Planning & Prog, Inventory, Replenishing

8/3/2019 Planning & Prog, Inventory, Replenishing

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3. PLANNING AND PROGRAMMING OF MATERIALS

The starting point for the planning of materials procurement is the production

schedules. Based on the annual sales of forecasts the production schedules are

made. Working backwards on the schedules the dates on which the different

materials must be in plant are calculated. Normally a factor of 1.2. or any other

appropriate factor of safety should be used in working out the latest dates of

arrival. The quantities are also computed with the help of bill of materials.

This statement of annual requirements helps the purchasing department in

formation policies for different materials as (1) Contract buying, (2) Blanket

contracts, (3) One time buying (for seasonal materials) and so on. It also gives the

purchasing sufficient lead time for items that need substantial procurement periods.

The items for which the markets are more or less steady and the purchases are

comparatively easier are not tackled at this point. Any changes in the lead time for

procurement are fed back to the inventory control section. Subsequently as and

when the periodical production schedules are made, Production Control sends the

bill of materials for each product planned to be produced during the next period

and the quantities of each product to the inventory control; who enter the stocks on

hand and forward it to purchasing for procurement.

The initiation for purchase of other items, which dont directly go into the productis done by inventory control based on their records of stocks and ordering points.

These have to be approved by the planning, since there is always the chance that

inventory control may keep on ordering items that are intended to be discontinued.

The above practice is followed successfully by a number of Manufacturers of

Automobile and Aircraft parts, electrical components, pharmaceuticals,

confectionery and machinery manufacturers.

Whatever the method of initiating the purchasing orders, it is important that the

information regarding anticipated requirements be given to the purchasingdepartment at the earliest possible stage. The bill of materials method has the

advantage of getting this information the sooner the production schedule is

tentatively set.


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A bill of materials form is given below:

Bill of MaterialsProduct

Specifications Schedule

Order Nos. Qty. Date:

Material

Code or

Description

Unit Nos. per

Unit

Qty. Reqd. on

date

Stock on

hand

unalloted

Order

Date

Signature of P.P.C. Stores Purchase


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A lot of work in requisitioning routine items, by stores can be saved if an

additional card in Kardex for each item is introduced. This card has the description

of the item and specifications and 30 lines for order requisitioning. Each time the

order point is reached the card is filled in for quantity or replenishment required

and sent to purchasing when the card is not found in Kardex the record keepers

immediately know that an order has already been placed for replenishments.

Its always convenient to purchase commodities in groups, so that even though

individual quantities are small the aggregate order becomes substantial, affording

advantages of discounts. There are also savings affected in transport and the

ordering work of purchasing department is reduced. Colour tags can be attached to

the cards mentioned above to indicate its group and all cards in one group can be

reviewed at one time. Here it is necessary to note that the order point of allcommodities in one group is not likely to occur at one time, but at least the

commodities for which the difference is not excessive can be ordered at one time.

Moreover with practice its possible to intelligently adjust so that for more of the

items in group the order points lie somewhere together.

The above methods apart from reducing considerably the clerical work afford more

economies and convenience in procurement and reduce the changes of stock outs.


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BUDGETING AND PLANNING OF MATERIALS

Materials budget is a part of the total company budget and is a device of estimating

and planning the expenses of materials well in advance and ensuring the

availability of funds at the required time. It is also a tool for pinpoints any

variations from the planned expenditures so that, such variations can be further

investigated for corrective action.

The budgeting committee normally consists of companys major department heads

and budgets most frequently are annual. The starting point for the budget is the

sales forecasts for next year annual plan. Many companies prefer to take next 3 to

5 years of sales forecasts into consideration as these help suggest in advance of any

plant expansions or curtailments necessary in future. In Indian conditions where

sales forecast is not an easy matter the orders outstanding (which can in many castsbook 12 to 14 months of plant capacity) can be used for making budgets. Based on

the sales forecasts for New Year production schedules are prepared.

From the bill of materials for each product, the quantities of different materials are

consolidated. Working on the production schedules backwards the latest dates

when the materials must arrive in the plant are calculated. Till now all the materials

are expressed in terms of units and till now we have collected the total annual

requirements and the dates of latest arrivals at factory.

Quality discounts can also be utilized more effectively. Inventory investments and

its associated risks, can likewise be reduced by advance planning of requirements.

Materials budgets provide a maximum of purchase lead time. This benefit permits

the careful selection of qualified suppliers, negotiations without pressure of

deadlines and a better change of obtaining maximum value for every Re. Spent.

Savings can also be effected through use of routine transport rather than premium

transportations. The work and cost of expediting get reduced. Purchasing

requirements can be meshed with the production schedules of vendors.

In using budgeting for controlling purchasing performance certain limitations exist.One is the budget can be only as accurate as the sales forecasts. If the forecasts are

not reliable the budget too will be as unreliable and cannot be used for effective

controlling. Secondly, some amount of experience has been gathered to make the

budgets realistic and useful for planning initially they tend to be far from it and this

is the time people tend to under rate its importance or think of it as nothing more

than as routine exercise.


