dirt finds its way in many types of equipment.

Deterioration cannot be stopped but to arrest and counteract the effects of all these diseases in equipment, the only wonder drug
at industry‘s disposal is proper maintenance.

14.1 Importance of Maintenance

The importance of maintenance to industry can be summarized as follows:

(a) It helps the industry to maintain continuous supply of goods and services.
(b) Keeps equipment running (operating).
(c) Makes the industry to remain competitive in the market by producing more and satisfying the customers.
(d) Keeps the plant efficient and preserves its values by producing more and satisfying the customers.
(e) Keeps the plant efficient and preserves its value by reducing the rate at which it deteriorates.

14.2 Effects of Poor Maintenance

(a) It becomes hard to plan production if schedules cannot be met.
(b) Cannot design production to desired level.
(c) Cannot satisfy customers.
(d) Results in poor morale of workers.

14.3 Control of Maintenance Work

In order that there should be some control over the work of maintenance, four rules should be rigidly enforced.
(a) All requests for maintenance work must be made (preferably in writing) to one central control point (maintenance
supervisor). No work should be carried out without the knowledge and approval of the maintenance supervisor. Lack
of strict adherence to this rule will result in a waste of skilled staff and inability to keep any schedule of essential work.
(b) No maintenance work should be undertaken by productive staff (except in an emergency) unless the operator
concerned is seconded to the maintenance department.
(c) Maintenance stores must be as carefully controlled as any other of the company‘s stores, as the absence of a vital part
can lead to an expensive plant shut down.
(d) Records of all work carried out, including a statement of materials required, should be kept as these assist in setting
rational maintenance, replacement and depreciation policies.

14.4 Maintenance Policies

Within the context of maintenance, failure is defined as an inability to produce work in the appropriate manner rather than an
inability to produce any work. Thus a piece of plant, which deteriorates and consequently produces work of too low a quality or
at too high a cost is said to fail. Work carried out before failure is said to be overhaul, or planned maintenance work, while that
carried out after failure is emergency, breakdown or recovery work.

In order to come up with rational policies there is need to collect and analyze maintenance information and data of the plants with
regard to actual times taken and work involved when carrying out maintenance tasks and also maintenance costs. From here a
choice can then be made of one or a combination of several of the following five types of maintenance policies.

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 (a) Time base (‗overhaul every x months‘)
(b) Work based (‗overhaul when x volume of work is produced‘)
(c) Opportunity based (‗maintain when available‘)
(d) Condition based (‗repair when parameter is at level p‘)
(e) Emergency based (‗continue to operate until plant fails, then maintain‘)

The above policy decisions come as an address to the following questions:

(a) Should maintenance consist of service or repair or both?

(b) What should be the timing of service or preventive work in order to involve minimum effort and cost, yet minimize the
probability of breakdown of resources?
(c) How should repair work be conducted?
(d) What should be the size of maintenance teams?
(e) How should information be gathered to enable the above questions to be answered?

14.5 Duties of Maintenance

The duties of maintenance can be classified into five:
Inspection
Engineering
Production
Clerical
House keeping

14.5.1 Inspection
Inspection is concerned with the routine scheduled checks of the plant, building and its equipment and their conditions and to
check for needed repairs. On intensively used production equipment inspection is much more frequent and detailed than
functions of housing, e.g. production machines, motors and belting may be inspected once every week, boilers, furnaces and
compression equipment every month, overhead cranes may be inspected every 4 to 6 months.

Facilities will normally be inspected at intervals in order to determine whether service and/or preventive maintenance is required
or is likely to be required in the near future. Such work may involve visual inspection or the measurement of certain of the
physical characteristics of a facility. It may involve the whole facility or simply those parts, which are known to be liable to failure.

A report should be made after such inspection showing the condition of plants, probable reasons for their development and
suggested repairs and replacement. A succession of these reports often indicates their weaknesses, which may be developing
or may call for change in the inspection interval.

14.5.2 Engineering
Engineering is concerned with developing changes and improvement in the plant building or the operating equipment. Recurring
breakdowns in certain equipment may suggest a need for engineering by the maintenance department to determine what has
caused the difficulty. After the study, maintenance would then develop some modification to prevent or at least reduce such
future recurrences. In its engineering capacity, for example, maintenance might be deciding to study and develop ways of
directing sufficient illumination towards a particular job through a stronger fixture brazing arrangement.

14.5.3 Production
This puts into operation the ideas developed by the engineering phase. It is also concerned with the performing work suggested
by inspection function as well as performing other tasks such as servicing and lubricating of equipment. The implementation
aspects of maintenance are the part that will be classified under this heading.

14.5.4 Clerical Work

This is largely keeping records of cost, time progress on jobs etc. It is also responsible for maintaining records to the important
features of the plant, equipment and other properties. These may include records of property maps, complete building drawings,

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complete wiring and power line drawings, maps of underground piping of water, steam, air and similar lines, complete layout
drawings of whole machinery, showing types, location and date purchased, spare parts required, etc, and records of all
inspection, adjustment, repairs and replacements by department, equipment and date.

14.5.5 House keeping

As the name suggests, it means taking care of the detail of the upkeep and cleaning of the buildings, equipment, tools and plant
facilities.

These five functions are in essence the total duties of the maintenance department.

14.6 Types of Maintenance

Fundamentally there are only two types of maintenance, preventive maintenance carried out before failure and breakdown
maintenance carried out after failure.

14.6.1 Preventive Maintenance

This is also called overhaul, schedule or planned maintenance.

It is generally defined as the orderly routine of inspecting, testing, cleaning, furnishing, adjusting and lubricating machines. The
main objective of this programme is to avoid or reduce the number of avoidable breakdowns. It is a concept subject to
mechanical tear and wear.

A good preventive maintenance programme provides for plant shut downs during periods of inactivity or least usage for the
purpose of major overhauls. This ensures continuity of operation and lessens the danger of breakdowns at peak loads.

When preparing routine inspection schedule, it must be recognized that too frequent inspection are a waste of time and money
and that insufficient inspection places equipment in virtual jeopardy. The frequency of inspection should depend on the
equipments‘ contribution to profitable production, its duty cycle, age, and overload etc.

In order to carry out a preventive maintenance schedule it is first necessary to produce an inventory of every item, its service, its
role and method required for maintenance, the acceptable frequency of maintenance and attention needed. The selection would
be based on the consequences in failure in regard to such factors as safety, productivity and the frequency based on analysis of
the past records.

This programme is a corrective measure carried out on an item before it fails to prevent its failure. In most cases, the whole
factory would be closed down for overhauls. It embraces type 1 to 3 of maintenance policies.

Planning a preventive maintenance program

(a) The most important phase of a preventive maintenance program is the recording and interpretation of data pertinent to
each piece of equipment.
(b) Maintenance personnel should be selected to the basis of qualification on the job.
(c) A skilled maintenance force should be kept abreast of the latest techniques and developments in the field. Files of
equipment, manufacturer‘s bulletins and instructions should be available to all maintenance personnel.
(d) Only modern testing equipment, proper tools and latest methods should be used.
(e) A carefully selected assortment of spare parts is essential to a good maintenance programme and represents
insurance against prolonged shutdowns. Overstocking and under stocking should be avoided, since overstocking
results in excessive holding up of funds as well as losses due to theft and obsolescence of equipment, while under
stocking places production in jeopardy if a breakdown occurs.
(f) Safety operation of machines and safety to personnel should be uppermost when planning any maintenance
programme.

14.6.1.1 Objectives of Preventive Maintenance

(a) To minimize the possibilities of anticipated production interruption by identifying any condition which might lead to it.
(b) To make plant equipment and machines available and ready for use.

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 (c) To reduce the work content of maintenance jobs that would be occasioned by breakdowns.
(d) To ensure the safety of employees.

14.6.1.2 Advantages (Benefits) of Preventive Maintenance

(a) A good preventive maintenance ensures continuity of operation and lessens the chances of breakdown at peak loads.
(b) It enables troubles to be detected in their early stages so that corrective action can be taken before expensive damage
is done.
(c) The relatively high cost of down time due to equipment failure is avoided particularly in processing plants, assembly
lines, power plants, and etc, where failure of a relatively minor component can disrupt the entire operation.
(d) The total cost of down time and emergency round the clock repairs, which can be staggering are minimized.
(e) The probability of law suits that may arise from injury to personnel and failure to meet commitments because of
unavoidable break down are eliminated.
(f) Leads to better spare parts control leading to minimum inventory level and reduction in maintenance cost.

14.6.2 Service
This involves the routine readjustment of equipment, lubrication, cleaning, etc. Such work will often be undertaken, if seen to be
required alongside inspection.

14.6.3 Running Maintenance

This is part of preventive maintenance, which is done more routinely. It involves walking around and inspecting machines
through observation while in operation in order to ascertain loose parts like nuts, screws, parts which are vibrating abnormally,
parts which by their nature require oiling, greasing, etc, and being able to take the necessary action, i.e. tightening or replacing
loose or worn out parts nuts, rivets, clips, etc, oiling and greasing, adjusting offset parts, etc.

It is a combination of inspection and service and has all the ingredients of a preventive maintenance scheme.

14.6.4 Total Preventive maintenance

This is where you have workers perform preventive maintenance on the machines they operate, rather than use separate
maintenance personnel for that task. It is a system where employees are given greater responsibility for quality productivity and
the general functioning of the system.

14.6.5 Predictive Maintenance

It is an attempt to determine when to perform preventive maintenance activities. It is based on historical records, analysis of
technical data to predict when a piece of equipment of a plant is about to fail. The better the predictions of failures are, the more
effective preventive maintenance will be. A good preventive maintenance effort relies on complete records for each piece of
equipment. Records must include information such as data of installation, operating hours, dates and types of insurance and
dates and types of repairs.

14.6.6 Break Down Maintenance

It is also called corrective, emergence or recovery work. It is type 4 and 5 of maintenance policies.

This is a maintenance, which is carried out on an item, which has failed in its service. It is repair work, which is carried out
through fault diagnosis, analysis and identification to establish its position. It is done by repairing the faulty part so as to restore
its operation. Some of the worn out or broken parts are removed and replaced.

Repair or breakdown maintenance is remedial; taking place after an item has ceased to operate. The need to repair is not
necessarily the result of inefficient or insufficient inspection, service or preventive maintenance, since in some cases the cost of
repairs will be less than the accumulated cost of preventive work.

14.6.6.1 Causes of Breakdown

(a) Failure to identify and replace worn out parts.
(b) Lack of lubrication.
(c) Inefficient cooling system.

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 (d) Indifference towards minor faults.
(e) Use of sub-standard or wrong fluids.

14.6.6.2 Disadvantages of Breakdown Maintenance

(a) It is expensive since it results in high cost of down time due to outage, for during repair work the equipment is
scheduled out of service.
(b) It results in dislocation of production and losses thereof, and causes excessive delays or reduction in output.
(c) Failure of machines may cause accident leading to losses and strained industrial relations.

14.6.6.3 Reasons why breakdowns should be avoided

(a) Avoid production disruptions.
(b) Prevent addition to production costs.
(c) Maintain high quality products.
(d) Avoid missed delivery dates.

14.6.6.4 Adverse consequences when breakdown occurs

(a) Production capacity is reduced and orders are delayed.
(b) There is on production but overheads continue increasing the cost per unit.
(c) There are quality issues; product may be damaged.
(d) There are safety issues; employees or customers may be injured.

14.6.6.5 Handling Breakdowns

The following are some of the major approaches used to deal with breakdown maintenance:

(a) Have standby or back up equipment that can be quickly pressed into service.
(b) Have inventories of spare parts that can be installed as needed, thereby avoiding lead times involved in ordering parts,
and buffer inventories, so that other equipment will be less likely to be affected by short-term downtime of a particular
piece of equipment
(c) Have operators who are able to perform at least minor repairs on the equipment.
(d) Repair people who are well trained and readily available to diagnose and correct problems with equipment.

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15 HEALTH AND SAFETY AT WORK
Health and safety at work forms a very important aspect of working conditions and job design in industry. It is the duty of
management to remove all possible causes of accidents. They are responsible for the health and safety of their subordinates.
Employees are of course required to carry responsibility for the safety of themselves and their colleagues through both the
observance of safety practices and adoption of those working methods in which they have been instructed. The employer or
manager is required to provide an overall working environment, including adequate training of the operator, so that it is safe and
healthy for employees to undertake their jobs.

The number of days lost through industrial accidents is generally very much greater than those lost through industrial disputes,
strikes and grievance activity. Although the ministry of labour is supposed to gather statistics on the number of accidents, a large
number of accidents are not reported and others are simply reported as sickness, absence, etc.

In general in factories, the major source of accidents is concerned with the handling of goods, e.g. lifting, placing, movement, etc.
at the workplace and between work places. Falls and accidents caused by machinery are the next most important source of
accidents. Most severe accidents occur as a result of individuals becoming ‗involved‘ with machinery, while accidents occurring
during the handling of goods comprise a major proportion of those accidents causing lesser or shorter periods of disablement.
Fires and explosions are also a major source of accidents.

15.1 Economic Effects

Among the economic implications to the employer deriving from the occurrence of an accident are as follows:

(a) Working time lost by the injured employee.

(b) Time lost by other employees who choose to or must of necessity stop work at the time of or following the accident from
curiosity, sympathy or to assist.
(c) Time lost by supervision, management and technical staff following the accident as a result of assisting the injured,
investigating causes, re-scheduling work, re-training replacement personnel, preparing accident reports and attending
inquiries.
(d) Proportion of the cost of employing first aid, medical staff, etc.
(e) Costs of disruption to the operation.
(f) Cost of any damage to the equipment or any cost associated with the subsequent modification of the equipment.
(g) Cost of any compensation payments or fines resulting from legal action.
(h) Costs associated with increased insurance premiums.
(i) Reduced output from the injured employee on return to work.
(j) Cost of reduced morale, increased absenteeism, increased labour turnover among employees.

15.2 Prevention of Accidents

The prevention of illness and accidents requires efforts on the part of employees and management, the latter including those
responsible for the design of the operating system and it‘s staffing. Some of the steps, which might be taken to reduce the
frequency and severity of accidents, are as follows:

(a) Developing safety consciousness among staff and workers and encouraging departmental pride in a good safety record.
(b) Developing effective consultative participation between management, workers and unions so that safety and health rules
can be accepted and followed.
(c) Giving adequate instruction in safety rules and measures as part of the training of workers for safe working and operation.
(d) Materials handling, a major course of accidents, to be minimized and designed as far as possible for safe working and
operation.
(e) Ensuring a satisfactory standard from the safety angle for both basic plant and auxiliary fittings such as guards and other
devices.
(f) Ensuring good maintenance by making sound job repairs.

15.3 Fire Prevention and Control

The main causes of fire in industry and commerce tend to be associated with electrical appliances and installations. Smoking is

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a major source of fires in business premises. Thus fire prevention and control represent an important area of preventive action.
The following guidelines for the prevention and control are recommended.

(a) Management should accept that fire prevention policies must be established and reviewed regularly.
(b) An estimate should be made of the possible effects of a fire in loosing buildings, plant, work-in-progress, workers,
customers, plans and records.
(c) Identify the fire risks, considering sources of ignition, combustible materials, and means whereby fire could spread.
(d) Estimate the magnitudes of the risks to establish priorities.
(e) Establish clean lines of responsibility for fire prevention
(f) A fire officer should be appointed.
(g) A fire protection drill for each department should be set up and practiced.
(h) Set up a fire prevention program, which will be maintained at appropriate intervals.

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16 PROJECT MANAGEMENT
A project is a unique, one-time operation designed to accomplish a set of objectives in a limited time frame.
Examples of projects include constructing a shopping complex, installing a new computer system, launching a space shuttle,
making a movie, putting on a play and, designing and running a political campaign. Examples of projects within business
organizations include designing new products and services, designing advertising campaigns, designing information systems,
designing databases and designing data pages. Other examples include quality improvement, process improvement, re-
engineering, moving an organization from one location to another and designing and implementing a new pay roll system.

Projects may involve considerable cost. Some have a long time horizon and some involve a large number of activities that must
be carefully planned and coordinated. Most projects are expected to be completed within time, cost and performance guidelines.
To accomplish this, goals must be established and priorities set. Tasks must be identified and time estimates made. Resource
requirements also must be projected and budgets prepared. Once underway, progress must be monitored to assure that project
goals and objectives will be achieved.

The project approach enables focusing of attention and concentration of efforts on accomplishing a narrow set of objectives
within a limited time and budget framework. This can produce significant benefits compared with other approaches that might be
considered.

16.1 Project Manager

The project manager is the control person in the project. He bears the ultimate responsibility for the success or failure of the
project. The role of the project manager is one of an organizer, a person who is capable of working through others to accomplish
the objectives of the project.

Once the project is underway, the project manager is responsible for effectively managing each of the following:
(a) The work, so that all the necessary activities are accomplished in the desired sequence.
(b) The human resources, so that those working on the project have direction and motivation.
(c) Communications, so that everybody has the information they need to do their work.
(d) Quality, so that performance objectives are realized.
(e) Time, so that the project is completed on time.
(f) Costs, so that the project is completed within budget.

16.1.1.1 Qualities of a Good Project Manager

A good project manager should have the following qualities:
(a) Ability to select and organize a team of persons with a variety of skills.
(b) Ability to smooth out difficulties between specialist groups and present facts clearly to management.
(c) Ability to understand technical details.
(d) Ability to run meetings and communicate effectively.
(e) Ability to deal with contract documents.

16.2 Project Life Cycle

The size, length and scope of projects vary according to the nature and purpose of the project. Nevertheless, all projects have
something in common; they go through a life cycle, which typically consists of five phases.

(a) Concept, at which point the organization recognizes the need for a project or responds to a request from a potential
customer or client.
(b) Feasibility analysis, which examines the expected costs, benefits, and risks of undertaking the project.
(c) Planning, this spells out the details of the work and provides estimates of the necessary human resources, time and
cost.
(d) Execution, during which the project itself is done. This phase often accounts for the majority of time and resources
consumed by the project.
(e) Termination is achieved during closure. Termination can involve reassigning personnel and dealing with any left over
materials, equipment, and any other resources associated with the project.

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It should be noted that the phases could overlap, so that one phase may not be fully complete before the next phase beg ins.
This can reduce the time necessary to move through the life cycle, perhaps generating some competitive advantage and cost
saving.

16.3 Work Breakdown Structure

Because large projects usually involve a very large number of activities, planners need to determine exactly what will need to be
done so that they can realistically estimate how long it will take to complete the various elements of the project and how much it
will cost. They often accomplish this by developing a work breakdown structure, which is a hierarchical listing of what must be
done during the project. This methodology establishes a logical framework for identifying the required activities for the project as
shown in fig 15.1 below.

Level 1 PROJECT

Level 2

Level 3

Level 4

Fig 15.1 Schematic diagram of work breakdown structure.

The first step in developing the work breakdown structure is to identify the major elements of the project. These are the level 2
boxes in fig 15.1. The next step is to identify the major supporting activities of each of the major elements – the level 3 boxes.
Then, each major supporting activity is broken down into a list of the activities that will be needed to accomplish it – the Level 4
boxes (For purposes of illustration, only a portion of the level 4 boxes are shown). Usually there are many activities in the Level
4 lists. Some large projects may involve additional levels.

Developing a good breakdown structure can require substantial time and effort due to the uncertainties associated with a project
and/or the size of the project. Typically the portion of time spent on actually developing the work breakdown structure greatly
exceeds the time spent on actually developing a project schedule. A work breakdown structure serves as the focal point for
planning and doing the project.

After attaining a work breakdown structure, planning charts are then used to plan and schedule the work and serve for control of
the project.
There are three types of charts in use:

Critical Path Method (CPM)

PERT
Gantt chart

16.4 Critical Path Analysis (CPA)

This is a technique of scheduling, which overcomes the deficiency of the Gantt chart. It is used for scheduling special projects
(not continuous) where the relationship between the different parts of the project is more complicated than that of a simple chain
of tasks to be completed one after the other. It is used at one extreme for quite simple jobs, like scheduling the purchase and
installation of a new machine where the activities of purchasing, electricity supply, foundation building, etc have to be
coordinated and scheduled, and at the other extreme for very complicated projects like the design, production and testing of a
new aircraft prototype such as the Concode, where the activities of many different specialist teams, and sub-contractors, have to

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be scheduled and controlled.

CPA serves two main purposes, to find the earliest completion date for the project as a whole, and to find the best scheduling
times for its different parts and with these two, time factors, costs and resources can easily be worked out.

A variety of names exist for CPA and some of these are:-

Critical Path Planning CPP

Critical Path Analysis CPA
Critical Path Scheduling CPS
Critical Path Method CPM

16.4.1 Basic Network Terminology

Basically the following elements constitute a network.

(a) Activity
This is the task or job of work, which takes time and resources e.g., builds a well, dig foundation, fit new conduits, etc. An
activity is represented in a network by an arrow as in fig 16.2.

Fig 16.2 Activity

The head of the arrow indicates where the task ends and the tail where the task begins. The arrow points from left to right
but is not drawn to scale, i.e., length of the arrow has no bearing to the time of the activity.

(b) Event
This is a point in time and indicates the start or finish of an activity, or activities. An event is represented in a network by a
circle or node as shown in fig 16.3.

Fig. 16.3 Event

Events are numbered 0, 1, etc for identification. It will be noted that the establishment of activities automatically determines
events because they are the start and finish of activities and represent the achievement of a specific stage of a project.

(c) Dummy activity

This is an activity, which does not consume time or resources. It is used merely to show clear, logical dependences
between activities so as not to violate the rules for drawing networks. It is represented on a network by a dotted arrow line
as in fig 16.4.

Fig 16.4 Dummy activity

The dummy activities are not usually listed with the real activities but become necessary as the network is drawn.

(d) 4 Network
This is the combination of activities, dummy activities and events in logical sequence according to rules for drawing
networks. An example of a network is shown in fig 16.5, where for instance activity F can only take place after activities A,
B and D are completed.

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 4 E
5
D H

0 2
6
6
A B F
G
1 C
3

Fig 16.5 Simple Network

Activities may be identified in several ways.

Typical of the methods to be found include:
(a) A shortened description of the activity e.g., plaster wall, order timber, etc.
(b) Alphabetic or numeric code e.g., A,B,C, etc, as shown in the figure, or numerical code e.g. 100, 101, 108, etc.
(c) Identification by the tail and head event numbers e.g. activity D in the figure could be left blank and simply called
activity 0-2 and activity E called activity 4-5, etc.

16.4.2 Conventions Rules for Drawing Networks

(a) Networks proceed from left to right.
(b) An event is not reached until all activities leading into it have been completed.
(c) An activity cannot start until its tail event has been reached.
(d) All activities must both start and finish with an event.
(e) Any event except the first and the last must have at least one activity leading into it, and at least one activity leading
out of it, otherwise a dangling error occurs as shown in fig 16.6.

Note that many activities may use the same tail event and many may use the same head event (e.g., events 1 and 3
respectively in fig 16.5), but an activity must not share the same tail event and the same head event with any other
activities (fig 16.8).

(f) ‗Loops‘ i.e. a series of activities which lead back to the same event are not allowed (fig 16.7) because the essence of
networks is a progression of activities always moving onwards in time.

1 2 4 1 2

3 3

Fig 16.6-Dangling error Fig 16.7-Looping error

16.4.3 Dummy examples

Example 1
Assume that part of the network involves a car arriving at a service station during which two independent activities take place;
filling with petrol (A) and topping up with oil (B). Two ways it could be shown:

B
Car Car
arrived ready

Fig 16.8-This is wrong since it contravenes rule 5.

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It could be shown correctly by use of dummy activity as shown in fig 16.9.

Oil
topped up

Car Car
arrived ready

Fig 16.9 - Use of Dummy

Example 2

Assume that part of a network involves a man lighting a cigarette. The activities involved, and their relationships are assumed to
be as given in table 16.1 below.

Activity Preceding activity____________

A-Remove cigarette from case (Relates to earlier part of network)
C-Put cigarette case away A
B-Strike match (Relates to earlier part of network)
D-Light cigarette A, B________________________

Table 16.1

The network could be drawn as in fig 16.10.

A C

B D

Fig 16.10 – This is RIGHT

If the network were drawn as in fig 16.11, it would be incorrect because it depicts that the cigarette case cannot be put away (C)
until the match has been struck (B) which is incorrect according to the procedure rules given in table 16.1.

A C

B D

Fig 16.11 – This is WRONG

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16.4.4 Practical Examples
Example 1
Draw the network diagram for the project in table 16.2.

Activity Preceding Activity___

A -
B A
C -
D C
E -
F E
G -
H A
I B, D, G
J H, I
K J, F
L K
M L_________

Table 16.2

Example 2
Table 16.3 shows stages in the construction of a Boat. Draw the network.

Activity Preceding Activity Description___________

A - Design Hull
B - Prepare Boat Shed
C A Design mast & mast mount
D A Obtain Hull
E A Design sails
F C Obtain mast mounts
G C Obtain mast
H C Design Rigging
J B, D Prepare Hull
K F, J Fit mast mount to Hull
L E, H, G, K Step mast
M E, H Obtain sails and Rigging
N L, M Fit sails and Rigging____

Table 16.3 – Project MZ Building of a Boat

16.4.5 Network Analysis

(a) Critical Path
Once the network is drawn the next step is to carry out the basic time analysis, first by finding the critical path. The critical
path of a network gives the shortest time in which the whole project can be completed. It is the chain of activities with the
longest time. There may be more than one critical path in a network and it is possible for the critical path to run through a
dummy. The following procedure is followed in establishing the critical path.

For each activity, mark on it the estimated time duration. This may be time in hours, weeks, months or even years.
Divide each event into three sections and make entries as shown in fig 16.12 below.

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 Event
Number

EST LST

Fig 16.12-Sections of an event

(b) Event number – events are progressively numbered 0, 1, 2, etc from starting to end event.

(c) Earliest starting time (EST) – The EST is the earliest possible time at which a succeeding activity can start and can be
calculated by considering the simple network of fig 16.13 in which the activity durations are in days.

2
3 3

D
B 2 4

0 A 1 C 3 E 4 F 5
0 0 1 1 1 3 4 6 1 7 7 2 9 9

Fig 16.13 Simple network

EST is also called the Forward Pass and is calculated thus:

a) The EST of a head event is obtained by adding onto the EST of the tail event the linking activity duration starting from
Event 0, time 0 and working forward through the Network.
b) Where two or more routes arrive at an event the longest route time must be taken, e.g., activity F depends on
completion of D and E. E is completed by day 5 and D is not complete until day 7. Therefore F cannot start before day
7.

(d) Latest Start Time (LST) – To enable the critical path to be isolated, the LST also called the Back Pass, for each activity
must be established. The LST is the latest possible time at which a preceding activity can be finished without increasing the
project duration.

From the example above the LST is calculated thus:

Starting at the finish event no. 5, insert the LST = EST (i.e., day 9) and work backwards through the network deducting each
activity duration from the previously calculated LST. Where two or more tails of activities start at an event, the lowest time is
taken, e.g., tails for activities B and C join event No. 1, the LST for C is day 3 and the LST for B is day 1. The lowest
number is taken as the LST for event No. 1 because if event No. 1 occurred at day 3 then activities B and C could not be
completed by day 7 as required and the project would be delayed.

(e) Project Duration – The EST in the finish event No. 5 is the Project duration and is the shortest time in which the whole
project can be completed; i.e., the project time = 9 days.

(f) Critical Path – Examination of fig 16.13 shows that one path through the network (A,B,D,F) has ESTs and LSTs which are
identical. This is the critical path, which should be noted to be the chain of activities, which has the longest duration. The
critical path can be indicated on the network either by a different colour or by two small transverse lines across the arrows
along the path as indicated.

Implications of critical path –The activities along the critical path are vital activities which must be completed by their
ESTs/LSTs otherwise the project will be delayed. The non-critical activities (C and E in the example above) have spare

Wanyama B. N. 78
 time or float available i.e., C and / or E could take up to an additional 2 days in total without delaying the project duration. If
it is required to reduce the overall project duration then the time of one or more of the activities on the critical path mus t be
reduced perhaps by using more labour, or more or better equipment or some other method of reducing job times.

(g) Float – Float or spare time can only be associated with activities which are non critical. Thus activities on the critical path
cannot have a float. There are three types of floats.

J 5 K 6 N
10 20 10 40 50

G H

Other parts of networks

Fig 16.14

(i) Total Float – This is the amount of time a path of activities could be delayed without affecting the overall project
duration.

Example - Consider a part of a network in fig 16.14 which consists of one activity only i.e. Activity K

Total Float = Time available – Time required

= (Latest Head time – Earliest Tail time) – Activity Duration
= (50 – 10) – 10
= 30 days

(ii) Free Float – This is the amount of time an activity can be delayed without affecting the commencement of a
subsequent activity at its earliest start time, but may affect float of a previous activity.

Free Float = Earliest Head Time – Earliest Tail Time – Activity Duration
= (40 – 10) – 10
= 20 days

(iii) Independent Float – This is the amount of time an activity can be delayed when all preceding activities are
completed as late as possible and all succeeding activities completed as early as possible.

Independent Float = Earliest Head Time – Latest Tail Time – Activity Duration
= (40-20) – 10
= 10 days

Note:
1. For examination purposes the most important type of float is Total Float because it is involved with the
overall project duration. On occasions the term ―Float‖ is used without qualification. In such cases assume
that Total Float is required.
2. The Total Float can be calculated separately for each activity but it is often useful to find the total float over
chains of non-critical activities between critical events. For example in fig 16.13, the only non critical chain is
activities C, E for which the following calculation can be made;

Non-critical Time Time Total float

chain required available over chain
C, E 3+1 7–1
4 days 6 days 2 days

(h) Slack – It is the difference between earliest and latest times at which an event can take place without affecting the duration
time of the project.

Wanyama B. N. 79
Put simply,
Slack = LST – EST for each event

Example: Slack for event 3 in fig 9

= 6-4
= 2 days

16.4.6 Crashing (time-cost trade offs)

Estimates of activity times for projects are normally made for some given level of resources. In many situations it is possible to
reduce the length of a project by injecting additional resources. Projects may be shortened to reflect efforts to avoid late
penalties, to take advantage of monetary incentives for timely or early completion of a project or to free resources for use on
other projects. In new product development, shortening may lead to strategic benefit – beating the competitors to the market. In
some cases, however, the desire to shorten the length of a project merely reflects an attempt to reduce the indirect costs,
associated with running the project, supervision and labour and personnel costs. Managers often have certain options at their
disposal that will allow them to shorten, or crash, certain activities. Among the most obvious options are the use of additional
funds to support additional personnel or more efficient equipment and the relaxing of some work specifications. Hence a project
manager may be able to shorten a project by increasing direct expenses to speed up the project, thereby realizing savings on
indirect project costs. The goal in evaluating time-cost trade-offs is to identify activities that will reduce the sum of the indirect
and direct project costs.

In order to make a rational decision on which activity, if any, to crash and on the extent of crashing desirable, a manager n eeds
the following information:

Regular time and crash time estimates for each activity

Regular cost and crash cost estimate for each activity
A list of activities that are on the critical path

Activities on the critical path are potential candidates, because shortening non-critical activities would not have an impact on total
project duration. And from an economic standpoint, activities should be crashed according to crashing costs; crash those with
the lowest crash costs first. Moreover, crashing should continue as long as the cost to crash is less than the benefits derived
from crashing. These benefits might take the form of incentive payments for early project completion as part of a government
contract, or they might reflect savings in the indirect project costs or both. The following is the general procedure for crashing:

Obtain estimates or regular and crash times and costs of each activity.
Determine the lengths of all paths and path slack times
Determine, which are the critical activities
Crash activities, in order of increasing costs as long as crashing costs do not exceed benefits. When two or more
paths become critical as the original critical path becomes shorter, subsequent improvements will require simultaneous
shortening of two or more paths.

16.4.7 Uses of CPA

Besides finding the critical path, CPA provides the data required when scheduling the activities. In other words, the analysis
figures provide the information needed to fix starting and finishing times for all activities and it is now possible to use a Gantt
chart to show the schedule times.

16.4.8 Objectives of CPA

(a) To ensure that information, material, plant, labour, etc are available when required.
(b) To ensure that excessive and costly high demands for plant and labour are avoided.
(c) To ensure that the project will be completed in time.
(d) Enables labour rationalization

16.4.9 Advantages of Network Analysis

(a) It makes the planner to work logically
(b) Activities requiring concentration of efforts during the project implementation are identified in the process of planning

Wanyama B. N. 80
 (c) Non-critical activities are also identified and resource levelling facilitated
(d) Information and materials requirements, which act as restraints on the commencement of some activities are identified
in the process of planning and acted upon in time
(e) Crash times – alternative durations based on increased gang sizes may be introduced in order to recover lost ground
(f) The network may be translated onto a time scale in order to level resources by manual adjustment (as opposed to
computer updating) in which form it has many advantages of the Gantt chart
(g) Alternative resource levels may be considered by running a computer program for different activity durations. This can
be determined from alternative levels of manning in order to determine the least cost and shortest project duration

16.4.10 Disadvantages of Network Analysis

(a) Not readily understood as a graphical statement of the project duration.
(b) Updating calls for a re-drafting of the network from the date concerned. Frequent updating entails continuous re-
drafting in a situation of uncertainty and becomes remote from managerial decision-making.
(c) A thorough knowledge of the construction process and of practical sequence is required prior to preparing the network.
This involves liaison between ground management and the planners preparing the network. This liaison facility may
not be readily available.

16.4.11 Examples
1. Table 16.4 is the same as that of Table 16.3 but has the addition of activity durations. It is required to find the critical path
and all the floats.

Activity Preceding Activity Description Activity

Duration (days)
A - Design Hull 9
B - Prepare Boat Shed 3
C A Design mast & mast mount 8
D A Obtain Hull 2
E A Design sails 3
F C Obtain mast mounts 2
G C Obtain mast 6
H C Design Rigging 1
J B, D Prepare Hull 4
K F, J Fit mast mount to Hull 1
L E, H, G, K Step mast 2
M E, H Obtain sails and Rigging 3
N L, M Fit sails and Rigging 4____________

Table 16.4 - Project MZ Building of a Boat

2. In the network of Table 16.5,

a. Find the critical path
b. Calculate the total float on the non-critical chains
c. Slack for each event

Activity Preceding Activity Duration (weeks)

1 - 4
2 - 7
3 - 5
4 - 6
5 2 2
6 3 3
7 5 5
8 2, 6 11
9 7, 8 7
10 3 4

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 11 4 3
12 9, 10, 11 4

Table 16.5

3. A manufacturing company is planning to introduce a new product for sale in the market. Table 16.6 provides a list of the
activities required to plan and control this marketing project effectively.

