Inventory Control in PPC (7)

Production & Operations Management

Inventory Control Study Module

for PGDM - INMANTEC, Ghaziabad.

ByProf S.S.Sharma

Production Planning & Control

Inventory Control

Concerned with achieving balance between the competing objectives:

1. Minimize cost of maintaining or carrying inventory

2. Maximize the service to customers

Inventory Control

Inventory carrying Costs:

a. Investment cost:

A dominant factor of inventory carrying cost.

-Company investing borrowed money to buy material at a certain interest rate in material that have not yet been delivered to the customer for payments.

b. Storage Cost

c. Cost of possible obsolescence or spoilage

Inventory Control

How do we minimize the cost of carrying inventory?

Maintain Zero inventories Customer service may suffer

Resulting in loss of business.

Cost referred is called Stock Out Cost: Minimize stock out cost Provide a high level of customer service.

Inventory Control

Inventory control procedure to be used depends on type of demand for the item.

Types of demands:

1. Independent Demand Demand or consumption for the item is un-related to demand for other items.

Example: End products and spare parts

2. Dependent Demand Demand for the item is directly related to demand for something else, usually because

the item is a component of an end product, subject to independent demand.

Example: An automobile is an end product having independent demand, while tyres and other components required to build the automobile falls in the dependent demand category as their demand depends on demands of automobiles to be manufactured.

Inventory Control

An automobile is an end product having independent demand, while tyres demand depends on demands of automobiles.

Replacement Components, like tyres represent :

1. Dependent demand in new car business

2. Independent demand in the replacement tyre market.

Inventory Control

Systems of Inventory Control: Different inventory control systems required, depending upon

which type of demand we are attempting to manage

1. Order Point System:

2. Material Requirement planning

Inventory Control

Systems of Inventory Control

Order Point System :

Used for control of inventories of independent demand items

Addresses two important issues

a. How much to order?

b. When to order?

Inventory Control



How much to order?

Decided by means of using economic order quantity formulas.

When to order?

Accomplished using reorder points.


Order Point System Inventory Level Model

TimeTime

Inventory Level

Replenishment

Average Inventory Level

Maximum Inventory level

Q

O

Demand Rate

Inventory Control



How much to order?

Total Annual Inventory Cost equation:

TIC = Ch Q / 2 + Csu Da / Q

Where TIC = Total Annual Inventory Cost (Carrying + ordering cost) Rs./Yr

Q – Order quantity, pieces/order

Ch – Holding Cost (cost of carrying the inventory), Rs. / piece /Yr

Da – Annual Demand for the item, pieces/yr

Csu – Cost of setting up an order, Rs. / setup or Rs./ order

Da/Q = the number of orders (batches of parts produced) per year, this gives number of set up per year.

Inventory Control



How much to order?

Economic Order Quantity:

EOQ = Sq Root of 2Da Csu / Ch

Da – Annual Demand for the item

Csu – Cost of setting up an order

Ch - Holding Cost i.e cost of carrying the inventory

Inventory Control



When to Reorder

Follow the reorder point system

To be high enough level so as to minimize the probability of a stock out.

- Implemented using computerized inventory control systems


Operation of a reorder point inventory system

TimeTime

Inventory Level

Q

O

Reorder lead time

Demand Rate

Reorder Point Buffer Stock

Material & Capacity Requirement Planning

Material Requirement Planning (MRP)

Computational procedure to convert the master production schedule for end products in to a detailed schedule for raw materials and components used in the end products.

• Detail schedule indicates :

Quantities of each item

When it must be ordered

When it must be delivered to achieve the master schedule

Technique used for determining quantities of dependent demand items constituting the inventories of raw material, purchased parts, work in process etc.

