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PROJECT REPORT
ON
MATERIAL HANDLING
AND INVENTORY
MANAGEMENT OF
PHARMACUETICAL
COMPANY
PROJECT GUIDE: TEJAS PAREKH
(MBAGJ0042)
PAREPARED BY: VISHALKUMAR PATEL
Introduction
and
Importance
of
Inventory
Management
The term inventory refers to the goods or materials used by a
firm for the purpose of production and sale. It also includes the items,
which are used as supportive materials to facilitate production.
There are three basic types of inventory: raw materials, work-inprogress and finished goods. Raw materials are the items purchased
by firms for use in production of finished product. Work-in-progress
consists of all items currently in the process of production. These are
actually partly manufactured products. Finished goods consists of
those items, which have already been produced but not yet sold.
which
is
concerned
with
maintaining
optimum
Definition
component
of
supply
chain
management,
inventory
2.
It
has
to
minimize
the
investment
in
inventory
to
SCOPE
The thesis examines the problems in achieving inventory
annual
operating
costs.
The
study
is
limited
to
Purchasing,
inventory
control,
in-plant
materials
Principles
of
Purchasing
Materials
Management
The fundamental objectives of the Materials Management
function ,often called the famous 5 Rs of Materials Management, are
acquisition of materials and services :
In other words quality means the useful value of a specific thing for
a specific purpose to fulfil.
The starting point for determining the quality of the materials
needed in an organisation is the end use, i.e., what is intended to
be done or accomplished.
We then have to establish a specification and this is what quality is
all about. A full and complete quality specification is an essential
part of a purchase contract.
The quality of a material has a direct relationship with its end use.
In other words, an inappropriate quality would mean that the end
product is either too good or too bad for a particular purpose. Both
these have a direct effect on costs and competitiveness of the end
product. In one case, some extra cost has to make the quality more
than is necessary and, in other case, the quality of the incurred
product would suffer.
We can express quality in various ways, i.e., dimensions, weights,
and measures, chemical properties, physical properties, strength,
power, limit and tolerance, hardness, finish, colour, capacity,
durability, performance characteristics, appearance, design, etc.
The quality requirement should be determined first and then
correctly specified. Ambiguity in defining quality is one of the
major problems in purchasing. This can be avoided by ensuring
that the supplier really understands exactly what is required by
the purchaser. If the supplier does not understand the quality
of
raw
materials,
their
likely
future
trends,
and
where
the
automatically right.
materials
have
been
obtained
should
be
However, there are cases where anomaly occurs and it is, therefore,
necessary to get the materials from the right source.
are
some
typical
ways
of
evaluating
suppliers
of
quality
materials
and
services
to
users
which
permits
efficient
and
effective
operation
atmosphere
in
performance
and
pricing
pilferage
and
obsolescence
of
operations
and
procedures
reservoir
of
talent
ideas
products,
and
better
prices
and
service
ensure
efficiency
and
honesty
Materials function
and
production
plans.
Planning and control is done for the materials taking into account
the materials not available for the operation and those in hand or
in
pipe
line.
Purchasing:
Basically, the job of a materials manager is to provide , to the user
departments right material at the right time in right quantity of
right quality at right price from the right source.
vendors.
Stores :
Once the material is delivered , its physical control , preservation ,
minimisation of obsolescence and damage through timely disposal
and efficient handling, maintenance of records, proper locations
and
stocking
is
done
in
Stores.
Inventory control :
One of the powerful ways of controlling the materials is through
Inventory control.
raw
material
state
to
the
finished
product
state.
Purchasing
Physical distribution
Objectives
of
Materials
Secondary Objectives.
Management:
Primary
and
Primary Objectives:
The following are the primary objectives:
1. Low Prices:
If materials department succeeds in reducing the price of items it buys, it
contributes in not only reducing the operating cost but also in enhancing
the profits.
2. Lower Inventories:
By keeping inventories low in relation to sales, it ensures that less capital
is tied up in inventories. This increases the efficiency with which the
capital of the company is utilized resulting in higher return on
investment. Storage and carrying costs are also lower.
3. Reduction in Real Cost:
Efficient and economical handling of materials and storage lowers the
acquisition and possession cost resulting in the reduction in the real
cost.
4. Regular Supply:
Continuity of supply of materials is essential for eliminating the
disruption in the production process. In the absence of regular supply of
materials, production costs go up.
Secondary Objectives:
The following are the important secondary objectives of materials
management.