Activity Immediate Expected

Predecessors Time (days)
A. Initial discussions - 6
B. Product design A 22
C. Market survey A 17
D. Market evaluation C 3
E. Product costing B 9
F. Sales Plan C 12
G. Product pricing D,E 4
H. Prototype construction F,G 22
I. Market Information B 15
__J.___Prototype testing H, I 17________

Table 16.6 – Marketing project for new product

(a) Draw a network to represent the various activities of the market project.
(b) Determine the critical path and minimum project time.

4. Orbona Office Equipment Limited has recently developed a new colour-copying machine and is planning to launch it at a
forthcoming trade show. In the meantime, salesmen and service engineers will have to be trained to deal with the new
copier, the necessary documentation and publicity material must be gotten ready, and the preparations for the show itself
must be completed. In particular, the product manager has drawn a list of activities, which will be involved, and he has also
estimated the duration of each activity as shown in Table 16.7 below:

Activity Immediate Expected

Predecessors Time (days)
A. Train salesmen C, J 3
B. Train Service engineer C, I 4
C. Prepare instruction manuals - 10
D. Organize trade show display G, J 4
E. Train Staffs for trade show D 1
F. Arrange pre release publicity H, J 3
G. Arrange staffs for trade show H 2
H. Set up sales office - 5
I. Have service contract prepared - 5
_J.___Produce promotional material I 8_________

Table 16.7 – Launch of new colour copying machine

Represent the stages involved in the product launch in the form of an appropriate network of activities. Given that the trad e
show will take place in 6 months (i.e. 26 weeks time), can all the necessary activities be completed in time for the show?

16.5 Program Evaluation and Review Technique (PERT)

This method is a variant of the CPA method. The difference between them is that PERT uses three time estimates for each
activity.
They are:-

(a) Most optimistic time (a) – This is the time that will be taken to complete the project if everything worked as planned.

Wanyama B. N. 82
 This does not normally occur.
(b) Most likely time (M) – It is the average time taken under normal circumstances.
(c) Most pessimistic time (b) – This is the time that will be taken if many things went wrong during the project.

From these time estimates, the expected time is calculated using the formula.

Expected time = a + 4m + b
6

After calculating the expected time for each activity the CPA network is drawn as before and the project duration time is
determined.

16.5.1 Examples

5. Table 16.8 shows a set of activities for the construction of a power station.

Activity Description Time (months)

a m b_
A-B Land survey 1 2 5
A-C Installation survey 8 10 12
B-D Road construction 2 4 9
C-E Transmission line installation 2 4 6
D-G Water works 1 2 4
D-F Building construction 1 3 7
G-I Wiring buildings 2 5 7
F-H Transporting equipment 2 3 5
H-J Installing plant 7 9 11
E-I Installation of Txs and auxiliaries 3 7 9
I-J Testing installation line and accessories 3 7 11
J-K Testing plant and commissioning 1 2 3_

Table 16.8 – Construction of power station

Draw the network and determine the minimum project duration time.

6. A market research department plans a questionnaire survey. Table 16.9 shows the tasks involved, the immediately
preceding tasks, and for each task duration the most likely estimate, the optimistic estimate, and the pessimistic estimate.
Draw a network for this survey and establish the critical path and the minimum duration of the survey.
_________________________________________________________________________________________
____________Duration in days_______________
Task Preceding Most Optimistic Pessimistic
________________________Tasks__________________ likely (m)________(a)______________(b)_______
A Design of questionnaire - 3 2 4
B Sampling Design - 12 10 20
C Pilot survey A 5 4 12
D Interviewer recruitment B 4 2 6
E Interviewer training D, A 3 3 3
F Interviewer allocation B 3 4 5
G Interviews undertaken C, E, F 10 8 18
H Data entry on computer G 3 2 4
I Interviewer debriefing G 2 2 2
J Data analysis H 5 4 6
K Write report I, J 4 2 12______

Table 16.9 – Questionnaire Survey

Wanyama B. N. 83
16.6 Gantt Charts
The Gantt chart was developed by Henry L Gantt around 1902. It is a technique for representing graphically work to be done
and sometimes work already accomplished. It is also known as schedule chart.

It was prepared to show the planned utilization of departments, groups of machines, work stations and dates of performance and
has wide application in project management as well.

16.6.1 Gantt Chart Representing Workshop Activities

There are three sets of information that could appear on this chart.
The planned figure
The actual figure achieved
The actual cumulative figure

The basis of the chart is time, which is represented by constantly spaced distances. Time could be in minutes, hours, days,
weeks, months or even years according to the duty for which the chart is required. If the quantities planned for successive
periods vary, then they must be plotted to different scales provided. The quantity planned for the period is also represented by
the distance period on the chart.

The horizontal lines divide the chart into sections, which can be used to represent either products, work tasks or work centers.
When the chart shows products, it is generally known as either a ‗sales forecast‘ or a program. When it shows only work tasks it
is known as a work schedule. When it shows these same work tasks opposite the work centers at which they are to be produced
– factories, departments, workshops, machine tools or men, it is known as a load chart.

Example
Consider the data in Table 16.10 below and present it on a Gantt chart

WEEK PLANNED O/P ACTUAL O/P CUMULATIVE O/P

1 1200 1550 1550
2 1600 1000 2550
3 2000 1600 4150
4 2000 2000 6150
5 2000 2300 8450
6 1600 2300 10750
7 1400

Table 16.10 – Data table for Workshop activities

PERIOD WEEK 1 WEEK 2 WEEK 3 WEEK 4 WEEK 5 WEEK 6 WEEK 7

PLANNED 1200 1600 2000 2000 2000 1600 1400
ACTUAL 1550 1000 1600 2000 2300 2300
WEEKLY
ACTUAL
Wk1 Wk2 Wk3 Wk4 Wk5 Wk6
CUMMULATIVE

Table 16.11 – Gantt chart for workshop activities

In the Gantt chart the periods are weekly and each week occupies 20mm. A planned output of 1200 in week 1 occupies 20mm
and a planned output of 1600 the following week also occupies 20mm, etc. The actual output is plotted within its period and, if it
exceeds the planned amount the excess is plotted on another line within the same period.

The cumulative, however, can overlap into the next period but upon entry into another area, it must be plotted to the scale of that

Wanyama B. N. 84
area.

In the figure, figures for week 1 show an excess of output, the cumulative bar thus extends into week 2 and the amount of this
extension is calculated as follows. The output 1550 against 1200 planned. Out of the 1550, 1200 can be taken to complete the
week‘s program, leaving a balance of 350 as start to the following week‘s program.

Since the planned amount for this week is 1600; 350 is 350/1600x100=22% of the distance which is equal 4.4mm. Week 2
required only 1600-350=1250 units to complete its total requirement. If only 1000 units are produced then this plus 350 =
1350/1600 or 84% of the way across the second week, etc.

These charts are simple to use and can incorporate elastic strings for the bars. They can also be purchased commercially.

16.6.2 Gantt chart Representing a Project

It is often useful to represent the activities of a project on a Gantt chart. This is after drawing the critical path network, which has
no time scale. The use of Gantt chart to represent activities, the start dates, etc, will be appropriate when using network
techniques to develop schedules which must then be communicated to others and/or displayed for easy reference. Gantt char ts
are easy to read and can be used to show progress of work on activities of projects. They can also be easily updated and
changed.

Fig 16.15 shows the Project MZ building of a boat. It shows a schedule of activities derived from a CPM chart of the project.
The arrowheads show interrelationship between activities, e.g., activity J occurs after completion of activities B and D. After an
initial sketch, refinement is done on the chart to avoid unnecessary crossings between activities and arrows. For simple projects
the Gantt chart may be drawn straight away without the necessity of a CPM chart.

Start Time in days Finish

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29

A - Design Hull

C - Design Mast/Mast mount

G - Obtain Mast

B - Prepare Boatshed

D - Obtain Hull

J - Prepare Hull

F - Obtain Mast mount

K - Fit Mast Mount to Hull

H - Design Rigging

E - Design Sails

M - Obtain Sails and Rigging

L - Step Mast

N - Fit Sails and Rigging

Fig 16.15- Gantt chart for MZ building of a boat

Advantages of Gantt chart

(a) It is simple in format
(b) It is readily understood at a glance.
(c) It is easy to update without having to re-draft.
(d) Shows the relationship between planned and actual performances by merely marking up as the job progresses.
(e) The chart may be used to indicate the demand for resources over each period and summing under appropriate date.
(f) It helps in evaluating performance.
(g) It may help in fixing pay rates.

Wanyama B. N. 85
Disadvantages of Gantt chart
(a) Complex, inter-related operations may be difficult to show.
(b) There are no special emphases on critical activities, which control the length of time required to complete a whole
project on this type of chart.
(c) The sequence in which the different parts of a project must be completed is not shown.

Wanyama B. N. 86
17 WORK STUDY
Work study is concerned with the efficient design and execution of manual work, and with the establishment of standards of
performance. It is of relevance whenever manual work is undertaken, and in particular where such work is fairly repetitive in
nature, i.e. where it is both possible and appropriate to seek to examine and establish appropriate work standards. Work study is
important in manufacturing industries, building and building services, health services, transport, military, supply systems, in
offices, etc.

In planning the layout of facilities and methods and procedures for the handling of materials, etc, it becomes necessary to
conduct some form of work study investigation. It may be used either in designing work for high productivity in existing work by
improving current work methods and reducing ineffective and wasted time. In each case the design or improvements are sought
within the context of existing resources and equipment.

The reason some investigation may become necessary on existing jobs is perhaps because there has been a slight change in
the product, new equipment is being used, or wage rates or incentives are to be altered. Examination of existing work method s
could also result from low machine utilization, excessive labour overtime or idle time, complaints from the workers, inadequate
quality, high scrap or wastage rate, etc.

17.1 Objectives of Work Study

(a) To establish the most economical method of doing the work.
(b) To standardize the method, the materials and equipment involved.
(c) Establish the time required by a qualified and adequately trained worker to do the job, while working at a defined level
of performance.
(d) Install this work method as standard practice.

There are two techniques used in work-study

(a) Method study
(b) Work measurement

17.2 Method Study

This is the examination of work performance and its subsequent re-arrangement to produce the same results with less effort.
The work performance of any organization depends on a number of interrelated operations and activities. Any combination of
the operations/ activities to achieve the desired goal is called method. The function of a method analyst is to study the wa y in
which work is being done with a view to developing a procedure which when adapted would increase the level of performance.

17.2.1 Objectives of method study

(a) Improvement of process and procedure.
(b) Improvement of factory shop and work place layout and of design of plant and equipment.
(c) Economy in human effort and reduction in unnecessary fatigue.
(d) Improvement in the use of material, machines and manpower.
(e) Development of better physical working environment.

17.2.2 Procedure of Method Study

This involves:
(a) Selecting the task (job) to study
(b) Recording the facts
(c) Analyzing the facts
(d) Developing the new method
(e) Defining the new method
(f) Installing the new method
(g) Maintaining the new method

Wanyama B. N. 87
17.2.3 Selection of the Task to be Studied
This is a managerial responsibility because it involves money and a budget has to be set-aside for it. It is carried out if there are
valid and identifiable reasons for doing the study.

17.2.4 Recording the Facts

Information is collected from the place where the job under study is being executed by direct visual observation. This can b e
done by using process and movement charts for:
(a) Recording the movement of equipment and material (motion study).
(b) Recording the critical procedure involved in the job.
(c) Recording the work done by an operator on a broad basis.
(d) Recording the movement of operators with respect to machines and other operations.
(e) Recording the paths of movements to improve work place layout.
(f) Recording material wastage.

17.2.5 Analyzing the Facts

Information provided through the recorded data/information is critically examined and screened by asking searching questions.
They can be tested through the following 5 sets of questions.
I. Purpose of the method
What is to be done?
Why it is to be done?
What else could be done?
What should be done?
I Place
Where is it to be done?
Why there?
Where else could it be done?
When should it be done?
II Sequence
When it is to be done?
Why it is to be done at that time?
When else could it be done?
When should it be done?
III The operators
Who does it?
Who else could do it?
Who should do it?
IV Means
How is it done?
Why this way?
How else could it be done?
How should it be done?

17.2.6 Developing the New Method

The device specially designed for improving work method is known as ―the process improvement formulae‖. The four steps in
the procedure are: Eliminate, combine, sequence, and simplify each separate activity in the job. Complete elimination of
unnecessary activities is clearly the most important step in developing an improved method. If further elimination is not possible
the possibilities of combining one activity with others of the same process should be explored. Next strategy in development
stage is to identify the scope of changes in the sequence of activities. Last and the most expensive step in the process of
method development is simplification of activity to permit the worker to complete the job more quickly and easily by reducing the
number of operations, eliminating delays and minimization of transportation distances.

Wanyama B. N. 88
17.2.7 Defining the New Method
Having determined the work method to be adopted, experimental work will be necessary in order to locate and eliminate s nags,
and the process layout is then written.

17.2.8 Installation
The new method once approved is first ‗sold‘ out to the management, supervisors and then to the operators. The success or
failure of the new method depends on the operators and therefore the goodwill and acceptance of the operators must be sought
through assurance and building of trust. This can be achieved by confidence building and training to ensure that they
understand how the new methods work and the benefits, which could accrue from their use.

17.2.9 Maintaining the New Method

‗Old habits die hard‘ so habits of work different from those desired may develop unless the new technique is maintained. This
may require continual visits by the engineer concerned but better still by the operators‘ immediate supervisor. For the supervisor
to be effective, the method must be clearly understood by him. If variations in the method then arise he can either correct them,
or, if they appear desirable, submit them to the work study department for incorporation into the process layout.

The success of method study is based on the assumption that the output of men can be increased by improved methods in
working conditions and motivation.

17.2.10 Uses of Work Methods

Development of training plans.
Design of work places.
Design of equipment.
Satisfying health and safety requirements at the workplace.

17.3 Work Measurement

This is the application of techniques designed to establish the time for a qualified worker to carry out a specified job at a defined
level of performance. Put simply, it is a study which attempts to determine the amount of time required to perform a task by an
operator following a prescribed method (as determined by method study). Time study is work measurement technique for
recording the times and rates of working for the elements of a specified job carried out under specific conditions and analyzing
the data so as to obtain the time necessary for carrying out the job at a defined level of performance.

17.3.1 Objectives of Work Measurement

The main purpose of work measurement is to eliminate ineffective time and set time standards. Time standards reflect the
amount of time it should take an average worker to do a given job working under typical conditions. The standards include
expected activity time plus allowances for probable delays.

17.3.2 Procedure for Work Measurement

(a) Select the work to study (from method study).
(b) Record all the relevant data.
(c) Examine the recorded data critically.
(d) Measure quantity of work involved in terms of time.
(e) Compile standard time for the operation, which includes allowance to cover for relaxation, personal needs and
contingencies.
(f) Define precisely the series of activities and methods of operation for which the time has been compiled and issue the
time as standard for the activities specified.

17.3.3 Stopwatch Time Study

Stopwatch time study was introduced by F.W Taylor in the late 19th century and today it is the most widely used method of work
measurement.

Wanyama B. N. 89
The study is used to develop a time standard based on observations of one worker taken over a number of cycles. The result is
then applied to the work of all others in the organization who perform the same task. The basic steps in the study are:

(a) Define the task to be studied, and inform the worker who will be studied.
(b) Determine the number of cycles to observe
(c) Time the job, and rate the worker‘s performance
(d) Compute the standard time

The analyst should be thoroughly familiar with the job being studied to be able to interpret the worker‘s pace as well as the work
efficiency before setting the time standard.

17.3.4 Uses of Time Standard

(a) Work scheduling.
(b) Capacity management.
(c) Worker/work allocation.
(d) Incentive payments.
(e) Provide information for labour cost control and enable standard costs to be fixed and maintained.

17.3.5 Time Study and Rating

The work study man has to have some means of assessing the rate of working of the operative he is observing and of relating it
to standard pace. This process is known as rating.

(a) Performance or Observed Rating (PR)

This is the assessment of the worker‘s rate of working relative to the observer‘s concept of the rate corresponding to
standard pace, i.e. he is compared by the observer with a qualified operator working at standard performance. This could be
less than 100% if the worker is considered slower or over 100% if faster.

(b) Standard Performance

Is the rate of output, which qualified workers will naturally achieve without over exertion as an average over the working day
or shift provided that they know and adhere to the specified method and provided that they are motivated to apply
themselves to the work.

This performance is denoted as 100% on the standard rating and the performance scale.

(c) The qualified Worker

Is one who is accepted as having the necessary physical attributes, who possesses the required intelligence and education
and who has acquired the necessary skill and knowledge to carry out the work in hand to satisfactory standards of safety,
quality and quantity.

17.3.6 Various Time Estimates

(a) Observed Time
This is the time, which is actually taken to complete a desired task or job. If an operator works with 100% efficiency then
actual time will be equal to Normal or Basic Time. If the job is timed over several cycles, say n cycles, the observed time is
the average of the recorded times of cycles of times.

OT = Σ t -------------------------------------------------------------------------------(1)
n

Where OT = Observed or Actual time

Σ t = Sum of recorded times (over all cycles)
n = Number of observations (timed cycles)

(b) Normal or Basic Time

This is the time required by the worker to perform the task at a standard rate without any interruptions or delays. It is the
observed time adjusted for work performance.

Wanyama B. N. 90
 NT = OT x PR ------------------------------------------------------------------------(2)
SR

Where NT = Normal (Basic) time

PR = Performance Rating
SR = Standard rating = 100%

(c) Standard Time

Normal time is the length of time a worker should take to perform a job if there are no delays or interruptions. It does not
take into account any allowance for inevitable delays.

The standard time for a job is the normal time plus an allowance due to delays.

ST = NT + ALLOWANCE ----------------------------------------------------------(3)

17.3.7 Allowances
Basic time is merely the time required by the worker to perform the task at a standard rate without any interruptions or delays.
Allowances are normally given as a percentage of the basic element times and usually include:

1. Relaxation allowances:
a) Fatigue allowances- to give the worker time to recover from the effort (physiological and psychological) required
by the job.
b) Personal needs – to visit toilets, washrooms, etc.
2. Contingency allowances- given to compensate for the time required by the workers to perform all necessary
additional and periodic activities which were not included in the basic time because of infrequent or irregular
occurrence and the difficulty of establishing the times, e.g. reading of drawings, cleaning of machinery, etc.
3. Tool and machinery allowance- to compensate the worker for the time necessary for adjusting and sharpening tools,
setting up equipment, etc.
4. Reject allowance- necessary where a proportion of defective items are produced.
5. Interference allowance- to compensate for time unavoidably lost because of talking to the supervisor, etc.
6. Excess work allowance- to compensate for the extra work necessary because of unforeseen or temporary changes in
the standard conditions.

The allowances are expressed in the form of Allowance Factor, where upon,

ST = NT x AF -------------------------------------------------------------------------(4)

Where ST = Standard time

AF = Allowance factor

Allowances can be based on either job time (physical working time), or work period (e.g., a workday)

17.3.7.1 Job-time Allowance

If allowances are based on the job time, the allowance factor is computed using the following formula.

AF job = 1 + A ------------------------------------------------------------------------(5)

Where A = Allowance percentage based on job time.

Job time allowance is used when different jobs have different allowances.

17.3.7.2 Work-Time Allowance

If allowances are based on percentage of the work period (i.e., the workday) the following formula is used:

Wanyama B. N. 91
AF day = _1 -------------------------------------------------------------------------- (6)
1-A

Where A = Allowance percentage based on workday

This is used when jobs are the same or similar and have the same allowance factors.

17.3.8 Solved Example

A time study of an assembly operation yielded the observed times in Table 17.1 for one element of a job, for which the analyst
gave a performance rating of 113%. Determine the standard time for this operation given:

(a) An allowance of 20% of job time

(b) An allowance of 20% of a workday
___________________________________________________________
Observation Time, t Observation Time, t
n (minutes) n (minutes)
1 1.12 6 1.18
2 1.15 7 1.14
3 1.16 8 1.14
4 1.12 9 1.19
______5 1.15 10.35____

Table 17.1

Solution
Given: n = 9; PR = 113%; A job = 20%; A day = 20%

(a) OT = Σ t = 10.35 = 1.15 min

n 9

NT = OT x PR
SR

= 1.15 x 113/100 = 1.30 min

ST = NT x AF job
= NT x (1 + A)
=1.30 x (1 + 0.20) = 1.56 minutes

(b) NT = 1.30 min (as in [a] above)

ST = NT x AF day
= NT x _1_
(1-A)

= 1.30 x ___1___ = 1.63 minutes

(1-0.20)

17.3.9 Unsolved examples

1) Table 17.2 shows timings done at various ratings. Complete the table by calculating the average time and the basic time at
each rating.

Table 1

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Observed Rating 80 85 90 95 100 25
Time Readings 31 32 30 28 28 25
31 30 30 27
30 30 27 27
31 26 28 26
31 27 27 27
28 26 28
29 29 27
29
29
Average
Basic Time

Table 17.2

2). A job was timed for 60 cycles and had an average of 1.2 minutes per piece. The performance rating was 95%, and workday
allowances are 10%.

Determine each of the following:

(a) Observed time
(b) Normal time
(c) Standard time

3). A worker-machine operation was found to involve 3.3 minutes of machine time per cycle in the course of 40 cycles of stop
watch study. The worker‘s time averaged 1.9 minutes per cycle, and the worker was given a rating of 120%. Midway
through the study, the worker took a 10-minute rest break. Assuming an allowance factor of 12% determine the standard
time for this job.
4) After the application of appropriate work simplification techniques, a direct time study of a simplified job was undertaken.
Table 17.3 shows the time elements obtained.

JOB ELEMENT CYCLE (Time in min)

1 2 3 4 5
1 0.16 0.12 0.13 0.15 0.24
2 0.6 0.6 0.6 0.6 0.6
3 0.33 0.5 0.35 0.37 0.35
4 0.5 0.5 0.5 0.5 0.5
5 0.24 0.24 0.25 0.27 0.25

Table 17.3

The following additional information was also determined:

a. Job elements 2 and 4 are machine controlled and cannot be speeded.

b. There were two irregular occurrences while timing in jobs having more than 25% variation from average
c. The observer rated the operation at 110% efficiency
d. Personal allowance was given as 30 min a day and unavoidable delays 20 min, fatigue 10% of the operator‘s actual
physical working time.
e. A shift is 8 hours a day

Required:
a. The standard time in minutes per unit for this job.
b. The shift standard output

1) The following are the results of a work sampling study, which took place over 300-hour period during which the worker was

Wanyama B. N. 93
 observed while processing 27, 000 parts.

No. of observations
Working 1600
Non-working 400

The worker when working was rated at 80% normal performance. For this type of work the usual allowance should be 10% of
the total work-day (8 hours). Find the standard number of units the worker should process per hour.

6) The following data concerns the assembly of one electric switch

Mean observed time for assembly 0.9 min
Rating on the ‗hundred‘ scale 110
Personal allowances 7%

a) Determine the standard time for the assembly of one electric switch
b) The number of switches assembled in a shift of 8 hours

7) (a) The final operation in the manufacture of screws is packing in 1-gross boxes. At standard performance an operator
packs 1 gross in 0.40 minutes. If there is a contingency allowance of 10 percent and a rest allowance of 15 per cent,
how many gross of screws are packed in a 5 day, 40 hour week, allowing 1½ hours per day for breaks, and how many
hours does an operator earn.

(b) After packing in 1 gross boxes, the screws are boxed in 100 gross cartons and wired on a machine, which suffers
stoppages, due to changing wire, stapling boxes, etc, to the equivalent of a 10% contingency. The allowed time for this
operation is 2.50 minutes. If there are 20 packers employed, working as previously indicated in (a) what is the back log
of work waiting against the machine after 1 week?

Wanyama B. N. 94
18 QUALITY CONTROL
The quality of a product or service is not a property which has no absolute meaning, though it may be regarded as the degree to
which it satisfies customers‘ requirements. It may refer to a grade of product like ―grade A‖ eggs or mangoes. At other times, it
refers to materials, workmanship or special features, such as ―waterproof‖, ―subtle aroma‖, ―high tech‖, or convenience of use‖. It
may also be related to colour or price etc.

The implication in these various connotations of quality is that customers value certain aspects of a product or service, and
therefore associate these aspects with the quality that they perceive a product or service has. This implies that quality does not
pertain to a single aspect of a product or service, but to a number of different dimensions of the product or service.

Although these dimensions may vary somewhat from product to product, or between a product and a service, generally
speaking, the dimensions of quality include:

(a) Performance – These are the main characteristics of a product, i.e. quality of an article has meaning only when
related to its function, e.g. a high quality pair of beach shoes can well be a very low quality pair in a mountainous
environment, or an electric blanket could be highly regarded in temperate regions of the world but could turn out to be
useless in tropical regions.
(b) Aesthetics – Appearance, feel, smell, taste etc.
(c) Special features – Extra characteristics such as ease of use, high tech, etc.
(d) Conformance – How well a product or service corresponds to the customer‘s expectations.
(e) Safety – Risk of injury or harm to the user.
(f) Reliability – Consistence of performance i.e. for how long it will give satisfactory function
(g) Durability – The useful life of the product or service
(h) Perceived quality – Indirect evaluation of quality (e.g. reputation)
(i) Service after sales – Handling of complaints or checking on customer satisfaction

18.1 Determination of Quality

The degree to which a product or a service successfully satisfies its intended purpose has four primary determinants. These are:

(a) Quality of design – This refers to the degree to which the specification of the product or service, satisfies customers‘
design requirements in terms of included or excluded features by the designers e.g. the many different models of cars on
the market differ in size, appearance, roominess, fuel economy, comfort and materials used. These differences reflect
choices made by designers that determine the quality of design. The degree to which a specific product satisfies the wants
of a specific consumer is called consumer’s preference.
(b) Quality of Conformance - This is the degree to which manufactured goods, (products) and services conform to or
achieve the intent of the designers, i.e. conforms to design specifications. Put simply, it is the degree to which a specific
product conforms to a design or specification
(c) Ease of Use – After the product is sold and delivered, user instructions are important. They increase the chances but do
not guarantee, that a product will be used for its intended purposes and in such a way that it will continue to function
properly and safely. This means that users must be clearly informed on what they should or should not do; otherwise, there
is the danger that they will take some action that will adversely affect quality. Using printed instructions and labeling,
manufacturers can ensure that directions for unpacking and assembling, using, maintaining, and adjusting the product and
what to do if something goes wrong are clearly visible and clearly understood.
(d) Service after delivery – For a variety of reasons, products do not always perform as expected, and services do not always
yield the desired results. Whatever the reason, it is important from a quality standpoint to remedy the situation. The options
available could include recall and repair of the product, adjustment, replacement or buyback or re-evaluation of a service;
and do whatever is necessary to bring the product or service up to standard.

18.2 Consequences of Poor Quality

It is important for management to recognize the different ways that the quality of a firm‘s products or services can affect the
organization and to take these into account in developing and maintaining a quality assurance program. The following are the
major ways poor quality affects an organization.

(a) Loss of Business – Poor designs or defective products can result in loss of business by damaging the image of the

Wanyama B. N. 95
 organization which may lead to a decreased share of the market, or increased criticism and/or controls by a government
agency.
(b) Liability costs – When there are damages or injuries resulting from either faulty design or poor workmanship, it can lead to
litigation in courts resulting into liability costs. Through express written warranties as well as implied warranties, generally
guarantee the product as safe when used as intended.
(c) Reduction in Productivity – Poor quality can adversely affect productivity during the manufacturing process if parts are
defective and have to be reworked, which effectively reduces the output/input ratio i.e. productivity.
(d) Costs – Poor quality increases certain costs as outlined in the section on costs of quality control

18.3 Quality Assurance (QA)

Quality Assurance is concerned with every aspect of quality, including design, specifications, supplier assessment, quality culture
motivation, education and training, inspection and testing and feed back loops to ensure that all measures are effective for
quality output. The objective of the quality assurance function is broadly to ensure that all products are manufactured free from
defects, conform to all specifications and satisfy the customer‘s requirements through using planned and systematic activities.
Thus QA is concerned with defect prevention.

18.4 Quality Control (QC)

Quality control is concerned with defect detection and correction. It is a preventive function through which some measures are
taken to ensure that the defective items are not produced at all, and when they occur, preventive action must be taken
immediately to prevent further occurrence. It includes inspection and monitoring processes, finding and eliminating causes of
quality problems, right from the supplier to the final product before it goes to the market.

18.4.1 Objectives of Quality Control

(a) To establish standards of quality which are acceptable to the customer and economical to maintain.
(b) To enable adjustments and resetting of processes and machinery.
(c) To locate and identify the process faults and defects of products and thus to control the scrap and waste
(d) Primarily to making things right rather than discovering and rejecting those made wrong.

In conclusion the primary objective of all the quality control is to provide quality assurance for the finished product, and assure
optimum quality costs for that product.

18.4.2 Advantages of Quality Control

(a) It leads to reduction of cost of scrap and re-works
(b) It reduces the cost of factors of production by better utilization of labour and material.
(c) It brings about improved quality standards.
(d) It helps in better understanding of processes and products
(e) It leads to fewer customer complaints.
(f) Brings about reduction in overhead expenses.
(g) There is increase in yield and efficiencies.
(h) There is increase in goodwill
(i) There is reduction in idle time loss of machines and equipment as well as operational staff.

18.4.3 Quality Control Costs

There are two main aspects of quality related costs:

1. Cost of Original Quality

This consists of all costs incurred in providing a product or service with a particular quality level. These may be
classified into three:

(a) Preventive Costs – Costs related to reducing the potential for quality problems. They include quality
improvement programs, training, monitoring, data collection and analysis, and design costs.
(b) Appraisal Costs – These are costs related to measuring, evaluating, and auditing materials, parts, products, and
services to assess conformance with quality standards. They include inspection equipment, testing labs,

Wanyama B. N. 96
 inspectors and the interruption of production to take samples.
(c) Internal Failure Costs – These are costs related to defective products or services before they are delivered to
customers. They include rework costs, problem solving, material and product losses, scrap and downtime.
2. Usage Costs
These are all those costs associated with failure of products or services in use. They include:

(a) Providers Costs or External Failure Costs – Costs related to delivering substandard products or services to
customers. They include returned goods, reworking costs, warranty costs, loss of goodwill, liability claims and
penalties.
(b) User Costs – Costs related to equipment and plant failure, used in the production process. They include
downtime due to breakdowns, cost of replacement, service and repair.

18.5 Determination of Quality Level

The specification of the product or service is established during the design stage. This follows a market survey to establish the
quality and reliability of similar products already in the market. The design then seeks to better their quality and/or price. The
operations (production) management seeks to ensure conformity with this specification bearing in mind limitation factors.

There are two factors that could limit enforcement of quality levels:
1. Process capability – When making design decisions, care has to be taken to avoid making designs beyond the process
capabilities.
2. Cost – The feasibility and cost of ensuring conformity with design specification must be taken into account.

18.6 Quality Control and Assurance

Once the item specifications have been established and the appropriate process is available, there are three stages at which
quality control and assurance can be defined:
Control of inputs
Control of conversion process
Control of output (product)

18.6.1 Control of Inputs

There are two procedures the organization could adapt to ensure that only items which fully conform to required specifications
and standards are used.

1. Inspection of incoming items, which could be done at two levels:

(a) Monitor the quality controls conducted by the supplier by asking for copies of all the final inspection documents or
ask a third party such an insurance company to ensure that the items conform to the required minimum quality.
(b) Conduct inspections on receipt of supplies. One or both of the following procedures would normally be adopted.

(i) Exhaustive inspection of every item (100% inspection) received.

(ii) An inspection of a sample of the items received. This procedure, which is commonly adopted, is referred
to as acceptance sampling.
2. The organization purchases only from those suppliers who are known to be likely to provide acceptable items. To be
able to ensure this, some form of vendor rating is essential. The following are some of the factors on which suppliers
(vendors) are rated:

(a) Percentage of acceptance items received in the past

(b) Price
(c) Percentage of warranty claims, which can be traced to defective items provided by the vendor
(d) Quality of packaging

Wanyama B. N. 97
18.6.2 Control of Process
Process control involves inspection of items between operations for two reasons:

(a) To ensure that faulty or defective items do not proceed to the subsequent operations
(b) To predict when the process is likely to produce defective items so that necessary preventive adjustments can be
made

Quality control during the process often involves the use of control charts.

18.6.3 Control of Outputs

Quality inspection of output items is carried out by the producer to avoid defective items being passed on to the consumer.
Despite earlier inspections it is a realization that damage can occur at any time during the entire process.

Inspection of output is normally conducted in a similar manner to the inspection of input items, either exhaustive checks or
acceptance sampling procedures.

18.7 Inspection
Inspection is the art of comparing materials, products and performances with established standards. It is concerned with
estimating the degree to which output conforms to established specifications. The process by which the degree of conformance
is determined may range from the simplest possible comparison of a unit of output with a specification by measuring with
standard instruments all the way to life testing under actual operating conditions of a simple output. It is both an instrument for
quality measurement and a part of the activity of quality control. It can be taken as measurement plus judgment. By means of
inspection one can take a decision to accept or reject certain items. In brief, inspection is concerned with four qualities of the
product; functional efficiency, Dimension, Appearance and Durability.

18.7.1 Aims of Inspection

(a) To maintain the specified standards of the quality of products
(b) To help in devising ways and means of conducting inspection at lower cost
(c) To segregate spoiled work which may be salvaged by re-operation
(d) To maintain inspection equipment in good condition
(e) To furnish advice to operators when production difficulties arise
(f) To help in the detection defects at source in order to reduce scraps and defective work
(g) To detect sources of weakness and trouble in the finished product and thus check the work of designers

18.7.2 Place of Inspection in the Organization Structure

In designing an organization structure the location of the inspection function varies with the type of the product manufactured,
size and physical arrangement of the plant and the quality standards required to reach the major objectives of the enterprise .
Basically, inspection should be an independent function, with the chief inspector reporting to the chief plant operating executive
such as the works or factory manager. In some organizations, inspection is made a sub-division of quality control or product
engineering and in other organizations, the chief inspector reports directly to the general manager with quality control as a sub-
division of inspection.