Product Design

Master production schedule

Material requirements planning

Inventory record file

Capacity planning

Bill of materials file

Orders released & other outputs

Sales Forecasts

Service Parts Requirement

Structure and Data flows in a Material Requirements Planning (MRP) system

Sales orders



Inputs to the MRP system:

1. Master production schedule

2. Bill of material file

3. Inventory Record file

4. Capacity requirement planning


Inputs to the MRP system:Bill of material (BOM) file:• Lists component parts and sub-assemblies that make up each

product and used in computing the requirement of raw material and components used in the end products listed in the master schedule.

• Case: Simplified structure of an assembled product. Product consists of two sub-assemblies

Each sub assembly consisting of three parts

Number of each item in the next level is indicated in parentheses


Inputs to the MRP system:

Inventory Record file:• Identifies each item by part number and gives time-phased

record of its inventory status.

• Data includes gross requirement for the item i.e. How many units will be needed to build products in the master schedule


How MRP System Works?Based on inputs from the master schedule, bill of material file and the inventory

record file, MRP processor computes how many of each component and raw material will be needed in future time period by “exploding the end product schedule in to successively lower levels in the product structure.

For every unit of final product listed in MPS, the required number of components of each type must be ordered or fabricated. Its ordering or manufacturing lead time to be taken in to account.

For each component, the raw material must be ordered, accounting for its ordering lead time.

Assembly lead time to be considered in the scheduling of sub-assemblies and final products.


How MRP System Works?

Material Requirement Planning Case: Component C4 of Product P1.

The required deliveries for P1 are as given in the MPS. As per product structure two units of C4 are required to make sub-assembly S2 and two S2 units are required to make final product P1. C4 is made out of raw material M4, and one unit of M4 is used to make each unit of C4.

Ordering, manufacturing and assembly lead times for items:

Item Identification: P1 S2 C4 M4

Lead Time (weeks): 1 1 2 3

Inventory status in units: 0 0 50

There are no scheduled requirements, receipts or order releases indicated in the inventory records for these items. Neither material M4 nor component C4 is used on any other product. Determine the time phased requirement for M4, C4 and S2 to meet the master schedule for product P1. Orders for P1 beyond period 9 to be ignored in this case.


How MRP System Works?

Material Requirement Planning Case: Component C4 of Product P1.

Case Solution:

Deliver Requirements for P1 must be offset by 1 week to obtain the planned order releases. S2 must be exploded by 2 units per P1 unit and offset by 1 week to obtain its order release. C4 is exploded by 2 units per S2 units and offset by 2 weeks to obtain its requirements and M4 is offset by its 3 week ordering time to obtain its release date, taking in to account current stock of M4 on hand...\Material Requirement Case solution P1-C4.xls


Capacity requirement planning

Objective: To determine the labour and equipment requirement needed to

meet the master Production Schedule.

To identify company’s long term future capacity needs

To identify production resource limitations in order to plan a realistic Master Production Schedule.

Capacity Requirement Planning

Relationship between Capacity Planning and other function in PPC:

The Master Production Schedule reduced to material and component requirement using MRP. This provides estimates of the required labour hours, machinery/equipments and other resources required to produce the components.

The required resources compared to plant capacity over the planning horizon.

Compatibility of master production schedule with plant capacity is checked and adjustment made to the schedule or plant capacity.


Plant Capacity Adjustment Short – Term, Includes:

1. Employment Level – Direct labour hours increased or decreased.

2. Shift Hours – Labour hour per shift increased or decreased thru overtime or reduced hour working

3. Number of work shifts - per production period increased or decreased , authorizing evening and night shifts and or using week end shifts

4. Inventory stockpiling – Used to maintain steady employment period during slow demand period

5. Order Backlogs – deliveries delayed/prioritized during busy period when resources insufficient to keep up with demand.

6. Subcontracting- Contacting work (Out sourcing) during peak period or taking in extra work during slack period.


Plant Capacity Adjustment Long – Term, Includes:

1.New plant equipment and machinery. Enhancing the plant capacity requires long lead time. Investment in:

Additional Machinery

More productive machinery

New Type of machines to match future changes in product design.

