8326589 Materials Management

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Introduction to Materials Management

Meaning

It deals with purchasing and storage of materials so as to provide

optimum customer service consistent with efficient operation at minimum

inventory investment. Inventory in an organization is analogous to water level

in a bath tub. The level increases if rate of outflow is less than inflow. A perfect

synchronization of rate of outflow with rate of inflow through a suitable control

mechanism will ensure a minimum water level just enough to meet

requirements.

2.

Relationship with Productivity

Productivity in manufacturing sector in India has declined at a rapid rate

during 1960 to 1980. The rate of declined in engineering industries has been

much higher than other industry, more so in the case of non-electrical machineryand transport equipment where the rate of decline is as high as1.6% per annum. This is

despite the fact that labour productivity in these industries has been growing at

an impressive rate of 3-4% per annum. Among other measures in arresting

this decline, better inventory management and reduction in cash holdings are

verysignificant.


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2 Materials Management

Productivity = ____ Values of Goods & Services produced___

Inputs(Labour + materials + Capital + Energy+…)

As nearly 70% of the total cost of production in manufacturing organizations is

constituted by Materials Cost, a small % reduction in this cost is going to

increase productivity substantially than effecting same % reduction in any other

input factors like labour, energy etc. Moreover, better availability of materials

will increase production and sales values.

Inventory Syndrome

A supplier producing 4 units/week & meeting requirement of 4 customers with a

consumption of 1 unit/week, delivered 4 units to each after 4 weeks. Each unit

will have average inventory of 2 units 4+0

2

Customer ‘ A ’ puts up a false demand of 1 additional unit as safety stock so as

to be more safe than other units. Since the total demand in 4 weeks is now 17

against production capacity of 16, the supplier 'is forced to increase lead time

from 4 weeks to 5 weeks. Immediately orders from other 3 customers will also

be increased from 4 to 5 units making a total demand to 20 units. Each customer

will then have an average inventory of 3 units

1+ 4 + 0

2 With the real consumption of 1 unit/week only.

Customer ' A ' then to be ahead of others will place an order of 6 units

making a total demand of 21 units. The supplier will therefore increase the lead

time to 6 weeks forcing other three customers also to place orders for 6 units.

Total demand will be 24 units. Each customer will have to keep an

average inventory of 4 units, 2+ 4+0 with the real consumption of

2

1 unit/week as earlier.

And so on--this process continues. The inventories go on increasing

without any real use. If the system of constant demand of 4 units/week would

have continued, the balance of demand and supply would not have disturbed

resulting into smooth functioning with a level of 2 units of average inventory.

Fictitious demand, long lead times and piled-up inventories are the result of such

syndrome.

Scope

A survey of the 161 Public Sector manufacturing units carried out in India

during 1985 revealed the following:


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Introduction to Materials Management 3

Total Investment = 43000 Crores

Annual Output = 55000 Crores

Average Inventory = 12800 Crores

(Stores only)

This means the inventory maintained in the form of stores inventory isapproximately 3 months stock. In addition to the inventory lying in stores, a

large work-in-process (WIP) inventory is also observed in an industry. It is

quite normal practice to observe heaps of stock at each work station. Further,

there are temporary stores and inspection points within the shops.

Inventories in the form of finished goods (FG) are also not a small figure.

Due to seasonal demand, incorrect forecast, improper co-ordination between

Marketing and Production Planning, uncertain power supply, production

leveling etc., some FG inventory may be necessary. FG inventory in various

organizations however vary from few days to over 6 months, depending upon

the nature of product.

Adding up inventory of Raw Materials, Maintenance Spares, Operating

Supplies, WIP & FG, it is estimated that a medium size industry keeps 4-6

months stocks.

Most of the companies in Japan work on zero inventory or 2-3 days

stocks. Agreed that the environment and work culture in India is such that the

Japanese Standards of inventory cannot be met, however the level can certainly be brought down to less than a 1 month with little of planning and effort. This

means that thousands of corers of rupees blocked in the form of inventories can

be released for country's developmental projects.

Importance of MM

The pie diagram (Fig.1.2) shows that 64% of sale rupee are spent on cost

of materials, 16% on labour cost and 20% on overheads. This is as per the result

of the survey of 29 major industries in India. In addition to the cost of materials,

the inventory carrying cost should also be taken into account when considering

material cost. This comprises various elements e.g. interest charges, storage and

handling costs, insurance, obsolescence etc. All this amounts to at least 20% of

average inventory that means total material cost will be about 70%

64 + 0.20 x 64 – 0 . As a big chunk of expenditure i.e. 70% is

2

towards materials cost, large savings will result if MM tools and techniques are

used to cut down this cost-than whatever attempts are made to save on other

items of expenditure like wages and salaries and overheads.


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It is true that most of the MM techniques are very simple to apply ascompared to techniques of reducing wages and overheads.

Fig. 1.2

Causes of Higher Inventory at Various Stages in an Organization

Storage Place Causes

(i) Central Stores *Bulk Purchases to avail discounts.

* Seasonal availability of materials.

* Purchases during periods of low

market prices.

* Full Wagon load to economies onfreight.

*Full Lorry load to economies onfreight.

* In anticipation of price rise at a ratehigher than bank interest.

*Scarce commodity (Not alwaysavailable).

*

Long lead times.

*Wide variation in lead time.

*Quota item (Quantity and time ofdelivery not within control).

*High stock-out cost.

* Reduced No. of orders or largeorder quantities


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Introduction to Materials Management5

*Availability of Safe Storagefacilities.

*Long term contract with ancillaryunits/suppliers w.r.t. quantity andtime of delivery.*Helping suppliers by making

purchases in quantities more thanactual requirement.

(ii) Sub-Stores * Avoid frequent issues toeliminate 'Q' formation at centralstores.

*Avoid frequent handling in smallunit loads between central store &

sub-stores.*Spares, consumables and toolsExclusively purchased fordepartmental use.*Extra guard against a particularitem feared to be out of stock at thecentral store.*Safety stock to meet contengencyin case of rejections, higher rate of

production, overtime work.*Drawal of materials for IInd &I1Ird shift if the central store remainsopen during 1st shift only.

(iii) Semi-FinishedStores

* Waiting for the specified unit loadquantity to move to the nextsection/department.* Waiting for other components, sub-assemblies, bought-out item.

* Waiting for clearance byInspection Staff.

* Re-work required before transit tonext section.

(iv) Work Stations *Waiting after the operation for

transit to next station.* Operator absent/slow/late. *Machine breakdown. * Machine setting.* Solving Quality problems on themachine or re-work required.


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6 Materials management

* Bottle-neck operation

(v) F.G. Stores

* Waiting for customer orders.

* Waiting for customer clearance vis-a-vis payments

* Production leveling for bettercapacity utilization to meet seasonaldemand.* Cancellation of customer orders.

* Stop dispatch due to anticipated price rise.

. * Waiting forwagon/lorry/container load.

* Waiting for customs clearancewherever required.

* Waiting for quality

mark/Inspection.

* Seasonal demand.

* Lack of co-ordination betweenMarketing & PPC deptts.

* Errors in sales forecasting.

* Waiting for good remuneration (vi) Scrap, Obsolete

Items & Disputed

Stores

* Normal delay in correspondence insettling disputes.

* Long procedure in obtainingapproval for disposals.

* Waiting for accumulation ofsufficient quantity before disposals.