18.7.3 Inspection Department

A large inspection department may be divided into the following sections.
(a) Process inspection (including machines, tools, etc)
(b) Complete parts inspection (outgoing goods inspection)
(c) Incoming goods inspection
(d) Clerical section
(e) Statistical section concerned with the statistical quality control

18.7.4 Functions of Inspection

(a) Raw Materials Inspection – This is carried out to determine if the incoming goods are physically and chemically in

Wanyama B. N. 98
 accordance with specification
(b) Process Inspection – This is to determine if the component part is correctly formed and dimensioned in accordance
with specification, free from defects in materials, improper processing or accidental injury etc.
(c) Purchase parts Inspection – This is to determine if purchased items conform to the purchase specification
(d) Finished goods Inspection – This is undertaken by management to prevent excessive amount of goods below the
predetermined quality being delivered to customers.
(e) Tools Inspection – This is done to determine if the patterns and tools which are purchased or made are capable of
producing the parts in accordance with specifications.
(f) Assembly department Inspection – This is done to determine and report errors in design or manufacture that result
in excess assembly time or poor performance.
(g) Salvaging Operations – In which poor works is re-worked to eliminate the defects or converted to other uses or other
materials that will raise the price when sold
(h) Complaints – Which receives reports on defective workmanship or materials from the sales department and other
departments, investigates them and makes recommendations to the engineering and manufacturing departments to
prevent future occurrences.

18.7.5 Types of Inspection

These are:
Inwards inspection
Roving, Floor or Patrol inspection
Process inspection
Fixed or central inspection
Automatic inspection
Outwards inspection
Lab tests
Life tests and running tests

(a) Inwards Inspection

This is also called Goods inwards inspection or raw materials inspection (R.M.I.). It is a form of acceptance sampling
carried out on materials reaching the firm from outside suppliers. They are checked against the order which they fulfill. The
material may be in the form of raw materials such as sheet metal, paint, glass etc or components such as castings,
brackets, switches, packing materials etc. The materials can be checked for dimensions, chemical composition, hardness,
colour, electrical properties, damage, appearance and any other special tests laid down. The acceptance quality level
should be agreed between the supplier and the firm and any batch failing this should be returned.

(b) Roving, Floor or Patrol inspection

It is where work and samples of work are checked at random at the various stages of production

Advantages of floor/patrol inspection

(a) Production delays, scrap and detective work may be reduced
(b) Handling costs and travelling times in moving products to a central inspection room and back to the department may
be saved
(c) Promptness in inspection may result in increased rate of production, decrease in process inventories and ensure better
utilization of the production capacity.

Disadvantages of flow/patrol inspection

(a) Less freedom of movement for the operators
(b) Sufficient space is not available for inspection work
(c) Flow of work from machine to machine is disturbed on account of accumulation of work on the floor
(d) Work in process is scattered resulting in inspection difficulties

(c) Fixed or Central Inspection

This is where all work has to be taken to a central inspection bay in batches as it is processed.

Advantages of Central Inspection

Wanyama B. N. 99
 (a) Gauges and other checking instruments are concentrated in one place.
(b) Permits work to be continued without inspection interruption.
(c) Inspection staffs spend more time on inspection than in moving around the factory.
(d) Greater specialization of staff is possible.
(e) Control of quality is more certain and reduces possible friction between inspector and operator.
(f) Easier supervision of staff.

(d) Process Inspection

This is inspection of parts (samples) from a running process as soon as they are produced in order to detect any variations
in the process which may be out of control.
It can be classified into two:

1. Trial run inspection

The machine settings are checked against the drawings and specifications before the commencement of operation. A
single piece is run. If this piece conforms to specifications then, the production is allowed to be carried on, otherwise
remedial measures are taken.
2. First Off Inspection
The items produced in the first production run are inspected and examined with respect to specifications, thoroughly
and carefully. It is concerned with checking the set-up of the machine and the reasons for discrepancy in actual and
specified standards. This inspection reduces the chances of scrap at later stages when the production is in full swing.

(e) Automatic Inspection

This happens in automated production processes where variation in the process performance is monitored using sensors
and fed back to a control system, which then makes the necessary adjustments in the settings to remedy the situation;
alternatively defective products i.e. products not meeting certain specifications are automatically removed from the line e.g.
in dry cell manufacture, cells whose short circuit current falls below a certain value and open circuit voltages above a certain
value are automatically removed from the line upon the sensor measuring these quantities.

(f) Outwards Inspection

Also called outgoing quality inspection, is the final inspection before the products leave the factory. It is another instance of
acceptable sampling, this time on the customer‘s behalf. It is usually carried out by central inspection department which is
not responsible to the production manager. The outgoing batches are sampled and either accepted for transit to the
commercial stores or rejected for re-processing by the production department.

(g) Laboratory Tests

There are some scientific tests which are beyond the means and skill of inspectors on the production floor. These tests are
made in laboratory specially equipped for them to be carried out. Examples of these are analyses in food production, plants,
paint or chemical works, tests on electrical equipment such as television and radio receivers and tests on parameters of
transistors, ICs, television tubes etc.

(h) Live tests and Running Tests.

Besides the checks necessary to ensure that equipment leaves the factory in working order, it is also important to know for
how long the products will last in service outside the factory. Samples of the product are therefore taken at intervals and
given simulated ‗running‘ or ‗live‘ tests. Sometimes these are accelerated in order to obtain the information in shorter time
than would normally be possible. This acceleration can take the form of an over run condition which, in the case of electric
lamps for example, would be to run them at a higher voltage than normal.
Motor cars are given severe tests in which they cover thousands of kilometers in a few weeks. Switches can be operated
every few seconds in order to test their durability during several thousands operations. Fluorescent and tungsten lamps can
be run for several weeks with occasional switching on and off as a life test. Thus products can be given the same usage in a
relatively short time as they would normally receive during several years of normal duty.

18.8 Sampling
Inspection of each critical feature of every item may be undertaken so that no defective items would pass unnoticed, except b y
mistake or error in the inspection procedure. There are however, several reasons why such a procedure may be uneconomical
or even impossible.
(a) Inspection may cause damage or even complete destruction of the items.

Wanyama B. N. 100
 (b) The accuracy of the inspection may be diminished after frequent repetition due to boredom.
(c) Handling of the item may result in deterioration, or items may naturally deteriorate and lengthy inspection procedures
may be undesirable.
(d) Inspection may be particularly expensive.
(e) Inspection may be a hazardous, even dangerous procedure.

For these reasons some form of sampling inspection is often required.

Sampling is the process of examining a representative number of items out of the whole population, in order to gain an
understanding about some feature or attribute of the whole population, based on the characteristics of the sample. The sample
only provides an estimate of a population characteristic and the accuracy of the estimate depends on sample size, how the
sample was selected and the extent of variability of the population.

18.8.1 Statistical Quality Control (SQC)

This is the name given to the use of statistical techniques which are helpful in maintaining and improving quality standards. It
involves periodic taking of samples of products manufactured, inspecting the data and carrying out statistical analysis based on
the principles of the normal curves in order to determine their relationship with the specified limits of quality allowed.

The size of samples taken for statistical quality control varies with the number of products made and the limits will vary with the
products and the tolerance laid down by management.

There are two distinct levels at which statistical quality control is applied. The first is Acceptance sampling, which is inspection of
materials already in existence in order to determine their acceptability, whether they are in raw, or semi-finished or finished state.
The second is process control, which is the periodic inspection of samples of products in order to control their quality during
manufacturing. It is applied to items made in large numbers and on a repetitive or continuous basis.

18.8.2 Acceptance Sampling

Acceptance sampling is a sampling process carried out on a batch of products from a manufacturing process (outputs) or
supplier (inputs) in order to inspect (examine) the sample and make decisions about its quality. If the sample of the items
conforms to the required quality levels then the whole batch from which it came is accepted. If the sample does not conform to
the required quality level, then the whole batch is rejected.

18.8.3 Acceptance Sampling Schemes

A key element of acceptance sampling is the sampling plan. Sampling plans specify the lot/batch size, N; the sample size, n; the
number of samples to be taken; and the acceptance/rejection criteria. Acceptance sampling procedures can be applied to both
attributes (countable characteristics e.g. the number of weld defects, defective rivets or scratches). However because inspection
of attributes is more commonly applied, it will be used in all acceptance sampling examples.

A variety of sampling plans can be used. Some samples call for selection of a single sample, and others call for two or more
samples, depending on the nature of the plan. Following are some of the different kinds of plans.

18.8.4 Single Sampling Plan

In this plan, one random sample is drawn from each lot/batch, and every item in the sample is examined and classified as either
―good‖ or ―defective‖. If it is good, it is accepted as ―satisfactory‖ and if it is defective it is rejected as ―unsatisfactory‖. If any
sample contains defectives equal to or less than the specified number of defectives C, that lot is accepted otherwise it is
rejected. The quality control process is therefore effectively that of determining which one, out of the two possible decisions is
appropriate. This ‗one of the two‘ situation is a binomial situation, and the sampling process is governed by laws of the binomial
distribution.

18.8.5 Double Sampling Plan

A double sampling plan allows for the opportunity to take a second sample if the results of the initial sample are
inconclusive. With this plan, two values are specified for the number of defective items, a lower level, C1 and an
upper level C2. For example, the lower level might be two defectives and the upper level five defectives. Using those

Wanyama B. N. 101
values as decision rules, the first sample is taken. If the number of defective items in the first sample is less than or
equal to the lower value (i.e., C1 ≤ 2), the lot is judged to be good and accepted, and sampling is terminated.
Conversely, if the number of defectives exceeds the lower limit, another sample is taken. If the combined number of
defectives in both samples does not exceed the upper limit, the lot is accepted; otherwise it is rejected.

18.8.6 Multi-Sample Plan

A multi- Sampling plan is similar to double-sampling plan except that more than two samples may be required. The
sampling plan will specify each sample size and two limits for each sample. The value increases with the number of
samples. If, for any sample, the cumulative number of defectives found (i.e., those in the present sample plus those
found in previous samples) exceeds the upper limit specified for that sample, sampling is terminated and the lot
rejected. If the cumulative number of defectives is less than or equal to the lower limit, sampling is terminated and the
lot accepted. If the number is in between the limits, another sample is taken. The process continues until the lot is
either accepted or rejected.

18.8.7 Choosing Type of Acceptance Sampling Plan

The two most important factors that dictate the kind of sampling plan to be used are cost and time.
Where the cost to obtain a sample is relatively high compared with the cost to analyze the observations, a single sampling plan is
more desirable. This is because observations taken under double and multiple sampling plans could turn out to be very
expensive. For example if a sample of moon soil in needed, the cost of returning for a second or third sample far outweighs the
cost of analyzing a single large sample. Conversely, where item inspection costs are relatively high, such as destructive testing,
it may be better to use double or multiple sampling because the average number of items inspected per lot will be lower.

18.8.8 Procedure for Single Sampling Plan

In this sampling plan, the following specifications are given:

The batch size =N

The sample size =n
Number of defectives in a sample =r
The maximum number of accepted defectives in the sample =c
Actual percentage Defectives = PD
Fraction defective = PD/100 =p
Therefore fraction of non-defectives (good ones) = q, where p+q =1

If only one sample is taken, then the probability of finding 0,1,2,3,………….defectives in any sample is given by successive terms
in the binomial expansion of (q+p)n

i.e. Probability of c defectives or P(c) = nCr pr qn - r

= n! pr qn - r
r! (n-r)!

e.g. for c=3, i.e. P(r ≤ 3) = Probability of acceptance, P(a) = P(r=0) + P(r=1) + P(r=2) + P(r=3)

The example above put in words means, ‗for a maximum number of accepted defectives in a sample equal to 3 (i.e. c=3), the
probability of having the number of defectives equal to 3 or less (i.e. P(r ≤ 3), is equal to the probability of having zero defective
i.e. P(r = 0), plus the probability of having one defective i.e. P(r = 1), plus the probability of having two defectives i.e. P(r = 2),
plus the probability of having three defectives i.e. P(r = 3), where P(r ≤ 3) is also called probability of acceptance, P(a). Note that
the statement could simply be written as,

P(r ≤ 3) = P(a) = P(0) + P(1) + P(2) + P(3)

And in a batch of N items, the number of items likely to be good,

Wanyama B. N. 102
 =N x P(a)
=N x P(r ≤ 3)

Conversely, the Probability of rejection, P (rej) = 1 – P(a)

And the likely number of bad ones in the batch

= N x P(rej)
= N [1-P (a)]
=N [1-P(r ≤ 3)]

Example 1
A sampling inspection is used as a final check of the printing of a large encyclopaedia. The pages are selected at random and
checked for printing errors. The whole book is accepted if only one or zero pages with errors are found by the sample. If ten
pages are sampled, find: (a) probability of acceptance of the book, (b) The likely number of pages with errors in a book of 200
pages. It is generally accepted that in his type of printing work 10% of the pages will have defects.

Solution 1
(a) n = 10
c = 1 or r ≤ 1
PD = 10%; Therefore p = 0.1
Therefore q = 1- p = 1 – 0.1 = 0.9

P(x) = n! p rqn - r
r!(n -r)!

P(1) = 10! x 0.11 X 0.99 = 0.39

1! 9!

P(0) = 10! x 0.10 x 0.910 = 0.35

0! 10!

P(a) = P (r ≤1) = P(0) + P(1) = 0.74

(b) P(rejection) = 1 - P (a) = 1- 0.74 = 0.26
Likely number of pages with errors = N x P (rejection)
= 200 x 0.26
= 52 pages

Example 2
A greengrocer buys peaches in large consignment directly from a wholesaler. In view of the perishable nature of the commodity,
the greengrocer accepts that 15% of the supplied peaches will usually be unsaleable. As he cannot check all the peaches
individually, he selects a single batch of 10 peaches on which he bases his decision of whether to purchase a large consignment
or not. If no more than two of these peaches are unsatisfactory, the green grocer purchases the consignment. Determine the
probability that under normal supply conditions the consignment is purchased.

Solution 2
Given: n = 10
PD = 15%; p = 0.15
c=2
Required: P(r ≤ 2) = P(0) + P(1) + P(2)

P(X) = n! qn – r pr
r!(n-r!)

Wanyama B. N. 103
P (0) = 10! x 0.8510-0 x 0.150 = 0.197
0!(10-0)!

P (1) = 10! x 0.8510-1 x 0.151 = 0.347

1!(10-1)!

P (2) = 10! x 0.85 10-2 x 0.152 = 0.276

2!(10-2)!

P(r ≤ 2) = P(0) + P(1) + P(2) = 0.82

Other examples

1. A certain company manufacturing electric bulbs has the fraction of defective products as 0.15 and the sample size is 20.
Determine the probability of a single sample containing
(i) 0 defective
(ii) 1 defective
(iii) 2 defectives

2. Components for testing are packed in trays of 60. If the process average defective is 2.5% find the number of trays which
will be found to contain 0,1 or 2 defectives in a batch of 1,000 trays.

3. A manufacturer knows that 10% of a day‘s production id defective. What is the chance that a customer will accept the output if
his plan is to reject all goods if he discovers more than one defective in a random sample of 10 units?

18.9 The Operating Characteristic (OC) Curve

Using this simple (single acceptance sampling by attributes) sampling scheme, it would be ideal for the consumer to wish that all
batches which have an actual percentage of defectives greater than the tolerated figure are rejected by the sample while the
producer would with that the whole batch is accepted if the number of defectives found in the sample is equal to, or less tha n an
agreed figure X. In practice such a situation would only obtain if the sample size is equal to the batch size, i.e. if there is 1 00%
faultless inspection, only then can we be 100% certain that batches do or do not, conform to the agreed quality level. This kind
of situation is presented in the figure below called the operating characteristic curve in which a maximum of 20% defective per
batch is assumed to be the agreed quality level.

_
1.0
Probability of accepting batch, P(a)

P(a)=1.0 P(a)=0
_
0.8
Acceptance % defectives

_
0.6

_
0.4

_
0.2
_

0 20 40 60 80 100
Actual per cent (PD) defectives in batch

Fig 18.1-Ideal OC curve for 20% defectives

Thus the performance ability of a statistical sampling plan is described by its operating characteristic curve. It helps the manager
to know what to expect from a particular sampling scheme. It shows the probability of accepting batches with various percentage
defectives, i.e. it tells the user how the sampling plan will discriminate between good and bad batches (lots)

Wanyama B. N. 104
18.9.1 Practical OC Curve
We have already considered why it is not practical to do 100% inspection. The purpose of acceptance sampling is to take a
sample size which is less than the batch size.

To construct such a characteristic curve, the sample size n and the acceptable number of defectives (X) per batch needs to be
known. The probability of acceptance P(a) for various percentage defectives is then found using the binomial distribution. The
two variables, P(a) and PD are then tabulated and used to construct the curve as illustrated in the example below.

Example
Construct an OC curve for the following sample: n =10 & r ≤1

Procedure
Calculate P(a) for various percentage defectives, i.e. PD = 10%; 20% etc.

When PD = 10%

P (0) = 10! x 0.1 0 x 0.910 = 0.349

0! 10!

P (1) = 10! x 0.11 x 0.99 = 0.387

1! 9!

P(r < 1) = P(0) + P(1) = 0.74

When PD = 20%;

P(0) = 10! x 0.20 x 0.810

0! 10! = 0.107

P(1) = 10! x 0.21 x 0.89 = 0.268

1! 9!

P(r < 1) = P(0) + P(1) = 0.38

Similarly when PD = 30%, P(r < 1) = 0.15

And when PD = 40%, P(r < 1) = 0.05

When PD = 50%, P(r < 1) = 0.002, and can therefore be ignored plus any higher PDs.

When the above figures are tabulated in Table 18.1, the graph can then be drawn from the table as shown in fig 18.2.

PD 0 10 20 30 40
P(a) 1.0 0.74 0.38 0.15 0.05

Table 18.1

Wanyama B. N. 105
 Probability of accepting batch P(a) 1.0 .

0.8
.
0.6

0.4 .
0.2
.
.
0 10 20 30 40
`Percentage defectives PD

Fig 18.2- Practical OC curve

18.9.2 Acceptable Quality Level (AQL)

It is the highest percentage of rejects (defectives) in a batch which the receiver will regularly accept while at the same time the
risk that good batches will be rejected is specified.
Example: AQL = 2% defective with a producer‘s risk of 5%

18.9.3 Lot Tolerance Percent Defective (LTPD)

This is the percentage of defectives which is unacceptable to the recipient. Batches of this quality or worse should be reje cted.
The risk of accepting worse quality is the consumer‘s risk.
Example: L T P D = 12% defective with a consumer‘s risk of 10%

In this type of acceptance sampling scheme there are always risks that wrong decisions may be taken. These are:

18.9.4 The Producer’s Risk (α)

This is the risk that a batch of goods of acceptable quality will be rejected as a result of a sample inspection, OR, this is the
probability of rejecting batches with less than acceptance number of defectives.

18.9.5 The Consumer’s Risk (β)

This is the risk that an unsatisfactory batch will be accepted as a result of a sample inspection OR, this is the probability of
accepting batches with more than the acceptable number of defectives.

These four values are shown on the OC curve in fig 18.3.

Wanyama B. N. 106
 (AQL:α)

1.0 .
} 5% Probability of
rejecting supplier’s
satisfactory shipment
0.8 is producer’s risk

0.6
P(a)

0.4 (LTPD:β)

0.2

0
} 10% risk of accepting an
unsatisfactory shipment is
2 4 6 8 10 12 14 consumer’s risk
PD
Acceptable Indeferent Unacceptable
quality range quality range quality range

Fig 18.3 – Sampling plan Design Specs

The consumer‘s risk (β) is usually specified at about 10% and the producer‘s risk (α) at approximately 5%. AQL is often around
2% and LTPD around 10%. The four values are specified in designing the sampling plan. All that then remains is to construct
an OC curve which passes through the two points (AQL : α) and (LTPD : β). This can be done by trial and error, selecting
various values for the sample size (n) and acceptable number of defectives (X) and substituting into the binomial probability
formula until an acceptable curve is obtained.

In practice people responsible for the design and use of acceptance sampling rarely establish their sampling plans from first
principles. Normally there are published charts or tables which are used, such as those in BS 6001.

Defective items found in the samples will always be either rectified or replaced. If during inspection, samples are drawn from the
batch which include more than the acceptable number of defectives, then two alternatives are available:

1. Reject and scrap the complete batch

2. Subject the complete batch to 100 percent inspection and replace or rectify all faulty items found in it.

The choice of alternative (1) or (2) will depend on the value of the items concerned and the cost of replacing or rectifying them,
but, often, in order to obtain a high-quality level for batches with a minimum of inspection, the second alternative is adopted.

18.9.6 Sampling Procedure in which Rejected Batches are Subject to 100% percent Inspection
Let us consider a batch of N items from which a sample of n items is drawn. The sample is inspected and defectives are found,
which are then replaced or rectified. Depending on whether x is less than X (the acceptable number of defects) or not, the e ntire
batch is either accepted or rejected. If the batch is rejected (x >X), the remaining (N-n) items in the batch are all inspected,
defective items being either rectified or replaced. In this way we can be certain (subject to inspection error) that we are left with
N goods items. If on the other hand, the batch is accepted because x <X then we can be certain that the sample contains all
good items, but of course some of the remaining (N-n) will be defective.

18.9.7 Average Outgoing Quality (AOQ)

This is the overall proportion of defective items in a large number of batches, when all batches are assumed to have the same
actual percentage of defectives (PD) and when all batches are subjected to the 100% of inspection procedure described above.
The AOQ percentage, which must be less than PD, is found as follows:

AOQ Percent = Number of defectives remaining x 100

Total number of items

= Number of defective items in accepted batches each of size N-n x 100

Total number of items

Wanyama B. N. 107
 = P(a) (PD) (N-n)
N

Where, P(a) = Probability of accepting batch (from OC curve)

PD = actual percent defectives in all batches
N = batch sizes
n = sample sizes

A curve showing the average outgoing quality level for any actual percent of defectives is then easily drawn from the above
formulae.

Example
A hotel is anxious to check the attitudes of its residents when they leave. They take a sample of ten customers each day and
ask if they were satisfied with the service. No action is taken if one or few customers in each sample complain (i.e. if the OC
curve drawn earlier applies). Construct the AOQ curve for this sampling plan where the batch size N = 200 customers per day.

Solution
AOQ per cent = P (a) (PD) N - n
N

= P (a) (PD) 0.95

P(a) PD percent AOQ percent

From OC curve
0.90 5 4.3
0.77 10 7.3
0.55 15 7.8
0.37 20 7.0
0.22 25 5.2
0.13 30 3.7
0.08 35 2.7
0.06 40 2.3

Table 18.2 – AOQ tabulation

The AOQ curve is shown in fig 18.4 below.

9 _
_ AOQ Limit (AOQL)
8 .
_ . .
7 N = 200

6
_ n = 10
AOQ (%)

X _ 1
v

_ .
5
4
_ .
.
3
_
. .
2
_
1
_
_

0 10 20 30 40 50 60
Actual percent defectives in batch, PD

Fig 18.4 – AOQ curve

Wanyama B. N. 108
18.9.8 Average Outgoing Quality Limit (AOQL)
The advantage of this sampling procedure is that it gives a limit for the proportion of defectives. The AOQL is the worst ave rage
quality which, over a large number of batches, we may expect to pass either to the customer or to the next production stage.

Practice Question
A college buys 1000 scones everyday from Katole Pastry Store for their students‘ teas. They have agreed with Katole that as
part of quality assurance, before every consignment is accepted, a random sample of 20 scones is taken and examined for any
defects. If more than 4 scones are found with any defects, the consignment is rejected. Otherwise it is accepted.

a) Draw an OC curve for this sampling plan and establish the Acceptable Quality Level and Lot Tolerance at a Producer‘s
risk of 5 % and Consumer‘s risk of 10% respectively.
b) Determine the Average Outgoing Quality Limit for this sampling plan.

18.10 Statistical Process Control

Acceptance sampling is a method of quality control which is used to ensure that defective items are not accepted by the firm and
to ensure that defectives are not offered to the customer. It is concerned with both ends of the quality functions but not w ith the
middle, i.e., it is not concerned with controlling quality during the process. Process control is so important because it is during
the process that steps may be taken to prevent the output of defective and sub-standard items, i.e. a form of quality assurance
function. The procedure used during process control is the control chart, which is a special application of statistical sampling
techniques.

Statistical Process Control is part of Statistical Quality Control which involves taking of samples from production, testing,
weighing or measuring them as the case may be, and statistical tests applied to see whether the process is performing
satisfactorily or not.

All production methods and processes are subject to variability. For example, a machine filling 300ml bottles of soft drink (soda)
will be set to work to an average of say, 300ml, but inevitably some bottles will contain slightly more than 300 ml, others slightly
less.

The general purpose of process control is to indicate the process remains in control or whether it is out of control or likel y to go
out of control if present trends continue. The statistical methods used do not identify the specific cause of variation but they act
as an early warning system which tells management that something odd has probably happened.

The variability can arise from two causes:

(a) Assignable causes (assignable causal effects)

These are causes which can be identified and assigned to a particular cause and can therefore be eliminated or controlled.
They are caused by specific changes in the process or environment, e.g. tool wear, variations in materials, errors in setting,
a component fails, poor machine maintenance, etc, and human factors such as carelessness, fatigue, failure to follow
correct procedures, etc. These causes produce instability in the distributions which are no longer predictable and the
process is ―out of control”.

(b) Chance, Random or Inherent Causes (random causal effects)

These are natural variations exhibited by all processes that produce goods or provide services. Put another way, they
are the unavoidable causes of variability inherent in the nature of the process, the machines used, the material, etc. These
causes occur randomly and produce a distribution of values (sizes, weights, volumes, etc) which is approximately Normal
(i.e. can be described by the Normal probability Distribution) and which is predictable. If all the variability of the samples
was due to inherent causes, the process would be said to be ―in control”.

They are further divided into two types:

(c) Control by variables

This is where the product has measurable characteristics such as volumes, diameters, lengths, resistances, angles, current,
voltage, etc, using gauges, meters and any other instruments. When these measurements are taken and used to monitor
the process performance then it is called ―checking or control by variables”.

Wanyama B. N. 109
(d) Control by attributes
This is where the product has characteristics that we can count rather than measure. For instance, if glass bottles are
inspected for chipping and cracking, both the good bottles and the defective ones can be counted. Similarly one can c ount
the number of scratches on a polished surface or the number of faulty rivets in a riveted structure. When these counts are
taken and used to monitor a process performance then it is called ―checking or control by attributes”.

18.10.1 The Sampling Distribution

In a process, if a large number of items e.g. soda bottles, are taken and their measurements (e.g. volume of contents in the soda
bottle) taken, and graphed, the frequency distribution would reflect the process variability. The values would be clustered close
to the process average, (e.g. 300 ml) but some of the values would inevitably vary from the mean.

If now samples of say 10 bottles each are taken at intervals and their means computed, their values would also vary just like the
individual values varied. When graphed, the distribution of sample means would represent the random variability of all possible
sample means.

The two distributions are compared in fig 18.5 below.

Sampling
distribution

Process
distribution

Mean

Fig 18.5 – Process/ Sample Frequency Distribution

The sampling distribution exhibits less variability (i.e. it is less spread out) than the process distribution. This reflects the
averaging that occurs in computing the sample means, where high and low values in samples tend to offset each other, resulting
in less variability among sample means than among individual values, even though both have the same mean. The sampling
distribution is a normal distribution, even if the process distribution is not normal as is the case sometimes. This is known as the
central limit theorem in statistics.

The normal distribution is used to help judge whether a process is performing adequately (some kind of hypothesis or
significance testing) or not. If the output reflects only random variability, the conclusion is that the process is stable (i.e. in
control). But if there is evidence of non-random variability, the conclusion is that the process is unstable (i.e. out of control)

The limits of acceptability of random variability are set at ±3.09σ (standard deviations) which are commonly rounded up to ±3σ
and are considered the natural limits. These boundaries cover an area of 99.8% of the area under the curve (99.8 level of
confidence) and signify a common acceptability level that not more than 2 in every 1000 shall be rejected. What these mean is
that if a sample of say, 1000 items is taken at random from production and more than 2 of them lie outside the 3σ limits
calculated from previous measurements, then it is extremely likely that there are causes other than random causes at work, i.e.
there are assignable causes operating, meaning that the process is out of control and must be stopped so that corrective action
is taken by tracing and eliminating the cause.

The action limits are preceded by warning limits set at the ±1.96σ, commonly rounded up to ±2σ. The area bound by these
limits is 95% of the area under the curve. Values outside these limits act as a warning that the process is, or may be; chan ging
from its desired performance and therefore closer observation is required.

The two limits are illustrated in fig 18.6 below.

Wanyama B. N. 110
 σ = standard deviation

-3σ -2σ Mean +2σ +3σ

95%
99.8%

Fig 18.6 – Limits of Acceptability

18.11 Control Charts

The control chart is a time-ordered plot of sample statistics, which enables presentation of collected data in graphical form. It is
used to distinguish between random variability and non-random variability. The values from the samples are directly or with
some statistical manipulation plotted on them, the distribution of which essentially describes random variability. The charts would
already contain control limits, calculated using statistical principles, and the sample values are checked against the control limits.

A process is considered to be statistically under control or ‗in control‘ if it regularly produces items whose attributes or variables
fall within the acceptable or tolerable range, i.e. exhibits randomness, whereas a process is said to be ‗out of control‘ if items are
produced whose attributes or variables are beyond the acceptable or tolerable range, i.e. exhibits non-randomness. If the
process is out of control, it is stopped and corrective action taken.

Control charts have two limits that separate random variation and non-random variation. The larger value is the Upper Action
Limit (UAL), and the smaller value is the Lower Action Limit (LAL). A sample statistic that falls between these two limits suggests
(but does not prove) randomness, while a value outside or on either limit suggests (but does not prove) non-randomness. The
two limits are set at approximately ±3 Standard Errors (SE), where, Standard Error is the name given to the standard deviation of
the sample means, i.e. SE = σ/√n.

Components of a typical control chart are illustrated in fig 18.7. Each sample is represented by a single value (e.g. the sample
mean) on the chart. Each value is compared to the extremes of the sampling distribution (the control limits) to judge if it is within
the acceptable (random) range.
Out of Abnormal variation
Control due to assignable

UAL
. sources

. .
. . .. Normal variation
Mean
. .. .. due to random
causes

LAL

1 2 3 4 5 6 7 8 9 10 11 12 Abnormal variation
Sample Number due to assignable
sources

Fig 18.7 – Components of a Control Chart

There are four commonly used control charts. Two are used for variables, and two are used for attributes.

18.11.1 Control Charts for Variables

The two control charts for variables are:
Mean chart
Range chart

Wanyama B. N. 111
These two types of charts (also called X-charts and R-charts respectively) are usually based on the normal probability
distribution and they are designed to test the means and ranges of samples rather than individual measurements. The main
reason why means are used is that even when the actual distribution of a variable resulting from a process does not conform to
the normal distribution, sample means will always tend to be distributed normally. This is known as the central limit theorem of
statistics. In practice, therefore, the measurements of individual components are not plotted separately on control charts; only
the means or average value of the measurements in the sample is plotted. It is for similar reasons that ranges are used.

Mean charts are sensitive to shifts in the process mean, whereas range charts are sensitive to changes in the process
dispersion. Because of this difference in perspective, both types of charts are used to monitor the same process. The reason for
using both is because the change in process dispersion is less apt to be detected by the mean chart and similarly a shift in the
process mean cannot be indicated by the range chart.

18.11.2 The Mean Chart (X-Chart)

Two sets of control limits are normally used, the outer control limits are the upper and lower action limits or lines, while the inner
control limits are the upper and lower warning limits or lines. If points fall beyond the warning limits, this is taken to indicate that
the process may be going out of control and that careful observation or additional sampling is required. Points falling beyond the
action limits indicate non-randomness and hence the need to take immediate steps to establish and to eliminate the cause.

Warning limits are set at 95% confidence limits (which is the 5% level of significance). These fall approximately within ±2
standard errors (SE). The action limits are set at 99.8% confidence limits (which is the 0.2% level of significance). These fall
approximately within ±3 standard errors (SE).

Thus the limits are calculated as follows:

Upper and lower Action Limits _ 3o-

= X + (1)
X
_ 3o-/ n
= X + (2)

Upper and Lower warning Limits _ 2 o-

= X + (3)
X

_ 2o- / n
= X + (4)

Centre ( = Process mean) = X

Where, o- = o-/ n = Standard Error (SE) = Standard deviation of the sample means
X
o- = Standard deviation of the parent population, i.e. the process
n = Sample size
X = Overall process mean
Usually, it is a little tiresome to calculate standard deviations for samples particularly under the conditions which often exist in
practice and consequently the range is usually used as a measure of variability instead of standard deviation. The range is the
difference between the largest and the smallest value, and for small samples it has been shown that:

o- = w / dn

Where, o- = Standard deviation of the process

w = Mean range of several samples
dn = A constant depending on the sample size and is given in tables as in Table 18.3

Sample size n 2 3 4 5 6 7 8 9 10
d 1.13 1.69 2.06 2.33 2.53 2.70 2.85 2.97 3.08

Table 18.3

Wanyama B. N. 112
Consequently, when we substitute for σ in eqs. 2 and 4 we have,

Upper action limit (UAL) = X + 3 ( w /dn ) / n (5)

Upper warning limit (UWL) = X + 2 ( w /dn ) / n (6)

Centre (= process mean) = X (7)

_
Lower warning limit (LWL) = X 2 ( w /dn ) / n (8)
_
Lower action limit (LAL) = X 3 ( w /dn ) / n (9)

To simplify the calculations the factors 2/dn√n and 3/dn√n which are dependent only on n are designated A1 and A2 for
warning and action limits respectively and given in tables for mean charts. Four factors designated D 1 D2, D3 and D4 representing
lower action line, lower warning line, upper warning line and upper action line respectively for range charts are also tabulated.
The D-factors are multiplied by the mean range to obtain the range limits. All these factors are tabulated in Table 18.4.

MEAN RANGE
Sample Warning Action Lower Lower Upper Upper
Size n Action Warning Warning Action
n A1 A2 D1 D2 D3 D4
2 1.23 1.94 0.00 0.04 2.81 4.12
3 0.67 1.05 0.04 0.18 2.17 2.98
4 0.48 0.75 0.10 0.29 1.93 2.57
5 0.38 0.59 0.16 0.37 1.81 2.34
6 0.32 0.50 0.21 0.42 1.72 2.21
7 0.27 0.43 0.26 0.46 1.66 2.11
8 0.24 0.38 0.29 0.50 1.62 2.04
9 0.22 0.35 0.32 0.52 1.58 1.99
10 0.20 0.32 0.35 0.54 1.56 1.93

Table 18.4 – Table of factors for calculating control limits for mean and range charts.

The process mean, (X) and average range, (W) will have been determined in an earlier study. In the construction of the range
chart, only the upper action and warning lines are used. This is because a reduction in range, which is an increase in precision,
is often not of significance i.e. is an advantage and we need not worry about it.

