business concepts iv unit

7/30/2019 Business Concepts IV Unit

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UNIT III - ELEMENTS OF BUSINESS ACTIVITY

PRODUCTION

Production means application of processes. (Technology) to the raw material toadd the use and economic values to arrive at desired product by the best method, with outsacrificing the desired quality. We have three ways of Production, they are:(i) Production by Disintegration: By separating the contents of Crude oil or a mixture

the desired products are produced. For example the crude oil is disintegrated into variousfuel oils. Similarly salt production is also an example for product produced bydisintegrated. We can use Mechanical or Chemical or both technologies to get the desiredproduct, so that it will have desired use value.(ii) Production by Integration: In this type of Production various Components of theproducts are assembled together to get the desired product. In this process, Physical andChemical Properties of the materials used may change. The examples are: Assembly ofTwo wheelers, four wheelers and so on.(iii) Production by Service: Here the Chemical and Mechanical Properties of materialsare improved without any physical change. The example for this is Heat Treatment ofmetals. In real world, a combination of above methods is used. In general production is

the use of any process or procedure designed to transform a set of input elements into aset of output elements, which have use value and economic value.

DEFINITION OF PRODUCTION MANAGEMENT

It may be defined as: (i) The performance of the management activities withregards to selecting, designing, operating, Controlling and updating production system.(ii) It is the processes of effectively planning, coordinating and controlling the productionthat is the operations of that part of an enterprise, it means to say that production andoperations Management is responsible for the actual transformation of raw materials intofinished products.(iii) Production management is a function of Management, related to planning,

coordinating and controlling the resources required for production to produce specifiedproduct by specified methods, by optimal utilization of resources.(iv) Production management is defined as management function which plans, organizes,coordinates, directs and controls the material supply and processing activities of anenterprise, so that specified products are produced by specified methods to meet anapproved sales programme. These activities are being carried out in such a manner thatLabour, Plant and Capital available are used to the best advantage of the organization.

OBJECTIVE OF PRODUCTION MANAGEMENT

The objective of Production Management is to produce the desired product orspecified product by specified methods so that the optimal utilization of available

resources is met with. Hence the production management is responsible to produce thedesired product, which has marketability at the cheapest price by proper planning, themanpower, material and processes. Production management must see that it will deliverright goods of right quantity at right place and at right price. When the above objective isachieved, we say that we have effective Production Management system.


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SCOPE OF PRODUCTION MANAGEMENT:

In fact, we apply Principles of Management; and functions of Management in ourday-to-day life. We all know, from morning till night, we plan our activities; wecoordinate available resources and control our activities to achieve certain goals. So alsoany organization must follow the Principles of Management for its survival and growth.The same is applicable to production Management also. Reading and learning ProductionManagement will enable one to be capable of solving the problems of the organization,

may be an Educational Institution, Production Shop, Hospital, Departmental shop or evena barber shop. The problems a manager face in various organizations are more or lesssimilar to that of Production department but smaller in magnitude.

Hence the knowledge of Production Management will help any professionalManager to tackle the problems of his business easily. For example: The ProductionManagement consists of Planning, selection of materials, planning of processes, Routing,Scheduling and controlling the activities etc., Take the example of an EducationalInstitution/University. Here also selection of raw students, Planning of the Course Work,Educating the students and conducting the examination. Therefore this knowledge willenable one to apply the principles of Production Management to any field of life withoutrestriction. Here, we have to remember that the above is also applicable to the

management of a service organization and the management of a Project. Here it is betterto distinguish between product, Service and Project, so as to help the reader to know onwhich particular aspect of Production Management to put much emphasis, in managing aservice organization or a project.(i) Product: Manufacturing system often produces standardized products in largevolumes. The plant and machinery have a finite capacity. The facilities constitute fixedcosts, which are allocated to the products produced. Variable costs, such as, labour costand materials costs. While manufacturing the product use value and economic values areadded to the product. Hence the product is a store of values added during manufacture.Because the input costs and output costs are measurable, the productivity can bemeasured with certain degree of accuracy. Product can be transported to the markets and

stored physically until it is sold.(ii) Service: Service system present more uncertainty with respect to capacity and costs.Services are produced and consumed in the presence of the customer. We cannot storethe service physically. Because of this the service organizations, such as Hotels,Hospitals, Transport Organizations and many other service organizations the capacitymust be sufficiently or consciously managed to accommodate a highly variable demand.Sometimes services like legal practice and medical practice involve Professional orintellectual judgments, which cannot be easily standardized. Because of this thecalculation of cost and productivity is difficult.(iii) Project: Project system does not produce standardized products. The Plant,Machinery, Men and Materials are often brought to project site and the project iscompleted. The project is of big size and remains in the site itself after completion. As thecosts can be calculated and allocated to the project with considerable accuracy,Productivity can be measured. Once the project is completed, all the resources areremoved from site.


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TYPES OF PRODUCTION SYSTEMS

The organization of manufacturing systems, also planning and control ofproduction greatly depends on type of product type of the product line. Basic principlesthat guide the formation of planning policy and its execution may be the same for all themanufacturing concerns. But emphasis on a particular aspect of production management

in fulfilling of specific requirement of the plant and the management approach to theproblems of inventory, machine selection, machine setting, tooling, routing, scheduling,loading, follow up and general control will differ depending on the type of productionsystem. Three main factors generally determine this aspect are :(i) Type of production i.e., quantities of finished products and regularity of manufacture.For example whether Job production or Batch Production or Continuous Production.(ii) Size of the Plant i.e., Small Industry, Medium sized Industry or Large Industry.(iii) Type of Production: In general there are three classifications in types of Productionsystem. They are discussed below.(a) Job Production: In this system Products are manufactured to meet the requirementsof a specific order. The quality involved is small and the manufacturing of the product

will take place as per the specifications given by the customer. This system may befurther classified as.(i) The Job produced only once: Here the customer visit the firm and book his order.After the completion of the product, he takes delivery of the product and leaves the firm.He may not visit the firm to book the order for the same product. The firm has to plan formaterial, process and manpower only after receiving the order from the customer. Thefirms have no scope for pre-planning the production of the product.(ii) The job produced at irregular intervals: Here the customer visits the firm to placeorders for the same type of the product at irregular intervals. The firm will not have anyidea of customers visit here also planning for materials, process and manpower will startonly after taking the order from the customer. In case the firm maintains the record of the

Jobs Produced by it, it can refer to the previous plans, when the customer arrives at thefirm to book the order.(iii) The Jobs Produced periodically at regular intervals: In this system, the customerarrives at the firm to place orders for the same type of product at regular intervals. Herefirm knows very well that the customer visits at regular intervals, it can plan formaterials, and process and manpower and have them in a master file. As soon as thecustomer visits and books the order, the firm can start production. If the volume of the


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order is considerably large and the number of regularly visiting customers are large innumber, the Job Production system slowly transform into Batch Production system.(b) Batch Production: Batch Production is the manufacture of number of identicalproducts either to meet the specific order or to satisfy the demand. When the Productionof plant and equipment is terminated, the plant and equipment can be used for producingsimilar products. This system also can be classified under three categories.(i) A batch produced only once: Here customer places order with the firm for the

product of his specification. The size of the order is greater than that of job productionorder. The firm has to plan for the resources after taking the order from the customer.(ii) A Batch produced at irregular intervals as per Customer order or when the need

arises: As the frequency is irregular, the firm can maintain a file of its detailed plans anditcan refer to its previous files and start production.(iii) A Batch Produced periodically at known Intervals: Here the firm either receivesorder from the customer at regular intervals or it may produce the product to satisfy thedemand. It can have well designed file of its plans, material requirement and instructionsfor the ready reference. It can also purchase materials required in bulk in advance. As thefrequency of regular orders goes on increasing the Batch Production system becomesMass Production System. Here also, incase the demand for a particular product ceases,

the plant and machinery can be used for producing other products with slightmodification in layout or in machinery and equipment.(c) Continuous Production: Continuous Production system is the specializedmanufacture of identical products on which the machinery and equipment is fullyengaged. The continuous production is normally associated with large quantities and withhigh rate of demand. Hence the advantage of automatic production is taken. This systemis classified as(i) Mass Production: Here same type of product is produced to meet the demand of anassembly line or the market. This system needs good planning for material, process,maintenance of machines and instruction to operators. A purchase of materials in bulkquantities is advisable.