Functions of Materials Management

Major tasks involved in Materials Management are:

1. PLANNING Material Requirements as permaster production schedules;identification, classification andcodification of items that must bemanufactured, sub-contracted or

bought-out


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Introduction to Materials Management

7

2. PURCHASING:- Selection of the sources of supp-ly, placement of orders, follow up oforders, inspection before dispatch,transportation, payment of bills,vendor rating

3. INVENTORY CONTROL:- Determination of EOQ, SafetyStock, Lead Time; Implementationof Selective Controls &Replenishment Systems

4. STORE-KEEPING:- Receipt and Issue, Layout &Handling, Maintenance, Upkeepand Safety of Items, Scrap/Surplusdisposal.

5. ACCOUNTING:- Valuation of stores, PhysicalVerification, Cost & BudgetaryControl.

6. MATERIAL ECONOMICS :-Value Analysis, Variety Reduction,Standardization.

Benefits of MM

The health of an organization is measured by calculating its Rate ofReturn (ROR) on investment:

Application of MM techniques result in reducing inventory thereby

. reducing capital and hence increasing Capital Turnover Ratio. The techniquesalso help in reducing cost of materials through effective purchasing,· valueanalysis, standardization, efficient material handling and reducingloss/obsolescence, thereby increasing profitability. Multiplication of both thesefactors creates a double effect on ROR and therefore it is true to say that thetechnique effects favorably from the top (increasing profit) and from the

bottom (decreasing capital employed). It also lowers the Breakeven (BE) pointas shown in figure 1.3·


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3.8

Symptoms of Poor Inventory Management

1. Inability to meet delivery promises.

Materials Management

2. Continuously growing inventory while turnover is almost constant.

4. High rate of customer turnover or order cancellations due to non-

attendance to their complaints.

5. Uneven production with frequent layoffs and re-hiring’s.

2. Frequent need for uneconomical production runs to meet sales

requirements.

6. Excessive machine downtime because of spares shortages.

7. Periodic lack of adequate storage space.

8. Consistently large inventory write-downs because of price declines,

distress sales, disposal of non -moving stocks and so on.

8. Widely varying rates of inventory loss or turnover among branch

warehouses or widely varying rates of turnover ratios among major

inventory items indicating surplus stocks.

9. Consistently large write-downs at the time of physical stock taking.

MM-Not an Easy Task

High stocks cover up most of the management lapses. This is like driving

a ship in a deep sea. The driver is not at all worried of any chance


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Introduction to Materials Management 9

of ship hitting rocks in the sea and can even sleep while the ship sails smoothly.

Managing with low inventory is like driving ship in shallow waters. The driver

has to be very active all the time so as to steer ship to safe waters and avoid

smash with rocks. As the water level goes down in the sea, more and more

rocks appear calling for more and more vigilance of the driver. See Figure 1.4

below:

MM being an important function should be under direct control of the

chief executive. A typical organization set up of a medium size Engineering

industry indicating position of Materials Manager in shown below

It may be noted that various functions of materials management are being

looked after by separate officers. Since most of the parts are supplied by

ancillary units, a separate officer has been posted for this function and a separate

officer for clearing & forwarding. There is no person for material planning since

this functions/has been distributed between Inventory Controland purchase officers.

Organization structure under Materials Manager normally varies from

organization to organization depending upon the nature & volume of business.


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Linkage of Production System with Inventory

Materials Planning is closely related with the type of production system in a manufacturing

organisation. The conventional systems and their linkage with inventory are briefly discussed in this

chapter.

Line Production System

Line production system is the specialized manufacture of identical articles on which the equipment is

fully engaged. Line production system normally associated with large quantities and with a high rate of

demand. While in the job and lot type of manufacturing the production capacity normally exceeds the rate

of demand, line production system is justified only when it" capacity can be sustained by the market. Here,

full advantage should be taken of repetitive operations in the design of production auxiliary aids, such as

special tools, fixtures, positioners, feeders and materials handling system, inspection devices, and weighing

and packing equipment.

Lot Production System

Lot production System is the manufacture of a number of identical articles, either to meet a specific

order or to satisfy continuous demand. When production of the lot is terminated, the plant and equipment

are available for the production of similar or other products. As in job shop production, policies regarding

tooling, fixtures, and other aids are dependent on the quantities involved. If the order is to be executed only

once, there will be less justification for providing elaborate production aids than when the order is to be

repeated.

Job Shop Production System

This is the manufacture of products to meet specific customer requirements of special orders. Thequantity involved is small, usually "one off" or "several off," and is normally concerned with special

project, models, prototypes, special machinery or equipment to perform specialized and specific tasks,

components or assemblies to provide replacement for parts in existing machinery, etc.


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Linkage of Production System with Inventory 11

Production & Inventory Control in line Production System

Some Key Points

(1) To keep production levels constant by adjusting product inventories.

(2) To balance capacity among all processes.

(3) To have buffering stock to avoid interference between processes.

Kinds of line production system

(1) Single-model assembly line:-An assembly line which is prepared in advance to produce an identical single item.

(2) Mixed-model assembly line :-

An assembly line which is prepared in advance to produce continuously identical multi itemswhich can be assembled through almost same operations.

Procedure for designing a single model assembly line

(1) Determination of a cycle time.

(2) Computation of a minimum number of processes.

(3) Line balancing.

(4) Determination of the length of the operations range of each process.

(1) Cycle time:-

A cycle time is an elapsed time between completed units coming off the end of an assembly line.

C: cycle time

A: available time per dayQ: planned production quantity of the product

(2) Minimum number of processes :-

Nmin: minimum number of processes needed for the desired line output

T : total operations time to assemble the product

[] : minimum integer not less than the accurate figure in it


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Linkage of production System with Inventory 13

(2) Computation of a minimum number of processes

(3) Preparation of a diagram of integrated precedence relationships among work elements

(4) Line balancing

(5) Determination of the sequence schedule for introducing various products to the line

It is important to note that a product might have a longer operation time than the predetermined cycle

time. This is due to the fact that the line· balancing on the mixed-model line is made under the

condition that the operation time of each process, which was weighted by each quantity of mixed

models, should not exceed the cycle time.

This condition (constraint) will be described as the following formula:

Qi: planned production quantity of the product Ai (i=1,2 .)

Tij: operation time of product Ai on the jth process

C: cycle time

As a result, if products with relatively longer operation times are successively introduced into the

line, the products will cause a delay in completing the product and may cause line stoppage.

Therefore, the assembly line model-mix sequence must be determined to minimize the risk of

stopping the conveyor.

(6) Determination of the length of the operations range of each process. . 'The length of the operations

range of each process must be determined with some allowance for avoiding the work conjestion above

mentioned.


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The systems of single model assembly and mixed model assembly are shown in Figure 2.1 below:

1(1) Singe-model assembly ! inc

(2) Mixed-model assembly line

Fig. 2.1

Production & Inventory Control in Lot Production System

Some key points

(1) To determine proper lot sizes.

(2, To determine proper quantities of work- in-process. (3) To make setup times as short as possible.

The EOQ formulaAn economic ordering quantity formula is used which calculates the EOQ in one step. One form of

this formula is:

(8)

A : the annual usage, in Rs.

S : the setup or ordering cost, in Rs.

I : the inventory carrying cost, as a decimal fraction per Rs. of average inventory

When lot sizes of each item in lot production system are determined according to the EOQ formula, itfrequently happens that under the given capacity the resultant production schedules is infeasible for reasonsof interference among the items.


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Linkage of Production System with Inventory 15

An example of production planning in a single process

A basic cyclic schedule which both satisfies requirements during the planning period and minimizes

quantities of work-in-process is presented in this section.

TET (Total Elapsed Time) can be expressed as follows:

Ri: requirements of item i during the planning period

tsi: setup time of item i

Tmi: machine processing time of item i

N: the number of setups during the planning period

To satisfy requirements during the planning period, the following inequality must hold true:

Thus N (the upper limit of the number of setups) that satisfies requirements of all items during the

planned period) can be derived as follows:

[]: maximum integer not greater than the accurate figure in it.

Production & Inventory Control in Job Shop Production System

Key points

(1) To grasp accurate work loads to each process for a planning period.

(2) To minimize due date tardiness.

(3) To shorten shop time.

Preparation of master schedule

(1) Estimate shop time of each operation in each job

(2) Arrange the operations in accordance with the routing.

(3) Adjust starting time of each operation for the schedule of each operation not to mutually overlap in

time in each process, pursuing minimization of the total elapsed time.


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Materials Control Through JIT System

Inventory requirements in an organisation are closely related to the production or consumption

systems. JIT (Just-in-Time) is a production technique which helps in reducing inventory. The technique

developed by Toyota Company in Japan has now spread all over the world. JIT system is an integrated

manufacturing and supply system aimed at producing the highest quality and, at the same time, the lowest

cost products through the elimination of waste.

