Operations Session 14 - Review Notes

8/12/2019 Operations Session 14 - Review Notes

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MET ICSsPGDM 2013-2015 batch Session # 14Operations Management

Document1SessB14LotSizingNOrderFinal.docx Page 1 of 20 (KV,LB,ST /PM,PG,SK,NR)

Operations Management

(Shashank Tilak)

Session no. 14

Dated: 16thSeptember 2013

Topic:Lot Size Controlling and Make of Buydecision

Notescritiquedby:

Kapil Jadhav- 07

Bhumi Jakharia- 21

Bijon Kanabar- 24

Gaurav Sahasrabudhe- 33

Jophy Thomas- 38

Manish Makhija- 54

Kinjal Shah- 56

Notes pre predby:

Ashwin Widge 05

Afreen Jawed11

Nikita Singh 19

Amar Puri 35

Priyanka Chhabria 46

Sayli Chaudhari 53


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Lot Size Controlling and Buying Decision

The two main areas which need to be look after before considering lot size

controlling and buying decision is managing inventory and how to plan and placeand order.

Managing Inventory:

Managing inventory includes the balance of demand and supply. To meet up the

customers demand the demand and the supply forces both have to be balanced.

Demand is generally customer centric and supply is planning and procurement of

the stock required meeting up the customer demand. For managing demand

various things like time of order, quantity demanded etc have to be taken into

consideration. For managing inventory there has to be proper warehousing

facility and supplier and plant or wareshouse have to be connected in best

possible way whichever is feasible and cost effective.

Planning and Placing an Order:

While planning and placing order how many and how much quantity to order is to

be decided. When and what time to place order and even release the order an d

even at what time the raw materials are to be received and procured in stock. The

location, site, vendor from which the material should be received has to be taken

into consideration too.

Make or buy decision

The act of choosing Strategic Act of Deciding whether a part/service should be

procuredor manufacturedinternallyor purchased of fromanoutside supplier.One You

has have to attach weights on each of the parameter and take a decision based on

current situation and decide whether to make it in-house or outsource it. The major

factors to be considered are:-

1- Cost- It should make economic sense to buy i.e. it has to be cheap and

affordable. . It should be cheaper to buy.Any cost saving achieved from buying

or making must be weighed against the preceding factors. Economic analysis

of make or buy decision is based on evaluation of overall economic and

strategic factors in a structured and weighted manner.

2- Timing of need-Timing of need is also an important factor. It includesseasonality of goods. Suppose we need to manufacture some goods and if it

would take long time E.g. 5 days, it would be rational to buy it from outside,

thus this would save time. Timing is also related to overall period for which the

need is expected. If it is a short term or very infrequent need, it may not be

worth efforts to set up a facility to manufacture in housebut rather outsource

it..

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3- Capacity and Availability- This is another very important factor which we

should consider while taking a decision whether to produce internally or buy

from outside. If firm has available capacity in equipments, necessary skills and

time, it makes sense to produce an item so that the available capacity in

equipments and skilled labour can be made use of. Here we may have the

capacity to produce the goods but we have booked it to produce some other

goods i.e. it is utilised for some other purpose. So despite having the capability

it is wise to take the decision of buying from outside.

4- Proprietary/ specialized/patented-

Patented-Patented products are protected so that they itcant be imitated.

Specialize-If the needed expertise is lacking in the firm, buying might be a better

alternative.

In another sense technology and methods used for manufacturing may be

proprietary and hence not available for our use.

5- Quality and Skills Consideration-Quality and skills are of strategic

Importance. Outside suppliers who specialize can usually offer high quality

products than what the firm can produce. But unique quality requirement or the

desire to closely monitor the quality may cause a firm to decide to make

When we have the required skills we can make the product in the way it is

exactly required. Sometimes companies require particular skills to develop a

particular product, and in absence of the required skill it becomes essential for

the company to develop these skills.

E .g.- Tata Motors will outsource engine due to availability of skills with their engine

production JV with Cummins Ltd, and on the other hand it will never outsource gear

box as it possesses the required skills.

6-Volume, Speed of Need:-The volume may be too high or too small for few

organizations to make it. The speed or rate at which production takes place and it

what quantity or volume one can produce it is of great importance and benefit. For

e.g: China gets or receives orders from major manufactures of the world because of

the huge human resource and the flexibility in the operations over there. The rate,

time and speed at which they produce is the main reason they dominate the

manufacturing processes worldwide. someone else to make it.