(ii) Flow Production: The difference between Mass and Flow Production is the type ofproduct and its relation to the plant. In Mass Production identical products are producedin large numbers. If the demand falls or ceases, the machinery and equipment, after slightmodification be used for manufacturing products of similar nature. In flow production,the plant and equipment is designed for a specified product. Hence if the demand falls forthe product or ceases, the plant cannot be used for manufacturing other products. It is tobe scraped. The examples for the above discussed production system are(i) Job Production Shop: Tailors shop; cycle and vehicles repair shops, Job typing shops,small Workshops.(ii) Batch Production Shop: Tyre Production Shops, Readymade dress companies,Cosmetic manufacturing companies...etc.(iii) Mass Production Shops: Components of industrial products,(iv) Flow Production: Cement Factory, Sugar factory, Oil refineries...etc.,


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FINANCE-SOURCES OF FINANCE

BUSINESS FINANCE:

Every business requires some amount of money to start and run the business.Whether it is a small business or large, manufacturing or trading or transportationbusiness, money is an essential requirement for every activity. Money required for anyactivity is known as finance. So the term business finance refers to the money requiredfor business purposes and the ways by which it is raised. Thus, it involves procurement

and utilization of funds so that business firms will be able to carry out their operationseffectively and efficiently. Every business needs funds mainly for the following purposes:1. To purchase fixed assets: Every type of business needs some fixed assets like landand building, furniture, machinery etc. A large amount of money is required for purchaseof these assets.2. To meet day-to-day expenses: After establishment of a business, funds are needed tocarry out day-to-day operations e.g., purchase of raw materials, payment of rent andtaxes, telephone and electricity bills, wages and salaries, etc.3. To fund business growth: Growth of business may include expansion of existing lineof business as well as adding new lines. To finance such growth, one needs more funds.4. To bridge the time gap between production and sales: The amount spent on

production is realized only when sales are made. Normally, there is a time gap betweenproduction and sales and also between sales and realization of cash. Hence during thisinterval, expenses continue to be incurred, for which funds are required.5. To meet contingencies: Funds are always required to meet the ups and downs ofbusiness and for some unforeseen problems. Suppose, a manufacturer anticipatesshortage of raw materials after a period, then he would like to stock the raw materials inlarge quantity. But he will be able to do so only if sufficient money is available with him.6. To avail of business opportunities: Funds are also required to avail of businessopportunities. Suppose a company wants to submit a tender for which some amount ofmoney is required to be deposited along with the application. In case of no availability offunds it would not be possible for the company to submit the tender. Take another

example. When a stockist offers special discount on large amount of purchase of anyparticular material then a manufacturer can avail of such offer, only if he has adequatefunds to buy it.

IMPORTANCE OF BUSINESS FINANCE

Finance is the most important requirement of every business and it is consideredas lifeline of the business. Inadequate finance poses many problems and may bring anend to the life of the business. The importance of finance has considerably increased inmodern days due to following reasons in addition to the usual need:(a) Need for Large Scale Operation: Now-a-days business activities are generallyundertaken on a large scale. The products of any country are now freely and easilyavailable in other countries. The entire world has become a big market. So to survive inthe business world the businessman has to expand the horizon of his activities andfunction on large scale. This expansion of business always demands more funds.(b) Use of Modern Technology: Use of latest technology in the process of production aswell as distribution has become imperative for every business now a-days. To meet thecompetition, production process now demands use of modern machinery, equipments andtools. Hence, there is a greater need for finance to meet the challenge of the worldsmarkets successfully.


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(c) Promotion of sales: In this era of competition lot of money is to be spent on activitiesfor promoting sales. This involves advertisement, personal selling, use of salespromotional schemes, providing after sales service and free home delivery, etc. whichneed huge amount of funds.TYPES OF BUSINESS FINANCE

The type and amount of funds required usually differs from one business toanother. For instance, if the size of business is large, the amount of funds required will

also be large. Likewise, the financial requirements are more in manufacturing business ascompared to trading business. The business need funds for longer period to be invested infixed assets like land and building, machinery etc. Sometimes, the business also needsfund to be invested in shorter period. So based on the period for which the funds arerequired, the business finance is classified into three categories.

(a) Short-term Finance;(b) Medium-term Finance; and(c) Long-term Finance;

Let us now learn about each of them in detail.SHORT-TERM FINANCE

Funds required to meet day-to-day expenses are known as short-term finance.

This is required for purchase of raw materials, payment of wages, rent, insurance,electricity and water bills, etc. The short-term finance is required for a period of one yearor less. This financial requirement for short period is also known as working capitalrequirement or circulating capital requirement. It may be noted that a part of the workingcapital requirement is of a long-term nature, as certain minimum amount of funds arealways kept to meet the requirement of stock and regular day-to-day expenses.MEDIUM-TERM FINANCE

Medium-term finance is utilized for all such purposes where investments arerequired for more than one year but less than five years. Amount required to fundmodernization and renovation, special promotional programmes etc. fall in this category.LONG-TERM FINANCE

The amount of funds required by a business for more than five years is calledlong-term finance. Generally this type of finance is required for the purchase of fixedassets like land and building, plant and machinery furniture etc. The long term finance isalso known as fixed capital as such need in fact is, of a permanent nature. Everyorganization need different types of finance i.e., long term, medium-term as well as short-term. But the combinations in which these are used differ from one business to another.For example, steel industry requires more long-term finance to be invested in land andbuilding and machinery as compared to the manufacturing of leather goods or plasticbuckets. Similarly, for manufacturing hosiery items, requirement of short-term financewould be more than that of long-term finance.


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SOURCES OF FINANCE

There are two main categories of sources from which the businessmen can get therequired funds for their business. These are:(1) Internal source; and(2) External source.

You know that to start a business the businessman either invests his own money

or borrows from outsiders or uses both the sources. When the businessman invests hisown money (called owners capital), and retains a part of the profits earned in thebusiness it constitute the internal sources of finance. It is an integral part of everybusiness organization and it is cost effective. But, this source has its own limitations.Hence the business houses have to resort to the external sources of finance. The variousexternal sources from where businessmen can get the finance include, friends andrelatives, banks and other financial institutions, moneylenders, capital market,manufacturers and producers, customers, foreign financial institutions and agencies, etc.It is observed that the scope of raising funds also depends upon the nature and form ofbusiness organization. For example, a sole proprietorship form of business organizationhas very limited sources from which it can arrange funds for the business. These are:

(a) Own Savings(b) Friends and Relatives(c) Moneylenders(d) Commercial Banks(e) Finance Companies(f) Manufactures and Suppliers(g) Retained Profits

The same sources of financing are also available in case of partnership firms. Inboth sole proprietorship and partnership form of business organisation, long term capitalis generally provided by the owners themselves by way of investing their own savings

and retaining a part of the profits generated by the business and the rest of the abovesources are mostly used for their short-term financial needs. However, in case ofcompanies, the following are the usual sources of finance.(a) Capital Market(b) Financial Institutions(c) Public Deposits(d) Commercial Banks(e) Leasing Companies(f) Investment Trusts(g) Retained Profits.


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UNIT IV - HUMAN RESOURCES

HUMAN RESOURCE MANAGEMENT:

Human resource (or personnel) management, in the sense of getting things done throughpeople. It's an essential part of every manager's responsibilities, but many organizationsfind it advantageous to establish a specialist division to provide an expert servicededicated to ensuring that the human resource function is performed efficiently.

"People are our most valuable asset" is a clich which no member of any seniormanagement team would disagree with. Yet, the reality for many organizations is thattheir people remain

under valued under trained under utilized poorly motivated, and consequently perform well below their true capability

The rate of change facing organizations has never been greater and organizations mustabsorb and manage change at a much faster rate than in the past. In order to implement asuccessful business strategy to face this challenge, organizations, large or small, mustensure that they have the right people capable of delivering the strategy.