JIT integrates and controls the entire process. It specifies what should be stored, moved, operated on

or inspected and precisely when it should be done. Just-in-Time production continuously strives to

improve production processes and methods. It attempts to reduce, and ultimately to eliminate inventories

because high inventories tend to cover up production problems. Various components of a JIT production

system are given in figure 3.1.

Components of JIT Production System

FILL-UP: A PULL Type Ordering System

Contrary to the conventional system where a central controller co-ordinates material flow from the

first to the last stage of manufacturing, a pull system triggers action from the market demand. As soon as

an order is received from the market, the dispatch section places an. order on final assembly section who

in turn to sub-assembly section and so on to the stage of withdrawal of materials from stores for

manufacturing. A chain reaction starts where-in each user is responsible to withdraw materials from the

preceding operation eliminating the need for the central controller. A concept chart showing the

conventional push type ordering system and the new pull type ordering system is given in Fig. 3.2. The

production stages, storage stages, information and material flow channels have been shown explaining

both the systems. The system is flexible and is adaptable to quick changes in demand. Only the required

quantity of materials for use during a ~ay or a part thereof is drawn from the previous operation, thereby

leaving almost nil inventory at work stations at the end of the day. The chances of accumulation of

process inventory in a Push System are more since total output of a work station is pushed to next work

station whether required or not.


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Materials Control Through JIT System 19


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Small Lot ProductionAs the lot size increases, the work in process increases. To reduce inventories, the lot size should be

reduced. In an ideal situation there should be one piece production and conveyance. The objective is to

reduce production lead time through line balancing and redu6itg setting up time to almost zero. Use of

flexible manufacturing system; standby tools, jigs and fixtures; automatic holding and conveying

equipment; fastest possible speeds, feeds, depth of cut, CIM , automatic dimensional control etc., are some

of the aspects which can be considered and adopted. A frame-work of reducing production lead time is

shown in figure 3.3.

Production Smoothing

A system of forecasting demand for next 3 months, preparation of master production schedule andmonthly production planning with a provision to adopt monthly demand changes. Simultaneously, a

system of 10 day advance booking of firm orders from dealers, co-ordinating with sub-contractors,

balancing shop production, preparation of daily despatch schedules and provision to incorporate last

minute changes in daily demand should be well prepared. A frame work of production smoothing is shown

in figure 3.4.

KANBAN System

A Kanban is a hand sized signboard contained in polypack that is the key control tool for JIT

production. Kanbans are of two types i.e. "Production Instruction Kanban" and "Pick-Up or Withdrawal

Kanban". Production Instruction Kanban indicates how many and what kind of parts have been passed

from one place on the production line to the next place. It is a green signal to begin processing exactly the

same type and number of items that were passed along. Pick-up Kanban is of two types. One called

'Interprocess Kanban' used within the plant for picking up needed parts from earlier process jobsite to the

next process jobsite. Other type is 'supplier Kanban' used for picking up needed items from outside

suppliers and is used the same way as inter-process pick up Kanbans. Steps involved in using the two

Kanbans and their flows as well as the flow of physical units of product are explained in figure 3.5. It may

be seen that the number of withdrawal· Kanbans lying in post at "1" indicate the units consumed in

subsequent process assembly line and therefore creation of the demand for equal number of units to be

provided by preceding process machinery line. These Kanbans authorise picking up units from the

machinery line store and are returned to assembly line along with physical units (see '3'). Depending upon

the shortfall in the machinery line store, production ordering Kanbans


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in desired quantity are placed in the post (see '2'), carried to production ordering Kanban post (see '5').Production ordering Kanban authorise production in the machinery line and are sent to store again

alongwith machined parts. Kanbans are the pre-printed forms containing product specifications, quantities

and frequency of issue during a day. Kanbans are normally replaced every month depending upon next

month production schedule. There is no need w give written instructions every time and hence it

eliminates lot of paper work. At the same time it coordinates activities of whole plant as well as with the

suppliers and establish a close circuit.

Visual Control

This is a method by which managers and supervisors can tell at a glance if production activities are

proceeding normally or not. Light signals (Red & Yellow) are placed on various machines and storage

points. If any problem arises, the operator switches on light signal.


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'Yellow' means there is a problem which operator himself is trying to solve. 'Red' means he needs help ofthe supervisor. Seeing red light, supervisor rush to the workplace. Similarly, a system of replenishment ofstocks is used. A material calling ANDON for the later replenishment system is illustrated in Figure 3.6.When an empty box is found in the production shop, the worker pushes a switch (see' 1') thereby puttingon main light in thecentral store and a glow lamp (see '2') in the control pannel indicating the kind ofmaterial required-Seeking the lamps, material carrier transports filled boxes to the line (see '5') and submitsSupplier Kanban (detached from material box) to the Post Office of material Kanbans (see '6'). During theevening, all supplier Kanbans are classified supplier wise and handed over to respective truck drivers (see'7;) along with empty boxes. The drivers draw the materials from supplier as per the number of Kanbansand deliver to the factory during night (see


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'8'). The materials are therefore replenished to the central stores every day morning before production

starts. From the system it may be observed that inventory is kept only for 1-2 days stocks, with almost

no paper work, no noice and chaos and no congestion.

The results of the introduction of JIT systems in Japan as per the survey conducted in 1986 aresummarised below:


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Material Requirement Planning (MRP)

Definition

It is a management planning and control technique. Its initial processing function is to work

backward from planned quantities and completion dates for end items on a master production schedule to

determine what and when individual parts should be ordered.

While any company that wants to do a better job of controlling material priorities and capacity can

employ MRP, companies that manufacture complex assemblies are ideal for MRP. Thus while MRP can be

effective in pharmaceutical, food, textile and chemical companies which are not 'assembly' operations, the

technique can be extremely powerful in automotive, electronic and other assembly oriented companies.

Item Forecasts

Item forecasts are needed for determining order points, material plans, order quantities and schedules.

They are best made using simple statistical techniques based on their own demand history. The technique

called "exponential smoothing" an application of the "weighted average" concept provides a routine

method for updating forecasts regularly as shown in table below:

First Week

Weight Weight

Old forecast = 100 x 0.5 = 50 x 0.9 = 90Sales = 70 x 0.5 = 35 x 0.1 = 7

New forecast = 85 97

Second Week

Old forecast 97 x 0.9 = 87

Sales 105 x 0.1 = 11

New forecast 98

General formula

New forecast = a x Sales + (1-a) Old forecast. a is called weighting

factor and can be estimated by the management for each

type of product separately. a = 0.01 in the above ex

ample.


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Principles of MRP

Material requirements planning evolved from an approach to inventory management in which the

following two principles are combined:

(1) Calculation (versus forecast) of component item demand, i.e., dependent demand.

(2) Time phasing, i.e., segmenting inventory status data by times

Because of its focus on timing, an MRP system can generate outputs that serve as valid inputs to

other systems in the area of manufacturing logistics, such as purchasing systems, shop scheduling

systems, dispatching systems, shop floor control systems, and capacity requirements planning systems.

MRP in Manufacturing Planning and Control

Figure 4.1 is a general model of a manufacturing planning and control (MPC) system. Several

supporting activities are shown for the front end, engine, and back end of the system. The front end

section of the MPC system produces the master production schedule (MPS). The back end, or execution,

systems deal with detailed scheduling of the factory and with managing materials coming from vendor

plants .

Material requirements planning is the central system in the engine portion of Fig. 4.1. It has the

primary purpose of taking a period-by-period (time-phased) set of master production schedule

requirements and producing a resultant time-phased set of component/raw material requirements.

In addition to master production schedule input, MRP has two other basic inputs. A bill of material

shows, for each part number, what other part numbers are required as direct components. The second

basic input to MRP is inventory status. To know how many are on hand, how many of those are already

allocated to existing needs, and how many have already been ordered.

