unit 2
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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.
.
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