The market place for talented, skilled people is competitive and expensive. Taking onnew staff can be disruptive to existing employees. Also, it takes time to develop 'culturalawareness', product/ process/ organization knowledge and experience for new staffmembers.

As organizations vary in size, aims, functions, complexity, construction, the physical

nature of their product, and appeal as employers, so do the contributions of humanresource management. But, in most the ultimate aim of the function is to: "ensure that atall times the business is correctly staffed by the right number of people with the skillsrelevant to the business needs", that is, neither overstaffed nor understaffed in total or inrespect of any one discipline or work grade.

FUNCTIONAL OVERVIEW AND STRATEGY FOR HRM

These issues motivate a well thought out human resource management strategy, with theprecision and detail of say a marketing strategy. Failure in not having a carefully craftedhuman resources management strategy, can and probably will lead to failures in the

business process itself.

These sets of resources are offered to promote thought, stimulate discussion, diagnose theorganizational environment and develop a sound human resource management strategyfor your organization. We begin by looking at the seven distinguishable functions humanresource management provide to secure the achievement of the objective defined above.


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FUNCTION 1: MANPOWER PLANNING

The penalties for not being correctly staffed are costly.

Understaffing loses the business economies of scale and specialization, orders,customers and profits.

Overstaffing is wasteful and expensive, if sustained, and it is costly to eliminate

because of modern legislation in respect of redundancy payments, consultation,minimum periods of notice, etc. Very importantly, overstaffing reduces thecompetitive efficiency of the business.

Planning staff levels requires that an assessment of present and future needs of theorganization be compared with present resources and future predicted resources.Appropriate steps then be planned to bring demand and supply into balance.

Thus the first step is to take a 'satellite picture' of the existing workforce profile(numbers, skills, ages, flexibility, gender, experience, forecast capabilities, character,potential, etc. of existing employees) and then to adjust this for 1, 3 and 10 years ahead

by amendments for normal turnover, planned staff movements, retirements, etc, in linewith the business plan for the corresponding time frames.

The result should be a series of crude supply situations as would be the outcome ofpresent planning if left unmodified. (This, clearly, requires a great deal of informationaccretion, classification and statistical analysis as a subsidiary aspect of personnelmanagement.)

What future demands will be is only influenced in part by the forecast of the personnelmanager, whose main task may well be to scrutinize and modify the crude predictions ofother managers. Future staffing needs will derive from:

Sales and production forecasts The effects of technological change on task needs Variations in the efficiency, productivity, flexibility of labor as a result of

training, work study, organizational change, new motivations, etc. Changes in employment practices (e.g. use of subcontractors or agency staffs,

hiving-off tasks, buying in, substitution, etc.) Variations, which respond to new legislation, e.g. payroll taxes or their abolition,

new health and safety requirements Changes in Government policies (investment incentives, regional or trade grants,

etc.)

What should emerge from this 'blue sky gazing' is a 'thought out' and logical staffingdemand schedule for varying dates in the future which can then be compared with thecrude supply schedules. The comparisons will then indicate what steps must be taken toachieve a balance.

That, in turn, will involve the further planning of such recruitment, training, retraining,labor reductions (early retirement/redundancy) or changes in workforce utilization as will


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bring supply and demand into equilibrium, not just as a oneoff but as a continuingworkforce planning exercise the inputs to which will need constant varying to reflect'actual' as against predicted experience on the supply side and changes in productionactually achieved as against forecast on the demand side.

FUNCTION 2: RECRUITMENT AND SELECTION OF EMPLOYEES

Recruitment of staff should be preceded by:

An analysis of the job to be done (i.e. an analytical study of the tasks to be performed todetermine their essential factors) written into a job description so that the selectors knowwhat physical and mental characteristics applicants must possess, what qualities andattitudes are desirable and what characteristics are a decided disadvantage;

In the case of replacement staff a critical questioning of the need to recruit at all(replacement should rarely be an automatic process).

Effectively, selection is 'buying' an employee (the price being the wage or salarymultiplied by probable years of service) hence bad buys can be very expensive.

For that reason some firms (and some firms for particular jobs) use externalexpert consultants for recruitment and selection. Equally some small organizations exist to 'head hunt', i.e. to attract staff with high

reputations from existing employers to the recruiting employer. However, the'cost' of poor selection is such that, even for the mundane day-to-day jobs, thosewho recruit and select should be well trained to judge the suitability of applicants.

The main sources of recruitment are:

Internal promotion and internal introductions (at times desirable for moralepurposes)

Careers officers (and careers masters at schools) University appointment boards Agencies for the unemployed Advertising (often via agents for specialist posts) or the use of other local media

(e.g. commercial radio)

Where the organization does its own printed advertising it is useful if it has someidentifying logo as its trade mark for rapid attraction and it must take care not to offendthe sex, race, etc. antidiscrimination legislation either directly or indirectly. The form onwhich the applicant is to apply (personal appearance, letter of application, completion ofa form) will vary according to the posts vacant and numbers to be recruited.

It is very desirable in many jobs that claim about experience and statements aboutqualifications are thoroughly checked and that applicants unfailingly complete a healthquestionnaire (the latter is not necessarily injurious to the applicants chance of beingappointed as firms are required to employ a percentage of disabled people).

Before letters of appointment are sent any doubts about medical fitness or capacity (inemployments where hygiene considerations are dominant) should be resolved by


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requiring applicants to attend a medical examination. This is especially so where, as forexample in the case of apprentices, the recruitment is for a contractual period or involvesthe firm in training costs.

Interviewing can be carried out by individuals (e.g. supervisor or departmental manager),by panels of interviewers or in the form of sequential interviews by different experts andcan vary from a five minute 'chat' to a process of several days. Ultimately personal skills

in judgment are probably the most important, but techniques to aid judgment includeselection testing for:

Aptitudes (particularly useful for school leavers) Attainments General intelligence

(All of these need skilled testing and assessment.) In more senior posts other techniquesare:

Leaderless groups

Command exercises Group problem solving

(These are some common techniques - professional selection organizations often useother techniques to aid in selection.)

Training in interviewing and in appraising candidates is clearly essential to goodrecruitment. Largely the former consists of teaching interviewers how to draw out theinterviewee and the latter how to rate the candidates. For consistency (and as an aid tochecking that) rating often consists of scoring candidates for experience, knowledge,physical/mental capabilities, intellectual levels, motivation, prospective potential,

leadership abilities etc. (according to the needs of the post). Application of the normalcurve of distribution to scoring eliminates freak judgments.

FUNCTION 3: EMPLOYEE MOTIVATION

To retain good staff and to encourage them to give of their best while at work requiresattention to the financial and psychological and even physiological rewards offered by theorganization as a continuous exercise.

Basic financial rewards and conditions of service (e.g. working hours per week) aredetermined externally (by national bargaining or government minimum wage legislation)

in many occupations but as much as 50 per cent of the gross pay of manual workers isoften the result of local negotiations and details (e.g. which particular hours shall beworked) of conditions of service are often more important than the basics. Hence there isscope for financial and other motivations to be used at local levels.

As staffing needs will vary with the productivity of the workforce (and the industrialpeace achieved) so good personnel policies are desirable. The latter can depend upon


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other factors (like environment, welfare, employee benefits, etc.) but unless the wagepacket is accepted as 'fair and just' there will be no motivation.

Hence while the technicalities of payment and other systems may be the concern ofothers, the outcome of them is a matter of great concern to human resource management.

Increasingly the influences of behavioral science discoveries are becoming important not

merely because of the widely-acknowledged limitations of money as a motivator, butbecause of the changing mix and nature of tasks (e.g. more service and professional jobsand far fewer unskilled and repetitive production jobs).

The former demand better-educated, mobile and multi-skilled employees much morelikely to be influenced by things like job satisfaction, involvement, participation, etc. thanthe economically dependent employees of yesteryear.

Hence human resource management must act as a source of information about and asource of inspiration for the application of the findings of behavioral science. It may be amatter of drawing the attention of senior managers to what is being achieved elsewhere

and the gradual education of middle managers to new points of view onjob design, workorganization and worker autonomy.