The Basic MRP Record

At the heart of the MPC system is a universal representation of the status and plants for any single

item (part number), whether raw material, component part, or finished good. This universal representation

is the MRP time-phased record. Figure 4.2 provides an illustration, displaying the following information:

(l)Time bucket

The top row in Fig. 4.2 indicates periods. The period is also called a time bucket. The most widely

used time bucket or period is one week. A


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Material Requirement Planning (MRP) 27

timing convention for developing the MRP record is that the current time is the beginning of the first

period. The number of periods in the record is called the planning horizon.The planning horizon indicates the number of future periods for which plans are made.(2) Gross requirements

The second row, Gross Requirements, is a statement of the anticipated future usage of or demand forthe item during the period. The


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gross requirements are time phased, which means they are stated on a unique period-by-period basis ratherthan aggregated or averaged.

(3) Scheduled receipt

The Scheduled Receipt row describes the status of any open orders (work-in process or existingreplenishment orders) for the Item due in at the beginning of the period. This row shows the quantities thathave already been ordered.

Period 1 2 3 4 5

Gross requirements 10 40 10

Scheduled receipts 50

Projected available balance 4 54 44 44 4 44

Planned order releases 50

Lead time = 1 periodFig. 4.2.

Lot size = 50 The Basic MRP Record

(4) Projected available balance

The next row is called Projected Available Balance. i.e., the row is the projected balance at the end ofthe period after replenishment orders have been received and gross requirements have been satisfied. Anextra time bucket shown at the beginning shows the balance at the present time.

(5) Planned order release

Whenever the projected available balance would show a quantity insufficient to satisfy requirements(a negative quantity), additional material must be planned for. This is done by creating a planned orderrelease at the beginning of the period in time to keep the projected available balance from becomingnegative.

(6) Action bucket

The MRP system produces the planned order release data in response to the gross requirement,scheduled receipt, and projected available data. When a planned order is created for the most immediate orcurrent period, it is in action bucket. A quantity in the action bucket


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means that some action is needed now to avoid a future problem. The action is to release the order, whichconverts it to a scheduled receipt.

Bill of Materials

Figure 4.3 shows a snow shovel, which is end item part number 1605.The product structure diagram and the indented bill of materials (BOM) are shown in Fig. 4.4

Gross to Net Explosion

Explosion is the process of translating product requirements into component part requirements,taking existing inventories and scheduled receipts into account.

The gross to net explosion process means that, as explosion takes place, only the component partrequirements (net) of any inventory are considered as exemplified in Fig. 4.5. In this way, only the

necessary requirements ate linked through the system.

Leadtime Off Setting

In addition to precedent relationships, the determination of when to schedule each component part alsodepends upon how long it takes to


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Fig. 4.4 Product Structure diagram

GROSS AND NET REQUIREMENTS CALCULATION FOR THE SNOW SHOVEL


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Produce the part, i.e., the lead time. There are two alternatives in scheduling approaches. One is the front

schedule logic, i.e., scheduling as early as possible. Another is the back schedule logic, i.e., scheduling as

late as possible.

Back scheduling has several obvious advantages. In MRP, the timing of the planned order release is

arrived at by offsetting for lead time. MRP achieves the benefits of the back scheduling approach and can

perform the gross to net explosion.

Linking the MRP Records

Figure 4.6 shows the linked set of individual time-phased -MRP records for the top handle assembly of the

snow shovel.

Technical Issues

Processing frequency

Since conditions change and new information is received, the MRP records must be brought up-to-

date so that plans can be adjusted to reflect these changes. This means processing the MRP records anew,

incorporating the current information. Two issues are involved in the processing decision; how frequently

should the records be processed, and whether all the records should be processed at the same time.

(1) Regeneration

When all of the records are processed in one computer run, it is called regeneration. This signifies

that all part number records are completely reconstructed each time the records are processed.

(2) Net change

An alternative is net change processing, which means that only those records which are affected by

the new or changed information and net change is the frequency of processing.

Lot sizing

In the snow shovel example of Fig. 4.6 we illustrated a fixed lot size and lot-for-lot procedure.

Several other approaches to lot sizing are widely recognized .


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Safety stock and safety lead time

Carrying out detailed component plans is sometimes facilitated by the inclusion of safety stocks

and/or safety lead times in the MRP records. Safety stock is a buffer of stock above and beyond that

needed to satisfy the gross requirements. Safety lead time is a procedure whereby shop orders or purchase

orders are released and scheduled to arrive one or more periods before necessary to satisfy the gross

requirements.

Low-level coding

If Fig. 4.6 the time-phased record is processed for either of common parts before all their gross

requirements have been accumulated, the computations will all have to be redone. The way this problem

is handled is to assign low-level code numbers to each part in the product structure or the indented BOM.

Pegging

Pegging relates all the gross requirements for a part of all the planned order releases that created

the requirements. The pegging records contain the specific part number or number of the sources of all

gross requirements. The pegging information can be used to trade the impact of a material problem all the

way up to the order it would affect.

Service parts

Service part demand must be included in the MRP record if the material requirements are not to be

understated. The service part demand is typically based on a forecast and is added directly into the gross

requirements for the part.

Firm planned orders

If changes have taken place since the last time the record was processed, the planned order releases

can be very different from one record-processing cycle to the next. Since the planned orders are passed

down as gross requirements to the next level, the differences can cascade throughout the productstructure.

One device for preventing this cascading down through the product structure is to create a firm

planned order (FPO). FPO, as the name implies, is a planned order that the MRP system does not

automatically change when conditions change.


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Inventory Control

Selective Controls

Basic Terms

Inventory: The term refers to the stock at hand at a given time (a tangible asset which can be seen,

weighed or counted). It refers to the material held in an idle or incomplete state awaiting future sale or use.

In the most general sense, inventory is an idle resource.

Item: An element, mixture, compound, component, sub-assembly, finished good, production

equipment or any other one piece tangible asset which forms inventory in an organisation.

Inventory Policy: A definitive statement regarding the philosophy of inventory management, a

policy stating when to procure and how much to procure, usually to ensure that the sum of all costs

associated with the inventory process will be minimized.

Inventory Control: A functional activity the objective of which is to minimize the total costs of

maintaining inventories and of acquiring them in order to render the stipulated level of service.

Inventory Classification

Raw Materials: Basic materials for processing/conversion into finished goods e.g. Pig Iron, M.S.

Rods, PVC Resin.

Bought-out Components: Items not manufactured/fabricated by the organisation but used with or

without further processing and/or packing the finished product; e.g. Rubber parts by an Engg. Co., Tin

Cans by a Vanaspati Mill.

Work-in-Process: Partly manufactured/processed inventories awaiting further

manufacturing/processing between two operations and are in the process of being fabricated or assembled

into finished products, including materials lying with sub-contractors and materials lying in shop floor for

further processing or assembly.

5


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Inventory Control 35

Finished Goods: The complete units and the assemblies carried in stock ready for delivery to

customers or for transfer to other plants or for own use. e.g. A bicycle, a Football, A Lathe Machine.

MRO: Maintenance, Repair and operating supplies. The group include spare parts and consumables

which are required for use in the process but do not form a part of the finished product. e.g. lubricants, V-

belt, Electrodes, pencil, soap, etc.

Inventory Analyses

Altogether the company deals with stock of thousands of items raising a serious problem of how one

can keep control or track of all these items and also, whether it is necessary to have the same extent ofcontrol on each and every item or not. Different types of analysis each having its own specific advantages

and purpose, help in bringing a practical solution to control inventory. The most important of all such

analyses is the ABC analysis. The others are:

VED

SDE

FSN

HML

XYZ

Definitions and application of these analyses are tabulated as in the following pages.


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36 Inventory Control


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While formulating inventory policy for an item a combination of various analyses is useful. For

example, liberal safety stock may be kept for an item which falls into 'C', 'V' and 'S' categories and vice

versa for an 'A', 'D' ai1d 'E' item.

ABC Analysis

ABC is said to connote 'Always Better Control'. The basis of analysing the Annual Consumption

Cost (or usage cost) goes after the principles ' 'VITAL FEW TRIVIAL MANY" , and the criterion used

here is the money spent and not the quantity consumed. The figure given below brings out clearly the

concept of ABC analysis.

