Unit 2

Material & Inventory Management

Overview of the Unit

• Material Management

• Handling Technology

Unit Overview

• Robots, Automated storage and retrieval systems (ASRS)

• JIT, / Kanban, ABC Systems

Unit Overview

• Independent Demand Inventory Models

• Fixed order system

• Economic Order Quantity

Material Management

• Ref to all tasks related to flow of materials From

the purchase of raw material to the distribution of

finished products or services.

• It is concerned with decisions about purchasing

materials & services, inventories, production

levels, staffing pattern, schedules & distribution.

Modern Materials Management

• Integration of activities done by 3 different

departments namely, Purchasing,

Production Control & distribution.

Inventory

• Includes materials that are Raw, in-

process, finished, packaging, spares & in

stock, maintained by the organization in

order to meet day-to-day and future

demand.

Types of Inventory

ProductionInventories

MROInventories

In-processInventories

Finished goodsInventories

Raw MatParts &Components

Lube oilMachineparts

Semi Finishedgoods

Goods readyfor shipment

Inventory Management

• Is the development & administration of

policies, systems & procedures which will

minimize total costs related to inventory

decisions.

Objectives of Materials Mgmnt

• Primary Objectives- Purchasing- Stores & Inventory Mgmt- Continuity of supply- Quality of Materials- Good supplier relation

• Secondary Objectives- Make or buy- Value analysis & engineering- Standardization- Product devlpmnt & new products- Forecasting- Orgn structure- Leadership question- Structural balance

Secondary Objectives

• Value Analysis & Value Engineering

Done by in-house engineers and purchase team. Qlty & design of the product ordered.

Organization Structure

• Determination of basic objectives

• Determination of areas of activity

• Determination of ideal structure

• Authority & responsibility

• Span of control

• Personal Ability

Organization Structure

• Unity of command

• Job Assignment

• Regulations

• Two way communication

• Flexibility

• Line & staff activity

Material Handling

• Defined as an art & science of

moving, packaging & storing of

materials.

Importance of Material Handling

• Efficient material handling results in lower costs.

• Enables higher productivity.

Objectives of Material Handling• Increased productivity

• Lower Costs

• Control of flow of Materials

• Reduction in Manufacturing Cycle time

• Increased Quality by reducing damages.

Principles of Material Handling

• Direct flow pattern

• Planned layout

• Mechanized Material Handling

• Movement of shortest distance

Principles of Material Handling

• Reduction in repetitive handling

• Flexible System

• Carry Full load

JUST IN TIME – JIT

• Intro abt JIT.

• JIT in Maruthi.

• JIT 2 or modern JIT.

KANBAN

• Only means of communication.

• Spl cards used for communication which are called KANBAN cards.

ABC Analysis

• Inventory control technique where

materials are classified as A, B & C

category based on their annual

consumption value.

ABC Analysis

• A category items – Top 10%

• B Category Items – Next 20%• C Category Items – Rest 70%

• Classification done in order to exercise

different types of control over materials.

Related Techniques

• SDE Analysis – Scarce, Difficult & Easy

• SOS Analysis – Seasonal & Off seasonal

• XYZ Analysis – same as ABC.

ABC Control

A Items B Items C Items

Very strict Moderate Loose

Safety stock – No / Less

Low High

Frequency of orders – frequent

Quarterly Half yearly

Control Stmnts – Weekly

Monthly Qtrly

Follow – up Max Periodic Exceptional

ABC Control

A Items B Items C Items

Value Analysis – Rigorous

Moderate Minimum

Sources – many 2 or more 2 for each item

Forecast - Exact Past data based Rough estimate

Review – 15 days

Quarterly Annual

Posting – Individual

Small group Group

ABC Analysis – Quantitative

Refer word document.

Decoupling inventory

• Inventory “decouples” in different stages. It might be raw material, WIP, finished goods inventory. Ex: customer has inventory for 10 days for the consumption. For 10 days the customer is decoupled from the producer.

• So, decoupling inventory is the one which decouples the customer and the producer.

Safety Stock

• Raw material, WIP or finished goods

which are extra stock required to take

care of fluctuation or uncertainties in

the demand or lead time.