FUNCTION 4: EMPLOYEE EVALUATION

An organization needs constantly to take stock of its workforce and to assess itsperformance in existing jobs for three reasons:

To improve organizational performance via improving the performance ofindividual contributors (should be an automatic process in the case of goodmanagers, but (about annually) two key questions should be posed:

o

What has been done to improve the performance of a person last year?o And what can be done to improve his or her performance in the year to

come?). To identify potential, i.e. to recognize existing talent and to use that to fill

vacancies higher in the organization or to transfer individuals into jobs wherebetter use can be made of their abilities or developing skills.

To provide an equitable method of linking payment to performance where thereare no numerical criteria (often this salary performance review takes place aboutthree months later and is kept quite separate from 1. and 2. but is based on thesame assessment).

On-the-spot managers and supervisors, not HR staffs, carry out evaluations. Thepersonnel role is usually that of:

Advising top management of the principles and objectives of an evaluationsystem and designing it for particular organizations and environments.

Developing systems appropriately in consultation with managers, supervisors andstaff representatives. Securing the involvement and cooperation of appraisers andthose to be appraised.
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Assistance in the setting of objective standards of evaluation / assessment, forexample:

o Defining targets for achievement;

o Explaining how to quantify and agree objectives;

o Introducing self-assessment;

o Eliminating complexity and duplication.

Publicizing the purposes of the exercise and explaining to staff how the system

will be used. Organizing and establishing the necessary training of managers and supervisors

who will carry out the actual evaluations/ appraisals. Not only training inprinciples and procedures but also in the human relations skills necessary. (Lackof confidence in their own ability to handle situations of poor performance is themain weakness of assessors.)

Monitoring the scheme - ensuring it does not fall into disuse, following up ontraining/job exchange etc. recommendations, reminding managers of theirresponsibilities.

Full-scale periodic reviews should be a standard feature of schemes since resistance to

evaluation / appraisal schemes is common and the temptation to water down or renderschemes ineffectual is ever present (managers resent the time taken if nothing else).

Basically an evaluation / appraisal scheme is a formalization of what is done in a morecasual manner anyway (e.g. if there is a vacancy, discussion about internal moves andinternal attempts to put square pegs into 'squarer holes' are both the results of casualevaluation). Most managers approve merit payment and that too calls for evaluation.Made a standard routine task, it aids the development of talent, warns the inefficient oruncaring and can be an effective form of motivation.

FUNCTION 5: INDUSTRIAL RELATIONS

Good industrial relations, while a recognizable and legitimate objective for anorganization, are difficult to define since a good system of industrial relations involvescomplex relationships between:

(a) Workers (and their informal and formal groups, i. e. trade union, organizations andtheir representatives);

(b) Employers (and their managers and formal organizations like trade and professionalassociations);

(c) The government and legislation and government agencies l and 'independent' agencieslike the Advisory Conciliation and Arbitration Service.

Oversimplified, work is a matter of managers giving instructions and workers followingthem - but (and even under slavery we recognize that different 'managing' produces verydifferent results) the variety of 'forms' which have evolved to regulate the conduct ofparties (i.e. laws, custom and practice, observances, agreements) makes the giving andreceipt of instructions far from simple. Two types of 'rule' have evolved:
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'Substantive', determining basic pay and conditions of service (what rewardsworkers should receive);

'Procedural,' determining how workers should be treated and methods andprocedures.

Determining these rules are many common sense matters like:

Financial, policy and market constraints on the parties (e.g. some unions do nothave the finance to support industrial action, some have policies not to strike,some employers are more vulnerable than others to industrial action, some willnot make changes unless worker agreement is made first, and rewards alwaysultimately reflect what the market will bear);

The technology of production (the effect of a strike in newspaper production isimmediate -it may be months before becoming effective in shipbuilding);

The distribution of power within the community - that tends to vary over time andwith economic conditions workers (or unions) dominating in times of fullemployment and employers in times of recession.

Broadly in the Western style economies the parties (workers and employers) are free tomake their own agreements and rules. This is called 'voluntarism'. But it does not meanthere is total noninterference by the government. That is necessary to:

Protect the weak (hence minimum wage); Outlaw discrimination (race or sex); Determine minimum standards of safety, health, hygiene and even important

conditions of service; To try to prevent the abuse of power by either party.

FUNCTION 6: PROVISION OF EMPLOYEE SERVICES

Attention to the mental and physical well-being of employees is normal in manyorganizations as a means of keeping good staff and attracting others.

The forms this welfare can take are many and varied, from loans to the needy tocounseling in respect of personal problems.

Among the activities regarded as normal are:

Schemes for occupational sick pay, extended sick leave and access to the firm'smedical adviser;

Schemes for bereavement or other special leave; The rehabilitation of injured/unfit/ disabled employees and temporary or

permanent move to lighter work; The maintenance of disablement statistics and registers (there are complicated

legal requirements in respect of quotas of disabled workers and a need for'certificates' where quota are not fulfilled and recruitment must take place);

Provision of financial and other support for sports, social, hobbies, activities ofmany kinds which are work related;


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Provision of canteens and other catering facilities; Possibly assistance with financial and other aid to employees in difficulty

(supervision, maybe, of an employee managed benevolent fund or scheme); Provision of information handbooks, Running of pre-retirement courses and similar fringe activities; Care for the welfare aspects of health and safety legislation and provision of first-

aid training.

The location of the health and safety function within the organization varies. Commonlya split of responsibilities exists under which 'production' or 'engineering' managementcares for the provision of safe systems of work and safe places and machines etc., butHRM is responsible for administration, training and education in awareness andunderstanding of the law, and for the alerting of all levels to new requirements.

FUNCTION 7: EMPLOYEE EDUCATION, TRAINING AND DEVELOPMENT

In general, education is 'mind preparation' and is carried out remote from the actual workarea, training is the systematic development of the attitude, knowledge, skill pattern

required by a person to perform a given task or job adequately and development is 'thegrowth of the individual in terms of ability, understanding and awareness'.

Within an organization all three are necessary in order to:

Develop workers to undertake higher-grade tasks; Provide the conventional training of new and young workers (e.g. as apprentices,

clerks, etc.); Raise efficiency and standards of performance; Meet legislative requirements (e.g. health and safety); Inform people (induction training, pre-retirement courses, etc.);

From time to time meet special needs arising from technical, legislative, and knowledgeneed changes. Meeting these needs is achieved via the 'training loop'. The diagnosis ofother than conventional needs is complex and often depends upon the intuition orpersonal experience of managers and needs revealed by deficiencies. Sources ofinspiration include:

Common sense - it is often obvious that new machines, work systems, taskrequirements and changes in job content will require workers to be prepared;

Shortcomings revealed by statistics of output per head, performance indices, unitcosts, etc. and behavioral failures revealed by absentee figures, lateness, sickness

etc. records; Recommendations of government and industry training organizations; Inspiration and innovations of individual managers and supervisors; Forecasts and predictions about staffing needs; Inspirations prompted by the technical press, training journals, reports of the

experience of others; The suggestions made by specialist (e.g. education and training officers, safety

engineers, work-study staff and management services personnel).


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Designing training is far more than devising courses; it can include activities such as:

Learning from observation of trained workers; Receiving coaching from seniors; Discovery as the result of working party, project team membership or attendance

at meetings; Job swaps within and without the organization;

Undertaking planned reading, or follow from the use of selfteaching texts andvideo tapes; Learning via involvement in research, report writing and visiting other works or

organizations.

So far as group training is concerned in addition to formal courses there are:

Lectures and talks by senior or specialist managers; Discussion group (conference and meeting) activities; Briefing by senior staffs; Role-playing exercises and simulation of actual conditions;

Video and computer teaching activities; Case studies (and discussion) tests, quizzes, panel 'games', group forums,

observation exercises and inspection and reporting techniques.

Evaluation of the effectiveness of training is done to ensure that it is cost effective, toidentify needs to modify or extend what is being provided, to reveal new needs andredefine priorities and most of all to ensure that the objectives of the training are beingmet.

The latter may not be easy to ascertain where results cannot be measured mathematically.In the case of attitude and behavioral changes sought, leadership abilities, drive and

ambition fostered, etc., achievement is a matter of the judgment of senior staffs. Exactvalidation might be impossible but unless on the whole the judgments are favorable thecooperation of managers in identifying needs, releasing personnel and assisting intraining ventures will cease.