The general picture of ABC - analysis will show the following pattern :-

In many cases, the figures bring out that the A items are still fewer in number representing the bulk

of the money. To cite an example :-


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Class of items Item % % of Annual Usage Cost

A 8 75

B 25 20

C 67 5

It may be of interest to note that this ABC analysis i.e. the vital few; trivial many, principle is

observed in most of the business problems such as number of dealers and volume of business; different

items of expenditure of revenue and the amount involved, nature of customer complaints and number of

complaints etc. etc. The controls necessary on A, B & C items are obvious "Thick on the best, thin on the

rest". One of the Departmental stores modified this to state "Thick on the best to hell with the rest".

Control on A Items

The annual consumption cost being very high for these few items, any small percentage savings

bring out large benefits such as reduction in expenditure, release of locked up capital etc. Normally, these

items are to be under the direct control of the purchasing manager himself. All endeavours should be to

reduce the safety stocks, low cost of purchasing, control on consumption and waste. The measures to be

taken on 'A' items can be briefly put down as follows :-

(i) Annual contract for supplies with as frequent staggered deliveries as is economical.

(ii) Minimum safety stock or even fluctuating safety stocks by maintaining better vendor/vendee

relationships, speculation of market conditions, supply conditions, etc.

(iii) More frequent review of stock position and consumption patterns.

(iv) Precise quality specifications or materials standard evolved.

(v) Value Analysis to find cheaper substitutes, better source of supply and to reduce the overall costs.

(vi) Waste control measures to reduce the scrap, rejection, rework and sub standards.

(vii) Continuous developmental work or research carried out wherever possible.

(viii) Possibility of adopting 'cock-system' when the materials are stored and supplied at the factory

site by the supplier at his own cost.


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Control on C-Items

The other extreme where a large number of items constituting a small percentage of costs, needs very

simplified procedures and the objectives being to reduce the purchase costs as well as handling and

distribution costs. The following measures are suggested :-

i) Maintain sumptuous stocks (Avoid the proverb, "For the sake of a horse-shoe nail, the battle was

lost' ').

ii) Purchasing costs minimized through single tender system, blanket contract, travel orders, clubbing

of similar items into one purchase order, purchasing annual requirements, blank cheque ordering

procedure etc.

iii) Inventory carrying costs & Paper work reduced by bulk issues, writing off the values (controlthrough perpetual inventory) of stocks, variety reduction and standardization, pool-system. etc.

Control of B Items

On these items the controls are 'via-media' of A & C, Usually, the safety stocks are decided on a

policy basis.

Other Analyses

The definitions and criteria of YED, SDE, FSN, HML and XYZ analyses have already beentabulated on pages 5-36. Keeping in view the objective of such categorization and nature and, volume of

inventory, the classification is made by each organisation suiting to its own requirements and controls. For

example, non-moving items in an organisation may be the list of those items which were not consumed

during a period of last one year while another organisation engaged in Projects or Maintenance Services

may fix a period of even 2 or more years to identify such items. It is however useful to keep a list of 'V'

items with stores officer, 's' with purchase officer and 'A', 'V', ‘S' & 'N' with chief executive for

continuous follow up & control.

Economic Order Quantity (EOQ)

Total cost of managing inventory of an item depends upon three factors :-

(i) Ordering Cost (OC).

(ii) Inventory Carrying Cost (ICC).

(iii) Quantity Discounts (QD).


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Ordering Cost (DC)e

Ordering cost is the cost of placing one order. Total ordering cost per order can be determined by

estimating annual cost actually incurred during the past one year against following elements :-

(i) Salaries + Perks paid to all the employees in the purchase department.

(ii) Proportionate part of salary + perk of the executives and employees of other departments spending

part of their time in making purchases. This will include accounts personnel associated with pur-

chase department in evaluating quotations and making payments. Also QC department engaged in

inspection and testing of purchased items.

(iii) Traveling expenses related to procurement.

(iv) Telephone, telegram 1 telex, postage and stationery relating to procurement.

(v) Depreciation of accommodation (or rent of building) and equipm nt used for procurement.

(vi) Insurance, power, water and other service charges relating to purchase department.

(vii) Any other cost (entertainment etc.) incurred for purchasing.

If N is the number of orders placed during the year, ordering cost

There are many limitations in the above method of calculating ordering cost. Firstly the cost has been

uniformally distributed to all orders by taking average. In actual practice there is wide variation from order

to order. For example, the cost involved in procuring an item on the basis of tendering will be much higher

than placing order to a standard supplier (evaluated best through vendor rating). Similar cost of procuringitem from far off place will be much higher than local purchases. Secondly an order may contain only one

item or ten or even more items. If separate orders for each item are placed the cost will be much higher than

the common order for items at a time. Since the economic order quantities are being worked out order for

each item, the above ordering cost, which may be for a group of items, will not indicate a clear picture of

the OC relating to the item in question. Thirdly, by increasing no. of order in a year for an item, the

quantity per order will reduce. The reduced quantity


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inventory during that year. Average inventory can be calculated as follows :-

Av. Inv. = Opening Stock + Closing Stock

2

A better estimate of average inventory can be made by adding stock balance on the last day of eachmonth of the previous year and dividing it by 12.

Let us take an example to explain the method of calculating ICC. If the stock balance on the last dayof each month for previous year is 4, 4.5, 3, 6, 5, 4.5,4,4.5,5.5,3,2, 2lakhs then

Av. Inv. = 4+4.5+3+6+5+4.5+4+4.5+5.5+3+2+2

12= 4 lakhs

If the bank interest on working capital is 18% and total inventory holding cost against all elementslisted from (ii) to (ix) above is Rs. 40,000 then

The I.C.C has a straight line relationship with the average inventory as shown in figure 5.1.

Economic Order Quantity is defined as the order quantity against which total of OC and ICC isminimum. As shown in figure 5.1, EOQ will be the order quantity where both ICC and OC curves intersecteach other. Mathematically this quantity is calculated by the following formula :-

Where Q = EOQ

A = Annual Consumption of the item in units.

S = Ordering Cost in Rs.

I =Inventory carrying cost as a fraction of the Av. Inv.

C =Unit cost of the item in Rs.


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Let us say that during the next year forecast of consumption of an Item is 5,000 units, S and Icalculated on the basis of last year data are Rs. 50/- and 0 . 25 respectively and the unit price of the item isRs. 2 then

If we assume the ordering cost S =10 and the inventory carrying cost 1= 20 per cent or 0.20, foreveryday use it is possible to workout EOQ data for different levels of annual consumption. It is not

necessary to calculate the EOQ for each and every item, since the ordering cost and carrying cost vary only

with number or orders and the value of purchase and not with the nature of the item to be purchased. An

illustrative table' incorporating economic order quantity and cost data for seven values of annual usage is

given in table below:-

(EOQ data with = Rs. 10 per order and I = 20 per cent or 0.20)

Annual Usage Economic Order Time Supply Number of or-(A) Rs. Quantity (Q) Rs. ders per Year

(A/Q)

40,000 2,000 18 days 20

10,000 1,000 5 weeks 10


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Annual Usage Economic Order Time Supply Number of (A) Rs. Quantity (Q) Rs. orders per year

~ (AQ)

8,100 900 6 weeks 9

4,900 700 7.5 weeks 7

1,,600 400 3 months 4

900 300 4 months 3

100 100 1 year 1

From the table it can be easily seen that for C items, the cost of carrying inventory is naturally small

and, for minimizing total cost, the ordering cost has to be kept low and so these items are ordered as

infrequently as once or twice a year. On the other hand, for A items the inventory-carrying cost is high and

for minimum total cost, the ordering cost should be very nearly equal to it. This means that the number of

orders should be greater and purchases should be made more frequently in small lots so that inventories

may be carried at a low level and at a low total cost.

While, normally, purchases should be guided by the EOQ data similar to that shown above,

departures can be made for good and valid reasons. The practical order quantity may be slightly more or

less than that theoretically calculated. It should be noted that the total cost curve is flat at the bottom and

the total cost is therefore relatively insensitive over an appreciable range around the theoretically calculated

quantity. It can be shown mathematically that for an order quantity ranging from 75 percent to 125 percent

of the theoretical quantity, the cost increase is less than 10 percent. Some practical considerations, as

mentioned below may suggest a different quantity for purchase than the one mathematically obtained by

the EOQ formula:

(1) Simplification of routine-for example, instead of 13 orders per annum, 12 orders per annum may be

issued.

