MODULE V

MATERIAL
MANAGEMENT

Asst Prof Arvind Gajakosh

BE, MBA, NET
II-ASSIGNMENT OF P&OM
 Define the following :
 MRP
 ERP
 PPC
 MRP2
 SPC
 WIP
 JIT
 SCM
 IM
 VE
II-ASSIGNMENT OF P&OM
 Explain the features of MRP?
 Explain the importance of PPC?
 Differentiate between MRP and MRP2?
 Define capacity planning and explain it with example.
 Compare cost control vs cost reduction.
 What is value analysis? Explain it briefly.
 Is there any difference between value engineering
and value analysis justify it with an example.
 Explain the role ERP in P&OM?
II-ASSIGNMENT OF P&OM
 What is inventory management? And explain
different types analysis used in inventory
management.
 What is ABC analysis? Explain it with an example.
 What are different forms of inventory?
 What do you mean by cycle stock and safety stock?
 Explain importance of lean manufacturing?
 What is the difference between push and pull
system?
 Explain different measuring methods of SCM.
 What is outsourcing? And explain mass customization
INVENTORY MANAGEMENT
 Inventories are stocks of any kind. Today’s inventory
is tomorrow's production, and in turn sales.
 Inventory is material that the firm obtains in
advance of need, holds until it is needed, and then
uses, consumes, incorporates into a product, sells, or
otherwise disposes it of.
 Inventories are stocks of any kind like fuel and
lubricants, spare parts and semi processed material
to be stored for future use mainly in the process of
production.
 It can be known as the idle resources of any kind
having some economic value.
FORMS OF INVENTORIES
 Raw material inventories
 Work in process inventories (semi finished form)
 Spare part inventories
 MRO Inventories (Maintenance repairs and operating
supplies)
 Finished inventories
CYCLE STOCK AND SAFETY STOCK
 When an items undergoes repetitive usage or
demand over a long period of time, the firm usually
established a periodic replenishment(fill up) policy
to maintain an inventory on the item.
 The firm may also maintain an additional amount of
inventory called safety stock, to deal with the
potential uncertainty in the replenishment situation.
CLASSIFICATION OF INVENTORIES COSTS
 Cost of inventories are traditionally categorized into
four basic types:
 Purchase costs (includes transport cost, tariff etc)
 Ordering costs (includes administrative cost)
 Holding costs (includes storage cost, risk cost)
 Shortage costs (includes disruption cost, lost sales)
USES OF INVENTORY
 Over the past few decades management attention
has increasingly focused on firm’s inventory as an
area where improvements can be made so as to both
reduce costs and improve the level of customer
service that the enterprise delivers to its customer
base.
USES OF INVENTORY
 Over the past few decades management attention
has increasingly focused on firm’s inventory as an
area where improvements can be made so as to both
reduce costs and improve the level of customer
service that the enterprise delivers to its customer
base.
INVENTORY CONTROL
 IC is the technique of maintaining the size of the
inventory at some desired level keeping in mind the
best economic interests of the production system.
 Maintaining desired level of inventory can be called
as safety stock.
INVENTORY POLICY
 Safety stock
 Total cost
 Inventory levels
 Number of orders from clients
 Reorder quantity
 Customer service
INVENTORY CONTROL ACTIVITIES
 Determination of the limits of the inventories to be
held.
 Determination of inventory policies.
 Selling out of investment pattern and its regulations
as per requirements.
 Follow up to examine the work of inventory policy
and effect changes as and when needed.
OBJECTIVITIES OF INVENTORY CONTROL
 To ensure smooth flow of stock
 To provide for required quality of materials
 To control investment in stock
 Protection against fluctuating demand
 Protection against fluctuating in output
 To avoid risk of obsolescence
 Minimization of material cost
FUNCTIONS OF INVENTORY CONTROL
 Ensures timely availability of material
 Better use of financial resources
 Protecting the inventory from losses
 Provides protection against the uncertainties of
demand & supply
 Preparation of accurate material reports
 Determination of financial results
 Minimizes the wastages
ABC ANALYSIS (ALWAYS BETTER CONTROL)
 A very close control is exercised over the items of
‘A’ group which account for a high percentage of
costs while less stringent control is adequate for
category ‘B’ and very little control would suffice for
category ‘C’ items.
 The difference b/n the types of items are
summarized below:
Criteria A type B type C type
Quantity 10% 20% 70%
Value 65% 20% 15%
Control Very strict Moderate less
Ordering Daily/weekly Bi monthly Yearly
Safety stock Less Moderate High
CASE OF ABC ANALYSIS
Categories Quantity Values
In units Percentage In Rs. Percentage
A 7,500 15% 130,00,000 65%
B 10,000 20% 40,00,000 20%
C 32,500 65% 30,00,000 15%
Total 50,000 100% 200,00,000 100%