In making their judgments senior managers will question whether the efforts expendedhave produced:

More effective, efficient, flexible employees; Faster results in making newcomers knowledgeable and effective than would

follow from experience;

More effective or efficient use of machinery, equipment and work procedures; Fewer requirements to implement redundancy (by retraining); Fewer accidents both personal and to property; Improvements in the qualifications of staff and their ability to take on tougher

roles; Better employee loyalty to the organization with more willingness to innovate and

accept change.


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MEANING OF STAFFING

Staffing refers to the managerial function of employing and developing humanresources for carrying out the various managerial and non-managerial activities in anorganisation. This involves determining the manpower requirement, and the methods ofrecruiting, selecting, training and developing the people for various positions created inthe organisation.IMPORTANCE OF STAFFING

(a) It helps in getting right people for the right job at the right time. The function ofstaffing enables the manager to find out as to how many workers are required and withwhat qualifications and experience.(b) Staffing contributes to improved organizational productivity. Through properselection the organisation gets quality workers, and through proper training theperformances level of the workers can be improved.(c) It helps in providing job satisfaction to the employees keeping their morale high. Withproper training and development programmes their efficiency improves and they feelassured of their career advancements.(d) Staffing maintains harmony in the organisation. Through proper staffing, individualsare not just recruited and selected but their performance is regularly appraised and

promotions made on merit. For all these, certain rules are made and are dulycommunicated to all concerned. This fosters harmony and peace in the organisation.PROCESS OF STAFFING

The various steps involved in the process of staffing are as follows.(a) Manpower Planning (b) Job Analysis (c) Recruitment (d) Selection(e) Placement (f) Induction (g) Training and Development (h) Performance Appraisal (i)Compensation (J) Promotion and Transfer.MANPOWER PLANNING

Manpower planning refers to the process of estimating the manpower requirementof an organisation. While estimating the manpower requirement, the managementgenerally keeps in mind the available infrastructure including the technology, production

schedule, market fluctuation, demand forecasts, governments policies and so on.JOB ANALYSISIn the context of recruitment, one must be conversant with another important

aspect of manpower planning viz, job analysis, which is a pre-requisite for anyrecruitment exercise. The job analysis helps in determining the qualifications, skills andexperience required for various categories of employees. It involves:(i) Identification of each job in terms of duties and responsibilities, (called jobdescription) and(ii) Determining the abilities and skills that are required for performing the job (called jobspecification).These two aspects of job analysis (job description and job specification) are useful inrecruitment and selection of employees so as to find the right person for the job.


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RECRUITMENT

The term recruitment is often used to signify employment. It is true that normallywhen we say we have recruited such and such persons; it signifies that we have employedthem. But as a part of staffing function, the term recruitment has limited scope. It justrefers to one of the initial steps in employment of people i.e., searching for suitablecandidates for the various job positions to be filled up from time to time in theorganisation. Thus, recruitment is the process of finding and attracting suitable

applicants for employment.SOURCES OF RECRUITMENT

(A) Internal Sources: In any business, existing employees expect that they will havechances of promotion and will be considered for higher positions before outsiders areconsidered. Managers therefore may promote and transfer some of the existingemployees to fill the vacant positions. The advantage of internal recruitment is that it iseasier for managers to fill vacancies as they are conversant with the abilities and skills oftheir subordinates and have records of their performances. Employees also feel happy astheir work performance is recognized by management through promotion. However,there is one major drawback of recruitment through internal sources i.e., the organisationis deprived of the benefit of inducting fresh blood into its system.

(B) External Sources: All vacancies cannot be filled up from within the organisation.Existing employees may lack the required skill, initiative and qualification needed for thejobs involved. Hence managers have to recruit some persons from outside theorganisation. Not only that the external recruitment provides a wide choice from among alarge number of external candidates from which employees may be recruited. Theworkers and office employees at the lower level are often recruited from outside theorganisation. The various external sources of recruitment are as follows:(a) Media Advertisements: You must have seen advertisements in newspapers aboutvacancies in organizations. The advertisement contains details about the job, its nature,the qualification required to do the job, how to apply, etc. This is a very popular mediumof advertising. The job advertisements are also given in magazines, specialized

employment magazines like Employment News, Rozgar Samachar, etc. Now-a-days wealso commonly find such advertisements in various electronic media like television andInternet. Such advertisements normally get a very good response from the prospectivecandidates.(b) Employment Exchanges: In India, employment exchanges have been set up by thegovernment for bringing together job-seekers and employers who are looking foremployees. Those who are in search of employment get themselves registered with thelocal Employment Exchanges which keep a record of all such persons in detail whorequire help in finding jobs. The employer informs about the vacancies to the nearestEmployment Exchange. The Employment Exchange, in turn, identifies the names of thequalified employment seekers already registered with it, and forwards them to theemployer for consideration. Thus, if you are seeking a job after passing the seniorsecondary examination, it would be better if you get yourself registered with anEmployment Exchange. It may forward your name to the prospective employers keepingin view the suitability of the job as per your qualifications.(c) Educational Institutions:Now-a-days, companies/big organizations maintain a closeliaison with the universities, vocational institutes and management institute forrecruitment of their staff. As and when the need arises, the companies send one or moreof their senior executives to the institutions of repute imparting such


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professional/technical education to students. These executives take the interview of theinterested candidates and select the suitable candidates as per their requirement. Thisprocess is popularly known as campus interview and is found to be an effective source ofrecruitment of managers, engineers, technicians etc. for many companies on a regularbasis.(d) Unsolicited Application: Those looking for jobs often apply on their own initiative.They assume that certain vacancies are likely to arise, and apply without references to

any job advertisement. Managers keep a record of such applications and contact thesuitable candidates when they need them.(e) Recruitment at the Factory gate: This is found mainly in case of factory workers tobe recruited on daily wages. Such workers gather in the morning at the factory gate toserve as casual workers. Very often existing regular employees go on leave, and theirvacancies are filled up by recruitment at the factory gate. These casual workers havingserved in the factory for some time may be considered for regular employment at somestage.(f) Referrals: Quite often the management gets references about interested workers fromdifferent sources like workers unions, previous employees, existing employees, clients ofthe organisation etc. These sources are important because their recommendations are

made by people who are associated with the organisation and are fully conversant with itsrequirements. Sometimes we also receive recommendations from our friends andrelatives to employ persons known to them. But one should be very much cautious whileconsidering such recommendations.(g) Private Employment Agencies: In urban areas, number private organizations havestarted functioning as employment agencies. These agencies register with them the namesof the individuals who are seeking employment and try to arrange job interviews for suchcandidates. Companies often get in touch with such agencies to provide them the detailsof suitable candidates for various jobs.

SELECTION

When an adequate number of applications/names of interested candidates havebeen collected through the recruitment exercises the selection process starts. Selectionrefers to the process of choosing the most suitable person from among the list ofinterested candidates. It involves going through the qualification and experience of allcandidates and matching them with the expectation for the job so as to decide on the mostsuitable ones for the job. The entire process goes through a number of steps which maybe called as selection procedure.SELECTION PROCEDURE

As stated above, the selection procedure consists of a number of steps in logicalorder to identify the candidates who are to be finally appointed. These steps are:(a) Screening the applications (b) Holding tests (c) Selection interview (d) Checkingreferences (e) Medical examination of the candidates (f) Issue of appointment letter(a) Screening the Applications

After receiving the applications from the candidates through recruitment process,the same must be examined to decide which ones deserve to be considered and followedup. Screening exercise involves checking the contents of the applications so as theascertain whether or not the minimum eligibility conditions in respect of age, experience,qualifications and skills are fulfilled by the candidates who have applied for the job.Screening is usually done by a senior officer of the company or by a screening


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committee. The purpose of screening is to prepare a list of eligible candidates who are tobe evaluated further. Candidates not eligible are thereby excluded from furtherconsideration.(b) Holding Tests

After screening the applications, eligible candidates are asked to appear forselection tests. These tests are made to discover and measure the skill and abilities of thecandidates in terms of the requirements of the job. Passing the test by a candidate does

not mean that he will be employed. It implies that all those who have passed the test arequalified for further processing and those who have failed are not to be considered(c) Selection Interview