Example
A process is used to fill bottles. Each bottle should contain 12cl. A random sample of five bottles is taken each hour, and for
each sample the mean and range have been calculated and given in the Table 18.5

Sample
(Size n = 5) Sample mean(X) Sample Range(Wx)
9.00 a.m 12.005 0.007
10.00 a.m 12.001 0.008
11.00 a.m 11.993 0.010
12.00 a.m 11.991 0.003
1.00 p.m 12.001 0.006
2.00 p.m 12.003 0.015
3.00 p.m 11.995 0.011
4.00 p.m 12.004 0.008
5.00 p.m 12.003 0.009

Wanyama B. N. 113
 6.00 p.m 12.000 0.010
7.00 p.m 11.999 0.006
8.00 p.m 11.997 0.013
9.00 p.m 11.993 0.011
10.00 p.m 12.000 0.010
TOTAL 167.991 0.127

Table 18.5

From an earlier pilot study the overall mean (X) and the average range (W) have been found to be:

X = 11.9994 and w = 0.0091

i Calculate the control lines for the mean and range charts based on 95% confidence limits.
ii Plot the control lines and sample results on a mean and range chart.
iii Interpret the charts.

SOLUTION

Given: X = 11.9994
w = 0.0091
n = 5
(a)(i) Mean Chart

By use of d n tables

Action Lines = X ± 3.09(W/dn)

√n
= 11.9994 ± 3.09 x 0.0091 [i.e. d(n=5) = 2.33]
√5 x 2.33

= 11.9994 ± 0.0054

Warning Lines = X ± 1.96(W/dn)

√n
= 11.9994 ± 1.96 x 0.0091
√5 x 2.33

= 11.9994 ± 0.0034
By using A1 and A2 tables
Action lines = 11.9994 ± 0.0091 x 0.59

= 11.9994 ± 0.0054

Warning Lines = 11.9994 ± 0.0091 x 0.38

= 11.9994 ± 0.0034

Both approaches yield the same results and therefore either method can be used. The action lines are therefore as follows:

Upper action line = 11.9994 + 0.00054 = 12.0048

Upper warning line = 11.9994 + 0.0034 = 12.0028
Lower warning line = 11.9994 – 0.034 = 11.996
Lower action line = 11.9994 – 0.0054 = 11.994

The mean chart is shown in Fig 18.8.

Wanyama B. N. 114
 12.006 -
. . . UAL
12.004 -
. UWL
12.002 -
. . . .
12.000 -
. . MEAN
Mean

11.998 -
.
11.996
. LWL

11.994
. LAL

11.992 -
.
11.990 -
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12.00
9.00 am

2.00 pm

3.00 pm

4.00 pm

5.00 pm

6.00 pm

7.00 pm

8.00 pm

9.00 pm
10.00 am

11.00 am

10.00 pm
1.00 pm

Time (or Sample no.)

Fig 18.8 – Mean Chart

Practice question
A drilling machine bores holes with a mean diameter of 0.5230 cm and standard deviation of 0.0032cm. Calculate the 2-sigma
and 3-sigma upper and lower control limits for means of samples of 4, and prepare a mean control chart.

18.11.3 The Range Chart (R-Chart)

As already stated, only the upper action and warning lines are necessary for this chart. From the table, the multiplying factor for
sample size = 5 are D4 = 2.34 and D3 = 1.81 for upper action and warning lines respectively.

Hence: Upper Action Limit = W x D4

= 0.0091 x 2.34
= 0.0213

Upper Warning Limit = W x D3

= 0.0091 x 1.81
= 0.0165
The chart is drawn from 0 to say 0.024 to be inclusive of UAL and UWL on the Y-axis and Time or Sample number on the X-axis
as shown in Fig 18.9.

0.024 -
UAL
0.020 -

UWL
0.016 -
.
Range

.
0.012 -
. . . . .
. .
Mean
0.008 -
. . . .
Range

0.004 -
.
-
-
-
-
-
-
-
-
-
-
-
-
-
-

0
2.00 pm
12.00
9.00 am

1.00 pm

3.00 pm

4.00 pm

5.00 pm

6.00 pm

7.00 pm

8.00 pm

9.00 pm
10.00 am

11.00 am

10.00 pm

Time (OR Sample Number)

Fig 18.9 – Range Chart

18.11.4 Conclusions on the Mean and Range Chart

The charts indicate that the process is beginning to settle down. The means from early samples were probably unacceptable
but, towards the end of the day the process was under better control.

Practice question

Wanyama B. N. 115
 (a) A machine produces components at a rate of 100 per hour. Every hour a random sample of five components is taken
and their lengths measured. After ten hours the data given in Table 18.6 had been collected. Use this data to design
control charts for the sample mean and range of the dimension concerned.

Sample number Measurements

1 9.00 9.10 9.00 9.05 8.95
2 9.10 9.10 9.00 9.05 9.05
3 9.00 9.05 9.00 9.05 9.00
4 9.00 9.00 8.95 9.00 9.05
5 9.00 9.05 9.05 9.05 9.00
6 9.00 9.10 9.10 9.05 9.00
7 9.00 9.10 9.05 9.15 9.05
8 9.00 9.10 9.10 9.00 9.05
9 9.00 9.00 8.95 9.00 9.00
10 9.00 9.05 9.00 9.10 8.95

Table 18.6
(b) Following the construction of the charts, the same sampling procedure is followed and the data in Table 18.7 is
obtained. Plot this data on the control charts and comment on the quality performance of the process.

Sample Mean length Range Sample Mean length Range

Number (cm) Number (cm)
1 9.020 0.100 11 9.040 0.150
2 9.030 0.100 12 9.040 0.125
3 9.025 0.050 13 9.035 0.100
4 9.030 0.100 14 9.040 0.055
5 9.035 0.025 15 9.030 0.100
6 9.040 0.105 16 9.025 0.050
7 9.020 0.050 17 9.030 0.125
8 9.030 0.100 18 9.025 0.100
9 9.040 0.050 19 9.025 0.150
10 9.035 0.065 20 9.030 0.150

Table 18.7

18.11.5 Control Charts for Attributes

Just as in acceptance sampling it is possible after inspecting items to classify them only as ‗good ‗or ‗bad‘, as ‗acceptable‘ or ‗not
acceptable‘, etc, and it is for reasons such as these that control charts for attributes have been devised. These charts are
developed in much the same way as were control charts for variables.
The two common charts among them are:

1. Control chart for proportion or per cent defective

2. Control chart for number of defects.

The methods of using the charts is similar to that outlined for variables charts, except in this case, rather than calculate the mean
and range of all the items in each random sample, only the number or the percentage of defective items in the sample is
calculated.

18.11.6 Control Charts for Proportion, Fraction or Percent Defective

These charts are also called P- charts. Control points are constructed after a pilot investigation and if, during production, the
proportion of defectives in a sample falls within these limits the process is considered to be ‗under control‘, whereas if the
proportion of defectives in a sample falls beyond these limits this is taken to be a good indication that the process is, for some
reason, out of control and that some investigation and corrective action is required. An estimate of the proportion of defectives
produced by the process is obtained after a pilot study consisting of several samples, i.e.,

Wanyama B. N. 116
P = Total number pf defectives of 10 to 20 samples
Total number inspected

0.2% level of significance control limits are set in the usual way, i.e.

Action Limits = P _ 3o-

+ P

Where, P = Proportion of defectives produced by the process

-
o P = Standard deviation of this distribution

The statistical theory of the binomial probability distribution is used, by which it can be shown that:
o-P = P (1 - P ) /n
Consequently, the action limits are set at:

Upper Action Limit = P +3 P (1 - P ) /n

_
Lower Action Limit = P 3 P (1 - P ) /n
Where n = Sample size

Example
An automatic machine sorts letters in a large Post office. A manual check is kept on the machine. About 200 letters are checked
each hour to see if they have been sorted correctly. The data from one day‘s work is given in Table 18.8. Construct a P– chart
and examine the data.

Throughput for previous week=10,000

Number of defectives included in that throughput = 370

Sample No Sample Size Number of defective P

n in sample
1 205 12 0.0585
2 206 14 0.07
3 195 12 0.0615
4 200 15 0.075
5 210 14 0.0665
6 195 12 0.0615
7 200 15 0.075
8 200 16 0.080
9 205 13 0.0635
10 195 14 0.0715
11 200 15 0.075
12 195 14 0.0715

Table 18.8

Solution
A column for P has been added to the table to give a fraction of defectives for each sample.

The proportion of defectives produced by the machine is in this case estimated from the previous week‘s throughput.

i.e. P = 370 = 0.037

10,000

Wanyama B. N. 117
 n = 200

And the Action Limits = P _3

+ P (1 - P ) /n

= 0.037 ± 3.09 √ [0,037 (1 - 0.037)]

200
= 0.037 ± 0.0412

Upper control limit (UCL) = 0.037 + 0.0412 = 0.0782

Lower Control Limit (LCL) = 0.037 – 0.0412?

NB: The nature of the process has no Lower control limit

0.090 -
Sample proportion defectives

0.080 - . UCL

. . .
0.070 - . . .
. .
0.060 -
. . .
-
-
-
-
-
-
-
-
-
-
-
-

0.050
1 2 3 4 5 6 7 8 9 10 11 12
Sample number (OR Time)

Fig 18.10 – P- Chart

Note that instead of using Sample number in the table and on the X-axis, we would also use Time.

Conclusion from the P- chart:

Compared with the previous week‘s throughput, the proportion of defectives in the batches has increased, and the process is
almost out of control.

Practice Questions
1. A new shearing machine is set to cut off a piece of steel from a long bar. For various reasons the machine at times cuts off a
piece that is too long or too short. These unacceptable pieces are automatically dropped in a box and the operator of the
shearing machine must count these defectives after every 100 pieces are sheared off. The record after the first day of operation
is shown in Table 18.9.

No. sheared off No. of defectives

100 5
100 6
100 7
100 4
100 8

Table 18.9

2. Using the data given in Table 18.10, which have resulted from a study over a period of one week, construct a control chart.
Plot the data given in Table 18.11. Comment on the results.

Target throughput of items for the period 6250

Throughput of good quality items 5620
Total number of defective items 99

Wanyama B. N. 118
Table 18.10

Percentage performance = Accepted output x 100 = 90%

Target
Sample Output Sample Numbers defectives
Size n in sample
1 575 60 1
2 600 60 2
3 550 60 2
4 550 60 1
5 600 60 2
6 650 65 2
7 625 65 1
8 590 70 2
9 625 75 2
10 490 60 1
11 565 60 1

Table 18.11

18.11.7 Control Chart for Number of Defects

These charts are also known as C-charts and are of particular value for controlling the number of defects in, or on, a particular
unit i.e. a single item, a group of items, or a part of an item. For example, the C-chart might be used to control the quality of a
cloth by counting the number of defects in a roll, to control the quality of a riveted structure by counting the number of rivets, etc.
Conditions such as these enable the poison distribution to be used. The symbol C is the average number of defects per unit
obtained after a pilot investigation over several samples. The standard deviation of the poison distribution is given by √ C.
Consequently the control limits are set at:

Control (Action) Limits = C ± 3.09√ C

i.e. Upper Control (\action) limit (UCL) = C + 3.09√ C

Lower Control (action) Limit (LCL) = C - 3.09√ C

The manner in which C-charts are constructed and used are very similar to the construction and use of P-charts.

Example
In a medium size company carrying out the anodizing of various aluminum components, the components were inspected to
locate defects in them. The observations are given in Table 18.11. Plot a C- chart for the experiment and draw conclusions.

Component inspected Number of defects found

During the inspection
1 2
2 5
3 0
4 5
5 5
6 7
7 2
8 3
9 1
10 7
Total Number 37=Total number
Of inspections = 10 of defects

Wanyama B. N. 119
Table 18.12

Solution
Since no pilot study is given, the average number of defectives is found from the table.

i.e. C = Total Number of defectives = 37 = 3.7

Total number of inspections 10

Control Limits = C ± 3.09√ C

= 3.7 ± 3.09√3.7
= 3.7 ± 5.944

Upper control Limit (UCL) = 3.7 + 5.944 = 9.644

Lower Control Limit (LCL) = 3.7 – 5.943?

Because LCL is negative, it is taken to be zero.

10 - UCL
9-

8-
. .
Number of defectives

7-
6-
5- . . .
4- Mean
3- .
2- . .
1- .
0 .
-

1 2 3 4 5 6 7 8 9 10
Component inspected

Fig 18.11 – C- Chart

It can be concluded from this chart that since the number of defectives is within the control limits, the process is under control.

Advantages of Statistical Quality Control

S Q C is one of the tools of scientific management and has several advantages over 100% inspections.
(a) Reduction in cost - Since only a fraction of output is inspected, costs of inspection are greatly reduced.
(b) Greater efficiency - Efficiency goes up because much of the boredom is avoided due to considerable reduction in the
work of inspection.
(c) Easy to apply - Once this system is established, it does not need persons with specialized training or highly
mathematical background to operate it.
(d) Early detection of faults - Through the use of control charts, it enables early detection of faults the moment a point falls
outside the control limits, which prompts corrective actions to take place, thereby minimizing waste or reject production.
(e) Adherence to specifications - It enables the process to be brought into and held in a state of statistical control through
the accurate prediction for the future.
(f) The only course - It enables valid inferences to be drawn about the total output from samples without going through
every item, which could result into deterioration or even destruction of the items during inspection.
(g) Determination of effect of change in process - With the help of control charts one can easily detect whether or not a
change in the production process results in a significant change in quality.
(h) Ensuring overall coordination - SQC records provide a basis on which operating and engineering forces can reconcile
system capabilities when it is established that specifications are either too tight or too loose.

Wanyama B. N. 120
18.11.8 Limitations of SQC
1. The techniques of SQC should not be applied mechanically but matched to the process in question.
2. Application of standard procedures without adequate study of the process is extremely dangerous as it could lead to
statistical methods being discredited.
3. Statistical methods applied may lead to a false sense of security. The responsibility for quality and process decisions
rests with the manager in change of the process and not with the statistician, i.e the charts do not reduce the
manager‘s responsibilities.

18.12 Product/Service Life Cycle

Every product, service and technology has a life cycle, which involves four stages, i.e. incubation, growth maturity and decline as
illustrated in the Fig 19.1.

Demand
Rate

Time

Incubation Growth Maturity Decline

Fig 18.12 – Product Life Cycle

18.12.1 Stages in Product Life Cycle

1. Incubation – This is the introduction stage. The product is put on the market. Awareness and acceptance are minimal
and therefore demand grows very slowly. There is a lot of emphasis on promotion at this stage.
2. Growth –The product begins to make rapid sales, gains because of the cumulative effects of introduction promotion,
distribution and word – of mouth influence.
3. Maturity – Sales growth continues but at a declining rate because of the diminishing number of potential customers who
remain unaware of the product or who have taken no action. Then the demand reaches a pick and remains
steady marked by the level of replacement demand.
4. Decline - Sales begin to diminish absolutely as the product is gradually edged out by better products or substitutes.

18.12.2 Factors Determining the Life Cycle

(a) The degree of technological progress
(b) Changes in customer habits
(c) Ease of entry to the market

18.12.3 Actions (Market Decisions) at the Various Lifecycle Stages

(a) Before or at the launch – Price decision
(b) At incubation stage – Emphasis on promotion
(c) Growth stage – Distribution is all-important
(d) Maturity period – Introduction of price changes or changes in specification to prevent decline and or the introduction of
new offerings.

Wanyama B. N. 121
19 MATERIALS MANAGEMENT
Materials are an important determinant of the total cost of production as it occupies 20% to 35% of the total cost of production
which in certain cases may be up to 60%. Material means raw materials, components, in-process materials and finished
products. Materials (or stock) are all classified into two kinds:

1. Direct Materials
These are materials which go directly into the making of the product and forms a part of the end product, e.g. threads in the
making of garments, bolts and bushes in assembly works, switches, electronic components, in electrical assemblies, etc.

2. Indirect materials
Those materials that aid the production process but are not themselves part of the end product. They are used in processing or
packing the direct materials. They include tools, oils, jigs and fixtures, etc.

The materials management responsibility can be subdivided into three main areas:

(a) Purchasing or procurement – which is the responsibility for obtaining and managing incoming materials through to
input stock
(b) In-process materials management – which is the management of materials and items through the transformation
process
(c) Distribution/logistics – for the transfer of items, products, etc. to the customer from the system, where appropriate
from output stock

Within these areas of responsibility there will exist physical stock situations. There are two types of stocks:

1. Incoming materials, components, parts, products, etc; and

2. Outputs

In practice such stocks are the responsibility of an inventory control or inventory management function. The inventory
management function links together the three areas of responsibility. Finally there is the store organization responsible for the
physical identification and safe storage of materials. Put simply it is the receiving and storage activity and constitutes the final link
in the materials supply chain.

19.1 Purchasing and Supply

The purchasing or procurement function is closely related to the operations management. Operations management is
responsible for providing goods or services of the right specification and quality in the right quantity and at the right time. While
in the same terms, purchasing managers are responsible for purchasing materials and items of the right specification and quality,
at the right time, in the right quantity, from the right source and at the right price. Thus their responsibility is that of obtaining
those items required by the operating system. They are concerned with the input to the operating system, i.e., the flow of
physical resources to the operating system.

19.1.1 The Objectives of Purchasing Function:

1. To supply the organization with a steady flow of materials and services to meet its needs.
2. To ensure continuity of supply by maintaining effective relationships with existing sources and by developing other
sources of supply either as alternatives or to meet emerging or planned needs.
3. To obtain efficiently, the best value for every unit of expenditure.
4. To manage inventory so as to give the best possible service at lowest cost.
5. To maintain sound co-operative relationships with other departments providing information and advice as necessary to
ensure the effective operation of the organization as a whole
6. To develop staff, policies, procedures and organization to ensure the achievement of the foregoing objectives.

Wanyama B. N. 122
19.1.2 Duties of Purchasing Department
Deriving from the above objectives, the following are the duties of purchasing department.
(a) Finding and Approving Suppliers
This involves discussion with potential suppliers or their representatives, examination of their catalogues and samples and
visiting the suppliers premises
(b) Purchasing at most competitive price
Price determination is best done through competitive tendering. It should be noted that the lowest purchase price may not
necessarily be that which is least costly to the company, since it may attract other costs such as rectification, sorting, etc
which increases the total cost of the purchased item.
(c) Ensuring delivery of goods at the right time
This involves contacting suppliers before the material is actually due and seeking assurances that delivery dates will be
maintained.
(d) Warning all concerned of late deliveries
From a process of progressing on orders, if it is evident that a delivery date is not going to be met the production control
department must be informed in order that work can, if necessary be re-scheduled.
(e) Verifying Invoices
It is necessary to check that the price quoted on invoices presented by suppliers agree with those negotiated. This is
achieved by comparison with the purchase order if the price is quoted there. Also the quantities invoiced should be verified.
(f) Organizing all discussions with suppliers
It is sometimes necessary that technical departments, such as design department, do meet suppliers and discuss problems
with them. The purchasing department should always be involved whether the suppliers are actual or potential.
(g) Speculative buying
This is the purchase of materials or goods not for reasons of immediate need but because it appears that market conditions
are favourable. This arises from the buyer‘s intimate knowledge of the market.
(h) Advising on Price
This concerns new or modified designs and is key to making decisions such as meeting marketing requirements on price or
the likely cost of re-equipping a workshop.
(i) Acting as a window-on-the-world
The buyer is always in continual contact with organizations outside his own. This makes a valuable channel of
communication whereby news of novel processes, materials, services and equipments are brought to the notice of his
colleagues who are most concerned with these matters.

19.1.3 Purchasing Policy

The questions a purchasing policy should address include:

1. The make or buy decisions – This involves comparing the cost of making compared to the cost of buying from outside.
2. The type of documentation procedures and computer procedures.
3. Amount of material requirements planning. This concerns the amount of stock to be maintained

19.2 Types of purchasing organization

This concerns decisions of whether to have centralized or decentralized system of purchasing organization.

19.2.1 Centralized Purchasing

This is where within an organization, one department carries out all the buying. It avoids the uneconomical purchasing of
unnecessarily small quantities, irritation of the vendor at having a number of contacts with the company, and the carrying out of a
specialized function by non-specialists. Its advantages are:

1. A consistent buying policy

2. Maximum purchasing power in the hands of one person when conducting negotiations with vendors i.e. enables
economies of scale.
3. Uniform purchasing records and organization.

Wanyama B. N. 123
19.2.2 Decentralized Purchasing
This is where a company with autonomous divisions within the same plant allows the divisions to have their own buying
departments.
Advantages
1. Greater flexibility enables rapid reaction.
2. Greater opportunity for functional specialization.
3. Greater responsibility placed at the hands of the local executives i.e. makes him responsible for the purchase of the
goods.

19.3 Stores Keeping

Receiving and storage activities constitute the final link in the materials supply chain. The receiving activity is responsible for
expeditious receipt and general inspection of all incoming materials. It also completes the communication activity by promptly
notifying all interested parties of the receipt and conditions of incoming materials. The stores organization is responsible for the
physical identification and safe storage of materials. The way in which receiving and stores activities are conducted directly
influences inventory carrying cost and, to some extent, the direct labour costs of production. Stores are part of inventory control
department.

19.3.1 Aims of Stores Keeping

The primary aims of store keeping are to provide service to the organization by:

1. Making available a balanced flow of raw materials, equipment, tools and other components to the production line within
the least possible time, and that too of right quality and quantity.
2. Providing spare parts, general stores, and other materials required by the production for proper functioning.
3. Receiving from production unit and issuing to the sales unit the finished products.
4. Accepting and storing the scrap and other discarded materials and making arrangements for their disposal in
consultation with the appropriate departments and authorities.

19.3.2 Functions (Duties or Roles) of Storekeeping

(a) Receipt of materials into store
These include raw materials, purchase parts and components, in-progress items, and finished products. These materials
are inspected and then moved into the appropriate storage areas.
(b) Storage and preservation
Storage means custody of materials in a scientific way so as to help in the maintenance of regular flow of materials in and
out of the store house for the smooth and efficient running of the entire organization. On the other hand preservation
means the safe custody of the materials in perfect serviceable condition.
(c) Record keeping
Maintenance of records of goods carried in and out of the store is one of the most important functions which storekeeping
has to perform. Proper maintenance of records helps the management in minimizing the cost of both storage and
production. This in turn assists in planning the future course of production and purchasing.
They also assist the costing department.
(d) Issue of materials
Ultimately the materials received, stored and preserved are to be issued to various departments on proper authorization and
requisition as and when demanded. This is one of the most important functions of storekeeping because materials are
supplied to the stores department for their issue.

19.3.3 Factors Contributing to Successful Functioning of Stores

1. Location of stores
Stores should be centrally situated to be easily accessible to other departments resulting in better co-ordination.
2. Layout of the store
Efficient storekeeping demands that a store should be free from congestion. Proper grouping, classification and loading of
stores, proper arrangement of storeroom equipments, proper indexing for easy accessibility, maximum possible utilization
of available space, and proper placement of receipt, issue, record and inspection counters are the essentials of a good
layout of a storeroom. As examples, maximum use should be made of height, e.g. use of fork-lift trucks and pallets, and

Wanyama B. N. 124
 use of metal racks which are strong and conveniently easy to erect and dismantle. Materials should flow into stores via the
inspection department and then flow to works. Finished goods should move via inspection to dispatch. Gangways should
be sufficiently wide for mechanical aides, etc.
3. Records
Proper up-to-date and complete records result in reduction or elimination of wastage and misappropriation in the stores
department. It also acts as a check on dishonest workers in the store and removes the possibility of theft and pilferage.
Efficiency and economy, protection from all kinds of damage, settlement of disputes with creditors, debtors, insurance
companies and government, checks against overstocking and under stocking, are some of the advantages of store keeping
records which makes storekeeping more successful and efficient than it would be in their absence.
4. Preservation
The underlying idea of storekeeping function is to protect stores from all kinds of damage so that the materials carried in the
store may not lose their quality and value for a long time to come. This requires a bright, airy, fire-proof and well-ventilated
storeroom in which materials are kept in safe custody.
5. Verification
There should be a constant check on the movement of materials and on the balance of materials in bins. This physical
verification of stores enables detection of fraud, mismanagement and misappropriation.
6. Management
The internal management, the policy level management and the distribution of different functions of storekeeping to
personnel will make a success or failure of the storekeeping function.

19.3.4 Stocktaking
This is the physical count of stock taken and results checked against the entries on stock record cards. Errors found are
investigated and if necessary, alterations are made to the records to bring them into line with actual stock. These stock ch ecks
can either be carried out annually (at the end of the company‘s trading year) or continually throughout the year, a few items being
checked each day. Stock-taking is also called stock-check and is a part of inventory control.

Stock needs to be correctly recorded not only in order that the factory may be run efficiently but also in order that the trading
results shall be calculated accurately. When goods are continuously being moved in and out of the stock it is inevitable tha t
inaccuracies creep in, and though a control account held by costing department might indicate probable errors in total, it is
clearly necessary to minimize the effect of mistakes. That is the essence of stock taking.

In summary, the following are the main reasons for stock taking:

1. To establish or estimate capital resource held in stock at a given time.

2. To check whether records correspond to actual materials in stock.
3. To balance the raw materials and finished goods.
4. To be in a position to establish on amount to purchase.
5. To ensure there is enough stock to meet demand.
6. To ensure that purchases conform to receipts i.e. detect and eliminate fraud.
7. Ensure accountability of all inventories.

19.4 Definition of Terms (Glossary)

The following are some of the common terms used in this subject:

Stores – Goods kept for a particular use.

Stock – A store of goods available for distribution or use. Thus the two terms stores and stock essentially mean the same thing
and are used commutatively with the later more popular.
Inventory – In a wider sense is defined as any idle resource of an enterprise. It‘s commonly used to indicate materials – raw, in-
process, finished, packaging, spares and others – stocked in order to meet an expected demand or distribution in the future. Idle
here means not meant for immediate use.
Also inventory can be said to be all those items ready for sale or items which keep the process running.
Pilferage – Losses due to damage such as rust, evaporation, etc.
Obsolescence – Material or product which has run out of demand due to change in test, technology, mode of production, and a
host of other reasons.
Misappropriation – Conversion to some use other than that intended for.

Wanyama B. N. 125
Fraud – Misrepresentation of facts with the intension to cheat.

19.5 Inventory Management

The main pre-occupation of inventory management is inventory control, concerned with making optimum decisions with respect
to variables which are subject to control.

19.5.1 Reasons for Holding Stocks

The important reasons of inventory or holding stocks in a material flow system can be summarized as follows:

(a) To ensure that sufficient goods are available to meet anticipated demand.
(b) To absorb variations in demand and production.
(c) To provide a buffer between production processes. This is applicable to work-in-progress stocks which effectively
decouple operations.
(d) To take advantage of bulk purchasing discounts.
(e) To meet possible shortages in the future.
(f) To absorb seasonal fluctuations in wage demand.
(g) To enable production processes to flow smoothly and efficiently.
(h) As a necessary part of the production process, e.g. the manufacturer of beer, whisky, etc.
(i) As deliberate investment policy particularly in times of inflation or possible shortages.

19.5.2 Evils of Excess Inventory

(a) Essential though they are, inventories also mean lock up capital which could be invested in more profitable operations
(b) Excess inventory adds to the cost of carrying the inventory, more store space, equipment, personnel, insurance, taxes,
pilferage, etc.
(c) Excess inventory invites risk of deterioration and obsolescence.
(d) Changes in the prices of inventory materials sometimes go unfavorable.
(e) Maintenance of cost money.

19.5.3 Classification of Inventory

For ease of management, inventories are conveniently classified into four types;

1. Production Inventories - These are raw materials, parts and components used in the manufacture of products.
2. MRO Inventories-Maintenance, repair and operating supplies which are consumed in the production process but which
do not form a part of the product (often known as consumables), e.g. gas, tools etc.
3. Work-in progress (W.I.P) inventories-Also called in-process inventories, are semi-finished goods and materials, sub-
assemblies, etc, held between manufacturing stages.
4. Finished goods Inventories-completed products ready for shipment, i.e. sale or distribution.

19.6 Inventory Control

This may be defined as planning, ordering and scheduling of materials used in the manufacturing process.

19.6.1 Objectives of Inventory Control

The overall objective of inventory control is to maintain stock levels so that the combined total costs are kept to a minimum. This
is done by establishing two factors when to order and how many to order.

19.6.2 Stock Costs

Stock represents an investment by the organization. As with any other investment, the costs of handling stock must be related to
the benefits to be gained. To do this effectively the costs must be identified. There are four categories of these costs; cost of
holding stock, costs of obtaining stock, stock out costs, and the cost of the stock itself.

Wanyama B. N. 126
19.6.3 Costs of Holding Stock
These costs are also known as carrying costs and include:

1. Interest on the capital invested in the stock.

2. Storage charges (rent, lighting, heating, refrigeration, air conditioning, etc).
3. Stores staffing, equipments maintenance and running costs.
4. Handling costs.
5. Audit, stocktaking or perpetual inventory costs
6. Insurance, security.
7. Deterioration and obsolescence
8. Pilferage, vermin damage.

19.6.4 Costs of Obtaining Stock

These costs are also called ordering or procurement costs, and include:

1. The clerical and administrative costs associated with the purchasing, accounting and goods received departments.
2. Transport costs
3. Where goods are manufactured internally (internal ordering), the setup and tooling costs associated with each
production run.

19.6.5 Stock out Costs

These are costs associated with running out of stock. The avoidance of this cost is the basic reason why stocks are held in the
first instance. They include:

1. Lost contribution through lost sale caused by the stock out.

2. Loss of future sales because customers go elsewhere.
3. Loss of customer goodwill.
4. Cost of production stoppages caused by stock outs of W.I.P. or raw materials.
5. Labour frustration over stoppages.

19.6.6 Costs of Stock

These costs are the buying-in prices or the direct costs of production. These costs need to be considered when:-

1. Discounts are available for bulk purchases.

2. Savings in production costs are possible with longer batch runs.

19.6.7 Inventory Control Terminology

The following are brief definitions of common inventory control terms:
Lead or Procurement time-The period of time, expressed in days, weeks, months, etc between ordering (either internally or
externally) and replenishment, i.e. when the goods are available for use.
Demand-The amount required by sales, production, etc, usually expressed as a rate of demand per week, month, etc. estimates
of rate of demand during the lead time are critical factors in inventory control systems.
Economic Ordering Quantity (EOQ) or Economic Batch Quantity (EBQ) – This is a calculated ordering quantity which
minimizes the balance between inventory holding costs and re-order costs.
Physical stock -The number of items in stock at a given time.
Free stock-Physical stock plus outstanding replenishment orders minus unfulfilled requirements.
Buffer stock or Minimum stock or Safety stock - A stock allowance to cover errors in forecasting the lead time and the
demand during the lead time.
Maximum stock - A stock level selected as the maximum desirable, which is used as an indicator to show when stocks have
risen too high.
Re-order level -The level of stock at which a further replenishment order should be placed. The re-order level is dependent
upon the lead time and the demand during the lead time.

Wanyama B. N. 127
Re-order quantity -The quantity of the replenishment order. In some types of inventory control systems this is the EOQ, but in
some other systems a different value is used.

19.6.8 Procurement and Consumption Cycle

A simplified procurement and consumption cycle is shown in the fig. 20.1 below, in which the following assumptions are made:
Regular rates of demand; fixed lead time, and replenishment in one batch.

Reorder level
_
1000 (700 units)
Slopes indicate
anticipated rates
of demand
_
800
Average
Stock level

Maximum
600 _
Reorder quantity
(usually EOQ) in
this case
600 units
_
400

200 _ Lead time

(5 weeks)
Safety stock
_
_
_

_
_
_

_
_

_
_

_
_

0 _
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Time in weeks

Fig 19.1

Notes on this graph

1. It can be seen from this illustration that the safety stock is needed to cope with periods of maximum demand during the
lead time.
2. The lead time as shown is 5 weeks, the safety stock 200 units, and the re-order quantity 600 units.
3. With constant rates of demand, as shown, the average stock is the safety stock plus half re-order quantity. i.e. average
stock is

200 + ½ (600) = 500 units

19.6.9 Types of Control Systems

There are two basic types of systems controlling inventories; the two-bin system and the perpetual inventory control system

1. Two-Bin Inventory Control System

This system is also called Fixed Order Quantity System or Re-order level system. The name two-bin is derived from a method of
operating the system whereby stock is segregated into two bins. Stock is initially drawn from the first bin and a replenishment
order issued when it becomes empty.
Its characteristics are:

(a) The design of the system recognizes that each item possesses its own unique optimum order quantity and therefore
sets a predetermined re-order level for each item.
(b) When the stock order falls to re-order level, replenishment order is issued.
(c) The replenishment order is the EOQ.
(d) Most organizations operating the re-order level system maintain stock records with calculated re-order levels which
trigger off the required replenishment order.

Advantages
(a) Lower stocks on average
(b) Items are ordered in economic quantities via the EOQ calculation.
(c) Somewhat more responsive to fluctuations in demand.
(d) Automatic generation of a replenishment order at the appropriate time by comparison of stock level against re-order
level.
(e) Appropriate for widely differing types of inventory within the same firm.

Wanyama B. N. 128
Disadvantages
(a) Many items may reach re-order level at the same time, thus overloading the re-ordering system.
(b) Items come up for re-ordering in a random fashion so that there is no set sequence.
(c) In certain circumstances (e.g. variable demand, ordering costs, etc) the EOQ calculation may not be accurate.

2. Perpetual Inventory Control System

This system is also called periodic review system, cyclical ordering system or constant cycle system. It is a time based system
which involves periodic reviews of the stock level of all inventory items. The system has the following characteristics:

(a) Stock levels for all items are reviewed at fixed intervals e.g. every fortnight.
(b) Where necessary a replenishment order is issued.
(c) The quantity of the replenishment order is not a previously calculated EOQ, but is based on; the likely demand until the
next review, the preset stock level and the lead time.
(d) The replenishment order quantity seeks to bring stocks up to a pre-determined level.
(e) The effect of the system is to order variable quantities at fixed intervals as opposed to two bin system where fixed
quantities are ordered at variable intervals.

Advantages
(a) All stocks are reviewed periodically so that there is more chance of obsolete items being eliminated.
(b) Economics in placing orders may be gained by spreading the purchasing office load more evenly.
(c) Larger quantity discounts may be obtained when a range of stock items are ordered at the same time from a supplier.
(d) Because orders will always be in the same sequence, there may be production economies due to more efficient
production planning being possible and lower set up costs.

Disadvantages
(a) In general larger stocks are required as re-order quantities must take account of the period between reviews as well as
lead time.
(b) Re-order quantities are not at the optimum level of a correctly calculated EOQ.
(c) Less responsive to changes in consumption. If the rate of usage change shortly after a review, a stock out may well
occur before the next review.
(d) Unless demands are reasonably consistent, it is difficult to set appropriate periods for review.