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4. INVENTORY ANALYSIS AND SELECTIVE CONTROLS

1. Introduction:

1.1 A typical industrial inventory comprises of four components, viz.,

i. Production inventories: Raw materials, parts and components

bought out which go into the manufacturing process of the

company products.

ii. MRO inventories: Maintenance, repair and operating supplies

which are consumed in the production process but which do not from

a part of the product (often known as consumables).

iii. In-process inventories: Semi finished products at various stages in

the production operation.

iv. Finished goods inventories: Completed products ready for shipment.

2. Inventory Analysis:

2.1 Altogether the company deals with stock of thousands of items raising a

serious problem of how one can keep control of track of all these items also,

where is it necessary to have the same extent of control on each and every

item. Different types of analysis each having its own specific advantages and

purpose, help in bringing a practical solution to the control of inventory. The

most important of all such analysis is the ABC analysis. The other are

VED analysis

SDE analysis

RML analysis

FSN analysisAnd many others, described here.

3. Selective Control:

3.1 The common purpose of analyzing the inventory is to formulate selective

controls. The extent of attention paid, cost incurred and controls installed


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should have definite relationship with the results and achievements obtained

by such measures.

4. ABC analysis:

4.1 ABC is said to connote Always Better Control. The basis of analyzing the

Annual Consumption Cost (or usage cost) goes after the principle VITAL

FEW TRIZIAL MANY, and the criterion used here is the money spend and

not the quantity consumed. The figure given below brings out clearly the

concept of ABC analysis.

100

90

70

0

10 30 100

% of Items

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

Item % % of the Annual

Consumption CostA items 10 70

B items 20 20

C items 70 10

1.ofComu

lativeConsumption


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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

Class of

Items

Item % % of the 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 concerned nature of customer complaints andnumber 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 of hell with the rest.

5. VED analysis:

5.1 This analysis specially pertains to the classification of maintenance spares

denoting the essentiality of stocking spares.

V - stands for Vital items when go out of stock or when not readily

available, completely bring the production to a half.

E - is for Essential items without which temporary losses of production or

dislocation of production work occurs.

D - denotes Desirable items all other items which are necessary but do not

cause any immediate effect on production.

6. SDE analysis:

6.1 For developing countries and especially where certain items are in scarce

supply, this analysis is very useful.

S - refers to Scarce items, especially imported items and those which are

very much in short supply.


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D - are Difficult items which are available in market but not easily

available. For example items which have to come from far off cities or

where there is not much of competition in market or where good

quality supplies are difficult to get.

E - items are those which are easily available; mostly local items.

7. It is normally advantageous to continue A, V & S items for selective

controls.

8. HML analysis:

8.1 The cost per item (per piece) is considered for this analysis. High cost items

(H), Medium cost items (M) and Low cost items (L) help in bringingcontrols over consumption at the departmental level.

9. FSN analysis:

9.1 Here the quantity and rate of consumption is analysed to be classified as

Fast moving (F), Slow moving (S) and Non moving (N) items. The Non

moving items (usually, not consumed over a period of two years) are of

great importance. It is found that many companies maintain huge stocks of

Non moving items and the number of such items running to thousands.

Scrutiny of non moving items is to be made to determine whether they could

be used or to be disposed off. The Fast & Slow moving classification help

in arrangement of stocks in stores and their distribution and handling

methods.

10. Other type of analysis:

10.1 Items held in stock could be analysed category wise, product or project wise.

The turnover ratio of holding of stocks after such analysis are found very

useful in certain cases.

11. It is important to note that the different types of analysis described here are

meant to be used only when and where found necessary and useful;

otherwise, they may turn out to be of academic interest.


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12. Control of A items:

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

percentage savings brings 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 endeavors

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 marketconditions, supply conditions, etc.

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

iv. Precise quality specifications or materials standards evolved.

v. Value analysis to find cheaper substitutes, better sources 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.

13. Control on C items:

13.1 The other extreme where a large number of items constituting a small

percentage of costs, needs very simplified procedures and objective being to

reduce the purchase costs as well as handling and distribution costs. The

following measures are suggested:


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i. Maintain sumptuous stocks (avoid the proverb, For the sake of 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 and paper work reduced by bulk issues,

writing off the values (control through perpetual inventory) of stocks,

variety reduction and standardization, pool system, etc.

14. Control of B Items:

14.1 On these items, the controls are via-media of A & C. Usually, the safetystocks are decided on a policy basis.


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5. REPLENISHING SYSTEMS

1. Introduction:

1.1 Replenishing system for stock control involve two main controls on (i) the

ordering system and (ii) the safety stocks. The analytical approach to these

inventory control techniques has the logical starting point in the basic

inventory model and economics of managing the inventory.