Interview is the most important part of the selection procedure. It serves as ameans of checking the information given in the application form and making an overallassessment of the candidates suitability for the job. In an interview, the candidate has aface-to-face interaction with the employer or representatives of the employer, where theytry to judge the ability of the candidate.(d) Checking of References

In addition to the requisite educational qualification, skill and experience, it isexpected that the candidates who are to be considered for employment must have other

qualities like balanced temperament, honesty, loyalty, etc. These qualities cannot bejudged on the basis of any test. Therefore, information is obtained and verified from theheads of educational institutions where the candidates have studied, or from the personswhose names are given by the candidates as referee, or from their previous employers.(e) Medical Examination

Candidates finally selected for the job are asked to undergo medical examinationto see whether the selected candidates are physically fit for the job. A proper medicalexamination ensures higher standard of health of the employees and their physical fitnesswhich, in turn, reduces the labour turnover, absenteeism and accidents.(f) Issue of Appointment Letter

Candidates finally selected are offered to join the organisation for which a formal

appointment letter is issued containing the nature of job, the remuneration, pay scale, andother terms and conditions relating to employment. Usually a reasonable time is given tothe candidates to join the organisation.

DIFFERENCE BETWEEN SELECTION AND RECRUITMENT

We have noted recruitment and selection are the two essential components of thestaffing process. While the recruitment helps in attracting suitable candidates, selectionhelps in finding out the candidates who meet the requirements of the job. These areclosely inter-connected activities. However, recruitment and selection differ in certainrespects.

While the recruitment refers to the process of attracting good applicants for jobs,selection identifies the most suitable amongst the applicants. In the recruitment process,the effort is to attract the candidates as many as possible and it is regarded as a positiveprocess. But, selection is a negative process as it involves rejection of many candidates.Recruitment involves decisions as regard to the sources of potential candidates. Selectionis made through different steps in the procedure adopted. Recruitment helps the managerto attract good candidates, the selection leads to making the right choice.


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PLACEMENT

If the selected candidate decides to join the organisation, he/she has to report tothe concerned authority and formally joins the organisation by giving his consent inwriting. Then he/she is placed to perform specific job. Thus, placement refers to selectedcandidates joining the positions in the organisation for which they have been selected.The appointment of every candidate is followed by a record of particulars ofemployment. Such records is properly maintained and described as employment record. It

serves a useful purpose on many occasions like selection of employees for training,promotion, increments etc.INDUCTION

Induction is the process of introducing new employees to the organisation. Thenew employees should know under whom and with whom he/she is to work, getacquainted and adjusted to the work environment, get a general idea about the rules andregulations, working conditions etc. Usually the immediate supervisor of the newemployee introduces him to his work environment. A proper induction programme islikely to reduce his anxiety on how to cope with the work and how to become part of theorganisation and helps in development of a favorable attitude towards the organisationand the job.

TRAINING AND DEVELOPMENTHelping the employees to improve their knowledge and skill so as to be able toperform their tasks more efficiently is known as training. It is an organized activity forincreasing the knowledge and skills of people for a specific purpose. The termdevelopment refers to the process of not only building up the skill and abilities forspecific purpose but also the overall competence of employees to undertake moredifficult and challenging tasks. It is generally used with reference to the training ofmanagers and executives.

Training is necessary for new employees as well as the existing employees forimproving their performance at work. For new employees, training is necessary to helpthem get acquainted with the method of operation and skill requirement of the job. For

existing employees, training at periodical intervals is helpful for learning better ways ofdoing the work, and also as and when they have to undertake new jobs. Thus, traininghelps employees to improve their knowledge and skill and make them perform their tasksmore efficiently.METHODS OF TRAINING

There are different methods of giving training to the employees which can bedivided into two broad categories.(1) On-the-Job methods, and(2) Off-the-Job methods.1. On-the-Job methods: In these methods, the employees learn about their jobs whiledoing the work duly assisted by their supervisors or seniors. These methods encourageself-learning through practice. Job instruction or coaching, while working as an assistantto a senior, understudy positions, temporary promotions are some of the commonmethods of on-the-job training.2. Off-the-Job methods: These methods involve training employees away from the workplace so that experts may conduct the training and employees are free from immediatepressure of completing the jobs at hand. Lectures with demonstration, conferences, casediscussions, video shows and films are some of the common methods used as off-the-jobtraining methods. Then, there is another off the job method of training called vestibule


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training. The vestibule training refers to the training in specially designed workshops inwhich an attempt is made to duplicate as closely as possible the actual condition of thework place. In such workshops a large number of employees can be trained in a relativelyshort period of time.

PERFORMANCE APPRAISAL

In simple words, performance appraisal means judging the performance of

employees. Specifically, it means judging the relative abilities of employees at work in asystematic manner. This enables managers to identify employees who are performing theassigned work satisfactorily, and those who are not able to do so, and why. To be fair,performance appraisal needs to be carried out using the same methods and keeping inview uniform standards of work. Generally it is the responsibility of supervisors to carryout performance appraisal of their subordinates, and report it to their own superiors. Hemay also have to identify the causes of the performance especially if it has fallen short ofthe expected performance.

COMPENSATION

Compensation is one of the most important factors influencing relations between

management and the workers. No organisation can attract and retain qualified employeeswithout offering them a fair compensation. The term compensation refers to a widerange of financial and non financial rewards to the employees for services rendered to theorganisation. It includes wages, salaries, allowances and other benefits which anemployer pays to his employees in consideration for their services. Compensation may bedivided into two categories:

(a) Base/primary compensation.(b) Supplementary compensation.

Base or primary compensation is a fixed amount paid every month to anemployee. It includes wages, salary and allowances paid to an employee irrespective ofhis performance.

Supplementary compensation refers to the compensation paid to the employees tomotivate them to work more efficiently. It is also known as incentive compensation. Theincentives may be monetary or non-monetary. The monetary incentives include bonus,commission sales, or profit sharing plans. The non-monetary incentives, on the otherhand, include cordial relations with the supervisor, assignment of challenging jobs,recognition etc. Such incentives help the employees to sustain interest in the job andmotivate them to work hard. They also provide job satisfaction

PROMOTION AND TRANSFER

When an employee is assigned a job involving greater responsibilities, more pay,higher status and prestige than his/her present job, it is known as promotion. Thus,promotion refers to the advancement of an employee to a higher level or position. Themain purpose of promotion is to make fuller use of the abilities of a person and alsoincrease his job satisfaction. The basis of promotion may be seniority in service or merit,that is, superior abilities of the employees or it may be seniority and merit, that is, a meritbeing the same, one who is senior, is considered for promotion. When the performance ofan employee is not satisfactory and it cannot be improved, he may be assigned a job oflower rank carrying lower status and pay. This is known as demotion.


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Transfer refers to a type of job change where any employee is assigned a differentjob of the same rank and pay, or when an employee is assigned a similar job in anotherunit of the firm. Thus, transfer does not usually involve any increase in pay or a superiorstatus. It may be done simply to enable the employee to gain wider experience, or to givehim greater job satisfaction, or to balance the requirements of staff in different units.

MEANING OF WAGE EMPLOYMENT

In wage employment, there are always two parties and the employee gets wage orsalary from the employer for his work. Wage is normally an assured amount (which isagreed upon by both the parties) given to the employee on a daily or weekly basis for hiswork. Similarly, salary is also a mutually agreed upon assured amount given to theemployee by the employer for his work on a monthly basis.

