2. Recommended text books :
1. Production Planning & Inventory Control
By : Seetharama L.Narshimhan , Dennis W. Mc
Leavy
2. Principles of Inventory and Material
Mangement.
By Richard J. Tersine ,
4. Inventory concept & need for inventory management
The cost structure of Indian manufacturing plants shows
that materials constitute 66 percent of total costs, and
material processing overhead as 24 percent.
This implies that management initiatives to control
manufacturing costs need to focus on reduce material
costs and overheads.
Indian Manufacturing sector is facing stiff competition
from ASIAN market forcing it to be cost competitive in the
final products and move towards mass customization .
The challenge is to move from mass production culture to
mass customization.
6. Why inventory problem
Standardization Non standardization
Variation
Flow (Mass) Batch Job Project/ Turn
Production production production key production
MTS ETO
Standard parts & Non standard low volume
High Volume
7. Toyota Production System.
TPS works on the premise of eliminating waste and
being flexible and open to change . It’s approach is to
identify and eliminate waste (non-value adding activities)
through continuous improvement by flowing the product at the
pull of the customer in pursuit of perfection.
The Toyota Production System is a philosophy of
manufacturing that was created by the Toyota Corporation.
TPS, has become synonymous with Lean Manufacturing.
TPS defined three types of waste: “Muda“( non value-added
work), “Muri" (overburden) and “Mura“( unevenness). By
eliminating waste, overall quality can be improved and
production time as well as cost can be reduced.
8. TPS defined three types of waste known as 3 M’s of
TPS.
“Muda“( non value-added work)
“Muri" (overburden) Excess inventory
“Mura“( unevenness).
By eliminating waste, overall quality can be improved
and production time as well as cost can be reduced.
9. Toyota Production System ( TPS) & 3 M’s
According to TPS , there are seven types of wastes in
production .
1. Over-production
2. Motion (of operator or machine)
3. Waiting (of operator or machine)
4. Conveyance,
5. Processing itself
6 .Inventory
7. Correction (rework and scrap).
Lean manufacturing aims to improve the manufacturing
process by eliminating seven wastes in all their forms.
10. Inventory types in manufacturing Industry
Raw Material ( RM Inventory )
Maintenance Repair & Operating supply. (MRO)
Work in Progress Inventory ( WIP )
Warehouse inventory ( CKD /SKD ) Semi Finished goods
Sales Return Inventory
Spares inventory
Scrap inventory
Refill inventory
11. In business accounting , the Inventory turnover is a measure of the number of
times inventory is sold or used in a time period ( year) . The equation for inventory
turnover equals the cost of goods sold divided by the average inventory . Inventory
turnover is also known as inventory turns, stock turn, stock turns, turns, and
stock turnover.
Inventory turn over = COGS
Average inventory
Average Inventory = Opening stock + closing stock
2
A low turnover rate may point to overstocking
The purpose of increasing inventory turns is to reduce inventory for three reasons.
Increasing inventory turns reduces holding cost . The organization spends less
money on rent, utilities, insurance, theft and other costs of maintaining a stock of
good to be sold.
It increases net income and profitability as long as the revenue from selling the
item remains constant.
Items that turn over more quickly increase responsiveness to changes in customer
requirements while allowing the replacement of obsolete items.
12.
13. D = 4,800 Annual Demand
P = 40.00 Cost to Place an Order
V = 62.50 Value of one unit at Cost
C = 40% Annual Carrying Cost as a Percentage
14.
15. Assumptions of the Simple EOQ Model
1. Constant & Known rate of demand.
2. Zero replenishment cycle or lead time.
3. Fixed purchase price that is independent of the
order quantity or time.
4. Fixed transportation cost that is independent of
the order quantity or time.
5. No inventory in transit.
6. Only one item in inventory, or at least no
interaction among items.
7. An infinite planning horizon.
8. No limit on capital availability.
16. Inventory models to overcome the assumptions .
Dimensions of inventory models
Deterministic versus Stochastic
Indefinite versus finite planning horizon
Independent versus dependent demand
Single versus multiple:
item
location
echelon (interrelated locations)
indenture (interrelated items)
17. MRP is an essential task for : Strategic inventory
management
In MRP decision, lot size has to be considered as it affects the production
schedule. However while doing so, set up cost need to be considered as it
affects the production cost.