1. Reciprocity:
The purchase of raw materials from the organisations/customers by the
concern and in turn, sale of finished products to the above customers is
for
new
developments
in
material
handling.
These
supplying the
standardised
materials or components
to the
more
accurately
track
expiration
dates
and
location
of
Methodology
the optimal safety stock level, order quantity and order frequency for
each of the groups
management
of input
materials
is
of
utmost
decision
making
with
respect
to
materials.
Management.
conflict
of
interests
may
occur.
results
for
the
organisation
as
whole.
channels.
and
development
of
produced
by
integration
of
Materials
function.
Material Planning
In any integrated Materials Management environment, planning
for getting the materials is the starting point for the whole MM
function. Materials planning sets the procurement function and
the subsequent material functions rolling.
consumables, spare parts and all other materials that are required to meet the give
for a certain iod.
Material planning is derived from the over all organisational planning and hence it
of the broad organisational plan.
What it does is forecasting and initiating for procurement of materials
to
business
entity.
delegation
Techniques
of
of
power
planning
are
micro
factors.
materials
There are a few techniques used for planning material for the given
period. The following two are , however, commonly used :
1)
Materials
2)
Requirement
Requirement
based
on
Planning
past
(MRP)
consumption
MRP has ,as its starting point, the annual production plan of the
manufacturing concern. Once a firm
Inventory
Management - a
vital
cog
in
the
wheel
Inventory
management is
one
important
aspect
of
the
total
of
the
enterprise.
This has to be not only in the short-run but also keeping the long run
interests
of
the
Company
in
view.
pattern.
policies
and
procedures for
procurement. In
business
in
stock.
getting
their
due
importance.
In simple terms, productivity is the positive relationship of output viz-aviz inputs. Inventory management can be considered an important facet
of
output
&
input
management.
inventory
techniques,
balances,
reporting
setting
actual
targets,
and
providing
projected
replenishment
inventory
status.
The task of ABC analysis, lot tracking, cycle counting support etc. can
even be a part of inventory management.
Inventory control is concerned with minimizing the total cost of
The cost of holding the stock (e.g., based on the interest rate).
The cost of placing an order (e.g., for row material stocks) or the
set-up
cost
of
production.
The third element is the most difficult to measure and is often handled
by establishing a "service level" policy, e. g, certain percentage of demand
will be met from stock without delay.
Terminology used in Inventory
management
control
item
shall
be
allowed.
Minimum Limit : It is the lower limit to which the stock can be allowed
to fall in course of replenishment of the stock of an item. Normally, this is
taken to be the safety stock also.
in
about
20%
of
the
items.
The ABC concept is derived from the Pareto's 80/20 rule curve. It is also
known as the 80-20 concept. Here, Rupee / Dollar value of each
individual inventory item is calculated on annual consumption basis.
consumption
the
next
15-25%
('B'
class)
account
for
10-20%
of
the
consumption and
'A' class items are closely monitored because of the value involved (7080% !).
High
value
(A),
Low
value
(C)
intermediary
value
(B)
including
leading
plans
on
alternative
stocking
than
class
stores
have
the
most
effect.
B Items : "B" items are those that are 30-40% of all inventory
items, and account for 30-40% of the total Rupee consumption
volume of the inventory. These are important, but not critical, and
don't
pose
sourcing
difficulties.
C Items : "C" items account for 40-50% of all inventory items, but
or
sales
to
customer
or
operations.
The
strict
cons.Moderate control
Loose control
control
No or very low safetyLow safety stock
stock
Phased delivery (Weekly) Once in three months
Once in 6 months
Min.clerical efforts
Can be delegated
Sr.officers
associated.
having a
different
management
control
class items
represent 70% of the value, B class items fall between 70% and 90% of
the annual value with C class the remaining. In practical terms the
complex high cost materials typically fall into the A class items, with the
consumable, low cost (and typically fast moving) classed as C class.
factor.
Procedural steps :
1.First of all, collect all the data of the inventory and calculate the
consumption or sale value. For a Stores, maintaining inventory, this shall
be Quantity issued X unit rate of an item, say x1. Similarly , get the
values for all the remaining items, say , x2,x3,x4....x100 in the following
way :
Slno.
Item
Unit rate
Consumption
(Qty) issued)
1
2
3
4
5
6
x1
x2
x3
x4
x5
x6
10
12
15
20
30
5
7
8
9
10
x7
x8
x9
x10
4
16
13
35
10
10
12
5
2
100
80
12
22
6
item).
