ENGINEERING MANAGEMENT AND INDUSTRIAL ECONOMY (EENG410)

3 INDUSTRIAL ORGANIZATION 3.1 INTRODUCTION Every business needs to be organized for effective and efficient performance. Once the objectives, strategies and necessary plans to carry out are formulated, the next phase in management process is that of organization. Organization is thus a function of management which basically deals with the establishment of organizational structure. To start and run a business the essential requirements are men, materials, machines and money. Organization is a coordination of these factors in such a way that maximum output is obtained efficiently and effectively with minimum total cost. Organization is a backbone of management which establishes relationship between people, work and resources. A clear understanding of the objectives and strategies of an organization enables structuring functioning and performance of an organization. Organization involves division of work among people whose efforts must be coordinated to achieve specific objectives and to implement predetermined strategies. 3.2 DEFINITIONS OF ORGANIZATION

The following are some of the definitions of organization. 1. A process of a. Identifying and grouping the work to be performed, b. Defining and delegating the responsibility and authority, and c. Establishing the relationships for the purpose of enabling people work efficiently together in accomplishing objectives. 2. The form of every human association for the attainment of a common purpose. 3. A system of cooperative activities of two or more persons. 4. A process of defining and grouping the activities of an enterprise and establishing the authority relationship among them. 5. The grouping of activities necessary to accomplish goals and plans, and assignment these activities to appropriate departments and positions for authority delegation and coordination. 6. The process of combining the work which individuals or groups have to perform with facilities necessary for its execution, that the duties so performed are the best channels for efficient, systematic, positive and coordinated application of available effort. 7. The rational coordination of the activities or roles of a number of people for the achievement and some common explicit purpose or goal, through division and labour of function, and through a hierarchy of authority and responsibility. 8. Consists of people who carry out differentiated tasks which are coordinated to contribute to the organizations goals. 3.3 SYSTEM APPROACH APPLIED TO ORGANIZATION

A business organization can be looked up on as an open system as it influences and is influenced by its environment continuously. It is an adaptive open system. It receives input from the society in the form of men, materials, machinery, information, thoughts, energy and finance. By utilizing the efforts and skills of the persons, the raw material is converted in to output of goals and services required by the customers. The working of one part of the system is dependent on the working of other parts of the system. The changes in the environment affect the performance of the system process. Environment of organization consists of economic, social, cultural, political, legal, technological, etc. The feedback of information and results is utilized for corrective action. The feedback may be in the form of orders, customer complaints, sales, etc. This information is fed at the control points and conversion processes.
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ENGINEERING MANAGEMENT AND INDUSTRIAL ECONOMY (EENG410)

Environment Input Conversion Process Output

Feedback
Fig. 3.1 System Approach Applied to Organization

The system is coordinated by a managerial subsystem creating, planning, organizing, motivating, communicating and controlling the overall efforts directed towards set goals. Every organization must be aware of environmental elements. Some environmental elements are important to the success or failure of the business. Some are internal, while others are external. A healthy organization realistically deals with them. It adapts to and helps, shapes its environment so that it can become and remain viable. 3.4 NECESSITY OF ORGANIZATION

The increasing size of the manufacturing plant, introduction of most complex production methods, and tough competition between the enterprise and labor problems has necessitated every factory to be well organized in order to produce required quantity of products of the required quality at the required time with minimum production cost. A well designed organization structure with qualified personnel in all key positions achieves execution, coordination and control of all policies and functions of the firm. A good organization is necessary for the following reasons: 1. Complexity of industry-increasing size, introduction of modern machines, labour problems, ... 2. Growing competition-tough competition existing in market, 3. Optimum utilization of resources-men, materials, machines, can be used efficiently if there is organization. 4. Fixation of responsibility and authority- individuals will be provided with responsibility and authority with defined duties, 5. Reduced labour problems-good employer-employee relations if there is good organization, 6. Coordination and directing efforts- a good organization makes it possible to direct and coordinate the efforts of individuals, departments, etc, 7. Facilitates administration-management and operation of the company will be facilitated, 8. Stimulates creativity-sound organization stimulates independent creative thinking and initiative by providing well-defined areas of work with broad latitude of the development of new and improved methods of doing work. 3.5 ESSENTIAL ELEMENTS OF GOOD ORGANIZATION

The essential elements of good organization are:

ENGINEERING MANAGEMENT AND INDUSTRIAL ECONOMY (EENG410)

1. 2. 3. 4.

It must be helpful in achieving objectives, There must be a harmonious grouping of activities, The activities of the organization must be coordinated properly, An organization must be complete in all respects, should include all the essential activities, there should not be repetition of activities, 5. An organization should have an effective system of communication, 6. The span of control should be reasonable, 7. Provision of expansion should be there, 8. Clear and well defined policies and procedures, 9. Employees satisfaction is essential, 10. Proper division of authority and responsibility. 3.6 THE PROCESS OF ORGANIZATION

The logical steps involved in the process of organization are: a. b. c. d. e. f. g. 3.7 Determination of objectives, strategies, plans and policies, Determination of activities, Separation and grouping of activities, Delegation of authority and responsibility, Establishing inter-relationships, Providing physical facilities and proper environment, Preparation of organization chart.