19.6.10 Economic Order Quantity (EOQ)

As already defined, EOQ is the ordering quantity which minimizes the balance of cost between inventory holding costs and re-
order costs.
To be able to calculate a basic EOQ certain assumptions are made:

(a) That there is a known, constant stockholding cost;

(b) That there is a known constant ordering cost;
(c) That rates of demand are known;
(d) That there is a known, constant price per unit;
(e) That replenishment is made instantaneously, i.e. the whole batch is delivered at once;
(f) No stock outs allowed;

EOQ for a given item is then found either by calculation or by graphical means.
The following formula is used in the calculation method:

EOQ = 2.Co.D
Cc

Where Co = Ordering cost per order

D = Demand per annum
Cc = Carrying cost per item per annum

Wanyama B. N. 129
Example
A company uses 50,000 widgets per annum which are Sh 1,000/= each to purchase. The ordering and handling costs are
Shs.15, 000 per order and carrying costs are 15% per annum. Find the Economic order quantity for this item.
Solution:

(a) By calculation (using formula)

Co = Shs 15,000
D = 50,000 widgets
Cc = Shs1, 000 X 15%
= Shs150 per widget

EOQ = 2x15, 000x50, 000

150

= 3,162 widgets

(b) By graphical means

Three graphs are essential to determine the EOQ; Total cost, Stock holding cost and Ordering cost graphs. The EOQ is at the
point where total cost is minimum, and is minimum when Stock holding cost = Ordering cost.
The following calculations are therefore necessary:

Where Total costs p.a. = Ordering Cost p.a. + Carrying Cost p.a.

Ordering Cost p.a. = No. of orders x shs 150 and

The No. of orders = Annual Demand

Order Quantity

(e.g. if the order quantity was 2,000 widgets,

The No. of orders = 50,000 = 25

2,000

And ordering cost p.a. = 25 x shs 150 = shs 3,750)

And carrying cost p.a. = Average stock level x Carrying cost/ widget in stock
And cost of carrying a widget in stock = shs 10 x 15% = shs1.50 p.a.

And the average stock = Order Quantity

2
e.g. if the order quantity is 2,000, carrying costs p.a. = 2,000 x shs 1.50 = shs 1,500)
2

Based on the above principles, table 19.1 gives the costs for various quantities.

Order quantity Average no. of Annual ordering Average Stock holding cost Total cost
orders p.a. cost stock p.a.
N X = 50,000 AC0 = X x £150 N/2 Cc = n/2 x £1.50 ACo + Cc
n
shs shs shs shs
1,000 50 7,500 500 750 8,250
2,000 25 3,750 1,000 1,500 5,250
3,000 16²⁄3 2,500 1,500 2,250 4,750
4,000 12½ 1,875 2,000 3,000 4,875
5,000 10 1,500 2,500 3,750 5,250
6,000 8¹⁄3 1,250 3,000 4,500 5,750

Wanyama B. N. 130
Table: 19.1

10,000 _
.
8,000 _ .

_
6,000 .Total cost
Costs

. . . .
_
.
Stock holding
4,000 . cost

.
2,000 _ . . . Ordering cost
_

0 1,000 2,000 3,000 4,000 5,000 _

6,000
EOQ
Order size
Fig 19.2

It can be seen from the graph that the EOQ is about 3,200 widgets, which is very close to that obtained by calculation.

Some notes can be made about the two methods:

(a) The closest value obtainable from the graph is approximately 3,200 which is very close to the calculated figure.
(b) It is easier and faster to use the calculation method in the examination than the graphical method.

Practice Question
Over the course of each year Kengele Company Limited purchases a large number of wooden pallets for use in the storage and
transportation of its products to replace those lost or damaged in transit. The average yearly requirement for the past two years
has been 3,000 pallets, a quantity which can be applied realistically to this year as well. The need for replacement pallets is
relatively constant and the cost associated with the placing and receipt of an order is shs. 1,000. The inventory cost policy that
Kengele has traditionally employed is to charge 18% of the purchase cost as the annual inventory holding cost for any item in
inventory. The standard price charged by the major manufacturing company is shs 800 per pallet.

Required

(a) Determine the optimum order quantity and the consequent time between the orders.
(b) Describe the assumptions you have made in part (a) and assess their likely validity within the context of this question.

Wanyama B. N. 131
 Section 3

THE

BUSINESS ENVIRONMENT

AND

ECONOMICS

Wanyama B. N. 132
20 ECONOMICS

20.1 Introduction
Economics is a social science.
In economics we study that part of human activity according to which individuals co-operate with each other to satisfy their basic
wants like food, clothing, accommodation etc.

Various economists have advanced different definitions of economics.

20.1.1 Adams Smith

Economics is a study of causes of the wealth of nations.

20.1.2 Alfred Marshall

Economics is a study of mankind in ordinary business of life. It examines that part of individual and social action which is most
closely connected with the attainment and the use of material requisite of well being.

20.1.3 Criticisms of Marshall by Robbins

1. It is incomplete because he said economics relates to material requirements only. We have immaterial wants which are
also important.
2. It is unscientific because welfare is the main objective of his definition and yet welfare cannot be measured.
3. Our concern should be with real facts of human life not with welfare as such.

20.1.4 Robbins Definition (1933)

Economics is a science which studies human behaviour as a relationship between ends and scarce means which have
alternative uses.

20.1.5 Characteristics of Robbins Definitions

(i) Unlimited wants.
(ii) Limited or scarce resources.
(iii) Alternative uses of resources.
(iv) Different importance of wants.

Economic problems arise due to the above reasons as spelt out by Robbins.

The main objective of economic activity is to allocate the scarce resources in such a way that maximum satisfaction may be
achieved.
The scarcity of resources is the subject matter of economics.

20.2 Scope of Economics

1. Is economics the study of man as an individual or as a member of society?
2. Is economics a science or an art?
3. How is economics related with other social sciences?

These questions help us to determine the limits under which different problems can be discussed in economics.

20.2.1 As regards question one

Economics is the study of man as a member of society not as an individual. We study how men co-operate with each other to
satisfy their basic wants. The importance of a farmer is due to the reason that he produces food grains for others, etc.

Wanyama B. N. 133
20.2.2 Science
Science is the sum of all facts found correct after experience and analysis about aspects of nature.
There are two types of science; Positive science which describes how circumstances occur, and normative science which
states how circumstances should occur.

20.2.3 Art
Art means to utilize the facts of science for practical purposes.

20.2.4 Economics is a Science and an Art

1. Economics is a science because it is the sum of all those facts found correct after experience regarding the allocation of
scarce means to unlimited ends e.g. law of demand, law of diminishing utility, etc.
2. It is a positive science because it describes how the economic facts occur e.g. when we talk of unemployment of a country
or high population growth rate, it is a positive aspect.
3. It is normative when it states how economic circumstances should occur e.g. when we say that there should be no
unemployment or population growth rate should be lower.
4. When definite measures are adopted to remove unemployment or to check the rise in population then economics becomes
an art.
5. It is closely connected with other Social Sciences, Political Science, History, Sociology, Ethics etc, because problems of
these sciences affect economic conditions of a country.
6. Economic factors also affect the political, social and historical situations and moral values of any country.

20.3 Economic Laws

Facts of economics found to be correct are known as economic laws.
Economic Laws are the statements of scientific truth regarding the allocation of scarce means to unlimited ends like law of
demand.
They are general in characteristics.
They are based on reality but have certain limitations.
They apply only under special circumstances.

20.3.1 Positive Economic Analysis

It is analysis of changes in economic policy or conditions seeks to predict the impact of the change on such observable
phenomena as Production, Purchases, Prices or Income. It makes statement of the ―if…then‖… variety that may then be
supported or refuted by comparison with available facts and figures.

1. Represents a prediction that could be verified.

2. Positive analysis makes no judgment concerning whether an outcome is good or bad.

20.3.2 Normative Economic Analysis

It is used to evaluate the desirability of alternative outcomes according to underlying value judgments.

1. It can be used to make recommendations regarding what ought to be done.

2. It prescribes remedies in the form of government policy to correct results of market interaction when those results are not in
accordance with the underlying criteria.
3. Normative statements make recommendations when they say this or that should be done e.g. Policies that impede
interaction in trade should be eliminated, this advocates free trade.
4. A normative statement cannot be rejected by facts. It embodies a prescription rather than a prediction.

20.4 Economic Terms

20.4.1 Wealth
This is the stock of goods and services in the country. In economics, wealth means those goods that have the following

Wanyama B. N. 134
qualities:

1. Utility
2. Scarcity
3. Money value
4. Capability of being transferred

20.4.2 Types of Wealth

1. Personal Wealth-Owned by an individual, e.g. cloths, furniture, radio, motor car, etc.
2. Business Wealth-This consists of business assets such as factory premises, plant and machinery, furniture, etc.

3. Social Wealth-Things that are owned by the community and are used for the benefit of the whole community e.g. roads,
dams, airports, schools, hospitals, etc.

20.4.3 Goods
A ‗good‘ is anything that can satisfy a human want and has exchange value. It may be a commodity (such as bread, milk, etc) or
service (such as that of a doctor, teacher etc)

1. Free goods – Have no exchange value e.g. air. They have utility but no value.
2. Economic goods – Are goods that are scarce when compared to human wants and human effort is required to obtain
them. They have therefore to be paid for e.g. food and clothes.
3. Consumer goods-Satisfy a want directly e.g. pen, book or soda. They are for immediate consumption and do not require
further processing. They are also called goods of the first order because they satisfy wants directly.
4. Producer Goods-Help in the production of consumers‘ goods also referred to as capital goods, e.g. machinery, factory
buildings and workshops, raw materials, means of transport, etc.

20.4.4 Perishable and Durable Goods

Durable goods give service for a longer time e.g. buildings, furniture.
Perishable goods are those whose capacity to satisfy human need will end after consumption e.g. foods.

20.4.5 Material and Non Material Goods

Material – These are things we can touch e.g. clothes
Non-Material – Non- touchable e.g. services rendered by a Doctor.

20.5 Opportunity Cost

The opportunity cost of a commodity is the next best alternative sacrifice made in order to obtain that commodity. e.g. If a firm is
using its own capital to the value of sh.10,000 and this capital could be lent out at 10% rate of interest, then shs. 1,000 could be
earned. But the firm will not be able to earn this shs.1,000 p.a due to use of this amount into own business, so this shs. 1 ,000 is
opportunity cost.

20.6 Utility
Amount of satisfaction to be derived from a commodity or service at a particular time e.g. utility of bread is satisfaction after
consuming it, and that of a Doctor is getting healed after treatment. It is also said to be that quality of a commodity whic h
satisfies any human want or is the ability of a commodity to satisfy a particular want.

20.7 Scarcity
This means that a commodity is available but is less than the total requirements. It should be noted that the main cause of
economic problems is the scarcity of resources at the disposal of human beings e.g. time, wealth, money etc. A commodity is
considered scarce when it is limited in supply e.g. production of food may be in hundreds and thousands of tones but it is sc arce
because it is less than the total requirements.

Wanyama B. N. 135
20.8 Choice
This is the preference given to those wants/needs that have greater importance. These wants should be fulfilled first before the
lesser ones can be considered.

20.9 Wants
These are human desires, e.g. desires to get better quality of food, more cloths, large houses, new model cars, etc.

20.9.1 Characteristics of Human Wants

1. Human wants are unlimited-It is not possible to satisfy human wants because once one want is satisfied another one is
raised, etc.
2. Human wants are competitive-Wants are alternative. It is possible to satisfy a given want through the use of substitute
goods e.g. tea or coffee, chicken or meat. It depends on taste and pocket.
3. Human wants are complementary-Sometimes two commodities are used together to satisfy a particular want e.g. car and
petrol or diesel are used together to provide the service of transportation.
4. Human wants vary in intensity and urgency-Some wants are more urgent than others e.g. if a person has some money
and he is hungry and also needs new clothes, he or she will buy food first because hunger is more intense and urgent than
new clothing.
5. Particular wants recur-Some human wants satisfied once are felt again and again e.g. the desire for food and new clothes
will arise again and again.

20.9.2 Types of Human Wants

There are two types:

1. Basic wants
2. Secondary wants.

20.9.3 Basic Wants

They are those wants which are essential for human existence e.g. food, clothing and shelter.
They can be sub-divided into three:-

(i) Necessities for existence

They are those things that are necessary for survival and without them a person can die i.e. food, shelter and clothing.
(ii) Conventional Necessities
These are those things that are done due to traditions e.g. weddings.
(iii) Necessities for Efficiency
They help to work efficiently e.g. dust coat for a technician, a car for a businessman etc.

20.9.4 Secondary Wants

These are those things that improve the standards of living for human beings. They can be divided into two:

1. Comforts
These are things that make life more comfortable e.g. TV, radio etc.
2. Luxuries
They enhance prestige and social position or status e.g. very expensive cars, big houses.

20.10 Economic System

It is that institutional arrangement where human and natural resources of a country are used together to produce goods and
services.
Economic systems may be of three kinds or classes:

1. Centrally Controlled (Command) Economy

Wanyama B. N. 136
They are also referred to as planned economies. The central government plays a very important role in the economy. The
government decides what to produce where to produce and how to produce its products. This situation was prevalent is Western
Europe before the break up of the Soviet Union. Nowadays it is found in China, Burma and North Korea. The most essential
factors of production are owned by the government. The citizens can only use these factors or production through the co-
operatives. The government makes a detailed plan of production. The main objective of a command economy is to ensure
equitable distribution of income and wealth.

Advantages
1. Ensures that there is equal distribution of resources and employment.
2. Government ensures that everybody is involved.

Disadvantages
1. There is no economic freedom.
2. Individuals are seen as machines.

2. Free Enterprise or Market Economy

There is private ownership of resources. Decisions regarding production of commodities are made according to the forces of
demand and supply. The major motive behind economic activity is self interest. Suppliers are seeking to maximize profit,
consumers seek to maximize benefits. There is freedom of choice and there is a lot of competition.

Main defects of Market Economy

1. There is unfair distribution of income and wealth.
2. There is unemployment
3. Instability of prices of commodities
4. Causes too much self interest

Advantage
There is freedom to own your property

3. Mixed Economy
These are economies that have a mixture of the features of the market and command economies. Most of the mixed economies
are a product of market forces. Government attempts to remove the bad features of a market economy. Some resources are
owned by individuals and some by the government. Decisions are made partly by the government e.g. land and schools. Most
economies of the world are mixed.

Wanyama B. N. 137
21 DEMAND
It is the quantity of any commodity that a consumer is willing to buy and able to buy for a given price for a specific period.

When prices rise demand falls and when the prices fall demand rises.

21.1 Law of Demand

It states that other factors remaining constant if there is an increase in price, there will be corresponding decrease in demand. It
is referred to as contraction of demand. It also states that other factors remaining constant if there is a decrease in pric e, there
will be corresponding increase in demand and we refer to this increase as extension of demand.

21.1.1 Demand Schedule

Demand schedule is a list of different prices of a commodity and corresponding demand at these prices.
______________________________________
Price Demand
(shs) (Units)_
50 10
45 20
40 30
35 40
30 50
25 60
20 70____

Table 21.1 Demand Schedule

21.1.2 Demand Curve

It is a geometrical representation of the demand schedule. A normal demand curve slopes downwards from left to right.

D
50
DE
40 MA
ND
CU
30 RV
Price

E
20
D
10

0 10 20 30 40 50 60 70
Demand

Fig 21.1 Demand Curve

21.1.3 Assumptions of the Law of Demand

(a) The income of the consumer is assumed to remain constant
If the income of the consumer increases at the same time as the price of the commodity, there will be no change and
therefore the law of demand will not apply.
(b) The tastes and preferences of individuals
There should be no change in the taste and preferences of the individuals because if taste and preference of any consumer
changes at the same time as the price of the commodity, the law of demand will not apply.
(c) Prices of substitute commodities remain constant
There should be no change in the prices of substitute commodities. If the prices of any substitute commodity changes, the
law of demand will not apply.

Wanyama B. N. 138
(d) Further expected changes in price
If any other change is expected in the price of any commodity the law of demand will not apply. This is because people will
not buy immediately there is a small decrease in price. They will wait until the prices drop to the lowest level possible before
they buy.
(e) New inventions
New and good inventions must not be invented. If new goods are invented, in that case, in spite of a fall in the price of that
commodity, demand will not increase.

21.2 Extension and Contraction of Demand

Extension of demand means an increase in demand due to fall in price.
Contraction of demand means decrease in demand due to increase in price.

Consider the demand schedule of Table 21.2 from which extension and contraction of demand is shown in Fig 21.2:

Price 6 5 3 2 1
Demand 10 20 30 40 60

Table 21.2
C d
on em
tr a
ac n

6
tio d
n
of

4
Price (shs)

E de
xt m
en a

3
si n d
on
of

2
1

0 10 20 30 40 50 60
Demand

Fig 21.2 Extension and Contraction of Demand

21.3 Rise and fall in Demand

These occur due to other factors other than price. Rise in demand occurs when either price remaining the same demand
increases or at a higher price, demand remains the same (i.e. x to y, or z to y respectively). Similarly, fall in demand occurs
when either price remaining the same, demand decreases or at a lower price, demand remains the same (i.e. y to x or y to z
respectively). This is explained in the graph of Fig 21.3.

X Y
P1
Price

P2 Z

D1 D2
Demand

Fig 21.3-Rise and Fall in Demand

Wanyama B. N. 139
21.4 Factors of Change in Demand
(a) Change in Fashion and Tastes
If there is a change in fashion and taste of any commodity then demand will increase even though there is no change in
price. If the commodity goes out of fashion, then demand will fall even if there is no change in price.
(b) Change in Income
If the income of a consumer increases, his purchasing power increases and therefore demand will increase. If the income
of a consumer decreases, purchasing power will decrease and demand will therefore decrease.
(c) Change in Price of Substitute Commodities
Demand for any commodity may change due to change in price of any substitute commodity. For example, if price of coffee
rises, demand for tea may increase.
(d) Change in Population
If there is an increase in population demand is high and when there is a decrease in population demand will be low.
(e) Change in Wealth
If wealth distribution is inequitable, few people will have purchasing power and demand will fall. If wealth is evenly
distributed, many people will have purchasing power and therefore demand will rise.
(f) Economic Conditions
When there is economic prosperity in the country demand will be greater and during depression demand will be lower.

21.5 Abnormal Demand

When the demand curve has a negative gradient, i.e. when it rises from left to right or drops from right to left, it is said to be
abnormal. This has two causes:

21.5.1 Speculative Buying

If it is anticipated that prices may rise in future there will be rapid rise in demand of a certain commodity even when the price is
high to warrant such purchase.

21.5.2 Giffen Goods

These are inferior quality goods. This is when people resort to buy inferior quality goods usually in small quantities because of
lower price e.g. if people used to chicken resort to beef because the price of meat has fallen, then beef is a giffen good.

21.6 Types of Demand

(a) Joint Demand
Also called complementary demand or interrelated demand, it means that two commodities are used together to satisfy a
particular need, e.g. pen and ink, car and petrol etc.
(b) Competitive Demand
This is demand for goods which are close substitutes e.g. demand for coffee and tea. Tea and coffee compete for
consumers and it is due to this competition that we refer to their demand as being competitive.
(c) Composite Demand
This is demand for a commodity that has got many uses e.g. steel can be used to make spoons, motor vehicles, ships,
bridges and is also used in the construction industry. The total demand for steel for all those purposes is the composite
demand.
(d) Derived Demand
This is demand for a commodity that is used to make other commodities e.g. cotton is used to make cloth which is used to
make dresses for people to wear. The demand for cotton is therefore derived since we don‘t use it directly but use
something made from it.

21.7 Elasticity of Demand

This means the responsiveness of demand due to changes in price. It also means the ratio at which demand changes due to
change in price.

Wanyama B. N. 140
21.7.1 21.7.1 Types of Elasticity of Demand
1. Less Elastic demand
Refers to situation where a large change in price leads to a less than proportionate change in demand. From Fig 21.4,
when there is a large change in price from P1 to P2 the contraction in demand from Q1 to Q2 is very small, i.e. when the slope
is ΔP/ΔD is very big.

D
P2
Price (shs)

P1
D

0 Q2 Q1
Quantity (units)

Fig 21.4 - Less Elastic demand

2. More Elastic Demand

This refers to a situation where a very small change in price leads to a very big change in demand. From Fig 21.5, when
price changes from P1 to P2 there is a very big change in demand from Q1 to Q2 i.e. ΔP/ΔD is very small.

D
P2
Price (shs)

P1 D

0 Q2 Q1
Quantity (units)

Fig 21.5 – More Elastic Demand

3. Inelastic Demand
This refers to a situation where there is a change in price but no change in demand. In real life, this is applied in utilities like
electricity and water. Inelastic demand is shown in Fig 21.6.

D
Price (shs)

D
0 Quantity (units)

Fig 21.6 – Inelastic Demand

4. Elastic Demand
This refers to a situation where there is continuous demand at the same price. In real life this is not possible since the
prices of commodities will always change.

Wanyama B. N. 141
 D D
Price (shs)

0 Quantity (units)

Fig 21.7 – Elastic Demand

21.7.2 Factors of Elasticity of Demand

There are several factors which determine the elasticity of demand.

(a) Demand for necessities of life

For necessities of life, demand is less elastic. This is because the commodities will still be purchased whatever the price
may be e.g. maize flour, sugar and salt which must be purchased so long as people need to eat.
(b) Demand for luxuries
The demand for luxuries is more elastic because a little change in price level, leads to a more disproportionate change in
demand. It may lead to a fall in demand as they are unnecessary and cost a lot of money, e.g. music systems and
cameras.
(c) Demand for substitute goods
Commodities which have substitutes are more elastic in demand e.g. when the price of coffee rises demand for coffee will
decrease as more people are likely to go for tea and vice versa.
(d) Demand for goods having several uses
Commodities which have different applications have more elastic demand. This is because if the commodity becomes
expensive its use can be prioritized for more urgent needs, which decreases its demand e.g. use of fuel can be curbed by
organizing a movement schedule for vehicles instead of workers using them at their freewill.
(e) Demand for goods whose use can be postponed
Demand for goods whose use can be postponed is more elastic e.g. cement. If cement becomes too expensive some
people may postpone construction of houses until the price of cement goes down.
(f) Price Level
Some commodities are bought even if their price level is very high e.g. buses and lorries. Their demand is less elastic.

21.7.3 Measurement of Elasticity of Demand

Elasticity of Demand (ED) = Δq/q ’ Δp/p
Where,

Δq/q = Change in demand = New Demand – Initial Demand

Δp/p = Change in price = New price – Initial price
q = Initial demand
p = Initial price

Example
Mangoes are sold at shs 4. At this price demand is 5 units. If the price increases to shs 6 demand contracts to 3 units. Find the
elasticity of demand.

ED = Δq/q ’ Δp/p = 3 - 5 ÷ 6 - 4 = -2/5 ÷ 2/4 = -0.4/0.5 = - 0.8

5 4

Elasticity of demand is always negative. This is because there is an inverse relationship between price and demand.

21.7.4 Types of Elasticity of Demand

There are four types of elasticity of demand:

Wanyama B. N. 142
1. Price Elasticity
It means the responsiveness of demand to a change in price level. Price elasticity is measured by the formula.

EP = Proportionate change in demand = Δq/q

Proportionate change in price Δp/p,

Which is similar to example 1.

2. Income Elasticity
It refers to responsiveness of demand to changes in income

EI = Change in demand ÷ Change in income = Δq/q

Demand Income ΔIn/In

where,
ΔIn/In = change in income = New income – Initial income

Example
A consumer has an income of sh.10, 000. At this income demand is 10 units. If the consumer income increases to shs.12, 000
demand increases to 12 units. Find the income elasticity.

EI = 12 – 10 ÷ 12,000 – 10,000 = 2 x 10,000 = 1

10 10,000 10 2,000

NB – Income elasticity is always positive. This is because an increase in income leads to an increase in demand. Therefore, we
have direct proportionality.

3. Cross Elasticity
It refers to the ratio at which demand for any commodity changes due to a change in price of a substitute commodity. It is
measured by the formula.

EC = Proportionate change in demand for a commodity

Proportionate change in the price of a close substitute

Example
The price of coffee is sh.10; at this price the demand for tea is 12 units. If the price of coffee increases to shs.12 and demand for
tea increases to 14 units;

EC = change in demand for tea ÷ change in price for coffee

Initial demand for tea Initial price for coffee

= 14-12 ÷ 12 – 10 = 2 x 10 = 0.83
12 10 12 2

4. Complementary or joint elasticity

Where goods have joint demand like for pens and ink, the fall in the price of pens is likely to increase the demand for ink. The
ratio at which demand for ink increases due to fall in the price of pens is what is known as joint or complementary elasticity.

21.7.5 Importance of the Concept of Elasticity

1. To the consumer
The consumer has to know the elasticity of commodities. This is because he spends most of his income on commodities
with less elastic demand. These commodities with less demand are also the necessities of life e.g. food and clothing.
2. To the Monopolist
He has to know which commodities have less elastic demand and which ones have more elastic demand. This is because
he can increase the prices of commodities with less elastic demand without loss of sales while he tries to keep the prices of
commodities with more elastic demand constant.

Wanyama B. N. 143
3. Balance of Payments
This is the difference between exports and imports. The government tries to make the balance of payments positive by
reducing the price of exports especially those exports with more elastic demand thereby stimulating demand by other
countries and increasing taxes on imports especially those with more elastic demand so as to make them expensive and
therefore reduce their demand which in turn lessens their imports. This results in more foreign currency in the country.
4. To the Government (Taxation)
When imposing taxes, the government needs to know which commodities have less elastic demand so that when taxing,
more revenue will be generated.

Wanyama B. N. 144
22 SUPPLY
It means the quantity of any commodity which is taken to the market at a specific price and specific time period.

22.1 Law of Supply

It states that other factors remaining constant when price rises, supply increases and when price falls supply decreases.

The law of supply can well be explained by the graph below, which is based on the linear equation, y = a + bx, and has a positive
gradient as shown in Fig 22.1

e
C u rv
ply
Price

p
Su

Supply

Fig. 22.1-Supply curve

22.1.1 Assumptions of Law of Supply (Factors of Change in Supply)

The law of supply is subject to the following conditions (factors) which are assumed unchanged.

(a) Cost of Production

When the cost of production of any commodity rises supply falls because less people would be willing to buy and vice
versa.
(b) Climatic Situation
At given times climate favours production of certain commodities and supply rises e.g. agricultural produce during rain
seasons, blankets and warm jackets during cold weather.
(c) Improved Methods of Production
If new and less expensive methods of production are invented, supply rises, otherwise old and less efficient methods lead to
less output and fall in supply.
(d) Development of Infrastructure
If methods of transport and communications are adequate and well developed, it becomes possible to move commodities
from one place to another and therefore increase supply.
(e) Peace and Security
When there is peace and security, production is encouraged and therefore supply is bound to rise unlike when there lacks
peace and security which discourages production and therefore supply falls.
(f) Government Policies
When government imposes restrictions on movement of certain commodities like it used to be on cereals, supply falls and
vice versa.
(g) Rate of Taxation
If the rate of taxation is increased, the cost of production increases and supply falls and vice versa.

22.2 Types of Supply

1. Joint Supply
This means the supply of those goods that are produced together or have a common process of production e.g. mutton and
wool, all from sheep; diesel, petrol, and paraffin, all produced by fractional distillation from crude oil.
2. Composite Supply
This refers to supply of substitute goods such as tea and coffee, Pepsi Cola and Coca Cola, etc
3. Competitive Supply

Wanyama B. N. 145
 This refers to alternative use of factors of production such as agricultural land where, if more land is used to produce
bananas than coffee, then the supply of bananas increases while that of coffee decreases.

22.3 Extension and Contraction of Supply

These are the changes in supply due to changes in price levels. Extension is when supply increases due to increase in price
level and contraction is when supply decreases due to decrease in price level. Consider the supply curve in Fig. 22.2 in which
the supply was initially at S. The change in supply from S to S 1 constitutes a contraction in supply while the change in supply
from S to S2 constitutes an extension in supply.

of
ion
te ns ly
Ex supp
f S2
no
Price

r a ctio S
nt ply
C o su p
S1

Supply

Fig 22.3-Extension and Contraction of Supply

22.4 Rise and Fall in Supply

Rise in supply refers to increase in supply due to some factors other than price i.e. price remaining constant. The supply curve
shifts to the right from SS to S1S1 as shown in the fig. 22.4. Conversely, fall in supply refers to decrease in supply due to some
factors other than price i.e. price remaining constant. The supply curve shifts to the left from SS to S2S2 as shown in fig. 22.5.

S2
S
S1 S
P P
Price

Price

S2
S
S1 S

Q1 Q2 Q2 Q1
Supply Supply

Fig.22.4-Rise in Supply Fig.22.5-Fall in Supply

22.5 Abnormal Supply Curves

Supply curves normally move upwards from left to right. In some exceptional cases however, the supply curve moves from left
to right downwards. It means when price rises supply decreases and vice versa. Such a curve is said to be an abnormal curve.

22.6 Elasticity of Supply

Elasticity of supply means the ratio at which rate of supply changes with rate of change in price level. When due to a small rate
of change in price, there is a more proportionate rate of change in supply the supply is said to be more elastic and when a b ig
rate of change in price leads to a less proportionate change in supply, the supply is said to be less elastic. Figs 22.6 and 22.7
can help explain the concept of elasticity of supply.

Wanyama B. N. 146
 S
P2 S
P2
Price

Price
P1
P1 S

Q1 Q2 Q1 Q2
Supply Supply

Fig 22.6-Less Elastic Supply Fig 22.7-More Elastic Supply

22.6.1 Measurement of Elasticity of Supply

Elasticity of supply Es
= Proportionate change in supply = S2 – S1 ÷ P1 –P2 = ΔS ÷ ΔP
Proportionate change in Price S1 P1 S P

Example
The price of mangoes is shs.5 and at this price 15 units are supplied. If the price rises to shs.12 supply increases to 30 u nits.
Find elasticity of supply.

Solution
Es = ΔS/S ÷ ΔP/P = 30 – 15 ÷ 12 – 5 = 5/7
15 5

22.6.2 Factors of Elasticity of Supply

(a) Nature of Commodity

Those commodities which are durable and can be kept for a long time have a more elastic supply e.g. shoes and cloths.
Perishable commodities like meat, milk and fruits have a less elastic supply since they cannot be stored.
(b) Cost if Production
If the cost of production is high, commodities will have less elastic supply. Those commodities which have a low cost of
production have a more elastic supply.
(c) Time
Those commodities which are produced in a short period of time have a more elastic supply. Those commodities which
take a longer time to produce have a less elastic supply.
(d) Methods of Production
Those commodities that have a simpler method of production have a more elastic supply. If the method of production is
complicated, the goods have a less elastic supply.
(e) Law of Returns
If returns on investment are high, many people will venture into a business and the supply of commodities will be more
elastic. If the returns on investment are low, few people will venture into the market therefore supply will be less elastic.

22.7 Price Determination

Forces of demand and supply determine Price of any commodity
Price is determined at that point where demand and supply are equal. The price at which demand and supply are equal is
known as the Equilibrium Price. The quantity sold at that equilibrium price is known as the Equilibrium Output. This is
illustrated in Fig 22.8, where Ep is equilibrium price and Eo/p is equilibrium output.

Wanyama B. N. 147
 D

y
em

pl
up
an

S
d
Price

Ep

Eo/p
Units of output

Fig 22.8-Price Determination Curve

22.7.1 Working of the price mechanism

If a price is higher than the original price then supply will exceed demand & there will be a surplus in the market. Due to the
surplus, there is competition between suppliers and this forces price down back to equilibrium price. If the price is less than
equilibrium, demand will exceed supply and there will be a shortage. Due to shortage there will be competition between the
buyers and this will force price back to the equilibrium.

Wanyama B. N. 148
23 MARKET STRUCTURES
It is a place where buyers and sellers come together to make transactions. The market involves a region or area within which
buyers and sellers of a commodity are present and relate to each other in such a way that only one price of any commodity
prevails in the region.

23.1 Essentials of a Market

To qualify as a market, the following factors must apply.
1. There should exist commodities
2. There should be presence of buyers and sellers
3. The market should be situated in some area/region.
4. There should be contact between buyers and sellers.

23.2 Functions of a Market

1. To facilitate Transactions
A market makes it easier for buyers and sellers to interact. The buyers can then buy the commodities that they want from the
suppliers.
2. Outlet of products
A market serves as outlet for products from various manufacturers. Suppliers bring their goods to the market where they are
able to sell them.
3. Sources of Supply
A market serves as a source of supply of goods and services and offers choice to the buyers.
4. Contact between buyers and sellers
By enabling sellers and buyers to interact the market provides an occasion for buyers and sellers to establish contacts with one
another.
5. Price stability
The market helps establish price stability for a certain period of time. This is because the forces of supply and demand interac t
so that there is equilibrium price Ep.
6. Increasing production
A market helps firms increase production since it is easier to know when demand is greater for a given product.

23.3 Types of Markets

Markets are classified according to time, place, commodity and competition.

23.3.1 Based on time

1. Day to day market
This is where prices of commodities are determined during each day according to demand and supply conditions for that day.
2. Short period market
This is where prices are determined within a period of six months i.e. according to existing capacity after which capacity is likely
to change.
3. Long period market
This is a market where prices are determined for a long run demand and supply conditions of one year or more after which
capacity is expected to change.

23.3.2 Based on place

1. Local Market
This is a market where the products sold are produced within the location of the market.
2. National Market
It is where products are purchased and sold throughout the country.
3. International Market

Wanyama B. N. 149
This is where products are purchased and sold in many countries in the world. This is achieved by working with dealers in other
countries, opening braches there or by e-commerce as is the case today.

23.3.3 Based on Commodity

1. General Market
This is a place where a variety of products are purchased and sold.
2. Specific Market
It is a place where a specific product is purchased and sold.
3. Grading Market
When in some place a commodity is purchased according to its grade, it is called a grading market.

23.3.4 Based on Competition

On the basis of competition, a market may have perfect competition (i.e. level playing field) or imperfect competition when some
sellers and buyers have some factors tilted in their favour .

1. Perfect Competition
It is characterized by the following factors:
(a) There should be a large number of buyers and sellers to prevent influencing of price levels
(b) There should be homogeneity, i.e. the products should be of uniform nature and quality.
(c) There should be free entry or exit of new or existing firms so that all firms can earn normal profit.
(d) Buyers and sellers should have perfect knowledge about the market situation to prevent the selling and buying at
different prices.
(e) There should be free movement (without restriction) of goods, capital and labour to areas of greater demand and
therefore more productive.