•Policies for ‘A’ group items

They should be ordered more frequently to reduce
capital lock up at a time in inventories.
These items are to be stored as few in number as
possible.
 Policies for ‘B’ group items:
 Order quantities, reorder stocks and safety stock
should be fixed and revised for B items at least one
in every 4 to 6 months.
 B items should be ordered less frequently than A
items.
 Policies for ‘C’ group items:
 Large quantities can be brought at a time, as total
investment will be the least.
 Paper work can be reduced considerably if orders are
placed once or twice a year.
OTHER TYPES OF ANALYSIS
 VED analysis:
 Means Vital(critical), Essential, and Desirable items.
This technique analyzes the essentiality of the material
for production.
 FSN analysis:
 F: fast moving items
 S: slow moving items
 N: non moving items
 HML anaysis:
 H:high cost items
 M: Medium cost items
 L: Low cost items
 SOS analysis:
 Seasonal off-seasonal items (agri-i/ps)
 JUST IN TIME
MANUFACTURING
SYSTEM

Asst Prof Arvind Gajakosh

BE, MBA, NET
JUST IN TIME
 Today, it is not enough for firms to be high quality
and low cost producers. They must also be first in
getting products and services to the customer fast.
 To compete in this new envt the order to delivery
cycle must be drastically reduced JIT is the weapon
of choice today to reduce manufacturing lead times.
 This is primarily achieved by drastic reduction in
work in process.
 A central feature of JIT is the ability to operate with
minimal levels of inventory.
 JIT manufacturing is a philosophy of manufacturing
based on planned elimination of waste and
continuous improvement of productivity.
THE DISTINCTION B/N JIT &
TRADITIONAL MANUFACTURING SYTEM
JIT manufacturing system
Reduces inventory
Reduces lead time
Reduces setup time
Emphasizes product oriented
layout
Emphasizes team oriented
employee involvement
Emphasizes pull manufacturing
Emphasizes zero defects
Traditional manufacturing system
Increased inventory to protect against
process problems
Increases lead time as a buffer
against uncertainty
Disregards(no attention) setup time
as an improvement priority
Emphasizes process oriented layout
Emphasizes work of individuals
following mgr instructions
Emphasizes push manufacturing
Tolerates defects
FEATURES OF JIT
 Organize production in manufacturing cells
 Hire & retain workers who are multi skilled
 Aggressively pursue TQM to eliminate defects
 Place emphasis on reducing both setup time and
manufacturing lead time
 Carefully select suppliers who are capable of
delivering quality materials in a timely manner.
ELEMENTS OF JIT MANUFACTURING
 Eliminating waste
 Enforced problem solving and continuous
improvement (kaizen)
 TQM
 Parallel processing
 Kanban Production Control
 JIT purchasing
 Reducing inventories
ELIMINATING THE WASTE
 JIT is a management philosophy that eliminates
sources of manufacturing waste by producing the
right part in the right place at the right time.
 JIT concept applies to repetitive manufacturing
processes in which the same products and
components are produced repetitively. Ex: Bamul
 Under the JIT system, the waste is aimed to be
eliminated by the application of the following steps
 Only what is needed now, is produced.
 Waiting is reduced by coordinating flows and
balancing loads.
 All the un needed production steps are eliminated.
 Set up times are reduced & the production rates are
increased.
ENFORCEMENT PROBLEM SOLVING &
CONTINUOUS IMPROVEMENT
 In JIT manufacturing,
Kaizen the approachInnovation
is to lower
inventory gradually to expose the problems & force
their solution.
Effect LT but un dramatic small steps ST but dramatic large steps
maintenance & improvement scrap & rebuild

Time frame Continuous & incremental Inter midterm non

incremental

Involvement Everyone Select a few champions

Spark Conventional know how & state of Technological breakthrough

the art : new inventions

Efforts Requires little investment but Requires large investment

great effort to maintain it little effort to maintain it

Evaluation Process and efforts for better Results for profits

criteria results
 TQM:
 There are three main principles of TQM, namely
customer focus, continuous improvement, and
teamwork.