Apart from the above important considerations, the other non-economic

considerations could be:-

1. Reliability of outside suppliers.

2. Delivery schedule to be met


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3. Control of design secrets.

4. Employee preference for particular nature of work

5. Availability of suppliers (for outsourcing)

6. Reliability of outside suppliers

Lot Sizing Models

In Lot sizing model there are different principles that are applied

Lot sizing is done mainly for optimizing the cost. As we can see in the graph, direct cost alwaysremain constant, Storage cost shows linear variation. Ordering Cost , Carrying Cost, InventoryCost, Setup cost are the different cost which are to be taken into consideration for calculationof optimal cost. During the delivery of goods there are many transportation issue s. Properplanning plays a very important role for completion of order. One should be aware about the

type of order he is taking from the customer depending upon the capacity. Take an exampleone time order of 30,000 units of a product is important or everyday order of 1000 product issuitable. If there is a possibility to group 2-3 orders group together and& do processing.Grouping leads to minimization of cost as well as effective utilisations of resource. In the abovegraph where setup cost and storage cuts each other at the point, that point indicates optimalcost at which the output is being produce and most of the company try to achieve that point.

Optimisation of Cost-The MRP system generates planned order releases, which

trigger purchase orders for outside suppliers or production orders for in-house

production department as certain cost such as the setup cost or ordering cost and

holding cost or inventory carrying cost are associated with each other, it is necessary to

consider the trade offtradeoffbetween these 2 types of cost and take decision regardinghow much to order that is batch size or lot size.

Transportation and transit/transaction issues also lead to optimization of cost.

Combination of Run time for each Lot- It refers to the time for which each

machine is working. It includes the maximum time required for production. It also

takes into consideration idle time.


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setting order, systemic cleaning, standardizing, and sustaining the discipline ensure thatno dollars are lost to poor processes.

The principles of inventory management are not any different from other industrialprocesses. Disorganization costs money. Each process, from housekeeping toinventory transactions needs a formal, standardized process to ensure consistentlyoutstanding results.

3. Inventory Turns/Stock Rotation

In certain industries, such as pharmaceuticals, foodstuffs and even in chemicalwarehousing, managing inventory down to lot numbers can be critical to minimizingbusiness costs. Inventory turns is one of the key metrics used in evaluating howeffective your execution is of the principles of inventory management.

Defining the success level for stock rotation is critical to analyzing your demand

forecasting and warehouse flow.

4. Cycle Counting

One of the key methods of maintaining accurate inventory is cycle counting. This helpsmeasures the success of your existing processes and maintain accountability ofpotential error sources. There are financial implications to cycle counting. Someindustries require periodic 100% counts. These are done through perpetual inventorycount maintenance or though full-building counts.

5. Process Auditing

Proactive error source identification starts with process audits. One of the cornerstone

principles of inventory management is to audit early and often. Process audits shouldoccur at each transactional step, from receiving to shipping and all inventorytransactions in between.

By careful attention to each of these critical core principles, your business can increase

Demand:An economic principle that describes a consumer's desire and willingness topay a price for a specific good or service. Holding all other factors constant, the price ofa good or service increases as its demand increases and vice versa.

Basic Identification of demand-

There are two types of Demand:-

-Independent demand-

Meaning- demand for a material which that is independent of the demands for other

materials. For example-demand for end products are independent of demand for parts,

raw materials or components as their demand are determined by customers outside the

organisation.

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Basic details for sample;-

Ordering cost (Cp)

It is total of all expenses incurred in placing an order. It is the cost incurred in preparing

and processing purchase orders as well as in receiving and inspecting the purchased

items. Examples of ordering costs include salaries of purchasing clerks, telephone, and

stationery.

Inventory carrying cost. (Ch)

Inventory Carryingcarrying cost refers to the total cost of holding inventory. This

includes warehousing costs such as rent, utilities and salaries, financial costs such as

opportunity cost, and inventory costs related to perishability, shrinkage and insurance.

When there are no transaction costs for shipment, carrying costs are minimized when no

excess inventory is held at all, as in a Just In Time production system

Average requirements- It is demand for the goods. This requirement may be

calculated on monthly basis/weekly basis etc.