(2) Ordering in nearest trade quantities or packing-for example, instead of ordering 11-1/2 dozen,

order a gross (12 dozen).

(3) By slightly increasing the order quantity a better freight rate may be obtained-for example, instead

of seven -eights or three-quarters of a wagon load, order a full wagon load.

(4) In the case of perishable items or items whose shelf life is very low, it may be advantageous to

order less than the economic order quantity.


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(5) If an item is of a season~1 nature, it may be necessary to buy large quantities during the season,

regardless of the EOQ.

(6) Considerations of shipping facilities from abroad and Government import policy may indicate a

different order quantity for imported items.

(7) Internal transportation difficulties, quota licenses, etc. may also justify different quantities from

the EOQ.

(8) Liberal discounts may be applicable to bulk purchases which may suggest buying much larger

quantities than indicated by EOQ. Each case should be worked out in terms of ultimate cost,

considering extra inventory costs, additional costs f05 storage and handling, dangers of

deterioration and pilferage, etc.

Normally the aim should be to order the nearest practical quantity approximately to the EOQ.

Where large deviations are considered necessary, each case should be examined carefully to ensure that

the deviation from the EOQ does actually benefit the undertaking in the long run.

Quantity Discounts

Whenever discounts are offered for bulk purchases, each case should be considered in terms of its

ultimate cost. A rough and ready formula for deciding such cases can be worked out if, to simplify matters,

we assume that the ordering cost is negligible compared to the other factors involved. If one month's usage:

of an item is added to the EOQ by bulk purchase, the average inventory cost of the item is increased by halfI a month's usage i.e., by A/24 of a year's usage where A is, as before, the annual consumption value of the

item. If m months' usage is added to the EOQ the average inventory will be increased by mN24 rupees.

The increase in inventory-carrying cost will be mAII24 rupees where I is the inventory-carrying cost

expressed as a· fraction of the inventory cost. The reduction in cost offered by the discount must be more

than this increase. If x is the reduction (expressed as a fraction) offered per rupee-worth of material, the

annual cost reduction due to bulk discount will be xA rupees.

. '. xA > mAI / 24x > mI / 24

If I is taken as 24 per cent or 0.24.

x > m / 100

or100x > m


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This indicates that bulk purchases can be profitably made if the per cent discount offered is greater

than the number of months' usage added to the EOQ. Though this is a very rough formula, it is useful and

the following example will make its application clear.

Example: The price and discount pattern for an item is as follows:

Quantity Unit Price (Rs.) Discount

1-99' 100 -

100-999 95 5 percent1000 &

over 85 15 per cent

If the monthly usage of the item is 150 and the EOQ is 500, would it be advisable to increase the

order quantity to 1000 to take advantage of the bulk discount?Per cent discount if 1000 units are ordered at a time instead of

Number of months' usage added to the EOQ by purchasing 1000

As 10.5 is greater than 3.3, the order quantity can be raised from 500 to 1000 to take advantage ofthe discount.

Replenishment

There are two ways to find out when and how much quantity is to be ordered. The first is based on

fixing a Re-ordering point (known as Re-ordering level or R.O.L) and when· the stocks fall below this

point an order is placed. The second approach is to place an order at fixed intervals of time. These two

approaches can be termed as :-

(1) R.O.L. Method of Ordering

(2) Periodic Ordering Method.

R.O.L. Method

The R.O.L. is determined by adding the Lead Time requirements to safety stock.

R.O.L. = Safety Stock + Lead Time Requirements. The


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Ordering Quantity is usually the Economics Ordering Quantity as shown in Figure 5.2.

Periodic Ordering Method

The stocks are reviewed at fixed intervals of time (known as Review Period) and orders are placed

either for a fixed quantity or a variable quantity.

(i) When the ordering quantity is fixed (EOQ); it is checked whether! it the periodic reviews the

stocks have fallen below a Re-order Limit (R). If the stock is lower than the Re-order Limit,

order is placed for E.O.Q. but if it is above the Re-order point, no action need to be taken till the

next Review date.

The Re-order limit R is calculated as follows:

R =Safety Stock + Rate of Consumption (Lead Time +Review Period)

2

R = Re-order limit (in units)

B = Safety Stock (in units)

Sd = Average Daily Sales (unit/day)

L = Average Lead Time (in days)

P = Review Time (in days)


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The average stock works out to : safety Stock + 1/2 of EQQ

INVENTORY MODEL

(ii) Where there is no fixed ordering quantity, Q is determined as the difference between the actual stocks

held at the time of Period Review and the Maximum Inventory Level (M).

M = Safety Stock + Consumption Rate (Lead Time + Review Period), Depending upon whether theLead Time is greater or lesser than the Review Period, one of the following two rules is used in

fixing the Reordering Quantity:

Q = : M - (Actual Stores held at the time of Review + Quantity on order)

The Inventory fluctuation by this system is shown in Fig. 5.4.

Average Stock =Safety Stock + l/z Consumption Rate x Review Period

If Lead Time < Review Period

Q = M - (Actual Stores held at the time of Review)


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Optimum Review Period (RP)

Safety Stock

The safety stocks become necessary in order to avoid 'Stock Outs' if the rate of consumption

increases and/or the lead time gets extended from the values considered for the replenishing systems.

Thus, a simple way of establishing the safety stock would be to find out the above two variations that

could normally occur over a period of time in terms of additional quantity of stock to be maintained.

Applying the Probability Theory, safety stock would be determined as follows:-

(i) When R.O.L. System is used:

(ii) When periodic Review System is used:

According to Kobert, it might be a good idea to define three degrees of criticality in regard to safety

stocks for which he establishes the following reaction rules:

*Minor items whose stock out would cause little inconvenience and could easily be overcome: Any safety

stock for this type of item would be a needless expense.

* Major items whose stock out would cause expediting inconvenience, and additional costs due to minor

production delays, extra shipping and handling charges etc: Emergency qualities of these types of

stocks could be obtained locally at a premium. The extent of the extra costs should determine the size of

stock these types of items.


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* Critical items whose stock out would cause major delays in shipment and/or production with excessive

costs resulting from both the effects of the stock out and the efforts to overcome the situation:

Emergency quantities of these items are not available locally at any cost. Safety stocks would be calledfor with these types of items, but reasonableness should be considered in determining their size.

The factor K is taken out from the table given below:

Accept-

ableAverage

No. of Order Quantity in Month'. SupplyYears be-tweenStocks

outs

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

20 2.64 2.39 2.24 2.13 2.04 1.96 1.89 1.83 1.78 1.73 1.69 1.64

15 2.54 2.29 2.13 2.01 1.92 1.83 1.76 1.70 1.64 1.59 1.55 1.50

12 2.48 2.20 2.04 1.92 1.82 1.73 1.66 1.59 1\53 1.48 1.43 1.38

10 2.39 2.13 1.96 1.83 1.73 1.64 1.57 1.50 1.44 1.38 1.33 1.28

9 2.36 2.09 1.92 1.79 1.68 1.59 1.52 1.45 1.38 1.33 1.27 1.22

8 2.31 2.04 1.86 1.73 1.63 1.53 05 1.38 1.32 1.26 1.20 1.15

7 2.26 1.98 1.80 1.67 1.56 1.47 1.38 1.31 1.24 1.18 1.12 1.07

6 2.20 1.92 1.73 1.39 1.48 1.38 1.30 1.22 1.15 1.09 1.02 0.97

5 2.13 1.83 1.64 1.50 1.38 1.28 1.19 1.11 1.04 0.97 0.90 0.84

4 2.04 1.73 1.53 1.38 1.26 1.15 1.05 0.97 0.89 0.81 0,74 0.67

3 1.92 1.59 1.38 1.22 1.09 0.97 0.86 0.76 0.67 0.59 0.51 0.43

2 1.73 1.38 1.15 0.97 0.1l1 0.67 0.55 0.43 0.32 0.21 0.10 0

1 1.38 0.97 0.67 0.43 0.2l 0 0 0 0 0 0 0

K factors used to calculate the safety stock needed to provide various levels of protection against

stock out for items whose usage pattern is similar to a Poisson distribution.