2. Imperfect Market
In the absence of the above conditions, imperfect competition exists. The following levels of imperfect competition may prevail:

(a) Oligopoly
It occurs where there are few firms in the market.
Pure oligopoly is where the sellers sell the same products e.g. petroleum products and differential oligopoly is where there are a
few sellers in the market whose products are of different quality.

(b) Duopoly
This is where there are only two firms in a market. Duopoly can also be pure or differential.

(c) Monopoly
There are two types of monopoly:

(i) When there is a large number of sellers with unidentical products, though serving same purpose, then monopolistic
competition exists. The buyer‘s choice of what to buy and the price he pays then depends on advertisement propaganda.
Such is the case with detergents and toothpastes.

The main features/characteristics of this type of monopolistic competition are:

1. There are many sellers
2. The products of different sellers are different in quality
3. Advertisement plays an important role to increase the sales of a firm

(ii) This is that situation in the market where one firm controls the whole supply of any commodity and there is no close
substitute e.g. KPLC and electrical energy.

Main Features of this type of Monopoly:

1. There is only one producer or supplier.
2. The commodity produced by the monopolist has no close substitute.

Wanyama B. N. 150
23.3.5 Foundations of Monopoly Power
1. Ignorance
2. Legal prohibition of new entrants
3. Indivisibilities – soda ash
4. Patents, copyrights and trade marks
5. Government procurement procedures
6. Natural circumstances

23.3.6 Artificial Monopolies

These are created through agreement of existing producers. They may merge and come together.

Advantages of Monopoly
1. Monopoly can afford to research and develop products.
2. They help to provide some services more smoothly and efficiently e.g. water supply
3. Monopoly can help a firm obtain economies of scale
4. Large firms are not physically restricted if their aim is to expand

Disadvantages of Monopoly
1. They charge too high prices for their products which affect the welfare of the consumers.
2. Monopoly does not take any interest to improve a quality of his or her product.
1 The level of output is too low and this results in decrease in production and increase in unemployment.
2 A monopoly can use his or her own powers to restrict entry of new firms which discourages competition.

23.4 Extent of a Market

Market products can be wide or limited. The extent of a market is determined by:-

1. Nature of Commodity
If the product is durable the market is wide. If the product is perishable the market is small.
2. The Extent of Demand
The greater the demand for a given commodity the wider the market and vice-versa.
3. Peace and Security
When peace and security prevails, the products are bought in large quantity thus the market becomes wide.
4. Means of Transport and Communication
If means of transport and communication are developed then it will be possible to move commodities from one place to another
place more easily so the market will be wider and vice versa.
5. Policy of the Government
If restrictions are imposed by the Government on movement of commodities then the market will be limited and vice versa.
6. Banking and Monetary System
If the banking and monetary system of a country is more stable then transactions will be facilitated and the market will be wider.
7. Grading
If any commodity is divided into different grades the market will be wider because individuals will be definite about the quality of
any particular grade.

Wanyama B. N. 151
24 PRODUCTION
It is an activity that results in the creation of goods and services for the satisfaction of human wants. It is also the process of
creating utility and wealth.

24.1 Direct Production

It means production of goods and services by an individual for his own consumption e.g. if a farmer plants maize and uses it as
food.

24.2 Indirect Production

This is the production of goods and services for sale to another person.

24.3 Levels of Production

1. Primary Production
It is the first stage of production. It consists of the extracting industries like mining, fishing and farming. The output at this stage
is raw materials.
2. Secondary Production
This is the second stage of production. Raw materials from primary production are used as the input of secondary production.
e.g cotton produced in primary production is used in the textile industries to produce cloth which is then used to make garme nts.
Secondary production consists of:-

(i) Manufacturing industries

(ii) Constructive industries

3. Tertiary Production
It is the third stage of production. It consists of commercial and direct services. Commercial services refer to the servic es of
wholesalers, retailers, bankers, insurance, advertising, warehousing and transport.
Direct services refer to the services of doctors, lawyers and teachers.

24.4 Factors of Production

There are four main factors of production:
1. Land
2. Capital
3. Labour
4. Organization

24.4.1 Land
It means all those factors/resources given free by nature. e.g. soil, minerals, rivers, lakes and the oceans.
Land has the following main features:

1 It the basic factor of production. This is because no production can take place unless land is available.
2 Its supply is limited
3 It is not mobile
4 Fertility of different pieces of land varies.
5 Productivity of land can be increased by use of more labour and capital
6 The price for land is rent and royalty.

24.4.2 Labour
It is the physical and mental effort used in production.

Features of Labour:

Wanyama B. N. 152
1 Labour cannot be stored e.g. labour spent idling cannot be recovered.
2 Labour cannot be separated from the labourer.
3 The price of labour is wages and salaries.
4 The bargaining power of a labourer is weak.

24.4.3 Efficiency of Labour

It means the quality of any commodity produced by a labourer. If a labourer produces greater quantity and superior quality and
less wastage of raw material she will be more efficient. If a labourer produces smaller quantity, inferior quantity and waste raw
materials he will be less efficient.

24.4.4 Factors of Efficiency of Labour

1 Mental abilities and physical strength
2 Social services
3 Working conditions
4 Wage level
5 Education and training
6 Supply of proper equipment and tools

24.5 Mobility of Labour

This is the movement of labourers from one place to another or from one profession to another.

24.5.1 Types of Mobility

1. Geographical Mobility
It means the movement of labourers from one place to another place.
2. Occupational Mobility
It means the movement of labourers from one occupation to another.
3. Horizontal Mobility
It means the movement of labourers from one job in an organization to another job of the same grade in a different
organization.
4. Vertical Mobility
It means the movement of labourers from a low grade to a senior grade through promotion.

24.6 Division of Labour

It means division of a particular job into smaller parts and giving each part to separate labourers.

Advantages of Division of Labour

1 Greater production due to specialization

2 Greater efficiency due to repetition; each worker becomes more efficient with passage of time.
3 Economy of tools. One labourer needs one set of tools to complete his task
4 Saves time. This is because each worker knows what he is supposed to do when to do it and how to do it.

Disadvantages of Division of Labour

1. There is nonotony-repetition of tasks can be boring and the boredom can lead to laziness and loss of morale.
2. Greater risk of unemployment-A labourer specializes in one small part of work therefore if there is depression in the
industry; the labourer becomes unemployed since he cannot do any other work.
3. Lack of responsibility-one job is done by many workers and therefore it is difficult to find the person responsible for a bad
job.

Wanyama B. N. 153
24.7 Demand for Labour
It means the number of people which a firm or organization is willing to employ or engage in production. Given the price of the
labour, demand for labour is derived demand or it is a function of goods and services which are needed by the consumer. This
means that the demand for labour depends on the demand for the goods and services which labour is needed to produced.

The higher the wage rate the higher the cost of production. Determinants of demand for labour are:

1. Demand for the Goods and Services

How fast the goods are going leads to high production and the demand for labour will be high
2. State of Technology:
(a) Labour intensive techniques means more labourers will be employed compared to capital
(b) Capital intensive techniques means more capital is used compared to labour.
3. Favorable Investment Opportunities
This will promote the demand for labour because of its positive effect on the size of production enterprises in an economy.
4. Wage Rate Demand
Labour is affected by wage rate; if the wage rate is low then the cost of production in terms of labour will be low and the u se
of labour in production will be considered cost effective and the demand for labour will be high.
5. Climatic Condition
In agriculture sector for example if the climate is favourable the demand for labour will be high.
6. Government Policies
The government intervenes into the labour market through formulation and implementing employment policies depending on
the effect it has on entrepreneurs and enterprises
7. Income of Consumers
If the level of income of consumers influences the demand for labour through its effect on both the production of labour and
level of savings in the economy (the purchasing power of consumers), saving level determines the level of demand of
labour.
8. Efficiency of Labour
If labour is more efficient compared to the other factors of production then more labour will be employed. Low efficiency
means that the use of labour is more uneconomical i.e it will be more uneconomical to use labour.
9. Economic Performance
Performance of any economy is a significant determinant of labour. Poor economic performance – low effective demand
and limited expansion of production enterprises, leads to a decline in demand for labour.
10. Organization Performance
The ability of a given enterprise to employ labour depends on its performance. If an enterprise is competitive depending on
techniques of production and other factors of determining its production then demand for labour will be high. A poorly
performing enterprise may not be able to sustain its increased labour cost given its poor liquidity of cash position.

24.8 The supply of Labour

The supply of labour is the quantity of labour that individuals or households may be willing to offer at a given wage rate within a
specified period of time.

24.8.1 Factors Affecting the Supply of Labour

1. Wage Rate
When it is high most people are willing to offer their services because of the high returns for services. Low wages
discourage the provision of labour services.
2. Government Policy
Policy may affect wage revolution, labour mobility and organization of workers. Supply of labour can also be affected by
movement of labourers.
3. Strong and Militant Trade Union
This can interfere with supply of labour e.g. by withholding labour during strikes.
4. Taxation
If taxation is high, it discourages supply of labour.
5. Age Policies
Restriction of age affects supply of labour. Employment age is restricted by the government.

Wanyama B. N. 154
6. Mobility of Labour
Movement from one location to another or movement across geographical areas affects supply of labour.
7. Tastes of Preference
Subjective preferences held by labourers such as prejudice of jobs to be taken, period of working etc, affect supply of
labour.
8. Level of Education and Training
The stock of skills and knowledge possessed by labour; generally high level of education and training enable labour force
participants to have the necessary skill to perform a given task confidently.
9. Length of Schooling
Has a direct effect on supply of labour in that the longer the period of education, the lower the supply of labour.
10. Population Size and Structure
This will affect the supply of labour by impacting directly on the number of participants in the labour market. A high death
rate may reduce the high supply of labour by affecting the active section of the work force.

24.9 Capital
It means all those man made goods used to make consumer goods e.g. machines and tools. Capital is also referred to as
producer goods. Capital increases productivity of land and labour. Capital could also refer to the resources available in the
business e.g. raw materials. The payment of capital is interest.

24.9.1 Forms of Capital

1 Private Capital
This is capital that is owned wholly/partially by an individual and earns him income, e.g. a posho mill, a photo-copy machine,
etc
2 Public Capital
This is capital owned by the community e.g. schools, hospitals and roads
3 Fixed Capital
It refers to machinery, buildings and other equipment used in production. It is permanent and durable in nature and is
capable of being used over and over again.
4 Circulating Capital
It consists of raw materials used in production. It is only used once and exhausted in the process.
5 Working Capital
It is the money which the businessman has in hand to buy raw materials, pay wages and other expenses.
6 Sunk Capital
This is specialized form of capital. It cannot be easily adapted for alternative use, e.g an icing plant which produces ice only
and a folk lift which is only used to lift solid and heavy things in factories and yards.
7 Floating Capital
This is capital that can be used for a number of purposes e.g. fuel or money could be used for many purposes.

24.9.2 Accumulation of Capital

This means rapid increase in the number of capital goods, i.e. those goods helpful for further production. Capital formation
depends on savings, which in turn depends on:
1. Power to save
2. Will to save

24.10 Organization or Entrepreneurship

Organization means to combine the three factors of production i.e. land, labour and capital. The person who organizes the
business is known as the organizer/manager.
Person who undertakes the production is called the entrepreneur.
The reward for the services of an entrepreneur is profit.

Wanyama B. N. 155
24.10.1 Functions of the Organizer
The organizer is the person who supervises the whole process of production. He brings together land, labour and capital. He is
paid by the entrepreneur and therefore his reward is salary. Thus his functions can be summed into two:
1. To acquire the services of land, labour and capital
2. To supervise the whole process of production.

24.10.2 Functions of the Entrepreneur

The entrepreneur is the risk bearer or person who is responsible for the profit and loss of the enterprise. His functions are:
1. To start the business
2 To employ land, labour and capital
3. To look after production
4. Sell the product in the market
5. Pay the price of land, labour and capital
6. To take responsibility for profit and loss.

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25 MONEY
Money is anything which is generally acceptable as a medium of exchange and acts at the same time as a measure of value and
store of value. It is a means of settling debts. It consists of all claims held by individuals, banks, the government and the public.
Money is a means and not an end in itself. It‘s a medium of exchange. It measures the value of goods and services. After
acquiring a product you store its value in terms of money e.g. a car, cloth, T.V etc

25.1 Characteristics of Money

1. Money has to be acceptable by the society as a medium of exchange.
2. Money is portable and convenient to carry (contains greater value in small quantities)
3. Money should be divisible to meet all kinds of needs and without loss of value.
4. Homogeneity-Money should have the same value regardless of the material it is made from e.g. the five shilling coin
and the notes.
5. Durability-Money should be durable. Materials used should not perish in a short period and should withstand rough
and continuous handling.
6. Money should be scarce. Wants should be more than money so that people should struggle to get it.
7. Money should be stable in value to win people‘s confidence.
8. Money should be easy to recognize whether it is proper money or not – size, texture, line.
9. Money should be malleable i.e. cheap to manufacture and to write.

25.2 Functions of Money

1. It is a medium of exchange used to make transactions i.e. people can sell their goods to get money or use money to
purchase goods and services.
2. Measures value - prices of goods are indicated in terms of money.
3. Money is a store of value - commodities which cannot be kept for a long time can be stored in terms of money.
4. Money is a standard of deferred payment – used to make future transactions i.e. credit transactions.
5. Money is used in transfer of immovable properties e.g. houses and land.

25.3 Types of Money

Money can be classified into various categories as shown in fig. 25.1.

Types of money

Paper money Metallic money

Convertible Inconvertible Standard Token

paper money paper money Coins Coins

Credit money Legal money

or Bank money
(acceptible on confidence only)

Limited legal Unlimited legal

money (coins) money
Fig. 25.1-Types of money

Standard coins are metallic money whose metallic value and the value of the denomination is the same, while a token coil is one
whose face value is greater than its metallic value. Paper money is convertible if it can be converted into gold, otherwise it is
unconvertible (as is the case with today‘s money)

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The currency notes and coins used by a given country are called its Legal Tender, while checks, credit cards etc are not Lega l
Tender. Currency notes can be used to make transactions up to any limit and are therefore called unlimited legal money while
coins are limited legal money because they are used to make small transactions only such as to buy bread.

25.4 Money Supply

This consists of notes, coins and bank deposits.

We need money because of the following reasons:

1. To make day to day transactions such as pay for power, food, shelter, water etc.
2. For speculative needs such as entertainment, transport, business and bride prize.
3. As precaution against accidentals such as medical.

25.5 Transactions
This is where one needs money to meet day to day requirements. It is for the convenience of ordinary transactions e.g. food,
clothes, entertainment
Money kept for these transactions depends on the following:
1. Size of income
2. The standard of living. The higher the standard of living the higher the money spent.
3. Time interval between each day – the longer the interval the more you require.

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26 BANKING
A bank is an institution that does the following:

1. Accept deposits either in current or fixed savings accounts.

2. Safeguard the money deposited.
3. Makes it available to its true owners
4. Advances loans to clients.
5. Transfer of money such as on standing orders.
6. Sell shares on behalf of companies.

26.1 Types of Banks

1. Central bank
2. Commercial bank
3. Savings bank
4. Cooperative bank
5. Development bank

26.1.1 Savings Bank

Encourages low income individuals by accepting small deposits and paying some interests as well as offering limited withdrawal
facilities e.g. Post Bank whose objective is to encourage the small income earner to save as much as possible.

26.1.2 Commercial Bank

Offers a wide range of services and are owned by shareholders and is also known as a joint stock bank. They are run like joint
stock companies, purposely started to earn profits.

26.1.3 Merchant bank

These are banks set up to serve industry. They take deposits and lend out in large amounts called ―wholesale banking‖, they
guarantee the eventual payment of bills called ―acceptance‖ and give management advice to the industries. They also issue
acknowledgement of deposits received in which they state interest rates and date of payment (called certificates of deposit).
Finally they buy bills of exchange at a discount, being repaid when the bill matures (called bill discounting)

26.1.4 Cooperative Banks

Used to serve co-operative societies.

26.1.5 Central Bank

It is a government institution established to control, guide and assist the commercial banking services to the government
(financial advice)
It is responsible for the economic stability and economic soundness of any country. Its main objective is to maintain economic
stability while earning profit is a secondary objective.

26.1.6 Functions of a Central Bank

1. Currency issue
It issues currency i.e. has currency issuing authority in a country. It prints notes and mints coins. Ensures the right quantity
of money is in circulation.
2. Bankers to the Government
a) Receives deposits on behalf of the government.
b) It advances loans either on short or long term period.
c) Sells treasury bills to the public.
d) Arranges national and foreign loans on behalf of the government.

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3. Lender to the Government
Provides the government with necessary funds against securities. Acts as the government agent for raising loans by the
sale of government securities to the public. The central bank manages the public debt i.e. any money due by the
government to its people.
4. Advisor to the Government
Advises on the best way to raise short-term finance for government projects and on ways and means of controlling inflation
in the country. Gives advice to the ministry responsible for financial affairs.
5. Exchange Control
These are measures taken by the government to control and restrict the outflow of money to other countries. Gives
permission to commercial banks to effect payment abroad and sell foreign currency. Compiles statistics about balance of
payment positions from the periodic reports from commercial banks.
6. Bankers to International Agencies
Provides banking facilities to international financial bodies such as IMF with whom their respective governments have
dealings. Deals with other central banks regarding their countries‘ transactions with other countries.
7. Bank to Commercial Banks
Commercial banks have accounts in central bank to enable them to settle any debt arising from issuing of cheques by their
customers to the clients of other banks in the country. They instruct the central banks to make an appropriate entry in the
accounts.
8. Control of Commercial Banks
Advises commercial banks on government monetary policies of any changes on them. They are briefed on roles to play in
the accomplishment of objectives set by the government. Receives periodic reports on the dealings and deposits held by
commercial banks. Gives guidance to commercial banks on matters as opening new branches, planning, etc.
9. Lender to Last Resort
Comes to aid of commercial banks when they have insufficient funds to render services to borrowers.

26.1.7 Bank Rate

It is the rate of interest charged by a central bank on any short-term loans it may advance. Declares bank rates after considering
factors like supply of money, demand for loans.

26.1.8 Credit Control

This is ensuring that the right quantity of money is in circulation.

26.2 Commercial Banks

These are profit making financial institutions. They are banks established to earn profit from interest earned from getting loans.

26.2.1 Functions of Commercial Banks

1. They receive deposits either in current accounts, savings accounts or fixed deposit accounts.
2. Advance loans in the following way:
I. Through overdrafts (temporary loans) paid after a few days.
II. Discount of bills of exchange. A bill matures after 90 days.
III. Through direct loan, they will give loans against security.

2. They act as agents of the stock exchange market.

3. Commercial banks are custodians of valuable items e.g. jewellery, diamonds, silver and valuable documents.
4. Transferring money from one town to another.
5. Commercial bank can act as referee for clients.
6. Banks offer advice on tax matters. They assist businessmen in solving financial problems.
7. Commercial bank acts as trustees.
8. Commercial banks offer mobile services i.e. act as mobile banks.

Advantages of Commercial Banks

1. They assist in development of trade and industry through loans.

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 2. They contribute to increase in capital accumulation inducing individuals to save by offering a reasonable interest on
deposit.
3. Commercial banks increase the rate of economic growth by loan, promoting agriculture and industry.

Disadvantages
1. Discrimination against low-income earners.
2. Discrimination in lending by requiring collateral which may not be affordable by the disadvantaged.
3. Excessive caution and high liquidity.
4. Wasteful competition
5. They lack control of credit supply either to individual or to sectors or to different geographical areas.

26.3 None Bank Financial Intermediaries and Specialized Financial Institution

Institution involved in collection of savings e.g. the post banks caters for small savers with low income who don‘t have access to
commercial banks.

26.3.1 Building Societies

These collect savings of mainly middle-income households. Their share capital deposits are repayable at a fixed nominal
monetary value at short notice and even at demand. They advance loans e.g. HFCK, East Africa building Society, Pioneer
building Society, Saving and Loan Kenya Societies, etc.

26.3.2 Hire Purchase Finance Company

They provide finance to enable business enterprises to buy fixed assets on hire purchase basis.

26.3.3 Insurance Companies

Pension funds e.g. N.H.I.F and N.S.S.F.

26.4 Types of Accounts

1. Savings Account
It has the following requirements:

1. A minimum deposit is required. This amount varies from bank to a bank.

2. A minimum is required at all times when one withdraws.
3. Interest is given to only those accounts that have the required balance.
4. Ledger fee is charged at all times
5. Depositing can be done at all times.
6. Limited withdrawal
7. Cheque book facilities are not given.
8. When opening the account one needs not to be introduced in the bank provided he has the minimum deposit,
identification card, passport, signature etc.
9. Overdraft facilities are not given

2. Current Accounts
It has the following requirements:
1. Minimum deposit required
2. No minimum balance required
3. No interest is earned
4. Cheque book facilities are given
5. They offer various means of payment
6. One needs to be introduced to the bank by a client to the bank and by his employer on opening the account. This is an
assurance against loan default.
7. One is required to have a minimum deposit which is slightly higher than that of the savings accounts, passport
identification card and signature which must appear on all the cheques signed by him
8. Overdraft facilities

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 9. A small ledger fee is paid to the bank on monthly basis to take care of the transactions that take place during the
month.
10. Money can be deposited anytime
11. Money can be withdrawn anytime
12. No interest is offered

3. Fixed Deposit Account

1. It is opened by those with large sums of money and have no intention of using the money in the near future, hence,
they keep the money in the bank for a specified period of time for an interest to be paid on this account.
2. No more depositing after the first deposit
3. Withdrawing is done after expiry of the stated period of time but if need arises to require the money, one can notify the
bank of his intentions to withdraw the money and forego one months interest.

26.5 Cheques
A cheque is a written order by the account owner, requesting the bank to transfer his funds to the account of the person named
on the cheque.

26.5.1 Types of Cheques

1. Open cheque
Payable across the counter. Two types of open cheque are – order cheque and bearer cheque.
2. Order cheque
Has a name on it. It is payable to the named person though he can transfer by endorsing on it.
3. Bearer cheque
No name on it. Payable to the person who presents it across the counter.
4. Crossed cheque
Not payable across the counter. The crossings are an instruction that it should be deposited into a bank account.

26.5.2 Types of Check Crossings

1. A cheque with two parallel lines and no writings. This instructs that it should be
deposited into a bank.
2. Two parallel lines with Co. It has no meaning.
3. Two parallel lines with the words not negotiable.
4. Two parallel lines with the words ―accounts payee only‖. Instructs the cheque should be deposited into the account of the
payee only.
5. Two parallel lines ―accounts payee only, Machakos Branch‘‘. Special way of crossing. The cheque is only payable to that
particular bank.
6. Two parallel lines not exceeding shs.200,000. Mostly used in offices sot that petty cash can be obtained easily.

26.5.3 Parties to a Cheque

1. Drawer – signs the cheque
2. Drawee – The person named in the cheque
3. Payee – Person to receive payment
4. Endorsing a cheque – Transferring ones right to receive money to someone else by signing behind it.
5. Endorser – The person who transfers the right
6. Endorsee – The one who receives the transfer
7. Collector bank – Collects money from the other bank on behalf of his clients.

26.5.4 Reasons Why a Bank can Dishonour a Cheque

1. If the drawer has no sufficient funds
2. If the drawer has requested the bank not to honour any cheque
3. If the amount in words differ with the amount in figures.
4. If the accounts holder is dead
5. If he has become mad/bankrupt

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6. If the cheque is stale
7. If the cheque is postdated.

26.6 Credit Transfer

It is a document that is used to settle a number of debts, especially by businessmen. He only needs to prepare a list of the
people he wants to be paid, specify the amount to be paid against each, total the amount and pay the total by one cheque to his
account

26.7 Standing Orders

It is an instruction to a bank to pay a specified sum of money to a named person on a regular and a specified period or thus the
arrangement is cancelled. Banks charge a small fee for this service.

26.8 Bank Draft

It is a cheque drawn on a bank and is more readily acceptable as the bank guarantees payment against it. A bank will issue the
draft only after it has received money from the person requesting it.

26.9 Traveller’s Cheque

They are cheques issued by the bank in fixed denominations to a person who pays for them in advance. People who travel a lot
use them.

26.10 Credit Cards

They are issued by banks or other organizations. They give the holder the authority to buy goods at shops designated by the
agreed maximum. The bill is then issued to the organization and then the organization bills out the card holder and either asks
for prompt cash or in instalments in which case interest is charged on unpaid monthly balances.

26.11 Clearing House

It is a place where different bank representatives meet to clear debts that accrue to each other as a result of their clients ‘
transactions.

26.12 Credit Creation

One source of income to a bank is the interest it charges on money lent by it to businessmen who are in need of financial
assistance and are prepared to provide financial security.

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27 INTERNATIONAL TRADE
This is trade between two countries. It involves physical transfer of goods from one country to another. Purchase of goods from
another country is called import. A sale of goods to another country is called export.

27.1 Bi-lateral and Multi-lateral Trade

Bi-lateral trade means a country has a great part of her foreign trade with only one country. Multi-lateral trade means a country
trades with a number of countries, buying from some and selling to others.

Advantages of International Trade

1. It enables a country get what she cannot produce herself.
2. It enables a country to dispose off her surplus goods.
3. It affords the citizens of a country a greater variety of goods.
4. It enables citizens to specialize in fields which they have the greatest advantages over others.
5. It leads to a certain degree of dependence of one country on another.
6. It promotes healthy competition among local & foreign producers.
7. At times of calamities e.g. food, droughts, supplies may be obtained swiftly from other countries.
8. It promotes international understanding among people of different nations.

Disadvantages of International Trade

1. Too much specialization often leads to problems. Price fluctuation and unexpected fall in demand of such commodities may
cause severe hardships to a country.
2. If a country exports mainly raw materials of a mineral nature and spends all her efforts on extraction of such minerals at th e
expense of other industries, it may soon run out of its deposits.
3. Goods imported from more developed countries often pose a threat to local industries.
4. Some of the goods imported may have adverse effects on the citizens of a country e.g. cheap detective and romantic
literature and also harmful drugs.
5. If a country depends on a particular country for an imported commodity it may sometimes have to tolerate some undesirable
gestures from such a country.

27.2 Restrictions on International Trade

The following steps are usually taken to control imports:

1. Imposing heavy import duties: A government levies a tax called import duty on any goods imported.
2. Fixing Import quotas: A country may decide upon the maximum quantity of certain goods to be imported in a given period,
e.g. sugar.
3. Total ban: A government may ban import of particular type of goods.

27.3 Improving Exports

This is done by providing incentives.
The following incentives are provided:

1. Export compensation – An exporter from Kenya is entitled to claim a certain percentage of the value of his exports from
the government. This means that he can afford to charge less for his goods to importers therefore making his products
more attractive to them.
2. Customs Drawbacks: If a manufacturer imports a raw material and pays customs duty on it, such customs duty may be
fully/partially refunded to him by the government if he exports the finished goods.
3. Government Agencies: Governments have set up agencies to help their exporters find new markets for their products. It
arranges exhibitions in foreign countries, provides useful information and education to local businessmen by organizing
seminars and assist them by providing in certain cases, export credit guarantees.

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27.4 Visible and Invisible Trade
Visible trade consists of import and export goods.
Invisible trade refers to the exchange of services between nations.

27.5 Balance of Trade

It is the difference between the visible imports and visible exports or a country. If a country exports more goods than she imports
during a year she would have favourable balance of trade. If her imports exceed her exports it will have unfavourable balance of
trade.

27.6 Balance of Payments

This is the difference between receipts and payments for both visible and invisible exports. If receipts exceed payments, it is a
favourable balance of payments. If payments exceed receipts it is an unfavourable balance of payments.

A country may invest money in other countries by either loaning money or establishing industries there. Such expenditure is
termed as capital expenditure and any difference between such receipts and payments is called the balance of payment on
capital account. The difference between receipts and payments on both current and capital accounts is called the overall
balance of payments.

27.7 Intermediaries in Import Trade

(a) Import Merchant: These are traders who buy goods from abroad in their own names and sell them locally. Their profits
consist of the difference between the cost and selling price of goods imported. They resemble wholesalers.
(b) Import Commission agents: These are people who import goods at overseas seller‘s risk and are paid on a commission
basis. They are sent consignments by overseas sellers and they use their knowledge of the local market conditions in
disposing of the consignment at best prices. They deduct their commission from proceeds of sale and remit the difference.
They do not take any risks and if goods remain unsold, they can return them at the exporter‘s expense.
(c) Import brokers: These are people who do not buy or sell goods themselves but arrange deals between buyers and sellers.
They possess export knowledge of technical details and offer their services to importers for a ―brokerage‖ which is a
commission calculated as a percentage of the cost of goods bought through them.

27.8 Channels of Export Trade in East Africa

There are three such channels:
1. Selling from East Africa
2. Selling from an overseas office
3. Selling by overseas agents.

27.9 Terms of Sale

(a) Ex-works – The price quoted includes only the cost of goods as they leave the factory (works) and all other expenses are
to be borne by the buyer.
(b) F.O.R (Free on Rail) – Charges for carriage to the nearest railway station from the seller‘s factory are included, but railway
freight is not included.
(c) D.D (Delivered Docks) – Includes the cost of carriage charges to the docks. Docks are places where ships wait for cargo.
(d) F.A.S (Free Alongside Ship) – Includes carriage charges to the docks, dock handling charges and dock dues, but not
loading expenses.
(e) F.O.B. (Free on Board) – Includes all the expenses mentioned above (F.A.S) and loading expenses.
(f) C $ F (Cost and Freight) – Includes all previous costs (F.O.B) and also the shipping freight charges.
(g) C.I.F (Cost, Insurance and Freight) – Includes all expenses mentioned above (C $ F) and also insurance premiums to
cover the goods against marine risks.

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(h) Landed – Includes all costs to the port of destination plus unloading charges.
(i) In bond – Also includes the cost of handling into a bonded warehouse.
(j) Duty paid – In addition to all the above expenses, includes, the payment of any customs duty.
(k) Franco (Free of expenses) – Includes all charges up to and including delivering of the goods to the premises of the buyer.

27.10 Documents in International Trade

(a) Bill of lading: It contains the details of goods loaded into the ship, the terms and conditions under which they have been
accepted by the shipper and the shipping charges. It has three functions:
1. It is a receipt for the goods by the shipper.
2. It is a contract of carriage.
3. It is a document of title to the goods i.e. a person named in this document can claim the goods.

(b) Certificate of origin: It is a document used to enable the customs officer to calculate correctly the customs duty on the
goods.

(c) Indent: It is a request to the agent in the exporting country to place an order on behalf of the importers with the appropriate
exporters.

(d) Proforma Invoice: It resembles an invoice but it does not debit. It may be sent when payment is expected before delivery.

(e) Freight Note: It‘s drawn by the shipping company and indicates the charge for shipping the goods.

(f) Letter of Credit: This is a means by which an importer obtains credit and the exporter gets an assurance of payment of
amount due to him. Briefly, it works as follows:
The importer asks the exporter to supply goods.
The importer approaches his bank for this purpose
The letter of credit is written by the bank signifying that the issuing bank will pay to the corresponding bank, when the
exporter meets certain conditions.

(g) Consular Invoice: It is an invoice that has been seen and signed by the consulate or embassy of the country to which the
goods are being exported.

(h) Bill of exchange: It is defined as an ―unconditional order in writing, addressed by one person to another, signed by the
person giving it requiring the person to whom it is addressed to pay on demand or at a stated future date a sum of money at
a certain period or to the order of that person or to bearer.

27.11 Bonded Warehouse

It is a warehouse where imported goods are kept pending payment of customs duties. These are managed by government
officials but do not necessarily belong to the government.

27.12 Problems in International Trade

(a) Finding customers is difficult.
(b) Obtaining credit can be difficult.
(c) Possibilities of fraud exist.
(d) There is risk of getting wrong or sub-standard goods.
(e) Fluctuating rates of exchange and prices impact on profits.
(f) Stiff competition at international level.

27.13 Common Market

It consists of countries that have agreed to accord preferential treatment to goods imported from or exported to each other.
Preferential treatment may take any of the following forms:

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Goods imported from a member of a common market country may be charged less customs duty than that charged on goods
imported from other countries.
Duty charged may be lowered on goods imported from a member of a common market country but raised on goods imported
from other countries.

A common market has the obvious object of promoting trade between countries. However the matter does not usually end with a
greater amount of trade being done between the members. Greater trade volume results in greater contacts and better
communication between the members which in turn leads to greater co-operation in other spheres. The European Economic
Community is an example of a common market.

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28 OFFICE ADMINISTRATION

28.1 The Office

This describes any place set aside for work of clerical nature. It serves as the administrative centre of the organization.

28.1.1 Functions of the office

This refers to the activities or operations which the office facilitates for the accomplishment of the office organization goals.

(a) Obtaining Information

Being the centre of communication as an important part of routine work the office receives information from both internal
and external sources and also takes whatever steps necessary to obtain missing or delayed information.
(b) Keeping records and information
This involves keeping records in various books, registers, etc. Other resources are kept in diskettes, flash disks and CDs.
Some of these are statutory or required by law and others for the purpose of control or reference.
(c) Preparing information
This includes simple arrangement of figures or data or original entry before entering them into books and other documents.
It also includes the arrangement or preparation of statistical materials for management decision-making.
(d) Communication
After receiving information and preparing it the office may communicate it to the management, staff or to the outside
world.
(e) Protection
The office assumes responsibility for security and safety of administration records and information. It also handles
important information and provides internal checks to safeguard internal assets.
(f) Administration
It serves as the administration centre, where staffing, budgeting, etc is done.

28.2 Office Layout

This is defined as the practical arrangement of an office. It refers to determination of the space required and details of use of the
space.
This is done in order to provide the best space utilization. It can be in the form of:

1. The internal arrangement of furniture

2. The arrangement of department office and rooms inside it.

28.2.1 Principles of Office Layout

This refers to a set of guidelines which assist the manager in designing as ideal layout of the office.
(a) It requires an ideal layout to allow work and document to flow in definite direction.
(b) Legal requirements – A good office layout should conform to the legal requirements of the society of a country.
(c) Minimum movement – Placement of furniture should be done with minimum movement to prevent their breakages.
(d) Noise reduction –A good office reduces noise to minimum. The rooms should be made sound proof and floors carpeted
(e) Flexibility principles –avoidance of disturbance of ones affair.
(f) Easy office layout – a good office layout should avoid verbal communication to beyond itself.
(g) A good office layout makes supervision easy.
(h) It allows enough lighting.
(i) It should provide security and safety to both staff and equipment.