Net result of all the factors related to ordering and holding inventory is recognition of a

point / quantity of product which will give right balance between these two costs. This

quantity is called Economic Ordering Quantity (EOQ)The total cost of ordering and

holding inventory is expected to be minimum at this quantity. This is a useful concept and

model that helps to understand overall balancing of costs and identify how one should

proceed with optimization. For most purposes this is an ideal scenario. There are

number of assumptions and expectations at work here. These are mainly related to

steady rate of consumption, ideal execution by way of receiving full ordered quantity

exactly when the inventory gets over, steady levels of prices regardless of quantities

ordered or payment terms etc. For these reasons, it will be good to look at this model

only for understanding different forces at work in defining total costs for the procurement

and making inventory available.

It is important to realize that EOQ is only one and a starting point of these studies.

There are several other options and methods that can be used to optimize procurement

costs. Some of these are discussed below.

Methods of ordering

When you are involved in the production process you tend to buy the goods that you

will be using in the process. The goods that you will be using are large in quantity and

are expensive in nature, so in order to avoid any wastage and to make a good usage of

the goods it becomes necessary that proper planning is been made and the order of the

quantity of the required goods are made in the economic manner. So in order to make an


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effective ordering decision it is very important to decide on the frequency of placing an

order and the quantity of order so as to keep the total cost low.

For all the examples below there are a standard set of assumptions such as

Ordering cost is Rs 300 per order

Inventory carrying cost is Rs 2 per piece per week

EOQ for the product is 166 pieces per order

Average demand for the 12 week period and the statistics of demand is 92.1 per

week

1. EOQ Method - STANDARD METHOD

The economic order quantity (EOQ) is the order quantity that minimizes total holding

and ordering cost for the year.

Ordering Cost (Cp) = 6 X 300 = 1800

Carrying Cost (Ch) = (Total Start inventory + Total End Inventory) = 3065

Total Cost =( Cp + Ch) = 1800 + 3065 = 4865

This method relies on placing each order for EOQ. In this method the order is higher

and it is placed just in time before the stock is out. For each of the 6 orders here total

ordering cost will be Rs 300 X 6 = Rs 1800. For each week it is necessary to calculate

average inventory (= sum of starting and end inventory / 2). Then multiplying this

average inventory for each week by Rs 2 will give inventory carrying costs. Here the

resulting total cost can be calculated by adding the ordering cost and carrying cost. The

carrying cost in this method is comparatively higher because your inventory is higher. As

a result total cost of procurement for this set works out to Rs 4865/-.

2. Periodic Order Quantity

Week no 1 2 3 4 5 6 7 8 9 10 11 12

Requirements 10 10 15 20 70 180 250 270 230 40 0 10

Order qty 20 - 35 - 250 - 520 - 270 - - 10

Startnventory 20 10 35 20 250 180 520 270 270 40 0 10

end inventory 10 0 20 0 180 0 270 0 40 0 0 0

Week no. 1 2 3 4 5 6 7 8 9 10 11 12Reqiuireents

10 10 15 20 70 180 250 270 230 40 0 10

Order qty 166 166 223 270 230 166

Startnventory

166 156 146 131 111 207 250 270 230 166 126 126

Endnventory

156 146 131 111 41 27 0 0 0 126 126 116


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Total Cost =( Cp + Ch) = 1800 + 2145 = 3945

In this method you place an order periodically by calculating the time between orders byOQ. This can be calculated by dividing the EOQ by total demand. This will give you thexact order quantity required. Since total 6 orders are required to meet the demand, here theecision is to place orders in alternate weeks. Each order will meet requirement for next twoeeks. As a result overall ordering pattern will be as shown above. With same number ofrders, ordering costs will remain same. But overall the average inventory comes downrastically. As a result, inventory carrying cost will come down to Rs 2145/- and total cost ofrocurement will be Rs 3945/-. Here the carrying cost is comparatively lesser than thetandard method because the order quantity is reduced and the frequency of order is

ncreased.

3. Part Periodic Balancing Method

Week no 1 2 3 4 5 6 7 8 9 10 11 12

Requirmnts 10 10 15 20 70 180 250 270 230 40 0 10

Order qty 55 - - - 70 180 250 270 270 - - 10

Startnventory 55 45 35 20 70 180 250 270 270 40 0 10end

nventory 45 35 20 0 0 0 0 0 40 0 0 0

Ordering Cost (Cp) = 7 X 300 = 2100Carrying Cost (Ch) = (Total Start inventory + Total End Inventory) = 1385Total Cost =( Cp + Ch) = 2100 + 1385 = 3485