2. New Plant Facility (Additional) Construction of new plants

Purchase of existing plants from other companies

3. Plant Closing : Closing of production facility which is not required in future due to lack of demand or obsolescence.


Just -In -Time Production

JIT – Just In Time: Approach developed in Japan to Minimize inventory cost. Work in process and other inventories are viewed as waste to be eliminated as it ties up space and investment funds. Principles and procedures aimed at reducing inventories directly or indirectly.

JIT procedures proved most effective in high volume repetitive manufacturing such as automobile industry. A just time production produces exactly the right number of each components required to satisfy the next operation in the manufacturing sequence just when that component is needed – Just in Time.

The Ideal Batch size – One Part. Practically more than parts are produced at a time but the batch size is kept small.

In JIT philosophy producing too many units is to be avoided as much producing too few units.



Requisites to successful implementation of JIT:

1. Stable Schedule: Work must flow smoothly with minimum disturbances. A Master Production Schedule that remains relatively constant over time is one way of achieving smooth work flow and minimizing disturbances and changes in production.

2. Small Batch sizes and setup reduction: Use of EOQ formula to compute batch size. Efforts to be focused on finding ways to reduce set up time.

Use of quick acting clamping devices instead of nuts and bolts

Perform as much of the setup work as possible while previous jobs still running.

Eliminate or minimize adjustments in setups

Use of group technology , cellular manufacturing: Similar part styles produced on the same equipments, i.e. Machining Centers etc..




3. On time delivery, Zero defects and reliable equipments Small lot size requires parts to be delivered before stock out occur at

downstream stations (final Assembly).

Workers inspect their own output to make sure it is right before it moves o the next operation.

Low work in process requires reliable production machinery & equipment.

Emphasis on reliable equipment design and preventive maintenance




4. Pull system of production control: Order to produce parts at a given work station comes from the downstream

station (Assembly or Final Assembly) that uses those parts.

As the supply of parts becomes exhausted at a given station it places an order at the upstream station (parts manufacturing /feeding) to replenish the supply.

Procedure repeated at each workstation in the plant has the effect of pulling parts through the production system

Push system of production operates by supplying parts to each station in the plant. Driving the work from upstream station to downstream station.

Kanban (Kahn-bahn): Toyota Pull System




Pull system of production control:


The Kanban System of production control is based on use of cards to authorise production and work flow in the plant.

Types of Kanbans:

1. Production Kanban

2. Transport Kanban




A B DC

Production Kanban

Parts

Transport Kanban

Operation of a Kanban System Between workstations

Work station


Toyota Pull System Operation of a Kanban System Between workstations

Station B is the supplier in the pair of B & C station, and C is the consumer. Station supplies down stream station D. B is supplied by upstream station A.

When station C starts work on a full container, a worker removes the transport Kanban from that container and takes it back to station B.

The worker finds a full container of parts at B that has just been produced, removes the production kanban from that container and places it on a rack at B.

The worker then places the transport kanban in the full container, which authorises its movement to station C.

The production kanaban on the rack at station B authorizes production of a new batch of parts.

The kanban pull system between stations A and B and between station C and D operates the same way as it does between station B and c




5. Work force and supplier Base; Workers to be cooperative, committed and capable of performing multiple

tasks

The work force to inspect the quality of their work and to deal with minor technical problems with the machinery so that major breakdown do not occur.

Suppliers to hold to the standards of on time delivery, zero defects and other JIT requisites as the company itself.




5. Work force and supplier Base;

Vendor Policies for JIT. Reducing the total number of suppliers

Selecting and developing vendors/suppliers with proven track records for meeting quality and delivery standards.

Establishing long term partnership with suppliers

Selecting the suppliers that are located near the company’s manufacturing facility/plant

Inventory Control in PPC (7)

Documents

Transcript of Inventory Control in PPC (7)