CHARACTERISTICS OF WAGE EMPLOYMENT

Following are the characteristics of wage employment1. Two parties: In case of wage employment there are always two parties involved. Oneis known as the employee and the other as the employer.2. Contractual nature: Wage employment is always contractual in nature. It is basically

an agreement between two parties whereby one party works for the other under specificterms and conditions and the later party has to pay the former any mutually agreed uponwage or salary in return of his work. The whole employment relationship can beterminated by either party by giving a notice to the other party just like a contract.3. Employer-Employee relationship: The relationship between the two parties in wageemployment is an employer-employee relationship. This is unlike a master servant,father-son or teacher-pupil relationship. Here both the parties are interdependent andinterrelated. One cannot exist without the other. Both operate under some pre-determinedand mutually agreed upon rules and regulations concerning their work relationship.4. Remuneration: Remuneration is the return or reward that the employee receives fromthe employer for his work. This is one of the important characteristics of wage

employment as this remuneration is determined and accepted by both the parties. Thisremuneration is known as wage or salary.5. Terms and conditions of employment: In case of wage employment the nature ofwork, working conditions, rules concerning work relationships etc. are decided inadvance. Both the party abides to these terms and conditions of employment.

IMPORTANCE OF WAGE EMPLOYMENT

Wage employment provides a regular and steady income for the individual to earnhis livelihood and to sustain his family. In this section let us discuss its importance.1. Wage employment not only assures a regular and steady income but also ensuresvarious other benefits like medical facilities, housing facility, travel concessions, loansand advances, insurance, old age benefits like pension, gratuity etc.2. Wage employment is a must in almost every sphere to carry out several tasks. Evenself-employment generates wage employment, although not immediately but when itexpands. For example, suppose you start a shop at your locality and run it alone. Whenthe business grows, it may not be possible to manage everything alone. Then you maythink of employing another to assist you, thereby creating wage employment.


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3. Wage employment can be made as a career and individuals can excel in theirrespective fields. For example, to be a renowned scientist it is not required to own theentire laboratory. Rather any one can start the career as an employee of a big laboratory.4. Wage employment involves much less risk than self-employment. There is no need toinvest in land, building etc. for wage employment.5. Everyone is not capable of being self-employed by starting a business or profession.Wage employment is normally undertaken as a vocation by majority.

STATUTORY BENEFITS

Some benefits are guaranteed to employees under labour laws. These are calledstatutory benefits. In some cases, these are applicable to NGOs also.

Minimum Wages

The Minimum Wages Act, 1948 is not applicable to NGOs by themselves.However, if their workers are engaged in certain activities, then the Act becomesapplicable to those workers. There is no threshold limit for number of employees as in thecase of PF Act. These activities include agriculture, farming, dairy, horticulture, forestryand other farm operations.

Apart from this, in some states, the Act is applicable to workers engaged inschools, hospitals, pharmacies, etc. In Bihar and Jharkhand, the Act is also applicable toall religious and social institutions as also Khadi and village industries. If an employee iscovered by the Minimum Wages Act, then the minimum notified wages must be paid tohim or her. These vary from one region to another and from one job to another. There isno exemption or proportional reduction in wages for employees who work for a limitednumber of hours, such as teachers at an NFE centre. If a lower payment is made, then theemployer can be fined or imprisoned.

Provident Fund

Provident Fund is an emergency fund, set aside for use by employees. The fund is

compulsory in some cases. Others can also start their own fund, if they so desire.

Compulsory Provident Fund

Provident Fund is compulsory for those NGOs where 20 or more employees areworking in a specified activity. This includes certain types of manufacturing as also somenon-factory activities Examples include:

Printing, including screen printing

Medical and pharmaceuticals, including ayurvedic medicines

Agarbatti, Textiles, coir or leather items

Bottling or canning of fruits and vegetables.Who is an employee? Any person who receives wages for work is an employee.

Renaming wages as honorarium does not change things. The relationship of employeeand employer is important for this purpose8. Part-time employees are also covered9under PF. However, casual labour and people employed for short durations are notcounted. Total Provident Fund contribution comes to 21.16% of the salary amount. Ofthis, 10% is contributed by the employee from his / her salary, another 10% by theemployer11, and the balance 1.16% is contributed by the Government. The totalcollection of 20% should be deposited with the PF Commissioner every month. The Fund


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is administered by the PF Commissioner. Currently, its investments are valued at aboutRs.10.27 kharabs.

Voluntary Provident Fund

If Provident Fund Act does not apply to you, you can still provide this benefit tothe workers. This can be done by depositing the desired amount in a Public ProvidentFund account in the name of each worker. This account is normally opened in a Post

Office or State Bank of India. In such a case, there is no requirement of a fixedpercentage or amount that you must contribute. You can therefore decide and fix thisamount internally. However, it is best to make the contribution regularly, at least on anannual basis.

Pension

If Provident Fund Act is applicable to your organisation, then there is no need toprovide separately for pension. This is because more than half the amount of monthlycontributions to PF is taken to a Pension Fund by the Government. However, otherNGOs must seriously consider the question of pension for old and retired employees. Anamount of about 10% of salary invested each year would be sufficient to provide lifelong

pension to a worker after retirement. This can be done by taking out a superannuationpolicy with an insurance company on behalf of the employees.

Gratuity

Gratuity originally started as a voluntary payment to workers at the time ofretirement. However, once the Payment of Gratuity Act, 1972 was passed, it becamecompulsory for commercial em-ployers to pay gratuity. In 1997, the Act was extended toNGOs as well. If an NGO employs 10 or more workers, then payment of gratuity iscompulsory. The payment is made on termination of employment, if the employee hascompleted five years of service. However, if the employee dies before completing fiveyears, gratuity is payable.

Gratuity is calculated on the basis of a formula:

For this purpose, salary includes dearness allowance, but does not include HRA orother benefits. NGOs required to pay gratuity must take out an insurance policy with LICor another insurer. Premiums for this policy are paid annually. When gratuity is paid toan employee, the insurer pays back the amount in that employees account. Maximumamount payable to a worker under the Act is limited to Rs.3, 50,000.


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UNIT V FOREIGN TRADE AND BANKING

EXTERNAL TRADE MEANING

The countries having excess production of certain items find it beneficial to sellthem to some other countries and buy items in which they are deficient from others. It isalso observed that some countries attain specialization in production of certain productsby virtue of adopting advanced technology while others find it difficult or expensive to

produce it in their own country. They prefer to buy those products from the former. Thus,uneven distribution of natural resources and specialization attained in production ofcertain items give rise to exchange of goods and services between different countries.Such exchange is termed as External Trade. It is also known as Foreign Trade orInternational Trade.TYPES OF EXTERNAL TRADE

On the basis of sale and purchase of goods and services, external trade can bedivided into three kinds. They are:(a) Import trade(b) Export trade(c) Entrepot trade

Let us discuss details about them.(a) Import trade

When the business firm of a country purchases goods from the firm of anothercountry, it is called Import trade. For example, when India Govt. purchases petroleumproducts, electronic goods, gold, machineries, etc., from other countries it is termed asimport trade.(b) Export trade

When the firm of a country sells goods to a firm of another country, it is calledExport trade. For example, the sale of iron and steel, tea, coffee, coal, etc. by Indiancompanies to other countries is known as its export trade.(c) Entrepot trade

When the firm of a country imports goods for the purpose of exporting the sameto the firms of some other country with or without making any change, it is known asentrepot trade or re-export trade for that country. For example, if an Indian companyimports rubber from Thailand and exports it to Japan then it is called Entrepot trade forIndia. Now you must be thinking, why India comes between Thailand and Japan. Whydoesnt Japan directly imports rubber from Thailand? Let us see what could be thepossible reasons for this.A country cannot import goods directly from others because of the following reasons:

The exporting country may not have any accessible trade routes connecting theimporting country; or

The goods imported may require processing or finishing before exporting. And

these facilities may be lacking in the exporting or importing countries; There may not be any trade agreement between both the countries.

IMPORTANCE OF EXTERNAL TRADE

External Trade is an important indicator of economic condition of a nation. Bothimporting and exporting countries are benefited by external trade. While exportingcountry earns more foreign exchange by exporting its surplus, the importing country atthe same time gets the opportunity to use better products and raise the standard of livingof its people. Let us discuss in details about the importance of external trade.