18. Effects of Lot sizing
Lot-for-lot
+ ”Preserves” the MPS quantities
+ Suitable for JIT manufacturing
+ Generates smooth requirements for material and capacity
– No economic considerations
Fixed order quantities
– Lumps together requirements to large orders
– Amplifies lumpiness through the BOM
– Fluctuating material and capacity requirements
Variable quantity and cover-time
+ Economic considerations considering discrete requirements
- Estimation of cost parameters
– Covering many periods net requirements tends to create amplified variability of
demand for material and capacity
22. What can happen: Q,R Policy . Demand
during lead time is greater than lead time
23. Demand during lead time is larger than order size.
If ordered only when replenishment comes, inventory is depleted.
Pink line when backorders, black when demand is lost.
25. Inventory decision rules
Q is clear but S somewhat less clear. If we review inventory balance
continuously, then when reorder point is reached and quantity Q
ordered, it will lead to an expected opening inventory of S
However, if review is periodic, then the inventory can be more or less
below R, so S would be S = Q + (R-inventory).
Policy Q,T is interesting. If demand during review T > Q, this policy
does not really work. Unless we decide that it is still Q that is ordered
but we can order or more times Q (n*Q).
In practice, Q could be some physical logistics limit, like full truckload
or a full pallet.
In practice, S could be some periodic system, like shipping schedule
or production cycle.
26.
27. Buffering techniques
Safety stock
Physical safety quantity. Used when quantity, demand or consumption is
unreliable
Safety lead time
Safety in time, order receipt before requirement
Used when lead times are stochastic
Extends the lead time
Hedging
Safety in order quantities used when yield is stochastic (e.g. scrap)
Mainly used in master production scheduling
Slack in the system (e.g. spare capacity)
5. Some Safety Stock Strategies
Specified fill rate (demand filled from stock) or Specified service level (probability
a stock out will not occur)
Maximize $ demand filled from a given investment.
Set SS based on specified number of Sigmas (Std.Dev., MAD, etc.)
Set SS based on specified time supply.
Minimize shortage occurrences for a given investment (# of orders with a
problem.)
Minimize transaction shortages for a given investment (# of problems in orders.)
28. Safety stock = Z*δd
Where
– Z = value from the standard normal distribution
– δd = standard deviation of demand during replenishment lead time
Reorder Point = Z*δd + expected demand during lead time
Examples
– Z(1,645) = 95%
– Z(1,960) = 97,5 %
– Z(3,090) = 99,9 %
29. Minor Problems
It calculates the probability of a stock out during replenishment lead
time, not customer service level measured as fill-rate. They are not
the same thing.
What if delivery time is not certain but a variable, too?
The formula applies only for normally distributed demand, not other
demand distributions.
How to incorporate demand forecasts?
30. If the LT distribution is binomial, then the joint distribution can be created
manually.
Bowersox gives a following approximate formula for calculating Z for variable lead
time situation
joint δ = √(t* δd 2+ d2* δt2
Where
t = replenishment lead time
δt = replenishment lead time variance
d = demand during average replensihment lead time
δd = demand variance during average replensihment lead time
31. Inventory independent on market Demand ( Mass production )
Q
Q/2
ROP
Time
Lead time
D Lt = Av demand x LT
Stock level = EOQ + DLt ( When supplier lead time not
constant )
Stock level = EOQ + Dlt + variation in demand ( when
demand fluctuates )
32. Cost trade off.
When orders are placed more frequently, the ordering cost is high but
carrying cost lost is low , on the other hand if less frequent orders are placed
ordering cost will be low but carrying cost will be high.
Total cost
Cost
Carrying cost
Total
cost
Ordering cost
Order
Qty
33. Total no. of orders /year = D/ Q
Average Inventory = Q/2
Cost of ordering /year = D/Q x Co where Co is ordering cost per order
Carrying cost /year = Q/2 X Cc where Cc is carrying cost per unit per year
Total cost is minimum when
D/Q X Co = Q/2 X Cc
Q2 =
2 X DX Co/ Cc
EOQ= 2x D x Co
Cc
34. Manufacturing model without shortage
Items are produced & consumed simultaneously for a portion
of the cycle time. The rate of consumption is uniform through
out the year & cost of production remains same irrespective of
production lot .
I max = t p x ( P-D)
Q
Q = Pxtp , tp = Q/P
D P = production rate
D= consumption rate
P P – D = inventory build up rate
Q = Inventory at t1
tp
Cycle 2 DXCs P
EBQ = Ci ( P-D )
35. I max = t p x ( P-D)
= Q/P x ( P-D)
= Q x (1- D/P)
Av annual Inv = Q/2 x ( 1- D/P)
Av Annual Inv Cost = Q/2 x (1- D/P) Ci
Annual set up cost = D/Q x C s
Q/2 x(1-D/P) Ci = D/Q x Cs
Q2 =
2 x D x Cs
(P-D )Ci
P
Economic 2x Dx C x P
Q= s
Batch Qty C i P-D
36. A manufacturing unit has annual demand of 10000 valves.
Each valve costs Rs 32. The product engineering
department estimates the setup cost as Rs 55 & holding
cost as 12.5 % of the valve. The production rate is uniform
at 120 valve/day. Production happens for 250 days in a
year.