PRINCIPLES OF ORGANIZATION

Efficiency of an enterprise depends on the organizational structure. Some of the important principles to be followed for developing sound and efficient organization structure are: 1. Consideration of unity of objectives. The objectives must be clearly defined for the entire enterprise, for each department and even for each position in the organization structure. There must be unity of objectives so that all efforts can be concentrated on achieving the set goals at minimum cost. 2. Principle of specialization. The organization structure should be formulated in such a way that the activities of the enterprise are divided according to functions. Work should be distributed among the persons very carefully on the basis of their skill, experience and ability to do that work. 3. Principle of authority. Authority empowers the superiors to make the subordinates to do the work. Everybody in the enterprise should be given some authority to secure coordination from subordinates. Lines of authority should be clearly established in the structure of organization in order to avoid overlapping, omission of facts, etc. 4. Principle of coordination. Coordination (between departments, sections...) is necessary for unity of action. 5. Principle of unity of command. Each subordinate should have only one superior and dual subordination should be avoided. 6. Principle of span of control. A single executive should not have more people looking for him for controlling and guidance than he can reasonably manage because the executive will have limited time and energy/capacity. The number of persons which can be effectively supervised by a single executive or department head should be limited to six in average firm; however when the activities are routine and closely related the span can be as large up to twenty. 7. Principle of exception. Only exceptionally complex matters should be referred to executives for their decision and matters of routine nature should be decided by subordinates themselves. 8. Principle of flexibility. The organization structure should be flexible enough to permit slight alterations and expansions whenever needed, due to changes in circumstances.
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ENGINEERING MANAGEMENT AND INDUSTRIAL ECONOMY (EENG410)

9. Principle of simplicity. The organization structure should be simple with minimum number of levels. If the organization has a large number of levels, the problem of effective coordination and communication may arise. 10. Principle of responsibility. The superior should be held responsible for the acts of his subordinates to whom he has delegated authority. 11. Principle of balance. There should be balance between activities and sizes of various departments, authority and responsibility, standardization of procedures and flexibility, centralization and decentralization, etc. 12. Principle of continuity. The organizational structure should be set in such a way that it enables to continue its useful existence for a longer period. This is possible if it is dynamic and capable of adopting itself to the needs of changing circumstances. 13. Principle of scalar chain. Organization is a vertical hierarchy specifying various chains of command from top to bottom level. The links of chain should be continuous from top to bottom. The authority originating from the top should flow below without interruption. 14. Principle of parity between authority and responsibility. Authority means the ability of the superior to command. Conversely responsibility means the obligation of the subordinates to a superior to perform the assigned work. The authority and responsibility should go hand in hand. When authority is delegated to an individual, he is held responsible for its performance and therefore responsibility is demanded from him. 15. Principle of efficiency. The organization structure should enable the enterprise to attain objectives with minimum cost and effort. It should allow the optimum utilization of its scarce resources. 16. Principle of communication. A good communication subsystem is essential for smooth flow of information. For better results it should have free two-way communication. Not only executive should pass down information to the subordinates, there should be feedback. 3.8 ORGANIZATIONAL STRUCTURE

Organizational structure is a skeleton or framework that divides the total activities in to related groups, develops superior and subordinate relationships among the persons by prescribing the authorities. Thus it indicates the hierarchy, authority structure and reporting relationships. There are three main types of organizational structure: i. ii. iii. Functional structure, Divisional structure and Matrix structure.

Each structure has its own strong and weak points. i. Functional Structure

In the functional structure, the employees are working in departments based on what they are doing i.e. we have engineering department, maintenance department, finance department, research department, Warehouse department, purchasing department. This structure enhances the experience of each function. For example, all the maintenance engineers are working in the same department and thus they will exchange knowledge and support with each other. This structure saves us money because of the economies of scale. This structure makes the coordination between different departments more difficult than other structures. It also does not allow for flexibility because of the centralization.

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ENGINEERING MANAGEMENT AND INDUSTRIAL ECONOMY (EENG410)

Fig. 3.2 Functional Organizational Structure

ii.

Divisional Structure

Divisional structure divides the employees based on the product/customer segment/geographical location. For example, each division is responsible for certain product and has its own resources such as finance, marketing, warehouse, maintenance, etc. Accordingly, this structure is a decentralized structure and thus allows for flexibility and quick response to environmental changes. It also enhances innovation and differentiation strategies. On the other hand, this structure results in duplication of resources because, for example, we need to have warehouse for each division. Obviously, it does not support the exchange of knowledge between people working in the same profession because parts of them are working in one division and the others are working in other divisions.

Fig. 3.3 Divisional Organizational Structure

iii.

Matrix Structure

Matrix structure combines both structures. For example, we can have a functional structure and then assign a manager for each product. Some employees will have two managers: functional manager and product manager. This type of structure tries to get the benefits of functional structure and also of divisional structure; however, it is not easy to implement because of the dual authority. This structure is very useful for multinational companies.

3. Industrial Organization

ENGINEERING MANAGEMENT AND INDUSTRIAL ECONOMY (EENG410)

Fig. 3.4 Matrix Organizational Structure

It is important to keep in mind that each managerial decision has its own pros and cons. Sometimes, writers will convince you that divisional or matrix structure is the recent trend and that you need to reengineer your structure tomorrow morning. Obviously, this is not true. Many organizations still have functional structure and are doing very well. It is very important to select the structure that best service your condition. What is your strategy? How many products do you have? What type of technology are you using? How big is your company/organization? Management should take necessary actions to decrease the disadvantages of the chosen structure and to enhance its positive effects. For example, if we think the divisional structure is the best type for our condition then we should have tools to exchange knowledge between engineers working in different divisions. Conversely, if we adopt functional structure, we can form teams from different functions to solve problems and develop our products. Whatever structure you have, the results are the most important. The results are not your perception that you are the best. Measure yourself compared with similar companies. Do you need one week to take a decision that they make in one hour? Are your employees motivated more than those in other companies? Are you developing new products and services faster than other companies? Are you achieving your main strategy?

3. Industrial Organization