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(j) It should minimize cost.
(k) Appearance should be attractive in terms of colour of curtains.

28.2.2 Types of Office Layout

(a) Closed Office Layout
It is the most common type of layout in which the office is subdivided into small rooms with each room connected to one
another by a corridor. Each room is meant for one employee and has a separate accessible door.

Advantages
1. Privacy
2. Prestigious
3. Efficiency, i.e. allows high concentration
4. Minimum conflict with other personnel.
5. Easily maintained because if one wants to organize his own office.
6. Security of documents.
7. Enhances accountability and responsibility.
8. Healthy – less disease transmission.
9. There is a sense of responsibility.

Disadvantages
1. Costly maintenance
2. Supervision is impaired
3. Coordination of work may be difficult
4. Increases movement which is time wasting
5. Consultation is hard and takes long
6. Risking eventualities like fire outbreak
7. Inflexibility
8. Kills team work

(b) Open Plan Office Layout

This is a layout in which the office is kept free of any partition. In this arrangement both senior and junior staffs share one
large room.

Advantages
1. Supervision is easy
2. Easy decision making (easy communication)
3. Reduces maintenance costs such as rent and electricity
4. Saves time wasted on movement from one office to another.
5. Easy flow of work.
6. Easy delegation of work
7. Enhances cooperation and team work
8. Enhances sharing of machines and equipment as they can be placed in most suitable position.
9. There is provision of learning from one another.

Disadvantages
1. No maximum confidentiality can be practiced.
2. Disease infection can spread easily.
3. High rate of conflicts.
4. No freedom brings supervision and this may affect maximum output.
5. Commotion in the office which affects concentration.
6. High rate of documents insecurity and no privacy.
7. No sense of responsibility and accountability. It may look like a factory and create impersonal atmosphere and
demotivate employees.
8. Special steps must be taken to reduce noise e.g. telephone discussion etc.
9. Distraction of people moving around.

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 10. Unless fully conditioned the atmosphere may be stuffy.
11. Reduces the status of the seniors in the eyes of the juniors.
12. The room may be large enough and artificial light necessary and this increases costs.
13. Staff personal distances tempered with.

(c) Landscape Office Layout

This office attempts to put together the advantages of open office layout and closed office layout while avoiding their
disadvantages. This is an open office layout but in which green plants and flowers are introduced into the room. It has two
main features:

1. Green plants planted in vases, and strategically placed to create a semblance of partition.
2. Quality floor carpet is fitted in the office

Advantages
1. Improves working environment
2. Allows easy flow of work
3. Enables efficient supervision
4. Eases internal supervision
5. Noise is reduced
6. Its flexible

Disadvantages
1. Space wastage
2. Lacks privacy
3. Expensive in terms of special carpets and flowers

(d) Modified Office Layout

This layout seeks to benefit the advantages of closed type while avoiding its disadvantages. It is closed in that offices are
sub-divided into small rooms and corridors each with its door, but it is partitioned using glass materials so that you can see
through what is happening in the offices without hearing what the others say.
Such layout is convenient in an organization where work is performed individually e.g. in a research station.

(e) Workstation Office Layout

The office is subdivided into small working areas with each area meant for one employee. However, the partitioning is only
half distance high so that from a seated position the employee is hidden but visible when standing. Each work area is a
complete workstation, where an employee‘s working equipment is kept and normally no sharing of office machines.

28.3 Office Orderlies

28.3.1 Responsibilities of a Secretary in an Office
A secretary should posses an advanced level secretarial qualification, be of high professional calibre and posses a wealth of
responsible secretarial experience.

Her duties include:

1. Receiving dictation and transcribing it on the typewriter
2. Undertaking reception duties including receiving and entertaining visitors
3. Handling telephone calls
4. Keeping the employer‘s diary and arranging his appointments and engagements
5. Making travel arrangements and booking hotels
6. Handling correspondence, sorting inward mails, preparation of outward mail and subsequent clearance
7. Filing employer‘s personal and business correspondence
8. Attending meetings and recording minutes
9. Supervising junior secretarial staff
10. Designing visual aids for the office and providing office stationery
11. Relieving the employer of his many routine business and personal matters

Wanyama B. N. 170
28.3.2 A secretary should have the following personal qualities:-
1. Willingness to work
2. Responsible and dependable
3. Should be loyal both to her immediate executive and the business
4. Should have a good and smart appearance, which should be conducive to her working and to those around her
5. Be able to carry out routine tasks on her own and be able to make the arrangements while the executive is away.

28.4 Duties Performed by Other Office Staff

28.4.1 Office Messenger
A messenger is a very important person in organization and should be treated with the same respect that is given to the other
members of the organization.
An office messenger should:-
1. Be a person of general education
2. Have a general knowledge of the organization and the town where the organization operates
3. Have courtesy and a sense of understanding
4. Be able to perform some simple general office routines

His duties are:-

1. Collecting and posting mail
2. Mail distribution within the offices
3. Taking of parcels to the carriers for dispatch
4. Messengerial duties such as collecting files from the registries
5. Helping the receptionist to escort visitors to offices within the building or to another building
6. Training in the routines to include sorting, recording, filing, petty cash records, telephone so as to acquire a good all
round general clerical experience for his future progress
7. Making and serving tea
8. Relieving the telephone operator or filing clerks or reprographic clerk at times of sickness or an emergency

28.4.2 Receptionist
She is the first person that a customer meets in any organization. In many cases she is also the receptionist. She undertakes
the following duties:-

1. Operation of the telephone most likely on the switchboard

2. Receiving and directing visitors to their respective destinations
3. Taking and passing of messages
4. Making, renewing and cancelling appointments
5. Addressing envelopes
6. Supervising messengers
7. Keeping a reliable visitors record book
8. Recording charges for both local and trunk calls and follow up to ensure settlement
9. Dealing with simple petty cash for buying newspaper, magazines etc

A receptionist should have the following characteristics:-

1. Be interested in people
2. Have confidence when greeting people
3. Wear a friendly smile
4. Be considerate
5. Be diplomatic
6. Know the various and most frequent customers by their names
7. Be willing to listen to others and be listened to
8. Be able to operate a paging system for instant communication

Wanyama B. N. 171
28.4.3 Clerical Staff
The clerical staff is graded differently according to qualifications, experience and nature of work.
A clerk should have good general education, share initiative, be neat, reliable and accurate to continue with his education

His duties include:-

1. Handling the mail
2. Filing and indexing
3. Collecting and stapling documents
4. Undertaking simple bookkeeping either in the accounts office or in the cashier‘s office
5. Helping in store keeping or record keeping
6. Recording of credit control records
7. Handling ordering, receipt, storing and issuing of stationery

28.4.4 Accountant
The duties of an accountant include:-
1. Keeping record books
2. Prepares the annual accounts for the firm
3. Responsible for preparation of the payroll, recording the salaries and wages of the employees
4. Controls the creditor‘s account at the firm
5. Maintains the ledger records
6. Receives invoices, prepares the records and appropriate analysis of the accounts

Wanyama B. N. 172
29 FORMS OF BUSINESS ORGANIZATIONS

Businesses are organized in units, which vary in terms of ownership, method of control and size. The
following chart shows at a glance the various classes of business organizations.

FORMS OF BUSINESS
ORGANIZATIONS

PRIVATE SECTOR PUBLIC SECTOR

SOLE PUBLIC LOCAL

COMPANIES PARTNERSHIPS COOPERATIVES PARASTATALS
PROPRIETOR CORPORATIONS AUTHORITIES

PUBLIC ORDINARY PRODUCER

COMPANIES PARTINERSHIPS COOPERATIVES

PRIVATE LIMITED CONSUMER

COMPANIES PARTNERSHIPS COOPERATIVES

TRANSPORTERS
COOPERATIVES

SAVINGS & CREDIT

COOPERATIVES

Fig 29.1

29.1 The Sole Trader

Sole proprietorship means being in business by one-self. A sole trader is usually connected with retailing but may be in service
trades such as a decorator, electrician, plumber, fabricator, barber, lawyer, doctor, accountant etc.

29.1.1 Formation
The main legal requirement of sole proprietorship is that the proprietor should be only one in order to be registered as such.
Usually legal registration is not compulsory and only if one anticipates legal hitches ahead, does it become necessary to reg ister
formally. Otherwise, a majority of sole traders, especially those in very basic forms of trade such as vegetable vendors,
shopkeepers, butchers, bar owners, etc are not registered formally but are licensed to operate by the local authorities within
whose jurisdiction they operate. In order to be registered formally as a sole trader, one needs to apply to the registrar of
companies where the registration will be effected on payment of some nominal fees.

29.1.2 Characteristics of a sole proprietorship

1. The owner is the manager and organizer assisted by members of his family.
2. The owner reaps the profits and bears any losses incurred by the business alone.
3. His/her business liability is unlimited, i.e. there is no distinction between his/her business and personal property, a
significant factor, especially when property has to be attached for payment of debts.
4. The owner is the sole contributor of capital for the business.

29.1.3 The advantages of a sole trader

1. He/she is his/her own boss and runs the business as he/she pleases.
2. The business premises frequently provide living accommodation for the trader‘s family who act as assistants when
necessary.
3. The sole trader is able to manage his/her business in every detail on account of its small size.
4. The sole trader is in personal touch with his/her customers whereas the larger organizations are often impersonal.
Since the business is restricted to a small local area the trader is in a position to know the needs of his customers.
5. A sole trader has an advantage in being local, making customers‘ journeys to the centre of town for daily household
requirements unnecessary.

Wanyama B. N. 173
 6. The sole trader can make on the spot decisions and take charge of the situation much more effectively because he or
she does not need to consult any other party before he or she can make a decision.
7. The owner is independent and so can put his or her plans into action quickly e.g. when there is need to change the
nature of the business to adopt it to the changing market situation.
8. The owner‘s business affairs can remain private as he or she is under no obligation to disclose any profits earned or
capital invested.

29.1.4 The sole trader’s capital structure

The prospective trader will, having estimated his/her initial capital requirements, obtain it from some of the following sources:
1. His/her own savings.
2. The savings of relatives and friends
3. A bank or finance company loan
4. Purchase on credit
5. A loan from a co-operative society or insurance company.

29.1.5 Limitations of the sole trader

1. He or she may lack capital for the development of the business and as a result this places a restriction to the range of
activities that can be undertaken.
2. He or she may not have the foresight to see and take advantage of opportunities that present themselves from time to
time and hence he is unable to extend the business or adopt new methods of working.
3. The sole trader bears all the risks of business. Having made all the decisions, he or she is in turn responsible for all
the debts, whereas in larger forms of organization these risks are shared out among many people. For the purposes of
debt recovery, the sole trader suffers the risk of attachment of business property and if this is not enough, the personal
property of the trader will then be attached and auctioned if money is not forthcoming within a given period of time.
4. The sole trader loses the advantages of specialization since he or she has to perform a large variety of tasks. In the
larger firms, special duties are assigned to specialists. The sole trader, due to economic constraints, cannot make use
of specialists.
5. The sole trader on account of his capital base cannot be able to buy goods on equal terms with the larger
organizations whose orders, on account of their size, enable them to obtain favourable trading terms such as discounts
on bulk purchases.
6. The business of the sole trader may lack continuity. Ultimately, the trader will retire or die and the extent of his or her
personal influence may then be realized. Many sole proprietorships do not survive their founders because the nature
of relationship between them and their business is very personal. In contrast, the larger forms of business organization
are less personal and the loss of one member does not affect control to the same extent.

Most sole trader businesses are operated informally and are not recognized legally. For purposes of financial transactions, the
trader will use his or her personal particulars to effect whatever service he or she may require. For this reason, many sole
traders operate on the fringes of the business world and cannot partake of the larger business cake. To break into the real
business world, it is necessary for the sole trader to evolve into the next stage of business formation.

29.2 Partnership
A partnership is an association of persons who carry on a business for the purpose of making a profit. The formation of a
partnership is a method of expanding the scope of a business, since, the capital may be increased, the management specialized,
the market widened and the sphere of activity broadened.

When a number of persons decide to form a partnership a written agreement is usually drawn up stating the purpose of forming
the business, the amount of capital to be provided by each partner, particulars of the way in which the firm is to be managed and
the division of profits.

29.2.1 Formation of Partnership

Under the partnership act, a partnership can be formed by two or more persons who have agreed to contribute capital to carry
out certain commercial activities with the aim of making profits. Except for banking where the maximum number of partners
permitted is ten and for business firms such as accountants, solicitors, stockbrokers, etc. who may have more than the legal
maximum, the maximum number of partners allowed by the law is twenty members.

Wanyama B. N. 174
29.2.2 Types of Partnerships
There are two distinct types of partnerships:

1. Ordinary or general partnership – all the partners have equal contractual powers and responsibilities. Every partner
may take part in the management of the business, make decisions and contracts binding upon himself/herself and the
other partners, and in so doing is individually liable for the debts of the firm.
2. Limited Partnership – In limited partnerships there must be at least one ordinary partner, who is responsible for all the
debts of the firm, and therefore has greater powers than the limited partners. The limited partners take no part in the
management of the firm and their liability is limited to their capital invested. This type of partnership is a compromise
between the ordinary partnership and the private limited company since it possesses some of the features of each.

29.2.3 Kinds of Partners

There are five categories of partners:

(a) Active or working partner

This is a partner who takes an active part in running and management of the business.

(b) Dormant or sleeping partner

This is a partner who does not take an active part in the running of the business.

(c) Nominal partner

This is a person whose name is used in the business for prestige enhancement of the firm‘s reputation. He/she does not
contribute any capital although he is entitled to the profits and is liable for the firm‘s obligation on unlimited basis. He or she
does not take an active part in the running of the business.

(d) Quasi-partner
A quasi-partner is anyone (whether a former partner or not) who allows himself/herself to be considered by others to be a
partner within the firm. Although not a partner, such a person can nevertheless find himself/herself liable for the debts of the
partnership to anyone who was misled into thinking he or she was a partner.

(e) Partners under the age 18

If all the existing general partners of the firm agree to allow the admission of a minor into the firm, he or she can be taken in
as a partner but there are certain points to be noted in this connection:

a) Minors can only be admitted with the full consent of all the partners
b) A minor shares only profits, not the losses.
c) After every six months he or she has to give a public notice that he/she is still a minor, or has reached the age of
18 years.
d) After every six months he or she has to give a public notice that he/she is still a minor, or has reached the age of
18 years.
e) At the age of maturity, he or she has the option either to continue with the firm or to leave it. If he/she wishes to
continue in the business, he/she becomes liable to share the profits as well as losses.

29.2.4 Partnership Agreement

A partnership agreement can be made either orally or in writing. The law lays no restrictions on an oral agreement. However, a
written agreement is always better than the oral one, and it is better still if it is made formally by deed under seal. Such an
agreement is called a partnership deed. The partnership deed contains the following details:

1. Capital contributed by each partner

2. The ratio in which profits and losses are to be shared
3. The rate of interest to be paid on capital.
4. How much each partner may withdraw monthly.
5. Agreements regarding salaries payable to any partner.
6. The method of calculating the amount of partner‘s shares in the event of death or on retirement.
7. The amount of goodwill to be paid to the retiring partner.

Wanyama B. N. 175
In the absence of any agreement, the following rules can be applied:
1. Every partner can take part in the conducting of the business.
2. In case of any dispute the decision of the majority would be accepted.
3. Any work or contract can only be undertaken or made with the consent of all the partners.
4. All the property of the firm is to be held and used by the partners for the purpose of running the business.
5. The partners would share profits equally.

29.2.5 Registration of the Partnership

The partnership Act provides that a firm of partners can be registered with the registrar of companies personally or through the
post. The statement must be given on the prescribed form and accompanied by the registration fee. The statements should be
signed by all the partners and should contain the following particulars:

1. The name of the firm (as many as possible, in case a suggested name is already being used by another firm)
2. The principal place of the business (building and plot no.)
3. Names, addresses and particulars of partners.
4. The nature of the business.
5. Other places where the firm wishes to carry out its business.

Advantages of Partnerships
1. Partnerships are a convenient way of introducing new blood and fresh ideas into a business. In addition, a valued
employee may be made a partner thus securing his/her expertise.
2. Additional capital may be obtained by forming a partnership and the activities of the firm extended.
3. In a partnership some degree of specialization is possible. Various sections or branches of the business may be
managed by different partners, and duties may be allotted according to their abilities and qualifications.
4. The amount of capital can be varied by mutual consent. Additional amounts may be invested by the existing partners
or subject to unanimous agreement by the admission of new members. Similarly, the capital can be reduced by
common consent if necessary.
5. The individuality of a member in a partnership is not lost as is perhaps the case in a limited company.
6. There is greater continuity in a partnership than in the case of a sole trader. The retirement or death of a partner may
necessitate a re-organization of the partnership but the remaining partners have some knowledge which will enable
them to carry on the business if they so wish.
7. Losses and liabilities are shared equally among the partners as opposed to the sole trader who bears all the risks and
losses alone.

Disadvantages of Partnerships
1. Partners are individually and collectively liable for all the debts of the firm. If necessary, the personal property of each
may be used to pay the amounts outstanding.
2. An ordinary partner may bind the firm in trading contracts and in so doing commit the other partners to accepting extra
liability.
3. The consent of all partners is necessary for the admission of a new partner. As a result, one partner alone may
prevent the admission of a very desirable new member and thus hinder the development of the firm.
4. The amount of capital subscribed in many cases is not likely to allow the business to expand to its fullest extent.
5. The success of the business often depends upon the ability of the partners to work harmoniously with each other and
in most cases the survival of the business would depend solely on this one factor. Hence the ability to resolve conflicts
and tolerance of partners‘ character weaknesses is essential in a partnership.

29.3 Joint Stock Companies

A joint stock company is an association of persons who contribute capital in order to carry out business usually with a view to
make and share profits in the name of the company. The company itself is a separate legal entity apart from its shareholders.
Thus the company can enter into contracts in law in its own names.

Wanyama B. N. 176
29.3.1 Important features of a company are:
1. A company is an artificial person created by the law
2. Its life is perpetual
3. It is a separate entity from its owners
4. Finance is obtained by sale of shares
5. Shareholders control the business on majority vote basis with votes being related to shareholding.
6. Profits are distributed as dividends on the basis of shares held. All shareholders are able to have limited liabilities.
7. It can sue and be sued in the same way as an individual
8. It is created for a particular purpose

29.3.2 Formation of Companies

The first move in the formation of a company is to bring it into separate legal existence so that it becomes a separate entity apart
from the individuals who comprise it. This is done by registering a company under the company‘s Act.
Registered companies can be either private or public.

29.4 Private Companies

A private company may be formed by filing the documents named below with the registrar of companies:
1. Memorandum of association
2. Articles of association
3. Statutory declaration
4. Notice of the situation of the registered office of the company

29.4.1 Memorandum of Association

The memorandum of association is a document which lists the basic information regarding the company, its name, the total
amount of capital it has to issue, the location of its registered office, a statement that the liability of the members is to be limited,
and the names and addressees of the directors. It also contains a list of the objects of the company. A company does not have
power to anything which is not covered by its objects clause.

The memorandum of association should contain the following particulars:

(a) The name of the company

A company can choose any name it likes, but it should not be similar to or identical with that of any existing company.
It is compulsory for the company to use the word ‗limited‘ as the last word in its name. This shows to all the people
dealing with the company that the liability of the members of the company is limited.
(b) Situation of the company
Every company must have an office registered with the registrar of companies to which notices can be sent. It is
sufficient to mention here, particulars like plot number, building name, street, town within the country, etc.
(c) Objects of the company
It is enough for the company to mention clearly the objects of the company for which it was formed. It shows the
position of the company, its power to borrow, draw bills of exchange, etc.
(d) Liabilities of the company
A clause must be written into the memorandum to the effect that the liabilities of the company‘s shareholders are
limited to the amount which they have contributed to the company.
(e) Capital of the company
This paragraph contains details about the capital of the company. It shows the total capital of the company which can
be raised by sales of its shares. It also shows how to convert its fully paid up shares into stock or vice versa.

29.4.2 Articles of Association

The articles of association is a document which regulates the rights of the members of the company among themselves. It
describes the manner in which the business of the company shall be conducted and it outlines how the internal management of
the company will be organized.

Wanyama B. N. 177
29.4.3 Contents of the Articles of Association
A company limited by shares must have the following principal subjects dealt with in the articles of association:
1. Whether table A is excluded and if so to what extent
2. The payment of underwriting commission and brokerage
3. Managing director and chairman, their appointments, terms of office, remuneration, powers and duties.
4. Convening of meetings, giving notices
5. Elections of the chairman, voting, proxies and quorum
6. Dividends and reserves
7. Accounts and audits

29.5 Comparison of Memorandum and Articles of Association

1. The memorandum of association is the most important document which must be prepared by each company, while
articles of association are, however, not so important. If the company fails to prepare it, it can adopt the clauses
mentioned in table A.
2. Both the memorandum and the articles can only be altered by a special resolution of the company. Such a resolution
must be passed by a 75% majority, and a 21 days notice must be given of the meeting and of the intention to move the
special resolution.
3. The memorandum of association deals with relations of the company with the outside world, while the articles govern
relations of the members of the company between themselves.

29.6 Public Companies

A Public Company may be registered by filing the documents named below with the registrar of companies.
1. Memorandum of association
2. Articles of association
3. List of board of directors
4. Statutory declaration that the requirements of law for registration have been duly completed
5. Notice of the situation of the company‘s registered office
6. Prospectus
7. Registration fees

The memorandum of association and the articles must be signed by seven persons. If the company adopts ―table A‘ there is no
need for any special articles.

29.6.1 Differences between a Private and Public Company

Private Company Public Company

A private company needs at least two shareholders and a A public company needs at least seven shareholders and
maximum of 50. no maximum limit
A private company must have at least one director A public company is required to file a prospectus with the
registrar of companies.
Shares can only be sold and transferred privately with the
consent of the owners A public company must have at least three directors
A private company can commence its business Shares can be sold freely to the public via the stock
immediately after the receipt of certificate of incorporation exchange and can be advertised freely.
A private company is not required to submit a prospectus A public company has to wait for the certificate of
with the registrar of companies. commencement of business
Audit of the accounts by a qualified auditor is not Audit of the accounts is compulsory and it should be made
necessary; neither should it be made public. public
Private companies are formed mainly to achieve limited As well as obtaining limited liability public companies can
liability. sell shares to large numbers of people throughout the
world

Wanyama B. N. 178
 Advantages of Public Companies
1. Since the liabilities of members is limited, the financial collapse of a company does not affect the social status and
financial position of its shareholders as much as the failure of a business run by a sole trader or partnership
2. A company is better placed to raise great amounts of capital due to increased number of shareholders as well as other
means of raising funds from the public.
3. A company can issue several types of shares to suit investment habits of different types of people.
4. Employees may be allowed and encouraged to buy shares in the company giving them added incentive to work harder.
5. If a company has been declaring good dividends, a shareholder would be able to sell his or her share at a much higher
price than their face value. Shares are freely transferable. A sale of shares by a member does not affect the capital of
the company. This is also an incentive to the investors who are assured that they can convert their holdings to cash at
any time they wish.
6. The company‘s continued existence is assured and is not affected by the death, bankruptcy or insanity of a member.
7. The management of the company is in the hands of directors who are expert people. A board of directors may then be
formed in such a manner that experts in various fields are included in it. They are liable to be removed if the
shareholders do not find their work satisfactory.

Disadvantages of Public Companies

The owners (shareholders) do not have a direct control over the running of the business.
1. The directors and senior staff have a tendency to develop spheres of influence where their interests may predominate
over those of the majority shareholders.
2. It takes a long time and involves difficult formalities to set up a business. The decision making process is long and
tedious.
3. It is difficult for a company to keep in personal touch with customers and employees.
4. Sometimes more time and money is spent on documentation to control minor things.

29.6.2 Prospectus of the Company

Simply, a prospectus means any notice, circular, advertisement or any other invitation of a similar nature, offering the public
subscription to or debentures of a company.

A private company is not required to issue its prospectus, as the public is not permitted to subscribe to the shares. The ma in
contents of a prospectus are:

1. The number of shares fixed by the memorandum

2. Names and addresses of the directors and managers
3. The minimum subscription on which the directors may proceed to allotment
4. The name and addresses of the auditors (if any)
5. The brief history of the firm with emphasis on the vision of the top management.
6. Its fiscal policies in the recent past and its performance in terms of profits, productivity and potential for future growth.

29.6.3 Certificate of Incorporation

It has already been stated that the promoters of a joint stock company are required to submit to the registrar of companies the
following documents:

1. Memorandum of association
2. Articles of association
3. List of directors
4. Prospectus (in case of a public company)
5. The statement of nominal capital

If the registrar of companies finds the document in order he may ask the promoters to pay registration fees. On receipt of these
fees he issues a certificate of incorporation. A certificate of incorporation means that:

1. The company posses a separate legal identity

2. The company can be considered as an artificial person
3. The company can now enter into legal transactions e.g. buy land, machinery, employ people etc.

Wanyama B. N. 179
29.6.4 Certificate of Trading (Certificate for the Commencement of Business)
Public companies in addition to possessing the certificate of incorporation are required to apply for the certificate of trading.
Public companies therefore, cannot start business before acquiring this certificate.
The certificate of trading is applied for by lodging the following documents with the registrar of companies:

1. A statement that the minimum capital has been subscribed

2. A statement that the directors have paid their shares.
3. A statutory declaration that the companies act has been complied with.

29.7 Shares
Shares are actually printed documents issued by the companies under their seals having fixed face value. Shares are the actual
capital of the company which can be classified into six categories.

(a) Ordinary Shares

An ordinary share carries the right to such dividend as may be approved by the company in general meetings. There
is no ‗right‘ to a dividend failing such approval, even if substantial profits have been made. The dividends can only be
paid out of profits and only after the preference dividend (including all arrears) have been paid. Dividends can be very
high in some years, and very low in others. The ordinary shares usually carry voting rights and cannot be redeemed
by the company. The only way the shareholder can dispose of his shares is by selling them in the open market.

(b) Preference Shares

Preference shareholder has a right to fixed rate of dividend before any dividend is paid on other classes of shares. In
the event of a company being wound up, the preference shareholders have priority rights over other shareholders , i.e.
have preferences with regard to assets or dividends over other classes of shares.

(c) Cumulative Preference Shares

All preference shares are cumulative unless stated otherwise. This means that if profits are insufficient to pay the
preference dividend in any one year, the amount is carried forward to the following year. All arrears of dividend as well
as the current year‘s dividend must be paid on such shares before the other shareholders are paid, i.e. they
accumulate until paid.
Non-cumulative preferred shares do not accumulate if unpaid.

(d) Participating Preference Shares

Holders of participating preference shares possess the right to a fixed dividend and in addition participate with the
ordinary shareholders in additional dividends paid.

(e) Redeemable Preference Shares

These are the shares which a company may issue on condition that they be repaid at the option of the company i.e.
may be purchased by the company at its option despite the shareholders‘ unwillingness to sell. These shares must be
fully paid before they can be redeemed.

(f) Deferred Shares

These are shares that rank for dividends after all the other classes of shares have received fixed rates of dividend.
They are generally few in number and are taken up by the founders or promoters of the company.

29.8 Share Capital of a Company

The share capital of a company can be classified in seven ways.

1. Registered capital - Registered capital is that capital which is stated in the memorandum of association. They are the
shares that a company is permitted to issue by the memorandum of association. It is also called the nominal capital or
authorized capital.
2. Issued capital - This is the amount represented by the shares issued to the public for subscription. Usually a
company does not issue all its registered capital, but withholds a part of it for future needs.

Wanyama B. N. 180
 3. Subscribed capital-This is that part of the issued capital for which the public has responded by submitting applications
for the shares.
4. Called-up-capital-Called-up capital is that part of the subscribed capital which is called up on the shares actually
applied for by the public.
5. Paid-up capital-This is the actual amount of the called-up capital which the company has received.
6. Un-called capital-This is that part of the company‘s capital which the company has not called up from its
shareholders, perhaps because it is not yet required by the company.
7. Reserve capital-After shares have been subscribed for, a company, by special resolution, may decide to call up only
part of its capital from the shareholders. A certain portion of its capital shall not be called up except in the event of
winding up of the company. This part of the capital is called the reserve capital.

29.9 Debentures
A debenture is a loan certificate issued by the company under its seal, containing a contract for the payment of the principa l sum
at a specified date and for the payment of interest at a fixed rate until the principal sum is repaid. They are long-term unsecured
debt securities. A limited company may issue six kinds of debentures:

1. Naked debentures-These are debentures which do not have security for the payment of interest and the repayment of
capital. Actually, such debentures are unknown in practice.
2. Mortgage debentures-These are debentures secured by the assets of the company.
3. Redeemable debentures-These are debentures repayable by the company after a stated period. Usually, all
debentures issued by a company are redeemable.
4. Irredeemable debentures-These are debentures not repayable during the lifetime of the company issuing them.
5. Registered debentures-The holders of these debentures are registered in the books of the company.

29.9.1 Difference between Shares and Debentures

Shares and debentures are the main source of capital for companies limited by shares. The following table shows the basic
differences between them.

Shares Debentures

1. Shares are issued by the company Debentures are issued by the company under its seal
under its seal having a fixed nominal bearing a fixed rate of interest.
value.

2. A share is a unit of capital. A debenture is a unit of a loan.

3. A share creates an owner. A debenture creates a creditor.

4. A shareholder may lose his dividend if A debenture holder is not concerned with the profit and
the company fails to make profits. losses of the company. He gets his fixed rate of interest
even if the company suffers losses.

5. Shareholder gets a dividend A debenture holder gets interest

6. Shares are usually irredeemable. Debentures are usually redeemable

29.10 Winding Up (or Liquidation)

There are three distinct ways in which a company can be dissolved:
1. It could be wound up voluntarily.
2. Its name could be struck off by the registrar.
3. It may be dissolved by order of the court.

Wanyama B. N. 181
A company may be dissolved by the shareholders if the members wish to do so. The directors are required to declare the
solvency of the company. They have to state also that the assets of the company are enough to settle debts to the creditors.

A company can also be dissolved by the court in the following circumstances:

1. If the company does not commence its business within a specified period.
2. If the number of members is less than 7, in case of public companies
3. If the company is unable to pay its debts.

Usually, when a company is in the process of being wound up, a receiver or liquidator is usually appointed to safeguard the
interests of either the shareholders or creditors and oversees the sale of assets and ensures all creditors are fully paid and any
monies or assets remaining is shared equally among the shareholders. Thus a liquidator arranges for the death of the company
and its burial.

Wanyama B. N. 182
30 CONTRACTS
A contract is an agreement enforceable by law between two or more persons (parties) to do, or to abstain from doing, some act
or acts.

The law binds the parties to carry out their obligations and responsibilities imposed upon them by the contract. Note that not all
agreements or promises that people make attain the status of contracts. We have all made and broken numerous promises
without fear of being sued by those to whom promises were made. Such are mainly ‗social promises‘ such as a failed promise to
give a lift to a friend on the way to work. There are clear distinctions between such unenforceable promises and legally
enforceable contracts.

30.1 Formation of the Contract

For a contract to be valid it must meet certain basic tests, which comprise the basic elements of a contract. Contracts are
agreements (an agreement is an offer that is made and accepted), that are voluntarily created by persons with the capacity to
contract. The objectives of the agreements must be legal and, the agreement must be supported by some consideration (a
bargained for exchange of legal value). Finally there should be some written evidence of some kinds of agreements before the y
can be enforced.

In contracts one part makes an offer and the other accepts. The person making the offer is referred to as the offeror and the
person to whom the offer is made is referred to as the offeree.

Thus the main elements in the formation of the contract can be summarized in point form:
 Offer
 Acceptance
 Consideration
 Intent and capacity
 Privity

30.1.1 The Offer

An offer indicates a willingness to enter into a legal obligation. It is a definite intention to be bound if there is proper acceptance.
Offers can be made orally or in writing, or may be implied from the conduct of the offeror.

It can also be defined as the manifestation or willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it. In other words, when we consider all that the parties
said and did, did one of the parties ever, in effect, say to the other; ‗This is it-if you agree to these terms, we have a contract‖.
This means that the offer must be in terms sufficiently clear to the other party for them to make a decision on whether to accept
or not.

30.1.2 Invitation to Treat

An invitation to treat is an offer to negotiate. It is an indication by someone that they are ready to receive an offer whic h may or
may not eventually lead to a binding contract. The main areas where invitation to treat may arise are:

(a) Advertisements
These are all attempts to induce offers but are not offers themselves.

(b) 2. Display of Goods

The display of an article with a price on it in a shop window is an invitation to treat, so is the display of goods on a shelf in
a supermarket. The contract of sale is not made when a customer selects the goods from the shelves, but when the cashier
accepts the offer to buy what has been chosen. The same principles are applied to prices set out in price lists, catalogues,
circulars, newspapers and magazines.

An illustration of this rule is in the case of Pharmaceutical society of Great Britain v Boots Cash Chemists (Southern) Ltd
(1953) in which a chemist was prosecuted for selling certain medicinal products without a pharmacist being present which

Wanyama B. N. 183
 was against the medicines Acts. The buyer picked up priced goods from a shelf and took them to the counter. The society
claimed this was offer and acceptance. The courts ruled this was invitation of offer and therefore the seller could still refuse
to accept the offer if there was no pharmacist present. Boots were acquitted.

(c) Auctions
In auctions the auctioneer is held to be inviting offers, and the drop of the hammer signifies acceptance of a particular offer.
At this point there is a sale on the terms and conditions of the auctioneer.

(d) Reward offers

Adverts for reward are not the same as adverts for sale. An offer is made to ‗the world at large‘, in reward situations. Th us
the person fulfilling the requirements of the advert for reward accepts this offer and there is no need for that acceptance to
be individually communicated to the person making the offer.

30.1.3 Acceptance and Counter Offer

In order to conclude a valid contract there must be clear and unqualified acceptance of the terms of the offer. The offeror, as the
―master of his offer‖, may specify in detail what behaviour is required of the offeree in order to bind him to a contract. If the
offeror does so, the offeree must ordinarily comply with all the terms of the offer before a contract will result.

This means that acceptance of a valid contract must be clear and unequivocal (definite in meaning or intention). If an offer
requires acceptance by post then the acceptance is effective and the contract is in force from the time of posting, whether the
offeror receives the acceptance or not.

Silence on its own does not amount to acceptance. However, acceptance may be by silent conduct. Acceptance by conduct
could in practical terms, take place by acceptance of delivery of goods. If a counter-offer is in reply to an offer then it does not
constitute acceptance. A counter offer is a rejection of the original offer and in most cases has the effect of cancelling the
original offer. Where the purported acceptance introduces a new term or changes the terms of the offer, this is deemed a
counter offer and the original offer is cancelled because they impliedly indicate intent by the offeree to reject the offer instead of
being bound by its terms. However, if an offeree merely asks about the terms of the offer without indicating its rejection (an
inquiry regarding terms), or accepts the offer‘s terms while complaining about them (a grumbling acceptance) no rejection will be
implied.