This method is a refinement of periodic order quantity mentioned above. It relies mainly onalculating optimal cost by trial and error. It will try to increase order quantity to include oneore weeks consumption. As a result each order quantity will increase and unit co st for

ach order will decrease. Against this, inventory carrying cost will increase. The calculations done by increasing order quantities by one week in each step and calculation of total costor that order. So long as the increased inventory carrying cost is less than Rs 300 or cost ofne more order, this technique will result in lesser total cost. Resulting ordering and

nventory holding pattern is shown in table above. In this method you order the quantity bylubbing the requirements of few weeks and you identify the combination that gives

inimum cost. When the Requirement is of higher quantity the order is made on weeklyasis, whereas where the required quantity is smaller, the order is combined for few weeks.ere the resulting cost is less because the carrying cost is the least, as whatever is ordered

s consumed and not much quantity is kept as inventory. Although cost of ordering one moreime is increased by one order (Rs 300/-), inventory carrying cost is decreased even more.ence total cost of procurement comes down to Rs 3485.


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Wagner Whitin Algorithm-

Week no 1 2 3 4 5 6 7 8 9 10 11 12

Requirmts 10 10 15 20 70 180 250 270 230 40 0 10

Order qty 55 - - - 70 180 250 270 280 - - -

Startnventory 55 45 35 20 70 180 250 270 280 50 10 10

endnventory 45 35 20 0 0 0 0 0 50 10 10 0



Total Cost =( Cp + Ch) = 1800 + 1445 = 3245

IN this method, a dynamic programming technique is used to further optimize total

costs. This method gives order and inventory holding pattern shown above. You try to

maintain least amount of stock. In this method we follow dynamic

programingprogrammingmethod in which we identify the combination that will help us in

giving the minimum cost. As compared to Part Period balancing, one lesser order is

required which reduces ordering cost. At the same time an additional inventory is carried

from weeks 9 through 12. Hence total cost of operation is Rs 3245/-.

All these methods show that it is possible to further optimize costs of procurement by

using different ordering techniques. Total cost of procurement will depend not only on

costs of ordering and carrying inventory but also on demand pattern and quantum of

each demand element.

Factors that will influence the ordering decision

1.Production of goods is ordered based on the past trends. Like for instance during a

year the demand for the goods produced might be more but for the next year the demand

for the same goods might be less. So in such a scenario if the manufacturer orders more

goods expecting the same level of revenue the next year, then the organization will

definitely face loss.

2. Cost of the products that are needed in the production process.

3. The variation in ordering cost; based on the season and the need the cost of the

product will vary. So it is up to the manufacturer to decide on the best time to invest in

buying the needed goods.

4. Availability of proper storage space for the easily perishable and excess goods

5. The demand and nature of the product


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7. Availability of the needed goods throughout the year

9.The quantity of goods that is needed to be kept as backup, so that the production

process is not withheld due to lack of resources.

Further considerations:-

Major demand Consideration

Single level considerations-There are 2 types of single level

considerations:-

1-Independent demand-

2-Dependent demand-

Multi Level Demand-At multiple level demand we will need components.

Here we require same material. Ability to handle uncertainty is Key- Here we need extra support to

handle these uncertainty which is going to be there. We need to have an

idea about how much the uncertainty could be.

How can you estimate the uncertainty?

- Have an idea as to what can go wrong, how much can go wrong and be ready to

meet contingency.

Reasons for uncertainty

-Stability of operations details-

-Customer order quantity and dates may change and as a result both quantity

and demand patterns will also alter.

-Accuracy and availability of inventory is essential to ensure that all materialavailable in inventory is applied for active usage

-Ability to control production related to Dates and Quantity stability. Without such

stability

ORDER PROCESS TIMING

The expectedperiod of time between the date anorder is placed and when it is

manufactured/produced or shipped.

Timing is set on the basis of quantity

Safety Stock- The calculation of safety stock includes finding the probability andcombination of components.

Re order point- quantity of stock at which it will be necessary to place a new order. This

balance quantity should cover demand during lead time- including cover for Uncertainty

/Variation in Requirements.


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Order Timing decision

When after ROP (re order point) the consumption is slower so there is not much of a

problem but if the consumption goes faster than usual there can be a problem, we need

to stop the production. Or you may change your ROP but in case the supplier also cant

give you early and delays then there is a Stock out situation. If stock is consumedslower and materials are ordered before the stock is exhausted then there will be an

problem of inventory pile. If consumption faster and order placed after exhausting stock

then there can be shortage for a few days if materials dont arrive on time.

APPLICATION OF SAFETY STOCK

SERVICE LEVEL-

Service level is a tool to measure customer service, denoted by (SL) and ( 0(0 SL 1) .