Calculate optimal batch size & total inventory cost on the basis of optimal policy.
Find the number of set ups on the basis of optimal batch .
Ci= 12.5% of 32 = Rs 4 , D= 10000/250 = 40 units /day
EBQ = 2 x 10000 x 55 ( 120/120-40) = 642 valves.
4
(10000/642)x 55 + 642/2 ( 120-40/120) x 4
856.8 + 856.35 = Rs 1713.15 /yr
No of setups = 10000/ 642= 16 Approx
37. Inventory Control Techniques
Inventory control techniques are used to prevent :
1 financial leakage due o excessive stock & poor demand ,
2 shortage of inventory
3. Inventory Obsolescence
Plan safety stock for critical & essential items
Build selective control on fast & slow moving inventory .
Various Inventory control technique used are :
ABC : Always Better Control
VED : Vital Essential & Desirable
SDE : Scarce Difficulty & Easy
FNSD Fast moving , Normal , Slow moving , Dead
38. ABC Classification
100
CLASS C
90 Low annual consumption value
CLASS B
Usage %
Moderate annual Consumption value
70
(Inventory
Value )
CLASS A
High annual consumption value items
0 10 30 100
% items
39. VED analysis : Vital : Without which production process
will come to halt.
Essential : Non availability of such item will affect
the efficiency .
Desirable : It is good if it is available , however
alternate option can be done.
SDE : Scarce ( Short supply )
Difficult ( Imported components )
easily ( Short lead time )
40. Purchase Inventory review system :
Review process is administered on the basis of Fixed
order quantity ( Q system ) and fixed period quantity
system . ( P system )
In Q system , whenever the stock level reaches the RoL
, order is placed for a fixed quantity of material .
RoL is calculated as a sum of demand during the lead
time & variation in demand during lead time ( safety
stock ) and average demand during delivery delays.
( reserve stock )
In p system , stock position is reviewed after every fixed
period & order is placed according to stock position .
41. The goal of JIT in manufacturing organization is to
continuously reduce the cost associated with requirement
material resource. Its objective is to achieve zero ( minimal )
inventory through out the supply chain, hence implement
good material control. The goal of JIT process is to reduce
excess working capital held-up on account of material ,
minimal inventory at WIP .
The constraints for implementing JIT are :
•Unpredictable quality of supply of material
•Inability to hold tolerances.
•Shortcoming in lead time. ( Erratic delivery )
•Short supply of quantity of material
•Inaccurate forecasting
•Non standard materials being used ( Increased variety )
•Last minute product changes.
42. Steps for implementing JIT in an organization.
•Do detailed analysis of inventory requirement of all types at every stage of
production process.
•Estimate the market fluctuations on account of price, supply , quality
demand etc.
•Identify reliable source of suppliers who are capable of supplying material
as when required.
•Take supplier in to confidence & sensitize them the importance of JIT
inventory & build healthy business relationship with suppliers to have high
commitment & ownership . Use Value engineering approach.
•Conduct periodic vendor appraisal & follow vendor rating system of evaluation
.
•Give instant feed back on the supply & suggest improvement steps.
•Sign rate contract .
• Use IT enabled ordering system , ERP .
43. Value Engineering or Value Analysis
It is a technique of cost reduction and cost
prevention. It focuses on building necessary
functions at minimum cost with out
compromising on quality, reliability ,performance
& appearance. It helps in identifying unnecessary
costs associated with any material , part
components or service by analysis of function
and efficiently eliminating them with out
impairing the quality functional reliability or its
capacity to provide service. It is a preventive
process.
44. When to apply VE
1. Raw material cost increases suddenly .
2. Vendors are unreliable & organization is highly
dependent on a few select vendor .
3. Cost of manufacturing is disproportionate to
volume of production .
Value analysis is done w.r.t cost associated at:
• Cost Value (Labour , Material & overhead).
• Use Value
• Esteem Value ( Look & finish )
• Performance Value ( Reliability , Safety , Service &
Maintenance )
45. Value = Performance ( Utility)
Cost
Vendor analysis is done to minimize the cost incurred due
to a supplier Inefficiency or inability .