Ready Reckoners

For the replenishing system (including for safety stocks) tables could be prepared which would act as

Ready Reckoners to replace the laborious calculations involved. Some examples of such tables are given on

next page:


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The decision rules in inventory control systems employ order points or order-up-to-Levels based on

safety stocks developed through analysis of errors of forecasting the needs of individual components

treated independently. The weaknesses of such an approach in a manufacturing environment can be

summarized as follows:

1. There is no need to statistically forecast the requirements of a component. Once the production

plans for all items in which it is used have been established, the requirements of the component

follow, as dependent demand, by simple arithmetic. The patterns of inventory balance vis order

point for independent demand from customer, dependent demand of components and raw

materials are shown in figure 5.5.

END PRODUCTMONY SMALL INDEPENDENT DEMANDS FROM CUSTOMERS


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2. The procedures for establishing safety stocks are usually based on reasonably smooth demand.This is usually unrealistic in the case of component items.

3. Inventory control systems are geared to replenish stocks immediately following large demands

that drive inventories to low levels. In a "lumpy" demand situation, a large demand may be

followed by stock out but it makes no sense to immediately replenish the stock. Unnecessary

carrying cost would be incurred by such an action. The causes of lumpy demand of 'steel z' for a

hand tool manufacturing unit are shown in Figure 5.6.

Fig. 5.6 CAUSES OF "LUMPY" DEMAND

4. Where several components are needed for a single assembly the inventories of these individual

components should not be treated in isolation. To illustrate, consider the case where twenty

different components are required for a particular assembly. Suppose, under independent control

of the components that for each component there is a 95 percent chance that it is in stock. Then

the probability of being able to build a complete assembly is only (0.95)

20

or

0.36.


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Work In Process Inventory (WIP)

Definition

All materials in an organization after the point of issue from stores to the point of receipt in the sales-

godown are called Work in Process (WIP) Inventory. The time gap for the flow of materials between these

two points is called processing time. WIP has direct relationship with the processing time. WIP is normally

expressed as the value of materials being processed during processing time. This value goes on increasing

from the starting point that is issue of materials from stores to the last point. In the beginning this value is

just the materials cost and then labour cost, machine cost and overheads go on adding. Since labour cost,

machine cost and overhead are

6


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Work in Process Inventory (WIP) 55

also directly proportional to the processing time, these costs will also be affected by the processing time.Figure6.1 shows WIP curves. Solid curve is for the processing time T (before its reduction) and dotted

curve is for the processing time t (after its reduction). Area below the curve is an indication of the value of

WIP. It is clear that area below dotted line is less than the area below solid line. If an effort is made to cut

the processing time from T' to t and assuming the time reduction is spread equally throughout the process,

the post WIP curve will plot such that the horizontal axis value shifts to the right (is reduced) by the value

T -t. If level of WIP is Wand

Manufacturing sales are S than WIP Inventory turnover ratio =l2SW

Calculation of WIPWIP inventory as explained above is a function of manufacturing cost (C) and processing time (T).

Where D 1 is the cost incurred or the input in the month before a product is completed, D 2 is the input two

months before the product is completed and Dr is the input T months before a product is completed. The

value of WIP i.e. W is shown by

This does not, however, include input in the month of completion since these goods become finished

goods at the point. OT.T is determined by the manufacturing costs and the distribution of work performed

monthly (WIP distribution co-efficient) in particular the processing time T. Let the co-efficient be called

E.

From equations 1, 2 & 3 :-

Assuming that the input (C) remains same but the processing time is reduced from T to t thereby changingWIP co-efficient from E to e. The new


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WIP (w) will be as follows :-

w = C(e-l) ... (5)

Example 1

Through factory automation (FA) the processing time in an automobile factory is reduced from 4months to 2 months. Month-wise break-up of inputs are given below:-

Before FA After FA1 month before completion 50,000 2,00,000

2 months before completion 1,00,000 3,00,0003 months before completion 1,50,000 -----

4 months before completion 2,00,000 -----

If the manufacturing sales are Rs. 5.50 lakhs, calculate the WIP inventory, WIP ratio and %reduction in WIP before and after FA.

Solution:

1. Before FA

Manufacturing Cost (C) = 0.5 + 1.0 + 1.5 + 2.0 = Rs.5 lakhs. WIP distribution co-efficient (E)

WIP (W) = 5 (3 - 1) = 10lakhs

WIP T/O Ratio = 12 X 05.5 = 6.610

2. After FA

Manufacturing Cost (C) = 2 + 3 = 5 lakhs

Manufacturing sales (s) = 5.51akhs


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Example 2

Processing time in an electronic industry is reduced from 12 days to 3 days through processimprovement and line balancing. Day-wise break-up of input to the factory is as follows:

Day before the final assly & testing1 2 3 4 5 6 7 8 9 10 11 12

Before Im- 1 1 2 2 4 1 1 2 3 2 1 10

provement

After Im- 3 7 20 - - - - - - - - -

provement

Calculate % reduction in WIP inventory & % reduction in process time.

Solution:

C = 1 + 1 + 2 + 2 + 4 + 1 + 1 + 2 + 3 + 2 + 1 + 10 = 30CE = 1 x 1 + 1 x 2 + 2 x 3 + 4 x 5 + 1 x6 + 1 x 7 + 2 x 8 + 3 x 9 +

2 x 10 + 1 x 11 + 10 x 12 = 244

W = CE-C = 244-30 = 214

C = 3 + 7 + 20 = 30

Ce = 3 x 1 + 7 x 2 + 20 x 3 = 77

w = 77 -30 = 47


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How to Reduce Process Time?

* Line Balancing.

* Minimum movement through improved Plant Layout.

* Maximum speed of flow of materials between processes through mechanised handling.

* Minimum Setting Time. Quick die change mechanism, standby tool holders and machine

heads etc.

* Minimum process time. Use catalytic agents. Maximum tool speeds, feeds and depth of cut.

* Rigorous use of preventive machine maintenance systems.

* Self inspection by operator. Eliminate inspection stages by adopting running inspection and samplinginspection during material movement between processes.

* Minimum number of operations.

* Most efficient operations through factory automation.

* Just-in-time Production System.


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Spare Parts Management

Specific Problems

The main problem with spares required for day to day repair, maintenance of plant and machinery is

that there never seem to enough of them when required and too many in stock of such spares which are not

required. This is only the symptom of the illness. The main causes of this universal state of affairs are :-

1. The wage usage rates of spares are very low as compared to raw materials of general stores; this

causes their requirement to be highly fluctuating from period to period. The spare parts manager is

always at the end of his wits to assess and catch up with this variation.

2. The wage range of spare parts is very large and their individual value, relatively small. This raises

the problem of the level of control. Most spare parts inventory management is done at the lowest

organisationallevel. The senior manager just does not have time to deal with such a large range.,

though the problem of spare parts are most complex and can be appreciated by a trained manager

much better than a stores clerk.

3. The rate itself is difficult to establish from past records especially for the slow movers which form

the bulk of the spare parts inventory. Little usage history is available and the natural variability of

usage causes over estimates of requirement. As such, usage rates of spare parts have to be an

engineering assessment. If at all the maintenance engineer is consulted, he tends to make an over

estimate by himself taking over the material manager's function and allowing for safety margin,

also to allow for his own error of judgment.

The above problems have been tackled scientifically only in recent years. The solutions are far from

ideal but provide a much greater satisfaction as compared to the situation currently obtained in mostorganizations.


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Let us consider an example from the transportation industry where a single workshop looks after a

large fleet of, say, 10,000 vehicles. If the average requirements of fan belt per lead time (such as one

month) was 10% then the workshop should place a demand when the stocks fall to 1000 fan belts (10%

to 10,000). Vehicles are now split into ten groups of 1000 each, and each group is supported by the

different workshop (the lead time for procurement remaining the same as before) then, on the average,

each workshop will experience a consumption of 100 fan belts during the lead time but the variation

from workshop to workshop will be of the order of perhaps, 90 to 110. In their attempt to provide all the

spares when required, each workshop will then tend to retain a stock of 110. Causing a total stock of

1100 amongst all the workshops.