Offers and acceptances can be written, oral or inferred from the conduct of the parties involved.

30.1.4 Consideration
This is some right, interest, profit or benefit accrued to one party as a result of some loss or responsibility given to the other. This
is consistent with the notion that the purpose of contract law is to enforce freely made bargains which gives effect only to
contracts that are founded on the mutual exigencies (urgent needs or demand) of men and does not compel the performance of
any merely gratuitous agreements, i.e. free promises. For example, if you agree to give a work colleague a lift to work in the
morning and then fail to do so, you are not in breach of contract because you have not received any consideration (financial or
otherwise) for your promise. It is a voluntary undertaking which nobody has paid for and nobody is entitled to enforce.

It should be noted that consideration is anything of legal value. An act or a promise can have legal value in one of two way s. If,
in exchange for the promisor‘s promise, the promisee does, or agrees to do, something he had no prior legal duty to do, that
provides legal value. If in exchange for the promisor‘s promise, the promise refrains from doing, or agrees not to do, something
he has a legal right to do that also provides legal value.

This definition does not require that an act or promise have monetary (economic) value to amount to consideration. An example
of this came out in a case where an uncle, promised his nephew $5,000 if he refrained from using tobacco, drinking, bating an d
playing cards or billiards for money until his 21st birthday. The promise was held to be supported by consideration when the
nephew refrained from doing any of these acts even though the nephew may have benefited from refraining to do so. He had a
legal right to indulge in such activities and he had refrained from doing so at his uncle‘s request and in exchange for his uncle‘s
promise.

Wanyama B. N. 184
30.1.5 Rules for Consideration
1. Consideration must be real although not necessarily adequate.
2. Consideration must move from the promisee. A stranger to the contract cannot sue.
3. Consideration must not be something which the promise is already legally bound to do.
4. Consideration must be lawful.
5. It must not be past.
6. Consideration must also be given when a contract is varied as well as when it is created.

Rule 6 is explained in the case of Atlas Express Ltd v Kafco (importers) Ltd (1989). Kafco invited haulage companies to quote
for the delivery of boxes and baskets to Woolworths for them. The contract has strict clauses about delivery on time. Atlas
quoted the lowest price. Unfortunately they had miscalculated their prices and when they realized, they insisted Kafco sign a
new contract with an increased price, before they would deliver any of the goods to woolworths. Reluctantly Kafco s igned but
when Atlas invoiced them, Kafco insisted on paying at the original price. The courts ruled they were right. There was an original
contract which was binding on both parties and there had been an agreement to vary it. Kafco were paying more under this but
Atlas were doing nothing more than they were already obliged to do. Thus there was no fresh consideration for the new deal.

30.1.6 Executed and Executory Contracts

A contract is executed when all parties have fully performed their contractual duties and it is executory until such duties have
been fully performed.

30.1.7 Intent
For a contract to be legally valid, there should be an intention for both parties to create legal relations so that the contr act
becomes enforceable by law.
For commercial contracts, unless stated expressly, the legal intention is assumed.
For family arrangements, the legal intention is assumed not to exist unless expressly stated.

30.2 Terms of a Contract

The final step of the formation of a contract is the identification of the terms and their effects.

30.2.1 Express Contract

This is the contract in which the mutual agreement necessary to create a contract may be demonstrated by the conduct of the
parties. When the surrounding facts and circumstances indicate that an agreement has in fact been reached, an implied contract
has been created.

If a contract becomes unworkable due to the absence of certain terms (express or implied) the court is empowered to insert
some terms just to make the contract workable (facilitate contract efficacy). However if the terms are expressed and are later
found to be difficult to comply by one party, the court cannot change such terms nor can they declare the contract void. In such a
case the party which fails to comply with the terms will be liable to penalties stipulated in the contract or damages decided upon
by the courts.

30.2.2 Exclusion Clauses

This is a section included in contracts to limit the liability of one party to another. It is assumed that the accepting party has read
and understood the exclusion clauses before entering into the contract e.g. insurance companies cover all accident, theft, fire,
etc. except those accidents caused by an act of god or by a state of war, or by uprising (e.g. a coup).

30.2.3 Capacity
This means the legal capacity to enter into a valid legal agreement. In law not all persons are able to do this.

(a) In general, agreements made by minors (under 18) are not valid. There are, however, two major exceptions. Agreements
by a minor for a beneficial contract of service are binding. This will include contracts for employment and/or training as long
as the terms taken as a whole are for the benefit of the minor. The second form of agreement which is binding is when a

Wanyama B. N. 185
 minor purchases necessities. This means something which is necessary for them in their station in life. A minor living at
home and not working would therefore find it difficult to argue that a contract to purchase a car was a necessity. However, if
it were necessary for him or her to get to work, then it would be a necessity.

This is why contracts for sale with minors will normally involve an adult acting as a guarantor. Thus luxuries are not binding;
a minor may only be forced to pay a reasonable price for the goods. If a minor enters into an on going contract such as a
business partnership with an adult he or she will be bound by all the debts of the business. However, they could repudiate
the contract at any time and only therefore be liable for debts incurred before the revocation. The adults have no such
rights.

(b) Mentally ill people and those under the influence of drinks or drugs are also limited in their liability. The key issue is whether
the person knew the nature of the transaction they entered into. In such a case they can be revoked by that person but are
valid until that happens. A contract made by a drunken man may, however, be ratified when he is sober.

(c) Limited companies and other corporate bodies such as Corporations, Local Authorities, Co-operative Societies and Trade
Unions are limited in their contractual capacity. They may only do what the documents creating that corporation state that
they are empowered to do. Any other action is principally void as ultravires (beyond their powers).

30.3 Void Contracts

Contracts may be unenforceable due to a variety of factors. In particular a distinction needs to be made between contracts
which are void and those which are voidable. A void contract is one which has no legal effect ab initio (as from the start) and
nothing can be done to give it legality. Void contracts include contracts which are illegal by statute on the grounds of public
policy such as:

 Contracts to defraud the revenue

 Contracts to commit a crime, a tort or a fraud
 Contracts leading to corruption in public life
 Contracts which are sexually immoral
 Contracts prejudicial to public safety
 Contracts with enemy aliens
 Contracts prejudicial to the status of marriage
 Contracts creating unreasonable restraints of trade

Such contracts are void and in general any money paid under them is recoverable and any property transferred is recoverable.
Contracts which although not illegal will be unenforceable include;
 Wagering contracts (betting)
 Penalty clauses
 Contracts made unenforceable by statutes.
Whereas such contracts are void, they are not illegal. Here, however, the law will not provide a remedy, as the contracts are
unenforceable by law.

30.3.1 Mutual Mistakes

Other void contracts are those which are based upon mistakes. A mistake is an erroneous belief about a matter material to a
contract. These contracts include:
a). Where both parties make a mistake as to identity of the subject matter, then the contract is void.
b). Where both parties make a mistake as to the existence of the subject matter, the contract is void.
c). Where one party mistakes the identity of the second party and the identity of the second party is important, the contract
is void.
d). The contract is void where there is a mistake as to the nature of the transaction (not the contents).

30.4 Voidable Contracts

A voidable contract is one which is capable of being voided by one party in certain specific situations, but which until that time is
perfectly valid.

Wanyama B. N. 186
Already it has been stated that a contract between a minor and an adult to run a business is one where the law states that such a
contract is voidable by the minor at any time until he or she achieves majority (18).

Similarly a drunken person or one under the influence of drugs can also revoke such contract.

30.4.1 Misrepresentation and Fraud

A misrepresentation is ―an assertion that is not in accord with the facts‖ Misrepresentation does not have to be intentionally
deceptive. The person making it may believe in good faith that what she says is true. Fraud on the other hand is a type of
misrepresentation that is knowingly made with intent to deceive, while misrepresentation, a broader concept does not have to be
intentional. Either fraud or misrepresentation gives the complaining party the right to rescind a contract. Note also that a person
who commits fraud may be liable in tort for damages.

30.4.2 Duress and Undue Influences

Duress is use of wrongful coercion such as threat of physical harm or threats to economic interests in order to deprive one of hi s
ability to resist entering the contract. Undue influence is unfair persuasion. In undue influence, however, the pressure is exerted
through persuasion rather than through coercion. Usually it involves persons who are unfairly persuaded to enter a contract
while in a position of mental or physical weakness that makes them particularly vulnerable to being preyed upon by dominant
parties. These contracts are voidable at the discretion of the victim.

30.4.3 Contracts of Utmost Good Faith

Contracts, which require full disclosure of material facts before they can be entered into, are called contracts of utmost good
faith. In such contracts failure to disclose material facts will render the contract voidable at the discretion of the innocent party.

30.4.4 Privity of Contract

The principle of privity of contract is that only a party may sue or be sued upon it.

30.5 Discharge of Contracts

Discharge is the release of contractual obligations of the parties to a contract. Once a contract is discharged, it is no longer in
existence. Contracts can be discharged in several ways:

1. Performance
2. Breach
3. Agreement
4. Frustration
5. Merger

30.5.1 Performance
Only exact and complete performance of contractual obligations can discharge a contract by performance. Where a contract has
been substantially performed, payment may be due, with an allowance for deficiencies. If a contract is in parts, divisible
payments will be due for those parts which have been completed.

30.5.2 Breach
Breach of contract occurs when one party fails to perform some or all of his obligations when they are due. Every breach giv es
the innocent party a right to sue for damages. If the breach is serious (breach of condition), the innocent party has the option to
treat the party in breach as having repudiated (refused to carry out this contract) the whole contract, and he can also sue for
damages. If it is not a very serious breach (such as a breach of warranty), the innocent party can sue for damages only, but the
contract remains valid.

Wanyama B. N. 187
30.5.3 Agreement
Both parties can agree to terminate the contract on terms agreeable to both. They may also agree to have a contract performed,
differently from the original agreement.
Novation is the substitution of a new contract for an existing one.
Accord and satisfaction is when one party accepts an act different from the original one.

30.5.4 Frustration
If without default of either party, the circumstances change so radically that the performance of contractual obligation becomes
impossible then the contract is said to be frustrated and it becomes discharged. Frustration occurs only if circumstances change
radically or when one party does not create an environment necessary for the performance of the contract. If performance
becomes difficult or impossible just because the contractor did not foresee the difficulties the contract cannot be said to be
frustrated.

30.5.5 Merger
When one contract is merged with another the original contract is automatically discharged and the new contract becomes
operational and binding.

30.6 Remedies
Remedies for breach of contract are:
1. Damages
2. Specific performance
3. Injunction
4. Quantum merit

30.6.1 Damages
Damages are recoverable if they result either from the natural consequences of the breach, or from special circumstances of
which the parties had actual knowledge, and which caused the breach to result in exceptional loss. The principle used to
determine the amount of damages are that the innocent party should be restored to the position he should have been in had the
other party performed his obligations. If a contractor puts up defective work, the normal damages will be actual or estimated cost
of reinstatement. Where the breach consists of not doing the work, the damages will be extra cost of completing the work at the
earliest possible time.

30.6.2 Liquidated Damages

This is a clause by which a formula is included for the calculation of a fixed amount, which will be paid by the defaulting party in
the event of late delivery or late performance. For example, if the supplier shall be unable to deliver goods by contracted date
then they shall pay by way of liquidated damages a sum representing 1% of the contract price for every day of delay or part of a
day beyond the contractual delivery date, up to a maximum of 20% of the contract price.

30.6.3 Specific Performance

This is an equitable remedy and it is given at the discretion of the court. It is normally awarded if damages would be adequate
remedy, or if performance would require the supervision of the court.

30.6.4 Injunction
This is also a discretionary remedy given to restrain one party from breaking the contract, if damages would be inadequate.

30.6.5 Quantum Merit (“What it is worthy”)

This arises when one party has performed his contractual obligations and the other party decides to repudiate the contract. The
first party then sues for the amount of work already done.

Wanyama B. N. 188
30.6.6 Limitation Periods
Cases for breach of contract should be filed within 6 years from the date of breach, otherwise they are barred by statute from
being filed. There are some exceptions to this rule:

(a) If the innocent party had some disability (e.g. insanity), then he is allowed to file the case anytime the disability ceases.
(b) In case of fraud or concealment of breach the limitation period starts after the fraud has been discovered.
(c) If the defaulting party acknowledges the breach after 6 years, the limitation period starts all over again.
The same would happen if the defaulting party performs his obligation after the statutory limitation period.

30.7 Types of Contracts

There are two major types of contracts:
Simple contracts
Contracts under seal

30.7.1 Simple Contracts

Any agreement express or implied, which gives rise to legal obligation, is a simple contract. Bills of exchange and promissory
notes are simple contracts but the law requires that they be in writing for them to be enforceable.

30.7.2 Contracts of Guarantee

These are simple contracts where the guarantor promises to take responsibility of one party in case that party defaults on a
contract. The guarantor‘s responsibility is secondary i.e. the creditor first has to make attempts to get the debtor to fulfil his
responsibilities. It is only when these attempts fail that the guarantor becomes liable. Contracts of guarantee must be evidenced
in writing.

30.7.3 Contracts of Indemnity

The indemnifier promises to ensure that the debtor performs his responsibilities. In case of default, the indemnifier is
immediately held responsible i.e. he has primary responsibility. Contract of indemnity may be oral or written.

30.7.4 Contracts under Seal

These are contracts which are not necessarily supported by consideration. They are also called Speciality Contracts or Deeds.
They are normally made and sealed by the government, local authorities or large corporations. Title Deeds and bonds are
contracts under seal. They must always be in writing.

30.7.5 Contracts of Record

These are entered into through the machinery of a court of law, usually arising from criminal proceedings. They usually bind a
person to be of good behaviour for a given period.

There is no agreement in such contracts. They must also be in writing.

30.8 Contracts for the Sale of Goods

A contract for the sale of goods worth more than Kshs.200 must be evidenced in writing. The rules in the sale of goods Act are
in addition to the general principle of contracts. The Act sets out:-

1. Implied terms
2. Rules for ascertaining and apportioning risks.
3. Provision for remedies.

Wanyama B. N. 189
30.8.1 Implied Terms
(a) Stipulation as to Time
If a contract makes it clear that delivery dates are important, then late delivery results in breach of contract and the buyer
can sue for damages, including for consequential loss. Unless a different intention appears from the terms of contract,
stipulation as to time of payment is not essential i.e. the buyer cannot be sued for late payment.

(b) Title
The seller impliedly promises that he has the right to sell the goods (e.g. if the goods are bought from a thief who was not
legally the owner, there is breach of condition and the rightful owner can recover his goods). This implied term can never be
excluded.

(c) Sale by Description

It is implied condition that goods, if sold by description, correspond to description e.g. where the buyer has not seen the
goods, or where he selects from a catalogue, even small variations can be grounds for rejection.

(d) Quality
It is an implied condition that goods supplied will be of merchantable quality (fit to be sold) bearing in mind the descriptions,
price etc. This condition does not apply where:-
Defects were specifically drawn to the buyer‘s attention before the contract was made.
The buyer examined the goods before the contract was made.

(e) Fitness for Purpose

Goods sold are expected to be of reasonable fitness for the intended purpose, but the buyer must have made known to the
seller the purpose for which he wanted the goods.

(f) Sale by Sample

It is an implied condition that goods sold by sample correspond to the sample.

30.8.2 Exclusion of Implied Terms

(a) Dealing as a Customer
Where one party is a dealer selling goods of a type ordinarily supplied for private use e.g. a grocer selling to a house wife)
the purchasing party is said to be dealing as a consumer.
In such a case there can be no exclusion of the implied terms for title, description, quality, fitness for purpose and sample.

(b) Not Dealing as a Customer

Where both parties are dealers contracting in their course of business (e.g. a merchant selling to contractor), the only
exclusion, which is void, is for the title of the goods. All the other implied terms can be excluded provided that the exclusion
clause is reasonable if:-
(i) The strength of bargaining positions of the seller and buyer are equal
(ii) The buyer received an inducement to agree to the term
(iii) The buyer knew or ought reasonably to have known of the existence and extent of the term.
(iv) The goods were made to order

30.8.3 Responsibility for Risks

1. Unless the parties agree otherwise goods remain at the sellers risk until ownership passes to the buyer.
2. Ownership cannot pass in unascertained goods (goods that are not separated from others and identified as belonging
to the buyer.
3. Ownership in specific or ascertained goods passes when the parties intend it to pass.

Wanyama B. N. 190
31 TENDERING AND ESTIMATING IN BUILDING TRADES

31.1 Tenders
A tender is an offer by one party to provide goods or services or undertake works for another party in return for a specific amount
of money.

31.1.1 Tender documents

These include drawings and bills of quantities (BOQ) plus a comprehensive description of work to be carried out, location of
works, any special features, etc.

31.2 Methods of Obtaining Tenders

The following are the four methods of obtaining tenders:
1. Open or competitive tendering
2. Selective tendering
3. Negotiated tendering
4. Serial tendering

31.2.1 Open or Competitive Tendering

This is where the client advertises in the local, national or technical press giving brief details and key information of the proposed
works and inviting interested contractors to apply for the relevant contract documents often at a non-refundable fee to cover
expenses for the preparation of tender documents. The client then decides on the best contractor to award the tender. Once
this is communicated to the successful tenderor, a contract then exists with the tenderor as the offeror and the client as th e
offeree.

Advantages
1. It offers the client a wide choice of tenders to pick from and can therefore pick the most suitable.
2. It allows all interested contractors to tender and therefore, gives opportunity for unknown contractors to compete for the
work.
3. Ensures good competition. Since there is not obligation to accept an offer, it follows that offers received are from
contractors interested in carrying out the work.
4. It prevents contractors from forming rings, i.e. agreeing on the level of prices to be submitted and sharing out of the
work so that prices are kept high.

Disadvantages
1. Tender lists can be long, involving a large number of contractors in pricing where only one can be successful.
2. Public accountability may be questioned if the lowest offer is not accepted, though it is sometimes difficult to accept the
lowest tender when the reputation of the contractor is not known.
3. If the lowest contractor has poor management structure then the contract could drag out and cause delay in completing
the work.
4. If the price is too low and a contractor realizes that he is loosing money then he may decide to reduce the quality of
work or submit numerous claims in order to recover part of the loss (the consequence of which is deterioration of
work).
5. Many of the better contractors will not price on an open tendering basis unless they are forced.

31.2.2 Selective Tendering

In this method a short list of contractors is drawn up and they are invited to submit tenders for the works. The rest of the
procedure is the same as for competitive tendering. The client‘s professional advisors can draw up a short list or alternatively an
advert giving details of the proposed works could be placed in the press, requesting contractors to make application to be
considered for the work.
A short list of the successful contractors is drawn up and the remainder informed of their non-inclusion on the list.

Wanyama B. N. 191
 Advantages
1. Since only competent contractors are invited to tender then the lowest tender can be accepted.
2. It reduces the risk of failure and cuts the cost of preparing estimates.
3. It enables competing contractors to include an adequate level of profit which in turn helps to give stability in the
industry.

Disadvantages
1. Care needs to be taken to ensure that favouritism does not influence the inclusion or exclusion of firms from a
particular list.
2. Tenders are likely to be expensive.
3. There is a greater chance of collusion between firms unless the compilation of the list is changed for each contract.

31.2.3 Negotiated Tendering

Negotiated contracts are usually entered into for a particular version e.g. the contractor has special management skills or can
undertake particular works requiring a high degree of technical competence or is capable of completing the works without the
required restricted time period.
If there is no special reason for negotiated contract then some other forms of tendering will be most likely to be suitable for the
client.

Advantages
1. The two parties can come to mutual agreement as opposed to other systems where choice is based on tender
documents only.
2. Since the tenderor is chosen at an early stage he may assist in the designing and re-designing of the project to suit the
client and the amount of money in his possession.
3. Can commence ordering materials, prefabricating work and programming so that an early start can flow smoothly.

Disadvantages
1. The cost of the work is likely to be higher than in competitive tendering.

31.2.4 Serial Tendering

It is a form of standing offer where the contractor undertakes to enter a series of separate contracts in accordance with the terms
of the offer.
Contractors are invited into tender in competition on the basis of a normal bill of qualities, but on the understanding that a series
of contracts of similar works will be let to the successful contractor on the basis of a bill contained in that bill of quantities.
This type of contract is particularly useful when there is a similarity of projects such as in housing as the contracts gain familiarity
with the organizing and management where the workforce becomes more efficient due to repetition.

Advantages
1. Allows the client and contractor to program their workload in advance with more certainty.
2. It leads to better relationships between the contractor and client and/or architect and lends itself to a situation where
the contractor may offer advice in the planning of future work.
3. Allows the contractor more time to plan the work on the site so that it can be carried out more efficiently.

Disadvantages
1. It relies on the integrity of the client in that, since he knows the contractor‘s prices, the following contract may be based
unfairly on the low cost items in the bill of quantities.
2. It reduces the work available under competition to other contractors who may have wished to price.

31.3 Tendering Arrangements

There are a number of contractual forms which may exist between the client and the contractor but they tend to fall within two
broad categories. These are:
1. Cost reimbursement contracts
2. Price given in advance contracts.

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31.3.1 Cost Reimbursement Contracts
These are contracts where there is no risk to the contractor and little incentive to ensure that work is carried out in an efficient
manner and at an economically sound price. Provided that a contractor of good repute is employed then contracts on this basis
are suitable for the following works.

a). Work which is required to be carried out at short notice such as may be necessary in the case of urgent repair and all
maintenance work.
b). Work, which due to the uncertainty and the nature of the work such as may arise in alterations and repairs to assets
and properties the exact content cannot be pre-determined.
c). Work where the client wishes to exercise a measure of control over the method of working or to supervise the work
such as may be necessary in the co-ordination of machinery installation where building and sundry works are required.
d). Work where the contractor possesses special abilities, which the client/architecture wishes to utilize, such as skilled
tradesman for intricate work of exceptional quality.

There are three forms of contracts in cost re-imbursement:

(a) Cost + percentage

In this type of contract the contractor is paid the actual price cost of work plus an agreed percentage.
(b) Cost + Fixed fee
This type of contract is similar to the previous one, but instead of a percentage being added to the price cost of the work, a
fixed lump sum is added.
(c) Target Cost
In this type of contract a target price is agreed on for the works. If, when the works are completed, the actual cost is less
than the target cost, then the difference in cost is shared between the contractor and client on a pre-agreed basis.
If however the actual cost is greater than the target cost then the contractor is usually only paid the actual cost plus an
agreed percentage to recover his overhead costs. The target cost is frequently negotiated and agreed upon from a price of
the bill of quantities.

31.3.2 Price given in advance contracts

The form of contracts in this category is the most common for medium and large works. The risk to the contractor is influenced
by whether the contract is on fixed price or fluctuation price basis. Only contracts of under12 month‘s duration however should
be let on a fixed price basis, and allowance must be made for fluctuations. There are four forms of contracts in this category.

(a) Lump Sum or Plan and Specification contract

In this type of contract the contract document comprises of drawings, specifications and conditions of contract. The
contractor is responsible for taking off the quantities and preparing his estimate.
The onus is therefore on the contractor to include in his price everything necessary for carrying out the work.
(b) Contracts based on schedule of rates
In this form of contract a specification and a list of more important items of work in each trade are sent to the contractor for
pricing.
The item descriptions and units of measurement are similar to those used in a normal bill of quantities, but no quantity is
given.
(c) Contracts based on Bill of Quantities
A bill of quantities comprises of contract, trade preambles and measured items of materials and labour. The trade preamble
indicates the quality of material and workmanship required while the measured items give the quantity of materials and
labour necessary to complete the works.
(d) Package deal contracts
The contractor in this type of contract is responsible for the design as well as for the construction of the works.
Competing contractors are required to comply with the client‘s brief but are given scope to utilize their professional
knowledge and skills.

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31.4 Conditions of Tender
(a) Time for acceptance
The period during which the tender is open for acceptance by the client should be stated.
(b) Workmanship
It is an implied term that workmanship will be of good quality and fit for the purpose.
(c) Increase in cost
This should be specified in the contracts document for the purpose of protecting the contracts.
(d) Nature and scope of work
Any material nature or physical properties of their size or structure to which the success of a contractor‘s work will depend
should be stated clearly.
(e) Insurance
Parties should understand their obligation to the contract. There are three types of obligations to be considered:
(i) Third party
This covers insurance against injury or damages to people or property not belonging to the contractor.
(ii) Employer’s liability
This covers employees of the contractor or sub-contractor.
(iii) Work-in progress policy
This covers thefts and damages to property belonging to the sub-contractors.
(f) Defects liability
The contractor is responsible for rectifying defects within a given time. This should be clearly stated in the tender. The
standard time is (6) months or twelve (12) months depending upon the nature of the work.
(g) Progress and final payments
This should be clearly spelt out in the contract document by the two parties.
(h) Completion of the contract
Dates for completion should be stated.
(i) Arbitration
Procedure to be followed in case of a dispute is normally included in the contract. The disputing parties still have an option
to go to court of law for arbitration even if a procedure is specified in the formal of contract.

31.5 Contract Documents

The documents which form the basis of most building contracts are the drawings of the proposed building, the conditions of
contract applicable to the contract, the preambles and bill of quantities, a letter in the form of a formal tender from the contractor
to the client offering to carry out the work in accordance with the foregoing documents and the letter of acceptance from the
client to the contractor.

31.5.1 Drawings
Copies of the contract drawings must be available for the contractor to inspect if he so desires prior to him submitting his offer.
It is better, however, if copies of small plans and elevations are sent to the contractor together with the bill of quantities when he
is invited to tender.
Copies of the contract drawings are signed by the parties to the contract to satisfy that they are the drawings relevant to the
contract.

31.5.2 Conditions of Contract

There are usually standard forms of contract conditions, the most usual being the JCT standard form of building contract (private
and local authority editions) and GC/works/1, the form used by the central government departments.
The parties to the contract should sign the building contract or the articles of agreements.

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31.5.3 Preambles and Bill of Quantities (BOQ)
The preambles give the type and standard of quality of materials and workmanship required to be used in the execution of the
contract. The bill of quantities gives the description of each item and material and labour required to execute the work tog ether
with quantity involved. The estimator is able to price each item in order to calculate a figure for carrying out the contract.

31.5.4 Letter of offer

This is in the form of a formal tender, which is prepared by the quantity surveyor and sent to the contractor along with the BOQ.
The contractor must use this tender form when submitting his offer.

31.5.5 Letter of acceptance

This is the final contract document from the client to the contractor after examining various tenders and agreeing as to the most
suitable to carry out the works.
Once the letter of acceptance reaches the contractor a contract exists between the parties. A formal contract may be signed if
either of the parties so desires.

31.6 Estimating
It is the process of detailing the material and labour requirements, pricing them and establishing the total material cost, labour
requirement cost and other costs of carrying out the work.
The following are required for estimating:-
1. The preliminaries
2. The trade preambles
3. The drawings and technical reports
4. The site (visit)

31.6.1 The Preliminaries

Preliminaries deal with the following:
(a) Check that standard conditions apply. Examine any amendment to these conditions and see whether they are
workable.
(b) Note the starting and finishing date
(c) Check if there is a time limit for completion and whether there are liquidated damages for non-completion in time.
(d) Assess when bulk of outside work will be required to be done and consider the effect of this on completion date.
(e) Check if the contract has to be executed in any particular sequence.
(f) Consider any requirements regarding special insurance in terms of the contract.
(g) Note the terms of payment, when the final account will be satisfied and the limit of the rotation fund.
(h) Check if the opportunity will be given to quote for any nominated subcontractor‘s work applicable to this firm.
(i) Note the location of the site i.e. accessibility and unloading and storing of materials.
(j) Note the length of the period of defects liabilities.
(k) Check if the contract is on lump sum basis.

The Trade Preambles

(a) Check that all materials are available and supplies will not interfere with completion date.
(b) Check on any handling or storage difficulties that may be encountered if new or unusual materials are specified.
(c) Ensure that your firm has experience in handling and fixing the specified materials. If there are materials of recent
innovations, then inspect any difficulty in fixing, amount of waste expected and labour requirements.

Drawing and special reports

(a) Assess the likely requirements from mechanical plant and scaffolding
(b) Assess the rates between the value of new work and works in alterations
(c) Check access and working space for plant and storage space for materials.
(d) Consider the requirements for welfare facilities, toilets and temporary roads.
(e) Consider the supervisory staff required and approximate size of the labour force.
(f) Consider security and necessity for hiring watchmen.

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 (g) Check the position for boundaries, accesses and services. Consider the number and position of temporary water
points, power and sewage connections.
(h) Check on the completeness of the drawings and this could reflect on accuracy of the bill of qualities.
Well-prepared drawings invariably imply that the scheme has been fully considered and description of work on site due
to numerous variations is less likely than if the scheme appears to be ill prepared.
(i) Read all technical reports prior to visiting the site e.g. an engineer‘s report on soil condition may be available.

Site
(a) Check the actual position of the site in relation to adjoining property. Consider the access and the transport of plant
and materials. Ensure that there are no obstacles to the transport of the plant to the site such as narrow bridges or
overhead cables.
Access problems due to traffic restrictions such as limited waiting and no packing, and their effects on unloading of the
materials.
(b) Determine the position of temporary roads, barriers, toilets, holdings and storage areas. Check on the suitability of the
site for the use of land.
(c) Consider the possibility of employing local labour. Check the availability of accommodation, in case lodgers are
required in the area.
(d) Determine the type of ground to be excavated. This may be done by inspection of trial holes. Make enquiries
regarding the height of water table and on the tendency to flooding. Read the relative enclosures in the bill of
quantities.
(e) Note the position, distance and time taken to travel to the nearest tip and the charge for its use if excavated or other
materials are required to be moved to and from the site.
(f) Check the position of telephone wires, electricity services for the provision of temporary supplies.
(g) Determine the general position of the weather and consider the time allowance.
(h) Check on the availability of public transport, the time taken for the journey and distance from the yard.
(i) Check in the case of alteration work, that unoccupied property is in fact empty property.

The contractor, after having looked into the implications of the contract, is now in a position to decide whether or not to submit an
offer for the work.
The following points should be carefully considered before making the decision:
1. How in relation to present and likely future commitments, will this work fit into the firm‘s overall work program?
2. Will there be sufficient workmen available to complete the work within the time limit laid down by the client?
3. Will there be supervisory staff who are competent to do this work, available at the time of contract?
4. Do they have the necessary financial resources available for use on this contract?
5. Will the type of work involved make the best use of labour force and are they competent to undertake such work?
6. Do they require the contract in order to keep their work force fully employed?
7. Is there sufficient time available to prepare an accurate tender?

Insufficient men, lack of proper plant and poor management hold up contracts, frustrate the architects and cause loss of clients.
A contractor must also consider the cash flow through the firm so that at any particular time is not in a financial situation that
could be detrimental to the future of the firm. If the contractor decides to proceed and submit a tender, he must obtain quotation
of the following:

Materials – The cost of materials delivered to the site, labour for loading and storing.

Labour
(i) The cost of men‘s wages plus the cost of all other charges and allowances that must be paid by the employer.
(ii) The performance standards of the men while carrying out the various elements of the work.

Plant
(i) The true cost of the plant to the contractor, allowing for outstanding charges and running cost.
(ii) Transport, erection and dismantling charges and variable costs.

Temporary works – The cost of all temporary works necessary for the completion of all the building works and for the removal
of the same on completion of the contract.

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Overheads – A proportion of the cost of general supervision and own cost necessarily incurred in running the business.

Profit – A sum of money which is commensurate with the risk and effort involved in the organizing and carrying out the work.

The information available to the estimates will contain many uncertainties due to the fact that the work will take place sometime
in the future and at a site some distance from the contractor‘s yard.
In order to reduce the risk of errors, the estimate should be built up in methodical manner and the estimates should stick to strict
routine.
When ‗all in‘ quotations from sub-contractors or suppliers are received for portions of the work, such as precast concrete or
specialist joinery work, then a risk portion of this estimate is removed from the main contractor although he really has the overall
responsibility to ensure that works as satisfactorily completed.
The main contractor will require adding a percentage (usually 2½ to 5%) to cover administrative cost and give an element of
profit.
The sub-contractor may require special facilities such as the unloading of materials by the main contractor storage and canteen
facilities on site, the hoisting of units and like work, the cost of such work plus profit will require to be included in the tender
figure.

31.7 General Terminology

31.7.1 Price Costs
This refers to cost of materials, labour and plant required for the work, i.e. the basic inputs. The prime cost of materials and
labour are usually allowed for in the build up of unit rates. Plant however may either be included in the general overhead or
priced as lump sum in the appropriate items in the preliminaries or trade section of the bill of quantity or in the particular unit
rates in which its use is required.

31.7.2 Overheads
(a) General overheads
The term overhead generally refers to general overheads. They are the outgoings of the firm which are required for its day
to day functioning and which are not directly associated with any particular contract. They include salaries for regular staff,
office costs, transport costs, etc.
(b) Project overheads
This refers to site costs, which are included in order that the building may be erected (project may be executed) in an
efficient manner but not included in the prime costs. They would include such items as site administration (i.e. supervision
on the site) and temporary works.
Special risks
Special risks and considerations, which affect a particular job, will require to be isolated in order that their financial
implication can be established.
In a contract where a bill of quantities is required, such items will be contained in the preliminary section where project
overheads pertain to most jobs, special risks are particular to the job under consideration.

31.7.3 Profit
(a) Gross profit – This refers to the money left after all direct costs are met (the direct costs are the prime cost + project
overheads)
The gross profit is therefore the proportion of the general overhead charged against this particular job plus the balance
of the money due.
(b) Net Profit – This is the money left after the requirements for general overheads haveve been made.

31.8 Tender Policy

(a) In order to maximize their resources all firms should have a tendering policy that is based on knowledge gained from
past trading e.g. whether to adopt selective or non-selective approach to the preparations of offer to carry out work.
(b) Tendering for and accepting work without adequate financial managerial power resources.
(c) The necessary additional work which could result to possible loss.

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 (d) Effect on profitability on other current works due to resources being spread too thinly.

All these are major causes of bankruptcies due to overtrading.

31.9 Distinction between an Estimate and a Tender

A tender is an offer made by a contractor to carry out work at a price stated. An estimate only indicates the probable price of the
work without offering to do it.
The estimate forms a basis on which a tender figure is derived. The object of an estimate is to predict the likely cost of the
proposed work while the object of the tender is to obtain the contract so as to earn maximum profit.

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