Vendor cost to be considered are :
•Opportunity loss due to poor quality ( High rejection cost )
•leading to machine & labour idle time.
•High re-work cost
•Inconsistent lead time
•Inability to meet the demand of the manufacturer
•Poor Credit terms
46. Value engineering procedure:
Constantly evaluate the inventory costs associated &
benchmark against the best in practice.
As & when the cost of manufacturing increases
disproportionately, identify an alternate source for contract
manufacturing & monitor the quality & standards.
Use more standard parts which can be sourced easily
Develop more suppliers ( atleast 4 to5 for one part.) &
minimize dependency on one supplier.
Audit the supplier’s work premise & rate them on the
performance .
Conduct quarterly vendor meet & share the highlights &
concerns .
47. Material requirement planning (MRP )process.
Batch production Turnkey production
Explode
Demand Analyze Requirement
Demand into
aggregation Make or Buy Analysis
bill of material ( BOM)
decision
Check Inventory
Stock
(Stocking Policy ) Make Buy
N Y
Raise Stock
Raise production . Raise subcontract
Purchase availability
work order contract
Indent
48. Make or Buy decision .
Criteria of make : 1. Finished goods can be made cheaper by the firm.
2.Quality standardization can not be met by out side
party. ( strict quality control. )
3.Supply of the parts are unsteady ( Long lead time)
4.Capacity of production can be used for
manufacturing some other part. ( Fixed cost)
Buy : 1.Heavy investment in the facility
2.Parts are standard and available easily.
3.Demand of the components are seasonal .
4.Patent of some legal implications exists.
5.Cost of buying is less than manufacturing.
49. A firm has extra capacity which can be used for production of gears, which
they have been buying form the market at Rs 300 per unit. If the firm makes
gears , it incurs the following cost.
Mat cost Rs 90/unit.
Lab cost 120/unit
Overhead Rs 30/unit . The annual fixed cost of production estimated is Rs
240,000. Projected demand for next 24 months is 4000 units.
Will it be profitable for the firm to manufacturer?
The same capacity can be utilized for producing agri-equipment. In such case
there will be a saving of s 90,000. What should be the decision.
Making /Buying gears
VC/unit = ( Rs 90 + 120+ 30) = Rs 240
Total VC = 4000 X 240 = 9,60,000
Fixed cost = 2,40,000
Total cost = 12,00,000
Purchase cost = ( 4000 x Rs 300/unit ) = 12,00,000
Fixed cost = 2,40,000
Total cost = 14,40,000
Make gears Make Gears and Agri Equipment
Rs 12,00,000 12,00,000 – 90,000 = 11,10,000
50. There are two machines to manufacture a particular product in a firm .
Alternatively , they can also buy it from local market. The cost associated
areas follows. The annual demand for the product is 10000 units. When
would it be feasible for the firm to use process A & B .
Cost ( Rs ) Machine A Machine B Buy
FC/ Year 1,00,000 3,00,000 -----
VC/ unit 75 70 -----
Buy price / unit 80
Cost of Process A = 1,00,000 + 75 x 10000 = Rs 8,50,000
Cost of process B = 3,00,000 + 70 x 10000 = Rs 10,00,000
Cost of buying = 80 x 10000 = 8,00,000
Le t Q be the vol of production.
For Process A 100000 + 75 Q =< 80 Q
100000 =< 5 Q
20000 units
TC A >= TC B
100000 +75Q >= 300000 + 70Q
5Q>= 200000 = 40000 units
When demand exceeds 20000 units , use process A & beyond 40000, use process B
51. Multi-echelon Distribution Network
Managing inventory can be a daunting task for an enterprise
with tens of thousands of products that are located in
hundreds of locations. The challenge is even greater when the
locations are situated in different tiers or echelons of the
enterprise’s distribution network. In such multi-echelon
networks, new product shipments are first stored at a regional
or central facility. These central facilities are the internal
suppliers to the customer-facing locations. This is a common
distribution model for many retail chains as well as for large
distributors and manufacturers. For example, a large
pharmaceutical wholesaler’s distribution network consists of
one regional distribution center (RDC) and more than 30
forward distribution centers (DCs).
52. Managing inventory in a multi-echelon network presents
major pitfalls.
• End customer service failures occur even when in adequate
inventory exists in the network.
• Customer-facing locations experience undesirable stock outs, while
service between echelons is more than acceptable.
• External suppliers deliver unreliable performance, because
they have received unsatisfactory demand projections.
• Shortsighted internal allocation decisions are made for products with
limited availability.
•The network carries excess inventory in the form of redundant safety
stock.