). Service level can be measured by

SL = No. of units delivered No. Of units demanded expressed a fraction or

percentageit essentially indicates a probability that available stocks will be sufficient

to meet most normal requirements.

Eg. If units demanded during a given period is 100 and the firm delivers 98 units, so

Consumption Faster

Consum tion

Slower

Consum tion

Order

Coming

In

Shortage during placing order &

deliveries


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SL= 98100 = 98%

Maintaining Service level-

The goal of maintaining a service level is to maintain and improve on service quality

through a constant cycle of agreeing, monitoring, reporting and improving the current

levels of service. It is focused on maintaining the service and the quality acceptable by

the customer all the time and ensures that there is no stock out situation. For this safety

stock is maintained i.e the amount of inventory kept to meet the service target given the

forecast errors due to variation in customer demand over the stated lead time. A

business in general expects a normal distribution for most demand patterns or other

events that occur as part of normal business operations. There is a possibility that a

stock out may occur. There are various factors governing the level of safety/Buffer

stock-

Variation in demand-

A situation may occur where there is seasonal variation in demand. It may happen in

two ways. Either the demand is higher than the maximum available supply or demand is

lower than the maximum supply. The reason for seasonal variations is changes in the

environment or other cultural factors causing people to have different types of

requirements at different times of the seasonality time period.

Example: Demand for hotels and all other facilities in tourist location is much higher

during their respective tourist seasons or school vacations, different festival seasons or

other high points of social life in these locations.

Example: Demand for toys and presentation items are very high during Christmas and

other festivals when people exchange gifts. It is obvious that seasonal variations in

demand will result in seasonal variations in all activities connected with fulfilling those

activities.

Such variations in demand can be taken care by using forecasting techniques like-

i). Regression analysis- i.e. collecting past available data and analysing it for the future

strategies

ii) Method of moving average- using 3 yearly moving averageaveragesand forecasting

the demand for the next year.

iii) Exponential smoothing analysis- helps to forecast the demand for an in betweenmonth in a particular year.

Supplies- timing and Quantity- Variations in the suppliers lead time can also cause

service problems. Usually it is advisable to calculate and communicate the lead time

with the suppliers but sometimes such a variation may occur due to sudden breakdown

etc. There could be an imbalance in the supply side. So in order to avoid this it is very

important-


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To calculate the probability of stock out- It may require keeping additional safety stock

so as to cover the observed variation in the lead time. This information protects your

customer service by calculating a second element of safety stock and thus changing the

ROP. (Reordering point).

Detailed statistical analysis- It also requires detailed statistical analysis to calculate and

determine the cost of supplier variation. Example: One might measure the standard

deviation of the delivery lead time vs. the stated lead time. Then you can prioritize the

suppliers or products to be improved. You may upload this additional safety stock to

your planning system. Or, after seeing the cost of supplier variation, you may choose to

delete this safety stock. Armed with this information, you can prioritize the cost

opportunities to improve and control supplier variation.

CONTROL DECISIONS

Sometimes, in spite of making forecasts and using statistical analysis, a firm might face

forecast errors and may face demand and supply variation which may affect the entire

process of activities.

Service levels- In order to maintain a balance in the service level, a firm should always

check out various combinations of inventory holding, order time, order quantity etc. and

change its ROP and inventory holding accordingly so as to meet any variation in

demand efficiently.

Cost of Operations- While maintaining the service level at its optimum, its also very

important to manage the cost optimally. One needs to carry out various combinations todecide on the optimal holding cost, carrying cost, ordering cost etc. which Whichin turn

will affect the service level of the firm. One of the major cost items consists of

transportation costs for getting goods in or ensuring supplies to your customers.

Normally any priority, short lead time transport will cost lot more than a well planned

transport. Hence it is a good method to gain good lead time by continuous

communications with customers as well as suppliers so as to avoid last minute rush and

need to hire such high priority transport. For this a firm must carry out iterative

processes of finding out the lowest optimal cost by using various trials and errors and

thereby ensure that the over targets are met.

MULTIPLE ITEM MANAGEMENT


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Multiple item management is about handling a set of items on basis of importance. Here

all the materials are analysed and categorized on the basis of importance and priority

for which various techniques are used.

Using ABC analysis (Always better Control) - In supply chain, ABC analysis is

an inventory categorization method which consists of dividing items into three

categories, A, B and C: A being the most valuable items, C being the least valuable

ones. This method aims to draw managers attention onthe critical few (A-items) and

not on the trivial many (C-items). This technique is based on the usage value of an item

. usage value can be calculated as:- usage value = price/ X consumption.