Lead Time

• Time taken to receive the delivery after placing

order with the supplier. It is the number of days

required to receive the inventory from the date of

placing order. It is also called Procurement time

of Inventory.

Lead Time

Supply lead time:• This time refers to the time lapse

between placing of order with the supplier and receiving it by the customer.

Manufacturing Lead time:• The average time consumed by the

product in the plant.

Supply lead time

Supply lead time (L)

• L=T1+T2+T3+T4+T5

• T1= order genesis time and transit time

(selection of supplier).

• T2= manufacturing time of the product by

suppliers.

Supply lead time

• T2= 0 If the product is readily available with

the supplier.

• T3= inspection time.• T4= transit time.• T5=receiving time.

• If L is high, more inventory is needed to take

care of high lead time.

Inventory cost

• Ordering Cost

A. Cost of placing an order with Vendor:

Preparing a purchase order

Processing Payments

Receiving & Inspecting Materials

Inventory Cost

• Ordering Cost contd…

B. Ordering from the Plant:

Machine set up cost

Start – up to scrap generated from getting a

production run started.

Inventory Cost

• Carrying Cost

A. Costs Connected Directly with Materials

Obsolescence

Deterioration

Pilferages.

Inventory Costs

• Carrying Cost contd…

B. Financial Costs

Taxes

Insurance

Storage

Interest

Inventory Costs• Carrying Cost contd… (Broader View)

Capital Cost (Interest on Investment)

Storage Space Cost (Rent, Tax, Insu,Depri)

Inventory Service Cost (Emp cost, Taxes)

Handling Equipment Cost (Tax, Insu, Depri,etc)

Inventory Risk Cost (Obso, Insu, Pilf, etc)

Inventory Costs

• Out-of-Stock Cost

• Back Ordering

• Lost Sales

Inventory Costs

• Capacity Costs

• Overtime payments when capacity is small

• Lay-offs & Idle time when capacity is too large.

Independent Demand Inventory Models

Fixed Order System• Fixed Order Quantity

• Also Known as Q Sys &

Perceptual review sys.

• Fixed Qnty of Mat ordered whenever stock reaches reorder point.

• Fixed Qnty = EOQ

• Fixed Order Period • Also known as P Sys• Mat ordered based on

the fixed predetermined period.

• Helps in huge discounts.

Distinction – Q & P Sys

Q System P System

Reorder Point Review period

Anytime based on stock levels Predetermined period

Perpetual system Only on reviews

Constatnt Variable

Less compared to P More Compared to Q

Huge due to pepetual sys Less time consuming

Period of Order

Order Initiation

Time to maintain

Size of Inventory

Order Quantity

Redord Keeping

Economic Order Quantity

• EOQ refers to the level of Inventory order

of which the inventory cost comprising

ordering cost & carrying cost is minimum.

• Also known as Q Opt (Optimum Quantity)

EOQ Contd…

• Graphical Representation:

EOQ Contd…

• Formula:

EOQ = Q = 2DCo/PCi Where,

D = Demand or Annual Demand

Co = Ordering Cost per Order,

Ci = Inventory Carrying Cost as a percentage of value of

the item per unit per year.

P = Unit price of the item.

EOQ SumsQ 1. A company’s books of A/Cs revealed the

following:

Staff salary of purchase dept – Rs. 250000/-

Warehouse personnel salaries - Rs. 275000/-

Warehouse security - Rs. 80000/-

Traveling & Purch follow up – Rs. 80000/-

Taxes & Insu – 1% p.a. Interest on Inventory - 20%

Bills payments – Rs. 30000/-. Obs & Pilf Rs.20000

Mat handling Rs.1.5 lakhs, Inward Inspec Rs.48000

EOQ Sums contd…

• It is also known that average inventory is Rs.60 lakhs, No of orders placed is 3400 orders p.a..

1. Calculate:1. Ordering Cost per order. 2. Inventory

carrying cost as %.2. EOQ if annual demand is 12000 units &

Unit price is Rs.60/-.