 Parallel Processing:
 JIT believes in parallel processing rather than series
processing. This helps in saving the time, which is
considered the most significant asset in Japanese
manufacturing as also in any of the other qualitative
theories of manufacturing
 Kanban Production System:
 Kanban is the means of the signaling to the upstream
workstation that the downstream workstation is
ready for the upstream workstation to produce
another batch of parts.
 JIT purchasing:
 Under JIT purchasing supplier selection is based not
only on price, but also delivery schedules, product
quality and mutual trust.
 JIT is the purchase of goods or materials such that a
delivery immediately precedes demand or use.
JIT purchasing
Smaller lot sizes
More frequent deliveries
No rejection from the supplier
LT contracts
Buyer decides delivery
schedule
Less formal communication
Traditional purchasing
Relatively large lot sizes
Less deliveries at higher
quantities
2% rejection from supplier
Lowest price is main objective
Time consuming, formal
paperwork
Formal communication
 Reducing inventories:
 Under JIT manufacturing, setup time and lot size
reduced in order to reduce inventories.
 To attain this we should implement FMS (flexible
manufacturing systems)
 Implementation of JIT manufacturing
 Eliminate setup times
 Reduce lot sizes
 Reduce lead times
 Preventive maintenance
 Flexible workforce
 Zero defects quality program
PARETO PRINCIPLES
 The basis for ABC analysis is pareto principles.
 Pareto arrived at the general conclusion that income
distribution pattern were basically same in different
countries & in different historical period.
 Pareto study shows that a very small % of the total
population always seemed to receive the bulk of the
income.
 He also concluded that there was a natural economic
law in existence which would always establish the
shape of the income distribution & could not be over
ridden (control) by any political or sociological
reforms.
STATISTICAL PROCESS CONTROL (SPC)
 Statistical process control (SPC) is based on
Statistical quality control (SQC).
 SQC is the application of statistical techniques to
accept or reject products already produced, or to
control the process.
 When we use SQC to control the process will be
known as SPC.
 SQC for process control is based on the probability
theory.
 It is common that when several identical parts are
manufactured some are little large & some are little
small, but most will be approximately same.
STATISTICAL PROCESS CONTROL (SPC)
 Chance causes: these are inherent and cannot be
controlled or prevented. (size b/n 0.995-1.005)
 Chance causes are ignored because any effort to
eliminate then is uneconomical & counterproductive.
 If the size measures beyond 1.005 inches or below
0.995 it is not due to chance causes but because of
assignable causes.
 Assignable causes: include internal temp, tear of m/c
parts, improper dimension of RM etc.
 Assignable cause can be controlled and rectify by
identifying it.
LEAN MANUFACTURING
 LM is a method of production that emphasizes the
minimization of the amount of all resources used in
the various activities of the enterprise.
 It requires identifying & elimination non value adding
activities in design, production, SCM, & dealing with
the customers.
 Lean producers employ teams of multi skilled workers
at all levels of the organization.
 It uses highly flexible increasingly automated
machines to produce volumes of products.
 LEAN MANUFACTURING PRINCIPLES/TOOLS
 Pull processing:
 Production are pulled from the consumer end (demand)
not pushed from the production end (supply).
 Defect free quality:
 Quest for zero defects, revealing and solving problems at
the source.
 Waste minimization:
 Eliminating all activities that do not add value in the
production process.
 Continuous improvement:
 Reducing costs, improving quality, increasing
productivity, flexibility, and building LT relationship etc.
ECONOMIC ORDER QUANTITY (EOQ)
 To make a fixed order  No single formula applies to
all situations…
 Each situation requires analysis based on the
characteristics of that particular inventory system.
 EOQ for three inventory models:
 Model I – Basic economic order quantity
 Model II – EOQ for production lots
 Model III – EOQ with quantity discounts
MODEL I – BASIC ECONOMIC ORDER QUANTITY
 Assumptions:
 Annual demand, carrying cost, & ordering cost for a
material can be estimated.
 Average inventory level for a material is order quantity
divided by 2.
 Quantity discounts do not exist.
 Variable definitions:
 D = annual demand for a material (units/yr)
 Q = quantity of material ordered at each order point
(units/order)
 C = cost of carrying one unit in inventory for one yr
(rupees/unit per yr)
 S = avg cost of completing an order for a material (rupees
/yr)
 TSC = total annual stocking costs for a material (rupees/yr)
 Cost formulas
 Annual carrying cost = avg invntry level * CarryingCost
= Q/2*C
 Annual ordering cost = orders/yr * ordering cost
= D/Q*S
 Total annual stocking cost = annual CC + annual OC
= Q/2*C + D/Q*S
 EOQ = square root (2DS/C)
MODEL II – EOQ FOR PRODUCTION LOTS
 If production occurs & flows into inventory at a rate
(p) that is greater than the usage or demand rate (d)
at which the material is flowing out of inventory.
 Eg. Inventory flow rate is 120 products/day and
demand rate is 40 products/day.
 Therefore this model is suited for planning the size of
production lots for in house manufacture of products.

 EOQ = square root of [2DS/c*{p/(p-d)}]

MODEL III – EOQ WITH QUANTITY DISCOUNTS
 Suppliers may offer their goods at lower unit prices if
larger quantities are ordered. This practice is referred
to as quantity discounting.
BREAK EVEN ANALYSIS
 Break even point is the point at which the firm’s
revenues are just sufficient to cover its total costs
(aggregated fixed cost & variable cost).
 Fixed cost includes fixed overhead cost.
 Variable cost includes direct wages, direct material
cost and variable overhead cost.
 End please..!