Now if each of these groups of 1000 vehicles is further split up into 10 groups of 100 vehicles

each, then there will be in all 100 groups of 100 vehicles, each experiencing .an average monthly

demand of 10 fan belts per group. However, now the actual variation of requirement of fan belts from

group to group would perhaps 'be of the order of 5 to 15. If 100 different workshops were to service

these 100 groups, then each workshop would tend to keep a stock of 15 fan belts to ensure full

availability when required so that the total 'deployed' stock would now rise to 1500 whereas the true

requirement was only 1000. This can be carried on further. Intuitively, one can guess that the variation in

consumption will increase as the usage rate goes down. Finally, when the usage rate becomes fractional,

the variation can be from 0 to at least 1 or even 2. The deployed stocks will then rise as shown in the

following table:

No. of Average Variation Total no. Total SafetyVehicles rate per of usage of groups Spares stock (ex-

in each group rate per Stocked cess overgroup group average)

10, 000 1000 - 1 10001, 000 100 90- 110 10 1100 100

100 10 5- 15 100 1500 500

10 1 0- 2 1000 2000 1000

1 0. 1 0- 1 10000 10000 9000

The above table clearly brings out the tremendous relative increase in the variation of usage below

and above the average as the latter decreases and becomes fractional consequently, the safety stack, i.e.

the quantity to meet the excess requirement also goes up sharply. In fact, it


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Spare Parts Management 61

also points to the method of reducing spares inventories. Thus, if the spares support is rendered from a

central store, the effective usage rate increases and its variation is reduced so that the safety stock required

is also small. Splitting vehicles into small pockets effectively reduces the usage rate, variation of. which

then becomes greater and greater and safety stock increases very rapidly.

Statistical Analysis

Having noted the fact that there is random variation in the actual requirement of spares from period to

period, the next step is to look for any pattern that may exist in this variation. Research conducted in

Western countries and in the Armed Forces has proved that a statistical law governed the requirement ofmaintenance spares for every kind of equipment be it air-craft, submarine, ship, radar, tank, vehicle,

machine tool, telephone or radio. To understand how these patterns can be used to determine the safety

stock, a simple numerical example can be taken.

Assume that we had a large amount of data available relating to the requirement of a certain spare

over a long period, Figure 7.1 above indicates this data. The height of the vertical bars represents the

proportion of times that particular spare (on the horizontal axis) was required. Typically, the data

pOl1rayed in Figure 7.1 shows that Qty. 8 spares were required 2% of the months Qty. 7 spares were

required 6% of the months. Within the total number of months examined, it was observed that there were 1


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% of the months during which no spare at all was required (The reference is to be one particular spare).


Hence, average requirement 439/100 = 4.39 per month.

From these figures, we can calculate the risk, or assurance associated with each stocking policy. It

should be noted that in the present case, the average consumption per month during the 100 month period is

only 4.39 as calculated above.

If we had stocked exactly 4 spares we would have had a 50% assurance only i.e. there would be a

50-50 chance of having enough spares when required. If we wish to give a better assurance than this, we

must increase the stock. This excess stock is the true/safety stock. The relationship between assurance and

safety stock in the present case is as under :-

Stock at the time of Safety Stock Assurance % Risk%PLACING DEMAND

8 4 100 0

7 3 98 2

6 2 92 8

5 1 74 26

4 0 49 51

3 - 29 71

2 - 14 86

No. of No. in Total No. of Spares

Spares which required

0 x 1 = 0

1 x 3 = 32 x 10 = 203 x 15 = 454 x 20 = 805 x 25 = 125

(i x 18 = 1087 x 6 = 428 x 2 = 16

439 No. of months 100


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D 1.5 2.0

E 1.3 1.9


Criticality Availability Annual Consumption

Value

A B

E S 1.2 1.6

D 1.0 1.5

E 0.8 1.4

D S 0 0.8

D 0 0.8

E0 0.8

k for an item classified as 'E-S-A' is 1.2 & for 'V-D-B' is 2.0

The k values proposed above provide assurance between 70 - 99.7% that items will not be out of

stock. Assurance is more where k value is more and less where it is less i.e. for k = 2.1 it is 99.7% and for

k = 0.8 it is 70%.

This simplification avoids the need for too many tables for various levels of assurance. In any case, it

has been found that, in practice, the quantity of spares the tables would indicate at low levels of assurance

would almost always be 0.

The above table shows that the cycle stock i.e. the 'average usage' part of the ROP becomes

relatively an insignificant part as the usage rate diminishes where the safety stock becomes the predominant

part for any given level of assistance. Typically, for a fast moving item having a monthly usage of 16, the


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the supplier, or anyone else. All these costs can be roughly estimated. Let us say, this cost (C1) is

estimated at Rs. 10000/-.


This value is called the "indifference level", The maintenance engineer is now asked whether, in'hisestimate, the chance of requiring that spare in the life-time of the affected vehicle fleet is as high as 10%. Ifhis answer is 'yes', the spare is stocked. If the answer is 'No', the spare is not stocked but bought only whenactually required,

It should be noted that the engineer will not be able to answer the questions "what is the probabilityof requiring a given spare during a given time" but when his thoughts are pegged against a specific figure(the indifference level) he will more often than not, be able to bring to bear his entire experience andengineering knowledge upon this question. It will be rare that he will not be able to answer even thisquestion, because, just as there is never complete knowledge, there is also never complete ignorance.

If the cost of the slow moving spares is very low, the above analysis is not required. The spare parts-manager should stock them at quantity l or 2, if they are critical and none or 1 if they are not


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Purchasing

Preliminary Considerations

It is a belief of long standing that purchasing is a matter of experience, contacts and bargainingskills. There exists, however, the other important side which helps economic purchasing and these arecertain modern techniques that give a more systematic approach and help in giving a sharper edge to theexperience and bargaining skills.

The five essentials of a good purchase are:

(1) Right Quality

(2) Right Quantity

(3) Right Price

(4) Right Time

(5) Right Source/

Right Quality :

The quality is usually specified by the designers or the engineering personnel. The tendency isalways to specify quality a step higher than necessary to doubly ensure the performance. The extra qualityhowever adds nothing but costs to the product. The purchasing can always scrutinize the qualityspecifications by comparison with the quality the competitors are buying and bring it to the notice of thedesigners. The other aspects are being in touch with the markets. Purchasing can always supply to thedesigners with information about alternative materials that can meet the specified quality requirements. Inmany requisitions the quality is specified so vague that future troubles are guaranteed; in such cases

purchasing must insist for explicit statement of quality requirements. The purchaser should considerfollowing points for ensuring right quality:

- As per own requirements.

- Clear specifications (ISI).

- Simplification & Standardizations.

- Support to supplier.


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Right Quantity

The concepts of E.O.Q. have already been considered elsewhere; there are two more aspects of Right

Quantity from the point of view of transportation costs and quantity discounts. If the supplies are in truck

loads or wagon loads substantial savings in transportation costs can be affected. At times two or three

items can be purchased from one supplier; it gives savings in transportation costs. The other aspect is of

discounts.

When buying for discounts, it is necessary to calculate the increase in inventory costs and also

chances of deterioration or obsolescence. E.O.Q. usually will give a value which may not be very suitable

from both the above angles and purchasing will have to modify it suitably. Before deciding right quantity,

following points should be considered:

- E.O.Q.

- Economy on Transportations.

- Quantity Discounts.

Right Price

and the interests in anticipation of delayed payments. Analysis of all these costs is necessary when

comparing When we talk of price, we talk of cost of materials upto factory which consists mainly of

ordering costs, the price of ready goods, the packaging costs, the handling and transportation costs,

forwarding and clearing costs prices as consideration only of the goods cost can be misleading.

The packaging, forwarding and clearing charges and damages ir transport can be reduced to a

minimum by purchasing locally. Again for different modes of transportation the packing need not be of the

same type. Handling costs can be reduced by getting the goods in packages that are ready for issuing to

shops. Last of all, if a supplier knows that he would not get his bills paid for a year, he is bound to charge

extra. Calling open tenders too increases the ordering costs and consequently the price and should be done

only when necessary. Consider following point before deciding right price:

- Need not be lowest

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