EOQ Sums contd…

• Soln:

Ordering Cost per order

= Tot ordering cost / no. of orders per year

Inventory carrying cost in %

= (Tot inventory cost / Avg inventory p.a)*100

EOQ Sums contd…

EOQ = Q = 2DCo/PCi

Step 1:From the given data classify the details as Ordering Cost items & Inventory Carrying Cost Items.

EOQ Sums contd…

Step 2:

Ordering Cost items:

Sal of Purch dept staff - 250000

Traveling & purch followup – 80000

Cost of bills of payments – 30000

Cost of inward inspection – 48000

Total Ordering Cost – 408000/-

EOQ Sums contd… Step 3: Inventory Carrying Cost items:

Warehouse personnel Sal – 275000

Warehouse Security - 80000

Taxes & Insu – 1/100*60,00,000 = 60000

Interest on inventory – 20% = 1200000

Mat handling cost – 150000

Obse & Pilf – 20000

Total Inventory carrying cost = 1785000.

EOQ Sums contd…

• Step 4:

Ordering Cost per Order (Co) = 408000 / 3400

= Rs. 120/- Per order• Step 5:

Inventory Carrying cost in % (Ci)

= (1785000 / 6000000)*100

= 29.75%.

EOQ Sums contd…

• Step 6:

• EOQ when D = 12000 & P = 60:

EOQ = Q =

[2*(12000*120)]/(60*0.2975)

= 401.67 = 402 Units.

Material Requirements Planning

• MRP is a computer-based production planning and

inventory control system. MRP is concerned with

both production scheduling and inventory control. It

is a material control system that attempts to keep

adequate inventory levels to assure that required

materials are available when needed.

MRP Objectives

• The major objectives of an MRP system are to simultaneously:-

1. ensure the availability of materials, components and

products for planned production and for customer

delivery,

2. Maintain the lowest possible level of inventory,

3. Plan manufacturing activities, delivery schedules

and purchasing activities.

MRP – Independent & Derived Demand

• Independent Demand

The demand of many of the components depends on the

demand of items that face external demands.

Derived Demand

The demand for components used to manufacture end items

depend the on the demands for the end items.

Overview of MRP system

MRP - MPS

• MPS – Master Production Schedule is a statement

of the planned production of finished products that

will meet the demand on time, within the

organization’s capacity. The master production

schedule expresses what we intend to make, how

much we intend to make and when we intend to

make.

Manufacturing Resource Planning (MRP II)

• Closed Loop MRP

Closed loop MRP is the development of MRP where

feedback is made possible by including new

functions such as file control, a master production

schedule, rescheduling actions and shop floor

control.

Closed loop MRP

Manufacturing Resource Planning (MRP II)

• MRP II is an extended form of closed loop MRP that

also incorporates strategic planning processes,

business planning, and a number of other business

functions such as human resources planning, profit

calculation and cash flow analysis. MRP II uses the

master production schedule as the basis.

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MRP II

• Capacity Requirements Planning

CRP is a computer-based extension of the MRP

process that uses the results of MRP along with

detailed production information and labor

information to calculate planned workloads. It is a

computerized system that projects load from

material requirements plan.

MRP II - Scheduling

• Forward Scheduling - In forward scheduling, we identify

the earliest start date for the operation in question

through consideration of the planned order release date

generated by MRP.

• Backward Scheduling - In backward scheduling, we

identify the due date for the operation in question and

use the operation lead time to calculate the latest

operation start date.

MRP II – RRP

• RRP – Resource requirements planning

refers to the planning of the overall

capacities of the firm. This planning is

done to validate the aggregate

production plans of the firm.

MRP II - RCCP• RCCP - Rough cut capacity planning involves

planning capacities at key / bottleneck work

centers and broadly balancing workloads.

Validating the MPS with respect to capacity is an

extremely important step in MRP. This validation

exercise has been termed rough cut capacity

planning

MRP II – Overstated MPS

• An overstated master production schedule is one that

orders more production to be released than production

can complete. An overstated MPS causes raw

materials and WIP inventories to increase because

more materials are purchased and released to the

shop than are completed and shipped. It also causes a

buildup of queues on the shop floor.

CRP Inputs & Outputs