1.2 The total annual cost of managing the inventory of an item consists of its

two components, which are (i) the ordering cost and (ii) the inventory

carrying cost. The total cost of these reaches a minimum point (as shown in

the figure) at a value of ordering quantity known as E.O.Q. (EconomicOrdering Quantity), which could be mathematically established by simple

formula.

Total cost

Carrying cost

Ordering cost

E.O.Q.

Quantity

Cost


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2 X (Annual Usage in Units) X (Order Cost in Rs./Order

EOQ = ------------------------------------------------------------------------------

(Unit cost of matl. In Rs./Unit) X (Carrying cost in % per year

expressed in decimals)

1.3 The inventory model which illustrates an ideal movement pattern for a

material whose usage is constant is given herebelow:

Ordering

Qty.

Safety stock Average Inventory

Time in days

2. The Ordering Systems:

2.1 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:

R.O.L. method of ordering.Periodic Ordering Method.

2.2 R.O.L. Method: The R.O.L. is determined by adding the Lead Time

requirements to safety stock.

Quantityin

Units


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

The Ordering Quantity is usually the Economic Ordering Quantity, as shown

in the following figure:

Reorder Point

Average

Inventory

Re-

order

Level

Order received

Lead Time in days

Time in days

The average stocks maintained will be:

Safety stocks + of E.O.Q.

2.3 Periodic Ordering Method: The stocks are received 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 (the E.O.Q.) it is checked whether

at 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.; otherwise if it is above the Re-order point, no action need to

be taken till the next review point.

The Re-order point, R, is calculated as follows:

R = Safety Stock + Rate of Consumption

(Lead Time + Review Period)

2

Quantityin

Units


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The inventory model is shown in the following figure:

Recorder

___ P _________ L Order received

Time in days

R = Re-order point (in Units)

B = Safety stock (in Units)

Sd = Average daily sales (Units/day) R = B + Sd (L + P/2)

L = Average lead time (in days)

P = Review time (in days)

The average stock works out to : Safety stock + of E.O.Q.

ii. Where there is no fixed ordering quantity, the ordering quantity is

determined as the difference between the actual stocks held at the time

of periodic review and the Maximum Inventory Level (M)

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

Depending upon whether the Lead Time is greater or lesser than the

Review Period, one of the following two rules is used in fixing theRe-ordering quantity:

If Lead Time Review Period, Ordering Quantity = M Actual

Stores held at the time of review.

If Lead Time Review Period, Ordering Quantity = M (Actual

Quantityin

Units


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Stores held at the time of Review + Quantity on

Order)

The Inventory fluctuation by this system is shown in the following

figure:

Qty. Ordered Replenishment Level

M

Quantity

ordered

- L -

- R -

Time in

days

L = Lead Time (days) R = Review Period (days)

The average stocks = Safety Stock + Consumption Rate X

Review Period.

Quantityin

Units


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2.4 Optimum Review Period: The Optimum Review Period could be

calculated by using the following formula.

Optimum Review Period (in months) =

288 X Cost per order in Rs.

Annual Usage X Unit Cost X Annual Inv. Carrying Cost

(in units) (in Rs.) (as a decimal)

3. Safety Stocks:

3.1 The Safety Stocks become necessary in order to avoid Stock Outs if the

rate of consumption increased and/or the lead time gets extended from the

values considered for the replenishing systems.

3.2 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.

3.3 Applying the Probability Theory, safety stock could be determined as

follows:

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

Safety Stock = K Average consumption during lead time

ii. When Periodic Review System is used:

Safety Stock = K Average consumption (lead time + review period)

3.4 The factor, K, is taken out from the table given in the next page.


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Acceptable

Average No.

of Years

between

stock outs.

ORDER QUANTITY IN MONTHS SUPPLY

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

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 1.5012 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 1.45 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 1.59 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 0.81 0.67 0.55 0.43 0.32 0.21 1.10 0

1 1.38 0.97 0.67 0.43 0.21 0 0 0 0 0 0 0

K factor used to calculate the safety stock needed to provide various levels of protection against stock out for itemswhose usage pattern is similar to a Poisson distribution.


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5. Ready Reckoners:

5.1 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 here below.

5.2 For examples, if the cost of placing an order is Rs.10 and the inventory

carrying cost is 24%, the following tables could be prepared to determine

either the E.O.Q. in terms of number of days/weeks/months/years

requirements or the member of orders to be placed in a year.

Annual Usage Cost

in Rs.

No. of orders per

year

No. of months requirements

per orderUpto 200 1 1 year

201 500 2 6 months

501 1000 3 4 months

1001 2100 4 3 months

2101 6750 6 2 months

6751 27000 12 1 month

27001 120000 24 2 weeks

120001 & above 52 1 week

5.3 The Review Period depending upon the Annual Usage Cost is given in the

following table, where cost of placing an order is Rs.10 and Annual

Inventory Carrying Cost is 24%.

Annual Usage Cost in Rs. Review Period in Months

Upto 400 6

401 600 5

601 1000 4

1001 2000 3

2001 6000 2

6001 & above 1

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