Consumption
Value
Class
Value
100
120
180
ascending order
60
100
100
560
1160
260
x5
x1
100
60
500
320
192
286
210
120
180
192
210
286
320
500
380
560
752
962
1248
1568
2068
x2
C
x3
C
x8 C
x10 B
x9 B
x7 A
x6 A
C
C
x4
From the last column it is clearly evident that the bottom 20 % of items
(x6 & x7) consume together nearly 70% of value, upper 70%
(x1,x2,x3,x4,x5,x8) items consume only 20% value and the remaining
10% items (x9) consume 10% value. Respectively, these are A,B and C
classes of items.
XYZ analysis is one of the basic supply chain techniques, often used to
determine the inventory valuation inside a Stores.
value.
and
then
scored
(X,
or
Z).
Bandings may be specific to the industry but typically follow a 70%, 90%,
100% banding in that X class items represent 70% of the stock value
(although they may account for 20% number wise), Y class items fall
between 70% and 90% of the annual stock value with C class the
remaining. In practical terms the complex high cost materials typically
fall into the X class items, with the consumable, low cost (and typically
fast
moving)
classed
as
class.
Not all stock is equally valuable and therefore doesnt require the same
management focus. The results of the XYZ analysis provide information
that helps evaluate how each inventory part should be monitored and
controlled.
These
controls
are
typically:
X class items which are critically important and require close monitoring
and tight control while this may account for large value these will
typically comprise a small percentage of the overall inventory count.
Y class are of lower criticality requiring standard controls and periodic
reviews
of
usage.
Z class require the least controls, are sometimes issues as free stock or
forward holding.
Classification of inventory in terms of XYZ is also quite strategic as It can
form the basis of various activity including leading plans on alternative
stocking arrangements (consignment stock), reorder calculations and can
help determine at what intervals inventory checks are carried out (for
example X class items may be required to be checked more frequently
than Z class stores.
money.
While the need for having inventory can't be denied for any running
plant / machinery, its availability in controlled measures too is highly
desirable. Control techniques such as ABC and XYZ analyses though
done in different ways, try ,at the same time, to get maximum control
with
little
commitment
of
resources.
One of the ways to have still better (tight) control over the inventory with
still less commitment of resources is by determining the AX category of
items in a given inventory. Once ABC and XYZ analyses have been done
and a list of A and X classes of items are drawn then AX category is a
combination of the two categories. Going by the definition of A and X
separately , AX category of items , normally, display a high consumption
(A) as well as a high stock value (X). Essentially, these items are high
value , in terms of overall procurement cost including their being costly.
Obviously , the measures that need to be taken to keep AX inventory
under control is similar to that of A or X items, viz stock less number at
any given time, have tight consumption control, more sources so that
the
known
period
of
requirement
(time).
system
MRP , by its nature, does not need carrying of any inventory ahead of
requirement. It starts with the finalisation of the production plan in a
firm.
The production plan then is used by the Materials management
professionals to explode the "Bill of material" which is a complete
detailing of the materials needed including their various components. It
is exploded for the number of units to be produced, to obtain that
product's exact requirement.
of
any
item.
MRP
system
of
master
production
inventory.
schedule
which
is
updated
Inventory record file (IRF) is the third input for MRP. It contains
the status of an inventory item. It indicates the current stock
position, the past timing and sizes of all orders , including the
open orders for the item, the lead time for each item. IRF basically
happens to be the past experience and serves as a good reference
point for planning for the future MRP
How
does
MRP
work?
There are two important questions to ask here. How much of an item is
needed? When is an item needed to complete a specified number of
units, in a specified period of time? The MRP process involves the
following
steps:
Develop a master production schedule for the end item (this is the
output of the aggregate / production planning). The MPS is adjusted
accordingly,
as
follows:
Determines
the
exact
numbers
needed
of
MRP
The basic outputs of the MRP system are the planned orders from the
planned order release row of the MRP matrix which details the timing
and the quantity of subassemblies, parts and raw materials used to plan
purchasing
and
manufacturing
actions.
Benefits
of
MRP
The MRP is also a very powerful tool since it takes into consideration
changes in certain assumptions especially under uncertain conditions,
especially when the inputs to the MRP system change because of the
following realities in the production area:
Dependent demand
MRP system , thus , generates a complete set of planned orders for all
manufactured parts and purchased materials based on information
inputs. Accurate forecast and a timely lead time happen to be the main
determinant of its success in a run.
several
computer
software
companies
have
developed
stock.
ways
of
good
inventory
management.