(ABC = Always Better Control)

This is based on cost criteria. Or it can also be based on value or any other characteristics which can

be applied uniformly for entire population of items or products

It helps to exercise selective control when confronted with large number of items it rationalizes the

number of orders, number of items & reduce the inventory.

About 10 % of materials consume 70 % of resources



A Items:

Small in number, but consume large amount of resources

Must have:

Tight control

Rigid estimate of requirements

Strict & closer watch

Low safety stocks

Managed by top management

B Items:

Intermediate

Must have:

Moderate control

Purchase based on rigid requirements

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Reasonably strict watch & control

Moderate safety stocks

Managed by middle level management

C Items:

Larger in number, but consume lesser amount of resources

Must have:

Ordinary control measures

Purchase based on usage estimates

High safety stocks

ABC analysis does not stress on items those are less costly but may be vital

Is carried out for cross combination of two different criteria. One may be the standard

value based criteria like price / cost of items. Second criteria may be on basis of

criticality of needs or contribution that a particular client, sales outlet or any contributor

makes to overall business. This cross combination will ensure that all critical high value

items are available at each location as well as all items required at a fast seller location

are also available at such high critical location. This technique is useful for maximizingrevenue or value to customer as well as improving sales performance of selected

outlets. The tables below show results of such combinations or performance.

Value Based Analysis











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Category Items % Items % Usage

A 12 4 75%

B 32 11 21%

C 278 85 4%Criticality Based Analysis

Category Items % Items % Usage

I 8 2.5 65%

II 47 16 26%

III 267 81.5 9%

Application Of Controls

Actions AA BB CC

CountingFrequency

Monthly Quarter/Six Montly Annual

Order Quantity Small For Costly

Items

EOQ base as per

consumption

Large quantities

Safety Stock Large for criticalitems

Large for select items Low or none

Reclassificationreview

Half yearly Half yearly or asnecessary

Annual

Above 3 table shows the ABC analysis & VED analysis.

APPLICATION OF CONTROL based on above analysis helps to deliver

better performance by using steps and techniques mentioned below

1. Counting frequency: Under this technique, the A type of materials are counted

and controls verified on a monthly basis as they are the most critical and important items,B type of materials are counted on a quarterly basis and C type of items are counted

once in a year.

2. Order Quantity: A type of items are types of items are ordered in smaller

quantities as they are very costly. B type of items are ordered as per consumption i.e.

EOQ. And C type of items are ordered in large quantities.

3. Safety stock:Safety stock is kept quite large for critical items like A, large for item

item B and smaller quantity for C item..

4. Reclassification Review:For A items review is done half yearly, for B items

itsitsdone half yearly or as required and C type items are reviewed annually.

1. COST/benefit analysis i.e. Profitability analysis-The cost/benefit analysis is astrategy or formula for evaluating the potential for some type of operation or project

within the confines of a company or other organization. Essentially, the purpose of

a cost benefit analysis is to ascertain if conducting the project or operation is feasible,

given the current circumstances of the organization. As part of this process, the

cost/benefit analysis will identify the benefits that can be reasonably expected to be


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gained from the effort, while also considering the impact on the organization in terms of

various types of cost to carry out the project.

2. VED Analysis- VED analysis (vital, essential and desirable). This technique is

based on criticality. Vital Production would come o haul, Essential - whose stock out

cost is very high, Desirable - items which do not cause any immediate loss of production.

This is carried out mostly for maintaining service levels for spare parts and other

inventory where cost of a particular part may not have any relationship with disaster

value of non availability of such part.

3. HML Analysis:

Classification based on unit price:

This classification is as follows:

High Cost (H) = Item whose unit value is very high

Medium Cost (M) = Item whose unit value is of medium value

Low Cost (L) = Item whose unit value is low

This type of classification helps in implementing proper control such as authorization,

expiry management; identify opportunity to find out a less expensive substitute.

All the types of inventory and situations may not be standard and thus real life situation

may need more complicated handling. Inventory optimization is critical in order to keep

costs under control within the supply chain. Yet, in order to get the most from

management efforts, it is efficient to focus on items that cost most to the business or

what the business values the most.A firm needs to make sure that it maintains a balance

between its customers and its supplies so that it maintains its service delivery and level

of competence.


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Operations Session 14 - Review Notes

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