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(a) Promotes specialisation

External trade promotes specialisation. When there is expansion in the demand fora particular commodity, its producer is encouraged to specialize in its production. Forexample, there is demand of Japanese electronic goods all over the world. The result isthat Japans efficacy in this field has developed enormously. Similarly our country hasspecialized in tea, coffee and sugar production.(b) Improves standard of living

On account of import trade, a country can consume goods, which it does notproduce. On the other hand, it earns foreign exchange through export trade. The importand export trade thus, help in raising standard of living of a country.(c) Enhances competition

External trade enhances competition, which compels the domestic firms toimprove technology of production, production process and quality of the products. Itultimately benefits the consumers in getting better quality products at competitive prices.It also provides a large variety of goods.(d) Generates employment opportunities

External trade facilitates the growth of agricultural, commercial as well asindustrial activities, which in turn generates more and more employment opportunities for

the people.(e) Price equalizationExternal trade leads to equalisation of prices of goods and commodities in the

world. Whenever the prices of commodities tend to rise because of short supply it can bechecked by importing more goods. Similarly when the prices of products decline becauseof availability of excessive item, the country may export that surplus to others.(f) International relation

External trade brings the people of two different countries to come closer and tounderstand the need and requirement of each other. They also participate in various tradeand cultural exhibitions. All these activities promote harmonious and cordial relationshipamong the nations.

(g) Economic growthEconomic growth of every country depends to a large extend on the volume ofexternal trade. If a country specialises in any product, it needs to produce more to meetthe worldwide demand. So by producing and exporting more goods and services it canaccelerate the economic growth of the country.(h) Proper utilisation of natural resources

External trade is a means through which the natural resources of various countriescan be properly utilised. For example, a country may be rich in minerals but due to lackof technological advancement it is not able to extract those minerals from the earth. So itcan import modern equipments and machineries from advanced countries and makeproper utilisation of those natural resources.

DIFFICULTIES FACED IN EXTERNAL TRADE

The various difficulties, which are faced by the buyers and sellers engaged inexternal trade are described below.(a) Distance: External trade involves transport of goods over long distances, except forneighbouring countries. Distance between various countries makes it difficult to establishquick and close trade contact between the importers and exporters.


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(b) Greater risk: In external trade goods are exposed to greater degree of risk. Risk intransit of goods is more because of long distance. Goods are transported by ship, whichmay sink due to storm or collide with submerged rocks. The ships or goods may also becaptured by the enemies. These risks may be covered through marine insurance, but thatincreases the cost of goods.(c) Difficulties of transport and communication: Long distances incidental to externaltrade create difficulties of proper and quick means of transport and communication.

Though modern means of communication have solved this problem, it is quite costly andcan not be used for securing all sorts of information. Loading and unloading of goodsoften takes long time and also involves large expenses which increase the cost of goods.(d) Restrictions: External trade is subject to various restrictions by way of customs,tariff, quotas and exchange regulations, which restrict the scope of external trade.(e) Lack of personal touch: In external trade, the transactions are made with unknownpersons through correspondence and other means of communication. There is no directcontact between the buyer and seller. So the risk of dispute and bad debts are alwaysthere.(f) Study of foreign markets: Markets for different products have their owncharacteristics as regards demand, intensity of competition, buyers preferences, etc.

Thus, an extensive study of foreign markets is required for success in external trade. Thisis not easily possible from an individual exporters or importers point of view.(g) Cost: Both import and export of goods involve very costly operations due to high costof transport, insurance, intermediaries and cost of formalities to be completed.(i) Change in rules and regulations: Every country has framed its own rules andregulations for its external trade, to protect its economic and political interest. These ruleschange from time to time. So the traders find it difficult to acquaint themselves with therules and regulations and procedures followed by different countries.

PROCEDURE FOR EXPORT TRADE

The procedure generally adopted for exporting goods to a foreign country is as follows:

1. Receipt of enquiry and sending quotations: The importer of goods first sends anenquiry to different exporters requesting them to send information about price, quality,terms of payment etc. In reply to the enquiry, the exporters then send the quotationmentioning details about the products, price, quality, mode of delivery, terms andconditions if any.2. Receipt of an indent or export order: If the prospective importer finds the terms andconditions acceptable, then he places an order for export of goods which is known asindent. An indent contains a description of the goods ordered, price to be paid, terms andconditions of delivery, packing of goods and other details. On receipt of indent if theexporter finds it satisfactory, then he forwards his acceptance to export the goods.3. Credit Enquiry: The exporter must ensure that there is no risk of default in payment.He should verify the credit worthiness of the importer. For this purpose he may ask theimporter to send a letter of credit, bank guarantee or any other guarantee.4. Obtaining export license: Each and every country has its own import and exportpolicy for free goods and restricted goods. An exporter in India has to complete variousformalities and apply for export license to the appropriate authority. If the authority issatisfied it will issue the export license. To get an export license, the exporter must have(i) an IEC number (ii) RCMC from appropriate export promotion council and (iii)


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Registration with Export Credit and Guarantee Corporation (ECGC). The registrationwith ECGC safeguards against risk of non-payments.5. Production or Procurement of goods: The exporter has to produce the goods or buythem from the market. The goods must be in accordance with the instructions given in theindent regarding the quality, quantity, price, etc.6. Pre-shipment Inspection: To ensure that only good quality products are exportedfrom our country, the Government of India has made compulsory pre-shipment

inspection of goods by certain authorized agencies.7. Excise Clearance: In India, manufactured products are subject to excise duty underthe Central Excise Act. Therefore excise clearance certificate is a must for the goods tobe exported. It may be noted here that the Government of India has exempted excise dutyin many cases if the goods are manufactured exclusively for the purpose of export.8. Packing and marking of the goods: Packing should be done strictly according to theinstructions given in the indent. If loss arises due to defective packing, the exporter mayhave to bear it. If necessary, grading should be done before packing. The packages shouldbe properly marked according to instructions, if any, so that they may be easilyrecognized. 9. Appointment of forwarding agent: Packed goods may be despatched to the port

directly by the exporter or through a forwarding agent. If the goods are stored in anylocation, the exporter may appoint a forwarding agent who will perform all theformalities on behalf of the exporter before shipping the goods. The forwarding agentwill charge commission for this work.10. Despatch of goods by rail/road: The exporter has to despatch the goods by rail/ roadto the port town. He will send the R/R (railway receipt) to the forwarding agent alongwith other instructions. The agent will take delivery of the goods and complete otherformalities before shipping them to the importer.11. Formalities to be completed by Forwarding agent:

(a) Obtaining the custom permit: The agent has to apply to the custom office givingfull details of the goods and also their destination in order to receive the custom permit. If

goods are duty free then custom permit is given immediately, otherwise it will benecessary to complete other formalities.(b) Obtaining shipping order: The agent has to secure adequate space in the ship forloading of goods. For this purpose he has to sign an agreement with the shippingcompany for issue of the shipping order which will enable him to put the goods in theship.(c) Completion of shipping bill and payment of export duty: The Agent has to fill inthree copies of shipping bill and submit them to the custom-house. On the basis of thebill, duty is calculated by the custom authority. The agent has to make payment of theduty and get the original and third copy of the Shipping Bill from the custom authority.(d) Payment of dock dues: The agent has to make arrangement for carrying the goods tothe dock. For this purpose, two copies of properly completed Dock Challan aresubmitted to the dock authorities along with one copy each of shipping bill and shippingorder. After dock charges are received, the dock authorities retain one copy of dockchallan and return the duly signed second copy to the agent.(e) Customs verification before loading of goods: As soon as the ship touches the port,the dock authorities start loading the goods on it. Before the goods are actually loaded,custom officials verify them to know if there is anything on which duty remains to be


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paid or which is not mentioned in the shipping bill. The captain or his assistant (mate)will receive goods only when shipping order has been produced before him.(f) Mates receipt: The captain or mate will issue a receipt known as mates receiptafter the goods have been loaded. This receipt contains particulars like quantity of goods,number of packets, condition of packing, etc.(g) Bill of lading: The forwarding agent has to present the mates receipt at the office ofthe shipping company and in exchange will get a document known as Bill of Lading. He

has to fill in three blank forms of bills of lading giving details regarding the goods,destination, name of the ship, date and place of loading and name and address of theperson to whom delivery is to be made. If the freight is paid in advance the bill of ladingis marked freight paid. Otherwise it is marked freight forward which means freightwill be paid at the port of destination.(h) Insurance of cargo: As a safeguard against marine risks, it is necessary to insure thegoods. Insurance must be

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